<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _____________
Commission file number 1-12898
SOURCE ONE MORTGAGE SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 38-2011419
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
27555 Farmington Road, Farmington Hills, Michigan 48334-3357
(Address of principal executive offices) (Zip-code)
Registrant's telephone number, including area code: (810) 488-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
8.42% CUMULATIVE PREFERRED STOCK, SERIES A ON WHICH REGISTERED
9.375% QUARTERLY INCOME CAPITAL SECURITIES NEW YORK STOCK EXCHANGE
(SUBORDINATED INTEREST DEFERRED DEBENTURES, DUE 2025) NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
THERE IS NO AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT. AS OF MARCH 28, 1997, THE NUMBER OF SHARES OF THE
REGISTRANT'S COMMON STOCK OUTSTANDING WAS 2,561,054
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1996 (Parts II and IV).
<PAGE> 2
FORM 10-K
Source One Mortgage Services Corporation and Subsidiaries
<TABLE>
<S> <C>
PART I
ITEM 1. BUSINESS
</TABLE>
GENERAL
Source One Mortgage Services Corporation, a Delaware corporation (together
with its subsidiaries, the "Company" or "Source One"), is one of the largest
mortgage banking companies in the United States. As of December 31, 1996, the
Company had a mortgage loan servicing portfolio totaling $29.2 billion,
including $2.8 billion of loans subserviced for others, which is serviced on
behalf of approximately 320 institutional investors and numerous other security
holders. As of December 31, 1996, the Company had 131 retail branch offices in
26 states and originated $3.8 billion in mortgage loans for the year then
ended.
As a mortgage banker, the Company engages primarily in the business of
producing, selling and servicing residential mortgage loans and subservicing
residential mortgage loans for third parties. Its primary sources of revenue
are net servicing revenue, net interest revenue, net gain on sale of mortgages,
net gain on sale of servicing and other revenue (including underwriting and
appraisal fees). Through subsidiaries, the Company also engages in the sale of
credit-related insurance products (such as life, disability, health, accidental
death and property and casualty insurance).
The Company was incorporated in 1972 and is the successor to Citizens
Mortgage Corporation which was organized in 1946. The Company is now an
indirect wholly-owned subsidiary of Fund American Enterprises Holdings, Inc.
("Fund American"), a Delaware corporation organized in 1980, which was formerly
known as The Fund American Companies, Inc. and Fireman's Fund Corporation.
The Company's principal executive offices are located at 27555 Farmington
Road, Farmington Hills, Michigan 48334-3357; its telephone number is (810)
488-7000.
INDUSTRY OVERVIEW
Mortgage banking is the business of serving as a financial intermediary in
(i) the origination and purchase of mortgage loans, (ii) the holding of such
loans while aggregating sufficient loans to form appropriate mortgage-backed
security pools, (iii) the subsequent sale of such loans through pools or
directly to investors, and (iv) the ongoing management or servicing of such
loans during the repayment period. Mortgage bankers generate revenue in each of
the four stages of the mortgage banking process.
MORTGAGE LOAN PRODUCTION
The Company produces residential mortgage loans through a system of retail
branch offices, a specialized marketing program, mortgage brokers and a
correspondent network of banks, thrift institutions and other mortgage lenders.
The existence of these mortgage production sources gives the Company the
flexibility to shift its production between those sources as market conditions
warrant and allows it to emphasize the production mode which is most
economically advantageous.
Loans produced, whether through origination or purchase, include
conventional residential mortgage loans as well as mortgage loans which are
either insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Veterans Administration ("VA") (government loans). In
evaluating loans purchased through its correspondent network and loans
originated through its broker network, the Company applies the same quality
standards as required for loans originated by the Company itself. The
Company's quality control department reviews a sample of the loans purchased to
determine compliance with Company standards.
1
<PAGE> 3
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
It is a policy of the Company to primarily produce fixed rate mortgage
loans. Fixed rate mortgages tend to capture a larger share of the market in a
declining interest rate environment and are less susceptible to prepayment risk
than adjustable-rate mortgages. Accordingly, in a rising interest rate
environment, consumer preference for adjustable-rate mortgages tends to
increase, which could have an adverse impact on the Company's mortgage
production operations. However, the possible adverse impact on mortgage
production may be mitigated by the positive impact on the Company's servicing
portfolio.
In 1996, fixed rate mortgage originations accounted for approximately 90%
of the Company's total mortgage loan production as compared to 87% in 1995.
The increase reflects overall lower interest rates in 1996 relative to 1995.
The following table sets forth selected information regarding the
Company's mortgage loan production:
<TABLE>
<CAPTION>
(in millions)
Year ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHA/VA $2,035 $1,565 $2,065 $ 3,453 $1,927
Conventional 1,796 1,287 2,521 7,999 5,664
- ----------------------------------------------------------------------------------------
Total production $ 3,831 $2,852 $4,586 $11,452 $7,591
========================================================================================
Retail branch originations $1,590 $1,347 $2,005 $ 4,922 $3,326
Correspondent network
acquisitions 1,640 1,157 1,081 2,643 2,578
Mortgage broker originations 369 196 696 1,708 1,026
Specialized marketing
program originations 232 152 804 2,179 661
- ----------------------------------------------------------------------------------------
Total production $3,831 $2,852 $4,586 $11,452 $7,591
========================================================================================
</TABLE>
Mortgage loans originated by the Company are subject to a defined
underwriting process in order to assess each prospective borrower's ability to
repay the loan requested and the adequacy of each property as collateral. In
addition, the Company is subject to the underwriting guidelines of FHA, VA, the
Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") and the
Federal National Mortgage Association ("FNMA" or "Fannie Mae"), as well as
specific contractual requirements of institutional investors who have agreed to
acquire mortgage loans originated by the Company.
RETAIL BRANCH OFFICES. As of December 31, 1996, the Company had 131
retail branch offices in 26 states. Each office has sales representatives who
originate mortgage loans through contacts with real estate brokers, builders,
developers and others, as well as through direct contact with homebuyers.
As of December 31, 1996, the Company's retail branch offices were located
in the following states:
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
State Number of Offices State Number of Offices State Number of Offices
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
California 31 Missouri 5 Kansas 1
Washington 22 Colorado 4 Maryland 1
Texas 11 Ohio 4 Oregon 1
Illinois 7 Alaska 2 Rhode Island 1
Arizona 6 Kentucky 2 Tennessee 1
Nevada 6 Massachusetts 2 Utah 1
New York 6 New Jersey 2 Vermont 1
Florida 5 Pennsylvania 2 Virginia 1
Michigan 5 Arkansas 1
- ------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 4
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
Most branch office originations are referred to regional operating centers
for preparation of loan documentation, evaluation of compliance with the
Company's underwriting conditions and closing of the loans.
CORRESPONDENT NETWORK. The Company conducts a program through which it
agrees to purchase mortgage loans from a network of banks, thrift institutions
and other mortgage lenders. The funding price for such loans is set by the
Company on a daily basis. In addition, the Company pays a premium for the
release of servicing rights, which is negotiated on a case-by-case basis. As
of December 31, 1996 there were approximately 209 participants in the Company's
correspondent network, with no single participant or group of affiliated
participants accounting for more than 10% of the Company's total mortgage loan
originations.
MORTGAGE BROKERS. The Company conducts a program through which it closes
loans originated by a network of mortgage brokers. The funding price for such
loans is set by the Company on a daily basis. The mortgage broker receives
compensation equivalent to the difference between the Company's pricing
schedule and the closing price. As of December 31, 1996 there were
approximately 366 active participants in the Company's mortgage broker network,
with no single broker or group of affiliated brokers accounting for more than
10% of the Company's total mortgage loan originations.
SPECIALIZED MARKETING PROGRAM. The Company also generates mortgage loan
originations through affinity programs and by responding to refinancing
requests from the population of loans currently serviced by the Company. The
products currently offered by the Specialized Marketing Program consist of
purchase money first mortgages, home equity lines of credit, closed-end second
mortgages, refinancing and relocation assistance. The Company is continuing
its efforts to increase outsource services provided for other mortgage lenders
through this program.
SALES OF LOANS
The Company sells loans either through mortgage-backed securities issued
pursuant to programs of the Government National Mortgage Association ("GNMA" or
"Ginnie Mae"), FNMA and FHLMC or to institutional investors. Most loans are
aggregated in pools of $1.0 million or more, which are purchased by
institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
Substantially all GNMA securities are sold without recourse to the Company for
loss of principal in the event of a subsequent default by the mortgage borrower
due to the underlying FHA and VA insurance.
The following table summarizes the principal amount of the Company's loans
sold:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended
December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------
Principal Principal Principal
amount Percentage amount Percentage amount Percentage
(in millions) of total (in millions) of total (in millions) of total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GNMA $1,678 42.82% $1,252 46.30% $2,301 40.94%
FNMA 1,384 35.32 927 34.29 2,282 40.61
FHLMC 453 11.56 251 9.28 929 16.53
Other 404 10.30 274 10.13 108 1.92
- -------------------------------------------------------------------------------------------------
Total loan sales $3,919 100.00% $ 2,704 100.00% $5,620 100.00%
=================================================================================================
</TABLE>
Servicing agreements relating to mortgage-backed securities issued
pursuant to the programs of GNMA, FNMA and FHLMC require the Company to advance
funds to make the required payments to investors in the event of a delinquency
by the borrower. The Company expects that it would recover most funds advanced
upon cure of default by the borrower or at foreclosure. However, in connection
3
<PAGE> 5
[LOGO]
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
with VA partially guaranteed loans and certain conventional loans (which may
be, at most, partially insured by private mortgage insurers), funds advanced
may not cover losses due to potential declines in collateral value. The
Company is subject to limited amounts of principal risk with respect to these
loans since the insurer has the option to reimburse the servicer for the lower
of fair market value of the property or the mortgage loan outstanding, in
addition to the VA guarantee on the loan. In addition, most of the Company's
servicing agreements for mortgage-backed securities typically require the
payment to investors of a full month's interest on each loan although the loan
may be paid off (by optional prepayment or foreclosure) other than on a
month-end basis. In this instance, the Company is obligated to pay the investor
interest at the note rate from the date of the loan payoff through the end of
that calendar month without reimbursement.
The Company, through private placements and public offerings, has also
sold mortgage loans through the issuance of mortgage pass-through certificates.
The Company issued $521.7 million of real estate mortgage investment conduit
("REMIC") certificates through December 31, 1990. The Company is the primary
servicer for these REMIC certificates, which were sold pursuant to five
separate trusts that have no recourse provisions. The Company has not issued
any mortgage pass-through certificates since 1990, however, the Company may
offer additional mortgage pass-through certificates in the future if economic
and market conditions warrant.
Historically, the Company's sales of loans have generated net gains.
However, if secondary market interest rates decline after the Company obtains a
mandatory forward commitment for a loan, the loan may not close and the Company
may incur a loss from the cost of covering its obligations under such
commitment. If secondary market interest rates increase after the Company
commits to an interest rate for a loan, and the Company has not obtained a
forward commitment, the Company may incur a loss when the loan is subsequently
sold. To minimize this risk, the Company obtains mandatory forward commitments
of up to 120 days to sell mortgage-backed securities with respect to all loans
which have been funded and a substantial portion of loans in process
("pipeline") which it believes will close.
The Company's risk management function closely monitors the mortgage loan
pipeline to determine appropriate forward commitment coverage on a daily basis.
In addition, the risk management area seeks to reduce counterparty risk by
committing to sell mortgage loans only to approved dealers, with no dealer
having in excess of 20% of current commitments. The Company currently
transacts business with nine approved dealers.
LOAN SERVICING
Mortgage loan servicing consists primarily of (i) collecting principal,
interest and funds to be escrowed for tax and insurance payments from mortgage
loan borrowers; (ii) remitting principal and interest to mortgage loan
investors; (iii) paying property taxes and insurance premiums on mortgaged
property; (iv) in some cases, advancing uncollected payments to mortgage loan
investors; (v) administering delinquent loans; (vi) supervising foreclosures in
the event of unremedied defaults; and (vii) performing all related accounting
and reporting activities. Servicing generates cash income in the form of fees,
which represent a percentage of the declining outstanding principal amount of
the loans serviced and are collected from each mortgage loan payment received
plus any late charges.
The Company currently retains the rights to service substantially all of
the mortgage loans it produces. In addition, the Company may acquire the rights
to service or subservice a mortgage loan portfolio without originating or
acquiring the underlying mortgage loans. The Company customarily makes such
purchases of servicing rights from banks, thrift institutions and other
mortgage lenders. The fees paid to acquire such servicing rights are
negotiated on a case-by-case basis. The Company purchased the rights to
service $2.8 billion, $4.7 billion and $3.7 billion of mortgage loans from
third parties during 1996, 1995 and 1994, respectively.
The Company also sells servicing rights when management deems it
economically advantageous. In 1996 and 1995, the Company sold the rights to
service a total of $3.3 billion and $11.0 billion, respectively,
4
<PAGE> 6
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
of mortgage loans to third parties resulting in a pretax gain of $10.1 million
and $40.0 million, respectively. In 1994, the Company sold the rights to
service $3.9 billion of mortgage loans to a third party and continues to
subservice the majority of these loans pursuant to a five-year subservicing
agreement.
During 1996, the Company forged a new strategy with respect to its
servicing operations. A major focus of this strategy is reducing exposure to
interest rate risk, which increases with the size of an owned servicing
portfolio. To reduce the exposure, the Company is taking actions to contract
its owned servicing portfolio and expand its subservicing business. Consistent
with this corporate strategy, the Company sold, subject to regulatory and
investor approvals, approximately $17 billion of its non-recourse mortgage
servicing portfolio to a third party for estimated proceeds of $271.5 million
in February of 1997. The transaction is expected to result in the recognition
of an after tax loss of approximately $2.1 million in the first quarter of
1997. Source One will retain subservicing on the portfolio for a minimum of
one year and a maximum of three years, at the option of the purchaser. The
Company is currently evaluating its options as to how it will utilize the
proceeds from the sale. These options include: (i) purchasing additional
mortgage servicing rights from third parties; (ii) reducing its outstanding
indebtedness; (iii) reducing its outstanding preferred or common shareholders'
equity; or (iv) a combination of any of the foregoing.
As a result of the 1997 servicing sale, the Company expects that its
mortgage servicing revenue and its related amortization for 1997 and thereafter
will be significantly less than its mortgage servicing revenue and related
amortization in 1996. The Company is currently analyzing its cost structure to
identify expenses that may be reduced as a result of the sale.
The following table summarizes the changes in the Company's mortgage loan
servicing portfolio including loans subserviced, interim servicing contracts
and those under contract to acquire and excluding loans sold but not
transferred:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in millions)
Year ended December 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $31,831 $39,568 $38,403 $37,312 $41,014
Mortgage loan production 3,831 2,852 4,586 11,452 7,591
Servicing acquisitions 2,789 4,674 3,707 6,368 2,323
- ---------------------------------------------------------------------------------
Total servicing in 6,620 7,526 8,293 17,820 9,914
- ---------------------------------------------------------------------------------
Regular payoffs 3,006 2,271 4,728 13,563 11,532
Sale of servicing 3,302 10,973 - - -
Principal amortization,
servicing released, foreclosures
and other 1,997 2,019 2,400 3,166 2,084
Subservicing transfers 945 - - - -
- ---------------------------------------------------------------------------------
Total servicing out 9,250 15,263 7,128 16,729 13,616
- ---------------------------------------------------------------------------------
Balance at end of year $29,201 $31,831 $39,568 $38,403 $37,312
- ---------------------------------------------------------------------------------
</TABLE>
The above table includes loans suberviced for others having a principal
balance of $2,791 million, $4,039 million and $4,294 million as of December 31,
1996, 1995 and 1994, respectively.
5
<PAGE> 7
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
The Company closely monitors the rate of delinquencies and foreclosures
incident to its servicing portfolio. The following table summarizes the
Company's delinquency and foreclosure experience with respect to residential
mortgage loans serviced by the Company.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(% of total residential loans serviced)
December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
31-59 days past due 4.74% 3.99% 3.15% 3.41% 3.26%
60-89 days past due .95 .70 .54 .58 .65
90 days or more past due .55 .59 .38 .45 .48
- --------------------------------------------------------------------------------
Total delinquencies 6.24% 5.28% 4.07% 4.44% 4.39%
- --------------------------------------------------------------------------------
Foreclosures .93% .80% .77% .92% .77%
- --------------------------------------------------------------------------------
</TABLE>
The increase in delinquencies in 1995 and 1996, is primarily the result of
servicing portfolios acquired by the Company during the fourth quarters of 1995
and 1996. The delinquency rates of these acquired portfolios were higher than
the Company's historical average delinquency rate. The Company purchased these
portfolios for prices which were reflective of these higher delinquency rates.
The value of the Company's investment in mortgage servicing rights
("MSR") is affected by changes in mortgage interest rates. Interest rates
directly influence prepayment rates as well as other assumptions used in valuing
the Company's MSR asset. In order to offset changes in the value of its MSR
asset and to mitigate the effect on earnings of higher amortization and
impairment of the asset which results from increased prepayment activity, the
Company invests in various financial instruments. As interest rates decline,
prepayment activity generally increases, thereby reducing the value of the MSR
asset, while the value of the financial instruments increases. Conversely, as
interest rates increase, the value of the MSR asset increases while the value of
such financial instruments decreases. The financial instruments utilized by the
Company include interest rate floor contracts ("floors") and principal-only
("P/O") swaps. With respect to the floors, the Company is not exposed to losses
in excess of its initial investment in the floors. The Company's exposure to
loss in the P/O swaps is related to changes in the market value of the
underlying P/O security over the life of the contract.
RELATED ACTIVITIES
In conjunction with its mortgage origination and servicing activities, the
Company provides certain credit-related insurance products (such as life,
disability, health, accidental death and property and casualty insurance)
through subsidiaries. The insurance subsidiaries act as agents and receive
fees based on premium value, but do not assume any insurance risk. Insurance
products are sold through (i) solicitation at the time of mortgage application,
(ii) direct mail solicitation shortly after mortgage loan closing, (iii)
solicitation by a direct solicitor and (iv) resolicitation of the Company's
servicing portfolio on an annual basis. At certain locations, personal
solicitation by Company staff is permitted by state regulations which
determine allowable insurance sales practices. The fees recognized under these
programs were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
Year ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insurance revenue $4,554 $4,762 $4,582 $5,039 $5,605
- --------------------------------------------------------------------------------
</TABLE>
CERTAIN BUSINESS CONDITIONS
Changes in the economy or prevailing interest rates can have significant
effects, including material adverse effects, on the mortgage banking business
and the Company.
Inflation and changes in interest rates can have differing effects on
various aspects of the Company's business, particularly with respect to
marketing gains and losses from the sale of mortgage loans, mortgage loan
production, the value of the Company's servicing portfolio and net interest
revenue. Historically, the Company's loan originations and loan production
income have increased in response to falling interest rates and have decreased
during periods of rising interest rates. Periods of low inflation
6
<PAGE> 8
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
and falling interest rates tend to reduce loan servicing income and the value
of the Company's mortgage loan servicing portfolio because prepayments of
mortgages increase and the average life of loan servicing rights is shortened.
Conversely, periods of increasing inflation and rising interest rates tend to
increase loan servicing income and the value of the Company's mortgage loan
servicing portfolio because prepayments of mortgages decline and the average
life of loan servicing rights is lengthened.
COMPETITION
The Company competes nationally and locally with other mortgage bankers,
state and national banks, thrift institutions and insurance companies.
National banks and thrift institutions have substantially more flexibility in
their loan origination programs than the Company, which must originate loans
meeting the standards of the secondary market. Mortgage lenders compete
primarily with respect to price and service. Competition may also occur on
mortgage terms and closing costs. The Company competes, in part, by using its
commissioned sales force to maintain close relationships with real estate
brokers, builders, developers and members of its correspondent and broker
networks. In the opinion of management, no single mortgage lender dominates
the industry.
REGULATION
The Company is subject to the rules and regulations of, and examinations
by, FNMA, FHLMC, GNMA, FHA and VA with respect to originating, processing,
selling and servicing mortgage loans. These rules and regulations, among other
things, prohibit discrimination, provide for inspections and appraisals of
properties, require credit reports on prospective borrowers and, in some cases,
establish maximum interest rates, fees and loan amounts. Lenders are required
to submit audited financial statements annually. FNMA and GNMA require the
maintenance of specified net worth levels which vary depending on the amount of
FNMA loans serviced and GNMA mortgage-backed securities issued by the Company.
Mortgage loan origination activities are also subject to fair housing laws, the
Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Real Estate
Settlement Procedures Act, the Fair Credit Reporting Act, the Home Mortgage
Disclosure Act and the regulations promulgated thereunder which, among other
things, prohibit discrimination in residential lending and require the
disclosure of certain information to borrowers. Certain conventional mortgage
loans are also subject to state usury statutes. FHA and VA loans are exempt
from the effect of such usury statutes. There are various other state laws and
regulations affecting the Company's mortgage banking and insurance operations.
The Company's internal audit and quality control departments monitor compliance
with these laws and regulations.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 1,682 persons
(of whom approximately 376 were engaged in loan servicing activities and
approximately 1,306 were engaged in residential loan production activities,
appraisal functions, administrative and managerial responsibilities).
None of the Company's employees are covered by a collective bargaining
agreement. Management believes that the Company's employee relations are good.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, new products and similar matters. Such information is often subject
to risks and uncertainties. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause its actual results and experience to differ Source One Mortgage
Services Corporation and Subsidiaries materially from the anticipated results or
other expectations expressed in its forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include those discussed elsewhere herein (such
as loan servicing, competition and regulation).
7
<PAGE> 9
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
ITEM 2. PROPERTIES
The Company owns its principal executive offices in Farmington Hills,
Michigan which house the majority of the Company's employees. The Company also
owns an office building in West Bloomfield, Michigan which is currently leased
to a third party. The Company leases several other office facilities and
operating equipment under cancelable and noncancelable agreements. Most leases
contain renewal clauses.
ITEM 3. LEGAL PROCEEDINGS
Various claims have been made against the Company in the ordinary course
of business. Management believes that any liabilities which could result from
such claims would not materially affect the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE> 10
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Reported on page 4 of the Company's 1996 Annual Report to Shareholders,
herein incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Reported on pages 3-4 of the Company's 1996 Annual Report to Shareholders,
herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reported on pages 5-12 of the Company's 1996 Annual Report to
Shareholders, herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements reported in the consolidated financial statements of
the Company and the notes thereto and the report thereon of Ernst & Young LLP,
independent auditors, appearing on pages 13-40 of the Company's Annual Report
to Shareholders, herein incorporated by reference. Selected Quarterly
Financial Data reported on page 41 of the Company's 1996 Annual Report to
Shareholders, herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 24, 1997, the Company, upon recommendation of the Audit
Committee of the Board of Directors of its ultimate parent, Fund American
Enterprises Holding, Inc., appointed KPMG Peat Marwick LLP as its independent
auditors for the fiscal year ending December 31, 1997, to replace Ernst & Young
LLP ("Ernst & Young") effective upon the date of Ernst & Young's report on the
consolidated financial statements of the Company for the year ended December
31, 1996, contained herein.
In connection with the audits of the two years ended December 31, 1996,
there were no disagreements with Ernst & Young on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to their satisfaction, would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.
The Company has requested Ernst & Young to furnish a letter addressed to
the Commission stating whether it agrees with the above statements. A copy of
that letter, dated March 27, 1997, is filed as Exhibit 16 (a) hereto.
9
<PAGE> 11
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Board of Directors
(as of March 28, 1997)
Director
Name Age Since
- --------------------------------------------------------------------------------
<S> <C> <C>
Michael C. Allemang 54 1993
Terry L. Baxter 51 1994
James A. Conrad 55 1987
Robert R. Densmore 48 1986
Robert P. Keller 59 1995
Gordon S. Macklin 68 1996
James H. Ozanne 53 1996
Roger K. Taylor 44 1995
Allan L. Waters 39 1993
- --------------------------------------------------------------------------------
</TABLE>
Mr. Allemang has served as a director, Executive Vice President and Chief
Financial Officer of the Company since November 1993 and has also served as
Secretary of the Company since August 1996. He was a director and Vice
President of Fund American Enterprises, Inc. from August 1992 to December 1993.
Mr. Allemang was formerly Senior Vice President of Fireman's Fund Insurance
Company ("Fireman's Fund") from 1991 to 1992 and served as Vice President and
Treasurer of Fund American from 1989 to 1991 and Vice President of Fireman's
Fund from 1986 to 1991.
Mr. Baxter has served as a director of the Company since 1994. He
served as Chairman of the Company from June 1996 to March 1997. He has served
as President of White Mountains Holdings, Inc. since February 1997 and President
of Fund American Enterprises, Inc. from January 1994 to February 1997. He was
the Managing Director of the National Transportation Safety Board from 1990 to
1993, and prior to that was Senior Vice President of the National Bank of
Washington. Mr. Baxter previously served as Assistant Director of The Office of
Management and Budget under President Reagan and was a Vice President of GEICO
Corporation. Mr. Baxter is also a director of Fund American Enterprises, Inc.,
Centricut, LLC., Main Street America Holdings, Inc., White Mountains Holdings,
Inc. and White Mountains Insurance Company.
Mr. Conrad has served as a director of the Company since 1987. He has
served as President of the Company since December 1989 and President and Chief
Executive Officer of the Company since April 1990. He was Executive Vice
President, Production Division from 1987 to 1989 and Corporate Vice President,
Wholesale Division from 1985 to 1987. He is currently a member of the Board of
Governors for the Mortgage Banker's Association of America. Mr. Conrad joined
the Company in 1983.
Mr. Densmore has served as a director of the Company since 1986. He has
served as Executive Vice President of the Company's Servicing Division since
1987. He was the Chief Financial Officer from 1978 to 1987. Mr. Densmore
joined the Company in 1976.
Mr. Keller has served as a director of the Company since August 1995. He
has served as the President and Chief Executive Officer of Commerce Security
Bancorp, Inc. or its predecessor SDN Bancorp, Inc. since October 1995, and
President and Chief Executive Officer of Dartmouth Capital Group, Inc. since
June 1995. Commerce and Dartmouth are bank holding companies. From August 1994
to March 1995, Mr. Keller was the President and Chief Executive Officer of
Independent Bancorp of Arizona, Inc., a bank holding company. Prior to August
1994, Mr. Keller served as a consultant to Independent Bancorp of Arizona, Inc.
and Caliber Bank, and as President and Chief Executive Officer of New Dartmouth
Bank in Manchester, New Hampshire. Mr. Keller is also a director of Pennichuck
Corporation (a public utility holding company), Centricut, LLC and White
Mountains Holdings, Inc.
10
<PAGE> 12
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
Mr. Macklin has served as a director of the Company since February 1996.
He has served as Chairman of White River Corporation since December 1993. He
is also a director of Fund American Enterprises Holdings, Inc., MCI
Communications Corporation, CCC Information Services Group, Inc., MedImmune,
Inc., Shoppers Express and Spacehab, Inc. Mr. Macklin is director, trustee or
managing general partner, as the case may be, of 53 of the investment companies
in the Franklin Templeton Group of Funds. He was formerly Chairman of
Hambrecht and Quist Group, Director of H&Q Healthcare Investors and President
of the National Association of Securities Dealers, Inc.
Mr. Ozanne has served as a director of the Company since August 1996. He
has served as Chairman of the Company since March 1997 and as President of Fund
American Enterprises, Inc. since February 1997. He is the founder and
principal of Greenrange Partners. He was Chairman, President & Chief Executive
Officer of Nations Financial Holdings Corporation (formerly US WEST Capital
Corporation) from 1989 to 1996. From 1983 to 1989 he was Executive Vice
President, Asset Management and Consumer Groups, of General Electric Capital
Corporation ("GECC"), Stamford Connecticut and held other executive positions
with GECC. He is currently a director of Financial Security Assurance
Holdings, Ltd.("FSA"), a publicly-held financial guaranty insurer with
securities listed on the New York Stock Exchange.
Mr. Taylor has served as a director of the Company since August 1995. He
has served as the Chief Operating Officer of FSA, since May 1993. He is also a
member of FSA's management review committee for structured transactions and its
underwriting committee for municipal transactions. Prior to joining FSA in
1990 as an advisor for its new municipal bond insurance business, Mr. Taylor
was an Executive Vice President, founder and executive committee member of
Financial Guaranty Insurance Company. He is also a director of FSA.
Mr. Waters has served as a director of the Company since 1993. He is also
a director of Folksamerica Holding Co., Fund American Enterprises, Inc., FSA,
White Mountains Holdings, Inc. and White Mountains Insurance Company. Mr.
Waters has served as Senior Vice President and Chief Financial Officer of Fund
American since 1993. He was formerly Vice President and Controller of Fund
American Enterprises, Inc. from 1991 to 1993. Mr. Waters was Vice President,
Controller and Assistant Secretary of Fund American from 1990 to 1991, and was
Vice President, Finance of Fund American from 1988 to 1990.
COMMITTEES OF THE BOARD OF DIRECTORS
The major committees of the Board of Directors, committee membership and
the functions of those committees are described below.
EXECUTIVE COMMITTEE. The members of the Executive Committee are: Gordon
S. Macklin (Chairman), Terry L. Baxter and James A. Conrad.
The Executive Committee has been delegated all of the powers and authority
of the Board on all but such matters which are reserved to the Board by the
Delaware General Corporate Law.
AUDIT COMMITTEE. The members of the Audit Committee are: Allan L. Waters
(Chairman), Robert P. Keller and James H. Ozanne.
The Audit Committee exercises the powers of the Board in the management of
the business and affairs of the Company regarding the accounting, reporting and
financial control practices of the Company. It reviews the qualifications of
the independent certified public accountants, makes recommendations to the
Board as to their selection, reviews the plan, fees and results of their audit,
and reviews their non-audit services and related fees.
HUMAN RESOURCES COMMITTEE. The members of the Human Resources Committee
are: Terry L. Baxter (Chairman), Gordon S. Macklin and Roger K. Taylor.
The Human Resources Committee establishes compensation for executive
officers of the Company.
11
<PAGE> 13
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS (as of March 28, 1997)
<TABLE>
<CAPTION>
Executive
Officer
Name Age Position Since
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Michael C. Allemang 54 Executive Vice President, 1993
Chief Financial Officer
and Secretary
James A. Conrad 55 President and 1985
Chief Executive Officer
John A. Courson 54 Senior Vice President; 1990
President and Chief
Executive Officer of
Central Pacific
Mortgage Company
Robert R. Densmore 48 Executive Vice President 1983
Mark A. Janssen 38 Executive Vice President 1996
- --------------------------------------------------------------------------------
</TABLE>
Mr. Courson has served as a Senior Vice President of the Company and
President and Chief Executive Officer of Central Pacific Mortgage Company
("Central Pacific"), a wholly-owned subsidiary of the Company, since July 1990.
Prior to that he was President and Chief Operating Officer of Fundamental
Mortgage Corporation of Dallas, Texas.
Mr. Janssen has served as Executive Vice President of Capital Markets
since 1996. He has also served as Senior Vice President of Finance from 1992
to 1996, Corporate Vice President and Controller from 1991 to 1992 and Vice
President of the Financial Division from 1988 to 1992. Mr. Janssen joined the
Company in 1981.
Based upon its review of the reports furnished to the Company for 1996
pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, the
Company believes that all of such reports were filed on a timely basis, except
for an inadvertent late filing of a Form 3 by James H. Ozanne, a director.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding the salary,
incentive compensation and benefits paid by the Company to its Chief Executive
Officer, its four most highly compensated executive officers other than the
Chief Executive Officer and its executive officer who retired during 1996
(collectively, the "Named Executive Officers") during each of the three most
recent fiscal years.
12
<PAGE> 14
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Long-term All
Other Incentive Other
Name and Annual Compensation SARs Plan Compensation
Principal Position Year Salary Bonus (a) (#) Payouts (b)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James A. Conrad 1996 $237,936 $110,000 $ 7,481 - $- $ 7,500
President and Chief 1995 222,627 38,000 40,034 - - 4,500
Executive Officer 1994 219,212 75,000 32,718 - - 4,500
Robert R. Densmore 1996 $178,196 $ 64,000 $ 1,468 - $- $ 7,500
Executive Vice President 1995 166,748 34,500 10,698 - - 4,500
1994 160,000 54,000 23,920 - - 4,500
Michael C. Allemang 1996 $172,136 $ 62,000 $ 9,000 - $- $ 7,500
Executive Vice President, 1995 163,847 27,000 12,000 - - 4,500
Chief Financial Officer 1994 156,107 52,000 12,381 - - 4,500
and Secretary
Mark A. Janssen 1996 $125,033 $ 75,000 $ 9,000 - $- $ 7,352
Executive Vice President 1995 109,160 22,000 12,000 - - 4,025
1994 93,080 25,000 12,000 - - 3,212
John A. Courson 1996 $187,044 $138,496 $12,570 - $- $ 7,500
Senior Vice President; 1995 187,044 87,512 14,945 - - 4,500
President and Chief 1994 187,293 24,531 14,316 - - 4,500
Executive Officer of
Central Pacific
Robert W. Richards 1996 $116,829 $ - $ 4,652 - $- $442,500(c)
Chairman (retired) 1995 218,059 36,000 32,099 - - 4,500
1994 211,528 72,000 25,295 - - 4,500
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(a) Amounts shown for 1996 consist of the following: (i) Mr. Conrad:
interest reimbursement of $2,309 on amounts paid to purchase investment
contracts and reimbursement of automobile expenses; (ii) Mr. Densmore:
reimbursement of automobile expenses; (iii) Mr. Allemang: reimbursement of
automobile expenses; (iv) Mr. Janssen: reimbursement of automobile expenses;
(v) Mr. Courson: interest reimbursement of $570 on amounts paid to purchase
investment contracts and reimbursement of automobile expenses; (vi) Mr.
Richards: interest reimbursement of $2,252 on amounts paid to purchase
investment contracts and reimbursement of automobile expenses. Amounts shown
for 1995 consist of the following: (i) Mr. Conrad: interest reimbursement of
$32,578 on amounts paid to purchase investment contracts and reimbursement of
automobile expenses; (ii) Mr. Densmore: reimbursement of automobile expenses;
(iii) Mr. Allemang: reimbursement of automobile expenses; (iv) Mr. Janssen:
reimbursement of automobile expenses; (v) Mr. Courson: interest reimbursement
of $2,945 on amounts paid to purchase investment contracts and reimbursement of
automobile expenses; (vi) Mr. Richards: interest reimbursement of $23,661 on
amounts paid to purchase investment contracts and reimbursement of automobile
expenses. Amounts shown for 1994 consist of the following: (i) Mr. Conrad:
interest reimbursement of $25,638 on amounts paid to purchase investment
contracts and reimbursement of automobile expenses; (ii) Mr. Densmore:
interest reimbursement of $13,222 on amounts paid to purchase investment
contracts and reimbursement of automobile expenses; (iii) Mr. Allemang:
reimbursement of automobile and relocation expenses; (iv) Mr. Janssen:
reimbursement of automobile expenses; (v) Mr. Courson: reimbursement of
automobile expenses and interest reimbursement of $2,316 on amounts paid to
purchase investment contracts; (vi) Mr. Richards: interest reimbursement of
$18,611 on amounts paid to purchase investment contracts and reimbursement of
automobile expenses.
(b) Represents amounts allocated pursuant to the Company's employee stock
ownership plan ("ESOP"), except for (c) below.
(c) In addition to (b) above, amount includes: (i) consulting fee of
$35,000 and (ii) payment of $400,000 pursuant to the Agreement between Mr.
Richards and the Company.
INVESTMENT CONTRACTS AND STOCK APPRECIATION RIGHTS
In 1993, certain directors and executive officers of the Company exchanged
all their shares of the Company's Class B common stock for 1.558 units in an
investment contract and 1.558 units of Stock Appreciation Rights ("SAR") for
each Class B share held. The investment contract entitles the holder to
receive the lesser of $86.625 or the closing price of Fund American's common
stock on the day preceding exercise of the investment contract, multiplied by a
factor of 1.223 in cash for each unit held. The units may be exercised at any
time at the option of the holder.
13
<PAGE> 15
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
The SARs may be exercised at any time simultaneously with each exercised
investment contract unit at the option of the holders thereof. The value of
each SAR is equal to the difference between $86.625 and the closing price of
Fund American's common stock on the date preceding the exercise of the SAR
multiplied by a factor of 1.223. The following table summarizes SAR values as
of December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of unexercised
underlying unexercised in-the-money
SARs at fiscal year end (b) SARs at fiscal year-end (b)
------------------------------ ------------------------------
Shares acquired on
Name exercise (a) Value realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James A. Conrad 12,800 $ 92,432 4,000 0 $121,909 $0
Robert R. Densmore 0 0 12,000 0 365,727 0
Michael C. Allemang 0 0 0 0 0 0
Mark A. Janssen 104 963 0 0 0 0
John A. Courson 1,162 8,058 871 0 26,551 0
Robert W. Richards 18,804 151,020 0 0 0 0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the number of investment contract units with respect to
which the SARs were exercised.
(b) The number and value of unexercised SARs are based on shares of Fund
American common stock.
PENSION BENEFITS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Years of Service
-----------------------------------------------------
Remuneration 15 20 25 30 35
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$125,000 $30,000 $ 40,000 $ 50,000 $ 60,000 $ 70,000
150,000 36,000 48,000 60,000 72,000 84,000
175,000 42,000 56,000 70,000 84,000 98,000
200,000 48,000 64,000 80,000 96,000 112,000
225,000 54,000 72,000 90,000 108,000 126,000
250,000 60,000 80,000 100,000 120,000 140,000
300,000 72,000 96,000 120,000 144,000 168,000
400,000 96,000 128,000 160,000 192,000 224,000
450,000 108,000 144,000 180,000 216,000 252,000
500,000 120,000 160,000 200,000 240,000 280,000
- --------------------------------------------------------------------------
</TABLE>
The gross annual benefit paid is computed as a straight-life annuity
reduced by .485% of average salary up to covered compensation; that is, the
average of social security wage bases for the 35 years prior to retirement.
The annual benefits shown in the above table are not reduced to reflect the
limitations imposed by the Internal Revenue Code, which limit the annual
benefits payable from qualified plans to any individual. The Company maintains
a Supplemental Retirement Plan which is a non-qualified, unfunded deferred
compensation plan. Under the plan, certain highly compensated employees
affected by these limitations will receive additional retirement income
payments from the Company so that their pension benefits will equal the amounts
they would otherwise have been were it not for the limitations.
Messrs. Conrad, Densmore, Allemang, Janssen and Courson participate in
retirement plans under which they are entitled to receive estimated annual
retirement benefits in accordance with the table shown above.
Participants in the retirement plans are eligible to receive normal
retirement benefits at age 65, reduced normal retirement benefits at age 55
with at least ten years of service or a deferred vested benefit if they
terminate employment prior to retirement but after five years of service.
Eligible compensation for Messrs. Conrad, Densmore, Allemang, Janssen and
Courson, includes base salary plus bonus received,
14
<PAGE> 16
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
but is limited to not more than one and one-third of base salary in total.
Benefits accrued under the retirement plans are limited to eligible
compensation of $150,000 for each of the Named Executive Officers.
Benefits under the retirement plans for a single person are computed on a
straight-life basis and benefits for a married person are generally computed on
a joint and 50% survivor basis, subject to each participant's right to elect
alternative survivor benefits. As of December 31, 1996, Messrs. Conrad,
Densmore, Allemang, Janssen and Courson had 13, 20, 3, 15 and 6 whole years of
credited service, respectively, for purposes of computing their benefits under
the retirement plans.
COMPENSATION OF DIRECTORS
Directors who are neither employees of the Company nor employees or
directors of Fund American (Messrs. Keller, Macklin, Ozanne and Taylor) receive
an annual retainer of $10,000 and a fee of $1,500 for each board meeting
attended. In addition, Mr. Macklin receives an annual retainer of $15,000 as
Chairman of the Executive Committee and $60,000 as a consultant to the Chairman
of the Board of Directors. Mr. Ozanne receives an additional annual retainer
of $35,000 as a consultant to the Company.
EMPLOYMENT CONTRACTS IN TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In connection with the June 1996 retirement of Robert W.
Richards as Chairman of the Board of the Company and pursuant to a certain
agreement between him and the Company dated June 5, 1996, the Company agreed to
pay Mr. Richards (who is currently 54 years of age) the following: (i) the
balance of his ESOP account and the portion of any contribution by the Company
to the ESOP which would have been allocated to this account had he retired at
age 55 under the Company's Retirement Plan; (ii) a consulting fee of $5,000 per
month from June 1996 to December 1996; (iii) a lump sum payment of not less than
$400,000 in satisfaction of any claims he was entitled to under the Company's
Long Term Incentive Plan, (iv) medical and dental benefit coverage he would
have received had he retired at age 55 under the Company's Retirement Plan and
(v) pension benefits he would have received had he retired at age 58
(representing 30 years of credited service) under the Company's Retirement Plan.
In addition, Mr. Richards exercised his remaining 4,000 investment contract
units and corresponding rights under the Company's Stock Appreciation Rights
Plan in June 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Human Resources Committee of the Board of Directors establishes
compensation for executive officers of the Company. None of the members of the
Human Resources Committee, namely Terry L. Baxter, Gordon S. Macklin and Roger
K. Taylor, is, or was, an officer or employee of the Company or any of the
Company's subsidiaries.
15
<PAGE> 17
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 28, 1997, there were two holders of the 2,561,054 shares of
the Company's issued and outstanding common stock, each entitled to one vote,
as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Name and address of Number of Percent
Class beneficial owners shares owned of class
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock Fund American Enterprises, Inc. 2,456,054 96.0%
The 1820 House
Norwich, Vermont 05055-0850
Fund American Enterprises
Holdings, Inc. 105,000 4.0%
80 South Main Street
Hanover, NH 03755
- -------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The following table sets forth, as of March 28, 1997, beneficial ownership
of Fund American common stock by each director of the Company and each of the
current "Named Executive Officers" as defined herein.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name of Number of Percent
Title of Class beneficial owner shares owned (b) of class (c)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Common stock (a) Michael C. Allemang 202 *
Terry L. Baxter 43 *
James A. Conrad 921 *
John A. Courson 344 *
Robert R. Densmore 842 *
Mark A. Janssen 423 *
Robert P. Keller - -
Gordon S. Macklin 8,000 *
James H. Ozanne 600 *
Roger K. Taylor - -
Allan L. Waters 5,900 *
- ----------------------------------------------------------------------
</TABLE>
*Represents less than 1% of the outstanding shares.
(a) Represents Fund American common stock pursuant to Item 403(b) of Regulation
S-K of the Securities Act of 1933.
(b) Except for Messrs. Keller, Macklin, Ozanne, Taylor and Waters, includes
shares beneficially owned by the Company's Employee Stock Ownership Plan and
401(k) Savings Plan (whereby voting rights are exercised by the Plan's trustee
and attributable under the terms of the Plan to such person).
(c) Determined based on the beneficial ownership provisions specified in Rule
13d-3(d)(1) of the Exchange Act. Except to the extent indicated above, all
executive officers and directors have (or share with their spouses) sole voting
and investment power with respect to the shares for which they claim beneficial
ownership.
16
<PAGE> 18
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the terms of a tax allocation agreement between the Company
and Fund American, Fund American has agreed to compensate the Company for the
use of certain accumulated unrealized losses associated with the Company's
common equity securities portfolio if such losses, when realized, can be
utilized in Fund American's consolidated tax returns.
During 1995, the Company transferred a total of $27 million of certain
common equity securities and $93 million in cash and money market investments
to Fund American Enterprises, Inc. ("FAE"), then the sole common shareholder of
the Company, in exchange for 959,049 shares of the Company's common stock held
by FAE, which were retired by the Company. The Company recognized a $2.2
million pretax loss on the noncash exchanges.
During 1996, the Company sold $1.4 million of common equity securities to
FAE for cash proceeds of $.5 million. The Company recognized a $.9 million
pretax loss from the sale.
In January 1997, the Company transferred $2.3 million of common equity
securities to FAE in exchange for 21,239 shares of the Company's common stock
held by FAE, which were retired by the Company. The Company recognized a $.3
million pretax gain from the transfer in the first quarter of 1997.
During 1996, Mr. Conrad received $1,108,799 upon the exercise of 12,800
investment contract units, Mr. Janssen received $9,042 upon the exercise of 104
investment contract units, Mr. Courson received $100,659 upon the exercise of
1,162 investment contract units and Mr. Richards received $1,628,896 upon the
exercise of 18,804 investment contract units. See discussion of "Investment
Contracts and Stock Appreciation Rights" on page 12.
17
<PAGE> 19
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. (1) Financial Statements
The Financial Statements applicable to Source One Mortgage Services
Corporation and consolidated subsidiaries have been incorporated by
reference herein from Source One Mortgage Services Corporation's 1996
Annual Report to Shareholders as they appear in the Index to Financial
Statements and Financial Statement Schedules appearing on page 19 of
this Annual Report on Form 10-K.
(2) Financial Statement Schedules
None.
(3) Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K and by
this form are listed on page 22 of this Annual Report on Form 10-K.
The management contracts and compensatory plans or arrangements
required to be filed as exhibits and included in such list of exhibits
are as follows:
Exhibit 10(a) Source One Mortgage Services Corporation
Employee Stock Ownership and 401(k) Savings Plan and Trust
Agreement, as amended and restated effective as of October 1,
1996.
Exhibit 10(b) Form of Source One Mortgage Services
Corporation Voluntary Deferred Compensation Plan.
Exhibit 10(c) First Amendment to Source One Mortgage
Services Corporation Voluntary Deferred Compensation Plan.
Exhibit 10(d) Form of Source One Mortgage Services
Corporation Retirement Plan, as amended and restated.
Exhibit 10(e) First Amendment to Source One Mortgage
Services Corporation Retirement Plan.
Exhibit 10(f) Second Amendment to Source One Mortgage
Services Corporation Retirement Plan.
Exhibit 10(g) Third Amendment to Source One Mortgage
Services Corporation Retirement Plan.
Exhibit 10(h) Form of Source One Mortgage Services
Corporation Retirement Plan Trust Agreement.
Exhibit 10(i) Source One Mortgage Services Corporation
Supplemental Retirement Plan.
Exhibit 10(j) Source One Mortgage Services Corporation
Stock Appreciation Rights Plan.
Exhibit 10(w) Investment Contract by and between Source
One Mortgage Services Corporation and James A. Conrad.
Exhibit 10(x) Investment Contract by and between Source
One Mortgage Services Corporation and John A. Courson.
18
<PAGE> 20
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
Exhibit 10(y) Investment Contract by and between Source
One Mortgage Services Corporation and Robert R. Densmore.
Exhibit 10(aa) Source One Mortgage Services Corporation
Long Term Incentive Plan.
Exhibit 10(gg) Incentive Agreement in the event of a
sale of Source One Mortgage Services Corporation among certain
Senior Officers of Source One Mortgage Services Corporation and
Fund American Enterprises, Inc.
Exhibit 10 (hh) Retirement Agreement dated June 5, 1996 between
Source One Mortgage Services Corporation and Robert W. Richards.
19
<PAGE> 21
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
Source One Mortgage Services Corporation and Subsidiaries
Index to Financial Statements and Financial Statement Schedules
(Item 14(a))
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Annual Report
page(s)*
- --------------------------------------------------------------------------------
<S> <C>
FINANCIAL STATEMENTS:
Consolidated statements of condition
as of December 31, 1996 and 1995........................................... 14
Consolidated statements of income for each of the
years ended December 31, 1996, 1995 and 1994............................... 15
Consolidated statements of stockholders' equity for each
of the years ended December 31, 1996, 1995 and 1994........................ 16
Consolidated statements of cash flows for each
of the years ended December 31, 1996, 1995 and 1994..................... 17-18
Notes to consolidated financial statements................................ 19-40
OTHER FINANCIAL INFORMATION:
Report of independent auditors.............................................. 13
Selected quarterly financial data (unaudited)............................... 41
- --------------------------------------------------------------------------------
</TABLE>
Schedules for which provision is made in Regulation S-X are not required under
the related instructions or are inapplicable and, therefore, have been omitted
or the information required is included in the consolidated financial
statements or notes thereto.
*Source One Mortgage Services Corporation's 1996 Annual Report to
Shareholders.
20
<PAGE> 22
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
b. Reports on Form 8-K
The Company filed 7 reports on Form 8-K during the fourth quarter of 1996.
The dates and contents are described below.
<TABLE>
<S> <C>
October 23, 1996 Reported Distribution Date Statements for October 25,
November 1, November 1, and October 20, 1996 relating to the
Source One Mortgage Services Corporation Agency MBS
Multi-Class Pass-Through Certificates Series 1987-2, 1988-1,
1988-2 and 1990-1, respectively.
October 25, 1996 Reported Report to the Trustee and Report to the Certificate
Holders for the month of October 1996 relating to the Source
One Mortgage Services Corporation 11 1/2% Mortgage
Pass-Through Certificates, Series A.
November 22, 1996 Reported Distribution Date Statements for November 25,
December 1, December 1, and November 20, 1996 relating to
the Source One Mortgage Services Corporation Agency MBS
Multi-Class Pass-Through Certificates Series 1987-2, 1988-1,
1988-2 and 1990-1, respectively.
November 25, 1996 Reported Report to the Trustee and Report to the Certificate
Holders for the month of November 1996 relating to the
Source One Mortgage Services Corporation 11 1/2% Mortgage
Pass-Through Certificates, Series A.
December 20, 1996 Reported Source One Mortgage Services Corporation bid
acceptance to sell mortgage servicing rights to Chase
Manhattan Mortgage Corporation.
December 23, 1996 Reported Distribution Date Statements for December 25, 1996,
December 25, 1996, January 1, 1997, January 1, 1997 and
December 20, 1996 relating to the Source One Mortgage
Services Corporation Agency MBS Multi-Class Pass-Through
Certificates Series 1987-1, 1987-2, 1988-1, 1988-2 and
1990-1, respectively.
December 26, 1996 Reported Report to the Trustee and Report to the Certificate
Holders for the month of December 1996 relating to the
Source One Mortgage Services Corporation 11 1/2% Mortgage
Pass-Through Certificates, Series A.
</TABLE>
21
<PAGE> 23
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
c. Exhibits
Exhibit No.
3(a) Restated Certificate of Incorporation of Source One Mortgage Services
Corporation (incorporated by reference to Exhibit 4(a) of the February
28, 1994 Current Report on Form 10-K, File No. 1-12898, formerly File No.
33-8562).
(b) Certificate of Designation for Series A Preferred Stock of Source One
Mortgage Services Corporation (incorporated by reference to Exhibit 3(b)
of the Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 1-12898).
(c) Amended and Restated Bylaws of Source One Mortgage Services Corporation
(incorporated by reference to Exhibit 4(d) of Amendment No. 1 to the
registration statement on Form S-3, Registration No. 33-71924).
4(a) Pooling and Servicing Agreement between Manufacturers Hanover Mortgage
Corporation (now "Source One Mortgage Services Corporation") and National
Bank of Detroit dated March 1, 1983 and relating to Mortgage Pass-Through
Certificates, Series A, 11(% Pass-Through Rate (incorporated by reference
to Exhibit 4(a) of the Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 1-12898, formerly File No. 33-8562).
(b) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated September 25, 1987 and relating to Agency MBS
Multi-Class Pass-Through Certificates, Series 1987-1 (incorporated by
reference to Exhibit 10(jj) of the September 22, 1988 Current Report on
Form 8-K, File No. 1-12898, formerly File No. 33-8562).
(c) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated January 28, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1987-2 (incorporated by reference to
Exhibit 10(kk) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(d) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated March 30, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1988-1 (incorporated by reference to
Exhibit 10(ll) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(e) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated June 28, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1988-2 (incorporated by reference to
Exhibit 10(mm) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(f) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated July 30, 1990 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1990-1 (incorporated by reference to
Exhibit 4(a) of the July 30, 1990 Current Report on Form 8-K, File No.
1-12898, formerly File No. 33-8562).
(g) Indenture between Fireman's Fund Mortgage Corporation (now "Source One
Mortgage Services Corporation") and National Bank of Detroit dated
September 15, 1986 (incorporated by reference to Exhibit 4(a) of the
registration statement on Form S-1, Registration No. 33-8562).
22
<PAGE> 24
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
(h) First Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and National Bank of
Detroit dated November 1, 1986 (incorporated by reference to Exhibit 4(b)
of the registration statement on Form S-1, Registration No. 33-8562).
(i) Indenture between Fireman's Fund Mortgage Corporation (now "Source One
Mortgage Services Corporation") and The First National Bank of Chicago
dated November 21, 1988 (incorporated by reference to Exhibit 4(h) of the
Annual Report on Form 10-K for the year ended December 31, 1990, File No.
1-12898, formerly File No. 33-8562).
(j) First Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated November 21, 1988 (incorporated by reference to
Exhibit 4(i) of the Annual Report on Form 10-K for the year ended December
31, 1990, File No. 1-12898, formerly File No. 33-8562).
(k) Second Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated October 10, 1991 (incorporated by reference to
Exhibit 4(k) of the Annual Report on Form 10-K for the year ended December
31, 1991, File No. 1-12898, formerly File No. 33-8562).
(l) Third Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated October 10, 1991 (incorporated by reference to
Exhibit 4(l) of the Annual Report on Form 10-K for the year ended December
31, 1991, File No. 1-12898, formerly File No. 33-8562).
(m) Indenture between Source One Mortgage Services Corporation and The First
National Bank of Chicago dated May 7, 1992 (incorporated by reference to
Exhibit 19(a) of the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1992, File No. 1-12898, formerly File No. 33-8562).
(n) Resolutions of the Chairman of the Board of Source One Mortgage Services
Corporation regarding the issuance of medium-term indebtedness adopted
pursuant to authority delegated by the Board of Directors of Source One
Mortgage Services Corporation (incorporated by reference to Exhibit 19(b)
of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992,
File No. 1-12898, formerly File No. 33-8562). (Said resolutions establish
the terms of the Medium-Term Notes, Series B, of Source One Mortgage
Services Corporation issuable under the Indenture between Source One
Mortgage Services Corporation and The First National Bank of Chicago dated
May 7, 1992).
(o) Resolutions of the Chairman of the Board of Source One Mortgage Services
Corporation regarding the issuance of a series of medium-term notes,
Series B, entitled "9% Debentures due June 1, 2012" adopted pursuant to
authority delegated by the Board of Directors of Source One Mortgage
Services Corporation (incorporated by reference to Exhibit (i) of the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, File
No. 1-12898, formerly File No. 33-8562). (Said resolutions establish the
terms of the 9% Debentures due June 1, 2012 of Source One Mortgage
Services Corporation issued under the Indenture between Source One
Mortgage Services Corporation and The First National Bank of Chicago dated
May 7, 1992).
(p) Indenture dated December 1, 1995 between Source One Mortgage Services
Corporation and IBJ Schroeder Bank & Trust Company, as trustee
(incorporated by reference to Exhibit (a)(1) of Amendment No. 4 to the
Report on Schedule 13E-4 filed with the Securities and Exchange Commission
on December 21, 1995).
23
<PAGE> 25
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
(q) First Supplemental Indenture dated December 1, 1995 between Source One
Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as
trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to
the Report on Schedule 13E-4 filed with the Securities and Exchange
Commission on December 21, 1995).
(r) Form of 8.25% Debentures due 1996 (incorporated by reference to Exhibit
4(p) of the Annual Report on Form 10-K for the year ended December 31,
1992, File No. 1-12898, formerly File No. 33-8562).
(s) Form of Medium-Term Note, Series A (incorporated by reference to Exhibit
4(q) of the Annual Report on Form 10-K for the year ended December 31,
1992, File No. 1-12898, formerly File No. 33-8562).
(t) Form of 8.875% Notes due 2001 (incorporated by reference to Exhibit 4(r)
of the Annual Report on Form 10-K for the year ended December 31, 1992,
File No. 1-12898, formerly File No. 33-8562).
(u) Form of 9% Debentures due 2012 (incorporated by reference to Exhibit 4(s)
of the Annual Report on Form 10-K for the year ended December 31, 1992,
File No. 1-12898, formerly File No. 33-8562).
(v) Specimen Certificate for 8.42% Cumulative Preferred Stock, Series A, of
Source One Mortgage Services Corporation (incorporated by reference to
Exhibit 4(a) of the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, File No. 1-12898).
(w) Form of 9.375% Quarterly Income Capital Securities (Subordinated Interest
Deferrable Debentures, Due 2025); included in the First Supplemental
Indenture dated December 1, 1995 between Source One Mortgage Services
Corporation and IBJ Schroeder Bank & Trust Company, as trustee
(incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the
Report on Schedule 13E-4 filed with the Securities and Exchange Commission
on December 21, 1995).
10 Material Contracts
(a) Source One Mortgage Services Corporation Employee Stock Ownership and
401(k) Savings Plan and Trust Agreement (as amended and restated effective
as of October 1, 1996).*
(b) Form of Source One Mortgage Services Corporation Voluntary Deferred
Compensation Plan (incorporated by reference to Exhibit 10(e) of the
Annual Report on Form 10-K for the year ended December 31, 1993, File No.
1-12898).
(c) First Amendment to Source One Mortgage Services Corporation Voluntary
Deferred Compensation Plan (incorporated by reference to Exhibit 10(g) of
the Annual Report on Form 10-K for the year ended December 31, 1994, File
No. 1-12898).
(d) Form of Source One Mortgage Services Corporation Retirement Plan, as
amended and restated (incorporated by reference to Exhibit 10(hh) of the
Annual Report on Form 10-K for the year ended December 31, 1990, File No.
1-12898, formerly File No. 33-8562).
(e) First Amendment to Source One Mortgage Services Corporation Retirement
Plan (incorporated by reference to Exhibit 10(j) of the Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 1-12898).
(f) Second Amendment to Source One Mortgage Services Corporation Retirement
Plan (incorporated by reference to Exhibit 10(k) of the Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 1-12898).
24
<PAGE> 26
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
(g) Third Amendment to Source One Mortgage Services Corporation Retirement
Plan (incorporated by reference to Exhibit 10(l) of the Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 1-12898).
(h) Form of Source One Mortgage Services Corporation Retirement Plan Trust
Agreement (incorporated by reference to Exhibit 10(d) of the registration
statement on Form S-1, Registration No. 33-8562).
(i) Source One Mortgage Services Corporation Supplemental Retirement Plan
(incorporated by reference to Exhibit 10(n) of the Annual Report on Form
10-K for the year ended December 31, 1989, File No. 1-12898, formerly File
No. 33-8562).
(j) Source One Mortgage Services Corporation Stock Appreciation Rights Plan
(incorporated by reference to Exhibit 10(c) of the Current Report on Form
8-K dated November 11, 1993, File No. 1-12898, formerly File No. 33-8562).
(k) Second Amended and Restated Revolving Credit Agreement dated as of
November 12, 1996 by and among Source One Mortgage Services Corporation,
The Mortgage Authority, Inc. and Central Pacific Mortgage Company
(subsidiaries of Source One Mortgage Services Corporation), and The First
National Bank of Chicago, individually and as Administrative Agent and
Certain Other Lenders.*
(l) Second Amended and Restated Security and Collateral Agency Agreement dated
as of November 12, 1996 by and among Source One Mortgage Services
Corporation, The Mortgage Authority, Inc. and Central Pacific Mortgage
Company (subsidiaries of Source One Mortgage Services Corporation), The
First National Bank of Chicago (in its capacity as administrative agent
for the lenders), Norwest Bank Minnesota, N.A. (as the successor trustee
under certain Indentures under which Source One Mortgage Services
Corporation is an issuer of certain debt securities) and National City
Bank, Kentucky, as collateral agent.*
(m) Federal Tax Sharing Agreement dated as of January 1, 1991, and effective
for taxable years beginning after December 31, 1990, by and among Fund
American Enterprises Holdings, Inc. and Source One Mortgage Services
Corporation.*
(n) Eurocommercial Paper Program Agreement dated August 1, 1988 among
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and the Dealers named therein (incorporated by reference to
Exhibit 10(bb) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(o) Commercial Paper Dealer Agreement dated September 25, 1986 between
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and Shearson Lehman Commercial Paper Inc. (incorporated by
reference to Exhibit 10(cc) of the September 22, 1988 Current Report on
Form 8-K, File No. 1-12898, formerly File No. 33-8562).
(p) Commercial Paper Dealer Agreement dated September 23, 1986 between
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and First Boston Corporation (incorporated by reference to
Exhibit 10(dd) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
25
<PAGE> 27
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
(q) Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's
Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and Manufacturers Hanover Trust Company (incorporated by
reference to Exhibit 10(s) of the Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562).
(r) Amendment dated June 20, 1992 to Issuing and Paying Agency Agreement
dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and Manufacturers Hanover
Trust Company (incorporated by reference to Exhibit 10(x) of the Annual
Report on Form 10-K for the year ended December 31, 1992, File No.
1-12898, formerly File No. 33-8562).
(s) Amendment dated August 1, 1988 to Issuing and Paying Agency Agreement
dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and Manufacturers Hanover
Trust Company (incorporated by reference to Exhibit 10(t) of the Annual
Report on Form 10-K for the year ended December 31, 1990, File No.
1-12898, formerly File No. 33-8562).
(t) Letter of Representations dated November 23, 1990 relating to Issuing and
Paying Agency Agreement dated September 18, 1986 between Fireman's Fund
Mortgage Corporation (now "Source One Mortgage Services Corporation") and
Morgan Guaranty Trust Company of New York (incorporated by reference to
Exhibit 10(v) of the Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 1-12898, formerly File No. 33-8562).
(u) Depository Agreement dated June 16, 1993 between Source One Mortgage
Services Corporation and The First National Bank of Chicago (incorporated
by reference to Exhibit 10(a) of the Current Report on Form 8-K dated
February 28, 1994, File No. 1-12898, formerly File No. 33-8562).
(v) Stock Purchase Agreement dated December 15, 1995, between Source One
Mortgage Services Corporation and Fund American Enterprises, Inc.
(incorporated by reference to Exhibit 10(bb) of the Annual Report on Form
10-K for the year ended December 31, 1995, File No. 1-12898).
(w) Investment Contract by and between Source One Mortgage Services
Corporation and James A. Conrad (incorporated by reference to Exhibit
10(dd) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(x) Investment Contract by and between Source One Mortgage Services
Corporation and John A. Courson (incorporated by reference to Exhibit
10(ee) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(y) Investment Contract by and between Source One Mortgage Services
Corporation and Robert R. Densmore (incorporated by reference to Exhibit
10(ff) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(z) Investment Services Agreement dated November 13, 1991 between Source One
Mortgage Services Corporation and Fund American Enterprises, Inc.
(incorporated by reference to Exhibit 10(rr) of the Annual Report on Form
10-K for the year ended December 31, 1991, File No. 1-12898, formerly
File No. 33-8562).
(aa) Source One Mortgage Services Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10(ii) of the Annual Report on Form
10-K for the year ended December 31, 1994, File No. 1-12898).
(bb) Loan Agreement dated August 10, 1995 by and between Source One Mortgage
Services Corporation and Comerica Bank, as amended by an Amendment No. 1
to Loan Agreement dated 1995 and by an Amendment No. 2 to Loan Agreement
dated July 10, 1996.*
26
<PAGE> 28
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
(cc) First Amendment to the Second Amended and Restated Revolving Credit
Agreement by and among Source One Mortgage Services Corporation, The
Mortgage Authority, Inc. and Central Pacific Mortgage Company
(subsidiaries of Source One Mortgage Services Corporation), and The
First National Bank of Chicago, individually and as Administrative
Agent, and Certain Other Lenders.*
(dd) FNMA/FHLMC/GNMA Mortgage Servicing Purchase and Sale Agreement dated
February 28, 1997, by and between Source One Mortgage Services
Corporation and Chemical Mortgage Company.*
(ee) Mortgage Loan Interim Subservicing Agreement made as of March 1, 1997,
by and between Chemical Mortgage Company and Source One Mortgage
Services Corporation.*
(ff) Mortgage Loan Subservicing Agreement, by and between Chemical Mortgage
Company and Source One Mortgage Services Corporation.*
(gg) Incentive Agreement in the event of a sale of Source One Mortgage
Services Corporation among certain Senior Officers of Source One
Mortgage Services Corporation and Fund American Enterprises, Inc.
(incorporated by reference to Exhibit 10(ll) of the Annual Report on
Form 10-K for the year ended December 31, 1995, File No. 1-12898).
(hh) Retirement Agreement dated June 5, 1996 between Source One Mortgage
Services Corporation and Robert W. Richards.*
13 Source One Mortgage Services Corporation 1996 Annual Report to
Shareholders. Such report, except for those portions which are expressly
incorporated by reference in this Annual Report on Form 10-K, is
furnished only for the information of the Commission and is not deemed
filed as part hereof.*
16(a) Letter of Ernst & Young LLP dated March 27, 1997.*
21 Subsidiaries of Source One Mortgage Services Corporation.*
23 Consent of Ernst & Young LLP.*
24 Powers of Attorney.*
27 Financial Data Schedule.*
* Filed herewith
27
<PAGE> 29
FORM 10-K
- --------------------------------------------------------------------------------
Source One Mortgage Services Corporation and Subsidiaries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Source One Mortgage Services Corporation
Date: March 28, 1997 By: /s/ MICHAEL C. ALLEMANG
------------------------
Michael C. Allemang
Executive Vice President, Chief Financial
Officer and Secretary
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------------------------------------------
<S> <C> <C>
* Chairman and Director March 28, 1997
- -------------------
James H. Ozanne
* President, Chief Executive Officer March 28, 1997
- ------------------- and Director (Principal Executive Officer)
James A. Conrad
/s/ Michael C. Allemang
- ------------------------- Executive Vice President, Chief Financial March 28, 1997
Michael C. Allemang Officer, Secretary and Director
(Principal Financial Officer and
Principal Accounting Officer)
* Executive Vice President and Director March 28, 1997
- -------------------
Robert R. Densmore
* Executive Vice President March 28, 1997
- -------------------
Mark A. Janssen
* Director March 28, 1997
- -------------------
Terry L. Baxter
* Director March 28, 1997
- -------------------
Robert P. Keller
* Director March 28, 1997
- -------------------
Gordon S. Macklin
* Director March 28, 1997
- -------------------
Roger K. Taylor
* Director March 28, 1997
- -------------------
Allan L. Waters
*By: /s/ Michael C. Allemang
-----------------------
Michael C. Allemang
As Attorney-in-fact for the persons indicated
</TABLE>
- --------------------------------------------------------------------------------
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.
The Company does not have any voting securities registered under Section
12 of the Act, and all of the Company's voting securities are held by two
entities. Accordingly, no proxy statement, form of proxy or other proxy
soliciting material has been, or will be, sent to more than 10 of the
registrant's security holders with respect to any annual or other meeting of
security holders.
28
<PAGE> 30
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
c. Exhibits
Exhibit No.
3(a) Restated Certificate of Incorporation of Source One Mortgage Services
Corporation (incorporated by reference to Exhibit 4(a) of the February
28, 1994 Current Report on Form 10-K, File No. 1-12898, formerly File No.
33-8562).
(b) Certificate of Designation for Series A Preferred Stock of Source One
Mortgage Services Corporation (incorporated by reference to Exhibit 3(b)
of the Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 1-12898).
(c) Amended and Restated Bylaws of Source One Mortgage Services Corporation
(incorporated by reference to Exhibit 4(d) of Amendment No. 1 to the
registration statement on Form S-3, Registration No. 33-71924).
4(a) Pooling and Servicing Agreement between Manufacturers Hanover Mortgage
Corporation (now "Source One Mortgage Services Corporation") and National
Bank of Detroit dated March 1, 1983 and relating to Mortgage Pass-Through
Certificates, Series A, 11(% Pass-Through Rate (incorporated by reference
to Exhibit 4(a) of the Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 1-12898, formerly File No. 33-8562).
(b) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated September 25, 1987 and relating to Agency MBS
Multi-Class Pass-Through Certificates, Series 1987-1 (incorporated by
reference to Exhibit 10(jj) of the September 22, 1988 Current Report on
Form 8-K, File No. 1-12898, formerly File No. 33-8562).
(c) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated January 28, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1987-2 (incorporated by reference to
Exhibit 10(kk) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(d) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated March 30, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1988-1 (incorporated by reference to
Exhibit 10(ll) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(e) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated June 28, 1988 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1988-2 (incorporated by reference to
Exhibit 10(mm) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(f) Deposit Trust Agreement between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and the First National Bank
of Chicago dated July 30, 1990 and relating to Agency MBS Multi-Class
Pass-Through Certificates, Series 1990-1 (incorporated by reference to
Exhibit 4(a) of the July 30, 1990 Current Report on Form 8-K, File No.
1-12898, formerly File No. 33-8562).
(g) Indenture between Fireman's Fund Mortgage Corporation (now "Source One
Mortgage Services Corporation") and National Bank of Detroit dated
September 15, 1986 (incorporated by reference to Exhibit 4(a) of the
registration statement on Form S-1, Registration No. 33-8562).
(h) First Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and National Bank of
Detroit dated November 1, 1986 (incorporated by reference to Exhibit 4(b)
of the registration statement on Form S-1, Registration No. 33-8562).
(i) Indenture between Fireman's Fund Mortgage Corporation (now "Source One
Mortgage Services Corporation") and The First National Bank of Chicago
dated November 21, 1988 (incorporated by reference to Exhibit 4(h) of the
Annual Report on Form 10-K for the year ended December 31, 1990, File No.
1-12898, formerly File No. 33-8562).
(j) First Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated November 21, 1988 (incorporated by reference to
Exhibit 4(i) of the Annual Report on Form 10-K for the year ended
December 31, 1990, File No. 1-12898, formerly File No. 33-8562).
(k) Second Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated October 10, 1991 (incorporated by reference to
Exhibit 4(k) of the Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 1-12898, formerly File No. 33-8562).
(l) Third Supplemental Indenture between Fireman's Fund Mortgage Corporation
(now "Source One Mortgage Services Corporation") and The First National
Bank of Chicago dated October 10, 1991 (incorporated by reference to
Exhibit 4(l) of the Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 1-12898, formerly File No. 33-8562).
(m) Indenture between Source One Mortgage Services Corporation and The First
National Bank of Chicago dated May 7, 1992 (incorporated by reference to
Exhibit 19(a) of the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1992, File No. 1-12898, formerly File No. 33-8562).
(n) Resolutions of the Chairman of the Board of Source One Mortgage Services
Corporation regarding the issuance of medium-term indebtedness adopted
pursuant to authority delegated by the Board of Directors of Source One
Mortgage Services Corporation (incorporated by reference to Exhibit 19(b)
of the Quarterly Report on Form 10-Q for the quarter ended March 31,
1992, File No. 1-12898, formerly File No. 33-8562). (Said resolutions
establish the terms of the Medium-Term Notes, Series B, of Source One
Mortgage Services Corporation issuable under the Indenture between
Source One Mortgage Services Corporation and The First National Bank of
Chicago dated May 7, 1992).
(o) Resolutions of the Chairman of the Board of Source One Mortgage Services
Corporation regarding the issuance of a series of medium-term notes,
Series B, entitled "9% Debentures due June 1, 2012" adopted pursuant to
authority delegated by the Board of Directors of Source One Mortgage
Services Corporation (incorporated by reference to Exhibit (i) of the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1992, File
No. 1-12898, formerly File No. 33-8562). (Said resolutions establish the
terms of the 9% Debentures due June 1, 2012 of Source One Mortgage
Services Corporation issued under the Indenture between Source One
Mortgage Services Corporation and The First National Bank of Chicago
dated May 7, 1992).
(p) Indenture dated December 1, 1995 between Source One Mortgage Services
Corporation and IBJ Schroeder Bank & Trust Company, as trustee
(incorporated by reference to Exhibit (a)(1) of Amendment No. 4 to the
Report on Schedule 13E-4 filed with the Securities and Exchange
Commission on December 21, 1995).
(q) First Supplemental Indenture dated December 1, 1995 between Source One
Mortgage Services Corporation and IBJ Schroeder Bank & Trust Company, as
trustee (incorporated by reference to Exhibit (a)(2) of Amendment No. 4
to the Report on Schedule 13E-4 filed with the Securities and Exchange
Commission on December 21, 1995).
(r) Form of 8.25% Debentures due 1996 (incorporated by reference to Exhibit
4(p) of the Annual Report on Form 10-K for the year ended December 31,
1992, File No. 1-12898, formerly File No. 33-8562).
(s) Form of Medium-Term Note, Series A (incorporated by reference to Exhibit
4(q) of the Annual Report on Form 10-K for the year ended December 31,
1992, File No. 1-12898, formerly File No. 33-8562).
(t) Form of 8.875% Notes due 2001 (incorporated by reference to Exhibit 4(r)
of the Annual Report on Form 10-K for the year ended December 31, 1992,
File No. 1-12898, formerly File No. 33-8562).
(u) Form of 9% Debentures due 2012 (incorporated by reference to Exhibit 4(s)
of the Annual Report on Form 10-K for the year ended December 31, 1992,
File No. 1-12898, formerly File No. 33-8562).
(v) Specimen Certificate for 8.42% Cumulative Preferred Stock, Series A, of
Source One Mortgage Services Corporation (incorporated by reference to
Exhibit 4(a) of the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, File No. 1-12898).
(w) Form of 9.375% Quarterly Income Capital Securities (Subordinated Interest
Deferrable Debentures, Due 2025); included in the First Supplemental
Indenture dated December 1, 1995 between Source One Mortgage Services
Corporation and IBJ Schroeder Bank & Trust Company, as trustee
(incorporated by reference to Exhibit (a)(2) of Amendment No. 4 to the
Report on Schedule 13E-4 filed with the Securities and Exchange
Commission on December 21, 1995).
10 Material Contracts
(a) Source One Mortgage Services Corporation Employee Stock Ownership and
401(k) Savings Plan and Trust Agreement (as amended and restated
effective as of October 1, 1996).*
(b) Form of Source One Mortgage Services Corporation Voluntary Deferred
Compensation Plan (incorporated by reference to Exhibit 10(e) of the
Annual Report on Form 10-K for the year ended December 31, 1993, File No.
1-12898).
(c) First Amendment to Source One Mortgage Services Corporation Voluntary
Deferred Compensation Plan (incorporated by reference to Exhibit 10(g) of
the Annual Report on Form 10-K for the year ended December 31, 1994, File
No. 1-12898).
(d) Form of Source One Mortgage Services Corporation Retirement Plan, as
amended and restated (incorporated by reference to Exhibit 10(hh) of the
Annual Report on Form 10-K for the year ended December 31, 1990, File No.
1-12898, formerly File No. 33-8562).
(e) First Amendment to Source One Mortgage Services Corporation Retirement
Plan (incorporated by reference to Exhibit 10(j) of the Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 1-12898).
(f) Second Amendment to Source One Mortgage Services Corporation Retirement
Plan (incorporated by reference to Exhibit 10(k) of the Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 1-12898).
(g) Third Amendment to Source One Mortgage Services Corporation Retirement
Plan (incorporated by reference to Exhibit 10(l) of the Annual Report on
Form 10-K for the year ended December 31, 1994, File No. 1-12898).
(h) Form of Source One Mortgage Services Corporation Retirement Plan Trust
Agreement (incorporated by reference to Exhibit 10(d) of the registration
statement on Form S-1, Registration No. 33-8562).
(i) Source One Mortgage Services Corporation Supplemental Retirement Plan
(incorporated by reference to Exhibit 10(n) of the Annual Report on Form
10-K for the year ended December 31, 1989, File No. 1-12898, formerly
File No. 33-8562).
(j) Source One Mortgage Services Corporation Stock Appreciation Rights Plan
(incorporated by reference to Exhibit 10(c) of the Current Report on Form
8-K dated November 11, 1993, File No. 1-12898, formerly File No.
33-8562).
(k) Second Amended and Restated Revolving Credit Agreement dated as of
November 12, 1996 by and among Source One Mortgage Services Corporation,
The Mortgage Authority, Inc. and Central Pacific Mortgage Company
(subsidiaries of Source One Mortgage Services Corporation), and The First
National Bank of Chicago, individually and as Administrative Agent and
Certain Other Lenders.*
(l) Second Amended and Restated Security and Collateral Agency Agreement
dated as of November 12, 1996 by and among Source One Mortgage Services
Corporation, The Mortgage Authority, Inc. and Central Pacific Mortgage
Company (subsidiaries of Source One Mortgage Services Corporation), The
First National Bank of Chicago (in its capacity as administrative agent
for the lenders), Norwest Bank Minnesota, N.A. (as the successor trustee
under certain Indentures under which Source One Mortgage Services
Corporation is an issuer of certain debt securities) and National City
Bank, Kentucky, as collateral agent.*
(m) Federal Tax Sharing Agreement dated as of January 1, 1991, and effective
for taxable years beginning after December 31, 1990, by and among Fund
American Enterprises Holdings, Inc. and Source One Mortgage Services
Corporation.*
(n) Eurocommercial Paper Program Agreement dated August 1, 1988 among
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and the Dealers named therein (incorporated by reference to
Exhibit 10(bb) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(o) Commercial Paper Dealer Agreement dated September 25, 1986 between
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and Shearson Lehman Commercial Paper Inc. (incorporated by
reference to Exhibit 10(cc) of the September 22, 1988 Current Report on
Form 8-K, File No. 1-12898, formerly File No. 33-8562).
(p) Commercial Paper Dealer Agreement dated September 23, 1986 between
Fireman's Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and First Boston Corporation (incorporated by reference to
Exhibit 10(dd) of the September 22, 1988 Current Report on Form 8-K, File
No. 1-12898, formerly File No. 33-8562).
(q) Issuing and Paying Agency Agreement dated June 19, 1987 between Fireman's
Fund Mortgage Corporation (now "Source One Mortgage Services
Corporation") and Manufacturers Hanover Trust Company (incorporated by
reference to Exhibit 10(s) of the Annual Report on Form 10-K for the year
ended December 31, 1990, File No. 1-12898, formerly File No. 33-8562).
(r) Amendment dated June 20, 1992 to Issuing and Paying Agency Agreement
dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and Manufacturers Hanover
Trust Company (incorporated by reference to Exhibit 10(x) of the Annual
Report on Form 10-K for the year ended December 31, 1992, File No.
1-12898, formerly File No. 33-8562).
(s) Amendment dated August 1, 1988 to Issuing and Paying Agency Agreement
dated June 19, 1987 between Fireman's Fund Mortgage Corporation (now
"Source One Mortgage Services Corporation") and Manufacturers Hanover
Trust Company (incorporated by reference to Exhibit 10(t) of the Annual
Report on Form 10-K for the year ended December 31, 1990, File No.
1-12898, formerly File No. 33-8562).
(t) Letter of Representations dated November 23, 1990 relating to Issuing and
Paying Agency Agreement dated September 18, 1986 between Fireman's Fund
Mortgage Corporation (now "Source One Mortgage Services Corporation") and
Morgan Guaranty Trust Company of New York (incorporated by reference to
Exhibit 10(v) of the Annual Report on Form 10-K for the year ended
December 31, 1991, File No. 1-12898, formerly File No. 33-8562).
(u) Depository Agreement dated June 16, 1993 between Source One Mortgage
Services Corporation and The First National Bank of Chicago (incorporated
by reference to Exhibit 10(a) of the Current Report on Form 8-K dated
February 28, 1994, File No. 1-12898, formerly File No. 33-8562).
(v) Stock Purchase Agreement dated December 15, 1995, between Source One
Mortgage Services Corporation and Fund American Enterprises, Inc.
(incorporated by reference to Exhibit 10(bb) of the Annual Report on Form
10-K for the year ended December 31, 1995, File No. 1-12898).
(w) Investment Contract by and between Source One Mortgage Services
Corporation and James A. Conrad (incorporated by reference to Exhibit
10(dd) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(x) Investment Contract by and between Source One Mortgage Services
Corporation and John A. Courson (incorporated by reference to Exhibit
10(ee) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(y) Investment Contract by and between Source One Mortgage Services
Corporation and Robert R. Densmore (incorporated by reference to Exhibit
10(ff) of the Annual Report on Form 10-K for the year ended December 31,
1993, File No. 1-12898).
(z) Investment Services Agreement dated November 13, 1991 between Source One
Mortgage Services Corporation and Fund American Enterprises, Inc.
(incorporated by reference to Exhibit 10(rr) of the Annual Report on Form
10-K for the year ended December 31, 1991, File No. 1-12898, formerly
File No. 33-8562).
(aa) Source One Mortgage Services Corporation Long Term Incentive Plan
(incorporated by reference to Exhibit 10(ii) of the Annual Report on Form
10-K for the year ended December 31, 1994, File No. 1-12898).
(bb) Loan Agreement dated August 10, 1995 by and between Source One Mortgage
Services Corporation and Comerica Bank, as amended by an Amendment No. 1
to Loan Agreement dated 1995 and by an Amendment No. 2 to Loan Agreement
dated July 10, 1996.*
(cc) First Amendment to the Second Amended and Restated Revolving Credit
Agreement by and among Source One Mortgage Services Corporation, The
Mortgage Authority, Inc. and Central Pacific Mortgage Company
(subsidiaries of Source One Mortgage Services Corporation), and The
First National Bank of Chicago, individually and as Administrative
Agent, and Certain Other Lenders.*
(dd) FNMA/FHLMC/GNMA Mortgage Servicing Purchase and Sale Agreement dated
February 28, 1997, by and between Source One Mortgage Services
Corporation and Chemical Mortgage Company.*
(ee) Mortgage Loan Interim Subservicing Agreement made as of March 1, 1997,
by and between Chemical Mortgage Company and Source One Mortgage
Services Corporation.*
(ff) Mortgage Loan Subservicing Agreement, by and between Chemical Mortgage
Company and Source One Mortgage Services Corporation.*
(gg) Incentive Agreement in the event of a sale of Source One Mortgage
Services Corporation among certain Senior Officers of Source One
Mortgage Services Corporation and Fund American Enterprises, Inc.
(incorporated by reference to Exhibit 10(ll) of the Annual Report on
Form 10-K for the year ended December 31, 1995, File No. 1-12898).
(hh) Retirement Agreement dated June 5, 1996 between Source One Mortgage
Services Corporation and Robert W. Richards.*
13 Source One Mortgage Services Corporation 1996 Annual Report to
Shareholders. Such report, except for those portions which are expressly
incorporated by reference in this Annual Report on Form 10-K, is
furnished only for the information of the Commission and is not deemed
filed as part hereof.*
16(a) Letter of Ernst & Young LLP dated March 27, 1997.*
21 Subsidiaries of Source One Mortgage Services Corporation.*
23 Consent of Ernst & Young LLP.*
24 Powers of Attorney.*
27 Financial Data Schedule.*
* Filed herewith
<PAGE> 1
EXHIBIT 10(a)
SOURCE ONE MORTGAGE SERVICES CORPORATION
EMPLOYEE STOCK OWNERSHIP AND
401(k) SAVINGS PLAN AND TRUST AGREEMENT
(as amended and restated effective as of October 1, 1996)
<PAGE> 2
SOURCE ONE MORTGAGE SERVICES CORPORATION
EMPLOYEE STOCK OWNERSHIP AND
401(K) SAVINGS PLAN AND TRUST AGREEMENT
(AS AMENDED AND RESTATED EFFECTIVE OCTOBER 1, 1996)
INDEX
PART ONE
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS AND INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
A. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
B. Governing Law and Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13
C. Power to Interpret . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-13
D. Adoption of Plan by Related Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-14
ARTICLE II PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
A. Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
B. All Years of Service Counted for Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
C. Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
D. Inactive Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2
ARTICLE III CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
A. ESOP Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
B. Elective Contributions; Adjusted $7,000
Limitation; Corrective Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
C. Matching Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-3
D. Limitations on Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-3
E. Two or More Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4
F. Deductibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4
G. Contributions by Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5
H. Limitation on Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5
I. No Employee Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5
ARTICLE IV ALLOCATION AND ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
A-1. Establishment of ESOP Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
A-2. Allocation of ESOP Contributions and Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
B. Elective Contributions Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2
C. Matching Company Contributions Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2
D. Limitations on Annual Additions to Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-2
E. Special Limitations on Allocations of
Elective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-5
F. Special Limitations on Allocations of
Matching Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-6
G. Adjustments to Prevent Excess Allocations
of Elective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-8
H. Adjustments to Prevent Excess Allocations
of Matching Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-11
I. Adjustments to Prevent Multiple Use of
Alternative Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-13
J. Establishment and Objectives of
Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-13
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
K-1 Investment of Elective Contributions,
Matching Company Contributions,
and Rollover Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-14
K-2. Investment of ESOP Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-15
L. Participants' Rights to Periodic Reallocation
of Elective Contributions, Matching Company
Contributions and Rollover Contributions Accounts . . . . . . . . . . . . . . . . . . . . . . . IV-16
M. Participants' Credit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-16
N. Periodic Revaluation of Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-16
O. Periodic Adjustments to Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-17
P. Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-19
Q. Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-20
R. Accounting for Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-20
S. Company Stock Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-21
ARTICLE V RETIREMENT BENEFITS AND VESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
A. Normal Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
B. Late Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-2
C. Early Retirement; Vesting Schedule for ESOP
Contributions and Matching Company Contributions;
Full Vesting of Elective Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-2
D. Deadline for Payment of Benefits;
Required Beginning Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-5
E. Cash-Outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-5
F. Limitations on Payment of Benefits Derived
from Elective Contributions and Matching
Company Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-6
G. Termination of Employment by Reason of Dissolution . . . . . . . . . . . . . . . . . . . . . . . . V-6
H. Termination of Employment in Other Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . V-6
I. Temporary Absences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-6
J. Manner of Payment of Benefits from ESOP
Portion of Plan and from Company Stock Fund;
Company Stock or Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-8
ARTICLE VI OTHER BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1
A. Death, Spousal Consent to Designation
Required if Spouse is not Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1
B. Designation of Beneficiary and Method
of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1
C. Required Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-2
C-1. Manner of Payment; Company Stock or Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-2
D. Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-3
E. Hardship Distributions; Distributions
After Age 59-1/2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-3
F. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-5
ARTICLE VII [RESERVED] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1
PART TWO
ARTICLE VIII COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
A. Composition of Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
B. Removal and Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
C. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
D. Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
E. Records and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
F. Powers and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1
G. Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-2
H. Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-3
I. No Separate Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-4
J. Investment Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-4
K. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-4
ARTICLE IX TRUSTEE AND OTHER FIDUCIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1
A. Bonding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1
B. Protective Provisions for Fiduciaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1
C. Management and Control of Assets;
Consultants and Investment Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1
D. Participant-Directed Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4
E. Prohibited Transactions, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4
F. General Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-4
G. General Powers of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-5
H. Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-7
I. Periodic Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-8
J. Protective Provisions for Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-9
K. Provisions Pertaining to Co-Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-10
L. Removal and Resignation of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-10
M. Successor Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11
N. Settlement of Accounts upon Resignation
or Removal of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11
O. Segregated Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11
P. Investments in Common Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11
Q. Voting Rights of Investment Committee
with Respect to Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-11
R. Rights on Tender or Exchange
Offer for Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-12
ARTICLE X TERMINATION, AMENDMENT AND SUSPENSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
A. Termination, Etc.; Assumption of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-1
B. Liquidation of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2
C. Termination of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2
D. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X-2
ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
A. Persons Prohibited from Serving as
Fiduciaries, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
B. Information Required by ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
C. Retention of Records for Six Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
D. No Reversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1
E. Nonforfeitability, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2
F. Rollovers; Direct Transfers; Certain
Transfers Prohibited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3
G. Spendthrift Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5
H. Exceptions to Spendthrift Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5
I. Execution of Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6
J. Successors, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-6
K. [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7
L. Miscellaneous Protective Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
M. No Duress or Retaliation Against
Participants, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7
N. Record Keeping, Investigations, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7
O. Distributions to Minors and Incompetent
or Missing Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-7
P. Expenses and Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-8
Q. No Warranty of Company Stock Value or Dividends . . . . . . . . . . . . . . . . . . . . . . . . . XI-9
ARTICLE XII INSURANCE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1
A. No Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII-1
ARTICLE XIII TOP-HEAVY RULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII-1
A. Application; Top-Heavy Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII-1
B. Effect of Top-Heavy Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII-3
C. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII-5
</TABLE>
-iv-
<PAGE> 6
SOURCE ONE MORTGAGE SERVICES CORPORATION
EMPLOYEE STOCK OWNERSHIP AND
401(k) SAVINGS PLAN AND TRUST AGREEMENT
(as amended and restated effective October 1, 1996)
THIS AGREEMENT, made effective the 1st day of October, 1996, by and
between Source One Mortgage Services Corporation, a Delaware corporation
(herein called the "Company"), and Merrill Lynch Trust Company (herein, with
its predecessors and successors, called the "Trustee"),
WITNESSETH THAT WHEREAS --
(A) On or about February 14, 1991, the Company amended its then
existing profit-sharing plan, which met the requirements of Section 401(a) of
the Internal Revenue Code and qualified as an eligible individual account plan
under Section 407(d)(3) of ERISA, by adopting a document captioned "Fireman's
Fund Mortgage Corporation Amended Employee Stock Ownership Plan" (herein called
the "ESOP");
(B) The Company has amended the ESOP from time to time by adopting
the amendments bearing the captions and dates set forth below in this
paragraph:
<TABLE>
<S> <C>
First Amendment to Fireman's Fund
Mortgage Corporation Amended Employee
Stock Ownership Plan May 19, 1992
Second Amendment to Source One Mortgage
Services Corporation Amended Employee
Stock Ownership Plan November 11, 1993
Third Amendment to Source One Mortgage
Services Corporation Amended Employee
Stock Ownership Plan January 1, 1994
Fourth Amendment to Source One Mortgage
Services Corporation Amended Employee
Stock Ownership Plan August 23, 1994,
</TABLE>
the ESOP as so amended being hereinafter called the "Amended ESOP";
(C) On or about October 21, 1986, the Company and Manufacturers
National Bank of Detroit, a predecessor trustee of the ESOP, entered into an
agreement captioned "Fireman's Fund Mortgage Corporation Employee Stock
Ownership Trust Agreement" (herein called the "Trust Agreement") establishing a
trust (herein called the "ESOP Trust") to provide the benefits payable under
the ESOP;
1
<PAGE> 7
(D) The Company desires to amend and restate the Amended ESOP and
the ESOP Trust (i) to add a Code Section 401(k) feature to the Amended ESOP
(the Amended ESOP as so amended being herein called the "Plan"), (ii) to
continue a single trust (herein called the "Trust") to hold the assets of the
ESOP portion of the Plan and the 401(k) portion of the Plan in separate
accounts, and (iii) to embody the terms of the Plan and the Trust in a single
document; and
(E) The Company intends that the Plan and Trust shall continuously
qualify under those provisions of the federal income tax laws relating to
qualified plans under Section 401(a) of the Code, that the ESOP portion of the
Plan will continuously qualify as an eligible individual account plan under
Section 407(d)(3) of ERISA and that the 401(k) portion of the Plan will
continuously meet the requirements of Section 401(k) of the Code;
NOW, THEREFORE, in consideration of the premises and of the provisions
hereinafter set forth, it is agreed as follows:
1. The Amended ESOP and the Trust Agreement are hereby amended
and restated in their entirety to read as set forth in Parts One and Two
attached hereto.
2. No benefit provided under the Plan protected by Section
411(d)(6) of the Code and Regulations thereunder shall be eliminated by the
adoption of this agreement, and this agreement shall be construed and
administered so as to comply with such Code Section and Regulations.
3. This agreement shall be effective as of October 1, 1996.
IN WITNESS WHEREOF, the Company has duly executed this Agreement on
the _________ day of ____________________, 1996.
Signed and delivered SOURCE ONE MORTGAGE SERVICES
in the presence of: CORPORATION
_____________________ By _________________________________
Its __________________________
2
<PAGE> 8
Signed and delivered MERRILL LYNCH TRUST COMPANY
in the presence of:
_____________________ By __________________________________
Its ____________________________
This Agreement was prepared for execution by and between Merrill Lynch
Trust Bank of Michigan (the "Trustee") and Source One Mortgage Services
Corporation (the "Company"). However, the Trustee refused to execute this
Agreement. Instead, at its request it has entered into a separate Trust
Agreement with the Company designating it as trustee of the Plan and setting
forth the provisions relating to its service as a trustee of the Plan. The
Company acknowledges that if there is any conflict between the provisions of
the Plan and such separate Trust Agreement the provisions of the separate Trust
Agreement control, to the extent such provisions comply with ERISA.
3
<PAGE> 9
PART ONE
ARTICLE I
DEFINITIONS AND INTERPRETATION
A. Definitions. The following words and phrases, wherever capitalized,
shall have the following meanings respectively, unless the context otherwise
requires:
(1) "Account" or "account" means and includes a Participant's
Company Stock Account, Other Investments Account, Elective Contributions
Account, Matching Company Contributions Account, if any, and any additional
accounts established for the Participant under this Agreement. "ESOP Account"
means and includes a Participant's Company Stock Account and Other Investments
Account. "401(k) Account" means and includes a Participant's Elective
Contributions Account, Matching Company Contributions Account, if any, and
Rollover Account, if any.
(2) "Accrued Benefit" means the balance in a Participant's account
separately maintained under Article IV hereof.
(3) "Adjusted Equivalent", wherever applied to a dollar amount,
means said amount adjusted for increases in the cost of living in accordance
with applicable Treasury Regulations.
(4) "Administrative Parties" means and includes the Company, the
Trustee, the Committee and any Insurer.
(5) "Agreement" means this Agreement, as from time to time amended
or supplemented.
(6) "Anniversary Date" means the last day of the Plan Year.
(7) "Annual Addition" means the amounts allocated to a
Participant's account for any taxable year of the Company (which taxable year
also is the Limitation Year) which constitute -
(a) Company contributions to the Trust (including Elective
Contributions);
(b) Forfeitures credited to the Participant's account in respect
of such taxable year;
(c) Contributions allocated to an individual medical account
described in Section 415(l)(2) of the Code which is part of a
pension or annuity plan maintained by the Company and amounts
described in Section 419A(d)(2) of the Code dealing with
separate accounts for key employees, as defined in Section
419(A)(d)(3) of the Code established for post-retirement
medical benefits under a welfare benefit fund maintained by
the Company; and
I-1
<PAGE> 10
(d) Employee after-tax contributions.
Company Contributions initially allocated to a Participant's Elective
Contributions Account or Matching Company Contributions Account and later
determined to be an Excess Elective Deferral, Excess Contribution or Excess
Matching Contribution do not cease to be Annual Additions even if corrected
through distribution or other means.
(8) "Attained Age" of any individual means his chronological age,
not the age he was, or will be, on his nearest birthday.
(9) "Beneficiary" means the person so designated by a Participant
pursuant to this Agreement, or the person otherwise named as the Participant's
beneficiary under (A) or (B) of Article VI.
(10) "Board" means the Board of Directors of the Company.
(11) "Code" means the Internal Revenue Code of 1986, as from time
to time amended.
(12) "Committee" means the administrative committee appointed under
Article VIII, which shall be the plan administrator as defined in Section
414(g) of the Code, except as otherwise provided in Article VIII(I).
(13) "Company Contributions" means and includes ESOP Contributions,
Elective Contributions, Matching Company Contributions, if any, Qualified
Nonelective Contributions and Qualified Matching Contributions.
(14) "Company Stock" means shares of common stock, $1.00 par value,
of Fund American Enterprises Holdings, Inc., a Delaware corporation, which is
the indirect parent of the Company, as traded on the New York Stock Exchange.
(15) "Company Stock Account" means the account maintained to record
the number of shares and fractional shares of Company Stock allocable to a
Participant under the ESOP portion of the Plan out of Company Stock contributed
to the Trust by the Company, purchased and paid for by the Trust out of the
ESOP portion of the Plan, or received by the Trust as a stock dividend on
Company Stock held in a Participant's Company Stock Account.
(16) "Compensation" means all compensation as that term is defined
in Section 415(c)(3) of the Code. The Compensation of each Participant taken
into account under the Plan for any Plan Year beginning before January 1, 1994
shall not exceed the Adjusted Equivalent of $200,000. In determining the
Compensation of a Participant for purposes of this limitation, the rules of
section 414(q)(6) of the Code shall apply, except in applying such rules, the
term "family" shall include only the spouse of the Participant and any lineal
descendants of the Participant who have not attained
I-2
<PAGE> 11
age 19 before the close of the Plan Year. If, as a result of the application
of such rules such limitation is exceeded, then (except for purposes of
determining the portion of compensation up to the integration level if this
Plan is integrated with Social Security), the limitation shall be prorated
among the affected individuals in the ratio which each such individual's
Compensation as determined prior to the application of the limitation bears to
the total Compensation of all such individuals as so determined.
"Creditable Compensation," where used with reference to any
Participant or Employee, means the total Compensation (as above defined) paid
to him by the Company, including overtime and bonuses, if any, plus any amount
contributed by the Company pursuant to a salary reduction agreement and which
is not includible in the gross income of such individual under Section 125,
402(e)(3) or 403(b) of the Code, but excluding --
(i) Compensation paid in kind, including personal use of
a Company car and similar non-cash compensation,
(ii) Special allowances or reimbursements to cover
expenses on behalf of the Company or in the course of
employment with the Company (for example, but not by
way of limitation, travel and entertainment
expenses),
(iii) Deferred compensation and contributions to or under
any other employee retirement, welfare, medical,
dental, health, disability or insurance plan or
arrangement,
(iv) Compensation paid under the Source One Mortgage
Services Corporation Long Term Incentive Plan, the
Source One Mortgage Services Corporation Fund
American Stock Appreciation Rights Plan and any
Source One Mortgage Services Corporation Fund
American Investment Contract, and
(v) For purposes of the ESOP portion of the Plan only,
bonuses and commissions which in the aggregate exceed
one-third of the base salary paid in such taxable
year to any Participant who in the taxable year in
which such bonuses and commissions are earned is a
corporate vice president or higher ranking officer of
the Company or a vice president of the Company who
participates in the Company's Executive Incentive
Compensation Plan and is not a Regional Manager of
the Company.
The Creditable Compensation of each Participant taken into account
under the Plan for any Plan Year beginning before January 1, 1994 shall not
exceed the Adjusted Equivalent of $200,000, subject to the rules of Section
414(q)(6) of the Code applied in
I-3
<PAGE> 12
the same manner as in the first paragraph of this subparagraph (16) relating to
Compensation.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan Years
beginning on or after January 1, 1994, the Compensation and Creditable
Compensation of each Employee taken into account under the Plan shall not
exceed the OBRA '93 annual compensation limit. The OBRA '93 annual
compensation limit is $150,000, as adjusted by the Commissioner for increases
in the cost-of-living in accordance with Section 401(a)(17)(B) of the Code.
The cost-of-living adjustment in effect for a calendar year applies to any
period, not exceeding 12 months, over which Compensation and Creditable
Compensation is determined (determination period) beginning in such calendar
year. If a determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under Section 401(a)(17) of the Code shall mean the
OBRA '93 annual compensation limit set forth in this provision.
If Compensation or Creditable Compensation for any prior determination
period is taken into account in determining an Employee's benefits accruing in
the current Plan Year, the Compensation or Creditable Compensation for that
prior determination period is subject to the OBRA '93 annual compensation limit
in effect for that prior determination period. For this purpose, for
determination periods beginning before the first day of the first Plan Year
beginning on or after January 1, 1994, the OBRA '93 annual compensation limit
is $150,000.
(17) "Computation Period" means for purposes of determining
eligibility to participate in the Plan an Eligibility Computation Period and
for purposes of determining Years of Vesting Service a calendar year.
(18) "Defined Contribution Plan" means a plan described in Section
415(k) of the Code which provides for an individual account for each
participant and for benefits based solely on the amount contributed to the
participant's account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be allocated to such
participant's account, except as otherwise provided by Section 414(k) of the
Code for hybrid plans.
(19) "Disqualified Person" means a disqualified person as defined
in Section 4975(e)(2) of the Code.
(20) "Eligibility Computation Period" means with respect to an
Employee each consecutive twelve-month period commencing on the
I-4
<PAGE> 13
date the Employee first completes an Hour of Service and anniversaries thereof.
(21) "Employee" means an individual who renders services to the
Company as a common law employee or officer, i.e., a person whose compensation
from the Company is subject to federal income tax withholding, who -
(a) is not laid off without pay, on unpaid leave of absence, or on
active duty in the armed forces of any nation or international
body (other than as a member of the inactive reserve of the
armed forces of the United States of America while not
receiving pay from the Company); and
(b) is not included in an employee unit covered by a collective
bargaining agreement (not violated by this Subparagraph (b))
as to which there is evidence that retirement benefits were
the subject of good faith bargaining, all within the meaning
of Section 410(b)(3)(A) of the Code, except to the extent a
collective bargaining agreement provides for coverage under
the Plan.
An individual rendering services to the Company purportedly as an
independent contractor shall not be treated as an Employee before the Company
has acknowledged that it must withhold federal income tax from the individual's
compensation.
For purposes of the pension requirements of Section 414(n)(3) of the
Code (but not for purposes of eligibility to participate in the Plan) the term
Employee shall include leased employees as defined in Section 414(n)(2) of the
Code. Under this section of the Code the term leased employee means any person
who is not an employee of the Company or a Related Company (in this paragraph
any of such Companies being referred to as the "recipient") and who provides
services to the recipient if (i) such services are provided pursuant to an
agreement between the recipient and any other person (in this paragraph called
the "leasing organization"), (ii) such person has performed such services for
the recipient (or for the recipient and related persons) on a substantially
full-time basis for a period of at least one year, and (iii) such services are
performed under primary direction or control by the recipient or for Plan Years
beginning before January 1, 1997 such services are of a type historically
performed in the business field of the recipient by employees. Contributions
or benefits provided by the leasing organization which are attributable to
services performed for the recipient shall be treated as provided by the
recipient. However, a leased employee shall not be considered an Employee if
(i) such employee is covered by a money purchase pension plan providing (aa) a
nonintegrated employer contribution rate of at least 10% of compensation, as
defined in Section 415(c)(3) of the Code, but including amounts contributed
pursuant to a salary reduction agreement which are excludable from the
employee's gross
I-5
<PAGE> 14
income under Section 125, Section 402(e)(3), Section 402(h) or Section 403(b)
of the Code, (bb) immediate participation, and (cc) full and immediate vesting,
and (ii) leased employees do not constitute more than 20% of the recipient's
nonhighly compensated work force.
(For purposes of meeting the minimum coverage requirements of Section
410(b) of the Code, employee shall mean any employee of the Company or any
other employer required to be aggregated with the Company under Sections
414(b), (c), (m), or (o) of the Code.)
(22) "Entry Date" means and includes for purposes of the ESOP
portion of the Plan (a) the first day of a Plan Year and (b) the date six
months thereafter, and for purposes of the 401(k) portion of the Plan, the
beginning of the first payroll period coinciding with or next following (c)
October 1, 1996 or (d) the first day of any subsequent calendar quarter.
(23) "ERISA" means the Employee Retirement Income Security Act of
1974 (Public Law 93-406), as from time to time amended.
(24) "ESOP portion of the Plan" and "ESOP portion of the Trust"
mean the ESOP Accounts, the ESOP Contributions and the provisions of the Plan
and Trust which pertain to such accounts and contributions.
(25) "Excess Contribution" means Excess Contribution as defined in
Article IV(G)(2)(c).
(26) "Fiduciary" means and includes the Trustee, Committee members,
and any other Person who -
(a) Exercises any discretionary authority or discretionary control
respecting management of the Plan or exercises any authority
or control respecting management or disposition of its assets,
(b) Renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other
property of the Plan, or has any authority or responsibility
to do so,
(c) Has any discretionary authority or discretionary
responsibility in the administration of the Plan,
(d) Is described as a "fiduciary" in Section 3 of ERISA or is
designated to carry out fiduciary responsibilities (other than
trustee responsibilities) pursuant to this Agreement.
Notwithstanding the foregoing provisions of this definition, the word
"Fiduciary" shall in any particular context not include any Person or category
of Persons to the extent excluded by any applicable Regulation. The Committee
shall be the "Named
I-6
<PAGE> 15
Fiduciary" with respect to control and management of the operation and
administration of the Plan. The Investment Committee shall be the "Named
Fiduciary" with respect to the acquisition or sale of Company Stock, the
selection of the Investment Funds and generally the investment of Plan assets
as provided in Article VIII(I-1). The Trustee shall be the "Named Fiduciary"
for custody of Plan assets, the investment of said assets other than Company
Stock (except where an Investment Manager has been appointed to manage
investments), the disbursement of benefits as instructed by the Committee, and
the purchase and sale of Company Stock as instructed by the Committee.
(27) "Fixed Account" means an account which has become fixed,
Vested, set apart and segregated pursuant to Article IV(P), regardless of
whether or not the assets thereof shall be commingled with any other such
account or accounts.
(28) "401(k) portion of the Plan" and "401(k) portion of the Trust"
mean the 401(k) Accounts and the provisions of the Plan and Trust which pertain
to such accounts.
(29) "Highly Compensated Employee" means any Employee of the
Company or a Related Company who, during a particular Plan Year or the
preceding Plan Year -
(a) Was at any time a 5-percent owner as defined in Code Section
416(i)(1);
(b) Received aggregate compensation from the Company or any
Related Company in excess of the Adjusted Equivalent of
$75,000;
(c) Received aggregate compensation from the Company or any
Related Company in excess of the Adjusted Equivalent of
$50,000 and was in the top paid group of Employees for the
Plan Year; or
(d) Was at any time an officer of the Company or a Related Company
and received compensation greater than 50 percent of the
amount in effect under Code Section 415(b)(1)(A) for the Plan
Year;
provided that an Employee not described in (b), (c) or (d) above for the
preceding Plan Year shall not be treated as being described in (b), (c) or (d)
for the current Plan Year unless such person is a member of the group of 100
Employees paid the greatest compensation from the Company or any Related
Company during the current Plan Year. At the election of the Company the term
"preceding Plan Year" as used above in this Section (A)(29) shall be deemed to
mean the calendar year which coincides with the "particular Plan Year" as used
above for which the determination of Highly Compensated Employees is being
made, provided that if the Company makes this election with respect to this
Plan it shall apply to all plans, entities and arrangements of the Company. As
I-7
<PAGE> 16
used above in this Article I(A)(29), "compensation" means compensation as
described in Code Section 415(c)(3) increased by Elective Contributions and by
any other compensation not includible in gross income under Section 125 of the
Code; "top paid group" means the group consisting of the top 20-percent of
Employees when ranked on the basis of Plan Year compensation; and Employee
means Employee as defined in Article I(A)(19) but without regard to (b) of that
provision and without restricting such term to employees of the Company.
For purposes of (d) above no more than 50 Employees (or, if lesser,
the greater of three Employees or 10% of the Employees) shall be treated as
officers. If for any Plan Year no officer of the Company or a Related Company
meets the compensation requirements of (d) above, the highest paid officer for
such Plan Year shall be treated as a Highly Compensated Employee.
A former Employee who Separated from the Service of the Company or a
Related Company prior to the Plan Year for which the determination of Highly
Compensated Employees is being made shall be treated as a Highly Compensated
Employee if such Employee was a Highly Compensated Employee in the Plan Year of
separation or in any Plan Year ending on or after the Employee's 55th birthday.
If an Employee is during a particular Plan Year a family member of a
5-percent owner or of a Highly Compensated Employee who is one of the 10 most
highly compensated Employees (ranked on the basis of compensation paid by the
Company or any Related Company) during such Plan Year, then such Employee shall
not be considered a separate Employee, and any compensation paid to the
Employee and any contribution made on his behalf under the Plan shall be
treated as paid to (or on behalf of) the 5-percent owner or top-ten compensated
Employee. For these purposes, "family member" means the spouse or any lineal
ascendant or descendant of such 5-percent owner or top-ten Employee as well as
the spouses of such lineal ascendants and descendants.
(30) "Hour of Service" means with respect to an employee of the
Company:
(a) Each hour for which an employee is paid, or entitled to
payment, for the performance of duties for the Company during
the applicable Computation Period, with such hours being
credited to the employee for the Computation Period in which
such duties were performed;
(b) Each hour for which an employee is paid, or entitled to
payment, by the Company on account of a period of time during
which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation,
holiday, illness, incapacity (including disability), layoff,
jury duty, military duty or leave of absence; provided,
however that no more than 501 hours of service are required to
be credited under this item (b)
I-8
<PAGE> 17
to an employee on account of any single continuous period
during which the employee performs no duties (whether or not
such period occurs in a single Computation Period);
(c) Each Hour of Service for which he receives credit pursuant to
Article V(I), provided that the counting of such hours shall
not cause an individual who does not meet the requirements of
Article I(A)(19)(a) to become a Participant while temporarily
absent for a reason described in Article V(I); and
(d) Each hour for which back pay irrespective of mitigation of
damages, has been either awarded or agreed to by the Company.
These hours shall be credited to the employee for the
Computation Period or periods to which the award or agreement
pertains rather than the Computation Period in which the
award, agreement or payment is made.
(e) Hours shall not be credited under (a), (b) and/or (c) if such
hours are credited under (d) of this subparagraph (30).
Also, solely for purposes of determining whether a One-Year
Break in Service for eligibility and Vesting purposes has occurred,
but not for purposes of determining the number of Years of Service of
an Employee or Participant for eligibility or Vesting purposes, nor
for any other purpose under the Plan, an Employee or Participant who
is absent from work by reason of maternity or paternity shall be
deemed to have completed Hours of Service during such absence subject
to the following terms and conditions:
(f) Absence from work by reason of maternity or paternity means
and includes any absence (i) by reason of the pregnancy of the
individual, (ii) by reason of the birth of a child of the
individual, (iii) by reason of the placement of a child of the
individual in connection with the adoption of such child by
such individual, or (iv) for purposes of caring for such child
for a period beginning immediately following such birth or
placement,
(g) The number of Hours of Service deemed to have been completed
during any such absence (not to exceed 501) shall be the
number of Hours of Service which otherwise normally would have
been credited to such Employee or Participant but for such
absence, or in any case when the Committee is unable to
determine such number of hours, eight Hours of Service per day
of such absence,
(h) Hours of Service shall be deemed to have been completed during
an absence under this paragraph only in the Computation Period
in which the absence begins if an Employee or Participant
would be prevented from incurring a One-Year Break in Service
in such Computation Period
I-9
<PAGE> 18
solely because Hours of Service are deemed to have been
completed during such absence, or in any other case in the
immediately following Computation Period,
(i) No Hour of Service shall be deemed to have been completed
during an absence under this paragraph unless the Employee or
Participant furnishes to the Committee such timely information
as the Committee may reasonably require to establish that the
absence is for a reason described in (f) above and the number
of days of such absence, and
(j) Nothing in this paragraph shall be deemed to prevent the
crediting of Hours of Service for any purpose under the Plan
under Article II(D), even though such hours are not required
to be credited under (f) through (i) above.
The word Company as used in this paragraph shall be deemed to include
any Related Company. The foregoing definition shall be interpreted in
accordance with the rules set forth in Department of Labor Regulations Sections
2530.200b-2(b) and 2530.200b-2(c), the contents of which are hereby
incorporated herein by reference.
(31) "Investment Manager" means a Fiduciary which has fully
complied with the provisions of Section 3(38) of ERISA and has provided the
Committee and the Trustee with written acknowledgement that he has done so and
is a Fiduciary with respect to the Plan.
(32) "Limitation Year" shall mean the Plan Year unless the Company
has designated a different 12 consecutive month period pursuant to a written
resolution of its Board of Directors.
(33) "Lump Sum" means one or more payments all made within a single
taxable year of the recipient.
(34) "Normal Retirement Age," in respect of any Participant, means
his 65th birthday.
(35) "Normal Retirement Benefit" means the benefit payable under
Article V(A).
(36) "Normal Retirement Date," in respect of any Participant, means
the Anniversary Date coinciding with or next following his Normal Retirement
Age.
(37) "One-Year Break in Service" means a Computation Period during
which the employee in question has not completed more than 500 Hours of
Service.
(38) "Other Investments Account" means the account maintained to
record the amount (in dollars and cents) of Trust assets other than shares of
Company Stock allocable to a Participant under the ESOP portion of the Plan.
I-10
<PAGE> 19
(39) "Participant" means a person who at the time in question is
participating in the Plan pursuant to Article II.
(40) "Person" means any individual, corporation or other entity
mentioned in Section 3(9) of ERISA.
(41) "Plan Year" means the fiscal year on which the records of the
Plan are kept, which shall be the twelve consecutive month period ending on
December 31st.
(42) "Regulation" shall be construed as a reference to a
regulation, ruling, or other interpretation, validly promulgated by the
Department of Treasury or Department of Labor, as the case may be, and in
effect at the time in question.
(43) "Related Company" means and includes (i) each organization,
whether or not incorporated, which is a service organization and is a member of
an affiliated service group (within the meaning of Section 414(m) of the Code)
of which the Company is a member, (ii) all corporations which are members of a
controlled group of corporations (within the meaning of Section 414(b) of the
Code) of which the Company is a member, (iii) each trade or business, whether
or not incorporated, which is under common control (within the meaning of
Section 414(c) of the Code) with the Company and (iv) any other entity required
to be aggregated with the Company pursuant to Regulations under Section 414(o)
of the Code; provided that no such corporation, organization, trade or business
shall be considered to be a Related Company at any time prior or subsequent to
the period of time during which it meets the foregoing definition; provided
further that the status of being employed by a Related Company shall only
pertain to an individual during the period of time when his employer is a
Related Company, and not to any period of time prior or subsequent to its
Related Company status, unless this Agreement or an amendment to it shall
otherwise expressly provide.
(44) "Rollover Account" means the account established for any
Employee who makes a Rollover Contribution to the 401(k) portion of the Trust
under Article XI(F) after October 1, 1996 consisting of the Rollover
Contribution adjusted for earnings or losses.
(45) "Separation (or Separated) from Service" means separation (or
separated) from the service of the Company within the meaning of Section
410(a)(4) of the Code.
(46) "Trust Fund" means and includes any and all property which
shall comprise the corpus of the Trust at the inception thereof, together with
any contributions thereto and such other property as shall from time to time
become subject to the Trust, and any and all property acquired by the Trustee
in substitution for any such contributions or other property, and any and all
accumulations thereon, increments thereof, and accretions thereto, less amounts
paid out or sustained as distributions, expenses, losses or otherwise;
provided, further, that Contracts (as
I-11
<PAGE> 20
hereafter defined) shall be deemed to be property and included in the Trust
Fund, except as otherwise expressly stated in this Agreement.
(47) "Vested" when used with respect to a benefit, right or account
hereunder, means a claim obtained by a Participant or his Beneficiary to that
part of an immediate or deferred benefit under the Plan (arising from the
Participant's service) which is unconditional and legally enforceable against
the Trust; but a right to an Accrued Benefit derived from Company contributions
shall not fail to meet this definition solely (i) because it is not payable if
the Participant dies, or (ii) because the payment of benefits is suspended
during the period that the Participant is employed by the Company.
(48) "Year of Eligibility Service" means (i) with respect to a
full-time Employee, the period of 12 months ending on the first anniversary of
the date on which he first is credited with an Hour of Service and
anniversaries thereof, and (ii) with respect to a part-time Employee, an
Eligibility Computation Period during which such Employee is credited with at
least one thousand (1,000) Hours of Service. For purposes of determining an
Employee's Years of Eligibility Service, all periods of employment with the
Company or a Related Company, including periods prior to the effective date of
the Plan and periods when he does not meet the definition of an Employee, shall
be recognized.
(49) "Year of Vesting Service" means with respect to an Employee each
calendar year during which such Employee is credited with at least one thousand
(1,000) Hours of Service. For purposes of determining an Employee's vested
interest in his Account, all periods of employment with an Employer or a
Related Company, including periods prior to the Effective Date and periods when
he does not meet the definition of an Employee, shall be recognized, except as
provided in Article V(C)(2).
(50) Definitions of the following words and phrases are contained
in the following provisions, respectively:
<TABLE>
<S> <C>
Actual Contribution Percentage Article IV(F)
Actual Deferral Percentage Article IV(E)
Company Opening Paragraph
Company Stock Fund Article IV(S)
Contribution Percentage Article IV(F)
Deferral Percentage Article IV(E)
ESOP Account Article I(A)(1)
ESOP Contribution Article III(A)
Elective Contribution(s) Article III(B)
Elective Contributions Account Article IV(B)
Excess Contribution Article IV(G)(2)(c)
Excess Elective Deferrals Article III(B)
Excess Matching Contributions Article IV(H)(3)
401(k) Account Article I(A)(1)
Investment Fund Article IV(J)
</TABLE>
I-12
<PAGE> 21
<TABLE>
<S> <C>
Matching Company Contribution Article III(C)
Matching Company Contributions
Account Article IV(C)
Plan Opening Paragraph
Qualified Matching
Contributions Article IV(G)(2)(b)
Qualified Nonelective
Contributions Article IV(G)(2)(a)
Re-employment Commencement
Date Article V(C)(2)(a)
Required Beginning Date Article V(D)(2)
Rollover Contribution Article XI(F)
Top Heavy Plan and Related
Definitions Article XIII
Trust Opening Paragraph
Trustee Opening Paragraph
Valuation Date Article IV(P)(1)
</TABLE>
B. Governing Law and Rules of Construction. This Agreement shall be
governed in all respects, whether as to construction, capacity, validity,
performance or otherwise, by applicable Federal law and, to the extent that
Federal law is inapplicable, by the laws of the State of Michigan. Wherever
reasonably necessary, pronouns of any gender shall be deemed synonymous, as
shall singular and plural pronouns. The index to this Agreement and the
headings to the Articles and paragraphs of this Agreement are included solely
for convenience and shall in no event affect, or be used in connection with,
the interpretation of this Agreement. Each provision of this Agreement shall
be treated as a severable, to the end that, if any one or more provisions shall
be adjudged or declared illegal, invalid or unenforceable, this Agreement shall
be interpreted, and shall remain in full force and effect, as though such
provision or provisions had never been contained in this Agreement.
C. Power to Interpret. This Agreement shall be interpreted and
effectuated to comply with the applicable requirements of ERISA and the Code;
and all such applicable requirements are hereby incorporated herein by
reference. Any reference in this Agreement to the requirements of ERISA or any
section or title thereof shall be construed with due regard to Sections 108,
109 and 110 of ERISA. Subject to the above, the Committee shall have power to
construe and interpret this Agreement and all related documents and
administrative forms, including but not limited to the power to construe and
interpret all provisions of this Agreement and related documents and forms
relating to eligibility for benefits and the amount, manner, and time of
payment of benefits, any such construction and interpretation by the Committee
and any action taken thereon in good faith by any Administrative Party to be
final and conclusive upon any affected party. The Committee shall also have
power to correct any defect, supply any omission, or reconcile any
inconsistency in such manner and to such extent as the Committee shall deem
proper to carry out and put into effect this Agreement; and any construction
made or other action taken by the
I-13
<PAGE> 22
Committee pursuant to this Paragraph (C), if and when communicated in writing
to any other Administrative Party or affected party, shall be binding upon such
other party and may be relied upon by such other party.
D. Adoption of Plan by Related Companies. Any Related Company may adopt
this Agreement and the Plan and Trust for the benefit of its eligible employees
by action of its Board of Directors but only with the consent of the Company
evidenced by a resolution of its Board of Directors or the written consent of
its President or the Committee. Unless the context otherwise requires, at any
time while a Related Company has adopted this Agreement (i) the term Company as
used herein with respect to any Employee or Participant shall be construed to
mean the adopting corporation by which such Employee or Participant is
employed, and (ii) whenever the term Company is used in connection with action
to be taken in connection with the Plan, or its administration, e.g., in
Article X relating to the termination or amendment of the Plan or in Article
VIII(A) relating to the appointment of the Committee, the term Company shall
mean Company as defined in the opening paragraph of this Agreement. A transfer
of employment by a Participant between Related Companies shall not be
considered a termination of employment requiring a distribution from the Trust.
A Related Company which has adopted this Agreement shall, by doing so,
authorize Source One Mortgage Services Corporation to adopt any amendments to
this Agreement on behalf of the Related Company without the separate
authorization of such Related Company.
I-14
<PAGE> 23
ARTICLE II
PARTICIPATION
A. Eligibility. Eligibility to participate in the Plan will be
determined as follows:
(1) Each Employee who is a Participant in the ESOP portion of the
Plan immediately prior to October 1, 1996, shall continue to be a Participant
in the ESOP portion of the Plan, subject to the terms of this Agreement. Each
other Employee who has completed at least one Year of Eligibility Service shall
become a Participant in the ESOP portion of the Plan automatically on the Entry
Date coinciding with or next succeeding the first date when said condition is
fulfilled unless he was Separated from Service before such Entry Date and has
not been restored to Employee status prior to such date.
(2) Each Employee shall become a Participant in the 401(k) portion
of the Plan automatically on the earlier of the Entry Date coinciding with or
next following (i) the date on which he has completed one Year of Eligibility
Service or (ii) the first Entry Date on which he is employed in a position
normally requiring at least 1,000 Hours of Service annually. As a consequence
of being or becoming a Participant in the 401(k) portion of the Plan, the
Employee shall be eligible to elect as of the Entry Date on which he becomes a
Participant, or as of any later January 1, April 1, July 1 or October 1 on
which he is a Participant, to reduce his Creditable Compensation and to have
the Company make Elective Contributions on his behalf to the Trust in the
amount of such reductions in accordance with Article III(B).
B. All Years of Service Counted for Eligibility. For purposes of
determining eligibility to participate, all Years of Service with the Company
and/or a Related Company shall be counted.
C. Reemployment. A former Participant or Employee shall be subject to
the following rules with respect to participation in the Plan upon
reemployment:
(1) A former Participant or other former Employee who (i) did not
have a Nonforfeitable right to an accrued benefit derived from Company
contributions on the date his employment with the Company or a Related Company
terminated, (ii) did not complete at least one Year of Eligibility Service on
the date his employment terminated, and (iii) subsequently is reemployed by the
Company or a Related Company which has adopted the Plan shall become eligible,
or again become eligible, to participate in the ESOP portion of the Plan and
the 401(k) portion of the Plan upon meeting anew the eligibility requirements
of Article II(A)(1) and/or (2) above, as applicable.
(2) A former Participant or other former Employee who (i) had
completed at least one Year of Eligibility Service on the date his employment
with the Company or a Related Company terminated and
II-1
<PAGE> 24
(ii) subsequently is reemployed by the Company or a Related Company which has
adopted the Plan again shall become a Participant as soon as administratively
feasible after again becoming an Employee.
D. Inactive Participants. Subject to Article IV(P)(1) and (R) with
respect to certain Participants, it is agreed as follows:
(1) During any Plan Year in which a Participant does not have at
least 1,000 Hours of Service but remains employed by the Company throughout
such Plan Year, he shall be deemed an inactive Participant in the ESOP portion
of the Plan and as such he shall not share in the allocation of any ESOP
Contributions or forfeitures of the same, if any, for such Plan Year under
Article IV(A). However, he shall continue to be treated as a Participant in
such portion of the Plan for other Plan purposes including the periodic
adjustments to accounts of Participants described in Article IV(O)(1), (2), (3)
and (5) and he shall continue to be eligible to make Elective Contributions to
the Trust under Article II(A)(2). If in any subsequent Plan Year such an
inactive Participant in the ESOP portion of the Plan completes at least 1,000
Hours of Service he again shall become an active Participant in the ESOP
portion of the Plan.
(2) During any period when a Participant fails to conform to the
definition of an Employee because he is covered by a collective bargaining
agreement within the meaning of Article I(A)(21)(b) but is still employed by
the Company or because he is transferred to employment with a Related Company
which has not adopted the Plan for its eligible employees, he shall be deemed
an inactive Participant and during such period no Compensation paid to him by
the Company shall be taken into account for the purpose of allocating ESOP
Contributions or forfeitures of the same under Article IV or otherwise under
the Plan. However, he shall continue to be treated as a Participant for other
Plan purposes including the periodic adjustments to accounts of Participants
described in Article IV(O)(1), (2), (3) and (5). If such an inactive
Participant again conforms to the definition of an Employee he subsequently
shall be treated as an active Participant for all Plan purposes and
Compensation paid to him thereafter by the Company shall be taken into account
for the foregoing purposes.
(3) During any period (i) when an election under Article III(B) to
reduce the Creditable Compensation which a Participant otherwise would be
entitled to receive and to have the Company make Elective Contributions to the
Trust on his behalf is not in effect, (ii) when a Participant fails to meet the
definition of an Employee because he is covered by a collective bargaining
agreement within the meaning of Article I(A)(21)(b), or (iii) when because of a
transfer of employment he is employed by a Related Company which has not
adopted the Plan, he shall be considered an inactive Participant in the 401(k)
portion of the Plan and no Elective Contributions will be allocated to his
Elective Contributions Account for such period. However, during such period
the Participant shall continue to be treated as a Participant in the
II-2
<PAGE> 25
401(k) portion of the Plan for other Plan purposes including the periodic
adjustments to accounts of Participants described in Article IV(O)(1), (2), (3)
and (5).
II-3
<PAGE> 26
ARTICLE III
CONTRIBUTIONS
A. ESOP Contributions. Subject to the limitations of Article III(D) and
(E), the Company shall in respect of each taxable year, within the time
prescribed by law for filing its federal income tax return for such taxable
year (including extensions thereof), contribute to the ESOP portion of the
Trust in furtherance of the Plan, in cash or shares of Company Stock, such
amount, if any, as may be determined in the discretion of the Company by or in
accordance with a resolution of its Board of Directors adopted within the time
prescribed by law for filing its federal income tax return for such taxable
year, including extensions thereof, any such amounts being herein called "ESOP
Contributions."
B. Elective Contributions; Adjusted $7,000 Limitation; Corrective
Distributions. Subject to the limitations of Article III(D) and (E) and
Article IV(E), each Participant may elect within a reasonable time (to be
specified by the Committee) before any Entry Date, and before any additional
regular periodic dates which the Committee may designate and communicate to
Participants, on a form to be furnished to him by the Committee, to reduce the
Creditable Compensation which otherwise would be paid to him after such Entry
Date (or other designated date) and to have the Company make contributions
(herein called "Elective Contributions") to the 401(k) portion of the Trust in
the amounts of such reductions on his behalf, provided, however, that no
Participant may elect to have Elective Contributions (i) made to the 401(k)
portion of the Trust on his behalf of less than 1% or more than 14% (in whole
percentages) of such Creditable Compensation or (ii) made to the 401(k) portion
of the Trust and/or to any other tax qualified plan of the Company on his
behalf of more than the Adjusted Equivalent of $7,000 in any taxable year of
the Participant. Such an election, and any election to change the same made
pursuant to this Agreement, may be made only with respect to Creditable
Compensation which is not currently available to the electing Participant on
the Entry Date (or other designated date) as of which the election is made.
Elective Contributions made by means of payroll reductions shall be
paid by the Company to the Trustee at the earliest date on which they can
reasonably be segregated from the Company's general assets and in no event
later than the 15th business day of the month following the month in which (i)
the Elective Contributions are received by the Company (in the case of amounts
that a Participant pays to the Company) or (ii) such amounts would otherwise
have been paid to the Participants in cash (in the case of amounts withheld by
the Company from a Participant's Creditable Compensation), plus any extension
of such maximum time period obtained by the Company in accordance with
applicable U.S. Department of Labor Regulations, except that prior to February
3, 1997 Elective Contributions shall in no event be paid by the
III-1
<PAGE> 27
Company to the Trustee later than 90 days after the date on which such amounts
otherwise would have been paid to the Participants as Creditable Compensation.
Subject to the foregoing, Elective Contributions for a Plan Year shall be made
during the Plan Year or within the time prescribed in A. above for making ESOP
Contributions for the Plan Year, except that any additional Company
Contributions made under Article IV(G)(2) and treated as Elective Contributions
for the Plan Year may be made within 12 months following the close of the Plan
Year.
A Participant who has elected to have the Company make Elective
Contributions to the 401(k) portion of the Trust on his behalf may, as of any
Entry Date and as of any additional regular periodic dates as the Committee may
determine and communicate to Participants, change the annual dollar amount of
such Elective Contributions or the percentage of Creditable Compensation used
to determine the amount of such Elective Contributions. Also, at any time, a
Participant may elect to terminate his Elective Contributions for the period
subsequent to the effective date of the election. All such elections may be
made and become effective only in accordance with such reasonable rules as may
be established by the Committee. In the event of the termination of Elective
Contributions on behalf of a Participant under this paragraph, the Participant
shall not be entitled, until a subsequent Entry Date, to again elect that
Elective Contributions be made on his behalf.
If the Elective Contributions made to the 401(k) portion of the Trust
on behalf of a Participant under the Plan together with any elective deferrals
(as defined in Section 402(g)(3) of the Code) under another qualified cash or
deferred arrangement as defined in Section 401(k) of the Code, a simplified
employee pension as defined in Section 408(k) of the Code, a salary reduction
arrangement under Section 403(b) of the Code, a deferred compensation plan
under Section 457 of the Code, or a trust described in Section 501(c)(18) of
the Code, cumulatively exceed the limitation imposed by Section 402(g) of the
Code for the Participant's taxable year, the Participant may, not later than
March 1 following the close of such taxable year, notify the Committee in
writing of the excess Elective Contributions made to the 401(k) portion of the
Trust (in this Agreement called "Excess Elective Deferrals") and request that
such Excess Elective Deferrals be paid to the Participant.
In such event the Committee may direct the Trustee to pay such Excess
Elective Deferrals plus any income, or less any loss, allocable to the same to
the Participant not later than the first April 15 following the close of such
taxable year. At the request of the Participant Excess Elective Deferrals for
a taxable year of the Participant may be paid to the Participant from the
401(k) portion of the Trust during the taxable year for which they were made if
the Committee so directs the Trustee, provided that in such event (i) the
Participant designates the payment as an Excess Elective Deferral, (ii) the
payment is made after the date on which the Trustee received the Excess
Elective Deferral, and (iii) the
III-2
<PAGE> 28
Committee designates the payment as a distribution of Excess Elective
Deferrals.
Notwithstanding the foregoing, a Participant's Excess Elective
Deferrals for the taxable year of the Participant shall be reduced, but not
below zero, by any distribution of Excess Contributions made to the Participant
pursuant to Article IV(G) for the Plan Year beginning with or within the
taxable year of the Participant.
The income or loss allocable to an Excess Elective Deferral paid to a
Participant by the Trustee shall be an amount equal to the income or loss of
the Participant's Elective Contributions Account for the taxable year of the
Participant for which the Excess Elective Deferral was made multiplied by a
fraction the numerator of which is the Excess Elective Deferral made on behalf
of the Participant for such taxable year and the denominator of which is the
Participant's Elective Contributions Account balance as of the beginning of
such taxable year plus the Participant's Elective Contributions for such
taxable year.
If Elective Contributions for a Participant for any Plan Year exceed
the percentage limitation imposed on the same by the first paragraph of this
Article III(B) the excess shall be refunded to the Participant in the same
manner as Excess Elective deferrals.
C. Matching Company Contributions. Subject to the limitations of Article
III(D) and (E) and Article IV(F) and the rights and obligations of the
Committee under Article IV(G) and (H) to monitor and make adjustments in
certain contributions, the Company may in the discretion of its Board of
Directors make Matching Company Contributions for any Plan Year for those
Participants who make elective contributions for such Plan Year in such amount,
and subject to such limits, if any, as the Board of Directors may determine. A
Participant's Elective Contribution for the Plan Year for purposes of this
Paragraph (C) means his Elective Contribution remaining after distribution to
him of any Excess Elective Deferrals under Article III(B) and any Excess
Contributions under Article IV(G)(2)(c) for such Plan Year. The Company shall
contribute all such Matching Company Contributions to the 401(k) portion of the
Trust for each Plan Year from time to time during such Plan Year, or after the
end of such Plan Year but not later than the time prescribed by law for filing
its federal income tax return for its taxable year with respect to which the
Matching Company Contribution is made, including extensions thereof.
D. Limitations on Company Contributions. The Company Contributions to
the Trust for any taxable year of the Company shall not exceed the least of:
(1) The aggregate Company Contributions permitted by Article IV(D)
(specifying maximum Annual Additions) as applied to all Participants;
III-3
<PAGE> 29
(2) An amount equal to 15% of the aggregate Compensation paid
during such taxable year to Employees who are Participants as of the
Anniversary Date falling within such taxable year, plus the amount of any
unused pre-87 limitation carry forwards available under Section 404(a)(3)(A)(v)
of the Code in respect of such taxable year; or
(3) The Company contributions permitted by Article III(E)
(pertaining to two or more plans).
E. Two or More Plans. If the Company makes contributions for the taxable
year in question, in connection with one or more additional tax qualified plans
(including annuity plans) whose participants include one or more Participants
in this Plan, the total amount so contributed by the Company for said taxable
year, including its contribution for said taxable year under Paragraphs A, B
and C of this Article III, shall not exceed the greater of (i) 25% of the
Compensation otherwise paid during said taxable year to the participants in
said additional plans and the Participants in this Plan or (ii) the amount of
Company contributions necessary to satisfy the minimum funding standard
provided by Section 412 of the Code for the Plan Year which ends with or within
said taxable year (or for any prior Plan Year), all within the meaning of
Section 404(a)(7) of the Code; provided that:
(1) If any carry-over deduction is available to the Company for
said taxable year from one or more prior taxable years under Section
404(a)(7)(B), the amount thereof shall reduce the limitation set forth in the
foregoing portion of this Paragraph (E).
(2) If said limitation (reduced, if appropriate, under (1) above)
would otherwise be exceeded, the Company's contribution under this Plan for
said taxable year shall be reduced by an amount equal to the excess.
F. Deductibility. All Company Contributions to the Trust are conditioned
upon the Plan and Trust being initially tax qualified and upon deductibility
under Section 404 of the Code, unless otherwise expressly stated by the
Company. Accordingly (unless so stated), if the Plan and Trust are submitted
to the Internal Revenue Service for a determination letter within the time
provided by law for filing the Company's federal income tax return for the
fiscal year of the Company in which the Plan and Trust were adopted or by such
later date as the Secretary of the Treasury may prescribe, and are determined
to be not initially tax qualified, or if and to the extent that such a
deduction is disallowed within the meaning of Section 403(c)(2) of ERISA, the
contribution in question shall be repaid to the Company upon demand (but
subject to Paragraph (H) below and, if by reason of disallowance, only to the
extent disallowed) within one year after such disallowance or denial of initial
qualification. Any Elective Contributions so returned to the Company shall be
paid by the Company to the Employees on whose behalf they were made. If any
Company
III-4
<PAGE> 30
contribution for any taxable year shall exceed the amount deductible for said
taxable year under the Code, but shall not be repaid pursuant to the foregoing
sentence, the portion not so deductible shall in like amount reduce the
contribution required in respect of the subsequent taxable year during which
the disallowance or other determination of nondeductibility is made and (to the
extent not thereby consumed) any subsequent taxable year or years.
