<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 8-K
CURRENT REPORT
____________________
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 18, 1997
CHEVY CHASE BANK, F.S.B
- --------------------------------------------------------------------------------
(Exact name of registrants as specified in governing instruments)
United States 333-1682 52-0897004
- ------------------ ---------------------- ------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification Nos.)
organization)
8401 Connecticut Avenue, Chevy Chase, Maryland 20815
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 986-7000
----------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address if changed since last report)
Exhibit Index located at Page 2
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Items 1 through 6 and Item 8 are not included because they are not applicable.
Item 7. Exhibits.
--------
(a) Executed exhibits - The following executed exhibits to the Form
S-3 Registration Statement of the Registrant are hereby filed:
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
4.2 Form of Pooling and Servicing Agreement.
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP
with respect to securities being registered.
8.1 Opinion of Orrick, Herrington & Sutcliffe LLP
with respect to tax matters.
23.3 Consent (filed as part of opinions in Exhibits
5.1 and 8.1).
23.4 Accountants' Consent.
99.1 Financial Statements of Capital Markets
Assurance Corporation.
2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CHEVY CHASE BANK, F.S.B.
(Registrant)
September 18, 1997 By: /s/ Stephen R. Halpin, Jr.
--------------------------------
Name: Stephen R. Halpin, Jr.
Executive Vice President and
Chief Financial Officer
3
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EXHIBIT 4.2
================================================================================
FORM OF
POOLING AND SERVICING AGREEMENT
between
CHEVY CHASE BANK, F.S.B.,
as Seller and Servicer,
and
U.S. BANK NATIONAL ASSOCIATION,
as Trustee
Dated as of _________ 1, 1997
CHEVY CHASE HOME LOAN TRUST 1997-1
____% Home Loan Asset-Backed Certificates, Series 1997-1
================================================================================
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TABLE OF CONTENTS
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ARTICLE I
Definitions
SECTION 1.01. Definitions.............................................. 1
SECTION 1.02. Other Definitional Provisions............................ 17
ARTICLE II
Establishment of Trust
SECTION 2.01. Creation of Trust........................................ 19
SECTION 2.02. Acceptance by Trustee.................................... 19
ARTICLE III
Transfer of Loans
SECTION 3.01 Transfer of Loans........................................ 20
SECTION 3.02. Acceptance by Trustee; Reassignment of Loans;
Substitution of Eligible Substitute Loans................ 22
ARTICLE IV
The Loans
SECTION 4.01. Representations and Warranties of the Seller
Regarding the Loans; Removal and Substitution
Obligations.............................................. 26
SECTION 4.02. Official Record.......................................... 30
ARTICLE V
Administration and Servicing of Loans
SECTION 5.01. The Servicer and the Seller.............................. 31
SECTION 5.02. Collection of Certain Loan Payments...................... 32
SECTION 5.03. Maintenance of Hazard Insurance;
Property Protection Expenses............................. 32
SECTION 5.04. Assumption and Modification Agreements................... 33
SECTION 5.05. Realization Upon Liquidated Loans........................ 34
SECTION 5.06. Servicing Fee............................................ 35
SECTION 5.07. Servicer's Certificate................................... 35
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SECTION 5.08. Annual Independent Public Accountants'
Servicing Report......................................... 35
SECTION 5.09. Access to Certain Documentation and In-
formation Regarding the Loans............................ 36
SECTION 5.10. Maintenance of Certain Servicing
Policies................................................. 36
SECTION 5.11. Reports to the Securities and Exchange
Commission............................................... 37
SECTION 5.12. Information Required by the Internal
Revenue Service Generally and Reports of
Foreclosures and Abandonments of Mortgaged
Property................................................. 37
SECTION 5.13. Servicer Expenses........................................ 37
SECTION 5.14. Annual Statement as to Compliance........................ 37
SECTION 5.15. Recordation of Assignments of Mortgage................... 37
SECTION 5.16. Tax Treatment............................................ 38
ARTICLE VI
Accounts; Collections; Allocations; Distributions;
Statements to Certificateholders
SECTION 6.01. Establishment of Accounts................................ 39
SECTION 6.02. Collections.............................................. 39
SECTION 6.03. Application of Collections............................... 40
SECTION 6.04. Additional Deposits...................................... 40
SECTION 6.05. Permitted Withdrawals from the
Collection Account....................................... 40
SECTION 6.06. Allocations and Deposits................................. 41
SECTION 6.07. Distributions............................................ 43
SECTION 6.08. Reserve Fund............................................. 43
SECTION 6.09. Statements to Certificateholders......................... 44
SECTION 6.10. Tax Returns.............................................. 45
ARTICLE VII
The Policy
SECTION 7.01. The Policy............................................... 47
SECTION 7.02. Claims Under Policy...................................... 47
SECTION 7.03. Surrender of Policy...................................... 48
SECTION 7.04. Replacement Policy....................................... 48
ARTICLE VIII
The Certificates
SECTION 8.01. The Certificates......................................... 50
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SECTION 8.02. Authentication of Certificates......................... 50
SECTION 8.03. Registration of Transfer and Exchange of
Certificates........................................... 50
SECTION 8.04. Mutilated, Destroyed, Lost or Stolen
Certificates........................................... 51
SECTION 8.05. Persons Deemed Owners.................................. 51
SECTION 8.06. Access to List of Certificateholders'
Names and Addresses.................................... 52
SECTION 8.07. Maintenance of Office or Agency........................ 52
SECTION 8.08. Book-Entry Certificates................................ 52
SECTION 8.09. Notices to Clearing Agency............................. 53
SECTION 8.10. Replacement Certificates............................... 53
SECTION 8.11. Temporary Certificates................................. 54
ARTICLE IX
The Seller and Servicer
SECTION 9.01. Representations of the Seller and Servicer............. 55
SECTION 9.02. Liability of the Servicer.............................. 56
SECTION 9.03. Merger or Consolidation of, or Assumption
of the Obligations of, the Servicer or Seller.......... 56
SECTION 9.04. Limitation on Liability of the Servicer
and Others............................................. 56
SECTION 9.05. Delegation of Duties................................... 58
SECTION 9.06. Servicer Not to Resign................................. 58
SECTION 9.07. Limitation on Liability of Certain Persons............. 59
SECTION 9.08. Liability of Seller.................................... 59
SECTION 9.09. Seller May Own Certificates............................ 60
ARTICLE X
Default
SECTION 10.01. Events of Default...................................... 61
SECTION 10.02. Trustee to Act; Appointment of Successor............... 63
SECTION 10.03. Notification to Certificateholders..................... 64
SECTION 10.04. Waiver of Past Defaults................................ 64
ARTICLE XI
The Trustee
SECTION 11.01. Duties of Trustee...................................... 65
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SECTION 11.02. Certain Matters Affecting Trustee...................... 66
SECTION 11.03. Trustee Not Liable for Certificates or Loans........... 67
SECTION 11.04. Trustee May Own Certificates........................... 67
SECTION 11.05. Trustee's Fees and Expenses............................ 67
SECTION 11.06. Eligibility Requirements for Trustee................... 68
SECTION 11.07. Resignation or Removal of Trustee...................... 68
SECTION 11.08. Successor Trustee...................................... 69
SECTION 11.09. Merger or Consolidation of Trustee..................... 70
SECTION 11.10. Appointment of Co-Trustee or Separate Trustee.......... 70
SECTION 11.11. Representations and Warranties of Trustee.............. 71
SECTION 11.12. No Bankruptcy Petition................................. 72
SECTION 11.13. Trustee's Certificate.................................. 72
SECTION 11.14. Trustee's Assignment of Loans.......................... 72
SECTION 11.15. Appointment of Paying Agent............................ 73
SECTION 11.16. Limitation of Liability of Trustee..................... 73
SECTION 11.17. Streit Act............................................. 73
ARTICLE XII
Termination
SECTION 12.01. Termination............................................ 75
ARTICLE XIII
Miscellaneous Provisions
SECTION 13.01. Amendment.............................................. 77
SECTION 13.02. Recordation of Agreement............................... 78
SECTION 13.03. Limitation on Rights of Certificateholders............. 79
SECTION 13.04. Protection of Title to Trust........................... 80
SECTION 13.05. Separate Counterparts.................................. 82
SECTION 13.06. Governing Law.......................................... 82
SECTION 13.07. Notices................................................ 82
SECTION 13.08. Severability of Provisions............................. 83
SECTION 13.09. Assignment............................................. 83
SECTION 13.10. Certificates Nonassessable and Fully Paid.............. 84
SECTION 13.11. Counterparts........................................... 84
SECTION 13.12. Effect of Headings and Table of Contents............... 84
SECTION 13.13. Third Party Beneficiary................................ 84
SECTION 13.14. Merger and Integration................................. 84
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SECTION 13.15. Certificate Insurer as Controlling Party............... 84
SECTION 13.16. Representation of Certificateholders................... 85
SECTION 13.17 Grant of Security Interest............................. 85
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Exhibit A Form of Certificate
Exhibit B Form of Depository Agreement
Exhibit C-1 Form of Trustee's Initial Certification
Exhibit C-2 Form of Trustee's Certification
Exhibit D Form of Trustee's Notification of Defective Loans
Exhibit E-1 Form of Trustee's Certificate - Assignment to Servicer
Exhibit E-2 Form of Trustee's Certificate - Assignment to Seller
Exhibit E-1A Form of Assignment of Eligible Substitute Loans to Trustee
Exhibit F Form of Servicer's Certificate
SCHEDULE A Schedule of Loans
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POOLING AND SERVICING AGREEMENT dated as of _________ 1, 1997, between
CHEVY CHASE BANK, F.S.B., a federal savings bank organized under the laws of the
United States, as transferor and servicer (the "Seller" and "Servicer,"
------ --------
respectively), and U.S. BANK NATIONAL ASSOCIATION, a national banking
association, doing business as First Bank National Association, as trustee (the
"Trustee").
-------
WHEREAS, the Seller owns and wishes to transfer to the Trust (as
hereinafter defined) certain closed-end home equity loans (the "Home Equity
-----------
Loans"), certain closed-end debt consolidation loans (the "Debt Consolidation
- ----- ------------------
Loans") and certain conventional home improvement installment sales contracts
- -----
and certain installment loan agreements (the "Home Improvement Contracts")
--------------------------
identified in the Loan Schedule attached hereto as Schedule A; and
----------
WHEREAS, the Seller, the Servicer and the Trustee wish to set forth
the terms and conditions pursuant to which the Trust will acquire Home Equity
Loans, Debt Consolidation Loans and Home Improvement Contracts and certain
related property from the Seller and the Servicer will service such loans and
contracts on behalf of the Trust;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the Seller, the Servicer and the Trustee agree
as follows:
ARTICLE I
Definitions
SECTION 1.01. Definitions. Whenever used in this Agreement, the
-----------
following words and phrases shall have the following meanings:
"Affiliate" means, with respect to any specified Person, any other
---------
Person controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect
to any Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms
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"controlling" and "controlled" have meanings correlative to the foregoing.
"Agreement" means this Pooling and Servicing Agreement between Chevy
---------
Chase Bank, F.S.B., as Seller and Servicer, and the Trustee, dated as of
September 1, 1997.
"Assignment of Mortgage" means, with respect to each Mortgage, an
----------------------
assignment, notice of transfer, or equivalent instrument sufficient under the
laws of the jurisdiction in which the Mortgaged Property is located to record
the sale of the related Mortgage to the Trustee for the benefit of the
Certificateholders and the Certificate Insurer.