G. Contributions by Mistake. If and to the extent that a Company
contribution to the Trust is made as a result of facts and circumstances
constituting a good faith mistake of fact, the same shall be repaid to the
Company upon demand (but subject to Paragraph (H) below and only to the extent
of such mistake) within one year after the payment of the contribution. Any
Elective Contributions so returned to the Company shall be paid by the Company
to the Employees on whose behalf they were made.
H. Limitation on Repayments. All repayments of Company Contributions
under Paragraphs (F) and (G) above shall be subject to the conditions that:
(1) Such repayment shall not include any earnings attributable to
that portion of the Company contribution which qualifies for repayment under
Paragraphs (F) and (G) above.
(2) There shall be deducted from the amount of such repayment any
losses attributable to that portion of the Company Contribution which qualifies
for repayment under Paragraphs (F) and (G) above.
(3) If in any event such repayment would result in any
Participant's account being reduced to a balance which is less than the balance
which would have been in his account had the amount contributed by mistake of
fact or in excess of the deductible amount not been contributed, then the
amount to be repaid shall be reduced until no Participant's account shall be so
reduced by reason of such repayment.
I. No Employee Contributions. No Employee shall make any nondeductible
(after-tax) employee contributions to the Trust. This prohibition shall not
prevent rollovers or transfers to the Trust permitted under Article XI(F).
III-5
<PAGE> 31
ARTICLE IV
ALLOCATION AND ACCOUNTS
A-1. Establishment of ESOP Accounts. The Trustee shall from time to time
establish a Company Stock Account and an Other Investments Account for each
Participant in the ESOP portion of the Plan and shall thereafter maintain
records thereof. Such accounts shall be credited, or debited, annually with
shares of Company Stock and with amounts in dollars and cents, respectively, as
follows:
(1) Company Stock Account. The Company Stock Account maintained for
each Participant will be credited with his allocable share, including
fractional shares, of Company Stock purchased by the ESOP portion of the Trust
or contributed in kind to the ESOP portion of the Trust by the Company and with
any stock dividends on Company Stock held in his Company Stock Account.
(2) Other Investments Account. The Other Investments Account
maintained for each Participant will be credited, or debited, with its share of
the net income, or net loss, of the ESOP portion of the Trust and with any cash
dividends on Company Stock allocated to his Company Stock Account.
A-2. Allocation of ESOP Contributions and Forfeitures. The Company's ESOP
Contributions and forfeitures for any taxable year shall, subject to Article
II(D) respecting inactive Participants, promptly upon receipt be allocated
among the various Participants ESOP Accounts, as of the Anniversary Date
falling within such taxable year, as follows:
(1) Each Participant who (i) is employed by the Company on such
Anniversary Date (including any individual who first became a Participant as of
either Entry Date falling within such taxable year) and (ii) is credited with
at least 1000 Hours of Service in such taxable year shall be entitled to an
allocation of any ESOP Contributions for such taxable year. The amount of the
Company's ESOP Contribution allocated to each Participant's ESOP Account shall
be determined by multiplying the aggregate of such contribution by a fraction,
the numerator of which is the Participant's Creditable Compensation for such
taxable year and the denominator of which is the aggregate Creditable
Compensation of all Participants entitled to an allocation of the Company's
ESOP Contribution for such taxable year, provided that for purposes of this
subparagraph (1) the Creditable Compensation of any Participant who becomes a
Participant on the July 1st Entry Date falling within such taxable year shall
include only that Creditable Compensation received by the Participant on and
after such Entry Date.
(2) Forfeitures occurring or becoming final, as the case may be,
during each Plan Year, as provided in Article IV(Q) below (Forfeitures) shall,
as of the Anniversary Date falling within such taxable year, be credited to the
ESOP Accounts of Participants in
IV-1
<PAGE> 32
the same proportion as ESOP Contributions are to be credited under (1) above.
B. Elective Contributions Accounts. The Trustee shall establish an
account (herein called an "Elective Contributions Account") for each
Participant who makes Elective Contributions and shall thereafter maintain a
record thereof. Elective Contributions under Article III(B) for any Plan Year
shall, subject to the limitations of Paragraphs (D) and (E) of this Article IV,
be credited to the Participant's Elective Contributions Account upon receipt by
the Trustee not less frequently than monthly and in no event later than as of
the Anniversary Date falling within such Plan Year.
C. Matching Company Contributions Accounts. The Trustee shall establish
an account (herein called a "Matching Company Contributions Account") for each
Participant in respect of whom the Company makes a Matching Company
Contribution to the 401(k) portion of the Trust and shall thereafter maintain a
record thereof. Matching Company Contributions under Article III (C) for any
Plan Year in respect of each Participant shall be credited to the Participant's
Matching Company Contributions Account upon receipt by the Trustee and in no
event later than as of the Anniversary Date falling within such Plan Year. If
a Participant's employment terminates for any reason during the taxable year an
amount shall be allocated to his Matching Company Contribution Account only if,
and to the extent, required by Article IV(P)(1) (relating to Fixed Accounts).
D. Limitations on Annual Additions to Accounts. Notwithstanding the
foregoing provisions of Paragraphs (A-2), (B) and (C) of this Article IV or of
Article III, the contributions and other additions with respect to any one
Participant for any Limitation Year under all Defined Contribution Plans of the
Company, expressed as an Annual Addition to such Participant's Accounts under
this Plan and as annual additions (defined similarly to Article I(A)(7)
allocated to such Participant's accounts under all other Defined Contribution
Plans of the Company, shall not exceed the lesser of:
(1) The Adjusted Equivalent of $30,000.00, or, if greater,
one-fourth of the defined benefit dollar limitation set forth in Section
415(b)(1) of the Code as in effect for the Plan Year; or
(2) 25% of the Compensation paid to such Participant by the
Company in said taxable year;
provided that:
(a) if the applicable limitation of (1) or (2) above would
otherwise be exceeded, the amount allocated to said
Participant's Accounts shall be reduced by an amount equal to
the excess, and the Company's contributions for said Plan Year
shall be reduced to the extent necessary to avoid such excess;
provided, however, that if such reduction is not possible or
practical in the
IV-2
<PAGE> 33
circumstances because the Company's contributions for such Plan Year
have been made at the time it is discovered that said limitation would
otherwise be exceeded and the Committee determines that the excess
part of such contribution cannot be returned to the Company without
adversely affecting the tax qualified status of the Plan either as a
contribution made as a result of a mistake of fact or by reason of its
nondeductibility, then if such excess was created as the result of the
allocation of forfeitures, a reasonable error in estimating a
Participant's Compensation or Creditable Compensation, a reasonable
error in determining the amount of Elective Contributions that may be
made with respect to any individual under the limits of Section 415 of
the Code, or under other limited facts and circumstances which the
Commissioner of Internal Revenue finds justify the availability of the
rules set forth in the remainder of this Paragraph (D), the portion of
such excess, if any, attributable to Excess Elective Deferrals may be
distributed to the Participant to the extent such distribution reduces
the excess, and any remaining excess shall be held in a suspense
account, provided (i) no further Company contributions will be made to
the Trust on behalf of the Participants for which such excess exists
until they can be allocated to the accounts of such Participants
without violating the aforesaid limitation, (ii) investment gains
and/or losses and other Trust income are not allocated to such
suspense account and (iii) the amounts in such suspense account are
allocated to the accounts of Participants for which such excess exists
as of each subsequent date on which Company contributions are normally
allocated until such suspense account is exhausted. In the event the
Plan and Trust are terminated any amount remaining in such suspense
account at the time of termination shall be paid to the Company and to
the extent any such amount consists of Elective Contributions, the
Company shall pay the same to the appropriate Participants.
(b) if said Participant is also a participant in a Defined Benefit
Plan maintained by the Company, the sum of his Defined Benefit Plan
Fraction and his Defined Contribution Plan Fraction shall not exceed
1.0 for any taxable year of the Company, except as otherwise permitted
by Section 2004(a) of ERISA; provided, however, that if this
requirement would otherwise be violated, the Company shall first
adjust, freeze or suspend the rate of benefit accrual under any said
Defined Benefit Plan and shall then reduce the amount of its
contributions (or other components of Annual Additions) to any said
Defined Contribution Plan to the extent necessary, whether or not
including this Plan, with respect to the Participant in question, so
that such violation will not occur.
IV-3
<PAGE> 34
(c) for purposes of applying the foregoing provisions of this
Paragraph (D), all Defined Benefit Plans (whether or not
terminated) of the Company are to be treated as one Defined
Benefit Plan, and all Defined Contribution Plans (whether or
not terminated) of the Company are to be treated as one
Defined Contribution Plan, all within the meaning of (and to
the extent necessary to comply with) Section 415 of the Code
(including, in particular, subsection (f) thereof) and any
applicable Treasury Regulations thereunder.
(d) for purposes of this Article IV(D) the following terms,
wherever capitalized, shall have the following meanings,
respectively, unless the context otherwise requires:
(1) "Defined Benefit Plan" means any plan described in
Section 414(j) of the Code (listing tax qualified and
similar plans) which is not a Defined Contribution
Plan, except as otherwise provided in Section 414(k)
of the Code for hybrid plans.
(2) "Defined Benefit Plan Fraction" for a Participant for
any Plan Year is a fraction -
(i) The numerator of which is the
projected annual benefit of the
Participant under the Company's
Defined Benefit Plan (determined as
of the close of such Plan Year), and
(ii) The denominator of which is the
lesser of (A) the product of 1.25,
multiplied by the dollar limitation
in effect under Section 415(b)(1)(A)
of the Code for such Plan Year, or
(B) the product of 1.4, multiplied
by the amount which may be taken
into account under Section
415(b)(1)(B) of the Code with
respect to the Participant under
such Defined Benefit Plan for such
Plan Year.
(3) "Defined Contribution Plan" shall have the meaning
given to this term in Article I(A)(13).
(4) "Defined Contribution Plan Fraction" for a
Participant for any Plan Year is a fraction -
(i) The numerator of which is the sum of
the Annual Additions to the
Participant's account as of the
close of such Plan Year, and
(ii) The denominator of which is the sum
of the lesser of the following
amounts
IV-4
<PAGE> 35
determined for such Plan Year and for
each prior year of service with the
Company and/or a Related Company:
(A) the product of 1.25, multiplied
by the dollar limitation in effect
under Section 415(c)(1)(A) of the
Code for such Plan Year and for each
prior year of service with the
Company and/or a Related Company, or
(B) the product of 1.4, multiplied
by the amount which may be taken
into account under Section
415(c)(1)(B) of the Code with
respect to such Participant for such
Plan Year.
(e) The word Company as used above in this Article IV(D) shall be
deemed to include any Related Company unless the context
otherwise requires so that for purposes Section 415 of the
Code all employees of the Company and any Related Company
shall be treated as employed by a single employer.
E. Special Limitations on Allocations of Elective Contributions. For
each Plan Year beginning on or after October 1, 1996, allocations of Elective
Contributions to the Participants' Elective Contribution Accounts shall be
limited so that the Actual Deferral Percentage for the group of Participants
who are Highly Compensated Employees shall bear a relationship to the Actual
Deferral Percentage for the group of all other Participants which meets either
of the following tests:
(1) The Actual Deferral Percentage for the group of Participants
who are Highly Compensated Employees is not more than the Actual Deferral
Percentage for the group of all other Participants multiplied by 1.25, or
(2) The excess of the Actual Deferral Percentage for the group of
Participants who are Highly Compensated Employees over the actual Deferral
Percentage for the group of all other Participants is not more than 2
percentage points, and the Actual Deferral Percentage for the group of
Participants who are Highly Compensated Employees is not more than the Actual
Deferral Percentage for the group of all other Participants multiplied by 2.
For purposes of this Paragraph (E), "Actual Deferral Percentage" for
each group of Participants referred to above for a Plan Year means the average
of the ratios, calculated separately for each Participant in the group, of the
amount of Elective Contributions paid to the Trust on behalf of the Participant
for the Plan Year, to the Participant's Creditable Compensation paid in that
portion of the Plan Year during which he was a Participant. As separately
calculated for each Participant, such ratio is referred to as his "Deferral
Percentage."
IV-5
<PAGE> 36
The Deferral Percentage of a Participant for whom no Elective
Contribution is made for the Plan Year is zero. The Deferral Percentages of
Participants and the Actual Deferral Percentage of each group of Participants
shall be calculated to the nearest one hundredth of one percent. For purposes
of the tests described in (1) and (2) above Elective Contributions shall
include any amounts treated as Elective Contributions under Article IV(G).
For purposes of this Paragraph (E), the following special rules shall
apply:
(3) The Deferral Percentage for any Participant who is a Highly
Compensated Employee for the Plan Year and who is eligible to have Elective
Contributions allocated to his accounts under this Plan and under one or more
other plans or arrangements described in Section 401(k) of the Code that are
maintained by the Company or a Related Company shall be determined as if all
such Elective Contributions were made under a single plan or arrangement.
(4) For purposes of determining the Deferral Percentage of a
Participant who is a five percent owner of the Company or one of the ten most
highly paid Highly Compensated Employees, the Elective Contributions and
Creditable Compensation of such Participant shall include the Elective
Contributions and Creditable Compensation of family members, as defined in
Article I(A)(29). Such family members shall be disregarded as separate
Participants in determining the Actual Deferral Percentage for the group of
Participants who are not Highly Compensated Employees.
(5) The determination and treatment of the Elective Contributions
and Deferral Percentage of any Participant shall satisfy such other
requirements as may be prescribed by Regulation. The Company shall maintain
for a reasonable time records sufficient to demonstrate compliance with the
Regulations relating to the Actual Deferral Percentage test described above.
F. Special Limitations on Allocations of Matching Company Contributions.
For each Plan Year beginning on or after October 1, 1996, allocations of
Matching Company Contributions, if any, to Participants' Matching Company
Contributions Accounts shall be limited so that the Actual Contribution
Percentage for the group of Participants who are Highly Compensated Employees
shall bear a relationship to the Actual Contribution Percentage for the group
of all other Participants which meets either of the following tests:
(1) The Actual Contribution Percentage for the group of
Participants who are Highly Compensated Employees is not more than the Actual
Contribution Percentage for the group of all other Participants multiplied by
1.25, or
(2) The excess of the Actual Contribution Percentage for the group
of Participants who are Highly Compensated Employees over the Actual
Contribution Percentage for the group of all other Participants is not more
than 2 percentage points, and the Actual
IV-6
<PAGE> 37
Contribution Percentage for the group of Participants who are Highly
Compensated Employees is not more than the Actual Contribution Percentage for
the group of all other Participants multiplied by 2.
For purposes of this Paragraph (F), "Actual Contribution Percentage"
for each group of Participants for a Plan Year means the average of the ratios,
calculated separately for each Participant in the group, of the amount of
Matching Company Contributions paid to the Trust on behalf of each Participant
for the Plan Year, to the Participant's Creditable Compensation paid in that
portion of the Plan Year during which he was a Participant. As separately
calculated for each Participant, such ratio is referred to as his "Contribution
Percentage."
The Contribution Percentage of a Participant for whom no Matching
Company Contribution is made for the Plan Year is zero. The Contribution
Percentages of Participants and the Actual Contribution Percentage of each
group of Participants shall be calculated to the nearest one hundredth of one
percent. For purposes of the tests described in (1) and (2) above Matching
Company Contributions shall include any amounts treated as Matching Company
Contributions under Article IV(H).
For purposes of this Paragraph (F), the following special rules shall
apply:
(3) The Contribution Percentage for any Participant who is a
Highly Compensated Employee for the Plan Year and who is eligible to have
Matching Company Contributions allocated to his accounts under this Plan and
under one or more other plans or arrangements described in Section 401(k) of
the Code that are maintained by the Company or a Related Company shall be
determined as if all such Matching Company Contributions were made under a
single plan or arrangement.
(4) For purposes of determining the Contribution Percentage of a
Participant who is a five percent owner of the Company or one of the ten most
highly paid Highly Compensated Employees, the Matching Company Contributions
and Creditable Compensation of such Participant shall include the Matching
Company Contributions and Creditable Compensation of family members, as defined
in Article I(A)(26). Such family members shall be disregarded as separate
Participants in determining the Actual Contribution Percentage for the group of
Participants who are not Highly Compensated Employees.
(5) The determination and treatment of the Matching Company
Contributions and Contribution Percentage of any Participant shall satisfy such
other requirements as may be prescribed by Regulation. The Company shall
maintain for a reasonable time records sufficient to demonstrate compliance
with the Regulations relating to the Actual Contribution Percentage test
described above.
IV-7
<PAGE> 38
G. Adjustments to Prevent Excess Allocations of Elective Contributions.
In order to assure that no amounts in excess of the limitations imposed by
Paragraph (E) of this Article IV are allocated to the Elective Contributions
Account of any Participant who is a Highly Compensated Employee, and in the
case of (1) below also to assure that no amounts in excess of the limitations
imposed by Article III(D) and (E) and Article IV(D) are exceeded, the following
steps shall be taken:
(1) The Committee shall monitor elections made by Participants
under Article III(B) and Elective Contributions being made periodically to the
Trust pursuant to such elections and may require changes in the elections of
Participants, prior to or during any Plan Year, which would reduce the Elective
Contributions being made to the Trust on behalf of such Participants and the
Matching Company Contributions being made to the Trust on account of such
Elective Contributions and/or may reduce or terminate such Elective
Contributions and the Matching Company Contributions being made to the Trust on
account of such Elective Contributions at any time, in order to assure
compliance with any of the limitations referred to above.
(2) If notwithstanding the Committee's efforts to monitor
allocations to the Accounts of Participants as required by subparagraph (1)
above, the Committee determines after the end of a Plan Year that the
allocations of Elective Contributions to the Elective Contribution Accounts of
Highly Compensated Employees for such Plan Year exceed the special limitations
described in Paragraph (E) above:
(a) The Company may make additional discretionary contributions to
the Trust for such Plan Year for allocation to separate
accounts of Participants who are not Highly Compensated
Employees, or to accounts of all Participants, in amounts
which in combination with Elective Contributions (and any
Qualified Matching Contributions under (b) below) for such
Plan Year are sufficient to cause such special limitations not
to be exceeded. Any such contributions (i) shall be allocated
to separate accounts of such Participants in proportion to the
Creditable Compensation of each paid in that portion of the
Plan Year during which he was a Participant, (ii) shall meet
the requirements of Regulation 1.401(k)-1(b)(3), and (iii)
shall normally be made within the time prescribed by law for
filing the Company's federal income tax return for its taxable
year with respect to which the discretionary contribution is
made, including extensions thereof. Such special accounts
shall be fully Vested at all times, shall be subject to the
same limitations on distributions which are applicable to
Elective Contributions described in Article V(F) and shall be
treated as Elective Contributions for purposes of Article
IV(E). Contributions made to separate accounts pursuant to
this
IV-8
<PAGE> 39
subparagraph (a) are referred to in this Agreement as
"Qualified Nonelective Contributions".
(b) The Company may treat all or part of the Matching Company
Contributions to the Trust for such taxable year, all of which
are fully Vested and subject to the limitations of Article
V(F), as Elective Contributions. The Company may make
additional matching contributions to the Trust for such Plan
Year for allocation to separate accounts of Participants for
whom Elective Contributions were made to the Trust for such
Plan Year and who are not Highly Compensated Employees in
amounts which in combination with the Elective Contributions,
the Matching Company Contributions treated as Elective
Contributions (and any Qualified Nonelective Contributions
under (a) above) for such Plan Year are sufficient to cause
such special limitations not to be exceeded. Any such
additional matching contributions (i) shall be allocated to
separate accounts of such Participants in proportion to the
Elective Contributions made on behalf of each for the Plan
Year, (ii) shall meet the requirements of Regulation
1.401(k)-1(b)(3), and (iii) shall normally be made within the
time prescribed by law for filing the Company's federal income
tax return for its taxable year with respect to which the
matching contribution is made, including extensions thereof.
Such special accounts shall be fully Vested at all times and
shall be subject to the same limitations on distributions
which are applicable to Elective Contributions described in
Article V(F) and shall be treated as Elective Contributions
for purposes of Article IV(E). Also, the Company may transfer
to separate accounts of the kind described above any
Discretionary Company Contributions made to the Trust for such
Plan Year in which event they shall be treated in the same
manner and be subject to the same conditions as additional
matching contributions to the Trust under this subparagraph
(b). Matching Company Contributions which are fully Vested
and subject to the limitations of Article V(F), and
contributions made or transferred to separate accounts
pursuant to this subparagraph (b) are referred to in this
Agreement as "Qualified Matching Contributions".
(c) The Committee may direct the Trustee to distribute to
Participants who are Highly Compensated Employees that portion
of the Elective Contributions made to the Trust on their
behalf for such Plan Year which exceeds the special
limitations of Article IV(E) (in this Agreement called "Excess
Contributions") adjusted for earnings or losses. Any Excess
Contributions, as so adjusted, to be distributed to
Participants shall be designated as Excess Contributions by
the Company and be distributed after the close of the Plan
Year for which they were made normally within 2 1/2 months
after the end of such Plan Year, and
IV-9
<PAGE> 40
in any event not later than 12 months after the end of such
Plan Year. (If such Excess Contributions are distributed
after 2 1/2 months after the end of such Plan Year an excise
tax is imposed on the Company with respect to the same.)
(d) The Excess Contribution for the Plan Year, if any, for each
Participant who is a Highly Compensated Employee shall be
determined and distributed as follows:
(i) The Deferral Percentage of the Highly
Compensated Employee with the highest
Deferral Percentage shall be reduced to the
extent required to either (A) enable the Plan
to satisfy one of the Actual Deferral
Percentage tests of Article IV(E), or (B)
cause the Highly Compensated Employee's
Deferral Percentage to equal the Deferral
Percentage of the Highly Compensated Employee
with the next highest Deferral Percentage.
This process shall be repeated until the Plan
satisfies one of the Actual Deferral
Percentage tests of Article IV(E). When and
if the Deferral Percentages of two or more
Highly Compensated Employees to be reduced
are the same, such percentages shall be
reduced equally and simultaneously.
(ii) The Excess Contribution to be distributed to
each Highly Compensated Employee whose
Deferral Percentage is reduced under (i)
above shall be the Elective Contributions
made to the Trust for the Plan Year on behalf
of the Highly Compensated Employee
(determined prior to the application of this
subparagraph (d)) minus the amount determined
by multiplying the Highly Compensated
Employee's Creditable Compensation by his
Deferral Percentage (determined after the
application of this subparagraph (d)).
(e) The income or loss allocable to an Excess Contribution
distributed to a Highly Compensated Employee under (c) and (d)
above by the Trustee shall be an amount equal to the income or
loss of the Participant's Elective Contributions Account for
the Plan Year for which the Excess Contribution was made
multiplied by a fraction the numerator of which is the Excess
Contribution made on behalf of the Participant for such Plan
Year and the denominator of which is the Participant's
Elective Contributions Account balance as of the beginning of
such Plan Year plus the Participant's Elective Contributions
for such Plan Year.
IV-10
<PAGE> 41
(f) If a Participant and one or more of his family members are
subject to the family aggregation rules described in Article
IV(E) and Code Section 414(q)(6), the allocation and
distribution of Excess Contributions in respect of such
individuals shall be made in accordance with Regulation
1.401(k)-l(f)(5)(iii).
H. Adjustments to Prevent Excess Allocations of Matching Company
Contributions. If notwithstanding the Committee's efforts to monitor
allocations to the Accounts of Participants as required by Article IV(G)(1),
the Committee determines after the end of a Plan Year that the allocations of
Matching Company Contributions to the Matching Company Contribution Accounts of
Highly Compensated Employees for such Plan Year exceed the special limitations
described in Paragraph (F) above:
(1) The Company may make Qualified Nonelective Contributions to
the Trust for such Plan Year for allocation to separate accounts of
Participants in the same manner and subject to the same conditions set forth in
Article IV(G)(2)(a), which in combination with the Matching Company
Contributions (and any additional matching contributions under (2) below) for
such Plan Year are sufficient to cause such special limitations not to be
exceeded. Also, to cause such special limitations not to be exceeded the
Company may transfer to separate accounts of the kind described above any
Elective Contributions made to the Trust for such Plan Year provided that
Elective Contributions for such Plan Year meet the requirements of Reg.
1.401(m)-1(b)(2).
(2) The Company may make additional matching contributions to the
Trust for such Plan Year for allocation to the Matching Company Contributions
Accounts of Participants for whom Elective Contributions were made to the Trust
for such Plan Year and who are not Highly Compensated Employees in amounts
which in combination with the Matching Company Contributions (and any Qualified
Nonelective Contributions under (1) above) for such Plan Year are sufficient to
cause such special limitations not to be exceeded. Any such contributions
shall be allocated to the Matching Company Contributions Accounts of such
Participants in proportion to the Matching Company Contributions theretofore
made on behalf of each for the Plan Year, and shall normally be made within the
time prescribed by law for filing the Company's federal income tax return for
its taxable year with respect to which the additional matching contribution is
made, including extensions thereof. Such additional matching contributions
shall be subject to the same plan rules applicable to Matching Company
Contributions and shall be treated as Matching Company Contributions for
purposes of Article IV(F).
(3) The Committee may direct the Trustee to distribute to
Participants who are Highly Compensated Employees that portion of the Matching
Company Contributions made to the Trust on their behalf for such Plan Year
which exceeds the special limitations of Paragraph (F) of this Article IV (in
this Agreement called "Excess
IV-11
<PAGE> 42
Matching Contributions") adjusted for earnings or losses. Any Excess Matching
Contributions, as so adjusted, to be distributed to Participants shall be
designated as Excess Matching Contributions by the Company and be distributed
after the close of the Plan Year for which they were made normally within 2 1/2
months after the end of such Plan Year, and in any event not later than 12
months after the end of such Plan Year. (If such Excess Matching Company
Contributions are distributed after 2 1/2 months after the end of such Plan
Year an excise tax is imposed on the Company with respect to the same.)
(4) The Excess Matching Company Contribution for the Plan Year, if
any, for each Participant who is a Highly Compensated Employee shall be
determined and, if not reallocated under subparagraph (7) below to the accounts
of other Participants, shall be distributed, as follows:
(a) The Contribution Percentage of the Highly Compensated Employee
with the highest Contribution Percentage shall be reduced to
the extent required to either (A) enable the Plan to satisfy
one of the Actual Contribution Percentage tests of Article
IV(F), or (B) cause the Highly Compensated Employee's
Contribution Percentage to equal the Contribution Percentage
of the Highly Compensated Employee with the next highest
Contribution Percentage. This process shall be repeated until
the Plan satisfies one of the Actual Contribution Percentage
tests of Article IV(F). When and if the Contribution
Percentages of two or more Highly Compensated Employees to be
reduced are the same, such percentages shall be reduced
equally and simultaneously.
(b) The Excess Matching Company Contribution to be distributed to
each Highly Compensated Employee whose Contribution Percentage
is reduced under (a) above shall be the Matching Company
Contributions made to the Trust on behalf of the Highly
Compensated Employee (determined prior to the application of
this subparagraph (4)) minus the amount determined by
multiplying the Highly Compensated Employee's Creditable
Compensation by his Contribution Percentage (determined after
the application of this subparagraph (4)).
(5) The income or loss allocable to an Excess Matching
Contribution distributed to a Highly Compensated Employee under (3) and (4)
above by the Trustee shall be an amount equal to the income or loss of the
Participant's Matching Company Contributions Account for the Plan Year for
which the Excess Matching Contribution was made multiplied by a fraction the
numerator of which is the Excess Matching Company Contributions made on behalf
of the Participant for such Plan Year and the denominator of which is the
Participant's Matching Company Contributions Account balance as of the
beginning of such Plan Year plus the Matching Company Contributions made on
behalf of the Participant for such Plan Year.
IV-12
<PAGE> 43
(6) If a Participant and one or more of his family members are
subject to the family aggregation rules described in Article IV(F) and Code
Section 414(q)(6), the allocation and distribution of Excess Matching
Contributions in respect of such individuals shall be made in accordance with
Regulation 1.401(m)-l(e)(5)(iii).
(7) Instead of directing the Trustee to distribute any Excess
Matching Company Contributions for the Plan Year to Participants who are Highly
Compensated Employees, the Committee may direct the Trustee to allocate such
Excess Matching Company Contributions, adjusted for income or loss and
determined and allocated as provided in (3) through (6) above, to the Matching
Company Contribution Accounts of Participants who are not Highly Compensated
Employees and for whom Elective Contributions were made to the Trust for the
Plan Year. Such Excess Matching Company Contributions as so adjusted shall be
allocated among such accounts in the ratio which each such Participant's
Creditable Compensation for the Plan Year bears to the Creditable Compensation
of all such Participants for the Plan Year. Any Matching Company Contribution
for the Plan Year made to the Trust on account of an Elective Contribution
which is determined to be an Excess Elective Deferral under Article III(B) or
an Excess Contribution under Article IV(E) and (G) or (i) shall, after
adjustment for income or loss, be allocated among the Matching Company
Contribution Accounts of such participants in the same manner.
I. Adjustments to Prevent Multiple Use of Alternative Limitation. If
multiple use of the alternative limitations described in Articles IV(E)(2) and
IV(F)(2), as defined by Regulation 1.401(m)-2, shall occur, such multiple use
shall be corrected by reducing the Actual Deferral Percentage of the group of
Highly Compensated Employees in the manner described in Article IV(G)(2)(d) and
(e). In determining whether multiple use of such alternative limitations has
occurred the applicable Actual Deferral Percentages and Actual Contribution
Percentages shall be determined after all adjustments made under Article IV(G)
and (H). The required reduction shall be treated as an Excess Contribution and
shall be allocated and distributed in the same manner described in Article
IV(G)(2)(c), (d) and (e).
J. Establishment and Objectives of Investment Funds. Within the context
of the Trust Fund, the Trustee at the direction of the Committee shall
establish one or more Investment Funds for the investment of Trust Assets
comprising the 401(k) portion of the Trust, having such investment objectives
as may be ascribed to each such fund by the Investment Committee. Such
Investment Funds may consist of the Trust's investment in (i) one or more
pooled funds established by the Trustee, if it is a bank or trust company, for
the investment of the assets of tax qualified pension and/or profit-sharing
plans, (ii) one or more mutual funds, (iii) one or more contracts issued by an
insurance company, (iv) a Company Stock fund (herein called the "Company Stock
Fund") consisting of shares of Company Stock and short-term money market
investments in which funds may be temporarily invested pending investment in
shares of
IV-13
<PAGE> 44
Company Stock and/or in (v) any other investment vehicle suitable for the
investment of assets of the Trust Fund and designated by the Investment
Committee.
The Committee shall provide information to Participants regarding the
Investment Funds available under the Plan, including a description of the
investment objectives and types of investments of each such Investment Fund.
If a prospectus is required to be issued with respect to any such Investment
Fund, the Committee will inform Participants of the availability of such
prospectus or, if required by law, arrange to furnish a copy of the prospectus
to each Participant.
K-1. Investment of Elective Contributions, Matching Company Contributions
and Rollover Contributions. As of the last business day of each calendar
quarter, and as of any more frequent intervals designated by the Committee
(including intervals as frequently as daily), each Participant shall have the
right to designate on an investment election form furnished by the Committee
(or by telephone call if permitted by the Committee) in accordance with
procedures established by the Committee (or by the Trustee or Plan record
keeper with the consent of the Committee) how Elective Contributions, Matching
Company Contributions, if any, and Rollover Contributions, if any, hereafter
made to the 401(k) portion of the Trust on his behalf are to be allocated among
the Investment Funds. The Committee shall either furnish any such investment
election forms to the Trustee or shall compile the results of any such
elections and direct the Trustee how such contributions for each Participant
are to be allocated among such Investment Funds. The Trustee shall as soon as
reasonably possible after receipt of each Elective Contribution, Matching
Company Contribution or Rollover Contribution made by the Company to the 401(k)
portion of the Trust, and not less frequently than monthly, allocate such
contribution among the Investment Funds in accordance with such investment
elections or instructions. Until a new investment election or instruction (or
telephone call if permitted by the Committee) for any Participant is received
by the Trustee, the Trustee shall continue to invest Elective Contributions,
Matching Company Contributions and Rollover Contributions made for such
Participant in the manner designated on the most recently received written (or
telephone) investment election or instruction relating to such Participant. If
the Trustee shall receive an Elective Contribution, Matching Company
Contribution or a Rollover Contribution for a Participant for whom it has not
received any investment election or instruction, the Trustee shall invest such
contribution in the Investment Fund which most nearly fits the description of a
short-term fixed income fund.
Notwithstanding the foregoing, if the Investment Committee so directs
the Trustee in writing and advises the Participants in the summary description
of the Plan or in another written communication, the amounts allocated to the
Matching Company Contribution Accounts of Participants shall be invested in the
sole discretion of the Trustee (or the Investment Committee) or an
IV-14
<PAGE> 45
investment manager appointed pursuant to Article IX(C). Such investments shall
be considered to be a separate Investment Fund invested in the discretion of
the Trustee (or the Investment Committee).
K-2. Investment of ESOP Contributions. Trust assets comprising the ESOP
portion of the Trust shall be invested primarily in Company Stock. Such Trust
assets, including ESOP Contributions, may be used to acquire shares of Company
Stock from Company shareholders, from former Participants (or Beneficiaries) or
from the Company or a Related Company. Trust assets comprising the ESOP
portion of the Trust invested in Company Stock shall be held in an investment
fund separate from the Company Stock Fund referred to in Article IV(J)(iv)
above. Such fund is sometimes referred to herein as the "ESOP Company Stock
Fund." The Trustee may also invest Trust assets comprising the ESOP portion of
the Trust in savings accounts, certificates of deposit, short-term fixed income
funds, high-grade short-term securities including commercial paper, common and
preferred stocks, bonds, bank pooled investment funds, mutual funds including a
money market fund or other investments desirable for the ESOP portion of the
Trust, or may be held in cash. Such investments also shall be held in an
investment fund separate from any of the investment funds described in Article
IV(J) above. Such fund is sometimes referred to herein as the "ESOP Other
Investments Fund." All investments of Trust assets comprising the ESOP portion
of the Trust, including all dispositions of Company Stock, shall be made by the
Trustee only upon the direction of the Investment Committee, and all purchases
of Company Stock shall be made at prices which result in the payment of not
more than adequate consideration (as defined in Section 3(18) of ERISA) by the
Trustee for such Company Stock. Moreover, all sales of Company Stock made by
the Trustee upon the direction of the Investment Committee shall be made at
prices which result in the payment to the Trustee of at least adequate
consideration (as defined in Section 3(18) of ERISA) for such Company Stock.
The Investment Committee may direct that up to 100% of the assets of the ESOP
portion of the Trust be invested and held in Company Stock.
No loans to the Trust by, or guaranteed by, a Disqualified Person
shall be permitted, nor shall any purchases of Company Stock from a
Disqualified Person on an installment basis be permitted.
Notwithstanding the foregoing provisions of this Paragraph K-2 or any
other provision of the Plan or Trust Agreement, if Fund American Enterprises
Holdings,Inc., the indirect parent of the Company, ceases to be the indirect
parent or parent of the Company or if the Investment Committee determines that
it is likely that the Company will soon cease to be the indirect or direct
parent of the Company, the Investment Committee may direct the Trustee to sell
up to 100% of the Company Stock held by the Trust in the ESOP portion of the
Trust and to invest the proceeds in other assets authorized in the Plan and
Trust Agreement for the investment of assets of the ESOP portion of the Trust,
pending amendment or
IV-15
<PAGE> 46
termination of the ESOP portion of the Plan and Trust by action of the
Company's Board of Directors.
L. Participants' Rights to Periodic Reallocation of Elective
Contributions, Matching Company Contributions and Rollover Contributions
Accounts. As of the last business day of each calendar quarter and as of any
more frequent intervals designated by the Committee (including intervals as
frequently as daily), each Participant shall be entitled to direct the Trustee
in accordance with procedures established by the Committee (or by the Trustee
or Plan record keeper with the Committee's consent) to reallocate all or a
portion of his Elective Contributions, Matching Company Contributions and
Rollover Contributions Accounts so that, as of the date of such reallocation,
specified percentages (in multiples to be designated by the Committee) of such
Accounts shall be invested in one or more of the Investment Funds. Upon
receipt of timely instructions from the Committee (which shall be consistent
with the directions of Participants desiring allocation or reallocation) (or
upon timely telephone calls from Participants if permitted by the Committee)
the Trustee shall, invest or reinvest such portions of the aforesaid Accounts
of Participants thus directing allocation or reallocation as will (immediately
following such investment or reinvestment) result in the aforesaid Accounts of
each such Participant being invested in the Investment Funds substantially in
accordance with the directions of each such Participant. However, no transfers
between Investment Funds shall be permitted if prohibited by the rules
applicable to the particular Investment Fund from or to which a transfer is to
be made or by rules adopted by the Committee and communicated to the
Participants.
M. Participants' Credit Accounts. The Trustee shall establish and
maintain one or more Credit Accounts for each Participant, showing the balance
in each of his Accounts in the 401(k) portion of the Plan (and in each of the
Investment Funds, if applicable), and for such other purposes as may be useful
in the administration of the Trust under this Agreement, and shall cause to be
furnished to each Participant at least annually a statement of the Credit
Accounts. The fact that Credit Accounts are established and maintained shall
not be construed to mean under any circumstances or event that any Participant
has title to any specific asset held in trust hereunder.
N. Periodic Revaluation of Investment Funds. As of each Valuation Date
the Trustee shall determine as provided in Article IX(H) (Appraisal), or shall
cause the organization(s) holding the assets of a particular Investment Fund,
such as an insurance company or mutual fund, to determine the net earnings or
the net loss of each Investment Fund including net capital gains or losses, if
any, for the period ending on such date or since the previous Valuation Date,
and shall revalue, or cause to be revalued, each Investment Fund so as to
reflect the increase or decrease in the value of the investments of each
Investment Fund as compared to the value of such investments as of the previous
Valuation Date. To
IV-16
<PAGE> 47
the extent an Investment Fund is invested in shares or units of participation
in a mutual fund or pooled fund maintained by the Trustee, such shares or units
of participation shall be valued in the manner they are normally valued by the
mutual fund or pooled fund. To the extent an Investment Fund is invested in an
annuity or deposit administration contract, including a guaranteed income
contract or similar contract issued by an insurance company, it shall be valued
in the manner such contract is normally valued by the insurance company.
O. Periodic Adjustments to Accounts. Adjustments shall from time to time
be made to each Participant's Accounts as follows:
(1) The Trustee shall debit such Accounts currently in respect of
any distributions of benefits therefrom.
(2) Promptly following each revaluation of an Investment Fund
pursuant to Paragraph (N) above, the Trustee shall allocate, or shall cause to
be allocated, to each 401(k) Account invested in such Investment Fund a portion
of the net earnings or net loss of such Investment Fund, including appreciation
or depreciation in the value of the assets of such fund, such portion being
determined by applying to such net earnings or loss the ratio which the balance
of each 401(k) Account in such fund on the immediately preceding Valuation Date
bears to the total of the balances of all 401(k) Accounts in such fund on such
Valuation Date, but taking into account in a manner determined to be equitable
by the Trustee (with the consent of the Committee) any Company Contributions
to, or distributions from, such 401(k) Accounts since the immediately preceding
Valuation Date. Notwithstanding the foregoing, the Trustee may allocate, or
cause to be allocated, to each such 401(k) Account invested in such Investment
Fund a portion of the net earnings or net loss of such Investment Fund,
periodically and not less frequently than quarterly (and as frequently as
daily), on any other basis which in the Trustee's judgment is fair and
equitable to Participants and which is based in substance on the sizes of the
Accounts invested in such Investment Fund over the period during which such net
earnings or net loss in value occurs; provided the Committee consents to such
other basis of allocation.
(3) The net income, or loss, of the ESOP portion of the Trust for
each Plan Year shall be determined as of each Valuation Date and shall be
allocated to the ESOP Accounts of Participants as follows:
(a) Each Participant's shares of the net income or loss of the
ESOP portion of the Trust as of each Valuation Date shall be
allocated to his Other Investments Account in the ratio which
the balance of such Other Investments Account on the preceding
Valuation Date (reduced by the amount of any distribution of
part of his ESOP Account from his Other Investments Account)
bears to the sum of such balances for all Participants as of
that date. The net income or loss, includes the increase or
decrease in
IV-17
<PAGE> 48
the fair market value of Trust assets of the ESOP portion of
the Trust (other than Company Stock), interest income,
dividends and other income or expenses, attributable to Trust
assets of the ESOP portion of the Trust (other than allocated
Company Stock) since the preceding Valuation Date.
(b) Any cash dividends received on shares of Company Stock
allocated to Participants' Company Stock Accounts shall be
allocated to their respective Other Investments Accounts. Any
stock dividends received on Company Stock shall be credited to
the Company Stock Account to which such Company Stock was
allocated.
(c) Rights to purchase Company Stock received by the Trustee with
respect to a Participant's Company Stock Account shall be
allocated in like manner as a dividend. After such
allocation, the Committee shall determine with respect to each
such Participant's Other Investments Account the maximum
number of rights and fractions thereof which can be exercised
by the use of the available cash therein; and shall instruct
the Trustee to (and the Trustee shall) sell and exercise
rights accordingly. The Company Stock thus purchased shall be
allocated among the Participants' Company Stock Accounts in
accordance with the rights therein which were exercised.
Rights for the purchase of other than Company Stock received
by the Trustee with respect to Company Stock in a
Participant's Company Stock Account shall be sold and the
proceeds allocated in like manner as a cash dividend.
(d) In the event of a merger, reorganization or recapitalization
in which Company Stock in the ESOP portion of the Trust is
exchanged for other stock or securities, the Trustee shall
effect such exchange with respect to all Company Stock in the
ESOP portion of the Trust and the Committee shall allocate the
stock and securities received in such exchange among the
Participants' Company Stock Accounts in proportion to the
number of shares and fractions of a share of Company Stock
allocated or allocable to said accounts at the time of such
exchange. Thereafter, such stock or securities shall be
deemed to be Company Stock for all purposes of this Plan,
except as the Committee may otherwise determine. Any
fractional share or fractional unit received in such exchange
shall be handled in like manner as a fractional share in a
stock dividend.
(4) As of each Anniversary Date, the Trustee shall credit each
ESOP Account in the same proportion as ESOP Contributions are to be credited
under Article IV (A-2) above, with respect to any forfeitures occurring or
becoming final, as the case may be, since
IV-18
<PAGE> 49
the previous Anniversary Date, as provided in Paragraph (Q) below
(Forfeitures).
(5) Expenses and compensation of the Trustee and Committee may be
charged to the Accounts of Participants as provided in Article XI(P).
P. Fixed Accounts. Upon the termination of a Participant's employment
with the Company, whether due to his retirement, death, disability or other
cause whatsoever, he shall cease to be a Participant for purposes of Article
III and, except for benefits payable or distributable under this Agreement,
shall cease to have any further right, title or interest in the Plan and Trust;
provided, further, that -
(1) Such Participant's Accounts, except to the extent his ESOP
Account and Matching Company Contributions Account may be forfeited, shall
become fixed and Vested at their balances as close as administratively feasible
to the Valuation Date coinciding with or next following the date of such
termination. "Valuation Date" shall mean the last day of each calendar quarter
or other date occurring regularly more frequently than quarterly (including
daily) designated by the Committee and communicated to the Participants in
writing. If such termination shall be by reason of his death, disability (as
defined in Article VI(D)) or if he shall retire under the Source One Mortgage
Services Corporation Retirement Plan on or after his early or normal retirement
date as defined in such plan, his ESOP Account shall participate in the
allocation of ESOP Contributions and forfeitures under Paragraphs (A-2) and
(O)(4) of this Article IV as of the Anniversary Date coinciding with or next
following his termination to the same extent as if he were still a Participant.
Payment or the start of payments under Article V of the amount of such ESOP
Contribution and forfeitures so allocated to the Participant's ESOP Account
shall be made or shall occur as soon as administratively feasible after such
allocation. Notwithstanding the foregoing, if the Valuation Date described
above is subsequent to the Participant's Required Beginning Date then such
Valuation Date shall be the Valuation Date immediately preceding the
Participant's Required Beginning Date.
(2) In determining the balance of any Account under (1) above,
there shall be included any Company Contributions and other items which have
been or should be credited or debited to such Account as of the Valuation Date
or prior thereto. Thereafter, no further credits or debits shall be made to
said Account, except as provided in (1) above and except for:
(a) Distributions therefrom,
(b) Special expenses chargeable thereto under Article
XI(P)(2)(b),
(c) Matters mentioned in Subparagraphs (3) below, and
IV-19
<PAGE> 50
(d) Any Elective Contributions and Matching Company
Contributions made to the Trust with respect to the
Participant after the Valuation Date.
(3) If prior to the termination of the Participant's employment
the Trustee was investing any of his 401(k) Accounts in accordance with the
Participant's instructions, the Trustee shall continue to invest such Accounts
in accordance with such instructions for as long as administratively feasible
prior to the time such Accounts are paid to the Participant.
Q. Forfeitures. With respect to all or any portion of a Participant's
ESOP Account and Matching Company Contributions Account which are subject to
forfeiture under Article V(C) below (Early Retirement; Vesting Schedule, etc.)
- -
(1) With respect to the ESOP Account, or portion thereof, of a
Participant which is forfeited under Article V(C) below (Early Retirement;
Vesting Schedule, etc.) or any other provision of this Agreement, on the date
such Account or portion thereof is forfeited under Article V(C)(4), but (i) in
the case of a Participant who consents to, and receives, the immediate payment
of the Vested portion of his ESOP Account pursuant to Article V(E), as of the
last day of the Plan Year in which the Participant's employment terminates, and
(ii) in the case of a Participant who does not so consent to, and does not
receive, the immediate payment of the Vested portion of his ESOP Account, as of
the last day of the Plan Year in which the nonvested portion of such Account is
forfeited, such forfeited amount shall be credited to other ESOP Accounts, as
provided by Article IV(A-2) above (Allocation of ESOP Contributions and
Forfeitures). If the Participant is not vested in any part of his ESOP
Account, he shall be deemed to have elected to receive the Vested part of his
ESOP Account, namely, zero, in a Lump Sum upon termination of his employment.
(2) Matching Company Contributions forfeited under Article V(C)
shall be treated in the same manner as forfeited ESOP Contributions under (1)
above as if the terms Matching Company Contributions and Matching Company
Contributions Accounts were substituted for the terms ESOP Contributions and
ESOP Accounts, except that instead of allocating such forfeited Matching
Company Contributions to the Matching Company Contribution Accounts of other
Participants such forfeited amounts shall be applied to reduce Matching Company
Contributions otherwise authorized to be made to the Trust for the Plan Year in
which the forfeiture occurred or for the next following Plan Year or Plan Years
and pending such application shall be held in a suspense account in the 401(k)
portion of the Trust.
R. Accounting for Allocations. The Committee shall establish accounting
procedures for the purpose of making the allocations to Participants' Accounts
provided for in this Article IV. The Committee shall maintain adequate records
of the cost basis of Company Stock allocated to any Participant's Company Stock
Account
IV-20
<PAGE> 51
and to the extent feasible the Participant's 401(k) Account. From time to
time, the Committee may modify its accounting procedures for the purposes of
achieving equitable and nondiscriminatory allocations among the Accounts of
Participants, in accordance with the provisions of this Article IV and the
applicable requirements of the Code and ERISA.
S. Company Stock Fund. The Company Stock Fund, subject to the next
following paragraph, shall be invested by the Trustee solely in Company Stock
purchased by the Trustee in the open market or by private purchase from Fund
American Enterprises Holdings, Inc. or others at the fair market value of such
stock at the time of purchase as determined by the Trustee pursuant to Article
IX(H). Company Stock may also be acquired within the Plan for the accounts of
active Participants from the accounts of Participants who elect, or whose
Beneficiaries elect, pursuant to Article V(J) or VI(C-1), to receive cash
distributions from the Plan instead of shares of Company Stock allocated to
their Company Stock Accounts or 401(k) accounts. All such acquisitions shall
be at the fair market value of such shares at the close of the day of the
transaction as determined by the Trustee pursuant to Article IX(H). In
acquiring shares of Company Stock for the accounts of active Participants the
Trustee may net purchases, including internal acquisitions of the kind
described above, against sales of Company Stock. There shall be no percentage
limitation on the portion of the 401(k) portion of the Trust which the Trustee
may invest or hold in Company Stock. However, no Participant may direct that
any portion of his Elective Contributions Account or Rollover Account be
invested in the Company Stock Fund before the effective date of the
registration of the Company Stock to be held in the Company Stock Fund with the
U.S. Securities and Exchange Commission.
Dividends, interest and other distributions received by the Trustee in
respect of each Investment Fund, including the Company Stock Fund, shall be
reinvested in the same Investment Fund. However, pending reinvestment, any
such dividends, interest and other distributions in respect of the Company
Stock Fund shall be invested by the Trustee in short-term fixed income
investments, which may include units of participation in a short term fixed
income fund maintained by the Trustee or a short term fixed income mutual fund.
IV-21
<PAGE> 52
ARTICLE V
RETIREMENT BENEFITS AND VESTING
A. Normal Retirement. A Participant may retire from the employment of
the Company at his Normal Retirement Date, whereupon the Trustee shall as
promptly as administratively feasible arrange to make benefits available to the
Participant as follows:
(1) Except as provided in (3)-(5) below, the balance of the
Participant's Fixed Account shall be paid in a Lump Sum.
(2) In no event shall the Participant's Account be paid, or
commence to be paid, later than his Required Beginning Date.
(3) If the Participant shall so specify in a written election
delivered to the Company not later than 30 days after his retirement, the
balance of the Participant's ESOP Account shall be paid in regular installments
over a period not exceeding the lesser of (i) fifteen (15) years or (ii) the
life expectancy of the Participant or the joint life expectancy of such
Participant and his designated Beneficiary, which installments shall not be
directed at a rate of less than $1200 per year nor payable more frequently than
monthly, provided however, that the amount to be distributed each year,
commencing with the year in which the Participant's Required Beginning Date
falls, must be at least an amount equal to the quotient obtained by dividing
the entire interest of the Participant under the ESOP portion of the Plan at
the time the distribution is made (expressed in either dollars or units) by the
life expectancy of the Participant and his designated Beneficiary (whichever is
applicable); and provided, further, that payments in regular installments under
this subparagraph (3) may not be elected by a Participant who elects under
Article V(J) to receive his Vested ESOP Account in shares of Company Stock.
(4) For purposes of paragraph (3) above life expectancy shall be
computed by use of the return multiples included in Section 1.72-9 of the
Income Tax Regulations or such other applicable successor regulations which may
be issued by the Internal Revenue Service. For purposes of paragraph (3)
above, the Participant's life expectancy, and the joint life and last survivor
life expectancies of the Participant and his designated Beneficiary, if such
designated Beneficiary is the Participant's spouse, may be recalculated from
time to time but not more frequently than annually, but the life expectancy of
a designated Beneficiary other than the Participant's spouse may not be
recalculated.
(5) If the installments required by paragraph (3) above are
payable to the Participant and a designated Beneficiary who is not the
Participant's spouse, the payments to be made to the Participant on or after
the Participant's Required Beginning Date must satisfy the incidental benefits
requirements of Section 401(a)(9) of the Code and the Regulations thereunder.
V-1
<PAGE> 53
(6) If a distribution is one to which Sections 401(a)(11) and 417
of the Code do not apply, such distribution may be made or may commence less
than 30 days after the notice required under Section 1.411(a)-11(c) of the
Regulations is given, provided that:
(a) the Committee clearly informs the Participant that
the Participant has a right for a period of at least
30 days after receiving the notice to consider the
decision of whether or not to elect a distribution
(and, if applicable, a particular distribution
option), and
(b) the Participant, after receiving the notice,
affirmatively elects a distribution.
Notwithstanding the foregoing, a Participant's Normal Retirement Date under the
Plan shall not be construed as a mandatory retirement date.
B. Late Retirement. If a Participant shall continue in the Company's
employ beyond his Normal Retirement Date (in which event he shall remain a
Participant in the Plan for all purposes), no retirement benefits shall be
payable to him under this Agreement until his actual retirement, at which time
the same steps shall be taken as in the case of normal retirement, provided
that in no event shall such benefits be paid or commence to be paid later than
the Required Beginning Date or other deadline specified in Article V(D).
C. Early Retirement; Vesting Schedule for ESOP Contributions and Matching
Company Contributions; Full Vesting of Elective Contributions. Upon retirement
of a Participant prior to his Normal Retirement Date, the Trustee shall as
promptly as possible (but subject to Article V(E)) arrange to make benefits
available to the Participant (except as otherwise provided in Article X(A)) in
the same manner and form as at normal retirement; provided, however, that the
Participant shall not have the right to elect that his ESOP Account be paid in
installments as provided in Article V(A)(3) unless he retires under the Source
One Mortgage Services Corporation Retirement Plan on or after his early
retirement date (as defined in such plan), and provided, further, that -
(1) Such Participant shall be entitled only to a percentage of the
balance in his ESOP Account and his Matching Company Contributions Account
based upon the number of his Years of Service, as follows:
<TABLE>
<CAPTION>
Years of Percentage Vesting in ESOP and
Service Matching Company Contribution Accounts
------------- ---------------------------------------
<S> <C>
</TABLE>
V-2
<PAGE> 54
<TABLE>
<S> <C>
less than 3 0%
3 but less than 4 20%
4 but less than 5 40%
5 but less than 6 60%
6 but less than 7 80%
7 or more 100%
</TABLE>
(2) In computing a Participant's period of service for purposes of
(1) above, he shall be credited with one Year of Service for each Plan Year,
i.e., the vesting Computation Period, during which he has completed at least
1,000 Hours of Service with the Company (regardless of whether or not he was a
Participant at such time) except that the following shall not be counted:
(a) For purposes of determining his Vested percentage in
such account following a break in service, Years of
Service during vesting Computation Periods prior to a
One-Year Break in Service shall not be counted unless
and until the Employee completes 1,000 Hours of
Service during the 12 consecutive month period
beginning on the date he first completes one Hour of
Service (his "Re-employment Commencement Date") or
during any subsequent 12 consecutive month period
beginning on an anniversary of his Re-employment
Commencement Date; and
(b) In the case of a Participant or other Employee who
does not have a Vested right to an Accrued Benefit
derived from Company Contributions, i.e., who is not
Vested in any part of his account balances under the
Plan derived from ESOP Contributions and Matching
Company Contributions, Years of Service prior to a
period of consecutive One-Year Breaks in Service
shall not be counted if the number of consecutive
One-Year Breaks in Service in such period equals or
exceeds five (excluding from the number of Years of
Service before such period any Years of Service not
required to be counted hereunder by reason of any
prior break in service);
provided, further, that Years of Service after five or more consecutive
One-Year Breaks in Service shall not be counted for purposes of determining the
Vested percentages under (1) above of the Participant's Accrued Benefit derived
from ESOP Contributions and Matching Company Contributions which accrued before
such five or more consecutive One-Year Breaks in Service.
(3) If a Participant's eligibility Computation Period overlaps two
vesting Computation Periods and he completed 1,000 Hours of Service during such
eligibility Computation Period but failed to complete 1,000 Hours of Service in
either of the overlapped vesting Computation Periods, then the Year of Service
completed for eligibility to participate shall be deemed a Year of
V-3
<PAGE> 55
Service for the vesting Computation Period during which such eligibility
Computation Period ended.
(4) The portion of such Participant's ESOP Account to which he is
not entitled under (1) above, if any, shall be forfeited and allocated among
the other ESOP Accounts pursuant to Article IV(Q) (Forfeitures). If a
Participant who is partially Vested in his ESOP Account has a balance in both
his Company Stock Account and his Other Investments Account, shares of Company
Stock in his Company Stock Account may be forfeited only after the balance in
his Other Investments Account is forfeited, and if his Company Stock Account
should include shares of more than one class of Company Stock the same
proportion of each class shall be forfeited. The portion of such Participant's
Matching Company Contributions Account to which he is not entitled under (1)
above, if any, shall be forfeited and applied to reduce Matching Company
Contributions pursuant to Article VI(Q)(2). If, following a distribution of
the Vested portion of a partially Vested Participant's Account, he is
re-employed by the Company in circumstances where he has not sustained five
consecutive One-Year Breaks in Service, then, following such re- employment,
the portion of the Participant's Account which was forfeited will be restored
to its amount on the date of distribution if the Participant repays to the
Trust the full amount of the distribution attributable to ESOP Contributions
and Matching Company Contributions before the earlier of 5 years after the
first date on which the Participant is re-employed by the Company, or the date
the Participant incurs 5 consecutive One-Year Breaks in Service following the
date of the distribution. If a Participant who was not Vested in any part of
his ESOP Contributions Account and Matching Company Contributions Account and
was deemed to have received a distribution pursuant to Article IV(Q) and the
Participant is re-employed by the Company in circumstances where he has not
sustained five consecutive One-Year Breaks in Service, upon the reemployment of
such Participant, the forfeited Account balances of the Participant will be
restored to their amounts on the date of such deemed distribution. The funds
to be used to restore such account shall first be obtained out of forfeitures
of ESOP Contributions and Matching Company Contributions, if any, and next out
of ESOP Contributions and Matching Company Contributions to the Trust, for such
Plan Year or succeeding Plan Years.
(5) Notwithstanding the foregoing provisions of this Paragraph
(C), if a Participant is discharged for participating in any fraud, theft,
dishonesty or embezzlement towards or involving the Company or other Related
Company at a time when the Participant has accumulated less than five (5) Years
of Service, he shall not be entitled to any part of his ESOP Account, which
shall be forfeited and allocated among the ESOP Accounts of the other
Participants pursuant to Article IV(Q) (Forfeitures); provided, however, that
this subparagraph (5) shall not apply to any discharge from employment
occurring in any Plan Year in, or after, which the Plan becomes a Top-Heavy
plan as described in Article XIII.
V-4
<PAGE> 56
(6) Notwithstanding the foregoing provisions, a Participant's ESOP
Account and Matching Company Contributions Account shall be fully Vested at his
Normal Retirement Age.
(7) A Participant's Elective Contributions Account shall at all
times be fully and immediately Vested.
D. Deadline for Payment of Benefits; Required Beginning Date. The
following deadlines shall apply to the payment, or commencement of payment, of
any benefits under the Plan:
(1) Unless the Participant shall otherwise elect, the payment of
benefits under the Plan to the Participant shall be made or begin not later
than the 60th day after the close of the Plan Year in which occurs the latest
of the following:
(a) The date on which he attains the earlier of age 65 or Normal
Retirement Age;
(b) The tenth anniversary of the year in which he commenced
participation in the Plan; or
(c) The termination of his service with the Company.
If the Participant under another provision of this Agreement may elect to defer
the payment, or commencement of payment, of benefits under the Plan beyond the
latest of the foregoing dates, such election shall be subject to (2) below and
to the distribution rules of Article V(A), must be submitted to the Committee
in writing, signed by the Participant, and must describe the benefit and the
date on which payment of such benefit shall be made or shall commence.
(2) Any benefits payable under the Plan to a Participant shall be
paid, or shall begin to be paid, not later than April 1 of the calendar year
following the calendar year in which the Participant attains age 70-1/2 or (ii)
the Participant's employment terminates, whichever is later, except in the case
of a Participant who is a 5-percent owner (as defined in Code Section 416)(ii)
above shall not apply. However, prior to January 1, 1997 any benefits payable
under the Plan to a Participant who attains age 70-1/2 after 1988 shall be
paid, or shall begin to be paid, not later than April 1, of the calendar year
following the calendar year in which the Participant attains age 70-1/2. In
the Plan the date by which any such benefits must be paid, or begin to be paid,
as specified above in this paragraph, is called the "Required Beginning Date".
E. Cash-Outs. Notwithstanding anything in this Article V or in Article
VI to the contrary, if at the time of a Participant's death or other
termination of employment the present value of any Accrued Benefit payable to
or with respect to him under the Plan, i.e., the Vested portion of his Fixed
Account derived from ESOP Contributions and 401(k) Contributions, does not
exceed, or at the time of any prior distribution did not exceed, $3,500, such
benefit shall be
V-5
<PAGE> 57
paid to his Beneficiary or to him in a Lump Sum. If a Participant's employment
terminates before his Normal Retirement Date for any reason other than his
death and such Accrued Benefit exceeds, or at the time of any prior
distribution exceeded, $3,500, the Participant shall have the right to elect in
writing delivered to the Committee to defer payment of such Accrued Benefit
(subject to adjustment for profits or losses and fees and expenses as provided
in Article IV(O)(5) to the Participant's Normal Retirement Date. The failure
of such a Participant to elect either an immediate Lump Sum, or an immediate
Lump Sum of his 401(k) Account and installments of his ESOP Account as
permitted by Article V(C) and Article V(A)(1) and (3), shall be deemed an
election by the Participant to defer payment of any such Accrued Benefit to his
Normal Retirement Date as provided above. If payment of the Participant's
Accrued Benefit is so deferred, such Accrued Benefit shall be paid to the
Participant as soon as administratively feasible in a Lump Sum after the
Valuation Date coinciding with or next following the earlier of (i) the
Participant's Normal Retirement Date or (ii) receipt by the Committee of the
Participant's written election to receive a distribution from the Plan prior to
his Normal Retirement Date.
F. Limitations on Payment of Benefits Derived from Elective Contributions
and Matching Company Contributions. In no event shall any distribution from a
Participant's account which is attributable to Elective Contributions or
Matching Company Contributions (other than a hardship distribution under
Article VI(E)) be made earlier than: (1) the Participant's retirement, death,
disability, separation from service, or attainment of age 59-1/2; (2) the
termination of the Plan and Trust pursuant to Article X without establishment
of a successor plan; (3) the date of sale by the Company of substantially all
of its assets to a corporation in whose employment the Participant continues;
or (4) the date of sale by the Company of a subsidiary in whose employment the
Participant continues.
G. Termination of Employment by Reason of Dissolution. Subject to
Paragraph (F) above, if a Participant's employment shall terminate by reason of
complete or partial liquidation or dissolution of the Company, then such
Participant shall be deemed to have retired under Article V(A), (B) or (C), as
the case may be, except that, for purposes of said Paragraph (C) (Early
Retirement; etc.), his percentage Vesting in his ESOP Account and Matching
Company Contribution Account shall be 100%.
H. Termination of Employment in Other Circumstances. Subject to
Paragraph (F) above, if a Participant's employment shall terminate for any
reason not covered by Article V(G) (Dissolution) or Article VI(A) (Death, etc.)
or (D) (Disability), he shall be deemed to have retired and shall be entitled
to only such benefits as are provided by Article V(A), (B) or (C), as the case
may be.
I. Temporary Absences. Any substantial absence from active employment
with the Company other than during vacation, holidays
V-6
<PAGE> 58
and non-business hours shall constitute a termination of employment for
purposes of the Plan except as follows:
(1) If the Participant or other Employee shall be absent from
active employment with the Company for a period not exceeding one year on
account of (i) illness, (ii) mental or physical disability, (iii) leave of
absence granted by the Company in accordance with uniform and nondiscriminatory
rules so that all employees in similar circumstances are treated alike, (iv)
temporary layoff or (v) jury duty, his employment with the Company or
participation in the Plan, as the case may be, shall not be deemed to have
terminated solely on account of such absence and during such absence he shall
be provisionally credited with Hours of Service at the same weekly rate (not
exceeding 37-1/2 hours per week and not exceeding 501 hours per Plan Year) he
was being credited with Hours of Service at the time such absence commenced;
provided, however, that if he does not resume active employment within thirty
(30) days from the expiration of such illness, disability, leave of absence or
jury duty, or if he fails promptly to report for work upon being recalled from
such layoff, his employment or participation, as the case may be, shall be
deemed to have terminated on the date when such absence commenced, provided,
further that his Valuation Date shall be the Valuation Date coinciding with or
preceding the expiration of such thirty (30) day period.
(2) If the Participant or other Employee shall leave the active
employment of the Company for the purpose of becoming (and thereupon becomes) a
member of the Armed Forces of the United States, his employment with the
Company or participation in the Plan, as the case may be, shall not be deemed
to have terminated solely on account of such absence and during such absence he
shall be credited with Hours of Service at the same weekly rate (not exceeding
37-1/2 hours per week) he was being credited with Hours of Service at the time
such absence commenced; provided, however, that if he does not resume active
employment within ninety (90) days after his first eligibility for release or
discharge from said Armed Forces, his employment or participation, as the case
may be, shall be deemed to have terminated on the date when such absence
commenced, provided, further that his Valuation Date shall be the Valuation
Date coinciding with or preceding the expiration of such ninety (90) day
period.
(3) During any period when a Participant or other Employee is not
in fact actively employed by the Company, he shall not be regarded as receiving
any Compensation except such as the Company may actually pay to him during such
period.
(4) If contributions or other credit or debit items shall be
allocated to a Participant's account due to the provisions of Subparagraph (l)
above and it shall later be determined that such Participant's employment
should be deemed to have theretofore terminated, then the Trustee upon
notification thereof shall treat
V-7
<PAGE> 59
such allocations as erroneous and shall reasonably endeavor to undo the effects
thereof.
(5) If the Participant timely resumes active employment (or
reports for work) as contemplated by (1) or (2) above but his resumed
employment is terminated (other than by death, permanent and total disability,
normal or late retirement, or complete or partial dissolution or liquidation of
the Company) prior to his having been in the Company's continuous employ for a
period at least equal to the lesser of (a) six (6) months or (b) the period
from the commencement of the absence in question to the resumption of his
active employment, then his employment or participation, as the case may be,
shall be deemed to have terminated on the date when such absence commenced.
(6) The foregoing provisions of this Paragraph (i) shall not
prevent the Company and the Participant or other employee in question from
mutually determining in writing that his status as an employee or Participant,
as the case may be, shall terminate (or have terminated) at any designated
time, either with or without cause.
(7) The foregoing provisions of this Paragraph (i) are subject to
any contrary requirements, more favorable to the Participant or other employee
in question, contained in Article II(A) or Article V(C).
J. Manner of Payment of Benefits From ESOP Portion of Plan and From
Company Stock Fund; Company Stock or Cash. The benefits payable to a
Participant (or to a Beneficiary under Article VI) under the ESOP portion of
the Plan and from the Company Stock Fund (which is one of the Investment Funds
in the 401(k) portion of the Plan) shall be payable in the following manner:
(1) All benefits payable under the Plan to a Participant or
Beneficiary from the Participant's Other Investment Account or from any 401(k)
Account other than the Company Stock Account shall be paid in cash. However,
the Participant or Beneficiary shall be entitled to elect in accordance with
(2) below and any rules and procedures which the Committee may adopt to receive
all or any portion of his Vested Company Stock Account and all or any portion
of his Vested 401(k) Account which is invested in the Company Stock Fund either
in cash or in shares of Company Stock plus cash for any fractional share of
Company Stock.
(2) If pursuant to (1) above the Participant elects to receive any
portion of his Vested or partially Vested 401(k) Account which is invested in
the Company Stock Fund, in cash rather than in shares of Company Stock, the
Trustee shall, as soon as administratively feasible after the applicable
Valuation Date, sell such portion of the Vested shares of Company Stock in such
accounts and pay the proceeds to the Participant in accordance with Article
V(A), (B) or (C), or in accordance with Article V(E), whichever applies. If
pursuant to (1) above the Participant elects to
V-8
<PAGE> 60
receive any portion of his Vested or partially Vested Company Stock Account and
all or any portion of his Vested or partially Vested 401(k) Account which is
invested in the Company Stock Fund, in shares of Company Stock rather than in
cash, the Trustee shall distribute such shares to the Participant in accordance
with Article V(A), (B) or (C), or in accordance with Article V(E), whichever
applies. In the event of the Participant's death similar procedures shall be
followed with respect to the Participant's Beneficiary depending upon the
Beneficiary's election under Article VI(C-1).
(3) Any ESOP contributions and forfeitures allocated to the ESOP
Account of a Participant under Article IV(P)(1) for the Plan Year in which a
Participant's employment terminates by reason of the Participant's death,
permanent disability or retirement under the Source One Mortgage Services
Corporation Retirement Plan after payment to the Participant (or Beneficiary)
has been made or has commenced under Article V(A), (B) or (C) shall, as
provided in Article IV(P), be paid (or shall commence to be paid) to the
Participant (or Beneficiary) as soon as administratively feasible after the
Anniversary Date as of which they are allocated. Any such payments shall be
made in cash and not in shares of Company Stock.
V-9
<PAGE> 61
ARTICLE VI
OTHER BENEFITS
A. Death, Spousal Consent to Designation Required if Spouse is not
Beneficiary. Upon the death of a Participant irrespective of whether his
employment has theretofore terminated, the Trustee shall arrange as promptly as
possible to pay the entire balance of such Participant's Fixed Account in a
Lump Sum (reduced by any portion of the Participant's account applied pursuant
to Article VI(F)(4) to pay the balance of any loan from the Trust to the
Participant outstanding at the time of the Participant's death) to his
surviving spouse (who, subject to the following provisions of this sentence,
shall be deemed the Participant's designated Beneficiary), or if there is no
surviving spouse, or the surviving spouse has consented in writing to the
designation of another specific Beneficiary by the Participant, to the
Participant's designated Beneficiary, subject, however, to Article VI (B) and
(C) below. Any such written consent by the Participant's spouse shall
acknowledge the effect of the consent and be witnessed by a representative of
the Plan or a notary public. A representative of the Plan shall include any
member of the Committee or any other person designated by the Committee for
this purpose. No designation by a married Participant of a Beneficiary other
than the Participant's spouse or method of payment shall be changed without the
written consent of the spouse unless the written consent of the spouse to the
first designation expressly permits further designations by the Participant
without any requirement of further consent by the spouse. No such written
consent of the spouse of a Participant need be obtained if it is established to
the satisfaction of the Committee that such spouse cannot be located or that
such other circumstances as may be described in Treasury Regulations
promulgated under Section 417(a)(2)(B) of the Code exist.
B. Designation of Beneficiary and Method of Distribution. Subject to
Paragraphs (A) (requiring spousal consent if a person other than the
Participant's spouse is to be designated as a Beneficiary) and (C) (imposing
certain restrictions on distributions from the Plan on account of the death of
the Participant) of this Article VI, a Participant shall have the right from
time to time to file with the Committee a written designation of Beneficiary
under the Plan, which designation may from time to time be amended or revoked.
Upon receipt of any such designation or notice, the Committee shall inform the
Trustee, who shall (subject to Paragraphs (A) and (C) of this Article VI) in
turn take any and all steps reasonably necessary to make the same effective;
provided, however, -
(1) No designation of Beneficiary, and no amendment or revocation
thereof, shall become effective if filed after such Participant's death, unless
the Committee and Trustee shall determine such designation, amendment or
revocation to be valid.
VI-1
<PAGE> 62
(2) A Participant shall not have the right, unless the Committee
shall otherwise consent, to designate as a Beneficiary anyone except his
estate, his dependents, individuals who are the natural objects of his bounty,
or a trust or trusts for the principal benefit of one or more such dependents
or Persons.
(3) In the absence of an effective designation of Beneficiary, or
if the Beneficiary designated shall not survive the Participant, then said
death benefits shall be paid to the individual in (or paid in equal shares, per
stirpes and not per capita, to the individuals in) the first of the following
classes of successive preference Beneficiaries (deemed to have been designated
as such by the Participant) in which there shall be an individual surviving
such Participant:
(a) His spouse,
(b) His children,
(c) His parents, or
(d) His brothers and sisters and issue thereof.
(4) In determining who are "children" for purposes of (3) above,
adopted individuals shall be treated as if they are the natural offspring of
their adoptive parents, rather than their natural parents.
(5) If any individual who would be entitled to receive death
benefits (either under (3) above or because designated by the Participant as a
Beneficiary) shall be a minor or adjudged mentally incompetent, the Committee
may in its discretion direct the Trustee to pay all or part of the death
benefits otherwise distributable in accordance with Article XI(O). If and to
the extent that there shall be no surviving Beneficiary under (3) above, or
effectively designated by the Participant, the Participant's estate shall be
deemed to be the Beneficiary.
C. Required Distributions. Upon the death of a Participant the
distribution of his interest under the Plan, i.e., the entire balance of his
Fixed Account shall be made in a Lump Sum as soon as administratively feasible
after the Valuation Date falling on or next following the Participant's death.
C-1. Manner of Payment; Company Stock or Cash. Any benefits payable under
the ESOP portion of the Plan and from the Company Stock Fund on account of the
death of a Participant shall be payable in cash and/or in shares of Company
Stock in accordance with the rules set forth in Article V(J) (Manner of Payment
of Benefits from ESOP portion of Plan and from Company Stock Fund; Company
Stock or Cash). All other benefits payable on account of the death of a
Participant shall be payable in cash.
VI-2
<PAGE> 63
D. Disability. If, notwithstanding Article V(I) (Temporary Absences), a
Participant's employment shall terminate on account of his permanent
disability, mental or physical, evidenced by the certificate of a physician
satisfactory to the Committee then the entire balance of his Fixed Account
shall be paid in a Lump Sum (subject to the same restrictions set forth in
Paragraph (2) of Article V(A)), except the entire balance of his ESOP account
shall be paid in a Lump Sum or in regular annual or more frequent installments,
subject to the restrictions set forth in paragraphs (2) and (3) of Article V,
whichever the Participant shall elect in writing delivered to the Committee.
E. Hardship Distributions; Distributions After Age 59-1/2. Subject to
the application of uniform rules consistently applied, the Committee may upon
the written request of a Participant direct the Trustee to distribute funds to
such Participant from his Elective Contributions Account (but not amounts
treated as Elective Contributions or income allocable thereto), in a Lump Sum,
as follows:
(1) Any such distribution from the Participant's Elective
Contributions Account shall be subject to the following
requirements:
(a) No such distribution shall be made unless the
Committee determines that the distribution will be
made on account of an immediate and heavy financial
need of the Participant and is necessary to satisfy
such financial need.
(b) A distribution will be deemed to be made on account
of an immediate and heavy financial need only if the
distribution is on account of:
(i) Medical expenses described in Code Section
213(d) incurred by the Participant, the
Participant's spouse, or any dependents of
the Participant (as defined in Code Section
152 or necessary for these individuals to
obtain medical care described in Code Section
213(d));
(ii) Purchase (excluding mortgage payments) of a
principal residence for the Participant;
(iii) Payment of tuition and related educational
fees for the next 12 months of post-secondary
education for the Participant, his or her
spouse, children or dependents;
(iv) The need to prevent the eviction of the
Participant from his principal residence or
foreclosure on the mortgage of the
Participant's principal residence;
VI-3
<PAGE> 64
(v) Any other immediate and heavy financial need
of the Participant designated as such for
purposes of Section 401(k) of the Code in a
revenue ruling, notice, or other document of
general applicability published by the U.S.
Treasury Department; or
(c) A distribution will be deemed necessary to satisfy an
immediate and heavy financial need of a Participant
if all of the following requirements are satisfied:
(i) The distribution is not in excess of the
amount of the immediate and heavy financial
need of the Participant. The amount of an
immediate and heavy financial need may
include any amounts necessary to pay any
federal, state or local income taxes or
penalties reasonably anticipated to result
from the distribution.
(ii) The Participant has obtained all
distributions, other than hardship
distributions, and all nontaxable loans
currently available under this Plan and all
other plans maintained by the Company,
(iii) All other plans maintained by the Company
which cover the Participant provide that the
Participant's elective contributions and
employee contributions, if any, will be
suspended for at least 12 months after
receipt of the hardship distribution under
the Plan, and
(iv) All other plans maintained by the Company
which cover the Participant provide that the
Participant may not make elective
contributions for the Participant's taxable
year immediately following the taxable year
of the hardship distribution in excess of the
applicable limit under Section 402(g) of the
Code for such taxable year less the amount of
the Participant's elective contributions (to
this Plan and such other plans) for the
taxable year of the hardship distribution.
If a Participant receives a hardship distribution
under this Plan the Participant's Elective
Contributions to this Plan will be suspended for 12
months after receipt of the distribution and he may
not make Elective Contributions to this Plan (and to
any other plan of the Company) for his taxable year
immediately following the taxable year of the
VI-4
<PAGE> 65
distribution in excess of the applicable limit under
Section 402(g) of the Code for such taxable year less
the amount of his Elective Contributions to this Plan
(and his elective contributions to any other plan of
the Company) for the taxable year of the hardship
distribution. A Participant will not fail to be
treated as an eligible employee for purposes of the
coverage and discrimination requirements of
Regulation Section 1.401(k)-1(b) merely because he is
suspended from making elective contributions or
employee contributions under the above requirements.
(d) No such distribution shall exceed the Participant's
Elective Contributions credited to his Elective
Contributions Account. Earnings on the Participant's
aggregate Elective Contributions shall not be
distributed under this Article VI(E)(2).
(2) Notwithstanding the foregoing provisions of this Paragraph
(E), the Trustee may distribute up to 100% of the funds from the Participant's
Elective Contributions Account under the Plan to such Participant in a Lump Sum
while the Participant is still employed by the Company, provided the
Participant has attained age 59-1/2 and requests such distribution in writing.
F. Loans. Subject to the application of uniform rules consistently
applied, the Committee may upon the written request of a Participant, which
shall be treated as an election by the Participant to segregate and separately
direct the investment of a portion of his account under Article IX(O), direct
the Trustee to make a loan or loans to such Participant first from any Rollover
Contribution, then from his Elective Contributions Account as follows:
(1) The aggregate amount of such loan or loans to a Participant
shall not exceed the lesser of -
(a) $50,000 reduced by the excess, if any, of (i) the highest
outstanding balance of loans from the Trust during the
one-year period ending on the day before the date on which the
loan is made, over (ii) the outstanding balance of loans from
the Trust on the date on which the loan is made; or
(b) 50% of the amount which would be the Vested balance of his
401(k) Account if he were to retire or otherwise terminate his
employment with the Company at the time of the loan.
(2) No such loan shall be made unless the Committee shall
determine that there is a reasonable expectation of its repayment as and when
due, otherwise than under (4) below.
VI-5
<PAGE> 66
(3) The Committee shall determine the amount, terms and conditions
of any such loan; provided that each such loan must by its terms be repayable
in substantially equal payments of principal and interest not less frequently
than quarterly within five years from the date of the loan, bear interest at a
reasonable rate, be adequately secured, and, if made to a so-called
"disqualified person", meet the other requirements of Section 4975(d)(1) of the
Code. Notwithstanding the limitation on the term of a loan set forth in this
subparagraph, the Committee may agree to a loan term in excess of five years
provided that the loan is used to acquire a dwelling unit which within a
reasonable time is to be used (determined at the time the loan is made) as the
principal residence of the Participant.
(4) No payment out of the Trust shall be made to or in respect of
such Participant or his Beneficiary (except under Paragraph (E) or this
Paragraph (F)) unless and until all unpaid loans to such Participant have been
satisfied in full, and if any loan to a Participant has not been satisfied in
full at the time such Participant or the Participant's Beneficiary is to
receive a payment out of the Trust, the Trustee may apply a sufficient part of
the Participant's account in satisfaction of any unpaid part of such loan. No
part of a Participant's Elective Contributions Account shall be applied in
satisfaction of the unpaid part of a loan to the Participant prior to the
earlier of an event entitling the Participant or the Participant's Beneficiary
to the payment of his Elective Contributions Account or the Participant's
attainment of age 59 1/2.
(5) The aggregate of all loans to a Participant under this Plan
and under all other tax qualified Plans of the Company or any Related Company
shall not exceed the amount stated in (1)(a) above.
(6) If the Company is or should become an electing small business
(S) corporation, no such loan shall be made to any shareholder-employee of the
Company in any taxable year of the Company in which it is an S corporation.
For purposes of this paragraph a shareholder-employee means an employee or
officer of the Company who owns, or is considered as owning within the meaning
of Section 318(a)(1) of the Code, on any day during the taxable year of the
Company, more than 5% of its outstanding capital stock.
(7) The Committee shall, before directing the Trustee to make any
loan under this Paragraph (F), adopt rules relating to loans consistent with
this Paragraph (F) and in compliance with the applicable provisions of the Code
and ERISA.
VI-6
<PAGE> 67
ARTICLE VII
[RESERVED]
VII-1
<PAGE> 68
PART TWO
ARTICLE VIII
COMMITTEE AND INVESTMENT COMMITTEE
A. Composition of Committee. Subject to Article IX, the Plan may, but
need not, be administered by a Committee of one or more employees (or other
individuals familiar with the affairs and personnel of the Company), who shall
be appointed by, and hold office at the pleasure of, the Board of Directors of
the Company. Vacancies in the Committee resulting from death, resignation,
removal or otherwise shall be promptly filled by the Board, but the Committee
may exercise its powers and authority notwithstanding the existence of
vacancies.
B. Removal and Resignation. A member of the Committee may resign at any
time upon not less than ten days' written notice to the Board, specifying the
effective date of resignation. A member may be removed or appointed by the
Board for any reason or for no reason and at any meeting of the Board, whether
or not called for that purpose.
C. Quorum. The Committee shall act by a majority of its members at the
time in office, and such action may be taken either by vote at a meeting or in
writing without a meeting. A member of the Committee shall not vote or act on
any matter relating solely to himself.
D. Officers. The Committee may by such majority action appoint from
among its number a Chairman to preside at its meetings and a Secretary, who
need not be a member, to keep records of its meetings and activities and to
perform such other duties and functions as the Committee may prescribe. It may
in like manner designate any one or more of its members or its Secretary to
execute any instrument or document upon its behalf, and the action of such
person shall have the same force and effect as if taken by the entire
Committee. In the event of such authorization, the Committee shall in writing
notify the other Administrative Parties thereof, and such parties shall be
entitled to rely upon such notification until the Committee shall give written
notification to the contrary.
E. Records and Reports. The Committee shall exercise such authority and
responsibility as it deems appropriate in order to comply with ERISA, the Code,
the Securities Exchange Act of 1934, and governmental regulations issued
thereunder relating to reporting and disclosure, including the furnishing of
information to Participants and Beneficiaries and the filing of information and
reports with the Internal Revenue Service and the Department of Labor.
F. Powers and Duties. The Committee shall control and manage the
operation and administration of the Plan and shall have any and all
VIII-1
<PAGE> 69
powers, authority and duties which shall be necessary and proper to enable it
to carry out its obligations under this Agreement, including by way of
illustration and not limitation, the power and duty:
(1) To construe and interpret the Plan as provided in Article
I(C), decide all questions of eligibility, determine the amount, manner and
time of payment of any benefits hereunder, and direct the Trustee with respect
to the amount, manner and time of payment of such benefits;
(2) To prescribe procedures to be followed by Participants or
Beneficiaries filing applications to participate, elections, designation of
beneficiary forms, applications for benefits, if any, and any other forms
required or desirable under the Plan;
(3) To prepare and distribute, in such manner as the Committee
determines to be appropriate, information explaining the Plan;
(4) To receive from the Company and from Participants such
information as shall be necessary for the proper administration of the Plan;
(5) To furnish the Company, upon request, such annual reports with
respect to the administration of the Plan as are reasonable and appropriate;
(6) To receive and review the periodic valuation of accounts made
by the Trustee;
(7) To receive, review and keep on file (as it deems convenient
and proper) reports of account allocations and benefit payments by the Trustee
and reports of disbursements for expenses directed by the Committee;
(8) To appoint or employ individuals to assist in the
administration of the Plan and any other agents it deems advisable, including
legal, accounting, appraisal, and benefit consultant counsel and to delegate
any of its administrative duties to other employees of the Company or any other
Related Company, including employees in the Company's, or any other Related
Company's, personnel department.
G. Rules and Regulations. The Committee may adopt such rules and
regulations as it deems necessary, desirable or appropriate in connection with
the administration of the Plan including, but not limited to, rules and
regulations relating to loans and hardship distributions. All rules and
regulations of the Committee shall be uniformly and consistently applied to all
Participants in similar circumstances. When making a determination or
calculation, the Committee shall be entitled to rely upon information furnished
by a Participant or Beneficiary, the Company, any Related Company, legal
counsel for the Company, or the Trustee.
VIII-2
<PAGE> 70
H. Claims Procedure. If any Participant or Beneficiary shall claim
benefits for which the Committee has determined he is ineligible, or shall
dispute the amount or timing of benefits determined by the Committee to be
payable hereunder, he shall be entitled to make a claim for benefits pursuant
to this Paragraph (H). All claims for benefits under this Agreement, whether
made by a Participant or Beneficiary, shall be in writing addressed and
delivered to the Committee, or any member thereof, at the Company's main
office, shall contain the claimant's name, mailing address, and telephone
number, if any, and shall identify the claim in a manner reasonably calculated
to make the claim understandable to the Committee. If the claim is defective
in any foregoing respect, the Committee may at any time within ten days after
said delivery give the claimant not less than ten days' written notice
specifying the defect or defects and the deadline for correction. A claim
shall be deemed to be effectively made when and if it is timely corrected in
writing (addressed and delivered as aforesaid), or when it is timely and
correctly prepared and delivered in the first place, or when it (or a revision
thereof) is timely delivered as aforesaid if the Committee does not give
written notice of any defect therein within ten days after said delivery. It
is further agreed:
(1) If a claim is (or is deemed to be) effectively made, the
Committee, shall within 60 days thereafter notify the claimant in writing
whether the claim has been granted or has been denied in whole or in part.
Such notice shall be written in a manner calculated to be understood by the
claimant, shall make specific reference to the Plan, and, if adverse in whole
or in part, shall set forth:
(a) The specific reason or reasons for the denial;
(b) A description of any additional material or information
necessary for the claimant to perfect the claim, together with
an explanation of why such material or information is
necessary; and
(c) An explanation of the claim review procedure set forth in (3)
and (4) below.
(2) If within said 60 days the claim has not been granted, it
shall be deemed to have been denied for purposes of the claim review procedure
set forth in (3) below, even if notice of denial has not been given under (1)
above.
(3) Upon denial of a claim in whole or in part, the claimant or
his duly authorized representative shall have 60 days within which to file with
the Committee or any member thereof a written request for a review of such
denial, whereupon -
(a) The Committee shall as promptly as is practicable, but not
later than 60 days after receipt of such request, schedule a
hearing to review said claim.
VIII-3
<PAGE> 71
(b) The claimant or his duly authorized representative shall,
pending and/or at said hearing, be permitted at all reasonable
hours to review the pertinent documents and also be entitled
to submit issues and comments in writing.
(4) The hearing mentioned in (3) above shall be held at the
Company's main office during normal business hours, unless a different time
and/or place are mutually agreed upon. It shall be attended by at least a
majority of the Committee. A decision on the claim shall be rendered thereat
or as soon as possible thereafter, but in no event later than 120 days after
the Committee's receipt of the written request for review; shall be in writing
and include specific reasons; shall be written in a manner calculated to be
understood by the claimant; and shall contain specific reference to the
pertinent Plan provisions on which the decision is based.
I. No Separate Committee. Notwithstanding the foregoing provisions of
this Article VIII -
(1) If and while the one or more Persons comprising the Committee
and Trustee are identical, the separation in this Agreement of the
responsibilities, rights, powers, authority, and functions of the Committee and
Trustee respectively shall be disregarded; said Persons shall act and serve in
both said capacities combined; and they need not furnish information,
directions, instructions or notices, or make reports or demands, by themselves
in one such capacity to themselves in the other such capacity.
(2) If and while there is no Committee, either because none is
designated or no one or more Persons are at the time in question actively
serving as members thereof, the responsibilities, rights, powers, authority,
and functions of the Committee shall be vested in the Company; and the Company
and Committee need not furnish information, directions, instructions or
notices, or make reports or demands, one to the other.
(3) Whoever performs the functions of the Committee shall be the
Plan Administrator as defined in ERISA.
J. Investment Committee. The Board shall appoint an Investment Committee
of one or more individuals to select, deselect and monitor the performance of,
the Investment Funds and to direct the Trustee as to the acquisition and
disposition of shares of Company Stock. The Investment Committee shall have
such powers as are necessary, desirable and/or appropriate to enable it to
carry out its duties. The rules applicable to the Committee in Article VIII
(B), (C) and (D) also shall apply to the Investment Committee.
K. Indemnification. The Company shall indemnify each member of the
Committee and the Investment Committee against any personal
VIII-4
<PAGE> 72
liability or expense in connection with serving as a Committee member except
for his own gross negligence, willful misconduct or bad faith. The Company may
obtain and maintain in effect fiduciary liability insurance covering each
member of the Committee and the Investment Committee in amounts as determined
by the Company to be sufficient to cover any liability or costs which could
arise from their serving as members of the Committee and the Investment
Committee. Such indemnification and/or insurance shall also apply to any
individual serving as Trustee or co-Trustee but not to a corporate trustee.
VIII-5
<PAGE> 73
ARTICLE IX
TRUSTEE AND OTHER FIDUCIARIES
A. Bonding. Every Fiduciary shall be bonded to the extent (1) required
by Section 412 of ERISA or applicable Labor Regulations or (2) directed by the
Company.
B. Protective Provisions for Fiduciaries. To the extent permitted by
ERISA, it is agreed:
(1) No Fiduciary shall be liable with respect to a breach of
fiduciary duty if such breach was committed before he became a Fiduciary or
after he ceased to be a Fiduciary.
(2) Notwithstanding any other provisions of this Agreement -
(a) Any Fiduciary may, but need not, purchase insurance from and
for his own account to cover liability arising under or with
respect to the Plan.
(b) The Company may, but need not, purchase insurance to cover
potential liability of one or more Persons who serve in a
fiduciary capacity with respect to the Plan.
(c) Upon first obtaining the written consent of the Company, any
Trustee may use assets of the Trust to purchase insurance for
itself and/or one or more other Fiduciaries and/or the Trust
to cover liability or losses occurring by reason of the act or
omission of itself and/or one or more other Fiduciaries, if
such insurance permits recourse by the insurer against such
Trustee and/or one or more other Fiduciaries in question in
the case of its or their breach of a fiduciary obligation.
(3) Any Fiduciary may, by written instrument, allocate and
delegate to others any of such Fiduciary's powers, duties or responsibilities,
terminable upon such notice as such Fiduciary deems prudent. Any person or
entity may serve in more than one fiduciary capacity with respect to the Plan.
A Fiduciary's responsibility shall be limited to performance of those duties
conferred upon such Fiduciary by or pursuant to the Plan, and, subject to
Section 405 and 410 of ERISA, no Fiduciary shall be responsible for the acts or
omissions of any other Fiduciaries.
C. Management and Control of Assets; Consultants and Investment Managers.
To the extent permitted by Section 402(c) of ERISA:
(1) Any Fiduciary may employ one or more Persons to render advice
with regard to any responsibility which such Fiduciary has under this
Agreement.
(2) At the direction of the Committee, the Trustee shall invest
and reinvest ESOP Contributions primarily in Company Stock,
IX-1
<PAGE> 74
in accordance with the terms of this Agreement. The Committee shall assume the
responsibility and liability for the prudence of investment in Company Stock
directed by it under this subparagraph (C)(2). Except as hereinafter otherwise
provided, the Trustee shall be the Fiduciary with respect to the investment,
management and control of the Trust Fund, with full discretion in the exercise
of such investment, management and control; provided, however, that this
subparagraph (C)(2) shall not apply to Trust assets which consist of Contracts
issued by an Insurer qualified to do business in Michigan nor to any Trust
assets held by such Insurer; nor shall it apply if the Plan is exempt from such
requirements by reason of Section 403(b)(4) of ERISA and applicable Labor
Regulations.
(3) The Company may, by resolution of its Board of Directors,
assume from the Trustee and transfer to the Committee or an Investment Manager
the authority and duty to direct the investment and management of all or a
portion of the Trust Fund; and, if such authority and duty have been
transferred to the Committee, the Committee, by appropriate action, may appoint
an Investment Manager to direct the investment and management of all or a
portion of the Trust Fund, provided that:
(a) A copy of any such Board resolution or Committee action shall
be delivered to the Trustee whereupon the Committee or the
Investment Manager, as the case may be, shall be the Fiduciary
with respect to the investment and management of the Trust
Fund (or designated portion thereof) and the Trustee shall
have no responsibility therefor.
(b) Any transfer of investment and management to the Committee or
to an Investment Manager may be revoked upon receipt by the
Trustee of a written notice to that effect by the Company
through its Board of Directors or the Committee, as the case
may be.
(c) The appointment, selection and retention of a qualified
Investment Manager shall be solely the responsibility of the
Company or the Committee, as the case may be.
(4) During such period or periods of time, if any, as the
Committee or any Investment Manager is authorized to direct the investment and
management of all or a part of the Trust Fund:
(a) The Trustee is authorized and entitled to rely upon the fact
that said Investment Manager is at all times a qualified
Investment Manager, as defined in Section 3(38) of ERISA,
until such time as the Trustee has received a written notice
from the Company or Committee to the contrary, as well as to
rely upon the fact that said Investment Manager is authorized
to direct the investment and management of the Trust Fund
until such time as the Company or Committee, as the case may
be, shall notify the Trustee in writing that another
Investment Manager
IX-2
<PAGE> 75
has been appointed in the place and stead of the Investment
Manager named or, in the alternative, that the Investment
Manager named has been removed and the responsibility for the
investment and management of the Trust Fund has been assumed
by the Committee or has been transferred back to the Trustee,
as the case may be.
(b) The Trustee shall not be liable or responsible for losses or
unfavorable results arising from the Trustee's compliance with
proper directions of the Committee which are made in
accordance with this Agreement and which are not contrary to
the provisions of any applicable Federal or State statute
regulating such investment and management of the assets of an
employee benefit trust.
(c) The Trustee shall not be liable or responsible in any way for
any losses or other unfavorable results arising from the
Trustee's compliance with investment or management directions
received by the Trustee from the Investment Manager.
(d) All directions concerning investments made by the Committee or
the Investment Manager shall be signed by such person or
persons, acting on behalf of the Committee or the Investment
Manager, as the case may be, as may be duly authorized in
writing; provided, however, that the transmission to the
Trustee of such directions by photostatic teletransmission
with duplicate or facsimile signature or signatures shall be
considered a delivery in writing of the aforesaid directions
until the Trustee is notified in writing by the Committee that
the use of such devices with duplicate or facsimile signatures
is no longer authorized.
(e) The Trustee shall, as promptly as possible, comply with any
written directions given by the Committee or an Investment
Manager hereunder and, where such directions are given by
photostatic teletransmission with facsimile signature or
signatures, the Trustee shall be entitled to presume that any
directions so given are fully authorized.
(f) The Trustee shall not be liable for its failure to invest any
or all of the Trust Fund in the absence of such written
directions.
(g) The Trustee shall have no obligation to determine the
existence of any conversion, redemption, exchange,
subscription or other right relating to any of said securities
purchased, of which notice was given prior to the purchase of
such securities, and shall have no obligation to exercise any
such right unless the Trustee is informed of the existence of
the right and is instructed to exercise such right, in
writing, by the
IX-3
<PAGE> 76
Committee or the Investment Manager, as the case may be,
within a reasonable time prior to the expiration of such right.
(h) Neither the Committee nor any Investment Manager referred to
above shall direct the purchase, sale or retention of any
assets of the Trust Fund if such directions are not in
compliance with the applicable provisions of ERISA and any
Regulations issued thereunder.
D. Participant-Directed Investments. If, while, and to the extent that a
Participant exercises control with the meaning of Section 404(c) of ERISA over
the assets in his 401(k) Account by an election under Article IV(K-1) or (L),
such Participant shall not be deemed to be a Fiduciary by reason of such
exercise; and no Person who is otherwise a Fiduciary shall be liable under
Title I, Subtitle B, Part 4, of ERISA (or comparable provisions of this
Agreement) for any loss, or by reason of any breach, which results from such
Participant's exercise of control.
E. Prohibited Transactions, Etc. Notwithstanding any other provision of
this Agreement -
(1) Except as authorized by applicable Regulations, no Fiduciary
may maintain the indicia of ownership of any assets of the Trust outside the
jurisdiction of the district courts of the United States.
(2) A Fiduciary shall not knowingly and willfully cause the Trust
to engage in a transaction which violates Section 406 or 407 of ERISA or which
is taxable under Section 4975 of the Code.
F. General Duties of Trustee. In addition to all its other duties and
responsibilities under this Article IX and other provisions of this Agreement,
the Trustee shall -
(1) Receive, collect, hold, safeguard, administer and retain,
temporarily or permanently, the cash and other property originally or at any
time comprising all or part of the Trust Fund, together with such income,
rents, issues and profits as shall from time to time be produced thereby or
arise therefrom.
(2) Make such payments and distributions, and take such further
action, as shall be proper to effectuate benefits under the Plan and to carry
out this Agreement.
(3) Maintain complete records and accounts of the Trust, including
those which the Company or Committee may direct, and the Company or Committee
may examine the same at all reasonable times during business hours.
(4) Render such periodic accountings and reports, including but
not limited to those hereafter described in this Article IX, as the Company or
Committee may reasonably require.
IX-4
<PAGE> 77
(5) Carry out the proper directions and instructions of the
Committee and, insofar as may be proper under this Agreement, make
determinations, participate in consultations and conferences, and give or
withhold approvals and consents.
G. General Powers of Trustee. Except as otherwise expressly provided in
this Agreement or required by law, the Trustee is authorized and empowered -
(1) To sell, exchange, transfer, assign, lease, pledge, mortgage
or otherwise encumber or dispose of, publicly or privately, any real or
personal property at any time included in the Trust Fund as and when, for such
(if any) price and consideration, on credit or otherwise, with or without
security, and upon such other terms and conditions as the Trustee shall deem
proper.
(2) To invest and reinvest all or part of the Trust Fund, in such
amounts, proportions and investments, including but not limited to bonds,
notes, debentures, mortgages, equipment trust certificates, investment trust
certificates, preferred or common stocks, mutual funds or other property, real
or personal, either within or without the State of Michigan, as the Trustee may
deem proper or the Committee shall direct.
(3) To hold cash uninvested, or on deposit with any bank, savings
and loan association or trust company, in such amount as the Trustee shall deem
proper, for the purpose of defraying anticipated expenses of (and benefits out
of) the Trust. At any time the Trustee is a bank or trust company the
authority herein conferred shall extend to deposits with the Trustee.
(4) To pay, perform, defend, collect, maintain, sue on, modify,
settle, compromise, release, abandon or otherwise adjust or dispose of any
claims or demands in favor of or against the Trust Fund or any Participant's
account.
(5) To vote or not vote any stock or securities in person, through
designees or by proxy (but with respect to Company Stock, only as provided in
Article IX(S).
(6) To hold or register any stock, securities or other property in
the name of any Trustee or nominee or unregistered or in such form that title
shall pass by delivery, provided that the records of the Trustee shall always
indicate the fiduciary nature of such ownership.
(7) To exercise, not exercise, sell or otherwise dispose of any
conversion or subscription right, or other right or option, and to make any
payments incidental thereto.
(8) To oppose, consent to or participate in any voting trust,
pooling agreement, foreclosure, reorganization, consolidation, merger,
liquidation, refinancing, or sale of assets, of or with
IX-5
<PAGE> 78
respect to any corporation or other organization, including the Company
(subject to Article IX(S) through (W)), and in connection therewith to deposit
stock, securities or other property with, and transfer title to, any protective
committee or other Person whatsoever.
(9) To pay calls, assessments and other charges which the Trustee
shall deem proper.
(10) To borrow and lend money in such circumstances and upon such
terms and conditions, with or without security, as the Trustee shall deem
proper and, further, to borrow from any lender (including the Company or the
Trustee) solely for the purpose of financing the acquisition of Company Stock,
giving its note as Trustee with such reasonable interest and security for the
loan as may be appropriate or necessary, provided that any such borrowing shall
comply with the provisions of Article IX(R).
(11) To make or not make any provision for amortization or a
sinking fund with respect to any security which is received at a value or
purchased at a price in excess of par or of the amount payable on its call,
redemption, maturity or liquidation.
(12) Subject to Article IX(E)(1), to keep all or part of the Trust
Fund at any place or places, and to hold and administer the Trust Fund in one
or more common trust funds or other consolidated funds, in which the various
accounts may have undivided interests, and without distinction between income
and corpus.
(13) To retain as an investment any stock, securities or other
property received through the exercise of any foregoing powers and authority.
(14) To make, execute and deliver any and all agreements,
instruments and documents whatsoever, including but not limited to those
incidental to the foregoing powers and authority, and to make the same binding
and enforceable beyond the duration of the Trust.
(15) To buy, sell and trade in option contracts and 'short' sales
for cash, and for such purpose the Trustee may maintain and operate cash
accounts with brokers, and may deliver and pledge any securities held or
purchased by the Trustee with such brokers both as security for loans and
advances made to the Trustee and to ensure the Trustee's ability to deliver
stock against short options provided that all such purchases, sales and trades
shall be made on one or more designated national securities exchanges whose
plans regulating such transactions have been declared effective pursuant to the
Securities Exchange Act of 1934, such as the Chicago Board Options Exchange,
Incorporated.
(16) To do any and all additional acts and things which the Trustee
shall be authorized to do under the laws of the State of Michigan or of any
other jurisdiction in which it may act or which
IX-6
<PAGE> 79
the Trustee in its discretion shall deem proper to carry out this Agreement, to
the end that the Trustee shall have and may exercise all the powers and
authority of an absolute owner, except as the Committee shall otherwise direct;
and no Person dealing with the Trustee shall be bound to see to the application
of any money or other property paid, delivered or transferred to the Trustee or
to inquire into the validity or propriety of any transaction whatsoever.
(17) As directed by the Committee, to invest any reinvest the
assets of the ESOP portion of the Plan and the assets of the Company Stock Fund
primarily in Company Stock in accordance with this Agreement.
(18) In the event that the Committee directs the Trustee to dispose
of any Company Stock held as Trust assets, under circumstances which require
registration and/or qualification of the securities under applicable Federal or
state securities laws, then the Company, at its own expense, will take, or
cause to be taken, any and all such actions as may be necessary or appropriate
to effect such registration and/or qualification.
H. Appraisal. As of each Anniversary Date and Valuation Date, and as of
such other dates as the Company or Committee may reasonably direct, the Trustee
shall determine the fair market value of the assets comprising the Trust Fund,
including the assets of each Investment Fund, established within the context of
the Trust Fund by appraising such assets as follows, except as otherwise
required by ERISA:
(1) Stocks and securities which are listed or reported on any
national exchange shall be valued on the basis of their closing prices on such
exchange on the appraisal date or, if there were no reported sales on such
exchange on the appraisal date, then at their bid prices at the close of
market.
(2) Stocks and securities not susceptible of valuation under (4),
but which are traded over-the-counter, shall be valued on the basis of their
closing prices on the market on the appraisal date or, if there were no
reported sales over-the-counter on the appraisal date, then at their bid prices
at the close of market.
(3) Stocks and securities not susceptible of valuation under (4)
or (5), but which would be susceptible of valuation as of a date not more than
seven (7) days prior to the appraisal date, shall be valued as of such prior
date as near as possible to the appraisal date.
(4) For purposes of (2), (3), and (4) above, information contained
in any newspaper of general circulation or any standard financial periodical,
or furnished by any national securities exchange or by any broker who is a
member of any national securities exchange, as the case may be, may be fully
relied upon
IX-7
<PAGE> 80
by the Trustee in the absence of actual knowledge or advice to the contrary.
(5) property not subject to valuation by the foregoing methods
shall be valued at its fair market value in accordance with written directions
given to the Trustee by the Committee (except as otherwise provided in Article
XII).
(6) There shall be excluded from the assets valued under this
Paragraph (H), if appraisal is being made as of an Anniversary Date, the amount
of the Company's contribution which is allocable to the Participants' accounts
as of said date.
(7) Valuations determined by appraisal under this Paragraph (H)
shall be binding and conclusive upon each and every Person beneficially
interested in the Trust, but shall not be binding upon the Company or Committee
unless incorporated in an accounting under Paragraph (i) below.
(8) Upon completion of an appraisal, the Trustee shall file copies
thereof with the Committee and the Company.
(9) Notwithstanding the foregoing, any assets of the Trust Fund or
any Investment Fund within the context of the Trust Fund consisting of units of
participation in any pooled fund established and maintained by the Trustee
under any trust instrument establishing a pooled fund or funds for the
investment of the assets of pension and profit-sharing plans of various
employers for which the Trustee acts as trustee shall be valued in accordance
with the terms of such trust instrument.
I. Periodic Accounting. Within 60 days after such Anniversary Date, and
at such other times as the Company or Committee may reasonably direct or as
ERISA may require, the Trustee shall prepare and deliver to the Company and
Committee an accounting of the administration of the Trust, which accounting
shall include a description of all assets then comprising the Trust Fund and
shall be in such further detail as the Company or Committee may reasonably
request. Within 90 days after receiving such accounting, the Company and
Committee, respectively, shall notify the Trustee in writing whether or not
such accounting is approved; and unless so disapproved, it shall be deemed to
be approved. It is in addition agreed:
(1) Either the Company or the Committee or both may require the
Trustee to furnish such other or additional information with respect to the
administration of the Trust as may be reasonably necessary or desirable prior
to determining upon the approval thereof; and in such event the aforesaid
90-day period shall be tolled until such information is received by the party
requesting it.
(2) If the Company or Committee shall notify the Trustee that the
aforesaid accounting is not approved, an audit or opinion shall
IX-8
<PAGE> 81
thereupon be made by an independent public accountant or accountants chosen by
the Company or Committee, as the case may be. Upon completion of such audit or
opinion, any errors in the accounting shall be corrected, and the corrected
accounting shall be deemed to be approved by the Company and Committee.
(3) The approval by the Company and Committee of the accounting or
corrected accounting shall constitute an account stated between the Company,
Committee, Trustee, all Participants, all Beneficiaries, and any other Persons
having any interest in the Trust or Plan.
(4) Nothing in this Paragraph (i) shall prevent the Trustee from
having an accounting settled and allowed by, or being required by the Company
or Committee to account in, a court of competent jurisdiction.
(5) The foregoing provisions of this Paragraph (i) are subject to
the provisions of ERISA.
J. Protective Provisions for Trustee. The Trustee accepts the Trust
solely upon the terms and conditions of this Agreement, and no duties or
responsibilities not expressly set forth herein or in ERISA shall be implied or
imposed. It is further agreed:
(1) The Trustee shall have no duty to ascertain whether any
directions or instructions of the Company or Committee are in accordance with
this Agreement, nor to see to the application of any payment made pursuant to
such directions or instructions.
(2) Any benefit or other payment under the Plan shall be made only
if and when the Trustee has sufficient assets of the Trust Fund available for
the purpose intended.
(3) In the event of any dispute as to the Persons to whom payment
of any money or delivery of any other property shall be made by the Trustee,
the Trustee may withhold such payment or delivery in whole or part until such
dispute shall be settled to the satisfaction of the Trustee or determined by a
court of competent jurisdiction.
(4) The Trustee may withhold all or such part of any distribution
as the Trustee in its discretion may deem proper to protect the Trustee and the
Trust Fund against any liability or claim or account of any estate,
inheritance, income or other tax whatsoever, and with all or any part of any
such distribution so withheld may discharge any such liability. Any part of
any such distribution so withheld by the Trustee that may be determined by the
Trustee to be in excess of any such liability shall upon such determination by
the Trustee be distributed forthwith to the Person from whom it was withheld.
(5) The Trustee shall not be obligated to institute any action or
proceedings for the collection of money or other property
IX-9
<PAGE> 82
due the Trust, or in defense of any claim against the Trust or any portion of
the Trust Fund, unless the Trustee shall first have been indemnified to its
satisfaction for all costs, expenses, attorney fees and liabilities to which
the Trustee might become subject.
K. Provisions Pertaining to Co-Trustees. During any period of time when
the Trustee shall consist of two or more Persons (whether individuals,
corporations or otherwise), the following provisions shall apply:
(1) Except as otherwise provided in the foregoing provisions of
this Article IX -
(a) Each such Person shall use reasonable care to prevent a
co-Trustee from committing a breach; and
(b) Such Persons shall jointly manage and control the Trust
assets, except that this item (b) shall not preclude any
agreement, and the co-Trustees are hereby authorized to agree
(in a written document executed by all co-Trustees) to
allocate specific responsibilities, obligations or duties
among themselves, in which event a co-Trustee to whom certain
responsibilities, obligations or duties have not been
allocated shall not be liable by reason of this item (b),
either individually or as a Trustee, for any loss resulting to
the Trust arising from acts or omissions on the part of
another co-Trustee to whom such responsibilities, obligations
or duties have been allocated.
(2) Nothing in (1) above shall limit any liability that a Fiduciary
may have under Part 4 of Title I of ERISA.
(3) The Trustee shall act by a majority of such Persons at the
time in office, and such action may be taken either by vote at a meeting or in
writing without a meeting.
(4) Said Persons serving as co-Trustees may unanimously designate
any one or more co-Trustees to execute any instrument or document on behalf of
all, including but not limited to the signing or endorsement of any check and
the signing of any applications for Contracts, and the action of such
designated co-Trustee shall have the same force and effect as if taken by all
the co-Trustees. In the event of such authorization, all the co-Trustees shall
in writing notify the other Administrative Parties thereof, and such parties
shall be entitled to rely upon such notifications until one or more co-Trustees
shall give written notification to the contrary.
L. Removal and Resignation of Trustee. Any sole or co-Trustee may resign
at any time upon not less than 60 days written notice to the Board of Directors
of the Company specifying the effective date of resignation. Any sole or
co-Trustee may be removed by the Board with or without cause, but only upon not
less than 60 days' written
IX-10
<PAGE> 83
notice to such sole or co-Trustee specifying the effective date of removal and
enclosing a copy of the resolution of the Board. No such removal shall become
effective until all sums due to such sole or co-Trustee under this Agreement
have been paid. The Trustee and the Committee may waive any of the provisions
of this Paragraph by mutual agreement in writing.
M. Successor Trustees. The lack of a Trustee due to resignation, removal
or otherwise shall not terminate the Trust. The Company shall promptly appoint
one or more successor Trustees. In the absence of any other Trustee, the
Committee shall act and serve as an interim Trustee. Each and every estate,
title, right, power, authority, discretion, duty and obligation conferred upon
the Trustee by this Agreement shall devolve upon, and be exercised and
performed by, such successor Trustees, including the Committee or any remaining
Trustee.
N. Settlement of Accounts upon Resignation or Removal of Trustee. In the
event of the resignation or removal of a sole or co-Trustee, such sole or
co-Trustee shall have the right to a settlement of its accounts at the expense
of the Trust, which accounting shall be made as provided in Paragraph (i)
above. Upon completion of such accounting and payment to the outgoing sole or
co-Trustee of its compensation and expenses, including court costs and legal
fees, such sole or co-Trustee or its legal representative shall promptly
assign, transfer and deliver unto the remaining or successor Trustee (or in the
absence thereof, to the Committee) the Trust Fund and all records and data (or
copies thereof) pertaining to the Plan and Trust.
O. Segregated Accounts. Except as provided in Article IV(K-1), no
Participant shall be permitted to segregate and/or separately direct the
investment of his account under the Plan and any reference to segregated
accounts elsewhere in this Agreement shall be disregarded.
P. Investments in Common Trust Funds. Notwithstanding any other
provisions of this Agreement, all or any part of the assets of the Trust may be
invested in any collective investment trust; provided that such collective
investment trust is exempted under the Code or regulations or rulings issued by
the Internal Revenue Service and is then maintained by the Trustee. The
provisions of the document governing any such collective investment trust, as
amended from time to time, shall govern any investment therein and are hereby
made a part of this Agreement.
Q. Voting Rights of Investment Committee with respect to Company Stock.
The Investment Committee shall have the right to direct the Trustee as to the
manner in which voting rights appurtenant to Company Stock held by the Trustee,
whether or not allocated to the Company Stock Accounts or 401(k) Accounts of
Participants, are to be exercised in each matter brought before an annual or
special stockholders meeting of the Company and on each matter as to which
shareholder authorization of corporate action is solicited by
IX-11
<PAGE> 84
written consent. Before each such meeting or solicitation, the Company shall
cause to be furnished to each member of the Investment Committee a copy of the
proxy, other information or solicitation material furnished to other
stockholders, together with a form requesting directions on how the shares of
Company Stock held by the Trustee shall be voted on each such matter. Upon
timely receipt of such directions the Trustee shall on each such matter vote as
directed the number of shares held by the Trustee and covered by such
instructions. If the Investment Committee fails to give the Trustee timely
instructions as to how to vote any Company Stock, the Trustee shall not vote
such Company Stock.
R. Rights on Tender or Exchange Offer for Company Stock. Each present or
former Participant (or, in the event of his death, his Beneficiary) shall have
the right, to the extent of the number of shares of Company Stock allocated to
his Company Stock Account and 401(k) Account, to instruct the Trustee in
writing as to the manner in which to respond to a tender or exchange offer with
respect to such shares of Company Stock. The Committee shall use its best
efforts timely to distribute or cause to be distributed to each present or
former Participant (or Beneficiary thereof) such information as will be
distributed to stockholders of the Company in connection with any such tender
offer or exchange offer. Upon timely receipt of such instructions, the Trustee
shall respond as instructed with respect to shares of such Company Stock. The
instructions received by the Trustee from Participants shall be held by the
Trustee in confidence and shall not be divulged or released to any person,
including officers or employees of the Company or any Related Company. If the
Trustee does not receive timely instruction from a Participant (or Beneficiary)
as to the manner in which to respond to such a tender or exchange offer, such
Participant (or Beneficiary) shall be deemed to have instructed the Trustee not
to tender or exchange the shares allocated to his Company Stock Account and
401(k) Account, and the Trustee shall not tender or exchange any such shares.
If pursuant to instructions from any Participant or Beneficiary (each
in this paragraph being referred to as a "Tendering Participant") given
pursuant to this Paragraph R the Trustee tenders shares of Company Stock in the
Tendering Participant's Company Stock Account and 401(k) Account, if any, and
receives cash for these shares, the Tendering Participant's (i) Company Stock
Account shall be reduced by the number of shares in his Company Stock Account
which were sold, his Other Investments Account shall be increased by the
amount of cash received, and the proceeds of the sale if they consist of cash
shall be invested in investments other than Company Stock authorized for the
ESOP portion of the Trust and (ii) the portion of the Participant's 401(k)
Account, if any, invested in the Company Stock Fund shall be reduced by the
number of shares in the Company Stock Fund portion of his 401(k) Account which
were sold, and the proceeds of the sale if they consist of cash shall be
invested in any one or more of the Other Investment Funds as directed by the
Participant. If the Trustee receives property other than cash for any tendered
shares
IX-12
<PAGE> 85
of Company Stock, the Tendering Participant's (i) Company Stock Account shall
be reduced by the number of shares sold, the property received shall be
retained in a separate fund to be established by the Trustee pending a decision
by the Trustee of its disposition, and the Tendering Participant shall be
credited with his allocable share of such special fund and any successor
investments and (ii) the portion of the Participant's 401(k) Account, if any,
invested in the Company Stock Fund shall be reduced by the number of shares in
the Company Stock Fund portion of his 401(k) Account which were sold, the
property received shall be retained in a separate Investment Fund in the 401(k)
portion of the Trust pending a decision by the Trustee of its disposition, and
the Tendering Participant shall be credited with his allocable share of such
separate Investment Fund.
Notwithstanding the foregoing provisions of this Paragraph R, no
Participant or Beneficiary shall have the right under this Paragraph R to
instruct the Trustee as to the manner in which to respond to a tender or
exchange offer made by any Related Company, and the Trustee shall tender or
exchange any shares of Company Stock held by the Trust in response to such a
tender or exchange offer only if so directed by the Investment Committee,
which, in so directing, shall act solely in accordance with the principles set
forth in Section 404(a) of ERISA.
The Trustee shall tender or exchange unallocated shares of Company
Stock only if so directed by the Investment Committee, which, in so directing,
shall act solely in accordance with the principles set forth in Section 404(a)
of ERISA.
IX-13
<PAGE> 86
ARTICLE X
TERMINATION, AMENDMENT AND SUSPENSION
A. Termination, Etc.; Assumption of Plan. It is the present intention of
the Company permanently to maintain the Plan and continue to make contributions
under Article III(A); provided, however, that subject to Article XI(E) -
(1) The Company reserves the right at any time to revoke this
Agreement, terminate the Plan, or terminate or suspend its liability to make
further contributions to the Trust, but no such action shall become effective
until the Company shall notify the Committee and Trustee.
(2) The Plan shall automatically terminate, and likewise the
Company's liability to make contributions to the Trust, upon the Company's
legal dissolution, or upon its adjudication as bankrupt or insolvent, or upon
its making a general assignment for the benefit of creditors, or upon a
receiver being appointed for its assets, or upon its merger or consolidation
with or into any other corporation or corporations, or upon a complete
discontinuance of contributions under the Plan within the meaning of Section
411(d)(3) of the Code.
(3) Termination of the Plan may be forestalled if and to the
extent that any successor corporation, or any corporation or business entity
employing a majority of the then Participants, shall expressly assume the Plan
and the Company's liability to make contributions. Such assumption shall be
expressed in a written agreement between the Company and such corporation or
business entity, pursuant to proper resolution of the latter's Board of
Directors or other governing body, but shall not be effective unless copies of
such agreement and resolution shall be filed with the Trustee prior to
termination. Such agreement shall provide for assumption of the Plan and the
liability to make contributions, with respect to all Participants employed by
such corporation or business entity, and such corporation or business entity
shall thereupon be substituted pro tanto in the place and stead of the Company.
With respect to any then Participants who are not taken over as employees of
such corporation or business entity, the Plan shall be deemed to terminate, and
Paragraph (B) below shall be invoked.
(4) In the event of any termination or suspension under (1) or (2)
above, the Company and the Trustee shall give prompt notice thereof to the
Internal Revenue Service, if, and to the extent required by the Code or ERISA;
and, subject to Paragraph (B) below, each Participant's account shall be Vested
to the extent required by Article XI(E)(2).
(5) The Company may cause a termination referred to above to apply
to the ESOP portion of the Plan or the 401(k) portion of the Plan or to the
entire Plan.
X-1
<PAGE> 87
B. Liquidation of Trust. In the event of termination of the Plan, after
each such account has been appropriately adjusted to cover any expenses of
distribution and final liquidation costs, the Trustee shall pay the balance of
such account to the Participant (or, if deceased, his Beneficiary) in an
immediate Lump Sum, provided that, at the time the Trust is terminated the
Company does not maintain any other defined contribution plan (other than an
employee stock ownership plan as defined in Section 4975(e)(7) of the Code),
and the consent of the Participant or his Beneficiary to such immediate Lump
Sum distribution shall not be required.
Alternatively, if so directed by the Committee, the Trustee shall
continue the 401(k) portion of the Plan and Trust and/or the ESOP portion of
the Plan and Trust in existence as "frozen" Plans and Trusts (without receiving
any additional Company contributions and without admitting any additional
Participants) and shall pay the balances of the accounts of Participants to
them at such times as they are entitled to receive the same under this
Agreement, i.e., at retirement, death, other termination of employment. In
such event the frozen Plan and Trust shall be operated and maintained so that
they continue to meet the qualification requirements of Section 401(a) of the
Code, including the minimum coverage requirements of Section 410(b) of the Code
to the extent such requirements apply to a frozen Plan.
C. Termination of Trust. Notwithstanding termination of the Plan, the
Trust shall terminate when and if, but not until, the Trust Fund shall be
entirely paid out and distributed in accordance with this Agreement.
D. Amendment. Subject to Article XI(E) (Nonforfeitability, etc.) the
Company reserves the right at any time and from time to time to amend this
Agreement, without the consent of any Participant or Beneficiary, in any manner
which the Company deems to be proper, whether or not (1) for reasons of
business necessity or (2) for the purpose of causing the Plan and Trust to be
tax qualified or to continue to be tax qualified. No such amendment, except
upon written consent, shall increase the duties or liabilities of the Trustee
or Committee, or diminish their compensation, or deprive any Participant or
Beneficiary of any then Vested equitable interest in the Trust; provided,
however, that such amendment may be retroactive to the extent necessary to take
full advantage of Section 401(b) of the Code if such amendment is adopted for
the purpose of causing the Plan and Trust to be tax qualified or to continue
to be tax qualified with respect to any taxable year of the Company and is
adopted and effective within the time limit specified in Article III(A) with
respect to making contributions for such taxable year or within such longer
period permitted under applicable Regulations. Notwithstanding anything herein
to the contrary, any provisions of Article IV relating to allocations to ESOP
Accounts shall not be amended more than once every six months other than to
comport with changes in the Code, ERISA or the rules thereunder.
X-2
<PAGE> 88
ARTICLE XI
MISCELLANEOUS
A. Persons Prohibited from Serving as Fiduciaries, Etc. No person shall
serve as a Committee member, Fiduciary, officer, Trustee, custodian, counsel,
agent or employee of the Trust, or as a consultant to the Trust or in any other
capacity, if prohibited so to do by Section 411 of ERISA.
B. Information Required by ERISA. If some or all of the information
necessary to enable the Committee to comply with the requirements of Title I of
ERISA is maintained by -
(1) An insurance carrier or other organization (normally the
Insurer) which provides some or all of the benefits under the Plan, or holds
assets of the Plan in a separate account,
(2) A bank or similar institution (normally a corporate Trustee)
which holds some or all of the assets of the Plan in a common or collective
trust or a separate trust or custodial account, or
(3) A Plan sponsor (normally the Company) as defined in Section
3(16)(B) of ERISA,
such carrier, organization, bank, institution or sponsor shall transmit and
certify the accuracy of such information to the Committee within 120 days after
the end of the Plan Year (or such other date as may be prescribed by applicable
Labor Regulations).
C. Retention of Records for Six Years. Every Person (such as the
Trustee, Committee, Insurer, Company or an accountant) who is subject to a
requirement to file any description or report or to certify any information
therefor under Title I of ERISA (whether or not expressly required to do so by
this Agreement), or who would be subject to such a requirement but for an
exemption or simplified reporting requirement under Section 104(a)(2) or (3) of
ERISA, shall maintain records on matters of which disclosure is required which
will provide in sufficient detail the necessary basic information and data from
which the documents thus required may be verified, explained or clarified, and
checked for accuracy and completeness, and shall include vouchers, worksheets,
receipts, and applicable resolutions, and shall keep such records available for
examination for a period of not less than six (6) years after the filing date
of the documents based on the information which they contain, or six (6) years
after the date on which such documents would have been filed but for the
aforesaid exemption or simplified reporting requirement.
D. No Reversion. The assets of the Trust shall never inure to the
benefit of the Company and shall be held for the exclusive purposes of
providing benefits to Participants and their Beneficiaries and defraying
reasonable expenses of administering
XI-1
<PAGE> 89
the Plan; and except as otherwise provided in Article III(F) and (G), the
Company shall not be entitled to receive or recover any part of its
contributions to the Trust or the earnings thereof.
E. Nonforfeitability, Etc. In compliance with ERISA and the Code, it is
agreed:
(1) A Participant's right to his normal retirement benefits under
Article V(A) shall be Vested upon his attaining his Normal Retirement Age.
(2) Upon termination or partial termination of the Plan, or the
complete discontinuance of contributions by the Company under the Plan, the
rights of all Participants to Accrued Benefits as of such time (i.e., those
accrued to the date of such event), to the extent then funded or credited,
shall be Vested, except as otherwise required or permitted by applicable
Regulations (e.g., Regulation Section 1.411(d)- 2(a)) mentioned in Section
411(d)(3) of the Code.
(3) The Accrued Benefit of a Participant shall never be decreased
by an amendment of the Plan, except an amendment described in Section 412(c)(8)
of the Code and Section 302(c)(8) of ERISA. An amendment which has the effect
of eliminating an optional form of benefit with respect to benefits
attributable to service before the amendment shall be treated as decreasing the
Accrued Benefit of a Participant except as otherwise provided by Treasury
Regulations.
(4) The vesting schedule in Article V(C) and any other vesting
provision of this Agreement based thereon shall not be amended unless -
(a) The Vested percentage of the Accrued Benefit derived
from the ESOP Contributions and Matching Company
Contributions (determined as of the later of the date
such amendment is adopted, or the date such amendment
becomes effective) of any Participant is at least
equal to such Vested percentage computed without
regard to such amendment; and
(b) Each Participant with at least three Years of Service
is permitted within a period beginning no later than
the date such amendment is adopted, an election
complying with the requirements of Regulation Section
1.411(a)-8T(b) to have his aforesaid Vested
percentage computed without regard to such amendment.
(5) In the case of any merger or consolidation with, or transfer
of assets or liabilities to, any other plan, within the meaning of Section
401(a)(12) of the Code, each Participant shall (if the Plan then terminates)
receive a benefit immediately after
XI-2
<PAGE> 90
the merger, consolidation, or transfer which is equal to or greater than the
benefit he would have been entitled to receive immediately before the merger,
consolidation, or transfer (if the Plan had then terminated).
(6) A Participant's Elective Contributions Account shall be fully
and immediately vested at all times.
F. Rollovers; Direct Transfers; Certain Transfers Prohibited. Subject to
Subparagraphs (3) and (4) of this Paragraph (F), but notwithstanding any
contrary provisions of this Agreement, including but not limited to Articles V,
VI and X, but only as and to the extent contemplated by Section 402(a)(5), (6)
or (7), 403(a)(4), 408(d)(3) or 409(b)(3) of the Code, a Participant shall be
entitled -
(1) Subject to the last paragraph of Subparagraph (2) below
(prohibiting certain transfers to this Plan), to transfer (or cause to be
transferred) to the Trust to be held as part of his account (i) the redemption
proceeds of a retirement bond and/or (ii) all or part of the cash and other
property or the proceeds of the same received by him in one or more
distributions together constituting a Lump Sum distribution from or under
another tax qualified trust or tax qualified plan or an employee annuity or
custodial account and/or (iii) an amount paid or distributed out of an
individual retirement account or individual retirement annuity or retirement
bond consisting of a prior rollover contribution from a tax qualified trust or
annuity plan; provided, however, that no such transfer will be permitted unless
the Committee determines that such transfer will meet the applicable
requirements of the Plan and will not adversely affect the tax qualified status
of the Plan; and/or
(2) Upon at least 60 days' written notice to the Committee, to
cause his entire account to the extent that it has Vested to be transferred in
whole or in part on his behalf (or to him for retransfer), in the form of cash
or other property or the proceeds of the same (in one or more distributions
which, together with any distributions retained by him, constitute a Lump Sum
distribution), to an individual retirement account, an individual retirement
annuity (other than an endowment contract), a tax qualified trust, or an
annuity plan.
The amount so transferred to or from the Trust is herein called a "Rollover
Contribution." Any Rollover Contribution to the Trust, together with the
earnings thereon, shall be fully Vested but need not be segregated from the
remainder of the Participant's account unless the Trustee otherwise elects or
the Participant or Committee otherwise directs. In the case of a transfer
described in (2) above, made to the Participant for retransfer, he shall not
retransfer the portion described in Section 402(e)(4)(D)(i) of the Code
(constituting in effect his own nondeductible employee contributions).
XI-3
<PAGE> 91
A Participant also shall be entitled to directly transfer to the Trust
any amount described in Subparagraph (1)(ii) above, provided the tax qualified
plan referred to in said Subparagraph (1)(i) permits such transfer, and to
directly transfer to another tax qualified plan which provides for the
acceptance of direct transfers any amount described in Subparagraph (2) above;
provided, however, that no such direct transfer to or from this Plan will be
permitted unless the Committee makes the same determination with respect to
such transfer as it must make under Subparagraph (1) above with respect to a
Rollover Contribution. For purposes of this Paragraph (F), Participant shall
include an Employee who is expected to become a Participant upon completion of
the age and service requirements of Article II(A)(2) of this Agreement.
Notwithstanding the foregoing provisions of this Paragraph (F), there
shall not be transferred to this Plan, nor shall this Plan accept, a transfer
of assets from (i) a tax qualified defined benefit plan, (ii) a tax qualified
Defined Contribution Plan which is subject to the funding standards of Section
412 of the Code, including a target benefit plan, or (iii) any other plan to
which clause (iii) of Section 401(a)(11)(B) of the Code applies with respect to
a Participant, which transfer would cause this Plan to be a "direct or indirect
transferee" of such a plan with respect to a Participant within the meaning of
such term as defined in Section 401(a)(11)(B)(iii) of the Code. Moreover, no
transfer or rollover shall be made to the ESOP portion of the Plan.
(3) This Subparagraph (3) and Subparagraph (4) below apply to
distributions made on or after January 1, 1993. Notwithstanding any provision
of this Agreement to the contrary that would otherwise limit a distributee's
election under this Subparagraph (3), a distributee may elect, at the time and
in the manner prescribed by the Committee, to have any portion of an eligible
rollover distribution paid directly to an eligible retirement plan specified by
the distributee in a direct rollover.
(4) Definitions.
(i) Eligible rollover distribution: An eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified
period of ten years or more; any distribution to the extent
such distribution is required under Section 401(a)(9) of the
Code; and the portion of any distribution that is not
includible in gross income (determined without regard to the
exclusion for net
XI-4
<PAGE> 92
unrealized appreciation with respect to employer securities).
(ii) Eligible retirement plan: An eligible retirement
plan is an individual retirement account described in Section
408(a) of the Code, an individual retirement annuity described
in Section 408(b) of the Code, an annuity plan described in
Section 403(a) of the Code, or a qualified trust described in
Section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account
or individual retirement annuity.
(iii) Distributee: A distributee includes an Employee or
former Employee. In addition, the Employee's or former
Employee's surviving spouse and the Employee's or former
Employee's spouse or former spouse who is the alternate payee
under a qualified domestic relations order, as defined in
Section 414(p) of the Code, are distributees with regard to
the interest of the spouse or former spouse.
(iv) Direct rollover: A direct rollover is a payment by
the Plan to the eligible retirement plan specified by the
distributee.
G. Spendthrift Provision. It is the intention and purpose of the parties
to this Agreement to place the absolute title to the Trust Fund in the Trustee
alone, with power and authority to pay out the same only as provided in this
Agreement. Accordingly, the benefits provided by this Agreement may not be
assigned or alienated, within the meaning of Section 206(d)(1) of ERISA and
Section 401(a)(13) of the Code, except as provided in Paragraph (H) below.
H. Exceptions to Spendthrift Provision. It is agreed that:
(1) Paragraph (G) above shall not apply to a loan made under
Article VI(F) to a Participant or Beneficiary if such loan is secured by the
Participant's Accrued Vested Benefit (within the meaning of Section 401(a)(13)
of the Code) and by reason of Section 4975(d) of the Code is exempt from the
tax on prohibited transactions imposed by Section 4975 of the Code.
(2) Paragraph (G) above shall apply to the creation, assignment,
or recognition of a right to any benefit payable with respect to a Participant
pursuant to a domestic relations order, except that effective January 1, 1985
said Paragraph (G) shall not apply if the order is determined by the Committee
to be a qualified domestic relations order (as defined in Section 414(p) of the
Code), and shall not apply to any domestic relations order entered before
January 1, 1985 if the Trust commenced to pay benefits pursuant to such order
on or prior to such date, or if the Trust
XI-5
<PAGE> 93
had not then commenced to pay any such benefits the Committee determines that
such order is valid and compliance with same will not violate any provision of
the Code or adversely affect the tax qualified status of the Plan.
Notwithstanding any restrictions in this Agreement regarding the payment of
benefits prior to the date on which a Participant terminates employment with
the Company, a qualified domestic relations order may provide for payment of
benefits to any "alternate payee" (as defined in Section 414(p)(8) of the Code)
on any date subsequent to the entry of such order and subsequent to a
determination by the Committee that such order is a "qualified domestic
relations order" pursuant to Section 414(p) of the Code, whether or not such
payment would be made prior to the Participant's "earliest retirement age" (as
defined in Section 414(p)(4)(B) of the Code). If a qualified domestic
relations order so provides, the Trustee shall pay benefits to the alternate
payee from the vested portion of a Participant's Account as required by the
qualified domestic relations order.
(3) If a Participant shall so direct the Committee or Trustee in
writing, amounts may be withheld out of his benefits under the Plan (not in
excess of 10% of any benefit payment) to pay for his chargeable portion of
group medical, hospital, accident or life insurance premiums and other group
programs, not necessarily related to insurance, maintained by the Company for
the convenience or welfare of all or part of its active or retired Employees.
I. Execution of Instruments. Except as in this Agreement otherwise
expressly provided, any instrument or document to be delivered or furnished by
the Company shall be sufficiently executed if executed in the name of the
Company by any officer or officers thereof; or, where furnished or delivered by
the Committee, if executed in the name of the Committee by any member thereof;
or where furnished or delivered by the Trustee, if executed as follows:
(1) If the Trustee consists of two or more Persons, if executed in
the Trustee's name by any such Person, and
(2) In the case of any corporate Trustee (whether or not the sole
Trustee), if executed as Trustee in the name of such corporation by any officer
or officers thereof;
provided, further, that any Administrative Party shall be fully protected in
relying upon any instrument or document so executed; and execution as
aforesaid shall create a strong presumption that any signature so affixed is
duly authorized and that any information contained in such instrument or
document is true and correct.
J. Successors, Etc. This Agreement shall be binding upon, and inure to
the benefit of, the Company and (subject to Article X(A)) its successors, the
Trustee and its successors, the Committee as from time to time constituted, and
the Participants and Beneficiaries, their heirs, personal representatives,
successors,
XI-6
<PAGE> 94
and assigns, all in accordance with and subject to the terms of this Agreement.
K. [Reserved]
L. Miscellaneous Protective Provisions. It is further agreed, that,
except as otherwise provided in this Agreement or ERISA -
(1) Any Administrative Party may request and rely upon an opinion
of counsel, who may or may not be counsel for the Company, and shall be fully
protected for any action taken, suffered or omitted in good faith reliance upon
such opinion.
(2) No recourse under this Agreement, or for any action or nonaction
hereunder, or for any loss or diminution of the Trust Fund, or for any payment
or nonpayment of benefits, or for any other reason whatsoever relating to the
Plan, shall be had by any Person whomsoever against any individual in his
capacity as stockholder, officer, director or employee of the Company, past,
present or future.
(3) Where the establishment of any fact is in question, any
Administrative Party may in its discretion accept as evidence thereof any
properly executed instrument or document furnished by any other Administrative
Party or such other evidence as may seem reasonable in the circumstances.
M. No Duress or Retaliation Against Participants, Etc. No Participant or
Beneficiary shall be discharged, fined, suspended, expelled, disciplined, or
discriminated against for exercising any right to which he is entitled under
this Agreement, ERISA, or the federal Welfare and Pension Plan Disclosure Act,
or for the purpose of interfering with the attainment of any right to which
such Participant may become entitled thereunder; nor shall any Participant or
Beneficiary (through the use of fraud, force, violence, or threat of such use)
be restrained, coerced, or intimidated (nor shall there be any attempt so to
do) for the purpose of interfering with or preventing the exercise of any right
to which he is or may become entitled under this Agreement, ERISA, or said
Disclosure Act; nor shall any Person be discharged, fined, suspended, expelled,
or discriminated against because he has given information or has testified or
is about to testify in any inquiry or proceeding relating to ERISA or said
Disclosure Act.
N. Record Keeping, Investigations, Etc. The Company and each Fiduciary,
Committee member, and other appropriate Person shall maintain such books and
records pertaining to the Plan and Trust, make them available for inspection,
file such information, and submit to such investigations as are properly
required by the Secretary of Labor or his delegate pursuant to Section 504 or
505 of ERISA.
O. Distributions to Minors and Incompetent or Missing Individuals. If
any individual to whom benefits shall be
XI-7
<PAGE> 95
distributable under the Plan shall be a minor, adjudged mentally incompetent or
cannot reasonably be located, the Committee may direct the Trustee to
distribute such benefits by one or more of the following methods, to be
determined by the Committee: (1) directly to such minor or incompetent
individual; (2) to the guardian of such individual; (3) to another Person for
the use or benefit of such individual; (4) by the Trustee or Committee, or
their agents, expending, or arranging for the expenditure of, such benefits for
the education, health or maintenance of such individual; or (5) to a bank
account established on behalf of such individual. Except as to (4) above,
neither the Committee nor Trustee shall be required to see to the application
of any such distributions. Distributions made pursuant to this Paragraph (O)
shall operate as a complete discharge of the Trustee, the Committee and the
Trust Fund. Also, if the Committee determines after reasonable efforts to
locate an individual who is entitled to a distribution of all or part of an
account balance under the Plan that such individual cannot be located, the
amount payable to such individual may, if the Committee so determines, be
forfeited as of the Anniversary Date falling within the Plan Year of such
determination and be allocated among the accounts of the Participants in the
same manner as a forfeiture under Article IV(Q)(1). However, in such event if
the individual entitled to a distribution of the forfeited amount subsequently
makes a claim for the same, it shall be reinstated out of forfeitures, if any,
for the Plan Year in which the claim is made and/or an additional contribution
to the Trust by the Company for such Plan Year and shall be paid to such
individual in accordance with the Plan.
P. Expenses and Compensation. Subject to Article IX -
(1) Members of the Committee shall serve without compensation, but
the Trustee shall be paid compensation in such amount and manner as may from
time to time be mutually agreed between the Trustee and the Company.
(2) The expenses of the Trustee and Committee, including but not
limited to legal fees and the Trustee's compensation, shall be paid by the
Company:
(a) Although it is intended that expenses shall be paid
by the Company, the Trust Fund guarantees that they
shall in all events be paid in full when due, and a
lien for such payment is hereby impressed upon the
Trust Fund; provided that no individual Trustee who
already receives full-time pay from the Company shall
receive from the Trust Fund any compensation for his
services as Trustee, excepting reimbursement of
expenses properly and actually incurred.
(b) Notwithstanding any provision to the contrary, any
expenses which the Trustee or Committee may incur
XI-8
<PAGE> 96
with special reference to any Participant or
his account (including any Fixed Account)
shall first be charged against such account
to the extent that the same is sufficient for
such purpose. Any balance of said special
expenses shall then be charged to the Company
or the Trust Fund pursuant to (a) above but
shall if possible be later reimbursed to the
Company or the Trust Fund out of future
credits to such Participant's account.
Q. No Warranty of Company Stock Value or Dividends. Neither the Company
nor any Related Company nor the Trustee nor the Committee nor the Investment
Committee warrants or represents in any way to any Participant or Beneficiary
that the value of Company Stock will increase or will not decrease or that
dividends will continue to be paid on Company Stock, either at all or at any
particular level. Each Participant assumes all risks in connection with
changes in the value of Company Stock and all risks that dividends may not be
paid or continued, either at all or at any particular level.
XI-9
<PAGE> 97
ARTICLE XII
INSURANCE PROVISIONS
A. No Life Insurance. No portion of the Trust Fund shall be
invested in life insurance policies, and any reference to life insurance
policies or contracts elsewhere in this Agreement shall be disregarded.
XII-1
<PAGE> 98
ARTICLE XIII
TOP-HEAVY RULES
A. Application; Top-Heavy Status. Notwithstanding any other provision of
the Plan to the contrary, the provisions of Article XIII(B) shall apply for any
Plan Year beginning after December 31, 1983 in which the Plan is determined to
be Top-Heavy as of the Determination Date, in accordance with the following:
(1) Required Aggregation of Plans. If the Company and any Related
Companies maintain one or more tax qualified plans in addition to this Plan,
then there shall be aggregated for purposes of this Article XIII(A) those of
such plans -
(a) in which a Key Employee is a participant, and
(b) which enable any plan in which a Key Employee is a
participant to meet the nondiscrimination
requirements of Section 401(a)(4) of the Code or the
minimum participation standards of Section 410 of the
Code.
All such plans shall be referred to in this Article XIII as the
"Required Aggregation Group". There also must be aggregated with the aforesaid
plans and considered as included in the Required Aggregation Group any other
tax qualified plan which was maintained by the Company or a Related Company
within the five Plan Years ending on the Determination Date and would be part
of the Required Aggregation Group for the Plan Year but for the fact that such
plan terminated before the Determination Date.
(2) Permissive Aggregation of Plans. If the Company and any one
or more Related Companies maintain one or more tax qualified plans in addition
to this Plan and any other plan or plans in the Required Aggregation Group then
there may be aggregated with this Plan, or with the plans in the Required
Aggregation Group, any of such additional plans which, when so aggregated,
continue to meet the requirements of Sections 401(a)(4) and 410 of the Code
(the "Permissive Aggregation Group"). There also may be aggregated with the
aforesaid plans and considered as included in the Permissive Aggregation Group
any other tax qualified plan which was maintained by the Company or a Related
Company within the five Plan Years ending on the Determination Date and could
be part of the Permissive Aggregation Group for the Plan Year but for the fact
that such plan terminated before the Determination Date.
(3) Key Employees. Key Employees shall mean and include all
employees and former employees (and the beneficiaries of all employees and
former employees) who are or were one or more of the following during the five
Plan Years ending on the Determination Date:
(a) officers of the Company or any Related Company having
annual compensation greater than 50 percent
XIII-1
<PAGE> 99
of the Adjusted Equivalent of the amount in effect
under Section 415(b)(1)(A) of the Code for such Plan
Year, provided that no more than 50 employees (or if
lesser, the greater of (i) three or (ii) 10% of the
employees) shall be treated as officers, and provided
that employees described in Section 414(q)(8) of the
Code shall be excluded;
(b) one of the ten employees owning (or considered as
owning within the meaning of Section 318 of the Code)
both more than a one-half percent interest and the
largest interests in the Company and any Related
Company, as further defined in Section
416(i)(1)(A)(ii) of the Code and the Treasury
Regulations thereunder, having annual compensation
greater than the Adjusted Equivalent of $30,000,
provided that if two or more employees own the same
interest, the employee having greater annual
Compensation shall be treated as owning the greater
interest;
(c) five percent owners of the Company; or
(d) one percent owners of the Company having annual
compensation from the Company and any Related Company
of more than $150,000 per year.
For purposes of (a), (b) and (d) above, compensation means Creditable
Compensation as that term is defined in Article I(A)(16). For purposes of (c)
and (d) above, "owner" shall have the same meaning as in Section 416(i)(1)(B)
of the Code. Also, for purposes of determining ownership in the Company under
(b), (c) and (d) above, the aggregation rules of subsections (b), (c) and (m)
of Section 414 of the Code shall not apply.
An employee who is identified as a Key Employee under more than one
category shall nevertheless be counted as one Key Employee. A Non- Key
Employee who is also the beneficiary of a Key Employee shall be counted as a
Key Employee, but only the Accrued Benefit attributable to the Key Employee
shall be counted in determining Top-Heavy status.
(4) Accrued Benefits. For purposes of this Article XIII(A),
Accrued Benefits for all defined benefit plans required or permitted to be
aggregated under (1) and (2) above shall mean the Actuarial Equivalent (which
shall be the same for all plans being aggregated) of the Accrued Benefit
determined as of the actuarial valuation date preceding or coinciding with the
Determination Date. If there is no method of computing Accrued Benefits that
uniformly applies for all such plans, then solely for the purposes of this
Article XIII(A), the Accrued Benefit of an employee other than a Key Employee
shall be determined as if his benefits accrued not more rapidly than the
slowest accrual rate permitted under the fractional accrual rate of Section
411(b)(1)(C) of the Code.
XIII-2
<PAGE> 100
For all defined contribution plans required or permitted to be so
aggregated, Accrued Benefits shall mean the balance in the employer and
employee contribution accounts (excluding amounts attributable to deductible
employee contributions) as of the Determination Date, and shall for all plans
include:
(a) distributions to any employee during the five Plan
Years ending on the Determination Date;
(b) unrelated rollovers (rollovers during the five Plan
Years ending on the Determination Date which were
initiated by the employee and transferred to a plan
maintained by an employer other than the Company or
any Related Company) made from this Plan, (or made to
this Plan prior to December 31, 1983); and
(c) related rollovers (rollovers to this Plan which were
either not initiated by the employee or were made
from another tax qualified plan maintained by the
Company or any Related Company).
(5) Top-Heavy Determination. There shall be computed, as of the
Determination Date, the sum of all Accrued Benefits for all Key Employees and
the sum of all Accrued Benefits of all employees. Such computation shall be
made separately for each plan required or permitted to be aggregated with this
Plan, as of the determination date (as defined in each such plan) which falls
within the calendar year in which the Determination Date falls. If the
following ratio --
the sum of all Accrued Benefits for all Key Employees
the sum of all Accrued Benefits for all Employees
for this Plan if it is the only tax qualified plan maintained by the Company
and any Related Company, or for all plans in any Required Aggregation Group, is
greater than sixty percent (60%), then this Plan and all plans in any Required
Aggregation Group is (are) Top-Heavy, effective on the first day of the Plan
Year. If such ratio for all tax qualified plans in any Permissive Aggregation
Group is 60% or less, then neither this Plan (nor any other plan in such
Permissive Aggregation Group) is (are) Top-Heavy for the Plan Year. For
purposes of the foregoing computation, there shall be excluded the Accrued
Benefits of:
(a) former Key Employees, i.e., persons who were Key
Employees but who have not fulfilled the definition
of Key Employee at any time during the five Plan
Years ending on the Determination Date), and
(b) former employees who have not performed any service
for the Company or a Related Company during the five
Plan Years ending on the Determination Date.
B. Effect of Top-Heavy Status.
XIII-3
<PAGE> 101
(1) Minimum Contribution. For any Plan Year in which the Plan is
Top-Heavy the following shall apply:
(a) The amount of Company Contributions and forfeitures
allocated pursuant to Article IV to the account of
each Participant who is a Non-Key Employee shall not,
when expressed as a percentage of such Participant's
Compensation for such Plan Year, be less than the
lesser of:
(i) three percent (3%), or
(ii) the percentage for the Key Employee for whom
such percentage is the highest
minus the amount of Company (or Related Company)
contributions plus forfeitures allocated to such
Participant's account(s) under any other tax
qualified Defined Contribution Plan(s) maintained by
the Company or by a Related Company, if any.
Notwithstanding the foregoing, neither Matching
Company Contributions nor Elective Contributions
allocated to the accounts of Non-Key Employees shall
be treated as Company Contributions for purposes of
meeting the above minimum contribution requirement.
However, Elective Contributions allocated to the
Accounts of Key Employees shall be treated as Company
Contributions for purposes of meeting the above
minimum contribution requirement.
Subparagraph (ii) above shall not apply in any Plan Year in which this Plan is
required to be aggregated with a tax qualified defined benefit plan in order to
enable such plan to meet the requirements of Sections 401(a)(4) or 410 of the
Code.
(b) For purposes of this paragraph (1) --
(i) The minimum allocations under this paragraph
shall be made to the account of each active
and inactive Participant who is a Non-Key
Employee who has not Separated from Service
as of the Anniversary Date falling within
such Plan Year; and
(ii) This and any other tax qualified Defined
Contribution Plan(s) maintained by the
Company or by a Related Company shall be
treated as a single plan.
(2) Vesting. Commencing with the first day of the first Plan Year
in which the plan is Top-Heavy, Article V(C) (1) shall be amended to read as
follows:
XIII-4
<PAGE> 102
"(1) such Participant shall be entitled only to a percentage
of the balance in his ESOP Account and the balance of his Matching Company
Contributions Account based upon the number of his full Years of Service, as
follows:
<TABLE>
<CAPTION>
Full Years of Percentage
Service Vesting
------------- ----------
<S> <C>
less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
</TABLE>
The foregoing vesting schedule shall apply to all Plan Years after the Plan
first becomes Top-Heavy, whether or not the Plan is Top-Heavy for that Plan
Year. Such vesting schedule shall not apply to any Participant who fails to
perform an Hour of Service for his Employer on or after the day the Plan first
becomes Top-Heavy.
(3) Section 415 Fraction Reduced to 1.0 if Plan Becomes Super
Top-Heavy. For any Plan Year in which the plan is Top-Heavy, the figure 1.0
shall replace the figure 1.25 in the definitions of Defined Benefit Plan
Fraction and Defined Contribution Plan Fraction in Article IV(A)(3)(d) (and in
Section 415(e)(2)(B) and (3)(B) of the Code), except for Plan Years as to which
the Plan is not Super Top-Heavy. For purposes of this subparagraph (b), a plan
is "Super Top-Heavy" if (and only if) it fails the ninety percent test
mentioned in Section 416(h)(2)(B) of the Code, i.e., if (and only if) it would
meet the "Top-Heavy" definition in Article XIII(A)(5) above if the phrase
"sixty percent" therein were replaced by "ninety percent" wherever it appears.
C. Definitions. For purposes of this Article XIII, the following
definitions apply:
(1) "Determination Date" means the last day of the preceding Plan
Year or, for the first Plan Year, the last day of such Plan Year.
(2) "Non-Key Employee" means any employee who is not a Key
Employee and his or her beneficiary.
XIII-5
<PAGE> 1
EXHIBIT 10(k)
SECOND AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
dated as of November 12, 1996
by and among
SOURCE ONE MORTGAGE SERVICES CORPORATION
and
THE MORTGAGE AUTHORITY, INC.
and
CENTRAL PACIFIC MORTGAGE COMPANY
and
THE FIRST NATIONAL BANK OF CHICAGO,
individually and as Administrative Agent
and
CERTAIN OTHER LENDERS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1.3 Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE II
BORROWINGS . . . . . . . . . . . . . . . . . . . . . . 28
2.1 Availability and Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.2 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.3 Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.4 Discount Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.5 Swingline Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.6 Bid Loans and Approved GNMA Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.7 Rate after Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.8 Interest Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.9 Method of Selecting Rate Options and Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.10 Maximum Number of Eurodollar Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2.11 Funding Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.12 Conversion and Continuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.13 Optional Principal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.14 Required Principal Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.15 Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.16 Notes; Telephonic Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.17 General Provisions as to Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.18 Notification of Advances, Interest Rates and Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.19 Lending Installations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.20 Non-Receipt of Funds by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE III
CHANGE IN CIRCUMSTANCES . . . . . . . . . . . . . . . . . . . 45
3.1 Yield Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.2 Availability of Rate Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3.3 Funding Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.4 Lender Statements; Survival of Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3.5 Lender Tax Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE IV
COLLATERAL AND BORROWING BASE . . . . . . . . . . . . . . . . . . 49
4.1 Eligible Collateral - Pledged Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.2 Eligible Collateral - Repurchased Agency Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . 51
4.3 Eligible Collateral - Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.4 Eligible Collateral - Pledged Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
4.5 Eligible Collateral - Servicing Sale Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
4.6 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.7 Special Representations as to Pledged Warehouse Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.8 Special Representations as to Pledged Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
4.9 Special Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.10 Release of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
4.11 Settlement Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4.12 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4.13 Abatement of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
4.14 Transition from Original Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
ARTICLE V
CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 68
5.1 Initial Advance (Company and Borrowing Subsidiaries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
5.2 Initial Advance (Lenders) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
5.3 All Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ARTICLE VI
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . 71
6.1 Organization, Corporate Powers, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
6.2 Corporate Authority, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
6.3 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
6.4 Government Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
6.5 Valid and Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
6.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
6.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
6.8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
6.9 Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
6.10 Accuracy of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
6.11 Investment Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
6.12 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
6.13 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
6.14 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
6.15 GNMA, FHA, VA, FNMA, AND FHLMC Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
6.16 No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
ARTICLE VII
AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 75
7.1 Payment of Debts, Taxes, Etc.; Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
7.2 Preservation of Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
7.3 Compliance with Laws, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
7.4 Requested Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
7.5 Keeping of Records and Books of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7.6 Maintenance of Approvals, Filings and Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
7.7 Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
7.8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
7.9 Maintenance of Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
7.10 Federal Agency Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
7.11 Approved Investor Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
7.12 Borrowing Base Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
7.13 Further Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
7.14 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
7.15 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
ARTICLE VIII
NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . 85
8.1 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
8.2 Compliance with Security Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
8.3 Mergers; Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
8.4 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
8.5 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
8.6 Ratably Secured Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
8.7 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
8.8 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
8.9 Leverage Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
8.10 Recourse Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
8.11 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
8.12 Credit Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
8.13 Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
8.14 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
8.15 FHA and other Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
8.16 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
8.17 Borrowing Subsidiary Liabilities and Secured Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
8.18 Funding of Borrowing Subsidiary Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
8.19 Subordinated Debt Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
8.20 Minimum Cash Flow Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
ARTICLE IX
THE AGENT . . . . . . . . . . . . . . . . . . . . . . 97
9.1 Appointment and Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
9.2 Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
9.3 Action by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
9.4 Consultation with Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
9.5 Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
9.6 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
9.7 Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
9.8 Resignation or Removal and Appointment of Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . 100
9.9 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
</TABLE>
-iii-
<PAGE> 5
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9.10 Release of Collateral Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
9.11 Knowledge of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
9.12 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
ARTICLE X
DEFAULTS . . . . . . . . . . . . . . . . . . . . . . 101
10.1 Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
10.3 Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
10.4 Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
10.5 Letter of Credit Collateral Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
ARTICLE XI
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS . . . . . . . . . . . . 108
11.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
11.2 Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
11.3 Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
11.4 Dissemination of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
11.5 Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
ARTICLE XII
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . 112
12.1 Immediately Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
12.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
12.3 Survival and Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
12.4 Fees and Expenses of the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
12.5 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
12.6 Modification of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
12.7 Non-Waiver of Rights by the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
12.8 Dealings with the Company and its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
12.9 Changes in GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
12.10 Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 115
12.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 116
12.12 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 116
12.13 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 116
12.14 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 117
12.15 Limitation on Recourse to Borrowing Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 117
12.16 Consent of Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 117
12.17 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 118
SCHEDULE 1 APPLICABLE MARGIN
SCHEDULE 2 FEE RATES
EXHIBIT A LIST OF APPROVED INVESTORS
EXHIBIT B BORROWING BASE CERTIFICATE
EXHIBIT C COMMITMENTS AND COMMITMENT PERCENTAGES
</TABLE>
-iv-
<PAGE> 6
TABLE OF CONTENTS
(CONTINUED)
PAGE
EXHIBIT D FORM OF SECURITY AGREEMENT
EXHIBIT E-1 FORM OF NOTE
EXHIBIT E-2 FORM OF DISCOUNT NOTE
EXHIBIT F METHOD OF DETERMINING WEIGHTED AVERAGE
PURCHASE PRICES
EXHIBIT G FORM OF BID LOAN NOTICE
EXHIBIT H FORM OF NEW/MODIFIED COMMITMENT SUPPLEMENT
EXHIBIT I FORM OF NON-LENDER BALANCE BANK SUPPLEMENT
EXHIBIT J FORM OF AP NOTICE
EXHIBIT K FORM OF OPINION LETTER
EXHIBIT L MATERIAL LITIGATION NOT REFERENCED IN
ANNUAL/QUARTERLY REPORTS
EXHIBIT M FORM OF FUNDING AGREEMENT
EXHIBIT N FORM OF TRANSITION MEMORANDUM
-v-
<PAGE> 7
SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is dated as
of November 12, 1996 by and among SOURCE ONE MORTGAGE SERVICES CORPORATION, a
Delaware corporation (the "Company"), THE MORTGAGE AUTHORITY, INC., a Delaware
corporation ("TMA"), CENTRAL PACIFIC MORTGAGE COMPANY, a California corporation
("CPM"), the lenders identified on the signature pages hereof, and THE FIRST
NATIONAL BANK OF CHICAGO, a national banking association ("First Chicago"),
individually as a Lender and as administrative agent for the Lenders.
RECITALS
This Second Amended and Restated Revolving Credit Agreement
consolidates, amends and restates in its entirety that certain Amended and
Restated Revolving Credit Agreement dated as of March 24, 1995 by and among the
Company, TMA, First Chicago and certain other lenders, as amended by that
certain First Amendment to Amended and Restated Revolving Credit Agreement
dated as of September 27, 1995 (as so amended, the "Original Facility").
The revolving credit facility made available to the Company and the
Borrowing Subsidiaries pursuant to this Agreement shall be used (i) for
originating, acquiring, and/or holding residential mortgage loans, mortgage
backed securities, and mortgage servicing rights, (ii) as liquidity backup for
the Company's commercial paper program, and (iii) for general working capital
and corporate purposes. The Company will request Advances hereunder for the
purposes set forth in the preceding sentence, and the Company will distribute
the proceeds of some of the Advances to one or more Borrowing Subsidiaries for
purposes of mortgage loan originations by such Borrowing Subsidiaries. In
addition, up to $1,000,000 of Swingline Advances may be requested directly by
TMA, and up to $10,000,000 of Swingline Advances may be requested directly by
CPM, in each case to the extent available, subject to all of the terms and
conditions contained herein. Accordingly, the Borrowing Subsidiaries shall be
co-makers (with the Company) of the Notes executed in connection herewith and
shall pledge certain of the Collateral securing the Loans made pursuant to this
Agreement.
In consideration of the foregoing and for other good and valuable
consideration, the parties hereto agree as follows:
<PAGE> 8
ARTICLE I
DEFINITIONS
1.1 Definitions.
Capitalized terms used in this Agreement shall have the
following meanings:
Acknowledgment Agreements: means, as of any date, acknowledgment
agreements executed by the Collateral Agent, the Company and FNMA, FHLMC and
any other Federal Agency which is a party to any Servicing Agreement included
in Collateral hereunder and which is then issuing such agreements in the form
required by such Federal Agency, recognizing and consenting to the security
interest created under the Security Agreement.
Additional Required Mortgage Documents: means the instruments and
documents described in Schedule B to the Security Agreement.
Adjusted Consolidated Tangible Net Worth: means, as of any date of
determination thereof, the net worth of the Company and its consolidated
Subsidiaries on a consolidated basis as determined in accordance with GAAP;
less the sum (without duplication) of (a) any assets of the Company and its
consolidated Subsidiaries which would be treated as intangibles under GAAP
including, without limitation, any write-up of assets, good-will, research and
development costs, trade-marks, trade names, copyrights, patents and
unamortized debt discount and expenses, and (b) loans or other extensions of
credit to officers of the Company or of any of its consolidated Subsidiaries
other than Mortgage Loans made to such Persons in the ordinary course of
business; plus one percent (1%) of the then-current aggregate outstanding
principal balance of all Mortgage Loans then being serviced by the Company
either for its own account with respect to Pledged Items or for others under
Servicing Agreements (excluding Subservicing Agreements) to the extent the
servicing rights relating to such Mortgage Loans have not been capitalized and
are thus not accounted for in the Company's net worth as computed in accordance
with GAAP.
Adjusted Commitment Percentage: means, for each Lender as of any date,
the quotient of (i) such Lender's General Commitment divided by (ii) the
Aggregate Commitment minus the Swingline Commitment, which Adjusted Commitment
Percentage shall initially be as set forth on Exhibit C for each Lender.
Advance: means a borrowing hereunder consisting of the aggregate amount
of Loans made to the Company or any Borrowing
-2-
<PAGE> 9
Subsidiary by one or more of the Lenders hereunder pursuant to Article II on
any given Advance Date.
Advance Date: means a date on which an Advance is made hereunder.
Advance Notice: is defined in Section 2.9.
Affiliate: means, as to any Person, any other Person directly or
indirectly Controlling, Controlled by or under direct or indirect common
Control with such Person.
Agent: means The First National Bank of Chicago in its capacity as
administrative agent for the Lenders hereunder, and any successor Agent
appointed pursuant to Article IX.
Aggregate Borrowing Base: is defined in Section 4.6.
Aggregate Commitment: means, as of any date, the aggregate of the
Lenders' then-current General Commitments and Swingline Commitments.
Agreement: means this Second Amended and Restated Revolving Credit
Agreement, as the same from time to time may be extended, amended,
supplemented, waived or modified.
Alternate Base Rate: means, on any day, a fluctuating rate of interest
per annum equal to the higher of (a) the Published Federal Funds Effective Rate
for such day plus the Applicable Margin, and (b) the Corporate Base Rate for
such day.
Alternate Base Rate Advance: means an Advance which bears interest at
the Alternate Base Rate.
Alternate Base Rate Loan: means a Loan which bears interest at the
Alternate Base Rate.
AP Mortgage: means, on any date, any Pledged Mortgage which has been
identified in an AP Notice and for which the Collateral Agent has not received
the Required Mortgage Documents by such date.
AP Notice: means a written pledge substantially in the form of Exhibit
J to this Agreement executed by the Company or a Borrowing Subsidiary and
delivered by facsimile to the Collateral Agent, specifically identifying all
Mortgage Loans with respect to which the Required Mortgage Documents are not
being delivered on or before the Pledge Date of such Mortgage Loan.
Applicable Margin: means, with respect to each Rate Option as of any
date, the applicable percentage per annum as set forth on Schedule 1 attached
hereto which is in effect on such date,
-3-
<PAGE> 10
changing as and when the Company's then-current unsecured long-term debt rating
by either S & P or Moody's changes as described therein.
Approved GNMA Letter of Credit: means a letter of credit issued by an
Issuing Lender in favor of GNMA as a result of the failure by the Company or
any Borrowing Subsidiary to satisfy all document submission requirements of
GNMA in connection with the certification or re- certification by GNMA of a
pool of Mortgage Loans, which letter of credit (and related reimbursement
agreement and other documentation) has been approved by the Agent pursuant to
Section 2.6(b).
Approved GNMA Letter of Credit Obligations: means, as of any date, all
liabilities, whether actual or contingent, as of such date of the Company and
the Borrowing Subsidiaries with respect to Approved GNMA Letters of Credit,
including, without limitation, the undrawn face amount of the then outstanding
Approved GNMA Letters of Credit and the sum of all drawn amounts for which the
Issuing Lenders have not yet been reimbursed.
Approved Investor: means, as of any time, any of the institutions
listed on Exhibit A attached hereto and any other institution approved by the
Agent, provided that any such institutions listed on Exhibit A or previously
approved by the Agent may be eliminated as an Approved Investor by notice to
the Company from the Agent.
Approved Investor Commitment: means a commitment issued by an Approved
Investor to purchase Mortgage Loans, to exchange Securities for Mortgage Loans
or to purchase Securities.
Approved MBS Custodian: is defined in Paragraph 7(b)(2)(iii) of the
Security Agreement.
Assignment: means a duly executed assignment for the benefit of the
Secured Parties of a Mortgage, of the indebtedness secured thereby, and of all
documents and rights related to the related Mortgage Loan secured by such
Mortgage in accordance with the requirements of the Security Agreement.
Authorized Officer: means, with respect to the Company or a Borrowing
Subsidiary, the president, chairman, chief financial officer, or other officer
of the Company or the Borrowing Subsidiary, as applicable, authorized in
writing to execute any particular statement, certificate or agreement on behalf
of the Company or the Borrowing Subsidiary.
Bailee Letter: means a Bailee Letter substantially in the form of
Exhibit 4 to the Security Agreement.
-4-
<PAGE> 11
Balance Bank: means any Lender or Non-Lender Balance Bank which makes a
Discount Advance.
Balance Bank Agreement: means (i) an agreement between each Balance Bank
and the Company which sets forth the fees, charges and other matters governing
Discount Loans requested from such Balance Bank in accordance with Section 2.4
herein, or (ii) an agreement between the Company and the Swingline Lender which
sets forth the fees, charges and other matters governing Swingline Buydown
Advances requested from the Swingline Lender in accordance with Section 2.5(b).
Bid Lender: is defined in Section 2.6(a).
Bid Loan: is defined in Section 2.6(a).
Bid Loan Notice: means, with respect to each Bid Loan, a notice
executed by the Company and the Bid Lender for such Bid Loan and delivered to
the Agent in the form of Exhibit G hereto.
Bid Rate: means the interest rate applicable to a Bid Loan which is to
be agreed upon by the Company and a Bid Lender and communicated to the Agent in
the Bid Loan Notice for such Bid Loan.
Borrowing Base Certificate: means a certificate executed by the Chief
Financial Officer or Treasurer of the Company or other employees of the Company
so authorized in writing, an original of which shall be delivered to the Agent,
by such Chief Financial Officer or Treasurer in substantially the form attached
hereto as Exhibit B.
Borrowing Base Sublimits: is defined in Section 4.6.
Borrowing Subsidiary: means either of The Mortgage Authority, Inc. or
Central Pacific Mortgage Company, each a wholly owned Subsidiary of the Company
in the business of originating, purchasing and selling Mortgage Loans.
Business Day: means (i) with respect to any borrowing, payment or rate
selection regarding a Eurodollar Advance or a Discount Advance, a day (other
than a Saturday or Sunday) on which banks are open for business in Chicago, Los
Angeles and New York and on which dealings in United States dollars are carried
on in the London interbank market and (ii) for all other purposes, a day (other
than a Saturday or Sunday) on which banks are open for business in Chicago, Los
Angeles, New York and Louisville, Kentucky.
Capital Securities: means liquid and readily marketable securities
contributed to the capital of the Company after the date hereof and investments
acquired with the income therefrom or
-5-
<PAGE> 12
the proceeds from any disposition thereof in the form of cash or Cash
Equivalents or liquid and marketable securities listed on the New York Stock
Exchange, the American Stock Exchange or NASDAQ to the extent such investments
are held in a separate trust, custodial or investment account and income
therefrom is accounted for separately as investment income and not consolidated
as income from operations.
Cash Equivalents: means (i) marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof, (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having the highest rating obtainable
from either S&P or Moody's, (iii) commercial paper maturing no more than 90
days from the date of creation thereof and, at the time of acquisition, having
the highest rating obtainable from either S&P or Moody's, (iv) certificates of
deposit or bankers' acceptances maturing within one year from the date of
acquisition thereof issued by commercial banks organized under the laws of the
United States or any state thereof or the District of Columbia, each having
combined capital and surplus of not less than $500,000,000, and (v) reverse
repurchase obligations having terms not exceeding seven days entered into with
any financial institution meeting the qualifications specified in clause (iv)
above or with any securities dealer approved by the Agent, provided that there
is an investment agreement in effect pursuant to which the underlying
securities are held by a sub-agent for the Collateral Agent and all cash
proceeds are payable directly to the Settlement Account.
Change in Control: means the acquisition by any Person, or two or more
Persons (other than the Parent) acting in concert, of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities and Exchange Commission
under the Securities Exchange Act of 1934) of outstanding shares of voting
stock of the Company at any time if after giving effect to such acquisition (i)
such Person or Persons owns twenty percent (20%) or more of such outstanding
voting stock, and (ii) the Parent does not own more than fifty percent (50%) of
such outstanding shares of voting stock.
Code: means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
Collateral: means all right, title and interest of the Company or the
Borrowing Subsidiaries, as applicable, of every kind and nature, in and to all
of the following property, assets
-6-
<PAGE> 13
and rights of the Company or the Borrowing Subsidiaries wherever located,
whether now existing or hereafter arising, and whether now or hereafter owned,
acquired by or accruing or owing to the Company or any Borrowing Subsidiary,
and all proceeds and products thereof:
(i) all Pledged Mortgages;
(ii) all Pledged Securities;
(iii) any commitments or other agreements issued by any
private mortgage insurer or by the FHA or VA to insure or guarantee any
Pledged Mortgage;
(iv) all commitments of FNMA, FHLMC or other Persons to
purchase Pledged Items from the Company or any Borrowing Subsidiary or
exchange Securities with the Company or any Borrowing Subsidiary for
Pledged Items;
(v) any options to sell or purchase Securities, future
contracts, or any other interest rate protection products which directly
or indirectly protect the Company or any Borrowing Subsidiary against
reductions in value of such Pledged Items due to changes in mortgage
interest rates;
(vi) the Settlement Account and any Custodian Settlement
Accounts and any amounts standing to the credit of the Settlement
Account and any Custodian Settlement Accounts then in existence with
Approved MBS Custodians, as described in Paragraph 7(c) of the Security
Agreement;
(vii) all VA Mortgage Loans or FHA Mortgage Loans (plus any
REO or accounts receivable from FHA or VA resulting therefrom, including
guaranty claims against VA and insurance claims against FHA or HUD)
which are repurchased by the Company from Security holders and pledged
to the Collateral Agent as security for the Secured Debt;
(viii) Pledged Servicing;
(ix) Pledged Servicing Sale Receivables;
(x) cash and Cash Equivalents held by the Agent or Collateral
Agent as security for the Secured Debt; and
(xi) all property and proceeds related to the foregoing,
including without limitation, the right to service Pledged Mortgages
while owned by the Company or any Borrowing Subsidiary, all accounts and
general intangibles of whatsoever kind so related and all documents or
instruments delivered to the Agent or the Collateral Agent in respect of
any Pledged Item, including, without limitation, the right to
-7-
<PAGE> 14
receive all insurance proceeds and condemnation awards which may be
payable in respect of the premises encumbered by any Pledged Mortgage.
Collateral Agent: means National City Bank of Kentucky or its
successor, as Collateral Agent under the Security Agreement.
Collateral Agent Review Procedure: means the required review steps set
forth in Exhibit 1 to the Security Agreement.
Collateral Transmittal: means a transmittal from the Pledgor to the
Collateral Agent in electronic form and, if required by the Collateral Agent,
written form of the following information for the following submissions or
special treatment of different types of Collateral: (i) the information
described on Exhibit 7 to the Security Agreement for each AP Mortgage covered
by any AP Notice, (ii) the information described on Exhibit 7 to the Security
Agreement (other than the "AP Code") for each Pledged Mortgage not covered by
an AP Notice, or (iii) such information as may be required from time to time by
the Collateral Agent for the different types of Securities for any Pledged
Security.
Commitment: means either a General Commitment or a Swingline
Commitment.
Commitment Percentage: means, for each Lender as of any date, the
quotient of (i) the sum of such Lender's General Commitment and its Swingline
Commitment (if any), divided by (ii) the Aggregate Commitment, which Commitment
Percentage shall initially be as set forth on Exhibit C for each Lender.
Company: means Source One Mortgage Services Corporation, a Delaware
corporation.
Company Trust Receipt: means a trust receipt substantially in the form
of Exhibit 2 to the Security Agreement.
Conforming Mortgage Loan: means a Residential Mortgage Loan that meets
all applicable requirements for sale to FNMA or FHLMC or for guaranty by GNMA.
Consolidated Interest and Dividend Expense: means, for any period, the
sum of all "interest expense" (as reported on the Company's consolidated
financial statements) for such period (i) plus all interest credited to the
Company on escrow balances, (ii) minus amounts paid by the Company to Security
holders or mortgage pool investors for Mortgage Loan interest which is not
collected by the Company from the borrower of a Mortgage Loan due to early
payoff of such Mortgage Loan, (iii) plus all dividends paid on common or
preferred stock of the Company during such period other than dividends paid
pursuant to and in compliance with Section 8.16(b)(ii) below.
-8-
<PAGE> 15
Consolidated Operating Cash Flow: means, for any period, (i) the sum of
the following items for the Company and its consolidated Subsidiaries for such
period (with terms in quotes having the meanings given such terms in the
Company's consolidated financial statements): "net income", "amortization of
capitalized servicing" (including impairment expense), net losses on interest
rate contracts and other similar hedging instruments, "provision for loan
losses", "depreciation and amortization of good will", the increase in deferred
(but not current) taxes, Consolidated Interest and Dividend Expense, and other
non-cash losses or deductions included in the computation of net income; minus
(ii) the sum of the following items for the Company and its consolidated
Subsidiaries for such period (with terms in quotes having the meanings given
such terms in the Company's consolidated financial statements): "capitalized
excess servicing income", "originated mortgage servicing rights income", "gains
on the sale of servicing", net gains on interest rate contracts and other
similar hedging instruments, "amortization of deferred gain on sale of
servicing", the decrease in deferred (but not current) taxes, and other
non-cash gains included in the computation of "net income".
Control: means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of another entity,
whether through the ownership of voting securities, by contract or otherwise.
Controlled Group: means all members of a controlled group of
corporations and all trades or business (whether or not incorporated) under
common control which, together with the Company, are treated as a single
employer under Section 414(b) or 414(c) of the Code.
Conversion/Continuation Notice: is defined in Section 2.12(iii).
Corporate Base Rate: means a rate per annum equal to the corporate base
rate of interest announced by First Chicago from time to time, changing when
and as such corporate base rate changes.
Credit Documents: means this Agreement, the Security Agreement, the
Notes, the Balance Bank Agreements, any Approved GNMA Letters of Credit and any
related reimbursement agreements, and all other documents and instruments now
or hereafter delivered to the Agent or the Lenders pursuant to or in connection
with the transactions contemplated hereby, and any amendments, supplements,
modifications, renewals, replacements, consolidations, substitutions and
extensions of any of the foregoing.
-9-
<PAGE> 16
Credit Indebtedness: means, as of any date, the sum of (i) all amounts
owing under any of the Credit Documents (other than the Balance Bank
Agreements) to any of the Lenders, the Agent, or the Collateral Agent, plus
(ii) to the extent such fees have accrued within the three calendar months
immediately preceding such date, all deficiency fees owing to the Balance Banks
under the Balance Bank Agreements due to the Company's failure to maintain
sufficient deposits with such Balance Banks.
Credit Requirement: means, as of any date, the sum of (A) the aggregate
unpaid principal balance of all Loans then outstanding hereunder plus (B) the
aggregate principal amount of the outstanding Ratable Medium-Term Notes, plus
(C) the aggregate face amount of all Outstanding CPNs, plus (D) the then
current amount of Approved GNMA Letter of Credit Obligations.
Custodian Settlement Accounts: is defined in Paragraph 7(c) of the
Security Agreement.
Debt: means, with respect to any Person, as of any date of
determination thereof, without duplication, (i) all obligations of such Person
for borrowed money, including but not limited to money borrowed from any
parent, subsidiary or affiliate of such Person, whether or not evidenced by a
promissory note, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person to pay the deferred purchase price of property or services, including
without limitation the obligation of such Person to pay any deferred purchase
price for Servicing Agreements acquired, (iv) all obligations of such Person as
lessee under capital leases, (v) all Debt of others secured by a Lien on any
asset of such Person, whether or not such Debt is assumed by such Person, (vi)
all Debt of others Guaranteed by such Person, and (vii) all on-balance-sheet
obligations of such Person under repurchase agreements covering Securities or
pools of Mortgage Loans; provided that Debt shall not include Mortgage Related
Indebtedness.
Debt Threshold: is defined in Section 8.5.
Default: means an Event of Default or any event or condition that with
the giving of notice or the passage of time or both would constitute an Event
of Default.
Discount Advance: means an Advance made on a discounted basis by a
Balance Bank, a portion of which (or all of which, in the case of Discount
Advances made by Non-Lender Balance Banks) shall be simultaneously sold to the
other Lenders, all pursuant to Section 2.4 hereof, and to be repaid at the end
of the applicable Discount Loan Period.
-10-
<PAGE> 17
Discount Loan: means any Loan constituting a portion of a Discount
Advance.
Discount Loan Period: means, with respect to a Discount Loan, a period
of one month commencing on the Advance Date for such Discount Loan and ending
on the corresponding day in the next month. If a Discount Loan Period would
otherwise end on a day which is not a Business Day, such Discount Loan Period
shall end on the next succeeding Business Day, provided, however, (i) if said
next succeeding Business Day falls in a new calendar month, such Discount Loan
Period shall end on the immediately preceding Business Day, and (ii) no
Discount Loan Period shall extend beyond the Termination Date.
Discount Note: means, a Note executed and delivered by the Company and
the Borrowing Subsidiaries to each Lender in the form of Exhibit E-2 hereof
which shall evidence the Discount Loans described in Section 2.4 hereof.
Discount Rate: means, with respect to any Discount Loan Period, a fixed
rate of interest equal to the Applicable Margin for Eurodollar Advances in
effect at approximately 11:00 a.m. (London time) two Business Days prior to the
first day of such Discount Loan Period.
Eligible AP Mortgage: is defined in Section 4.1(c).
Eligible Collateral: means, as of any date without duplication, (i)
Eligible Delivered Mortgages, (ii) Eligible AP Mortgages, (iii) Eligible
Pledged Securities, (iv) Eligible Pledged Servicing, (v) Eligible Servicing
Sale Receivables, (vi) Eligible Repurchased Agency Loans and Receivables, (vii)
the balance to the credit of the Company in the Settlement Account, and (viii)
cash and Cash Equivalents held by the Agent or Collateral Agent as security for
the Secured Debt.
Eligible Delivered Mortgage: is defined in Section 4.1(b).
Eligible Mortgage Loan: is defined in Section 4.1(a).
Eligible Pledged Security: is defined in Section 4.3.
Eligible Pledged Servicing: is defined in Section 4.4.
Eligible Repurchased Agency Loans and Receivables: is defined in
Section 4.2.
Eligible Servicing Sale Receivables: is defined in Section 4.5.
ERISA: means the Employment Retirement Income Security Act of 1974, as
amended from time to time.
-11-
<PAGE> 18
ERISA Affiliate: means any corporation or trade or business which is a
member of the same Controlled Group as the Company.
Eurodollar Advance: means an Advance which bears interest at the
Eurodollar Rate.
Eurodollar Base Rate: means, with respect to a Eurodollar Interest
Period or a Discount Loan Period, the rate determined by the Agent to be the
rate at which deposits in U.S. dollars are offered by First Chicago to
first-class banks in the London interbank market at approximately 11 a.m.
(London time) two Business Days prior to the first day of such Eurodollar
Interest Period or Discount Loan Period, in the approximate amount of (i) the
amount of the Eurodollar Advance or Discount Advance divided by (ii) the number
of Lenders making Loans in connection with such Advance, and having a maturity
approximately equal to such Eurodollar Interest Period or Discount Loan Period.
Eurodollar Interest Period: means, with respect to a Eurodollar
Advance, a period of one, two or three months, as selected by the Company,
commencing on a Business Day selected by the Company pursuant to this
Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day
which corresponds numerically to such date one, two or three months thereafter,
as applicable; provided, however, that if there is no such numerically
corresponding day in such next month, such Eurodollar Interest Period shall end
on the last Business Day of such next month. If a Eurodollar Interest Period
would otherwise end on a day which is not a Business Day, such Eurodollar
Interest Period shall end on the next succeeding Business Day, provided,
however, that (i) if said next succeeding Business Day falls in a new calendar
month, such Eurodollar Interest Period shall end on the immediately preceding
Business Day, and (ii) no Eurodollar Interest Period shall extend beyond the
Termination Date.
Eurodollar Loan: means a Loan which bears interest at a Eurodollar
Rate.
Eurodollar Rate: means, with respect to a Eurodollar Advance and
Eurodollar Loan for the relevant Eurodollar Interest Period, and with respect
to the calculation of the Purchase Price with respect to any Discount Loan
Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable
to such Eurodollar Interest Period or Discount Loan Period, divided by (b) one
minus the Reserve Requirement (expressed as a decimal) applicable to that
Eurodollar Interest Period or Discount Loan Period, plus (ii) the Applicable
Margin in effect two Business Days prior to the first day of such Eurodollar
Interest Period or Discount Loan Period.
Event of Default: means any of the events described in Section 10.1.
-12-
<PAGE> 19
Facility: means the facility comprised of the Commitments made
available to the Company and (to the extent permitted hereunder) the Borrowing
Subsidiaries pursuant to this Agreement, which facility has an original term of
three years and an initial Aggregate Commitment of $750,000,000.
Facility Fee Rate: means, as of any date, the percentage per annum set
forth on Schedule 2 attached hereto which is in effect on such date, changing
as and when the Company's long-term unsecured debt rating by either S&P or
Moody's changes as described therein.
Federal Agency: means FHLMC, FNMA, GNMA, FHA or VA.
Federal Funds Advance: means an Advance bearing interest at the Federal
Funds Rate.
Federal Funds Funding Rate: means, with respect to any Federal Funds
Loan for any day, the rate per annum equal to the consensus (or if no consensus
exists, the arithmetic average) of the rates at which reserves are offered by
first-class banks to other first-class banks (at approximately the time at
which the applicable Advance Notice or Conversion/Continuation Notice is
received or the time at which an automatic continuation is deemed to have
occurred) on such day (or if such day is not a Business Day, on the immediately
preceding Business Day) on overnight federal funds transactions with members of
the Federal Reserve System arranged by federal funds brokers, based on quotes
received by the Agent from three federal funds brokers of recognized standing
selected by the Agent in its sole discretion; provided, however, that in lieu
of determining the rate in the foregoing manner, the Agent may substitute
therefor the consensus (or if no consensus exists, the arithmetic average) of
the rates at which reserves are offered by first-class banks to other
first-class banks at 10:00 a.m. (Chicago time) on such day (or if such day is
not a Business Day, on the immediately preceding Business Day) on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers, received by the Agent from three federal funds
brokers of recognized standing selected by the Agent in its sole discretion.
Federal Funds Loan: means any Loan constituting a portion of a Federal
Funds Advance.
Federal Funds Rate: means, for any day, an interest rate per annum
equal to (i) the Federal Funds Funding Rate for such day, plus (ii) 0.125% per
annum, plus (iii) the Applicable Margin.
Fees: is defined in Section 2.2.
-13-
<PAGE> 20
FHA: means the Federal Housing Administration or other agency,
corporation or instrumentality of the United States to which the powers and
duties of the Federal Housing Administration have been transferred.
FHA-Approved Mortgagee: means an institution that is approved by the
FHA to act as a servicer and mortgagee of record with respect to a Mortgage
Loan insured by the FHA.
FHA Mortgage Loan: means a Mortgage Loan that is secured by a first
lien on land and the Single Family Residence constructed thereon and is insured
by FHA.
FHLMC: means the Federal Home Loan Mortgage Corporation or other
agency, corporation or instrumentality of the United States to which the powers
and duties of the Federal Home Loan Mortgage Corporation have been transferred.
FHLMC-Approved Lender: means an institution that is approved by the
FHLMC to act as a lender in connection with the origination of any Mortgage
Loan purchased by the FHLMC.
FHLMC Security: means a security representing an undivided fractional
interest in a pool of Mortgage Loans, which security is issued and guaranteed
as to full and timely payment of interest and full collection of principal by
FHLMC.
First Chicago: means The First National Bank of Chicago, in its
corporate capacity and not as Agent, and its successors and assigns.
FNMA: means the Federal National Mortgage Association or other agency,
corporation or instrumentality of the United States to which the powers and
duties of the Federal National Mortgage Association have been transferred.
FNMA-Approved Lender: means an institution that is approved by the FNMA
to act as a lender in connection with the origination of any Mortgage Loan
purchased by the FNMA.
FNMA Security: means a security representing an undivided fractional
interest in a pool of Mortgage Loans, which security is issued and guaranteed
as to full and timely payment of principal and interest by FNMA.
Fundamental Change: is defined in Section 8.4.
Fundamental Change/Investment Calculation Period: means, in respect of
any Fundamental Change or Investment, the period ending on the date of
consummation of such Fundamental Change or Investment and including the four
most recent consecutive fiscal
-14-
<PAGE> 21
quarters ending on or prior to the date of consummation of such Fundamental
Change or Investment.
Funded Debt: means as of any date of determination thereof, all Debt of
the Company and its consolidated Subsidiaries (including without limitation all
amounts payable by the Company in connection with the acquisition of any
Servicing Agreements and the amount of all checks, drafts or other items issued
by the Company or any of its consolidated Subsidiaries to fund Mortgage Loans
to the extent such checks, drafts or other items have not been collected upon
and paid), minus (i) all Debt of others Guaranteed by the Company or any of its
consolidated Subsidiaries and (ii) all Debt of others secured by a Lien on any
asset of the Company or any of its consolidated Subsidiaries, unless such Debt
is assumed by the Company or any of its consolidated Subsidiaries.
Funding Agreement: means an agreement by and between the Company and a
Borrowing Subsidiary relating to the methods by which the Company directly
funds certain Mortgage Loans made in such Borrowing Subsidiary's name, the form
of which is attached hereto as Exhibit M.
GAAP: means generally accepted accounting principles as in effect from
time to time.
General Commitment: means, for each Lender as of any date, the
obligation of such Lender to make Loans not exceeding the amount set forth as
its total commitment (excluding any Swingline Commitment) on Exhibit C attached
hereto, as such amount may be modified from time to time pursuant to the terms
hereof, or the amount established in any assignment to a new Lender pursuant to
the terms hereof.
GNMA: means the Government National Mortgage Association or other
agency, corporation or instrumentality of the United States as to which the
powers and duties of the Governmental National Mortgage Association have been
transferred.
GNMA Security: means a security representing an undivided fractional
interest in a pool of Mortgage Loans, which security is issued by the Company
and guaranteed as to full and timely payment of principal and interest by GNMA
without regard as to whether the Company collects any payments on such Mortgage
Loans.
Guaranty: means, with respect to any Person, any obligation, contingent
or otherwise, of such Person directly or indirectly guaranteeing any Debt of
any other Person (a "primary obligor") or in any manner providing for the
payment of any Debt of any primary obligor or otherwise protecting the holder
of such Debt against loss (whether by agreement to keep-well, to purchase
assets, goods, securities or services, to advance or supply funds
-15-
<PAGE> 22
to the primary obligor to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, to take-or-pay or otherwise), provided that the term
"Guarantee" shall not include (i) endorsements for collection or deposit in the
ordinary course of business, (ii) obligations of the Company pursuant to
Recourse Servicing, (iii) commitments by the Company or any Borrowing
Subsidiary to purchase Mortgage Loans in the ordinary course of business, and
(iv) obligations in the Company's capacity as servicer of Mortgage Loans. The
term "Guarantee" used as a verb has a correlative meaning.
Hazardous Substance: means any hazardous, toxic or dangerous waste,
substance or material subject to regulation under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, and
federal, state or local so-called "Superfund" or "Superlien" laws, or any other
federal, state or local laws, ordinances, rules or regulations governing or
regulating hazardous materials, pollution, the environment or public health, as
now or at any time hereafter in effect.
HUD: means the United States Department of Housing and Urban
Development or other agency, corporation or instrumentality of the United
States to which the powers and duties of the United States Department of
Housing and Urban Development have been transferred.
Investment: means, as applied to any Person, any direct or indirect
purchase or other acquisition by that Person of, or a beneficial interest in,
stock or other securities of any other Person or any option, contract,
certificate or other financial product (including, but not limited to, interest
rate swaps and other hedging instruments), or any direct or indirect loan,
advance or capital contribution by that Person to any other Person, including
all indebtedness and accounts receivable from that other Person which are not
current assets or did not arise from sales to that other Person in the ordinary
course of business. The amount of any Investment shall be determined in
accordance with GAAP.
Issuing Lender: is defined in Section 2.6(b).
Jumbo Mortgage Loan: means a Residential Mortgage Loan that (i) meets
all applicable requirements for sale to FNMA or FHLMC or for guaranty by GNMA
except that the amount of such Mortgage Loan exceeds the amounts permitted by
such requirements, (ii) at the time of origination had a principal balance that
did not exceed 80% of the appraised value of the real estate and improvements
securing such Mortgage Loan, unless private mortgage insurance was obtained
covering such Mortgage Loan, in which case it may have an original principal
balance in excess of 80% but not in excess of 95% of such appraised value,
(iii) has a term of
-16-
<PAGE> 23
not more than 30 years, (iv) meets all of the then-current requirements for
sale to an Approved Investor purchasing such type of Mortgage Loan from the
Company or Borrowing Subsidiary, and (v) has an outstanding principal balance
on the Pledge Date thereof of less than $1,000,000 in any event.
Lender: means, at any time, any party having a Commitment hereunder and
its successors and permitted assigns.
Lending Installation: means, with respect to a Lender, any office,
branch, subsidiary or affiliate of any Lender.
Lending Sublimits: is defined in Section 2.1(a).
Lien: means, with respect to any asset of any Person, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect
of such asset. For the purposes of this Agreement, such Person shall be deemed
to hold subject to a Lien any asset that it has acquired or holds subject to
the interest of a vendor or lessor under any conditional sales agreement,
capital lease or other title retention agreement relating to such asset.
Loan: means a loan of money in any amount to the Company or any
Borrowing Subsidiary by a Lender pursuant to this Agreement.
MBS Value: means, with respect to any Security, the lowest of (a) the
face amount of such Security, (b) the weighted average purchase price committed
to under those Approved Investor Commitments which could cover such Security,
determined in the manner set forth in Exhibit F, and (c) if so required from
time to time by the Agent, the then-current market value of such Security as
conclusively determined by a third party broker of nationally recognized
standing selected by the Collateral Agent.
Moody's: means Moody's Investors Service, Inc. or any successor to its
business.
Mortgage: means a mortgage, deed of trust, security deed or similar
instrument purporting to create a first lien or similar interest in real estate
and improvements thereon.
Mortgage Collateral Value: means, with respect to any Mortgage Loan,
the lowest of (A) the unpaid principal balance of such Mortgage Loan on the
Pledge Date therefor, (B) the net acquisition cost of such Mortgage Loan, if
acquired by the Pledgor, (C) the weighted average purchase price (determined on
a weekly basis and expressed as a percentage of par) committed to under those
Approved Investor Commitments which could cover such Mortgage Loan applied to
the unpaid principal balance (as of the Pledge Date) of such Mortgage Loan
determined in the manner set forth in Exhibit F, and (D) the then-current
market value of such
-17-
<PAGE> 24
Mortgage Loan as conclusively determined by a third party broker of nationally
recognized standing selected by the Collateral Agent.
Mortgage Loan: means a loan of money evidenced by a Mortgage Note and
secured by a Mortgage.
Mortgage Note: means a note evidencing the indebtedness secured by a
Mortgage.
Mortgage-Related Indebtedness: means, with respect to the Company and
its Subsidiaries, any amount arising out of the issuance in the ordinary course
of the mortgage banking business of the Company and its Subsidiaries of (i)
mortgage pools, pass-throughs, participation certificates and other
mortgage-related securities to the extent that such amount would not, in
accordance with GAAP, be shown as indebtedness on a consolidated balance sheet
of the Company and its Subsidiaries as at such date and (ii) collateralized
mortgage obligations and other mortgage-related securities issued by a
Subsidiary of the Company, the payment of principal and interest in respect of
which is secured by a Lien on mortgage loans or other mortgage-related
securities (or other securities in which the Company invests in the ordinary
course of its mortgage banking business) conveyed to such Subsidiary in an
amount reasonably anticipated by the Company to approximate the amount required
to pay the principal and interest in respect of such collateralized mortgage
obligations or other mortgage-related securities (whether or not such amount
would, in accordance with GAAP, be shown as indebtedness on a consolidated
balance sheet of the Company and its Subsidiaries as at such date).
Negative Security Event: means any date following a Positive Security
Event on which any of the following events occurs: (i) the Company's long term
unsecured debt ratings decrease to a level below "A-", as rated by S&P, or a
level below "A3", as rated by Moody's, or (ii) the Company's long-term
unsecured debt is no longer rated by both S&P and Moody's, or (iii) an Event of
Default occurs hereunder, or (iv) any of the Positive Security Conditions shall
cease to be satisfied.
Nonconforming Mortgage Loan: means a Residential Mortgage Loan that (i)
is neither a Conforming Mortgage Loan nor a Jumbo Mortgage Loan, (ii) at the
time of origination had a principal balance that did not exceed 80% of the
appraised value of the real estate and improvements securing such Mortgage
Loan, unless private mortgage insurance was obtained covering such Mortgage
Loan, in which case it may have an original principal balance in excess of 80%
but not in excess of 95% of such appraised value, (iii) has a term of not more
than 30 years, (iv) meets all of the then-current requirements for sale to an
Approved Investor purchasing such type of Mortgage Loan from the Company or any
-18-
<PAGE> 25
Borrowing Subsidiary, and (v) has an original principal balance of less than
$200,000 in any event.
Non-Lender Balance Bank: means any bank or other financial institution
approved in advance by the Agent and the Company which is not a Lender
hereunder but which is an Affiliate of a Lender and which has executed a
Balance Bank Agreement pursuant to which it has agreed to make Discount
Advances hereunder and sell such Discount Advances to the Lenders pursuant to
Section 2.4.
Note: means promissory notes evidencing amounts that may be advanced
from time to time under this Agreement, (i) in substantially the form of
Exhibit E-1 attached hereto with respect to Loans other than Discount Loans and
Bid Loans, (ii) in substantially the form of Exhibit E-2 attached hereto with
respect to Discount Loans, and (iii) in a form mutually agreed to between the
Company and each Bid Lender with respect to Bid Loans, each duly executed by
the Company and each Borrowing Subsidiary and payable to the order of a Lender,
including any amendment, modification, renewal or replacement of such
promissory notes.
Notice Address: means, as to any Person, the address of such Person
specified in or pursuant to Section 12.2.
Obligations: means any and all amounts due from the Company or any
Borrowing Subsidiary to any of the Lenders, the Agent or the Collateral Agent
hereunder or under the Notes, the Security Agreement or any other Credit
Document.
Original Facility: is defined in the first recital of this Agreement.
Outstanding CPN: means, as of any date, each commercial paper note
issued by the Company which has not been presented for payment or for which
payment has not been made in full; provided, however, that as long as there has
not occurred an Event of Default, which Event of Default has not been waived by
the Required Lenders, "Outstanding CPN" shall not include on any date any such
commercial paper note which matures on such date but shall include all such
commercial paper notes to be issued on such date.
Overnight Transaction Advance: means a Swingline Advance which bears
interest at the Overnight Transaction Rate.
Overnight Transaction Effective Rate: means, as of any day for any
Overnight Transaction Advance, a rate of interest per annum determined by First
Chicago in its sole discretion as its overnight transaction loan rate (at
approximately the time at which the applicable Advance Notice or
Conversion/Continuation
-19-
<PAGE> 26
Notice is received or the time at which an automatic continuation is deemed to
have occurred) for such day (or if such day is not a Business Day, on the
immediately preceding Business Day) for advances in such amount.
Overnight Transaction Rate: means, with respect to an Overnight
Transaction Advance, a per annum interest rate equal to the sum of the
Overnight Transaction Effective Rate plus the Applicable Margin plus one
quarter of one percent (0.25%).
Parent: means Fund American Enterprises, Inc.
Participants: is defined in Section 11.2(a).
PBGC: means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
Person: means an individual, corporation, limited liability company,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
Plan: means an employee pension benefit plan which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of
the Code as to which the Company or any member of the Controlled Group may have
any liability.
Pledge Date: means the date on which a Mortgage Loan or a Security is
first delivered in pledge to the Collateral Agent, provided that (i) the date
of delivery of a Mortgage Loan covered by an AP Notice shall be deemed to be
the date of delivery of such AP Notice even after subsequent delivery of the
related Required Mortgage Documents, and (ii) the "Pledge Date" for all
Collateral previously held by the Collateral Agent under the Original Facility
shall be deemed to be the date on which such Collateral was first delivered to
the Collateral Agent under the Original Facility even though such date is prior
to the date of this Agreement.
Pledged Item: means any Pledged Mortgage or Pledged Security.
Pledged Mortgages: means Mortgage Loans that are from time to time
designated by the Company or any Borrowing Subsidiary and the Required Mortgage
Documents in respect of which are required to be delivered to the Collateral
Agent pursuant to any of this Agreement or the Security Agreement, including
all Required Mortgage Documents related thereto.
Pledged Securities: means Securities that are from time to time
designated by the Company or any Borrowing Subsidiary and required to be
delivered to the Collateral Agent pursuant to
-20-
<PAGE> 27
either this Agreement or the Security Agreement, whether or not such Pledged
Securities are Eligible Pledged Securities.
Pledged Servicing: means, as of any date of determination thereof, all
right, title and interest of the Company, of every kind and nature, whether now
existing or hereafter arising, in and to all Servicing Agreements, together
with all accounts receivable arising therefrom, now or hereafter existing,
including without limitation all rights of the Company to sell or assign its
interest therein and all amounts payable to the Company thereunder arising out
of any termination thereof, and all files, surveys, certificates,
correspondence, appraisals, computer programs, tapes, disks, cards, accounting
records and other records and data of the Company related to the Mortgage Loans
covered by such Servicing Agreements and all proceeds and products thereof.
Pledged Servicing Sale Receivables: means Servicing Sale Receivables
which are from time to time designated by the Company and pledged to the
Collateral Agent in accordance with this Agreement and the Security Agreement.
Pledgor: is defined in Section 4.7.
Positive Security Conditions: is defined in Section 4.13(a).
Positive Security Event: means any date on which the Agent has
acknowledged in writing that (i) the Company's long-term unsecured debt ratings
are at a level equal to or above "A-", as rated by S&P, and a level equal to or
above "A3", as rated by Moody's, when either such ratings were previously below
such respective level, and (ii) the Positive Security Conditions are satisfied,
after which date the Lenders' security interest in the Collateral may be abated
at the Company's request pursuant to Section 4.13.
Published Federal Funds Effective Rate: means, for any day, an interest
rate per annum equal to the weighted average of the rates on overnight federal
funds transactions with members of the Federal Reserve System arranged by
Federal funds brokers on such day, as published for such day (or, if such day
is not a Business Day, for the immediately preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations at approximately
10:00 a.m. (Chicago time) on such day on such transactions received by the
Agent from three Federal funds brokers of recognized standing selected by the
Agent in its sole discretion.
Purchase Price: is defined in Section 2.4(d).
-21-
<PAGE> 28
Ratable Medium-Term Notes: means those certain notes issued by the
Company which are required to be ratably secured with any other secured debt of
the Company pursuant to the terms of (i) an Indenture, dated as of September
15, 1986, between Fireman's Fund Mortgage Corporation (predecessor in interest
to the Company) and National Bank of Detroit, as trustee, as supplemented by
certain supplemental indentures and (ii) an Indenture, dated as of November 21,
1988, between Fireman's Fund Mortgage Corporation and The First National Bank
of Chicago, as trustee, as supplemented by certain supplemental indentures.
The current trustee under each of the indentures relating to the Ratable
Medium-Term Notes is Norwest Bank Minnesota, N.A., a national banking
association.
Rate Option: means the Eurodollar Rate, the Overnight Transaction Rate,
the Federal Funds Rate, the Discount Rate, the Alternate Base Rate, the
Swingline Buydown Rate, or, if available, any Bid Rate.
Recourse Servicing: means any servicing rights under a Servicing
Agreement (other than any Servicing Agreement with GNMA) which obligates the
Company to repurchase Mortgage Loans upon default by the borrower thereunder or
indemnify any party having an interest in such Mortgage Loans against any
principal loss arising from such a default, unless (i) the Company has obtained
and maintains in effect insurance with coverages satisfactory to Agent from an
insurance company having a AAA rating covering the risk of being required to so
indemnify any such party, or (ii) the Company's obligation to indemnify any
party against any principal loss is limited to 10% or less of any such loss.
Regulation D: means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or
other regulation or official interpretation of said Board of Governors relating
to reserve requirements applicable to member banks of the Federal Reserve
System.
Regulation U: means Regulation U of the Board of Governors of the
Federal Reserve System from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to
the extension of credit by banks for the purpose of purchasing or carrying
margin stocks applicable to member banks of the Federal Reserve System.
Reinstated Repurchased Agency Loans and Receivables: means Eligible
Repurchased Agency Loans and Receivables which have been reinstated and as to
which (i) the Company shall have delivered to the Collateral Agent the Required
Mortgage Documents and a copy of the insurance or guaranty certificate (and, if
requested by the Agent or Collateral Agent, an original of such certificate and
any other Additional Required Mortgage Documents) related
-22-
<PAGE> 29
thereto and (ii) no more than two installments of principal or interest are
past due since the reinstatement of the Mortgage Loan.
REO: means any interest in real property and the improvements thereon
owned by the Company as a result of the foreclosure or transfer in lieu of
foreclosure of a Mortgage Loan.
Reportable Event: means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation waived the
requirement of Section 4043(a) of ERISA that it be notified of the occurrence
of such event, provided, however, that a failure to meet the minimum funding
standard of Section 412 of the Code and of Section 302 of ERISA shall be a
Reportable Event regardless of the issuance of any such waiver of the notice
requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
Repurchased Agency Loans and Receivables: means all VA Mortgage Loans
or FHA Mortgage Loans (plus any REO or accounts receivable from FHA or VA
resulting therefrom, including guaranty claims against VA and insurance claims
against FHA or HUD) which were originally repurchased by the Company from
Security holders. In each case such Mortgage Loans (and the REO or accounts
receivable resulting therefrom) shall be valued based solely on (i) the amount
of principal last due under such Mortgage Loan, even after conversion of such
Mortgage Loan to REO, plus (ii) the amount of past-due interest advanced by the
Company on account of such Loan which is guaranteed by VA or insured by FHA;
provided, however, that 90 days after written notice to the Company that the
Required Lenders have elected to exclude past-due interest from such valuation,
such valuation shall cease to include the past-due interest described under
clause (ii).
Required Lenders: means (i) the lenders having two-thirds of the
Aggregate Commitment then in effect, or (ii) if the Commitments have been
terminated, Lenders having at least two-thirds of the aggregate Loans then
outstanding.
Required Mortgage Documents: means the instruments and documents
described in Schedule A to the Security Agreement, as applicable to the
particular Mortgage Loan, which are required to be delivered to the Collateral
Agent and such other instruments and documents described therein as the Agent
or Collateral Agent may request.
Required Servicing Collateral Amount: means, on any date, the positive
amount, if any, equal to (1) the lesser of (a) the amount by which the Credit
Requirement on such date exceeds the Warehouse Borrowing Base on such date and
(b) the principal
-23-
<PAGE> 30
amount of all Loans other than Bid Loans outstanding on such date, multiplied
by (2) a fraction having a numerator equal to the principal amount of all Loans
other than Bid Loans outstanding on such date and a denominator equal to the
sum of the principal amount of all Loans other than Bid Loans outstanding on
such date plus the unpaid principal amount of the Ratable Medium-Term Notes on
such date.
Reserve Requirement: means, with respect to the Eurodollar Rate
applicable to a Discount Loan Period or a Eurodollar Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on
eurocurrency liabilities on the date of determination of such Eurodollar Rate.
Residential Mortgage Loan: means a Mortgage Loan secured by a Mortgage
on a Single Family Residence.
Restricted Payment: means: (i) with respect to the Company, any payment
of any dividends upon any shares of the Company's stock now or hereafter
outstanding, except dividends payable in the stock of the Company, and any
other distribution of assets to its stockholders, as such, (including any
repurchase of the Company's stock) whether in cash, property, or securities,
other than the exchange of Subordinated Debt for Series A Preferred Stock; and
(ii) any payment of principal of or interest on the Subordinated Debt, and any
amounts deposited with the trustee under the Subordinated Debt Indenture or
otherwise irrevocably set aside for the benefit of the holders of the
Subordinated Debt for the purpose of defeasance of the Subordinated Debt.
Resulting Entity: means the Company and its consolidated Subsidiaries
after giving effect to any Fundamental Change or Investment.
S&P: means Standard & Poor's Ratings Group or any successor to its
business.
SEC: means the Securities and Exchange Commission (or any successor
entity).
Secured Debt: means the sum of the Credit Indebtedness and all amounts
outstanding under the Ratable Medium-Term Notes.
Secured Parties: means, collectively, the Lenders, the Non-Lender
Balance Banks (to the extent of any Credit Indebtedness owed to such Non-Lender
Balance Banks), the Agent, the Collateral Agent and the holders of the Ratable
Medium-Term Notes.
Security: means any FHLMC Security, FNMA Security or GNMA Security.
-24-
<PAGE> 31
Security Agreement: means the Second Amended and Restated Security and
Collateral Agency Agreement as of even date herewith, substantially in the form
of Exhibit D attached hereto, by and among the Company, each Borrowing
Subsidiary, the Agent, the trustee under the indentures relating to the Ratable
Medium-Term Notes, and the Collateral Agent, pursuant to which a security
interest is created in favor of the Collateral Agent for the Secured Parties in
certain Collateral to be pledged pursuant to this Agreement, as the same may,
from time to time, be further supplemented, modified or amended.
Series A Preferred Stock: means the Company's 8.42% Cumulative
Preferred Stock, Series A.
Servicing Agreement: means a written contract of the Company with
another Person to act on behalf of such other Person to, among other things,
receive payments in respect of Mortgage Loans and to service Mortgage Loans,
but shall not include the servicing rights related to (i) any Residential
Mortgage Loans while they constitute Collateral, (ii) any commercial Mortgage
Loans, or (iii) any other Mortgage Loans held for investment by the Company,
Parent or any of their respective Subsidiaries.
Servicing Collateral Fee Rate: means, as of any date the percentage per
annum set forth on Schedule 2 attached hereto which is in effect on such date,
changing as and when the Company's long-term unsecured debt rating by either
S&P or Moody's changes as described therein.
Servicing Purchaser: means a Person which has purchased Servicing
Agreements from the Company.
Servicing Sale Receivables: means funds due to the Company from a
Servicing Purchaser in connection with a sale of Servicing Agreements from the
Company to such Servicing Purchaser.
Settlement Account: means the account established pursuant to Section
4.11.
Single Family Residence: means a one to four family dwelling unit,
which may be a condominium unit but which shall not be a mobile home (unless
qualified under a Federal Agency program) or a dwelling unit in a cooperative
apartment building.
Subordinated Debt: means the principal amount of (but not any interest
on) the unsecured subordinated Debt of the Company outstanding from time to
time (which amount shall not exceed $100,000,000) evidenced by the Quarterly
Income Capital Securities (Subordinated Interest Deferrable Debentures, Due
2025) of the Company issued in exchange for certain of the Series A Preferred
Stock, the terms of which unsecured subordinated Debt are set forth in the
Subordinated Debt Indenture; but shall not
-25-
<PAGE> 32
include any such unsecured subordinated Debt with respect to which any amounts
shall have been deposited with the trustee under the Subordinated Debt
Indenture or otherwise irrevocably set aside for the benefit of the holders of
such Debt for the purpose of defeasance of such Debt.
Subordinated Debt Indenture: means that certain Subordinated Indenture,
dated as of December 1, 1995, as amended or supplemented from time to time, by
and between the Company and IBJ Schroeder, as trustee, pursuant to which the
Company has issued or will issue the Subordinated Debt.
Subservicing Agreement: means a Servicing Agreement between the Company
and a Person which does not own the Mortgage Loans being serviced thereunder
but only has servicing or other non-ownership rights with respect thereto.
Subsidiary: of a Person means (i) any corporation more than 50% of the
outstanding voting securities having ordinary voting power of which shall at
the time be owned or controlled, directly or indirectly, by such Person or by
one or more of its Subsidiaries or by such Person and one or more of its
Subsidiaries, or (ii) any partnership, association, joint venture or similar
business organization more than 50% of the ownership interests having ordinary
voting power of which shall at the time be so owned or controlled. Unless
otherwise expressly provided, all references herein to a "Subsidiary" shall
mean a Subsidiary of the Company.
Swingline Advances: means all Advances made by the Swingline Lender
which are designated by the Company or a Borrowing Subsidiary as Swingline
Advances in the applicable Advance Notice, which Advances may be Overnight
Transaction Advances, Alternate Base Rate Advances or Swingline Buydown
Advances.
Swingline Buydown Advance: means a Loan made pursuant to Section 2.5(b)
by the Swingline Lender at the Swingline Buydown Rate.
Swingline Buydown Rate: means a rate to be agreed upon by the Company
and the Swingline Lender to apply to Swingline Buydown Advances pursuant to a
Balance Bank Agreement between the Swingline Lender and the Company.
Swingline Commitment: means, the obligation of the Swingline Lender to
make Swingline Advances hereunder not exceeding $10,000,000.
Swingline Lender: means First Chicago.
Termination Date: means November 11, 1999, or if any such day is not a
Business Day, the next preceding Business Day.
-26-
<PAGE> 33
Transferee: is defined in Section 11.4.
Unsecured Leverage Ratio: means as of any date, the applicable maximum
leverage ratio (which changes as and when the Aggregate Commitment changes) set
forth in Section 8.9(b).
VA: means the Veterans Administration or other agency, corporation or
instrumentality of the United States as to which the powers and duties of the
Veterans Administration have been transferred.
VA-Approved Lender: means an institution that is approved by the VA to
act as a lender in connection with the origination of any Mortgage Loan
guaranteed by the VA.
VA Mortgage Loan: means a Mortgage Loan that is secured by a first lien
on land and the Single Family Residence constructed thereon and is guaranteed
by the VA.
Warehouse Borrowing Base: means, for any date, that portion of the
Aggregate Borrowing Base on such date attributable to Eligible Collateral other
than Eligible Pledged Servicing.
1.2 Interpretation.
(a) Words of the masculine gender include correlative words
of the feminine and neuter genders.
(b) Unless the context shall otherwise indicate, words
importing the singular include the plural and vice versa.
(c) Articles and Sections referred to by number mean the
corresponding Articles and Sections of this Agreement.
(d) The terms "hereby," "hereof," "hereto," "herein,"
"hereunder" and any similar terms as used in this Agreement, refer to
this Agreement as a whole unless otherwise expressly stated.
1.3 Accounting Terms and Determinations.
Unless otherwise specified herein, all accounting terms used
herein shall be interpreted, all accounting determinations hereunder shall be
made, and all financial statements required to be delivered hereunder shall be
prepared, in accordance with GAAP, applied on a basis consistent (except for
changes concurred in by the Company's independent public accountants) with the
most recent audited consolidated financial statements of the Company delivered
to the Lenders. To enable the ready and consistent determination of compliance
with the covenants set forth herein, neither the Company nor any Borrowing
Subsidiary will change its fiscal year from a calendar year without (i) advance
written
-27-
<PAGE> 34
notice to the Lenders, (ii) providing interim financial reports certified by
the Company, by the dates that such reports would have been required prior to
such change, and (iii) providing an interim audited financial statement if more
than fifteen (15) months will have elapsed between annual audited financial
statements as a result of such change.
ARTICLE II
BORROWINGS
2.1 Availability and Adjustments.
(a) Agreement to Lend. Subject to subparagraphs (1)
through (4) below (the "Lending Sublimits"), each Lender severally
agrees to make Loans to the Company and participate in purchases of
Discount Advances (and, to the extent and not to exceed the amounts
provided in the second Recital of this Agreement, the Swingline Lender
agrees to make Swingline Advances to the Borrowing Subsidiaries) on the
terms and conditions set forth in this Agreement from time to time
through the Business Day immediately preceding the Termination Date,
provided that, on any date, after giving effect to such Loans and all
other Loans that the Company or any Borrowing Subsidiary has requested
be made on such date:
(1) the aggregate principal balance then outstanding
under all Loans made by any Lender under this Agreement
(excluding the aggregate principal balance then outstanding of
any Bid Loans made by such Lender and any portion of Discount
Advances made by such Lender which have been sold or, will on
such date be simultaneously sold, to the other Lenders under
Section 2.4) shall not at any time exceed the sum of (i) such
Lender's then-current General Commitment, and (ii) such Lender's
then-current Swingline Commitment, if any;
(2) the aggregate principal balance of all Loans
outstanding under this Agreement plus the aggregate face amount
of all Outstanding CPNs plus the amount of all outstanding
(whether currently due or contingent) Approved GNMA Letter of
Credit Obligations shall not at any time exceed the then-current
Aggregate Commitment;
(3) the Credit Requirement shall not exceed the
Aggregate Borrowing Base;
(4) except as otherwise set forth in Section 2.5(c),
the aggregate principal balance of all Swingline Advances
outstanding under this Agreement at any time shall not exceed
the Swingline Commitment.
-28-
<PAGE> 35
Subject to the terms hereof, the Company and the Borrowing Subsidiaries
may borrow, repay and reborrow amounts hereunder.
(b) Optional Increases in Aggregate Commitments. The
Company shall have the right to increase the Aggregate Commitment, but
not to an amount in excess of $1,250,000,000, by obtaining additional
Commitments, either from one or more of the Lenders or another lending
institution provided that (A) the Agent has approved the identity of any
such new Lender, (B) any such new Lender assumes all of the rights and
obligations of a "Lender" hereunder, and (C) the Agent has received a
"New/Modified Commitment Supplement" in the form of Exhibit H attached
hereto, which supplement shall be executed by the Company, each
Borrowing Subsidiary, the Agent and any Lender modifying its Commitment
thereby. Each New/Modified Commitment Supplement shall be deemed to
amend Exhibit C to the extent necessary to reflect any changes in the
Commitments hereunder, and the Agent shall promptly deliver a copy of
such supplement to each Lender whose Commitment Percentage is affected
thereby.
(c) Optional Reductions in Aggregate Commitments. The
Company shall have the right to reduce the Aggregate Commitment upon ten
Business Days' prior written notice to the Agent, provided that such
voluntary reductions shall be made only in multiples of $10,000,000.
Upon a reduction of the Aggregate Commitment pursuant to the preceding
sentence, each Lender's General Commitment shall be decreased pro rata
in accordance with such Lender's Adjusted Commitment Percentage. On or
before the effective date of any such reduction, the Company shall, if
necessary, repay sufficient Loans to prevent the remaining outstanding
Loans hereunder, after giving effect to such permanent reduction, from
exceeding the Lending Sublimits.
2.2 Fees.
The Company shall pay the following fees (the "Fees"):
(a) Facility Fee. A facility fee based on the Aggregate
Commitment from time to time, calculated at the Facility Fee Rate,
changing when and as such rate changes, expressed as a per diem rate on
the actual Aggregate Commitment for each day during the preceding full
or partial calendar quarter, payable in arrears, on or before the fifth
Business Day of each calendar quarter and on the Termination Date. This
fee shall be allocated among the Lenders on a pro rata basis in
accordance with their respective Commitments (including any Swingline
Commitment) on each day during such quarter.
-29-
<PAGE> 36
(b) Servicing Margin/Servicing Collateral Fee. A servicing
collateral fee based on the Required Servicing Collateral Amount, which
fee shall be calculated at the Servicing Collateral Fee Rate, changing
as and when such rate changes, expressed as a per diem rate on the
actual Required Servicing Collateral Amount for each day during the
preceding full or partial calendar quarter, payable in arrears on or
before the fifth business day of each calendar quarter and on the
Termination Date. This fee shall be allocated among the Lenders on a
pro rata basis in accordance with the principal balance of their
respective outstanding Loans other than Bid Loans on those days during
such quarter on which there was a Required Servicing Collateral Amount.
(c) Amendment Fee. An amendment fee of $1,000 to each
Lender for each amendment to this Agreement requested solely by the
Company in excess of two (2) amendments during any calendar year.
(d) Other Fees Payable to Agent. Any fees payable to the
Agent pursuant to the Company's prior letter agreement with the Agent.
(e) Up Front Fees Payable to Lenders. Up-front fees
payable to the Lenders, based on each Lender's accepted allocated
Commitment, in the amounts set forth on the schedule of up-front fees
dated October 2, 1996 previously delivered to the Lenders by the Agent.
(f) Collateral Agent Fees. Collateral Agent fees payable
to Collateral Agent for its services rendered pursuant to the Security
Agreement as agreed to by the Company and the Collateral Agent from time
to time.
(g) Fees Payable in Connection with Discount Loans or
Swingline Buydown Advances. Any deficiency fees owing to the Balance
Banks or the Swingline Lender under the Balance Bank Agreements due to
the Company's failure to maintain sufficient deposits with such Balance
Banks or the Swingline Lender and any other fees owing under the Balance
Bank Agreements.
2.3 Advances.
(a) Types of Advances. Each Advance hereunder shall
consist of Loans made from one or more of the Lenders and requested by the
Company or a Borrowing Subsidiary in accordance with Section 2.9. Subject to
the terms and conditions herein, Eurodollar Advances, Alternate Base Rate
Advances and Federal Funds Advances shall be generally available as permitted
by the Lending Sublimits. Discount Advances shall be available only as
provided in Section 2.4. Swingline Advances shall be available
-30-
<PAGE> 37
as provided in Section 2.5. Bid Loans shall be available as provided in
Section 2.6. Notwithstanding anything to the contrary contained in this
Agreement, at any time during the continuance of a Default the Agent may (and
at the direction of the Required Lenders shall) declare by notice to the
Company that no Advance may be made as, converted into or continued as a
Eurodollar Advance or a Discount Advance, and each such Advance shall
automatically be converted into a Federal Funds Advance at the expiration of
the interest period applicable thereto.
(b) Rate Options. Eurodollar Advances, Alternate Base Rate
Advances, Federal Funds Advances, Swingline Buydown Advances and Overnight
Transaction Advances shall accrue interest at the Eurodollar Rate, the
Alternate Base Rate, the Federal Funds Rate, the Swingline Buydown Rate and the
Overnight Transaction Rate, respectively. Discount Advances shall not bear
interest but shall be made on a discounted basis by one or more Balance Banks
and shall be sold to the other Lenders in accordance with Section 2.4.
(c) Funding of Advances. Discount Advances, Swingline
Advances and Bid Loans shall be funded by the Lenders as provided in Sections
2.4, 2.5 and 2.6, respectively. All other Advances shall be funded on a pro
rata basis among all Lenders in accordance with each Lender's Adjusted
Commitment Percentage.
(d) Reallocation of Swingline Advances. Upon the election
of the Swingline Lender at any time, all outstanding Swingline Advances
(including Swingline Advances made pursuant to Section 2.5(c) below) designated
by the Swingline Lender shall be reallocated among all Lenders in accordance
with each Lender's Adjusted Commitment Percentage, and each such Swingline
Advance shall thereafter be deemed for all purposes a Federal Funds Advance.
Notwithstanding the preceding sentence or any other provision of this
Agreement, no portion of any Swingline Advance shall be reallocated to any
Lender to the extent such reallocation would cause such Lender's share of the
aggregate unpaid principal amount of all Loans (other than Bid Loans) then
outstanding under this Agreement to exceed its General Commitment hereunder.
(e) Reallocation Upon Default. Automatically after the
occurrence of an Event of Default described in Section 10.1(k) and upon the
request of any Lender during the continuance of any other Event of Default, (i)
all Swingline Advances made in accordance with this Agreement, Federal Funds
Advances and Alternate Base Rate Advances (excluding Bid Loans) shall be
immediately reallocated among all Lenders in accordance with each Lender's
Commitment Percentage, and each Swingline Advance shall thereafter be deemed
for all purposes a Federal Funds Advance, and (ii) each Eurodollar Advance and
Discount Advance shall, upon the expiration of the interest period applicable
thereto,
-31-
<PAGE> 38
automatically be converted into a Federal Funds Advance and reallocated among
all Lenders in accordance with each Lender's Commitment Percentage. Each
Lender holding less than its Commitment Percentage of all Advances (excluding
Bid Loans) shall at the times set forth for reallocations in the preceding
sentence immediately purchase for cash and at face value such participations in
the Notes held by other Lenders, and make such other adjustments, as may be
needed to cause each Lender to hold its Commitment Percentage of the Advances
hereunder (other than Bid Loans made by such Lender). Notwithstanding the
preceding provisions of this Section 2.3(e) or any other provision of this
Agreement, no Lender shall be required to so purchase such participations to
the extent that such purchase would cause such Lender's share of the aggregate
unpaid principal amount of all Loans (other than Bid Loans) then outstanding
under this Agreement to exceed its Commitment hereunder.
2.4 Discount Advances.
(a) Funding of Discount Loans. Subject to the terms and
conditions herein (including the Lending Sublimits) and the terms and
conditions of any Balance Bank Agreement, the Company may request a Discount
Advance from any Balance Bank; provided that Discount Advances shall be made
only on the tenth day of each calendar month or, if such tenth day is not a
Business Day, on the next succeeding Business Day thereafter.
(b) Discounted Advance. Each Discount Loan made available
hereunder shall not bear interest but shall instead be funded to the Company at
a discount ("Balance Bank Discount") from the principal amount repayable by the
Company at the end of the applicable Discount Loan Period (the "Face Amount")
calculated to yield to the Balance Bank, when the Face Amount is repaid in full
at the end of the applicable Discount Loan Period, a per annum return on the
amount advanced equal to the Discount Rate for the applicable Discount Loan
Period. The full Face Amount of each Discount Advance shall then be repaid by
the Company at the expiration of the applicable Discount Loan Period.
Accordingly, each Discount Advance shall bear no interest prior to the
expiration of the applicable Discount Loan Period. The amount of the Discount
Advance actually disbursed to the Company on the Advance Date therefor (which
amount shall necessarily be less than the Face Amount) shall be equal to the
amount requested by the Company in the Advance Notice requesting such Discount
Advance, and the Face Amount shall be determined by the Agent based on the
Balance Bank Discount. From and after the expiration of such Discount Loan
Period, each Discount Loan constituting a portion of such Discount Advance not
repaid shall bear interest on its Face Amount at the rate set forth in Section
2.7.
-32-
<PAGE> 39
(c) Balance Bank Agreement. Discount Advances are based upon
the expectation that the Company will maintain average daily qualifying
balances with the applicable Balance Bank during the applicable Discount Loan
Period. The Agent will collect and disburse the Discount Advances, but shall
not be obligated to confirm any matters with respect to balances maintained
with Balance Banks or to collect any fees or amounts charged by Balance Banks
with regard to such balances. Each Balance Bank shall with the Company's
agreement impose its own requirements upon the Company in dealing with
deviations in actual balances from projected balances. All such matters shall
be governed by separate Balance Bank Agreements between each such Balance Bank
and the Company, and the Agent shall have no responsibility therefor. No
Discount Advance shall be available from a particular Balance Bank until (i)
the Company and such Balance Bank have executed and delivered a Balance Bank
Agreement and so advised the Agent in writing, and (ii) in the case of a
Non-Lender Balance Bank, such Non-Lender Balance Bank shall have executed
either this Agreement or a Non-Lender Balance Bank Supplement in the form of
Exhibit I hereto agreeing to be bound by the terms of this Section 2.4.
(d) Ratable Purchase by All Lenders. A portion of each
Discount Advance (or, in the case of Non-Lender Balance Banks, the entire
Discount Advance made in accordance with the terms of this Agreement), shall be
sold simultaneously with the funding by the Balance Bank to the other Lenders
(each a "Purchasing Lender") on a pro rata basis in accordance with each such
Lender's Adjusted Commitment Percentage. Each Purchasing Lender hereby agrees
to purchase and acquire, prior to funding, for cash at the Purchase Price and
without recourse to the Balance Bank, its Adjusted Commitment Percentage share
of such Discount Advance (as to each Purchasing Lender, such amount shall be a
Discount Loan by such Lender). The purchase price ("Purchase Price") payable
by each Purchasing Lender shall be calculated to yield such Lender upon payment
at the end of the applicable Discount Loan Period of its Discount Loan a per
annum return on the Purchase Price equal to the Eurodollar Rate which would
have been applicable for a one month Eurodollar Interest Period ending on the
same date as such Discount Loan Period. Each Balance Bank hereby irrevocably
agrees to sell and assign, without recourse, such portion of every Discount
Advance made by such Balance Bank (or, in the case of Non-Lender Balance Banks,
the entire amount of each such Discount Advance) to each Purchasing Lender at
the applicable Purchase Price. Each Balance Bank (other than Non-Lender
Balance Banks) shall retain its Adjusted Commitment Percentage share of the
Face Amount of each Discount Advance, which shall constitute a Discount Loan
owing to the Balance Bank.
(e) Minimum Amounts; Funding. Each Discount Advance shall be
requested by the Company in accordance with Section 2.9. On the Advance Date
for each such Discount Advance, subject to
-33-
<PAGE> 40
the other provisions hereof and upon receipt by the Agent for the account of
the Balance Bank from each of the Purchasing Lenders of the aggregate Purchase
Price required to be made available by such Lenders, the Balance Bank will make
the full Discount Advance available to the Agent for the account of the Company
in the manner specified in Section 2.11. On the Advance Date for each such
Discount Advance, each Purchasing Lender will make available to the Agent for
the account of the Balance Bank in immediately available funds an amount equal
to the Purchase Price for the share of such Discount Advance being purchased by
such Lender from the Balance Bank.
(f) Consent to Assignment. The Company hereby acknowledges and
consents to the assignment of Discount Loans by each Balance Bank to the other
Lenders, as contemplated by this Section 2.4. The Company and the Agent shall
treat each Purchasing Lender with respect to its share of each Discount Advance
as if such share of such Discount Advance had originally been made by such
Purchasing Lender directly to the Company as a Discount Loan.
(g) Discount Notes. The Discount Loans owing to each Lender
shall be evidenced by a single master promissory note of the Company in the
full amount of such Lender's Commitment, substantially in the form of Exhibit
E-2 (a "Discount Note") executed and delivered prior to the initial Discount
Advance, payable to the order of such Lender and representing from time to time
the obligation of the Company to pay the aggregate Face Amount of all Discount
Loans then owed to such Lender.
2.5 Swingline Advances.
(a) In General. Subject to the terms and conditions
herein, the Company and each Borrowing Subsidiary may request Swingline
Advances from the Swingline Lender on a non-pro rata basis, and such Swingline
Advance shall be funded to the Company or a Borrowing Subsidiary, as
applicable, by the Swingline Lender on the Advance Date therefor. As set forth
in, but subject to the provisions of, Sections 2.3(d) and (e), Swingline
Advances shall be reallocated among the Lenders (i) automatically after the
occurrence of an Event of Default described in Section 10.1(k), (ii) upon the
request of any Lender during the continuance of any other Event of Default, and
(iii) upon the election of the Swingline Lender made at any time.
(b) Swingline Buydown Advances. Swingline Buydown Advances
are based upon the expectation that the Company will maintain average daily
qualifying balances with the Swingline Lender while any Swingline Buydown
Advance is outstanding. The Swingline Lender shall with the Company's
agreement impose its own requirements upon the Company in dealing with
deviations in actual balances from projected balances. All such matters shall
-34-
<PAGE> 41
be governed by a Balance Bank Agreement between the Swingline Lender and the
Company.
(c) Swingline Advances to Pay Amounts Due to Swingline Lender.
If any amounts are advanced by the Swingline Lender to cover checks or wire
transfers from Company or Borrowing Subsidiary accounts maintained with the
Swingline Lender when there are insufficient funds in such accounts to cover
the applicable check or wire transfer and sufficient funds are not deposited in
the applicable account before the close of business on the day on which the
applicable check or wire transfer request is honored, then the Company shall be
deemed to have requested, and the Swingline Lender may (but shall not be
obligated to) elect to make, a Swingline Advance at the Alternate Base Rate to
pay such overdraft amount (even if such a Swingline Advance would cause the
aggregate amount of all outstanding Swingline Advances to exceed the Swingline
Commitment); provided however, that (i) the Swingline Lender shall not make any
such Swingline Advance to the extent such Advance would cause the Credit
Requirement to exceed the Aggregate Borrowing Base, and (ii) the reallocations
of any such Swingline Advances among the Lenders shall be as set forth in, but
subject to the provisions of, Sections 2.3(d) and (e).
2.6 Bid Loans and Approved GNMA Letters of Credit.
(a) Special Bids. The Company may, at any time, solicit a bid
from any Lender on a non-pro rata basis for a loan (a "Bid Loan") in such
amount and accruing interest at such rate as may be bid to the Company by such
Lender for interest periods of 1 to 45 days. Such Lender, in its sole
discretion, may make such a bid for a Bid Loan. The Company will be under no
obligation to accept any such bid, but may accept any one, or more than one, of
such bids. A Lender whose bid has been accepted by the Company shall be
referred to as a "Bid Lender". The Company and each Bid Lender shall execute
and submit a Bid Loan Notice in the form of Exhibit G hereto to the Agent
concurrently with the Advance Notice for such Bid Loan.
(b) Approved GNMA Letters of Credit. The Company may, at any
time, request that any Lender issue a letter of credit in favor of GNMA as a
result of the failure by the Company or any Borrowing Subsidiary to satisfy all
document submission requirements of GNMA in connection with the certification
or re-certification by GNMA of a pool of Mortgage Loans. If a Lender agrees to
issue such a letter of credit and desires that such letter of credit be ratably
secured (along with the other Credit Indebtedness) by the Collateral, such
Lender shall submit to the Agent a copy of the proposed letter of credit and
copies of any related reimbursement agreement or other related documentation.
If (i) the Agent approves such letter of credit and other documentation (which
approval shall not be unreasonably
-35-
<PAGE> 42
withheld), and (ii) the letter of credit expires by its terms on a date which
is prior to the Termination Date, then such letter of credit shall constitute
an Approved GNMA Letter of Credit and such Lender shall constitute an "Issuing
Lender". No such letter of credit shall be considered an Approved GNMA Letter
of Credit if its inclusion as an Approved GNMA Letter of Credit would, at the
time of issuance, cause any Lending Sublimit to be exceeded. The Company and
the applicable Issuing Lender shall promptly notify the Agent upon (i) the
expiration, cancellation or honoring of any Approved GNMA Letter of Credit, and
(ii) the payment by the Company or the applicable Borrowing Subsidiary of any
amounts due to the Issuing Lender in respect of any Approved GNMA Letter of
Credit Obligations. No Issuing Lender nor the Company shall amend or renew any
Approved GNMA Letter of Credit or any related reimbursement agreement or other
related document without the prior written consent of the Agent (which consent
shall not be unreasonably withheld).
(c) Additional Commitment. Each Bid Lender's commitment under
an accepted special bid and each Issuing Lender's issuance of an Approved GNMA
Letter of Credit shall be in addition to such Lender's Commitment and shall not
reduce such Lender's obligation to continue to fund its Adjusted Commitment
Percentage of any other Advance.
(d) Notes. Each Bid Loan owing to each Bid Lender shall not be
evidenced by the Notes executed and delivered in the form of Exhibit E-1 and
E-2, but shall instead be evidenced by an additional promissory note or notes
in a form mutually agreed to by the Company and such Bid Lender. The Agent
shall have no responsibility to confirm the existence or substance of such
additional promissory notes.
2.7 Rate after Maturity.
Any Advance not paid at maturity, whether by acceleration or
otherwise, and any other amount not paid when due hereunder shall bear interest
until paid in full at a rate per annum equal to the Alternate Base Rate plus
two percent (2.0%) per annum; provided, however, that such interest rate after
maturity shall in no event be less than the interest rate that was in effect
with respect to such Advance prior to maturity.
2.8 Interest Payment Dates.
Interest shall accrue at the relevant rate for each day from the
day on which the proceeds of such Advance are made available to the Company or
a Borrowing Subsidiary. Interest accrued on each Advance other than a
Eurodollar Advance or a Discount Loan (which does not accrue interest prior to
maturity) shall be payable on the first to occur of (i) the first Business Day
of the immediately following calendar month, commencing with
-36-
<PAGE> 43
the first such date to occur after the date hereof, or (ii) at maturity,
whether due to acceleration or otherwise. Interest accrued on each Eurodollar
Advance shall be payable on the first to occur of (i) the last day of each
Eurodollar Interest Period, or (ii) any date on which any such Eurodollar
Advance is prepaid, whether due to acceleration or otherwise, or (iii) the
Termination Date. Interest and Fees shall be calculated for actual days
elapsed on the basis of a 360-day year. Interest shall be payable for the day
an Advance is made. Interest shall not be payable for the day of any payment
on the amount paid if payment is received prior to noon (Chicago time) at the
place of payment. If any payment of principal of or interest on an Advance
shall become due on a day which is not a Business Day, such payment shall be
made on the next succeeding Business Day and, in the case of a principal
payment, such extension of time shall be included in computing interest in
connection with such payment.
2.9 Method of Selecting Rate Options and Interest Periods.
Subject to the terms hereof, for each Advance hereunder the
Company (or a Borrowing Subsidiary or the Company on behalf of a Borrowing
Subsidiary in the case of Swingline Advances to be borrowed by a Borrowing
Subsidiary) shall give the Agent irrevocable notice (an "Advance Notice") not
later than (i) 10:00 a.m. (Chicago time) on the proposed Advance Date for each
Bid Loan or Federal Funds Advance, (ii) noon (Chicago time) on the proposed
Advance Date for each Alternate Base Rate Advance (other than Swingline
Advances), (iii) 3:00 p.m. (Chicago time) on the proposed Advance Date for
each Overnight Transaction Advance, (iv) 4:00 p.m. (Chicago time) on the
proposed Advance Date for each Swingline Advance which is an Alternate Base
Rate Advance or a Swingline Buydown Advance, and (v) 11:00 a.m. (Chicago time)
three (3) Business Days before the Advance Date for each Eurodollar Advance and
each Discount Advance, specifying:
(a) the Advance Date, which shall be a Business Day, of
such Advance,
(b) the aggregate amount of such Advance, which shall be in
an amount equal to $5,000,000 or a whole multiple of
$1,000,000 in excess thereof, except that (i) Swingline
Advances other than Overnight Transaction Advances
shall have no minimum amount and need not be in
multiples of $1,000,000, and (ii) Overnight Transaction
Advances shall be in a minimum amount equal to $100,000
but need not be in multiples of $1,000,000.
(c) the type of such Advance,
-37-
<PAGE> 44
(d) the interest period applicable to such Advance, if
applicable,
(e) if such Advance is a Discount Advance, the Balance Bank
or Balance Banks for such Advance and, if applicable,
the portion of such Discount Advance allocated to each
such Balance Bank,
(f) if such Advance is a Bid Loan, the Bid Lender for such
Bid Loan,
(g) if such Advance is a Swingline Advance, which entity
(i.e. the Company or a particular Borrowing Subsidiary)
is the borrower of such Advance, and
(h) what portion, if any, of such Advance is to be used
solely for the purpose of repaying maturing commercial
paper.
Notwithstanding the foregoing, the Agent may also agree, in its sole
discretion, to accept (A) an Advance Notice requesting a Swingline Advance
which is an Alternate Base Rate Advance or Swingline Buydown Advance or (B) a
Bid Loan Notice at any time up until the close of the Agent's business day.
Delivery of an Advance Notice, whether by telephone or in writing, shall
constitute a representation and warranty that, after giving effect to the
amount of the Advance being requested, (i) the then-current Aggregate Borrowing
Base is equal to or greater than the Credit Requirement, and (ii) no Lending
Sublimit shall be exceeded. Changes in the rate of interest on that portion of
any Advance maintained as an Alternate Base Rate Advance will take effect
simultaneously with each change in the Alternate Base Rate. The interest rate
on each Overnight Transaction Advance or Federal Funds Advance shall be
recalculated daily for each day that such Overnight Transaction Advance or
Federal Funds Advance is continued under Section 2.12(ii). Each Eurodollar
Advance shall bear interest for each day from and including the first day of
the Eurodollar Interest Period applicable thereto to (but not including) the
last day of such Eurodollar Interest Period at the interest rate determined as
applicable to such Advance. The Company shall select Eurodollar Interest
Periods and Discount Loan Periods with respect to Eurodollar Advances and
Discount Loans so that it is not necessary to pay a Eurodollar Advance or
Discount Loan prior to the last day of the applicable Eurodollar Interest
Period or Discount Loan Period, as the case may be, in order to make the
mandatory repayment on the Termination Date. Any change in the Applicable
Margin shall be effective immediately with respect to the interest rates on any
Loans outstanding other than Discount Loans. Changes in the Applicable Margin
relating to Discount Loans shall not affect Discount Loans outstanding at the
time of any such change but shall be effective
-38-
<PAGE> 45
with respect to any Discount Loans made after the date of any such change.
2.10 Maximum Number of Eurodollar Loans.
The Company may not request an additional Eurodollar Advance if
the making of such Advance would result in any Lender holding Eurodollar Loans
having more than six (6) different Eurodollar Interest Periods at any given
time.
2.11 Funding Procedures.
Not later than 2:00 p.m. (Chicago time) on each Advance Date,
each Lender shall make available its Loan or Loans (including Bid Loans), in
funds immediately available in Chicago to the Agent at its address specified
pursuant to Article XII, provided that Swingline Advances may be funded at any
time up to (i) the close of the Swingline Lender's business day so long as
First Chicago is both the Agent and the sole Swingline Lender, or (ii) 4:00
p.m. (Chicago time) if First Chicago is not both the Agent and the sole
Swingline Lender. The Agent will make the funds so received from the Lenders
available to the Company or a Borrowing Subsidiary, as applicable, at the
Agent's aforesaid address, subject to the provisions of Article V.
Notwithstanding the foregoing, the Agent may also agree, in its sole
discretion, to accept delivery of Bid Loan funds and to make such funds
available to the Company at any time up to the close of the Agent's business
day.
2.12 Conversion and Continuation.
(i) The Company may elect from time to time, subject to
the provisions of Sections 2.3(a), 2.9 and 2.10 and the Lending
Sublimits to convert all or any part of any Advance (other than a Bid
Loan or Discount Advance) into a different type of Advance, provided
that any conversion of any such Eurodollar Advance shall be made on, and
only on, the last day of the applicable Eurodollar Interest Period.
Discount Advances and Bid Loans are payable on the last day of the
applicable Discount Loan Period or Bid Loan period and may be repaid out
of new Advances hereunder but may not be converted directly to a
different type of Advance.
(ii) Alternate Base Rate Advances shall continue as the
same type of Advances unless and until such Advances are converted into
a different form of Advance in accordance with the terms hereof.
Federal Funds Advances shall continue as Federal Funds Advances unless
and until (a) such Advances are converted into a different form of
Advance in accordance with the terms hereof or (b) the Company has paid
any such Federal Funds Advance prior to 10:00 a.m. (Chicago time) on any
Business Day or given the Agent written notice before 10:00
-39-
<PAGE> 46
a.m. (Chicago time) on any Business Day that such Federal Funds Advance
will be repaid on such Business Day. Overnight Transaction Advances and
Swingline Buydown Advances shall continue as Overnight Transaction
Advances and Swingline Buydown Advances, respectively, unless and until
(a) such Advances are converted into a different form of Advance in
accordance with the terms hereof or (b) the Company or a Borrowing
Subsidiary, as applicable, has paid any such Overnight Transaction
Advance or Swingline Buydown Advance prior to 3:00 p.m. (Chicago time)
on any Business Day or given the Agent written notice before 3:00 p.m.
(Chicago time) on any Business Day that such Overnight Transaction
Advance or Swingline Buydown Advance will be repaid on such Business
Day. If the Company so notifies the Agent that it will be paying a
Federal Funds Advance, Overnight Transaction Advance or Swingline
Buydown Advance on any Business Day and fails to do so, such Advance
shall be converted into an Alternate Base Rate Advance. Eurodollar
Advances shall continue until the end of the then-applicable Eurodollar
Interest Period therefor, at which time each such Advance shall be
automatically converted to a Federal Funds Advance, unless the Company
shall have given the Agent notice in accordance with Section 2.12(iii)
requesting that, at the end of such Eurodollar Interest Period, such
Advance continue as a Eurodollar Advance for a specified Eurodollar
Interest Period or be converted to a different type of Advance.
(iii) The Company shall give the Agent irrevocable notice
(a "Conversion/Continuation Notice") of each conversion of an Alternate
Base Rate Advance, a Federal Funds Advance, a Swingline Buydown Advance
or an Overnight Transaction Advance or conversion or continuation of a
Eurodollar Advance not later than (i) 10:00 a.m. (Chicago time) on the
date of the requested conversion or continuation, in the case of a
conversion into a Federal Funds Advance, Alternate Base Rate Advance,
Overnight Transaction Advance or Swingline Buydown Advance, or (ii)
11:00 a.m. (Chicago time) at least three Business Days prior to the date
of the requested conversion into or continuation of a Eurodollar Loan,
specifying: (1) the requested date (which shall be a Business Day) of
such conversion or continuation; (2) the amount and type of the Advance
to be converted or continued; (3) the amount and type(s) of Advance(s)
into which such Advance is to be converted or continued; and (4) in the
case of a conversion into or continuation of a Eurodollar Advance, the
duration of the Eurodollar Interest Period applicable thereto.
2.13 Optional Principal Payments.
All or any portion of Alternate Base Rate Advances, Overnight
Transaction Advances, Swingline Buydown Advances and
-40-
<PAGE> 47
Federal Funds Advances may be paid without penalty or premium on any Business
Day provided that such repayments are made by (i) 10:00 a.m. (Chicago time)
with respect to Federal Funds Advances, (ii) noon (Chicago time) with respect
to Alternate Base Rate Advances, or (iii) 3:00 p.m. (Chicago time) with respect
to Overnight Transaction Advances and Swingline Buydown Advances. A Eurodollar
Advance or Discount Loan may not be paid prior to the last day of the
applicable Eurodollar Interest Period or Discount Loan Period, as the case may
be; provided, however, that the Company shall compensate the Lenders for any
funding losses and/or loss of profits incurred as a result of any voluntary
prepayment (if accepted) or involuntary prepayment of any such Advance prior to
the last day of the applicable Eurodollar Interest Period or Discount Loan
Period. Bid Loans may not be prepaid unless the applicable Bid Lender has
agreed otherwise and notified the Agent of such agreement. All optional
principal payments shall be applied to the type of Advance designated by the
Company when making such payment, provided that any payments received during
the continuance of an Event of Default shall be applied on a pro rata basis to
all Advances then outstanding (with the portion applicable to Eurodollar Loans
or Discount Loans to be applied to such Loans either immediately or at the end
of the relevant Eurodollar Interest Period or Discount Loan Period at the
option of the Company).
2.14 Required Principal Payments.
(a) Payments Related to Aggregate Borrowing Base. On any
date that the Credit Requirement is in excess of the then-current Aggregate
Borrowing Base, the Company shall make a mandatory payment to the Agent for the
benefit of the Lenders in the amount of such excess. Such payment shall be
allocated pro rata among the Lenders in accordance with the amounts of their
outstanding Loans hereunder.
(b) Final Payment on Termination Date. The outstanding
principal balance of all Advances not repaid earlier, together with any accrued
and unpaid interest and Fees, unless required to be paid earlier pursuant to
the terms hereof, shall be due and payable on the Termination Date.
2.15 Method of Payment.
All payments of principal, interest, and Fees hereunder
(including any payments related to Bid Loans) shall be made in immediately
available funds to the Agent at the Agent's address specified pursuant to
Article XII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Company on the date due by 1:00 p.m. (Chicago time)
with respect to all Advances other than Swingline Advances and by 3:00 p.m.
(Chicago time) with respect to Swingline Advances. Notwithstanding the
foregoing, if the Company or a Borrowing
-41-
<PAGE> 48
Subsidiary fails to repay or give the Agent notice of repayment of a Federal
Funds Advance before 10:00 a.m. (Chicago time) or an Overnight Transaction
Advance before 3:00 p.m. (Chicago time) on the Business Day that the Company or
the Borrowing Subsidiary intends to repay such Advance, any payment of such
Advance received by the Agent on such Business Day after the time required for
payment or notice shall be deemed to have been received by the Agent at the
opening of business on the following Business Day. Each payment delivered to
the Agent for the account of any Lender shall be delivered promptly by the
Agent to such Lender in the same type of funds which the Agent received at its
address specified pursuant to Article XII or at any Lending Installation
specified in a notice received by the Agent from such Lender. The Agent is
hereby authorized to charge the account of the Company maintained with First
Chicago for each payment of principal, interest and fees as it becomes due
hereunder.
2.16 Notes; Telephonic Notices.
Each Lender is hereby authorized to record the principal amount
of each of its Loans and each repayment on the schedules attached to its Notes
provided, however, that the failure to so record or any error in such recording
shall not affect the Company's or any Borrowing Subsidiary's obligations
hereunder or under such Notes. The Company and each Borrowing Subsidiary each
hereby authorizes the Lenders and the Agent to extend, continue or convert
Advances, effect Rate Option selections and to transfer funds to or for the
account of the Company or the applicable Borrowing Subsidiary based on
telephonic notices (confirmed promptly thereafter by facsimile) made by any
person or persons the Agent or any Lender in good faith believes to be acting
on behalf of the Company or the applicable Borrowing Subsidiary. The Company
and each Borrowing Subsidiary each agrees to deliver promptly to the Agent a
written confirmation, if such confirmation is requested by the Agent or any
Lender, of each telephonic notice signed by an officer of the Company or the
Borrowing Subsidiary, as applicable, authorized in writing to do so. If the
written confirmation differs in any material respect from the action taken by
the Agent and the Lenders, the records of the Agent and the Lenders shall
govern absent manifest error.
2.17 General Provisions as to Payments.
(a) The Company (or the applicable Borrowing Subsidiary
with respect to Loans borrowed by a Borrowing Subsidiary) shall make
each payment of principal or interest on the Loans and shall pay all
Fees not later than the times stated in Section 2.15. The Agent shall
promptly distribute to each Lender its share of each payment of
principal or interest or fees received by the Agent for the account of
such Lender.
-42-
<PAGE> 49
(b) Amounts paid to or held by the Agent for the payment of
Loans shall not be deemed paid to a Lender until received by such Lender
by the later of 3:00 p.m. (Chicago time) or the close of business on
such date. If amounts are received by the Agent from the Company or a
Borrowing Subsidiary prior to the applicable times stated in Section
2.15 and the Agent fails to make a Lender's portion of such amount
available to such Lender by close of business on such date, neither the
Company nor such Borrowing Subsidiary shall have any obligation to pay
any further interest on such payment and the Agent shall pay to such
Lender interest on such payment to the date paid to such Lender by the
Agent at a rate per annum equal to the then-current Published Federal
Funds Effective Rate.
2.18 Notification of Advances, Interest Rates and Prepayments.
Promptly after receipt thereof, the Agent will notify each
Lender by facsimile of the contents of each Advance Notice,
Conversion/Continuation Notice, and repayment notice received by it hereunder.
Not later than one Business Day prior to the Advance Date for each Eurodollar
Advance or Discount Loan, the Agent will notify by facsimile each Lender and
the Company of the interest rate applicable to each Eurodollar Advance, the
Face Amount of each Discount Advance and the Purchase Price to be paid by each
Lender for its share of such Discount Advance promptly upon determination of
such interest rate, Face Amount and Purchase Price. When any Advances are
outstanding or have been requested at the Federal Funds Rate or the Alternate
Base Rate the Agent will give each Lender and the Company prompt notice by
facsimile of each change in such rate.
2.19 Lending Installations.
Each Lender may book its Loans at any Lending Installation
selected by such Lender and may change its Lending Installation from time to
time. All terms of this Agreement shall apply to any such Lending Installation
and the Notes shall be deemed held by each Lender for the benefit of such
Lending Installation. Each Lender may, by facsimile or written notice to the
Agent and the Company, designate a Lending Installation through which Loans
will be made by it and for whose account Loan payments are to be made.
Notwithstanding the foregoing, no Lender may transfer its Loans to another
Lending Installation if such transfer would cause the Company to incur
additional indemnification costs under Section 3.1 hereof, and if after a
Lender transfers its Loans to another Lending Installation the Company incurs
additional indemnification costs under Section 3.1 hereof as a result of such
transfer, such Loans shall be transferred back to the original Lending
Installation.
-43-
<PAGE> 50
2.20 Non-Receipt of Funds by Agent.
(a) Unless the Company, a Borrowing Subsidiary or a Lender, as
the case may be, notifies the Agent prior to the close of business on the
Business Day immediately preceding the date on which it is required to make
payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or
(ii) in the case of the Company or a Borrowing Subsidiary, a payment of
principal, interest or fees to the Agent for the account of the Lenders, that
it does not intend to make such payment, the Agent may assume that such payment
has been made or will be made on the date required. The Agent may, but shall
not be obligated to, make the amount of such payment available to the intended
recipient in reliance upon such assumption. If such Lender, the Company or the
Borrowing Subsidiary, as the case may be, has not in fact made or does not make
when due such payment to the Agent, the recipient of such payment shall, on
demand by the Agent, repay to the Agent the amount so made available together
with interest thereon in respect of each day during the period commencing on
the date such amount was so made available by the Agent until the date the
Agent recovers such amount at a rate per annum equal to (i) in the case of
repayment by a Lender, the Published Federal Funds Effective Rate for such day
or (ii) in the case of repayment by the Company or a Borrowing Subsidiary, the
interest rate applicable to the relevant Loan. If a Lender fails to pay the
Agent as provided in the preceding sentence, the Company shall pay such amount
to the Agent upon demand plus interest (at the rate applicable to the
applicable Advance) to the date of repayment (but not including such date if
payment is received prior to the deadlines established in Section 2.15).
(b) Neither the Agent nor any Lender shall incur any
liability to the Company or any Borrowing Subsidiary in acting upon any
telephonic notice referred to in this Agreement which the Agent or such Lender
believes in good faith to have been given by a duly authorized officer or other
person authorized to borrow on behalf of Company or the Borrowing Subsidiary or
for otherwise acting in good faith under this Section 2.20. Upon the funding
of Loans by the Lenders in accordance with this Agreement (including
satisfaction of all conditions thereto) pursuant to any telephonic notice (with
confirmation promptly thereafter by facsimile), the Company (or the applicable
Borrowing Subsidiary with respect to Advances borrowed by a Borrowing
Subsidiary) shall have effected a borrowing hereunder. An Advance Notice (or
telephonic notice in lieu thereof) shall be irrevocable and the Company or the
Borrowing Subsidiary, as applicable, shall be bound to effect a borrowing in
accordance therewith.
(c) If the Agent fails to make any Loan funds received from
a Lender available to the Company for any reason and does not return such Loan
funds to such Lender on the same Business Day such funds were received by the
Agent, the Agent shall pay to
-44-
<PAGE> 51
such Lender, upon demand, interest from the date such funds are received by the
Agent from such Lender, provided such funds were received prior to the
deadlines for receipt set forth in Section 2.11 until the date such
corresponding amount is either made available by the Agent to the Company
within the time limits of Section 2.11 or so returned to such Lender, at the
rate per annum equal to the then-current Published Federal Funds Effective Rate
and the Company shall have no responsibility to such Lender with respect to
such funds until they are so made available to the Company by the Agent.
(d) Nothing in this Section 2.20 shall relieve any Lender
from its obligation to fund its share of any Advance, prejudice any rights the
Company may have against any Lender as a result of such Lender's failure to
make the amount of its Loan available to the Company or obligate any Lender to
fund any other Lender's share of any Advance.
ARTICLE III
CHANGE IN CIRCUMSTANCES
3.1 Yield Protection.
If, after the date of this Agreement, the adoption of any law or
any governmental or quasi-governmental rule, regulation, policy, guideline or
directive (whether or not having the force of law), or any change in any
existing or future law, rule, regulation, policy, guideline or directive or the
interpretation or administration thereof, or the compliance of any Lender
therewith,
(i) subjects any Lender or any applicable Lending
Installation to any tax, duty, charge or withholding on or from payments
due from the Company or any Borrowing Subsidiary, or changes the basis
of taxation of payments to any Lender in respect of its Loans or other
amounts due it hereunder (excluding any tax imposed with respect to the
overall net income of any Lender or its Lending Installation, any
franchise taxes imposed on any such Lender or Lending Installation to
the extent such franchise taxes are in lieu of net income taxes), or
(ii) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar requirement
against assets of, deposits with or for the account of, or credit
extended by, any Lender or any applicable Lending Installation (other
than reserves and assessments taken into account in determining the
interest rate applicable to Eurodollar Advances or Discount Loans), or
-45-
<PAGE> 52
(iii) affects the amount of capital required or expected to
be maintained by any Lender or Lending Installation or any corporation
controlling any Lender or Lending Installation and such Lender
determines the amount of capital required is increased by or based upon
the existence of this Agreement or its obligation to make or maintain
Loans hereunder or of commitments of this type, or
(iv) imposes any other condition which requires any Lender
or any applicable Lending Installation to make any payment calculated by
reference to the amount of loans held or interest received by it in an
amount deemed material by such Lender,
and the result of any of the foregoing is to increase the cost to such Lender
or Lending Installation of making, renewing or maintaining its Commitment or
any Loan or to reduce any amount receivable in respect thereof or to reduce the
rate of return on the capital of such Lender or Lending Installation or any
Person controlling such Lender or Lending Installation as it relates to credit
facilities in the nature of that evidenced by this Agreement, then the Company
shall pay such Lender that portion of such increased expense incurred
(including, in the case of Section 3.1(iii), any reduction in the rate of
return on capital to an amount below that which it could have achieved but for
such law, rule, regulation, policy, guideline or directive and after taking
into account such Lender's policies as to capital adequacy) or reduction in an
amount received which such Lender determines is attributable to making, funding
and maintaining its Loans and its Commitment to the extent such expenses or
reductions arise from and after the date which is 90 days before receipt by the
Company of demand for payment by such Lender. Notwithstanding the foregoing,
if any of the foregoing circumstances otherwise giving rise to the yield
protection provisions of this Section are imposed solely against a single
Lender as a result of circumstances or conditions which apply solely to that
Lender and not generally to lenders domiciled in the jurisdiction of such
Lender's domicile, then the yield protection provisions of this Section shall
not apply with respect to such circumstances.
3.2 Availability of Rate Options.
If any Lender determines that maintenance of any of its
Eurodollar Loans or Discount Loans at a suitable Lending Installation would
violate any applicable law, rule, regulation or directive, whether or not
having the force of law, the Agent shall suspend the availability of the
affected Rate Option and require any Eurodollar Advances or Discount Loans
outstanding at the affected Rate Option to be repaid immediately upon demand;
or if the Required Lenders determine that deposits of a type or maturity
appropriate to match fund Eurodollar Advances or
-46-
<PAGE> 53
Discount Loans are not available, the Agent shall suspend the availability of
the affected Rate Option with respect to any such Loans or Advances made after
the date of any such determination. If the Required Lenders determine that the
Eurodollar Rate or the Discount Rate does not accurately reflect the cost of
making a Eurodollar Advance or Discount Loan at such Rate Option, then, if for
any reason whatsoever the provisions of Section 3.1 are inapplicable, the Agent
shall suspend the availability of the affected Rate Option with respect to any
Eurodollar Advance or Discount Loan made after the date of any such
determination.
3.3 Funding Indemnification.
If any payment of a Eurodollar Advance or Discount Loan occurs
on a date which is not the last day of the applicable Eurodollar Interest
Period or Discount Loan Period, whether because of acceleration, prepayment or
otherwise, or if a Eurodollar Advance, Overnight Transaction Advance, Federal
Funds Advance, Swingline Buydown Advance or Discount Loan is not made,
continued or established by conversion on the date specified by the Company or
a Borrowing Subsidiary for any reason other than default by the Lenders, the
Company will indemnify each Lender for any loss or cost incurred by it
resulting therefrom, including, without limitation, any loss or cost in
liquidating or employing deposits acquired to fund or maintain such Eurodollar
Advance or Discount Loan.
3.4 Lender Statements; Survival of Indemnity.
To the extent reasonably possible, each Lender shall designate
an alternate Lending Installation with respect to its Eurodollar Advances and
Discount Loans to reduce any liability of the Company to such Lender under
Section 3.1 or to avoid the unavailability of a Rate Option under Section 3.2,
so long as such designation is not to the economic detriment of such Lender and
does not impose any increased regulatory burdens on such Lender. Each Lender
shall deliver to the Agent and the Company a written statement of such Lender
as to the amount due, if any, under Section 3.1 or 3.3. Such written statement
shall set forth in reasonable detail the calculations upon which such Lender
determined such amount and shall be final, conclusive and binding on the
Company in the absence of manifest error. Determination of amounts payable
under such Sections in connection with a Eurodollar Advance or Discount Loan
shall be calculated as though each Lender funded its related Loan through the
purchase of a deposit of the type and maturity corresponding to the deposit
used as a reference in determining the Eurodollar Rate or Discount Rate
applicable to such Loan, whether in fact that is the case or not. The amount
specified in the written statement shall be payable within 15 days after
receipt by the Company of the written statement. The obligations of the
Company under Sections 3.1 and 3.3 shall survive payment of the Obligations and
-47-
<PAGE> 54
termination of this Agreement. In the event any Lender is affected by any of
the events described in Section 3.1 or 3.2 the Company shall have the right, if
no Default then exists, to repay in full all Credit Indebtedness owed to such
Lender provided that the Company has, with the approval of the Agent (not to be
unreasonably withheld), arranged to substitute a replacement lender for the
full amount of such Lender's Commitment.
3.5 Lender Tax Agreement.
Each Lender that is not incorporated under the laws of the
United States of America or a state thereof shall:
(i) deliver to the Company and the Agent (A) two duly
completed copies of the United States Internal Revenue Service Form 1001
or 4224, or successor applicable form, as the case may be, and (B) an
Internal Revenue Service Form W-8 or W-9, or successor applicable form,
as the case may be;
(ii) deliver to the Company and the Agent two further copies
of any such form or certification on or before the date that any such
form or certification expires or becomes obsolete and after the
occurrence of any event requiring a change in the most recent form
previously delivered by it to the Company; and
(iii) obtain such extension of time for filing and complete
such forms or certifications as may reasonably be requested by the
Company or the Agent;
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms or any
certifications required hereby inapplicable or which would prevent such Lender
from duly completing and delivering any such form or making such certification
with respect to it and such Lender so advises the Company and the Agent. Such
Lender shall certify (i) in the case of Form 1001 or 4224 delivered in
accordance with this Section 3.5, that it is entitled to receive payments under
this Agreement without deduction or withholding of any United States federal
income taxes and (ii) in the case of a Form W-8 or W-9, that it is entitled to
an exemption from United States backup withholding tax. Each Person that shall
become a Lender or a Participant pursuant to Article XI shall, upon the
effectiveness of the related transfer, be required to provide all of the forms
and statements required pursuant to this Section, provided that in the case of
a Participant such Participant shall also furnish all such required forms and
statements to the Lender from which the related participation shall have been
purchased as well as to the Company and the Agent.
-48-
<PAGE> 55
ARTICLE IV
COLLATERAL AND BORROWING BASE
4.1 Eligible Collateral - Pledged Mortgages.
(a) "Eligible Mortgage Loan" means a Pledged Mortgage
which:
(i) has been originated less than 360 days prior to inclusion
in the Aggregate Borrowing Base;
(ii) is a Conforming Mortgage Loan, a Jumbo Mortgage Loan or a
Nonconforming Mortgage Loan;
(iii) has been included in the Aggregate Borrowing Base for
180 days or less after the Pledge Date thereof;
(iv) is not financed under an agreement to repurchase or
otherwise pledged to secure any Debt other than the Credit Indebtedness
and the Ratable Medium-Term Notes pursuant to the Security Agreement;
(v) has been duly executed and delivered by the parties
thereto at a closing;
(vi) is valid and enforceable in accordance with its terms,
without defense or offset;
(vii) has not been modified or amended and has not had any
requirements thereof waived except as permitted by Federal Agency
requirements;
(viii) is subject to and complies with the delivery
requirements of an Approved Investor Commitment to purchase such Pledged
Mortgage;
(ix) has been correctly described in the Collateral
Transmittal submitted to the Collateral Agent in respect of such Pledged
Mortgage; and
(x) has been fully funded to the mortgagor or to an
escrow or closing agent by wire transfer, transmittal through the
"Automated Clearing House" or any similar private clearing house for
interbank transfers of funds, cashier's check or a cleared check or
draft;
and as to which the representations and warranties contained in Section 4.7
relating thereto are true and correct as of the Pledge Date of such Mortgage
Loan and as of each day thereafter as if made on each such date.
49
<PAGE> 56
(b) "Eligible Delivered Mortgage" means an Eligible
Mortgage Loan as to which:
(i) the Collateral Agent has received and continues to hold
the Required Mortgage Documents and, if requested by the Agent or the
Collateral Agent, the Additional Required Mortgage Documents for such
Pledged Mortgage, other than those documents and instruments which are
in the possession of a Person to whom delivery was made pursuant to a
Bailee Letter or a Company Trust Receipt;
(ii) not more than 45 days have passed after the day on which
the Mortgage Note for such Pledged Mortgage was delivered, pursuant to a
Bailee Letter, to an Approved Investor other than one created under a
government housing program which is not a Federal Agency for examination
and purchase without such Mortgage Note being returned to the Collateral
Agent; and not more than 75 days have passed after the day on which the
Mortgage Note for such Pledged Mortgage was delivered, pursuant to a
Bailee Letter, to an Approved Investor created under a government
housing program which is not a Federal Agency for examination and
purchase without such Mortgage Note being returned to the Collateral
Agent;
(iii) no Approved Investor has paid the purchase price or
delivered the Securities due to the Company on account of such Pledged
Mortgage;
(iv) not more than 15 days have passed after the date on which
any document relating to such Pledged Mortgage was sent, pursuant to a
Company Trust Receipt, to the Company or a Borrowing Subsidiary for
correction of clerical or other non-substantial documentation problems
in preparation of such document without such documentation being
returned to the Collateral Agent properly corrected;
(v) no installment of principal or interest on such Pledged
Mortgage is more than one payment past due; and
(vi) such Mortgage Loan constitutes a first lien on the
premises described therein.
(c) "Eligible AP Mortgage" means an AP Mortgage which is an
Eligible Mortgage Loan and as to which:
(i) the information described on Exhibit 7 to the Security
Agreement regarding such AP Mortgage was contained in a Collateral
Transmittal submitted to the Collateral Agent on the same date as the
applicable AP Notice;
(ii) the proceeds thereof have been funded (or, on the date of
the Advance supported by the applicable AP Notice,
-50-
<PAGE> 57
are being funded) by wire transfer or cashier's check, cleared check or
draft or other form of immediately available funds to the escrow or
closing agent for such AP Mortgage;
(iii) the Pledgor expects such AP Mortgage to close and become
a valid lien securing actual indebtedness by funding to the order of the
mortgagor thereunder;
(iv) not more than ten (10) Business Days have passed since
the delivery of the AP Notice therefor (and if more than five (5)
Business Days have passed since the delivery of such AP Notice, the
Borrowing Base Sublimit set forth in Section 4.6(x) has been satisfied);
(v) neither the Company nor the applicable Borrowing
Subsidiary has delivered to the Collateral Agent any documents which
purport to be Required Mortgage Documents for such AP Mortgage;
(vi) the proceeds thereof have not been returned to the
Company or a Borrowing Subsidiary from the escrow or closing agent for
such Pledged Mortgage;
(vii) neither the Company nor any Borrowing Subsidiary has
learned that such AP Mortgage will not be closed and funded to the order
of the mortgagor; and
(viii) upon recordation such Mortgage Loan will constitute a
first lien on the premises described therein.
4.2 Eligible Collateral - Repurchased Agency Loans and Receivables.
"Eligible Repurchased Agency Loans and Receivables" means
Repurchased Agency Loans and Receivables as to which:
(i) payments are more than 90 days past due when repurchased
by the Company;
(ii) no notice or other indication has been given by FHA or
VA challenging the obligation of FHA or VA to pay the full amount due on
any insurance or guaranty certificate in connection with such Mortgage
Loans (and in the good-faith estimation of the Company, no such
challenge is forthcoming);
(iii) the repurchased Mortgage Loan does not have any
payments more than 720 days past due (unless the borrower of such
repurchased Mortgage Loan filed a voluntary bankruptcy petition or had
an involuntary bankruptcy petition filed against it while the payments
on such Mortgage Loan were past due, in which case such 720 day period
shall be extended to 1080 days);
-51-
<PAGE> 58
(iv) not more than 120 days have passed since the foreclosure
sale or transfer in lieu of foreclosure with respect to the repurchased
Mortgage Loan;
(v) not more than 180 days have passed since the
reinstatement of the repurchased Mortgage Loan; and
(vi) the repurchased Mortgage Loan shall not be a Mortgage
Loan which in the good faith estimation of the Company is deemed to be a
"no bid" candidate under the current VA practice, provided that such
estimation by the Company may take into account the amount of any buy
down of the principal balance of such Mortgage Loan which (i) has
actually been made by the Company, or (ii) is anticipated to be made by
the Company, provided that the amount of any such anticipated buy down
shall be deducted from the Mortgage Collateral Value of such Repurchased
Agency Loan and Receivable for determining the portion of the Aggregate
Borrowing Base attributable to such Repurchased Agency Loans and
Receivables.
4.3 Eligible Collateral - Securities.
"Eligible Pledged Security" means a Pledged Security:
(i) which is covered by an Approved Investor Commitment;
(ii) as to which the Collateral Agent has received such
evidence as may be required under the Security Agreement to confirm the
existence of the security interest in favor of the Collateral Agent for
the benefit of the Lenders in such Pledged Security; and
(iii) which has been included in Collateral for 90 days or
less after the Pledge Date therefor.
4.4 Eligible Collateral - Pledged Servicing.
"Eligible Pledged Servicing" means Pledged Servicing as to
which:
(i) the applicable Servicing Agreement is between the Company
and a Federal Agency;
(ii) the Company has delivered to the Collateral Agent fully
executed copies of an Acknowledgment Agreement related to such Pledged
Servicing (unless the Pledged Servicing is with GNMA, in which case
receipt of an Acknowledgment Agreement related thereto shall be required
only in the event the Agent or the Required Lenders request that such an
Acknowledgment Agreement be obtained);
-52-
<PAGE> 59
(iii) the representations contained in Section 4.8 as to the
applicable Servicing Agreement are true and correct as of the date such
Servicing Agreement becomes Collateral hereunder and as of each day
thereafter as if made on that date;
(iv) the Mortgage Loans covered by the applicable Servicing
Agreement shall be Conforming Mortgage Loans, Jumbo Mortgage Loans or
Nonconforming Mortgage Loans;
(v) the applicable Servicing Agreement is not a Subservicing
Agreement; and
(vi) the applicable Servicing Agreement does not constitute
Recourse Servicing.
4.5 Eligible Collateral - Servicing Sale Receivables.
"Eligible Servicing Sale Receivables" means Pledged Servicing
Sale Receivables as to which:
(i) the Agent and Collateral Agent have received a complete
executed copy of the related purchase agreement and written confirmation
from the Servicing Purchaser as to the amount of such Servicing Sale
Receivable;
(ii) the Servicing Purchaser of the applicable sold Servicing
Agreements either (A) has a long term unsecured debt rating of at least
A- from S&P or A3 from Moody's, or (B) has been approved by the Required
Lenders;
(iii) the Agent has reasonably determined that the
counterparties to the sold Servicing Agreements have or will consent to
the sale of such Servicing Agreements to the Servicing Purchaser, if
such consent is required;
(iv) the Company has assigned its rights to such Servicing
Sale Receivables to the Collateral Agent for the benefit of the Secured
Parties pursuant to an assignment in form and content satisfactory to
the Required Lenders;
(v) the Servicing Purchaser of the applicable sold Servicing
Agreements has executed an agreement in form and content satisfactory to
the Required Lenders pursuant to which the Servicing Purchaser has
agreed to (A) pay such Servicing Sale Receivables directly to the
Collateral Agent for the benefit of the Secured Parties, and (B) provide
simultaneous written notice to the Agent and the Collateral Agent of any
claims made against or notices given to the Company which would
constitute an offset to or reduction in the amount of such Servicing
Sale Receivable; and
-53-
<PAGE> 60
(vi) the Servicing Sale Receivables have been included in
Eligible Collateral for 120 days or less;
provided, however, that (1) Eligible Servicing Sale Receivables shall not
include any "holdback" amounts or deferred installments of the purchase price
payable by such Servicing Purchaser which are not payable to the Company within
120 days after the initial payment to the Company for the sale of such
Servicing Agreements to such Servicing Purchaser, (2) Eligible Servicing Sale
Receivables shall not include any "holdback" amounts or deferred installments
of the purchase price payable by such Servicing Purchaser which are subject to
withholding or offset on account of the performance of the servicing being sold
or any failure, breach or other deficiency in the performance of the Company
after the date of such sale other than any such deferred payments which are
conditioned only on (x) the Company obtaining consents from the counterparty to
the sold Servicing Agreements approving the sale of such Servicing Agreements
to the Servicing Purchaser or (y) the Company's continuing to take customary
ordinary-course actions relating to origination and servicing of Mortgage Loans
(e.g. obtaining pool certifications, refraining from defaulting under Servicing
Agreements, etc.), and (3) any offset to or reduction in the amount of such
Servicing Sale Receivable claimed by the Servicing Purchaser (to the extent not
already deducted from Eligible Servicing Sale Receivables pursuant to the
preceding provisions) shall, at the election of the Agent, the Collateral Agent
or the Required Lenders, reduce the amount of such Servicing Sale Receivable
which qualifies as an Eligible Servicing Sale Receivable, with such reduction
to be effective immediately unless the Company in good faith contests the
amount or validity of such offset or reduction, and with such reduction to be
effective 30 days after the claim of offset or reduction with respect to any
amount which is contested in good faith by the Company.