"Avoided Payment" has the meaning set forth in Section 7.02(d).
--------------- ---------------
"Base Servicing Fee" means, with respect to any Monthly Collection
------------------
Period, the fee payable to the Servicer for services rendered during such
Monthly Collection Period, which shall be equal to one-twelfth of the Servicing
Fee Rate multiplied by the excess of the Pool Balance as of the first day of
------
such Monthly Collection Period over the aggregate principal balance of any
----
Defective Loans repurchased by the Seller or purchased by the Servicer as of the
last day of such Monthly Collection Period.
"BIF" means The Bank Insurance Fund, as from time to time constituted,
---
created under the Financial Institutions Reform, Recovery, and Enhancement Act
of 1989, or if at any time after the execution of this instrument the Bank
Insurance Fund is not existing and performing duties now assigned to it, the
body performing such duties on such date.
"Book-Entry Certificates" means a beneficial interest in the
-----------------------
Certificates, ownership and transfers of which shall be registered through book
entries by a Clearing Agency as described in Section 8.08.
------------
"Business Day" means any day other than a Saturday, a Sunday or a day
------------
on which banking institutions in the States of Minnesota, New York or Maryland
(or such other state in which the Corporate Trust Office of the Trustee or the
main office of the Paying Agent is located) are required or authorized to be
closed.
2
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"Certificate" means a ____% Home Loan Asset-Backed Certificate, Series
-----------
1997-1, evidencing a beneficial interest in the Trust, substantially in the form
of Exhibit A.
---------
"Certificateholder" or "Holder" means a Person in whose name a
----------------- ------
Certificate is registered in the Certificate Register, except that, solely for
the purpose of the giving of any consent, waiver, request or demand pursuant to
this Agreement, unless all Certificates are then so held, any Certificate
registered in the name of the Seller or the Servicer or any affiliate of either
shall be deemed not be outstanding and any such Certificates shall not be taken
into account in determining whether the requisite amount of Certificateholders
necessary to effect any such consent, waiver, request or demand shall have been
obtained; provided, however, that in determining whether the Trustee shall be
-------- -------
protected in relying upon any such consent, waiver, request or demand, only
Certificates which an Officer of the Trustee assigned to matters under this
Agreement actually knows to be so owned shall not be so taken into account.
"Certificate Insurer" means Capital Markets Assurance Corporation, a
-------------------
monoline insurance corporation domiciled in the State of New York, or any
successor thereto.
"Certificate Owner" means, with respect to a Book-Entry Certificate,
-----------------
the Person who is the beneficial owner of such Book-Entry Certificate, as
reflected on the books of the Clearing Agency or on the books of a Person
maintaining an account with such Clearing Agency (directly as a Clearing Agency
Participant or as an indirect participant, in each case in accordance with the
rules of such Clearing Agency).
"Certificate Principal Balance" means, as of any date of
-----------------------------
determination, the Initial Certificate Principal Balance, reduced by all amounts
previously distributed to Holders of Certificates and allocable to principal.
"Certificate Register" and "Certificate Registrar" mean the register
-------------------- ---------------------
maintained and the registrar appointed pursuant to Section 8.03.
------------
"Certificateholders' Interest Carryover Shortfall" means, with respect
------------------------------------------------
to any Distribution Date, the excess of the Interest Distributable Amount for
------
the preceding Distribution Date over the amount of interest that actually was
----
distributed to
3
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Certificateholders on such preceding Distribution Date, plus interest on such
excess, to the extent permitted by law, at the Pass-Through Rate from and
including such preceding Distribution Date to but excluding the current
Distribution Date.
"Chevy Chase" means Chevy Chase Bank, F.S.B., a federal savings bank
-----------
organized under the laws of the United States, or its permitted successor in
interest.
"Clearing Agency" means an organization registered as a "clearing
---------------
agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended.
"Clearing Agency Participant" means a broker, dealer, bank, other
---------------------------
financial institution or other Person for whom from time to time a Clearing
Agency effects book-entry transfers and pledges of securities deposited with the
Clearing Agency.
"Closed-end Home Equity Loan" means a closed-end home equity loan
---------------------------
originated or acquired by Chevy Chase and secured by a Mortgage.
"Closing Date" means September __, 1997.
------------
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Collection Account" means the account designated as such, established
------------------
and maintained pursuant to Section 6.01(a).
---------------
"Corporate Trust Office" means the principal corporate trust office of
----------------------
the Trustee, which at the time of execution of this agreement is located at 180
East Fifth Street, St. Paul, Minnesota 55101 (facsimile: (___) ___-____),
Attention: ________________________; or at such other address as the Trustee may
designate from time to time by notice to Certificateholders, the Certificate
Insurer, the Seller and the Servicer, or the principal corporate trust office of
any successor Trustee (of which address such successor Trustee shall notify the
Certificateholders, the Seller and Servicer).
"Cut-off Date" means September 1, 1997.
------------
"Debt Consolidation Loan" has the meaning set forth in the Preamble.
-----------------------
4
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"Defective Loan" means any Loan which is required to be removed or
--------------
replaced by the Seller pursuant to Section 3.02 or Section 4.01 or removed or
------------ ------------
replaced by the Servicer pursuant to Section 5.01(d).
---------------
"Deferral Loan" means a Loan for which the related Obligor has elected
-------------
to extend the contractual period between the Loan's funding date and the Loan's
first scheduled due date for 90 or 180 days in accordance with the Seller's
underwriting guidelines.
"Deposit Date" means, with respect to each Distribution Date, the
------------
Business Day preceding such Distribution Date.
"Depository Agreement" means the agreement dated September __, 1997,
--------------------
among the Trustee, the Servicer and The Depository Trust Company, as the initial
Clearing Agency, substantially in the form attached as Exhibit B.
---------
"Determination Date" means, with respect to a Monthly Collection
------------------
Period, the third Business Day prior to the related Distribution Date.
"Direct Home Improvement Loan" means an installment loan agreement
----------------------------
originated by Chevy Chase in connection with the financing of the construction
of home improvements, which loan may be secured by a Mortgage.
"Distribution Date" means the 20th day of each month or, if such day
-----------------
is not a Business Day, the next succeeding Business Day, commencing October 20,
1997.
"Electronic Ledger" means the electronic master record of Home Loans
-----------------
and Home Equity Loans (including the Loans) maintained by the Servicer.
"Eligible Account" means an account that is (i) maintained with a
----------------
depository institution which has a short term certificate of deposit rating at
the time of any deposit therein in the highest short-term debt rating category
by each Rating Agency, (ii) maintained with a depository institution whose
accounts are fully insured by either the SAIF or the BIF of the Federal Deposit
Insurance Corporation with a minimum long-term unsecured debt rating of Baa3,
(iii) a trust account maintained with the Trustee in its corporate trust
department or (iv)
5
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otherwise acceptable to each Rating Agency without reduction or withdrawal of
their then current ratings of the Certificates, as evidenced by a letter from
such Rating Agency to the Trustee, and acceptable to the Certificate Insurer.
"Eligible Substitute Loan" means a Loan proposed to be substituted by
------------------------
the Seller for a Defective Loan which, on the date of such substitution, (i) has
an outstanding principal balance (except as provided below) of not less than 95%
of the outstanding principal balance of such Defective Loan on the date of such
substitution; (ii) has a Loan Rate not less than the Loan Rate of such Defective
Loan and not more than one hundred (100) basis points in excess of the Loan Rate
of such Defective Loan; (iii) has a remaining term to maturity not later than
nor more than six months earlier than the remaining term to maturity of such
Defective Loan; (iv) is applicable, is secured by a Mortgage in a lien position
not junior to the lien position of the Mortgage of such Defective Loan; and (v)
complies with each representation and warranty set forth in Section 4.01 as if
------------
such representation and warranty were made on the date of such substitution. If
more than one Loan is substituted for a Defective Loan on any substitution date,
the requirements of clause (i) of this definition shall be satisfied if such
Loans shall have an aggregate principal balance of not less than 95% of the
aggregate principal balance of such Defective Loans on the date of substitution.
"Excess Interest" means, with respect to any Monthly Collection
---------------
Period, Interest Collections for such Monthly Collection Period remaining after
allocation of the amounts described in clauses (i), (ii), (iii) and (iv) of
Section 6.06(a).
- ---------------
"Expense Distribution Account" means the subaccount of the Collection
----------------------------
Account designated as such, established and maintained pursuant to Section
-------
6.01(a)(ii).
- -----------
"FDIC" means the Federal Deposit Insurance Corporation or any
----
successor.
"Final Order" has the meaning set forth in Section 7.02.
----------- ------------
"Foreclosure Proceedings" means proceedings or action for foreclosure,
-----------------------
deed in lieu of foreclosure or trustee's sale
6
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with respect to any Secured Loan and the related Mortgaged Property.
"Home Equity Loan" has the meaning set forth in the Preamble.
----------------
"Home Improvement Contract" has the meaning set forth in the Preamble.
-------------------------
"Home Loans" means, collectively, Indirect Debt Consolidation Loans,
----------
Indirect Home Improvement Loans and Direct Home Improvement Loans.
"Indemnification Agreement" means the Indemnification Agreement by and
-------------------------
among the Seller, Smith Barney Inc., Credit Suisse First Boston and the
Certificate Insurer dated September __, 1997.
"Indirect Debt Consolidation Loan" means a closed-end home equity loan
--------------------------------
originated by a third party and acquired by Chevy Chase in connection with the
consolidation of obligations of the related Obligor.
"Indirect Home Improvement Loan" means an installment sales contract
------------------------------
or installment loan agreement originated by a third party in connection with
home improvements and subsequently acquired by Chevy Chase.
"Initial Certificate Principal Balance" means $______________________.
-------------------------------------
"Initial Reserve Fund Deposit" means $_________________.
----------------------------
"Insolvency Proceeding" means the commencement, after the Closing
---------------------
Date, of any bankruptcy, insolvency, readjustment of debt, reorganization,
marshalling of assets and liabilities or similar proceedings by or against any
Person, or the commencement, after the Closing Date, of any proceedings by or
against any Person for the winding up or liquidation of its affairs, or the
consent after the date hereof to the appointment of a trustee, conservator,
receiver or liquidator in any bankruptcy, insolvency, readjustment of debt,
reorganization, marshalling of assets and liabilities or similar proceedings of
or relating to any Person.
7
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"Insurance Agreement" means the Insurance and Indemnity Agreement
-------------------
dated as of September __, 1997 among the Certificate Insurer, the Seller, the
Trustee and the Servicer.
"Insurance Proceeds" means, with respect to any Loan and a Monthly
------------------
Collection Period, proceeds paid to the Seller or the Servicer pursuant to any
insurance policy with respect to such Loan or the related Mortgaged Property,
reduced by related expenses, which proceeds (x) are not Liquidation Proceeds and
(y) are not applied or expected to be applied to the restoration or repair of
the related Mortgaged Property or released to the related Obligor in accordance
with the normal servicing procedures of the Servicer.