4.6 Borrowing Base.
The term "Aggregate Borrowing Base" means, as of any date, the
sum of the amounts determined by applying the percentages set forth below to
the respective values of the categories of Collateral described in
subparagraphs (a) - (h) below (without duplication as any asset is converted
from one category to another):
(a) one hundred percent (100%) of the balance to the credit
of the Company in the Settlement Account;
(b) one hundred percent (100%) of the value of the cash and
Cash Equivalents held by the Collateral Agent (or a sub-agent of the
Collateral Agent) and in which the Collateral Agent has a perfected
first priority security interest as security for the Secured Debt, as
conclusively
-54-
<PAGE> 61
determined by the Collateral Agent and reported to the Agent daily based
on the value of such cash and Cash Equivalents as of the close of
trading on the preceding Business Day;
(c) ninety-eight percent (98%) of the Mortgage Collateral
Value of each Eligible Delivered Mortgage;
(d) ninety-eight percent (98%) of the Mortgage Collateral
Value of each Eligible AP Mortgage;
(e) ninety-eight percent (98%) of the MBS Value of each
Eligible Pledged Security;
(f) ninety percent (90%) of the value of Eligible
Repurchased Agency Loans and Receivables (as determined in accordance
with the definition of Repurchased Agency Loans and Receivables) as
determined pursuant to information provided by the Company to the
Collateral Agent on the first Business Day of each week based on the
value of such Eligible Repurchased Agency Loans and Receivables as of
the close of trading on the preceding Business Day;
(g) seventy-five percent (75%) of the amount of Eligible
Servicing Sale Receivables; and
(h) the lesser of:
(1) fifty percent (50%) of the sum of (A) for Eligible
Pledged Servicing not covered by the then most recent appraisal
of the Company's Pledged Servicing pursuant to clause (B)
immediately below, the lesser of acquisition price or the
appraised market value (which shall be as set forth in an
appraisal dated no more than 30 days prior to acquisition of
such Eligible Pledged Servicing by a qualified third-party
appraiser approved by the Agent, with such appraisal to be
obtained and paid for by the Company and delivered to the Agent)
of such Eligible Pledged Servicing (i.e. such Pledged Servicing
shall be valued at zero unless such an appraisal was obtained),
and (B) for all other Eligible Pledged Servicing, the appraised
market value (which shall be determined every three months (or
more frequently at the request of the Company, or if reasonably
deemed advisable by the Agent, the Agent) by a qualified
third-party appraiser approved by the Agent, with such
appraisals to be obtained and paid for by the Company and
delivered to the Agent) of such Eligible Pledged Servicing
(provided that if any Eligible Pledged Servicing has been sold
by the Company since the date of the most recent appraisal, then
the appraised value of the Company's Eligible Pledged Servicing
shall be deemed reduced by an amount obtained by multiplying (i)
the
-55-
<PAGE> 62
appraised market value of all Eligible Pledged Servicing prior to
such servicing sale by (ii) a fraction having a numerator equal
to the aggregate principal outstanding balance of the Mortgage
Loans serviced under the sold Servicing Agreements as of the date
of sale and a denominator equal to the aggregate principal
outstanding balance of the Mortgage Loans serviced pursuant to
all of the Servicing Agreements (including the sold Servicing
Agreements) covered by the most recent servicing appraisal as of
the date of sale); or
(2) the sum of (A) three quarters of one percent
(0.75%) of the aggregate principal outstanding balance of the
Mortgage Loans serviced by the Company pursuant to Servicing
Agreements with FNMA or FHLMC constituting Eligible Pledged
Servicing and (B) one percent (1.00%) of the aggregate principal
outstanding balance of the Mortgage Loans serviced by the
Company pursuant to Servicing Agreements with GNMA constituting
Eligible Pledged Servicing.
The maximum amount that can be credited toward the Aggregate
Borrowing Base from certain categories of assets shall be limited as follows
(collectively, the "Borrowing Base Sublimits") so that the portion of the
Aggregate Borrowing Base:
(i) attributable to Jumbo Mortgage Loans shall not exceed
twenty-five percent (25%) of the Aggregate Commitment;
(ii) attributable to Nonconforming Mortgage Loans shall
not exceed five percent (5%) of the Aggregate Commitment;
(iii) attributable to Jumbo Mortgage Loans with Mortgage
Collateral Values on the Pledge Date therefor in excess of $600,000
shall not exceed two percent (2%) of the Aggregate Commitment;
(iv) attributable to Repurchased Agency Loans and
Receivables other than Reinstated Repurchased Agency Loans and
Receivables shall not exceed at any time the lesser of (A) $200,000,000,
and (B) twenty-seven percent (27%) of the Aggregate Commitment;
(v) attributable to Reinstated Repurchased Agency Loans
and Receivables shall not exceed at any time three percent (3%) of the
Aggregate Commitment;
(vi) attributable to REO and accounts receivable
(including proceeds of FHA insurance or VA guaranties) acquired in
connection with a foreclosure sale or a transfer in lieu of foreclosure
of Repurchased Agency Loans and
-56-
<PAGE> 63
Receivables shall not exceed five percent (5%) of the Aggregate
Commitment;
(vii) for the first five and last five Business Days in any
calendar month, attributable to AP Mortgages shall not exceed
thirty-five percent (35%) of the Aggregate Commitment;
(viii) for any day other than the first five and last five
Business Days of any calendar month, attributable to AP Mortgages shall
not exceed twenty-five percent (25%) of the Aggregate Commitment;
(ix) attributable to Eligible Delivered Mortgages which
were sent, pursuant to a Company Trust Receipt, to the Company or a
Borrowing Subsidiary for correction of clerical or other non-substantial
documentation problems in preparation of such document without such
documentation being returned to the Collateral Agent properly corrected
shall not exceed two percent (2%) of the Aggregate Commitment;
(x) attributable to AP Mortgages as to which the
Collateral Agent has not received the Required Mortgage Documents within
five Business Days of the Pledge Date therefor shall not exceed one
percent (1%) of the Aggregate Commitment;
(xi) attributable to Eligible Mortgage Loans which have
been included in the Aggregate Borrowing Base for more than 90 days
shall not exceed five percent (5%) of the Aggregate Commitment;
(xii) attributable to Eligible Mortgage Loans which were
originated more than 180 days prior to the Pledge Date therefor shall
not exceed five percent (5%) of the Aggregate Commitment;
(xiii) attributable to Eligible Pledged Servicing shall not
exceed the lesser of (1) $250,000,000 and (2) thirty-three and one-third
percent (33 - 1/3%) of the Aggregate Commitment; and
(xiv) attributable, as of any date, to any Eligible
Servicing Sale Receivable which is payable only upon the obtaining of a
consent to the transfer of the subject Servicing Agreements shall not
exceed the amount credited toward the Aggregate Borrowing Base on
account of such Servicing Agreements immediately prior to their transfer
less any portion of the purchase price for such Servicing Agreements
received by the Company prior to such date.
-57-
<PAGE> 64
4.7 Special Representations as to Pledged Warehouse Collateral.
By delivering or causing the delivery of any Mortgage Loan,
Security or AP Notice to the Collateral Agent in pledge under the Security
Agreement the Company or the applicable Borrowing Subsidiary, as applicable
(each such entity, with respect to any Pledged Item delivered or caused to be
delivered by such entity, is referred to herein as the "Pledgor"), shall be
deemed to have represented and warranted with respect to such Pledged Item,
that:
(1) Such Pledged Item constitutes Eligible Collateral;
(2) The Pledgor is the legal and equitable owner and holder
of such Pledged Item and has full power and authority to pledge such
Pledged Item. Such Pledged Item constitutes Eligible Collateral, has
been duly and validly pledged to the Collateral Agent, is subject to no
contractual restriction on the creation of a Lien thereon (other than
the provisions of the indentures relating to the Ratable Medium-Term
Notes which require such notes to be ratably secured), and is subject to
no Lien other than the lien of the Security Agreement in favor of the
Secured Parties. Each commitment of a Person to purchase Pledged Items
from the Pledgor (including Approved Investor Commitments) has been duly
and validly issued to the Pledgor, has been duly and validly pledged to
the Collateral Agent and is subject to no Lien other than the lien of
the Security Agreement in favor of the Secured Parties.
(3) Each Pledged Mortgage has been or will be promptly duly
recorded where necessary and complies with all applicable state or local
recording, registration and filing laws and regulations.
(4) There are no defenses, counterclaims or offsets of any
nature whatsoever with respect to such Pledged Mortgage or the
indebtedness evidenced and secured thereby or with respect to any
Required Mortgage Document and, other than the related Required Mortgage
Documents and Additional Required Mortgage Documents, there are no
instruments or documents evidencing, securing or guaranteeing payment of
the indebtedness constituting such Pledged Mortgage.
(5) Each requirement of any federal, state or local law
including, without limitation, usury, truth-in-lending, real estate
settlement procedures, consumer credit protection, equal credit
opportunity or disclosure laws (including environmental disclosure laws
imposing obligations on mortgagees) applicable to such Pledged Item has
been complied with in all material respects.
-58-
<PAGE> 65
(6) The Company is the servicer for each such Pledged
Mortgage (unless the Agent has been advised to the contrary in writing
and the Agent approved such other arrangement).
(7) The representation set forth in Section 6.15 is
reaffirmed as of the Pledge Date.
(8) Each Assignment (i) has been duly authorized by all
necessary corporate action by the Pledgor, duly executed and delivered
by the Pledgor and is the legal, valid and binding obligation of the
Pledgor enforceable in accordance with its terms and (ii) complies with
all applicable laws including all applicable recording, filing and
registration laws and regulations and is adequate and legally sufficient
for the purpose intended to be accomplished thereby, including, without
limitation, the assignment of all of the rights, powers and benefits of
the Pledgor as mortgagee.
(9) So long as the Collateral Agent complies with the
procedures set forth in the Security Agreement relating to possession of
Collateral (and assuming recordation of Assignments in states in which
such recordation is necessary for the perfection of the Collateral
Agent's security interest in the applicable Mortgage Loans) and, in the
case of book-entry Securities, notations of ownership related thereto,
the Collateral Agent, for the benefit of the Secured Parties, will have
a valid and perfected first priority security interest in such Pledged
Item and all proceeds, products and profits derived therefrom,
including, without limitation, all moneys, goods, insurance proceeds and
other tangible or intangible property received upon liquidation thereof.
(10) The Pledgor has complied with all laws, rules and
regulations in respect of such Pledged Mortgage if it is insured by FHA
or guaranteed by VA and the related insurance or guarantee is in full
force and effect. All such Mortgage Loans comply in all respects with
all applicable requirements for purchase under the FNMA standard form of
selling contract for FHA insured and VA guaranteed loans and any
supplement thereto then in effect.
(11) To the extent that any applicable requirements of any law
or any governmental rule, regulation, policy, guideline or directive
(whether or not having the force of law), or any interpretation thereof,
including, without limitation, the provisions of Title XI of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989, as
amended, reformed or otherwise modified from time to time, and any rules
promulgated to implement such provisions (collectively, "Appraisal
Regulations") require Pledgor to have received (or require that the
Lenders require Pledgor to receive) an appraisal on the property
underlying such Pledged Mortgage, such an appraisal has been be obtained
and such
-59-
<PAGE> 66
appraisal meets the requirements of all such Appraisal Regulations.
(12) All fire and casualty policies covering the premises
encumbered by each Pledged Mortgage (i) name the Pledgor as the insured
under a standard mortgagee clause not less favorable in coverage to the
mortgagee than is customarily used in the state where such premises is
located, (ii) are in full force and effect, and (iii) afford insurance
against fire and such other risks as are usually insured against in the
broad form of extended coverage insurance from time to time available,
as well as insurance against flood hazards as required by FHA or VA.
(13) To the best of the Pledgor's knowledge without
investigation, no Person has transported, released, emitted, discharged,
leached, dumped or disposed of any Hazardous Substance onto or into any
portion of the premises encumbered by a Pledged Mortgage except in
material compliance with all applicable federal, state, foreign and
local laws, rules, regulations and orders.
(14) If a Borrowing Subsidiary is the Pledgor, the Pledged Item
was funded by the Company and is shown on the Company's (rather than the
Borrowing Subsidiary's) balance sheet pursuant to the Funding Agreement.
By pledging any Repurchased Agency Loans and Receivables to the
Collateral Agent under the Security Agreement the Company shall be deemed to
have represented and warranted that such Repurchased Agency Loans and
Receivables were purchased by the Company in compliance with all regulations of
the Federal Agency which issued or guaranteed the Security relating to the pool
from which the Repurchased Agency Loans and Receivables were repurchased.
If any representation or warranty contained in this Section is
inaccurate or shall cease to be true with respect to any Pledged Item to which
such representation and warranty applies, such Pledged Item shall not
constitute an Eligible Mortgage Loan or an Eligible Pledged Security, but the
breach of such representation and warranty shall not constitute an Event of
Default.
4.8 Special Representations as to Pledged Servicing.
By granting a security interest to the Collateral Agent in the
Collateral under the Security Agreement, the Company shall be deemed to have
represented and warranted with respect to each Servicing Agreement included in
the Pledged Servicing, that:
-60-
<PAGE> 67
(1) The Company is the legal and equitable owner
and holder of such Servicing Agreement and the rights thereunder and has
full power and authority to grant a security interest in such
Collateral. Such Servicing Agreement has been duly and validly made
subject to the lien of the Security Agreement and is subject to no Lien
other than the liens created pursuant to this Agreement and any lien of
the applicable Investor as described in the Acknowledgement Agreement
related thereto.
(2) Such Servicing Agreement has been duly executed
and delivered by the parties thereto and is valid and enforceable in
accordance with its terms, without defense or offset.
(3) No default, nor any event which with notice or
lapse of time or both would become a default, has occurred and is
continuing under such Servicing Agreement and no action has been taken
to terminate such Servicing Agreement.
(4) The Company has complied, and will continue to
comply, with all laws, rules and regulations, including but not limited
to all applicable Federal Agency requirements, in respect of such
Servicing Agreement.
(5) Such Servicing Agreement is subject to, and
will continue to be subject to, no liens other than the liens created
pursuant to the Credit Documents (including the lien in favor of the
Secured Parties created by the Security Agreement) or described in the
Acknowledgement Agreement related thereto.
(6) Such Servicing Agreement does not, and will
continue to not, contain any restrictions on the pledging of such
Servicing Agreement or the rights thereunder to any other Person (or if
the Servicing Agreement contains any restrictions requiring the consent
of any Person, such consent has been obtained), and such Servicing
Agreement will continue to be in substantially the same form as the
Company's now-existing Servicing Agreements, with such material changes
as are approved in advance by the Required Lenders.
If any representation or warranty contained in this Section is inaccurate or
shall cease to be true with respect to any Pledged Servicing, such Pledged
Servicing shall not constitute Eligible Pledged Servicing, but the breach of
such representation and warranty shall not constitute an Event of Default.
-61-
<PAGE> 68
4.9 Special Covenants.
(a) The Pledgor warrants and will defend the right, title
and interest of the Agent and the Collateral Agent in and to all Pledged
Items, Pledged Servicing and all other items of Collateral against the
claims and demands of all other Persons.
(b) The Pledgor shall not materially amend or modify, or
waive any of the material terms and conditions of, or settle or
compromise any material claim in respect of, any Collateral or any
rights related to any of the foregoing.
(c) The Pledgor shall not sell, assign, transfer or
otherwise dispose of, or grant any option with respect to, or pledge or
otherwise encumber (except pursuant to this Agreement or the Security
Agreement), any of the Collateral or any interest therein, except as
provided in Section 4.10 with respect to releases of Collateral.
(d) The Pledgor shall service all Pledged Mortgages which
are the subject of Approved Investor Commitments in accordance with the
standard requirements of the issuers of such Approved Investor
Commitments and all applicable FHA and VA requirements. The Pledgor
shall service all Mortgage Loans which are the subject of Pledged
Securities in accordance with the standard requirements of the Federal
Agency issuing or guaranteeing such Securities and all applicable FHA
and VA requirements. The Company shall service all Mortgage Loans which
are the subject of any Servicing Agreements in accordance with the
standard requirements of the other party to such Servicing Agreements
and all applicable FHA and VA requirements.
(e) The Company shall promptly notify the Agent and the
Collateral Agent of any material default under any Servicing Agreement,
and in its normal daily reporting to the Collateral Agent, the Company
will include information identifying to the best knowledge of the
Company defaults under any Pledged Mortgages.
(f) The Company shall, at the request of the Agent or the
Required Lenders, promptly deliver to the Collateral Agent fully
executed copies of Acknowledgement Agreements with GNMA covering all
Pledged Servicing with GNMA.
(g) The Pledgor shall hold all escrow funds collected in
respect of Pledged Mortgages and Mortgage Loans which are the subject of
Pledged Securities in trust, in accordance with all Federal Agency
requirements and standards relating thereto, and apply the same for the
purposes for which such funds were collected.
-62-
<PAGE> 69
(h) The Pledgor shall observe and perform all of its
obligations in connection with each Approved Investor Commitment related
to any Pledged Item. Within forty-eight (48) hours after a request
therefor by the Collateral Agent or Agent, a copy of each Approved
Investor Commitment certified by the Pledgor, or if requested by the
Collateral Agent or Agent at any time after an Event of Default has
occurred, the originals of such Approved Investor Commitments shall be
delivered to the Collateral Agent or Agent.
(i) The Company or the applicable Borrowing Subsidiary, as
applicable, shall promptly notify the Agent and the Collateral Agent if
and when the Company or the applicable Borrowing Subsidiary receives any
prepayment arising from or relating to any Pledged Mortgage and hold the
same in trust, as security for the Secured Parties, until such Mortgage
Loan is removed from the Aggregate Borrowing Base in accordance with
this Agreement or, if an Event of Default has occurred and is continuing
under this Agreement, then immediately remit to the Collateral Agent
such prepayments (and all interest and earnings thereon or with respect
thereto).
(j) The Pledgor shall not withdraw or seek to withdraw or
substitute or seek to substitute any Pledged Item or Pledged Servicing
except as provided herein and in the Security Agreement.
(k) The Pledgor shall cooperate with the Agent, the Lenders
and the Collateral Agent and any of their respective representatives in
any review or inspection of the Pledged Mortgages, the property subject
to any Pledged Mortgage or the Servicing Agreements constituting Pledged
Servicing, and make available to such person any books and records
relating to such Collateral as well as the appropriate employees of the
Pledgor for the purpose of discussing the same, all at such time during
business hours as may be reasonably requested by the Agent, any Lender
or the Collateral Agent.
(l) The Pledgor shall not cease to have the approval of any
Federal Agency or any private mortgage insurer (unless, in the case of a
private mortgage insurer, such failure to maintain such approval shall
not cause any Eligible Collateral which is required for the Company to
be in compliance with Section 8.12 to cease to qualify as Eligible
Collateral) which it has on the date hereof or become ineligible as a
FHA-Approved Mortgagee, FHLMC-Approved Lender, FNMA-Approved Lender or
VA-Approved Lender.
(m) The Pledgor shall not waive or otherwise modify any
material term of, or fail to perform its material obligations under, any
Required Mortgage Document or Pledged Mortgage or release any security
or obligor, or, through any activity or
-63-
<PAGE> 70
inactivity, cause any Pledged Mortgage which shall have been eligible
for FHA insurance to become ineligible for FHA insurance or for purchase
in accordance with an Approved Investor Commitment related to such
Pledge Mortgage.
(n) The Pledgor shall do, execute, acknowledge and deliver,
or cause to be done, executed, acknowledged and delivered, all such
other acts, instruments and transfers (including, without limitation,
Assignments) as the Agent or the Collateral Agent may reasonably request
from time to time in order to create and maintain a perfected first
priority security interest in the Collateral in favor of the Secured
Parties and to create, maintain and preserve the security and benefits
intended to be afforded by this Agreement and the Security Agreement,
subject to no prior or equal security interest, lien, charge or
encumbrance, or agreement purporting to grant to any Person a security
interest in the Collateral (provided, however, that unless an Event of
Default is continuing or the Required Lenders have requested otherwise,
consents to assignments of options, futures contracts or other interest
rate protection products in favor of the Lenders from the counterparties
thereto shall not be required to be obtained).
(o) With respect to Repurchased Agency Loans and
Receivables, upon the request of the Collateral Agent or Agent the
Company shall have executed and provided any and all documentation
required by the Collateral Agent or Agent (including, but not limited
to, all Required Mortgage Documents, the insurance or guaranty
certificate applicable to such Mortgage Loan, and evidence satisfactory
to the Collateral Agent and Agent of the amounts advanced by the Company
in connection with such Mortgage Loan) to perfect the Lenders' security
interest in such Repurchased Agency Loans and Receivables.
(p) Upon the request of the Required Lenders, the Company
and each Borrowing Subsidiary agree that the Company and each Borrowing
Subsidiary shall require the closing agents for AP Mortgages to enter
into escrow or other agreements regarding the monies used to fund such
AP Mortgages.
(q) If the Collateral Agent releases any Pledged Servicing
in connection with a sale of Servicing Agreements to a Servicing
Purchaser and for any reason such sale does not close or the Company is
obligated to repurchase any such Servicing Agreements (whether because
the requisite consents to such sale are not obtained or otherwise), then
the Company shall execute such UCC financing statements and other
documents as the Agent or Collateral Agent may request in
-64-
<PAGE> 71
order to re-perfect the Collateral Agent's security interest in such
Servicing Agreements.
4.10 Release of Collateral.
In addition to the releases of Collateral provided for in
Sections 7(a)-(e) of the Security Agreement, upon the request of the Company
delivered from time to time to the Agent and the Collateral Agent, the Agent
shall authorize the Collateral Agent to release Collateral specified in such
notice from the lien of this Agreement, if, but only if, (i) at the time of
such release no Event of Default exists and no notice of a Default has been
issued that has not been cured, (ii) any payment under Section 2.14(a) which
may be required (based on information relating to the Aggregate Borrowing Base
supplied to the Agent by the Collateral Agent) as a result of such release has
been made (or contemporaneously with such release shall be made) so that the
release of such Collateral will not create a violation of any Lending Sublimit
or Borrowing Base Sublimit, and (iii) if the Collateral to be released is
Pledged Servicing, such release is made in connection with the sale of such
Pledged Servicing by the Company. Notwithstanding the foregoing, following an
Event of Default pledged Cash Equivalents which are the subject of reverse
repurchase obligations can be released in connection with the terms of the
applicable reverse repurchase agreement, and Pledged Items can be released in
connection with the sale of such Pledged Items pursuant to an Approved Investor
Commitment existing at the time of occurrence of the Event of Default if, in
either case, the proceeds of such sale are deposited into the Settlement
Account.
4.11 Settlement Account.
There has been established with the Agent, for the benefit of
the Secured Parties, a "cash collateral" account of the Company #19-19210
("Settlement Account") into which shall be deposited all cash proceeds from the
sale of any Pledged Item and any payments made by a Servicing Purchaser in
connection with Pledged Servicing Sale Receivables. Only the Agent shall have
access to the Settlement Account. Prior to the occurrence of a Default, to the
extent that, as determined by the Agent, the amounts in the Settlement Account
are not needed to keep the Aggregate Borrowing Base equal to or greater than
the Credit Requirement, the Company may request that the Agent release funds
from the Settlement Account, which funds shall be applied by the Agent as
directed by the Company. Upon the occurrence of an Event of Default (and
during the continuance thereof) all amounts then on deposit in the Settlement
Account, and any deposits made in the Settlement Account during the continuance
of such Event of Default, shall be withdrawn by the Agent from the Settlement
-65-
<PAGE> 72
Account and shall be applied to the Credit Indebtedness in accordance with the
provisions of Paragraph 18 of the Security Agreement and Section 10.4 of this
Agreement.
4.12 Termination.
If all Commitments shall have expired or been terminated
pursuant to the express terms hereof and no Credit Indebtedness shall be
outstanding, the Agent shall promptly deliver or cause to be delivered all cash
in the Settlement Account and all other Collateral to the Company. The receipt
by the Company of any cash in the Settlement Account and of all Pledged Items
and Pledged Servicing returned or delivered to the Company pursuant to any
provision of this Agreement shall be a complete and full acquittance for the
Pledged Items and Pledged Servicing so delivered, and the Agent, Collateral
Agent and the Lenders shall thereafter be discharged from any liability or
responsibility therefor.
4.13 Abatement of Security Interest.
(a) Positive Security Event. If a Positive Security Event
occurs prior to the Termination Date and no Event of Default has occurred and
is continuing, the security interest created under the Security Agreement and
this Agreement in the Collateral shall be abated at the request of the Company
and shall not be effective so long as no Event of Default exists and each of
the following conditions exist: (i) the Company shall have and maintain a
ratio of (1) Funded Debt less Subordinated Debt to (2) Adjusted Consolidated
Tangible Net Worth plus Subordinated Debt, calculated monthly on a three-month
rolling average basis, of not more than the applicable Unsecured Leverage
Ratio; (ii) the total Debt of the Company, excluding Subordinated Debt, shall
not exceed the Debt Threshold; and (iii) neither the Company nor either
Borrowing Subsidiary shall have, or permit to occur, any Lien upon their assets
other than as permitted under Section 8.11 (other than Section 8.11(o)). The
conditions under clauses (i) - (iii) of the preceding sentence are referred to
herein collectively as the "Positive Security Conditions". The Collateral
Agent shall, at the request of the Company and after the Agent has confirmed to
the Collateral Agent that a Positive Security Event has occurred and all
Positive Security Conditions are satisfied, execute and deliver such UCC-3
financing statements as may be required to evidence the abatement of any
security interest that shall previously have been perfected by means of the
filing of financing statements. As a condition to such abatement, the Company
and each Borrowing Subsidiary shall execute such UCC-1 financing statements and
other documentation as the Collateral Agent may request to permit the security
interest in the Collateral to be reinstated and perfected by the Collateral
Agent without further action by the Company or any Borrowing Subsidiary if a
Negative Security Event should occur
-66-
<PAGE> 73
thereafter. Although the Company and Borrowing Subsidiaries shall continue to
deliver Mortgage Loan files and other information and documents to the
Collateral Agent (in a custodial capacity) as set forth in the Security
Agreement even while the security interest is abated, so long as the security
interest is abated the Company shall perform all of the obligations of the
Collateral Agent as set forth in the Security Agreement with respect to
determining the Aggregate Borrowing Base and the Warehouse Borrowing Base. If
any of the Positive Security Conditions shall cease to exist at any time after
a Positive Security Event, such occurrence shall constitute a Negative Security
Event.
(b) Negative Security Event. If, following a Positive Security
Event, a Negative Security Event occurs, the Facility shall again be secured in
accordance with the terms herein unless and until the Required Lenders agree to
the contrary. If the Facility again becomes secured pursuant to the preceding
sentence, the Company (with respect to Collateral owned by the Company) and
each Borrowing Subsidiary (with respect to Collateral owned by such Borrowing
Subsidiary) shall be deemed to have automatically (i) re-pledged and re-granted
to the Collateral Agent for the benefit of the Secured Parties a first priority
security interest in the Collateral to secure payment of the Secured Debt, (ii)
consented to the Collateral Agent's filing of the UCC-1 financing statements
and dating and otherwise completing, filing and/or recording, if necessary, any
other documentation previously provided by the Company or such Borrowing
Subsidiary pursuant to the provisions of Section 4.13(a) above, and (iii)
reaffirmed its appointment of the Collateral Agent to act as its bailee
pursuant to the provisions of Section 9-305 of the Uniform Commercial Code of
any applicable state, and the Collateral Agent (upon receipt of notice from the
Credit Agent that a Negative Security Event has occurred) shall be deemed to
have been informed of and accepted such appointment. Notwithstanding the
foregoing, the Company may, in accordance with the terms of the succeeding
sentence, request that the Required Lenders consent to the Facility again
becoming unsecured despite the occurrence of a Negative Security Event. If the
Company so desires that the Facility again become unsecured following a
Negative Security Event (even though no Positive Security Event has occurred
since the occurrence of the Negative Security Event), it shall notify each
Lender in writing of such desire within thirty days after the occurrence of the
Negative Security Event (which notice shall identify the facts giving rise to
the Negative Security Event), and the Facility shall again become unsecured (A)
if and only if the Required Lenders so consent within thirty days after such
notification from the Company (a "Negative Event Waiver") and (B) only so long
as no further Negative Security Event (i.e. no Negative Security Event other
than the event referred to in the Company's notice) has occurred and is
continuing. If the Company's long term unsecured
-67-
<PAGE> 74
debt ratings decline further below "A-" as rated by S&P or "A3" as rated by
Moody's, or if any other Negative Security Event occurs after the Company has
obtained a Negative Event Waiver, the Facility shall again become secured in
accordance with this Section unless the Company obtains another Negative Event
Waiver in accordance with the terms of the preceding sentence. Finally, if a
Positive Security Event occurs subsequent to the occurrence of a Negative
Security Event, the Facility shall become unsecured at the request of the
Company, subject to and in accordance with the terms and conditions set forth
in Section 4.13(a) above.
(c) Lending Restrictions. If and during such time as the
Credit Indebtedness hereunder may be unsecured in accordance with Section
4.13(a), all Advances requested by the Company or any Borrowing Subsidiary
shall continue to meet the Lending Sublimits and shall be subject to the
conditions precedent set forth in Article V (other than conditions precedent
requiring the Collateral Agent to have a perfected security interest in the
Collateral).
4.14 Transition from Original Facility.
The Pledge Date and all other relevant delivery dates and time
periods with respect to the determination of Eligible Collateral shall be
calculated to include any delivery dates or holding periods prior to the date
hereof during which Collateral was being held by the Collateral Agent (or was
the subject of an AP Notice), had been delivered to an Approved Investor or had
been redelivered to the Company under the Original Facility.
ARTICLE V
CONDITIONS PRECEDENT
Each Advance may be made only if the following conditions
precedent are met:
5.1 Initial Advance (Company and Borrowing Subsidiaries).
Prior to the initial Advance hereunder, the Company and each
Borrowing Subsidiary shall have delivered, or caused to be delivered, to the
Agent:
(a) Copies of this Agreement duly executed by the Company
and each Borrowing Subsidiary for each Lender and the Agent.
(b) A Security Agreement duly executed by the Company and
each Borrowing Subsidiary in the form attached hereto as Exhibit D.
-68-
<PAGE> 75
(c) Notes payable to the order of each Lender duly executed
by the Company and each Borrowing Subsidiary in the form attached hereto
as Exhibits E-1 and E-2, respectively plus, in the case of a Bid Lender,
in the form approved by such Lender.
(d) Certificates of the Secretaries of the Company and each
Borrowing Subsidiary dated such date, (i) accompanied by and certifying
true and correct copies of the Articles of Incorporation and By-laws of
the Company and each Borrowing Subsidiary and resolutions of their
Boards of Directors authorizing the Company and the Borrowing
Subsidiaries to execute, deliver and perform this Agreement, the
Security Agreement and all other documents executed by the Company or
any Borrowing Subsidiary in connection herewith and (ii) confirming the
incumbency and signatures of those officers of the Company and each
Borrowing Subsidiary authorized to execute this Agreement, the Security
Agreement and the Notes and otherwise act on behalf of the Company or
any Borrowing Subsidiary hereunder or under the Security Agreement.
(e) The opinion of counsel to the Company and the Borrowing
Subsidiaries, in substantially the same form and substance as the
opinion letter attached hereto as Exhibit K attached hereto and covering
such other matters as the Agent may reasonable request, together with
appropriate good standing certificates for the Company and each
Borrowing Subsidiary.
(f) Executed UCC-1 and UCC-3 Financing Statements as the
Agent may reasonably request.
(g) A letter from the Company to each lender under the
Original Facility which is not a Lender hereunder providing for the
terms of payment of the loans outstanding under the Original Facility
payable to such lenders.
(h) If there are any Advances outstanding under the
Original Facility on the date hereof, an agreement in substantially the
form of Exhibit N hereto between the Company and the Agent on behalf of
the lenders under the Original Facility and the Lenders under this
Agreement as to the repayment or conversion of loans outstanding to the
Company under the Original Facility, the treatment of any interest and
fees accrued thereon, and the cancellation of all commitments under the
Original Facility.
(i) Evidence that the Company and each Borrowing Subsidiary
have paid all fees required to be paid hereunder and under the Security
Agreement on or before the date of the first Advance.
-69-
<PAGE> 76
(j) Such other documents as the Agent may reasonably
request.
Within thirty (30) days after the date hereof, the Company shall also
deliver to the Agent copies of such amendments to existing Acknowledgement
Agreements as the Agent may request to account for or recognize the amendment
and restatement of the Original Facility.
5.2 Initial Advance (Lenders).
On or before the date of the initial Advance hereunder, the
Lenders shall have delivered, or caused to be delivered, to the Agent and the
Agent shall in turn, have delivered, or caused to be delivered, to the Company
and each Borrowing Subsidiary one or more counterparts of this Agreement
executed by the Lenders.
5.3 All Advances.
On the date of each Advance, the Company and each Borrowing
Subsidiary shall be in compliance with all the terms and provisions set forth
herein and in the Security Agreement on their part to be observed or performed;
the representations and warranties of the Company and the Borrowing
Subsidiaries set forth in Articles IV and VI shall be true and correct in all
material respects on such date as if made on and as of such date (provided,
however that the representation and warranty contained in Section 6.6(c) shall
not apply to (i) conversions or continuations of Advances pursuant to Section
2.12, or (ii) Advances requested by the Company solely for the purpose of
repaying maturing commercial paper); and no Default shall have occurred and be
continuing on such date. On each Advance Date the Company and each Borrowing
Subsidiary shall be deemed to have represented and warranted to the Lenders
that no violation of the requirements set forth in the preceding sentence
exists on such date after giving effect to the requested Advance. Prior to
making an Advance (including any Bid Loan) available to the Company or any
Borrowing Subsidiary under Section 2.11 on any day, the Agent shall have (i)
received notice from the Collateral Agent of the amount of the Aggregate
Borrowing Base for such day, (ii) received notice from the issuing and paying
agent for the Outstanding CPNs as described in Section 7.7(p) confirming the
aggregate face amount of Outstanding CPNs for such day, and (iii) confirmed,
based solely upon the information contained in such notices, the amount of
Advances then-outstanding, and the Company's and the Borrowing Subsidiaries'
certifications contained in the preceding sentence as to all other facts, that
the Aggregate Borrowing Base will be greater than or equal to the Credit
Requirement on such date after giving effect to such Advance.
-70-
<PAGE> 77
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
The Company and each Borrowing Subsidiary represents and
warrants to the Lenders that:
6.1 Organization, Corporate Powers, Etc.
The Company and each Borrowing Subsidiary is a corporation duly
incorporated, validly existing, in good standing and authorized to exercise its
corporate powers, rights and privileges under the laws of the jurisdiction in
which it is incorporated, is qualified to do business and is in good standing
in all jurisdictions where failure to be so qualified and in good standing
would have a material adverse effect upon its business, operations or financial
condition, and has all requisite corporate power and authority, to conduct its
business, to own its properties and to execute and deliver, and to perform all
of its obligations under, this Agreement, the Security Agreement and the Notes;
and each Borrowing Subsidiary is a wholly-owned Subsidiary of the Company.
6.2 Corporate Authority, Etc.
The execution, delivery and performance by the Company and each
Borrowing Subsidiary of this Agreement, the Security Agreement and the Notes
have been duly authorized by all necessary corporate action and do not and will
not (i) violate any existing provision of any law, rule, regulation (including,
without limitation, Regulation U or X of the Board of Governors of the Federal
Reserve System or the rules and regulations of the SEC or any regulatory
commission of any jurisdiction), order, writ, judgment, injunction, decree,
determination or award currently in effect having applicability to the Company
or any of its Affiliates or of the charter or by-laws of the Company or of any
of its Affiliates, (ii) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Company or any of its Affiliates is a party or by which
the Company or any of its Affiliates or any of their respective properties may
be bound or affected, or (iii) result in, or require, the creation or
imposition of any mortgage, deed of trust, assignment, pledge, lien, security
interest or other charge or encumbrance of any nature upon or with respect to
any of the respective properties of the Company or any of its Affiliates (other
than that arising hereunder or under the Security Agreement or the Ratable
Medium-Term Notes with respect to the Collateral); and neither the Company nor
any of its Affiliates is in material default under any such law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
or any such indenture, agreement, lease or instrument.
-71-
<PAGE> 78
6.3 Compliance with Laws.
The Company and each of its Affiliates are in compliance with
the requirements of all applicable laws, rules, regulations and orders of any
governmental authority, non-compliance with which would, singly or in the
aggregate, materially and adversely affect their respective business or credits
including but not limited to financial condition and operations.
6.4 Government Approvals.
No authorization, consent, approval, license, exemption of or
filing or registration with any existing court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, is
or will be necessary for the valid execution, delivery and performance by the
Company and each Borrowing Subsidiary of, or the enforceability of, this
Agreement, the Security Agreement and the Notes.
6.5 Valid and Binding Obligations.
This Agreement, the Security Agreement and the Notes constitute
legal, valid and binding obligations of the Company and each Borrowing
Subsidiary enforceable against the Company and each Borrowing Subsidiary in
accordance with their respective terms, subject to bankruptcy and similar laws
and other general restrictions on creditor's rights and equitable principles
(whether applied in an action at law or a suit in equity).
6.6 Financial Statements.
(a) The balance sheet of the Company and its Subsidiaries
as of December 31, 1995 (which is presented in the Company's annual
report) and the related statements of income and changes in financial
position for the fiscal year then ended, copies of which have been
heretofore furnished to each of the Lenders, fairly present, in
conformity with GAAP, the financial condition of the Company and its
Subsidiaries as of such date and the results of the operations and
changes in financial position of the Company and its Subsidiaries for
such fiscal year.
(b) The quarterly financial statements of the Company and
its Subsidiaries submitted to the SEC or the Agent since the date of the
December 31, 1995 annual financial statements referred to in clause (a)
above fairly present, in conformity with GAAP, the financial condition
of the Company and its Subsidiaries as of the applicable dates of such
statements and the results of the operations and changes in financial
position of the Company and its Subsidiaries for the periods to which
such statements relate.
-72-
<PAGE> 79
(c) Since the date of the December 31, 1995 statements
there has been no material adverse change, taken as a whole, in the
business, financial position, or operations of either the Company or any
Subsidiary.
6.7 Litigation.
Except as disclosed on Exhibit L attached hereto and as
otherwise set forth in the Company's annual report referred to in Section
6.6(a), there are no actions, suits or proceedings pending or, to the knowledge
of the Company or any Borrowing Subsidiary after reasonable investigation,
threatened against or affecting the Company or any of its Affiliates or any of
their respective properties before any court, arbitrator or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign (including, without limitation, the SEC or any regulatory commission of
any jurisdiction), which, if determined adversely to the Company or any
Affiliate, as the case may be, would be reasonably likely to, singly or in the
aggregate, have a material adverse effect on the financial condition, or on the
respective properties or operations, of the Company and its Affiliates or the
transactions contemplated by this Agreement, the Security Agreement and the
Notes.
6.8 Use of Proceeds.
The Company and the Borrowing Subsidiaries will use the proceeds
of the Loans solely for (i) the purposes described in the recitals hereto, (ii)
the funding or purchasing of Mortgage Loans, (iii) the payment of principal,
interest, fees, expenses, and other obligations described in or contemplated by
this Agreement, (iv) payment of Debt of the Company existing on the date
hereof, and (v) such other purposes as may be permitted under this Agreement.
No part of the proceeds of any Loan will be used to purchase or carry, or to
reduce or retire, any indebtedness incurred to purchase or carry, any margin
stock (within the meaning of Regulations U and X of the Board of Governors of
the Federal Reserve System) or to extend credit to others for the purpose of
purchasing or carrying any margin stock and neither the Company nor any
Borrowing Subsidiary is engaged in purchasing or carrying margin stock.
6.9 Accuracy of Information.
All written information supplied by the Company or any Borrowing
Subsidiary to the Lenders relating to the Company and its Affiliates was true,
complete and accurate in all material respects when made, and there has been no
material adverse change in the financial condition of the Company and its
Affiliates from the time such information was provided to the Lenders.
-73-
<PAGE> 80
6.10 Accuracy of Representations and Warranties.
The representations and warranties of the Company and the
Borrowing Subsidiaries contained in each other document delivered in connection
with this Agreement are, or when such document is delivered will be, true and
correct in all material respects when made.
6.11 Investment Company.
Neither the Company nor any Borrowing Subsidiary is an
"investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, or an
"investment adviser" within the meaning of the Investment Advisers' Act of
1940, as amended.
6.12 ERISA.
Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and any other applicable Federal or
state law; and to the best of its knowledge no event or condition is occurring
or exists with respect to any Plan concerning which the Company or any
Borrowing Subsidiary would be under an obligation to furnish a report to the
Lenders in accordance with Section 7.7(i).
6.13 Tax Returns.
The Company and each of its Affiliates has filed or caused to be
filed all material federal, state and local tax returns which, to its
knowledge, are required to be filed and has paid or caused to be paid all
material taxes as shown on such returns or on any assessment received by it, to
the extent that such taxes have become due, except taxes the validity of which
is being contested in good faith by appropriate proceedings and for which
adequate reserves shall have been set aside on its books.
6.14 Full Disclosure.
No event has occurred and no circumstance exists as a result of
which any information, statement, or representation concerning the Company or
any Borrowing Subsidiary that has been provided to the Lender by the Company or
any Borrowing Subsidiary in connection herewith would include an untrue
statement of a material fact or omit to state any material fact or any fact
necessary to make the information, statements or representation contained
therein, in the light of the circumstances under which they were made, not
misleading.
-74-
<PAGE> 81
6.15 GNMA, FHA, VA, FNMA, AND FHLMC Eligibility.
(a) The Company is: (i) an FHA-Approved Mortgagee in good
standing, a VA-Approved Lender, a FHLMC-Approved Lender and a
FNMA-Approved Lender and meets all eligible requirements of law and
governmental regulation so as to be eligible to originate, purchase,
hold and service Mortgage Loans insured by FHA and to issue any
Security; (ii) an approved seller and servicer in good standing of
Mortgage Loans to each Federal Agency; and (iii) an approved issuer and
servicer in good standing of FHLMC, FNMA and GNMA Securities and meets
all FHLMC, FNMA and GNMA requirements, requirements of law and
governmental regulations so as to be able to issue FHLMC, FNMA and GNMA
Securities and to service the Mortgage Loans that secure such
Securities.
(b) Each Borrowing Subsidiary is: (i) an FHA-Approved
Mortgagee in good standing, a VA-Approved Lender, a FHLMC-Approved
Lender and a FNMA-Approved Lender and meets all eligible requirements of
law and governmental regulation so as to be eligible to originate,
purchase and hold Mortgage Loans insured by FHA and to issue any
Security; (ii) an approved seller in good standing of Mortgage Loans to
each Federal Agency; and (iii) an approved issuer in good standing of
FHLMC, FNMA and GNMA Securities and meets all FHLMC, FNMA and GNMA
requirements, requirements of law and governmental regulations so as to
be able to issue FHLMC, FNMA and GNMA Securities.
6.16 No Defaults.
No Default has occurred and is continuing.
ARTICLE VII
AFFIRMATIVE COVENANTS
The Company and the Borrowing Subsidiaries covenant and agree
with the Lenders that, so long as this Agreement shall remain in effect and so
long as any amounts are outstanding under the Notes or this Agreement, unless
the Required Lenders shall otherwise consent in writing, the Company will, and
the Borrowing Subsidiaries (except with respect to the covenants set forth in
Sections 7.7 (other than subsections (a), (f), (h), (q) and (r) of Section
7.7), 7.9 and 7.12, which shall apply only to the Company) will:
7.1 Payment of Debts, Taxes, Etc.; Maintenance of Insurance.
(a) Pay all debts and perform all obligations, and cause
each of its Subsidiaries to pay all debts and perform all obligations,
promptly and in accordance with the terms
-75-
<PAGE> 82
thereof and pay and discharge, and cause each of its Subsidiaries to pay
and discharge, all taxes, assessments and governmental charges or levies
imposed upon it or upon its income or profits, or upon any properties
belonging to it, prior to the date on which penalties attach thereto,
and all lawful claims, which, if unpaid, might become a lien or charge
upon any properties of the Company, a Borrowing Subsidiary or of such
other Subsidiary, provided that none of the Company, any Borrowing
Subsidiary or any other Subsidiary shall be required to pay any such
tax, assessment, charge, levy or claim which is being contested in good
faith and by appropriate proceedings and such contest shall operate to
stay any material adverse effect of such lien or charge;
(b) Use its best efforts to adhere to customary practices
and standards in the industry insofar as adherence to such practices and
standards would require the Company or a Borrowing Subsidiary, as
applicable, to cause obligors whose indebtedness is secured by Pledged
Mortgages to comply with the provisions of such Pledged Mortgages with
respect to the payment of real estate taxes and insurance premiums in
connection with the real estate securing such indebtedness; and
(c) Maintain, and cause each of its Subsidiaries to
maintain, insurance on its properties and other insurance in amounts and
types and with provisions and insurers as shall be satisfactory to the
Required Lenders, and at all times furnish to any Lender (upon written
request by such Lender) copies of its, and each of its Subsidiaries',
current Mortgage Bankers Blanket Bond and of its, and each of its
Subsidiaries', insurance policy containing errors and omissions coverage
or mortgage impairment coverage, and providing, in the case of Mortgage
Bankers Blanket Bonds, to the extent possible, that they are not
cancelable without thirty days' prior written notice to the Agent.
7.2 Preservation of Corporate Existence.
Preserve and maintain, and cause each of its Subsidiaries which
is a material part of the Company's overall business operations to preserve and
maintain, its corporate existence, rights, franchises and privileges in the
jurisdiction of its incorporation, and qualify and remain qualified as a
foreign corporation in each jurisdiction in which such qualification is
necessary in view of its business operations or the ownership of its
properties.
-76-
<PAGE> 83
7.3 Compliance with Laws, Etc.
Comply, and cause each of its Subsidiaries to comply, with the
requirements of all applicable laws, rules, regulations and orders of any
governmental authority, non-compliance with which would be reasonably likely
to, singly or in the aggregate, materially adversely affect its business or
credit, unless the same shall be contested by the Company, a Borrowing
Subsidiary or such other Subsidiary, as the case may be, in good faith and by
appropriate proceedings and such contest shall operate to stay the material
adverse effect of any such non-compliance.
7.4 Requested Information. At any reasonable time and from time to
time, on reasonable prior notice furnish to the Agent, any requesting Lender or
any agents or representatives thereof, or permit such agents or representatives
to examine and make copies of, the records and books of account of, and visit
the properties of, the Company, the Borrowing Subsidiaries or any of their
Subsidiaries and, so long as representatives of the Company (as chosen by
senior management of the Company) accompany the Agent or any such other Lender,
the Company's Affiliates, and to discuss the affairs, finances and accounts of
the Company, its Subsidiaries and such Affiliates with any of its officers.
7.5 Keeping of Records and Books of Account.
Keep or cause to be kept adequate records and books of account
in which complete entries will be made in accordance with generally accepted
accounting principles, consistently applied (except for changes concurred in by
the Company's independent auditors) reflecting all financial transactions of
the Company and its Subsidiaries.
7.6 Maintenance of Approvals, Filings and Registrations.
At all times maintain in effect, renew and comply with, and
cause each of its Subsidiaries to effect, renew and comply with all the terms
and conditions of all consents, licenses, approvals and authorizations as may
be necessary under any applicable law or regulation for the execution, delivery
and performance of this Agreement, the Security Agreement and the Notes and to
make this Agreement and such other documents legal, valid, binding and
enforceable.
7.7 Reporting Requirements.
Furnish to the Agent for distribution to each Lender:
(a) As soon as possible after becoming aware (i) of the
occurrence of any Default, or (ii) that any of the representations and
warranties contained in Article IV or Article VI has ceased to be true
and correct at any time
-77-
<PAGE> 84
since the last Advance hereunder (or, if no Advance has taken place, the
execution and delivery of this Agreement), telephone advice confirmed in
writing within three (3) Business Days by a statement of the president
or other Authorized Officer of the Company setting forth the details
thereof and the action which the Company proposes to take with respect
thereto.
(b) As soon as available and in any event within ninety
(90) days after the end of each fiscal year of the Company, a
consolidating and consolidated balance sheet of the Company and its
Subsidiaries as of the end of such fiscal year and the related
statements of income and changes in financial position of the Company
and its Subsidiaries including cash flow statements for such fiscal year
on a consolidating and consolidated basis, setting forth in each case in
comparative form the figures for the previous fiscal year, all reported
in accordance with GAAP and audited and unqualified by Ernst & Young or
other independent public accountants of nationally recognized standing.
(c) As soon as available and in any event within forty-five
(45) days after the end of each fiscal quarter of the Company, a
consolidating and consolidated balance sheet of the Company and its
Subsidiaries as of the end of such quarter and the related statements of
income for such quarter and for the portion of the Company's fiscal year
ended at the end of such quarter, all certified (subject to normal
quarter-end adjustments) as to fairness of presentation, generally
accepted accounting principles and consistency by the chief financial
officer of the Company.
(d) Simultaneously with the delivery of each set of
financial statements referred to in clauses (b) and (c) above, a
certificate of the chief financial officer of the Company (A) setting
forth in reasonable detail the calculations required to establish
whether the Company was in compliance with the requirements of Sections
7.9, 8.5, 8.6, 8.9, 8.10, 8.16, 8.17 and 8.20 and, if then applicable,
the Positive Security Conditions and (B) stating whether there exists on
the date of such certificate any Default and, if any Default then
exists, setting forth the details thereof and the action which the
Company is taking or proposes to take with respect thereto.
(e) Within forty-five (45) days after the end of each
fiscal quarter of the Company (or more frequently if reasonably deemed
advisable by the Agent), an appraisal of the value of the Company's
rights under its Servicing Agreements, which appraisal shall (i) be
performed by a third-party appraiser approved by Agent and which shall
itemize the value of such Servicing Agreements in such a
-78-
<PAGE> 85
manner as to allow the computation of the value of the Eligible Pledged
Servicing as set forth in Section 4.6(h)(1), and (ii) be concurrently
sent by the Company to the Collateral Agent.
(f) Promptly after the commencement thereof, notice of (i)
any action or proceeding which has more than a remote possibility of a
determination adverse to the Company or its Subsidiaries (a
"Non-Frivolous Action") instituted by or against the Company or any of
its Subsidiaries in any Federal or state court or before any commission
or other regulatory body (Federal, state or local, domestic or foreign),
or any such Non-Frivolous Action threatened against the Company or any
of its Subsidiaries in writing, which, if adversely determined, would
have a material adverse effect upon the business, assets or financial
condition of the Company, any Borrowing Subsidiary or any other mortgage
banking affiliate of the Company, and (ii) any other action, event or
condition of any nature which may lead to or result in a material
adverse effect upon the business, assets or financial condition of the
Company or any Borrowing Subsidiary or which, with or without notice or
lapse of time or both, would constitute a default under any other
material contract, instrument or agreement to which the Company or any
Borrowing Subsidiary is a party or by which the Company, any Borrowing
Subsidiary or their properties or assets may be bound or subject.
(g) As soon as possible after becoming aware of any change
in the Company's long-term unsecured debt ratings as rated by S&P or
Moody's, a copy of the S&P or Moody's publication of such ratings or
other written confirmation of such ratings.
(h) Such other information, financial or otherwise,
respecting the Collateral and the Company's or any Borrowing
Subsidiary's financial statements and condition as the Agent or any
Lender may from time to time reasonably request.
(i) As soon as possible, and in any event within thirty
(30) days after the Company knows or has reason to know that any of the
events or conditions enumerated below with respect to any Plan have
occurred or exist, a statement signed by an Authorized Officer of the
Company setting forth details respecting such event or condition and the
action, if any, which the Company or, to the best knowledge of the
Company, any ERISA Affiliate proposes to take with respect thereto;
provided, however, that if such event or condition is required to be
reported or notice thereof given to PBGC, such statement, together with
a copy of the relevant report or notice to PBGC, shall be furnished to
the Agent within ten
-79-
<PAGE> 86
(10) days after it is reported or notice thereof given to PBGC:
(i) the occurrence of any Reportable Event;
(ii) the filing under Section 4041 of ERISA of a
notice of intent to terminate any Plan or the termination of any
Plan;
(iii) the institution by PBGC of proceedings under
Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Plan; or
(iv) the complete or partial withdrawal by the
Company, any Subsidiary or any ERISA Affiliate from a Plan, or
the receipt by the Company, any Subsidiary or any ERISA
Affiliate of notice from a Plan that it is in reorganization or
insolvency pursuant to Section 4241 or 4245 of ERISA or that it
intends to terminate or has terminated under Section 4041A of
ERISA, if such withdrawal, reorganization, insolvency or
termination has resulted or may reasonably be expected to result
in any liability of the Company, any Subsidiary or any ERISA
Affiliate to the PBGC in connection with such Plan or to such
Plan.
(j) Promptly after the request of the Agent, copies of each
annual report filed pursuant to Section 104 of ERISA with respect to
each Plan (including, to the extent required by Section 104 of ERISA,
the related financial and actuarial statements and opinions and other
supporting statements, certifications, schedules and information
referred to in Section 103 of ERISA) and each annual report filed with
respect to each Plan under Section 4065 of ERISA.
(k) As soon as available but in any event within thirty
(30) days after the end of each calendar quarter, a servicing report and
analysis which shall show the status of all mortgages serviced by the
Company or any Borrowing Subsidiary including those which are
delinquent, all in such form and detail and including such additional
information as the Agent may reasonably request. Such servicing report
shall show separately information concerning any mortgages or securities
with respect to which there is recourse to the Company or any Borrowing
Subsidiary.
(l) As soon as available but in any event within thirty
(30) days after the end of each calendar quarter, a production
information report and a secondary marketing report for such quarter
satisfactory to the Agent.
-80-
<PAGE> 87
(m) Promptly upon receipt, a copy of any notice from any
Federal Agency or any private mortgage insurer to the effect that it is
or is contemplating withdrawing its approval of the Company or any
Borrowing Subsidiary as a FHA-Approved Mortgagee, FHLMC-Approved
Lender, FNMA-Approved Lender or VA-Approved Lender or as an approved
seller and servicer for FNMA, FHLMC and GNMA.
(n) Promptly after the Company's or any Subsidiary's
acquisition or creation of a new Subsidiary, written notice of such
event, which notice shall set forth the details of such event, the
percentage of capital stock owned by the Company or any other
Subsidiary, and the jurisdiction of incorporation of such new
Subsidiary.
(o) Promptly after the sending or filing thereof, copies of
all such proxy statements, financial statements and reports which the
Company sends to its stockholders, and copies of all regular, periodic
and special reports (other than Form 8-K reports containing only the
distribution reports relating to the Fireman's Fund Mortgage Corporation
Agency MBS Multi-Class Pass-Through Certificates, which the Company need
send to the Agent only and which the Agent shall make available to the
other Lenders upon request) and all final prospectuses which the Company
files with the SEC (if applicable), or any governmental authority which
may be substituted therefor, any Federal Agency, or any other
governmental agency.
(p) On each Business Day, a statement from the issuing and
paying agent for the Outstanding CPNs setting forth the aggregate face
amount of the Outstanding CPNs being issued on such Business Day, being
repaid on such Business Day and remaining outstanding at the end of such
Business Day, all in a form satisfactory to the Agent, which statement
need be transmitted to the Agent only.
(q) As soon as available and in any event within forty-five
(45) days after the end of each fiscal quarter of the Company and each
Borrowing Subsidiary, a list showing (i) each individual Guaranty in
excess of $1,000,000 of the Company or any Borrowing Subsidiary then in
effect (and the amounts thereof) and (ii) the aggregate amount of all
other Guarantees of the Company or any Borrowing Subsidiary then in
effect, certified as true and correct by Authorized Officers of the
Company and Borrowing Subsidiary.
(r) Such other information respecting the business,
properties or the condition or operation of the Company or its
Subsidiaries, financial or otherwise, as the Agent or any Lender may
from time to time reasonably request.
-81-
<PAGE> 88
(s) Notice of the occurrence of any of the following events,
immediately upon the Company's acquisition of knowledge thereof: (i) the
occurrence of an "Event of Default" (as defined in Article Five of the
Subordinated Debt Indenture), (ii) the deferral by the Company of any
quarterly installment of interest on the Subordinated Debt, (iii) the
acceleration of the entire principal amount of any series of securities
issued under the Subordinated Debt Indenture, (iv) the execution of any
amendment or supplement to the Subordinated Debt Indenture, or (v) the
resignation or removal of the trustee under the Subordinated Debt
Indenture, or any change in the notice address of such trustee.
7.8 Indemnification.
Pay, and protect, indemnify and save harmless, the Agent, the
Collateral Agent, each of the Lenders and the Affiliates of each of the
foregoing and, in their capacity as such, their respective officers, directors,
shareholders, controlling persons, employees, agents and servants from and
against all liabilities, losses, claims, damages, penalties, causes of action,
suits, costs and expenses (including, without limitation, attorneys' fees and
expenses) or judgments of any nature arising from the default of the Company or
any Borrowing Subsidiary in the performance of their respective agreements,
rights or obligations contained in this Agreement, the Security Agreement, the
Notes or any other instrument or agreement entered into by the Company or any
Borrowing Subsidiary in connection herewith or therewith or arising out of this
Agreement or the transactions contemplated herein; provided, that neither the
Company nor any Borrowing Subsidiary shall have any obligation hereunder to the
Agent, the Collateral Agent or any Lender or any other Person indemnified
pursuant to this Section 7.8 with respect to indemnified liabilities arising
from (1) the gross negligence or willful misconduct of such Person indemnified
pursuant to this Section 7.8, or (2) legal proceedings commenced against the
Agent, the Collateral Agent or any Lender by any other Lender or any
Participant. If any action, suit or proceeding arising from any of the
foregoing is brought against the Agent, the Collateral Agent or any Lender or
any other person indemnified pursuant to this Section 7.8, the Company and each
Borrowing Subsidiary will, if within a reasonable time requested in writing to
do so and at its expense, resist and defend such action, suit or proceeding or
cause the same to be resisted and defended by counsel designated by the Company
or Borrowing Subsidiary (which counsel shall be satisfactory to the party being
indemnified). The obligations of the Company and the Borrowing Subsidiaries
under this Section 7.8 shall survive any termination of this Agreement.
-82-
<PAGE> 89
7.9 Maintenance of Net Worth.
At all times, maintain the sum of (x) Adjusted Consolidated
Tangible Net Worth plus (y) Subordinated Debt in an amount at least equal to
the sum of:
(i) $280,000,000, plus
(ii) fifty percent (50%) of the positive cumulative quarterly increases,
if any, in Adjusted Consolidated Tangible Net Worth of the Company after
July 1, 1996 (computed without regard to any increase or decrease
resulting from (1) the contribution or distribution of Capital
Securities, (2) cash equity contributions to the Company, (3) the
receipt of proceeds of issuances of stock of the Company, (4) the
exchange of Subordinated Debt for Series A Preferred Stock, (5) the
payment of Restricted Payments) for each calendar quarter beginning with
calendar quarter beginning July 1, 1996.
7.10 Federal Agency Approvals.
Maintain its status as a FHA-Approved Mortgagee, remain eligible to
obtain VA guaranties of Mortgage Loans and remain approved by each Federal
Agency as a seller/servicer.
7.11 Approved Investor Commitments.
Maintain all of its Mortgage Loans included in Collateral and
all other Mortgage Loans owned by the Company or any Borrowing Subsidiary, as
applicable, which satisfy the delivery requirements of any then-current
Approved Investor Commitments to purchase Mortgage Loans or to exchange
Securities for Mortgage Loans held by the Company or any Borrowing Subsidiary
(in each case, other than any Mortgage Loans held by the Company or a Borrowing
Subsidiary solely for investment) in compliance with such Approved Investor
Commitments and perform all of its obligations in connection with such
commitments.
7.12 Borrowing Base Certificate.
Within the first ten (10) days of each month, and within three
Business Days after any request therefor by the Agent, deliver to the Agent a
Borrowing Base Certificate (which shall include the Company's reconciliation of
any discrepancies from the Collateral Agent's reports on the status of Eligible
Collateral at the end of the preceding month), together with a certificate of
the chief financial officer or other Authorized Officer of the Company
confirming compliance with Sections 7.9, 8.5, 8.9, 8.12 and 8.20 and, if then
applicable, with the Positive Security Conditions. Each regular monthly
Borrowing Base Certificate shall contain information as of the close of
-83-
<PAGE> 90
business on the final Business Day of the preceding month. Any Borrowing Base
Certificate delivered pursuant to the request of the Agent shall contain
information as of the close of business on the day on which the Agent requested
such Borrowing Base Certificate. Notwithstanding the two preceding sentences,
information contained in such Borrowing Base Certificates relating to Eligible
Repurchased Agency Loans and Receivables or Eligible Pledged Servicing may be
as of the latest dates on which the Company calculated the value of Eligible
Repurchased Agency Loans and Receivables and Eligible Pledged Servicing;
provided that such calculations shall be made (A) at least once per week with
respect to Repurchased Agency Loans and Receivables, and (B) at least once per
month and also immediately after any purchase or sale of any Servicing
Agreements with an aggregate unpaid principal balance of $1,000,000,000 or more
with respect to Eligible Pledged Servicing. An Authorized Officer of each
Borrowing Subsidiary shall certify as to the accuracy of each Borrowing Base
Certificate with respect to Collateral reflected therein which is owned by such
Borrowing Subsidiary.
7.13 Further Assurance.
As from time to time requested by the Agent and agreed upon by
the Required Lenders, at the cost and expense of the Company, execute and
deliver to the Agent all such documents and instruments and do all such other
acts and things as may be reasonably required to enable the Lenders to exercise
and enforce their rights under this Agreement and to realize thereon, and as
may be necessary to validate, preserve and protect the position of the Lenders
under this Agreement. With respect to those elements of Collateral as to which
the Lenders' security interest may not be perfected by delivery to the
Collateral Agent with the Security Agreement or the filing of a UCC-1 financing
statement, including but not limited to the Approved Investor Commitments and
any options, futures contracts or other interest rate protection products, the
Company and/or the applicable Borrowing Subsidiary, as requested by the Agent
at the direction of the Required Lenders, shall execute and deliver possession
of such elements of the Collateral to the Agent, have the interest of the
Lenders therein recorded on the books of any institution holding such assets
for the Company or the applicable Borrowing Subsidiary, obtain consents to
assignment in favor of the Lenders from the counterparties thereto or take such
other actions as may be necessary to perfect the security interest of the
Lenders therein (provided, however, that unless an Event of Default is
continuing or the Required Lenders have requested otherwise, consents to
assignments of options, futures contracts or other interest rate protection
products in favor of the Lenders from the counterparties thereto shall not be
required).
-84-
<PAGE> 91
7.14 Maintenance of Properties.
Do all things necessary to maintain, preserve, protect and keep
its properties in good repair, working order and condition, and make all
necessary and proper repairs, renewals and replacements so that its business
carried on in connection therewith may be properly conducted at all times.
7.15 Payment of Taxes.
On demand pay, or reimburse the Agent and Lenders for, all
stamp, documentation, intangible, or similar taxes, and all penalties or
interest that may be due with respect thereto, that may be imposed or asserted
by the State of Florida or any other jurisdiction in connection with the
execution and delivery of the Credit Documents or the making of the Loans
contemplated by this Agreement.
ARTICLE VIII
NEGATIVE COVENANTS
The Company covenants and agrees (and each Borrowing Subsidiary
covenants and agrees with respect to Sections 8.1, 8.2, 8.3, 8.4, 8.6, 8.7,
8.8, 8.11, 8.13, 8.14, 8.15, 8.17 and 8.18) with the Lenders that so long as
this Agreement shall remain in effect or any amounts are outstanding under the
Notes or this Agreement, unless the Required Lenders (or all Lenders, if
expressly required) shall otherwise consent in writing, the Company (or the
Borrowing Subsidiaries where applicable) (on a consolidated basis with its
Subsidiaries) shall not, directly or indirectly:
8.1 Use of Proceeds.
Use the amounts obtained under this Agreement for any purposes
other than (i) the purposes described in the recitals hereto, (ii) the funding
or purchasing of Mortgage Loans, (iii) the payment of principal, interest,
fees, expenses and other obligations described in or contemplated by this
Agreement, (iv) payment of Debt of the Company existing on the date hereof, and
(v) such other purposes permitted under this Agreement. Neither the Company
nor any Borrowing Subsidiary is engaged, nor will they engage, principally or
materially in the business of extending credit for the purpose of "purchasing"
or "carrying" any "margin stock" (within the meanings of each of the quoted
terms under Regulation U). If requested by a Lender, the Company and each
Borrowing Subsidiary shall each furnish to the Agent for the benefit of the
Lenders a statement in conformity with the requirements of Federal Reserve Form
U-1 referred to in Regulation U. No part of the proceeds of any Loan will be
used for any purpose which violates, or which would be inconsistent
-85-
<PAGE> 92
with, the provisions of the Regulations of the Board of Governors of the
Federal Reserve System as now and from time to time hereafter in effect.
8.2 Compliance with Security Agreement.
Enter into any collateral custodial agreement similar to the
Security Agreement for Mortgage Loans not included in Collateral with any
entity other than the Collateral Agent or fail to duly perform any of its
obligations under the Security Agreement; provided, however, that this Section
shall not prohibit the Company or any Borrowing Subsidiary from entering into
other custodial agreements relating to the possession of Mortgage Loans not
included in Collateral so long as such agreements are not made for the purpose
of or in connection with the granting of a security interest in such Mortgage
Loans. Security interests in Mortgage Loans given for confirmatory purposes in
connection with the sale of such Mortgage Loans by the Company or a Borrowing
Subsidiary to investors shall not be considered agreements "made for the
purpose of or in connection with the granting of a security interest in such
Mortgage Loans" within the meaning of the preceding sentence.
8.3 Mergers; Subsidiaries.
Merge or consolidate with any Person, or sell or otherwise
dispose of (whether in one transaction or in a series of transactions) the
shares of any of its Subsidiaries to any Person, provided that the Company may,
after prior written notice to the Agent and Lenders, (i) undertake such a
merger or consolidation so long as the Company shall be the surviving or
resulting company and (ii) take such action with respect to any Subsidiary
which is not a material part of the Company's overall business operations.
8.4 Sales.
Sell, assign, lease or otherwise dispose of (collectively,
"Transfer"), whether in one transaction or a series of transactions, all or
substantially all of its assets (whether now owned or hereafter acquired) to
any Person, or allow any Subsidiary to Transfer substantially all of its assets
to any Person (other than another Subsidiary or a Parent), provided that the
Company may after prior written notice to the Agent and Lenders allow such
action with respect to any Subsidiary which is not a material part of the
Company's overall business operations. Transfers described in this Section 8.4
and the mergers, consolidations and dispositions described in Section 8.3
(whether or not permitted by the provisions of such Sections) are referred to
herein as "Fundamental Changes."
-86-
<PAGE> 93
8.5 Debt. Allow the total Debt (excluding Subordinated Debt) of the
Company and its Subsidiaries (on a consolidated basis) to exceed the sum of the
following (the "Debt Threshold"):
(a) one hundred percent (100%) of the value of the
Company's cash and "short-term investments";
(b) ninety-eight percent (98%) of the value of the
Company's "mortgage loans receivable";
(c) ninety percent (90%) of the value of the Company's
"pool loan purchases" and "mortgage claims receivable", to the extent
such assets represent VA Mortgage Loans and FHA Mortgage Loans
repurchased by the Company from GNMA Security holders;
(d) seventy-five percent (75%) of the amount of Servicing
Sale Receivables which would qualify as Eligible Pledged Servicing Sale
Receivables if such Servicing Sale Receivables were pledged as
Collateral;
(e) seventy-five percent (75%) of "loans held for
investment"; and
(f) the lesser of:
(1) sixty-five percent (65%) of the sum of (A) for
Servicing Agreements not covered by the then most recent
appraisal of the value of the Company's Servicing Agreements
pursuant to clause (B) immediately below, the lesser of
acquisition price or the appraised market value (which shall be
as set forth in an appraisal dated no more than 30 days prior to
acquisition of such Servicing Agreements by a qualified
third-party appraiser approved by the Agent, with such appraisal
to be obtained and paid for by the Company and delivered to the
Agent) of such Servicing Agreements (i.e. such Servicing
Agreements shall be valued at zero unless such an appraisal has
been obtained), and (B) for all other Servicing Agreements, the
appraised market value (which shall be determined every three
months (or more frequently at the request of the Company, or if
reasonably deemed advisable by the Agent, the Agent) by a
qualified third-party appraiser approved by the Agent, with such
appraisals to be obtained and paid for by the Company and
delivered to the Agent) of such Servicing Agreements (provided
that if any Servicing Agreements have been sold by the Company
since the date of the most recent appraisal, then the appraised
value of the Company's Servicing Agreements shall be deemed
reduced by an amount obtained by multiplying (i) the appraised
market value of all Servicing Agreements prior to such
-87-
<PAGE> 94
servicing sale by (ii) a fraction having a numerator equal to
the aggregate principal outstanding balance of the Mortgage
Loans serviced under the sold Servicing Agreements as of the
date of sale and a denominator equal to the aggregate principal
outstanding balance of the Mortgage Loans serviced pursuant to
all of the Servicing Agreements (including the sold Servicing
Agreements) covered by the most recent servicing appraisal as of
the date of sale); and
(2) the sum of (A) one percent (1.00%) of the
aggregate outstanding principal balance of the Mortgage Loans
serviced by the Company pursuant to Servicing Agreements with
FNMA, FHLMC or any other Person other than GNMA, FHA or VA and
(B) one and one-quarter percent (1.25%) of the aggregate
outstanding principal balance of the Mortgage Loans serviced by
the Company pursuant to Servicing Agreements with GNMA, FHA or
VA.
Terms set forth in quotes in this Section shall have the meanings given such
terms in the Company's consolidated financial statements.
8.6 Ratably Secured Debt. Increase the amount of or extend the
maturity of the Ratable Medium-Term Notes or incur any other Debt which may be
entitled to a security interest in any of the Collateral which would be equal
or superior to the security interest of Collateral Agent as agent for the
Secured Parties.
8.7 Guarantees.
Create, incur, assume or suffer to exist any Guarantee of the
Company or a Borrowing Subsidiary except Guarantees in an aggregate combined
amount for the Company and the Borrowing Subsidiaries not to exceed $25,000,000
at any one time outstanding.
8.8 Investments.
Make or own any Investment in any Person, except:
(a) Investments in the ordinary course of its mortgage
banking business in connection with mortgage loans, collateralized
mortgage obligations and other mortgage-related securities;
(b) Investments in the ordinary course of its mortgage
banking business in connection with puts, calls, swaps and other
interest rate hedging products, options and futures contracts to provide
protection from interest rate fluctuation;
-88-
<PAGE> 95
(c) Investments in the ordinary course of its mortgage
banking business in connection with real estate acquired by foreclosure;
(d) Investments in the ordinary course of the Company's
mortgage banking business in connection with servicing rights;
(e) Investments in the ordinary course of its mortgage
banking business in connection with commitments from investors to
purchase Mortgage Loans or mortgage-related securities;
(f) the acquisition of the Mortgage Loans, Securities and
mortgage servicing contracts of another Person engaged in
mortgage-related businesses;
(h) Investments in Cash Equivalents;
(i) those Investments in existence on the date hereof and
disclosed in the financial statements referred to in Section 6.6;
(j) loans to officers of the Company in an aggregate
principal amount at any time outstanding not to exceed $5,000,000;
(k) loans and advances to employees of the Company, or its
Subsidiaries for (i) travel and entertainment in the ordinary course of
business in an aggregate amount for the Company and its Subsidiaries not
to exceed $100,000 at any one time outstanding and (ii) relocation
expenses in the ordinary course of business in an aggregate amount for
the Company and its Subsidiaries not to exceed $1,000,000 at any one
time outstanding;
(l) Investments of up to 10% of the Company's net worth (as
determined in accordance with GAAP) by the Company in its Subsidiaries
and investments by such Subsidiaries in the Company and in other
Subsidiaries;
(m) Investments made by any Subsidiary in the ordinary
course of its business;
(n) Investments in equity securities which (1) are traded
on the New York Stock Exchange, the American Stock Exchange or NASDAQ,
(2) are subject to no transfer restrictions, and (3) have a readily
determinable market value, in an aggregate market value amount not to
exceed $25,000,000 (which market value shall be determined by the
Company and reported to the Agent on a monthly basis, or more frequently
at the request of the Agent);
-89-
<PAGE> 96
(o) repurchase and reverse repurchase contracts incidental
to the mortgage-related businesses of the Company and its Subsidiaries
in an aggregate dollar amount not to exceed $250,000,000 and 25,000,000
respectively; and
(p) other Investments if, after giving effect to any such
Investment, the consolidated net revenues (determined in accordance with
GAAP) of all business segments that constitute mortgage-related
businesses of the Resulting Entity for the Fundamental Change/Investment
Calculation Period are at least 75 percent of the total net revenues
(determined in accordance with GAAP) of the Resulting Entity for the
Fundamental Change/Investment Calculation Period.
8.9 Leverage Ratios.
Permit the ratio of (1) Funded Debt less Subordinated Debt to
(2) Adjusted Consolidated Tangible Net Worth plus Subordinated Debt to exceed
the following:
(a) while the Facility is secured:
<TABLE>
<CAPTION>
Level of Aggregate Commitment Maximum Leverage Ratio
----------------------------- ----------------------
<S> <C>
0 - $750,000,000 5.0 to 1
$750,000,001 - $850,000,000 5.5 to 1
$850,000,001 - $950,000,000 6.0 to 1
$950,000,001 - $1,050,000,000 6.5 to 1
$1,050,000,001 - $1,150,000,000 7.0 to 1
$1,150,000,001 - $1,250,000,000 7.5 to 1
</TABLE>
(b) while the Facility is unsecured pursuant to Section
4.13(a):
<TABLE>
<CAPTION>
Level of Aggregate Commitment Maximum Leverage Ratio
----------------------------- ----------------------
<S> <C>
0 - $750,000,000 4.0 to 1
$750,000,001 - $850,000,000 4.5 to 1
$850,000,001 - $950,000,000 5.0 to 1
$950,000,001 - $1,050,000,000 5.5 to 1
$1,050,000,001 - $1,150,000,000 6.0 to 1
$1,150,000,001 - $1,250,000,000 6.5 to 1
</TABLE>
8.10 Recourse Servicing.
Permit the principal balance of Mortgage Loans covered by
Recourse Servicing to exceed the lesser of:
(i) the sum of (A) the aggregate principal balance of all Mortgage Loans
covered by Recourse Servicing owned by the Company as of September 30,
1996 plus (B) the aggregate principal balance of all Mortgage Loans
covered by Recourse
-90-
<PAGE> 97
Servicing acquired by the Company from and after October 1, 1996 as a
part of a larger acquisition of Servicing Agreements, but not in excess
of an additional $100,000,000 in principal balance of Mortgage Loans
covered by Recourse Servicing less (C) all reductions in such aggregate
principal balances, whether by reason of prepayment or amortization from
and after October 1, 1996 (or the date of later acquisition, as the case
may be) and less (D) the aggregate principal balance of any Mortgage
Loans covered by any such Recourse Servicing sold by the Company after
September 30, 1996; or
(ii) eleven and one-half percent (11.5%) of the aggregate outstanding
principal balance of all Mortgage Loans covered by the Company's
Servicing Agreements other than Subservicing Agreements, whether or not
such Servicing Agreements qualify as Eligible Pledged Servicing;
except that from and after the date that the principal balance of Mortgage
Loans covered by Recourse Servicing first falls below an amount equal to (a)
ten percent (10%) of the aggregate outstanding principal balance of all
Mortgage Loans then covered by the Company's Servicing Agreements other than
Subservicing Agreements minus (b) $100,000,000, the principal balance of
Mortgage Loans covered by Recourse Servicing shall not exceed ten percent (10%)
of the aggregate outstanding principal balance of all Mortgage Loans then
covered by the Company's Servicing Agreements other than Subservicing
Agreements.
8.11 Liens.
Permit, or permit any Subsidiary to permit, any Lien to exist on
any of its property or assets (including, without limitation, the Company's
rights under any contracts relating to mortgage sales and under any Servicing
Agreements) other than:
(a) Liens for taxes, assessments and other governmental
impositions not yet due or which are being contested in good faith by
appropriate proceedings, provided, that adequate reserves with respect
thereto are maintained on the books of the Company or its Subsidiaries,
as the case may be, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business and securing obligations which are not overdue for a period of
more than 60 days or which are being contested in good faith by
appropriate proceedings, provided, that adequate reserves with respect
thereto are maintained on the books of the Company or its Subsidiaries,
as the case may be, in accordance with GAAP;
-91-
<PAGE> 98
(c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security
legislation;
(d) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of
business;
(e) easements, rights-of-way, restrictions and other
similar encumbrances incurred in the ordinary course of business which,
in the aggregate, are not substantial in amount and which do not in any
case materially detract from the value of the property subject thereto
or interfere with the ordinary conduct of the business of the Company or
such Subsidiary;
(f) Liens of landlords, arising solely by operation of law
and which are not avoidable as a matter of law, on fixtures and moveable
property located on premises leased in the ordinary course of business,
provided, that the rental payments secured thereby are not yet due;
(g) Liens arising out of judgments or awards against the
Company or any Subsidiary with respect to which the Company or such
Subsidiary is prosecuting an appeal or proceeding for review and the
Company or such Subsidiary is maintaining adequate reserves in
accordance with GAAP;
(h) Liens which were in existence on December 31, 1995 and
which secured obligations reflected in the financial statements referred
to in Section 6.6;
(i) Liens upon real and/or tangible personal property,
which property was acquired after December 31, 1995 (by purchase,
construction or otherwise) by the Company or its Subsidiaries, each of
which Liens either (A) existed on such property before the time of its
acquisition and was not created in anticipation thereof at the request
or direction of the Company, or (B) was created solely for the purpose
of securing Debt representing, or incurred to finance, refinance or
refund, the cost (including the cost of construction) of the respective
property; provided, that no such Lien shall extend to or cover any
property of the Company or such Subsidiary other than the respective
property so acquired and improvements thereon;
(j) Liens incidental to the conduct of the Company's or a
Borrowing Subsidiary's mortgage-related businesses or the ownership of
its property or arising out of transactions entered in the ordinary
course of the Company's or a
-92-
<PAGE> 99
Borrowing Subsidiary's mortgage-related businesses which do not secure
Debt and do not, in the aggregate, materially detract from the value of
its properties in the aggregate or materially impair the use thereof in
the ordinary course of the Company's or such Borrowing Subsidiary's
business;
(k) Liens on assets of corporations which become
Subsidiaries after the date of this Agreement; provided, that (i) such
Liens existed at the time such corporation became a Subsidiary and were
not created in anticipation thereof, (ii) any such Lien is not spread to
cover any property or assets of such corporation after the time such
corporation becomes a Subsidiary (other than any such spreading
resulting from "after-acquired property" clauses in existence on the
date such corporation became a Subsidiary) and (iii) the amount of Debt
secured thereby is not increased;
(l) any extension, renewal or replacement (or successive
extensions, renewals or replacements), in whole or in part, of any Lien
referred to in the foregoing clauses; provided, that the principal
amount of Debt secured thereby shall not exceed the principal amount of
Debt so secured immediately prior to the time of such extension, renewal
or replacement, and that such extension, renewal, or replacement Lien
shall be limited to all or a part of the property which secured the Lien
so extended, renewed or replaced (plus improvements on such property);
(m) Liens (not otherwise permitted hereunder) which secure
obligations not exceeding (as to the Company and all Subsidiaries)
$15,000,000 in an aggregate principal amount at any one time
outstanding;
(n) Liens (not otherwise permitted hereunder) which secure
obligations (as to the Company and all Subsidiaries) (1) incidental to
forward delivery contracts or repurchase agreements in the ordinary
course of the Company's or a Borrowing Subsidiary's mortgage-related
businesses or (2) incidental to Investments by the Company in the
ordinary course of its mortgage banking business in connection with
puts, calls, swaps and other interest rate hedging products, options and
futures contracts to provide protection from interest rate fluctuation;
and
(o) the Liens arising under the Security Agreement
(including the Liens in favor of the holders of the Ratable Medium-Term
Debt as Secured Parties) or any other Credit Document;
provided, however, that so long as no Event of Default has occurred and is
continuing and the security interest in favor of the Collateral Agent is in
effect and is not abated pursuant to
-93-
<PAGE> 100
Section 4.13(a), the Company may also permit Liens on Securities and Mortgage
Loans owned by the Company (other than Securities or Mortgage Loans
constituting Collateral) to secure Debt incurred from sources other than the
Secured Parties for the purpose of originating or purchasing such Securities or
Mortgage Loans.
8.12 Credit Requirement.
Permit the Aggregate Borrowing Base to be less than the Credit
Requirement.
8.13 Affiliate Transactions.
Enter, or permit any Subsidiary to enter, into any transactions
with the Company's Parent or Affiliates that is not an arm's-length transaction
or that in any material respect is less advantageous to the Company or such
Subsidiary than a similar typical transaction with an unrelated third-party;
make any loans or advances to the Parent or any Affiliates with financial terms
more advantageous to the Parent or Affiliate than the terms of loans and
advances made to the Company from any such Parent or Affiliate; or make any net
loans or advances to the Parent or any Affiliates which would cause any
violation of Sections 7.9 or 8.9.
8.14 Conduct of Business.
Except as permitted under Section 8.8:
(a) enter into any material line of new business other than
businesses related to its current businesses, materially change the
nature of its business, cease to carry on its business as now conducted,
or
(b) fail to maintain its corporate existence, licenses,
franchises and privileges.
8.15 FHA and other Approvals.
Cause any Federal Agency which insures any material portion of
the Mortgage Loans owned or serviced by the Company or any Borrowing Subsidiary
to withdraw its approval of the Company or any Borrowing Subsidiary, or become
ineligible or allow any Borrowing Subsidiary to become ineligible as a lender
under the VA loan guaranty program.
8.16 Restricted Payments.
Make any Restricted Payments; provided, however, so long as no
Default arising from the Company's failure to comply with Section 7.9 has
occurred and is continuing (or would result from any such payment) and no Event
of Default has occurred and is
-94-
<PAGE> 101
continuing (or would result from any such payment), the Company may make
Restricted Payments as expressly permitted by subparagraphs (a) and (b) below:
(a) The Company may make Restricted Payments:
(i) through June 30, 1997, in an amount which, when added to
all other Restricted Payments (including Restricted Payments
made pursuant to Section 8.16(b)(i) below) made subsequent to
June 30, 1996, does not exceed fifty percent (50%) of the
increase, if any, in Adjusted Consolidated Tangible Net Worth
from June 30, 1996 through the completed calendar quarter
preceding any such Restricted Payment; and
(ii) from and after July 1, 1997, in an amount which, when
added to all other Restricted Payments made in the calendar
quarter when any such Restricted Payment is made and all
Restricted Payments made during the prior three completed
calendar quarters, does not exceed fifty percent (50%) of the
increase, if any, in Adjusted Consolidated Tangible Net Worth
during the most recent four consecutive calendar quarters
completed prior to any such Restricted Payment.
The increase in Adjusted Consolidated Tangible Net Worth
referenced in this Subsection (a) shall be computed without regard to
any increase or decrease resulting from the following activities: (1)
the contribution or distribution of Capital Securities, (2) cash equity
contributions to the Company, (3) the receipt of proceeds of issuances
of stock of the Company, (4) increases or decreases in the amount of
Subordinated Debt, or (5) the payment of permitted Restricted Payments.
(b) The Company may, without regard to the maximum limit on
Restricted Payments established by Subsection (a) above:
(i) pay dividends required to be paid on its Series A Preferred
Stock and pay interest that is due and payable on the
Subordinated Debt, provided that all payments made pursuant to
this clause (i) shall still be included for purposes of
determining the maximum amount of dividends and distributions
payable under Subsection (a);
(ii) make additional Restricted Payments during the fourth
calendar quarter of 1996 not to exceed $60,000,000 in value in
the aggregate, which additional Restricted Payments made
pursuant to this clause (ii)
-95-
<PAGE> 102
shall not be included in determining the maximum amount of
Restricted Payments made under Subsection (a);
(iii) distribute Capital Securities; and
(iv) distribute the proceeds (whether cash or non-cash proceeds)
of issuances of stock (whether in connection with a public
offering, a merger or otherwise) of the Company made after the
date hereof.
At the time the Company pays or makes any such Restricted Payment, it
shall notify the Agent in writing of the amount of such payment, which notice
shall (1) specify under which subparagraph and clause above the Restricted
Payment is being made and (2) contain such information as is necessary to
demonstrate that such dividend is permissible under the applicable subparagraph
and clause.
8.17 Borrowing Subsidiary Liabilities and Secured Debt. Allow (i)
TMA's total liabilities (as defined by GAAP), other than liabilities to the
Company or its Affiliates, to exceed at any time $5,000,000, (ii) CPM's total
liabilities for borrowed money other than money borrowed by CPM under this
Agreement or borrowed from the Company or its Affiliates to exceed at any time
$10,000,000, or (iii) any Borrowing Subsidiary to create or suffer any Liens on
any of its assets to secure the repayment of borrowed money.
8.18 Funding of Borrowing Subsidiary Mortgage Loans. Discontinue the
method by which the Company directly funds Mortgage Loans pledged by the
Borrowing Subsidiaries as Collateral or amend or terminate any Funding
Agreement without the prior written consent of the Required Lenders, which
consent shall not be unreasonably withheld.
8.19 Subordinated Debt Indenture.
(a) Enter into, without the prior written consent of
the Required Lenders, any amendment or modification of the Subordinated
Debt Indenture or other documents evidencing or governing the terms of
the Subordinated Debt if such amendment or modification would change (i)
the principal amount of or rate of interest on the Subordinated Debt,
(ii) the terms of repayment of the Subordinated Debt, (iii) the
provisions relating to the deferral of interest on the Subordinated
Debt, (iv) any terms or provisions of Article 12 (Subordination) of the
Subordinated Debt Indenture, (v) the definition of "Event of Default" in
the Subordinated Debt Indenture, or (vi) the provision of the
Subordinated Debt Indenture which requires the trustee to give certain
holders of senior indebtedness notices of defaults, accelerations and
certain other events; provided, however, that the Lenders
-96-
<PAGE> 103
hereby consent to that certain First Supplemental Indenture dated
December 1, 1995; or
(b) Enter into, without the prior written consent of
the Agent, any material amendment or modification of the Subordinated
Debt Indenture or other documents evidencing or governing the terms of
the Subordinated Debt other than the amendments or modifications
requiring the consent of the Required Lenders pursuant to clause (a)
above; or
(c) Consent, without prior written notice to the Agent,
to any change in the trustee under the Subordinated Debt Indenture.
8.20 Minimum Cash Flow Coverage Ratio. Permit the ratio of (1)
Consolidated Operating Cash Flow for any four consecutive calendar quarters to
(2) Consolidated Interest and Dividend Expense for such four consecutive
calendar quarters, to be less than 1.75 to 1.00. Such ratio shall be
calculated at the end of each calendar quarter beginning with the calendar
quarter ending December 31, 1996 using Consolidated Operating Cash Flow and
Consolidated Interest and Dividend Expense for the four most recently completed
calendar quarters.
ARTICLE IX
THE AGENT
9.1 Appointment and Authorization.
(a) Each Lender irrevocably appoints and authorizes the
Agent to take such action as agent on its behalf and to exercise such
powers under this Agreement as are delegated to the Agent by the terms
hereof together with all such powers as are reasonably incidental
thereto.
(b) The Agent is hereby authorized to enter into the
Security Agreement on behalf of the Lenders and all obligations of the
Lenders thereunder shall be binding upon each Lender as if such Lender
had executed the Security Agreement. Each Lender hereby appoints and
authorizes the Collateral Agent to act on its behalf in the capacity
described in the Security Agreement and authorizes the Collateral Agent
to act on such Lender's behalf in all respects with regard to
performance under the Security Agreement.
(c) Unless and until the Agent shall have received the
directions of the Required Lenders as provided in Section 10.2(1) or (2)
or of all Lenders, if expressly required hereunder, the Agent may (but
shall not be obligated to) take or refrain from taking such action, or
direct the
-97-
<PAGE> 104
Collateral Agent to take or refrain from taking such action with respect
to an Event of Default as it shall deem advisable in the best interests
of the Lenders.
(d) The Agent shall not be required to take any action
hereunder if it shall reasonably determine that by so doing it may incur
criminal or civil liability.
9.2 Agent and Affiliates.
The Agent shall have the same rights and powers under this
Agreement as any other Lender and may exercise or refrain from exercising the
same as though it were not the Agent, and the Agent and its Affiliates may
accept deposits from, lend money to, and generally engage in any kind of
business with, the Company, any Subsidiary or Affiliate of the Company as if it
were not the Agent hereunder.
9.3 Action by Agent.
The obligations of the Agent hereunder are only those expressly
set forth herein. Without limiting the generality of the foregoing, the Agent
shall not be required to take any action with respect to any Default, except as
expressly provided in this Article IX or in Article X.
9.4 Consultation with Experts.
The Agent may consult with legal counsel (who may be counsel for
the Company), independent public accountants and other experts selected by it
and shall not be liable for any action taken or omitted to be taken by it in
good faith in accordance with the advice of such counsel, accountants or
experts.
9.5 Liability of Agent.
(a) Neither the Agent nor any of its directors, officers,
agents, or employees shall be liable for any action taken or not taken
by it in connection herewith (i) with the consent or at the request of
the Required Lenders or of all Lenders, if required or (ii) in the
absence of its own gross negligence or willful misconduct.
(b) Neither the Agent (except as otherwise provided in this
Agreement) nor any of its directors, officers, agents or employees shall
be responsible for or have any duty to ascertain, inquire into or verify
(i) any statement, warranty or representation made in
connection with this Agreement or any Advance hereunder;
-98-
<PAGE> 105
(ii) the performance or observance of any of the
covenants or agreements of the Company or any Borrowing
Subsidiary;
(iii) the satisfaction of any condition specified
in Article V, except receipt of items required to be delivered
to the Agent and the determination of the amount of the Credit
Requirement; or
(iv) the validity, effectiveness or genuineness of
this Agreement, the Notes or any other instrument or writing
furnished in connection herewith.
(c) The Agent shall not incur any liability by acting in
reliance upon any notice, consent, certificate, statement, or other
writing (which may be a bank wire, telex or similar writing) or
telephone communication believed by it to be genuine or, in the case of
a writing, to be signed by the proper party or parties.
9.6 Indemnification.
(a) Each Lender shall, ratably in accordance with its share
of the Aggregate Commitment (or, if the Commitments have been
terminated, then in accordance with its share of aggregate Loans then
outstanding) at the time the Agent or the Collateral Agent incurred such
liability, indemnify the Agent and the Collateral Agent (to the extent
not reimbursed by the Company or a Borrowing Subsidiary or from any
portion of the Collateral proceeds allocated to the holders of the
Ratable Medium-Term Notes) against any cost, expense (including
reasonable counsel fees and disbursements), claim, demand, action, loss
or liability (except such as result from the indemnified party's gross
negligence or willful misconduct) that the Agent or the Collateral Agent
may suffer or incur in connection with this Agreement or the Security
Agreement or any action taken or omitted by the Agent or the Collateral
Agent hereunder or thereunder.
(b) For the purposes of this Section, the amount of any
Commitment of any Lender shall be the highest amount of such Commitment
of such Lender during the course of any event for which indemnity is
sought.
(c) The provisions of this Section shall survive the
termination of this Agreement.
9.7 Credit Decision.
Each Lender acknowledges that it has itself been and will
continue to be, independently and without reliance upon the Agent or any other
Lender, solely responsible for making its own
-99-
<PAGE> 106
independent appraisal of and investigations into the financial condition,
creditworthiness, condition, affairs, status and nature of the Company and the
Borrowing Subsidiaries. Accordingly, each Lender confirms to the Agent that it
has not relied, and will not hereafter rely, on the Agent or any other Lender
(i) except as otherwise provided in this Agreement, to check or inquire on such
Lender's behalf into the adequacy, accuracy or completeness of any information
provided by the Company or any Borrowing Subsidiary under or in connection with
this Agreement or the transactions herein contemplated (whether or not such
information has been or is hereafter distributed to such Lender by the Agent)
or (ii) to assess or keep under review on such Lender's behalf the financial
condition, creditworthiness, condition, affairs, status or nature of the
Company, any Borrowing Subsidiary or any Approved Investor.
9.8 Resignation or Removal and Appointment of Successor Agent.
The Agent may resign at any time by giving 90 days prior written
notice thereof to the Lenders and the Company. The Agent may be removed at any
time upon ninety (90) days prior written notice from the Required Lenders.
Upon any such resignation or removal notice the Required Lenders shall have the
right to appoint a successor Agent; provided that such appointment, unless made
after the occurrence of a Default and during the continuance thereof, shall be
subject to the consent of the Company, which consent shall not be unreasonably
withheld. If the Company and/or Required Lenders, as applicable, are unable to
agree on the appointment of a successor agent within such 90 day period, the
retiring agent shall appoint one of the Lenders as a successor agent for the
Lenders. Upon the appointment of a successor Agent, that successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations under this Agreement; provided, however, that
the resigning Agent shall not be discharged from any liability as a result of
its or its directors', officers', agents' or employees' gross negligence or
willful misconduct in connection with the performance of its duties and
obligations under this Agreement prior to the effective date of its
resignation. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article IX shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.
9.9 Compensation.
Compensation of the Agent for its services hereunder and
reimbursement for any expenses incurred by it in the performance of its duties
hereunder shall be paid by the Company pursuant to a separate written agreement
between the Agent and the Company.
-100-
<PAGE> 107
9.10 Release of Collateral Documents.
The Collateral Agent shall not release any Pledged Items or
Pledged Servicing except as provided herein or in connection with the
enforcement of any remedies hereunder.
9.11 Knowledge of Defaults.
The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Event of Default unless the Agent has received notice from a
Lender or the Company referring to this Agreement, describing such Event of
Default and stating that such notice is a "Notice of Default." The Agent shall
notify the Lenders within a reasonable time after the Agent has notice of the
occurrence of an Event of Default, which notice shall describe the Event of
Default.
9.12 Reports.
The Agent may, at its option with the approval of the Company,
alter the format of any report required hereunder, provided such modified
report contains the same information previously furnished in the unmodified
report.
ARTICLE X
DEFAULTS
10.1 Defaults.
In case of the happening of any of the following events (herein
called "Events of Default"):
(a) Any principal amount of any Loan made under this
Agreement (other than principal payments required to be made pursuant to
Sections 2.14(a)) shall not be paid when due and payable; or
(b) Any principal payment required to be made pursuant to
Sections 2.14(a) shall not be paid when due and payable, and shall
remain unpaid for one Business Day;
(c) Any interest or Fees due under this Agreement shall not
be paid when due and payable, and shall remain unpaid for five (5) days;
or
(d) Any amount, other than principal or interest or Fees,
payable under this Agreement shall not be paid when due and payable and
shall remain unpaid for five (5) days after written notice to the
Company or a Borrowing Subsidiary (as applicable) of such nonpayment; or
-101-
<PAGE> 108
(e) Any representation or warranty made or deemed made by
the Company or any Borrowing Subsidiary (or any of their officers)
herein (other than the representations and warranties contained in
Sections 4.7 and 4.8, the inaccuracies of which shall only cause the
Collateral affected thereby to cease to qualify as Eligible Collateral)
in the Security Agreement or in any certificate, agreement, instrument
or statement contemplated by or made or delivered pursuant to or in
connection herewith or therewith shall prove to have been incorrect when
made or deemed made in any material respect; provided however that if
the facts resulting in the breach of any such representation or warranty
are susceptible of correction, such breach shall not constitute an Event
of Default if such facts are corrected within 30 days after such
inaccurate representation or warranty was made or deemed made; or
(f) The Company or any Borrowing Subsidiary, as applicable,
shall fail to perform or observe any term, covenant or agreement
contained in Sections 7.10, 8.1, 8.3, 8.4, 8.6, 8.7, 8.9, 8.14(a), 8.15,
8.17, 8.18, 8.19 or 8.20 (or, while the security interest in favor of
the Collateral Agent is abated, Section 8.11); or
(g) The Company shall (i) fail to comply with the covenant
contained in Section 8.12 and such failure remains unremedied for one
Business Day, or (ii) fail to perform any term, covenant or agreement
contained in Sections 7.7(a), 7.9, 8.5, 8.8 or 8.16, and such failure
shall remain unremedied for more than 30 days;
(h) The Company or any Borrowing Subsidiary shall fail to
perform or observe any other term, covenant or agreement contained
herein (including Section 8.11 while the security interest in favor of
the Collateral Agent is not abated) or in the Security Agreement on its
part to be performed or observed and any such failure remains unremedied
for thirty (30) days after written notice thereof shall have been given
to the Company or such Borrowing Subsidiary (as applicable) by the Agent
or the Collateral Agent; or
(i) An Event of Default shall exist under any other Credit
Document; or
(j) Either this Agreement, the Notes or the Security
Agreement shall, at any time after its execution and delivery, for any
reason cease to be in full force and effect (unless such occurrence is
in accordance with its terms or after payment thereof) or shall be
declared to be null and void, or the validity or enforceability thereof
shall be contested by the Company, any Borrowing Subsidiary or the
Collateral Agent, or the Company, any Borrowing Subsidiary or
-102-
<PAGE> 109
the Collateral Agent shall deny that it has any further liability or
obligation thereunder; or
(k) The Company, its Parent, Fund American Enterprises
Holdings, Inc., any Borrowing Subsidiary or any of the Company's other
material Subsidiaries shall (i) be adjudicated bankrupt or insolvent,
(ii) admit in writing its inability to pay its debts as they mature,
(iii) make an assignment for the benefit of creditors, (iv) fail
generally to pay its debts as such debts become due and payable, (v)
apply for or consent to the appointment of any receiver, trustee,
custodian or similar officer for it or for all or any substantial part
of its property; or such receiver, trustee, custodian or similar officer
shall be appointed without the application or consent of the Company or
of such Subsidiary, as the case may be, and such appointment shall
continue undischarged for a period of 60 days, (vi) institute (by
petition, application, answer, consent or otherwise) any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt,
dissolution, liquidation or similar proceeding relating to it under the
laws of any jurisdiction, (vii) have any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, dissolution,
liquidation or similar proceeding (by petition, application or
otherwise) instituted against it and remain undismissed for a period of
60 days, or (viii) have any judgment, writ, warrant of attachment or
execution or similar process issued or levied in respect of any of its
obligations (alleged or otherwise) against any of its property involving
any amount in excess of $5,000,000 and such judgment, writ or similar
process shall not be released, vacated, stayed or fully bonded within 30
days after its issue or levy; or
(l) The Company, any Borrowing Subsidiary or any of the
Company's other material Subsidiaries shall (i) default in the payment
when due (after giving effect to any available cure period) of any
principal of or interest on any of its Debt other than the Credit
Indebtedness in excess of $25,000,000 in the aggregate or (ii) any event
specified in any note, agreement, indenture or other document evidencing
or relating to any such Debt in excess of $25,000,000 shall occur if the
effect of such event is to cause, or to permit the holder or holders of
such Debt (or a trustee or agent on behalf of such holder or holders) to
cause, such Debt to become due, or to be prepaid in full, prior to its
stated maturity, and in either case any notice or cure period has
expired and such default has not been waived in writing by the holder of
such Debt; or
(m) An event or condition occurs or exists with respect to
any Plan concerning which the Company is under an obligation to furnish
a report to the Lenders in accordance
-103-
<PAGE> 110
with Section 7.7(i) and as a result of such event or condition, together
with all other such events or conditions, the Company or any ERISA
Affiliate has incurred a liability to a Plan or the PBGC (or any
combination of the foregoing) which is material in relation to the
financial position of the Company; or
(n) A Change in Control shall occur with respect to the
Company; or
(o) Except in connection with a Positive Security Event,
the lien against the Collateral created under the Security Agreement for
the benefit of the Secured Parties shall cease to be a perfected, first
priority security interest; provided, however, that if the Secured
Parties shall cease to have a perfected, first priority interest in a
portion of the Collateral, such cessation shall not constitute an Event
of Default so long as the Collateral in which the Secured Parties have a
perfected, first priority interest is sufficient to cause the Aggregate
Borrowing Base to exceed the Credit Requirement; or
(p) An event of default exists under the terms of an
indenture pursuant to which any Ratable Medium Term Note is issued and
such event of default has not been waived in writing;
then, and in every such event and at any time thereafter during the continuance
of such event, the Agent and the Lenders shall have the rights described in the
following Sections of this Article X.
10.2 Remedies.
(1) Upon the occurrence of any Event of Default the Agent
may, and at the direction of the Required Lenders shall, at the same or
different times, take one or more of the following actions: (i) by
notice to the Company terminate the Commitments and they shall thereupon
terminate, (ii) by notice to the Company declare the Obligations to be,
and the Obligations shall thereupon become, immediately due and payable
without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by the Company and the Borrowing Subsidiaries,
provided that in the case of any of the Events of Default specified in
subparagraph (k) of Section 10.1, without any notice to the Company or
any Borrowing Subsidiary or any other act by the Agent or the Lenders,
the Commitments shall thereupon terminate and the Obligations shall
become immediately due and payable without presentment, demand, protest
or other notice of any kind, all of which are hereby waived by the
Company and the Borrowing Subsidiaries. Following the
-104-
<PAGE> 111
occurrence and during the continuance of a Default, no Lender shall be
obligated to fund any Loan hereunder.
(2) Following the occurrence and during the continuance of
an Event of Default, the Company and the Borrowing Subsidiaries agree
that the Company, the Borrowing Subsidiaries and the Agent shall, at the
request of the Required Lenders, implement certain procedures with
respect to the Company's and the Borrowing Subsidiaries' funding of AP
Mortgages, all at the Company's sole expense. Such procedures may
include, but are not limited to: (i) reducing the advance rate against
AP Mortgages for purposes of determining the Mortgage Collateral Value
component of the Aggregate Borrowing Base, (ii) requiring that if (A) AP
Mortgages are funded with wire transfers, such wire transfers originate
from accounts located at a lending office of a Lender, (B) AP Mortgages
are funded from accounts which are not located at a lending office of a
Lender, the financial institution which holds such account enter into an
agreement with the Company or the applicable Borrowing Subsidiary (as
applicable) and the Agent which shall provide that the Agent shall have
exclusive dominion and control over the funds in such account, and (iii)
requiring the Company and the Borrowing Subsidiaries to provide the
Agent and the Lenders with such information regarding the funding of
such AP Mortgages as the Required Lenders may reasonably request. The
Company and the Borrowing Subsidiaries, at their expense, shall from
time to time execute and deliver to the Agent or the Collateral Agent
all such assignments, certificates, supplemental documents, and
financing statements, and shall do all other acts or things, as the
Agent may reasonably request in order to more fully implement such
procedures.
(3) Upon the occurrence of any Event of Default, the Agent
and the Collateral Agent, on behalf of the Secured Parties, shall be
entitled to all rights and remedies hereunder and under the Security
Agreement and all other rights and remedies at law or in equity existing
in or conferred upon the Secured Parties by other jurisdictions or other
applicable law.
(4) The Company and the Borrowing Subsidiaries waive any
right to require the Agent, the Collateral Agent or any Lender to (i)
proceed against or exhaust any of its remedies against the Company, any
Borrowing Subsidiary or any other Person in any particular order, (ii)
proceed against or exhaust any of the Collateral or pursue its rights
and remedies as against the Collateral in any particular order or (iii)
pursue any other remedy in its power.
(5) The Agent on behalf of the Lenders may, but shall not
be obligated to, advance any sums or do any act or thing
-105-
<PAGE> 112
necessary to uphold and enforce the lien and priority of, or the
security intended to be afforded by, any Pledged Mortgage, including,
without limitation, payment of delinquent taxes or assessments and
insurance premiums. The Company and the Borrowing Subsidiaries shall
provide any and all information required by the Agent or the Collateral
Agent to administer this Agreement or collect on the Collateral. All
advances, charges, costs and expenses, including reasonable attorneys
fees, incurred or paid by the Agent in exercising any right, power or
remedy conferred by this Agreement, or in the enforcement hereof (or by
any Lender acting on instruction of the Required Lenders in the
enforcement hereof), together with interest thereon at the rate per
annum of two percent (2%) plus the Alternate Base Rate from the time of
payment until repaid, shall become a part of the Credit Indebtedness.
(6) No failure on the part of the Agent or any Lender to
exercise, and no delay in exercising, any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise by the Agent or any Lender of any right, power or
remedy hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. The remedies herein
provided are cumulative and are not exclusive of any remedies provided
by law.
10.3 Notice of Default.
The Agent may, and at the direction of the Required Lenders
shall, give notice to the Company under Section 10.1(d), 10.1(h) or 10.2 and
shall thereupon notify all Lenders thereof.
10.4 Application of Proceeds.
(a) After the occurrence of an Event of Default, the
portion of the proceeds of any sale or enforcement of all or any part of the
Collateral which is delivered to the Agent by the Collateral Agent pursuant to
the provisions of the Security Agreement shall be applied by the Agent, after
taking into account any adjustments made pursuant to Section 2.3(e):
First, to the extent that any such proceeds arise from a sale of
any of the Pledged Servicing, to the payment of any amounts due by the
Company to any Approved Investor as a condition to the transfer of the
Company's interest in any Servicing Agreements constituting Pledged
Servicing pursuant to the terms of such Servicing Agreements, including
without limitation all amounts described in the Acknowledgement
Agreements;
Second, to the extent not already paid from the Collateral
proceeds by the Collateral Agent, to payment of
-106-
<PAGE> 113
all costs and expenses of such sale or enforcement, including reasonable
compensation to the Agent's agents and counsel, and all expenses,
liabilities and advances made or incurred by the Agent or any Lender
acting on instructions of the Required Lenders in connection therewith;
Third, to the extent not already paid from the Collateral
proceeds by the Collateral Agent, to the payment of all costs and
expenses incurred by the Collateral Agent under the Security Agreement;
Fourth, to the payment of accrued and unpaid interest on the
Credit Indebtedness (including the accrued and unpaid interest portion,
if any, of the Approved GNMA Letter of Credit Obligations), fees due
hereunder and all other unpaid Credit Indebtedness other than the
principal amount of Loans and the face amount (whether drawn or undrawn)
of Approved GNMA Letters of Credit, ratably according to the respective
amounts owing or due each Lender or Non-Lender Balance Bank until such
amounts are paid in full;
Fifth, to the total unpaid principal amount of all Loans and to
the unpaid face amount (whether drawn or undrawn) of Approved GNMA
Letters of Credit, ratably according to the amount due each Lender
(provided, however, that proceeds applicable to the undrawn face amount
of Approved GNMA Letters of Credit shall be distributed in accordance
with Section 10.5 below) until such amounts are paid in full; and
Sixth, to the payment to the Company, or to its successors or
assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining from such proceeds.
(b) The Agent shall have absolute discretion as to the time
of application of any such proceeds, moneys or balances in accordance
with this Agreement.
(c) If the proceeds of any such sale are insufficient to
cover the costs and expenses of such sale, as aforesaid, and the payment
in full of the Credit Indebtedness, the Company and each Borrowing
Subsidiary shall remain liable for any deficiency.
10.5 Letter of Credit Cash Collateral Accounts.
(a) Upon the Agent's receipt of any Collateral proceeds to
be applied to the undrawn face amount of any Approved GNMA Letters of
Credit pursuant to Section 10.4(a), a separate cash collateral account
(each a "Letter of Credit Account") shall be established with the Agent
for each outstanding Approved GNMA Letter of Credit. Each Letter of
Credit
-107-
<PAGE> 114
Account shall be established in the name of the Company but shall be
under the sole dominion and control of the Agent, for the benefit of the
Lenders, and the Company shall have no interest therein. All funds
deposited into the Letter of Credit Accounts from time to time shall be
invested by the Agent at its discretion in certificates of deposit of
First Chicago having a maturity not exceeding 30 days, and all amounts
earned thereon shall also be held in the Letter of Credit Account to be
disbursed in accordance with Section 10.5(b). In addition to the
foregoing, the Company hereby grants to the Agent, for the benefit of
the Lenders, a properly perfected security interest in and to each
Letter of Credit Account and any funds that may hereafter be on deposit
in such account and the proceeds thereof.
(b) Upon the Agent's receipt of any Collateral proceeds to
be applied to the undrawn face amount of any particular Approved GNMA
Letter of Credit pursuant to Section 10.4, such proceeds shall be
deposited by the Agent into the Letter of Credit Account applicable to
that particular Approved GNMA Letter of Credit. Such funds shall be
promptly disbursed from the applicable Letter of Credit Account to
reimburse the applicable Issuing Bank for drafts drawn from time to time
under the applicable Approved GNMA Letter of Credit. If an Approved
GNMA Letter of Credit is drawn upon and the funds held in the Letter of
Credit Account applicable to that Approved GNMA Letter of Credit are
insufficient to reimburse the Issuing Bank in full for all Approved GNMA
Letter of Credit Obligations applicable thereto, such unreimbursed
obligations shall, for purposes of Section 10.4, thereafter be
considered unpaid Loan principal due and owing to the Issuing Lender.
If (i) an Approved GNMA Letter of Credit is fully drawn upon and all
Approved GNMA Letter of Credit Obligations relating thereto are paid in
full or (ii) an Approved GNMA Letter of Credit expires or is otherwise
terminated (and thus no further Approved GNMA Letter of Credit
Obligations exist with respect to such Approved GNMA Letter of Credit),
then any funds then held in the Letter of Credit Account relating to
such Approved GNMA Letter of Credit shall be considered Collateral
proceeds which shall again be distributed to the Agent to be disbursed
in accordance with Section 10.4.
ARTICLE XI
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
11.1 Successors and Assigns.
The terms and provisions of the Credit Documents shall be
binding upon and inure to the benefit of the Company, the Borrowing
Subsidiaries and the Lenders and their respective
-108-
<PAGE> 115
successors and assigns, except that neither the Company nor any Borrowing
Subsidiary shall have the right to assign its rights or obligations under the
Credit Documents without the consent of all the Lenders and any assignment by
any Lender must be made in compliance with Section 11.3. The Agent may treat
the payee of any Note as the owner thereof for all purposes hereof unless and
until such payee complies with Section 11.3 in the case of an assignment
thereof or, in the case of any other transfer, a written notice of the transfer
is filed with the Agent. Any assignee or transferee of a Note agrees by
acceptance thereof to be bound by all the terms and provisions of the Credit
Documents. Any request, authority or consent of any person, who at the time of
making such request or giving such authority or consent is the holder of any
Note, shall be conclusive and binding on any subsequent holder, transferee or
assignee of such Note or of any Note or Notes issued in exchange therefor.
11.2 Participations.
(a) Permitted Participants; Effect. Any Lender may, in the
ordinary course of its business and in accordance with applicable law,
at any time sell to one or more banks or other entities ("Participants")
participating interests in any Loan owing to such Lender, any Note held
by such Lender, any Commitment of such Lender or any other interest of
such Lender under the Credit Documents. In the event of any such sale
by a Lender of participating interests to a Participant, such Lender's
obligations under the Credit Documents shall remain unchanged, such
Lender shall remain solely responsible to the other parties hereto for
the performance of such obligations, such Lender shall remain the holder
of any such Note for all purposes under the Credit Documents, all
amounts payable by the Company or any Borrowing Subsidiary under this
Agreement shall be determined as if such Lender had not sold such
participating interests, and the Company, each Borrowing Subsidiary and
the Agent shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under the Credit
Documents.
(b) Voting Rights. Except as otherwise expressly provided
in the Credit Documents, each Lender shall retain the sole right to
approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Credit Documents other
than any amendment, modification or waiver with respect to any Loan or
Commitment in which such Participant has an interest which (i) forgives
principal, interest or Fees or reduces the interest rate or Fees payable
with respect to any such Loan or Commitment, (ii) postpones any date
fixed for any regularly-scheduled payment of principal of, or interest
on, any such Loan or Fees on any such Commitment, (iii) releases
Collateral beyond
-109-
<PAGE> 116
the releases expressly provided for herein, or (iv) extends the
Termination Date.
(c) Benefit of Set-Off. The Company and the Borrowing
Subsidiaries agree that each Participant shall be deemed to have the
right of set-off provided pursuant to Section 12.10(a) in respect of its
participating interest in amounts owing under the Credit Documents to
the same extent as if the amount of its participating interest were
owing directly to it as a Lender under the Credit Documents, provided
that each Lender shall retain the right of set-off provided in Section
12.10(a) with respect to the amount of participating interests sold to
each Participant. The Lenders agree to share with each Participant, and
each Participant, by exercising the right of set-off provided in Section
12.10(a), agrees to share with each Lender, any amount received pursuant
to the exercise of its right of set-off, such amounts to be shared in
accordance with Section 12.10(b) as if each Participant were a Lender.
Neither the Company nor any Borrowing Subsidiary is a party to the
agreement among the Lenders and Participants set forth in the
immediately preceding sentence, and such sentence may be amended without
the consent of either the Company or any Borrowing Subsidiary.
11.3 Assignments.
(a) Permitted Assignments. Any Lender may, with the prior
written consent of Agent (which consent shall not be unreasonably
withheld or delayed), in the ordinary course of its business and in
accordance with applicable law, at any time assign to one or more banks
or other entities ("Purchasers") all or any part of its rights and
obligations under the Credit Documents, provided that, unless an Event
of Default has occurred and is then continuing, the prior written
consent of the Company to the identity of any such Purchaser shall be
required, and the Company agrees that such consent shall not be
unreasonably withheld or delayed, except that no consent of the Agent or
the Company shall ever be required for (i) any assignment to a Person
directly or indirectly controlling, controlled by or under direct or
indirect common control with the assigning Lender or (ii) the pledge or
assignment by a Lender of such Lender's Note and other rights under the
Loan Documents to any Federal Reserve Bank in accordance with applicable
law. Notwithstanding the foregoing, no assignment of Loans or
Commitments which requires the consent of the Agent or the Company may
be made if the assignment would result in either the assigning Lender or
the Purchaser (which may be an existing Lender) holding a Commitment of
less than $15,000,000; provided, however, that if (due to reductions in
the Aggregate Commitment) a Lender's Commitment is less than
$15,000,000, such Lender may assign
-110-
<PAGE> 117
all (but not less than all) of its Commitment in accordance with the
terms of this Section notwithstanding the fact that such Commitment is
less than $15,000,000.
(b) Effect; Effective Date. Upon delivery to the Agent of
a New/Modified Commitment Supplement in the form of Exhibit H hereto
executed by the assigning Lender and the Purchaser and payment to the
Agent of an assignment fee of $3,500, such assignment shall become
effective on the effective date specified in such notice of assignment.
On and after the effective date of such assignment, such Purchaser shall
for all purposes be a Lender party to this Agreement and any other
Credit Document executed by the Lenders and shall have all the rights
and obligations of a Lender under the Credit Documents, to the same
extent as if it were an original party hereto, and no further consent or
action by the Company, the Lenders or the Agent shall be required to
release the transferor Lender with respect to the percentage of the
Commitments and Loans assigned to such Purchaser. Upon the consummation
of any assignment to a Purchaser pursuant to this Section, the
transferor Lender, the Agent, the Company and the Borrowing Subsidiaries
shall make appropriate arrangements so that replacement Notes are issued
to such transferor Lender and new Notes or, as appropriate, replacement
Notes, are issued to such Purchaser, in each case in principal amounts
reflecting their respective Commitments, as adjusted pursuant to such
assignment.
11.4 Dissemination of Information.
The Company and the Borrowing Subsidiaries authorize each Lender
to disclose to any Participant or any other Person acquiring an interest in the
Credit Documents by operation of law (each a "Transferee") and any prospective
Transferee any and all information in such Lender's possession concerning the
creditworthiness of the Company and its Subsidiaries, provided that the
transferor shall obtain from any such Transferee or prospective Transferee,
prior to disclosing any such information, a confidentiality agreement executed
by the Transferee or prospective Transferee agreeing to be bound by any
confidentiality requirements with respect to such information which are imposed
upon the Lenders under the terms of the Credit Documents.
11.5 Tax Treatment.
If any interest in any Credit Document is transferred to any
Transferee which is organized under the laws of any jurisdiction other than the
United States or any State thereof, the transferor Lender shall cause such
Transferee, concurrently with the effectiveness of such transfer, to comply
with all
-111-
<PAGE> 118
applicable provisions of the Code with respect to withholding and other tax
matters.
ARTICLE XII
MISCELLANEOUS
12.1 Immediately Available Funds.
All payments and other transfers of funds under this Agreement
shall be made in funds immediately available at the place of payment unless the
recipient thereof shall otherwise agree.
12.2 Notices.
Except where instructions or notices are expressly authorized
elsewhere in this Agreement to be given by telephone or by other means of
transmission, all instructions, notices and other communications to be given to
any party hereto shall be in writing and shall be personally delivered or sent
by certified mail, postage prepaid, private delivery service or by facsimile,
and shall be deemed to be given for purposes of this Agreement on the day (or
at the time of day, if applicable) when actually received by the intended party
at its address or facsimile or telephone number as set forth below (or as such
party may specify to the other parties in writing). Any requirement that
notice be given to any person under this Agreement shall be deemed to require
notice to the Agent, the Company and each Lender, unless otherwise expressly
provided herein. Whenever the giving of notice by telephone is permitted by
this Agreement, such notice shall be confirmed in writing within three days.
The addresses for notices to the parties are as set forth below
their signatures on the signature pages hereto or on any assignment.
12.3 Survival and Termination of Agreement.
All covenants, agreements, representations and warranties made
herein and in the certificates and other documents delivered pursuant hereto
shall survive the funding of the Notes and shall continue in full force and
effect to the Termination Date or so long as any amount payable to the Lenders
in connection with this Agreement is unpaid, whichever is later, at which time
this Agreement shall terminate, it being expressly understood that the
obligations of the Company under Sections 3.1, 3.3 and 7.8 shall survive any
termination of this Agreement. Whenever in this Agreement any party is
referred to, such reference shall be deemed to include the successors and
assigns of such party, but no assignment or transfer (by operation of law or
otherwise) of this Agreement by the Company
-112-
<PAGE> 119
or any Borrowing Subsidiary or any of their rights or duties hereunder may be
made without the prior written consent of all of the Lenders; and all
covenants, promises and agreements by or on behalf of the Company or any
Borrowing Subsidiary which are contained in this Agreement shall inure to the
benefit of the successors and assigns of the Lenders.
12.4 Fees and Expenses of the Lenders.
The Company will pay (a) all reasonable out-of-pocket costs and
expenses incurred by the Agent or by the Collateral Agent (including the fees,
out-of-pocket expenses and other reasonable expenses of counsel to the Agent or
the Collateral Agent) in connection with the preparation, execution and
delivery of this Agreement, the Notes, the Security Agreement and any other
agreements or documents referred to herein or therein and any amendments
thereto, and (b) all reasonable out-of-pocket costs and expenses incurred by
the Agent, the Collateral Agent and the Lenders (including the fees,
out-of-pocket expenses and other reasonable expenses of counsel to the Lenders)
in connection with the enforcement and protection of the rights of the Lenders
under this Agreement, the Notes, the Security Agreement or any other agreement
or document referred to herein or therein.
12.5 Applicable Law.
This Agreement shall be construed in accordance with and
governed by the law of the State of Illinois.
12.6 Modification of Agreement.
Except for certain changes in a Lender's Commitment or admission
of a new Lender which (pursuant to Section 2.1) do not require any consents or
approvals from the other Lenders but which require a New/Modified Commitment
Supplement executed by the Agent, the Company, the Borrowing Subsidiaries and
the Lender(s) being added or modifying their Commitment, no provisions of this
Agreement may be amended or waived unless such amendment or waiver is in
writing and is signed by the Company, and the Agent if the rights or duties of
the Agent are affected thereby, and
(1) each Lender if such amendment or waiver
(i) reduces or forgives any principal of any
unpaid Loan or any interest thereon or any Fees due to such
Lender hereunder; or
(ii) postpones the date fixed for any payment of
principal of or interest on any unpaid Loan or any Fees payable
to such Lenders; or
-113-
<PAGE> 120
(iii) changes the amount of payment of principal of
or interest on any unpaid Loan or any Fees payable to the
Lenders hereunder; or
(iv) changes or waives any of the conditions
precedent to the initial Advance hereunder or any subsequent
Advance; or
(v) changes the amount of any such Lender's
Commitment, except as expressly provided for herein; or
(vi) would amend or waive the method of
calculating the Aggregate Borrowing Base; or
(vii) would amend or waive the provisions of
Section 2.14; or
(viii) extends the Termination Date; or
(ix) releases any Collateral beyond the releases
expressly provided for herein or in the Security Agreement; or
(x) changes the definitions of Positive Security
Event, Negative Security Event or Positive Security Conditions
or waives compliance with any Positive Security Condition; or
(xi) changes or waives any restriction on the
Company's or any Borrowing Subsidiary's ability to assign its
rights or obligations under any of the Credit Documents; or
(xii) changes or waives any funding requirement,
including, without limitation, any Lending Sublimits; or
(xiii) changes or waives any yield protection; or
(xiv) changes or waives any provision herein
regarding the indemnification of the Agent, the Collateral Agent
or such Lender; or
(xv) changes the definition of Required Lenders or
modifies any requirement for consent by all of the Lenders; or
(xvi) changes or waives any provision herein
regarding the allocation among the Lenders of any payments or
proceeds received by the Agent hereunder; or
(2) the Required Lenders in the case of all other waivers
or amendments.
-114-
<PAGE> 121
12.7 Non-Waiver of Rights by the Lenders.
Neither any failure nor any delay on the part of the Agent or
the Lenders in exercising any right, power or privilege hereunder or under the
Security Agreement shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
12.8 Dealings with the Company and its Affiliates.
The Lenders and their Affiliates may accept deposits from,
extend credit to and generally engage in any kind of banking, trust or other
business with the Company and any of its Affiliates regardless of the capacity
of the Lenders hereunder.
12.9 Changes in GAAP.
The parties agree that if there are any changes in GAAP in the
future which result in material changes to the presentation of the Company's
financial condition in accordance with GAAP in such a way as to alter the
material intent of this Agreement, then the parties will negotiate in good
faith to attempt to agree on such modifications to this Agreement as may be
necessary to preserve the original intent of this Agreement in light of such
revised GAAP rules, provided that unless and until a written agreement is
entered into by all parties hereto, no changes to this Agreement shall be
effective and all calculations required to be made in accordance with GAAP
hereunder shall continue to be made as if GAAP had not changed.
12.10 Set-Off.
(a) If an Event of Default shall have occurred, each Lender
shall have the right, at any time and from time to time without notice
to the Company or any Borrowing Subsidiary, any such notice being hereby
expressly waived, to set-off and to appropriate or apply any and all
deposits of money or property or any other indebtedness at any time held
or owing by such Lender to or for the credit or the account of the
Company or any Borrowing Subsidiary against and on account of all
outstanding Credit Indebtedness and all Credit Indebtedness which from
time to time may become due hereunder and all other obligations and
liabilities of the Company or any Borrowing Subsidiary under this
Agreement, regardless of the adequacy of any Collateral and irrespective
of whether or not such Lender shall have made any demand hereunder and
whether or not said obligations and liabilities shall have matured.
(b) Each Lender agrees that if it shall, by exercising any
right of set-off or counterclaim or otherwise, receive
-115-
<PAGE> 122
payment of a proportion of the aggregate amount of principal, interest
or Fees due with respect to this Agreement and the Notes held by it
which is greater than the proportion received by any other Lender in
respect of the aggregate amount of principal, interest or Fees due with
respect to this Agreement and the Notes held by such other Lender, the
Lender receiving such proportionately greater payment shall purchase
such participations in the Notes held by the other Lenders and such
other adjustments shall be made, as may be required so that all such
payments of principal, interest or Fees shall be shared by the Lenders
hereunder pro rata according to their respective shares of the Credit
Indebtedness. Each Lender agrees to exercise any and all rights of
set-off, counterclaim or bankers' lien relating to the Credit
Indebtedness first fully against the Credit Indebtedness and only then
to any other Debt of the Company or any Borrowing Subsidiary to such
Lender. Neither the Company nor any Borrowing Subsidiary is a party to
the agreement among the Lenders set forth in this Section 12.10(b), and
such Section may be amended without the consent of either the Company or
any Borrowing Subsidiary.
(c) The Company and the Borrowing Subsidiaries agree that
funds received and held by the Company or any Borrowing Subsidiary as
custodian for FNMA, GNMA or other mortgage pools which are deposited
into accounts with any Lender shall be clearly identified as custodial
accounts, and each Lender agrees that each provision of the foregoing
paragraphs of this Section 12.10 shall not apply to such custodial
accounts. Neither the Company nor any Borrowing Subsidiary shall
deposit any of its general funds in any custodial accounts or otherwise
commingle funds in any custodial accounts.
12.11 Counterparts.
This Agreement may be executed in counterparts which, taken
together, shall constitute a single document.
12.12 Severability.
In case any one or more of the provisions contained in this
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
12.13 Headings.
Section headings in the Credit Documents are for convenience of
reference only and shall not govern the interpretation of any of the provisions
of the Credit Documents.
-116-
<PAGE> 123
12.14 Entire Agreement.
The Credit Documents embody the entire agreement and
understanding among the Company, the Borrowing Subsidiaries, the Agent and the
Lenders and supersede all prior agreements and understandings among the
Company, the Borrowing Subsidiaries, the Agent and the Lenders relating to the
subject matter thereof.
12.15 Limitation on Recourse to Borrowing Subsidiaries.
Each Borrowing Subsidiary and the Company shall be jointly and severally
liable for the payment of the Obligations; provided, however, that recourse to
any particular Borrowing Subsidiary hereunder shall be limited to (i) such
Borrowing Subsidiary's interest in the Collateral pledged by such Borrowing
Subsidiary to the Agent or the Collateral Agent under the Credit Documents and
the proceeds thereof, plus (ii) an amount equal to the capital investment by
the Company in such Borrowing Subsidiary, plus (iii) an amount equal to the
total of all Debt owed by such Borrowing Subsidiary to the Company.
12.16 Consent of Jurisdiction.
THE COMPANY AND EACH BORROWING SUBSIDIARY EACH HEREBY
IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES
FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO ANY CREDIT DOCUMENTS AND THE COMPANY AND EACH
BORROWING SUBSIDIARY HEREBY EACH IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT
OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND
IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE
OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH
COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE
AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE COMPANY OR ANY BORROWING
SUBSIDIARY IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY
THE COMPANY OR ANY BORROWING SUBSIDIARY AGAINST THE AGENT OR ANY LENDER OR ANY
AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY CREDIT
DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS.
-117-
<PAGE> 124
12.17 Waiver of Jury Trial.
THE COMPANY, EACH BORROWING SUBSIDIARY, THE AGENT AND EACH
LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR
OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY CREDIT
DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
IN WITNESS WHEREOF, the Company, the Borrowing Subsidiaries and the
Lenders have caused this Agreement to be duly executed by their duly authorized
officers, all as of the day and year first above written:
SOURCE ONE MORTGAGE SERVICES CORPORATION
By:________________________________
Name: Michael C. Allemang
Title: Executive Vice President
and Chief Financial Officer
Address for Notices:
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attn: Chief Financial Officer
Telephone No.: (810) 488-8639
Facsimile No.: (810) 488-7300
and
Attn: Vice President/Treasury
Telephone No.: (810) 488-7338
Facsimile No.: (810) 488-7812
-118-
<PAGE> 125
THE MORTGAGE AUTHORITY, INC.
By:________________________________
Name: Larry N. Ciofu
Title: Vice President/Treasury
Address for Notices:
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attn: Controller
Telephone No.: (810) 488-7338
Facsimile No.: (810) 488-7812
CENTRAL PACIFIC MORTGAGE COMPANY
By:________________________________
Name: John Cassell
Title: Chief Financial Officer
Address for Notices:
5750 Sunrise Boulevard
Citrus Heights, CA 95610
Attn: Chief Financial Officer
Telephone No.: (916) 537-2603
Facsimile No.: (916) 966-7327
-119-
<PAGE> 126
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
By:________________________________
Name:___________________________
Title:__________________________
Address for Notices Regarding
Fundings:
One First National Plaza
Chicago, Illinois 60670
Attn: Denise Lee
Telephone No.: (312) 732-6455
Facsimile No.: (312) 732-3852
Address for Other Notices:
One First National Plaza
Chicago, Illinois 60670
Attn: William A. Sholten, III
First Vice President
Telephone No.: (312) 732-4600
Facsimile No.: (312) 732-6222
THE FIRST NATIONAL BANK OF CHICAGO
By:________________________________
Name:___________________________
Title:__________________________
Address for Notices:
One First National Plaza
Chicago, Illinois 60670
Attn: William A. Sholten, III
First Vice President
Telephone No.: (312) 732-4600
Facsimile No.: (312) 732-6222
-120-
<PAGE> 127
ABN AMRO BANK, N.V.
By:________________________________
Name:___________________________
Title:__________________________
By:________________________________
Name:___________________________
Title:__________________________
Address for Notices:
135 S. LaSalle Street
Suite 625
Chicago, Illinois 60603
Attn: David Shapiro,
Vice President
Telephone No.: (312) 904-2654
Facsimile No.: (312) 606-8425
BANK OF AMERICA NT & SA
By:_________________________________
Thomas A. Pizurie
Vice President
Address for Notices:
24022 Calle de la Plata, Suite 405
Laguna Hills, California 92653
Attn: Thomas A. Pizurie,
Vice President
Telephone No.: (714) 951-4169
Facsimile No.: (714) 951-4046
-121-
<PAGE> 128
THE BANK OF NEW YORK
By:________________________________
Patricia M. Dominus
Vice President
Address for Notices:
One Wall Street, 17th Floor
New York City, New York 10286
Attn: Patricia M. Dominus,
Vice President
Telephone No.: (212) 635-6467
Facsimile No.: (212) 635-6468
THE BANK OF TOKYO-MITSUBISHI, LTD.
By:_________________________________
Noburu Kobayashi
Deputy General Manager
Address for Notices:
227 West Monroe, Suite 2300
Chicago, Illinois 60606
Attn: Michael Kempel
Telephone No.: (312) 696-4682
Facsimile No.: (312) 696-4535
-122-
<PAGE> 129
BANKERS TRUST COMPANY
By:________________________________
John O'Rourke
Vice President
Address for Notices:
280 Park Avenue, 23W
New York, New York 10017
Attn: John O'Rourke,
Vice President
Telephone No.: (212) 454-3760
Facsimile No.: (212) 454-3821
BANQUE PARIBAS
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
Address for Notices:
The Equitable Tower
787 Seventh Avenue
New York, New York 10019
Attn: Victor Brown
Telephone No.: (212) 841-2117
Facsimile No.: (212) 841-2689
-123-
<PAGE> 130
BARCLAYS BANK PLC
By:________________________________
Tina Swartz
Associate Director
Address for Notices:
222 Broadway, 12th Floor
New York, New York 10038
Attn: Tina Swartz,
Associate Director
Telephone No.: (212) 412-7637
Facsimile No.: (212) 412-5610
CAISSE NATIONALE DE CREDIT AGRICOLE
By:_________________________________
David Bouhl
First Vice President Head of
Corporate Banking Chicago
Address for Notices:
55 E. Monroe, Suite 4700
Chicago, Illinois 60603-5702
Attn: Richard Drennan,
Vice President
Telephone No.: (312) 917-7441
Facsimile No.: (312) 372-3724
-124-
<PAGE> 131
CIBC, INC.
By:________________________________
Stephen D. Reynolds
Director
CIBC Wood Gundy Securities
Corp., As Agent for CIBC, Inc.
Address for Notices:
425 Lexington Avenue, 8th Floor
New York, New York 10017
Attn: Stephen D. Reynolds,
Director
CIBC Wood Gundy Securities
Corp., As Agent for
CIBC, Inc.
Telephone No.: (212) 856-3566
Facsimile No.: (212) 856-3613
COMERICA BANK
By:________________________________
James R. Grossett
Vice President
Address for Notices:
One Detroit Center
500 Woodward Avenue, 9th Floor
Detroit, Michigan 48226-3265
Attn: James R. Grossett,
Vice President
Telephone No.: (313) 222-5502
Facsimile No.: (313) 222-3776
-125-
<PAGE> 132
CREDIT LYONNAIS NEW YORK BRANCH
By:___________________________
Renaud d'Herbes
Senior Vice President
Address for Notices:
1301 Avenue of the Americas
New York, New York 10019
Attn: Kathleen Deacy Bowers,
Asst. Vice President
Telephone No.: (212) 261-7367
Facsimile No.: (212) 261-3401
CREDIT SUISSE
By:________________________________
Name:___________________________
Title:__________________________
By:________________________________
Name:___________________________
Title:__________________________
Address for Notices:
12 East 49th Street, 41st Floor
New York, New York 10017
Attn: Hazel Leslie
Telephone No.: (212) 238-5218
Facsimile No.: (212) 238-5246
and
Attn: Mr. Kristinn Kristinsson
Telephone No.: (212) 238-5206
Facsimile No.: (212) 238-5245
Copies to:
227 W. Monroe Street, 40th Floor
Chicago, Illinois 60606
Attn: John Bordes
Telephone No.: (312) 630-0086
Facsimile No.: (312) 630-0359
-126-
<PAGE> 133
THE DAI-ICHI KANGYO BANK, LTD.,
CHICAGO BRANCH
By:________________________________
Name:___________________________
Title:__________________________
Address for Notices:
10 South Wacker Drive, 26th Floor
Chicago, Illinois 60606
Attn: Michael D. Pleasants,
Assistant Vice President
Telephone No.: (312) 715-6361
Facsimile No.: (312) 876-2011
FLEET BANK N.A.
By:_________________________________
Robert Pierson
Vice President
Address for Notices:
175 Water Street, 28th Floor
New York, New York 10038
Attn: Robert Pierson
Telephone No.: (212) 602-3631
Facsimile No.: (212) 602-3704
THE FUJI BANK, LIMITED
By:_________________________________
Peter L. Chinnici
Joint General Manager
Address for Notices:
225 West Wacker Drive, Suite 2000
Chicago, Illinois 60606
Attn: Philip Langheim,
Vice President
Telephone No.: (312) 621-0518
Facsimile No.: (312) 621-0539
-127-
<PAGE> 134
GUARANTY FEDERAL BANK, F.S.B.
By:_________________________________
Gregory Jackson
Vice President
Address for Notices:
8333 Douglas Avenue
Dallas, Texas 75225
Attn: Chad Patton,
Banking Officer
Telephone No.: (214) 360-1675
Facsimile No.: (214) 360-1660
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD.
By:_________________________________
Name:____________________________
Title:___________________________
Address for Notices:
190 S. LaSalle Street, Suite 800
Chicago, Illinois 60603
Attn: Mark Thompson
Telephone No.: (312) 704-5459
Facsimile No.: (312) 704-8505
or
Attn: Scott Place
Telephone No.: (312) 704-5499
Facsimile No.: (312) 704-8505
-128-
<PAGE> 135
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY
By:_________________________________
Name:____________________________
Title:___________________________
Address for Notices:
801 South Figueroa Street
Suite 500
Los Angeles, California 90017
Attn: Troy S. Akagi,
Vice President for Credit
Telephone: (213) 896-4653
Facsimile: (213) 687-4631
and
Attn: Yvonne Yoon,
Operations
Telephone: (213) 896-4737
Facsimile: (213) 629-2571
NATIONAL CITY BANK OF KENTUCKY
By:________________________________
Gary Sieveking
Vice President
Address for Notices:
421 W. Market Street
Louisville, Kentucky 40202
Attn: Gary Sieveking,
Vice President
Telephone No.: (502) 581-7660
Facsimile No.: (502) 581-4154
-129-
<PAGE> 136
PNC BANK, NATIONAL ASSOCIATION
By:________________________________
Peter Stack
Assistant Vice President
Address for Notices:
500 West Madison, Suite 3140
Chicago, Illinois 60606
Attn: Peter Stack,
Assistant Vice President
Telephone No.: (312) 906-3426
Facsimile No.: (312) 906-3420
THE SANWA BANK, LIMITED, CHICAGO BRANCH
By:_________________________________
Richard H. Ault
Vice President
Address for Notices:
10 South Wacker Drive, 31st Floor
Chicago, Illinois 60606
Attn: Michael McBride,
Credit Analyst
Telephone No.: (312) 368-3048
Facsimile No.: (312) 346-6677
THE SUMITOMO BANK, LTD.
By:_________________________________
Hiroyuki Iwami
Joint General Manager
Address for Notices:
233 South Wacker Drive, Suite 4800
Chicago, Illinois 60606
Attn: James Beckett,
Vice President
Telephone No.: (312) 876-6454
Facsimile No.: (312) 876-6436
-130-
<PAGE> 137
WELLS FARGO BANK, NA
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
Address for Notices:
707 Wilshire, 16 Floor
Los Angeles, California 90017
Attn: Pat McCormick,
Senior Vice President
Telephone No.: (213) 614-4933
Facsimile No.: (213) 614-2569
and
Attn: Jonathan David
Telephone No.: (213) 614-4128
Facsimile No.: (213) 614-2569
WESTDEUTSCHE LANDESBANK GIROZENTRALE,
NEW YORK BRANCH
By:________________________________
Name:___________________________
Title:__________________________
By:________________________________
Name:___________________________
Title:__________________________
Address for Notices:
1211 Avenue of the Americas
New York, New York 10036
Attn: Kenneth R. Crespo,
Vice President
Telephone No.: (212) 852-6044
Facsimile No.: (212) 852-6148
-131-
<PAGE> 138
SCHEDULE 1
APPLICABLE MARGIN
<TABLE>
<CAPTION>
==========================================================================================================================
Ratings: S&P and Moody's At Least A- or AT LEAST BBB+ At Least BBB At Least BBB- Below either
A3* OR Baa1* or Baa2* and Baa3 BBB- or Baa3
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Applicable Margin 0.35% 0.40% 0.45% 0.50% 0.75%
==========================================================================================================================
</TABLE>
The Applicable Margin for each Rate Option shall be the applicable percentage
per annum set forth above, which is based on the Company's long term unsecured
debt ratings, changing as and when such ratings change. Each rating
classification sets forth the S&P rating and the Moody's rating, respectively.
For the three columns noted with an asterisk (*), if on any day the ratings of
S&P and Moody's are not both at the required level, the higher rating will be
the applicable rating for purposes of determining the classification unless the
lower rating is more than one rating category below the minimum rating for such
rating agency under such column, in which event the higher rating will be
disregarded, the lower rating will be deemed to have been one rating category
higher than the actual reported lower rating, and the column applicable using
such deemed lower rating shall apply. If for any reason the Company's
unsecured long term debt is not rated by both S&P and Moody's, the column
headed "Below either BBB- or Baa3" shall be used.
-132-
<PAGE> 139
SCHEDULE 2
FEE RATES
<TABLE>
<CAPTION>
===========================================================================================================================
Ratings: S&P and Moody's At Least A- or AT LEAST BBB+ At Least BBB At Least BBB- Below either
A3* OR Baa1* or Baa2* and Baa3 BBB- or Baa3
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Facility Fee Rate .125% .15% .175% .20% .25%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Servicing Collateral .25% .275% .30% .35% .50%
Fee Rate
===========================================================================================================================
</TABLE>
The various Fee Rates for this Facility shall be the applicable percentage per
annum set forth above, which is based on the Company's long term unsecured debt
ratings, changing as and when such ratings change. Each rating classification
sets forth the S&P rating and the Moody's rating, respectively. For the three
columns noted with an asterisk (*), if on any day the ratings of S&P and
Moody's are not both at the required level, the higher rating will be the
applicable rating for purposes of determining the classification unless the
lower rating is more than one rating category below the minimum rating for such
rating agency under such column, in which event the higher rating will be
disregarded, the lower rating will be deemed to have been one rating category
higher than the actual reported lower rating, and another column will be
applicable using such deemed lower rating. If for any reason the Company's
unsecured long term debt is not rated by both S&P and Moody's, the column
headed "Below either BBB- or Baa3" shall be used.
-133-
<PAGE> 140
EXHIBIT A
LIST OF APPROVED INVESTORS
-134-
<PAGE> 141
EXHIBIT B
FORM OF BORROWING BASE CERTIFICATE
Dated as of: _______________
Reference is made to that certain Second Amended and Restated Revolving
Credit Agreement among the Company, the Borrowing Subsidiaries, The First
National Bank of Chicago, individually and as administrative agent, and the
lenders named therein, dated as of November 12, 1996 (the "Credit Agreement").
Capitalized terms not otherwise defined herein are used with the same meanings
as in the Credit Agreement.
<TABLE>
<S> <C>
1. AGGREGATE BORROWING BASE:
Eligible Mortgage Loans
(Mortgage Collateral Value):
Eligible Delivered Mortgages $______________
Eligible AP Mortgages $______________
Eligible Pledged Securities
(MBS Value) $______________
Total Pledged Items $______________
Percentage Factor 98%
(A) AGGREGATE BORROWING BASE
FROM PLEDGED ITEMS $______________
Eligible Repurchased Agency
Loans and Receivables $______________
Percentage Factor 90%
(B) AGGREGATE BORROWING BASE
FROM REPURCHASED AGENCY LOANS
AND RECEIVABLES $______________
</TABLE>
-135-
<PAGE> 142
<TABLE>
<S> <C>
(C) AGGREGATE BORROWING BASE
FROM ELIGIBLE PLEDGED SERVICING(1) $______________
Eligible Servicing Sale Receivables $______________
Percentage Factor 75%
(D) AGGREGATE BORROWING BASE
FROM ELIGIBLE SERVICING SALE RECEIVABLES $______________
(E) BALANCE IN SETTLEMENT ACCOUNT $______________
(F) CASH AND CASH EQUIVALENTS $______________
SUM OF (A) - (F) ABOVE $______________
Reconciling Items:
Timing Difference $______________
Loan Detail Difference $______________
AGGREGATE BORROWING BASE $______________
Credit Requirement:
Facility Advances $______________
Face Amount of Outstanding Ratable
Medium Term Notes $______________
Outstanding CPNs $______________
Approved GNMA Letter of Credit Obligations $______________
SUM OF CREDIT REQUIREMENT $______________
EXCESS OF AGGREGATE BORROWING
BASE OVER CREDIT REQUIREMENT $______________
</TABLE>
2. CERTIFICATION: To the best of the knowledge and belief (after
reasonable investigation) of the officer of the Company executing this
Certificate, the Company hereby certifies to The First National Bank of
Chicago for the benefit of lenders under the Credit Agreement that: (a)
the above information is, and the computations are accurate and complete
and in accordance with the requirements of the Credit Agreement, and (b)
as
__________________________________
(1) Based on either market value or principal balance of loans serviced as
described in Section 4.6(h) of the Credit Agreement
-136-
<PAGE> 143
of the date hereof, (1) all representations and warranties of the
Company set forth in the Credit Agreement are accurate and complete, (2)
there does not exist an Event of Default under the Credit Agreement, and
(3) the Company has given written notice to The First National Bank of
Chicago of any Default which now exists under the Credit Agreement.
IN WITNESS WHEREOF, the Company has caused this Borrowing Base
Certificate to be executed and delivered by its duly authorized officer
this ___ day of __________, 199_.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:_____________________________________
Name:___________________________________
Title:__________________________________
-137-
<PAGE> 144
EXHIBIT C
COMMITMENTS AND COMMITMENT PERCENTAGES
<TABLE>
<CAPTION>
====================================================================================================================
Commitment Commitment Adj. Commit.
Bank Name Amount Percentage Percentage
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Chicago SWING $10,000,000
- --------------------------------------------------------------------------------------------------------------------
1. First Chicago $32,500,000 5.66666667% 4.391891892%
- --------------------------------------------------------------------------------------------------------------------
2. Bank of New York $40,000,000 5.33333333% 5.405405405%
- --------------------------------------------------------------------------------------------------------------------
3. Bankers Trust $40,000,000 5.33333333% 5.405405405%
- --------------------------------------------------------------------------------------------------------------------
4. Comerica $40,000,000 5.33333333% 5.405405405%
- --------------------------------------------------------------------------------------------------------------------
5. Credit Lyonnais $40,000,000 5.33333333% 5.405405405%
- --------------------------------------------------------------------------------------------------------------------
6. Credit Suisse $40,000,000 5.33333333% 5.405405405%
- --------------------------------------------------------------------------------------------------------------------
7. PNC $40,000,000 5.33333333% 5.405405405%
- --------------------------------------------------------------------------------------------------------------------
8. Westdeutsche $40,000,000 5.33333333% 5.405405405%
- --------------------------------------------------------------------------------------------------------------------
9. ABN-AMRO $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
10. Bank of America $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
11. Banque Paribas $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
12. Barclays $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
13. Fleet Bank $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
14. Guaranty $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
15. National City $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
16. Bank of Tokyo $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
17. CIBC $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
18. Long Term $27,000,000 3.60000000% 3.648648649%
- --------------------------------------------------------------------------------------------------------------------
19. Credit Agricole $22,500,000 3.00000000% 3.040540541%
- --------------------------------------------------------------------------------------------------------------------
20. Fuji $22,500,000 3.00000000% 3.040540541%
- --------------------------------------------------------------------------------------------------------------------
21. Mitsubishi $22,500,000 3.00000000% 3.040540541%
- --------------------------------------------------------------------------------------------------------------------
22. Sumitomo $22,500,000 3.00000000% 3.040540541%
- --------------------------------------------------------------------------------------------------------------------
23. DKB $22,500,000 3.00000000% 3.040540541%
- --------------------------------------------------------------------------------------------------------------------
24. Sanwa $22,500,000 3.00000000% 3.040540541%
- --------------------------------------------------------------------------------------------------------------------
25. Wells Fargo $22,500,000 3.00000000% 3.040540541%
- --------------------------------------------------------------------------------------------------------------------
Total $750,000,000 100.000000% 100.000000%
====================================================================================================================
</TABLE>
-138-
<PAGE> 145
EXHIBIT D
SECURITY AGREEMENT
-139-
<PAGE> 146
EXHIBIT E-1
FORM OF AMENDED AND RESTATED NOTE
(FOR LOANS OTHER THAN DISCOUNT LOANS AND BID LOANS)
Date of Note: November 12, 1996
FOR VALUE RECEIVED, the undersigned (the "Makers") do hereby jointly and
severally covenant and promise to pay to the order of ____________________ (the
"Lender") or its successors or assigns (collectively, the "Payee"), on the
Termination Date, the aggregate unpaid principal amount of all Loans made by
Lender pursuant to the Credit Agreement other than Discount Loans and Bid Loans
held from time to time by the Lender (the "Principal Amount") and to pay
interest on the unpaid Principal Amount at the applicable interest rate or
rates per annum determined in accordance with the terms of the Credit
Agreement. All payments of principal of and interest on this Note shall be
made in legal tender of the United States. All payments of principal of and
interest on this Note shall be made in immediately available funds at the
principal office of The First National Bank of Chicago (the "Agent"), One First
National Plaza, Chicago, Illinois.
Interest on this Note shall be computed on the basis of actual number of
days elapsed in a 360 day year.
This Note is one of the Notes referred to in the Second Amended and
Restated Revolving Credit Agreement, bearing even date herewith, among the
Company, the Borrowing Subsidiaries, the Lender and the other lenders listed on
the signature pages thereof and the Agent (as the same may be amended and
supplemented from time to time, the "Credit Agreement") and is entitled to the
benefits thereof. Reference is made to the Credit Agreement for (i) provisions
for the prepayment hereof, (ii) acceleration of the maturity hereof, (iii) the
obligation of the Makers to pay certain expenses (including attorney's fees)
incurred in the enforcement thereof and hereof and (iv) a description of the
security for this Note. Capitalized terms used herein without definition have
the respective meanings ascribed to them in the Credit Agreement.
All Loans made by the Lender and all repayments of the principal thereof
shall be recorded by the Lender in its books and records; provided, however,
that the Lender's failure to so record or any error in such recording shall not
affect the Makers' liability hereunder or under the Credit Agreement. Upon any
transfer hereof, the Lender shall endorse on the schedule attached hereto or on
a schedule accompanying the transfer of this Note, the unpaid principal balance
of this Note.
-140-
<PAGE> 147
If an Event of Default shall occur under the Credit Agreement, the
unpaid Principal Amount hereunder shall become due and payable (i)
automatically in the case of any of the Events of Default specified in
paragraph (k) of Section 10.1 of the Credit Agreement, or (ii) at the option of
the Required Lenders with respect to all other Events of Default and shall bear
interest at the rate provided for in Section 2.7 of the Credit Agreement from
and after such date. The foregoing provision shall not be construed as a
waiver by the Payee of its right to pursue any other remedies available to it
under this Note, the Credit Agreement or any other instrument evidencing or
securing the Principal Amount.
This Note may not be changed orally but only by an agreement in writing,
signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought. Written notices required to be given
hereunder shall be given as provided in the Credit Agreement to the Payee and
Makers at the respective addresses specified or provided for therein.
Should the indebtedness evidenced by this Note or any part thereof be
collected at law or in equity, or in bankruptcy, receivership or any other
court proceeding (whether at the trial or appellate level), or should this Note
be placed in the hands of attorneys for collection upon default, the Makers
agree to pay, in addition to the principal, interest and other sums due and
payable hereon, all costs of collecting or attempting to collect on this Note,
including reasonable attorneys' fees and expenses.
Notwithstanding the foregoing, recourse to any particular Borrowing
Subsidiary hereunder shall be limited to (i) such Borrowing Subsidiary's
interest in the Collateral pledged by such Borrowing Subsidiary to the Agent or
the Collateral Agent under the Credit Documents and the proceeds thereof plus
(ii) an amount equal to the capital investment by the Company in such Borrowing
Subsidiary, plus (iii) an amount equal to the total of all Debt owed by such
Borrowing Subsidiary to the Company.
Anything herein to the contrary notwithstanding, the obligations of the
Makers under this Note shall be subject to the limitation that payments of
interest shall not be required to the extent that receipt of any such payment
by the Payee would be contrary to provisions of law applicable to Payee which
limit the maximum rate of interest that may be charged or collected by Payee.
The undersigned and all endorsers, guarantors and sureties of this Note
and all other persons liable or to become liable on this Note severally waive
presentment for payment, demand, notice of demand and of dishonor and
nonpayment of this Note, notice of intention to accelerate the maturity of this
Note, notice of
-141-
<PAGE> 148
acceleration of the maturity of this Note, protest and notice of protest,
diligence in collecting, and the bringing of suit against any other party, and
agree to all renewals, extensions, modifications, partial payments, releases or
substitutions of security, in whole or in part, with or without notice, before
or after maturity.
Notwithstanding the foregoing paragraphs and all other provisions of
this Note and the Credit Agreement, none of the terms and provisions of this
Note or the Credit Agreement shall ever be construed to create a contract to
pay to the Payee, for the use, forbearance or detention of money, interest in
excess of the maximum amount of interest permitted to be charged by the Payee
to the undersigned under applicable state or federal law from time to time in
effect, and the undersigned shall never be required to pay interest in excess
of such maximum amount. If, for any reason interest is paid hereon in excess
of such maximum amount, then promptly upon any determination that such excess
has been paid the Payee will, at its option, either refund such excess to the
undersigned or apply such excess to the principal owing hereunder.
This Note is to be construed and enforced in accordance with the laws of
the State of Illinois.
IN WITNESS WHEREOF, Makers have executed and delivered this Note on the
day and year first above written.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:________________________________
Name: Michael C. Allemang
Title: Executive Vice President
and Chief Financial Officer
Address:
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attn: Chief Financial Officer
Telephone No.: (810) 488-8639
Facsimile No.: (810) 488-7300
and
Attn: Vice President/Treasury
Telephone No.: (810) 488-7338
Facsimile No.: (810) 488-7812
-142-
<PAGE> 149
THE MORTGAGE AUTHORITY, INC.
By:________________________________
Name: Larry N. Ciofu
Title: Chief Financial Officer
Address:
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attn: Controller
Telephone No.: (810) 488-7338
Facsimile No.: (810) 488-7812
CENTRAL PACIFIC MORTGAGE COMPANY
By:________________________________
Name: John Cassell
Title: Chief Financial Officer
Address:
5750 Sunrise Boulevard
Citrus Heights, CA 95610
Attn: Chief Financial Officer
Telephone No.: (916) 537-2603
Facsimile No.: (916) 966-7327
-143-
<PAGE> 150
PAYMENTS OF PRINCIPAL
Unpaid
Principal Notation
Date Balance Made by
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
-144-
<PAGE> 151
EXHIBIT E-2
FORM OF AMENDED AND RESTATED DISCOUNT NOTE
Date of Note: November 12, 1996
FOR VALUE RECEIVED, the undersigned (the "Makers") do hereby jointly and
severally covenant and promise to pay to the order of ____________________ (the
"Lender") or its successors or assigns (collectively, the "Payee") the unpaid
principal amount of each Discount Loan made and retained by the Lender (if the
holder hereof is the Balance Bank initially making such discount Loan) or, in
all other cases, made by a Balance Bank and purchased by the holder hereof (or
its predecessor in interest) under the Credit Agreement (the "Principal
Amount"), on the last day of the Discount Loan Period applicable to each such
Discount Loan with a final payment of any such amounts not previously due on
the Termination Date.
Each Discount Loan evidenced by this Note was funded to the Company at a
discount as provided in the Credit Agreement; accordingly, the unpaid principal
amount of each Discount Loan evidenced by this Note will bear no interest
hereunder until the last day of the Discount Loan Period applicable thereto,
and if such unpaid principal amount of such Discount Loan is not paid in full
on such day, such unpaid principal amount shall from and after such day bear
interest at the rate of interest set forth in Section 2.7 of the Credit
Agreement. All payments of principal of and interest, if any, on this Note
shall be made in legal tender of the United States. All payments of principal
of and interest on this Note shall be made in immediately available funds at
the principal office of The First National Bank of Chicago (the "Agent"), One
First National Plaza, Chicago, Illinois.
Interest on this Note, if any, shall accrue, shall be computed on the
basis of actual number of days elapsed in a 360 day year.
This Note is one of the Discount Notes referred to in the Second Amended
and Restated Revolving Credit Agreement, bearing even date herewith, among the
Company, the Borrowing Subsidiaries, the Lender and the other lenders listed on
the signature pages thereof and the Agent (as the same may be amended and
supplemented from time to time, the "Credit Agreement") and is entitled to the
benefits thereof. Reference is made to the Credit Agreement for (i) provisions
for the prepayment hereof, (ii) acceleration of the maturity hereof, (iii) the
obligation of the Makers to pay certain expenses (including attorney's fees)
incurred in the enforcement thereof and hereof and (iv) a
-145-
<PAGE> 152
description of the security for this Note. Capitalized terms used herein
without definition have the respective meanings ascribed to them in the Credit
Agreement.
All Discount Loans made by the Lender and all repayments of the
principal thereof shall be recorded by the Lender in its books and records;
provided, however, that the Lender's failure to so record or any error in such
recording shall not affect the Makers' liability hereunder or under the Credit
Agreement. Upon any transfer hereof, the Lender shall endorse on the schedule
attached hereto or on a schedule accompanying the transfer of this Note, the
unpaid principal balance of this Note.
If an Event of Default shall occur under the Credit Agreement, the
unpaid Principal Amount hereunder shall become due and payable (i)
automatically in the case of any of the Events of Default specified in
paragraph (k) of Section 10.1 of the Credit Agreement, or (ii) at the option of
the Required Lenders with respect to all other Events of Default and shall bear
interest at the rate provided for in Section 2.7 of the Credit Agreement from
and after such date. The foregoing provision shall not be construed as a
waiver by the Payee of its right to pursue any other remedies available to it
under this Note, the Credit Agreement or any other instrument evidencing or
securing the Principal Amount.
This Note may not be changed orally but only by an agreement in writing,
signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought. Written notices required to be given
hereunder shall be given as provided in the Credit Agreement to the Payee and
Makers at the respective addresses specified or provided for therein.
Should the indebtedness evidenced by this Note or any part thereof be
collected at law or in equity, or in bankruptcy, receivership or any other
court proceeding (whether at the trial or appellate level), or should this Note
be placed in the hands of attorneys for collection upon default, the Makers
agree to pay, in addition to the principal, interest and other sums due and
payable hereon, all costs of collecting or attempting to collect on this Note,
including reasonable attorneys' fees and expenses.
Notwithstanding the foregoing, recourse to any particular Borrowing
Subsidiary hereunder shall be limited to (i) such Borrowing Subsidiary's
interest in the Collateral pledged by such Borrowing Subsidiary to the Agent or
the Collateral Agent under the Credit Documents and the proceeds thereof plus
(ii) an amount equal to the capital investment by the Company in such Borrowing
Subsidiary, plus (iii) an amount equal to the total of all Debt owed by such
Borrowing Subsidiary to the Company.
-146-
<PAGE> 153
Anything herein to the contrary notwithstanding, the obligations of the
Makers under this Note shall be subject to the limitation that payments of
interest shall not be required to the extent that receipt of any such payment
by the Payee would be contrary to provisions of law applicable to Payee which
limit the maximum rate of interest that may be charged or collected by Payee.
The undersigned and all endorsers, guarantors and sureties of this Note
and all other persons liable or to become liable on this Note severally waive
presentment for payment, demand, notice of demand and of dishonor and
nonpayment of this Note, notice of intention to accelerate the maturity of this
Note, notice of acceleration of the maturity of this Note, protest and notice
of protest, diligence in collecting, and the bringing of suit against any other
party, and agree to all renewals, extensions, modifications, partial payments,
releases or substitutions of security, in whole or in part, with or without
notice, before or after maturity.
Notwithstanding the foregoing paragraphs and all other provisions of
this Note and the Credit Agreement, none of the terms and provisions of this
Note or the Credit Agreement shall ever be construed to create a contract to
pay to the Payee, for the use, forbearance or detention of money, interest in
excess of the maximum amount of interest permitted to be charged by the Payee
to the undersigned under applicable state or federal law from time to time in
effect, and the undersigned shall never be required to pay interest in excess
of such maximum amount. If, for any reason interest is paid hereon in excess
of such maximum amount, then promptly upon any determination that such excess
has been paid the Payee will, at its option, either refund such excess to the
undersigned or apply such excess to the principal owing hereunder.
This Note is to be construed and enforced in accordance with the laws of
the State of Illinois.
IN WITNESS WHEREOF, Makers have executed and delivered this Note on the
day and year first above written.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:________________________________
Name: Michael C. Allemang
Title: Executive Vice President
and Chief Financial Officer
Address:
-147-
<PAGE> 154
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attn: Chief Financial Officer
Telephone No.: (810) 488-8639
Facsimile No.: (810) 488-7300
and
Attn: Vice President/Treasury
Telephone No.: (810) 488-7338
Facsimile No.: (810) 488-7812
THE MORTGAGE AUTHORITY, INC.
By:________________________________
Name: Larry N. Ciofu
Title: Chief Financial Officer
Address:
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attn: Controller
Telephone No.: (810) 488-7338
Facsimile No.: (810) 488-7812
CENTRAL PACIFIC MORTGAGE COMPANY
By:________________________________
Name: John Cassell
Title: Chief Financial Officer
Address:
5750 Sunrise Boulevard
Citrus Heights, CA 95610
Attn: Chief Financial Officer
Telephone No.: (916) 537-2603
Facsimile No.: (916) 966-7327
-148-
<PAGE> 155
PAYMENTS OF PRINCIPAL
Unpaid
Principal Notation
Date Balance Made by
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
-149-
<PAGE> 156
EXHIBIT F
METHOD OF DETERMINING WEIGHTED AVERAGE PURCHASE PRICES
STEP ONE
Group Mortgage Loans or Securities into the following categories (or such other
categories as are agreed upon among the Company, the Agent and the Collateral
Agent):
GNMA 15 FNMA/FHLMC 15 Private
GNMA 30 FNMA/FHLMC 30 Investors
GNMA ARM FNMA/FHLMC ARM
FNMA/FHLMC Balloon
Non-Conforming
Jumbo
STEP TWO - WEEKLY
Allocate Approved Investor Commitments (other than those allocated to repos)
under which the applicable Mortgage Loans or Securities could be settled to
each mortgage-type category on a FIFO basis. The dollar amount of Approved
Investor Commitments allocated should cover the maximum amount of Mortgage
Loans or Securities for which the Company expects to borrow in the following
week. If the mortgage balances exceed the allocated Approved Investor
Commitments on any day, a re-allocation should be calculated.
After allocating Approved Investor Commitments, compute the weighted average
price of the Approved Investor Commitments. This is the price to be allocated
to Securities or the unpaid principal balance of Mortgage Loans, as applicable,
in each category for any borrowing in the next week. Approved Investor
Commitments may not be allocated to Mortgage Loans unless the related coupons
net of servicing and guaranty fees equal or exceed the contract coupon
requirement.
AT THE REQUEST OF THE CREDIT AGENT, THE FOLLOWING FURTHER STEPS SHALL BE TAKEN
WHEN COMPUTING THE WEIGHTED AVERAGE PURCHASE PRICES.
STEP THREE - MARK TO MARKET FORWARD PURCHASE CONTRACTS
Calculate the value of all unallocated mandatory delivery forward purchase
contracts. Compute a net negative or positive amount to be added to or
subtracted from the aggregate market value of all collateral. Use the
following method:
-150-
<PAGE> 157
AGENCY SECURITY CONTRACT
Find the Telerate (or other recognized electronic service) purchase (offer)
price for same coupon, type, and delivery date as stated on the Company's
forward purchase contract. Subtract the Company's contract price from the
Telerate price and multiply by the dollar amount of the contract. A positive
number is a deduction, and a negative number is an addition to aggregate market
value.
OTHER CONTRACTS
Unallocated Whole Loan Contracts:
Use the above method but use the weighted average posted prices of two
nationally recognized private mortgage conduits mutually acceptable to the
Collateral Agent and the Company for similar mortgages, coupon (net of
servicing fees) and delivery date.
Private Label Securities Forward Purchase Contracts:
Use the same method but the current contract price should be based on quotes of
two nationally recognized dealers in private label mortgage-backed securities
for the same forward delivery date as the contract.
If no Telerate price is posted for a particular agency or whole loan coupon,
the posted price associated with the nearest lower coupon should be used. If
the contract coupon is below the lowest Telerate coupon then the price should
be based on quotes of two nationally recognized dealers in mortgage-backed
securities for the same forward delivery date as the contract.
-151-
<PAGE> 158
EXHIBIT G
FORM OF BID LOAN NOTICE
TO: The First National Bank of Chicago, as Agent
FROM: Source One Mortgage Services Corporation, and _______________,
as a Bid Lender
Reference is made to that certain Second Amended and Restated Revolving
Credit Agreement (the "Agreement") dated November 12, 1996 by and among Source
One Mortgage Services Corporation (the "Company"), the Borrowing Subsidiaries,
the Agent and certain other lenders. All capitalized terms not otherwise
defined in this notice shall have the meaning given to them in the Agreement.
The Company (on behalf of itself and the Borrowing Subsidiaries) and the
Bid Lender hereby inform you that the Company has accepted a bid from the Bid
Lender for one or more Bid Loans having the following terms:
Principal Amount of Loan: $_______________
Rate of Interest: _______________%
Advance Date: _______________, 199_
Interest Period (1 to 45 days): _______________
Proposed Due Date*: _______________, ____
[BID LENDER] SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:______________________ By:____________________________
Its:_____________________ Its:___________________________
* If other than Termination Date.
-152-
<PAGE> 159
EXHIBIT H
FORM OF NEW/MODIFIED COMMITMENT SUPPLEMENT
This New/Modified Commitment Supplement ("Supplement") is made as of
_________________, 199_ (the "Effective Date") by and among Source One Mortgage
Services Corporation (the "Company"), The Mortgage Authority, Inc., Central
Pacific Mortgage Company, The First National Bank of Chicago, in its capacity
as agent ("Agent"), and _______________________ ("New Lender"), [and
____________________________ ("Assignor")][BRACKETED LANGUAGE IS APPLICABLE IF
AN EXISTING LENDER IS ASSIGNING A PORTION OF ITS COMMITMENT].
The Company, the Borrowing Subsidiaries, [Assignor] and Agent are
parties to a certain Second Amended and Restated Revolving Credit Agreement
dated as of November 12, 1996 (the "Credit Agreement") pursuant to which Agent
and certain other Lenders agreed to provide a revolving credit facility to the
Company and the Borrowing Subsidiaries on the terms and conditions set forth in
the Credit Agreement. Any capitalized term not expressly defined herein shall
have the meaning ascribed to such term in the Credit Agreement.
The New Lender has agreed to become a Lender under the Credit Agreement
with a Commitment in the amount of ______________________ Dollars
($______________). [The Company and Assignor have agreed to reduce Assignor's
Commitment under the Credit Agreement to ____________________ Dollars
($___________).]
The parties hereto desire to amend the Credit Agreement pursuant to
Section 2.1(b) thereof to reflect the New Lender's Commitment [and Assignor's
reduced Commitment].
NOW, THEREFORE, the parties hereto agree as follows:
1. From and after the Effective Date, the New Lender shall be
considered a "Lender" under the Credit Agreement and the Company, the Borrowing
Subsidiaries and Agent hereby consent to the addition of the New Lender.
2. From and after the Effective Date, the New Lender's Commitment
under the Credit Agreement shall be ________________________ Dollars
($______________) or such other amount as may be stated in any subsequent
modification to the Credit Agreement. The Company and the Borrowing
Subsidiaries shall execute and deliver to the New Lender simultaneously
herewith Notes in the form attached as Exhibits E-1 and E-2 to the Credit
Agreement. The Aggregate Commitment of the Lenders under the Credit Agreement,
after giving effect to such
-153-
<PAGE> 160
Commitment by the New Lender [and the reduced Commitment of Assignor described
in the following Section] shall be $_______________.
[3. From and after the Effective Date, Assignor's Commitment under
the Credit Agreement shall be _________________________________ Dollars
($______________) or such other amount as may be stated in any subsequent
modification to the Credit Agreement.]
[4. The New Lender, promptly after receipt of its Notes, agrees to
purchase from Assignor, and Assignor hereby agrees to sell to the New Lender,
without recourse, a portion of the outstanding Loans made by Assignor equal to
_________ percent (__%) of the outstanding principal balance of each such Loan.
Such purchase shall be effected by wire transfer of immediately available funds
to Assignor on the Effective Date. The Company and each Borrowing Subsidiary
each irrevocably and unconditionally agrees that from and after the Effective
Date the portion of Loans so funded by Assignor shall be evidenced by and shall
be deemed to be Loans made by the New Lender under the New Lender's Note as of
the Effective Date and shall be treated as such for purposes of calculating
interest and fees accruing from and after the Effective Date under the Credit
Agreement. All interest and fees accruing on such portion of the Loans prior
to the Effective Date shall be paid when due to Assignor.]
5. For purposes of Section 12.2 of the Credit Agreement (Notices),
the New Lender's address and telecopy number shall be as specified below its
signature in this Supplement.
6. All references in the Credit Agreement and the other Credit
Documents shall be deemed to refer to the Credit Agreement as modified by this
Supplement. Pursuant to Section 2.1(b) of the Credit Agreement, Exhibit C to
the Credit Agreement is hereby replaced by Exhibit C to this Supplement.
7. In all other respects, the Credit Agreement is and remains
unmodified and in full force and effect and is hereby ratified and confirmed.
8. This Supplement may be executed in any number of counterparts,
all of which taken together shall constitute one agreement, and any of the
parties hereto may execute this Supplement by signing any such counterpart.
-154-
<PAGE> 161
IN WITNESS WHEREOF, the Company, the Borrowing Subsidiaries, the New
Lender, [Assignor] and Agent have executed this Supplement as of the date first
above written.
COMPANY: SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:________________________________
Name:___________________________
Title:__________________________
TMA: THE MORTGAGE AUTHORITY, INC.
By:________________________________
Name:___________________________
Title:__________________________
CPM: CENTRAL PACIFIC MORTGAGE COMPANY
By:________________________________
Name:___________________________
Title:__________________________
NEW LENDER: ___________________________________
By:________________________________
Name:___________________________
Title:__________________________
Address for Notices:
___________________________________
___________________________________
Attn: ____________________________
Telephone No.: ___________________
Facsimile No.: ___________________
-155-
<PAGE> 162
AGENT: THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
By:________________________________
Name:___________________________
Title:__________________________
[ASSIGNOR: ___________________________________
By:________________________________
Name:___________________________
Title:__________________________]
-156-
<PAGE> 163
EXHIBIT I
FORM OF NON-LENDER BALANCE BANK SUPPLEMENT
THIS NON-LENDER BALANCE SUPPLEMENT (the "Supplement") is entered into as
of _________________, 199_, by and among SOURCE ONE MORTGAGE SERVICES
CORPORATION, a Delaware corporation (the "Company"), THE MORTGAGE AUTHORITY,
INC., a Delaware corporation, CENTRAL PACIFIC MORTGAGE COMPANY, a California
corporation, THE FIRST NATIONAL BANK OF CHICAGO, a national banking
association, as administrative agent for the Lenders ("Agent"), and
____________________________, a _____________________ (the "Bank"), an
Affiliate of one of the Lenders.
A. The Company, the Borrowing Subsidiaries, and Agent are parties
to that certain Second Amended and Restated Revolving Credit Agreement dated as
of November 12, 1996 (the "Credit Agreement") pursuant to which Agent and
certain other Lenders agreed to provide a revolving credit facility to the
Company and the Borrowing Subsidiaries on the terms and conditions set forth in
the Credit Agreement. Any capitalized term not expressly defined herein shall
have the meaning ascribed to such term in the Credit Agreement.
B. The Bank has agreed to become a Non-Lender Balance Bank under
the Credit Agreement and to make Discount Advances and to sell its interest in
such Discount Advances to the Lenders in accordance with Section 2.4 of the
Credit Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Bank hereby agrees to become and is hereby designated as a
"Non-Lender Balance Bank" under the Credit Agreement, but is not and shall not
be considered a "Lender" under the Credit Agreement. The Bank hereby agrees to
(i) enter into a Balance Bank Agreement with the Company, (ii) make Discount
Advances to the Company, (iii) sell its interest in such Discount Advances to
the Lenders, and (iv) otherwise accede to all obligations of a Non-Lender
Balance Bank under Section 2.4 of the Credit Agreement. The Bank shall be
entitled to all rights of a Non-Lender Balance Bank under the Credit Agreement.
2. None of the Borrowing Subsidiaries, the Company or the Agent
shall consent to any amendment of the provisions of Section 2.4 of the Credit
Agreement affecting the Bank without the prior written consent of the Bank.
3. The Bank's address for any notices to be sent in connection with
the Credit Agreement shall be as specified below its signature in this
Supplement.
-157-
<PAGE> 164
4. This Supplement may be executed in any number of counterparts,
all of which taken together shall constitute one agreement, and any of the
parties hereto may execute this Supplement by signing any such counterpart.
IN WITNESS WHEREOF, the Company, the Borrowing Subsidiaries, Agent and
the Bank have executed this Supplement as of the date first above written.
COMPANY: SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:________________________________
Name:___________________________
Title:__________________________
TMA: THE MORTGAGE AUTHORITY, INC.
By:________________________________
Name:___________________________
Title:__________________________
CPM: CENTRAL PACIFIC MORTGAGE COMPANY
By:________________________________
Name:___________________________
Title:__________________________
AGENT: THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
By:________________________________
Name:___________________________
Title:__________________________
BANK: ___________________________________
By:________________________________
Name:___________________________
Title:__________________________
Address for Notices:
-158-
<PAGE> 165
___________________________________
___________________________________
Attn: ____________________________
Telephone No.: ___________________
Facsimile No.: ___________________
-159-
<PAGE> 166
EXHIBIT J
FORM OF AP NOTICE
[SOURCE ONE MORTGAGE SERVICES CORPORATION (the "Company")][OR THE
APPLICABLE BORROWING SUBSIDIARY] ("Borrowing Subsidiary")] pursuant to that
certain Second Amended and Restated Revolving Credit Agreement, dated as of
November 12, 1996 (as amended, extended and replaced from time to time,
collectively, the "Credit Agreement") among the Company, the Borrowing
Subsidiaries, The First National Bank of Chicago, individually and as agent
(the "Credit Agent"), and certain other lenders, and (ii) that certain Second
Amended and Restated Security and Collateral Agency Agreement dated as of
November 12, 1996 by and among the Company, the Borrowing Subsidiaries, the
Credit Agent and National City Bank of Kentucky (the "Collateral Agent") as
collateral agent for the Secured Parties (as defined in the Credit Agreement),
for new value this day received, and as security for the payment of any and all
indebtedness and obligations of the Company and Borrowing Subsidiaries under
the Credit Agreement, hereby creates and grants to the Collateral Agent for the
benefit of the Secured Parties a security interest in and to the mortgage loans
identified as "AP Mortgages" on the Company's "Collateral Transmittals" (as
such term is defined in the Credit Agreement) on the date indicated below which
provide the information concerning the AP Mortgages required by the Credit
Agreement.
[SOURCE ONE MORTGAGE SERVICES
CORPORATION]
[APPLICABLE BORROWING SUBSIDIARY]
By:_____________________________________
Dated:_______________, 199_.
-160-
<PAGE> 167
EXHIBIT K
FORM OF OPINION LETTER
-161-
<PAGE> 168
EXHIBIT L
MATERIAL LITIGATION NOT REFERENCED IN ANNUAL/QUARTERLY REPORTS
NONE.
-162-
<PAGE> 169
EXHIBIT M
FORM OF FUNDING AGREEMENTS
-163-
<PAGE> 170
EXHIBIT N
FORM OF TRANSITION MEMORANDUM
This TRANSITION MEMORANDUM is dated as of November 12, 1996, by and
between Source One Mortgage Services Corporation, a Delaware corporation (the
"Company"), The Mortgage Authority, a Delaware corporation ("TMA"), Central
Pacific Mortgage Company, a ____________ and The First National Bank of
Chicago, as agent ("Agent") for the Existing Lenders and for the Continuing
Lenders (as such terms are hereinafter defined).
The Company and the Borrowing Subsidiaries have entered into a certain
Second Amended and Restated Revolving Credit Agreement dated as of November 12,
1996 (the "Credit Agreement") with the lenders named therein and the Agent.
The lenders under the Credit Agreement are hereinafter referred to collectively
as the "Continuing Lenders". Pursuant to the Credit Agreement the Continuing
Lenders will agree to extend credit to the Company and the Borrowing
Subsidiaries through a revolving credit facility (the "New Facility") on the
terms and subject to the conditions set forth therein. Capitalized terms not
otherwise defined herein are used with the same meanings as in the Credit
Agreement.
The New Facility amends and restates the Company's and TMA's existing
revolving credit facility (the "Existing Facility") made available pursuant to
that certain Amended and Restated Revolving Credit Agreement dated as of March
24, 1995 (as amended, the "Existing Agreement"), by and among the Company, TMA,
the Agent and the lenders participating therein (each an "Existing Lender").
Certain of the Existing Lenders are not Continuing Lenders under the New
Facility (the "Exiting Lenders"). In addition, pursuant to the Credit
Agreement (i) certain of the Existing Lenders will have a percentage of the
Aggregate Commitment under the New Facility that differs from their percentage
under the Existing Facility, and (ii) certain Continuing Lenders joining the
New Facility are not Existing Lenders.
The purpose of this Transition Memorandum is to set forth an
understanding of certain matters concerning the transition by the Company from
the Existing Facility to the New Facility, such matters including, without
limitation, (i) the payment of all the outstanding Loans (as defined in the
Existing Agreement and hereinafter referred to as the "Existing Loans") to the
Exiting Lenders, (ii) the changes necessary in the percentage of the Advances
under the Credit Agreement held by the Continuing Lenders, and (iii) the
initial fundings of Advances by the Continuing Lenders which are not Existing
Lenders.
-164-
<PAGE> 171
1. Summary of Existing Loans. The initial Advance under the New
Facility shall be used to pay any Existing Loans held by the Exiting Lenders.
Prior to the date the conditions precedent set forth in Article 5 of the Credit
Agreement are satisfied (such date being the "Effective Date"), the Agent shall
identify the Existing Loans payable by the Company under the Existing
Agreements to each Exiting Lender and advise the Continuing Lenders of such
amount. The aggregate outstanding balance of the Existing Loans held by the
Exiting Lenders on the Effective Date shall be hereinafter referred to as the
"Exiting Lender Pay-Off Amount".
2. Initial Advance. Subject to the terms and conditions set forth
in the Credit Agreement, including, without limitation, satisfaction of the
conditions precedent set forth in Article 5 therein, the Continuing Lenders
will make an initial Advance to the Company on the Effective Date in an amount
equal to the Exiting Lender Pay-Off Amount. The initial Advance shall be based
upon an Advance Notice and shall consist of such types of Advances specified in
such Advance Notice. Each Continuing Lender will agree to make its share of
such Advance available to the Agent at such time and in such amount as provided
in the Credit Agreement as modified by Paragraphs 3 and 4 below.
3. Conversion of Loans. With respect to each Continuing Lender, to
the extent that such lender has an Existing Loan outstanding on the date of the
initial Advance, such Continuing Lender shall only be required to fund to the
Agent an amount (the "Net Funding Amount") equal to the excess, if any, of that
amount by which the aggregate amount of its Loans to be outstanding under the
New Facility on the Effective Date exceeds the aggregate amount of its Existing
Loans (excluding any accrued and unpaid interest, Fees and other charges or
expenses thereon). After making its Net Funding Amount available to the Agent,
such Continuing Lender shall be deemed to have made available all of its Loans
under the New Facility and shall be deemed to have converted its Existing Loans
(excluding any accrued and unpaid interest and other charges or expenses
thereon). To the extent that a Continuing Lender has Existing Loans in an
amount which exceeds the amount of its Loans to be outstanding under the New
Facility on the Effective Date, such Lender shall be deemed to have made
available all of its Loans under the New Facility required to be made on the
Effective Date and shall be repaid a portion of its Existing Loans equal to
such excess amount, if any, as provided in Paragraph 4. All Existing Loans
held by Continuing Lenders which are outstanding on the Effective Date and not
repaid shall continue as the same type of Loan under the New Facility until
repaid or converted in accordance with the terms of the Credit Agreement;
provided that from and after the Effective Date such Existing Loans shall bear
interest at the interest rates applicable under the Credit Agreement rather
than the rates applicable under the Existing Agreements.
-165-
<PAGE> 172
4. Percentage Reconciliation. If any Continuing Lender holds
Existing Loans (other than Bid Loans) on the Effective Date which are in excess
of such Continuing Lender's Adjusted Commitment Percentage of the Loans (other
than Bid Loans and Swingline Loans) to be outstanding under the New Facility
(an "Overfunded Lender") on the Effective Date, such Overfunded Lender shall be
repaid from the additional funding under the following sentence an amount of
Existing Loans sufficient to eliminate such excess. Each Continuing Lender
(including any Continuing Lender which is not an Existing Lender) that holds
Existing Loans in an amount less than such Continuing Lender's Adjusted
Commitment Percentage of the Loans (other than Bid Loans and Swingline Loans)
to be outstanding under the New Facility on the Effective Date (an "Underfunded
Lender") shall make an additional funding as a Federal Funds Loan in connection
with the initial Advance in an amount sufficient to eliminate such shortfall
(such additional funding being collectively referred to as "Percentage
Reconciliation Funding Amount").
5. Distribution of Initial Advance. After each Continuing Lender
has funded its Loan (or so much of such Loan as may be required pursuant to
Paragraphs 3 and 4 above), the Agent shall (i) distribute to each Exiting
Lender its Exiting Lender Pay-Off Amount in accordance with the Existing
Agreements and (ii) distribute to each Overfunded Lender its share of the
aggregate Percentage Reconciliation Funding Amount.
6. Payment of Accrued Interest and Fees; Indemnification. On the
Effective Date the Company shall pay to the Agent for distribution to each
Exiting Lender all accrued interest and Fees owing to such Lender for its
Existing Loans. To the extent of its obligations under the Existing Agreement,
the Company shall pay each Exiting Lender for all reasonable losses, costs and
expenses incurred by such Exiting Lender in connection with any prepayment of
its Existing Loans in accordance with the terms of the Existing Agreement.
7. Termination of Commitments under Existing Facility. On the
Effective Date the commitments of the Lenders (as defined in the Existing
Agreement) under the Existing Facility shall terminate and the Lenders therein
shall have no further obligation to make any further Loans (as defined in the
Existing Agreement) under the Existing Facility.
8. No Modification. It is understood and agreed to by the parties
hereto that, except as expressly set forth above, nothing in this memorandum
shall modify or amend the covenants, terms and agreements set forth in the
Existing Agreement or the documents related thereto or in the Credit Agreement
and the other Credit Documents, or discharge the obligations of (a) the
Company, TMA, the Existing Lenders and the Agent under the Existing Agreement,
-166-
<PAGE> 173
and (b) the Company, the Borrowing Subsidiaries, the Continuing Lenders and the
Agent under the Credit Agreement.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:_____________________________________
Name:________________________________
Title:_____________________________)_
THE MORTGAGE AUTHORITY, INC.
By:_____________________________________
Name:________________________________
Title:______________________________
CENTRAL PACIFIC MORTGAGE COMPANY
By:_____________________________________
Name:________________________________
Title:_______________________________
THE FIRST NATIONAL BANK OF CHICAGO, as
Agent for the Existing Lenders and the
Continuing Lenders
By:_____________________________________
Name:________________________________
Title:_______________________________
-167-
<PAGE> 1
EXHIBIT 10(l)
SECOND AMENDED AND RESTATED
SECURITY AND COLLATERAL AGENCY AGREEMENT
THIS SECOND AMENDED AND RESTATED SECURITY AND COLLATERAL AGENCY AGREEMENT
(the "Security Agreement") is made and dated as of November 12, 1996, by and
among SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation (the
"Company"), THE MORTGAGE AUTHORITY, a Delaware corporation ("TMA"), CENTRAL
PACIFIC MORTGAGE COMPANY, a California corporation ("CPM"), THE FIRST NATIONAL
BANK OF CHICAGO, a national banking association, acting in its capacity as
administrative agent for the lenders from time to time participating in the
Credit Agreement (as defined below) (in such capacity, the "Credit Agent"),
NORWEST BANK MINNESOTA, N.A., as the successor trustee under the Indentures (as
defined below) (the "Note Trustee") and NATIONAL CITY BANK OF KENTUCKY, a
national banking association, as collateral agent for the Secured Parties (as
defined below) (in such capacity, the "Collateral Agent").
RECITALS
A. This Second Amended and Restated Security and Collateral Agency
Agreement amends and restates in its entirety that certain Amended and Restated
Security and Collateral Agency Agreement dated as of March 24, 1995 by and
among the parties hereto (other than CPM). Pursuant to Section 22 of such
March 24, 1995 Agreement, execution of this Second Amended and Restated
Security and Collateral Agency Agreement by the Note Trustee is not required.
B. Pursuant to that certain Second Amended and Restated Revolving
Credit Agreement of even date herewith (the "Credit Agreement"), the Lenders
agreed to extend credit to the Company, TMA and CPM on the terms and subject to
the conditions set forth therein. The Credit Agreement amends and restates in
its entirety that certain Amended and Restated Revolving Credit Agreement dated
as of March 24, 1995 by and among the Company, TMA, First Chicago and certain
of the other Lenders. Capitalized terms not otherwise defined herein are used
with the same meanings as in the Credit Agreement.
C. TMA and CPM (each a "Borrowing Subsidiary") are wholly-owned
subsidiaries of the Company. Up to $1,000,000 of the Aggregate Commitment is
available to TMA and up to $10,000,000 of Swingline Advances are available to
CPM. Also, portions of the funds loaned to the Company under the Credit
Agreement may also be distributed by the Company to the Borrowing Subsidiaries
to enable the Borrowing Subsidiaries to originate or acquire Mortgage Loans,
which Mortgage Loans may constitute a portion of the Collateral.
D. The Note Trustee is the current trustee for the holders of the
Ratable-Medium Term Notes (the "Noteholders"), which notes are required to be
ratably secured with certain other secured debt of the Company pursuant to (i)
an Indenture, dated as of September
<PAGE> 2
15, 1986, between Fireman's Fund Mortgage Corporation (predecessor in interest
to the Company) and National Bank of Detroit, as trustee, as supplemented by
certain supplemental indentures and (ii) an Indenture, dated as of November 21,
1988, between Fireman's Fund Mortgage Corporation and The First National Bank
of Chicago, as trustee, as supplemented by certain supplemental indentures
(collectively, as supplemented, the "Indentures").
E. As a condition precedent to the effectiveness of the Credit
Agreement, the Credit Agent has required the execution and delivery of this
Security Agreement in order to, among other things, create a first priority
perfected security interest in the Collateral in favor of the Lenders, the
Non-Lender Balance Banks (to the extent of any Credit Indebtedness owed to such
Non-Lender Balance Banks), the Credit Agent, the Collateral Agent, the Note
Trustee and the Noteholders (collectively, the "Secured Parties") to secure
payment of the Credit Indebtedness and all amounts outstanding under the
Ratable Medium-Term Notes or otherwise due under the terms of the Indentures
(collectively, the "Secured Debt").
NOW, THEREFORE, in consideration of the above Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
AGREEMENTS
1. Appointment of Collateral Agent. The Note Trustee hereby
appoints, and each Lender and Non-Lender Balance Bank has, pursuant to the
terms of the Credit Agreement, appointed the Collateral Agent to act as secured
party, agent, bailee and custodian for the exclusive benefit of the Secured
Parties with respect to the Collateral. The Collateral Agent hereby accepts
such appointment and agrees to maintain and hold, or cause to be maintained and
held, all Collateral at any time delivered to it or any of its subagents as
secured party, agent, bailee and custodian for the exclusive benefit of the
Secured Parties. The Collateral Agent, the Borrowing Subsidiaries and the
Company agree that the Collateral Agent is acting and will act with respect to
the Collateral for the exclusive benefit of the Secured Parties and is not, and
shall not at any time in the future be, subject, with respect to the
Collateral, in any manner or to any extent, to the direction or control of the
Company or any Borrowing Subsidiary except as expressly permitted hereunder and
under the other Credit Documents. The Collateral Agent agrees to act in
accordance with this Security Agreement and in accordance with any written
instructions properly delivered pursuant hereto. Under no circumstances shall
the Collateral Agent deliver, or cause to be delivered, possession of
Collateral to the Company or any Borrowing Subsidiary except in accordance with
the express terms of this Security Agreement or the other Credit Documents.
-2-
<PAGE> 3
2. Delivery and Categorization of Collateral.
(a) Mortgage Loans. The Company and each Borrowing
Subsidiary (each such entity, with respect to any Pledged Item owned by such
entity, is referred to herein as the "Pledgor") shall deliver Collateral
Transmittals to the Collateral Agent from time to time identifying Mortgage
Loans that the Pledgor intends to include in Collateral by delivering to the
Collateral Agent the Required Mortgage Documents (as described on Schedule A
attached hereto) for such Mortgage Loans. Such delivery shall be made prior to
inclusion of such Mortgage Loans in Collateral, other than for AP Mortgages
identified in the Collateral Transmittal and covered by an AP Notice. The
Collateral Agent shall review the Required Mortgage Documents in accordance
with the review steps described on Exhibit 1 hereto.
(b) AP Notices. The Collateral Agent, upon receipt of a
Collateral Transmittal describing the AP Mortgages to be covered by an AP
Notice and an AP Notice as of that date, shall (subject to the eligibility
requirements set forth in the Credit Agreement) include such AP Mortgages as
Eligible Collateral in the Collateral Value Determination (as defined Paragraph
6(a) below). The Pledgor shall deliver the Required Mortgage Documents for
each such AP Mortgage not later than the tenth (10th) Business Day after the
date such AP Mortgage is first so included as an Eligible AP Mortgage. If the
Required Mortgage Documents for any AP Mortgage are not delivered by such 10th
Business Day, the Credit Agent or the Collateral Agent may request that the
Pledgor advise the Collateral Agent and the Credit Agent in writing of the
specific reason that such Required Mortgage Documents were not delivered, and
the Pledgor shall so advise the Collateral Agent and the Credit Agent within 30
days after such request.
(c) Securities. The Pledgor may, from time to time,
deliver Securities to the Collateral Agent or an Approved MBS Custodian and
shall provide such evidence that such Securities are either (a) in a
certificated form, with the certificates evidencing such Securities being
delivered to the Collateral Agent or such Approved MBS Custodian, or (b) in
book entry or uncertificated form with evidence that the Collateral Agent or
such Approved MBS Custodian has been identified as the nominal owner of such
Securities in the records of a Federal Reserve Bank or other institution
authorized by the applicable Federal Agency to maintain ownership records in
respect of such Securities.
(d) Repurchased Agency Loans and Receivables. The Company
shall identify Repurchased Agency Loans and Receivables from time to time by
providing a list of such items to the Collateral Agent. Such list shall
include statements indicating (i) the identification number of each such
Mortgage Loan, (ii) its unpaid principal balance, (iii) the "paid-to" date for
such
-3-
<PAGE> 4
Mortgage Loan, (iv) the date on which such Mortgage Loan was purchased by the
Company out of the applicable pool, (v) whether or not such Mortgage Loan has
been reinstated and the payment defaults thereunder cured by the mortgagor,
(vi) the date on which any foreclosure sale with respect to such Mortgage Loan
has occurred, (vii) the status of the related claim against the VA or FHA or
HUD, and (viii) whether the borrower of the Mortgage Loan filed a voluntary
bankruptcy petition or had an involuntary bankruptcy petition filed against it
while the payments on such Mortgage Loan were past due. The Company shall
provide a weekly update of such information to the Collateral Agent by 9:00
a.m. (Chicago time) on the first Business Day of each week with regard to any
Repurchased Agency Loans and Receivables previously identified as being
included in Collateral. The Collateral Agent shall have the right at any time
at the direction of the Aggregate Required Lenders, to require the Company to
submit all Required Mortgage Documents and item number 4 from the Additional
Required Mortgage Documents for any Repurchased Agency Loan and Receivable then
being included in Collateral, and the Collateral Agent shall request the
submission of such documents at the direction of the Credit Agent. In
addition, the Company shall provide, at the request of the Collateral Agent or
the Credit Agent, claim forms to FHA or VA or HUD for each such Repurchased
Agency Loan and Receivable, identifying the Collateral Agent as the "investor"
thereunder so that any payments made by FHA or VA or HUD with respect to such
Mortgage Loan shall be paid to the Collateral Agent rather than the Company.
In addition, with respect to those Repurchased Agency Loans and Receivables for
which there has been a foreclosure sale of the underlying property, the Credit
Agent shall have the right to require the Company to provide a new mortgage in
favor of the Collateral Agent on the real estate and improvements that
previously secured such Repurchased Agency Loan and Receivable, all in form
satisfactory to the Credit Agent and Collateral Agent and at the Company's sole
cost and expense, including the cost of recording such mortgage if required by
the Credit Agent.
(e) Pledged Servicing. The Company shall deliver to the
Collateral Agent fully executed copies of (i) the Acknowledgment Agreements
with FNMA and FHLMC, and (ii) Acknowledgment Agreements with all other Federal
Agencies (excluding GNMA unless and until the Agent or Required Lenders require
that an Acknowledgement Agreement with GNMA be obtained) covering all other
Servicing Agreements constituting Eligible Pledged Servicing. In the event the
Agent or the Required Lenders request that Acknowledgement Agreements with GNMA
be obtained, the Company shall deliver to the Collateral Agent fully executed
copies of Acknowledgement Agreements with GNMA covering all Pledged Servicing
with GNMA.
(f) Servicing Sale Receivables. The Company may, in
connection with a sale of Servicing Agreements from the Company to a Servicing
Purchaser, pledge the Servicing Sale Receivables due in
-4-
<PAGE> 5
connection with such sale to the Collateral Agent as Collateral. If the
Company so pledges Servicing Sale Receivables to the Collateral Agent, the
Company shall (i) deliver to the Credit Agent and the Collateral Agent a
complete executed copy of the related purchase agreement and written
confirmation from the Servicing Purchaser as to the amount of such Pledged
Servicing Sale Receivables, (ii) assign its rights to such Pledged Servicing
Sale Receivables to the Collateral Agent for the benefit of the Secured Parties
pursuant to an assignment in form and content satisfactory to the Required
Lenders, and (iii) cause the Servicing Purchaser of the applicable sold
Servicing Agreements to execute an agreement in form and content satisfactory
to the Required Lenders pursuant to which the Servicing Purchaser shall agree
to (A) pay such Pledged Servicing Sale Receivables directly to the Collateral
Agent for the benefit of the Secured Parties, and (B) provide simultaneous
written notice to the Credit Agent and the Collateral Agent of any claims made
against or notices given to the Company which would constitute an offset to or
reduction in the amount of such Pledged Servicing Sale Receivables.
(g) Identification of Collateral. All Mortgage Loans and
Securities at any time delivered to the Collateral Agent hereunder shall be
held by the Collateral Agent in a fire resistant vault, drawer or other
suitable depositary maintained in accordance with Federal Agency standards and
controlled solely by the Collateral Agent, conspicuously marked to show the
respective interests of the Secured Parties therein and not commingled with any
other assets or property of, or held by, the Collateral Agent. Accordingly, if
(pursuant to Paragraph 7(b) below) the Collateral Agent receives a shipping
request pursuant to which National City Bank of Kentucky is to retain physical
possession of the applicable Mortgage Loans or Securities as an agent for any
Person other than the Secured Parties, the Collateral Agent shall physically
separate such Mortgage Loans or Securities from the remainder of the Collateral
and shall execute any transmittal letters required under Paragraph 7(b) below.
3. Grant of Security Interest. The Company, with respect to
Collateral owned by the Company, and each Borrowing Subsidiary, with respect to
Collateral owned by the applicable Borrowing Subsidiary, hereby pledges,
assigns and grants to the Collateral Agent for the benefit of the Secured
Parties, a first priority security interest in the property described in
Paragraph 4 below (collectively and severally, the "Collateral"), to secure
payment of the Secured Debt. Furthermore, each AP Notice shall create a
security interest in favor of the Collateral Agent for the benefit of the
Secured Parties in the AP Mortgages identified therein. By delivering an AP
Notice, the Company represents and warrants that each AP Mortgage identified
therein constitutes an Eligible AP Mortgage. The Company agrees that while it
is in possession of any Required Mortgage Documents for an AP Mortgage, it will
hold same
-5-
<PAGE> 6
in trust and as agent and bailee for the Collateral Agent for the benefit of
the Secured Parties, without authority to make any other disposition thereof,
or of the proceeds thereof. The Company assumes the responsibility for loss or
destruction of any such Required Mortgage Documents until the same are
delivered to the Collateral Agent.
Unless so directed by the Credit Agent when an Event of Default has
occurred and is continuing, the Collateral Agent shall not record the
assignment of mortgage or deed of trust delivered in connection with any
Pledged Mortgage.
4. Collateral. The Collateral shall consist of all right, title
and interest of the Company and the Borrowing Subsidiaries, as applicable, of
every kind and nature, in and to all of the following property, assets and
rights of the Company and the Borrowing Subsidiaries wherever located, whether
now existing or hereafter arising, and whether now or hereafter owned or
acquired by or accruing or owing to the Company or a Borrowing Subsidiary, and
all proceeds and products thereof (including all proceeds in the Settlement
Account and Custodian Settlement Accounts from time to time):
(a) all Pledged Mortgages;
(b) all Pledged Securities;
(c) any commitments or other agreements issued by any
private mortgage insurer or by the FHA or VA to insure or guarantee any Pledged
Mortgage;
(d) all commitments of FNMA, FHLMC or other Persons to
purchase Pledged Items from the Company or any Borrowing Subsidiary or exchange
Securities with the Company or any Borrowing Subsidiary for Pledged Items;
(e) any options to sell or purchase Securities, future
contracts, or any other interest rate protection products which directly or
indirectly protect the Company or any Borrowing Subsidiary against reductions
in value of such Pledged Items due to changes in mortgage interest rates;
(f) the Settlement Account and any Custodian Settlement
Accounts and any amounts standing to the credit of the Settlement Account and
any Custodian Settlement Accounts then in existence with Approved MBS
Custodians, as described in Paragraph 7(c) of this Security Agreement;
(g) all VA Mortgage Loans or FHA Mortgage Loans (plus any
REO or accounts receivable from FHA or VA resulting therefrom, including
guaranty claims against VA and insurance claims against
-6-
<PAGE> 7
FHA or HUD) which are repurchased by the Company from Security holders and
pledged to the Collateral Agent as security for the Secured Debt;
(h) all cash and Cash Equivalents held by the Credit Agent
or Collateral Agent as security for the Secured Debt;
(i) all right, title and interest of the Company, of every
kind and nature, whether now existing or hereafter arising, in and to all
Servicing Agreements now or hereafter existing, including without limitation
all rights of the Company to sell or assign its interest therein and all
amounts payable to the Company thereunder arising out of any termination
thereof, and all files, surveys, certificates, correspondence, appraisals,
computer programs, tapes, disks, cards, accounting records and other records
and data of the Company related to the Mortgage Loans covered by such Servicing
Agreements and all proceeds and products thereof;
(j) all Pledged Servicing Sale Receivables; and
(k) all property and proceeds related to the foregoing,
including without limitation, the right to service Pledged Mortgages while
owned by the Company or any Borrowing Subsidiary, all accounts and general
intangibles of whatsoever kind so related and all documents or instruments
delivered to the Credit Agent or the Collateral Agent in respect of any Pledged
Item, including, without limitation, the right to receive all insurance
proceeds and condemnation awards which may be payable in respect of the
premises encumbered by any Pledged Mortgage.
5. Collateral Agent's Review of Collateral. Upon any receipt of
Required Mortgage Documents for any Mortgage Loan, the Collateral Agent shall
review the same and verify that:
(a) All Required Mortgage Documents relating to such
Mortgage Loan appear regular on their face (as determined by the Collateral
Agent in its reasonable discretion) and are in the Collateral Agent's
possession; and
(b) The statements set forth on Exhibit 1 hereto are
accurate and complete in all material respects.
If the Collateral Agent notes any exception in the review described in
subparagraph (a) or (b) above or questions, in its reasonable discretion, the
genuineness, regularity, propriety, or accuracy of any item of Collateral, the
Collateral Agent shall not include such item as Eligible Collateral in its next
Collateral Value Determination (as defined in Paragraph 6(a) below) delivered
to the Credit Agent. In the event that the Pledgor has been requested by the
Credit Agent or the Collateral Agent to deliver the "Additional Required
Mortgage Documents" (as described on Schedule B attached
-7-
<PAGE> 8
hereto) with respect to any Mortgage Loan, the Collateral Agent shall review
and verify such Additional Required Mortgage Documents consistent with the
obligations of the Collateral Agent above.
6. Collateral Value Determination; Determination Assumptions.
(a) On each Business Day the Collateral Agent shall compute
the value of the Aggregate Borrowing Base and the Warehouse Borrowing Base
(collectively, the "Borrowing Bases") and notify the Credit Agent thereof (a
"Collateral Value Determination") by telephone and by sending a facsimile copy
of a report ("Borrowing Base Report") in the form of Schedule C hereto (or such
other form as may be mutually agreed to by the Collateral Agent and the Credit
Agent) prior to 11:00 a.m. (Chicago time). With respect to any Required
Mortgage Documents delivered to the Collateral Agent by 10:00 a.m. (Chicago
time) on any Business Day, the Collateral Agent shall review such Required
Mortgage Documents in the manner set forth in Paragraph 5 above in time to
include the related Mortgage Loans (to the extent they constitute Eligible
Collateral) in the Borrowing Base Report delivered at 11:00 a.m. (Chicago time)
on such Business Day. If the Company or the Credit Agent reasonably believes
that the value of the Borrowing Bases has changed since the 11:00 Borrowing
Base Report, the Collateral Agent shall, at the request of the Company or the
Credit Agent made by facsimile prior to 2:00 p.m. (Chicago time) on any
Business Day, recompute the Borrowing Bases and notify the Credit Agent thereof
by telephone and by a facsimile transmission of a Borrowing Base Report.
Notwithstanding the foregoing, so long as the security interest in the
Collateral is abated as described in Paragraph 8, the Company shall perform all
of the obligations of the Collateral Agent with respect to determining the
Borrowing Bases, and the Collateral Agent shall have no duty to compute the
Borrowing Bases or submit Borrowing Base Reports.
(b) In making any Collateral Value Determination or other
calculation involving a determination of the value of the Borrowing Bases, the
Collateral Agent shall be permitted to rely, without independent investigation
of the correctness thereof, on:
(1) The information supplied by the Company to the
Collateral Agent with respect to (i) the aggregate principal balance of
the Mortgage Loans serviced by the Company pursuant to Servicing
Agreements constituting Eligible Pledged Servicing, which information
shall be provided by the Company within the first five days of each
month and (ii) the acquisition price paid by the Company to acquire any
Pledged Servicing;
(2) The information supplied by the Pledgor to the
Collateral Agent on the related Collateral Transmittal, with
-8-
<PAGE> 9
respect to the net acquisition cost (including any discounts and
excluding any servicing released premium) of any Mortgage Loan, the
unpaid principal balance of any Mortgage Loan as of the Pledge Date
therefor, and the weighted average purchase price (expressed as a
percentage of par) committed to under those Approved Investor
Commitments which could cover such Mortgage Loan;
(3) The most recent information supplied by the
Company to the Collateral Agent with respect to (i) the number of days
by which payments on any Mortgage Loan constituting Collateral are past
due, (ii) the date of any foreclosure sale or transfer in lieu of
foreclosure with respect to a repurchased Mortgage Loan constituting a
Repurchased Agency Loan and Receivable, (iii) the date of any
reinstatement of any Repurchased Agency Loans and Receivables, (iv) the
value of any REO and accounts receivable (including proceeds of FHA
insurance or VA guaranties) acquired in connection with a foreclosure
sale or a transfer in lieu of foreclosure of Eligible Repurchased Agency
Loans and Receivables, and (v) whether the borrower of any Mortgage Loan
which is included in Repurchased Agency Loans and Receivables filed a
voluntary bankruptcy petition or had an involuntary bankruptcy petition
filed against it while the payments on such Mortgage Loan were past due;
(4) The information supplied by the Company to the
Collateral Agent, whether written or in any other form acceptable to the
Collateral Agent, with respect to a determination as to whether amounts
received in the Settlement Account represent the purchase price paid for
a specific Mortgage Loan or Security and, consequently, whether the
Mortgage Collateral Value of such Mortgage Loan or MBS Value of such
Security should be removed from such calculation;
(5) The most recent information supplied by the
Credit Agent to the Collateral Agent with respect to (i) the amount of
the then current Aggregate Commitment, and (ii) the current balance in
the Settlement Account;
(6) The most recent information supplied by the
Company and the Servicing Purchaser(s) to the Collateral Agent with
respect to the amount of Servicing Sale Receivables; and
(7) Any information supplied by the Credit Agent,
the Company, or any other custodian of any of the Collateral, to the
Collateral Agent unless the Collateral Agent has actual knowledge that
such information is untrue or unreliable.
Furthermore, the Collateral Agent may rely on information
supplied by the Company with respect to the effect of the Borrowing
-9-
<PAGE> 10
Base Sublimits on the value of the Borrowing Bases attributable to Repurchased
Agency Loans and Receivables, which information shall be supplied by the
Company on the first Business Day of each week with respect to the value of the
Borrowing Bases attributable to Repurchased Agency Loans and Receivables as of
the close of the last Business Day of the preceding week; provided, however,
that the Collateral Agent shall (on the last Business Day of each month) verify
the accuracy of the information supplied by the Company in the most recent
report of such information and report to the Credit Agent any discrepancies
between such information as supplied by the Company and such information as
calculated by the Collateral Agent. The information as calculated by the
Collateral Agent shall be included in each daily Borrowing Base Report until
the Company again provides its next weekly report of the value of the Borrowing
Bases attributable to Repurchased Agency Loans and Receivables.
(c) The Collateral Agent is hereby authorized by the Credit
Agent to grant temporary waivers of strict compliance by the Company with the
eligibility requirements regarding qualification of any item of Collateral as
Eligible Collateral or with the Borrowing Base Sublimits when the Collateral
Agent deems it appropriate, in its sole discretion, (i) up to any amount for up
to three (3) Business Days, if the satisfaction of such eligibility
requirements or sublimits cannot be independently determined because of events
beyond the reasonable control of the Company (e.g. natural disasters,
transmission failures, etc.), provided that, if such determination cannot be
made for more than one (1) Business Day, the Company certifies in writing that
all such eligibility requirements and sublimits are in fact satisfied, or (ii)
if the aggregate amount of the portion of the Aggregate Borrowing Base
attributable thereto does not exceed the lesser of (A) $25,000,000 or (B) five
percent (5%) of the Aggregate Commitment at any time; provided that the waivers
permitted under this clause (ii) shall be limited to waivers of Borrowing Base
Sublimits and time limitations set forth in the eligibility requirements (e.g.
number of days eligible in the Aggregate Borrowing Base, number of days out on
Company Trust Receipts, etc.); and further provided that in no event shall any
Pledged Mortgage be included as Eligible Collateral while such Pledged Mortgage
is held by the Company under a Company Trust Receipt if the Company has held
such Pledged Mortgage under a Company Trust Receipt for more than 21 days.
7. Handling of Collateral; Settlement Account.
(a) From time to time until otherwise notified in writing
by the Required Lenders, the Collateral Agent is hereby authorized to release
documentation relating to Mortgage Loans to the Company against a trust receipt
executed by the Company in the form of Exhibit 2 hereto. The Collateral Agent
will maintain all original trust receipts in a vault, drawer or other suitable
-10-
<PAGE> 11
depositary with a one hour fire rating maintained in accordance with Federal
Agency requirements and controlled solely by Collateral Agent. The Company
hereby represents and warrants that any request by the Company for release of
Collateral under this subparagraph (a) shall be solely for the purposes of
correcting clerical or other non-substantial documentation problems in
preparation of returning such Collateral to the Collateral Agent for ultimate
sale or exchange and that the Company has requested such release in compliance
with all terms and conditions of such release set forth herein and in the
Credit Agreement, including, without limitation, Section 4.1(b)(iv) thereof.
(b) Prior to the occurrence of an Event of Default, upon
delivery by the Company to the Collateral Agent of a shipping request
substantially in the form of that attached hereto as Exhibit 3, the Collateral
Agent will transmit, or cause to be transmitted, Mortgage Loans and Securities
held by it or any Approved MBS Custodian as directed by the Company as follows:
(1) If the transmittal is of documentation for
Mortgage Loans or Securities in the possession of the Collateral Agent
or an Approved MBS Custodian in connection with the sale thereof to an
Approved Investor, such transmittal will be under cover of a transmittal
letter substantially in the form of that attached hereto as Exhibit 4
(or such other form as may be approved by the Credit Agent or required
under any Federal Agency program pursuant to which the relevant Mortgage
Loans or Securities are being shipped), subject to modification of such
Exhibit 4 pursuant to Paragraph 7(g) hereof at the request of the Agent.
(2) If the transmittal is of documentation for
Mortgage Loans or Securities in connection with the shipment to a
custodian or trustee in connection with the formation of a mortgage pool
supporting a Security (any such Security secured or otherwise supported
by any such Mortgage Loan or Security being referred to herein as a
"Warehouse-Related Security"), such transmittal will be under cover of a
transmittal letter substantially in the form of that attached hereto as
Exhibit 5 (or such other form as may be approved by the Credit Agent or
required if the Security is being issued under any Federal Agency
program), subject to modification of such Exhibit 5 pursuant to
Paragraph 7(g) hereof at the request of the Agent, and, in addition,
will be conditioned upon the facts that:
(i) If the Warehouse-Related Security is
being issued under a Federal Agency program, there has been
delivered for the Warehouse-Related Security such form as may be
required under the Federal Agency program pursuant to which such
Warehouse-Related Security is
-11-
<PAGE> 12
being issued (which form shall name the Collateral Agent or an
Approved MBS Custodian (as defined below) as the subscriber and
the Person to whom the Warehouse-Related Security is to be
delivered);
(ii) If the Warehouse-Related Security is
being issued pursuant to a program other than a Federal Agency
program, there has been delivered to and acknowledged by the
trustee and collateral agent or custodian for the underlying
mortgage pool a letter in form acceptable to the Collateral
Agent;
(iii) The Person to whom such
Warehouse-Related Security is to be delivered upon issuance in
exchange for the Mortgage Loans or Securities being shipped is
either (a) a Person approved by the Collateral Agent and the
Credit Agent which has agreed to hold such Warehouse-Related
Security and the proceeds of any sale or other disposition
thereof as custodian, agent and bailee for the benefit of the
Secured Parties pursuant to a custodial agreement substantially
in the form of that attached hereto as Exhibit 6 (a "Custodial
Agreement"), (b) the Collateral Agent or an Affiliate thereof or
(c) such other Person as is approved by the Collateral Agent and
the Credit Agent (any Person acting in such capacity being
referred to herein as an "Approved MBS Custodian");
(iv) There has been delivered to the Approved
MBS Custodian a letter in the form attached to the Custodial
Agreement (Exhibit A to Exhibit 6 hereto); and
(v) At the request of the Agent pursuant to
Paragraph 7(g) hereof, any Warehouse Related Security delivered
to the Collateral Agent or an Approved MBS Custodian pursuant to
subparagraphs (i) through (iv) shall be in a face amount of not
less than the amount of the Aggregate Borrowing Base which is
attributable to the Mortgage Loans so delivered in exchange for
such Warehouse Related Security.
In no event shall the Collateral Agent have any obligation to obtain written
acknowledgement of receipt from the addressee of any transmittal letter or
other communication sent by the Collateral Agent hereunder.
(c) All amounts payable on account of the sale of Pledged
Items (including, but not limited to, a sale pursuant to a repurchase
agreement) will be instructed to be paid directly by the purchaser to the
Settlement Account or, in the case of Pledged Securities delivered to an
Approved MBS Custodian, to a demand
-12-
<PAGE> 13
deposit account maintained with such Approved MBS Custodian (a "Custodian
Settlement Account") and, thereafter, to the Settlement Account as provided in
the applicable Custodial Agreement. Pursuant to Paragraph 3 above the Company
has granted a security interest in and lien upon the Settlement Account and in
all Custodian Settlement Accounts and in any and all amounts at any time held
therein as collateral security for the benefit of the Secured Parties. This
Paragraph 7(c) shall constitute notice to the Collateral Agent and any Approved
MBS Custodian of such security interest pursuant to the Uniform Commercial Code
of all relevant jurisdictions and any other law or regulation requiring such
notice. This Paragraph 7(c) shall further constitute irrevocable notice to the
Collateral Agent and any Approved MBS Custodian that the accounts referred to
in Paragraph 4(f) above are "no access" accounts to the Company and the
Collateral Agent except to the extent expressly permitted hereunder. The
Collateral Agent shall hold such security interest in and lien upon the
accounts referred to in Paragraph 4(f) above and all funds at any time held
therein for the benefit of the Secured Parties with all rights of a secured
party under the Uniform Commercial Code of all relevant jurisdictions.
(d) Prior to the occurrence of an Event of Default, the
Collateral Agent and any Approved MBS Custodian shall take such steps as they
may be reasonably directed from time to time by the Company in writing which
are not inconsistent with the provisions of this Security Agreement and the
other Credit Documents and which the Company deems necessary to enable the
Company to perform and comply with Approved Investor Commitments and with other
agreements for the sale or other disposition in whole or in part of Mortgage
Loans and Securities.
(e) The Collateral Agent may deliver any item of Collateral
to the Company or any other Person in accordance with the provisions of the
Credit Documents; provided, however, that the Collateral Agent shall not
deliver and shall incur no liability to the Company or any other Person for
refusing to deliver any item of Collateral to the Company or any other Person
(other than under existing Approved Investor Commitments) while an Event of
Default exists if the Collateral Agent has been directed to refrain from so
delivering Collateral by (i) the holders of more than 50% of the Secured Debt
then outstanding (the "Majority Debtholders") voting through the Credit Agent
or the Note Trustee, as applicable, as agents for the holders of the Secured
Debt as set forth in Paragraph 23 hereof, or (ii) the Required Lenders.
(f) In addition to the releases of Collateral provided for
in subparagraphs (a)-(e) of this Paragraph 7, upon the request of the Company
delivered from time to time to the Credit Agent and the Collateral Agent, the
Collateral Agent shall, with the prior written approval of the Credit Agent,
release Collateral specified
-13-
<PAGE> 14
in such notice from the lien of this Security Agreement. The Credit Agent
shall give its approval of such release if, but only if, (i) at the time of
such release no Event of Default exists and no notice of a Default has been
issued that has not been cured, (ii) any payment under Section 2.14(a) of the
Credit Agreement which may be required as a result of such release has been
made (or contemporaneously with such release shall be made) so that the release
of such Collateral will not create a violation of any Lending Sublimit or
Borrowing Base Sublimit, and (iii) if the Collateral to be released is Pledged
Servicing, such release is made in connection with the sale of such Pledged
Servicing by the Company; provided, however that, while an Event of Default
exists or while a notice of Default has been issued but not cured, the
Collateral Agent may (A) release pledged Cash Equivalents which are the subject
of reverse repurchase obligations in connection with the applicable reverse
repurchase agreement, and (B) release Pledged Items in connection with the sale
of Pledged Items pursuant to an existing Approved Investor Commitment if, in
either case, the proceeds of such repurchase or sale are deposited in the
Settlement Account. The Collateral Agent is authorized to execute and deliver
to the Company, on behalf of the Secured Parties, such UCC-3 partial release
forms or other evidence as may be required of any release permitted hereunder.
(g) Notwithstanding the provisions of Paragraph 7(b) above,
at the request of the Agent:
(i) The second sentence of the second full paragraph
of the form of whole loan sale transmittal letter attached
hereto as Exhibit 4 shall be deleted and replaced with the
following sentence:
"Each of the Mortgage Loans is subject to a security
interest in favor of National City Bank of Kentucky
(the "Collateral Agent") on behalf of the Secured
Parties, which security interest shall be automatically
released upon your remittance of an amount equal to the
greater of (1) the purchase price for such Mortgage
Loan (as set forth on the schedule attached hereto),
and (2) $__________, which is the mortgage collateral
value assigned by the Collateral Agent to such Mortgage
Loan. Such amount shall be remitted by wire transfer
to the following account:",
in which case the amount to be inserted in the blank in clause
two of such revised provision shall be an amount equal to the
amount of the Aggregate Borrowing Base which is attributable to
the Mortgage Loans being delivered pursuant to the transmittal
letter;
-14-
<PAGE> 15
(ii) The second sentence of the second full paragraph
of the form of warehouse related security transmittal letter
attached hereto as Exhibit 5 shall be deleted and replaced with
the following sentence:
"Each of the Mortgage Loans is subject to a security
interest in favor of National City Bank of Kentucky
(the "Collateral Agent") for the benefit of the Secured
Parties, which security interest shall be automatically
released upon the issuance of the Warehouse-Related
Security in accordance with the terms of the prescribed
GNMA, FNMA or FHLMC form enclosed herewith, which form
shall name either the Collateral Agent or another
person designated by the Collateral Agent as the person
to whom the Warehouse-Related Security is to be
delivered and require that the principal amount of the
Warehouse Related Security be in an amount not less
than $__________, which is the mortgage collateral
value assigned by the Collateral Agent to such Mortgage
Loan.",
in which case the amount to be inserted in the blank in such
revised provision shall be an amount equal to the amount of the
Aggregate Borrowing Base which is attributable to the Mortgage
Loans being delivered pursuant to the transmittal letter.
The Agent may require that the above described modifications be made to all
such transmittal letters or only to transmittal letters to certain Approved
Investors designated by the Agent.
8. Abatement of Security Interest. Upon the occurrence of a
Positive Security Event and so long as each of the Positive Security Conditions
is satisfied and no other Negative Security Event has occurred, the security
interest granted to the Secured Parties pursuant to Paragraph 3 herein shall
abate. The Credit Agent shall advise the Collateral Agent when such abatement
is in effect promptly after the Company notifies the Credit Agent that such a
Positive Security Event has occurred and shall advise the Collateral Agent if
such abatement expires under the terms of the Credit Agreement. The Collateral
Agent shall, at the request of the Company and after the Credit Agent has
confirmed to the Collateral Agent that a Positive Security Event has occurred
and all Positive Security Conditions are satisfied, execute and deliver such
UCC-3 financing statements as may be required to evidence the abatement of any
security interest that shall previously have been perfected by means of the
filing of financing statements. As a condition to such abatement, the Company
and each Borrowing Subsidiary shall execute such UCC-1 financing statements and
other documentation as the Collateral Agent may request to permit the
-15-
<PAGE> 16
security interest in the Collateral to be reinstated and perfected by the
Collateral Agent without further action by the Company or any Borrowing
Subsidiary if a Negative Security Event should occur thereafter. Although the
Company and the Borrowing Subsidiaries shall continue to deliver Mortgage Loan
files and other information and documents to the Collateral Agent (in a
custodial capacity) even while the security interest is abated, so long as the
security interest is abated the Company shall perform all of the obligations of
the Collateral Agent as set forth herein with respect to determining the
Borrowing Bases and delivering Borrowing Base Reports. During such abatement
period, (i) the remedies pertaining to the Collateral available to the
Collateral Agent, the Secured Parties and the Credit Agent under Paragraphs 16
and 17 or applicable law shall not be available, (ii) the Company shall perform
all of the obligations of the Collateral Agent with respect to determining the
Borrowing Bases, (iii) the Collateral Agent will not be required to sell the
Collateral or otherwise take any action at the direction of the Credit Agent to
realize upon the Collateral, (iv) the Collateral Agent shall be required to
sell the Collateral or otherwise take any action with regard to the disposition
of the Collateral at the direction of the Company, and (v) the Collateral shall
be deemed not to constitute security unless and until a Negative Security Event
occurs thereafter.
Upon the occurrence of a Negative Security Event, the Company
(with respect to Collateral owned by the Company) and each Borrowing Subsidiary
(with respect to Collateral owned by the Borrowing Subsidiaries) shall be
deemed to have (i) automatically re-pledged and re-granted to the Collateral
Agent for the benefit of the Secured Parties a first priority security interest
in the Collateral to secure payment of the Secured Debt, (ii) consented to the
Collateral Agent's filing of the UCC-1 financing statements and dating and
otherwise completing, filing and/or recording, if necessary, any other
documentation previously provided by the Company or any Borrowing Subsidiary to
the Collateral Agent, and (iii) reaffirmed its appointment of the Collateral
Agent to act as its bailee pursuant to the provisions of Section 9-305 of the
Uniform Commercial Code of any applicable state. Upon notice from the Credit
Agent that a Negative Security Event has occurred, the Collateral Agent shall
be deemed to have been informed of and accepted such appointment and shall file
UCC-1 financing statements executed by the Company and the Borrowing
Subsidiaries and other documentation as the Collateral Agent may request to
permit the security interest in the Collateral to be reinstated. The Company
shall pay or shall reimburse the Collateral Agent for the payment of any filing
costs incurred in connection with the filing of any UCC-1 or UCC-3 statements
pursuant to this Paragraph 8.
9. Reports. The Collateral Agent shall (a) deliver the Borrowing
Base Report at the times and in the manner set forth in Paragraph 6(a) above
and (b) deliver to the Credit Agent, the
-16-
<PAGE> 17
Company and any Lender which makes a written request therefor, such other
reports and information as any Lender may from time to time reasonably request.
In preparing any such reports the Collateral Agent shall be entitled to rely,
without independent investigation (other than the review steps described on
Exhibit 1 hereto), on information supplied to the Collateral Agent by the
Company.
10. No Reliance. The Collateral Agent shall not be responsible to
any Secured Party for any recitals, statements, representations or warranties
contained herein or in any other Credit Document; or for the execution,
effectiveness, genuineness, validity, enforceability, collectability, accuracy,
completeness or sufficiency of this Security Agreement or any other Credit
Document or instruments executed and delivered, or which could have been
executed or delivered, in connection with this Security Agreement or the other
Credit Documents, including, without limitation, the attachment, creation,
effectiveness or perfection of the security interests granted or purported to
be granted hereunder in and to the Collateral.
11. Costs and Expenses. The Collateral Agent shall notify the
Company of all extraordinary costs and expenses of the Collateral Agent
directly relating to the Collateral Agent's performance of this Security
Agreement, and such extraordinary costs and expenses shall be paid promptly by
the Company or, if already paid by the Collateral Agent, the Company promptly
shall reimburse the Collateral Agent therefor. For the purposes of this
provision, extraordinary costs and expenses shall include all costs and
expenses incurred by the Collateral Agent in performance of this Security
Agreement which have not been factored into the computation of the Collateral
Agent's fee (as agreed upon between the Company and the Collateral Agent
pursuant to a separate agreement), including, without limitation, reasonable
expenses of legal counsel to the Collateral Agent to enforce the rights of the
Collateral Agent hereunder.
12. Availability of Documents. The Secured Parties and their
agents, accountants, attorneys and auditors (each an "Inspecting Party") will
be permitted from time to time upon reasonable notice to the Collateral Agent
and the Company, and at such time as may be mutually acceptable to such
Inspecting Party, the Collateral Agent and the Company to examine (to the
extent permitted by applicable law) the files, documents, records and other
papers in the possession or under the control of the Collateral Agent relating
to any or all Collateral and to make copies thereof. Any such activity will be
at the cost and expense of the Secured Party requesting such access, except
that following the occurrence of an Event of Default, all reasonable
out-of-pocket costs and expenses associated with the exercise by the Credit
Agent or the Note Trustee of its rights under this Paragraph 12 shall be
promptly paid by the Company upon demand of the Credit Agent or the Note
-17-
<PAGE> 18
Trustee, as applicable.
13. Representations and Warranties. The Company, with respect to
Collateral pledged hereunder by the Company, and each Borrowing Subsidiary,
with respect to Collateral pledged hereunder by any such Borrowing Subsidiary,
hereby represents and warrants that: (a) the Company or the Borrowing
Subsidiary, as applicable, is the sole owner of the Collateral (or, in the case
of after-acquired Collateral, at the time the Company acquires rights in the
Collateral, will be the sole owner thereof), subject only to the rights of
Approved Investors under the Approved Investor Commitments; (b) except for
security interests in favor of the Collateral Agent for the benefit of the
Secured Parties hereunder, no Person has (or, in the case of after-acquired
Collateral, at the time the Company acquires rights therein, will have) any
right, title, claim or interest in, against or to the Collateral and, in any
event, so long as the Collateral Agent complies with the procedures relating to
possession of Collateral set forth in this Security Agreement, the Collateral
Agent shall have a perfected, first priority security interest therein for the
benefit of the Secured Parties; (c) no consent of any Person is required that
has not been obtained for the granting of the security interests provided for
herein, nor will any consent be required for the Collateral Agent to exercise
its rights under this Security Agreement in accordance with the terms of this
Security Agreement (except for consents to assignments of options, futures
contracts or other interest rate protection products in favor of the Secured
Parties from the counterparties thereto, which consents shall not be required
to be obtained unless an Event of Default is continuing or the Required Lenders
request otherwise); (d) to the best of the Company's and the Borrowing
Subsidiary's knowledge, all information heretofore, herein or hereafter
supplied to the Collateral Agent or to any Lender by or on behalf of the
Company with respect to the Collateral is or will be accurate and complete; (e)
the Approved Investor Commitments covering such Collateral may be collaterally
assigned to the Collateral Agent as described herein; and (f) each Mortgage
Loan and Security is, at all dates included in the computation of the value of
the Borrowing Bases, Eligible Collateral.
14. Covenants of the Company and Borrowing Subsidiaries. The
Company and the Borrowing Subsidiaries hereby agree: (a) to procure, execute
and deliver from time to time (unless a Positive Security Event has occurred
and is continuing) any endorsements, assignments, financing statements and
other writings deemed necessary or appropriate by the Collateral Agent or the
Credit Agent to perfect, maintain and protect the Collateral Agent's security
interest hereunder and the priority thereof and to deliver promptly to the
Collateral Agent all originals of any Collateral or proceeds thereof consisting
of chattel paper or instruments; (b) not to surrender or lose possession of
(other than to the
-18-
<PAGE> 19
Collateral Agent), sell, encumber, or otherwise dispose of or transfer, any
Collateral or right or interest therein other than shipment of Mortgage Loans
and Securities under Approved Investor Commitments and as otherwise permitted
under Paragraph 7 above and as otherwise permitted by the Credit Agreement; (c)
except as otherwise contemplated in any Custodial Agreement, not to grant to
any Federal Agency or Approved Investor any other security interest in any
Collateral, or otherwise acknowledge the creation of any ownership rights of
any Federal Agency or Approved Investor with respect to any Collateral unless
and until the Collateral Agent has received the proceeds of such Collateral as
described herein; (d) at all times to account fully for and promptly to deliver
to the Collateral Agent, in the form received, all Collateral or proceeds
thereof received, endorsed to the Collateral Agent or in blank as appropriate
and accompanied by such assignments and powers, duly executed, as the
Collateral Agent or the Credit Agent shall request, and until so delivered all
Collateral and proceeds thereof shall be held in trust for the Collateral Agent
for the benefit of the Secured Parties, separate from all other property of the
Company and the Borrowing Subsidiaries and identified as the property of the
Collateral Agent for the benefit of the Secured Parties; (e) to keep accurate
and complete records of the Collateral and at any reasonable time and at the
Company's expense, upon demand by the Collateral Agent or the Credit Agent, to
exhibit to and allow inspection of the Collateral and the records, reports and
information concerning the Collateral by the Collateral Agent or Credit Agent
(or Persons designated by the Collateral Agent or Credit Agent); (f) to keep
the records concerning the Collateral at the location(s) set forth in Paragraph
27 below and not to remove the records from such location(s) without the prior
written consent of the Collateral Agent and the Credit Agent; (g) not to
materially modify, compromise, extend, rescind or cancel any deed of trust,
mortgage, note or other document, instrument or agreement connected with any
Mortgage Loan pledged under this Security Agreement or any document relating
thereto or connected therewith or consent to a postponement of strict
compliance on the part of any party thereto with any term or provision thereof
in any material respect; (h) to keep the Collateral insured against loss,
damage, theft, and other risks customarily covered by insurance, and such other
risks as the Collateral Agent or the Credit Agent may request; (i) to do all
acts that a prudent investor would deem necessary or desirable to maintain,
preserve and protect the Collateral; (j) not knowingly to use or permit any
Collateral to be used unlawfully or in violation of any provision of this
Security Agreement, the Credit Agreement or any applicable statute, regulation
or ordinance or any policy of insurance covering the Collateral; (k) to pay (or
require to be paid) prior to their becoming delinquent all taxes, assessments,
insurance premiums, charges, encumbrances and liens now or hereafter imposed
upon or affecting any Collateral except as otherwise permitted in the Credit
Agreement; (l) to notify the Collateral Agent and the Credit Agent before any
such change shall
-19-
<PAGE> 20
occur of any change in the Company's name, identity or structure through
merger, consolidation or otherwise; (m) to appear in and defend, at the
Company's cost and expense, any action or proceeding which may affect its title
to or the Collateral Agent's interest for the benefit of the Secured Parties in
the Collateral; and (n) to comply in all material respects with all laws,
regulations and ordinances relating to the possession, operation, maintenance
and control of the Collateral. Notwithstanding the foregoing, (1) the
requirements of clauses (g), (k) and (m) shall not apply to any Collateral
which is not required to be included in the computation of the value of any of
the Borrowing Bases in order for the Company to be in compliance with the
requirements of the Credit Agreement unless failure to comply with the
requirements of said subparagraphs would have an adverse effect on the
Collateral which is included in such computation, and (2) the failure of the
Company or any Borrowing Subsidiary to comply with its obligations under this
Paragraph 14 with respect to any Pledged Item shall cause such Pledged Item to
cease to qualify as Eligible Collateral.
15. Collection of Collateral Payments.
(a) The Company or the applicable Borrowing Subsidiary
shall, at its sole cost and expense, use its best efforts to obtain payment,
when due and payable, of all sums due or to become due with respect to any
Collateral ("Collateral Payments" or a "Collateral Payment"), consistent with
all requirements of law and contractual obligations binding upon the Company or
the applicable Borrowing Subsidiary. Upon the request of the Collateral Agent
while an Event of Default exists, the Company or the applicable Borrowing
Subsidiary will notify and direct any party who is or might become obligated to
make any Collateral Payment, to make payment thereof to the Collateral Agent
(or to the Company or the applicable Borrowing Subsidiary in care of the
Collateral Agent) at such address as the Collateral Agent may designate. The
Company will reimburse the Collateral Agent promptly upon demand for all
out-of-pocket costs and expenses, including reasonable attorneys' fees and
litigation expenses, incurred by the Collateral Agent in seeking to collect any
Collateral Payment.
(b) The Collateral Agent shall, promptly upon receipt of
any funds delivered from any Servicing Purchaser as full or partial payment of
any Pledged Servicing Sale Receivable, deposit such funds into the Collateral
Agent's Settlement Account and notify the Company of the receipt of such funds.
If the Collateral Agent receives any check from a Servicing Purchaser in
payment of Servicing Sale Receivables and such check contains a restrictive
endorsement, the Collateral Agent shall obtain the consent of the Company and
the Credit Agent before cashing any such check.
(c) Following the occurrence of an Event of Default, upon
the request of the Collateral Agent the Company and each
-20-
<PAGE> 21
Borrowing Subsidiary will transmit and deliver to the Collateral Agent,
forthwith upon receipt and in the form received, all cash, checks, drafts and
other instruments for the payment of money (properly endorsed where required so
that such items may be collected by the Collateral Agent) which may be received
by the Company or any Borrowing Subsidiary at any time as payment on account of
any Collateral Payment and if such request shall be made, until delivery to the
Collateral Agent, such items will be held in trust for the Collateral Agent for
the benefit of the Secured Parties and will not be commingled by the Company or
any Borrowing Subsidiary with any of their other funds or property.
Thereafter, the Collateral Agent is hereby authorized and empowered to endorse
the name of the Company or the applicable Borrowing Subsidiary on any check,
draft or other instrument for the payment of money received by the Collateral
Agent on account of any Collateral Payment if the Collateral Agent believes
such endorsement is necessary or desirable for purposes of collection.
(d) The Company hereby agrees to indemnify, defend and save
harmless the Collateral Agent and its agents, officers, employees and
representatives from and against all reasonable liabilities and expenses on
account of any adverse claim asserted against the Collateral Agent relating to
any moneys received by the Collateral Agent on account of any Collateral
Payment (other than as a direct result of the gross negligence or willful
misconduct of the Collateral Agent) and such obligation of the Company shall
continue in effect after and notwithstanding the discharge of the Credit
Indebtedness and/or the release of the security interest granted in Paragraph 3
above.
16. Authorized Action by Collateral Agent. The Company and each
Borrowing Subsidiary each hereby irrevocably appoints the Collateral Agent as
its attorney-in-fact to do (but the Collateral Agent shall not be obligated to
and shall incur no liability to the Company, any Borrowing Subsidiary or any
Secured Party or any other third party for failure so to do) at any time and
from time to time at the written request and direction, given while an Event of
Default exists, of the Required Lenders or the Majority Debtholders, any act
which the Company or any Borrowing Subsidiary is obligated by this Security
Agreement to do, and to exercise such rights and powers as the Company or any
Borrowing Subsidiary might exercise with respect to the Collateral, including,
without limitation, the right to (a) collect by legal proceedings or otherwise
and endorse, receive and receipt for all dividends, interest, payments,
proceeds and other sums and property now or hereafter payable on or on account
of the Collateral; (b) insure, process, service and preserve the Collateral;
(c) transfer the Collateral to the Collateral Agent's own or its nominee's
name; and (d) make any compromise or settlement, and take any other action it
deems advisable with respect to the Collateral. Notwithstanding the preceding
sentence, the Collateral Agent shall endeavor to take
-21-
<PAGE> 22
only such actions with respect to the Collateral as are consistent with general
servicing of such Collateral and in compliance with Federal Agency
requirements; provided, however, that the Collateral Agent shall not be liable
to the Company or any Borrowing Subsidiary for any actions taken by the
Collateral Agent absent gross negligence or willful misconduct.
Notwithstanding anything contained herein, in no event shall the Collateral
Agent be required to make any presentment, demand or protest, or give any
notice, and the Collateral Agent need not take any action to preserve any
rights against any prior party or any other person in connection with the
Secured Debt or with respect to the Collateral.
17. Default and Remedies.
(a) While an Event of Default exists under any Credit
Document or the Indentures, the Collateral Agent shall at the written request
and direction of the Majority Debtholders, without notice to or demand upon the
Company: (a) foreclose or otherwise enforce the Collateral Agent's security
interest for the benefit of the Secured Parties in the Collateral in any manner
permitted by law or provided for hereunder; (b) sell or otherwise dispose of
the Collateral or any part thereof at one or more public or private sales or at
any broker's board or on any securities exchange, whether or not such
Collateral is present at the place of sale, for cash or credit or future
delivery and without assumption of any credit risk, on such terms and in such
manner as the Collateral Agent may determine; (c) require the Company to
assemble the Collateral and/or books and records relating thereto and make such
available to the Collateral Agent at a place to be designated by the Collateral
Agent; (d) enter into property where any Collateral or books and records
relating thereto are located and take possession thereof with or without
judicial process; and (e) prior to the disposition of the Collateral, prepare
it for disposition in any manner and to the extent the Collateral Agent deems
appropriate. Whether or not the Collateral Agent exercises any right given
pursuant to this Paragraph 17, upon the occurrence of any Event of Default, the
Collateral Agent on behalf of the Secured Parties shall have as to any
Collateral all other rights and remedies provided for herein and all rights and
remedies of a secured party under the Illinois Uniform Commercial Code and, in
addition thereto and not in lieu thereof, all other rights or remedies at law
or in equity existing or conferred upon the Collateral Agent on behalf of the
Secured Parties by other jurisdictions or other applicable law or given to the
Collateral Agent on behalf of the Secured Parties pursuant to any security
agreement, other instrument or agreement heretofore, now, or hereafter given as
security for the Company's obligations hereunder.
(b) The Collateral Agent is authorized, at any such sale,
if it deems it advisable so to do, to restrict the
-22-
<PAGE> 23
prospective bidders or purchasers to Persons who will represent and agree that
they are purchasing for their own account, for investment, and not with a view
to the distribution or sale of any of the Collateral. Upon any sale or other
disposition pursuant to this Security Agreement, the Collateral Agent shall
have the right to deliver, assign and transfer to the purchaser thereof the
Collateral or portion thereof so sold or disposed of and all proceeds thereof
shall be promptly distributed as set forth in Paragraph 18 hereof. Each
purchaser at any such sale or other disposition shall hold the Collateral free
from any claim or right of whatever kind, including any equity or right of
redemption of the Company or any Borrowing Subsidiary, and the Company and the
Borrowing Subsidiaries specifically waive (to the extent permitted by law) all
rights of redemption, stay or appraisal which they have or may have under any
rule of law or statute now existing or hereafter adopted. The Collateral Agent
shall give the Company or the applicable Borrowing Subsidiary only such notice
and shall publish such notice as may be required by the Illinois Uniform
Commercial Code or the Kentucky Commercial Code or by other applicable law of
the intention to make any such public or private sale or sale at broker's board
or on a securities exchange. Any such public sale shall be held at such time
or times within the ordinary business hours and at such place or places
permitted by the Illinois Uniform Commercial Code or the Kentucky Commercial
Code. At any such sale the Collateral may be sold in one lot as an entirety or
in separate parcels, as the Collateral Agent may determine. The Collateral
Agent may adjourn any public or private sale or cause the same to be adjourned
from time to time by announcement at the time and place fixed for the sale, and
such sale may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Collateral on credit
or for future delivery, (i) the Collateral so sold may be retained by the
Collateral Agent until the selling price is paid by the purchaser thereof, (ii)
none of the Secured Parties shall incur any liability in case of the failure of
such purchaser to take up and pay for the Collateral so sold, and (iii) in case
of any such failure, such Collateral may again be sold as provided herein.
Nothing contained in this Security Agreement shall prohibit any Lender or
Lenders from purchasing the Collateral at such sale.
(c) Notwithstanding anything herein to the contrary, with
respect to any Collateral covered by an executed Acknowledgement Agreement, the
Collateral Agent is authorized to carry out and comply with, and the Company
approves and acknowledges, all requirements regarding such a sale set forth
therein or as may otherwise be imposed by any Approved Investor which is a
party to such an Acknowledgement Agreement and agrees that such a sale in
accordance with the requirements of an Acknowledgement Agreement is
commercially reasonable.
-23-
<PAGE> 24
18. Disposition of Proceeds.
(a) General. "Net Proceeds" shall mean the proceeds
realized upon the sale or other disposition of any Collateral after deducting
therefrom the payment of the costs and expenses of such sale or disposition,
including (i) reasonable compensation to the Collateral Agent's and Credit
Agent's agents and counsel, and all expenses, liabilities and advances made or
incurred by any Secured Party acting on instructions of the Majority
Debtholders or the Required Lenders, and (ii) with respect to the Pledged
Servicing, the payment of any amounts due by the Company to FNMA or FHLMC, as
the case may be, as a condition to the transfer of the Company's interest in
any such Servicing Agreements pursuant to the terms of such Servicing
Agreements, including without limitation all amounts described in the
Acknowledgement Agreements. All such costs and expenses shall be deducted from
the proceeds directly related thereto or, in the absence of any such direct
relationship, on a pro rata basis from all types of proceeds recovered by the
Collateral Agent. The total of all Net Proceeds for all categories of
Collateral is referred to as "Aggregate Net Proceeds." To the extent the
Credit Agent is holding any Net Proceeds (e.g. amounts held in the Settlement
Account), the Credit Agent shall notify the Collateral Agent of the amount of
such Net Proceeds in order to enable the Collateral Agent to calculate the
Aggregate Net Proceeds. The Collateral Agent shall distribute the Aggregate
Net Proceeds as set forth in the following subparagraphs of this paragraph.
Each of the Credit Agent and the Note Trustee shall notify the Collateral Agent
in writing of the manner in which Aggregate Net Proceeds shall be delivered to
each such party (e.g. by providing wire transfer instructions).
(b) Distributions of Exempted Debt Proceeds. To the extent
that the amount of the Aggregate Net Proceeds actually in the possession of the
Collateral Agent are sufficient, the Collateral Agent shall first distribute to
the Credit Agent for the benefit of the Lenders an amount equal to the Exempted
Amount. "Exempted Amount" shall mean an amount equal to the lesser of (A) the
Credit Indebtedness and (B) sum of (i) 10% of the Company's Consolidated
Tangible Net Worth (as defined in the Indentures) as of June 30, 1994, and (ii)
the portion of the Credit Indebtedness constituting purchase money borrowings
by the Company or a Borrowing Subsidiary. The parties hereto acknowledge that
10% of the Company's Consolidated Tangible Net Worth equals $50,300,000 as of
June 30, 1994. The Collateral Agent shall be entitled to rely without
independent investigation upon the Credit Agent's determination of the amount
of Credit Indebtedness which constitutes purchase money borrowings. The
Aggregate Net Proceeds minus the Exempted Amount is hereinafter referred to as
the "Ratable Net Proceeds". After the Collateral Agent has distributed the
Exempted Amount to the Credit Agent, the Collateral Agent shall distribute the
Ratable Net Proceeds as set forth in the following
-24-
<PAGE> 25
subparagraphs.
(c) Distributions to the Note Trustee. The Collateral
Agent shall then distribute to the Note Trustee for the benefit of the
Noteholders an amount equal to the lesser of (A) the sum of the outstanding
principal balance of the Ratable Medium-Term Notes plus the accrued unpaid
interest thereon and (B) (i) the Ratable Net Proceeds from the disposition of
the Collateral multiplied by (ii) the quotient of (1) the sum of the
outstanding principal balance of the Ratable Medium-Term Notes plus the accrued
unpaid interest thereon, divided by (2) the Secured Debt minus the Exempted
Amount. The Collateral Agent shall be entitled to rely without independent
investigation upon (A) the Note Trustee's determination of the outstanding
principal balance of the Ratable Medium-Term Notes plus the accrued unpaid
interest thereon and (B) the Credit Agent's determination of the amount of
Credit Indebtedness. If the Credit Agent has retained more Net Proceeds than
the Lenders and the Company are entitled to (e.g. the proceeds in the
Settlement Account exceed the amount of Net Proceeds due to the Lenders and the
Company), the Credit Agent shall deliver such excess retained amount to the
Collateral Agent for distribution to the Note Trustee for the benefit of the
Noteholders.
(d) Distributions to the Credit Agent. The Collateral
Agent shall then distribute to the Credit Agent for the benefit of the Lenders
an amount equal to the remainder of any Aggregate Net Proceeds held by the
Collateral Agent.
19. Waiver. No Secured Party shall incur any liability as a result
of the sale of the Collateral, or any part thereof, at any public or private
sale. The Company and each Borrowing Subsidiary each hereby waives any claims
it may have against any Secured Party arising by reason of the fact that the
price at which the Collateral may have been sold at such private sale was less
than the price which might have been obtained at a public sale or was less than
the aggregate amount of the Secured Debt then outstanding.
20. The Collateral Agent
(a) Collateral Agent's Fee. Compensation of the Collateral
Agent for its services hereunder and reimbursement for any expenses incurred by
it in the performance of its duties hereunder shall be paid by the Company
pursuant to a separate written agreement between the Collateral Agent and the
Company.
(b) Actions by the Collateral Agent. The obligations of
the Collateral Agent hereunder are only those expressly set forth herein. The
Collateral Agent shall be entitled to (but shall not be obligated to) take or
refrain from taking any discretionary powers or actions under this Security
Agreement or any other Credit
-25-
<PAGE> 26
Document or the Indentures unless and until the Collateral Agent shall have
received the written direction to take or refrain from taking such action from
(i) the Required Lenders while no Event of Default exists, or (ii) the Majority
Debtholders while an Event of Default exists. The Collateral Agent shall not
be required to take any action hereunder if it shall reasonably determine that
by so doing it may incur criminal or civil liability.
(c) Consultation with Experts. The Collateral Agent may
consult with legal counsel (who may be counsel for the Company), independent
public accountants and other experts selected by it and shall not be liable for
any action taken or omitted to be taken by it in good faith in accordance with
the advice of such counsel, accountants or experts.
(d) Liability of Collateral Agent.
(1) Neither the Collateral Agent nor any of its directors,
officers, agents, or employees shall be liable for any action taken or
not taken by it in connection herewith (i) with the consent or at the
request of the Majority Debtholders or Required Lenders, as applicable,
or (ii) in the absence of its own gross negligence or willful
misconduct.
(2) The Collateral Agent shall not incur any liability by
acting in reliance upon any notice, consent, certificate, statement, or
other writing (which may be a bank wire, telex or similar writing) or
telephone communication believed by it to be genuine or, in the case of
a writing, to be signed by the proper party or parties.
(e) Indemnification. Subject to the limitations set forth
below, the Lenders and the Noteholders shall indemnify the Collateral Agent (to
the extent not reimbursed by the Company) against any cost, expense (including
reasonable counsel fees and disbursements), claim, demand, action, loss or
liability (except such as result from the Collateral Agent's gross negligence
or willful misconduct) that the Collateral Agent may suffer or incur in
connection with this Security Agreement or any action taken or omitted by the
Collateral Agent hereunder (the "Indemnified Amount"). Any Indemnified Amount
due to the Collateral Agent shall be paid by the Lenders and the Noteholders
pro rata in accordance with their respective shares of the Secured Debt at the
time the Collateral Agent incurred such liability (i.e. the portion paid by the
Noteholders shall equal the total Indemnified Amount multiplied by the quotient
of (i) the outstanding principal balance of the Ratable Medium-Term Notes plus
the accrued unpaid interest thereon at such time divided by (ii) the total
Secured Debt at such time); provided, however recourse to the Noteholders for
any amounts due from the Noteholders under this Paragraph shall be paid solely
from the portion of the Ratable Net Proceeds due but not yet distributed
-26-
<PAGE> 27
to the Noteholders under Paragraph 18(c) above and the remainder of any
Indemnified Amount shall be paid by the Lenders. Each Lender shall, ratably in
accordance with its share of the Aggregate Commitment at the time the
Collateral Agent incurred such liability, pay its portion of the Indemnified
Amount due from the Lenders. For the purposes of this Paragraph, the amounts
of (1) any Commitment of any Lender, (2) the outstanding principal balance of
the Ratable Medium-Term Notes plus the accrued unpaid interest thereon and (3)
the Credit Indebtedness shall be the highest amounts of such Commitments or
components of the Secured Debt during the course of any event for which
indemnity is sought. The provisions of this Paragraph shall survive the
termination of this Security Agreement.
(f) Knowledge of Defaults. The Collateral Agent shall not
be deemed to have knowledge or notice of the occurrence of any Event of Default
unless the Collateral Agent has received notice from a Secured Party or the
Company referring to the Credit Agreement, this Security Agreement or the
Indentures describing such Event of Default and stating that such notice is a
"Notice of Default." Following receipt of a Notice of Default, the Collateral
Agent shall assume that the Event of Default is continuing until the Collateral
Agent receives written information to the contrary from the Credit Agent.
(g) Reports. The Collateral Agent may, at its option with
the approval of the Company and the Credit Agent, alter the format of any
report required hereunder, provided such modified report contains the same
information previously furnished in the unmodified report.
(h) Other Transactions with Company. The Collateral Agent
and its Affiliates may accept deposits from, lend money to, and generally
engage in any kind of business with, the Company or any Subsidiary or Affiliate
of the Company as if it were not the Collateral Agent hereunder.
(i) Resignation/Removal. The Collateral Agent may resign
at any time by giving 90 days prior written notice thereof to the Credit Agent
and the Company. The Collateral Agent agrees to resign within 60 days after
written notice by the Company requesting the resignation of the Collateral
Agent provided that no Event of Default has occurred and is continuing at the
time of such request. In addition, in the event the Collateral Agent fails to
perform its obligations under this Security Agreement in any material manner
and fails to correct its performance within 30 days of receipt of written
notice of such failure given by the Credit Agent at the request of not less
than the Required Lenders, then the Collateral Agent may be removed upon 30
days written notice given by the Credit Agent at the direction of not less than
the Required Lenders. Upon any such resignation or removal: (i) so
-27-
<PAGE> 28
long as there has not occurred and is continuing an Event of Default, the
Company shall appoint from among the Lenders (which appointment shall be
subject to the approval of the Required Lenders, such approval not to be
unreasonably withheld or delayed), a successor agent for such Collateral Agent,
and (ii) following the occurrence and during the continuance of an Event of
Default, the Required Lenders shall appoint from among the Lenders, a successor
agent for such Collateral Agent. Following the appointment and acceptance of a
successor Collateral Agent the Credit Agent shall notify the Collateral Agent
as to who the successor Collateral Agent is and the Collateral shall be
transferred to the new Collateral Agent within 30 days after such acceptance.
If the Company and/or the Required Lenders, as applicable, are unable to agree
on the appointment of a successor agent prior to the expiration of any of the
time periods set forth above, the Credit Agent (or an Affiliate thereof
designated by the Credit Agent) shall be deemed a successor Collateral Agent
until the appointment of and acceptance by a different successor Collateral
Agent, and the Collateral Agent shall be permitted to transfer all the
Collateral held by the Collateral Agent to the Credit Agent (or an Affiliate
thereof designated by the Credit Agent) within 30 days after the
applicable time period set forth above. Within 30 days after the appointment
of a successor Collateral Agent and the successor's acceptance of such
appointment, that successor Collateral Agent shall thereupon succeed to and
become vested with all the rights, powers, privileges and duties of the
retiring Collateral Agent, and the retiring Collateral Agent shall be
discharged from its duties and obligations under this Security Agreement;
provided, however, that the retiring Collateral Agent shall not be discharged
from any liability as a result of its or its directors', officers', agents' or
employees' gross negligence or willful misconduct in connection with the
performance of its duties and obligations under this Security Agreement prior
to the effective date of its resignation or removal. Notwithstanding the
foregoing, the Collateral Agent shall continue to hold the Pledged Items and
the security interest created hereunder for the benefit of the Secured Parties
until such Pledged Items and security interest have been effectively
transferred to the successor agent. After the resignation or removal of any
Collateral Agent hereunder, the provisions of this Security Agreement shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was the Collateral Agent under this Security Agreement.
(j) Representations and Warranties. The Collateral Agent
hereby represents and warrants:
(1) The Collateral Agent is a national banking association
validly existing, in good standing and authorized to exercise
its powers, rights and privileges and is qualified to do
business in all jurisdictions where necessary, and has all
requisite power and
-28-
<PAGE> 29
authority to perform all of its obligations under this Security
Agreement;
(2) The execution, delivery and performance by the
Collateral Agent of this Security Agreement and all documents
required hereby to be executed by the Collateral Agent have been
duly authorized by all necessary corporate action and do not and
will not violate any existing provision of any law, rule,
regulation, order, writ, judgment, injunction, decree,
determination or award currently in effect having applicability
to the Collateral Agent; and
(3) This Security Agreement and all documents required
hereby to be executed by the Collateral Agent have been duly
executed and delivered by the Collateral Agent.
21. Confidentiality. The Collateral Agent agrees to take normal and
reasonable precautions and exercise due care to maintain the confidentiality of
all non-public information provided to it by the Company or any Borrowing
Subsidiary or by any other party on the Company's behalf in connection with
this Security Agreement or the Credit Documents and agrees and undertakes that
neither it nor any of its Affiliates shall disclose any such information for
any purpose or in any manner other than pursuant to the terms contemplated by
this Security Agreement or the Credit Documents. The Collateral Agent may
disclose such information (1) to any Secured Party, (2) at the request of any
regulatory authority or in connection with an examination of the Collateral
Agent or any of its Affiliates by any such authority, (3) pursuant to subpoena
or other court process, (4) when required to do so in accordance with the
provisions of any applicable law, (5) at the express direction of any other
governmental authority of any State of the United States of America or of any
other jurisdiction in which the Collateral Agent or any of its Affiliates
conducts its business, (6) to the Collateral Agent's or any of its Affiliates'
independent auditors, attorneys and other professional advisors, (7) if such
information has become public other than through disclosure by the Collateral
Agent or any of its Affiliates or any Lender, and (8) in connection with any
litigation involving the Collateral Agent or any of its Affiliates.
Notwithstanding the foregoing, the Company authorizes the Collateral Agent to
disclose to any lending institution proposed by the Company to become a Lender
under the Credit Agreement or any prospective or actual Participants such
financial and other information in its possession (i) which has been delivered
to the Collateral Agent pursuant to the Credit Documents or which has been
delivered to the Collateral Agent by the Company prior to entering into the
Credit Documents or (ii) which is reasonably necessary to effectuate the
purposes of the Credit Agreement and this Security Agreement, provided that
unless otherwise agreed by the Company, such lending institution or
-29-
<PAGE> 30
Participant shall agree in writing to keep such information confidential to the
same extent required of the Collateral Agent hereunder.
22. Limited Rights of Noteholders. It is expressly acknowledged and
agreed by the Note Trustee on behalf of the Noteholders, that the Ratable
Medium-Term Notes are entitled to the benefits of this Security Agreement and
the Collateral hereunder, that this Security Agreement and the Credit Agreement
may be amended and otherwise modified and/or provisions waived from time to
time as permitted hereunder and thereunder without consultation with the Note
Trustee or any Noteholder and without the consent of the Note Trustee or any
such Noteholder (other than amendments or modifications which are made prior to
the occurrence of a Positive Security Event or after the occurrence of a
Negative Security Event and which would (i) eliminate the Noteholders as a
"Secured Parties" hereunder (ii) materially reduce the rights of the
Noteholders in the proceeds of the Collateral created hereunder, or (iii) amend
the definition of "Majority Debtholders" or any provision hereof regarding the
consent or voting of the Majority Debtholders, which amendments or
modifications shall require the prior written consent of the Note Trustee).
23. Voting of Debtholders.
(a) Required Lenders. In all cases in which this Security
Agreement requires the consent, approval or direction of the Required Lenders
or all of the Lenders with respect to any action, the Credit Agent shall be
responsible for determining whether the Required Lenders has given such
consent, approval or direction and shall notify the Collateral Agent thereof in
writing. The Collateral Agent shall be entitled to rely without independent
verification upon the information supplied by the Credit Agent with respect to
any consent, approval or direction of the Required Lenders (or all of the
Lenders with respect to actions which require unanimous approval of the
Lenders).
(b) Majority Debtholders. In all cases in which this
Security Agreement requires the consent, approval or direction of the Majority
Debtholders with respect to any action, any of the Credit Agent, the Note
Trustee or the Collateral Agent may call for the approval of such action by the
Majority Debtholders by giving written notice (a "Voting Request") to the other
two of such Persons. Following delivery of the Voting Requests, the Note
Trustee shall be responsible for determining the vote on behalf of the
Noteholders and the Credit Agent shall be responsible for determining the vote
on behalf of the Lenders. The Credit Agent or the Note Trustee may request
that the other party distribute to the Noteholders or Lenders, as the case may
be, a statement setting forth the sender's reasons for recommending or opposing
that a particular action be taken. Within ten Business Days after the
-30-
<PAGE> 31
delivery of a Voting Request, each of the Credit Agent and the Note Trustee
shall notify the Collateral Agent in writing of (i) whether the Lenders or the
Noteholders (or the Trustee on behalf of the Noteholders), respectively,
approve of the proposed action, and (ii) the amount of Secured Debt then held
by the Lenders or the Noteholders, respectively. Both the Credit Agent and the
Note Trustee may approve of the proposed action on behalf of a portion of the
Lenders or Noteholders, respectively, and disapprove of the action on behalf of
the remainder of the Lenders or Noteholders, in which case the Credit Agent or
the Note Trustee shall also notify the Collateral Agent of the amount of
Secured Debt held by the Lenders or Noteholders approving the proposed action
and the amount of Secured Debt held by those opposing the action.
If the Credit Agent or the Note Trustee fails to respond to the Voting
Request within the ten Business Day period set forth above, all of the Lenders
or Noteholders, as applicable, shall be deemed to have approved the proposed
action. As soon as the Collateral Agent has received the approval (through the
Credit Agent or the Note Trustee) of the holders of more than 50% of the
outstanding Secured Debt with respect to a proposed action, the action shall be
deemed approved by the Majority Debtholders even if less than all of the
holders (through the Credit Agent or the Note Trustee) shall have responded to
the Voting Request at such time. The Credit Agent and the Note Trustee shall,
within one Business Day after a request from the Collateral Agent given at any
time, notify the Collateral Agent of the amount of Secured Debt then held by
the Lenders or Noteholders, respectively.
24. Binding Upon Successors. All rights of the Collateral Agent and
the Secured Parties under this Security Agreement shall inure to the benefit of
the Collateral Agent and the Secured Parties and their successors and assigns
(including any successors to or assigns of the Note Trustee), and all
obligations of the Company and the Borrowing Subsidiaries shall bind their
successors and assigns; provided that neither the Company nor any Borrowing
Subsidiary shall have the right to assign its rights or obligations under this
Security Agreement without the consent of all the Lenders. The parties hereto
acknowledge that the various series of Ratable Medium-Term Notes may require
representation by separate trustees following the occurrence of an Event of
Default, and the term "Note Trustee" when used herein shall be deemed to refer
to each such trustee.
25. Entire Agreement; Severability. This Security Agreement
contains the entire security agreement and collateral agency agreement with
respect to the Collateral among Secured Parties, the Company and the Borrowing
Subsidiaries and supersedes all prior written or oral agreements and
understandings relating thereto. All waivers by the Company or any Borrowing
Subsidiary provided for in this Security Agreement have been specifically
negotiated by the
-31-
<PAGE> 32
parties with full cognizance and understanding of their rights. If any of the
provisions of this Security Agreement shall be held invalid or unenforceable,
this Security Agreement shall be construed as if not containing such
provisions, and the rights and obligations of the parties hereto shall be
construed and enforced accordingly.
26. Choice of Law. This Security Agreement shall be construed in
accordance with and governed by the laws of the State of Illinois and, where
applicable and except as otherwise defined herein, terms used herein shall have
the meanings given them in the Illinois Uniform Commercial Code.
27. Place of Business; Records. The Company and each Borrowing
Subsidiary represents and warrants that its principal place of business and
chief executive office is at the address set forth beneath its signature below,
and that its books and records concerning the Collateral are kept at its
principal place of business and chief executive office. Neither the Company
nor any Borrowing Subsidiary shall change its principal place of business and
chief executive office without 30 days' prior written notice to the Credit
Agent and the Collateral Agent.
28. Notice. Except where instructions or notices are expressly
authorized elsewhere in this Security Agreement to be given by telephone or by
other means of transmission, all instructions, notices and other communications
to be given to any party hereto shall be in writing and shall be personally
delivered or sent by certified mail, postage prepaid, private delivery service
or by facsimile, and shall be deemed to be given for purposes of this Security
Agreement on the day (or at the time of day, if applicable) when actually
received by the intended party at its address or facsimile or telephone number
as set forth following its signature below (or as such party may specify to the
other parties in writing).
29. Modification of Agreement. No provisions of this Agreement may
be amended or waived (except for waivers expressly provided for hereunder)
unless such amendment or waiver is in writing and is signed by the Company, the
Collateral Agent if the rights or duties of the Collateral Agent are affected
thereby, the Note Trustee on behalf of the Noteholders if the Note Trustee's
consent is expressly required under Paragraph 22, and the Credit Agent on
behalf of the Lenders. The Credit Agent shall not consent to any such
amendment or waiver without the prior written consent of
(i) each Lender if such amendment or waiver
(1) would amend or waive the method of calculating
the Aggregate Borrowing Base; or
-32-
<PAGE> 33
(2) releases any Collateral beyond the releases
expressly provided for herein or in the Credit Agreement; or
(3) changes or waives any
restriction on the Company's or any Borrowing Subsidiary's
ability to assign its rights or obligations under any of the
Credit Documents; or
(4) changes or waives any provision herein
regarding the indemnification of the Credit Agent, the
Collateral Agent or such Lender; or
(5) changes the definition of Required Lenders or
Majority Debtholders or modifies any requirement for consent by
all of the Lenders; or
(6) changes or waives any provision herein
regarding the allocation among the Secured Parties of any
payments or proceeds received by the Collateral Agent hereunder;
or
(ii) the Required Lenders in the case of all other waivers
or amendments.
30. Consent of Jurisdiction.
THE COMPANY, EACH BORROWING SUBSIDIARY, THE NOTE TRUSTEE AND THE
COLLATERAL AGENT EACH HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE
JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN
CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY CREDIT
DOCUMENTS AND EACH HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH
ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND
IRREVOCABLY WAIVES ANY OBJECTION THEY MAY NOW OR HEREAFTER HAVE AS TO THE VENUE
OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH
COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE
CREDIT AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE COMPANY, ANY
BORROWING SUBSIDIARY, THE NOTE TRUSTEE OR THE COLLATERAL AGENT IN THE COURTS OF
ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE COMPANY, ANY BORROWING
SUBSIDIARY, THE NOTE TRUSTEE OR THE COLLATERAL AGENT AGAINST THE CREDIT AGENT
OR ANY LENDER OR ANY AFFILIATE OF THE CREDIT AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY CREDIT DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO,
ILLINOIS.
31. Waiver of Jury Trial.
EACH PARTY TO THIS SECURITY AGREEMENT HEREBY WAIVES TRIAL BY
JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH ANY CREDIT DOCUMENT OR THE RELATIONSHIP
ESTABLISHED THEREUNDER.
-33-
<PAGE> 34
EXECUTED the day and year first above written.
SOURCE ONE MORTGAGE SERVICES CORPORATION
By:________________________________
Name: Michael C. Allemang
Title: Executive Vice President
and Chief Financial Officer
Address for Notices:
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attn: Chief Financial Officer
Telephone No.: (810) 488-8639
Facsimile No.: (810) 488-7300
and
Attn: Vice President/Treasury
Telephone No.: (810) 488-7338
Facsimile No.: (810) 488-7812
-34-
<PAGE> 35
THE MORTGAGE AUTHORITY, INC.
By:________________________________
Name: Larry N. Ciofu
Title: Vice President/Treasury
Address for Notices:
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attn: Vice President/Treasury
Telephone No.: (810) 488-7338
Facsimile No.: (810) 488-7812
CENTRAL PACIFIC MORTGAGE COMPANY
By:________________________________
Name: John Cassell
Title: Chief Financial Officer
Address for Notices:
5750 Sunrise Boulevard
Citrus Heights, CA 95610
Attn: Chief Financial Officer
Telephone No.: (916) 537-2603
Facsimile No.: (916) 966-7327
THE FIRST NATIONAL BANK OF CHICAGO, a
national banking association, as
Credit Agent
By:_________________________________
Name:_______________________________
Title:______________________________
Address for notices:
One First National Plaza
Chicago, IL 60670
Attn: William A. Sholten, III,
First Vice President
Telephone No.: (312) 732-4600
Facsimile No.: (312) 732-6222
-35-
<PAGE> 36
NATIONAL CITY BANK OF KENTUCKY, a
national banking association, as
Collateral Agent
By:_________________________________
Name:_______________________________
Title:______________________________
Address for notices:
421 West Market Street
Louisville, Kentucky 40202
Attn: Ms. Wilma Kuerzi
Telephone No.: (502) 581-4354
Facsimile No.: (502) 581-4154
NORWEST BANK MINNESOTA, N.A., as Note
Trustee
PURSUANT TO SECTION 22 HEREOF,
SIGNATURE OF NOTE TRUSTEE NOT
REQUIRED FOR THIS AMENDED AND RESTATED
SECURITY AGREEMENT
Address for notices:
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota 55479-0069
Attn: Mr. Ray Haverstock
Telephone No.: (612) 667-7364
Facsimile No.: (612) 667-9825
-36-
<PAGE> 37
EXHIBITS AND SCHEDULES
TO
SECURITY AGREEMENT
SCHEDULE DOCUMENT
-------- --------
A Required Mortgage Documents
B Additional Required Mortgage Documents
C Form of Borrowing Base Report
EXHIBIT DOCUMENT
------- --------
1 Required Review Steps
2 Form of Company Trust Receipt
3 Form of Shipping Request
4 Form of Whole Loan Sale Transmittal Letter
5 Form of Warehouse-Related MBS Transmittal
6 Form of Custodial Agreement
7 Form of Collateral Transmittal - Initial Mortgage
Information
-37-
<PAGE> 38
SCHEDULE A
TO SECURITY AGREEMENT
REQUIRED MORTGAGE DOCUMENTS
1. Original of mortgage note executed in favor of the Company or
the applicable Borrowing Subsidiary (with a complete series of
endorsements from the original payee thereof, through any
subsequent holders to the Company or Borrowing Subsidiary if
purchased by the Company or Borrowing Subsidiary) and endorsed
by an authorized signatory of the Company or the applicable
Borrowing Subsidiary in blank.
2. Recorded Mortgage or deed of trust securing the above mortgage
note. In lieu of a recorded document, the Collateral Agent may
accept a copy certified as being out for recordation by the
escrow company, title insurance company or closing agent, or in
the case of refinanced transactions, a copy of such mortgage or
deed of trust certified by an authorized signatory of the
Company.
3. Assignment of the mortgage or deed of trust by an authorized
signatory of the Company or the applicable Borrowing Subsidiary
in blank, in recordable form and the original or a copy,
certified as being out for recordation by the records office or
escrow or title insurance company or the Company, of a proper
assignment or assignments of the related mortgage or deed of
trust from the original holder, through any subsequent
transferees, to the Company or the applicable Borrowing
Subsidiary.
4. A copy, certified by the title insurance company or the closing
agent, of all applicable and necessary powers-of-attorney and
assumed name certificates.
-38-
<PAGE> 39
SCHEDULE B
TO SECURITY AGREEMENT
ADDITIONAL REQUIRED MORTGAGE DOCUMENTS
1. The original recorded mortgage or deed of trust securing the
mortgage note.
2. Evidence of fire and extended coverage insurance in an amount
not less than the highest of the following: (a) the amount of
the Mortgage Loan, (b) 90% of the insurable value of the
improvements, and (c) an amount sufficient to prevent
co-insurance. The Collateral Agent reserves the right to obtain
a loss payable endorsement in its favor if it so desires.
3. Evidence of Notice to Customer required by the federal
Truth-in-Lending Law and Federal Reserve Regulation Z.
4. In the case of an FHA mortgage note, an FHA insurance
certificate or a commitment to deliver such; in the case of a VA
mortgage note; a VA guaranty certificate or a commitment to
deliver such and in the case of a conventional mortgage note, an
appraisal.
5. In the case of a conventional mortgage note with a loan-to-value
ratio in excess of 80%, the applicable private mortgage
insurance policy.
6. A certified copy of the preliminary policy of or commitment for
title insurance insuring the mortgage or deed of trust as a
first lien on the property subject thereto written by a title
company and in amount and containing exceptions satisfactory to
the Collateral Agent.
7. Evidence of certificate of completion, as appropriate under the
circumstances.
8. Other documentation as the Collateral Agent may reasonably deem
appropriate, as well as documentation necessary to fulfill
requirements of the Approved Investor Commitments.
9. Such additional documents as may be necessary in the opinion of
the Collateral Agent to transfer to the Collateral Agent, for
the benefit of the Secured Parties, the title to any Collateral
pledged and/or hypothecated pursuant to the Security Agreement.
-39-
<PAGE> 40
SCHEDULE C
TO SECURITY AGREEMENT
FORM OF BORROWING BASE REPORT
Date: _______________
Reference is made to that certain Second Amended and Restated Revolving
Credit Agreement among the Company, Borrowing Subsidiaries, The First National
Bank of Chicago, individually and as administrative agent, and the lenders
named therein, dated as of November 12, 1996 (the "Credit Agreement").
Capitalized terms not otherwise defined herein are used with the same meanings
as in the Credit Agreement.
1. AGGREGATE BORROWING BASE:
Eligible Mortgage Loans
(Mortgage Collateral Value):
Eligible Delivered Mortgages $______________
Eligible AP Mortgages $______________
Eligible Pledged Securities
(MBS Value) $______________
Total Pledged Items $______________
Percentage Factor 98%
(A) AGGREGATE BORROWING BASE
FROM PLEDGED ITEMS $______________
Eligible Repurchased
Agency Loans and Receivables $______________
Percentage Factor 90%
(B) AGGREGATE BORROWING BASE
FROM REPURCHASED AGENCY LOANS
AND RECEIVABLES $______________
(C) AGGREGATE BORROWING BASE
FROM ELIGIBLE PLEDGED SERVICING $______________
____________________
1 Based on either market value or principal balance of loans serviced
as described in Section 4.6(h) of the Credit Agreement
-40-
<PAGE> 41
Eligible Servicing Sale Receivables $______________
Percentage Factor 75%
(d) AGGREGATE BORROWING BASE
FROM ELIGIBLE SERVICING SALE RECEIVABLES $______________
(e) BALANCE IN SETTLEMENT ACCOUNT $______________
(f) CASH AND CASH EQUIVALENTS $______________
SUM OF (a) - (f) ABOVE $______________
Reconciling Items:
Timing Difference $______________
Loan Detail Difference $______________
AGGREGATE BORROWING BASE $______________
2. WAREHOUSE BORROWING BASE:
(a) AGGREGATE BORROWING BASE $______________
LESS
(b) AGGREGATE BORROWING BASE
FROM ELIGIBLE PLEDGED SERVICING $______________
LESS
(c) AGGREGATE BORROWING BASE
FROM ELIGIBLE SERVICING SALE RECEIVABLES $______________
WAREHOUSE BORROWING BASE $______________
-41-
<PAGE> 42
EXHIBIT 1
TO SECURITY AGREEMENT
REQUIRED REVIEW STEPS
1. All submitted documents, are consistent with the related
Collateral Transmittal as to borrower name, loan face amount,
loan type and the Company's or Borrowing Subsidiary's loan
number.
2. The note and mortgage/deed of trust each bears an original
signature or signatures which appear to be those of the person
or persons named as the maker and mortgagor/trustor, or, in the
case of a certified copy of the mortgage/deed of trust, such
copy bears what appears to be a reproduction of such signature
or signatures.
3. Except for (a) the endorsement to the Company or applicable
Borrowing Subsidiary of the note in the event such loan was
purchased by the Company or a Borrowing Subsidiary and (b) the
endorsement in blank of the note by an authorized signatory of
the Company or the applicable Borrowing Subsidiary, neither the
note, the mortgage/deed of trust, nor the assignment(s) of the
mortgage/deed of trust contain any irregular writings which
appear on their face to affect the validity of any such
endorsement or to restrict the enforceability of the document on
which they appear.
4. The note is endorsed in blank by an authorized signatory of the
Company or the applicable Borrowing Subsidiary.
5. The assignment of the mortgage/deed of trust bears an original
signature of an authorized signatory of the Company or the
applicable Borrowing Subsidiary.
6. Such other review steps as the Collateral Agent, in its sole
discretion, deems appropriate.