"Insurer Default" means the occurrence of either of the following
---------------
events:
(a) the Certificate Insurer shall fail to pay when due, as and
in the amounts required, any amount payable under the Policy; or
(b) (i) the Superintendent of Insurance of the State of New York
(or any Person succeeding to the duties of such Superintendent) (for
the purpose of this paragraph (b), the "Superintendent") shall apply
for any order (A) pursuant to Section 7402 of the New York Insurance
Law (or any successor provisions thereto), directing him to
rehabilitate the Certificate Insurer, (B) pursuant to Section 7404 of
the New York Insurance Law (or any successor provision thereto),
directing him to liquidate the business of the Certificate Insurer or
(C) pursuant to Section 7416 of the New York Insurance Law (or any
successor provision thereto), dissolving the corporate existence of
the Certificate Insurer which application is not dismissed or
withdrawn during a period of 60 consecutive days or from which relief
is not sought; (ii) the Superintendent shall determine that the
Certificate Insurer is insolvent within the meaning of Section 1309 of
the New York Insurance Law; (iii) the Certificate Insurer shall
commence a voluntary case or other proceeding seeking rehabilitation,
liquidation, reorganization or other relief with respect to itself or
its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a
8
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trustee, receiver, liquidator, custodian or other similar official of
it or any substantial part of its property, or shall consent to any
such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against
it, or shall make a general assignment for the benefit of creditors;
or (iv) an involuntary case or other proceeding shall be commenced
against the Certificate Insurer seeking rehabilitation, liquidation,
reorganization or other relief with respect to it or its debts under a
bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of
its property and such case or proceeding is not dismissed or otherwise
terminated within a period of 60 consecutive days or a court of
competent jurisdiction enters an order granting the relief sought in
such case or proceeding.
"Interest Collections" means, for any Distribution Date, (i) interest
--------------------
collections received from or on behalf of Obligors during the related Monthly
Collection Period, calculated in accordance with the Simple Interest Method and
otherwise in accordance with this Agreement (less the Servicing Fee and, with
respect to any Loan for which a Servicer Advance has been made and not
previously reimbursed, such interest collections allocable to pay any such
unreimbursed Servicer Advance), (ii) the interest portion of Net Liquidation
Proceeds and Insurance Proceeds received during the related Monthly Collection
Period calculated in accordance with the Simple Interest Method and otherwise in
accordance with this Agreement, (iii) Recoveries received during the related
Monthly Collection Period, (iv) the interest portion of the Repurchase Deposit
Amount received in respect of the related Monthly Collection Period and (v)
Investment Earnings on amounts on deposit in the Collection Account for the
related Monthly Collection Period.
"Interest Deficiency Draw Amount" means, with respect to any
-------------------------------
Distribution Date, the amount, if any, by which the Interest Distributable
Amount for such Distribution Date exceeds all amounts on deposit in the
Collection Account and Reserve Fund which the Trustee is required to transfer,
allocate or deposit to
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the Interest Distribution Account on the related Deposit Date pursuant to
Section 6.05(a)(i).
- ------------------
"Interest Distributable Amount" means, with respect to any
-----------------------------
Distribution Date, the sum of (i) interest accrued during the related Interest
---
Period at the Pass-Through Rate on the Certificate Principal Balance immediately
preceding such Distribution Date plus (ii) the Certificateholders' Interest
----
Carryover Shortfall, in each case calculated on the basis of a 360-day year
comprised of twelve 30-day months.
"Interest Distribution Account" means the subaccount of the Collection
-----------------------------
Account designated as such, established and maintained pursuant to Section
-------
6.01(a)(iii).
- ------------
"Interest Period" means the period from and including the Closing Date
---------------
(in the case of the first Distribution Date) or from and including the most
recent Distribution Date on which interest has been paid, to but excluding the
following Distribution Date.
"Investment Earnings" means, with respect to any Distribution Date,
-------------------
the investment earnings (net of losses and investment expenses) on amounts on
deposit in the accounts established pursuant to Section 6.01 and the Reserve
------------
Fund.
"Liquidated Loan" means, with respect to any Determination Date, a
---------------
Loan (i) with respect to which the Obligor is contractually delinquent for 180
days as of the end of the most recently completed Monthly Collection Period or
(ii) as to which the Servicer has determined in accordance with its customary
servicing practices that eventual payment of the scheduled payments is unlikely.
"Liquidation Expenses" means expenses incurred by the Servicer in
--------------------
connection with the liquidation of any Loan and not recovered under any
insurance policy or from the related Obligor, including, without limitation,
legal fees and expenses, the cost of recordation of assignments, title fees and
expenses, any unreimbursed amount expended by the Servicer pursuant to Section
-------
5.05 with respect to such Loan (including, without limitation, amounts advanced
- ----
to cure defaults on any mortgage loan which is senior to such Loan or to pay in
full any such senior mortgage loan) and any related and unreimbursed
expenditures for real estate property taxes or for property restoration,
preservation
10
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or insurance against casualty loss or damage as are customary in the residential
mortgage loan servicing industry.
"Liquidation Loss Amount" means, with respect to any Liquidated Loan,
-----------------------
the unrecovered principal balance thereof at the end of the Monthly Collection
Period in which such Loan became a Liquidated Loan, after giving effect to the
application of the principal portion of Net Liquidation Proceeds in connection
therewith.
"Liquidation Proceeds" means proceeds (excluding any amounts drawn
--------------------
from the Reserve Fund or on the Policy) received in connection with the
liquidation of a Liquidated Loan.
"Loan" means, as of any date, any Home Equity Loan, Debt Consolidation
----
Loan or Home Improvement Contract identified on the Loan Schedule as of such
date.
"Loan File" has the meaning set forth in Section 3.01(b)(iii).
--------- --------------------
"Loan Rate" means, with respect to any Loan, the specified annual per
---------
annum interest rate at which interest accrues on such Loan.
"Loan Schedule" means, as of any date, the schedule of Home Equity
-------------
Loans, Debt Consolidation Loans and Home Improvement Contracts included in the
Trust Property on such date, which sets forth, as of the Cut-off Date with
respect to each Loan and as of the last day of the Monthly Collection Period
during which the time to correct or cure the defect in the related Loan has
expired with respect to each Eligible Substitute Loan, (i) the principal balance
of each such Loan, (ii) the stated maturity date on which full and complete
payment of the principal balance of each such Loan is due and payable, (iii) the
name and address of the related Obligor and (iv) whether such Loan is a Secured
Loan. Initially, references to "Loan Schedule" shall refer to (x) with respect
to items (i) through (iii), the magnetic tape delivered to the Trustee by the
Seller on or prior to the Closing Date and (y) with respect to item (iv), the
Officer's Certificate delivered to the Trustee within five Business Days of the
Closing Date; thereafter, "Loan Schedule" shall refer to such schedule as
amended from time to time in accordance with Section 3.02, Section 4.01 and
------------ ------------
Section 5.01(d).
- ---------------
11
<PAGE>
"Material Subsidiary" means any subsidiary of the Seller with total
-------------------
consolidated assets in excess of $100,000,000.
"Monthly Allocable Principal" means, with respect to each Distribution
---------------------------
Date, an amount equal to the sum of (i) the Principal Collections deposited in
---
the Principal Distribution Account for such Distribution Date, (ii) any Excess
Interest to the extent deposited in the Principal Distribution Account pursuant
to Section 6.06(a)(v) for such Distribution Date, (iii) any Reserve Fund
------------------
Principal Transfer Amount drawn from the Reserve Fund pursuant to Section
-------
6.05(c)(ii) for such Distribution Date and (iv) any Principal Deficiency Draw
- -----------
Amount made under the Policy for such Distribution Date.
"Monthly Collection Period" means, for any Distribution Date, the
-------------------------
calendar month preceding such Distribution Date.
"Moody's" means Moody's Investors Service, Inc., or its successor.
-------
"Mortgaged Property" means any property, real, personal or mixed,
------------------
encumbered by the Mortgage that secures a Note, fixed rate home equity loan
agreement, sales contract or installment loan agreement evidencing a Secured
Loan.
"Mortgage" means any first, second or third lien mortgage or deed of
--------
trust securing a Secured Loan.
"Net Liquidation Proceeds" means, with respect to any Liquidated Loan,
------------------------
Liquidation Proceeds reduced by related Liquidation Expenses.
"Note" means the promissory note or other evidence of indebtedness
----
evidencing the indebtedness of an Obligor under a Loan.
"Obligor" on a Loan means the obligor or obligors who owe payments
-------
under the Loan or any guarantor or surety of such person.
"Officer" means any of the Chairman of the Board of Directors, a Vice
-------
Chairman of the Board of Directors, the President, an Executive Vice President,
a Senior Vice President or a Vice President of the Seller.
12
<PAGE>
"Officer's Certificate" means a certificate delivered to the Trustee
---------------------
and signed by an Officer of the Seller, if delivered by the Seller, and by a
Servicing Officer, if delivered by the Servicer.
"Opinion of Counsel" means one or more written opinions of counsel,
------------------
who may be an employee of or counsel to the Seller or the Servicer, which
counsel shall be acceptable to the Trustee, the Certificate Insurer or Rating
Agencies, as applicable.
"Original Pool Balance" means the Pool Balance as of the Cut-off Date.
---------------------
"Paid-Ahead Loan" means a loan for which, as of the Cut-off, one or
---------------
more scheduled payments has been made in advance.
"Pass-Through Rate" means ____% per annum.
-----------------
"Paying Agent" means any Person appointed by the Trustee pursuant to
------------
Section 11.15.
- -------------
"Permitted Investments" means one or more of the following:
---------------------
(i) obligations of, or guaranteed as to the full and timely payment
of principal and interest by, the United States or any agency or instrumentality
thereof whose obligations are backed by the full faith and credit of the United
States;
(ii) repurchase agreements on obligations specified in clause (i)
above maturing not more than one month from the date of acquisition thereof,
provided that the unsecured obligations of the party agreeing to repurchase the
- --------
specified obligations are at the time of such agreement rated by each Rating
Agency in its highest short-term rating category and provided, further, that if
-------- -------
Moody's is a Rating Agency, the short-term debt obligations of the party
agreeing to repurchase the specified obligations shall be rated P-1 or better;
(iii) certificates of deposit, demand deposits, time deposits and
bankers' acceptances (which, if Moody's is a Rating Agency, shall each have an
original maturity of not more than 90 days and, in the case of bankers'
acceptances, shall in no event have an original maturity of more than 365 days)
of any United States depository institution or trust company incorporated under
13
<PAGE>
the laws of the United States or any state or any branch or agency of any
foreign bank licensed under the laws of the United States or any state thereof,
provided that the debt obligations of such depository institution or trust
- --------
company at the date of acquisition of such certificates, demand deposits, time
deposits or bankers' acceptances have been rated by each Rating Agency in its
highest short-term rating category and provided, further, that if Moody's is a
-------- -------
Rating Agency, the short-term obligations of such depository institution or
trust company shall be rated P-1 or better;
(iv) commercial paper (having original maturities of not more than
270 days) of any corporation incorporated under the laws of the United States or
any state thereof which on the date of acquisition has been rated by each Rating
Agency in its highest short-term rating category;
(v) investments in money market funds registered under the
Investment Company Act of 1940, as amended, that, at the time of the Trust's
investment or contractual commitment to invest therein, are rated in the highest
investment category or otherwise approved in writing by each Rating Agency; and
(vi) other obligations or securities that are acceptable to each
Rating Agency and the Certificate Insurer as a Permitted Investment hereunder
and will not result in the reduction, suspension or withdrawal of the then-
current rating of the Certificates without taking into account the Policy;
provided, however, that (a) no instrument described hereunder shall evidence the
- -------- -------
right to receive only interest with respect to the obligations underlying such
instrument and (b) no instrument purchased hereunder may be a callable
investment purchased at a premium. The highest short-term rating of Standard &
Poor's for the investments specified in clauses (ii), (iii) and (iv) is A-1+ and
the highest investment category rating of Standard & Poor's for the investments
specified in clause (v) is either AAAm or AAAm-G.
"Person" means any legal person, including any individual,
------
corporation, partnership, limited liability company, joint venture, estate,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof, or any other entity.
14
<PAGE>
"Policy" means the financial guaranty insurance policy number _______
------
issued by the Certificate Insurer to the Trustee for the benefit of the
Certificateholders, including any endorsements thereto.
"Policy Premium Rate" means the per annum rate on which the premium
-------------------
payable to the Certificate Insurer is calculated, based on the outstanding
Certificate Principal Balance, as set forth in the Insurance Agreement.
"Pool Balance" means, as of any Distribution Date, an amount equal to
------------
the aggregate unpaid principal balance of the Loans as of the last day of the
related Monthly Collection Period other than Loans which became Liquidated Loans
during or prior to such Monthly Collection Period and other than Loans that have
been repurchased by the Seller or purchased by the Servicer prior to such
Distribution Date.
"Preference Event" has the meaning set forth in Section 7.02(d).
---------------- ---------------
"Principal Collections" means, for any Distribution Date, (i) the
---------------------
principal portion of payments received from Obligors on the Loans during the
related Monthly Collection Period calculated in accordance with the Simple
Interest Method and otherwise in accordance with the applicable fixed-rate home
equity loan agreement, sales contract or installment loan agreement (less, with
respect to any Loan for which a Servicer Advance has been made and not
reimbursed from Interest Collections relating to such Loan, principal
collections relating to such Loan for such Monthly Collection Period to the
extent necessary to pay any remaining portion of such unreimbursed Servicer
Advance), (ii) the principal portion of the Net Liquidation Proceeds and
Insurance Proceeds received during the related Monthly Collection Period and
(iii) the principal portion of the Repurchase Deposit Amount and the
Substitution Adjustment Amount for any repurchased or substituted Loans received
in respect of the related Monthly Collection Period.
"Principal Deficiency Draw Amount" means, for any Distribution Date,
--------------------------------
(i) if such Distribution Date is prior to the Final Distribution
Date, the amount, if any, by which the Principal Distributable Amount
for such
15
<PAGE>
Distribution Date exceeds the amount on deposit in the Principal
Distribution Account for such Distribution Date (calculated after
giving effect to the allocation and deposit of any Reserve Fund
Principal Transfer Amount that the Trustee is required to transfer
from the Reserve Fund on or prior to the related Deposit Date pursuant
to Section 6.06(c)); and
---------------
(ii) if such Distribution Date is the Final Distribution Date,
the amount, if any, by which the Certificate Principal Balance exceeds
the amount on deposit in the Principal Distribution Account for such
Distribution Date (calculated after giving effect to the allocation
and deposit of any Reserve Fund Principal Transfer Amount that the
Trustee is required to transfer from the Reserve Fund on or prior to
the related Deposit Date pursuant to Section 6.06(c)).
---------------
"Principal Distributable Amount" means, with respect to any
------------------------------
Distribution Date, an amount equal to the lesser of (a) the sum of (i) the
------ ---
Principal Collections for such Distribution Date plus (ii) any Liquidation Loss
----
Amount for the related Monthly Collection Period plus (iii) any portion of the
----
Principal Distributable Amount for any prior Distribution Date that was not
previously distributed and (b) the outstanding Certificate Principal Balance of
the Certificates; provided, however, that on the final Distribution Date, the
-------- -------
Principal Distributable Amount shall equal the Certificate Principal Balance;
and provided further, however, that in no event shall the aggregate amount
---------------- -------
distributed to Certificateholders in respect of principal exceed the Initial
Certificate Principal Balance.
"Principal Distribution Account" means the subaccount of the
------------------------------
Collection Account designated as such and established and maintained pursuant to
Section 6.01(a)(ii).
- -------------------
"Rating Agency" means Moody's and Standard & Poor's. If no such
-------------
organization or successor maintains a rating on the Certificates, "Rating
Agency" shall mean any nationally recognized statistical rating organization or
other comparable Person designated by the Seller and acceptable to the
Certificate Insurer (so long as an Insurer Default shall not have occurred and
be continuing), notice of which designation shall be given to the Trustee and
the Servicer.
16
<PAGE>
"Rating Agency Condition" means, with respect to any action, that each
-----------------------
Rating Agency shall have been given 10 Business Days (or such shorter period as
shall be acceptable to each Rating Agency) prior notice thereof and that each of
the Rating Agencies shall have notified the Seller, the Servicer, the
Certificate Insurer and the Trustee in writing that such action will not result
in a reduction or withdrawal of the then current rating of the Certificates.
"Record Date" means, with respect to each Distribution Date, the day
-----------
immediately preceding such Distribution Date if the Certificates are Book-Entry
Certificates, and the last day of the month preceding the month of the related
Distribution Date if Replacement Certificates are issued.
"Recordation Fees" means the fees and expenses incurred by the Trustee
----------------
in connection with the recordation of Assignments of Mortgages pursuant to
Section 5.15.
- ------------
"Recoveries" means, with respect to any Liquidated Loan and a Monthly
----------
Collection Period, any amount that was previously recognized as a loss but
subsequently has been collected with respect to such Loan from whatever source
(other than from withdrawals from the Reserve Fund or from draws on the Policy)
in a Monthly Collection Period following the Monthly Collection Period during
which such Loan became a Liquidated Loan, reduced by related expenses incurred
by the Servicer and not previously reimbursed from Liquidation Proceeds or
otherwise in connection with the liquidation of such Loan or the related
Mortgaged Property (including, without limitation, any Servicer Advances, costs
of recording assignments and any amount advanced in respect of the repayment of
a senior mortgage).
"Replacement Certificates" has the meaning set forth in Section 8.08.
------------------------ ------------
"Repurchase Deposit Amount" means, with respect to a Loan to be
-------------------------
repurchased by the Seller or purchased by the Servicer, the unpaid principal
balance thereof as of the end of the Monthly Collection Period immediately
preceding the date of repurchase or purchase, plus accrued and unpaid interest
thereon at the Loan Rate less, for so long as Chevy Chase is the Servicer, the
Servicing Fee Rate through the end of the Monthly Collection Period in which the
repurchase occurs.
17
<PAGE>
"Reserve Fund" means the account designated as such and established
------------
and maintained pursuant to the Reserve Fund Agreement as set forth in Section
-------
6.07.
- ----
"Reserve Fund Agreement" means the agreement between the Seller, the
----------------------
Trustee and the Certificate Insurer dated as of September 1, 1997, governing the
Reserve Fund.
"Reserve Fund Interest Transfer Amount" means, with respect to any
-------------------------------------
Deposit Date, an amount equal to the lesser of (a) the excess of (i) the
------ ------
Interest Distributable Amount for the related Distribution Date over (ii) all
----
amounts on deposit in the Interest Distribution Account on such Deposit Date
before giving effect to any transfer from the Reserve Fund and (b) the amount
on deposit in the Reserve Fund on such Deposit Date.
"Reserve Fund Principal Transfer Amount" means, with respect to each
--------------------------------------
Deposit Date, an amount equal to the lesser of (a) the excess of (i) the
------ ------
Principal Distributable Amount for the related Distribution Date over (ii) the
----
amount on deposit in the Principal Distribution Account before giving effect to
such transfer from the Reserve Fund and (b) the amount remaining on deposit in
the Reserve Fund on such Deposit Date after giving effect to the withdrawal of
any Reserve Fund Interest Transfer Amount from the Reserve Fund on such Deposit
Date.
"SAIF" means The Savings Association Insurance Fund, as from time to
----
time constituted, created under the Financial Institutions Reform, Recovery and
Enhancement Act of 1989, or if at any time after the execution of this
instrument the Savings Association Insurance Fund is not existing and performing
duties now assigned to it, the body performing such duties on such date.
"Secured Loan" means any Loan secured by a Mortgaged Property.
------------
"Seller" means Chevy Chase Bank, F.S.B. and its successors in interest
------
to the extent permitted hereunder.
"Servicer" means Chevy Chase as the servicer of the Loans, and each
--------
successor Servicer pursuant to Section 9.03 or Section 10.02.
------------ -------------
18
<PAGE>
"Servicer Advance" has the meaning ascribed thereto in Section 5.05.
---------------- ------------
"Servicer's Certificate" means an Officer's Certificate of the
----------------------
Servicer delivered pursuant to Section 5.07, substantially in the form of
------------
Exhibit F.
- ---------
"Servicing Fee" means the fee payable to the Servicer for services
-------------
rendered during each Monthly Collection Period, determined pursuant to Section
-------
5.06.
- ----
"Servicing Fee Rate" means 0.75% per annum.
------------------
"Servicing Officer" means any officer of the Servicer involved in, or
-----------------
responsible for, the administration and servicing of the Loans whose name
appears on a list of servicing officers annexed to an Officer's Certificate
furnished to the Trustee and the Certificate Insurer by the Servicer, as such
list may be amended from time to time.
"Simple Interest Loan" means any Loan under which the portion of a
--------------------
payment allocable to interest and the portion allocable to principal is
determined in accordance with the Simple Interest Method.
"Simple Interest Method" means the method of allocating a fixed level
----------------------
monthly payment to principal and interest, pursuant to which (a) the portion of
such payment allocated to interest is equal to the product of the fixed per
-------
annum rate at which interest accrues on the loan times the outstanding principal
-----
balance of such loan times the number of days elapsed since the preceding
-----
payment of interest was made (in some states assuming 30 day months), divided by
-------
the actual number of days in a year (360 days in states which assume 30 day
months) and (b) the portion of such payment allocable to principal is equal to
the excess of such monthly payment over the amount allocated to interest
------ ----
pursuant to clause (a).
"Specified Reserve Fund Requirement" has the meaning specified in the
----------------------------------
Insurance Agreement.
"Standard & Poor's" means Standard & Poor's Ratings Services, a
-----------------
division of The McGraw-Hill Companies, Inc., or its successor.
19
<PAGE>
"Stated Maturity Date" means the Distribution Date in January 2018.
--------------------
"Substitution Adjustment Amount" means, as to the Monthly Collection
------------------------------
Period related to any Distribution Date with respect to which the Seller or the
Servicer substitutes one or more Eligible Substitute Loans pursuant to Section
-------
3.02, Section 4.01 or Section 5.01(d), the amount, if any, by which the sum of
- ---- ------------ ---------------
(i) the aggregate principal balance of all such Eligible Substitute Loans being
added to the Trust at the end of such Monthly Collection Period is less than
(ii) the aggregate principal balance of the related Loans being removed from the
Trust at the end of such Monthly Collection Period, such amount to be deposited
into the Collection Account when and to the extent provided in Section 3.02,
------------
Section 4.01 or Section 5.01(d).
- ------------ ---------------
"Supplemental Servicing Fee" means charges including late fees,
--------------------------
prepayment fees, rebates and other administrative fees and expenses or similar
charges allowed by applicable law with respect to the Loans, collected (from
whatever source) on the Loans during the related Monthly Collection Period.
"Trust" has the meaning set forth in Section 2.01.