-42-
<PAGE> 43
EXHIBIT 2
TO SECURITY AGREEMENT
FORM OF COMPANY TRUST RECEIPT
_______________, 19__
The undersigned, SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware
corporation (the "Company"), acknowledges receipt from NATIONAL CITY BANK OF
KENTUCKY, acting as agent, bailee and custodian (in such capacity "Collateral
Agent") for the exclusive benefit of the Secured Parties pursuant to the
Security Agreement (as those terms and capitalized terms not otherwise defined
herein are defined in that certain Second Amended and Restated Revolving Credit
Agreement dated as of November 12, 1996, among the Lenders, the Company, the
Borrowing Subsidiaries and The First National Bank of Chicago, as Agent) of the
following described documentation for the identified Mortgage Loans (the
"Collateral Documents"), possession of which is herewith entrusted to the
Company solely for the purpose of correcting documentary defects relating
thereto:
Loan Document
Borrower Name Loan Number Note Amount Delivered
- ------------- ----------- ----------- -------------
It is hereby acknowledged that a security interest pursuant to the
Illinois Uniform Commercial Code and the Kentucky Commercial Code in the
Collateral hereinabove described and in the proceeds of said Collateral has
been granted to Collateral Agent for the benefit of the Secured Parties
pursuant to the Security Agreement.
In consideration of the aforesaid delivery by Collateral Agent, the
Company hereby agrees to hold said Collateral in trust for Collateral Agent on
behalf of the Secured Parties as provided under and in accordance with all
provisions of the Security Agreement and to return said Collateral to
Collateral Agent no later than the close of business on the fifteenth calendar
day following the date hereof or, if such day is not a Business Day, on the
immediately succeeding Business Day. The Company represents and warrants that
the aforesaid delivery by the Collateral Agent shall not cause any violation of
any of the Borrowing Bases or any other provision of the Credit Agreement.
SOURCE ONE MORTGAGE SERVICES
CORPORATION, a Delaware corporation
By:________________________________
Name:______________________________
Title:_____________________________
-43-
<PAGE> 44
EXHIBIT 3
TO SECURITY AGREEMENT
FORM OF SHIPPING REQUEST
Date:_______________
National City Bank of Kentucky,
as Collateral Agent
421 West Market Street
Louisville, Kentucky 40202
Attention: ________________
This letter is to serve as authorization for you to endorse and ship the
following loans:
Loan Number Borrower Name Note Amount
to the following address under Commitment #__________ (the "Commitment") from
an Approved Investor as follows:
NAME:
ADDRESS:
ATTENTION:
Please endorse the notes as follows:
Please ship the loan documents either by ____________________ or by such other
courier service as we have designated to you as "approved". The courier shall
act as an independent contractor bailee acting solely on your behalf as
Collateral Agent for the Secured Parties (as defined in that certain Second
Amended and Restated Security and Collateral Agency Agreement dated as of
November 12, 1996, as the same may be amended, extended or replaced from time
to time), but we acknowledge and agree that you are not responsible for any
delays in shipment caused by courier or any other actions or inactions of the
courier, including, without limitation, any loss of any loan documents;
however, because the Commitment expires on _______________, 199_, we ask that
you deliver the loan documents to the courier no later than _______________,
199_.
Please have the courier bill us by using our acct #__________. If you should
have any questions, or should feel the need for additional documentation,
please do not hesitate to call
-44-
<PAGE> 45
_______________.
[SOURCE ONE MORTGAGE SERVICES
CORPORATION, a Delaware corporation]
[THE MORTGAGE AUTHORITY, a Delaware
corporation]
[CENTRAL PACIFIC MORTGAGE COMPANY, a
California corporation]
By:________________________________
Name:______________________________
Title:_____________________________
-45-
<PAGE> 46
EXHIBIT 4
TO SECURITY AGREEMENT
(Direct Investor)
Date:____________
Name of Delivery Service:____________________________________
Airbill No.:____________________
FORM OF WHOLE LOAN SALE TRANSMITTAL LETTER
[LETTERHEAD OF COLLATERAL AGENT]
[Approved Investor]
_________________________
_________________________
Re: Source One Mortgage Services Corporation;
Sale of Mortgage Loans
Attached please find those Mortgage Loans listed separately on the
attached schedule, which Mortgage Loans are owned by SOURCE ONE MORTGAGE
SERVICES CORPORATION (the "Company"), THE MORTGAGE AUTHORITY, ("TMA"), a
wholly-owned subsidiary of the Company, or CENTRAL PACIFIC MORTGAGE COMPANY
("CPM"), a wholly-owned subsidiary of the Company, and are being delivered to
you for purchase.
The Mortgage Loans comprise a portion of the Collateral under (and as
the term "Collateral" and capitalized terms not otherwise defined herein are
defined in) that certain Second Amended and Restated Revolving Credit Agreement
dated as of November __, 1996 by and among the Company, TMA, CPM, The First
National Bank of Chicago, as Agent, and the Lenders thereunder. Each of the
Mortgage Loans is subject to a security interest in favor of National City Bank
of Kentucky (the "Collateral Agent") on behalf of the Secured Parties which
security interest shall be automatically released upon your remittance of the
full amount of the purchase price of such Mortgage Loan (as set forth on the
schedule attached hereto) by wire transfer to the following account:
WIRE INSTRUCTIONS TO SETTLEMENT ACCOUNT:
_________________________
_________________________
_________________________
Pending your purchase of each Mortgage Loan and until payment therefor
is received, the aforesaid security interest therein will remain in full force
and effect, and you shall hold possession of such Collateral and the
documentation evidencing same as custodian, agent and bailee for and on behalf
of the Secured Parties. In the
-46-
<PAGE> 47
event any Mortgage Loan is unacceptable for purchase, return the rejected item
directly to the Collateral Agent at the address set forth below. The Mortgage
Loan must be so returned or sales proceeds remitted in full no later than
[forty-five (45) days][UNLESS DELIVERED TO A GOVERNMENT HOUSING PROGRAM WHICH
IS NOT A FEDERAL AGENCY] [seventy-five (75) days][IN THE CASE OF DELIVERY TO A
GOVERNMENT HOUSING WHICH IS NOT A FEDERAL AGENCY] from the date hereof. In no
event shall any Mortgage Loan be returned or sales proceeds remitted to the
Company, TMA or CPM. If you are unable to comply with the above instructions,
please so advise the undersigned immediately.
NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS
LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR THE SECURED
PARTIES ON THE TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED, AS COLLATERAL
AGENT, REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND
THIS LETTER BY SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE
UNDERSIGNED; HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT.
Sincerely,
NATIONAL CITY BANK of KENTUCKY, as
Collateral Agent
By:________________________________
Title:_____________________________
Address: __________________________
__________________________
__________________________
The undersigned Company agrees to and acknowledges the terms of this
letter and, notwithstanding any contrary understanding with or instructions to
you, the addressee of this letter, the Company instructs you to act according
to the instructions set forth in this letter. These instructions cannot be
altered except by written instructions executed by Collateral Agent. The
Company and the Collateral Agent agree that a counterpart facsimile of this
letter executed by the Company shall suffice as an original of the Company's
agreement to and acknowledgment of the terms of this letter.
SOURCE ONE MORTGAGE SERVICES
CORPORATION, a Delaware corporation
By:________________________________
Name:______________________________
-47-
<PAGE> 48
Title:_____________________________
ACKNOWLEDGEMENT OF RECEIPT
[Approved Investor]
By:_______________________________
Name:_____________________________
Title:____________________________
Date:_____________________________
-48-
<PAGE> 49
EXHIBIT 5
TO SECURITY AGREEMENT
(Pool Formation)
FORM OF WAREHOUSE-RELATED SECURITY TRANSMITTAL LETTER
[COLLATERAL AGENT LETTERHEAD]
Date:___________________
[Certificating Custodian]
_________________________
_________________________
Re: Source One Mortgage Services Corporation;
Shipment of Mortgage Loans for Pool Formation
Attached please find those Mortgage Loans listed separately on the
attached schedule, which are owned by SOURCE ONE MORTGAGE SERVICES CORPORATION,
a Delaware corporation (the "Company"), THE MORTGAGE AUTHORITY, ("TMA") a
wholly-owned Subsidiary of the Company or CENTRAL PACIFIC MORTGAGE COMPANY,
("CPM") a wholly-owned Subsidiary of the Company, and are being delivered to
you, as custodian/trustee (the "Certificating Custodian"), for certification in
connection with the formation of a mortgage pool supporting the issuance of a
mortgage-backed security (the "Warehouse-Related Security") described as
follows: ______________________________.
The Mortgage Loans comprise a portion of the Collateral under (and as
the term "Collateral" and capitalized terms not otherwise defined herein are
defined in) that certain Second Amended and Restated Revolving Credit Agreement
dated as of November 12, 1996, by and among the Company, TMA, CPM, The First
National Bank of Chicago, as Agent, and the Lenders. Each of the Mortgage
Loans is subject to a security interest in favor of National City Bank of
Kentucky ("Collateral Agent") for the benefit of the Secured Parties, which
security interest shall be automatically released upon the issuance of the
Warehouse-Related Security in accordance with the terms of the prescribed GNMA,
FNMA or FHLMC form enclosed herewith.
Pending issuance of the Warehouse-Related Security, the aforesaid
security interest in each Mortgage Loan will remain in full force and effect,
and you shall hold such Collateral as custodian, agent and bailee for and on
behalf of the Secured Parties. In the event any Mortgage Loan is unacceptable
for pool formation, return the rejected item directly to the undersigned, as
Collateral Agent, at the address set forth below. Each Mortgage Loan must be
so returned or the Warehouse-Related Security issued no later than [forty-five
(45) days][UNLESS DELIVERED TO A
-49-
<PAGE> 50
GOVERNMENT HOUSING PROGRAM WHICH IS NOT A FEDERAL AGENCY] [seventy-five (75)
days][IN THE CASE OF DELIVERY TO A GOVERNMENT HOUSING WHICH IS NOT A FEDERAL
AGENCY] from the date hereof. In no event shall any Mortgage Loan be returned
or proceeds relating thereto be remitted to the Company, TMA or CPM. If you
are unable to comply with the above instructions, please so advise the
undersigned immediately.
NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS
LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR THE SECURED
PARTIES ON THE TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED, AS COLLATERAL
AGENT, REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND
THIS LETTER BY SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE
UNDERSIGNED; HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT.
Sincerely,
NATIONAL CITY BANK OF KENTUCKY, as
Collateral Agent
By:________________________________
Title:_____________________________
Address: __________________________
__________________________
__________________________
ACKNOWLEDGEMENT OF RECEIPT
[Certificating Custodian]
By:_______________________________
Name:_____________________________
Title_____________________________
Date:_____________________________
-50-
<PAGE> 51
EXHIBIT 6
TO SECURITY AGREEMENT
FORM OF CUSTODIAL AGREEMENT
(With Operating Instructions Attached)
_______________, 199_
_________________________
_________________________
_________________________
Re: Source One Mortgage Services Corporation
Ladies and Gentlemen:
The undersigned, National City Bank of Kentucky (the "Collateral Agent")
acts in the capacity as Collateral Agent pursuant to: (1) that certain Second
Amended and Restated Revolving Credit Agreement dated as of November 12, 1996
(as amended from time to time, the "Credit Agreement", and as capitalized terms
not otherwise defined herein are used with the same meaning as in the Credit
Agreement) by and among SOURCE ONE MORTGAGE SERVICES CORPORATION (the
"Company"), THE MORTGAGE AUTHORITY, ("TMA"), CENTRAL PACIFIC MORTGAGE COMPANY
("CPM"), the lenders participating therein (collectively, the "Lenders"), and
the FIRST NATIONAL BANK OF CHICAGO, as agent for the Lenders (the "Credit
Agent"), and (2) that certain Second Amended and Restated Security and
Collateral Agency Agreement (as amended from time to time, the "Security
Agreement") dated concurrently therewith among the Collateral Agent, the Note
Trustee, the Company, TMA, CPM and the Credit Agent. TMA and CPM are each
referred to herein as a "Borrowing Subsidiary".
The Collateral Agent represents and confirms that it has the power and
authority under the Credit Agreement and the Security Agreement to execute this
Custodial Agreement. The Collateral Agent may execute any of its duties
hereunder by or through agents or attorneys-in-fact of whose appointment you
have been notified in writing.
The Collateral Agent hereby appoints you and you hereby accept
appointment to act as agent, custodian and bailee for the benefit of the
Secured Parties (as defined in the Security Agreement) (in such capacity, the
"Approved MBS Custodian"). In such capacity, you agree to accept delivery only
on a free basis of certain mortgage-backed securities delivered to you from
time to time identified in a letter in the form attached hereto as Exhibit A
-51-
<PAGE> 52
(all such mortgage-backed securities delivered to you and so identified being
referred to herein as "Subject Securities"). This Custodial Agreement governs
your rights and responsibilities as Approved MBS Custodian with respect to all
Subject Securities.
From time to time the security interest of the Collateral Agent may be
abated upon a "Positive Security Event" under the terms of the Credit Agreement
and the Security Agreement. The Collateral Agent will promptly advise you of
any such abatement and issue directions to you regarding the effect of such
event on your duties and obligations hereunder.
The Collateral Agent hereby directs you, as Approved MBS Custodian, to
hold or dispose of Subject Securities deposited with you only in accordance
with the instructions of a person described as an "Authorized Collateral Agent
Representative" on a schedule from time to time delivered to you by the
Collateral Agent (the initial list of such persons being attached hereto as
Schedule I) or otherwise as expressly permitted hereunder, including without
limitation the Company's or any Borrowing Subsidiary's right to direct the sale
or disposition of the Subject Securities as described in the following
paragraph. You are authorized, directed and instructed to act upon all
instructions from persons reasonably believed by you to be genuine and
authorized. Any instruction given hereunder may, in your discretion, be by
telegraph, cable, facsimile or electronic communication which is received by
you.
All Subject Securities are to be held by you in a custodial account
(Account No. __________) maintained with you (the "MBS Custodial Account").
Unless and until you have received written notice to the contrary from the
Collateral Agent at the direction of the Majority Debtholders (which notice may
be by facsimile transmission) following an Event of Default, you may from time
to time deliver Subject Securities at the direction of the Company, to, but
only to, Approved Investors (as listed on a schedule of "Approved Investors"
delivered to you from time to time by an Authorized Collateral Agent
Representative) against payment of the purchase price therefor.
Notwithstanding the preceding sentence, even after your receipt of notice from
the Collateral Agent that an Event of Default exists, you may deliver Subject
Securities at the direction of the Company, but only to Approved Investors
pursuant to then-existing Approved Investor Commitments. The proceeds of the
sale or other disposition of all Subject Securities are to be held by you in an
account (Account No. __________) maintained with you (the "Custodian Settlement
Account") and transferred by the end of each Business Day to Account No.
19-19210 maintained in the Credit Agent's name at The First National Bank of
Chicago (the "Settlement Account") as follows:
_________________________
_________________________
-52-
<PAGE> 53
______________________________
By executing this Custodial Agreement the Company and the Borrowing
Subsidiaries confirm and the Collateral Agent, the Company and the Borrowing
Subsidiaries notify you that the Company and the Borrowing Subsidiaries have
assigned and granted to the Collateral Agent a security interest in and lien
upon all now existing and hereafter arising right, title and interest of the
Company and the Borrowing Subsidiaries in the MBS Custodial Account, the
Custodian Settlement Account and the Settlement Account and in any and all
investments and proceeds at any time held therein.
Unless and until you have received written notice from an Authorized
Collateral Agent Representative (which notice may be by facsimile transmission)
that there has occurred an Event of Default or Default, you may, at your
election, elect to make advances against Subject Securities held by you in the
MBS Custodial Account pending their sale and delivery to a purchaser thereof,
in accordance with a repo line of credit established between you and the
Company; provided, however, that: (1) any such repo line of credit shall be on
terms and conditions customary for similar lines of credit which you provide to
customers, including, without limitation, as to advance rate and interest
charge; (2) all advances to the Company under such repo line of credit (each, a
"Repo Advance") shall be transferred to the Custodian Settlement Account; and
(3) you hereby waive any and all rights of offset, counterclaim or other
recoupment rights which you may have with respect to any Repo Advance against
the MBS Custodial Account, the Custodian Settlement Account and any Subject
Securities or proceeds thereof at any time held therein (other than the Subject
Securities which are the subject of the Repo Advance). If, but only if and
only to the extent there has been transferred to the Custodian Settlement
Account the proceeds of a given Repo Advance, the rights of the Collateral
Agent in the Subject Securities which are the subject of the Repo Advance are
hereby automatically subordinated to your rights therein as collateral security
for the repayment of such Repo Advance, and upon receipt of such proceeds in
the Settlement Account, such rights of the Collateral Agent shall be
automatically released.
You shall be under no duty to take or omit to take any action with
respect to Subject Securities, except as specifically set forth in this
Agreement and the Operating Instructions attached hereto as Exhibit B, unless
specifically otherwise directed by the Collateral Agent and agreed to by you in
writing. In the event that you shall be uncertain as to your duties or rights
hereunder, you shall be entitled to refrain from taking any action until you
shall be directed otherwise by an order of a court of competent jurisdiction.
In case you should agree to our request and on our behalf to appear in,
prosecute or defend any legal or equitable
-53-
<PAGE> 54
proceeding either in your own name or in the name of your nominee, you shall
first be indemnified to your satisfaction (other than against your gross
negligence and willful misconduct).
By accepting delivery of any Subject Security, you shall be deemed to
have agreed to hold such Subject Security as Approved MBS Custodian hereunder,
free and clear of all liens, claims, interests and rights of offset in your
favor or in favor of persons claiming through you, subject only to the rights
with respect to Repo Advances described above. Until you have been notified in
writing (including by telecopier) by an Authorized Collateral Agent
Representative of the occurrence of an Event of Default, you are hereby
authorized to return Subject Securities to the issuer/transfer agent therefor
at the Company's written request in connection with the reissuance thereof in
smaller denominations; provided, however, that any delivery of Subject
Securities for reissuance shall be covered by a transmittal letter or other
written agreement instructing that the reissued securities be returned directly
to you. In this connection, we acknowledge familiarity with the current
securities industry practice of delivering physical securities against later
payment on the delivery date. Notwithstanding our instructions to deliver
Subject Securities against payment, you are authorized to make delivery of such
physical securities against a temporary receipt (sometimes called a "window
ticket") in lieu of payment. You agree to use your best efforts to obtain
payment therefor during the same business day, but we confirm our assumption of
all risks of payment for such deliveries. You may accept certified checks in
payment for Subject Securities delivered on the Company's instruction and you
shall not be responsible for the risks of collectability of any such checks.
YOU ARE HEREBY IRREVOCABLY INSTRUCTED BY THE COMPANY, EACH BORROWING SUBSIDIARY
AND THE COLLATERAL AGENT THAT ALL PROCEEDS RECEIVED FROM THE SALE OR OTHER
DISPOSITION OF SUBJECT SECURITIES AND ALL REPO ADVANCES, UNTIL OTHERWISE
NOTIFIED IN WRITING BY THE COLLATERAL AGENT, SHALL BE WIRED TO THE SETTLEMENT
ACCOUNT AS PROVIDED ABOVE.
You will provide to the Collateral Agent on a daily basis at or before
9:30 a.m. (Chicago time) a report of the prior day's activity with respect to
the MBS Custodial Account, the Custodian Settlement Account and Repo Advances
made by you hereunder.
You shall not be liable or accountable for any act or omission of
brokers, dealers or agents in connection with this Custodial Agreement. In
carrying out your duties hereunder, you may use such methods or agencies as you
determine in your sole discretion, including your own facilities.
You shall maintain regular business records documenting all instructions
transmitted to you through any authorized means and any response by you. You
are authorized to electronically record
-54-
<PAGE> 55
any telephone communications with the Company, any Borrowing Subsidiary or the
Collateral Agent arising out of this Custodial Agreement. Your records shall
be determinative of the form, content and time of all the Company's, the
Borrowing Subsidiaries' and Collateral Agent's instructions and any response
from you. The record of each instruction and any response thereto shall be
retained by you for at least ninety (90) days following the date of the
instruction. Any claim against you for failure to properly follow an
instruction transmitted by the Company, any Borrowing Subsidiary or the
Collateral Agent must be made in writing and received by you within sixty (60)
days after the date such instruction was received by you.
You shall give the Subject Securities that come into your possession
under this Custodial Agreement the same physical care and safeguards as are
afforded similar property owned by you; provided, however, your responsibility
hereunder is limited to losses occasioned directly by the gross negligence or
willful misconduct of your employees, to the extent of the market value of the
Subject Securities at the date of the discovery of such loss. With respect to
any Subject Securities which you deliver for us to a third party, and with
respect to such delivery, you shall be deemed no more than an "intermediary" as
referenced in Section 8-306(3) of the New York Uniform Commercial Code, and the
only warranty given by you shall be the warranty provided in said Section
8-306(3). In no event shall you be liable for any indirect, special or
consequential loss, even if you have been advised of the possibility of such
loss. You may, at your option, make arrangements for insuring yourselves
against loss from any cause, but you shall not be under any obligation to
insure for our benefit.
Except as expressly set forth above with respect to advances made by you
in connection with "late deliveries" and Repo Advances, none of the Subject
Securities held in the MBS Custodial Account, the funds held at any time in the
Custodian Settlement Account, the Subject Securities or any proceeds of the
sale or other disposition thereof will be subject to any right, charge,
security interest, lien, encumbrance or claim of any kind in your or your
creditors' favor. Any claims for the payment of fees with respect to the safe
custody or administration of Subject Securities or for compensation, expenses,
commitments made by you upon instructions of the Collateral Agent,
reimbursement of taxes incurred by you for the account of the Collateral Agent,
any penalties incurred by or levied or assessed against you resulting from the
Collateral Agent's improper or incorrect instructions, or other liabilities of
the Collateral Agent to you, and for indemnity against any claim or liability
to which you are subjected by reason of any registration of Subject Securities
shall be enforceable solely against the Company and none of the Collateral
Agent, the Credit Agent or any Secured Party shall have any responsibility
therefor (except to the
-55-
<PAGE> 56
extent any of the foregoing are due to the gross negligence or willful
misconduct of the Collateral Agent, the Credit Agent or any Secured Party, as
applicable). The Collateral Agent, the Borrowing Subsidiaries and the Company
agree to make no claim against you except for any such claims or liabilities
arising, or claimed to have arisen, as a result of your gross negligence or
willful misconduct.
The Operating Instructions attached hereto are hereby made part hereof
and any and all capitalized terms defined herein shall have the same meaning
when used therein.
This Custodial Agreement contains the whole of the understanding between
you and the Collateral Agent concerning the subject matter hereof and no
provision hereof shall be modified or altered except in a writing signed by
both you and the Collateral Agent.
This Custodial Agreement shall be governed by the laws of the State of
New York and shall be binding upon the Collateral Agent and upon its successors
and assigns and shall inure to your benefit and your successors and assigns and
shall be deemed continuing until terminated by either the Collateral Agent or
you upon at least sixty (60) days prior written notice to the other.
This letter is made in triplicate and will become an agreement between
you and the Collateral Agent upon your acceptance hereof in the space provided
below at your offices in the State of New York.
NATIONAL CITY BANK OF KENTUCKY, as
Collateral Agent
By:________________________________
Title:_____________________________
AGREED TO AND ACCEPTED:
________________________________,
as Approved MBS Custodian
By:_________________________________
Name:______________________________
Title:_______________________________
-56-
<PAGE> 57
ACKNOWLEDGEMENT AND AUTHORIZATION
The Company and the Borrowing Subsidiaries approve the foregoing
Custodial Agreement and authorize the Approved MBS Custodian to act in
accordance with the terms thereof. The Company and the Borrowing Subsidiaries
agree to be bound by the terms of the Custodial Agreement (including all
Exhibits thereto) to the same extent as if a party thereto. The Company and
the Borrowing Subsidiaries each agree to indemnify the Approved MBS Custodian
for, and hold the Approved MBS Custodian harmless against, any loss, liability
or expense in connection with, arising out of or in any way related to the
transaction contemplated and relationship established by the Custodial
Agreement, or any action or omission by the Approved MBS Custodian in
connection with the Custodial Agreement, or any agent, broker or dealer
employed by the Approved MBS Custodian hereunder, including the reasonable
costs and expenses incurred in defending any such claim of liability, except
that neither the Company nor any Borrowing Subsidiary shall be liable for (i)
any loss, liability or expense that is determined by a judgment of a court of
competent jurisdiction that is binding on the Approved MBS Custodian, final and
not subject to review on appeal, to be the direct result of acts or omissions
on the Approved MBS Custodian's part constituting gross negligence or willful
misconduct, or (ii) any claim that is based on the Approved MBS Custodian's
warranty as provided in Section 8-306(3) of the New York Uniform Commercial
Code.
SOURCE ONE MORTGAGE SERVICES
CORPORATION, a Delaware corporation
By:________________________________
Name:______________________________
Title:_____________________________
THE MORTGAGE AUTHORITY, a Delaware
corporation
By:________________________________
Name:______________________________
Title:_____________________________
CENTRAL PACIFIC MORTGAGE COMPANY, a
California corporation
By:________________________________
Name:______________________________
Title:_____________________________
-57-
<PAGE> 58
EXHIBIT A
TO CUSTODIAL AGREEMENT
FORM OF LETTER TO APPROVED MBS CUSTODIAN
To: _________________________,
as Approved MBS Custodian
Re: Source One Mortgage Services Corporation;
Custodial and Collateral Agency Instructions
Ladies and Gentlemen:
Reference is made to the attached schedule relating to a
letter/certification to a transfer agent/trustee for the issuance of the
Security described more particularly therein, which Security is supported by a
pool of residential mortgage loans and/or mortgage-backed securities including
mortgage loans and/or mortgage-backed securities in which the undersigned as
collateral agent (in such capacity, the "Collateral Agent"), acting under that
certain Second Amended and Restated Security and Collateral Agency Agreement
dated as of November 12, 1996, as amended, extended or replaced from time to
time, holds a first priority perfected security interest. The attached
schedule is (i) Delivery Schedule Form 11705 in the case of GNMA Securities,
(ii) Delivery Schedule Form 996 in the case of FHLMC Securities, (iii) Delivery
Schedule Form 2014 in the case of FNMA Securities, or (iv) a form containing
substantially similar information in the case of any other Securities.
Pursuant to the letter/certification, the transfer agent/trustee has been
instructed to deliver such Security to you. You are hereby notified that the
Collateral Agent and the Secured Parties named therein have a first perfected
security interest in the Security and in all proceeds of the sale or other
disposition thereof and in all accounts into which said proceeds may be
deposited.
This letter will confirm your agreement to hold such Security as a
"Subject Security" under and on terms and conditions set forth more
particularly in that certain Custodial Agreement, dated as of _______________,
199_ between you and the Collateral Agent.
Very truly yours,
NATIONAL CITY BANK OF KENTUCKY, as
Collateral Agent
By:________________________________
-58-
<PAGE> 59
The undersigned agree to and acknowledge the terms of this letter and,
notwithstanding any contrary understanding with or instructions to you, the
addressee of this letter, the undersigned instruct you to act according to the
instructions set forth in this letter. These instructions cannot be altered
except by written instructions executed by Collateral Agent.
SOURCE ONE MORTGAGE SERVICES
CORPORATION, a Delaware corporation
By:________________________________
Name:______________________________
Title:_____________________________
THE MORTGAGE AUTHORITY, a Delaware
corporation
By:________________________________
Name:______________________________
Title:_____________________________
CENTRAL PACIFIC MORTGAGE COMPANY, a
______________ corporation
By:________________________________
Name:______________________________
Title:_____________________________
-59-
<PAGE> 60
EXHIBIT B
TO CUSTODIAL AGREEMENT
OPERATING INSTRUCTIONS
These Operating Instructions are attached to and made a part of the
Custodial Agreement between National City Bank of Kentucky and
___________________, dated as of _______________, 199_ (as amended from time to
time, the "Custodial Agreement"). Terms defined therein shall have their same
meanings when used herein.
1. From time to time GNMA, FNMA and FHLMC Subject Securities will
be issued at the request of the Company or a Borrowing Subsidiary and credited
to your account with the Federal Reserve Bank of New York ("FRBNY") (in the
case of FNMA and FHLMC Subject Securities) or your account with the
Participants Trust Company ("PTC") (in the case of GNMA Subject Securities) (in
each case, to be held by you for the account of the Collateral Agent) in
accordance with the Code of Federal Regulations (in the case of FNMA and FHLMC
Subject Securities) or the rules of PTC (in the case of GNMA Subject
Securities). Upon your receipt of confirmation that such Subject Securities
have been deposited into your account with FRBNY (in the case of FNMA and FHLMC
Subject Securities) or your account with PTC (in the case of GNMA Subject
Securities), you shall promptly issue to the Collateral Agent and the Company
your confirmation that (1) you have received such confirmation of the Fedwire
(in the case of FNMA and FHLMC Subject Securities, which confirmation will
include the number of Subject Securities deposited into your account with
FRBNY) or from PTC (in the case of GNMA Subject Securities), (2) you have made
appropriate entries on your books reflecting the interests of the Company or
the applicable Borrowing Subsidiary as beneficial owner and the Collateral
Agent as secured party with respect to such Subject Securities, and (3) there
are no security interests or any rights or claims of any third party in such
Subject Securities in your favor or known to you which have priority over the
security interest of the Collateral Agent in such Subject Securities. You
shall be under no obligation to ensure or verify that Securities identified in
transmittal letters (in the form of Exhibit A to the Custodial Agreement) are
in fact credited to your account(s), but you shall be obligated only to report
your actual receipt of Subject Securities to the Collateral Agent and the
Company in accordance with the provision of this Instruction 1.
2. With respect to the delivery or transfer of Subject Securities
which you hold for the account of the Collateral Agent, you are hereby
authorized to act only upon instructions from the Collateral Agent or, to the
extent permitted by the Custodial Agreement, by the Company. Upon notification
to you by the
-60-
<PAGE> 61
Collateral Agent at the direction of the Majority Debtholders following an
"Event of Default" under the Credit Agreement, no third party, including
without limitation the Company and the Borrowing Subsidiaries, may direct you
to make any delivery or transfer of such Subject Securities other than Subject
Securities to be delivered pursuant to then-existing Approved Investor
Commitments.
3. The proceeds of redemptions, collections and other receipts,
including dividend and interest income, shall be credited to the Custodial
Settlement Account upon collection or payment.
4. You are to notify the Collateral Agent and the Company upon
receipt of notice by you of any call for conversion, redemption, subscription
rights or similar proceeding affecting the Subject Securities held in the
relevant account (any of the foregoing being referred to herein as "Account
Proceedings"), and shall take such action in respect thereof as you may be
directed in writing by the Collateral Agent; provided, however, that you shall
have no duty or responsibility to notify the Company or the Collateral Agent of
any Account Proceedings which do not appear in The Wall Street Journal (New
York Edition), The Standard & Poor's Called Bond Record for Preferred Stocks,
Financial Daily Called Bond Service, The Kenney Services or official
notifications from the Depository Trust Company or such other publications
which you may deem reasonable from time to time. All solicitation fees payable
to you as agent in connection with such event will be retained by you unless
specifically agreed to the contrary by you.
5. You are authorized and empowered in the name and on behalf of
the Collateral Agent and the Company to execute any certificates of ownership
or other reports which you are or may hereafter be required to execute and
furnish under any regulation of the Internal Revenue Service, or other
authority of the United States, insofar as the same are required in connection
with any property which is now or may hereafter be in your possession by virtue
of the Custodial Agreement and these Operating Instructions, claiming no
exemptions on behalf of the Collateral Agent or the Company. In the
preparation of such reports, the status of the Collateral Agent is to be
described as a bank, trust company or financial institution, as the case may
be, domiciled in the United States. The Collateral Agent agrees to notify you
immediately in writing of any change in such status.
6. All mail communications which are to be furnished or forwarded
hereunder to the Collateral Agent or the Company shall be addressed to such
party at the last address on your records, provided that in case you in your
sole discretion shall determine that an emergency exists, you may use such
other means of communication as you shall deem advisable.
-61-
<PAGE> 62
7. You are under no duty to supervise, recommend or advise the
Collateral Agent relative to the investment, purchase, sale, retention or other
disposition of any property held hereunder unless specifically provided for by
the Custodial Agreement.
8. With respect to any direction to receive securities in
transactions not placed through you, you shall have no duty or responsibility
to advise the Company of non-receipt, or to take any steps to obtain delivery
of securities from any brokers or dealers. All dealer concessions made to you
will be retained by you unless specifically agreed to the contrary by you.
9. Notwithstanding anything herein to the contrary, unless
instructions are received from the Collateral Agent, specifying a different
destination than the address listed on your records for the Collateral Agent,
within ten (10) days of the receipt of any termination notice, you shall have
the right to transfer all securities and other property held by you or any
depositary in connection with the Custodial Agreement or registered in your
name to the Collateral Agent at the address listed on your records.
-62-
<PAGE> 63
SCHEDULE I
TO CUSTODIAL AGREEMENT
AUTHORIZED COLLATERAL AGENT REPRESENTATIVES
-63-
<PAGE> 64
EXHIBIT 7
TO SECURITY AGREEMENT
COLLATERAL TRANSMITTAL -- INITIAL MORTGAGE INFORMATION
1. CUSTOMER NAME ______________________________
2. LOAN NUMBER _________________________________
3. MORTGAGOR ___________________________________
SURNAME ONLY
4. AP STATUS CODE _______________________________
5. DEPOSIT DATE _________________________________
6. ORIGINAL NOTE AMOUNT $_____________________
7. ACQUISITION COST $____________________________
8. TAKE-OUT VALUE $_____________________________
9. NOTE DATE OR CONVERSION DATE _____________
10. NOTE RATE ____________________________________
11. LOAN TYPE (i.e. a group category (e.g. GNMA 15, FNMA/FHLMC 30, etc.) set
forth on Exhibit F to the Credit Agreement)
_________________________________
-64-
<PAGE> 1
EXHIBIT 10(m)
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
_____________________________________________
FEDERAL TAX SHARING AGREEMENT
Dated as of January 1, 1991
And Effective For Taxable Years Beginning After December 31, 1990
_____________________________________________
SOURCE ONE MORTGAGE SERVICES CORPORATION
<PAGE> 2
FEDERAL TAX SHARING AGREEMENT
Federal Tax Sharing Agreement ("Agreement"), dated as of January 1,
1991, and effective for taxable years beginning after December 31, 1990, by and
among Fund American Enterprises Holdings, Inc., a Delaware corporation
("FAEH"), and Source One Mortgage Services Corporation, a Delaware corporation
("Source One").
Whereas, the parties to this Agreement are part of the FAEH affiliated
group (the "FAEH Group") as defined in 1504(a) of the Internal Revenue Code of
1986, as amended (the "Code");
Whereas, the FAEH Group files consolidated Federal income tax returns;
Whereas, Source One is a wholly-owned subsidiary of FAEH and, as a
member of the FAEH Group, is included in the consolidated Federal income tax
return filed by FAEH on behalf of the FAEH Group; and
Whereas, the parties to this Agreement have determined that execution
of this Agreement setting forth the methodology and procedures for allocating
the FAEH Group's consolidated Federal tax liability (or benefit) to and amongst
FAEH and its affiliates is in the interest of each party to this Agreement;
Now therefore, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. Source One Subsidiaries Incorporated Into This Agreement: Source One,
by entering into this Agreement, agrees to bind each of its current
subsidiaries (together with Source One, the "Source One Group"), jointly and
severally, to all the terms of this Agreement. If at any time any member of
the Source One Group acquires or creates one or more subsidiary corporations
which would be an includible corporation or corporations, as defined in Code
1504, in an affiliated group of which Source One (or its successor) is a common
parent, this Agreement and all references to the Source One Group shall
thereafter be interpreted to include such subsidiary corporations.
2. FAEH Responsibility for Filing U.S. Federal Income Tax Return: A Form
1120, U.S. Federal Income Tax Return ("Return") shall be filed with the
Internal Revenue Service ("IRS") by FAEH on behalf of the FAEH Group on a
consolidated basis. Such Return will be filed by FAEH for each taxable year
during which this Agreement is in effect and for which Source One and the other
members of the Source One Group remain members of the FAEH Group, provided such
members are required to file such a Return.
FAEH shall execute and file such Returns, as well as all consents,
elections, and other documents which may be required or appropriate, and each
member of the Source One Group shall be bound by such consents, elections, and
the terms of such other documents. FAEH shall promptly notify Source One of
all such consents, elections, and other terms as they relate to the Source One
Group prior to either the inclusion in the filed Return and/or separate mailing
to the IRS, as the case may be.
<PAGE> 3
If any penalties, including interest, for failure to file are imposed
on the FAEH Group by the IRS pursuant to Code 6651(a) as a result of FAEH's
failure to file in a timely manner, FAEH shall bear the entire cost of all such
penalties and interest, provided such penalties and interest were incurred
solely by reason of FAEH's failure in this regard and not due to any failure on
the part of Source One or the Source One Group.
3. FAEH Responsibility for Paying Federal Income Taxes to IRS: On behalf
of the FAEH Group, FAEH shall be responsible to make all required estimated
payments to the IRS required under Code 6655. Consequently, FAEH shall bear
the entire cost of any underpayment penalties, plus interest, if such penalties
and interest were incurred solely by reason of FAEH's failure in this regard
and not due to any failure on the part of Source One or the Source One Group.
In addition to the responsibility for making estimated payments on
behalf of the FAEH Group, FAEH shall bear the entire cost of any penalties and
interest which may be imposed by the IRS pursuant to Code 6651(b) for failure
to pay in a timely manner, provided such penalties are solely as a result of
FAEH's failure to make required payments in a timely manner and not due to any
failure on the part of Source One or the Source One Group.
4. Calculation of Source One Group Amounts to Appear in FAEH Group Return:
Source One shall, on behalf of the Source One Group, compute for each calendar
quarter each item of Federal taxable income, deduction, gain, loss, credit,
carryforward, carryback and tax liability or benefit (collectively, "Tax
Items") for the Source One Group as if the Source One Group itself is a
separate affiliated group as defined in Code 1504(a), totally unrelated to any
other members of the FAEH Group. All calculations of such Tax Items shall be
made pursuant to the provisions of the Code and Treasury Regulations in effect
for the taxable period to which the calculations relate, and shall be
consistent with all Federal tax elections made or expected to be made by FAEH
in the Return incorporating such quarterly period.
Source One acknowledges that FAEH shall have the right to make any and
all Federal tax elections which may be necessary or appropriate for calculating
the Federal taxable income of the FAEH Group, including elections which affect
the Tax Items of any member of the Source One Group. Any question regarding
the interpretation or applicability of any provision of the Code and/or
Treasury Regulations regarding the entitlement to make such elections shall be
left to reasonable resolution by FAEH, taking into consideration elections
normally made in the respective member's industry or industries, as the case
may be. Source One shall provide to FAEH, within fifteen days following each
calendar quarter-end, schedules which present the calculation of the Source One
Group's Tax Items for the current year-to-date period, as such amounts would be
actually included in the Return to be filed by FAEH.
5. Calculation of Source One Group Amounts Due To/From FAEH: Source One
shall be liable to pay to FAEH or receive from FAEH, as the case may be, the
Source One Group's share of the FAEH Group's consolidated Federal income tax
liability (or benefit). Notwithstanding the provisions of Section 4 above,
when calculating the amount of Federal tax due to or from FAEH for a taxable
period, the Source One Group shall be entitled to make, solely on a
hypothetical basis, any elections it would have been entitled to make had it
been a separate affiliated group as defined in Code 1504(a), totally unrelated
to any other members of the FAEH Group. In the event Source One chooses to
make a hypothetical election(s), different than the actual election(s) made by
FAEH, Source One shall provide to FAEH within fifteen days following each
calendar quarter-end:
<PAGE> 4
(i) Schedules which present the calculation of the Source One
Group's Tax Items for the current year-to-date period, as such amounts would be
included in a hypothetical Form 1120, U.S. Federal Income Tax Return the
"Source One Group Return"), which would be completed by Source One on behalf of
the Source One Group if Source One was not a member of the FAEH Group. Such
Source One Group Returns will utilize the hypothetical elections made by the
Source One Group described above in this Section 5.
(ii) Schedules reconciling the differences between the Source One
Group's Tax Items for the current year-to-date period, as such amounts would be
included in (a) the actual Return to be filed by FAEH and (b) the Source One
Group Return.
All calculations of such Tax Items included in the Source One Group
Return shall be made pursuant to the provisions of the Code and Treasury
Regulations in effect for the taxable period to which the calculations relate.
6. Tax Payments/Refunds: Payments of the Source One Group's periodic
Federal tax liability (or benefit) calculated pursuant to Section 5 shall be
made to FAEH (or to Source One, as the case may be) at the time, and in the
amounts, such payments would be required to be made to (or received from) the
IRS as if Source One is a separate affiliated group filing its own tax
return(s). Underpayment (if any) of those amounts due FAEH shall be treated as
an underpayment of tax and shall bear penalties and interest at the rate(s)
prescribed in the relevant provisions of the Code, Treasury Regulations or IRS
pronouncements. Payments due Source One (if any) from FAEH will likewise bear
interest unless paid within 45 days after the relevant Source One filing/notice
date making demand for such refund.
Source One and FAEH acknowledge that the payments Source One may be
required to make to FAEH (or receive from FAEH) in any particular taxable year
pursuant to this Agreement might be greater or less than the tax liability
which would be allocated to it under one or more of the Federal tax allocation
methods prescribed under Code 1552 and Treasury Regulation 1.1552-1 used for
purposes of determining a separate member's earnings and profits ("E&P").
Source One shall furnish to FAEH in a timely manner a calculation of Source
One's annual E&P calculated in accordance with the rules of Treasury
Regulation 1.1502-33 and 1.1502-33T.
7. Adjustments Resulting from Tax Audits: FAEH, as agent for all members
of the FAEH Group, shall have absolute authority to enter into settlement
agreements, make offers in compromise, file protest letters, make appeals,
pursue litigation and take what other remedial actions are available to FAEH
and deemed appropriate in defending any and all Federal tax controversies
affecting any member(s) of the FAEH Group.
Notwithstanding the above, FAEH shall inform Source One in a timely
manner of the commencement of any audit by the IRS and shall, when feasible,
consult with Source One concerning the appropriate actions or positions to be
taken throughout the course of any audits as they relate to tax issues
attributable solely to the operations and financial results of Source One
included in a Return. In the event such adjustments are made to any Source One
Group Tax Items by reason of an amended return, claim for refund, or audit
conducted by the IRS, the appropriate Source One Group Returns shall be
redetermined to give effect to such adjustments.
In the event the adjustments require payment(s) from Source One on a
hypothetical basis, to FAEH, Source One shall make such payments to FAEH no
later than the time FAEH is, or would be, required to make such payment(s) to
the IRS. Any payment Source One must make to
<PAGE> 5
FAEH shall include an amount equal to interest and any other addition to tax
imposed on account of such adjustment. However, nothing in thisAgreement
prohibits Source One from paying FAEH an amount constituting full payment of an
asserted tax deficiency - which is solely attributable to Source One - but
which FAEH is not in turn remitting to the IRS due to FAEH's decision to
protest such proposed deficiency either at the IRS Appeals Division or Tax
Court, as the case may be. Such prepayment (if any) by Source One shall not be
treated as a deposit in the nature ofa bond but shall be a payment of a tax
deficiency which tolls the further accrual of interest on such proposed tax
deficiency attributable to the Source One Group.
Conversely, in the event the adjustments require payment(s) from FAEH
to Source One, any payments due hereunder shall be made by FAEH as required to
be made by the IRS. Such payment to Source One shall include any interest owed
by FAEH on account of said IRS adjustment attributable to Source One.
8. Interpretations and Dispute Resolution: Interpretations and
resolutions of disputes arising from this policy shall be settled by the Chief
Financial Officer of FAEH.
9. Liability; Indemnification: Each party to this Agreement shall be
liable to the other(s) for any liability, damages or expenses of the other
arising out of the gross negligence or willful malfeasance of the party or any
of its directors, officers, employees or affiliates in fulfilling the
obligations of this Agreement.
10. Termination: This Agreement will continue to remain in effect until
such time as the Agreement is terminated. The Agreement may be terminated by
either party upon 30 days notice.
11. Notices: All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally or sent by first
class mail to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Source One: Source One Mortgage Services Corporation
27555 Farmington Road
Farmington Hills, MI 48334-3357
Attention: Chief Financial Officer
(b) if to FAEH: Fund American Enterprises Holdings, Inc.
80 South Main Street
Hanover, NH 03755
Attention: Chief Financial Officer
12. Sole Agreement: This Agreement constitutes the sole and only agreement
of the parties hereto relating to its subject and correctly sets forth the
rights, duties and obligations of each party to the other(s) as of its date.
Any prior agreements, promises, negotiations or representations not expressly
set forth in this Agreement are of no force or effect.
13. Waiver or Modification: No waiver or modification of this Agreement
shall be effective unless reduced to a written document signed by a duly
authorized representative of each party hereto.
<PAGE> 6
14. Law of New Hampshire: This Agreement shall be governed by and
construed in accordance with the laws of the State of New Hampshire, without
regard to principles of conflicts of law.
15. Assignment and Delegation: FAEH shall not have the right to sell,
transfer, delegate or assign this Agreement or its rights or duties to any
person, firm or corporation at any time and any proposed assignee shall not
acquire any rights nor assume any obligations unless the written consent of the
other party(ies) to this Agreement is given before such assignment or
delegation takes place. Subject to this Section, this Agreement binds and
inures to the benefit of the parties and their successors and assigns. Any
attempted assignment not in compliance with this Section shall be null and
void.
16. Confidentiality of Reports and Records: Except as expressly authorized
in this Agreement or directed by the other party in writing, Source One and
FAEH shall keep confidential the records and other information obtained by
reason of this Agreement.
17. Calendar Days: All references in this Agreement to "days" shall mean
calendar, not business, days.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
FUND AMERICAN ENTERPRISES HOLDINGS, INC.
By:_______________________
Name: Allan L. Waters
Title: Senior Vice President & Chief Financial
Officer
SOURCE ONE MORTGAGE SERVICES CORPORATION
By: _______________________
Name: Melinda F. Cain
Title: Vice President
<PAGE> 1
EXHIBIT 10(bb)
==================================================================
LOAN AGREEMENT
BY AND BETWEEN
SOURCE ONE MORTGAGE SERVICES CORPORATION
AND
COMERICA BANK
==================================================================
<PAGE> 2
THIS AGREEMENT is made as of this 10th day of August, 1995, by and
between SOURCE ONE MORTGAGE SERVICES CORPORATION of Farmington Hills, Michigan
(herein called "Company"), and COMERICA BANK, a Michigan banking corporation,
of Detroit, Michigan (herein called "Bank");
WITNESSETH:
ARTICLE 1. THE INDEBTEDNESS: Revolving Credit
1.1 Subject to the terms and conditions of this Agreement, Bank
agrees to lend to Company at any time and from time to time from the effective
date hereof until the earliest of (i) demand, (ii) the tenth day of the next
month following the occurrence of a Refunding Event, (iii) July 10, 1996, or,
(iv) upon an Event of Default (the "Maturity Date") sums not to exceed the
Commitment Amount. The borrowings hereunder shall be evidenced by a Revolving
Credit Note (herein called "Note") in form similar to that annexed hereto as
Exhibit "A" under which advances, repayments and readvances may be made,
subject to the terms and conditions of this Agreement, provided that Bank shall
only be required to make advances hereunder on the tenth (10th) day of a month
or if Bank is not open for commercial banking business on that day then on the
next day Bank is open for commercial banking business (each a "Business Day")
or on any other date agreed to by Company and Bank (each such date being
referred to herein as "Borrowing Date").
1.2 The principal indebtedness represented by the Note shall be
payable on or before the Maturity Date. Company agrees to pay interest on the
unpaid principal balance of the Note from time to time outstanding at a per
annum rate equal to the sum of one half of one percent (0.50%) and the Interest
Rate Margin (as defined below). After the Maturity Date, interest shall accrue
on the unpaid principal balance at the per annum rate of three and one-half
percent (3 1/2%) above Bank's Prime Rate. Interest shall be payable monthly
commencing on September 10, 1995 and on the tenth day of each month thereafter
until the Maturity Date, when the entire unpaid principal balance of the Note
and interest thereon shall be due and payable. Interest shall be computed on a
daily basis using a year of 360 days and assessed for the actual number of days
elapsed and in such computation effect shall be given to any change in the
interest rate resulting from a change in the Prime Rate or Interest Rate Margin
on the date of such change in the Prime Rate or Interest Rate Margin. "Prime
Rate" shall mean the rate of interest established by Bank as its prime rate for
its borrowers as the same may be changed from time to time, which may not
necessarily be Bank's lowest rate for loans.
For purposes of this Agreement, "Interest Rate Margin" shall mean a
margin which varies based on the rating of Company's commercial paper ("CP") by
Standard & Poor's Corporation or its successors ("S&P") and Moody's Investor
Services, Inc. or its successors ("Moody's") and is determined as follows:
<PAGE> 3
(a) If (i) the CP is rated A1 by S&P and P1 by Moody's, (ii)the CP
is rated A2 by S&P and Pl by Moody's, or (iii) the CP is rated
A1 by S&P and P2 by Moody's, the Interest Rate Margin shall be
zero.
(b) If the CP is rated A2 by S&P and P2 by Moody's, the Interest
Rate Margin shall be one tenth of one percent (0.10%).
Changes in the Interest Rate Margin shall be effective as of the date of any
change in the rating of the CP by either S&P or Moody's.
1.3 On the tenth day of each month or if such day is not a
Business Day, on the next succeeding Business Day, Company shall deliver to
Bank a forecast of its anticipated average daily Escrow Balances (as defined
below) for the following month (the amount set forth in such forecast being
referred to as the "Availability Amount"); provided however, in no event shall
the Availability Amount exceed $60,000,000. "Escrow Balances" means collected
funds in non-interest bearing accounts maintained by Company with Bank net of
any reserve requirement imposed from time to time by the Board of Governors of
the Federal Reserve Board ("FRB"), which funds represent escrow moneys arising
in connection with Company's mortgage servicing business. For purposes of this
Agreement, reserve requirements shall be determined on the amount of collected
deposits held each day by Bank in each type of escrow deposit account
maintained by Company with Bank at the applicable rate imposed by the FRB.
Bank shall not be obligated to lend to Company under the Note on any Borrowing
Date an amount which exceeds the Availability Amount as set forth in the
forecast delivered to Bank by Company on such date. Bank and Company will
consult from time to time with a view toward allowing Company to maintain its
deposit balances at Bank in types of deposit accounts bearing the lowest
legally permissible reserve requirements practicable consistent with the
flexibility required by the Company to make frequent withdrawals and deposits.
In addition, Bank shall not be obligated to lend under the Note unless
Company shall have first filed with Bank a Request for Draw and Certificate of
Compliance (as of the date of the borrowing) in form similar to that annexed
hereto as Exhibit "B", executed by an authorized officer of Company. Bank may,
at its option, lend under the Note upon the telephone request of an authorized
officer of Company and, in the event Bank makes any such advance upon a
telephone request, the requesting officer shall immediately fax and then
promptly mail to Bank, an executed Request for Draw and Certificate of
Compliance in the form attached as Exhibit "B". Advances upon telephone
request are for the convenience of Company and Bank shall have no liability to
Company in connection with making any advance based upon the telephone
2
<PAGE> 4
request of a person Bank in good faith believes to be a person authorized to
request advances hereunder.
1.4 (a) If the average daily Escrow Balances for any Loan Period
(as defined below) shall be less than the average daily balance of the
principal outstanding under this Agreement and the Note for such period (an
"Escrow Balance Shortage"), then the Availability Amount as of the next
succeeding Borrowing Date shall be reduced by the amount of the Escrow Balance
Shortage.
For purposes of this Section 1.4(a), "Loan Period" shall mean that
period of time beginning on the day the first advance hereunder is made and
ending on the day next preceding the applicable Borrowing Date.
(b) If the average daily Escrow Balances for any Escrow Balance
Measuring Period (as defined below) shall exceed the sum of (i) the average
daily balance of the principal outstanding under this Agreement and the Note
for such period and (ii) the amount of the Escrow Balance Shortage determined
on the first day preceding such Escrow Balance Measuring Period ("Escrow
Balance Overage"), then the Availability Amount as of the next succeeding
Borrowing Date shall be increased by the amount of the Escrow Balance Overage;
provided however, in no event shall the Availability Amount exceed $60,000,000.
"Escrow Balance Measuring Period" shall mean the period of time beginning on a
Borrowing Date and ending on the first day prior to the next succeeding
Borrowing Date.
1.5 On each Settlement Date (as defined below), Company shall pay
to Bank as additional interest, an amount equal to the product of the daily
average Federal Funds Rate for the period beginning with the last Settlement
Date (or if no Settlement Date has occurred, beginning with the date of the
first advance under this Agreement and the Note) and ending on such Settlement
Date (each a "Settlement Period") multiplied by an amount determined by
subtracting from the average daily balance of the principal outstanding under
this Agreement and the Note for the applicable Settlement Period an amount
equal to average daily Escrow Balances for the applicable Settlement Period.
"Settlement Date" shall mean the Maturity Date and any other date or dates
selected by Bank following the date on which all outstanding indebtedness
hereunder and under the Note shall become due and payable (whether by
acceleration, mandatory prepayment or otherwise). "Federal Funds Rate" shall
mean, for any day, a fluctuating interest rate per annum equal to the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers, as published for
such day (or, if such day is not a Business Day, for the next preceding
Business Day) by the Federal Reserve Bank of New York, or, if such rate is not
so published for any day which is a Business Day, the average of the quotations
for such day on such transactions received by Bank from three Federal funds
brokers of recognized
3
<PAGE> 5
standing selected by it. Following any Settlement Date, the Availability
Amount shall no longer be affected by any Escrow Balance Shortage existing
prior to such Settlement Date.
1.6 Company acknowledges and agrees that the principal amount
outstanding under this Agreement and the Note as of any date shall never exceed
an amount equal to One Hundred Ten percent (110%) of aggregate Escrow Balances
on such date. Company agrees upon request of Bank promptly to make all
payments necessary to comply with this provision.
1.7 Company may prepay the Note in whole or in part without
penalty or premium on the tenth (10th) day of each month or if that day is not
a Business Day on the next succeeding Business Day; provided, however, each
such prepayment shall be in an amount not less than $250,000. In addition, in
the event the aggregate Escrow Balances shall be less than $20,000,000 for
ninety (90) consecutive Business Days, Company shall, not later than (1)
Business day following demand therefor by Bank, prepay the indebtedness
outstanding hereunder and the Note in full and effective on the date of such
demand, Bank's commitments under this Agreement shall terminate.
ARTICLE 2. CONDITIONS.
Company agrees to furnish Bank, prior to the initial borrowing
hereunder, in form to be satisfactory to Bank, with (i) an opinion of Company's
counsel; (ii) certified copies of resolutions of the Board of Directors of
Company evidencing approval of the borrowings hereunder, (iii) certified copies
of Company's Articles of Incorporation and Bylaws, and (iv) a certificate of
good standing from the State of Company's incorporation and from each
jurisdiction in which it is required to be qualified to do business.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
Company represents and warrants and such representations and
warranties shall be deemed to be continuing representations and warranties
during the entire life of this Agreement:
3.1 Company is a corporation duly organized and existing
in good standing under the laws of the State of Delaware;
Company is in good standing in each jurisdiction in which it is
required to be qualified to do business; execution, delivery and performance of
this Agreement and other documents and instruments required under this
Agreement, and the issuance of the Note by Company are within its corporate
powers, have been duly authorized, are not in contravention of law or the terms
of Company's Certificate of Incorporation or Bylaws, and do not require the
consent or approval of any governmental body, agency or authority; and this
Agreement and other documents and instruments required
4
<PAGE> 6
under this Agreement and Note, when issued, and delivered, will be valid and
binding on Company and enforceable against Company in accordance with their
terms except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement or creditors' rights in general.
3.2 The execution, delivery and performance of this Agreement and
any other documents and instruments required under this Agreement, and the
issuance of the Note by Company are not in contravention of the unwaived terms
of any indenture, agreement or undertaking to which Company is a party or by
which it is bound.
3.3 No litigation or other proceeding before any court or
administrative agency is pending, or to the knowledge of the officers of
Company is threatened against Company, the outcome of which could materially
impair the financial condition of Company or business of Company.
3.4 Company has fulfilled its obligations under the minimum
funding standards of the Employment Retirement Income Security Act of 1974, as
amended ("ERISA") and the Internal Revenue Code of 1986, as amended, (the
"Code") with respect to each of its employee pension benefit plans subject to
ERISA (the "Pension Plans"), and is in compliance in all material respects with
the presently applicable provisions of ERISA and the Code with respect to each
of its Pension Plans, and has not incurred any liability to the Pension
Guaranty Corporation. As of the date of this Agreement, the Company does not
have any obligation or liability with respect to any multiemployer Plan.
3.5 The balance sheet of Company dated March 31, 1995, previously
furnished Bank, is materially complete and correct and fairly presents the
financial condition of Company as of the date thereof; since said date there
has been no material adverse change in the financial condition of Company; to
the best of the knowledge of Company's officers, Company does not have any
contingent obligations (including any liability for taxes) not disclosed by or
reserved against in said balance sheet, and at the present time there are not
material unrealized or anticipated losses from any present commitment of
Company.
3.6 All tax returns and tax reports of Company required by law to
be filed have been duly filed or extensions obtained, and all taxes,
assessments and other governmental charges or levies (other than those
presently payable without penalty and those currently being contested in good
faith for which adequate reserves have been established) upon Company (or any
of its properties) which are due and payable have been paid. The charges,
accruals and reserves on the books of Company in respect of the Federal income
tax for all periods are adequate in the opinion of Company.
5
<PAGE> 7
3.7 Company is, in the conduct of its business, in compliance in
all material respects with all federal, state or local laws, statutes,
ordinances and regulations applicable to it, the enforcement of which, if
Company were not in compliance, would have a material adverse effect on the
business or financial condition of Company. Company has all approvals,
authorizations, consents, licenses, orders and other permits of all
governmental agencies and authorities, whether federal, state or local,
required to permit the operation of its business as presently conducted, except
such approvals, authorizations, consents, licenses, orders and other permits
with respect to which the failure to have can be cured without having an
adverse effect on the operation of such business.
3.8 No representation or warranty by Company in this Agreement, or
in the Revolving Credit Agreement nor any statement or certificate (including
financial statements) furnished or to be furnished to Bank pursuant hereto
contains or will contain any untrue statement of any material fact or omits or
will omit to state any material fact necessary to make such representation,
warranty, statement or certificate not misleading.
3.9 Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended. No part of the proceeds of any
loan hereunder will be used for any purpose which violates the provisions of
Regulation G, T, U or X of the Board of Governors of the Federal Reserve System
as now or from time to time hereafter in effect.
ARTICLE 4. AFFIRMATIVE COVENANTS
Company hereby agrees that, so long as Bank is committed to make any
advance under this Agreement and thereafter so long as any indebtedness remains
outstanding under this Agreement, Company shall and (except in the case of
delivery of financial information, reports and notices) shall cause each of its
Subsidiaries to:
4.1 Financial Statements. Furnish to Bank:
(a) as soon as available, but in any event within 90 days after
the end of each fiscal year of Company, a copy of the consolidated balance
sheet of Company and its consolidated Subsidiaries as at the end of such year
and the related consolidated statements of common stockholders' equity and cash
flows and the consolidated statements of income and retained earnings of
Company and its consolidated Subsidiaries for such year, setting forth in each
case in comparative form the figures for the previous year, reported on,
without a "going concern" or like qualification or exception, or qualification
indicating that the scope of the audit was inadequate to permit such
independent certified public accountants to certify such financial statements
without such qualification, by Ernst & Young or other firm of
6
<PAGE> 8
independent certified public accountants of nationally recognized standing;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each fiscal year
of Company, the unaudited consolidated balance sheet of Company and its
consolidated Subsidiaries as at the end of each such quarter and the related
unaudited consolidated statements of common stockholders' equity and cash flows
and the unaudited consolidated statements of income and retained earnings of
Company and its consolidated Subsidiaries for such quarter and the portion of
the fiscal year through such date, setting forth in each case, commencing with
the quarterly period ending on June 30, 1995, in comparative form the figures
for the previous year, certified by a Responsible Officer as being fairly
stated in all material respects when considered in relation to the consolidated
financial statements of Company and its consolidated Subsidiaries (subject to
normal year-end audit adjustments); and
(c) all financial statements required to be delivered by Company
under the Revolving Credit Agreement, all such financial statements to be
complete and correct in all material respects and to be prepared in reasonable
detail and in accordance with GAAP applied consistently throughout the periods
reflected therein and with prior periods (except as approved by such
accountants or Responsible Officer, as the case may be, and disclosed therein).
4.2 Certificates; Other Information. Furnish to Bank:
(a) concurrently with the delivery of the financial statements
referred to in Section 4.1(a), a certificate of the independent certified
public accountants reporting on such financial statements stating that in
making the examination necessary therefor no knowledge was obtained of any
Default or Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements
referred to in Sections 4.1(a) and 4.1(b), a certificate of a Responsible
Officer (i) stating that, to the best of such Responsible Officer's knowledge,
Company during such period has observed or performed all of its covenants and
other agreements, and satisfied every condition contained in this Agreement and
in the Note to be observed, performed or satisfied by it, and that such
Responsible Officer has obtained no knowledge of any Default or Event of
Default except as specified in such certificate, and (ii) in the case of the
financial statements of Company referred to in Sections 4.1(a) and (b), showing
in detail the calculations supporting such statements in Sections 5.2, 5.3 and
5.5;
7
<PAGE> 9
(c) within fifteen days after the same are filed, copies of all
financial statements and reports relating to Company, FAC or FAE in general
which Company, FAC or FAE may make to, or file with, the Securities and
Exchange Commission or any successor or analogous Governmental Authority; and
(d) promptly, such additional financial and other information as
Bank, may from time to time reasonably request.
4.3 Payment of Obligations. Pay, discharge or otherwise satisfy
at or before maturity or before they become delinquent, as the case may be, all
of its obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of Company or its Subsidiaries, as the case may be.
4.4 Conduct of Business and Maintenance of Existence. (i) Continue
to engage in business of the same general type as now conducted by it, (ii)
take all reasonable action to maintain all rights, privileges and franchises
necessary or desirable in the normal conduct of its businesses, including
preservation and maintenance of Company's and such Subsidiary's status and
eligibility under the regulations of each of the Agencies, (iii) preserve,
renew and keep in full force and effect its corporate existence, and (iv)
comply with all Contractual Obligations and Requirements of Law applicable to
it (except, with respect solely to clauses (iii) and (iv), (a) to the extent
that failure to do so would not, in the aggregate, have a Material Adverse
Effect, and (b) to the extent contested in good faith by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
books of Company or such Subsidiary, as the case may be, in accordance with
GAAP).
4.5 Maintenance of Property; Insurance. Keep all property useful
and necessary in its businesses in good working order and condition; and
maintain with financially sound and reputable insurance companies insurance on
all its property in at least such amounts and against at least such risks as
are usually insured against in the same general area by companies engaged in
the same or a similar business (except, in each case, to the extent that
failure to do so would not, in the aggregate, have a Material Adverse Effect;
provided, that Company and its Subsidiaries may (so long as Company deems it
prudent in its business judgment to do so) maintain programs of self-insurance
to the same extent and in the same manner as in effect on the date of this
Agreement.
4.6 Inspection of Property; Books and Records; Discussions. Keep
proper books of records and account in which full, true and correct entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and permit
representatives of Bank to
8
<PAGE> 10
visit and inspect any of its properties and examine and make abstracts from any
of its books and records at any reasonable time and as often as may reasonably
be desired (subject to reasonable requests for confidential treatment), and to
discuss the business, operations, property, condition (financial or otherwise)
or prospects of Company and its Subsidiaries with officers and employees of
Company and its Subsidiaries and with its independent certified public
accountants.
4.7 Notices. Promptly give notice to Bank of:
(a) the occurrence of any Refunding Event, Default or Event of
Default;
(b) any (i) default or event of default under any Contractual
Obligation of Company or any of its Subsidiaries which, if not cured, would
reasonably be expected to have a Material Adverse Effect, or (ii) litigation,
investigation or proceeding which may exist at any time between Company or any
of its Subsidiaries and any Governmental Authority which, if adversely
determined, would reasonably be expected to have a Material Adverse Effect;
(c) any litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority affecting Company or any of its
Subsidiaries or any of its or their respective properties or revenues (i) with
respect to this Agreement or the Notes or any of the transactions contemplated
hereby, or (ii) which, if adversely determined, would have a Material Adverse
Effect, other than any such litigation, investigation or proceeding in respect
of which Company has determined in good faith, after advice from or
consultation with its counsel, that the likelihood that such litigation,
investigation or proceeding will be resolved in a manner which would have a
Material Adverse Effect is remote;
(d) the following events, as soon as practicable, and in any event
within 30 days, after it knows or has reason to know of the following events:
(i) the occurrence or expected occurrence of any Reportable Event with respect
to any Plan or any withdrawal from, or the termination, Reorganization or
Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or
the taking of any other action by the PBGC, Company or any Commonly Controlled
Entity, or any Multiemployer Plan with respect to the withdrawal from, or the
termination, Reorganization or Insolvency of, any Single Employer Plan or
Multiemployer Plan, and in addition to such notice, shall deliver to Bank a
certificate of its chief financial officer setting forth the details thereof
and the action that Company or the Commonly Controlled Entity proposes to take
with respect thereto; and
(e) any development or event that would reasonably be expected to
have a Material Adverse Effect.
9
<PAGE> 11
Each notice pursuant to this subsection shall be accompanied by a statement of
a Responsible Officer setting forth details of the occurrence referred to
therein and stating what action Company proposes to take with respect thereto.
4.8 Maintenance of Forward Commitments. Maintain at all times in
accordance with Company's practices on the date hereof, hedging contracts,
forward purchase contracts or other forward commitments in an aggregate amount
at least equal to the amount of mortgage loans receivable held by Company and
its Subsidiaries at such time.
ARTICLE 5. NEGATIVE COVENANTS
Company hereby agrees that, so long as Bank is committed to make any
advance under this Agreement and thereafter so long as any indebtedness remains
outstanding under this Agreement shall not, nor shall it permit any of its
Subsidiaries to, directly or indirectly:
5.1 Breach any covenant under the Revolving Credit Agreement, if
such breach results in the occurrence of an Event of Default under the
Revolving Credit Agreement.
5.2 Consolidated Tangible Net Worth. Permit Consolidated Tangible
Net Worth at any time to be less than $180,000,000.
5.3 Leverage. Permit the ratio of Consolidated Indebtedness to
Consolidated Tangible Net Worth at the end of any month to be greater than 4 to
1.
5.4 Margin Stock. Permit more than 25 percent of the value of the
assets either of Company only or of Company and its Subsidiaries on a
consolidated basis subject to any restriction under this Agreement to consist
of "margin stock" (within the meaning of Regulations G, T, U and X of the Board
of Governors of the Federal Reserve System).
5.5 Permit Debt (as defined in the Revolving Credit Agreement) to
exceed an amount which is $10,000,000 less than the sum of values as set forth
in section 8.5(a) through (f) of the Revolving Credit Agreement (assuming that
Facility is unsecured).
ARTICLE 6. DEFINITIONS.
For the purposes of Article 4 of this Agreement entitled "Affirmative
Covenants" and Article 5 entitled "Negative Covenants" the following terms
shall have the definitions set forth in this Article 6.
"Affiliate": as to any Person, (a) any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of,
10
<PAGE> 12
is controlled by, or is under common control with, such Person or (b) any
Person who is a director, officer, shareholder or partner (i) of such Person,
(ii) of any Subsidiary of such Person or (iii) of any Person described in the
preceding clause (a). For purposes of this definition, "control" of a Person
means the power, directly or indirectly, either to (i) vote 10% or more of the
securities having ordinary voting power for the election of directors of such
Person or (ii) direct or cause the direction of the management and policies of
such Person whether by contract or otherwise.
"Agencies": collectively, the Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation and Government National
Mortgage Association.
"Code": The Internal Revenue Code of 1986, as amended from time to
time.
"Commitment Amount": The lesser of (i) $60,000,000, or (ii) an amount
equal to the amount then available to be drawn by Company under the Revolving
Credit Agreement.
"Commonly Controlled Entity": an entity, whether or not incorporated,
which is under common control with Company within the meaning of Section 4001
of ERISA or is part of a group which includes Company and which is treated as a
single employer under Section 414 of the Code.
"Consolidated Indebtedness": at a particular date, all amounts which
would, in conformity with GAAP, be included as Indebtedness on a consolidated
balance sheet of Company and its Subsidiaries as at such date; provided, that
Consolidated Indebtedness shall in any event exclude Non-Recourse and Defeased
Debt.
"Consolidated Intangibles": at a particular date, all assets of
Company and its Subsidiaries, determined on a consolidated basis, that would,
in conformity with GAAP, be classified as intangible assets, including, without
limitation, unamortized debt discount and expense in respect of debt issued by
Company and its Subsidiaries net of unamortized premiums in respect of debt
issued by Company and its Subsidiaries, unamortized organization and
reorganization expense, patents, trade or service marks, franchises, trade
names and goodwill, but Consolidated Intangibles shall not include the amount
capitalized as mortgage purchase servicing costs.
"Consolidated Net Income": for a particular period, the amount set
forth as consolidated net income on the consolidated statement of income of
Company and its Subsidiaries calculated in accordance with GAAP.
"Consolidated Net Worth": at a particular date, all amounts which
would, in conformity with GAAP, be included under
11
<PAGE> 13
shareholders' equity on a consolidated balance sheet of Company and its
Subsidiaries as at such date, including up to $50,000,000 of redeemable common
stock of Company owned by the management or any employee stock ownership plan
of Company.
"Consolidated Tangible Net Worth": at a particular date, the excess,
if any, of (a) Consolidated Net Worth as at such date, over (b) Consolidated
Intangibles as at such date.
"Contractual Obligation": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Default": any of the events specified in Article 7 of this
Agreement whether or not any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
"ERISA": the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"Event of Default": any of the events specified in Article 7 of this
Agreement provided, that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
"FAC": The Fund American Companies, Inc., a Delaware corporation.
"FAE": Fund American Enterprises, Inc., a Delaware corporation.
"GAAP": generally accepted accounting principles in the United States
of America in effect from time to time.
"Governmental Authority": any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government, including without limitation, the Agencies.
"Indebtedness": of a Person, at a particular date, the sum (without
duplication) at such date of (a) all indebtedness of such Person for borrowed
money or for the deferred purchase price of property or services (other than
current trade liabilities incurred in the ordinary course of business and
payable in accordance with customary practices) or which is evidenced by a
note, bond, debenture or similar instrument, (b) all obligations of such Person
under Financing Leases, (c) all obligations of such Person in respect of
acceptances issued or created for the account of such Person, and (d) all
liabilities secured by any Lien on any property
12
<PAGE> 14
owned by such Person even though such Person has not assumed or otherwise
become liable for the payment thereof; provided, that Indebtedness of Company
and its Subsidiaries shall in any event exclude Mortgage-Related Indebtedness.
"Insolvency": with respect to any Multiemployer Plan, the condition
that such Plan is insolvent within the meaning of Section 4245 of ERISA.
"Lien": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), or preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any Financing Lease having substantially the same economic
effect as any of the foregoing, and the filing of any financing statement under
the Uniform Commercial Code or comparable law of any jurisdiction in respect of
any of the foregoing).
"Long-Term Liabilities": that portion of Total Liabilities which are
determined to be long term in accordance with GAAP.
"Material Adverse Effect": a material adverse effect on (a) the
business, operations, property or condition (financial or otherwise) of Company
and its Subsidiaries taken as a whole, (b) the ability of Company to perform
its obligations under this Agreement or the Note, or (c) the validity or
enforceability of this Agreement or the Note or of the rights or remedies of
Bank hereunder or thereunder.
"Maturity Date": as defined in Section 1.1 of this Agreement.
"Moody's": Moody's Investors Services, Inc.
"Multiemployer Plan": a Plan which is a multiemployer plan as defined
in Section 4001(a)(3) or ERISA.
"Note": as defined in Section 1.1 of this Agreement.
"PBGC": the Pension Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA.
"Person": an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan which is
covered by ERISA and in respect of which Company or a Commonly Controlled
Entity is (or, if such plan were terminated at such time, would under Section
4069 of ERISA be deemed to be) an `employer' as defined in Section 3(5) of
ERISA.
13
<PAGE> 15
"Refunding Event" shall mean that Company shall breach a covenant
contained in sections 5.2, 5.3 or 5.5 of this Agreement.
"Regulation U": Regulation U of the Board of Governors of the Federal
Reserve System.
"Regulations": the regulations of the Board of Governors of the
Federal Reserve System.
"Reorganization": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section
4241 of ERISA.
"Reportable Event": any of the events set forth in Section 4043(b) of
ERISA, other than those events as to which the thirty-day notice period is
waived under subsection .13, .14, .16, .18, .19 or .20 of PBGC Reg. S 2615.
"Requirement of Law": as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each cased applicable
to or binding upon such Person or any of its property or to which such Person
or any of its property is subject.
"Responsible Officer": with respect to Company, the Chairman, the
President, the Chief Financial Officer or any Executive Vice President of
Company.
"Revolving Credit Agreement" shall mean that Amended and Restated
Revolving Credit Agreement dated March 24, 1995, to which Company is a party,
as amended from time to time.
"S&P": Standard & Poor's Corporation.
"Single Employer Plan": any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.
"Subsidiary": as to any Person, (i) a corporation of which shares of
stock having ordinary voting power (other than stock having such power only by
reason of the happening of a contingency) to elect a majority of the board of
directors or other managers of such corporation are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person and (ii) any partnership of
which such Person or any Subsidiary is a general partner or any partnership
more than 50% of the equity interests of which are owned, directly or
indirectly, by such Person or by one or more other Subsidiaries, or by such
Person and one or more other Subsidiaries. Notwithstanding the foregoing,
except as applied to Section 4.1 of this Agreement, the term "Subsidiary" shall
not be
14
<PAGE> 16
deemed to include any special purpose corporation, partnership or trust created
for the purpose of, and the sole business and activities of which (other than
activities incidental to its organization and normal operations) relate to, the
issuance of Mortgage-Related Indebtedness.
"Total Liabilities": at any date, the total liabilities of Company and
its consolidated Subsidiaries as at such date, determined in accordance with
GAAP.
ARTICLE 7. EVENTS OF DEFAULT
7.1 Upon non-payment of any installment of the principal or
interest on the Note when due in accordance with the terms thereof, or upon
non-payment of any other outstanding indebtedness of Company to Bank hereunder
or under any other instrument or evidence of indebtedness when due in
accordance with the terms thereof, the Note shall automatically become
immediately due and payable and Bank shall not be obligated to make any further
advances hereunder.
7.2 Upon occurrence of any of the following events of
default:
(a) default in the observance or performance of any of the
conditions, covenants or agreements of Company set forth in Articles 4 or 5
herein (except for the covenants in sections 5.2, 5.3 and 5.5);
(b) default in observance or performance of any of the other
conditions, covenants (except for the covenants in sections 5.2, 5.3 and 5.5)
or agreements of Company herein set forth, and continuance thereof for thirty
(30) days after notice to Company by Bank;
(c) any representation or warranty made or deemed made by Company
herein or which is contained in any certificate, document or financial or other
statement furnished at any time under this Agreement shall prove to have been
incorrect, false or misleading in any respect material to Company or its
ability to perform its obligations under this Agreement on or as of the date
made or deemed made unless Company shall have caused the facts or circumstances
in respect of which such representation or warranty was incorrect, false or
misleading to be changed to conform to such representation or warranty so that
such representation or warranty ceases to be incorrect, false or misleading;
(d) default in the observance or performance of any of the
conditions, covenants or agreements of Company set forth in any document
related to or connected with this Agreement or the indebtedness hereunder, and
continuation of such default beyond any period of grace specified in any such
document;
15
<PAGE> 17
(e) Company shall (i) default in any payment of principal of or
interest on any indebtedness (other than the Note) in an aggregate principal
amount of $25,000,000 or in the payment of any matured contingent obligation in
an aggregate principal amount outstanding of at least $25,000,000 beyond the
period of grace, if any, and after the giving of required notice, if any,
provided that the instrument or agreement under which such indebtedness or
contingent obligation of at least $25,000,000 was created; or (ii) default in
the observance of performance of any other agreement or condition relating to
any such indebtedness or contingent obligation or contained in any instrument
or agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such indebtedness
or beneficiary or beneficiaries of such contingent obligation (or a trustee or
agent on behalf of such holder or holders or beneficiary or beneficiaries) to
cause, with the giving of notice if required, such indebtedness to become due
prior to its stated maturity or such contingent obligation to become payable;
(f) one or more judgments or decrees shall be entered against
Company involving in the aggregate a liability (not covered by insurance and
not paid) of $25,000,000 or more and all such judgments or decrees shall not
have been vacated, discharged, stayed or bonded pending appeal within 60 days
from the entry thereof;
(g) the occurrence of any "reportable event", as defined in the
Employee Retirement Income Security Act of 1974 and any amendments thereto,
which is determined to constitute grounds for termination by the Pension
Benefit Guaranty Corporation of any employee pension benefit plan maintained by
or on behalf of Company for the benefit of any of its employees or for the
appointment by the appropriate United States District Court of a trustee to
administer such plan and such reportable event is not corrected and such
determination is not revoked within thirty (30) days after notice thereof has
been given to the plan administrator or Company; or the institution of
proceedings by the Pension Benefit Guaranty Corporation to terminate any such
employee benefit pension plan or to appoint a trustee to administer such plan;
or the appointment of a trustee by the appropriate United States District Court
to administer any such employee benefit pension plan;
then, or at any time thereafter, unless such default is remedied, Bank may give
notice to Company declaring all outstanding indebtedness hereunder and under
the Note to be due and payable, whereupon all indebtedness then outstanding
hereunder and under the Note shall immediately become due and payable without
further notice and demand, and Bank shall not be obligated to make further
advances hereunder.
16
<PAGE> 18
7.3 If a creditors' committee shall have been appointed for the
business of Company; or if Company shall have made a general assignment for the
benefit of creditors or shall have been adjudicated bankrupt, or shall have
filed a voluntary petition in bankruptcy or for reorganization or to effect a
plan or arrangement with creditors; or shall file an answer to a creditor's
petition or other petition filed against it, admitting the material allegations
thereof for an adjudication in bankruptcy or for reorganization; or shall have
applied for or permitted the appointment of a receiver, or trustee or custodian
for any of its property or assets; or such receiver, trustee or custodian shall
have been appointed for any of its property or assets (otherwise than upon
application or consent of Company) and such receiver, trustee or custodian so
appointed shall not have been discharged within forty-five (45) days after the
date of his appointment or if an order shall be entered and shall not be
dismissed or stayed within forty-five (45) days from its entry, approving any
petition for reorganization of Company; then the Note and all indebtedness then
outstanding hereunder shall automatically become immediately due and payable
and Bank shall not be obligated to make further advances under this Agreement.
ARTICLE 8. INDEMNITY
Company agrees to release, hold harmless and indemnify Bank from and
against any and all claims of any kind which may at any time be brought by any
private party, administrative agency or any other person with respect to the
deposit by Company with Bank of any escrow funds, the non-interest bearing
nature of any deposits, and/or the use of the deposits by Company as
compensating balances. This indemnification extends not only to any judgments
or settlements against Bank, but also to full recovery of Bank's associated
legal expenses (whether out-of-pocket or incurred internally) and costs and
expenses including without limitation all costs and expenses incurred by Bank
in complying with any discovery requests or orders, administrative or other,
received in connection with such deposits.
It is expressly agreed and understood that the provisions of this
Section 8 shall and are intended to be continuing and shall survive the
repayment of any indebtedness of Company to Bank under this Agreement and the
Note and the termination of this Agreement.
ARTICLE 9. MISCELLANEOUS
9.1 This Agreement shall be binding upon and shall inure to the
benefit of Company and Bank and their respective successors and assigns.
9.2 No delay or failure of Bank in exercising any right, power or
privilege hereunder shall affect such right, power or privilege, nor shall any
single or partial exercise thereof preclude any further exercise thereof, or
the exercise of any other
17
<PAGE> 19
power, right or privilege. The rights of Bank under this Agreement are
cumulative and not exclusive of any right or remedies which Bank would
otherwise have.
9.3 Where the character or amount of any asset or liability or
item of income or expense is required to be determined or any consolidated or
other accounting computation is required to be made for the purposes of this
Agreement, it shall be done in accordance with generally accepted accounting
principles consistently applied.
9.4 All notices to Company with respect to this Agreement shall be
deemed to be completed upon mailing by certified mail as follows:
To Company: Source One Mortgage Services Corporation
27555 Farmington Road
Farmington Hills, Michigan 48018
Attention: Larry Ciofu, Vice President
To Bank: Comerica Bank
One Detroit Center
P.O. Box 75000
Detroit, Michigan 48275-3268
Attention: Michigan Corporate Division I
9.5 Company agrees to reimburse Bank for all reasonable
out-of-pocket expenses (including reasonable fees, time charges and expenses of
attorneys for Bank, which may be employees of the Bank) incurred in connection
with the preparation, negotiation and execution of this Agreement and any other
documentation contemplated hereby and the consummation and closing of the
transactions contemplated by this Agreement and such other documentation;
provided, however that the maximum amount of fees, time charges and expenses of
attorneys for Bank payable by Company pursuant to this sentence be twenty-five
thousand dollars ($25,000.00) plus the amount of disbursements actually
incurred by such attorneys. All reasonable costs, including reasonable
attorney fees, actually incurred by Bank in reviewing, revising, protecting or
enforcing any of its rights against Company or defending Bank from any claims
or liabilities by any party or otherwise incurred by Bank in connection with an
event of default or the enforcement of this Agreement or the related documents
shall also by paid by Company.
9.6 This Agreement shall become effective upon the execution
hereof by Bank and Company.
9.7 No amendments or waiver of any provision of this Agreement nor
consent to any departure by Company therefrom shall in any event be effective
unless the same shall be in writing and signed by the Bank, and then such
amendment, waiver or consent shall be effective only in the specific instance
and for the
18
<PAGE> 20
specific purpose for which given. No amendment, waiver or consent with respect
to any provision of this Agreement shall affect any other provision of this
Agreement.
9.8 This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Michigan.
WITNESS the due execution hereof as of the day and year first above
written.
COMERICA BANK SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:___________________________ By:____________________________
Its:__________________________ Its:___________________________
19
<PAGE> 21
EXHIBIT "A"
REVOLVING CREDIT NOTE
$60,000,000 Detroit, Michigan
As of August 10, 1995
On or before the Maturity Date, FOR VALUE RECEIVED, the undersigned,
Source One Mortgage Services Corporation, a Michigan corporation (herein called
"Company") promises to pay to the order of COMERICA BANK (herein called "Bank")
at: One Detroit Center, Detroit, MI 48226, or such other place as Bank may
designate, the indebtedness or so much of the sum of Sixty Million Dollars
($60,000,000) as may from time to time have been advanced and then be
outstanding hereunder and under a certain Loan Agreement by and between Company
and Bank dated as of August 10, 1995 (herein called the Loan Agreement").
The indebtedness outstanding under this Note from time to time shall
bear interest as set forth in the Loan Agreement. This Note may be prepaid as
set forth in the Loan Agreement.
This Note evidences borrowing under, is subject to, shall be prepaid
in accordance with, and may be matured under the terms of the Loan Agreement,
to which reference is hereby made.
All agreements between Company and Bank pertaining to the indebtedness
described herein are expressly limited so that in no event whatsoever shall the
amount of interest paid or agreed to be paid to Bank exceed the highest rate of
interest permissible under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision of the Loan Agreement, this Note or
any other instrument securing this Note or all or any part of the indebtedness
secured thereby, at the time performance of such provision shall be due, shall
involve exceeding the interest limitation validly prescribed by law which a
court of competent jurisdiction may deem applicable hereto, then, the
obligation to be fulfilled shall be reduced to an amount computed at the
highest rate of interest permissible under such applicable law, and if, for any
reason whatsoever, Bank shall ever receive as interest an amount which would be
deemed unlawful under such applicable law, such interest shall be automatically
applied to the payment of the principal amount described herein or otherwise
owed by Company to Bank, (whether or not then due and payable) and not to the
payment of interest.
Notwithstanding anything herein to the contrary, nothing shall limit
any rights granted Bank by other instruments or by law.
<PAGE> 22
This Note shall be governed by and interpreted in accordance with the
laws of the State of Michigan.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By: ___________________________
Its: ___________________________
2
<PAGE> 23
EXHIBIT "B"
REQUEST FOR DRAW AND
CERTIFICATE OF COMPLIANCE
TO: COMERICA BANK (the "Bank")
The undersigned hereby request(s) an advance in the amount of
_____________________________________ DOLLARS ($_______________) against the
Revolving Credit Note dated ________________, 1995, of undersigned to the Bank
in the face amount of Sixty Million Dollars ($60,000,000).
The proceeds of this advance shall be deposited to the Account No. ____
of the undersigned with the Bank or as follows: ________________________________
Undersigned warrants and certifies to the Bank that (i) the amount of
the advance requested herein does not exceed the amount which the undersigned
estimates to be its anticipated average daily escrow balances for the month
following the date of such advance under that certain Loan Agreement (the "Loan
Agreement") dated as of August 10, 1995, by and between undersigned and the
Bank and (ii) no condition exists or event has occurred which constitutes or,
with the running of time would constitute a default under the Loan Agreement.
Dated this ___ day of _______________, 19__.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By: ____________________________
Its:____________________________
<PAGE> 24
AMENDMENT NO. 1 TO LOAN AGREEMENT
This Amendment No. 1 is made as of ____________, 1995 by Source One
Mortgage Services Corporation, Farmington Hills, Michigan ("Company") and
Comerica Bank, a Michigan banking corporation, of Detroit, Michigan ("Bank").
Company and Bank entered into a loan agreement dated August 10, 1995
(the "Loan Agreement") in connection with a $60,000,000 revolving credit
facility as described therein.
Company has requested and Bank has agreed to amend the Loan Agreement
in certain respects to (i) allow for the exchange of certain newly issued
subordinated debt securities of the Company for certain existing preferred
stock of the Company, and (ii) modify certain provisions of the Loan Agreement
in order to treat such newly issued subordinated debt as equity in certain
instances.
Wherefore, Company and Bank agree as follows:
1. This Amendment No. 1 shall be effective from and after the
date on which Company first exchanges Subordinated Debt (as defined below) for
Company's 8.42% cumulative preferred stock, Series A.
2. The following definitions are hereby added to Article 6 of the
Loan Agreement:
"Subordinated Debt: means the principal amount of (but not
any interest on) the unsecured subordinated Indebtedness of the
Company outstanding from time to time (which amount shall not exceed
$100,000,000) evidenced by the Quarterly Income Capital Securities
(Subordinated Interest Deferrable Debentures, Due 2025) of the Company
issued (or to be issued) in exchange for certain of the Company's
Series A Preferred Stock, the terms of which unsecured subordinated
Indebtedness are set forth in the Subordinated Debt Indenture; but
shall not include any such unsecured subordinated Indebtedness with
respect to which any amounts shall have been deposited with the
trustee under the Subordinated Debt Indenture or otherwise irrevocably
set aside for the benefit of the holders of such Indebtedness for the
purpose of defeasance of such Indebtedness."
"Subordinated Debt Indenture: means that certain Subordinated
Indenture, dated as of December 1, 1995, as amended or supplemented
from time to time, by and between the Company and IBJ Schroeder, as
trustee, pursuant to which the Company has issued or will issue the
Subordinated Debt."
<PAGE> 25
3. Section 5.1 of the Loan Agreement is amended to read as
follows:
"Breach any covenant under (i) the Revolving Credit Agreement,
or (ii) the Subordinated Debt Indenture, as they may be
amended from time to time pursuant to their terms, if such
breach results in the occurrence of an Event of Default under
the Revolving Credit Agreement or the Subordinated Debt
Indenture, as the case may be."
4. Section 5.2 of the Loan Agreement is amended to read as
follows:
"Permit Consolidated Tangible Net Worth plus Subordinated Debt
at any time to be less than $180,000,000."
5. Section 5.3 of the Loan Agreement is amended to read as
follows:
"Permit the ratio of (i) Consolidated Indebtedness (excluding
Subordinated Debt) to Consolidated Tangible Net Worth
(including Subordinated Debt) at the end of any month to be
greater than 4 to 1."
6. Section 5.5 of the Loan Agreement is amended to read as
follows:
"Permit Debt (as defined in the Revolving Credit Agreement,
but excluding Subordinated Debt) to exceed an amount which is
$10,000,000 less than the sum of values as set forth in
section 8.5(a) through (f) of the Revolving Credit Agreement
(assuming that Facility is unsecured).
7. Except as amended hereby, the Loan Agreement shall remain in
full force and effect. This Amendment No. 1 may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Amendment No. 1 by signing any such
counterpart.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:____________________________________
Its:___________________________________
COMERICA BANK
By:____________________________________
Its:___________________________________
<PAGE> 26
AMENDMENT NO. 2 TO LOAN AGREEMENT
This Amendment No. 2 is made as of July 10, 1996 by Source One
Mortgage Services Corporation, Farmington Hills, Michigan ("Company") and
Comerica Bank, a Michigan banking corporation, of Detroit, Michigan ("Bank").
Company and Bank entered into a loan agreement dated as of August 10,
1995 (the "Loan Agreement") in connection with a $60,000,000 revolving credit
facility as described therein.
Company has requested and Bank has agreed to amend the Loan Agreement
to extend the maturity date.
Wherefore, Company and Bank agree as follows:
1. The date "July 10, 1996" in section 1.1 of the Loan Agreement
hereby is amended to read "July 10, 1997."
2. Except as amended hereby, the Loan Agreement shall remain in
full force and effect. This Amendment No. 2 may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Amendment No. 2 by signing any such
counterpart.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:____________________________________
Its:____________________________________
COMERICA BANK
By:____________________________________
Its:____________________________________
<PAGE> 1
EXHIBIT 10(cc)
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This First Amendment to Second Amended and Restated Revolving Credit
Agreement (the "First Amendment") is made as of January 6, 1997 by and among
SOURCE ONE MORTGAGE SERVICES CORPORATION, a Delaware corporation (the
"Company"), THE MORTGAGE AUTHORITY, INC., a Delaware corporation ("TMA"),
CENTRAL PACIFIC MORTGAGE COMPANY, a California corporation ("CPM"), the lenders
identified on the signature pages hereof, and THE FIRST NATIONAL BANK OF
CHICAGO, a national banking association ("First Chicago"), individually as a
Lender and as administrative agent for the Lenders.
RECITALS
The Company, TMA, CPM, the Agent and the Lenders are parties to a
certain Second Amended and Restated Revolving Credit Agreement, dated as of
November 12, 1996 (the "Credit Agreement"), pursuant to which the Lenders have
agreed to provide a revolving credit facility to the Company, TMA and CPM on
the terms and conditions set forth in the Credit Agreement. Any capitalized
term not expressly defined herein shall have the meaning ascribed to such term
in the Credit Agreement.
Pursuant to Section 12.6 of the Credit Agreement the Agent, the Lenders,
the Company, TMA and CPM may make certain amendments to the Loan Documents.
The Company, TMA, CPM, the Agent and the Lenders desire to amend the
Credit Agreement to (i) modify the covenant which limits the Recourse
Servicing, and (ii) extend the date by which the Company shall be entitled to
make a special dividend of up to $60,000,000.
AGREEMENTS
NOW, THEREFORE, the parties hereto agree as follows:
1. Recourse Servicing. Section 8.10 of the Credit Agreement is
hereby deleted and replaced with the following:
"8.10 Recourse Servicing.
Permit the principal balance of Mortgage Loans covered
by Recourse Servicing to exceed the sum of (A) the aggregate principal
balance of all Mortgage Loans covered by Recourse Servicing owned by the
Company as of December 31, 1996 plus (B) the aggregate principal balance
of all Mortgage Loans covered by Recourse Servicing acquired by the
Company from and after January 1, 1997 as a part of one or more larger
acquisitions of Servicing Agreements, provided that the principal
balance of Mortgage Loans covered by Recourse Servicing acquired in any
single larger acquisition shall not exceed the lesser of (i)
$100,000,000 or (ii) 10% of the principal balance of all Mortgage Loans
covered by the
<PAGE> 2
Servicing Agreements acquired in such acquisition less (C) all
reductions in such aggregate principal balances, whether by reason of
prepayment or amortization from and after January 1, 1997 (or the date
of later acquisition, as the case may be) and less (D) the aggregate
principal balance of any Mortgage Loans covered by any such Recourse
Servicing sold by the Company after December 31, 1996."
2. Extension of Date for $60,000,000 Special Dividend. The phrase "the
fourth calendar quarter of 1996" in Section 8.16(b)(ii) of the Credit Agreement
is hereby deleted and replaced with the phrase "the first six calendar months
of 1997".
3. Miscellaneous.
(a) All references to the Credit Agreement in the Credit
Agreement and the other Credit Documents shall be deemed to refer to the Credit
Agreement as amended by this First Amendment.
(b) The Company, TMA and CPM each hereby represents and
warrants to the Lenders that on the date of execution hereof, both prior to and
after giving effect to this First Amendment, (i) the representations and
warranties of the Company, TMA and CPM contained in the Credit Documents are
accurate and complete in all respects, and (ii) no Default or event which with
the giving of notice and/or the passage of time would constitute a Default has
occurred and is continuing.
(c) In all other respects, the Credit Agreement is and
remains unmodified and in full force and effect and is hereby ratified and
confirmed. This First Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one agreement, and any of the
parties hereto may execute this First Amendment by signing any such
counterpart.
(d) This First Amendment shall be construed in accordance with
and governed by the laws of the State of Illinois.
IN WITNESS WHEREOF, the Company, TMA, CPM, the Required Lenders and the
Agent have executed this First Amendment as of the date first above written to
be effective as of the date this First Amendment is executed by the Company,
TMA, CPM, the Agent and the Required Lenders.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
By:________________________________
Name: Michael C. Allemang
Title: Executive Vice President and
Chief Financial Officer
-2-
<PAGE> 3
THE MORTGAGE AUTHORITY, INC.
By:________________________________
Name: Larry N. Ciofu
Title: Vice President/Treasury
CENTRAL PACIFIC MORTGAGE COMPANY
By:________________________________
Name: John Cassell
Title: Chief Financial Officer
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
By:________________________________
Name:___________________________
Title:__________________________
THE FIRST NATIONAL BANK OF CHICAGO
By:________________________________
Name:___________________________
Title:__________________________
ABN AMRO BANK, N.V.
By:________________________________
Name:___________________________
Title:__________________________
By:________________________________
Name:___________________________
Title:__________________________
-3-
<PAGE> 4
BANK OF AMERICA NT & SA
By:_________________________________
Thomas A. Pizurie
Vice President
THE BANK OF NEW YORK
By:________________________________
Patricia M. Dominus
Vice President
THE BANK OF TOKYO-MITSUBISHI, LTD.
By:_________________________________
Noburu Kobayashi
Deputy General Manager
BANKERS TRUST COMPANY
By:________________________________
John O'Rourke
Vice President
BANQUE PARIBAS
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
BARCLAYS BANK PLC
By:________________________________
Tina Swartz
Associate Director
-4-
<PAGE> 5
CAISSE NATIONALE DE CREDIT AGRICOLE
By:_________________________________
David Bouhl
First Vice President Head of
Corporate Banking Chicago
CIBC, INC.
By:________________________________
Stephen D. Reynolds
Director
CIBC Wood Gundy Securities
Corp., As Agent for CIBC, Inc.
COMERICA BANK
By:________________________________
James R. Grossett
Vice President
CREDIT LYONNAIS NEW YORK BRANCH
By:___________________________
Renaud d'Herbes
Senior Vice President
CREDIT SUISSE
By:________________________________
Name:___________________________
Title:__________________________
By:________________________________
Name:___________________________
Title:__________________________
-5-
<PAGE> 6
THE DAI-ICHI KANGYO BANK, LTD.,
CHICAGO BRANCH
By:________________________________
Name:___________________________
Title:__________________________
FLEET BANK N.A.
By:_________________________________
Robert Pierson
Vice President
THE FUJI BANK, LIMITED
By:_________________________________
Peter L. Chinnici
Joint General Manager
GUARANTY FEDERAL BANK, F.S.B.
By:_________________________________
Gregory Jackson
Vice President
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD.
By:_________________________________
Name:____________________________
Title:___________________________
-6-
<PAGE> 7
THE MITSUBISHI TRUST AND BANKING
CORPORATION, LOS ANGELES AGENCY
By:_________________________________
Name:____________________________
Title:___________________________
NATIONAL CITY BANK OF KENTUCKY
By:________________________________
Gary Sieveking
Vice President
PNC BANK, NATIONAL ASSOCIATION
By:________________________________
Peter Stack
Assistant Vice President
THE SANWA BANK, LIMITED, CHICAGO BRANCH
By:_________________________________
Richard H. Ault
Vice President
THE SUMITOMO BANK, LTD.
By:_________________________________
Hiroyuki Iwami
Joint General Manager
-7-
<PAGE> 8
WELLS FARGO BANK, NA
By:_________________________________
Name:____________________________
Title:___________________________
By:_________________________________
Name:____________________________
Title:___________________________
WESTDEUTSCHE LANDESBANK GIROZENTRALE,
NEW YORK BRANCH
By:________________________________
Name:___________________________
Title:__________________________
By:________________________________
Name:___________________________
Title:__________________________
-8-
<PAGE> 1
EXHIBIT 10(dd)
FNMA/FHLMC/GNMA MORTGAGE SERVICING
PURCHASE AND SALE AGREEMENT
THIS FNMA/FHLMC/GNMA MORTGAGE SERVICING PURCHASE AND SALE AGREEMENT
(the "Sale Agreement") is dated as of February 28, 1997, by and between SOURCE
ONE MORTGAGE SERVICES CORPORATION, with offices located at 27555 Farmington
Road, Farmington Hills, Michigan 48334-3357 (the "Seller") and CHEMICAL
MORTGAGE COMPANY, an Ohio corporation, with offices at 200 Old Wilson Bridge
Road, Worthington, Ohio 43085-8500 (the "Purchaser").
W I T N E S S E T H:
WHEREAS, Seller owns the servicing rights to a mortgage portfolio
consisting of residential mortgage loans with an aggregate outstanding balance
of approximately $18 Billion Dollars as of August 31, 1996, as described more
particularly in the offering materials, copies of which are attached hereto and
incorporated by reference herein as Exhibit A (individually the "Mortgage
Loan" or collectively the "Mortgage Loans"), which Mortgage Loans are either
whole loans owned by the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"), or are pledged to secure
participation certificates issued by FHLMC or mortgage backed securities issued
by FNMA or the Government National Mortgage Association ("GNMA"), as more
particularly set forth in Exhibit A;
WHEREAS, Purchaser desires to purchase and Seller desires to sell all
right, title and interest in and to the Servicing (as defined herein below) of
the Mortgage Loans in accordance with the terms and conditions of this Sale
Agreement;
WHEREAS, it is contemplated that FNMA, FHLMC and GNMA will consent to
the assumption of the Servicing by Purchaser and to Seller's transfer and
assignment of the Servicing to Purchaser as provided herein;
NOW, THEREFORE, in consideration of the mutual covenants made herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Sale Agreement, the words and phrases set forth below
shall have the following meanings:
1.1. "ADVANCE(S)": All customary and necessary
out-of-pocket costs and expenses incurred in accordance with Agency
Requirements and the Mortgage Loan documents with regard to performance by a
servicer of its servicing obligations, including, but not limited
<PAGE> 2
to, advances of principal, interest (excluding Shortfall Interest), taxes,
insurance, foreclosure and bankruptcy expenses and guarantee fees.
1.2. "AGENCY(IES)": FNMA, FHLMC and/or GNMA
(collectively, or individually, may be referred to as the "Agency").
1.3. "AGENCY LOAN COMMITMENT[S]": The Agency loan sale
commitment[s] and/or agreement[s], including any related exhibits, together
with any amendments or supplements, whereby the Mortgage Loans were sold and/or
relating to the servicing thereof or otherwise affecting the Servicing.
1.4. "AGENCY REQUIREMENTS": The applicable rules,
regulations, announcements, notices, directives and instructions of an Agency,
including, without limitation, the applicable requirements of the Agency
Selling and Servicing Guides, as amended from time to time, and the Agency Loan
Commitments.
1.5. "ANCILLARY FEES": Reasonable and customary fees
acceptable to the Agencies and collected by servicers as income incidental to
the servicing of the Mortgage Loans such as late fees, insurance administration
fees and commissions, processing fees and assumption fees, which Ancillary Fees
shall not, during the Interim Subservicing Period or the Subservicing Period,
without the consent of Purchaser (which consent shall not be unreasonably
withheld as to inflationary increases in fee amount or as to an additional fee
type dictated by the Agencies), exceed, in fee amount or type, the fees charged
by Seller as of November 28, 1996.
1.6. "APPROVAL DATE": The date on which approval for the
transfer of ownership of the Servicing and the subservicing, all as
contemplated by this Sale Agreement, the Interim Subservicing Agreement and the
Subservicing Agreement, shall have been obtained from each of FNMA, FHLMC, GNMA
and any other regulatory agency whose approval is required, which date shall be
no later than May 31, 1997, provided however, that GNMA approval need not be
obtained by this Approval Date for the Mortgage Loans contained within the
Uncertified Pools.
1.7. "BANKRUPTCY LOAN": A Mortgage Loan that is affected
by a bankruptcy which has been filed, except for Mortgage Loans for which the
borrowers have filed Chapter 7 liquidations and which are otherwise not in
default.
1.8. "BI-WEEKLY MORTGAGE LOAN": A Mortgage Loan which as
of the Sale Date is the subject of an agreement relating to payment processing
on a bi-weekly basis under the Bi-Saver Program.
1.9. "BORROWER": The obligors on a Note.
1.10. "BUSINESS DAY": A day or a portion thereof during which both
Purchaser and Seller are open for business, other than Saturday or Sunday, or
any legal holiday.
1.11. "CUSTODIAN LEGAL FILE": Those files identified in Exhibits H
through K.
-2-
<PAGE> 3
1.12. "CUT-OFF DATE": Close of business on the Business Day
immediately prior to the applicable Transfer Date, or as otherwise agreed by
the parties.
1.13. "DEPOSIT": As defined in Section 3.2(a) hereof.
1.14. "DOCUMENT HOLDBACK": That amount to be held by Purchaser from
the Purchase Price, or so much of such amount as is then remaining, in
accordance with Section 3.2(d).
1.15. "ESCROW/IMPOUND FUNDS": The
tax/insurance/buydown/construction completion escrows and suspense balances
(but exclusive of Ancillary Fees assessed by Seller).
1.16. "FHA": Federal Housing Administration.
1.17. "FHLMC": As defined in the recitals hereof.
1.18. "FHLMC PAYMENT DATE": A date mutually agreeable to the
parties which is no later than five Business Days after the FHLMC Transfer
Date.
1.19. "FHLMC SERVICING": That portion of the Servicing which
pertains to FHLMC Mortgage Loans (whole or securitized).
1.20. "FHLMC TRANSFER DATE": March 17, 1998, the date on which
FHLMC Servicing Responsibility transfers to Purchaser, or such other date
mutually agreeable to the parties.
1.21. "FNMA": As defined in the recitals hereof.
1.22. "FNMA PAYMENT DATE": A date mutually agreeable to the parties
which is no later than five Business Days after the FNMA Transfer Date.
1.23. "FNMA SERVICING": That portion of the Servicing which
pertains to FNMA Mortgage Loans (whole or securitized).
1.24. "FNMA TRANSFER DATE": August 3, 1998, the date on which FNMA
Servicing Responsibility transfers to Purchaser, or such other date mutually
agreeable to the parties.
1.25. "FORECLOSURE LOAN": A Mortgage Loan on which (i) a
foreclosure has been completed or commenced or which has been forwarded to an
attorney to commence foreclosure; or (ii) a deed-in-lieu of foreclosure has
been accepted or is pending.
1.26. "GNMA": As defined in the recitals hereof.
1.27. "GNMA PAYMENT DATE": A date mutually agreeable to the parties
which is no later than five Business Days after the GNMA Transfer Date.
-3-
<PAGE> 4
1.28. "GNMA SERVICING": That portion of the Servicing which
pertains to GNMA Mortgage Loans (whole or securitized).
1.29. "GNMA TRANSFER DATE": June 1, 1998, the date on which GNMA
Servicing Responsibility transfers to Purchaser, or such other date mutually
agreeable to the parties.
1.30. "GUARANTY AGREEMENT": That certain Guaranty Agreement
executed by Fund American Enterprises, Holdings, Inc. in favor of Purchaser,
its successors and assigns, dated of even date herewith, a copy of which is
attached hereto as Exhibit F.
1.31. "INTERIM SUBSERVICING PERIOD": The period from the Sale Date
up to the Approval Date during which Subservicer shall subservice the Mortgage
Loans on behalf of Purchaser.
1.32. "INTERIM SUBSERVICING AGREEMENT": That certain agreement, a
copy of which is attached hereto as Exhibit C-1, setting forth the terms and
provisions pursuant to which Seller will subservice the Mortgage Loans, on
behalf of Purchaser, during the Interim Subservicing Period.
1.33. "LGC": Loan Guaranty Certificate issued by the VA.
1.34. "LITIGATION LOAN": A Mortgage Loan which is in any stage of
litigation, or which is the subject of an injunction or settlement requiring
Seller to take action or affecting the origination or servicing of the Mortgage
Loan[s], and which has a material adverse effect on the Mortgage Loan or the
Servicing associated with such Mortgage Loan.
1.35. "MIC": Mortgage Insurance Certificate issued by the FHA.
1.36. "MORTGAGE": The security instrument, mortgage, deed of trust
or other instrument securing a Note, which creates a first position lien on an
estate in fee simple or leasehold estate, if permitted by the relevant Agency,
in real property securing the Note, unless such Mortgage is granted in
connection with a cooperative lien, in which case the first lien position is in
the stock of the subject cooperative association and in the tenant's rights in
the cooperative lease relating to such stock.
1.37. "MORTGAGE LOAN[S]": As defined in the recitals hereof. The
term "Mortgage Loan[s]" shall not include property management functions in
connection with REO properties, or the properties themselves.
1.38. "MORTGAGE LOAN REPURCHASE PRICE": Unless otherwise
specified by the Agency, shall mean, as of the date of repurchase, the current
unpaid principal balance of a Mortgage Loan, together with interest then due,
plus outstanding Advances as well as reasonable and substantiated re-transfer
out-of-pocket expenses incurred by Purchaser.
1.39. "MORTGAGE LOAN SCHEDULE": The mortgage loan schedule in the
form attached hereto as Exhibit B, setting forth specific information with
respect to each Mortgage Loan.
-4-
<PAGE> 5
1.40. "MORTGAGED PROPERTY": The property described in the
Mortgage, securing repayment of the debt evidenced by the Note.
1. 41. "NON-ELIGIBLE MORTGAGE LOAN": A Mortgage Loan that, on the
Sale Date: (i) is sixty (60) days or more delinquent (and two (2) or more
monthly installments remain unpaid); (ii) is a Bankruptcy Loan; (iii) is a
Foreclosure Loan; (iv) is a Litigation Loan; or (v) is an FHA 235 loan for
which the subsidy has not been terminated.
1. 42. "NOTE": The note or other evidence of the indebtedness of a
Borrower secured by a Mortgage.
1.43. "PAYMENT DATE(S)": The FNMA Payment Date, the FHLMC Payment
Date, or the GNMA Payment Date, as applicable.
1.44. "PURCHASER": As defined in the recitals hereof.
1.45. "PURCHASE PRICE": As defined in Paragraph 3.1 hereof.
1.46. "PURCHASE PRICE PERCENTAGE": As defined in Paragraph 3.1
hereof.
1.47. "REAL ESTATE OWNED" ("REO"): Property acquired by the Seller
on behalf of FNMA, FHLMC or GNMA, as applicable, through foreclosure or by
acceptance of a deed-in-lieu of foreclosure.
1.48. "REQUIRED DOCUMENT" OR "REQUIRED DOCUMENTATION" : Those
documents identified in Exhibit G.
1.49. "SALE AGREEMENT": This FNMA/FHLMC/GNMA Mortgage Servicing
Purchase and Sale Agreement as defined in the first paragraph of this
agreement, and as used herein shall also be deemed to refer to and incorporate
all exhibits attached hereto.
1.50. "SALE DATE": A date not later than February 28, 1997, as
agreed by the parties.
1.51. "SELLER": As defined in the first paragraph of this Sale
Agreement.
1.52. "SERVICER RESPONSIBILITY": With the exception of the
Servicing Income Rights, the rights and responsibilities associated with the
Mortgage Loans, including without limitation, servicer responsibility as
defined in the Servicing Agreements.
1.53. "SERVICING": The Servicing Income Rights and the Servicer
Responsibility.
1.54. "SERVICING AGREEMENT[S]": The Agency servicing agreements,
FNMA or FHLMC contracts or commitments (which contracts or commitments
incorporate by reference either the FNMA Selling Guide and/or FNMA Servicing
Guide or the FHLMC Sellers' and Servicers' Guide, as applicable) or GNMA
contracts or commitments (which contracts or
-5-
<PAGE> 6
commitments incorporate by reference the underlying FHA and/or VA rules,
regulations and requirements, as applicable) with respect to the Mortgage
Loans, and any revisions to same.
1.55. "SERVICING FILE": Those files identified in Exhibits H
through K, including the items noted in such Exhibits together with any
additional items as may be required by Agency Requirements.
1.56. "SERVICING INCOME RIGHTS": The right to receive the
servicing fee income, including, but not limited to any and all Ancillary Fees
and escrow account benefits arising from or connected to any Mortgage Loan
(note that the owner of the Servicing Income Rights must provide funds to pay
guarantee fees to the applicable Agency).
1.57. "SERVICING REPURCHASE PRICE": Shall mean, with respect to
any Mortgage Loan for which a Purchase Price has been paid by Purchaser, an
amount equal to the Purchase Price Percentage multiplied by the then
outstanding unpaid principal balance of the Mortgage Loan, as well as
reasonable and substantiated re-transfer out-of-pocket expenses incurred by
Purchaser.
1.58. "SHORTFALL INTEREST": The Mortgage Loan curtailment or
payoff interest which is required to be paid to the Agency but which the
Borrower is not obligated to pay.
1.59. "SUBSERVICER": The party named in the Interim Subservicing
Agreement and the Subservicing Agreement, or any assignee permitted under the
terms of the Interim Subservicing Agreement and the Subservicing Agreement, who
is to subservice the Mortgage Loans on behalf of Purchaser during the Interim
Subservicing Period and the Subservicing Period.
1.60. "SUBSERVICER DEFAULT": An event of default by the
Subservicer during the Interim Subservicing Period or the Subservicing Period
which shall enable the Purchaser to terminate the Subservicer's right to
subservice the Mortgage Loans.
1.61. "SUBSERVICING AGREEMENT": That certain agreement, a copy of
which is attached hereto as Exhibit C-2, setting forth the terms and provisions
pursuant to which Seller will subservice the Mortgage Loans, on behalf of
Purchaser, during the Subservicing Period.
1.62. "SUBSERVICING PERIOD": The period from the Approval Date up
to the final Transfer Date during which Subservicer shall subservice the
Mortgage Loans on behalf of Purchaser.
1.63. "TRANSFER DATE(S)": The FNMA Transfer Date, the FHLMC
Transfer Date, or the GNMA Transfer Date, as applicable.
1.64. "UNCERTIFIED POOLS": Those certain pools which are
identified in Exhibit N, and which, as of the Approval Date, the Servicing on
such pools is unable to transfer to Purchaser because the pool has: (i) not
been finally certified, and the time permitted by GNMA for such final
certification has expired; or (ii) not been recertified.
-6-
<PAGE> 7
1.65. "VA": Department of Veteran's Affairs.
ARTICLE II
SALE AND TRANSFER OF SERVICING
2.1. SALE DATE. On the Sale Date, Seller shall, as hereinafter
provided, sell, transfer and assign to Purchaser the Servicing.
2.2. SERVICING DUTIES PRIOR TO TRANSFER DATE. All Servicing Income
Rights (with the exception of the right to retain Ancillary Fees collected by
Seller as subservicer during the Interim Subservicing Period or the
Subservicing Period) shall be paid to Purchaser after the Sale Date. During
the Interim Subservicing Period and the Subservicing Period, Seller shall:
(a) Subservice the Mortgage Loans pursuant to the terms of the
Interim Subservicing Agreement or the Subservicing Agreement, as applicable;
(b) Not assign or attempt to assign the responsibilities for
servicing or subservicing the Mortgage Loans prior to the Transfer Date, except
in accordance with the terms of this Agreement, the Interim Subservicing
Agreement and the Subservicing Agreement, and, in the event of any assignment,
Seller's liability for proper servicing of the Mortgage Loans shall continue in
effect;
2.3. SERVICING DUTIES POST TRANSFER. On the Transfer Date,
Purchaser shall assume all Servicer Responsibilities related to the Mortgage
Loans. Purchaser shall make all payments to the Agencies and file with the
Agencies all reports due on or after the Transfer Date. Seller shall make the
first remittance payment to the Agencies due after the Transfer Date, and shall
file with the Agencies all required reports for the month preceding the
Transfer Date. Before such remittance date, Purchaser shall remit to Seller,
in readily available funds and from the minimum cash transferred to Purchaser
per Section 7.5, the amount owed to the Agencies so that Seller can make such
first remittance payment.
2.4. ACTIONS REQUIRED PRIOR TO THE TRANSFER DATE.
(a) At least 20 days prior to the Transfer Date, Seller shall resolve
any outstanding Agency repurchase request, and shall repurchase from the
appropriate pools, Mortgage Loans, and the related Servicing, having defects,
if any. With the written approval of Purchaser, which approval shall not be
unreasonably withheld, Seller may resolve outstanding agency repurchase
requests as required by this Section 2.4(a) after such referenced date, but
before the Transfer Date.
(b) No later than ninety (90) calendar days after the Approval Date,
Seller shall assign to Purchaser, or its designee, by appropriate endorsements
and assignments (including UCC-3 notifications in reference to cooperative
loans), all of Seller's right, title and interest in and to the Servicing, and
the pools, Notes and Mortgages related to the Servicing, as required by
-7-
<PAGE> 8
applicable law and Agency Requirements; provided however that all Note
endorsements to Purchaser shall be completed on or before the Approval Date.
Seller shall record such assignments, when required pursuant to Agency
Requirements and applicable law. Within ninety (90) calendar days after the
Approval Date, Seller shall provide Purchaser with: (i) certified copies of
such executed assignments for all FHLMC loans; (ii) proof of payment of
recording fees; and (iii) a certification that such assignments (and UCC-3s)
have been sent for recording. In addition, Seller, or Seller's agent, shall
maintain a permanent database, which can, as of the Transfer Date, be
transferred to Purchaser. Seller shall also prepare assignments of Mortgages
from Purchaser to the Agency in blank, as may be required, and then send the
assignments of Mortgages to Purchaser's custodian for filing.
In connection with Mortgage Loans where Seller does not record an
assignment of Mortgage from Seller to Purchaser, where required by Agency
Requirements or applicable law, Seller shall provide an opinion of counsel
opining as to the fact that recording is not necessary in order to properly
transfer the Servicing associated with the Mortgage Loan. In addition, whether
or not required by Agency Requirements or applicable law, Seller shall provide
any such opinions currently in Seller's possession.
In addition, Seller shall deliver such other appropriately executed
and authenticated instruments of sale, assignment, transfer and conveyance to
Purchaser or its designee, including limited powers of attorney, as described
on Exhibit D, as Purchaser or its counsel may reasonably request in order to
accomplish the transfer to Purchaser of all of Seller's rights related to the
Servicing. Such instruments provided by Seller shall be in accordance with
Agency and industry standards.
Purchaser shall grant to Subservicer limited corporate authority to
allow Subservicer to execute satisfactions and bankruptcy and foreclosure
documentation on Purchaser's behalf.
(c) No later than the Approval Date, Seller shall have obtained, and
provided to Purchaser sufficient evidence of, insurance protecting Purchaser
against any losses occurring to any of the Custodian Legal Files prior to their
delivery to Purchaser, and Seller shall cause its document custodian to deliver
to Purchaser's document custodian a complete Custodian Legal File for each
Mortgage Loan as specified in Exhibits H through K.
(d) Seller will pay all costs associated with transporting and
documenting Mortgage Loans, in accordance with the reasonable requirements set
by Purchaser and the Agency to a document custodian of Purchaser's choice. The
costs imposed by Purchaser's custodian for final certifying or recertifying
pools or Mortgage Loans will be paid by Seller. Purchaser's custodian shall
complete its review of the delivered documentation on or before a date one
hundred twenty (120) days after the Approval Date.
2.5. AGENCY APPROVALS. Processing of the request for any
required Agency or participant approval shall take place as follows:
(a) At Seller's expense, Seller shall be responsible for obtaining
any required Agency or participant written approvals of the transfer of
Servicing, no later than the Approval Date
-8-
<PAGE> 9
(with the exception of the approval of GNMA as to the Mortgage Loans contained
within the Uncertified Pools, which approval shall be obtained as soon as
possible thereafter).
(b) Seller shall prepare all forms, documents and other information
requested by an Agency or participant in connection with the transfer of the
Servicing and shall submit such forms, documents and other information no later
than a date sixty (60) days after the Sale Date (with the exception of forms,
documentation and information in connection with the approval of GNMA as to the
Mortgage Loans contained within the Uncertified Pools, which forms,
documentation and information will be submitted as soon as possible
thereafter).
2.6. COOPERATION. To the extent reasonably possible, the parties
hereto shall cooperate with and assist each other, as requested, in carrying
out the other's covenants, agreements, duties and responsibilities under this
Sale Agreement and in connection herewith shall execute and deliver all such
documents and instruments as shall be necessary and appropriate in the
furtherance thereof.
ARTICLE III
CONSIDERATION
3.1. PURCHASE PRICE.
(a) In full consideration for the sale of the Servicing upon the
terms and conditions of this Sale Agreement, Purchaser shall pay to Seller the
purchase price calculated as follows: One and Six Hundred and Ten Thousandths
percent (1.610%) (the "Purchase Price Percentage") of the aggregate unpaid
principal balance of all Mortgage Loans as of the Sale Date, excluding
Non-Eligible Mortgage Loans (the "Purchase Price"), and minus the amounts to be
withheld by Purchaser from the Purchase Price pursuant to Section 3.3 of this
Sale Agreement.
(b) It is understood and agreed that if the Purchase Price or
Shortfall Interest or Advance netting shall be found, within one hundred twenty
(120) days after the final Payment Date, to be incorrectly computed, the
Purchase Price shall be promptly and appropriately adjusted, and payment shall
be promptly made by the appropriate party.
(c) It is understood and agreed that if the Advances reimbursed to
Seller by Purchaser pursuant to Section 3.4 shall be found to be
nonreimbursable by the applicable Agency, insurer (FHA, VA or private mortgage
carrier as applicable), taxing authority or the Borrowers, or to have been
incorrectly computed, there shall be an appropriate adjustment, and any payment
due as a result of such adjustment shall be promptly made by the appropriate
party. With reference to any individual Mortgage Loan, in considering whether
or not an Advance has been reimbursed, Purchaser shall consider that any
reimbursement of a particular type of fee or expense shall be credited first
against the amount outstanding for the longest period of time, unless there is
evidence that such outstanding amount is disputed by a party.
-9-
<PAGE> 10
3.2. PAYMENT. The Purchase Price shall be paid by Purchaser to
Seller by wire transfer of immediately available funds, in accordance with the
Seller's wiring instructions set forth in Section 3.2(e), as follows:
(a) Thirty Percent (30%) of the estimated Purchase Price will be paid
on the Sale Date.
(b) Ninety Percent (90%) of the Purchase Price (including the amount
paid in accordance with Section 3.2(a)), will be paid within five (5) Business
Days after the Approval Date.
(c) Ninety-Five Percent (95%) of the Purchase Price (including the
amount paid according to Sections 3.2(a) and 3.2(b)), will be paid on the
Payment Date. Interest on the unpaid Purchase Price from the Sale Date to the
Payment Date will be paid to Seller at the 30-day LIBOR rate. In the event the
actual Purchase Price is different from the estimated Purchase Price, an
adjustment shall be made in favor of the appropriate party.
(d) Five Percent (5%) of the Purchase Price will be withheld (the
"Document Holdback") until receipt by Purchaser of all Required Documentation.
Such Document Holdback will be released as follows:
(i) Fifteen Percent (15%) of the Document Holdback will
be released when Purchaser has received: (1) all Required
Documentation (original or Agency approved and in legally sufficient
form), with the exception of recorded assignments from Seller to
Purchaser (or Purchaser's designee), on 75% of the Mortgage Loans; and
substantially all Required Documentation, on the remaining 25% of the
Mortgage Loans; (2) copies of 75% of all assignments from Seller to
Purchaser sent for recording, or a database satisfactory to Purchaser
of information used to prepare assignments in recordable form; (3) all
assignments from Purchaser to FNMA, FHLMC and GNMA in executable form;
and (4) evidence, in the form of machine readable assignment vendor
database updates disclosing loan number, date sent for recording,
state and county, and summary reports, that 75% of all assignments
from Seller to Purchaser have been sent for recording.
(ii) An additional thirty percent (30%) of the Document
Holdback will be released when Purchaser has received seventy-five
percent (75%) of the recorded assignments (or Agency approved, legally
sufficient replacements) from Seller to Purchaser (or Purchaser's
designee).
(iii) The remainder of the Document Holdback, with the
exception of One Million Dollars ($1,000,000), will be released
prorata monthly, in proportion to the number of Mortgage Loans
completed, as the Purchaser receives the remaining recorded
assignments and other Required Documentation from Seller to Purchaser.
The remaining One Million Dollars ($1,000,000) of the Document
Holdback will be released upon receipt by Purchaser of all Required
Documentation, including recorded assignments and the final
certification and/or recertification of all Mortgage Loans. Seller
shall have the option of either recreating missing or defective
documents in
-10-
<PAGE> 11
Agency approved and legally sufficient form, or repurchasing the
Mortgage Loans which are the subject of missing defective
documentation.
(e) The wiring instructions of the Seller and Purchaser are as
follows:
(i) Seller's Wiring Instructions:
First National Bank of Chicago, Chicago, IL
Account No.: 19-19210
Account Name: S.O.M.S.C. Cash and Collateral Account
ABA No.: 071000013
(ii) Purchaser's Wiring Instructions:
Banc One
Columbus, Ohio
ABA No. 044000037
Credit Account No. 980116070
For: Chase Manhattan Mortgage Corporation
Attention: Ed Reik 614-842-7210
3.3. PURCHASE PRICE ADJUSTMENT FOR MORTGAGE PAYOFFS. Purchaser
shall not be obligated to purchase the Servicing for any Mortgage Loan that is
paid off as of the Sale Date, or pays off within sixty (60) days after the Sale
Date. In the event any Mortgage Loan, the principal of which was included in
the calculation of the Purchase Price, is paid off within sixty (60) days after
the Sale Date, upon notice of such event from Purchaser, Seller shall, within
seven (7) calendar days of such notice, remit to Purchaser the Servicing
Repurchase Price applicable to such Mortgage Loan. Subservicer shall provide a
report of the Mortgage Loans which have paid off within such sixty (60) day
period to Purchaser within sixty seven (67) calendar days after the Sale Date.
3.4. PAYMENT FOR ADVANCES. On the Sale Date, Purchaser shall pay
Seller an amount equal to the sum of all Advances for all Mortgage Loans, which
Advances are reimbursable pursuant to Agency guidelines and/or the applicable
Servicing Agreement and prudent mortgage banking practices.
3.5. PAYMENT FOR BI-WEEKLY MORTGAGE LOANS. In connection with each
Bi-Weekly Mortgage Loan that transfers to Purchaser on the Transfer Date:
(i) Seller shall, on the Transfer Date, pay Purchaser an
amount equal to sixty dollars ($60.00);
(ii) Purchaser shall pay any sum required to be paid for the
post Transfer Date administration of the bi-weekly payment
feature of any Bi-Weekly Mortgage Loan that transfers to
Purchaser on the Transfer Date (including any cancellation
fees due Borrowers as a result of transfer or modification of
the Bi-Saver
-11-
<PAGE> 12
Program), but excepting therefrom any sums resulting from
administration of the biweekly payment feature of any such
Bi-Weekly Mortgage Loan on or before the Transfer Date; and
(iii) Purchaser shall pay any sum required to be paid to any
bi-weekly payment processing or marketing vendor employed by
Purchaser for the set-up or performance of any payment
processing or marketing functions in connection with the
bi-weekly payment feature.
ARTICLE IV
GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER
As an inducement to Purchaser to enter into this Sale Agreement,
Seller represents and warrants that the following are true as of the execution
of this Sale Agreement and further represents and warrants that the following
will continue to be true through and including the final Transfer Date, unless
another date is specified:
4.1. DUE INCORPORATION AND GOOD STANDING. Seller is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction during the time of its activities with respect to the Mortgage
Loans and the Servicing. Seller is properly licensed, qualified and in good
standing to transact business in all appropriate jurisdictions and to conduct
all activities performed with respect to origination and servicing of the
Mortgage Loans.
4.2. AUTHORITY AND CAPACITY. Seller has all requisite corporate
power, authority and capacity to enter into this Sale Agreement and to perform
the obligations required of it hereunder. The execution and delivery of this
Sale Agreement, and the consummation of the transactions contemplated hereby,
have each been duly and validly authorized by all necessary corporate action.
This Sale Agreement constitutes a valid and legally binding agreement of Seller
enforceable in accordance with its terms except as such enforceability may be
limited by bankruptcy, insolvency and similar laws and equitable principles
affecting the enforceability of the rights of creditors generally.
4.3. EFFECTIVE AGREEMENT. The execution, delivery and performance
of this Sale Agreement by Seller, its compliance with the terms hereof and
consummation of the transactions contemplated hereby (assuming receipt of the
approvals required pursuant to this Sale Agreement) will not violate, conflict
with, result in a breach of, constitute a default under, be prohibited by or
require any additional approval under its charter, bylaws, or any instrument or
agreement to which it is a party or by which it is bound or which affects the
Servicing, including but not limited to the Servicing Agreements, or any state
or federal law, rule, or regulation or any judicial or administrative decree,
order, ruling or regulation applicable to it or to the Servicing.
4.4. COMPLIANCE WITH CONTRACTS AND REGULATIONS. Seller has
complied with all material obligations under all contracts to which it is or
was a party, and with all applicable
-12-
<PAGE> 13
federal, state and local laws and regulations with respect to and which affect
any of the Servicing being purchased by Purchaser hereunder, including the
origination of the Mortgage Loans. The laws and regulations which Seller has
complied with include but are not limited to all applicable Agency
Requirements. Seller has done, and will do, no act or thing which will
materially adversely affect the Servicing or the Mortgage Loans.
4.5. TITLE TO THE SERVICING AND RELATED ESCROW ACCOUNTS. As of the
Sale Date, and through and including the Approval Date, Seller is and shall
remain the custodian of the related escrow accounts. As of the Sale Date, the
Seller is the lawful owner of the Servicing, has the sole right and authority,
subject to Agency approval, to transfer the Servicing as contemplated hereby,
and is not contractually obligated to sell the Servicing to any other party.
The transfer, assignment and delivery of the Servicing in accordance with the
terms and conditions of this Sale Agreement shall vest in Purchaser all rights
as servicer free and clear of any and all claims, charges, defenses, offsets
and encumbrances, except for those of the Agency, including but not limited to
those of Seller. Neither Seller nor any other servicer of the Mortgage Loans
has entered into a settlement agreement with any party or with any state
attorney general relative to the handling or administration of tax and
insurance escrows, except as has been disclosed to Purchaser in writing.
4.6. RELATED ESCROW ACCOUNT MAINTENANCE. All related escrow
accounts are being maintained in accordance with applicable law and Agency
Requirements, and in accordance with the Servicing Agreements and the terms of
the Mortgages related thereto. Except as to payments which are past due under
the Notes, all escrow balances required by the Mortgages and paid to Seller for
the account of the Borrowers and Seller are on deposit in the appropriate
escrow/impound accounts. All funds received by the Seller in connection with
the Mortgage Loans, including, without limitation, foreclosure proceeds, hazard
insurance proceeds, condemnation proceeds and principal reductions, have
promptly been deposited in the appropriate account, and all such funds have
been applied to reduce the principal balance of the Mortgage Loans in question,
or for reimbursement or repairs to the Mortgaged Property or as otherwise
required by applicable law and the Agency Requirements. There are no pledged
accounts in lieu of escrow deposits.
4.7. LITIGATION; COMPLIANCE WITH LAWS. As of the Sale Date, and
through and including the Approval Date, there is and shall be no litigation,
proceeding or governmental investigation existing or pending or to the
knowledge of Seller threatened, or any order, injunction, decree or settlement
agreement outstanding against or relating to Seller or the Servicing or
Mortgage Loans, which may have a material adverse effect upon the business,
operations, assets or financial condition of Seller or which may draw into
question the validity of this Sale Agreement or which may impair the ability of
Seller to perform its obligations under this Sale Agreement, nor does Seller
know of any basis for any such litigation, proceeding or governmental
investigation. As of the Sale Date, and through and including the Approval
Date, Seller has not violated and will not violate any applicable law,
regulation, ordinance, order, injunction, decree or settlement agreement, nor
any other requirement of any governmental body or court, which may materially
affect any of the Mortgage Loans or the Servicing. For purposes of this
Section 4.7, "litigation" shall include a suit for damages alone and shall not
require that a specific performance remedy or injunction impacting the transfer
of the Servicing be pending.
-13-
<PAGE> 14
4.8. ABILITY TO PERFORM. Seller does not believe, nor does it have
any reason or cause to believe, that it cannot perform each and every covenant
contained in this Sale Agreement nor does Seller have any actual knowledge of
any intent on the part of any Agency not to consent to the transfers
contemplated hereby.
4.9. STATEMENTS MADE. As of the Sale Date, no representation,
warranty or written statement made by Seller, in connection with this Sale
Agreement, or any exhibit, schedule, data tape, statement or certificate
furnished to Purchaser by Seller or Seller's broker, Cohane Rafferty
Securities, Inc., in connection with the transactions contemplated hereby by
Seller contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading.
4.10. INSOLVENCY. Seller has not (i) admitted in writing its
inability to pay its debts generally as they become due, (ii) filed a petition
to take advantage of any applicable insolvency or reorganization statute, (iii)
made an assignment for the benefit of its creditors or (iv) voluntarily
suspended payment of any of its obligations.
4.11. NO ACCRUED LIABILITIES. As of the Sale Date, there are no
accrued liabilities of Seller with respect to the Mortgage Loans or the
Servicing or circumstances under which such accrued liabilities will arise
against Purchaser as successor to the Servicing, with respect to occurrences
prior to the Sale Date.
4.12. AGENCY REQUIREMENTS. Seller has performed all material
obligations to be performed under Agency Requirements, and no event has
occurred and is continuing which, but for the passage of time or the giving of
notice or both, would constitute an event of default thereunder. The Mortgage
Loans have been underwritten, originated, sold and serviced, and complete and
accurate books and records have been kept and maintained in connection
therewith, all in accordance with Agency Requirements and generally accepted
accounting principles. Seller is an approved seller/servicer/issuer in good
standing with FNMA, FHLMC and GNMA.
4.13. AUDITS. Seller has not, as of the Sale Date, been the subject
of allegations of material failure to comply with applicable loan origination,
servicing or claims procedures, in its most recent Agency or PMI policy
provider audits (if any) nor have any such audits resulted in a request for
repurchase of Mortgage Loans or indemnification in connection with the Mortgage
Loans, other than has been disclosed to Purchaser. Such disclosure shall not
affect any rights or remedies which Purchaser may have against Seller as a
result of an Agency repurchase demand or any indemnity or other remedy of
Purchaser hereunder.
4.14. COMPLIANCE WITH INSURANCE CONTRACTS. Seller has complied with
all material obligations under all applicable insurance contracts, including
hazard, flood and private mortgage insurance contracts, with respect to, and
which affect any of the Servicing. Seller has not taken any action or failed
to take any action which might cause the cancellation of or otherwise affect
any of the insurance contracts, other than cancellation of PMI policies in
compliance with Agency Requirements.
-14-
<PAGE> 15
4.15. ACCURACY OF SERVICING INFORMATION. As of the Sale Date, the
information provided by Seller to Purchaser is true and correct, in all
material respects.
4.16. ERRORS AND OMISSIONS POLICY. Seller has in full force and
effect an adequate errors and omissions policy or policies satisfying all
Agency Requirements with respect to its servicing operations and a standard
mortgage bankers blanket bond.
4.17. FINANCIAL CONDITION OF SELLER/REGULATORY APPROVAL. Seller is
not in receivership, conservatorship or bankruptcy, nor are any of its
subsidiaries or affiliates. Seller is not operating pursuant to any
restrictive operating agreement or order mandated by the OTS, the FDIC or any
federal or state regulatory body.
Except for Agency approval, the approval of OTS, FDIC or any other
federal or state regulatory body having jurisdiction over Seller is not
necessary for Seller's execution and consummation of this Sale Agreement or, if
necessary, timely approval, reasonably acceptable to Purchaser, including any
approval or filing required of Purchaser or Seller pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act, shall be obtained by Seller, at
its expense but with the assistance of Purchaser, and written evidence of same
shall be provided to Purchaser by Seller on or before the Approval Date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES AS TO MORTGAGE LOANS
As further inducement to Purchaser to enter into this Sale Agreement,
Seller represents and warrants to Purchaser, with respect to each Mortgage
Loan, that the following are true as of the execution of this Sale Agreement
and further represents and warrants that the following will continue to be true
through and including the final Transfer Date, unless another date is
specified:
5.1. MORTGAGE DOCUMENTS. With respect to each Mortgage Loan, the
Seller has in its possession all Required Documents or any miscellaneous items
(except for those Required Documents disclosed to Purchaser by Seller as
outstanding). All Required Documents and miscellaneous items shall be
delivered to Purchaser or its custodian within the time frames set forth in
this Agreement. The Mortgage, the Note, and each of the other documents
executed in conjunction therewith are genuine, were duly executed by a Borrower
of legal capacity, and all loan documents have been correctly completed and are
valid and legally binding documents. Neither the operation of any of the terms
of any Mortgage or Note, nor the exercise of any right thereunder, will render
the Mortgage or Note unenforceable, in whole or in part, or subject to any
right of rescission, setoff, counterclaim or defense, and no such right of
rescission, setoff, counterclaim or defense has been asserted with respect
thereto.