----- ------------
"Trust Property" means the property and proceeds of every description
--------------
conveyed pursuant to Section 3.01 and Section 3.02, the Policy, amounts on
------------ ------------
deposit in the Collection Account, any financial assets or investment property
(as defined in the UCC) or other investments purchased with such funds, and any
proceeds thereof or other amounts payable with respect thereto, all other
rights, property and interests in property granted to the Trustee under this
Agreement for the benefit of the Certificateholders and/or the Certificate
Insurer and any and all products and proceeds of the foregoing.
"Trustee" means U.S. Bank National Association, a national banking
-------
association, doing business as First Bank National Association, its successors
in interest and any successor Trustee hereunder.
"Trustee Fee Rate" means .00625% per annum.
----------------
"Trustee Officer" means the chairman or vice-chairman of the board of
---------------
directors, the chairman or vice-chairman of the
20
<PAGE>
executive committee of the board of directors, the president, any vice
president, the secretary, any assistant secretary, the treasurer, any assistant
treasurer, the cashier, any assistant cashier, any trust officer or assistant
trust officer, the controller and any assistant controller or any other officer
of the Trustee customarily performing functions similar to those performed by
any of the above designated officers and also means, with respect to a
particular corporate trust matter, any other officer to whom such matter is
referred because of such officer's knowledge of and familiarity with the
particular subject.
"Trustee's Fee" means, with respect to any Monthly Collection Period,
-------------
the fee payable to the Trustee for services rendered during such Monthly
Collection Period, equal to one-twelfth of the Trustee Fee Rate multiplied by
the excess of the Pool Balance as of the first day of such Monthly Collection
------
period over the aggregate principal balance of any Defective Loans repurchased
----
by the Seller of purchased by the Servicer as of the last day of such Monthly
Collection Period.
"UCC" means the Uniform Commercial Code as in effect in the State of
---
New York on the date hereof.
SECTION 1.02. Other Definitional Provisions. (a) All terms defined
-----------------------------
in this Agreement shall have the meanings defined herein when used in any
certificate or other document made or delivered pursuant hereto or thereto
unless otherwise defined therein.
(b) As used herein and in any certificate or other document made or
delivered pursuant hereto or thereto, accounting terms not defined herein or in
any such certificate or other document, and accounting terms partly defined
herein or in such Agreement or in any such certificate or other document to the
extent not defined, shall have the respective meanings given to them under
generally accepted accounting principles. To the extent that the definitions of
accounting terms herein or in any such certificate or other document are
inconsistent with the meanings of such terms under generally accepted accounting
principles, the definitions contained herein in any such certificate or other
document shall control.
(c) The words "hereof," "herein," "hereunder" and words of similar
import when used herein shall refer to this
21
<PAGE>
Agreement as a whole and not to any particular provision of the Agreement;
Article, Section, Schedule and Exhibit references contained in this Agreement
are references to Articles, Sections, Schedules and Exhibits in or to this
Agreement, as appropriate; and the term "including" shall mean "including
without limitation".
(d) The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such terms.
(e) Any agreement, instrument or statute defined or referred to
herein or in any instrument or certificate delivered in connection herewith
means such agreement, instrument or statute as from time to time amended,
modified or supplemented and includes (in the case of agreements or instruments)
references to all attachments thereto and instruments incorporated therein;
references to a Person are also to its permitted successors and assigns.
[End of Article I]
22
<PAGE>
ARTICLE II
Establishment of Trust
SECTION 2.01. Creation of Trust. Upon the execution of this
-----------------
Agreement by the parties hereto, there is hereby created a separate trust, which
shall be known as Chevy Chase Home Loan Trust 1997-1 (the "Trust"). The Trust
-----
shall be administered pursuant to the provisions of this Agreement for the
benefit of the Certificateholders and the Certificate Insurer.
SECTION 2.02. Acceptance by Trustee. The Trustee hereby accepts the
---------------------
Loans and other Trust Property transferred by the Seller pursuant to Section
-------
3.01 and declares that it will hold the Loans and other Trust Property upon the
- ----
trusts set forth herein for the benefit of the Certificateholders and the
Certificate Insurer, subject to the terms and provisions of this Agreement.
[End of Article II]
23
<PAGE>
ARTICLE III
Transfer of Loans
SECTION 3.01. Transfer of Loans. (a) In consideration of the
-----------------
Trustee's delivery on the Closing Date to or upon the order of the Seller of
Certificates in an aggregate principal amount equal to the Initial Certificate
Principal Balance, the Seller does hereby transfer, assign, set over and
otherwise transfer to the Trustee in trust for the benefit of the
Certificateholders and the Certificate Insurer, without recourse (subject to the
obligations set forth herein), all right, title and interest of the Seller in
and to:
(1) the Loans, and all moneys received thereon (including any
interest and any payments in respect of delinquent or defaulted
obligations thereunder) on and after the Cut-off Date;
(2) the Mortgages and the security interests in the Mortgaged
Properties and any other properties or interests in properties granted
by Obligors pursuant to the Loans and/or Mortgages and any other
interest of the Seller in such Mortgaged Properties or such other
properties or interests in properties granted by the Obligor in
connection with the Loans;
(3) any proceeds with respect to the Loans from claims on any
insurance policies covering the Mortgaged Properties, or any other
properties or interests in properties granted by the Obligors thereof
pursuant to any of the Loans or the Mortgages;
(4) any proceeds from the liquidation of the Loans or any of the
related Mortgaged Properties or any other properties or interests in
properties granted by the Obligors thereof pursuant to any of the
Loans or the Mortgages;
(5) the related Loan Files;
(6) the Policy; and
(7) the proceeds of any and all of the foregoing.
24
<PAGE>
It is the intention of the Seller that the transfer and assignment
contemplated by this Agreement shall constitute a sale of the Loans and other
Trust Property in which it has an interest from the Seller to the Trust and the
beneficial interest in and title to the Loans and the other Trust Property shall
not be part of the Seller's estate in the event a conservator, receiver,
liquidator or similar person is appointed in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings with respect
to the Seller.
In connection with such assignment and transfer, the Seller shall
file, on or prior to the Closing Date, in the appropriate office of any
applicable state, county or other relevant jurisdiction, a UCC-1 financing
statement executed by the Seller as debtor, naming the Trustee as secured party,
for the benefit of the Certificateholders and the Certificate Insurer, and
identifying as collateral the Loans identified on the Loan Schedule and all
property transferred by the Seller to the Trust constituting part of the Trust
Property. In connection with such filing, the Seller shall cause to be filed
all necessary continuation statements thereof and take or cause to be taken such
actions and execute such documents as are necessary to continue the perfection
and protect the Trustee's interest in such property for the benefit of the
Certificateholders and the Certificate Insurer.
(b) In connection with the foregoing assignment and transfer by the
Seller, and except as provided in the immediately following paragraph, the
Seller shall deliver to, and deposit with, the Trustee on or before the Closing
Date, with respect to each Loan:
(i) The original Note, fixed-rate home equity loan agreement,
sales contract or installment loan agreement, as applicable, or a copy
of such original Note, agreement or contract accompanied by a "lost-
note affidavit," with any intervening endorsements and/or assignments
evidencing a complete chain of title from the originator thereof to
the Seller and, in the case of a Note which is a promissory note,
endorsed in blank and signed, by facsimile or manual signature, in the
name of the Seller by an Officer thereof;
25
<PAGE>
(ii) With respect to each Secured Loan, either: (i) the
original Mortgage with evidence of recording thereon, (ii) a copy of
the Mortgage certified as a true copy by an Officer of the Seller, if
the original has been transmitted for recording but has not, at the
Closing Date, been returned or (iii) a copy of the Mortgage certified
by the public recording office in those instances where the original
recorded Mortgage has been lost or has been retained by the public
recording office; and
(iii) Originals of all assumption and modification agreements,
if any, or a copy certified as a true copy by an Officer of the Seller
if the original has been transmitted for recording until such time as
the original is returned by the public recording office (such
documents, along with the items in (i) and (ii) above and, with
respect to each Secured Loan, the related Assignment of Mortgage
referred to in subsection (d) below, being referred to herein with
respect to each Loan as the "Loan File").
---------
(c) The Seller hereby confirms to the Trustee that it has caused the
portions of the Electronic Ledger relating to the Loans to be clearly and
unambiguously marked to indicate that such Loans have been transferred and
assigned to the Trustee and constitute part of the Trust in accordance with the
terms of the trust created hereunder.
(d) The Seller, at its own expense, shall deliver to the Trustee
within 180 days of the Closing Day an Assignment of Mortgage for each Loan which
is a Secured Loan in blank in recordable form. Any such assignment may be made
by blanket assignments for Secured Loans located in the same county, if
permitted by applicable law. Any such Assignment of Mortgage shall be required
to be recorded only under the circumstances described in Section 5.15.
------------
26
<PAGE>
SECTION 3.02. Acceptance by Trustee; Reassignment of Loans;
---------------------------------------------
Substitution of Eligible Substitute Loans.
- -----------------------------------------
(a) The Trustee acknowledges receipt of the documents identified in
the Initial Certification in the form annexed hereto as Exhibit C-1 and declares
that it does hold and shall hold such files and the documents constituting a
part of the Loan Files in trust to the extent received by it, upon the terms
herein set forth, for the use and benefit of all present and future
Certificateholders and the Certificate Insurer. The Trustee acknowledges that
it shall maintain possession of the Loan Files in the State of Maryland unless
and until (x) 15 days prior notice has been given to the Rating Agencies and the
Certificate Insurer and (y) all measures necessary to perfect (or continue the
perfection in) the interest of the Trustee in such Loan Files in the
jurisdiction to which the Loan Files are to be moved have been taken to the
satisfaction of the Certificate Insurer.
(b) The Trustee shall review each document delivered to it pursuant
to Section 3.01(b) and Section 3.01(d) to ascertain that all required documents
--------------- ---------------
referred to therein have been executed and received, and that such documents
relate to the Loans identified on the Loan Schedule. The Trustee may rely on
the purported due execution of any such documents and genuineness of any
signature thereon. Not later than 210 days following the Closing Date, the
Trustee shall deliver to the Seller and the Servicer a certificate substantially
in the form of Exhibit C-2. If, as set forth in such certificate, the Trustee
-----------
determines that it does not have a Loan File for a Loan or any document
constituting a part of a Loan File (i) does not bear the required signatures,
(ii) has not been received or (iii) is unrelated to the Loans identified in the
Loan Schedule on the Closing Date, the Seller shall correct or cure any such
specified defect within 30 days of receipt of notice of such defect. In
addition, within fifteen (15) days following the substitution of any Eligible
Substitute Loan, (i) the Trustee shall review the Loan File for such Eligible
Substitute Loan (which shall include, at the time of delivery, an Assignment of
Mortgage in recordable form if such Eligible Substitute Loan is a Secured Loan)
for the purpose and to the extent set forth above in this paragraph, and (ii)
shall deliver to the Seller, the Servicer and the Certificate Insurer a
certificate substantially in the form of Exhibit D specifying any defect with
---------
respect to such Loan, as described above. The Seller
27
<PAGE>
shall have a period of thirty (30) days after receipt from the Trustee of such
certificate to correct or cure such defect. The Trustee shall be under no duty
or obligation to inspect, review or examine any such documents, instruments,
certificates or other papers to determine that they are genuine, enforceable, or
appropriate for the represented purpose or that they are other than what they
purport to be on their face.
The Trustee shall have no responsibility for reviewing any Loan except
as expressly provided in this Section 3.02(b). Without limiting the effect of
the preceding sentence, in reviewing any Loan File, the Trustee shall have no
responsibility for determining whether any document is valid and binding,
whether the text of any assignment or endorsement is in proper or recordable
form (except to determine that such endorsement is in blank), whether any
document has been recorded in accordance with the requirements of any applicable
jurisdiction or whether a blanket assignment is permitted in any applicable
jurisdiction, but shall only be required to determine whether a document has
been executed, that it appears to be what it purports to be, and, where
applicable, that it purports to be recorded.
(c) If the time to correct or cure any defect of which the Trustee
has notified the Seller pursuant to Section 3.02(b) has expired without any
---------------
correction or cure, the Seller shall, on the Business Day immediately preceding
the Determination Date in the month following the Monthly Collection Period in
which the time to correct or cure such defect expired, remove the related Loan
(including any property acquired in respect thereof and any insurance policy or
Insurance Proceeds with respect thereto) from the Trust either (i) in exchange
for depositing in the Trust the Repurchase Deposit Amount, which amount shall be
deposited into the Collection Account pursuant to Section 6.04 on such Business
------------
Day, or (ii) by substituting in its place an Eligible Substitute Loan or Loans,
delivering to the Trustee an assignment substantially in the form of Exhibit E-
---------
1A, without recourse, in order to vest in the Trustee all right, title and
- --
interest of the Seller in and to such Eligible Substitute Loan as of the last
day of the Monthly Collection Period in which the time to correct or cure such
defect expired, and depositing in the Collection Account any related
Substitution Adjustment Amount. Promptly upon receipt by the Trustee of (i) in
the case of a payment in respect of the removed Loan, written notification
signed by a Servicing Officer to the effect that the Repurchase Deposit
28
<PAGE>
Amount for any such Loan has been so deposited into the Collection Account or
(ii) in the case of a substitution, the Loan for each related Eligible
Substitute Loan and written notification signed by a Servicing Officer to the
effect that such Loan complies with the definition of Eligible Substitute Loan
and that the Substitution Adjustment Amount, if any, has been deposited into
the Collection Account as provided in Section 6.04, the Trustee shall release to
------------
the Seller the Loan File for the removed Loan and shall execute and deliver to
the Seller an assignment substantially in the form of Exhibit E-1, without
-----------
recourse, in order to vest in the Seller all right, title and interest of the
Trustee in and to such removed Loan (including any property acquired in respect
thereof and any insurance policy or Insurance Proceeds with respect thereto).
The form of assignment attached as Exhibit E-1 and Exhibit E-1A may be modified
----------- ------------
from time to time to the extent required by applicable law, as evidenced by an
Opinion of Counsel delivered to the Trustee. The obligation of the Seller to
remove (to the extent permitted herein) any Loan and either (x) deposit the
Repurchase Deposit Amount or (y) substitute an Eligible Substitute Loan and the
deposit of the related Substitution Adjustment Amount, if any, shall constitute
the sole remedy with respect to such defect available to Certificateholders,
the Trustee (for itself or on behalf of Certificateholders and the Certificate
Insurer) or the Certificate Insurer against the Seller.
(d) The Substitution Adjustment Amount for any Monthly Collection
Period shall be deposited into the Collection Account on the Business Day
immediately preceding the Determination Date occurring in the month following
such Monthly Collection Period. All amounts received in respect of the Eligible
Substitute Loan or Loans during the Monthly Collection Period in which the time
to correct or cure the defect giving rise to the relevant substitution occurs
shall not be a part of the Trust and shall not be deposited by the Servicer into
the Collection Account. All amounts received by the Servicer during the Monthly
Collection Period in which the circumstances giving rise to such substitution
occur in respect of any Loan so removed from the Trust shall be deposited by the
Servicer into the Collection Account. The Servicer shall amend the Loan
Schedule to reflect the removal of such Loan from the terms of this Agreement
and the substitution of the Eligible Substitute Loan or Loans therefor as of the
last day of the Monthly Collection Period during which the time to correct or
cure the defect has expired. Upon such
29
<PAGE>
substitution, the Eligible Substitute Loan or Loans shall be subject to the
terms of this Agreement in all respects, and the Seller shall be deemed to have
entered into or made with respect to such Eligible Substitute Loan or Loans, as
of the date of substitution, the covenants, representations and warranties set
forth in Section 4.01 as of the first day of the Monthly Collection Period
------------
following the Monthly Collection Period during which the time to correct or cure
the defect giving rise to such substitution occurred. The procedures applied by
the Seller in selecting each Eligible Substitute Loan shall not be adverse to
the interests of the Trustee, the Certificate Insurer or the Certificateholders
and shall be comparable to the selection procedures applicable to the Loans
conveyed hereunder as of the date of this Agreement.
The provisions of Section 3.02(c) and Section 3.02(d) also shall apply
--------------- ---------------
to any substitution of Eligible Substitute Loan or Loans by the Seller pursuant
to Section 4.01 and by the Servicer pursuant to Section 5.01(d).
------------ ---------------
[End of Article III]
30
<PAGE>
ARTICLE IV
The Loans
SECTION 4.01. Representations and Warranties of the Seller Regarding
------------------------------------------------------
the Loans; Removal and Substitution Obligations. (a) The Seller represents and
- -----------------------------------------------
warrants to the Trustee, the Certificate Insurer and the Certificateholders as
of the date of this Agreement and as of the Closing Date in the case of the
Loans, that:
(i) The information set forth on the Loan Schedule with respect to
the Loans was true and correct in all material respects at the date or dates as
of which such information was furnished by the Seller.
(ii) Each Note and each Mortgage is genuine and each is the legal,
valid and binding obligation of the Obligor thereof, enforceable in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting creditors' rights in
general and by general principles of equity. All parties to each Note and, if
applicable, each related Mortgage had legal capacity to enter into the related
Loan and to execute and deliver such Note and, if applicable, such Mortgage, and
such Note and, if applicable, such Mortgage have been duly and properly executed
by such parties.
(iii) As of the Closing Date, each Mortgage securing a Secured Loan
is a valid lien on the related Mortgage Property, subject only to (a) the lien
of current real property taxes and assessments, (b) the lien of the related
senior mortgage loans or deeds of trust, if any, (c) covenants, conditions and
restrictions, rights of way, easements and other matters of public record as of
the date of recording of such Mortgage, such exceptions appearing of record
being acceptable to mortgage lending institutions generally in the area wherein
the related Mortgaged Property is located or specifically reflected in the
appraisal obtained in connection with the origination of the related Loan
obtained by the Seller and (d) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security interest intended to be provided by such Mortgage.
31
<PAGE>
(iv) As of the Cut-Off Date, the proceeds of each Loan have been
fully disbursed and there is no requirement for future advances thereunder; all
costs, fees and expenses incurred in making or closing such Loan and the
recording of the related Mortgage, if any, were disbursed; the Obligor thereon
is not entitled to any refund of any amounts paid or due under any related Note,
installment sales contract or installment loan agreement, or any related
Mortgage; and any and all requirements set forth in any documents relating to
such Loan have been complied with.
(v) Each Mortgage contains customary and enforceable provisions
such as to render the rights and remedies of the holder thereof adequate for the
realization against the related Mortgaged Property of the benefits of the
security provided thereby, including (i) in the case of a Mortgage designated as
a deed of trust, by trustee's sale and (ii) otherwise, by judicial foreclosure.
(vi) Each Loan is an Indirect Debt Consolidation Loan, an Indirect
Home Improvement Loan, a Direct Home Improvement Loan or a Closed-end Home
Equity Loan, and was underwritten by the Seller or was required to have bee
underwritten by its originator in accordance with the Seller's then current
underwriting guidelines for such type of Loan.
(vii) No Obligor has notified the Seller, and the Seller has no
knowledge, of any relief requested or allowed to an Obligor under the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended.
(viii) Immediately prior to the transfer and assignment referred to in
Section 3.01(a), the Seller had good title to each Loan, subject to no prior
- ---------------
lien, mortgage, security interest, pledge, charge or other encumbrance.
(ix) As of the Closing Date, the transfer to the Trust of the Loans
constitutes either a valid sale of all right, title and interest of the Seller
in the Loans (to the extent provided herein) to the Trustee or the grant of a
first priority perfected ownership interest or security interest therein (to the
extent provided herein) to the Trustee for the benefit of the Certificateholders
and the Certificate Insurer.
32
<PAGE>
(x) As of the Cut-off Date, no payment on or in respect of any Loan
is 30 or more days past due on a contractual basis.
(xi) As of the Closing Date, there is no lien for any delinquent
recording fee, tax or assessment against any Mortgaged Property.
(xii) As of the Closing Date, no Mortgaged Property relating to a
Secured Loan is subject to any mechanics' lien or claim for work, labor or
material which is or may be a lien prior to, or equal or coordinate with, the
lien of the related mortgage, except those liens which are fully insured against
by a title insurance policy.
(xiii) As of the Closing Date, to the knowledge of the Seller, each
Mortgaged Property relating to a Secured Loan is free of material damage and is
in good repair.
(xiv) Each Loan complied at the time it was made in all material
respects with applicable state and federal laws, including without limitation
usury, equal credit opportunity and disclosure laws, and the consummation of the
transactions herein contemplated, including without limitation the receipt of in
terest by the Certificateholders, will not violate such laws in any material
respect.
(xv) As of the Closing Date, the Seller has not received a notice of
default of any senior mortgage loan on a Mortgaged Property relating to a
Secured Loan which has not been cured by a party other than the Seller.
(xvi) Each Note (if applicable) and each Mortgage relating to a
Secured Loan is an enforceable obligation of the related Obligor, except as
enforceability may be limited by (a) bankruptcy, insolvency or other similar
laws now or hereafter in effect relating to the enforcement of creditors' rights
generally and (b) general principles of equity (regardless of whether en
forceability is considered in a proceeding at law or in equity) and, to the
knowledge of the Seller as of the Closing Date, there is no offset, defense,
claim or counterclaim to any obligation under such Note or, with respect to each
Secured Loan, under the related Mortgage, including the obligation of the
Obligor to pay principal and interest in accordance with the terms of such Note.
33
<PAGE>
(xvii) No selection procedure reasonably believed by the Seller to be
adverse to the interests of the Certificateholders or the Certificate Insurer
was used in selecting the Loans.
(xviii) Each Closed-end Home Equity Loan was originated by the Seller
or acquired by the Seller from a mortgage company, duly licensed in the relevant
jurisdiction.
(xix) The Loan File for each Loan contains all required documents
referred to in Section 3.01(b) other than the related Assignment of Mortgage for
---------------
each Secured Loan, and such documents bear manual signatures of the related
Obligor and relate to such Loan.
(xx) A lender's title insurance policy or binder, or other
assurance of title customary in the relevant jurisdiction therefor (including,
without limitation, a title report) was issued on the date of origination of
each Secured Loan and is valid and remains in full force and effect with respect
to each such Secured Loan.