5.2. VALIDITY/PROVISIONS. The security interest granted by the
Borrower in the Mortgaged Property is a valid first lien. Seller has no
knowledge of any facts which would impair the validity or value of the Note,
the Mortgage, any other loan document or the
-15-
<PAGE> 16
Mortgaged Property. The Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder thereof
adequate for the realization against the Mortgaged Property of the material
benefits of the security provided thereby, including (i) in the case of a
Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise
by judicial foreclosure. Except as may be permitted by Agency Requirements or
related to bankruptcy and other similar laws affecting creditors' rights, there
is no homestead or other exemption available to a Borrower that would interfere
with the right to sell the Mortgaged Property by trustee's sale or the right to
foreclose the Mortgage.
5.3. NO DEFAULTS. As of the Sale Date, all payments required to be
made up to and including the Sale Date for each Mortgage Loan under the terms
of the related Note have been made, except as otherwise disclosed on the
Mortgage Loan Schedule, and there are no other defaults in complying with the
terms of the Mortgages. As of the Sale Date, no event which, with the passage
of time or with notice and the expiration of any grace or cure period, would
constitute a default, breach, violation or event of acceleration under a
Mortgage Loan has occurred, and neither the Seller nor its predecessors have
waived any default, breach, violation or event of acceleration. Other than
with respect to Advances, the Seller has not advanced funds, nor has the Seller
induced, solicited or knowingly received any advance of funds from a party
other than the Borrower, directly or indirectly, for the payment of any amount
required by the Mortgage Loan.
5.4. COMPLIANCE WITH LAW. Each Mortgage Loan transaction complies
in all material respects with each of the federal or state laws or regulations
and Agency Requirements which pertain to the origination, closing, sale and
servicing of the Mortgage Loan.
5.5. MORTGAGE MODIFICATION. As of the Sale Date, the terms of each
Mortgage have not been modified, no party thereto has been released in whole or
in part, and no part of the Mortgaged Property has been released, except as was
approved by the applicable Agency, or was allowed by Agency Requirements. As
of the Sale Date, the full original principal amount of each Mortgage has been
advanced as provided for in the Mortgage Loan documents, and there is no
requirement for any future advances.
5.6.PAYMENT TERMS. Except as otherwise disclosed in writing to
Purchaser, there is no provision for negative amortization within any Mortgage
Note with respect to any Mortgage Loan. To the best of Seller's knowledge,
each Mortgage Note is payable in monthly installments of principal and
interest, sufficient to amortize the Mortgage Loan fully by the maturity date
stated in the Note, over a remaining term of not more than thirty years, within
a tolerance of one hundred dollars ($100). Purchaser shall be entitled to the
remedies set out in this Sale Agreement for breach of representation or
warranty as if the forgoing representation and warranty shall have been given
without any reference to a tolerance. Interest on each Mortgage Loan is
calculated and payable in arrears.
5.7. LOANS AS DESCRIBED. As of the Sale Date, the information set
forth in the Mortgage Loan Schedule is complete, true and correct, and the
Servicing conforms to the description in Exhibit A. Except as identified in
the Mortgage Loan Schedule, none of the Mortgage Loans are VA vendee loans. As
of the Sale Date, none of the Mortgage Loans are
-16-
<PAGE> 17
the subject of nonstandard escrow arrangements. Except as set forth on the
Mortgage Loan Schedule none of the Mortgage Loans will contain provisions for
graduated payment mortgages, shared appreciation or contingent interest
features, or interest rate buydowns wherein monthly payments are paid or
partially paid with funds deposited in a separate account established by the
Seller, the Borrower or anyone on behalf of the Borrower, or paid by any source
other than the Borrower. Any Mortgage Loan identified as a buydown loan on the
Mortgage Loan Schedule is subject to a buydown agreement which complies with
the provisions of the applicable Agency Requirements and such buydown account
is fully funded. Except as set forth in Exhibit A, FNMA MBS Servicing operates
under standard FNMA MBS remittance procedures as set forth in the FNMA
Seller/Servicer Guide, and is not FNMA Express or RPM. Except as set forth in
Exhibit A, FHLMC ARC Servicing operates under standard FHLMC ARC remittance
procedures as set forth in the FHLMC Seller/Servicer Guide, and is not FHLMC
Super ARC.
5.8. USURY. As of the Sale Date, each Mortgage Loan meets, or is
exempt from, applicable state or federal laws, regulations and other
requirements pertaining to usury.
5.9. AGENCY LOAN COMMITMENT PROVISIONS. Each of the Agency Loan
Commitments delivered to the Purchaser represents an executed original or is a
certified (by Seller) true and correct copy of the original and in either case
represents true and correct copies of the same. Each of the Agency Loan
Commitments was in full force and effect during the term of such Agency Loan
Commitments. To the best of Seller's knowledge, none of the Agency Loan
Commitments provide for indemnification for losses (i.e. recourse servicing),
including repurchase obligations. Purchaser, and any future successor or
assignee of Purchaser, is and shall be, able to take full advantage of the
benefits of any waivers affecting any Mortgage Loan for so long as such
Mortgage Loan is outstanding.
5.10. NON-RECOURSE SERVICING. None of the Servicing is subject to
recourse against the servicer for losses in connection with the liquidation of
a Mortgage Loan, borrower defaults or repurchase obligations upon the
occurrence of nonpayment or other events, except as disclosed on the Mortgage
Loan Schedule.
5.11. POOLS. The Mortgage Loan Schedule sets forth a true and
complete list of all pools. Each Mortgage Loan included in a pool meets all
eligibility requirements for inclusion in such pool, in accordance with all
Agency Requirements. All of the pools have been, or will as of the Transfer
Date, be, finally and properly certified or recertified in accordance with
Agency Requirements. The Servicing in respect of each Pool is, or will as of
the Transfer Date, be, eligible under Agency Requirements to be transferred to
the Purchaser. No Mortgage Loan has been bought out of a Pool without prior
written approval of the applicable Agency to the extent required. The Mortgage
Loan File to be delivered to the Purchaser will include all documents necessary
in order for the appropriate custodian to certify and/or recertify the pools in
accordance with Agency Requirements, except for those documents disclosed to
Purchaser by Seller as outstanding, which documents shall be delivered to
Purchaser or its custodian within the time frames set forth in this Agreement.
With regard to the pools, the principal balance outstanding and owing on the
Mortgage Loans in each pool is equal to or exceeds the amounts owing to the
security holders of each pool. There is no pool insurance for the Mortgage
Loans.
-17-
<PAGE> 18
5.12. EFFECTIVE INSURANCE. All required insurance policies, of
whatever type, remain in full force and effect. The Seller has not engaged in,
and has no knowledge of the mortgagor's having engaged in, any act or omission
which would impair the coverage validity or binding effect of any such
policies. There is in force with respect to each Mortgage Loan, as required by
the applicable Agency, a hazard insurance policy that provides, at a minimum,
for fire, windstorm, earthquake and extended coverage in an amount not less
than the outstanding principal balance of the Mortgage Loan or the full
insurable value of improvements, whichever is less. If required by the Flood
Disaster Protection Act, each Mortgage Loan is covered by a flood insurance
policy in an amount not less than the lesser of (i) the outstanding principal
balance of the applicable Mortgage Loan or (ii) the maximum amount of insurance
that is available under such Act. All individual insurance policies contain a
standard mortgagee clause naming the Seller or the applicable Agency, and its
successors and assigns, as mortgagee, and all premiums due and payable thereon
have been paid. The Mortgage obligates the mortgagor thereunder to maintain
hazard and/or flood insurance policies at the mortgagor's cost and expense, and
on the mortgagor's failure to do so, authorizes the holder of the Mortgage to
obtain and maintain such insurance at such mortgagor's cost and expense, and to
seek reimbursement therefor from the mortgagor, if reimbursement is permitted
under applicable law, Agency Requirements and the Mortgage Loan documents.
5.13. PAYMENT OF TAXES, INSURANCE PREMIUMS, ETC. All applicable
taxes, special assessments and ground rents (i) have been paid prior to any
"economic loss" dates or discount dates (or if payments were made after any
"economic loss" date or discount date, then Seller has paid any penalty or
reimbursed any discount out of Seller's corporate funds) and (ii) will continue
to be paid as set forth in (i), if due within thirty (30) days after the
Transfer Date, if Seller, or its tax service provider, has received notice that
such payment is due at least five (5) Business Days prior to the Transfer Date.
All flood and hazard insurance premiums and mortgage insurance premiums (i)
which are due, have been paid without loss or penalty to the Borrower and (ii)
will continue to be paid without loss or penalty to the Borrower, and if due
within thirty (30) days after the Transfer Date and notice of such payment has
been received at least five (5) Business Days prior to the Transfer Date will
be paid prior to the Transfer Date, except as noted in Section 7.28. All
Mortgage Loans required to carry escrows under applicable law, Agency
Requirements or the Mortgage Loan documents, provide for tax and insurance
escrows. All Mortgage Loans for which Seller has advanced funds for payment of
all or part of the escrowed items have established escrows in amounts
sufficient to reimburse such advances, if not prohibited by applicable law.
5.14. PRIVATE MORTGAGE INSURANCE CONTRACTS. All Mortgage Loans
required to have private mortgage insurance shall have current, transferrable,
private mortgage insurance policies, the provisions of which have been and are
being complied with. Such private mortgage insurance policies are in full
force and effect, comply with applicable law and regulation, and any policy
premiums due have been paid without loss or penalty to the Borrower. Except as
disclosed by Seller in writing to Purchaser, there are no Mortgage Loans for
which Seller funds the premium. Except as disclosed by Seller in writing to
Purchaser, any Mortgage Loan subject to a private mortgage insurance policy
obligates the Borrower thereunder to maintain the policy in full force and
effect and to pay all premiums and charges in connection therewith.
-18-
<PAGE> 19
5.15. TAX SERVICE/FLOOD SERVICE. All of the Mortgage Loans have, or
will have by the Transfer Date, been setup for transferrable, verified,
life-of-loan, tax services by contract with Transamerica. All of the Mortgage
Loans are, or will be by the Transfer Date, setup on transferable, verified,
life-of-loan MapTrak flood tracking services by contract with FDSI.
5.16. TAX IDENTIFICATION. All tax identifications for both
individual mortgagors and the Mortgage Loan pools, have been certified as
required by law and Agency Requirements. Seller has complied with all IRS
requirements regarding the obtainment and solicitation of taxpayer
identification numbers and the taxpayer identification numbers provided to
Purchaser as reflected on the system are correct.
5.17. IRS FORMS. All IRS forms, including, but not limited to, forms
1099, 1099A and 1098, as appropriate, which are required to be filed with
respect to the Servicing for activity occurring on or before year end 1996 have
been filed or will be filed in accordance with applicable law.
5.18. CASUALTY LOSS/CONDEMNATION. As of the Sale Date, there are no
uninsured casualty losses or casualty losses where coinsurance has been, or
Seller has reason to believe will be, claimed by the insurance company or where
the loss, exclusive of contents, is, or will be, greater than the recovery
(less actual costs and expenses incurred in connection with such recovery) from
the insurance carrier. No casualty insurance proceeds have been used to reduce
Mortgage Loan balances or for any other purpose except to make repairs to the
mortgaged premises, except as allowed pursuant to Agency Requirements,
applicable law and the Mortgage Loan documents. All damage with respect to
which casualty insurance proceeds have been received by or through Seller has
been properly repaired or is in the process of being repaired using such
proceeds. As of the Sale Date, there is no damage to the Mortgaged Property
from fire, windstorm, flood, earthquake, other casualty, or any other property
related circumstances or conditions that would adversely affect the value or
marketability of any Mortgage Loan or Mortgaged Property. As of the Sale Date,
there is no proceeding pending or to the best of Seller's knowledge, threatened
for the partial or total condemnation of the Mortgaged Property that would
adversely affect the Mortgage Loan, except as disclosed in writing to
Purchaser.
5.19. INTEREST ON ESCROWS. As of the Sale Date, Seller has credited
to the account of Borrowers under the Mortgage Loans all interest required to
be paid by law or by the terms of the related Note on any escrow/impound
account. Evidence of such credit shall be provided to Purchaser upon request.
5.20. OPTIONAL INSURANCE. All Mortgage Loans for which
mortgage/credit life, accidental death, disability, unemployment, or any
similar insurance is collected as part of the Borrower's monthly payment are
identified in the Mortgage Loan Schedule. Any Mortgage Loan involved with any
type of optional insurance has been properly serviced, including, without
limitation, the proper application and collection of premiums, the maintenance
of complete and accurate records, processing and payment of claims and the
handling of correspondence.
5.21. TITLE INSURANCE. As of the Sale Date, unless waived by the
applicable Agency pursuant to a written waiver, a title policy, an abstract or
an attorney opinion of title, acceptable
-19-
<PAGE> 20
in all respects under applicable Agency Requirements currently in effect, has
been issued for each Mortgage Loan in an amount not less than the original
amount secured by the Mortgage insuring, or opining in the case of an attorney
opinion of title, that the Mortgage relating thereto is a valid first lien on
the Mortgaged Property therein described and that the Mortgaged Property is
free and clear of all encumbrances and liens having priority over the first
lien of the Mortgage, except for liens for real estate taxes and special
assessments not yet due and payable and except for covenants, easements,
restrictions and other matters of public record identified in the title policy
or legal opinion which are reasonably acceptable to the Purchaser and
acceptable to the applicable Agency, and all premiums with respect to each such
policy have been paid.
5.22. CUSTODIAN LEGAL FILES. As of the Approval Date, the Custodian
Legal Files shall be as described in Exhibits H and K. The Custodian Legal
Files contain all intervening assignments required by the applicable Agency.
All pools held by custodians have been, or will by the Transfer Date be,
certified and/or recertified as required by the Agencies.
5.23. ESCROW ANALYSIS. Seller has conducted an escrow analysis for
each escrowed Mortgage Loan in accordance with applicable law and Agency
Requirements. All books and records with respect to each Mortgage Loan comply
with applicable law and regulation and Agency Requirements, and have been
adjusted to reflect the results of the escrow analyses. Except as allowed by
applicable law and Agency Requirements, there is no inflation factor used in
the escrow analysis. Seller has delivered notification to the Borrower(s) under
each Mortgage Loan of all adjustments resulting from such escrow analyses.
5.24. LOCATION AND TYPE OF MORTGAGED PROPERTY. The Mortgaged
Property is located in the state identified in the Mortgage Loan Schedule and
in connection with Mortgage Loans that are not secured by cooperative units,
consists of one or more parcels of real property with a detached single family
residence erected thereon, or a two-to-four family dwelling, or an individual
condominium unit in a condominium project which has received Agency approval,
or an individual unit in a planned unit development, provided, however, that
any condominium project or planned unit development conforms with the
applicable Agency Requirements regarding such dwellings.
5.25. COMPLETION ESCROWS. As of the Sale Date, except as disclosed
in writing by Seller to Purchaser, there are no Mortgage Loans subject to
outstanding completion escrows.
5.26. ADJUSTABLE RATE LOANS. Adjustable rate Mortgage Loans have
been adjusted in accordance with the terms of the Mortgage Loan documents and
Agency Requirements. The conversion features of any adjustable rate Mortgage
Loans which are convertible to fixed rate Mortgage Loans are reasonable and
customary, and upon conversion, are redeliverable to the Agencies. The
Servicing fee for adjustable rate Mortgage Loans, as stated in Exhibit A, is a
minimum fee and shall not be reduced in the event of an interest rate change.
5.27. ELECTRONIC DRAFTING OF PAYMENTS. Concerning Mortgage Loans for
which the Seller drafts monthly payments electronically from the Borrower's
bank account, such drafting
-20-
<PAGE> 21
occurs in compliance with Agency Requirements, and the applicable agreement
with the Borrower.
5.28. NOTICE OF RELIEF REQUESTED PURSUANT TO THE SOLDIERS AND SAILORS
RELIEF ACT OF 1940 OR SIMILAR LAWS. Except as currently active and previously
disclosed in writing by Seller to Purchaser, as of the Sale Date and
periodically thereafter throughout the Interim Subservicing Period and the
Subservicing Period, the Seller has not received notice from any Borrower or
other party with respect to any Mortgage Loan of a request for relief pursuant
to or invoking any of the provisions of the Soldiers and Sailors Civil Relief
Act of 1940 or similar state or federal law suspending payments of amounts due
under the Note or the commencement of foreclosure proceedings.
5.29. REIMBURSEMENT FOR ADVANCES. As of the Sale Date, any monies
paid by Purchaser to Seller representing Advances made by Seller to the
Agencies for payments due them, are either fully recoverable from the Borrowers
or the Agency, and Seller has not by neglect or otherwise prejudiced or
adversely affected the rights of Purchaser to recover such Advances from the
Borrowers and/or the Agencies. Seller has not been reimbursed by the Borrowers
or the Agencies for any such costs or expenses advanced which will be paid to
Seller by Purchaser pursuant to the provisions hereof.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PURCHASER
As an inducement to Seller to enter into this Sale Agreement,
Purchaser represents and warrants that the following are true as of the
execution of this Sale Agreement and further represents and warrants that the
following will continue to be true through and including the Transfer Date:
6.1. DUE INCORPORATION AND GOOD STANDING. Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation. Purchaser is qualified to transact
business in each jurisdiction in which such qualification is necessary, except
where the failure to be so qualified will not have a material adverse effect on
the Seller, the Purchaser or the Servicing.
6.2. AUTHORITY AND CAPACITY. Purchaser has all requisite
corporate power, authority and capacity to enter into this Sale Agreement and
to perform the obligations required of it hereunder. The execution and
delivery of this Sale Agreement and the consummation of the transactions
contemplated hereby have each been duly and validly authorized by all necessary
corporate action. This Sale Agreement constitutes a valid and legally binding
agreement of Purchaser enforceable in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization and similar laws, and by equitable principles, affecting the
enforceability of the rights of creditors.
-21-
<PAGE> 22
6.3. EFFECTIVE AGREEMENT. The execution, delivery and performance of
this Sale Agreement by Purchaser, its compliance with the terms hereof and the
consummation of the transactions contemplated hereby (assuming receipt of the
approvals required pursuant to this Sale Agreement) will not violate, conflict
with, result in a breach of, constitute a default under, be prohibited by or
require any additional approval under the certificate of incorporation, bylaws,
or any instrument or agreement to which it is a party or by which it is bound
or which affects the Servicing, or any state or federal law, rule or regulation
or any judicial or administrative decree, order, ruling or regulation
applicable to it or to the Servicing.
6.4. COMPLIANCE WITH REGULATIONS. After the Transfer Date,
Purchaser shall comply with all material obligations under all contracts to
which it is a party, and with all applicable federal, state and local laws and
regulations, with respect to and which affect any of the Servicing being
purchased by Purchaser hereunder. The laws and regulations which Purchaser
shall comply with include but are not limited to all applicable Agency
Requirements. Purchaser will do no act or thing which will materially
adversely affect the Servicing or the Mortgage Loans.
6.5. GOOD STANDING. Purchaser is a mortgage lender and servicer
in good standing with all appropriate regulatory authorities, including,
without limitation, the Agencies.
6.6. LITIGATION; COMPLIANCE WITH LAWS. As of the Sale Date and
through and including the Approval Date, there is and shall be no litigation,
proceeding or governmental investigation pending, or any order, injunction,
settlement or decree outstanding against or involving Purchaser which
materially adversely affects any of the Servicing. Additionally, as of the
Sale Date and through and including the Approval Date, there is and shall be no
litigation, proceeding or governmental investigation existing or pending or to
the knowledge of Purchaser threatened, or any order, injunction or decree
outstanding against or relating to Purchaser that has not been disclosed by
Purchaser to Seller in writing which could have a material adverse effect upon
the Servicing, nor does Purchaser know of any basis for any such litigation,
proceeding, or governmental investigation. As of the Sale Date and through and
including the Approval Date, Purchaser has not violated and will not violate
any applicable law, regulation, ordinance, order, injunction or decree, or any
other requirement of any governmental body or court, which may materially
adversely affect any of the Servicing. For purposes of this Section 6.6,
"litigation" shall include a suit for damages alone and shall not require that
a specific performance remedy or injunction impacting the transfer of the
Servicing be pending.
-22-
<PAGE> 23
ARTICLE VII
COVENANTS
7.1. NOTICE TO BORROWERS. At Seller's expense, Seller shall mail to
the Borrower of each Mortgage Loan, no later than fifteen (15) days prior to
the Transfer Date, a letter advising the Borrower of the transfer of Servicing
to Purchaser; provided, however, the content, format and timing of the letter
shall be mutually agreed upon by Purchaser and Seller and shall comply with
applicable law. Seller shall provide Purchaser with a copy of a sample notice
at least five (5) Business Days before the mailing of same; and once notices
are mailed, an officer's certification that all notices have been sent as
required.
7.2. NOTICE TO TAXING AUTHORITIES AND INSURANCE COMPANIES. No
later than a date ten (10) days prior to the Transfer Date, at Seller's
expense, Seller shall transmit to the applicable taxing authorities (notice to
such taxing authorities may be accomplished by notice to Seller's current tax
service provider) and (mortgage/hazard/flood) insurance companies and/or
agents, notification of the assignment of the Servicing to Purchaser and
instructions to deliver all notices, tax bills and insurance statements, as the
case may be, to Purchaser from and after the Transfer Date. For all such
notices not accomplished by tape transmission, Seller shall provide Purchaser
with a copy of a sample notice and an officer's certification that all notices
have been sent as required. On the Transfer Date, Seller shall provide
Purchaser with a list of all applicable taxes, assessments and ground rents to
be paid within ninety (90) days after the Transfer Date.
7.3. DELIVERY OF LOAN DOCUMENTS. No later than five (5) Business
Days after the Transfer Date, Seller shall deliver to Purchaser, the Servicing
Files and miscellaneous servicing lists listed in Exhibits H through K;
provided, however, Purchaser and Seller may agree on a staggered delivery
timetable which commences on an earlier date. Files will be boxed, labelled,
inventoried and shipped in accordance with Purchaser's reasonable instructions.
7.4. DELIVERY OF SERVICING RECORDS. No later than five (5)
Business Days after the Transfer Date, Seller shall forward to Purchaser all
servicing records outlined in Exhibit L in accordance with the procedures
described in Exhibit L.
7.5. ESCROW/IMPOUND BALANCES/UNREMITTED PRINCIPAL AND INTEREST.
No later than five (5) Business Days after the Approval Date, Seller shall
provide Purchaser with immediately available funds in the amount of the
Escrow/Impound Funds associated with the Mortgage Loans. No later than five
(5) Business Days after the Approval Date and again no later than five (5)
Business Days after the Transfer Date, Seller shall provide Purchaser with an
accounting statement of the Escrow/Impound Funds sufficient to enable Purchaser
to reconcile same with the accounts of the Mortgage Loans. Additionally, no
later than five (5) Business Days after the Approval Date, Seller shall provide
Purchaser with immediately available funds in the amount of the minimum cash
per Paragraph 7.10.
No later than five (5) Business Days after the Approval Date, Seller
shall provide Purchaser with immediately available funds in the amount of the
unremitted principal and interest
-23-
<PAGE> 24
associated with the Mortgage Loans which has not been deposited into
Purchaser's custodial accounts. No later than five (5) Business Days after the
Approval Date and again no later than five (5) Business Days after the Transfer
Date, Seller shall provide Purchaser with an accounting statement of the
unremitted principal and interest sufficient to enable Purchaser to reconcile
same with the accounts of the Mortgage Loans.
7.6. MORTGAGE LOAN PAYMENTS RECEIVED PRIOR TO TRANSFER DATE.
Prior to the Transfer Date, all payments received by Seller on each Mortgage
Loan shall be properly applied by Seller to the account of the particular
Borrower.
7.7. MORTGAGE LOAN PAYMENTS RECEIVED AFTER TRANSFER DATE. The
amount of any Mortgage Loan payments received by Seller after the Transfer Date
shall be forwarded to Purchaser for a period of sixty (60) days after the
Transfer Date, at Seller's expense by overnight mail within 24 hours of the
date of receipt; provided, however, Seller shall notify Purchaser of the
particulars of the payment, which notification shall be satisfied if Seller
forwards with its payment sufficient information to permit appropriate
processing of the payment by Purchaser. To the extent that after the Transfer
Date, Seller is reimbursed by the Borrowers, or the Agencies for any Advances
for which Purchaser made payment to Seller, then such reimbursement shall be
immediately forwarded to Purchaser.
7.8. MISAPPLIED PAYMENTS. Misapplied payments shall be processed
as follows:
(a) Both parties shall cooperate in correcting misapplication errors.
(b) The party receiving notice of a misapplied payment occurring
prior to the Transfer Date and discovered after the Transfer Date shall
immediately notify the other party.
(c) If a misapplied payment which occurred prior to the Transfer Date
cannot be located by either party and said misapplied payment has resulted in a
shortage in a Mortgage Loan account, Seller shall be liable for the amount of
such shortage. Seller shall reimburse Purchaser for the amount of such
shortage within thirty (30) days after receipt of written demand therefor from
Purchaser.
(d) If a misapplied payment has created an improper Purchase Price as
the result of an inaccurate outstanding principal balance, a check shall be
issued to the party shorted by the improper payment application within ten (10)
Business Days after notice thereof by the other party.
(e) Any check issued under the provisions of this Section 7.8 shall
be accompanied by a statement indicating the purpose of the check, the Borrower
and Mortgaged Property address involved, and the corresponding Seller and/or
Purchaser account number.
7.9. BOOKS AND RECORDS. On the Transfer Date, the books, records and
accounts of Seller with respect to the Mortgage Loans shall be in accordance
with all applicable Agency Requirements, in all material respects (when
considered individually and in the aggregate).
-24-
<PAGE> 25
7.10. MINIMUM CASH RECONCILIATION. Seller shall, on or before the
Payment Date, reconcile control group and pool balances to investor's trial
balances outstanding, principal and interest cash balances to minimum cash
requirements, including any differences created by over/under collateralized
pools. Seller shall document (applicable reports required to verify minimum
cash shall be generated and sent to Purchaser via overnight mail on the fifth
Business Day following the Approval Date, and again on the fifth Business Day
following the Transfer Date), to Purchaser's reasonable satisfaction,
differences to meet the Purchaser's balancing requirements. Any monetary
adjustments made by Seller, allowed by the applicable Agency and necessary to
bring all balances into agreement will be reimbursed by Purchaser to Seller via
overnight mail on the fifth Business Day after each and every payment until
Seller shall be made whole.
7.11. DATA RECONCILIATION. Seller shall forward to Purchaser, via
overnight mail on the second Business Day following the Transfer Date, such
additional reports as are described on Exhibit E to enable Purchaser to
reconcile data conversion from Seller's computer system to Purchaser's computer
system.
7.12. IRS FORMS. Seller shall mail, on or before the date required
by law, all IRS required forms, including form numbers 1099, 1099A or 1098 (as
appropriate) to all parties entitled to receive same for the period from
January 1, 1997, until the Transfer Date. Seller shall provide copies of such
forms to Purchaser upon request and shall reimburse Purchaser for any fines or
penalties incurred by Purchaser due to Seller's failure to comply with this
Section 7.12. Purchaser shall make such IRS filings pertaining to events after
the Transfer Date.
7.13. RETURNED CHECKS. Purchaser shall reimburse Seller within seven
(7) Business Days for all checks for mortgage payments received by the Seller
prior to the Transfer Date and which are returned to Seller, unpaid, on or
after the Transfer Date. Seller shall identify the check, show how the check
was applied to the Borrower's account, and present the returned check to the
Purchaser promptly after receipt.
7.14. INSURANCE POLICIES. After the Transfer Date, Seller shall
deliver such insurance policies or renewals as it may receive to Purchaser
within five (5) Business Days of its receipt of same.
7.15. PAYMENT OF PROPERTY INSURANCE PREMIUMS. Seller shall pay,
prior to the Transfer Date, all property insurance premiums for which it
receives bills five (5) Business Days prior to the Transfer Date that are due
within thirty (30) days after the Transfer Date. Seller shall immediately
deliver to the Purchaser all bills and correspondence related to the Mortgage
Loans and received by it subsequent to the Transfer Date. On the Transfer
Date, Seller shall forward to Purchaser a listing of all Mortgage Loans that
have property insurance premiums due within thirty (30) days after the Transfer
Date and for which Seller did not pay the bills prior to the Transfer Date.
7.16. ESCROW ANALYSIS. Prior to the Transfer Date, Seller shall
perform an escrow analysis as of a date that is not more than twelve (12)
months prior to the Transfer Date, of all Mortgage Loans and bring about any
necessary changes in payment prior to the Transfer Date.
-25-
<PAGE> 26
There will be no inflation factor used in the escrow analysis. Refunds of
escrow overages are to be made in accordance with applicable law and Agency
Requirements. Escrow shortages are to be billed or prorated in the monthly
payment over a period of not more than twelve (12) months (or up to twenty four
(24) months in limited cases). Copies of the escrow analyses by month and in
Mortgage Loan number order, are to be provided to Purchaser within five (5)
Business Days of the Transfer Date on microfilm.
7.17. PROPERTY TAXES. Seller shall cause to be paid prior to the
Transfer Date all tax bills (including interest, late charges, and penalties in
connection therewith) that are issued by a taxing authority and relate to
Mortgaged Property and that are received by Seller, or available to Seller's
tax service provider in states where Seller utilizes a tax service provider,
five (5) Business Days prior to the Transfer Date that are due within thirty
(30) days after the Transfer Date. Seller or, on behalf of Seller, its tax
service provider, shall immediately forward to Purchaser all tax bills received
by Seller after the Transfer Date or received by Seller before the Transfer
Date but which are due more than thirty (30) days after the Transfer Date. The
foregoing shall in no way impose upon Seller an obligation to pay any taxes
(including interest, late charges, and penalties associated therewith) for
which (i) a title insurer has an obligation to pay by virtue of the terms of a
mortgagee policy of title insurance which is issued in connection with the
origination of the subject Mortgage Loans and which insures Purchaser
subsequent to the Transfer Date or (ii) a taxing authority has billed the
mortgagor directly rather than billing the Seller or the tax service provider
directly. On the Transfer Date, Seller shall forward to Purchaser a listing of
all Mortgage Loans that have property taxes due within thirty (30) days after
the Transfer Date and for which Seller did not pay the bills prior to the
Transfer Date.
7.18. SOLICITATION OF MORTGAGES: From and after November 28, 1996,
neither Seller nor any affiliate or agent of Seller shall, during the remaining
term of any of the Mortgage Loans, take any action to personally, by telephone,
by mail or otherwise, directly or indirectly, solicit the prepayment or
modification of the Mortgage Loans, in whole or in part, or offer any Borrower
any other mortgage or non-mortgage related products. Notwithstanding the
foregoing, it is understood and agreed that promotions which are directed to
the general public, including, without limitation, mass mailings based on
commercially acquired mailing lists, newspaper, radio and television
advertisements, shall not constitute solicitations under this paragraph.
7.19. PURCHASE FROM POOLS. Prior to the Approval Date, Seller shall
remove, with respect to the Non-Eligible Mortgage Loans, every Mortgage Loan
for which a sale of the Mortgaged Property has been conducted following
foreclosure, or for which a foreclosure sale has been scheduled.
7.20. AGENCY/REGULATORY APPROVALS. Seller shall, on or before the
Approval Date, obtain any required Agency written approvals, and such approvals
as may be needed from appropriate regulatory bodies, of the transfer of
Servicing from Seller to Purchaser. Seller shall deliver to Purchaser, on or
before such date, documentary proof of the receipt of such approvals. In
addition, on or before the Approval Date, Seller, at its expense, shall obtain
such approvals as may be needed from appropriate regulatory bodies.
-26-
<PAGE> 27
7.21. RECEIPT OF RECORDED DOCUMENTS. Seller shall diligently, but in
no event later than eighteen (18) months following the Sale Date, obtain
original recorded (i) security instruments, (ii) recorded assignments (in
accordance with applicable law and Agency Requirements), and (iii) other
documents of transfer, all of which are required to be delivered pursuant to
this Agreement and which were not previously forwarded to Purchaser or its
custodian. Seller shall forward same to Purchaser, at Seller's expense, and
shall also provide Purchaser with a monthly status report regarding the
outstanding assignments. In connection with Mortgage Loan satisfactions taking
place prior to Purchaser's receipt of such recorded assignments, Seller shall
cooperate with Purchaser in handling satisfactions and hold Purchaser harmless
from expenses and penalties stemming from Purchaser's non-receipt of such
recorded assignments.
7.22. AGENCY LOAN COMMITMENTS. Seller shall have provided to
Purchaser, prior to the Sale Date certified (by Seller) true and correct copies
of Agency Loan Commitments or special Agency or other agreements entered into
by Seller and in Seller's possession, relating to the Servicing, which were
executed or are effective on or after a date five (5) years prior to the Sale
Date. Seller shall also promptly provide to Purchaser any related documents
when requested by Purchaser.
7.23. UCC SECURITY INTEREST. Seller shall provide Purchaser with
evidence, at Seller's expense, that there exists no security interest in the
Servicing given by Seller to a third party, including an Agency, except for
that certain security interest in favor of National City Bank of Kentucky, such
evidence to consist of (i) a UCC search by Seller directly or a reputable third
party vendor which shows to Purchaser's reasonable satisfaction that no such
security interest exists as of the Sale Date, Seller to provide such evidence
no later than the Approval Date, (ii) written acknowledgement that no such
security interest exists from the applicable Agency investors, and (iii) at
the request of Purchaser, an opinion letter of Seller's counsel, dated the
Approval Date, which shall opine to Purchaser's reasonable satisfaction that no
third-party security interest given by the Seller exists in the Servicing,
except as disclosed in this Section 7.23.
In the event that such a security interest is shown to exist per item
(i) above, and in connection with the security interest which exists in favor
of National City Bank of Kentucky, Seller shall immediately provide Purchaser
with such documentation as is required by Purchaser to evidence removal of such
security interest by the Sale Date, including any appropriate security interest
waiver executed by the security holder.
Purchaser agrees to execute, as of the Sale Date, an acknowledgement
of a security interest in Seller's right to receive proceeds under the terms of
this Sale Agreement in favor of National City Bank of Kentucky, in a form
reasonably acceptable to Purchaser and Seller.
7.24. MORTGAGE LOAN MANAGEMENT FEE. On the Payment Date, Seller
shall pay, with respect to any Mortgage Loan that transfers to Purchaser on the
Transfer Date, and on the Sale Date: (i) is delinquent with respect to four
(4) or more monthly installments; or (ii) is a Bankruptcy Loan; or (iii) is a
Foreclosure Loan; or (iv) is a Litigation Loan; and (v) that was not removed
from the mortgage pool; a fee equal to $1,000 for every such Mortgage Loan
-27-
<PAGE> 28
relating to Mortgaged Property outside New York and $1,500 for every such
Mortgage Loan relating to Mortgaged Property inside New York. Such fee shall
compensate Purchaser for its services in managing the default and foreclosure
process, and shall be in addition to any indemnification in favor of Purchaser
as provided for in Section 11.2(k).
7.25. DELIVERY OF ADJUSTABLE RATE DOCUMENTS. Upon Seller's
performance of an interest rate adjustment on an adjustable rate Mortgage loan,
Seller creates a separate file containing copies of loan history, the Note and
any Note riders (the "Tickler File"). Seller shall separately deliver to
Purchaser the Tickler File on or before the Transfer Date. This document
delivery requirement is in addition to the file documentation requirements of
Exhibits G through K.
7.26. DEFAULT MANAGEMENT. With respect to any Loan past due under
the terms of the Note, or in any stage of bankruptcy, litigation or
foreclosure, Seller shall, no earlier than a date fifteen (15) days prior to
the Transfer Date or such earlier date as may be mutually agreed upon by Seller
and Purchaser, provide Purchaser with written notice of all actions required to
be performed by a servicer within thirty (30) days of the Transfer Date, which
are known to Seller, or which should be known to Seller in the performance of
its duties as a servicer under Agency Requirements, and which are required to
assure compliance with any insurer or guarantor requirements. Seller shall
cooperate with and assist Purchaser, as reasonably requested by Purchaser, in
providing information and assistance in connection with the orderly transition
of the default management function from Seller to Purchaser.
7.27. UNCERTIFIED POOLS. Seller shall diligently utilize best
efforts to obtain the approval of GNMA to the transfer of Servicing for the
Mortgage Loans contained within the Uncertified Pools on or before June 20,
1997. If such approval is not obtained on or before June 20, 1997, Seller
shall continue to diligently utilize best efforts to obtain such approval prior
to the GNMA Transfer Date. If such approval is ultimately obtained, in whole
or in part, on or before a date sufficient to allow transfer of the Servicing
on the Uncertified Pools on the GNMA Transfer Date, but after the initial
Approval Date, Seller shall proceed to transfer the Servicing for the Mortgage
Loans contained within such Uncertified Pools to Purchaser pursuant to the
payment provisions and terms of this Sale Agreement, and the date on which such
approval(s) is obtained shall be deemed the "Approval Date" for the Mortgage
Loans contained within the Uncertified Pools.
7.28. FHA INSURANCE PAYMENTS. Within three (3) Business Days of each
Transfer Date, Seller shall provide to Purchaser an electronic tape instructing
Purchaser as to the FHA insurance premium payment status of each FHA insured
Mortgage Loan. In lieu of such tape, Purchaser may, at least five (5) months
prior to each Transfer Date, provide written instruction to Seller as to the
payment of FHA insurance premiums due in the month of transfer. Provided that
Seller follows such written instruction, Seller shall incur no liability for
improper payment of such FHA insurance premiums.
-28-
<PAGE> 29
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATION OF PURCHASER
The obligation of Purchaser to consummate the transaction described in
this Sale Agreement is subject to the material compliance with the following
conditions:
8.1. DOCUMENTATION TO BE DELIVERED. No later than five (5)
Business Days after the Approval Date, Purchaser, or its custodian, shall have
received the Custodial Legal Files required to be delivered hereunder by such
date. Within five (5) Business Days of the Transfer Date, the information
which is described in Exhibits H through K shall have been transferred to
Purchaser as described therein. Within three (3) Business Days of the Transfer
Date, the information which is described in Exhibit L shall have been
transferred to Purchaser as described therein. The books, records and accounts
of Seller with respect to the Mortgage Loans being transferred shall be in
order according to all applicable regulations.
8.2. CORRECTNESS OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by Seller in this Sale Agreement are true
and correct on the date of execution of this Sale Agreement and through and
including the Transfer Date.
8.3. COMPLIANCE WITH CONDITIONS. All of the terms, covenants and
conditions of this Sale Agreement required to be complied with and performed by
Seller shall have been duly complied with and performed.
8.4. CORPORATE CERTIFICATE. By the Sale Date, Purchaser shall
have received from Seller a certified copy of its corporate resolution
approving the execution and delivery of this Sale Agreement and the
consummation of the transactions contemplated hereby, together with such other
certificates of incumbency and other evidences of corporate authority as
Purchaser or its counsel may reasonably request, and a current certificate of
good standing from Seller's state of incorporation.
8.5. AGENCY/REGULATORY APPROVAL. No later than the Approval Date,
Seller shall have obtained the approval of the Agencies and every other
governmental agency or regulatory authority having jurisdiction with respect to
the Mortgage Loans to the transfer and sale of the Servicing from the Seller to
the Purchaser in accordance with the terms of this Sale Agreement including any
approval required under the Hart- Scott-Rodino Antitrust Improvements Act, and
if any such approval is conditioned in any way, such conditions shall be
reasonably acceptable to the Purchaser.
8.6. OPINION OF COUNSEL. By the Sale Date, Purchaser shall have
received from Seller an opinion of counsel for the Seller in a form acceptable
to Purchaser.
-29-
<PAGE> 30
8.7. ADDITIONAL AGREEMENTS: By the Sale Date, Purchaser and
Seller shall have executed the Interim Subservicing Agreement and the
Subservicing Agreement and Fund American Enterprises Holdings, Inc. shall have
executed the Guaranty Agreement.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATION OF SELLER
The obligation of Seller to consummate the transactions described in
this Sale Agreement is subject to the satisfaction of the following conditions:
9.1. CORRECTNESS OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties made by Purchaser in this Sale Agreement are
true and correct on the execution hereof and through and including the final
Transfer Date.
9.2. COMPLIANCE WITH CONDITIONS. All of the material terms,
conditions and covenants of this Sale Agreement required to be complied with
and performed by Purchaser shall have been duly complied with and performed.
9.3. CORPORATE CERTIFICATE. By the Sale Date, Seller shall have
received from Purchaser a certified copy of its corporate resolution approving
the execution and delivery of this Sale Agreement and the consummation of the
transactions contemplated hereby, together with such other certificates of
incumbency and other evidences of corporate authority as Seller or its counsel
may reasonably request, and a current certificate of good standing from
Seller's state of incorporation.
9.4. AGENCY/REGULATORY APPROVALS: No later than the Approval
Date, Seller shall have obtained the approval of the Agencies and every other
governmental agency or regulatory authority having jurisdiction with respect to
the Mortgage Loans to the transfer and sale of the Servicing from the Seller to
the Purchaser in accordance with the terms of this Sale Agreement, including
any approval required under the Hart-Scott-Rodino Antitrust Improvements Act,
and if any such approval is conditioned in any way, such conditions shall be
reasonably acceptable to the Seller.
9.5. OPINION OF COUNSEL. By the Sale Date, Seller shall have
received from Purchaser an opinion of counsel for the Purchaser in a form
acceptable to Seller.
ARTICLE X
TERMINATION
This Sale Agreement may be terminated in whole or in part with respect
to the Servicing on or before the Approval Date:
-30-
<PAGE> 31
i) By Purchaser, if any of the conditions in Article VIII of
this Sale Agreement shall not have been met at the appointed time or
waived; provided further, to the extent the Sale Agreement is
terminated only in part, i.e., with respect to only the FNMA
Servicing, the FHLMC Servicing or the GNMA Servicing, Purchaser shall
have the right to revise the Purchase Price Percentage for the
remaining portion of the Servicing based on Purchaser's reasonable
re-evaluation of the characteristics of such remaining portion;
provided, however, such revision shall be acceptable to Seller. If
this Sale Agreement is terminated pursuant to this provision, as
liquidated damages, and as sole remedy for Seller's default, Purchaser
shall be entitled to $120,000 from Seller, provided, however, such
amount shall not be payable if termination is based upon Section 8.5
and failure to obtain approval is not related to Seller's lack of
compliance with Agency Requirements.
ii) By Seller, if any of the conditions set forth in Article
IX of this Sale Agreement shall not have been met at the appointed
time or waived. If this Sale Agreement is terminated pursuant to this
provision, as liquidated damages and as sole remedy for Purchaser to
default, Seller shall be entitled to $120,000 from Purchaser,
provided, however, such amount shall not be payable if termination is
based upon Section 9.4 and failure to obtain approval is not related
to Purchaser's lack of compliance with Agency Requirements.
iii) By mutual consent of the Seller and Purchaser.
If this Sale Agreement is terminated pursuant to this Article X, then,
the Servicing shall be returned to Seller and: (i) the Deposit, plus accrued
interest at the 30-day LIBOR rate from the date of deposit until return to
Purchaser, shall be immediately returned to Purchaser by Seller; and (ii) the
Servicing Income Rights actually collected by Purchaser (including the benefit
of any interest accrual on the custodial accounts) from the Sale Date to the
date of notice of termination, shall be immediately returned to Seller by
Purchaser.
ARTICLE XI
MISCELLANEOUS
11.1. COSTS AND EXPENSES. Seller shall pay the costs of preparing
and recording assignments (and/or other documents of transfer) from Seller to
Purchaser, preparing, in recordable form, but not recording the assignment from
Purchaser to the Agency, securing the approvals of the Agencies, and every
other governmental agency or regulatory authority whose approval is required
(including any approval required of Seller or Purchaser under the
Hart-Scott-Rodino Antitrust Improvements Act), Agency transfer fees, tax
service contract transfer fees, recertifying pools, Seller's custodial charges
(including the cost of insurance coverage in effect during transportation of
the Custodian Legal Files), and shipping Mortgage Loan files and Seller's
custodial files to Purchaser and Purchaser's custodian. Purchaser shall pay
setup fees, if any, associated with the transfer of the Mortgage Loans onto
life-of-loan Transamerica Tax
-31-
<PAGE> 32
Service contracts. Seller shall pay transfer fees, if any, associated with the
setup of the Mortgage Loans onto life-of-loan FDSI MapTrak flood tracking
service contracts.
11.2. INDEMNIFICATION BY SELLER. In connection with the Mortgage
Loans and the Servicing, Seller shall indemnify and hold Purchaser harmless
from and shall reimburse Purchaser for any losses, damages, deficiencies,
claims, causes of action or reasonable out-of-pocket expenses, of any nature
(including reasonable attorneys' fees) incurred by Purchaser which:
(a) Result from any error in the representations made by Seller in
this Sale Agreement, or in any schedule, written statement or certificate
furnished by Seller pursuant to this Sale Agreement;
(b) Result from any breach of representation or warranty by
Seller, or the non-fulfillment of any covenant or condition of Seller contained
in this Sale Agreement, or in any schedule, written statement or certificate
furnished by Seller pursuant to this Sale Agreement;
(c) Result from any defect in any Mortgage Loan existing as of the
Sale Date (including those defects subsequently discovered), or as a result of
any act or omission of originator, servicer or Seller prior thereto;
(d) Result from errors in originating, setting-up or servicing any
of the Mortgage Loans (e.g., incorrect rates, misquoted payoffs, misapplied
payments or other errors in payment collection and/or processing, failure to
file timely notice of default, failure to pay taxes or other charges including
penalties and interest) prior to the Sale Date, or as a result of Seller's or
originator's or any prior servicer's act or omission prior thereto. Such
errors may include improper action or failure to act when required to do so;
(e) Result from litigation existing, settled or threatened involving
the Servicing or any of the Mortgage Loans and relating to events occurring
prior to the Sale Date;
(f) Result from repurchase requirements in connection with the
conversion of convertible/adjustable rate Mortgage Loans which converted as of
a date prior to the Sale Date;
(g) Result from the "with recourse" nature of the Mortgage Loans
described on Exhibit M;
(h) Result from VA No-Bids, including, without limitation, those
resulting in Buydowns, for a period of two years following the anniversary of
the Sale Date up to an amount not to exceed $3.3 Million Dollars. In this
regard, Purchaser shall take all steps necessary to mitigate the VA No-Bid or
Buydown loss and will notify Seller of such steps;
(i) Result from administration of the Bi-Saver Program prior to
the Transfer Date, as it relates to any Bi-Weekly Mortgage Loan;
-32-
<PAGE> 33
(j) Result from Purchaser's inability to certify or recertify
pools within the time periods required by the Agency due to Seller's failure to
deliver all Required Documentation necessary for certification;
(k) Result from any Mortgage Loan which, as of the Sale Date, is a
Foreclosure Loan, Bankruptcy Loan or Litigation Loan;
(l) Result from failure to obtain full recovery on a guaranty for
a Mortgage Loan which, as of the Sale Date is a VA vendee Mortgage Loan, due to
the discount given to any prior holder of such VA vendee Mortgage Loan (net of
any loss resulting from Purchaser's error in servicing such VA vendee Mortgage
Loan); and
(m) Result from any failure to have received from Seller, either
directly or through its custodian, any Required Documents, disclosures required
by state or federal law or regulation (including but not limited to disclosures
required by the Truth-In-Lending Act or the Real Estate Settlement Procedures
Act), or any items required to be in the possession of the Seller under
applicable Agency Requirements.
With respect to the representations and warranties set forth in this
Sale Agreement, which were made to the best knowledge of the Seller (except for
Section 7.26), if it is discovered that the substance of such representation or
warranty is inaccurate, Purchaser is entitled to all remedies to which
Purchaser would be entitled for breach of representation or warranty, including
without limitation the repurchase requirements set forth in Section 11.5,
notwithstanding Seller's lack of knowledge with respect to the inaccuracy of
the representation or warranty.
11.3. INDEMNIFICATION BY PURCHASER. In connection with the Mortgage
Loans and the Servicing, Purchaser shall indemnify and hold Seller harmless
from and shall reimburse Seller for any losses, damages, deficiencies, claims,
causes of action or reasonable out-of-pocket expenses, of any nature (including
reasonable attorneys' fees) incurred by Seller which:
(a) Result from any error in the representations made by Purchaser
in this Sale Agreement, or in any schedule, written statement or certificate
furnished by Purchaser pursuant to this Sale Agreement;
(b) Result from any breach of representation or warranty by
Purchaser, or the non-fulfillment of any covenant or condition of Purchaser
contained in this Sale Agreement, or in any schedule, written statement or
certificate furnished by Purchaser pursuant to this Sale Agreement;
(c) Result from errors in servicing any of the Mortgage Loans
(e.g., incorrect rates, misquoted payoffs, misapplied payments, failure to file
timely notice of default or failure to pay taxes or other charges including
penalties and interest) after the Transfer Date. Such errors may include
improper action or failure to act when required to do so; and
-33-
<PAGE> 34
(d) Result from litigation existing, settled or threatened
involving the Servicing or the Mortgage Loans which is based on Purchaser's
wrongdoing following the Transfer Date;
(e) Result from Purchaser's custodian's failure to complete its
review of the delivered documentation on or before a date one hundred twenty
(120) days after the Approval Date;
(f) Result from the post Transfer Date administration of the
bi-weekly payment feature of any Bi-Weekly Mortgage Loan that transfers to
Purchaser on the Transfer Date (including any cancellation fees due Borrowers
as a result of transfer or modification of the Bi-Saver Program), but
excepting therefrom losses resulting from administration of the biweekly
payment feature of any such Bi-Weekly Mortgage Loan on or before the Transfer
Date;
(g) Result from Seller's following the written instructions of
Purchaser provided pursuant to Section 7.28.
11.4. NOTICE UNDER INDEMNIFICATION. If either party ("Indemnitee")
asserts any rights of indemnification hereunder, it shall give written notice
to the other party ("Indemnitor") prior to expiration of the Survival Period
(as defined in Section 11.6). Indemnitor shall have thirty (30) calendar days
from the receipt of such notice to pay any amounts owing the Indemnitee or to
give written notice to Indemnitee of its intention to defend or dispute such
claim or liability. If such defense or dispute notice is given by Indemnitor
within said thirty (30) day period, Indemnitor shall have the right to
compromise or defend any such claim or liability through counsel (including
accountants and other agents and representatives) of its own choosing (but
reasonably acceptable to the Indemnitee) and at its own expense; provided,
however, that the Indemnitor shall not, in the defense of such claim or
liability, or any litigation resulting therefrom, consent to entry of any
judgment or enter into any settlement in any case without the prior written
consent of Indemnitee which consent will not be unreasonably withheld.
Indemnitee shall cooperate fully with the Indemnitor in such defense. If,
within the said thirty (30) day period, Indemnitor fails to give written notice
to Indemnitee of its intention to defend said claim or liability at its own
expense, or if such notice is given but Indemnitor fails to defend such claim
or liability diligently and continuously, Indemnitee shall have the right to
compromise or defend such claim or liability through counsel (including
accountants or other agents and representatives) of its own choosing, but at
the expense of the Indemnitor. If any of the foregoing claims or liabilities
are finally determined adversely to Indemnitee, or if the Indemnitee
compromises the same as contemplated in the preceding sentence, or if the
Indemnitor or Indemnitee otherwise compromises any such claim or liability,
Indemnitor shall pay such claim or liability, together with costs, interest and
reasonable attorneys' fees.
11.5. REPURCHASE OF SERVICING. In the event:
(i) Purchaser discovers that any of the representations and
warranties contained in Articles IV or V hereof were not
materially accurate at the time they were made by Seller; and
-34-
<PAGE> 35
(ii) there is any demand for repurchase or indemnification in
lieu of repurchase by an Agency or other unaffiliated third
party investor who then has an ownership interest in the
Mortgage Loan at issue (if such demand for repurchase or
indemnification comes from an unaffiliated third party
investor the breach upon which demand is made must have been
cause for a breach if such Mortgage Loan was still owned by
the Agency that owned the Mortgage Loan prior to sale to the
unaffiliated third party investor);
then, Purchaser may require that Seller repurchase the affected Servicing from
Purchaser at the Servicing Repurchase Price; provided, however:
(i) Seller is not required to pay the Servicing Repurchase
Price if the affected Servicing was not included in the
Purchase Price; and
(ii) Seller shall have a sixty (60) day cure period from
receipt of written notice of breach, unless Agency or
unaffiliated third party investor guidelines provide
otherwise; and
(iii) Where the Agency or the unaffiliated third party
investor will allow indemnification rather than repurchase,
Seller may indemnify Purchaser or the Agency or unaffiliated
third party investor rather than repurchase if the Agency or
unaffiliated third party investor will accept such
indemnification.
In the event of a required Servicing repurchase, Seller shall also
repurchase, at the Mortgage Loan Repurchase Price, the related Mortgage Loan
out of the pool if so required by the applicable Agency or unaffiliated third
party investor.
Upon Seller's failure to cure within the sixty (60) days from receipt
of written notice cure period, Seller shall, within ten (10) days thereafter,
pay the Mortgage Loan Repurchase Price and the Servicing Repurchase Price, and
Purchaser shall immediately thereafter deliver to Seller all documents and
records in Purchaser's possession pertaining to the Mortgage Loans, including
any related escrow account benefits, and shall execute and record assignments
as may be appropriate, with such retransfer expenses to be at Seller's expense.
Prior to expiration of the Survival Period (as defined in Section
11.6), Seller shall repurchase the Servicing at the Servicing Repurchase Price
and the Mortgage Loan at the Mortgage Loan Repurchase Price (however, such
Mortgage Loan must be repurchased only if the applicable Agency or the
unaffiliated third party investor requires that the Mortgage Loan be
repurchased together with the Servicing), for any Mortgage Loan for which there
is either an outstanding demand by any Agency or an unaffiliated third party
investor for repurchase or indemnification as of the expiration of the Survival
Period, or for which there is an outstanding indemnification agreement between
such Agency or unaffiliated third party investor and Purchaser.
11.6. SURVIVAL. The representations and warranties in this Sale
Agreement, and in any document to be delivered pursuant hereto, shall survive
until a date (10) years after the Sale
-35-
<PAGE> 36
Date ("the Survival Period"). The parties further agree that (i) the
indemnifications provided for in Sections 11.2, 11.3 and 11.4 shall survive
until expiration of the Survival Period; (ii) the Mortgage Loan and Servicing
repurchase requirements provided for in Section 11.5 shall survive until
expiration of the Survival Period; and (iii) any and all covenants, agreements
and duties which contemplate performance after the Transfer Date shall also
survive until expiration of the Survival Period.
Purchaser and Seller may recover under Sections 11.2 and 11.3,
provided that notice in accordance with Section 11.4, shall have been given
prior to the expiration of the Survival Period. Notwithstanding anything to
the contrary in this Section 11.6, in the event that, prior to the expiration
of the Survival Period, notice of a claim for indemnification is given pursuant
to Section 11.4 and either the loss which is indemnifiable pursuant to Section
11.2 or 11.3 has not yet been incurred or litigation in connection with the
claim for indemnification has not yet commenced, such claim shall survive
beyond the Survival Period only if the threat of litigation arose within six
(6) months prior to the expiration of the Survival Period (which threat is
evidenced by written correspondence from an attorney) and litigation commences
within six (6) months after expiration of the Survival Period.
11.7. SUPPLEMENTARY INFORMATION. From time to time, upon reasonable
notice, prior to and after the Transfer Date, Seller shall furnish Purchaser
such incidental information, which is reasonably available to Seller,
supplementary to the information contained in the documents and schedules
delivered pursuant hereto, as Purchaser may reasonably request within ten (10)
years of the Sale Date. Any request for information under this Section 11.7
which is in reference to information which was not required to have been
provided under the terms of this Sale Agreement shall be fulfilled at the
reasonable expense of Purchaser.
11.8. ACCESS TO INFORMATION. Seller shall give to Purchaser and its
counsel, accountants and other representatives, upon seven (7) days advance
written notice, reasonable access during normal business hours throughout the
period prior to the Transfer Date, to all of Seller's files, books and records
relating to the Servicing.
11.9. CONFIDENTIALITY OF INFORMATION. Except as otherwise required
by law, Seller and Purchaser and their affiliates shall, and shall cause their
respective directors, officers, employees and authorized representatives to,
hold in strict confidence and not use or disclose to anyone without the prior
written consent of the other party all information concerning customers or
proprietary business procedures, servicing fees or prices, policies or plans of
the other party or any of its affiliates received by them from the other party
in connection with the transactions contemplated hereby.
11.10. BROKER'S FEES. Each party warrants and represents to the
other that it has not had any dealings or negotiations in connection with the
transaction contemplated by this Sale Agreement with any brokers or finders
other than Seller's agreement with Cohane Rafferty Securities, Inc. Seller
shall pay all broker fees of Cohane Rafferty Securities, Inc and Seller shall
defend, indemnify and hold Purchaser harmless from and against any and all
claims, actions, causes of action, losses, liabilities and expenses that may be
asserted against or sustained by Purchaser by reason of any allegation by
Cohane Rafferty Securities, Inc., that fees,
-36-
<PAGE> 37
commissions, or other payments of any kind are payable to it as a result of the
transaction contemplated by this Sale Agreement. Each party shall defend,
indemnify and hold the other harmless from and against any and all claims,
actions, causes of action, losses, liabilities and expenses that may be
asserted against or sustained by the indemnified party by reason of any
allegation that any fees, commissions, or other payments of any kind are
payable to a broker or other third party by the indemnified party as a result
of any negotiations or dealings with such broker or third party by the
indemnifying party contrary to the foregoing warranty and representation.
11.11. NOTICES. All notices, requests, demands and other
communications which are required or may be given under this Sale Agreement
shall be in writing, shall be given to the intended recipient at the address
specified below and shall be effective upon personal delivery or upon
transmission by facsimile or if sent by registered or certified mail, postage
prepaid then five (5) days following the day placed in the mail or, if sent
otherwise, then only upon receipt:
(a) If to the Purchaser, to:
Chemical Mortgage Company
200 Old Wilson Bridge Road,
Worthington, Ohio 43085-8500
Attn: Gary Roos, Servicing Portfolio Manager
With a copy to Molly Sheehan, General Counsel, at 343
Thornall, Edison New Jersey 08837.
(b) If to the Seller, to:
Source One Mortgage Services Corporation
27555 Farmington Road, Farmington Hills, Michigan 48334-3357
Attn: Gene Lavigne
With a copy to Robert Schrader, General Counsel, at the above
address.
or to such other address or person as Purchaser or Seller shall have specified
in writing to the other.
11.12. WAIVERS. Either Purchaser or Seller may, by written notice to
the other:
(a) Extend the time for the performance of any of the obligations or
other transactions of the other; and
(b) Waive compliance with any of the terms, conditions or covenants
required to be complied with by the other hereunder.
The waiver by any party hereto of a breach of any provision of this
Sale Agreement shall not operate or be construed as a waiver of any other
subsequent breach.
-37-
<PAGE> 38
11.13. ENTIRE AGREEMENT; AMENDMENT. This Sale Agreement constitutes
the entire agreement between the parties with respect to the sale of the
Servicing and supersedes all prior agreements with respect thereto. This Sale
Agreement may be amended and any provision hereof waived, but only in writing
signed by the party against whom such amendment or waiver is sought to be
enforced.
11.14. BINDING EFFECT. This Sale Agreement shall inure to the
benefit of and be binding upon the parties hereto and their successors and
assigns. Nothing in this Sale Agreement, express or implied, is intended to
confer on any person other than the parties hereto and their successors and
assigns, any rights, obligations, remedies or liabilities.
11.15. HEADINGS. Headings on the Articles and Sections in this Sale
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
11.16. APPLICABLE LAWS. This Sale Agreement shall be construed in
accordance with the laws of the State of Ohio.
11.17. INCORPORATION OF EXHIBITS. All exhibits attached hereto shall
be incorporated herein and shall be understood to be a part hereof as though
included in the body of this Sale Agreement.
11.18. COUNTERPARTS. This Sale Agreement may be executed in
counterparts, each of which, when so executed and delivered, shall be deemed to
be in original and all of which, taken together, shall constitute one and the
same agreement.
11.19. TRANSFER AND ASSIGNMENT. Seller does not have the right to
sell, assign, delegate or otherwise transfer its rights or obligations under
this Sale Agreement to a third party without obtaining the prior written
consent of Purchaser, which consent shall not be unreasonably withheld;
provided further, the financial condition of Seller's assignee shall be
reasonably acceptable to Purchaser.
The obligation to subservice the Mortgage Loans under the Subservicing
Agreement may, within one year of the Sale Date, be assigned to one other
party, which party must be reasonably acceptable to Purchaser. In determining
the acceptability of such party, Purchaser may, in its reasonable discretion,
consider the party's reputation in the industry, financial status, approval
status with the Agencies as well as with private investors and regulators,
status as a competitor and ability to service non-standard mortgage products.
Should Purchaser resell portions of the portfolio, Seller shall
reasonably cooperate with Purchaser and its assignee or designee to affect due
diligence and transfer. Seller shall not be responsible for any out-of-pocket
costs related to these sales that it would not have otherwise incurred in
connection with transferring the Servicing to Purchaser. In no event, other
than Subservicer Default or as mutually agreed by the parties, shall the
Servicing be transferred before the Transfer Dates set forth in this Sale
Agreement. The transfer dates associated with any such transfer shall be
agreed upon in accordance with the terms of this Sale Agreement, the Interim
Servicing Agreement and the Subservicing Agreement.
-38-
<PAGE> 39
11.20. GUARANTY. The performance of Seller under the terms of this
Agreement is guaranteed by Fund American Enterprises Holdings, Inc. pursuant to
the terms of the Guaranty Agreement.
IN WITNESS WHEREOF, each of the undersigned parties to this Sale
Agreement has caused this Sale Agreement to be duly executed in its corporate
name by one of its duly authorized officers, all as of the date first above
written.
PURCHASER:
CHEMICAL MORTGAGE COMPANY
ATTEST:
BY:_______________________________
_________________________ NAME:_____________________________
TITLE:____________________________
DATE:_____________________________
SELLER:
SOURCE ONE MORTGAGE SERVICES
CORPORATION
ATTEST:
BY:________________________________
_________________________ NAME:______________________________
TITLE:_____________________________
DATE:______________________________
-39-
<PAGE> 40
LIST OF EXHIBITS
Exhibit A - Offering Circular
Exhibit B - Mortgage Loan Schedule
Exhibit C-1 - Interim Subservicing Agreement
Exhibit C-2 - Subservicing Agreement
Exhibit D - Power of Attorney
Exhibit E - Reconciliation Reports
Exhibit F - Guaranty Agreement
Exhibit G - Required Documentation
Exhibit H - FHLMC Documentation
Exhibit I - FNMA Documentation
Exhibit J - FNMA MBS Documentation
Exhibit K - GNMA Documentation
Exhibit L - Transfer Information
Exhibit M - Recourse Mortgage Loans
Exhibit N - Uncertified Pools
Exhibit O - Seller Funded PMI Mortgage Loans
Exhibit P - Condemnation Mortgage Property
Exhibit Q - Completion Escrow Mortgage Loans
Exhibit R - Soldiers and Sailors Relief Act Mortgage Loans
Exhibit S - Receivable Assignment and Acknowledgment Agreement
Exhibit T - Active and Suspended Subsidized Mortgage Loans
Exhibit U - Missing Documents
-40-
<PAGE> 1
EXHIBIT 10(ee)
MORTGAGE LOAN INTERIM SUBSERVICING AGREEMENT
THIS MORTGAGE LOAN INTERIM SUBSERVICING AGREEMENT ("Agreement") is made as of
March 1, 1997, by and between CHEMICAL MORTGAGE COMPANY, an Ohio corporation,
with offices at 200 Old Wilson Bridge Road, Worthington, Ohio 43085-8500
("Servicer") and SOURCE ONE MORTGAGE SERVICES CORPORATION, with offices located
at 27555 Farmington Road, Farmington Hills, Michigan 48334-3357
("Subservicer").
RECITALS
A. WHEREAS, Subservicer is engaged as an independent contractor in the
business of servicing loans and performs servicing functions for various
investors;
B. WHEREAS, Servicer has contracted with Subservicer to perform the
administration and subservicing of certain mortgage loans ("Mortgage Loans")
the servicing rights to which were purchased by Servicer from Subservicer
pursuant to a FNMA/FHLMC/GNMA Mortgage Servicing Purchase and Sale Agreement
between Servicer and Subservicer, dated as of February 28, 1997 ("Sale
Agreement"); and
C. WHEREAS, pursuant to the terms of such Sale Agreement, Subservicer shall
perform the servicing obligations on the Mortgage Loans during the Interim
Subservicing Period in accordance with the terms of this Agreement; and
D. WHEREAS, such servicing obligations shall be performed under Subservicer's
seller/servicer identification numbers; and
E. WHEREAS, Servicer and Subservicer desire to formalize and state the terms
and conditions which shall govern the subservicing and administration of
such Mortgage Loans by Subservicer.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
The following terms shall have the meaning set forth after each:
1.1 Accepted Practices. Prudent mortgage banking practices for similar
loans.
1.2 Advances. All customary and necessary out-of-pocket costs and expenses
incurred in accordance with Agency Requirements and the Loan Documents with
regard to performance by Subservicer of its subservicing obligations,
including, but not limited to, advances of principal, interest (including
Shortfall Interest), taxes, insurance, foreclosure and bankruptcy expenses and
guarantee fees.
<PAGE> 2
1.3 Agency: FNMA, FHLMC and/or GNMA, individually and collectively, as
applicable.
1.4 Agency Requirements: The rules, regulations, announcements, notices,
directives and instructions of the Agency, as applicable, including, without
limitation, the Agency contracts or commitments (which contracts or commitments
incorporate by reference all applicable Agency Selling and Servicing Guides and
the underlying FHA and/or VA rules, regulations and requirements) with respect
to the Mortgage Loans, and any revisions to same.
1.5 Ancillary Fees: Reasonable and customary fees acceptable to the
Agencies and collected by servicers as income incidental to the servicing of
the Mortgage Loans such as late fees, insurance administration fees and
commissions, processing fees and assumption fees, which Ancillary Fees shall
not, without the consent of Servicer (which consent shall not be unreasonably
withheld as to inflationary increases in fee amount or as to an additional fee
type dictated by the Agencies), exceed, in fee amount or type, the fees charged
by Subservicer as of November 28, 1996.
1.6 Applicable Law: All federal, state and local laws, rules and
regulations, as amended from time to time, applicable to the Mortgage Loans,
the Servicing, Subservicer and/or the performance by Subservicer of its duties
hereunder including but not limited to the Truth in Lending Act, the Real
Estate Settlement Procedures Act ("RESPA" including the provisions set forth in
the regulations enacted under the Cranston-Gonzalez amendment), The Fair Credit
Reporting Act, The Equal Credit Opportunity Act, The Flood Disaster Protection
Act and laws relative to escrow administration, usury, due on sale and loan
servicing.
1.7 Borrower. Any person obligated under the promissory note or other
instruments evidencing and securing a Mortgage Loan.
1.8 Business Day. A day or a portion thereof during which both Servicer and
Subservicer are open for business, other than Saturday or Sunday, or any legal
holiday.
1.9 Custodial Account[s]. The accounts maintained in accordance with
Applicable Law and Agency Requirements for the deposit of principal and
interest payments in respect of one or more Mortgage Loans.
1.13 Escrow Account[s]. Any amounts collected from a Borrower for the
purpose of paying, on behalf of the Borrower, hazard insurance premiums,
mortgage insurance premiums, taxes, assessments and other similar items as
required or permitted under the Loan Documents.
1.10 FNMA. The Federal National Mortgage Association.
1.11 FHLMC. The Federal Home Loan Mortgage Corporation.
2
<PAGE> 3
1.12 GNMA. The Government National Mortgage Association.
1.14 Investor. FNMA, FHLMC and/or GNMA, as applicable.
1.15 Mortgage Loan[s]. The conventional and government mortgage loans, the
Servicing associated therewith being the subject of this Agreement and having
been transferred from Subservicer to Servicer pursuant to the Sale Agreement, a
listing of which is attached hereto as Exhibit A.
1.16 Loan Documents. Any promissory note, deed of trust, mortgage,
assignment, guaranty, title insurance policy, mortgage insurance policy, or
other instrument or document executed, issued or obtained in connection with a
Mortgage Loan.
1.17 Mortgaged Property. The property which is the subject of each security
agreement, mortgage or deed of trust securing repayment of the debt evidenced
by the Loan Documents.
1.18 REO (Real Estate Owned). Properties acquired through foreclosure or by
acceptance of a deed in lieu of foreclosure on behalf of Servicer or the
Investor.
1.19 Sale Agreement. As defined in the recitals.
1.20 Servicing. As defined in the Sale Agreement.
1.21 Shortfall Interest. The Mortgage Loan curtailment or payoff interest
which is required to be paid to the Agency but which the Borrower is not
obligated to pay.
1.22 Subservicing Accounts: The Escrow Accounts and Custodial Accounts
established pursuant to this Agreement.
1.23 Subservicing Fee: The compensation to be paid to Subservicer for
subservicing performed under this Agreement which shall be equal to Five
Dollars ($5.00) per each Mortgage Loan for which the Investor is or was FNMA or
FHLMC, and Six Dollars ($6.00) per each Mortgage Loan for whom GNMA is or was
the Investor, in existence on the first day of each month during the term of
this Agreement.
Defined terms used in this Agreement but not defined herein, shall have the
meanings ascribed to such terms in the Sale Agreement.
2. SUBSERVICING DUTIES
Subservicer shall have the following obligations with respect to all Mortgage
Loans:
3
<PAGE> 4
2.1 General Servicing Responsibilities. Subservicer shall undertake all
actions, with regard to the servicing and administration of the Mortgage Loans,
whether or not specifically outlined in this Agreement, including, but not
limited to, the advancing of funds, all in accordance with the terms and
conditions of the Loan Documents, Agency Requirements, Applicable Law and this
Agreement. Such actions shall be undertaken in accordance with Accepted
Practices. To the extent of any conflict between the terms and conditions of
this Agreement and the Agency Requirements, the Agency Requirements shall
control.
As to vendors utilized by Subservicer in connection with the performance of
its obligations hereunder, whose services earn fees in excess of $500,000 per
year, Subservicer shall obtain the written approval of Servicer to any change
from a vendor currently utilized by Subservicer, which approval shall not be
unreasonably withheld. Servicer has approved all vendors utilized by
Subservicer as of the date of execution of this Agreement. Attached hereto as
Exhibit B is a list of such vendors which have been approved by Servicer.
2.2 Collections. Subservicer shall proceed diligently to collect all sums
which become due under the Loan Documents as if Subservicer were servicing the
Mortgage Loans for its own account, including without limitation principal,
whether or not prepaid, interest, late charges, prepayment fees, private
mortgage insurance premiums, fire, flood, earthquake and other hazard insurance
premiums, and taxes, assessments and other similar charges, all in accordance
with Agency Requirements. Concerning Mortgage Loans for which the Subservicer
drafts monthly payments electronically from the Borrower's bank account, such
drafting occurs in compliance with Agency Requirements, and the applicable
agreement with the Borrower.
2.3 Insurance.
A. Subservicer shall undertake all actions necessary to ensure that fire,
flood, earthquake and other hazard insurance required by the Agency is
maintained by each Borrower on the Mortgaged Property in accordance with
Agency Requirements. Where any such required insurance coverage is
allowed to lapse, whether or not due to Borrower's fault or
negligence, Subservicer shall, immediately upon knowledge of such lapse,
promptly obtain new insurance in accordance with Agency Requirements
and the Loan Documents. Subservicer shall maintain records of all such
insurance coverage in accordance with Agency Requirements.
B. Upon receiving notice of any event which constitutes a loss under any
policy of insurance relative to a Mortgage Loan, Subservicer shall
undertake appropriate action, including the filing of all necessary
claims, to permit full recovery of such loss under the policy of
insurance. If a claim ("Claim") is made under a fire, flood, earthquake
or other hazard insurance policy, Subservicer is authorized to settle
such Claim, collect the insurance proceeds,
4
<PAGE> 5
make any arrangements with respect to restoration or rehabilitation of
the Mortgaged Property and disburse insurance proceeds in accordance with
Agency Requirements, the Loan Documents and Applicable Law. Subservicer
will cause an inspection(s) to be made so as to assure itself that the
Mortgaged Property has been satisfactorily repaired in accordance with
Agency Requirements and shall, if the loss is in excess of $5,000, secure
a statement from the Borrower indicating satisfaction with the repairs.
C. Any Mortgage Loan involved with any type of optional insurance has been
properly serviced, including, without limitation, the proper application
and collection of premiums, the maintenance of complete and accurate
records, processing and payment of claims and the handling of
correspondence.
2.4 Escrow Accounts. Subservicer shall take all actions necessary
to ensure that each Mortgage Loan Escrow Account is maintained in an FDIC
insured depository institution in accordance with Agency Requirements and
Applicable Law. Subservicer shall be responsible for all matters relating to
the administration of the Escrow Accounts, including without limitation: the
deposit of funds to the Escrow Accounts no later than the next Business Day
after receipt; the disbursement of funds to the proper parties when and if due
in payment of the items for which such Escrow Accounts are established; payment
of interest to Borrowers on funds deposited into such Escrow Accounts to the
extent required by Applicable Law (and Subservicer shall receive reimbursement
from the Servicer for its payment of interest to Borrowers on funds deposited
into such Escrow Account in accordance with this Agreement); and maintenance of
all books and records with respect to such Escrow Accounts, all in accordance
with Applicable Law and Agency Requirements. If, on the effective date of this
Agreement, Subservicer obtains sufficient Agency approval to transfer, and
does transfer the Escrow Accounts from their current depository institution to
Chase Manhattan Bank, USA, N.A., then Servicer shall have the right to all
actual interest income and other benefits derived from the Escrow Accounts.
In the event that Subservicer is unable to obtain sufficient Agency approval to
transfer the Escrow Accounts from their current depository institution to Chase
Manhattan Bank, USA, N.A. as of the effective date of this Agreement, then
until such transfer is able to be accomplished, Subservicer shall have the
right to all actual interest income derived from the Escrow Accounts, and shall
pay Servicer monthly, together with the remittance of the servicing fee to
Servicer, interest on the funds maintained in such accounts at a rate equal to
the 30-day LIBOR rate less one quarter of one percent. Unless transferred as
noted above, the Escrow Accounts shall be maintained in the accounts that
exists as of the date of execution of this Agreement (unless otherwise moved
with the prior approval of Servicer). Escrow Accounts shall be established in
the name of Subservicer and titled as mutually agreed by the parties for the
benefit of Servicer, the Agency and the Borrowers, as their interest appear.
Servicer shall permit Subservicer to have access to such Escrow Accounts to
make deposits and disbursements in accordance with the terms of this Agreement.
Subservicer shall provide all statements with regard to such Escrow Accounts as
required in compliance with Applicable Law, including but not limited to RESPA.
5
<PAGE> 6
2.5 Mortgage, Insurance. Subservicer shall keep all records,
provide all notices and undertake all other actions which may be required to
preserve and enforce all rights of Servicer under any private mortgage
insurance applicable to the Mortgage Loans in accordance with Agency
Requirements and the applicable policy of private mortgage insurance.
2.6 Delinquencies, Bankruptcy and Foreclosure. Subservicer shall
handle all Mortgage Loan delinquencies and bankruptcies and conduct all
Mortgage Loan foreclosures in strict accordance with Agency Requirements, the
Loan Documents, Applicable Law and Accepted Practices so as to minimize the
exposure and losses of Servicer and/or the Investor on such Mortgage Loans.
Subservicer's foreclosure responsibilities include timely mailing and recording
of all required notices, procuring all necessary foreclosure guarantees,
compliance with all Agency Requirements, including specifically, but not
limited to, those related to loss mitigation and collection including referral
to counselling; conducting the foreclosure sale and undertaking all necessary
eviction proceedings to vacate the Mortgaged Property subject to the
foreclosure and filing all appropriate claims with the applicable insurer or
guarantor in a timely manner. Servicer shall grant to Subservicer limited
corporate authority to allow Subservicer to execute satisfactions and
bankruptcy and foreclosure documentation on Servicer's behalf.
2.7 REO's. At the option of Servicer and at Servicer's expense,
Subservicer shall be responsible for the administration and maintenance of the
Mortgaged Property following any foreclosure sale to the extent required by
Agency Requirements; provided however that Subservicer shall pay, without
reimbursement from Servicer, the first $1,000 of REO expense on REOs located
outside of New York and the first $1,500 of REO expense on REOs located inside
New York, for any REO which related to a Mortgage Loan for which a fee would
have been due to Servicer as purchaser under the provisions of Section 7.24 of
the Sale Agreement but for the fact that such Mortgage Loan did not transfer.
All funds shall be held and remitted in accordance with Agency Requirements.
In the event that the Agency or Servicer should require Subservicer to market
the REO, Servicer agrees to pay Subservicer a fee for marketing the REO in an
amount equal to one thousand five hundred dollars ($1,500) per REO or one
percent (1%) of the REO sale price, whichever is greater. REO expense shall be
reimbursed to Subservicer monthly, upon receipt of an invoice prepared by
Subservicer.
2.8 Assumption and Other Modifications. Subservicer shall have
full responsibility for processing applications for and documenting all
assumptions and other modifications of the Mortgage Loans in accordance with
Agency Requirements, Applicable Law and the Loan Documents.
2.9 Annual Statements. Subservicer shall annually prepare for
each Borrower, without charge, written statements for each calendar year in
compliance with the Internal Revenue Code of 1986, as amended, and any other
Applicable Law.
6
<PAGE> 7
2.10 Payoffs. Subservicer shall process all Mortgage Loan Payoffs
and Loan Document satisfactions/reconveyances in compliance with Agency
Requirements and Applicable Law. Subservicer shall not act or fail to act in
any manner which may result in imposition of any penalty for late
satisfaction/reconveyance of a Mortgage Loan. Servicer shall reimburse
Subservicer for recording fees imposed for the recording of
satisfactions/reconveyances required by applicable law to be recorded by the
lender, and which cannot, under applicable law, be imposed upon the Borrower.
2.11 Reclassification of Delinquent Mortgage Loans: In the event
that the Agency, or the Servicer, requires the Subservicer to reclassify a
delinquent Mortgage Loan from a pool into the Servicer's actual portfolio,
Subservicer shall: (i) at the direction of the Servicer and/or the Agency,
effect any required repurchase; (ii) if not already established, establish a
new investor number on its system; (iii) open the appropriate escrow and
custodial accounts; and (iv) report the Mortgage Loan under the Servicer's
actual portfolio. Subservicer and Servicer shall perform all duties in
connection with such reclassified Mortgage Loans as defined in this Agreement.
2.12 Notice of Relief Requested Pursuant to the Soldiers and
Sailors Relief Act of 1940 or Similar Laws. Throughout the term of this
Agreement, Subservicer shall notify Servicer of any notification received from
any Borrower or other party with respect to any Mortgage Loan of a request for
relief pursuant to or invoking any of the provisions of the Soldiers and
Sailors Civil Relief Act of 1940 or similar state or federal law suspending
payments of amounts due under the Note or the commencement of foreclosure
proceedings.
3. DEPOSIT AND REMITTANCE OF FUNDS
3.1 Custodial Account. All funds applicable to the payment of
principal and interest on Mortgage Loans shall be held in trust for the
Investors in accordance with Agency Requirements and Applicable Law. Such
funds shall be deposited, no later than the next Business Day following
receipt, in a Custodial Account at an FDIC insured depository institution
meeting Agency Requirements. Unless transferred as noted below, the Custodial
Account shall be maintained in the account that exists as of the date of
execution of this Agreement (unless otherwise moved with the prior approval of
Servicer). The Custodial Account shall be established in the name of
Subservicer and titled as mutually agreed by the parties for the benefit of
Servicer and the applicable investors, as their interest appear. Servicer
shall permit Subservicer to have access to such Custodial Account to make
deposits and disbursements in accordance with the terms of this Agreement and
Agency Requirements. Subservicer shall provide all statements and reports
relative to the Custodial Account in accordance with Agency Requirements. If,
on the effective date of this Agreement, Subservicer obtains sufficient Agency
approval to transfer, and does transfer the Custodial Account from its current
depository institution to Chase Manhattan Bank, USA, N.A., then Servicer shall
have the right to all actual interest income and other benefits derived from
the Custodial Account. In the event that Subservicer is unable to obtain
7
<PAGE> 8
sufficient Agency approval to transfer the Custodial Account from its current
depository institution to Chase Manhattan Bank, USA, N.A. as of the effective
date of this Agreement, then until such transfer is able to be accomplished,
Subservicer shall have the right to all actual interest income derived from the
Custodial Account, and shall pay Servicer monthly, together with the remittance
of the servicing fee to Servicer, interest on the funds maintained in such
accounts at a rate equal to the 30-day LIBOR rate less one quarter of one
percent.
3.2 Remittance of Custodial Funds. Subservicer shall remit all
payments applicable to principal and interest, including without limitation
prepayments of principal, less the servicing fee calculated and deducted
pursuant to Section 3.5 of this Agreement, in accordance with Agency
Requirements and shall make all principal and interest advances to the Agency
pursuant to Agency Requirements.
3.3 Escrow Accounts. Deposits and withdrawals from the Escrow
Accounts shall be in accordance with Section 2.4.
3.4 Reimbursement of Subservicer. Servicer will reimburse
Subservicer for Advances and Shortfall Interest within one (1) Business Day of
its receipt, on a Business Day, from Subservicer of a billing along with
supporting documentation and a reconciliation of the prior amount paid and the
current amount due. Servicer shall reimburse Subservicer on a monthly basis
for any interest on escrow funds paid in the preceding month, within one (1)
Business Day of Servicer's receipt, on a Business Day, of an invoice
substantiating such payments made. Servicer shall reimburse Subservicer for
funds required in connection with repurchase and reclassification of a Mortgage
Loan in accordance with Section 2.11, within one (1) Business Day of its
receipt, on a Business Day, of an invoice substantiating such payments made.
Servicer will wire the FNMA and GNMA guarantee fees to Subservicer within one
(1) Business Day following its receipt, on a Business Day, of billing for the
guarantee fees which will include the FNMA draft report. All requests for
Advances or reimbursement hereunder shall be accompanied by a certification
from an Assistant Vice President or high ranking or Servicer approved officer
of Subservicer certifying that all such sums for which reimbursement of an
advance is requested has or will be paid to the proper parties in accordance
with Agency Requirements and Applicable Law and that all deposits and
disbursements required to be made on or prior to the date of said certification
have been made in accordance with Agency Requirements and Applicable Law. In
the event of an improper payment to Subservicer, Subservicer shall make any
appropriate payment back to Servicer within one (1) Business Day of its
receipt, on a Business Day, of a demand for such payment together with
supporting documentation.
3.5 Remittance to Servicer: Subservicer shall deduct monthly from
each monthly payment received from a Borrower, an amount equal to one-twelfth
of the annual servicing fee payable to Servicer pursuant to Agency
Requirements. On or before the 10th Business Day of each month, Subservicer
shall remit to Servicer the servicing fees pertaining to FNMA and GNMA
servicing, net of the Subservicing Fee described in Section 4. On or before
the 25th day of each month (or the next Business Day if the 25th day is not a
Business
8
<PAGE> 9
Day), Subservicer shall remit to Servicer the servicing fees
pertaining to FHLMC servicing, net of the Subservicing Fee described in
Section 4. Along with such remittances, Subservicer shall provide a report,
reasonably acceptable to Servicer, substantiating the amount remitted. All
funds remitted under this section shall be sent by wire transfer of immediately
available federal funds to the following account:
Banc One
Columbus, Ohio
ABA No. 044000037
Credit Account No. 980116070
For: Chase Manhattan Mortgage Corporation
Attention: Ed Reik 614-842-7210
3.6 Ownership of Escrow Accounts and Custodial Accounts:
Subservicer acknowledges that the Escrow Accounts, Custodial Accounts and any
collections it receives on the Mortgage Loans during the term of this Agreement
(except for Ancillary Fees) are for the account of Servicer, the Borrowers or
the Agency, as their interests may appear.
4. COMPENSATION
Subservicer shall receive as compensation, with respect to each
Mortgage Loan serviced by it hereunder, the Subservicing Fee. Subservicer will
also retain Ancillary Fees.
5. CUSTODY OF LOAN DOCUMENTS, BOOKS, RECORDS
AND REPORTS
5.1 Documents, Books, Records. Subservicer shall either retain
copies of all original Loan Documents required in connection with its
subservicing obligations and delivered to Servicer or its designee pursuant to
the Sale Agreement, or incur any expense in connection with obtaining such
copies after delivery to Servicer or its designee. All Loan Documents shall be
held and delivered by Subservicer to Servicer pursuant to the terms of the Sale
Agreement. Subservicer acknowledges that Servicer alone owns the documents and
records related to the Mortgage Loans and the Servicing, subject to the rights
of the Agency, notwithstanding that the documents and/or the records may remain
in the possession of Subservicer during the term hereof to facilitate the
performance of subservicing activities described herein. Servicer shall
instruct its custodian that certain authorized representatives of Subservicer
may obtain release of Loan Documents, in accordance with Agency Requirements,
directly from the custodian. Servicer shall reimburse Subservicer for the
expense of obtaining any original document from a custodian in situations where
the original is reasonably required (i.e. lien release or default proceedings
when required by applicable law). Subservicer shall promptly provide the
Servicer, on reasonable request, on a loan by loan basis, copies of all
correspondence, reports, statements and other items regarding any Mortgage
Loan. Subservicer shall maintain records with respect to each Mortgage Loan in
9
<PAGE> 10
accordance with Agency Requirements and Applicable Law, which shall include,
without limitation the application of payments as received from the Borrower
and all sums paid into and disbursed from any Escrow Account. Subservicer
shall also place copies of all relevant documentation received or sent by
Subservicer (**except on-line letters for which records are kept on the system*
*) during the term of this Agreement with regard to the Mortgage Loans in the
Servicing File, as defined in the Sale Agreement, or in a separate foreclosure
file, all of which will be delivered to Purchaser on the Transfer Date, as
defined in the Sale Agreement.
Servicer shall have the right at reasonable times and upon forty-eight
(48) hours written notice, to inspect all books, records and practices of
Subservicer which relate to the Mortgage Loans serviced under this Agreement.
5.2 Reports. On or before the 5th Business Day of each month
through the month following termination of this Agreement, Subservicer shall
forward to Servicer, Attn: Servicing Portfolio Management, 200 Old Wilson
Bridge Road, Worthington, Ohio 43085, a copy of the month end delinquency
report and loss mitigation report for the Mortgage Loans reflecting the current
status for each Mortgage Loan including bankruptcy, foreclosure and collection
status, and the month end delinquency report for all Agency Mortgage Loans
subserviced by Subservicer for the preceding month. Upon reasonable request,
Subservicer will provide Servicer with evidence substantiating its compliance
with Agency Requirements including but not limited to those regarding Borrower
counselling and bankruptcy and foreclosure monitoring requirements. On or
before the 25th day (or the next Business Day if the 25th day is not a Business
Day) of each month (unless an earlier date is required by Servicer to allow for
combining of reports of Servicer and its other affiliates as required by GNMA,
which date will be subsequently identified), through the month following
termination of this Agreement, Subservicer shall provide Servicer, to Attn:
Servicing Portfolio Management, Chase Manhattan Mortgage Corporation, 200 Old
Wilson Bridge Road, Worthington, Ohio 43085, with copies of all required
standard FNMA, FHLMC and GNMA month end cut-off reports and applicable copies
of standard pool and loan level accounting and reconciliation reports, all
relating to the preceding month. Subservicer shall, at Servicer's expense
which expense shall not exceed fifty dollars ($50.00) per month, monthly,
within five (5) Business Days of month end, provide to Servicer a servicing
data tape in form approved by Servicer (a copy of such form is attached hereto
as Exhibit C), for Servicer's use in valuation of the Servicing.
Subservicer shall, upon reasonable request of Servicer, provide such
other information or reports not previously agreed to in this Agreement as may
be requested by Servicer. Such requests shall be reimbursed by Servicer in an
amount previously approved by Servicer.
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS
10
<PAGE> 11
6.1 Subservicer's Representations, Warranties and Covenants.
A. As an inducement to Servicer to enter into this Agreement,
Subservicer represents and warrants that the following are
true as of the execution of this Agreement and further
represents and warrants that the following will continue to be
true through and including the final Transfer Date, unless
another date is specified:
(1) Due Incorporation and Good Standing.
Subservicer is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction during
the time of its activities with respect to the Mortgage Loans.
Subservicer is properly licensed, qualified and in good
standing to transact business in all appropriate jurisdictions
and to conduct all activities performed with respect to
subservicing of the Mortgage Loans.
(2) Authority and Capacity. Subservicer has all
requisite corporate power, authority and capacity to enter
into this Agreement and to perform the obligations required of
it hereunder. This Agreement constitutes a valid and legally
binding agreement of Subservicer enforceable in accordance
with its terms except as such enforceability may be limited by
bankruptcy, insolvency and similar laws and equitable
principles affecting the enforceability of the rights of
creditors generally.
(3) Effective Agreement. The execution, delivery
and performance of this Agreement by Subservicer, its
compliance with the terms hereof and consummation of the
transactions contemplated hereby will not violate, conflict
with, result in a breach of, constitute a default under, be
prohibited by or require any additional approval under its
charter, bylaws, or any instrument or agreement to which it is
a party or by which it is bound or which affects the Mortgage
Loans, including but not limited to the servicing agreements
related to the Mortgage Loans, or any state or federal law,
rule, or regulation or any judicial or administrative decree,
order, ruling or regulation applicable to it or to the
servicing of the Mortgage Loans.
(4) Compliance with Contracts and Regulations.
Subservicer has complied with all material obligations under
all contracts to which it is or was a party, and with all
applicable federal, state and local laws and regulations with
respect to and which affect the servicing of the Mortgage
Loans. The laws and regulations which Subservicer has
complied with include but are not limited to all applicable
Agency Requirements. Subservicer has done, and will do, no
act or thing which will materially adversely affect the
servicing of the Mortgage Loans or the Mortgage Loans.
11
<PAGE> 12
(5) Related Escrow Account Maintenance. All
related escrow accounts are being maintained in accordance
with applicable law and Agency Requirements, and in accordance
with the Servicing Agreements and the terms of the Mortgages
related thereto. Except as to payments which are past due
under the Notes, all escrow balances required by the Mortgages
and paid to Subservicer for the account of the Borrowers and
Subservicer are on deposit in the appropriate escrow/impound
accounts. All funds received by the Subservicer in connection
with the Mortgage Loans, including, without limitation,
foreclosure proceeds, hazard insurance proceeds, condemnation
proceeds and principal reductions, have promptly been
deposited in the appropriate account, and all such funds have
been applied to reduce the principal balance of the Mortgage
Loans in question, or for reimbursement or repairs to the
Mortgaged Property or as otherwise required by applicable law
and the Agency Requirements. There are no pledged accounts in
lieu of escrow deposits.
(6) Litigation; Compliance with Laws. There is
and shall be no litigation, proceeding or governmental
investigation existing or pending or to the knowledge of
Subservicer threatened, or any order, injunction, decree or
settlement agreement outstanding against or relating to
Subservicer or the servicing of the Mortgage Loans or the
Mortgage Loans, which may have a material adverse effect upon
the business, operations, assets or financial condition of
Subservicer or which may impair the ability of Subservicer to
perform its obligations under this Agreement, nor does
Subservicer know of any basis for any such litigation,
proceeding or governmental investigation. Subservicer has
not violated and will not violate any applicable law,
regulation, ordinance, order, injunction, decree or settlement
agreement, nor any other requirement of any governmental body
or court, which may materially affect any of the Mortgage Loans
or the servicing of the Mortgage Loans. For purposes of this
Section 4.6, "litigation" shall include a suit for damages
alone and shall not require that a specific performance remedy
or injunction impacting the transfer of the servicing be
pending.
(7) Ability to Perform. Subservicer does not
believe, nor does it have any reason or cause to believe, that
it cannot perform each and every covenant contained in this
Agreement.
(8) Statements Made. As of the date of execution
of this Agreement, no representation, warranty or written
statement made by Subservicer, in connection with this
Agreement, or any exhibit, schedule, data tape, statement or
certificate furnished to Servicer by Subservicer, in
connection with the transactions contemplated hereby by
Subservicer contains or will contain any untrue statement of a
material fact or omits or will omit to
12
<PAGE> 13
state a material fact
necessary to make the statements contained herein or therein
not misleading.
(9) Insolvency. Subservicer has not (i) admitted
in writing its inability to pay its debts generally as they
become due, (ii) filed a petition to take advantage of any
applicable insolvency or reorganization statute, (iii) made an
assignment for the benefit of its creditors or (iv)
voluntarily suspended payment of any of its obligations.
(10) Agency Requirements. Subservicer
has performed all material obligations to be performed under
Agency Requirements, and no event has occurred and is
continuing which, but for the passage of time or the giving of
notice or both, would constitute an event of default
thereunder. Subservicer is an approved seller/servicer/issuer
in good standing with FNMA, FHLMC and GNMA.
(11) Audits. Subservicer has not been
the subject of allegations of material failure to comply with
applicable servicing or claims procedures, in its most recent
Agency or PMI policy provider audits (if any).
(12) Compliance with Insurance Contracts.
Subservicer has complied with all material obligations under
all applicable insurance contracts, including hazard, flood
and private mortgage insurance contracts, with respect to, and
which affect any of the servicing of the Mortgage Loans.
Subservicer has not taken any action or failed to take any
action which might cause the cancellation of or otherwise
affect any of the insurance contracts.
(13) Accuracy of Servicing Information.
The information provided by Subservicer to Servicer pursuant
to this Agreement is true and correct, in all material
respects.
(14) Errors and Omissions Policy.
Subservicer has in full force and effect an adequate errors
and omissions policy or policies satisfying all Agency
Requirements with respect to its servicing operations and a
standard mortgage bankers blanket bond.
(15) Financial Condition of
Subservicer/Regulatory Approval.
13
<PAGE> 14
Subservicer is not in receivership, conservatorship or
bankruptcy. Subservicer is not operating pursuant to any
restrictive operating agreement or order mandated by the OTS,
the FDIC or any federal or state regulatory body.
B. Subservicer covenants that it shall subservice the loans
hereunder in accordance with the terms of this Agreement.
Subservicer shall notify Servicer of all employees currently
under employment agreements with Subservicer or who are
entitled to receive any additional compensation conditioned on
continued employment through a designated future date. In
addition, Subservicer shall provide Servicer advance (i.e.
with reasonable time to comment) notification of the granting
of any employment agreement or additional compensation
conditioned on continued employment through a designated
future date. Subservicer further covenants that during the
period of time that Subservicer is performing its services
hereunder, it will not make any of the following significant
changes in its operations, without the prior written consent
of the Servicer, which consent shall not be unreasonably
withheld:
Any servicing system change to a system which is not
generally accepted in the industry as customary and
competent of handling large loan volume.
Operational changes in lockbox operations, loan
numbers, force placed insurance carriers, or which
are associated with any change in a significant
vendor (vendors whose services earn fees in excess of
$500,000 per year).
Operational changes which require a waiver of an
Agency.
The outsourcing of any servicing obligation done by
Subservicer internally as of December 31, 1996.
A change in the ownership structure of Subservicer.
In addition, Subservicer shall timely notify Servicer of any
operational changes which must be made by Subservicer at the
request of any Agency.
C. Subservicer covenants that as of the date indicated below, it
will provide evidence to Servicer of the following:
(1) That as of June 1, 1997, Subservicer will have in
place a disaster recovery plan which will operate in
accordance with Agency Requirements.
14
<PAGE> 15
(2) That as of June 1, 1997, Subservicer's escrow
analysis department will have procedures in place to
adequately report on the placement and removal of
stop analysis flags on Mortgage Loans.
(3) That by the Transfer Date, as defined in the Sale
Agreement, Subservicer will have ensured that the
integrity of the Mortgage Loan data on its servicing
system is acceptable under Agency Requirements.
(4) That as of June 1, 1997, Subservicer's customer
service department will be adequately staffed to meet
the following customer service performance
parameters:
Phone call blockage cannot exceed 10%.
A phone call abandonment rate of less than 6%.
An eighty percent (80%) probability that a phone
call will be answered within ninety (90) seconds.
Phones must be available for Borrowers between
8:15 a.m. and 8 p.m. eastern time.
(5) That as of June 1, 1997, Subservicer will have in
place an active procedure to ensure that complaints
of a discriminatory basis, or which have been made to
regulators or to the Agencies and forwarded to
Subservicer, are dealt with at a senior officer
level.
(6) That as of June 1, 1997, Subservicer's bankruptcy
department will be performing escrow analyses, in
accordance with Agency Requirements, on Mortgage
Loans for which the Borrower has filed for protection
under the Bankruptcy Code.
(7) That as of June 1, 1997, Subservicer will have in
place a proactive loss mitigation function which
complies with Agency Requirements.
(8) That by March 1, 1997, Subservicer's Assumptions
Department will be reporting its mortgage record
change notices to the FHA by electronic transmission,
as required by HUD, and not by tape, unless such date
is extended by HUD. Additionally, by June 1, 1997,
Subservicer's Assumptions Department will have
procedures in place to ensure compliance with
Applicable Laws, including but not limited to such
reporting as is required under the Home Mortgage
Disclosure Act (HMDA) and such early disclosures as
are required by the Real Estate Settlement Procedures
Act and the Truth in Lending Act.
15
<PAGE> 16
(9) That by June 1, 1997, Subservicer will have performed
a full audit of the adjustable rate Mortgage Loans
which Subservicer acquired as part of its acquisition
from Empire.
(10) That by June 1, 1997, Subservicer will have
procedures in place to (i) properly report to HUD the
total payment amount on the HUD 300 for Mortgage
Loans with Escrow Account shortage spreads and (ii)
ensure that unapplied HUD 235 subsidies are being
reconciled timely each month to the HUD billings and
to the loan level detail.
Note: Items set forth above which must be completed by a date after
the date on which this Agreement is, pursuant to the provisions of Section 7,
scheduled to terminate, must be completed under the terms of this Agreement
only if this Agreement is, by mutual consent, extended beyond its currently
anticipated term.
6.2 Servicer's Representations, Warranties and Covenants
A. Servicer hereby makes, as if fully restated herein, the
representations and warranties of Purchaser set forth in
Article VI of the Sale Agreement, which are hereby
incorporated herein by this reference, as if they were fully
restated.
B. Servicer covenants that it will perform its duties hereunder
in accordance with the terms of this Agreement.
C. Servicer shall inform Subservicer in writing of any action
that Servicer contracts for which requires any action on the
part of Subservicer, and Servicer shall hold Subservicer
harmless from and against any acts or omissions of Subservicer
resulting from Servicer's failure to give such notice.
7. TERMINATION
This Agreement shall terminate (i) as of close of business on the
Approval Date, or if the approvals required by the Approval Date are not
obtained by June 1, 1997, by June 1, 1997, unless extended by mutual agreement
of the parties or (ii) by mutual consent of Servicer and Subservicer, in
writing. This Agreement may be terminated by Servicer at an earlier time for
cause, upon sixty (60) days written notice, if one or more of the following
events of default by Subservicer shall occur and be continuing:
(a) any failure by Subservicer to remit to the Agency and/or
Servicer any material (individually or in the aggregate) payment required to be
made by Subservicer under the terms of this Agreement or Agency Requirements
which continues unremedied for a period of one (1) Business Day after the
earlier of: (i) discovery by Subservicer of such non-
16
<PAGE> 17
payment; or (ii) the date upon which written notice of such failure, requiring
the same to be remedied, shall have been given to Subservicer by Servicer or
the Agency,
(b) failure on the part of Subservicer duly to observe or perform
in any material respect any other of the covenants or agreements on the part of
Subservicer set forth in this Agreement which continue unremedied for a period
of thirty (30) days, or (with notice to Subservicer) such shorter cure period
as may be permitted by the Agency after the date on which written notice of
such failure, requiring the same to be remedied, shall have been given to
Subservicer by Servicer or the Agency;
(c) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or receiver
or liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or liquidation of
its affairs, shall have been entered against Subservicer and such decree or
order shall have remained in force undischarged or unstated for a period of
thirty (30) days;
(d) Subservicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating to Subservicer
or relating to all or substantially all of its property;
(e) Subservicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations; or
(f) Subservicer shall cease to be eligible to sell mortgage loans
to or service mortgage loans for the Agency;
then, and in each and every such case, so long as an event of default shall not
have been remedied, Servicer by notice in writing to Subservicer may, in
addition to whatever rights Servicer may have at law or in equity, to damages,
including injunctive relief and specific performance, terminate all the rights
and obligations of Subservicer without incurring any penalty or fee of any kind
whatsoever in connection therewith. On or after the receipt by Subservicer of
such written notice, all authority and power of Subservicer under this
Agreement shall cease. Upon such termination, Subservicer shall promptly
prepare, execute and deliver any and all documents and other instruments, all
Servicing Files (as defined in the Sale Agreement), and do or accomplish all
other acts or things, all in accordance with the servicing transfer
instructions (as set forth in the Sale Agreement or as otherwise provided by
Servicer), Agency Requirements and Applicable Law, necessary or appropriate to
effect the purposes of such notice of termination at Subservicer's sole cost.
Subservicer agrees to cooperate with Servicer in effecting the termination of
Subservicer's responsibilities and rights hereunder, including, without
limitation the transfer to Servicer or its designee, in
17
<PAGE> 18
accordance with the terms of the servicing transfer instructions (as set forth
in the Sale Agreement or as otherwise provided by Servicer), the Sale Agreement
and Agency Requirements, for administration by it of all Subservicing Accounts
which are at the time maintained by Subservicer relative to the Mortgage Loans.
In the event this Agreement is terminated by Servicer for cause due to
an event of default by Subservicer, then Subservicer shall reimburse Servicer
for any losses, damages and reasonable out-of-pocket expenses that Servicer
suffers as a result of termination prior to the Transfer Date which losses
shall include, but not be limited to the following: (i) all costs incurred in
transferring the Servicing to Servicer or its designee (including cost of
transferring electronic data or transferring onto a different technological
platform); (ii) any reasonable (given the circumstances that exist at the time)
increase in amount over and above the Subservicing Fee which Servicer is
required to pay to a third party subservicer to subservice the Mortgage Loans
prior to the Transfer Date; (iii) any penalties which may be assessed by any
party; and (iv) reasonable attorney fees and costs.
8. INDEMNITY; BONDING
8.1 Indemnification of Servicer. Subservicer agrees to indemnify
and hold Servicer harmless from and against any and all claims, losses, damages
and reasonable out-of-pocket expenses arising out of or in any way related
to breach of any representation, warranty or covenant set forth in this
Agreement.
8.2 Indemnification of Subservicer. Servicer agrees to indemnify
and hold Subservicer harmless from any and all claims, losses, damages and
reasonable out-of-pocket expenses arising out of or in any way related to
breach of any representation, warranty or covenant set forth in this Agreement
or any actions of Subservicer taken in compliance with written instruction from
Servicer.
8.3 Survival. The indemnifications set forth in Sections 8.1 and
8.2 of this Agreement shall survive termination of this Agreement for a period
of ten (10) years from the Sale Date (the "Survival Period"). Servicer may
recover under this Section, provided that written notice of a claim shall have
been given prior to the expiration of the Survival Period. Notwithstanding
anything to the contrary in this Section 8.3, in the event that, prior to the
expiration of the Survival Period, written notice of a claim for
indemnification is given, and either the loss which is indemnifiable has not
yet been incurred or litigation in connection with the claim for
indemnification has not yet commenced, such claim shall survive beyond the
Survival Period only if the threat of litigation arose within six (6) months
prior to the expiration of the Survival Period (which threat is evidenced by
written correspondence from an attorney) and litigation commences within six
(6) months after expiration of the Survival Period.
8.4 Insurance. Subservicer shall maintain such insurance as may
be required to maintain its status as an Agency approved Seller/Servicer.
Subservicer shall maintain at Subsevicer's expense and keep in effect
throughout the term hereof for itself, and for
18
<PAGE> 19
Servicer as co-insured or loss payee, in accordance with Applicable Law and
Agency Requirements, fidelity, theft and forgery bond coverage and errors and
omissions insurance in amounts and with carriers satisfactory to the Agencies.
Subservicer shall provide Servicer, upon written request, with evidence
satisfactory to Servicer of its compliance with the requirements of this
Subsection. In addition, Subservicer shall provide Servicer, or any person
authorized by Servicer, full and complete access during reasonable business
hours to copies of then-current policies of insurance required hereunder,
given advance written notice of five (5) Business Days from Servicer to
Subservicer. All such policies shall provide that they may not be canceled by
the carrier without thirty (30) days' prior written notice to Servicer.
9. MISCELLANEOUS
9.1 No Joint Venture. Nothing herein shall be deemed or construed
to create a co-partnership or joint venture between the parties hereto, and the
services of Subservicer shall be rendered as an independent contractor.
9.2 Waiver. No delay, failure or discontinuance of either party
in exercising any right, power or remedy under this Agreement, shall affect or
operate as a waiver of such right, power or remedy, nor shall any single or
partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by either party of any breach or default under this Agreement must be in
writing and shall be effective only to the extent set forth in such writing.
9.3 Successors; Assignment. Subservicer does not have the right
to sell, assign, delegate or otherwise transfer its rights or obligations under
this Agreement to a third party without obtaining the prior written consent of
Servicer. Servicer reserves the right in its reasonable discretion to approve
the new subservicer. In determining the acceptability of the new subservicer,
Servicer may consider such subservicer's reputation in the industry, financial
status, approval status with the Agencies, as well as with private investors
and regulators, status as a competitor to Servicer, and ability to service
non-standard mortgage products. Subject to the restrictions on assignment set
forth in this Agreement and the Sale Agreement, this Agreement shall be
binding on and inure to the benefit of the successors and assigns of the
parties. Any assignment shall not release Subservicer from liability
hereunder for acts or omissions of Subservicer prior to such assignment. Any
assignee shall assume all of Subservicer's obligations hereunder, as well as
assume the performance of all functions related to the transfer of the
Servicing on the Transfer Date, as set forth in Exhibit D and Exhibit E.
Additionally, any assignee shall, as of the date of assignment, make all of
those representations and warranties required of Subservicer hereunder in
reference to this Agreement.
19
<PAGE> 20
Should Servicer choose to resell portions of the Servicing portfolio
due to no fault of the Subservicer, Subservicer shall reasonably cooperate with
Servicer and its assignee or designee to affect due diligence and transfer. In
such event, Subservicer shall not be responsible for any out-of-pocket expenses
related to such sale that it would not have otherwise incurred in connection
with transferring the Mortgage Loans to Servicer. In no event, other than
Subservicer Default or as mutually agreed by the parties, shall the Mortgage
Loans be transferred before the Transfer Dates set forth in the Sale Agreement.
The transfer dates associated with any such transfer shall be agreed upon in
accordance with the terms of this Agreement and the Sale Agreement.
9.4 Entire Agreement; Amendment. This Agreement and the Sale
Agreement and Exhibits and Schedules thereto constitute the entire agreement
between Subservicer and Servicer with regard to subservicing the Mortgage Loans
and supersedes all prior negotiations, communications, discussions and
correspondence concerning the subject matter hereof and may be amended or
modified only by a written instrument executed by each party hereto.
9.5 Notices. All notices, requests and demands given to or made
upon any party hereto must be in accordance with Section 11.11 of the Sale
Agreement.
9.6 Time. Time is of the essence of each and every provision of
this Agreement.
9.7 Severability of Provisions. If any provision of this
Agreement shall be prohibited by or deemed invalid under Applicable Law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
9.8 Ohio Law Applicable. This Agreement shall be governed by and
construed in accordance with the law of the State of Ohio.
9.9 Solicitation of Mortgages. Neither Subservicer nor any
affiliate or agent of Subservicer shall, during the remaining term of any of
the Mortgage Loans, take any action to personally, by telephone, by mail or
otherwise, directly or indirectly, solicit the prepayment or modification of
the Mortgage Loans, in whole or in part, or offer any Borrower any other
mortgage or non-mortgage related products. Notwithstanding the foregoing, it
is understood and agreed that promotions which are directed to the general
public, including, without limitation, mass mailings based on commercially
acquired mailing lists, newspaper, radio and television advertisements, shall
not constitute solicitations under this paragraph.
9.10 Cooperation. To the extent reasonably possible, the parties
hereto shall cooperate with and assist each other, as requested, in carrying
out the other's covenants, agreements, duties and responsibilities under this
Agreement and in connection herewith shall
20
<PAGE> 21
execute and deliver all such documents and instruments as shall be necessary
and appropriate in the furtherance thereof.
9.11 Confidentiality of Information. Except as otherwise required
law, Subservicer and Servicer and their affiliates shall, and shall cause their
respective directors, officers, employees and authorized representatives to,
hold in strict confidence and not use or disclose to anyone without the prior
written consent of the other party all information concerning customers or
proprietary business procedures, servicing fees or prices, policies or plans of
the other party or any of its affiliates received by them from the other party
in connection with the transactions contemplated hereby.
9.12 Supplementary Information. From time to time, upon reasonable
notice, prior to and after the Transfer Date, Subservicer shall furnish
Servicer such incidental information, which is reasonably available to
Subservicer, supplementary to the information contained in the documents and
schedules delivered pursuant hereto, as Purchaser may reasonably request within
ten (10) years of the Sale Date. Any request for information under this
Section which is in reference to information which was not required to have
been provided under the terms of this Agreement shall be fulfilled at the
reasonable expense of Purchaser.
9.13 Set-off. Servicer agrees that Subservicer may, at its option,
deduct from any payment due Servicer under the terms of this Agreement, any
monies due to Subservicer under the terms of this Agreement and based upon
Servicer's failure to make payment to Subservicer as required under the terms
of this Agreement.
21
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written.
SERVICER:
CHEMICAL MORTGAGE COMPANY
ATTEST:
BY:______________________________
_________________________ NAME:____________________________
TITLE:___________________________
DATE:____________________________
SUBSERVICER:
SOURCE ONE MORTGAGE SERVICES
CORPORATION
ATTEST:
BY:______________________________
_________________________ NAME:____________________________
TITLE:___________________________
DATE:____________________________
22
<PAGE> 23
Exhibit A - Mortgage Loan Listing
Exhibit B - Approved Vendors
Exhibit C - Tape Format
Exhibit D - Transfer Obligations
Exhibit E - Transfer Instructions
23
<PAGE> 1
EXHIBIT 10(ff)
MORTGAGE LOAN SUBSERVICING AGREEMENT
THIS MORTGAGE LOAN SUBSERVICING AGREEMENT ("Agreement") is made as of
close of business on the Approval Date, by and between CHEMICAL MORTGAGE
COMPANY, an Ohio corporation, with offices at 200 Old Wilson Bridge Road,
Worthington, Ohio 43085-8500 ("Servicer") and SOURCE ONE MORTGAGE SERVICES
CORPORATION, with offices located at 27555 Farmington Road, Farmington Hills,
Michigan 48334-3357 ("Subservicer").
RECITALS
A. WHEREAS, Subservicer is engaged as an independent contractor
in the business of servicing loans and performs servicing functions
for various investors;
B. WHEREAS, Servicer has contracted with Subservicer to perform
the administration and subservicing of certain mortgage loans
("Mortgage Loans") the servicing rights to which were purchased by
Servicer from Subservicer pursuant to a FNMA/FHLMC/GNMA Mortgage
Servicing Purchase and Sale Agreement between Servicer and
Subservicer, dated as of February 28, 1997 ("Sale Agreement"); and
C. WHEREAS, pursuant to the terms of such Sale Agreement,
Subservicer shall perform the servicing obligations on the Mortgage
Loans during the Subservicing Period in accordance with the terms of
this Agreement; and
D. WHEREAS, such servicing obligations shall be performed under
Servicer's seller/servicer identification numbers; and
E. WHEREAS, Servicer and Subservicer desire to formalize and
state the terms and conditions which shall govern the subservicing and
administration of such Mortgage Loans by Subservicer.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
The following terms shall have the meaning set forth after each:
1.1 Accepted Practices. Prudent mortgage banking practices for
similar loans.
1.2 Advances. All customary and necessary out-of-pocket costs and
expenses incurred in accordance with Agency Requirements and the Loan Documents
with regard to performance by Subservicer of its subservicing obligations,
including, but not limited to, advances of principal, interest (including
Shortfall Interest), taxes, insurance, foreclosure and bankruptcy expenses and
guarantee fees.
<PAGE> 2
1.3 Agency: FNMA, FHLMC and/or GNMA, individually and
collectively, as applicable.
1.4 Agency Requirements: The rules, regulations, announcements,
notices, directives and instructions of the Agency, as applicable, including,
without limitation, the Agency contracts or commitments (which contracts or
commitments incorporate by reference all applicable Agency Selling and
Servicing Guides and the underlying FHA and/or VA rules, regulations and
requirements) with respect to the Mortgage Loans, and any revisions to same.
1.5 Ancillary Fees: Reasonable and customary fees acceptable to
the Agencies and collected by servicers as income incidental to the servicing
of the Mortgage Loans such as late fees, insurance administration fees and
commissions, processing fees and assumption fees, which Ancillary Fees shall
not, without the consent of Servicer (which consent shall not be unreasonably
withheld as to inflationary increases in fee amount or as to an additional fee
type dictated by the Agencies), exceed, in fee amount or type, the fees charged
by Subservicer as of November 28, 1996.
1.6 Applicable Law: All federal, state and local laws, rules and
regulations, as amended from time to time, applicable to the Mortgage Loans,
the Servicing, Subservicer and/or the performance by Subservicer of its duties
hereunder including but not limited to the Truth in Lending Act, the Real
Estate Settlement Procedures Act ("RESPA" including the provisions set forth in
the regulations enacted under the Cranston-Gonzalez amendment), The Fair Credit
Reporting Act, The Equal Credit Opportunity Act, The Flood Disaster Protection
Act and laws relative to escrow administration, usury, due on sale and loan
servicing.
1.7 Borrower. Any person obligated under the promissory note or
other instruments evidencing and securing a Mortgage Loan.
1.8 Business Day. A day or a portion thereof during which both
Servicer and Subservicer are open for business, other than Saturday or Sunday,
or any legal holiday.
1.9 Custodial Account[s]. The accounts maintained in accordance
with Applicable Law and Agency Requirements for the deposit of principal and
interest payments in respect of one or more Mortgage Loans.
1.13 Escrow Account[s]. Any amounts collected from a Borrower for
the purpose of paying, on behalf of the Borrower, hazard insurance premiums,
mortgage insurance premiums, taxes, assessments and other similar items as
required or permitted under the Loan Documents.
1.10 FNMA. The Federal National Mortgage Association.
1.11 FHLMC. The Federal Home Loan Mortgage Corporation.
2
<PAGE> 3
1.12 GNMA. The Government National Mortgage Association.
1.14 Investor. FNMA, FHLMC and/or GNMA, as applicable.
1.15 Mortgage Loan[s]. The conventional and government mortgage
loans, the Servicing associated therewith being the subject of this Agreement
and having been transferred from Subservicer to Servicer pursuant to the Sale
Agreement, a listing of which is attached hereto as Exhibit A.
1.16 Loan Documents. Any promissory note, deed of trust, mortgage,
assignment, guaranty, title insurance policy, mortgage insurance policy, or
other instrument or document executed, issued or obtained in connection with a
Mortgage Loan.
1.17 Mortgaged Property. The property which is the subject of each
security agreement, mortgage or deed of trust securing repayment of the debt
evidenced by the Loan Documents.
1.18 REO (Real Estate Owned). Properties acquired through
foreclosure or by acceptance of a deed in lieu of foreclosure on behalf of
Servicer or the Investor.
1.19 Sale Agreement. As defined in the recitals.
1.20 Servicing. As defined in the Sale Agreement.
1.21 Shortfall Interest. The Mortgage Loan curtailment or payoff
interest which is required to be paid to the Agency but which the Borrower is
not obligated to pay.
1.22 Subservicing Accounts: The Escrow Accounts and Custodial
Accounts established pursuant to this Agreement.
1.23 Subservicing Fee: The compensation to be paid to Subservicer
for subservicing performed under this Agreement which shall be equal to Five
Dollars ($5.00) per each Mortgage Loan for which the Investor is FNMA or FHLMC,
and Six Dollars ($6.00) per each Mortgage Loan for whom GNMA is the Investor,
in existence on the first day of each month during the term of this Agreement.
Defined terms used in this Agreement but not defined herein, shall
have the meanings ascribed to such terms in the Sale Agreement.
2. SUBSERVICING DUTIES
Subservicer shall have the following obligations with respect to all
Mortgage Loans:
3
<PAGE> 4
2.1 General Servicing Responsibilities. Subservicer shall
undertake all actions, with regard to the servicing and administration of the
Mortgage Loans, whether or not specifically outlined in this Agreement,
including, but not limited to, the advancing of funds, all in accordance with
the terms and conditions of the Loan Documents, Agency Requirements, Applicable
Law and this Agreement. Such actions shall be undertaken in accordance with
Accepted Practices. To the extent of any conflict between the terms and
conditions of this Agreement and the Agency Requirements, the Agency
Requirements shall control.
As to vendors utilized by Subservicer in connection with the
performance of its obligations hereunder, whose services earn fees in excess of
$500,000 per year, Subservicer shall obtain the written approval of Servicer to
any change from a vendor currently utilized by Subservicer, which approval
shall not be unreasonably withheld. Servicer has approved all vendors utilized
by Subservicer as of the date of execution of this Agreement. Attached hereto
as Exhibit B is a list of such vendors which have been approved by Servicer.
2.2 Collections. Subservicer shall proceed diligently to collect
all sums which become due under the Loan Documents as if Subservicer were
servicing the Mortgage Loans for its own account, including without limitation
principal, whether or not prepaid, interest, late charges, prepayment fees,
private mortgage insurance premiums, fire, flood, earthquake and other hazard
insurance premiums, and taxes, assessments and other similar charges, all in
accordance with Agency Requirements. Concerning Mortgage Loans for which the
Subservicer drafts monthly payments electronically from the Borrower's bank
account, such drafting occurs in compliance with Agency Requirements, and the
applicable agreement with the Borrower.
2.3 Insurance.
A. Subservicer shall undertake all actions necessary to ensure
that fire, flood, earthquake and other hazard insurance
required by the Agency is maintained by each Borrower on the
Mortgaged Property in accordance with Agency Requirements.
Where any such required insurance coverage is allowed to
lapse, whether or not due to Borrower's fault or negligence,
Subservicer shall, immediately upon knowledge of such lapse,
promptly obtain new insurance in accordance with Agency
Requirements and the Loan Documents. Subservicer shall
maintain records of all such insurance coverage in accordance
with Agency Requirements.
B. Upon receiving notice of any event which constitutes a loss
under any policy of insurance relative to a Mortgage Loan,
Subservicer shall undertake appropriate action, including the
filing of all necessary claims, to permit full recovery of
such loss under the policy of insurance. If a claim ("Claim")
is made under a fire, flood, earthquake or other hazard
insurance policy, Subservicer is authorized to settle such
Claim, collect the insurance proceeds,
4
<PAGE> 5
make any arrangements with respect to restoration or
rehabilitation of the Mortgaged Property and disburse
insurance proceeds in accordance with Agency Requirements, the
Loan Documents and Applicable Law. Subservicer will cause an
inspection(s) to be made so as to assure itself that the
Mortgaged Property has been satisfactorily repaired in
accordance with Agency Requirements and shall, if the loss is
in excess of $5,000, secure a statement from the Borrower
indicating satisfaction with the repairs.
C. Any Mortgage Loan involved with any type of optional insurance
has been properly serviced, including, without limitation, the
proper application and collection of premiums, the maintenance
of complete and accurate records, processing and payment of
claims and the handling of correspondence.
2.4 Escrow Accounts. Subservicer shall take all actions necessary
to ensure that each Mortgage Loan Escrow Account is maintained in an FDIC
insured depository institution in accordance with Agency Requirements and
Applicable Law. Subservicer shall be responsible for all matters relating to
the administration of the Escrow Accounts, including without limitation: the
deposit of funds to the Escrow Accounts no later than the next Business Day
after receipt; the disbursement of funds to the proper parties when and if due
in payment of the items for which such Escrow Accounts are established; payment
of interest to Borrowers on funds deposited into such Escrow Accounts to the
extent required by Applicable Law (and Subservicer shall receive reimbursement
from the Servicer for its payment of interest to Borrowers on funds deposited
into such Escrow Account in accordance with this Agreement); and maintenance of
all books and records with respect to such Escrow Accounts, all in accordance
with Applicable Law and Agency Requirements. Servicer shall have the right to
all income and other benefits derived from the Escrow Accounts. The Escrow
Accounts shall be held in an institution designated by Servicer, established in
the name of Servicer and titled as mutually agreed by the parties for the
benefit of Servicer, the Agency and the Borrowers, as their interests appear.
Servicer shall permit Subservicer to have access to such Escrow Accounts to
make deposits and disbursements in accordance with the terms of this Agreement.
Subservicer shall provide all statements with regard to such Escrow Accounts as
required in compliance with Applicable Law, including but not limited to RESPA.
2.5 Mortgage, Insurance. Subservicer shall keep all records,
provide all notices and undertake all other actions which may be required to
preserve and enforce all rights of Servicer under any private mortgage
insurance applicable to the Mortgage Loans in accordance with Agency
Requirements and the applicable policy of private mortgage insurance.
2.6 Delinquencies, Bankruptcy and Foreclosure. Subservicer shall
handle all Mortgage Loan delinquencies and bankruptcies and conduct all
Mortgage Loan foreclosures in strict accordance with Agency Requirements, the
Loan Documents, Applicable Law and Accepted Practices so as to minimize the
exposure and losses of Servicer and/or the Investor
5
<PAGE> 6
on such Mortgage Loans. Subservicer's foreclosure responsibilities include
timely mailing and recording of all required notices, procuring all necessary
foreclosure guarantees, compliance with all Agency Requirements, including
specifically, but not limited to, those related to loss mitigation and
collection including referral to counselling; conducting the foreclosure sale
and undertaking all necessary eviction proceedings to vacate the Mortgaged
Property subject to the foreclosure and filing all appropriate claims with the
applicable insurer or guarantor in a timely manner. Servicer shall grant to
Subservicer limited corporate authority to allow Subservicer to execute
satisfactions and bankruptcy and foreclosure documentation on Servicer's
behalf.
2.7 REO's. At the option of Servicer and at Servicer's expense,
Subservicer shall be responsible for the administration and maintenance of the
Mortgaged Property following any foreclosure sale to the extent required by
Agency Requirements; provided however that Subservicer shall pay, without
reimbursement from Servicer, the first $1,000 of REO expense on REOs located
outside of New York and the first $1,500 of REO expense on REOs located inside
New York, for any REO which related to a Mortgage Loan for which a fee would
have been due to Servicer as purchaser under the provisions of Section 7.24 of
the Sale Agreement but for the fact that such Mortgage Loan did not transfer.
All funds shall be held and remitted in accordance with Agency Requirements.
In the event that the Agency or Servicer should require Subservicer to market
the REO, Servicer agrees to pay Subservicer a fee for marketing the REO in an
amount equal to one thousand five hundred dollars ($1,500) per REO or one
percent (1%) of the REO sale price, whichever is greater. REO expense shall be
reimbursed to Subservicer monthly, upon receipt of an invoice prepared by
Subservicer.
2.8 Assumption and Other Modifications. Subservicer shall have
full responsibility for processing applications for and documenting all
assumptions and other modifications of the Mortgage Loans in accordance with
Agency Requirements, Applicable Law and the Loan Documents.
2.9 Annual Statements. Subservicer shall annually prepare for
each Borrower, without charge, written statements for each calendar year in
compliance with the Internal Revenue Code of 1986, as amended, and any other
Applicable Law.
2.10 Payoffs. Subservicer shall process all Mortgage Loan Payoffs
and Loan Document satisfactions/reconveyances in compliance with Agency
Requirements and Applicable Law. Subservicer shall not act or fail to act in
any manner which may result in imposition of any penalty for late
satisfaction/reconveyance of a Mortgage Loan. Servicer shall reimburse
Subservicer for recording fees imposed for the recording of
satisfactions/reconveyances required by applicable law to be recorded by the
lender, and which cannot, under applicable law, be imposed upon the Borrower.
2.11 Reclassification of Delinquent Mortgage Loans: In the event
that the Agency, or the Servicer, requires the Subservicer to reclassify a
delinquent Mortgage Loan from a
6
<PAGE> 7
pool into the Servicer's actual portfolio, Subservicer shall: (i) at the
direction of the Servicer and/or the Agency, effect any required repurchase;
(ii) if not already established, establish a new investor number on its system;
(iii) open the appropriate escrow and custodial accounts; and (iv) report the
Mortgage Loan under the Servicer's actual portfolio. Subservicer and
Servicer shall perform all duties in connection with such reclassified Mortgage
Loans as defined in this Agreement.
2.12 Notice of Relief Requested Pursuant to the Soldiers and
Sailors Relief Act of 1940 or Similar Laws. Throughout the term of this
Agreement, Subservicer shall notify Servicer of any notification received from
any Borrower or other party with respect to any Mortgage Loan of a request for
relief pursuant to or invoking any of the provisions of the Soldiers and
Sailors Civil Relief Act of 1940 or similar state or federal law suspending
payments of amounts due under the Note or the commencement of foreclosure
proceedings.
3. DEPOSIT AND REMITTANCE OF FUNDS
3.1 Custodial Account. All funds applicable to the payment of
principal and interest on Mortgage Loans shall be held in trust for the
Investors in accordance with Agency Requirements and Applicable Law. Such
funds shall be deposited, no later than the next Business Day following
receipt, in a Custodial Account at an FDIC insured depository institution
meeting Agency Requirements. The Custodial Account shall be held in an
institution designated by Servicer, established in the name of Servicer and
titled as mutually agreed by the parties for the benefit of Servicer and the
Agency, as their interests appear. Servicer shall permit Subservicer to have
access to such Custodial Account to make deposits and disbursements in
accordance with the terms of this Agreement and Agency Requirements.
Subservicer shall provide all statements and reports relative to the Custodial
Account in accordance with Agency Requirements. Servicer shall be entitled to
all interest earned on said Custodial Accounts.
3.2 Remittance of Custodial Funds. Subservicer shall remit all
payments applicable to principal and interest, including without limitation
prepayments of principal, less the servicing fee calculated and deducted
pursuant to Section 3.5 of this Agreement, in accordance with Agency
Requirements and shall make all principal and interest advances to the Agency
pursuant to Agency Requirements.
3.3 Escrow Accounts. Deposits and withdrawals from the Escrow
Accounts shall be in accordance with Section 2.4.
3.4 Reimbursement of Subservicer. Servicer will reimburse
Subservicer for Advances and Shortfall Interest within one (1) Business Day of
its receipt, on a Business Day, from Subservicer of a billing along with
supporting documentation and a reconciliation of the prior amount paid and the
current amount due. Servicer shall reimburse Subservicer on a monthly basis
for any interest on escrow funds paid in the preceding month, within one
7
<PAGE> 8
(1) Business Day of its receipt, on a Business Day, of an invoice
substantiating such payments made. Servicer shall reimburse Subservicer for
funds required in connection with repurchase and reclassification of a Mortgage
Loan in accordance with Section 2.11, within one (1) Business Day of Servicer's
receipt, on a Business Day, of an invoice substantiating such payments made.
Servicer will wire the FNMA and GNMA guarantee fees to Subservicer within one
(1) Business Day following its receipt, on a Business Day, of billing for the
guarantee fees which will include the FNMA draft report. All requests for
Advances or reimbursement hereunder shall be accompanied by a certification
from an Assistant Vice President or high ranking or Servicer approved officer
of Subservicer certifying that all such sums for which reimbursement of an
advance is requested has or will be paid to the proper parties in accordance
with Agency Requirements and Applicable Law and that all deposits and
disbursements required to be made on or prior to the date of said certification
have been made in accordance with Agency Requirements and Applicable Law. In
the event of an improper payment to Subservicer, Subservicer shall make any
appropriate payment back to Servicer within one (1) Business Day of its
receipt, on a Business Day, of a demand for such payment together with
supporting documentation.
3.5 Remittance to Servicer: Subservicer shall deduct monthly from
each monthly payment received from a Borrower, an amount equal to one-twelfth
of the annual servicing fee payable to Servicer pursuant to Agency
Requirements. On or before the 10th Business Day of each month, Subservicer
shall remit to Servicer the servicing fees pertaining to FNMA and GNMA
servicing, net of the Subservicing Fee described in Section 4. On or before
the 25th day of each month (or the next Business Day if the 25th day is not a
Business Day), Subservicer shall remit to Servicer the servicing fees
pertaining to FHLMC servicing, net of the Subservicing Fee described in Section
4. Along with such remittances, Subservicer shall provide a report, reasonably
acceptable to Servicer, substantiating the amount remitted. All funds remitted
under this section shall be sent by wire transfer of immediately available
federal funds to the following account:
Banc One
Columbus, Ohio
ABA No. 044000037
Credit Account No. 980116070
For: Chase Manhattan Mortgage Corporation
Attention: Ed Reik 614-842-7210
3.6 Ownership of Escrow Accounts and Custodial Accounts:
Subservicer acknowledges that the Escrow Accounts, Custodial Accounts and any
collections it receives on the Mortgage Loans during the term of this Agreement
(except for Ancillary Fees) are for the account of Servicer, the Borrowers or
the Agency, as their interests may appear.
4. COMPENSATION
8
<PAGE> 9
Subservicer shall receive as compensation, with respect to each
Mortgage Loan serviced by it hereunder, the Subservicing Fee. Subservicer will
also retain Ancillary Fees.
5. CUSTODY OF LOAN DOCUMENTS, BOOKS, RECORDS
AND REPORTS
5.1 Documents, Books, Records. Subservicer shall either retain
copies of all original Loan Documents required in connection with its
subservicing obligations and delivered to Servicer or its designee pursuant to
the Sale Agreement, or incur any expense in connection with obtaining such
copies after delivery to Servicer or its designee. All Loan Documents shall be
held and delivered by Subservicer to Servicer pursuant to the terms of the Sale
Agreement. Subservicer acknowledges that Servicer alone owns the documents and
records related to the Mortgage Loans and the Servicing, subject to the rights
of the Agency, notwithstanding that the documents and/or the records may remain
in the possession of Subservicer during the term hereof to facilitate the
performance of subservicing activities described herein. Servicer shall
instruct its custodian that certain authorized representatives of Subservicer
may obtain release of Loan Documents, in accordance with Agency Requirements,
directly from the custodian. Servicer shall reimburse Subservicer for the
expense of obtaining any original document from a custodian in situations where
the original is reasonably required (i.e. lien release or default proceedings
when required by applicable law). Subservicer shall promptly provide the
Servicer, on reasonable request, on a loan by loan basis, copies of all
correspondence, reports, statements and other items regarding any Mortgage
Loan. Subservicer shall maintain records with respect to each Mortgage Loan in
accordance with Agency Requirements and Applicable Law, which shall include,
without limitation the application of payments as received from the Borrower
and all sums paid into and disbursed from any Escrow Account. Subservicer
shall also place copies of all relevant documentation received or sent by
Subservicer (**except on-line letters for which records are kept on the
system**) during the term of this Agreement with regard to the Mortgage Loans
in the Servicing File, as defined in the Sale Agreement, or in a separate
foreclosure file, all of which will be delivered to Purchaser on the Transfer
Date, as defined in the Sale Agreement.
Servicer shall have the right at reasonable times and upon forty-eight
(48) hours written notice, to inspect all books, records and practices of
Subservicer which relate to the Mortgage Loans serviced under this Agreement.
5.2 Reports. On or before the 5th Business Day of each month
through the month following termination of this Agreement, Subservicer shall
forward to Servicer, Attn: Servicing Portfolio Management, 200 Old Wilson
Bridge Road, Worthington, Ohio 43085, a copy of the month end delinquency
report and loss mitigation report for the Mortgage Loans reflecting the current
status for each Mortgage Loan including bankruptcy, foreclosure and collection
status, and the month end delinquency report for all Agency Mortgage Loans
subserviced by Subservicer for the preceding month. Upon reasonable request,
Subservicer
9
<PAGE> 10
will provide Servicer with evidence substantiating its compliance with Agency
Requirements including but not limited to those regarding Borrower counselling
and bankruptcy and foreclosure monitoring requirements. On or before the 25th
day (or the next Business Day if the 25th day is not a Business Day) of each
month (unless an earlier date is required by Servicer to allow for combining of
reports of Servicer and its other affiliates as required by GNMA, which date
will be subsequently identified), through the month following termination of
this Agreement, Subservicer shall provide Servicer, to Attn: Servicing
Portfolio Management, Chase Manhattan Mortgage Corporation, 200 Old Wilson
Bridge Road, Worthington, Ohio 43085, with copies of all required standard
FNMA, FHLMC and GNMA month end cut-off reports and applicable copies of
standard pool and loan level accounting and reconciliation reports, all
relating to the preceding month. Subservicer shall, at Servicer's expense
which expense shall not exceed fifty dollars ($50.00) per month, monthly,
within five (5) Business Days of month end, provide to Servicer a servicing
data tape in form approved by Servicer (a copy of such form is attached hereto
as Exhibit C), for Servicer's use in valuation of the Servicing.
Subservicer shall, upon reasonable request of Servicer, provide such
other information or reports not previously agreed to in this Agreement as may
be requested by Servicer. Such requests shall be reimbursed by Servicer in an
amount previously approved by Servicer.
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS
6.1 Subservicer's Representations, Warranties and Covenants.
A. As an inducement to Servicer to enter into this Agreement,
Seller represents and warrants that the following are true as
of the execution of this Agreement and further represents and
warrants that the following will continue to be true through
and including the final Transfer Date, unless another date is
specified:
(1) Due Incorporation and Good Standing.