(b) The representations and warranties set forth in Section 4.01(a)
---------------
shall survive the sale, transfer and assignment of the Loans on the Closing Date
and shall survive the delivery of the related Loan Files to or on behalf of the
Trustee. Upon discovery by the Seller, the Servicer, the Certificate Insurer or
the Trustee of a breach of any of the representations and warranties with
respect to any Loan made pursuant to Section 4.01(a) of this Agreement or a
---------------
breach of the Servicer of Section 5.01, which in each case materially and
------------
adversely affects the interests of the Certificateholders or the Certificate
Insurer in such Loan, the party discovering such breach shall give written
notice thereof to the other parties and the Certificate Insurer within 5 days
after such discovery; provided, however, that failure to give such notice within
-------- -------
such five day period shall not relieve the Seller or the Servicer, as the case
may be, of any of their corresponding obligations. Within 30 days after its
discovery or its receipt of notice of any such breach, the Seller or the
Servicer, as applicable, shall use all reasonable efforts to cure such breach in
all material respects. Unless at the expiration of such 30-day period, such
breach has been cured in all material respects or otherwise does not exist or
continue to exist, the Seller or the Servicer, as applicable, shall, not later
than the Business Day preceding the Determination Date
34
<PAGE>
immediately preceding the Distribution Date in the month following the related
Monthly Collection Period in which any such cure period expired, remove such
Defective Loan (including any property acquired in respect thereof and any
insurance policy or Insurance Proceeds with respect thereto) in exchange for (i)
deposit of the Repurchase Deposit Amount or (ii) in the case of the Seller
only, substitution in its place of an Eligible Substitute Loan or Loans, in any
case in the same manner and subject to the same conditions as set forth in
Section 3.02(c). In conjunction with any removal pursuant to the foregoing, the
- ---------------
Seller shall be entitled to receive an assignment of the removed Loan and a
release of the related Loan File from the Trustee to the extent set forth in
Section 3.02(c). Any such Defective Loan shall be deemed to have been purchased
- ---------------
as of the last day of the Monthly Collection Period immediately preceding date
on which such purchase occurred. The obligation of the Seller to remove any
Loan as to which a breach has occurred and is continuing shall constitute the
sole remedy against the Seller with respect to such breach available to
Certificateholders, the Trustee on behalf of Certificateholders, or the
Certificate Insurer.
A breach of the representation and warranty set forth in clause (xix)
of Section 4.01 with respect to any Loan shall be deemed to affect materially
------------
and adversely the interests of the Certificateholders and the Certificate
Insurer in such Loan. Notwithstanding the first paragraph of this Section
4.01(b), the provisions of Section 3.02(b) shall control with respect to notice
---------------
and cure periods applicable to the correction of any defective Loan Files and
the obligations of the Seller with respect thereto.
Any purchase of, or substitution of an Eligible Substitute Loan or
Loans for, a Defective Loan by the Servicer pursuant to Section 5.01 shall be
------------
effected in the same manner and subject to the same conditions as set forth in
Section 3.02(c). Upon completing any such purchase or substitution, the Servicer
- ---------------
shall receive an assignment of such Defective Loan and a release of the related
Loan File from the Trustee to the extent set forth in Section 3.02(c).
---------------
The Loan Schedule shall be amended to reflect all additions,
substitutions or deletions of Loans provided for in this Section 4.01(b) with
respect to Eligible Substitute Loans and Defective Loans, as provided in Section
-------
3.01(d) .
- -------
35
<PAGE>
SECTION 4.02. Official Record. The Seller and the Servicer agree
---------------
that, so long as the Certificates remain outstanding and/or amounts remain owing
to the Certificate Insurer, this Agreement, the Insurance Agreement, the
Indemnification Agreement and all related agreements, documents, instruments and
certificates delivered hereunder or thereunder shall remain outstanding as an
official record of the Seller within the meaning of Section 13(e) of the Federal
Deposit Insurance Act, as amended (12 U.S.C. (S) 1823(e)).
[End of Article IV]
36
<PAGE>
ARTICLE V
Administration and Servicing of Loans
SECTION 5.01. The Servicer and the Seller. (a) The Servicer shall
---------------------------
service and administer the Loans in accordance with its customary procedures
consistent with general industry practice, taking into account that the Trust is
a grantor trust for tax purposes; provided, however, that such procedures shall
-------- -------
be the same in all material respects as the procedures followed by the Servicer
with respect to Closed-End Home Equity Loans and Home Loans held in its own
portfolio. The Servicer shall have full power and authority to do any and all
things in connection with such servicing and administration which it may deem
necessary or desirable as to maximize the receipt of principal and interest on
such Loans and Net Liquidation Proceeds with respect to Liquidated Loans.
Without limiting the generality of the foregoing, the Servicer shall continue,
and is hereby authorized and empowered by the Trustee, to execute and deliver,
on behalf of itself, the Certificateholders, the Certificate Insurer and the
Trustee or any of them, any and all instruments of satisfaction or cancellation,
or of partial or full release or discharge, and all other comparable
instruments, with respect to the Loans and, with respect to Secured Loans, the
related Mortgaged Properties. The Trustee shall furnish the Servicer a power of
attorney in the form attached hereto as Exhibit G and other documents necessary
---------
or appropriate to enable the Servicer to carry out its servicing and
administrative duties hereunder.
The relationship of the Servicer (and of any successor to the Servicer
as servicer under this Agreement) to the Trustee under this Agreement is
intended by the parties to be that of an independent contractor and not that of
a joint venturer, partner or agent.
(b) The Servicer shall not consent to the placement of a lien on any
Mortgaged Property senior to that of the related Mortgage unless such action is
consistent with reasonable commercial practice.
(c) The Servicer shall not modify or amend any Loan (or waive any
term of any Loan other than waiving a late payment fee in connection with a late
payment on a Loan), other than to evidence an assumption, unless: (a) the Loan
is in default or a
37
<PAGE>
payment default with respect to such Loan is reasonably foreseeable by the
Servicer, (b) the amendment or modification of the Loan would not cause the loan
to be considered to be "exchanged" for the modified loan under section 1001 of
the Internal Revenue Code or (c) the modification or amendment would not cause
the Trust to fail to qualify as a grantor trust for federal income tax purposes.
Notwithstanding the foregoing, the Servicer may not extend or modify a Loan such
that the stated final maturity date of such Loan would extend beyond the last
day of the Monthly Collection Period preceding the Stated Maturity Date.
(d) The Servicer may agree to extend the final maturity date of any
Loan beyond the last day of the Monthly Collection Period preceding the Stated
Maturity Date if the Servicer, not later than the Business Day immediately
preceding the Determination Date next following the Monthly Collection Period in
which any such extension is made shall either remove the applicable Loan or
substitute an Eligible Substitute Loan or Loans for such Loan, and remit to the
Trustee the applicable Repurchase Deposit Amount or Substitution Adjustment
Amount.
(e) Any substitution of an Eligible Substitute Loan or Loans pursuant
to subsection (d) shall be effected in the same manner and subject to the same
conditions as set forth in Section 3.02(c), and the Loan Schedule shall be
---------------
amended to reflect such substitution. Upon completing any such transfer the
Servicer shall receive an assignment of the related Loan and a release of the
related Loan File from the Trustee to the extent set forth in Section 3.02(c).
---------------
SECTION 5.02. Collection of Certain Loan Payments.
-----------------------------------
(a) The Servicer shall make reasonable efforts to collect all
payments called for under the terms and provisions of the Loans, and shall, to
the extent such procedures shall be consistent with this Agreement, follow such
collection procedures as it follows with respect to Closed-End Home Equity Loans
and Home Loans in its servicing portfolio comparable to the Loans. Consistent
with, and without limiting the generality of, the foregoing, the Servicer, in
its discretion, may waive any late payment charge or any assumption fees or
other fees which may be collected in the ordinary course of the servicing of the
Loans.
38
<PAGE>
(b) The Seller shall Transfer any payments it receives with respect
to a Loan to the Servicer within two Business Days following receipt thereof.
SECTION 5.03. Maintenance of Hazard Insurance; Property Protection
----------------------------------------------------
Expenses. The Servicer, in accordance with its customary servicing procedures,
- --------
shall cause to be maintained for each Secured Loan hazard insurance naming the
Servicer as loss payee thereunder providing extended coverage in an amount which
is at least equal to the lesser of (i) the maximum insurable value of the
improvements securing such Loan from time to time or (ii) the principal balance
of such Loan. The Servicer also shall maintain, on property acquired in
Foreclosure Proceedings, hazard insurance with extended coverage in an amount
which is at least equal to the lesser of (i) the maximum insurable value from
------
time to time of the improvements which are a part of such property or (ii) the
principal balance of such Loan at the time of such Foreclosure Proceedings, plus
accrued interest and the good-faith estimate of the Servicer of related expenses
to be incurred in connection therewith. Amounts collected by the Servicer under
any such policies shall be deposited as Liquidation Proceeds or Insurance
Proceeds into the Collection Account to the extent provided in Section 6.02. In
------------
cases in which any Mortgaged Property securing a Secured Loan is located in a
federally designated special flood hazard area, the hazard insurance to be
maintained for the related Loan, or on property acquired in Foreclosure
Proceedings, shall include flood insurance. All such flood insurance shall be
in an amount equal to the lesser of (i) the maximum amount available under
------
standard flood insurance in such designated flood area and (ii) the principal
balance of the applicable Loan and the principal balance of any mortgage loan
senior to such Loan from time to time. The Servicer shall be under no
obligation to require that any Obligor maintain earthquake or other additional
insurance and the Servicer shall be under no obligation itself to maintain any
such additional insurance on property acquired in respect of a Loan, other than
pursuant to such applicable laws and regulations as shall at any time be in
force and as shall require such additional insurance.
If the Servicer shall obtain and maintain a blanket policy issued by
an insurer acceptable to the Rating Agencies insuring against hazard losses on
all of the Loans, it shall conclusively be deemed to have satisfied its
obligations as set forth in the first sentence of this Section 5.03. Any such
39
<PAGE>
blanket policy may contain a deductible clause. In the event that there shall
not have been maintained on the related Mortgaged Property a policy complying
with the first sentence of this Section 5.03, and there shall have been a loss
which would have been covered by such policy, the Servicer shall deposit into
the Collection Account the amount not otherwise payable under the blanket policy
because of such deductible clause.
The Servicer shall apply all Insurance Proceeds received with respect
to a Loan in reduction of the unpaid principal balance of such Loan.
SECTION 5.04. Assumption and Modification Agreements. In any case in
--------------------------------------
which a Mortgaged Property securing a Secured Loan has been or is about to be
conveyed by the Obligor, the Servicer shall have the option to exercise its
right to accelerate the maturity of the Loan secured thereby unless it is
prohibited from doing so by applicable law. If the Servicer is prevented from
enforcing such right by applicable law or elects not to exercise such right, the
Servicer (so long as such action conforms with the Servicer's underwriting
standards at the time for new originations) is authorized to take or enter into
an assumption and modification agreement from or with the Person to whom such
Mortgaged Property has been or is about to be conveyed, pursuant to which such
Person becomes liable under the related Loan and, to the extent permitted by
applicable law, the Obligor remains liable thereon. No change in the terms of
the related Loan may be made by the Servicer in connection with any such
assumption or modification to the extent that such change would not be permitted
to be made in respect of the original Loan pursuant to Section 5.01(c). The
---------------
Servicer shall notify the Trustee and the Certificate Insurer that any
assumption and modification agreement has been completed by delivering to the
Trustee (i) an Officer's Certificate certifying that such agreement is in
compliance with this Section 5.04 and (ii) a manually executed copy of such
assumption and modification agreement. Any such assumption and modification
agreement shall, for all purposes, be considered a part of the related Loan File
to the same extent as all other documents and instruments constituting a part
thereof. Any fee collected by the Servicer for entering into any such agreement
shall be retained by the Servicer as additional servicing compensation.