Subservicer is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction during
the time of its activities with respect to the Mortgage Loans.
Subservicer is properly licensed, qualified and in good
standing to transact business in all appropriate jurisdictions
and to conduct all activities performed with respect to
subservicing of the Mortgage Loans.
(2) Authority and Capacity. Subservicer
has all requisite corporate power, authority and capacity to
enter into this Agreement and to perform the obligations
required of it hereunder. This Agreement constitutes a valid
and legally binding agreement of Subservicer enforceable in
accordance with its terms except as such enforceability may be
limited by bankruptcy, insolvency and similar laws and
equitable principles affecting the enforceability of the
rights of creditors generally.
10
<PAGE> 11
(3) Effective Agreement. The execution,
delivery and performance of this Agreement by Subservicer,
its compliance with the terms hereof and consummation of the
transactions contemplated hereby will not violate, conflict
with, result in a breach of, constitute a default under, be
prohibited by or require any additional approval under its
charter, bylaws, or any instrument or agreement to which it is
a party or by which it is bound or which affects the Mortgage
Loans, including but not limited to the servicing agreements
related to the Mortgage Loans, or any state or federal law,
rule, or regulation or any judicial or administrative decree,
order, ruling or regulation applicable to it or to the
servicing of the Mortgage Loans.
(4) Compliance with Contracts and
Regulations. Subservicer has complied with all material
obligations under all contracts to which it is or was a party,
and with all applicable federal, state and local laws and
regulations with respect to and which affect the servicing of
the Mortgage Loans. The laws and regulations which
Subservicer has complied with include but are not limited to
all applicable Agency Requirements. Subservicer has done, and
will do, no act or thing which will materially adversely
affect the servicing of the Mortgage Loans or the Mortgage
Loans.
(5) Related Escrow Account Maintenance.
All related escrow accounts are being maintained in accordance
with applicable law and Agency Requirements, and in accordance
with the Servicing Agreements and the terms of the Mortgages
related thereto. Except as to payments which are past due
under the Notes, all escrow balances required by the Mortgages
and paid to Subservicer for the account of the Borrowers and
Subservicer are on deposit in the appropriate escrow/impound
accounts. All funds received by the Subservicer in connection
with the Mortgage Loans, including, without limitation,
foreclosure proceeds, hazard insurance proceeds, condemnation
proceeds and principal reductions, have promptly been
deposited in the appropriate account, and all such funds have
been applied to reduce the principal balance of the Mortgage
Loans in question, or for reimbursement or repairs to the
Mortgaged Property or as otherwise required by applicable law
and the Agency Requirements. There are no pledged accounts in
lieu of escrow deposits.
(6) Litigation; Compliance with Laws.
There is and shall be no litigation, proceeding or
governmental investigation existing or pending or to the
knowledge of Subservicer threatened, or any order, injunction,
decree or settlement agreement outstanding against or relating
to Subservicer or the servicing of the Mortgage Loans or the
Mortgage Loans, which may have a material adverse effect upon
the business, operations, assets or financial condition of
Subservicer or which may impair the ability of Subservicer to
perform its obligations under this Agreement, nor does
Subservicer know of
11
<PAGE> 12
any basis for any such litigation, proceeding or governmental
investigation. Subservicer has not violated and will not
violate any applicable law, regulation, ordinance, order,
injunction, decree or settlement agreement, nor any other
requirement of any governmental body or court, which may
materially affect any of the Mortgage Loans or the servicing
of the Mortgage Loans. For purposes of this Section 4.6,
"litigation" shall include a suit for damages alone and shall
not require that a specific performance remedy or injunction
impacting the transfer of the servicing be pending.
(7) Ability to Perform. Subservicer
does not believe, nor does it have any reason or cause to
believe, that it cannot perform each and every covenant
contained in this Agreement.
(8) Statements Made. As of the date of
execution of this Agreement, no representation, warranty or
written statement made by Subservicer, in connection with this
Agreement, or any exhibit, schedule, data tape, statement or
certificate furnished to Servicer by Subservicer, in
connection with the transactions contemplated hereby by
Subservicer contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein
not misleading.
(9) Insolvency. Subservicer has not (i)
admitted in writing its inability to pay its debts generally
as they become due, (ii) filed a petition to take advantage of
any applicable insolvency or reorganization statute, (iii)
made an assignment for the benefit of its creditors or (iv)
voluntarily suspended payment of any of its obligations.
(10) Agency Requirements. Subservicer
has performed all material obligations to be performed under
Agency Requirements, and no event has occurred and is
continuing which, but for the passage of time or the giving of
notice or both, would constitute an event of default
thereunder. Subservicer is an approved seller/servicer/issuer
in good standing with FNMA, FHLMC and GNMA.
(11) Audits. Subservicer has not, been
the subject of allegations of material failure to comply with
applicable servicing or claims procedures, in its most recent
Agency or PMI policy provider audits (if any).
(12) Compliance with Insurance Contracts.
Subservicer has complied with all material obligations under
all applicable insurance contracts, including hazard, flood
and private mortgage insurance contracts, with respect to, and
which affect any of the servicing of the Mortgage Loans.
Subservicer
12
<PAGE> 13
has not taken any action or failed to take any action which
might cause the cancellation of or otherwise affect any of the
insurance contracts.
(13) Accuracy of Servicing Information.
The information provided by Subservicer to Servicer pursuant
to this Agreement is true and correct, in all material
respects.
(14) Errors and Omissions Policy.
Subservicer has in full force and effect an adequate errors
and omissions policy or policies satisfying all Agency
Requirements with respect to its servicing operations and a
standard mortgage bankers blanket bond.
(15) Financial Condition of
Subservicer/Regulatory Approval. Subservicer is not in
receivership, conservatorship or bankruptcy. Subservicer is
not operating pursuant to any restrictive operating agreement
or order mandated by the OTS, the FDIC or any federal or state
regulatory body.
B. Subservicer covenants that it shall subservice the loans
hereunder in accordance with the terms of this Agreement.
Subservicer shall notify Servicer of all employees currently
under employment agreements with Subservicer or who are
entitled to receive any additional compensation conditioned on
continued employment through a designated future date. In
addition, Subservicer shall provide Servicer advance (i.e.
with reasonable time to comment) notification of the granting
of any employment agreement or additional compensation
conditioned on continued employment through a designated
future date. Subservicer further covenants that during the
period of time that Subservicer is performing its services
hereunder, it will not make any of the following significant
changes in its operations, without the prior written consent
of the Servicer, which consent shall not be unreasonably
withheld:
Any servicing system change to a system which is not
generally accepted in the industry as customary and
competent of handling large loan volume.
Any system conversion occurring during the time
period less than five (5) months prior to any
Transfer Date.
Operational changes in lockbox operations, loan
numbers, force placed insurance carriers, or which
are associated with any change in a significant
vendor (vendors whose services earn fees in excess of
$500,000 per year).
Operational changes which require a waiver of an
Agency.
13
<PAGE> 14
The outsourcing of any servicing obligation done by
Subservicer internally as of December 31, 1996.
A change in the ownership structure of Subservicer.
In addition, Subservicer shall timely notify Servicer of any
operational changes which must be made by Subservicer at the
request of any Agency.
C. Subservicer covenants that as of the date indicated below, it
will provide evidence to Servicer of the following:
(1) That as of June 1, 1997, Subservicer will have in
place a disaster recovery plan which will operate in
accordance with Agency Requirements.
(2) That as of June 1, 1997, Subservicer's escrow
analysis department will have procedures in place to
adequately report on the placement and removal of
stop analysis flags on Mortgage Loans.
(3) That by the Transfer Date, as defined in the Sale
Agreement, Subservicer will have ensured that the
integrity of the Mortgage Loan data on its servicing
system is acceptable under Agency Requirements.
(4) That as of June 1, 1997, Subservicer's customer
service department will be adequately staffed to meet
the following customer service performance
parameters:
Phone call blockage cannot exceed 10%.
A phone call abandonment rate of less than 6%.
An eighty percent (80%) probability that a
phone call will be answered within ninety (90)
seconds.
Phones must be available for Borrowers between
8:15 a.m. and 8 p.m. eastern time.
(5) That as of June 1, 1997, Subservicer will have in
place an active procedure to ensure that complaints
of a discriminatory basis, or which have been made to
regulators or to the Agencies and forwarded to
Subservicer, are dealt with at a senior officer
level.
(6) That as of June 1, 1997, Subservicer's bankruptcy
department will be performing escrow analyses, in
accordance with Agency Requirements, on Mortgage
Loans for which the Borrower has filed for protection
under the Bankruptcy Code.
14
<PAGE> 15
(7) That as of June 1, 1997, Subservicer will have in
place a proactive loss mitigation function which
complies with Agency Requirements.
(8) That by March 1, 1997, Subservicer's Assumptions
Department will be reporting its mortgage record
change notices to the FHA by electronic transmission,
as required by HUD, and not by tape, unless such date
is extended by HUD. Additionally, by June 1, 1997,
Subservicer's Assumptions Department will have
procedures in place to ensure compliance with
Applicable Laws, including but not limited to such
reporting as is required under the Home Mortgage
Disclosure Act (HMDA) and such early disclosures as
are required by the Real Estate Settlement Procedures
Act and the Truth in Lending Act.
(9) That by June 1, 1997, Subservicer will have performed
a full audit of the adjustable rate Mortgage Loans
which Subservicer acquired as part of its acquisition
from Empire.
(10) That by June 1, 1997, Subservicer will have
procedures in place to (i) properly report to HUD the
total payment amount on the HUD 300 for Mortgage
Loans with Escrow Account shortage spreads and (ii)
ensure that unapplied HUD 235 subsidies are being
reconciled timely each month to the HUD billings and
to the loan level detail.
6.2 Servicer's Representations, Warranties and Covenants
A. Servicer hereby makes, as if fully restated herein, the
representations and warranties of Purchaser set forth in
Article VI of the Sale Agreement, which are hereby
incorporated herein by this reference, as if they were fully
restated.
B. Servicer covenants that it will perform its duties hereunder
in accordance with the terms of this Agreement.
C. Servicer shall inform Subservicer in writing of any action
that Servicer contracts for which requires any action on the
part of Subservicer, and Servicer shall hold Subservicer
harmless from and against any acts or omissions of Subservicer
resulting from Servicer's failure to give such notice.
7. TERMINATION
15
<PAGE> 16
This Agreement shall terminate (i) on each of Transfer Dates set forth
in the Sale Agreement with respect to the Mortgage Loans transferred on each
such Transfer Date, or (ii) by mutual consent of Servicer and Subservicer, in
writing. Irrespective of what is contained in the prior sentence relating to
termination, Servicer retains the option to extend the term of this Agreement,
for all or part of the Servicing, for interim periods of no less than one
hundred fifty (150) days, for up to another two (2) years (e.g., up to February
28, 2000) at the same Subservicing Fee and in accordance with the terms of this
Agreement. This Agreement may be terminated by Servicer at an earlier time for
cause, upon sixty (60) days written notice, if one or more of the following
events of default by Subservicer shall occur and be continuing:
(a) any failure by Subservicer to remit to the Agency and/or
Servicer any material (individually or in the aggregate) payment required to be
made by Subservicer under the terms of this Agreement or Agency Requirements
which continues unremedied for a period of one (1) Business Day after the
earlier of: (i) discovery by Subservicer of such non-payment; or (ii) the date
upon which written notice of such failure, requiring the same to be remedied,
shall have been given to Subservicer by Servicer or the Agency,
(b) failure on the part of Subservicer duly to observe or perform
in any material respect any other of the covenants or agreements on the part of
Subservicer set forth in this Agreement which continue unremedied for a period
of thirty (30) days, or (with notice to Subservicer) such shorter cure period
as may be permitted by the Agency after the date on which written notice of
such failure, requiring the same to be remedied, shall have been given to
Subservicer by Servicer or the Agency;
(c) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or receiver
or liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or liquidation of
its affairs, shall have been entered against Subservicer and such decree or
order shall have remained in force undischarged or unstated for a period of
thirty (30) days;
(d) Subservicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating to Subservicer
or relating to all or substantially all of its property;
(e) Subservicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations; or
(f) Subservicer shall cease to be eligible to sell mortgage loans
to or service mortgage loans for the Agency;
16
<PAGE> 17
then, and in each and every such case, so long as an event of default shall not
have been remedied, Servicer by notice in writing to Subservicer may, in
addition to whatever rights Servicer may have at law or in equity, to damages,
including injunctive relief and specific performance, terminate all the rights
and obligations of Subservicer without incurring any penalty or fee of any kind
whatsoever in connection therewith. On or after the receipt by Subservicer of
such written notice, all authority and power of Subservicer under this
Agreement shall cease. Upon such termination, Subservicer shall promptly
prepare, execute and deliver any and all documents and other instruments, all
Servicing Files (as defined in the Sale Agreement), and do or accomplish all
other acts or things, all in accordance with the servicing transfer
instructions (as set forth in the Sale Agreement or as otherwise provided by
Servicer), Agency Requirements and Applicable Law, necessary or appropriate to
effect the purposes of such notice of termination at Subservicer's sole cost.
Subservicer agrees to cooperate with Servicer in effecting the termination of
Subservicer's responsibilities and rights hereunder, including, without
limitation the transfer to Servicer or its designee, in accordance with the
terms of the servicing transfer instructions (as set forth in the Sale
Agreement or as otherwise provided by Servicer), the Sale Agreement and Agency
Requirements, for administration by it of all Subservicing Accounts which are
at the time maintained by Subservicer relative to the Mortgage Loans.
In the event this Agreement is terminated by Servicer for cause due to
an event of default by Subservicer, then Subservicer shall reimburse Servicer
for any losses, damages and reasonable out-of-pocket expenses that Servicer
suffers as a result of termination prior to the Transfer Date which losses
shall include, but not be limited to the following: (i) all costs incurred in
transferring the Servicing to Servicer or its designee (including cost of
transferring electronic data or transferring onto a different technological
platform); (ii) any reasonable (given the circumstances that exist at the time)
increase in amount over and above the Subservicing Fee which Servicer is
required to pay to a third party subservicer to subservice the Mortgage Loans
prior to the Transfer Date; (iii) any penalties which may be assessed by any
party; and (iv) reasonable attorney fees and costs.
8. INDEMNITY; BONDING
8.1 Indemnification of Servicer. Subservicer agrees to indemnify
and hold Servicer harmless from and against any and all claims, losses, damages
and reasonable out-of-pocket expenses arising out of or in any way related to
breach of any representation, warranty or covenant set forth in this Agreement.
8.2 Indemnification of Subservicer. Servicer agrees to indemnify
and hold Subservicer harmless from any and all claims, losses, damages and
reasonable out-of-pocket expenses arising out of or in any way related to
breach of any representation, warranty or covenant set forth in this Agreement
or any actions of Subservicer taken in compliance with written instruction from
Servicer.
8.3 Survival. The indemnifications set forth in Sections 8.1 and
8.2 of this Agreement shall survive termination of this Agreement for a period
of ten (10) years from
17
<PAGE> 18
the Sale Date (the "Survival Period"). Servicer may recover under this
Section, provided that written notice of a claim shall have been given prior to
the expiration of the Survival Period. Notwithstanding anything to the
contrary in this Section 8.3, in the event that, prior to the expiration of the
Survival Period, written notice of a claim for indemnification is given, and
either the loss which is indemnifiable has not yet been incurred or litigation
in connection with the claim for indemnification has not yet commenced, such
claim shall survive beyond the Survival Period only if the threat of litigation
arose within six (6) months prior to the expiration of the Survival Period
(which threat is evidenced by written correspondence from an attorney) and
litigation commences within six (6) months after expiration of the Survival
Period.
8.4 Insurance. Subservicer shall maintain such insurance as may
be required to maintain its status as an Agency approved Seller/Servicer.
Subservicer shall maintain at Subservicer's expense and keep in effect
throughout the term hereof for itself, and for Servicer as co-insured or loss
payee, in accordance with Applicable Law and Agency Requirements, fidelity,
theft and forgery bond coverage and errors and omissions insurance in amounts
and with carriers satisfactory to the Agencies. Subservicer shall provide
Servicer, upon written request, with evidence satisfactory to Servicer of its
compliance with the requirements of this Subsection. In addition, Subservicer
shall provide Servicer, or any person authorized by Servicer, full and complete
access during reasonable business hours to copies of then-current policies of
insurance required hereunder, given advance written notice of five (5) Business
Days from Servicer to Subservicer. All such policies shall provide that they
may not be canceled by the carrier without thirty (30) days' prior written
notice to Servicer.
9. MISCELLANEOUS
9.1 No Joint Venture. Nothing herein shall be deemed or construed
to create a co-partnership or joint venture between the parties hereto, and the
services of Subservicer shall be rendered as an independent contractor.
9.2 Waiver. No delay, failure or discontinuance of either party
in exercising any right, power or remedy under this Agreement, shall affect or
operate as a waiver of such right, power or remedy, nor shall any single or
partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by either party of any breach or default under this Agreement must be in
writing and shall be effective only to the extent set forth in such writing.
9.3 Successors; Assignment. Subservicer does not have the right
to sell, assign, delegate or otherwise transfer its rights or obligations under
this Agreement to a third party without obtaining the prior written consent of
Servicer. Servicer reserves the right in its reasonable discretion to approve
the new subservicer. In determining the acceptability of the new subservicer,
Servicer may consider such subservicer's reputation in the industry,
18
<PAGE> 19
financial status, approval status with the Agencies, as well as with private
investors and regulators, status as a competitor to Servicer, and ability to
service non-standard mortgage products. Subject to the restrictions on
assignment set forth in this Agreement and the Sale Agreement, this Agreement
shall be binding on and inure to the benefit of the successors and assigns of
the parties. Any assignment shall not release Subservicer from liability
hereunder for acts or omissions of Subservicer prior to such assignment. Any
assignee shall assume all of Subservicer's obligations hereunder, as well as
assume the performance of all functions related to the transfer of the
Servicing on the Transfer Date, as set forth in Exhibit D and Exhibit E.
Additionally, any assignee shall, as of the date of assignment, make all of
those representations and warranties required of Subservicer hereunder in
reference to this Agreement.
Should Servicer choose to resell portions of the Servicing portfolio
due to no fault of the Subservicer, Subservicer shall reasonably cooperate with
Servicer and its assignee or designee to affect due diligence and transfer. In
such event, Subservicer shall not be responsible for any out-of-pocket expenses
related to such sale that it would not have otherwise incurred in connection
with transferring the Mortgage Loans to Servicer. In no event, other than
Subservicer Default or as mutually agreed by the parties, shall the Mortgage
Loans be transferred before the Transfer Dates set forth in the Sale Agreement.
The transfer dates associated with any such transfer shall be agreed upon in
accordance with the terms of this Agreement and the Sale Agreement.
9.4 Entire Agreement; Amendment. This Agreement and the Sale
Agreement and Exhibits and Schedules thereto constitute the entire agreement
between Subservicer and Servicer with regard to subservicing the Mortgage Loans
and supersedes all prior negotiations, communications, discussions and
correspondence concerning the subject matter hereof and may be amended or
modified only by a written instrument executed by each party hereto.
9.5 Notices. All notices, requests and demands given to or made
upon any party hereto must be in accordance with Section 11.11 of the Sale
Agreement.
9.6 Time. Time is of the essence of each and every provision of
this Agreement.
9.7 Severability of Provisions. If any provision of this
Agreement shall be prohibited by or deemed invalid under Applicable Law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
9.8 Ohio Law Applicable. This Agreement shall be governed by and
construed in accordance with the law of the State of Ohio.
19
<PAGE> 20
9.9 Solicitation of Mortgages. Neither Subservicer nor any
affiliate or agent of Subservicer shall, during the remaining term of any of
the Mortgage Loans, take any action to personally, by telephone, by mail or
otherwise, directly or indirectly, solicit the prepayment or modification of
the Mortgage Loans, in whole or in part, or offer any Borrower any other
mortgage or non-mortgage related products. Notwithstanding the foregoing, it
is understood and agreed that promotions which are directed to the general
public, including, without limitation, mass mailings based on commercially
acquired mailing lists, newspaper, radio and television advertisements, shall
not constitute solicitations under this paragraph.
9.10 Cooperation. To the extent reasonably possible, the parties
hereto shall cooperate with and assist each other, as requested, in carrying
out the other's covenants, agreements, duties and responsibilities under this
Agreement and in connection herewith shall execute and deliver all such
documents and instruments as shall be necessary and appropriate in the
furtherance thereof.
9.11 Confidentiality of Information. Except as otherwise required by
law, Subservicer and Servicer and their affiliates shall, and shall cause their
respective directors, officers, employees and authorized representatives to,
hold in strict confidence and not use or disclose to anyone without the prior
written consent of the other party all information concerning customers or
proprietary business procedures, servicing fees or prices, policies or plans of
the other party or any of its affiliates received by them from the other party
in connection with the transactions contemplated hereby.
9.12 Supplementary Information. From time to time, upon reasonable
notice, prior to and after the Transfer Date, Subservicer shall furnish
Servicer such incidental information, which is reasonably available to
Subservicer, supplementary to the information contained in the documents and
schedules delivered pursuant hereto, as Purchaser may reasonably request within
ten (10) years of the Sale Date. Any request for information under this
Section which is in reference to information which was not required to have
been provided under the terms of this Agreement shall be fulfilled at the
reasonable expense of Purchaser.
9.13 Set-off. Servicer agrees that Subservicer may, at its option,
deduct from any payment due Servicer under the terms of this Agreement, any
monies due to Subservicer under the terms of this Agreement and based upon
Servicer's failure to make payment to Subservicer as required under the terms
of this Agreement.
20
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written.
SERVICER:
CHEMICAL MORTGAGE COMPANY
ATTEST:
BY:_____________________________
_________________________ NAME:___________________________
TITLE:__________________________
DATE:___________________________
SUBSERVICER:
SOURCE ONE MORTGAGE SERVICES
CORPORATION
ATTEST:
BY:_____________________________
_________________________ NAME:___________________________
TITLE:__________________________
DATE:___________________________
21
<PAGE> 22
Exhibit A - Mortgage Loan Listing
Exhibit B - Approved Vendors
Exhibit C - Tape Format
Exhibit D - Transfer Obligations
Exhibit E - Transfer Instructions
22
<PAGE> 1
EXHIBIT 10(HH)
AGREEMENT
This Agreement ("Agreement") is between Source One Mortgage Services
Corporation (the "Company") and Robert W. Richards (the "Employee"). The
parties voluntarily agree as follows:
1. Employee hereby resigns from all his positions as a director,
board or other committee member or officer of the Company or any of its
affiliates effective on June 1, 1996 ("Termination Date"). In
consideration of Employee's resignation, and in consideration of the
promises and representations made in Paragraphs 2 through 7 below, the
Company agrees to make supplemental payments (subject to applicable taxes
and withholding) to Employee and his spouse, if she survives him, equal to
the excess of (i) the benefit that would have been payable to him and his
spouse, if she survives him, under the Source One Mortgage Services
Corporation Retirement Plan ("Retirement Plan") and the related Source One
Mortgage Services Corporation Supplemental Retirement Plan ("Supplemental
Plan") commencing on the Termination Date had he attained age 58 on the
Termination Date, had he been credited with benefit service until he
attained age 58 (instead of his actual benefit service) and had he elected
to have his benefits commence on the Termination Date over (ii) the amounts
actually payable from the Retirement Plan and Supplemental Plan beginning
as of the Termination Date. Payment of such benefits beyond the Employee's
55th birthday is contingent upon the Employee electing under Article IV,
Section 4(a), of the Retirement Plan, within 90 days before he attains age
55 (if he is then living) to commence to receive his monthly benefit under
the Retirement Plan on the first day of the month following his 55th
birthday. Such benefits shall be paid in the same manner and form as
benefits under the Retirement Plan are paid. Such benefits shall be paid
from the general funds of the Company. Execution of this Agreement by
Employee represents acknowledgment that the additional benefit described in
this paragraph 1 represents valuable consideration and not benefits or
compensation otherwise owed Employee by the Company.
2. By execution of this Agreement and in consideration of the
additional benefit described in Paragraph 1, Employee agrees as follows:
<PAGE> 2
a. Employee's resignation will be effective on the
Termination Date. Employee acknowledges that
effective as of such date, any right or
authority on Employee's part to act as an agent
or employee of the Company, in any manner
whatsoever,shall be terminated.
b. Employee agrees to release and discharge the
Company, Fund American Enterprises Holdings,
Inc. and any related company, and their
respective agents, employees directors and
officers ("Fund American Group") from
any and all actions, causes of action, claims,
awards, damages, demands or suits, at law or in
equity, or liabilities of any kind or nature
whatsoever, which Employee now has or hereafter
may have against the Fund American Group at any
time in the past and at any time through the
Termination Date, excepting, however, any
amounts payable to the Employee under paragraph
1 above and any amounts payable or benefits
provided as described in the letter dated June
5, 1996 to you from John J. Byrne on behalf of
the Company. This release and discharge is
specifically understood to apply to, but is not
limited to, claims of wrongful discharge,
claims of discriminatory treatment based upon
any one or combination of the factors of sex,
race, religion, sexual orientation, handicap,
national origin and any and all other claims
arising under federal, state or local law,
whether such claims arise due to common law
(whether arising in tort or contract) or by
constitution, statute or ordinance. This
release and discharge also includes a waiver of
any rights or claims which Employee may have
under the Age Discrimination in Employment Act,
as amended, arising on or prior to the date of
execution of this Agreement but does not
include any such rights or claims arising after
the date of this Agreement.
c. Employee agrees that he will hold in a
fiduciary capacity for the benefit of the
Fund American Group all Confidential
Information as defined below and shall
<PAGE> 3
not communicate or divulge any Confidential
Information to, or use any Confidential
Information for the benefit of, any person
(including the Employee) or entity other
than an entity in the Fund American Group.
"Confidential Information" shall mean
(i) information, not generally known, about the
Fund American Group's clients, processes,
services and products, whether written or not,
including information relating to research,
accounting, marketing, merchandising, selling
and the identity of current and prospective
customers and other client information and (ii)
any confidential information entrusted to the
Fund American Group by a client or customer
thereof which to the Fund American Group is
obligated to keep confidential. Employee
agrees that he will return to the Company as
soon as practicable after the Termination Date
any documents or other written, recorded or
graphic matter containing, relating or
referring to any Confidential Information (and
all copies thereof) in Employee's possession or
control.
d. Employee agrees that he will not make any
statement to any third party disparaging or
criticizing, or otherwise take action to cast
aspersions on, the management, business,
affairs or property of any of the Fund American
Group.
3. Employee acknowledges that he is entering into this Agreement
voluntarily and of his own free will. Employee also agrees that this
Agreement contains the parties' complete understanding and that there are
no other agreements, oral or written, pertaining to the subject matter of
this Agreement.
4. The parties hereto agree that this Agreement shall be governed by
and construed in accordance with the laws of the State of Michigan. The
parties further agree that should any part or provision of this Agreement
be held unenforceable or in conflict with controlling law, the validity of
the remaining parts and provisions shall be unaffected.
<PAGE> 4
5. The parties expressly agree that this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, successors and assigns.
6. Employee agrees that the terms of this Agreement shall be kept
confidential and shall not be divulged by Employee to anyone including but
not limited to any current or future employee of the Company.
7. Employee acknowledges that he was provided a copy of this
Agreement on June 5, 1996 and that he has until June 26, 1996, to sign and
return it to the Company. Employee shall have seven days from the date
this Agreement is executed by the Employee to revoke this Agreement. It is
agreed that this Agreement shall become effective and enforceable at end of
the seven-day revocation period unless the Employee exercises his right to
revoke this Agreement within such period. Employee is advised to consult
with an attorney prior to executing this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year written below.
SOURCE ONE MORTGAGE SERVICES
CORPORATION
________________________ By:______________________
ROBERT W. RICHARDS John L. Jansen
________________________ ______________________
(Date) (Date)
<PAGE> 1
EXHIBIT 13
[LOGO]
SELECTED CONSOLIDATED FINANCIAL DATA
& CORPORATE INFORMATION*
Income Statement Data (in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $ 148,680 $ 148,595 $ 142,493 $ 173,564 $ 118,072
Total expenses 143,553 105,313 137,215 111,387 100,747
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary loss
and cumulative effect of accounting changes 5,127 43,282 5,278 62,177 17,325
Income tax expense 9,453 16,132 4,474 22,056 7,378
- ---------------------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary loss and
cumulative effect of accounting changes (4,326) 27,150 804 40,121 9,947
Extraordinary loss on retirement of debt - (902) - - -
Cumlative effect of accounting changes (a) - - (44,296) - (25,769)
- ---------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (4,326) $ 26,248 $ (43,492) $ 40,121 $ (15,822)
- ---------------------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share (b):
Before extraordinary loss and cumulative
effect of accounting changes $ (3.57) $ 7.55 $ (1.65) $ 9.48 $ 2.34
Net (loss) income per share $ (3.57) $ 7.20 $ (14.21) $ 9.48 $ (3.73)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share (c) $ - $ - $ - $ 6.39 $ 2.40
Cash dividends declared on common shares $ - $ - $ - $ 26,616 $ 10,133
Payment for common shares repurchased $ - $ 120,000 $ 122,000 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Servicing portfolio at end of year (d):
Balance (in millions) $ 29,201 $ 31,831 $ 39,568 $ 38,403 $ 37,312
Number of loans serviced (e) 478,779 494,051 543,428 518,972 578,883
Weighted average interest rate (e) 8.48% 8.33% 8.14% 8.53% 9.34%
Weighted average net servicing fee (e) (f) .422% .419% .410% .432% .462%
Percent delinquent (e) 6.24% 5.28% 4.07% 4.44% 4.39%
Percent in process of foreclosure .93% .80% .77% .92% .77%
Total mortgage loan production (in millions) $ 3,831 $ 2,852 $ 4,586 $ 11,452 $ 7,591
Servicing rights acquisitions (in millions) $ 2,789 $ 4,674 $ 3,707 $ 6,368 $ 2,323
Sale of servicing rights (in millions) $ 3,302 $ 10,973 $ 3,868 $ - $ -
Number of employees at end of year 1,682 1,680 2,055 3,060 2,145
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (in thousands)
December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgage loans receivable $ 314,937 $ 381,028 $ 210,472 $1,298,506 $1,116,113
Capitalized servicing (net) (g) 410,939 397,071 530,450 666,666 624,657
Total assets 1,131,054 1,135,029 1,210,012 2,647,153 2,456,898
Senior debt 643,262 661,846 647,251 1,959,643 1,835,909
Subordinated debt 54,535 54,786 - - -
Total liabilities 816,297 812,785 733,925 2,095,153 1,924,773
Total stockholders' equity (h) 314,757 322,244 476,087 552,000 512,906
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*See accompanying notes to selected consolidated financial data.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
3
<PAGE> 2
[LOGO]
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
& CORPORATE INFORMATION
(a) The 1994 amount reflects the cumulative after tax effect, as of January
1, 1994, of a change in the methodology used to measure impairment of the
purchased mortgage servicing rights asset. See Note 3 to the consolidated
financial statements. The 1992 amount reflects the cumulative after tax
effect, as of January 1, 1992, of adopting Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions."
(b) Net (loss) income per common share amounts for all years presented are
based on the weighted average number of common shares outstanding.
(c) Cash dividends per common share were computed based on the total number
of common shares outstanding as of the dividend record dates.
(d) Includes loans subserviced for others having a principal balance of $2.8
billion, $4.0 billion and $4.3 billion as of December 31, 1996, 1995 and
1994, respectively, except as noted.
(e) Excludes interim servicing of loans having a principal balance of $1,651
million, $4,190 million and $75 million as of December 31, 1994, 1993 and
1992, respectively.
(f) Excludes loans subserviced for others as noted in (d) above.
(g) Reflects a $68.1 million cumulative pretax effect adjustment to the
purchased mortgage servicing rights asset as of January 1, 1994 relating
to a change in the methodology used to measure its impairment. See Note 3
to the consolidated financial statements.
(h) Total stockholders' equity excludes amounts applicable to redeemable
Class B common stock for years prior to 1993. In November 1993, all the
shares of redeemable Class B common stock were redeemed at the option of
the holders thereof.
FORM 10-K
The financial information contained in this report substantially conforms
with the information required in the "Form 10-K" Annual Report filed by the
Company with the Securities and Exchange Commission at the end of March
1997. Certain supplemental information appears in such Form 10-K that is
not necessarily disclosed within this document. Copies of such Form 10-K
(without exhibits) are available, without charge, upon request to the
Corporate Secretary's Office, Source One Mortgage Services Corporation,
27555 Farmington Road, Farmington Hills, Michigan 48334-3357 (telephone:
(810) 488-7000).
BUSINESS
The Company engages primarily in the business of producing, selling and
servicing residential mortgage loans and subservicing residential mortgage
loans for third parties. Its primary sources of revenue are net servicing
revenue, net interest revenue, net gain on sale of mortgages, net gain on
sale of servicing and other revenue (including underwriting and appraisal
fees).
The Company is also engaged, through certain of its subsidiaries, in the
sale of credit-related insurance products (such as life, disability,
health, accidental death and property and casualty insurance).
MARKET FOR STOCK AND RELATED MATTERS
There is no established public trading market for the Company's common
stock. As of March 28, 1997, there were two holders of the 2,561,054 shares
of the Company's issued and outstanding common stock.
No cash dividends on common stock were declared for the years ended
December 31, 1996, 1995 or 1994. The Company's secured credit agreement
contains covenants which limit its ability to pay dividends or make
distributions on its capital in excess of preferred stock dividend and
subordinated debt interest requirements each year. In addition, the Company
must comply with certain financial covenants provided in its secured and
unsecured credit agreements, including restrictions relating to tangible
net worth and leverage. The Company is currently in compliance with all
such covenants.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
4
<PAGE> 3
[LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
The Company reported a net loss of $4.3 million for the year ended December
31, 1996 as compared to net income of $26.2 million for the year ended
December 31, 1995. The 1996 net loss reflects a $29.1 million pretax charge
for the write-off of the Company's goodwill and other intangible assets
(refer to Note 7 to the consolidated financial statements for further
discussion) and a $.9 million pretax charge for impairment of its
capitalized servicing asset. These amounts were partially offset by a $10.1
million pretax gain on the sale of servicing to a third party and a $9.9
million pretax net gain on financial instruments. The 1995 net income
includes a $28.0 million pretax charge for impairment of the Company's
capitalized servicing asset, $40.0 million of pretax gains on the sale of
servicing to third parties and a $.8 million pretax net gain on financial
instruments.
Net servicing revenue was $77.5 million and $61.3 million for the years
ended December 31, 1996 and 1995, respectively. Mortgage servicing revenue
decreased slightly in 1996 primarily as a result of a lower average
servicing portfolio balance during 1996 as compared to 1995. This decrease
was partially offset by the recognition of a portion of the Company's
deferred gain on the 1994 sale of servicing rights to a third party subject
to a subservicing agreement which related to loans sold by the third party
in 1996. Amortization of the Company's capitalized servicing asset
decreased in 1996 primarily as a result of a significantly lower impairment
charge for valuation allowances for the underlying mortgage servicing
rights. This charge totaled $.9 million in 1996 as compared to $28.0
million in 1995. This decrease, however, was partially offset by higher
scheduled amortization expense due to higher market consensus prepayment
rates as well as a higher average asset balance during 1996 as compared to
1995.
The average prepayment rate of the Company's owned servicing portfolio was
11.2% for the year ended December 31, 1996 as compared to 8.3% for 1995.
The Company's prepayment experience is significantly influenced by
fluctuations in mortgage interest rates. A steady decline in market
interest rates for mortgage loans during 1995 in addition to average lower
interest rates in 1996 contributed to the increase in mortgage loan
prepayments during 1996.
Mortgage interest rates also affect the value of the Company's investment
in mortgage servicing rights ("MSR"). As mentioned above, interest rates
directly influence prepayment rates as well as other assumptions used in
valuing the Company's MSR asset. In order to offset changes in the value of
its MSR asset and to mitigate the effect on earnings of higher amortization
and impairment of the asset which results from increased prepayment
activity, the Company invests in various financial instruments. As interest
rates decline, prepayment activity generally increases, thereby reducing
the value of the MSR asset, while the value of the financial instruments
increases. Conversely, as interest rates increase, the value of the MSR
asset increases while the value of such financial instruments decreases.
The financial instruments utilized by the Company include interest rate
floor contracts ("floors") and principal-only ("P/O") swaps.
The floors are derivative contracts which derive their value from a
specified interest rate. The cash flow from the floors is equal to the
difference between the floor rate and the prevailing interest rate applied
to the notional amount. Payments are made to the Company only when the
prevailing interest rates are below the floor rate. To the extent that
prevailing interest rates decrease, the value of the floors increases, even
if the interest rates do not fall below the floor rate. To the extent that
prevailing interest rates increase, the value of the floors decreases.
However, the Company is not exposed to losses in excess of its initial
investment in the floors.
The P/O swaps are derivative contracts, the value of which is determined by
changes in the value of the referenced P/O strip security. The payments
received by the Company under the P/O swaps relate to the cash flows of the
referenced P/O security. The payments made by the Company are based upon a
notional amount tied to the market price and the remaining balance of the
referenced P/O security multiplied by a floating rate indexed to the London
Interbank Offered Rates for U.S. dollar deposits ("LIBOR").
For the year ended December 31, 1996, the Company recognized a $9.9 million
gain on its financial instruments as compared to a gain of $.8 million in
1995. The 1996 gain includes $8.1 million in realized gains from the sale
of financial instruments and net cash flows received and $1.8 million in
unrealized gains due to changes in the fair market value of
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
5
<PAGE> 4
[LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
(CONTINUED)
the various financial instruments. The 1995 gain includes unrealized gains
due to changes in the fair market value of the financial instruments. As of
December 31, 1996 and 1995, the carrying value of the financial instruments
was $8.0 million and $3.5 million, respectively, and is included in
investments in the consolidated statements of condition. Refer to Note 10
to the consolidated financial statements for further discussion.
The Company's total mortgage servicing portfolio decreased to $29.2 billion
as of December 31, 1996 from $31.8 billion as of December 31, 1995. The
Company is continuing to act on its corporate strategy to optimize returns
on its owned servicing portfolio by buying and selling mortgage servicing
rights based on the underlying risk and return characteristics. The Company
purchased the rights to service $2.8 billion and $4.7 billion of mortgage
loans from third parties during 1996 and 1995, respectively. During 1996,
the Company sold the rights to service $3.3 billion of mortgage loans for
net proceeds of $55.9 million and a pretax gain of $10.1 million. During
1995, the Company sold a total of $11.0 billion in servicing rights to
third parties for net proceeds of $199.1 million and a pretax gain of $40.0
million.
Loans being subserviced for others had principal balances totaling $2.8
billion and $4.0 billion as of December 31, 1996 and 1995, respectively. In
1994, the Company sold the rights to service $3.9 billion of mortgage loans
to a third party and continues to service the majority of these loans
pursuant to a subservicing agreement. The gain of $19.9 million was
deferred and is being recognized over the five-year life of the
subservicing agreement. In the fourth quarter of 1996, the third party sold
the rights to service approximately $1.0 billion of these mortgage loans,
representing approximately 25% of the total loans subserviced by the
Company. Accordingly, the Company recognized an additional $2.4 million of
the deferred gain in 1996, as mortgage servicing revenue, representing
approximately 25% of the deferred balance at the time of sale. For the
years ended 1996 and 1995, the Company has recognized $6.1 million and $4.2
million, respectively, of the deferred gain as part of net servicing
revenue in the consolidated statements of income.
During 1996, the Company forged a new strategy with respect to its
servicing operations. A major focus of this strategy is reducing exposure
to interest rate risk, which increases with the size of an owned servicing
portfolio. To reduce the exposure, the Company is taking actions to
contract its owned servicing portfolio and expand its subservicing
business. Consistent with this corporate strategy, the Company sold,
subject to regulatory and investor approvals, approximately $17 billion of
its non-recourse mortgage servicing portfolio to a third party for
estimated proceeds of $271.5 million in February of 1997. The transaction
is expected to result in the recognition of an after tax loss of
approximately $2.1 million in the first quarter of 1997. The portion of the
Company's mortgage servicing portfolio that was sold consists of
approximately 284,000 loans with a weighted average interest rate of 8.39%.
The Company will continue to service these loans pursuant to a subservicing
agreement for a minimum of one year and a maximum of three years, at the
option of the purchaser. Refer to Note 22 to the consolidated financial
statements for further discussion.
Total mortgage production for the years ended December 31, 1996 and 1995
was $3.8 billion and $2.9 billion, respectively. Production related to
refinancing activity made up 33% of total mortgage production for 1996 as
compared to 23% for 1995. Mortgage loan payoffs for the years ended
December 31, 1996 and 1995 were $3.0 billion and $2.3 billion,
respectively. The increase in mortgage loan production and payoffs in 1996
reflects overall lower market interest rates during 1996 and a
corresponding increase in refinancing activity from 1995 levels.
Net interest revenue decreased for the year ending December 31, 1996 to
$4.8 million from $10.3 million for the year ending December 31, 1995. The
increase in interest income for the 1996 year from 1995 is indicative of
the increase in production levels experienced in 1996 as compared to 1995.
However, this was more than offset by the increase in interest expense due
to the increase in short-term borrowings necessary to fund the production
as well as the additional expense related to the $56 million in principal
amount of subordinated debentures issued in December 1995.
The Company had net realized losses on the sale and exchange of securities
with affiliates of $.9 million and $2.2 million for the years ended
December 31, 1996 and 1995, respectively. The 1996 loss was a result of the
Company selling its remaining common equity securities to Fund American
Enterprises, Inc. ("FAE"), the Company's parent.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
6
<PAGE> 5
[LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
(CONTINUED)
The 1995 loss resulted from the transfer of $27.0 million of certain common
equity securities to FAE in exchange for shares of the Company's common
stock held by FAE, which were then retired by the Company. All of the
equity securities involved in such transactions were actively traded,
readily marketable, listed on a national exchange and, for purposes of such
transactions, were valued at their closing prices on the day preceding the
date of each transaction.
The net realized investment gain of $.6 million for the year ended December
31, 1996 includes a $1.4 million gain on the return of a partnership
investment, offset by the write-down of certain investments to realizable
value. The net realized loss of $.5 million for the year ended December 31,
1995 primarily reflects net losses realized on the sale of the Company's
common equity securities to third parties.
Net gain on sale of mortgages increased to $38.3 million for the year ended
December 31, 1996 from $24.0 million for 1995. The increase reflects
increased production and related mortgage sales volumes in 1996.
Other revenue was $18.1 million and $15.6 million for the years ended
December 31, 1996 and 1995, respectively. The increase in other revenue,
which consists primarily of loan processing fees, insurance commissions and
brokerage fees, was directly related to the increase in production volumes.
Salaries and employee benefits expense for the years ended December 31,
1996 and 1995 was $56.3 and $51.3 million, respectively. Generally accepted
accounting principles ("GAAP") require loan origination revenues to be
netted against direct loan origination costs. Since salaries and employee
benefits expense is the largest component of loan origination costs,
approximately 90% of loan origination fees are accounted for as a reduction
to salaries and employee benefits expense as illustrated in the following
table:
------------------------------------------------------------------------
Year ended December 31, (in thousands) 1996 1995
------------------------------------------------------------------------
Unadjusted salaries and employee benefits expense $ 76,114 $ 68,807
GAAP net origination revenues (19,820) (17,550)
------------------------------------------------------------------------
GAAP salaries and employee benefits expense $ 56,294 $ 51,257
------------------------------------------------------------------------
An increase in loan origination revenues, reflecting higher retail mortgage
loan production in 1996, partially offsets the increase in unadjusted
salaries and employee benefits expense. Excluding the effects of loan
origination revenues, salaries and employee benefits expense increased 11%
in 1996 as compared to 1995. This increase reflects the additional
personnel expenses and loan officer commissions associated with the
Company's increased mortgage loan production in 1996.
Office occupancy and equipment expense decreased to $13.6 million in 1996
from $14.3 million in 1995. This decrease is primarily due to a decrease in
depreciation expense resulting from certain assets of the Company becoming
fully depreciated in 1995.
The provision for loan losses increased to $10.3 million for the year ended
December 31, 1996 from $7.0 million for the year ended December 31, 1995.
This increase is attributable to higher average loss volumes relating to
certain California residential mortgage loans, charge-offs of certain
commercial real estate owned properties and increased losses due to
servicing portfolios acquired by the Company during the fourth quarters of
1995 and 1996. The delinquency rates of these acquired portfolios were
higher than the Company's historical average delinquency rate. The Company
purchased these portfolios for prices which were reflective of these higher
delinquency rates.
In the fourth quarter of 1996, the Company wrote off the remaining carrying
value of goodwill and other intangible assets totaling $29.1 million. Refer
to Note 7 to the consolidated financial statements for further discussion.
Other operating expenses, which consist primarily of loan processing
expenses and general office expenses, increased to $34.3 million for the
year ended December 31, 1996 from $32.8 million in 1995. Loan processing
expenses tend to decrease or increase with mortgage loan production.
Accordingly, the increase in other operating expenses in 1996 reflects
higher mortgage loan production in 1996 as compared to 1995.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
7
<PAGE> 6
[LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
The Company reported net income of $26.2 million for the year ended
December 31, 1995, compared to a net loss of $43.5 million for the year
ended December 31, 1994. The 1995 net income reflects $40.0 million of
pretax gains on sales of servicing to third parties. The 1994 net loss
includes the effects of a $68.1 million pretax charge related to a change
in accounting methodology for the purchased mortgage servicing rights
("PMSR") asset.
Effective January 1, 1995, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights", an amendment of SFAS No. 65. SFAS No. 122
requires the total cost of acquiring mortgage loans, either through loan
origination activities or purchase transactions, to be allocated to the
mortgage servicing rights and the loans based on their relative fair
values. The statement requires entities to measure impairment on a
disaggregated basis by stratifying the mortgage servicing rights based on
one or more predominant risk characteristics of the underlying loans.
Impairment is recognized through a valuation allowance for each individual
stratum.
SFAS No. 122 prohibits retroactive application to prior years, therefore,
the reported results for 1994 are in accordance with SFAS No. 65 and are
not directly comparable to the 1995 results reported under SFAS No. 122. A
major difference between SFAS No. 122 and SFAS No. 65 relates to the
capitalization of originated mortgage servicing rights ("OMSR"). Under SFAS
No. 65, the costs inherent in creating OMSR's could not be capitalized.
Under SFAS No. 122, a portion of the total cost of an originated loan is
allocated to the right to service the loan based on the relative fair value
of the mortgage servicing right and the loan.
The Company estimated the fair values of its mortgage servicing rights by
calculating the present value of the expected future cash flows associated
with such rights. In making those estimates, the Company incorporated
assumptions that market participants would use in their estimates of future
servicing income and expense and discounted those cash flows using current
estimated market rates.
To measure impairment of the mortgage servicing rights, the Company
stratified the related mortgage loan servicing portfolio based on its
predominant risk characteristics which were determined to be prepayment,
default and operational risks. This resulted in stratification by interest
rate, loan type (investor) and original term of maturity. The fair value of
each stratum was computed and compared to its recorded book value to
determine if a valuation allowance, or recovery of a previously established
valuation allowance, was required.
The adoption of SFAS No. 122 as it related to the capitalization of
originated mortgage servicing rights resulted in the recognition of
additional pretax gain on sale of mortgages of $27.2 million for the year
ended December 31, 1995. The impairment provisions of SFAS No. 122 resulted
in a pretax charge of $28.0 million for the year. The discount rate and
prepayment assumptions are significant factors used in estimating the fair
value of the Company's mortgage servicing rights and could be significantly
impacted by changes in interest rates. Accordingly, it is likely that
management's estimate of the fair value of the mortgage servicing rights
could change in the near term due to changes in interest rates.
Net servicing revenue was $61.3 million and $82.4 for the years ended
December 31, 1995 and 1994, respectively. The decrease in 1995 was
primarily due to the decrease in mortgage servicing revenue resulting from
the sale of $11.0 billion of servicing rights to third parties during 1995.
Amortization of capitalized servicing decreased in 1995 due to slower
amortization of the capitalized mortgage servicing asset reflecting lower
actual and anticipated prepayments and a smaller capitalized servicing
asset due to the sale of servicing, partially offset by higher impairment
charges related to the adoption of SFAS No. 122.
The average prepayment rate of the Company's owned servicing portfolio was
8.3% for the year ended December 31, 1995 as compared to 13.5% for 1994. A
steady rise in market interest rates for mortgage loans during 1994
resulted in a decrease in loan prepayments from the mortgage servicing
portfolio during 1995. However, falling interest rates through most of 1995
resulted in increased prepayment activity later in 1995.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
8
<PAGE> 7
[LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
(CONTINUED)
The Company's mortgage servicing portfolio decreased to $31.8 billion as of
December 31, 1995 from $39.6 billion as of December 31, 1994. In 1995, a
total of $11.0 billion in servicing rights were sold to third parties for
net proceeds of $199.1 million and a pretax gain of $40.0 million. In 1994,
the Company sold the rights to service $3.9 billion of mortgage loans to a
third party for net proceeds of $70.2 million and continues to service the
majority of these loans pursuant to a subservicing agreement. The gain of
$19.9 million has been deferred and is being recognized over the five-year
life of the subservicing agreement. For the years ended December 31, 1995
and 1994, the Company recognized $4.2 million and $2.7 million,
respectively, of the deferred gain as part of net servicing revenue on the
consolidated financial statements of income. Loans being subserviced for
others had principal balances totaling $4.0 billion and $4.3 billion as of
December 31, 1995 and 1994, respectively.
Total mortgage production for the years ended December 31, 1995 and 1994
was $2.9 and $4.6 billion, respectively. Production related to refinancing
activity made up 23% and 50% of total mortgage production for 1995 and
1994, respectively. Mortgage loan payoffs for the years December 31, 1995
and 1994 were $2.3 billion and $4.7 billion, respectively. The decrease in
mortgage loan production and payoffs in 1995 reflects an increase in market
interest rates during 1994 and a corresponding reduction in refinancing
activity from 1994 levels. Although interest rates during 1995 steadily
declined, particularly during the fourth quarter, the resulting increase in
production during the second half of 1995 was not sufficient to offset the
decrease in production volumes during the first half of 1995.
Net interest revenue decreased for the year ending December 31, 1995 to
$10.3 million from $12.1 million for the year ending December 31, 1994. The
decrease in net interest revenue in 1995 as compared to 1994 is a
reflection of lower average inventory balances associated with lower
mortgage production levels, partially offset by decreased short-term
borrowings. In addition, the Company used the proceeds from the 1995 sale
of its servicing rights to repurchase and retire $82.3 million of long-term
debt, which resulted in an extraordinary loss after tax of $.9 million.
The Company had net realized losses on the sale and exchange of securities
with affiliates of $2.2 million and $8.6 million for the years ended
December 31, 1995 and 1994, respectively. The 1995 and 1994 losses resulted
from the transfers of $27.0 million and $112.0 million, respectively, of
certain common equity securities to FAE in exchange for shares of the
Company's common stock held by FAE, which was then retired by the Company.
All of the equity securities involved in such transactions were actively
traded, readily marketable, listed on a national exchange and, for purposes
of such transactions, were valued at their closing prices on the day
preceding the date of each transaction.
The net realized investment loss of $.5 million for the year ended December
31, 1995 primarily reflects net losses realized on the sale of certain
common equity securities to third parties. The net realized gain of $3.3
million for the 1994 year is primarily due to net gains realized on the
sale of the common equity securities to third parties offset by write-downs
of certain long-term investments to estimated fair value.
Net gain on sale of mortgages decreased to $24.0 million for the year ended
December 31, 1995 from $29.5 million for 1994. The 1995 net gain amount
includes a $27.2 million gain related to the adoption of SFAS No. 122.
Intensive price competition during 1995 led to increased pricing subsidies
on originated loans which correspondingly reduced gains on sales of
mortgages into the secondary market.
Other revenue, which consists primarily of loan processing fees, insurance
commissions and brokerage fees decreased to $15.6 million for the year
ended December 31, 1995 from $23.9 million for 1994. Loan processing fees,
which generally represent approximately 80% of other revenue, tend to
decrease or increase with mortgage loan production. Accordingly, the
decrease in 1995 is directly related to the decrease in mortgage loan
production in 1995 as compared to 1994.
Salaries and employee benefits expense for the years ended December 31,
1995 and 1994 was $51.3 million and $61.6 million, respectively. Generally
accepted accounting principles ("GAAP") require loan origination revenues
to be netted against direct loan origination costs. Since salaries and
employee benefits expense is the largest component of loan
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
9
<PAGE> 8
[LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
(CONTINUED)
origination costs, approximately 90% of loan origination fees are accounted
for as a reduction to salaries and employee benefits expense as illustrated
in the following table:
------------------------------------------------------------------------
Year ended December 31, (in thousands) 1995 1994
------------------------------------------------------------------------
Unadjusted salaries and employee benefits expense $ 68,807 $ 91,115
GAAP net origination revenues (17,550) (29,550)
------------------------------------------------------------------------
GAAP salaries and employee benefits expense $ 51,257 $ 61,565
------------------------------------------------------------------------
A decline in loan origination revenues, reflecting lower retail mortgage
loan production in 1995, partially offsets the decrease in unadjusted
salaries and employee benefits expense. Excluding the effects of loan
origination revenues, salaries and employee benefits expense decreased 25%
in 1995 as compared to 1994. This decrease reflects headcount reductions
due to the downsizing of the production network during 1994 and lower
incentive compensation expenses due to lower mortgage loan production
volumes in 1995.
Office occupancy and equipment expense decreased to $14.3 million in 1995
from $18.2 million in 1994. The decrease reflects lower office lease and
related expenses as a result of the restructuring plan implemented by the
Company in 1994 to downsize its production network in response to a
contracting mortgage loan origination market.
The provision for loan losses decreased to $7.0 million for the year ended
December 31, 1995 from $8.2 million for the year ended December 31, 1994.
The 1994 amount includes charge-offs relating to certain commercial real
estate owned properties.
Other operating expenses, which consist primarily of loan processing
expenses and general office expenses, decreased to $32.8 million for the
year ended December 31, 1995 from $44.0 million in 1994. Loan processing
expenses tend to decrease or increase with mortgage loan production.
Accordingly, the decrease in other operating expenses in 1995 reflects
lower mortgage loan production in 1995 as compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash flow requirements relate to funding mortgage
loan production and investments in mortgage servicing rights. To meet these
financing needs, the Company relies on commercial paper borrowings,
short-term credit facilities, medium and long-term debt, early funding
programs and cash flow from operations. The Company also generates cash
from the sale of servicing. In 1994, the Company generated cash through the
issuance of preferred stock which was used to reduce medium and long-term
debt and to repurchase its common stock from FAE.
In August 1995, the Company entered into a $60.0 million unsecured
revolving credit facility which was extended in 1996 and expires in July
1997. As of December 31, 1996 and 1995, the Company had $45.0 million and
$60.0 million, respectively, outstanding under this borrowing facility.
In November 1996, the Company amended and restated its secured revolving
credit agreement which it entered into in March of 1995. The provisions of
the amended agreement increased the Company's revolving credit facility
from $500 million to $750 million and can be further increased, at the
Company's option with bank concurrence, up to $1.25 billion. Borrowings
under the facility are secured primarily by the Company's mortgage loans
receivable and mortgage servicing portfolio. The revolving credit facility
expires on November 12, 1999. As of December 31, 1996 and 1995, the Company
had no outstanding borrowings under this facility or the previous facility.
The Company must comply with certain financial covenants provided in its
secured and unsecured revolving credit facilities, including restrictions
relating to tangible net worth and leverage. In addition, the secured
facility contains certain covenants which limit the Company's ability to
pay dividends or make distributions of its capital in excess of preferred
stock dividend and subordinated debt interest requirements each year. The
Company is currently in compliance with all such covenants.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
10
<PAGE> 9
[LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company has a $650.0 million domestic and Euro commercial paper
program. The weighted average number of days to maturity of commercial
paper outstanding as of December 31, 1996 was 23 days. As of December 31,
1996 and 1995, there was $362.2 million and $256.6 million of commercial
paper outstanding, respectively.
Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company,
has a revolving credit agreement under which it can borrow up to $10.0
million through June 30, 1997. Borrowings under the credit agreement are
guaranteed by the Company. As of December 31, 1996 there were no borrowings
outstanding under this agreement. As of December 31, 1995, there was $4.5
million outstanding under this agreement.
Effective December 8, 1995, the Company exchanged and retired 2,239,061
shares of its 8.42% cumulative preferred stock, Series A, for $56.0 million
principal amount of 9.375% subordinated interest deferrable debentures
("subordinated debentures"), due December 31, 2025. Interest on the
subordinated debentures is paid quarterly in arrears at the annual rate of
9.375% on the last business day of each March, June, September and
December. The first interest payment was made on December 29, 1995 for the
period from November 1, 1995 (the last regular dividend payment date with
respect to the preferred stock) through December 8, 1995 at the annual rate
of 8.42% and from December 9, 1995 through December 31, 1995 at the annual
rate of 9.375%. The purpose for the exchange was to improve the Company's
after-tax cash flow since the interest payable on the subordinated
debentures is deductible for federal income tax purposes, whereas dividends
payable on the preferred stock are not.
The subordinated debentures are redeemable at the option of the Company, in
whole or in part, at any time on or after May 1, 1999. On or after such
date, the subordinated debentures may be redeemed at the option of the
Company at a price equal to 100% of the principal amount redeemed ($25 for
each $25 principal amount of subordinated debenture), plus accrued and
unpaid interest to the date fixed for redemption.
In June 1992, the Company issued $100.0 million of 9% debentures due June
2012 under terms of a $250.0 million shelf registration statement filed
with the Securities and Exchange Commission ("SEC") in April 1992. The
proceeds were used for general corporate purposes.
Under a $200.0 million shelf registration statement filed with the SEC in
November 1988, the Company issued $40.0 million of medium-term notes in
1989, with a total weighted average interest rate of 9.65% due 1996, and in
October 1991, the Company issued $160.0 million of 8.875% medium-term notes
due October 2001. During 1995, the Company repurchased and retired $10.3
million of the medium-term notes that were due in 1996 and $21.6 million of
the medium-term notes that were due in 2001. During 1996, the Company
repaid the remaining $29.7 million of the medium-term notes due in 1996 on
their maturity dates.
In 1986, the Company issued $125.0 million of 8.25% debentures due November
1, 1996. The Company repurchased and retired $50.4 million of these
debentures during 1995 and repaid the remaining $74.6 million on their
maturity date in 1996.
Management believes capital resources will be sufficient to meet the
Company's operating needs as well as to fund maturing medium and long-term
debt.
In February 1994, the Company's certificate of incorporation was amended to
change the number of authorized shares of preferred and common stock to 12
million and 8 million, respectively. In March 1994, the Company issued 4
million shares of 8.42% cumulative preferred stock, Series A, ("preferred
stock"), with an aggregate liquidation preference of $25 per share for net
proceeds to the Company of $96.8 million. In connection with the issuance
of preferred stock, the Company transferred a total of $112.0 million of
certain common equity securities to FAE in exchange for 838,826 shares of
the Company's common stock held by FAE, which were retired by the Company.
The Company recognized an $8.6 million pretax loss on these noncash
transfers. The Company also repurchased and retired 85,248 shares of its
common stock held by FAE for $10.0 million cash in 1994.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
11
<PAGE> 10
[LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company has a dividend policy which may result in the payment of
dividends on the Company's common stock, dependent upon the earnings, cash
position and capital needs of the Company, limitations in credit
agreements, general business conditions and other factors deemed relevant
by the Company's Board of Directors. The Company did not declare any
dividends on its common stock during 1996, 1995 or 1994.
Quarterly cash dividends are paid on preferred stock at an annual rate of
8.42% or $2.105 per share, if declared by the Board of Directors, in
arrears on the first day of each February, May, August and November. The
first dividend payment was made on May 1, 1994 with respect to the period
from the date of initial issuance of the preferred stock through April 30,
1994. The Company paid cash dividends totaling $3.7 million, $8.4 million
and $5.2 million on its preferred stock for the years ended December 31,
1996, 1995 and 1994, respectively.
The preferred stock is not redeemable prior to May 1, 1999. On or after
such date, the preferred stock may be redeemed at the option of the Company
at a price of $25 per share, plus accrued and unpaid dividends to the
redemption date.
During 1996, the Company sold the rights to service a total of $3.3 billion
of mortgage loans to a third party for net proceeds of $55.9 million, which
were used for general corporate purposes.
During 1995, the Company sold the rights to service a total of $11.0
billion of mortgage loans to third parties for net proceeds of $199.1
million, which were used to repurchase and retire debt, repurchase common
stock and for general corporate purposes.
During 1995, the Company transferred a total of $27.0 million of common
equity securities and $93.0 million in cash and money market investments to
FAE in exchange for 959,049 shares of the Company's common stock held by
FAE, which were retired by the Company. The Company recognized a $2.2
million pretax loss on these transfers. During 1995, the Company
repurchased and retired a total of $82.3 million of public debt and
recorded an extraordinary loss after tax of $.9 million.
During 1994, the Company sold the rights to service $3.9 billion of
mortgage loans to a third party for net proceeds of $70.2 million. The
Company continues to service the majority of these loans pursuant to a
subservicing agreement which ends in 1999. The proceeds from the sale were
used to reduce short-term debt and for general corporate purposes.
INFLATION
Inflation affects the Company primarily in the area of mortgage loan
originations. Interest rates normally increase during periods of high
inflation and decrease during periods of low inflation. Historically, the
Company's mortgage loan originations have increased in response to falling
interest rates and have decreased during periods of rising interest rates.
However, higher interest rate environments typically enhance the value of
the Company's mortgage servicing portfolio due to less refinance activity.
Lower interest rates generally result in higher payoffs and, therefore,
typically reduce the value of the mortgage servicing portfolio.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
12
<PAGE> 11
[LOGO]
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Source One Mortgage Services Corporation
We have audited the accompanying consolidated statements of condition of
Source One Mortgage Services Corporation and subsidiaries (the Company) as
of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Source One
Mortgage Services Corporation and subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3 to the consolidated financial statements, in
1995 the Company changed its method of accounting for mortgage servicing
rights. As discussed in Note 3 to the consolidated financial statements, in
1994 the Company changed its method of accounting for its purchased
mortgage servicing rights asset.
/S/ Ernst & Young LLP
Detroit, Michigan
January 30, 1997,
except for Notes 7 and 22,
as to which the date is
March 21, 1997
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
13
<PAGE> 12
[LOGO]
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
December 31, (in thousands, except for share and per share amounts) 1996 1995
- ------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 923 $ 4,146
Investments 46,555 26,290
Mortgage loans receivable 314,937 381,028
Pool loan purchases 131,539 118,995
Loans held for investment 23,351 24,335
Capitalized servicing (net) 410,939 397,071
Common equity securities (net) 2,312 529
Mortgage claims receivable and real estate acquired
(net of allowance for loan losses of $15,400 in 1996
and $13,500 in 1995) 51,501 45,416
Premises and equipment 28,054 31,014
Other assets 120,943 106,205
- ------------------------------------------------------------------------------------------------------
Total assets $1,131,054 $1,135,029
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Liabilities:
Senior debt $ 643,262 $ 661,846
Subordinated debt 54,535 54,786
Accounts payable and other liabilities 118,500 96,153
- ------------------------------------------------------------------------------------------------------
Total liabilities $ 816,297 $ 812,785
- ------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value, 12,000,000 shares authorized,
1,760,939 shares of 8.42% cumulative Series A (aggregate
liquidation preference of $25 per share) issued and
outstanding as of December 31, 1996 and 1995 18 18
Common stock, $.01 par value, 8,000,000 shares authorized,
2,247,000 shares issued and outstanding as of
December 31, 1996 and 1995 22 22
Paid-in capital 346,088 346,088
Unrealized investment loss (net) - (546)
Retained deficit (31,371) (23,338)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 314,757 322,244
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,131,054 $1,135,029
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
14
<PAGE> 13
[LOGO]
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands, except for per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
REVENUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage servicing revenue $ 139,578 $ 141,883 $ 169,293
Amortization of capitalized servicing (71,936) (81,385) (86,943)
Net gain on financial instruments 9,904 840 -
- ----------------------------------------------------------------------------------------------------------------------------
Net servicing revenue 77,546 61,338 82,350
- ----------------------------------------------------------------------------------------------------------------------------
Interest income 40,826 37,669 72,031
Interest expense (36,018) (27,348) (59,954)
- ----------------------------------------------------------------------------------------------------------------------------
Net interest revenue 4,808 10,321 12,077
- ----------------------------------------------------------------------------------------------------------------------------
Net realized investment loss on sale and
exchange of securities with affiliates (855) (2,159) (8,596)
Net realized investment gain (loss) 623 (544) 3,333
Net gain on sale of mortgages 38,346 24,015 29,471
Net gain on sale of servicing 10,080 40,041 -
Other 18,132 15,583 23,858
- ----------------------------------------------------------------------------------------------------------------------------
Total revenue 148,680 148,595 142,493
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES
- ----------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits 56,294 51,257 61,565
Office occupancy and equipment 13,619 14,326 18,241
Provision for loan losses 10,260 6,956 8,206
Write-off of goodwill and other intangible assets 29,128 - -
Restructuring charges - - 5,154
Other operating expenses 34,252 32,774 44,049
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 143,553 105,313 137,215
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary loss
and cumulative effect of accounting change 5,127 43,282 5,278
Income tax expense 9,453 16,132 4,474
- ----------------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary loss and
cumulative effect of accounting change (4,326) 27,150 804
Extraordinary loss on repurchase of debt
(net of $486 income tax benefit) - (902) -
Cumulative effect of change in accounting for
purchased mortgage servicing rights
(net of $23,852 deferred income tax benefit) - - (44,296)
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income (4,326) 26,248 (43,492)
Less dividends on preferred stock 3,707 7,634 6,642
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common stock $ (8,033) $ 18,614 $ (50,134)
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share:
Before extraordinary loss and
cumulative effect of accounting change $ (3.57) $ 7.55 $ (1.65)
Extraordinary loss - (.35) -
Cumulative effect of accounting change - - (12.56)
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income per common share $ (3.57) $ 7.20 $ (14.21)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
15
<PAGE> 14
[LOGO]
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1996, 1995 and 1994
(in thousands, except for share and per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized Total
Investment Retained Stock-
Preferred Common Paid-in Gain Earnings holders'
Stock Stock Capital (Loss) (Deficit) Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $ - $ 41 $ 544,063 $ (286) $ 8,182 $ 552,000
Net loss - - - - (43,492) (43,492)
Unrealized investment loss (net) - - - (3,779) - (3,779)
Issuance of 4,000,000 shares of
8.42% cumulative Series A
preferred stock, $.01 par value
(aggregate liquidation
preference of $25 per share) 40 - 99,960 - - 100,000
Repurchase of 924,074 shares of
common stock, $.01 par value,
from parent - (9) (121,991) - - (122,000)
Preferred dividends declared
of $2.105 per share - - - - (6,642) (6,642)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 40 32 522,032 (4,065) (41,952) 476,087
Net income - - - - 26,248 26,248
Unrealized investment gain (net) - - - 3,519 - 3,519
Repurchase of 959,049 shares of
common stock, $.01 par value,
from parent - (10) (119,990) - - (120,000)
Exchange of 2,239,061 shares of
8.42% cumulative Series A
preferred stock, $.01 par value
(aggregate liquidation
preference of $25 per share) for
9.375% subordinated
debentures (22) - (55,954) - - (55,976)
Preferred dividends declared of
$2.105 per share - - - - (7,634) (7,634)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 18 22 346,088 (546) (23,338) 322,244
Net loss - - - - (4,326) (4,326)
Unrealized investment gain (net) - - - 546 - 546
Preferred dividends declared of
$2.105 per share - - - - (3,707) (3,707)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $ 18 $ 22 $ 346,088 $ - $ (31,371) $ 314,757
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
16
<PAGE> 15
[LOGO]
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) income $ (4,326) $ 26,248 $ (43,492)
Noncash items included in the determination of
net (loss) income:
Amortization of capitalized servicing 71,936 81,385 86,943
Write-off of goodwill and other intangible assets 29,128 - -
Net unrealized gain on financial instruments (1,820) (840) -
Provision for loan losses 10,260 6,956 8,206
Depreciation and amortization 8,825 7,347 10,450
Net realized loss on investments 232 2,703 5,263
Amortization of goodwill 2,090 2,090 2,090
Gain on sale of servicing (10,080) (40,041) -
Amortization of deferred gain on sale of servicing (6,139) (4,188) (2,700)
Net decrease (increase) in mortgage loans receivable 66,091 (170,556) 1,060,241
Net (decrease) increase in accounts payable and other
liabilities (15,002) 18,749 (29,894)
Net decrease in other assets 5,399 3,768 42,444
Net change in current and deferred income taxes
receivable and payable (10,158) 16,849 (4,716)
Extraordinary loss on repurchase of debt - 902 -
Cumulative effect of change in accounting
for purchased mortgage servicing rights - - 44,296
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 146,436 (48,628) 1,179,131
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------------
Collections on pool loan purchases, mortgage
claims receivable and real estate acquired 160,936 192,697 254,136
Additions to pool loan purchases, mortgage claims
receivable and real estate acquired (189,825) (150,420) (242,841)
Capitalized excess servicing income (10,114) (7,442) (16,712)
Additions to purchased mortgage servicing rights (40,449) (82,147) (90,049)
Originated mortgage servicing rights (38,015) (31,197) -
Net proceeds from sales of servicing 11,706 181,109 70,242
Net (increase) decrease in investments (20,134) 23,846 65,391
Purchase of common equity securities - - (122,101)
Proceeds from sale of common equity securities
to affiliates 514 - -
Proceeds from sales of common equity securities - 21,390 129,679
Net (acquisition) disposition of premises and equipment (1,410) 185 (3,491)
Net decrease (increase) in loans held for investment 984 (4,560) 3,836
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities $(125,807) $ 143,461 $ 48,090
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
17
<PAGE> 16
[LOGO]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from issuance of commercial paper $ 5,140,110 $ 4,050,417 $ 1,778,950
Repayments on commercial paper (5,034,543) (3,819,904) (2,326,875)
Net decrease in credit agreement and borrowings (20,497) (133,978) (765,673)
Retirement of debt (104,350) (85,872) -
Net proceeds from issuance of preferred stock - - 96,850
Repurchase of common stock from parent - (92,980) (10,000)
Dividends paid on preferred stock (3,707) (8,420) (5,239)
Other (865) (1,190) (948)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (23,852) (91,927) (1,232,935)
- --------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (3,223) 2,906 (5,714)
Cash at beginning of year 4,146 1,240 6,954
- --------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 923 $ 4,146 $ 1,240
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
18
<PAGE> 17
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
ORGANIZATION
Source One Mortgage Services Corporation (together with its subsidiaries, the
"Company") was incorporated in 1972 and is the successor to Citizens Mortgage
Corporation which was organized in 1946. The Company is now an indirect
wholly-owned subsidiary of Fund American Enterprises Holdings, Inc. ("Fund
American"), a Delaware corporation organized in 1980, which was formerly known
as The Fund American Companies, Inc. and Fireman's Fund Corporation.
The Company is one of the largest mortgage banking companies in the United
States. As of December 31, 1996, the Company had a mortgage loan servicing
portfolio totaling $29.2 billion, including $2.8 billion of loans subserviced
for others, which is serviced on behalf of approximately 320 institutional
investors and numerous other security holders. As of December 31, 1996, the
Company had 131 retail branch offices in 26 states and originated $3.8 billion
in mortgage loans for the year then ended.
As a mortgage banker, the Company engages primarily in the business of
producing, selling and servicing residential mortgage loans and subservicing
residential mortgage loans for third parties. Its sources of revenue are net
servicing revenue, net interest revenue, net gain on sale of mortgages, net
gain on sale of servicing and other revenue (including underwriting and
appraisal fees). Through subsidiaries, the Company also provides credit-related
insurance products (such as life, disability, health, accidental death and
property and casualty insurance).
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company include the
accounts of Central Pacific Mortgage Company, a wholly-owned subsidiary of the
Company, (together with its subsidiaries, "Central Pacific") and all other
subsidiaries, and have been prepared in accordance with generally accepted
accounting principles. Significant intercompany transactions have been
eliminated in consolidation. The financial statements include all adjustments
considered necessary by management to fairly present the financial position,
results of operations and cash flows of the Company. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
amounts in prior year financial statements have been reclassified to conform
with the current year presentation.
Fund American acquired the stock of the Company in 1986. The acquisition
resulted in a purchase price in excess of historical book value of the
Company's net assets. The excess purchase price allocated to identifiable
assets was amortized primarily over 5 to 20 years depending on asset type and
the portion allocated to goodwill was amortized over 20 years. In the fourth
quarter of 1996, the Company wrote off the remaining carrying value of
goodwill and other intangible assets. Refer to Note 7 to the consolidated
financial statements for further discussion.
ACCOUNTING STANDARD RECENTLY ADOPTED
As of January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights," an amendment of SFAS No. 65, which requires the total cost
of acquiring mortgage loans, either through loan origination activities or
purchase transactions, to be allocated to the mortgage servicing rights and the
loans based on their relative fair values. The statement requires entities to
measure impairment on a disaggregated basis by stratifying the mortgage
servicing rights based on one or more predominant risk characteristics of the
underlying loans. Impairment is recognized through a valuation allowance for
each individual stratum. Pursuant to SFAS No. 122, consolidated financial
statements prior to 1995 have not been restated.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
19
<PAGE> 18
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
INVESTMENTS
Investments primarily consist of the following: short-term investments
stated at fair value with unrealized gains and losses, if any, reported in
income; real estate investment conduit ("REMIC") residuals considered held
to maturity and carried at amortized cost using a method which approximates
the effective yield method of amortization on a prospective basis;
investment partnership interests reported using the equity method of
accounting; and interest rate floor contracts ("floors") and principal-only
("P/O") swaps considered held for interest rate risk management purposes
and carried at fair value with unrealized gains and losses reported in net
gain on financial instruments.
MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable are stated at the lower of aggregate cost or
market value. Conventional mortgage loans are placed on a nonaccrual basis
when delinquent ninety days or more as to interest or principal. Interest
on delinquent Federal Housing Administration ("FHA") insured loans is
accrued at the insured rate beginning on the sixty-first day of
delinquency. Interest on delinquent Veterans Administration ("VA")
guaranteed loans is accrued at the loan rate during the period of
delinquency.
RECOGNITION OF REVENUES RELATED TO MORTGAGE LOANS RECEIVABLE
Discounts from the origination of mortgage loans receivable are deferred
and recognized as adjustments to gain or loss on sale. Gains and losses
from the sale of mortgage loans are recognized when proceeds are received.
Loan origination fees, net of certain direct costs, have been deferred and
are taken into income when mortgage loans receivable are sold.
POOL LOAN PURCHASES
Pool loan purchases, which are carried at cost, represent FHA insured, VA
guaranteed and conventional loans which were either delinquent or in the
process of foreclosure at the time they were purchased from Government
National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC")
mortgage-backed security pools that the Company services. Following the
purchase of these loans, interest is accrued at a rate based on expected
recoveries.
LOANS HELD FOR INVESTMENT
Loans held as permanent investments are stated at the lower of cost or
market value determined at the time the permanent investment decisions were
made. The amount of discount, if any, is amortized to income over the
anticipated life of the investment.
CAPITALIZED SERVICING
Capitalized servicing includes certain costs incurred in the origination
and acquisition of mortgage servicing rights ("originated and purchased
servicing") which are deferred and amortized over the expected life of the
loan. The total cost of acquiring mortgage loans either through origination
activities or purchase transactions, is allocated between the mortgage
servicing rights and the loans based on their relative fair values. The
fair values of mortgage servicing rights are estimated by calculating the
present value of the expected future cash flows associated with such
rights, incorporating assumptions that market participants would use in
their estimates of future servicing income and expense. A current market
rate is used to discount estimated future cash flows. Impairment of
mortgage servicing rights is measured on a disaggregated basis by
stratifying the mortgage servicing rights based on one or more predominant
risk characteristics of the underlying loans. Impairment is recognized
through a valuation allowance for each individual stratum.
Capitalized servicing also includes the present value of future servicing
revenue in excess of normal servicing revenue on loans sold with servicing
retained ("excess servicing") which is deferred and amortized using a
method that relates the anticipated servicing revenue to total projected
servicing revenue to be received over the expected life of the loan.
Impairment tests for excess servicing are performed on a disaggregated
basis. The original discount rate is used to discount excess servicing
future cash flows.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
20
<PAGE> 19
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
RECOGNITION OF REVENUES RELATED TO SERVICING MORTGAGE LOANS
Mortgage servicing revenue represents fees earned for servicing real estate
mortgage loans owned by investors and late charge income. The servicing
fees are calculated based on the outstanding principal balances of the
loans serviced and are recognized together with late charge income when
received.
COMMON EQUITY SECURITIES
Common equity securities are carried at fair value. Unrealized gains and
losses, net of tax, are recorded as a separate component of stockholders'
equity with no corresponding credit or charge to net income. Realized gains
and losses from sales of common equity securities are based on the specific
identification method.
MORTGAGE CLAIMS RECEIVABLE AND REAL ESTATE ACQUIRED
Mortgage claims receivable represent claims filed primarily with FHA and VA
and are carried at cost less an estimated allowance for amounts which are
not fully recoverable from claims filed with the underlying mortgage
insuring agencies.
Real estate acquired is stated at the lower of net realizable value or the
recorded balance satisfied at the date of acquisition determined on an
individual property basis. Costs relating to holding the properties are
charged to expense as incurred.
The allowance for loan losses is based upon an analysis of the mortgage
loan servicing portfolio and reflects an amount which, in management's
judgment, is adequate to provide for estimated losses.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements and systems and
programming software, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
method over the estimated useful lives of the related assets or over the
lease terms, whichever period is shorter.
NET INCOME PER SHARE
Net income per share amounts were computed based on the weighted average
total number of common shares outstanding. There were 2,247,000, 2,584,450
and 3,527,713 weighted average common shares outstanding for the years
ended December 31, 1996, 1995 and 1994, respectively.
DIVIDENDS PER SHARE
Cash dividends per share were computed based on the total number of common
shares outstanding as of the dividend record dates.
NOTE 2. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The adoption of this statement will eliminate the distinction
between "normal" servicing rights and excess servicing receivables and will
change the Company's method of measuring the value of its capitalized
excess servicing asset. The statement is effective for transfers and
servicing of financial assets beginning in fiscal year 1997. The Company
has not yet determined what impact, if any, the adoption of this statement
will have on its financial position or results of operations.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
21
<PAGE> 20
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. CAPITALIZED SERVICING
For the years ended December 31, 1996 and 1995, the Company estimated the
fair values of its mortgage servicing rights by calculating the present
value of the expected future cash flows associated with such rights. In
making those estimates, the Company incorporated assumptions that market
participants would use in their estimates of future servicing income and
expense.
As a result of the pending sale of approximately $17 billion in mortgage
servicing rights (refer to Note 22 to the consolidated financial
statements), the Company refined its calculation for measuring the
impairment of its capitalized servicing asset during the fourth quarter of
1996. The $17 billion portfolio was valued as one stratum using the market
price as determined by the third party purchaser.
The Company evaluated the predominant risk characteristics (prepayment,
default and operational) on the remaining owned servicing portfolio. The
Company stratified the portfolio by interest rate, loan type (investor),
original term to maturity and principal recourse. Consistent with its
existing methodology, the Company measured impairment of its remaining
owned servicing portfolio using assumptions that market participants would
use to value their estimates of future net servicing revenue. In estimating
fair value, the Company used market consensus prepayment rates and
discounted the future cash flows using discount rates that approximate
current market rates of 10.5% for conventional loans, 12% for insured loans
and 21% for recourse loans. The fair value of each stratum was computed and
compared to its recorded book value to determine if a valuation allowance,
or recovery of a previously established allowance, was required. As a
result of refining the calculation on its remaining owned servicing
portfolio, the Company recognized $13.4 million of pretax impairment during
the fourth quarter of 1996.
The discount rate and prepayment assumptions are significant factors used
in estimating the fair value of the Company's mortgage servicing rights and
could be significantly impacted by changes in interest rates. Accordingly,
it is likely that management's estimate of the fair value of the mortgage
servicing rights could change in the near term due to changes in interest
rates.
The following table summarizes the fair value of mortgage servicing rights
and certain characteristics of the Company's servicing portfolio related to
those mortgage servicing rights as of December 31, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Fair Value Weighted
Mortgage Principal Average Weighted Weighted
Servicing Balance Interest Average Average
Rights Serviced (a) Rate Maturity Service Fee
Loan Type (in thousands) (in millions) (in percent) (in months) (in percent)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insured $207,303 $11,932 8.88% 264 .45%
Conventional 124,257 7,856 8.44 215 .38
Recourse 26,452 2,188 8.72 214 .31
Adjustable Rate 16,219 997 7.97 301 .42
- ----------------------------------------------------------------------------------------
Total $374,231 $22,973 8.67% 244 .41%
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Excludes $3.4 billion of mortgage servicing rights related to originations
not capitalized prior to the adoption of SFAS No. 122.
In 1995, to measure impairment of the mortgage servicing rights, the
Company stratified the related mortgage loan servicing portfolio based on
its predominant risk characteristics which were determined to be
prepayment, default and operational risks. This resulted in stratification
by interest rate, loan type (investor) and original term to maturity. In
estimating fair value, the Company used market consensus prepayment rates
and discounted the future cash flows using discount rates that approximated
then current market rates of 10.5% for conventional loans and 12.0% for
insured loans. The fair value of each stratum was computed and compared to
its recorded book value to determine if a valuation allowance, or recovery
of a previously established valuation allowance, was required.
In 1994, the Company adopted an accounting methodology that measured
impairment of purchased servicing by discounting the estimated future cash
flows using a current market rate. Prior to 1994, the Company measured
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
22
<PAGE> 21
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. CAPITALIZED SERVICING (CONTINUED)
impairment of purchased servicing on a disaggregated basis including a cost
of capital charge for estimating future cash flows. The adoption of the new
accounting methodology, recorded as a cumulative adjustment as of January
1, 1994, resulted in a $68.1 million pretax, $44.3 million after tax,
charge to income for 1994.
The Company estimates the fair value of its capitalized excess servicing
asset by discounting the anticipated future cash flows over the estimated
life of the related loans. In making these estimates, the Company uses
"interest only strip" interest rates as quoted by market participants to
determine the appropriate discount rates and prepayment speed assumption
rates that are based on interest rates, loan types and original term of
maturity. The discount rate used to capitalize excess servicing ranged from
12.00% to 12.60% for 1996, was 12.00% for 1995 and ranged from 8.00% to
10.00% for 1994. For the years ended December 31, 1996, 1995 and 1994, the
weighted average discount rates inherent in the carrying amount of the
capitalized excess servicing asset were 10.36%, 10.03% and 9.12%,
respectively.
The following table summarizes changes in the Company's capitalized
servicing asset:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred
Gain on Total
Purchased Originated Excess Valuation Sale of Capitalized
(in thousands) Servicing Servicing Servicing Allowance Servicing Servicing
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $ 570,208 $ - $ 96,458 $ - $ - $ 666,666
Cumulative effect of
accounting change (68,147) - - - - (68,147)
Additions 69,704 - 16,712 - (19,912) 66,504
Scheduled amortization (61,665) - (12,120) - - (73,785)
Impairment/unscheduled
amortization (12,818) - (340) - - (13,158)
Amortization of deferred gain - - - - 2,700 2,700
Sales (21,706) - (28,624) - - (50,330)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 475,576 - 72,086 - (17,212) 530,450
Additions 64,239 31,197 7,442 - - 102,878
Scheduled amortization (43,936) (1,364) (7,553) - - (52,853)
Impairment/unscheduled
amortization - - (564) (27,968) - (28,532)
Amortization of deferred gain - - - - 4,188 4,188
Sales (132,371) - (26,689) - - (159,060)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 363,508 29,833 44,722 (27,968) (13,024) 397,071
Additions 77,385 38,015 10,114 - - 125,514
Scheduled amortization (56,746) (6,262) (6,924) - - (69,932)
Impairment/unscheduled
amortization - - (1,076) (928) - (2,004)
Amortization of deferred gain - - - - 6,139 6,139
Sales (37,685) - (8,164) - - (45,849)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $ 346,462 $61,586 $ 38,672 $(28,896) $ (6,885) $ 410,939
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1994, the Company sold the rights to service $3.9 billion of
mortgage loans to a third party for net proceeds of $70.2 million and
continues to service the majority of these loans pursuant to a subservicing
agreement. Accordingly, the Company recorded a deferred gain on the sale
which is being recognized as income over the five-year life of the
subservicing agreement. In the fourth quarter of 1996, the third party sold
the rights to service approximately $1.0 billion of these mortgage loans,
representing approximately 25% of the total loans subserviced by the
Company. Accordingly, the Company recognized an additional $2.4 million of
the deferred gain in 1996 as mortgage servicing revenue, representing
approximately 25% of the deferred balance at the time of the sale.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
23
<PAGE> 22
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. COMMON EQUITY SECURITIES AND INVESTMENTS
In January 1996, the Company sold its remaining $1.4 million of common
equity securities to Fund American Enterprises, Inc. ("FAE"), the Company's
direct parent, for cash proceeds. In 1995, the Company transferred $27.0
million of certain common equity securities to FAE in exchange for shares
of the Company's common stock held by FAE, which were retired by the
Company. All of the equity securities involved in such transactions were
actively traded, readily marketable, listed on a national exchange and, for
purposes of such transactions, were valued at their reported closing prices
on the day preceding the date of each transaction.
The Company received proceeds on the sale of common equity securities of
$.5 million and $21.4 million for the years ended December 31, 1996 and
1995, respectively, including the transactions with Fund American. Realized
gains and losses from the sale of these securities were included in the
determination of income. For the year ended December 31, 1996, the Company
realized losses totaling $.9 million. For the year ended December 31, 1995,
the Company realized gains totaling $2.8 million and losses totaling $5.6
million.
In December 1996, the Company received shares of certain common equity
securities with a market value of $2.3 million as a return of a partnership
investment. The resulting gain of $1.4 million is included in the
determination of income. In January 1997, the Company transferred these
shares to FAE in exchange for shares of the Company's common stock held by
FAE, which were retired by the Company. Refer to Note 22 to the
consolidated financial statements for further discussion.
The fair value of the portfolio of common equity securities is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common equity securities at adjusted cost $ 2,312 $ 1,369
Gross unrealized losses - (840)
- ------------------------------------------------------------------------------------------------------------------
Common equity securities at fair value $ 2,312 $ 529
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying value of debt securities, which is included in investments on
the consolidated statements of condition, approximates fair value and is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt securities at fair value which approximates amortized cost $ 1,577 $ 2,735
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The change in net unrealized investment loss on the portfolio of common equity
securities has been charged to stockholders' equity as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized investment loss at beginning of year $ (546) $ (4,065) $ (286)
Decrease in gross unrealized gains - (1,068) (3,875)
Decrease (increase) in gross unrealized losses 840 6,481 (1,938)
(Decrease) increase in deferred income tax (expense) benefit (294) (1,894) 2,034
- ------------------------------------------------------------------------------------------------------------------
Net unrealized investment loss at end of year $ - $ (546) $(4,065)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
24
<PAGE> 23
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. MORTGAGE LOANS RECEIVABLE
The following table summarizes mortgage loans receivable:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adjustable rate mortgage loans, weighted average interest rates of 6.60%
and 6.55% as of December 31, 1996 and 1995, respectively $ 35,077 $ 17,605
Fixed rate 5 year through 20 year mortgage loans, weighted average
interest rates of 7.73% and 7.47% as of December 31, 1996
and 1995, respectively 51,160 59,507
Fixed rate 30 year mortgage loans, weighted average
interest rates of 8.19% and 7.89% as of December 31,
1996 and 1995, respectively 228,067 303,007
- -------------------------------------------------------------------------------------------------------------------
314,304 380,119
Net premiums 633 909
- -------------------------------------------------------------------------------------------------------------------
Total mortgage loans receivable $314,937 $ 381,028
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 6. POOL LOAN PURCHASES
The following table summarizes pool loan purchases:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal Balance
(in thousands) Number of Loans
- -----------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan Type:FHA $ 89,922 $ 77,644 1,621 1,433
VA 35,341 32,456 592 545
Conventional 6,276 8,895 75 106
- -----------------------------------------------------------------------------------------------------------------
Total pool loan purchases $131,539 $118,995 2,288 2,084
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7. OTHER ASSETS
The following table summarizes other assets:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ - $ 21,978
Amount due from sale of servicing 46,823 14,672
Escrow advances 18,878 11,663
Deferred income tax benefit (Note 15) 18,210 10,533
Interest receivable-pool loan purchases 11,900 9,805
Branch network - 8,925
Note receivable from sale of servicing 7,000 7,000
Other 18,132 21,629
- -----------------------------------------------------------------------------------------------------------------
Total other assets $120,943 $ 106,205
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
In the fourth quarter of 1996, the Company wrote off the remaining carrying
value of goodwill and other intangible assets totaling $29.1 million. It is
the Company's policy to account for goodwill and other intangible assets at
the lower of amortized cost or fair value. On an ongoing basis, management
reviews the valuation and amortization of these assets. As a part of its
ongoing review, management estimates the fair value of the Company's
intangible assets, taking
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
25
<PAGE> 24
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. OTHER ASSETS (CONTINUED)
into consideration any events and circumstances which might have diminished
their value. During 1996, increased competition and industry consolidation
had adversely impacted the value of both the mortgage loan production and
servicing operations of the Company. In addition, the sale of approximately
$17 billion in servicing to a third party at an after tax loss of
approximately $2.1 million is described in Note 22 to the consolidated
financial statements. The impact of this sale is dependent upon the length
of the subservicing period, which will be at least one year from the date of
the sale.
The Company performed an evaluation of the recoverability of goodwill and
other intangible assets taking into consideration the impact of the above
factors and the reduction in interest rates in the fourth quarter of 1996 on
its forecast of future operations. Based on such valuation, the Company had
determined that its projected results would not support the future
amortization of the Company's remaining goodwill and other intangible assets
of $29.1 million at December 31, 1996 and, therefore, reduced the carrying
amount of these assets accordingly. The Company's valuation assumes continued
industry consolidation in mortgage servicing operations and intense
competition in loan origination operations.
NOTE 8. SENIOR AND SUBORDINATED DEBT
Senior and Subordinated Debt consists of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, weighted average interest rates of 5.69%
and 6.14% as of December 31, 1996 and 1995, respectively $ 362,180 $256,613
Credit agreements, weighted average interest rates of 6.19%
and 6.57% as of December 31, 1996 and 1995, respectively 45,000 64,485
Medium-term notes due 1996, weighted average interest rates
of 9.60% as of December 31, 1995 - 29,700
8.25% debentures due November 1, 1996 - 74,650
8.875% medium-term notes due October 15, 2001 138,355 138,355
9.0% debentures due June 1, 2012 100,000 100,000
9.375% subordinated debentures, due December 31, 2025 55,976 55,976
Less unamortized discount, premium and issuance costs (net) (3,714) (3,147)
- -------------------------------------------------------------------------------------------------------------------
Total senior and subordinated debt $697,797 $716,632
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMERCIAL PAPER
The Company has a $650.0 million domestic and Euro commercial paper program
backed by its secured credit agreement. The weighted average number of days
to maturity of commercial paper outstanding as of December 31, 1996 and 1995
was 22.8 days and 19.0 days, respectively.
CREDIT AGREEMENTS
In November 1996, the Company amended and restated its secured revolving
credit agreement. The provisions of the amended agreement increased the
Company's revolving credit facility from $500 million to $750 million and can
be further increased, at the Company's option with bank concurrence, up to
$1.25 billion. Borrowings under the facility are secured primarily by the
Company's mortgage loans receivable and mortgage servicing portfolio. The
revolving credit facility expires on November 12, 1999. As of December 31,
1996 and 1995, the Company had no outstanding borrowings under this facility
or the previous facility.
The Company also has a $60 million unsecured revolving credit facility which
expires in July 1997. As of December 31, 1996 and 1995, there was $45.0
million and $60.0 million outstanding under this agreement, respectively.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
26
<PAGE> 25
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. SENIOR AND SUBORDINATED DEBT (CONTINUED)
The Company must comply with certain financial covenants provided in its
secured and unsecured revolving credit facilities, including restrictions
relating to tangible net worth and leverage. In addition, the secured
facility contains certain covenants which limit the Company's ability to pay
dividends or make distributions of its capital in excess of preferred stock
dividend and subordinated debt interest requirements each year. The Company
is currently in compliance with all such covenants.
Under the credit agreements described above, the Company receives interest
expense credits as a result of holding escrow and custodial funds in trust
accounts at non-affiliated banks.
Central Pacific Mortgage Company, a wholly-owned subsidiary of the Company,
has a revolving credit agreement under which it can borrow up to $10.0
million through June 30, 1997. Borrowings under the credit agreement are
guaranteed by the Company. As of December 31, 1996, there were no borrowings
outstanding under this agreement. As of December 31, 1995, there was $4.5
million outstanding under this agreement.
MEDIUM-TERM NOTES AND DEBENTURES
In June 1992, the Company issued $100.0 million of 9% debentures due June
2012 under terms of a $250.0 million shelf registration statement filed with
the Securities and Exchange Commission ("SEC") in April 1992. The proceeds
were used for general corporate purposes.
In October 1991, the Company issued $160.0 million of 8.875% medium-term
notes due October 2001. During 1995, the Company repurchased and retired
$21.6 million of these medium-term notes.
SUBORDINATED DEBENTURES
Effective December 8, 1995, the Company exchanged and retired 2,239,061
shares of its 8.42% cumulative preferred stock, Series A, for $56.0 million
principal amount of 9.375% subordinated interest deferrable debentures
("subordinated debentures"), due December 31, 2025. Interest on the
subordinated debentures is paid quarterly in arrears at the annual rate of
9.375% on the last business day of each March, June, September and December.
The first interest payment was made on December 29, 1995 for the period from
November 1, 1995 (the last regular dividend payment date with respect to the
preferred stock) through December 8, 1995 at the annual rate of 8.42% and
from December 9, 1995 through December 31, 1995 at the annual rate of 9.375%.
The subordinated debentures are redeemable at the option of the Company, in
whole or in part, at any time on or after May 1, 1999. On or after such date,
the subordinated debentures may be redeemed at the option of the Company at a
price equal to 100% of the principal amount redeemed ($25 for each $25
principal amount of subordinated debenture), plus accrued and unpaid interest
to the date fixed for redemption.
Aggregate maturities of medium-term notes, debentures and subordinated
debentures, excluding discount, premium and issuance costs, for the five
calendar years after December 31, 1996 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in thousands) 1997 1998 1999 2000 2001 Thereafter Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $138,355 $155,976 $ 294,331
- ---------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9. STOCKHOLDERS' EQUITY
In March 1994, the Company issued 4 million shares of 8.42% cumulative
preferred stock, Series A, ("preferred stock"), with an aggregate liquidation
preference of $25 per share for net proceeds to the Company of $96.8 million.
Effective December 8, 1995, the Company exchanged and retired 2,239,061
shares of its preferred stock for $56.0 million principal amount of 9.375%
subordinated debentures, due December 31, 2025. The preferred stock is not
redeemable prior to May 1, 1999. On or after such date, the preferred stock
may be redeemed at the option of the Company at a price of $25 per share,
plus accrued and unpaid dividends to the redemption date.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
27
<PAGE> 26
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
Quarterly cash dividends are paid on preferred stock at an annual rate of
8.42% or $2.105 per share, if declared by the Board of Directors, in arrears
on the first day of each February, May, August and November. The first
dividend payment was made on May 1, 1994 with respect to the period from the
date of initial issuance of the preferred stock through April 30, 1994.
In connection with sales of rights to service a total of $11.0 billion of
mortgage loans to third parties during 1995, the Company transferred a total
of $27.0 million of common equity securities and $93.0 million in cash and
money market investments to FAE in exchange for 959,049 shares of the
Company's common stock held by FAE, which were retired by the Company.
In February 1994, the Company's certificate of incorporation was amended to
change the number of authorized shares of preferred stock and common stock to
12 million and 8 million, respectively. In connection with the issuance of
preferred stock in 1994, the Company transferred a total of $112.0 million of
certain common equity securities to FAE in exchange for 838,826 shares of the
Company's common stock held by FAE, which were retired by the Company. The
Company also repurchased and retired 85,248 shares of its common stock held
by FAE for $10.0 million cash in 1994.
NOTE 10. FINANCIAL INSTRUMENTS
Financial Instruments with Off-Balance-Sheet Risk
The Company utilizes derivative financial instruments in the management of
interest rate risk. The Company's use of derivative financial instruments is
primarily limited to commitments to extend credit, mandatory forward
commitments, interest rate floor contracts ("floors") and principal-only
("P/O") swaps. All of the Company's derivative financial instruments are held
or issued for purposes other than trading.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and reduce its own exposure to fluctuations in interest rates. These
financial instruments primarily include commitments to extend credit and
mandatory forward commitments. Those instruments involve, to varying degrees,
elements of credit and market risk in excess of the amount recognized in the
consolidated statements of condition. The contract or notional amounts of
those instruments reflect the extent of risk the Company has in the
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit
("mortgage loan pipeline") is represented by the contractual notional amount
of those instruments. The Company's locked mortgage loan pipeline that is
expected to close totaled $175.7 million and $221.9 million as of December
31, 1996 and 1995, respectively. Fixed rate commitments result in the Company
having market risk as well as credit risk. Variable rate commitments result
only in credit risk. The amount of collateral required upon extension of
credit is based on the Company's credit evaluation of the mortgagor and
consists of the mortgagor's residential property.
The Company obtains mandatory forward commitments of up to 120 days to sell
mortgage-backed securities to hedge the market risk associated with a
substantial portion of the mortgage loan pipeline that is expected to close
and all mortgage loans receivable. As of December 31, 1996 and 1995, the
Company had approximately $454.6 million and $561.0 million of mandatory
forward commitments outstanding, respectively. If secondary market interest
rates decline after the Company obtains a mandatory forward commitment for a
loan, the loan may not close and the Company may incur a loss from the cost
of covering its obligations under such commitment. If secondary market rates
increase before the Company obtains a mandatory forward commitment for a loan
and the loan closes, the Company may incur a loss when the loan is
subsequently sold.
The Company's risk management function closely monitors the mortgage loan
pipeline to determine appropriate forward commitment coverage on a daily
basis in order to manage the risk inherent in these off-balance-sheet
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
28
<PAGE> 27
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED)
financial instruments. In addition, the risk management area seeks to reduce
counterparty risk by committing to sell mortgage loans only to its nine
approved dealers, with no dealer having in excess of 20% of current
commitments.
The Company sells loans either through mortgage-backed securities issued
pursuant to programs of GNMA, FNMA, FHLMC or institutional investors. Most
loans are aggregated in pools of $1.0 million or more, which are purchased by
institutional investors after having been guaranteed by GNMA, FNMA or FHLMC.
Substantially all GNMA securities are sold without recourse to the Company
for loss of principal in the event of a subsequent default by the mortgage
borrower due to underlying FHA or VA insurance. Prior to December 1992,
substantially all conventional securities were sold with recourse to the
Company to the extent of insufficient proceeds from private mortgage
insurance, foreclosure and other recoveries. Since December 1992,
conventional loans have been sold without recourse to the Company.
Servicing agreements relating to mortgage-backed securities issued pursuant
to the programs of GNMA, FNMA and FHLMC require the Company to advance funds
to make the required payments to investors in the event of a delinquency by
the borrower. The Company expects that it would recover most funds advanced
upon default by the borrower or at foreclosure. However, in connection with
VA partially guaranteed loans and certain conventional loans (which may be,
at most, partially insured by private mortgage insurers), funds advanced may
not cover losses due to potential declines in collateral value. The Company
is subject to limited amounts of principal risk with respect to these loans
since the insurer has the option to reimburse the servicer for the lower of
fair market value of the property or the mortgage loan outstanding, in
addition to the VA guarantee on the loan. In addition, most of the Company's
servicing agreements for mortgage-backed securities typically require the
payment to investors of a full month's interest on each loan although the
loan may be paid off (by optional prepayment or foreclosure) other than on a
month-end basis. In this instance, the Company is obligated to pay the
investor interest at the note rate from the date of the loan payoff through
the end of that calendar month without reimbursement.
As of December 31, 1996, 1995 and 1994, the Company serviced approximately
$13.5 billion, $10.7 billion and $11.9 billion of GNMA loans, respectively,
and $2.9 billion, $3.5 billion and $3.7 billion of conventional loans with
recourse, respectively.
In order to cover loan losses that may result from these servicing
arrangements and other losses, the Company has provided an allowance for loan
losses of $15.4 million and $13.5 million as of December 31, 1996 and 1995,
respectively, which management believes is adequate to cover unreimbursed
foreclosure advances and principal losses. During 1995, the Company refined
the estimates used to calculate the allowance for loan losses to more
accurately reflect the Company's experience. This change reduced the amount
of the allowance that would have been computed using the prior estimates.
In order to offset changes in the value of its investment in mortgage
servicing rights ("MSR") and to mitigate the effect on earnings of higher
amortization and impairment of the MSR asset which results from increased
prepayment activity, the Company invests in various financial instruments. As
interest rates decline, prepayment activity generally increases, thereby
reducing the value of the MSR asset, while the value of the financial
instruments increases. Conversely, as interest rates increase, the value of
the MSR asset increases while the value of such financial instruments
decreases. The financial instruments utilized by the Company include interest
rate floor contracts ("floors") and principal-only ("P/O") swaps.
The floors derive their value from the 10 year constant maturity treasury
yield index or the 10 year swap index, as applicable. The floor yields range
from 5.47% to 6.24%. To the extent that market interest rates increase, the
value of the floor declines. However, the Company is not exposed to losses in
excess of its initial investment in the floors. The total notional principal
amount of the floors was $1.0 billion and $.5 billion as of December 31, 1996
and December 31, 1995, respectively. As of December 31, 1996 and 1995, the
carrying value of the Company's open floors was $4.8 million and $3.5
million, respectively. The floors have remaining terms ranging from 2 to 5
years.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
29
<PAGE> 28
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED)
In July 1996, the Company entered into two P/O swap transactions with a total
notional value of $150.0 million. The value of the P/O swaps is determined by
changes in the value of the underlying P/O strip security. The payments
received by the Company under the P/O swaps relate to the cash flows of the
referenced P/O security. The payments made by the Company are based upon a
notional amount tied to the market price and the remaining balance of the
underlying P/O security, multiplied by a floating rate indexed to LIBOR. The
Company's exposure to loss in the P/O swaps is related to changes in the
market value of the underlying P/O security over the life of the contract.
The remaining original notional value of the P/O swaps was $50.0 million as
of December 31, 1996. The carrying value of the P/O swaps was $3.2 million as
of December 31, 1996. The P/O swaps have a remaining term of 4.5 years.
The floors and P/O swaps are carried at market value and are included in
investments in the consolidated statements of condition. Realized and
unrealized gains and losses are recorded in net gain on financial instruments
in the consolidated statements of income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company determines the estimated fair value of its financial instruments
using appropriate market information and valuation methodologies.
Considerable judgment is required to interpret the market information to
develop the estimates of fair value. As a result, the estimates provided
herein are not necessarily indicative of the amounts that could be realized
in a current market exchange.
The following methods and assumptions were used by the Company to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND INVESTMENTS
For cash and short-term investments, the carrying amount equals fair value.
For interest rate floor contracts and P/O swaps, fair value is estimated
based on quoted market prices for those or similar investments and is equal
to the carrying value.
For investments in REMIC residuals, for which there are no quoted market
prices, fair value is estimated based on discounted cash flow analyses, using
interest only strip interest rates, prepayment speed assumptions and LIBOR
rates, taking into consideration the characteristics of the related
collateral.
LOANS RECEIVABLE
For mortgage loans receivable and loans held for investment, fair value is
estimated using quoted market prices for securities backed by similar loans,
adjusting for difference in loan characteristics.
POOL LOAN PURCHASES
For pool loan purchases, fair value is estimated based on discounted cash
flow analyses, using the Company's short-term incremental borrowing rate or
quoted market prices for securities backed by similar loans.
CAPITALIZED EXCESS SERVICING
For capitalized excess servicing, fair value is estimated by computing the
anticipated revenue to be received over the life of the related loans based
on market consensus prepayment rates, discounted using quoted interest only
strip interest rates.
COMMON EQUITY SECURITIES
For common equity securities, fair value is based on quoted market prices and
is equal to the carrying value.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
30
<PAGE> 29
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. FINANCIAL INSTRUMENTS (CONTINUED)
LOANS IN FORECLOSURE AND MORTGAGE CLAIMS RECEIVABLE
For these financial instruments, fair value is estimated by discounting
anticipated future cash flows using the Company's short-term incremental
borrowing rate.
DEBT
For commercial paper and credit agreements, the carrying amount approximates
fair value. For debentures and medium-term notes, fair value is estimated by
discounting future cash flows using the Company's incremental borrowing rates
for similar types of borrowing arrangements. For subordinated debentures,
fair value is based on quoted market prices.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Fair value for commitments to sell mortgage loans is based on current
settlement values for those commitments. Fair value for commitments to extend
credit is based on current quoted market prices for securities backed by
similar loans.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 923 $ 923 $4,146 $4,146
Investments
Interest rate floor contracts 4,825 4,825 3,455 3,455
Principal-only swaps 3,185 3,185 - -
Other 38,545 38,545 22,835 22,835
Mortgage loans receivable 314,937 315,895 381,028 391,484
Pool loan purchases 131,539 135,841 118,995 122,260
Loans held for investment 23,351 23,289 24,335 24,956
Capitalized excess servicing 38,672 39,617 44,722 46,032
Common equity securities 2,312 2,312 529 529
Loans in foreclosure and mortgage
claims receivable (net) (a) 38,387 37,714 29,630 29,018
- ---------------------------------------------------------------------------------------------------------
Financial Liabilities:
Short-term debt $406,205 $406,205 $424,661 $428,212
Long-term debt 291,592 322,715 291,971 332,220
Off-Balance-Sheet Financial Instruments:
Mandatory forward commitments N/A 454,456 N/A 562,379
Commitments to extend credit
expected to close (pipeline) N/A 176,757 N/A 226,572
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes $13.1 million and $15.8 million of real estate owned in 1996 and
1995, respectively.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
31
<PAGE> 30
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. MORTGAGE SERVICING
The Company's portfolio of mortgages serviced, including loans subserviced,
interim servicing contracts and those under contract to acquire and
excluding loans sold but not transferred, totaled $29.2 billion, $31.8
billion and $39.6 billion as of December 31, 1996, 1995 and 1994,
respectively (refer to Note 22 to the consolidated financial statements).
The Company's portfolio of mortgages serviced as of December 31, 1996 is
summarized below:
<TABLE>
<CAPTION>
Weighted Average
---------------------------------------------------------------------------
Net Remaining
Principal Loan Interest Servicing Contractual
Balance Serviced Balance Rate Fee Rate Life
Loan Type (in millions) (in thousands) (in percent) (in percent) (in months)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential
Conventional $12,266 $ 69 8.41% .409% 213
FHA 9,546 51 8.85 .434 271
VA 4,525 52 8.54 .434 260
Commercial 73 695 7.49 .154 166
- -------------------------------------------------------------------------------------------------------------------
$26,410 $ 58 8.59% .422% 242
Subservicing 2,791
- -------------------------------------------------------------------------------------------------------------------
Total mortgage
servicing portfolio $29,201
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The servicing fee rates in the table above are shown after deducting any
guarantee fees. Guarantee fees, when applicable, range from six basis points
for governmental loans up to approximately thirty basis points for certain
conventional loans. Certain loans sold to private investors have no guarantee
fees.
The following table summarizes the Company's mortgage servicing portfolio by
interest rate range:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Number Principal Average Number Principal Average
of Balance Interest Rate of Balance Interest Rate
Interest Rate Range Loans (in millions) (in percent) Loans (in millions) (in percent)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5.99% and lower 1,239 $ 87 5.49% 2,674 $ 114 5.51%
6.00%-6.49% 5,477 291 6.22 8,208 434 6.19
6.50%-6.99% 18,449 1,443 6.71 25,192 2,077 6.69
7.00%-7.49% 51,791 3,416 7.15 64,052 4,573 7.16
7.50%-7.99% 71,954 5,436 7.63 84,899 6,745 7.63
8.00%-8.49% 62,120 4,455 8.10 60,843 4,315 8.10
8.50%-8.99% 77,020 4,043 8.58 80,936 4,217 8.60
9.00%-9.49% 37,690 2,049 9.06 38,939 2,234 9.08
9.50%-9.99% 69,506 3,614 9.57 57,131 3,185 9.60
10.00% and above 83,533 4,367 10.49 71,177 3,937 10.55
- -------------------------------------------------------------------------------------------------------------------
Total 478,779 $29,201 8.48% 494,051 $31,831 8.33%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
32
<PAGE> 31
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. MORTGAGE SERVICING (CONTINUED)
The following table summarizes the Company's mortgage servicing portfolio by
location of property:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Percentage Percentage
of Principal of Principal
Number Principal Balance of Number Principal Balance of
of Balance Servicing of Balance Servicing
State Loans (in millions) Portfolio Loans (in millions) Portfolio
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 67,559 $5,811 19.9% 73,865 $ 6,668 20.9%
New York 43,406 2,555 8.7 45,830 2,803 8.8
Washington 26,583 2,054 7.0 30,064 2,386 7.5
Texas 31,603 1,673 5.7 28,841 1,705 5.4
Florida 29,463 1,495 5.1 28,123 1,502 4.7
Illinois 17,836 1,157 4.0 18,486 1,291 4.1
Michigan 26,873 1,128 3.9 30,235 1,308 4.1
New Jersey 14,446 979 3.4 15,201 1,056 3.3
Arizona 15,657 899 3.1 15,751 949 3.0
Virginia 16,116 840 2.9 15,481 826 2.6
Other* 189,237 10,610 36.3 192,174 11,337 35.6
- -----------------------------------------------------------------------------------------------------------------------
Total 478,779 $29,201 100.0% 494,051 $31,831 100.0%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*No other state constitutes more than 2.9% of the Company's servicing
portfolio as of December 31, 1996.
The above tables include loans subserviced for others having a principal
balance of $2,791 million and $4,039 million as of December 31, 1996 and
1995, respectively.
Escrow funds of approximately $207.8 million, $236.0 million and $277.9
million as of December 31, 1996, 1995 and 1994, respectively, relating to
mortgages serviced and subserviced, are held in non-interest bearing accounts
at non-affiliated banks and are not included in the consolidated financial
statements.
The Company has in force an errors and omissions policy in the amount of $20
million. Primary fidelity coverage up to a limit of $35 million is provided
under a Fund American master policy, for which the Company pays a portion of
the premium.
NOTE 12. RESTRUCTURING CHARGES
As a result of a contracting mortgage loan origination market, the Company
implemented a restructuring plan in 1994 to bring its mortgage loan
production network in line with anticipated levels of mortgage loan
production. As a result, the Company recorded a pretax restructuring charge
totaling $5.2 million in 1994, which included $2.7 million for future lease
expenses related to closed facilities, $1.2 million in asset writedowns and
$1.3 million for employee termination and other costs. As of December 31,
1996 and 1995, $.5 million and $.9 million, respectively, remained accrued on
the Company's consolidated statements of condition relating to future lease
expenses on closed facilities. The restructuring actions resulted in improved
efficiency of the mortgage loan production operations and slightly lower
operating costs for 1995.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
33
<PAGE> 32
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. LEASE COMMITMENTS
The Company has entered into a number of noncancelable operating lease
agreements with respect to premises and equipment. The minimum annual rental
commitments under these leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(in thousands) 1997 1998 1999 2000 2001 Total
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$2,837 $1,841 $769 $379 $154 $ 5,980
- ---------------------------------------------------------------------------------
</TABLE>
Leases for branches which were closed as a result of the Company's
restructuring plan implemented in 1994 are included in the table above. As of
December 31, 1996, $.5 million of future lease payments remained accrued on
the Company's consolidated statement of condition, and therefore, do not
represent future operating expenses.
Total rental expense for the years ended December 31, 1996, 1995 and 1994 was
$4.5 million, $4.6 million and $6.9 million, respectively. Some leases
contain escalation clauses that correspond with increased real estate taxes,
other operating expenses and/or renewal options that call for increased rents
when the leases are renewed.
NOTE 14. OTHER OPERATING EXPENSES
The following table summarizes other operating expenses:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Telephone $4,316 $4,015 $5,572
Professional services 3,376 1,649 3,045
Postage 2,119 1,985 2,325
Amortization of goodwill 2,090 2,090 2,090
Office supplies and printing 2,063 1,768 2,471
Travel and entertainment 1,885 1,808 2,636
Bank charges 1,618 1,948 2,901
Other 16,785 17,511 23,009
- --------------------------------------------------------------------------------
Total other operating expenses $34,252 $32,774 $44,049
- --------------------------------------------------------------------------------
</TABLE>
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
34
<PAGE> 33
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. INCOME TAXES
The Company files a consolidated federal income tax return with Fund
American. Federal income tax expense is provided substantially on a separate
return basis except for the impact of a $.3 million credit to the deferred
income tax asset in 1996, a $1.9 million credit to the deferred income tax
asset in 1995 and a $2.0 million benefit to the deferred income tax asset in
1994, relating to unrealized losses and gains on the Company's portfolio of
common equity securities. As of December 31, 1995, the Company had recorded
$.3 million of deferred tax assets relating to accumulated unrealized losses
on the portfolio of common equity securities. Pursuant to terms of a tax
allocation agreement between the Company and Fund American, Fund American has
agreed to compensate the Company for the use of these capital losses if such
losses, when realized, can be utilized in Fund American's consolidated tax
return.
The following table summarizes income taxes due (to) or from Fund American:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net current taxes $(5,746) $(6,766)
Net deferred taxes 18,210 10,533
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Total income tax expense is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
Federal $17,280 $11,847 $14,483
State and local 144 248 266
Deferred (benefit) expense (7,971) 4,037 (10,275)
- ----------------------------------------------------------------------------------------------------------
Total income tax expense $9,453 $16,132 $4,474
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The current federal income tax expense for the year ended December 31, 1995
shown above excludes a $.5 million benefit relating to the extraordinary loss
on the repurchase and retirement of debt which has been reported as a net
amount in the consolidated statements of income.
Deferred tax (benefit) expense for the years ended December 31, 1996, 1995
and 1994 represent the net change in the deferred tax asset or liability
during the year. Deferred income taxes arise from temporary differences
between the tax bases of assets and liabilities and their reported amounts on
the consolidated financial statements. The net deferred tax (benefit)
expense for the years ended December 31, 1996, 1995 and 1994, shown above
exclude a $.3 million deferred tax expense, a $1.9 million deferred tax
expense and a $2.0 million deferred tax benefit, respectively, associated
with unrealized gains and losses on the common equity securities portfolio
which were charged directly to stockholders' equity. The deferred tax
benefit for the year ended December 31, 1994 shown above also excludes a
$23.9 million benefit relating to the cumulative effect of the change in
accounting for purchased mortgage servicing rights which has been reported as
a net amount in the consolidated statements of income.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
35
<PAGE> 34
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. INCOME TAXES (CONTINUED)
The following table summarizes the types of temporary differences giving rise
to the net deferred tax assets and net deferred tax liabilities. There were
no valuation allowances recorded relating to the net deferred tax assets as
of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchase accounting adjustments $ - $6,219 $ - $10,208
Accumulated unrealized losses
on common equity securities - - 294 -
Capitalized servicing 18,384 - 13,667 -
Allowance for loan losses 4,838 - 4,774 -
Depreciation - 2,583 - 2,352
Deferred bi-weekly income 1,351 - 1,353 -
Accrued postretirement benefits 1,181 - 1,159 -
Other, net 6,739 5,481 5,752 3,906
- ---------------------------------------------------------------------------------------------------------------
Total $32,493 $14,283 $26,999 $16,466
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of taxes calculated using the federal statutory rate of 35%
to income tax expense follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at federal statutory rate $1,795 $ 15,149 $ 1,847
Write-off of goodwill 6,960 - -
Purchase accounting adjustments 732 732 732
Dividends received deduction - (35) (263)
State taxes 94 161 173
Other, net (128) 125 1,985
- ---------------------------------------------------------------------------------------------------------------
Total income tax expense $9,453 $ 16,132 $ 4,474
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 16. PENSION PLAN
The Company has a defined benefit pension plan covering most of its
employees. Benefits under the plan are based on years of service and the
employees' highest average compensation over five consecutive years in their
last ten years of employment. Funding of retirement costs complies with the
minimum funding requirements specified by the Employee Retirement Income
Security Act. Cash contributions received by the plan for the years ended
December 31, 1996, 1995 and 1994 totaled $1.3 million, $1.7 million and $1.1
million, respectively.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
36
<PAGE> 35
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PENSION PLAN (CONTINUED)
The following table sets forth the plan's funded status and amounts
recognized on the Company's consolidated statements of condition:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested benefits
of $16,627 and $15,085 in 1996 and 1995, respectively $18,586 $17,232
Effect of future projected salary increases 5,138 6,738
- --------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 23,724 23,970
Plan assets at fair value, primarily long-term bonds (20,942) (18,117)
- --------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 2,782 5,853
Unrecognized net loss (1,111) (5,061)
Prior service cost not yet recognized in net periodic pension cost 871 1,001
Unrecognized net obligation at transition (11) (57)
- --------------------------------------------------------------------------------------------------------------------------------
Accrued pension cost included in accounts
payable and other liabilities $ 2,531 $ 1,736
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of the components of net periodic pension costs is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the year $ 1,578 $ 1,354 $ 1,633
Interest cost on projected benefit obligation 1,633 1,388 1,308
Actual return on plan assets (1,998) (3,801) 985
Net amortization and deferral 892 2,613 (1,575)
- --------------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 2,105 $ 1,554 $ 2,351
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in the determination of the projected benefit obligation were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25% 7.00% 8.00%
Rate of increase in compensation levels 5.00% 6.00% 6.00%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 17. POSTRETIREMENT BENEFITS
The Company has an unfunded postretirement benefit plan which provides for
postretirement health care and life insurance benefits. Postretirement life
insurance benefits are provided to substantially all employees. Postretirement
health care benefits are provided to substantially all employees hired prior
to January 1, 1991. The Company provides for term life insurance coverage
based on the employees' annual earnings and length of service. Postretirement
health care benefits are contributory, whereby the Company provides for 87.5%
of medical costs to retirees who retired prior to January 1, 1993. Effective
January 1, 1993, the plan was amended to provide for a portion of monthly
retiree medical costs, based on years of service, to retirees who retire on or
after January 1, 1993.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
37
<PAGE> 36
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. POSTRETIREMENT BENEFITS (CONTINUED)
A summary of the components of net periodic postretirement benefit cost is as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 110 $ 86 $ 105
Interest cost 239 250 240
Net amortization and deferral - - 7
- ----------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 349 $ 336 $ 352
- ----------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the plan's funded status reconciled to the
amount recognized on the Company's consolidated statements of condition:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
December 31, (in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retired participants $ 1,868 $ 2,141
Fully eligible active participants 533 474
Other active participants 1,009 1,043
- ----------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 3,410 3,658
Plan assets at fair value - -
- ----------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation in excess of plan assets 3,410 3,658
Unrecognized net gain (loss) 67 (338)
- ----------------------------------------------------------------------------------------------
Accrued postretirement benefit cost included in accounts payable
and other liabilities $ 3,477 $ 3,320
- ----------------------------------------------------------------------------------------------
</TABLE>
A 9.66% annual rate of increase in the per capita costs of covered health
care benefits was assumed for 1997, gradually decreasing to 5.0% by the year
2007 and remaining at that level thereafter. Increasing the assumed health
care cost trend rate by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by
3.94% and increase the aggregate of the service cost and interest cost
components of net periodic postretirement benefit cost for 1996 by 2.56%. A
discount rate of 7.25% and 7.0% was used to determine the accumulated
postretirement benefit obligation as of December 31, 1996 and 1995,
respectively.
NOTE 18. STOCK PLANS
In 1986, the Company established an Employee Stock Ownership Plan ("ESOP") to
enable employees to have an equity interest in the Company. The Company
redeemed all the shares of Class B common stock held by the ESOP in November
1993 for $4.6 million in cash. Management subsequently used that cash to
invest in Fund American common stock. The assets currently held by the ESOP
consist substantially of Fund American common stock. Effective in the fourth
quarter of 1993, the ESOP was amended to allow employees who terminate their
employment with the Company, and who are vested in the ESOP, to receive their
distribution in cash or shares of Fund American common stock. Contributions
to the ESOP are determined at the discretion of the Board of Directors.
Effective October 1, 1996, the Company amended its ESOP to include employees
of Fund American Enterprises, Inc., the Company's direct parent, as eligible
employees and to add an employee savings plan feature under Section 401(k) of
the Internal Revenue Code of 1986. Eligible employees may contribute to the
plan up to 14% of their salary not to exceed the maximum allowable under
Internal Revenue Service guidelines. Contributions are invested at the
direction of the employee in one or more funds or can be directed to
purchase common stock of Fund American at fair market value. The Company
does not match employee contributions.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
38
<PAGE> 37
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. STOCK PLANS (CONTINUED)
In connection with the exchange of Class B common stock, the Company
established a Stock Appreciation Rights ("SAR") plan under which certain
officers of the Company received stock appreciation rights in exchange for
their shares of Class B common stock. The SARs may be exercised any time at
the option of the holders thereof. The value of each SAR is equal to the
difference between $86.625 and the closing price of Fund American's common
stock on the date preceding the exercise of the SAR multiplied by a factor of
1.223.
The Company has a long-term incentive plan which provides for the granting of
stock-based and cash incentive awards to key senior management employees of
the Company. Awards under the plan are payable upon the achievement of
specified financial goals covering four overlapping three-year periods
beginning January 1, 1994, 1995, 1996 and 1997.
NOTE 19. CONTINGENCIES
Various claims have been made against the Company in the ordinary course of
business. Management believes that any liabilities which could result would
not materially affect the Company's financial position.
NOTE 20. RELATED-PARTY TRANSACTIONS
As discussed in Notes 4 and 9, the Company had various stock transactions
with FAE. The Company also has a tax allocation agreement with Fund American
as discussed in Note 15.
The Company believes that all of the above transactions were on terms that
were reasonable and competitive. Additional transactions of this nature may
be expected to take place in the ordinary course of business in the future.
NOTE 21. SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of reporting cash flows, cash includes cash on hand and amounts
on deposit at banks, excluding custodial bank accounts.
The following table provides additional cash and noncash information not
presented elsewhere on the consolidated financial statements:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year ended December 31, (in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 57,172 $ 48,975 $ 42,951
- ---------------------------------------------------------------------------------------------------
Income taxes paid $ 18,650 $ 345 $ 9,328
- ---------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Acquisition of common equity securities as a return
of partnership investment, net (Note 4) $ 2,312 $ - $ -
Exchange of common equity securities for
shares of common stock from parent (Note 4) - 27,020 112,000
Exchange of 2,239,061 shares of 8.42% cumulative
Series A preferred stock for 9.375% subordinated
debentures (Note 9) - 55,976 -
- ---------------------------------------------------------------------------------------------------
</TABLE>
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
39
<PAGE> 38
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. SUBSEQUENT EVENTS
In January 1997, the Company transferred its common equity securities with a
market value of $2.6 million to FAE in exchange for 21,239 shares of the
Company's common stock held by FAE, which were retired by the Company. The
Company realized a pretax gain of $.3 million from the transfer in the first
quarter of 1997.
In February 1997, the Company sold, subject to regulatory and investor
approvals, approximately $17 billion of its non-recourse mortgage servicing
portfolio to a third party for estimated proceeds of $271.5 million. The
transaction is expected to result in the recognition of an after tax loss of
approximately $2.1 million in the first quarter of 1997. Source One will
retain subservicing on the portfolio for a minimum of one year and a maximum
of three years, at the option of the purchaser. The Company is currently
evaluating its options as to how it will utilize the proceeds from the sale.
These options include: (i) purchasing additional mortgage servicing rights
from third parties; (ii) reducing its outstanding indebtedness; (iii)
reducing its outstanding preferred or common shareholders' equity; or (iv) a
combination of any of the foregoing.
As a result of the 1997 servicing sale, the Company expects that its mortgage
servicing revenue and its related amortization for 1997 and thereafter will
be significantly less than its mortgage servicing revenue and related
amortization in 1996. The Company is currently analyzing its cost structure
to identify expenses that may be reduced as a result of the sale.
In mid-March 1997, the Boards of Directors of Fund American Enterprises
Holdings, Inc. ("Fund American") and several of its subsidiaries approved a
corporate restructuring plan that will strengthen the Company by increasing
its stockholders' equity. The most significant part of the plan is that
Source One will receive a capital contribution of common stock of Financial
Security Assurance Holdings, Ltd. ("FSA") and options to purchase common
stock of FSA. These securities have a total current estimated fair value of
approximately $126 million. In mid-March 1997, the Company sold 230,293
shares of its common stock to FAE in exchange for 1 million shares of the
common stock of FSA valued at $27.8 million. The balance of the contribution
is subject to insurance regulatory and lender approvals and is expected to
occur in the second quarter of 1997.
In addition, as part of this restructuring plan, the Company sold 105,000
shares of its common stock to Fund American for $12.7 million in mid-March
1997.
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
40
<PAGE> 39
[LOGO]
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 1996 and 1995 is shown in the
following table. The quarterly financial data includes, in the opinion of
management, all necessary recurring adjustments for a fair presentation of
the results of operations for the interim periods. In the third quarter of
1995, the Company retroactively adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights," as of January 1, 1995. Accordingly, the following table
reconciles the reported 1995 first and second quarter amounts that would
have been reported under SFAS No. 122:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Quarters Ended March June September December
(in thousands, except for per share amounts) 31 30 30 31
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Total revenue $ 48,684 $ 39,762 $ 39,859 $ 20,375
Net income (loss) $ 13,294 $ 5,922 $ 8,258 $ (31,800)(a)
Net income (loss) per share $ 5.50 $ 2.22 $ 3.26 $ (14.55)
- -------------------------------------------------------------------------------------------------------------------------------
1995
Total revenue, as reported $ 57,269 $ 28,537 $ 34,580 $ 31,258
SFAS No. 122 adjustment 4,409 (7,458) - -
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue, as adjusted $ 61,678 $ 21,079 $ 34,580 $ 31,258
- -------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss, as reported $ 19,196 $ 990 $ 4,760 $ 4,204
SFAS No. 122 adjustment 2,858 (4,858) - -
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss,
as adjusted 22,054 (3,868) 4,760 4,204
- -------------------------------------------------------------------------------------------------------------------------------
Extraordinary loss (675) (227) - -
Net income, as reported 18,521 763 4,760 4,204
SFAS No. 122 adjustment 2,858 (4,858) - -
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss), as adjusted $ 21,379 $ (4,095) $ 4,760 $ 4,204
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share before
extraordinary loss, as reported $ 5.33 $ (.45) $ 1.13 $ 1.24
SFAS No. 122 adjustment per share .89 (1.97) - -
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share before
extraordinary loss, as adjusted 6.22 (2.42) 1.13 1.24
- -------------------------------------------------------------------------------------------------------------------------------
Extraordinary loss per share (.21) (.09) - -
Net income (loss) per share, as reported 5.12 (.54) 1.13 1.24
SFAS No. 122 adjustment per share .89 (1.97) - -
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share, as adjusted $ 6.01 $ (2.51) $ 1.13 $ 1.24
- -------------------------------------------------------------------------------------------------------------------------------
(a) Includes a $29.1 million pretax write-off of the Company's goodwill and other intangible assets.
</TABLE>
SOURCE ONE MORTGAGE SERVICES CORPORATION AND SUBSIDIARIES 1996 ANNUAL REPORT
41
<PAGE> 1
Exhibit 16(a)
March 27, 1997
Securities and Exchange Commission
Washington, D.C. 20549
We have read Item 9 of Form 10-K dated March 28, 1997 of Source One Mortgage
Services Corporation and are in agreement with the statement contained in the
second paragraph of Item 9. We have no basis to agree or disagree with other
statements of the registrant contained therein.
Very truly yours,
/s/ Ernst & Young LLP
<PAGE> 1
EXHIBIT 21
<TABLE>
<S><C>
*SOURCE ONE MORTGAGE SERVICES CORPORATION
(full service mortgage corporation)
(subsidiaries)
THE MORTGAGE CMC INSURANCE MHMC INSURANCE SOMSC SERVICES
AUTHORITY, INC. AGENCY, INC. AGENCY, INC. INC.
(whole loan/ (credit insurance (credit insurance (biweekly mortgage
broker purchasing) agency) agency) payment admin.)
**CENTRAL PACIFIC MORTGAGE COMPANY
(full service mortgage corporation)
(subsidiaries)
NORTHWEST PACIFIC
MORTGAGE COMPANY
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Source One Mortgage Services Corporation of our report dated January 30,
1997, except for Notes 7 and 22, as to which the date is March 21, 1997,
included in the 1996 Annual Report to Shareholder of Source One Mortgage
Services Corporation.
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-47025 and Form S-4 No. 33-62765) of Source One Mortgage
Services Corporation and in the related Prospectuses of our report dated
January 30, 1997, except for Notes 7 and 22, as to which the date is March 21,
1997, with respect to the consolidated financial statements of Source One
Mortgage Services Corporation incorporated by reference in this Annual Report
(Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Detroit, Michigan
March 27, 1997
<PAGE> 1
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that James A. Conrad does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, and Robert L.
Densmore, and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1996, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ James A. Conrad
___________________________________
James A. Conrad
<PAGE> 2
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Robert R. Densmore does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A.
Conrad, and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1996, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ Robert R. Densmore
___________________________________
Robert R. Densmore
<PAGE> 3
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that James H. Ozanne does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, Robert R.
Densmore and James A. Conrad, and each of them, the true and lawful
attorney-in-fact of the undersigned, with full power of substitution and
revocation, for and in the name, place and stead of the undersigned, to execute
and deliver the Annual Report on Form 10-K of Source One Mortgage Services
Corporation for the year ended December 31, 1996, and any and all amendments
thereto; such Form 10-K and each such amendment to be in such form and to
contain such terms and provisions as said attorney or substitute shall deem
necessary or desirable; giving and granting unto said attorney, or to such
person or persons as in any case may be appointed pursuant to the power of
substitution herein given, full power and authority to do and perform any and
every act and thing whatsoever requisite, necessary or, in the opinion of said
attorney or substitute, able to be done in and about the premises as fully and
to all intents and purposes as the undersigned might or could do if personally
present, hereby ratifying and confirming all that said attorney for such
substitute shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ James H. Ozanne
___________________________________
James H. Ozanne
<PAGE> 4
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Gordon S. Macklin does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A.
Conrad, and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1996, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ Gordon S. Macklin
___________________________________
Gordon S. Macklin
<PAGE> 5
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Michael C. Allemang does hereby make,
constitute and appoint Mark A. Janssen, Robert R. Densmore, and James A.
Conrad, and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1996, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ Michael C. Allemang
___________________________________
Michael C. Allemang
<PAGE> 6
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Terry Baxter does hereby make, constitute
and appoint Mark A. Janssen, Michael C. Allemang, and James A. Conrad, and
each of them, the true and lawful attorney-in-fact of the undersigned, with
full power of substitution and revocation, for and in the name, place and stead
of the undersigned, to execute and deliver the Annual Report on Form 10-K of
Source One Mortgage Services Corporation for the year ended December 31, 1996,
and any and all amendments thereto; such Form 10-K and each such amendment to
be in such form and to contain such terms and provisions as said attorney or
substitute shall deem necessary or desirable; giving and granting unto said
attorney, or to such person or persons as in any case may be appointed pursuant
to the power of substitution herein given, full power and authority to do and
perform any and every act and thing whatsoever requisite, necessary or, in the
opinion of said attorney or substitute, able to be done in and about the
premises as fully and to all intents and purposes as the undersigned might or
could do if personally present, hereby ratifying and confirming all that said
attorney for such substitute shall lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ Terry Baxter
___________________________________
Terry Baxter
<PAGE> 7
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Robert P. Keller does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A.
Conrad, and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1996, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ Robert P. Keller
___________________________________
Robert P. Keller
<PAGE> 8
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Allan L. Waters does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A.
Conrad, and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1996, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ Allan L. Waters
___________________________________
Allan L. Waters
<PAGE> 9
EXHIBIT 24
SOURCE ONE MORTGAGE SERVICES CORPORATION
KNOW ALL MEN by these presents that Roger K. Taylor does hereby make,
constitute and appoint Mark A. Janssen, Michael C. Allemang, and James A.
Conrad, and each of them, the true and lawful attorney-in-fact of the
undersigned, with full power of substitution and revocation, for and in the
name, place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K of Source One Mortgage Services Corporation for the year
ended December 31, 1996, and any and all amendments thereto; such Form 10-K and
each such amendment to be in such form and to contain such terms and provisions
as said attorney or substitute shall deem necessary or desirable; giving and
granting unto said attorney, or to such person or persons as in any case may be
appointed pursuant to the power of substitution herein given, full power and
authority to do and perform any and every act and thing whatsoever requisite,
necessary or, in the opinion of said attorney or substitute, able to be done in
and about the premises as fully and to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that said attorney for such substitute shall lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of
the seventh day of March, 1997.
/s/ Roger K. Taylor
___________________________________
Roger K. Taylor
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 923
<SECURITIES> 2,312
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 28,054
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,131,054
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
18
<COMMON> 22
<OTHER-SE> 314,717
<TOTAL-LIABILITY-AND-EQUITY> 1,131,054
<SALES> 0
<TOTAL-REVENUES> 148,680
<CGS> 0
<TOTAL-COSTS> 143,553
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,260
<INTEREST-EXPENSE> 36,018
<INCOME-PRETAX> 5,127
<INCOME-TAX> 9,453
<INCOME-CONTINUING> (4,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,326)
<EPS-PRIMARY> (3.57)
<EPS-DILUTED> 0
</TABLE>