40
<PAGE>
SECTION 5.05. Realization Upon Liquidated Loans. The Servicer may,
---------------------------------
but is not required to, foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Secured Loans as come into
and continue in default when, in the opinion of the Servicer based upon the
practices and procedures referred to in the following sentence, no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such foreclosure or other conversion, the Servicer shall follow such
practices (including, in the case of any default on a related senior mortgage
loan, the advancing of funds to correct such default or to pay in full such
senior mortgage loan) and procedures as it shall deem necessary or advisable and
as shall be normal and usual in its general servicing activities in connection
with Closed-end Home Equity Loans and Home Loans in its portfolio.
Notwithstanding the foregoing, if the Servicer has actual knowledge or
reasonably believes that any Mortgaged Property is contaminated by hazardous or
toxic wastes or substances, then the Servicer shall not cause the Trust to
acquire title to such Mortgaged Property in a foreclosure or similar proceeding
if such acquisition in the reasonable opinion of the Servicer is not
commercially reasonable. The foregoing is subject to the proviso that the
Servicer shall not be required to advance its own funds in connection with any
foreclosure or restoration of any Mortgaged Property unless it reasonably
believes, consistent with its customary servicing practices, that such advance
will be recoverable and will maximize the receipt of principal and interest on
the related Loan (including Liquidation Proceeds with respect to such Loan)
after taking into account the Servicer's recovery of such advance (any such
advance, a "Servicer Advance"). The Servicer shall be entitled to retain out of
----------------
payments made by the Obligor on a Loan on which a Servicer Advance was made an
amount equal to such Servicer Advance.
Liquidation Expenses incurred by the Servicer in connection with a
Liquidated Loan shall be recoverable by the Servicer solely out of Liquidation
Proceeds and Recoveries received in respect of the same Liquidated Loan. The
Servicer's failure to claim reimbursement for Liquidation Expenses out of
Liquidation Proceeds or Recoveries received in respect of the related Liquidated
Loan for any one or more Monthly Collection Periods shall not in any way be
deemed a waiver of its right in the future to seek reimbursement for such
Liquidation Expenses or additional Liquidation Expenses out of Recoveries
received with
41
<PAGE>
respect to the related Liquidated Loan for subsequent Monthly Collection
Periods.
SECTION 5.06. Servicing Fee. The Servicing Fee for a Distribution
-------------
Date shall equal the sum of the Base Servicing Fee and the Supplemental
Servicing Fee, plus any reimbursement pursuant to Section 9.04. The Servicer,
------------
in its discretion at its election, may defer receipt of all or any portion of
the Servicing Fee for any Monthly Collection Period to and until a later Monthly
Collection Period for any reason, including in order to avoid a shortfall in any
payments due on any Certificates. Any such deferred amount shall be payable to
the Servicer on demand.
SECTION 5.07. Servicer's Certificate. (a) On each Determination
----------------------
Date, the Servicer shall deliver to the Trustee, the Certificate Insurer and
each Rating Agency a Servicer's Certificate containing, among other things, (i)
all information necessary to enable the Trustee to make any withdrawal, deposit
and set-off required by Section 6.04, Section 6.05 or Section 6.06, to give any
------------ ------------ ------------
notice required by Section 7.01 and make the distributions required by Section
------------ -------
6.07, (ii) all information necessary to enable the Trustee to send the
- ----
statements to Certificateholders and the Certificate Insurer required by Section
-------
6.09, (iii) a listing of all Loans to be purchased on the related Distribution
- ----
Date, identifying the Loans to be purchased, and (iv) all information necessary
to enable the Trustee to reconcile all deposits to, and withdrawals from, the
Collection Account for the related Monthly Collection Period and Distribution
Date. Loans purchased by the Servicer or repurchased by the Seller and each
Loan which became a Liquidated Loan or which was paid in full during the related
Monthly Collection Period shall be identified by account number (as set forth in
the Loan Schedule). A copy of such certificate may be obtained by any
Certificateholder by a request in writing to the Trustee addressed to the
Corporate Trust Office. The Trustee shall not be under any obligation to
confirm or reconcile the information provided pursuant to Section 5.07.
------------
(b) If the Servicer's Certificate contains a manifest error, the
Certificate Insurer's written notice to the Servicer and the Trustee containing
the corrected information shall be deemed to amend such Servicer's Certificate.
42
<PAGE>
SECTION 5.08. Annual Independent Public Accountants' Servicing
------------------------------------------------
Report. The Servicer, at its expense, shall cause a firm of independent public
accountants (who shall be (i)(A) recognized as a "big six" accounting firm or
(B) approved by the Certificate Insurer and (ii) a member of the American
Institute of Certified Public Accountants and may also render other services to
the Servicer or the Seller) to furnish a statement to the Trustee and the
Certificate Insurer on or before December 31 of each year, beginning with
December 31, 1998, to the effect that such firm has examined certain documents
and records relating to the servicing of the Loans by the Servicer under this
Agreement during the preceding twelve (12) months ended September 30 (or, in the
case of the first such Certificate, the applicable period ended September 30)
and that such examination, which has been conducted substantially in accordance
with (i) the audit guide for audits of non-supervised mortgagees approved by the
Department of Housing and Urban Development for use by independent public
accountants or (ii) the requirements of the Uniform Single Attestation Program
for Mortgage Bankers (to the extent that the procedures in such audit guide or
audit program are applicable to the servicing obligations hereunder), has
disclosed no items of noncompliance with the provisions of this Agreement which,
in the opinion of such firm, are material, except for such items of
noncompliance as shall be set forth in such report.
SECTION 5.09. Access to Certain Documentation and Information
-----------------------------------------------
Regarding the Loans. The Servicer and the Seller shall provide to the
- -------------------
Certificateholders which are federally insured savings and loan associations,
the Office of Thrift Supervision (successor to the Federal Home Loan Bank
Board), the Federal Deposit Insurance Corporation and the supervisory agents and
examiners of the Office of Thrift Supervision, access to the documentation
regarding the Loans to the extent required by applicable regulations of the
Office of Thrift Supervision and the Federal Deposit Insurance Corporation
(acting as operator of the SAIF or the BIF). The Servicer and the Seller shall
provide to the Trustee, and the Servicer, the Seller and the Trustee shall
provide to the Certificate Insurer or its nominee, access to the documentation
regarding the Loans. Such access in all cases shall be afforded without charge,
but only upon reasonable request and during normal business hours at the offices
of the Servicer, the Seller or the Trustee, as the case may be. Nothing in this
Section 5.09 shall derogate from the obligation of the
43
<PAGE>
Seller or the Servicer to observe any applicable law prohibiting disclosure of
information regarding the Obligors, and the failure of the Seller or the
Servicer to provide access as provided in this Section 5.09 as a result of such
obligation shall not constitute a breach of this Section 5.09.
SECTION 5.10. Maintenance of Certain Servicing Policies. The
-----------------------------------------
Servicer shall during the term of its service as Servicer maintain in force (i)
a policy or policies of insurance covering errors and omissions in the
performance of its obligations as servicer hereunder and (ii) a fidelity bond
in respect of its officers, employees or agents. Each such policy or policies
and bond shall, together, comply with the requirements from time to time of the
Federal National Mortgage Association for persons performing servicing for
mortgage loans purchased by such Association.
SECTION 5.11. Reports to the Securities and Exchange Commission. The
-------------------------------------------------
Servicer shall, on behalf of the Trust, cause to be filed with the Securities
and Exchange Commission any periodic reports required to be filed under the
provisions of the Securities Exchange Act of 1934, as amended, and the rules,
regulations or orders of the Securities and Exchange Commission thereunder.
SECTION 5.12. Information Required by the Internal Revenue Service
----------------------------------------------------
Generally and Reports of Foreclosures and Abandonments of Mortgaged Property.
- ----------------------------------------------------------------------------
Consistent with Section 5.16, the Servicer shall prepare and file, or cause to
------------
be prepared and filed, and shall file or cause to be filed, all federal and
state information reports when and as required by all applicable state and
federal income tax laws, including, without limitation, reports required by
Section 6050J of the Code.
SECTION 5.13. Servicer Expenses. Except as expressly provided in
-----------------
this Agreement, the Servicer shall be required to pay all expenses incurred by
it in connection with its activities hereunder, including fees and disbursements
of independent accountants, taxes imposed on the Servicer and expenses incurred
in connection with distributions and reports to Certificateholders and the
Certificate Insurer.
SECTION 5.14. Annual Statement as to Compliance. The Servicer shall
---------------------------------
deliver to the Trustee and the Certificate Insurer, on or before December 31 of
each year, beginning with
44
<PAGE>
December 31, 1998, an Officer's Certificate signed by a Servicing Officer
stating that (i) a review of the activities of the Servicer during the preceding
twelve (12) months ended September 30 (or, in the case of the first such
Certificate, the applicable period ended September 30) and of its performance
under this Agreement has been made under such Servicing Officer's supervision
and (ii) to the best of such Servicing Officer's knowledge, based on such
review, the Servicer has fulfilled all its material obligations under this
Agreement throughout such year or applicable period, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
known to such Servicing Officer and the nature and status thereof.
SECTION 5.15. Recordation of Assignments of Mortgage. An Assignment
--------------------------------------
of Mortgage shall be submitted for recordation by the Servicer if (x) the
Servicer determines in its reasonable judgment that such recordation is
necessary to foreclose upon a Mortgaged Property related to a Liquidated Loan
and that foreclosing upon such Mortgaged Property will maximize the receipt of
Net Liquidation Proceeds or Recoveries with respect to such Liquidated Loan or
(y) the Seller fails to be adequately capitalized, as determined pursuant to the
regulations of the Office of Thrift Supervision, in which case the Trustee shall
record all or any portion of such Assignments of Mortgage as and when directed
by the Certificate Insurer, the costs and expenses incurred by the Trustee in
connection with any such recordation being referred to herein as the
"Recordation Fees."
- -----------------
SECTION 5.16. Tax Treatment. It is the intention of the Seller, the
-------------
Servicer and the Trustee that the Trust will be treated as a grantor trust for
federal state and local income and franchise tax purposes and for purposes of
any other tax imposed on or measured by income. The Seller, the Servicer, the
Trustee and each Certificateholder by acceptance of its Certificates agree to
treat the Certificates, for purposes of federal, state and local income, as
interests in a grantor trust and to report the transactions contemplated by this
Agreement on all tax returns in a manner consistent with such treatment.
[End of Article V]
45
<PAGE>
ARTICLE VI
Accounts; Collections; Allocations; Distributions;
Statements to Certificateholders
SECTION 6.01. Establishment of Accounts. (a)(i) The Servicer, for
-------------------------
the benefit of the Certificateholders and the Certificate Insurer, shall
establish and maintain in the name of, and under the sole dominion and control
of, the Trustee an Eligible Account (the "Collection Account"), bearing a
------------------
designation clearly indicating that the funds deposited therein are held for the
benefit of the Certificateholders and the Certificate Insurer. The Collection
Account shall initially be held with the Trustee.
(ii) The Servicer, for the benefit of the Certificateholders and the
Certificate Insurer, shall establish and maintain within the Collection Account
three administrative subaccounts (the "Interest Distribution Account," the
-----------------------------
"Principal Distribution Account" and the "Expense Distribution Account,"
- ------------------------------- ----------------------------
respectively).
(b) Funds on deposit in the Collection Account and the Reserve Fund
shall be invested by the Trustee (or any custodian with respect to funds on
deposit in any such account) in Permitted Investments selected in writing or by
telephone (which shall be promptly confirmed in writing) by the Servicer
(pursuant to standing instructions or otherwise); provided, however, it is
-------- -------
understood and agreed that the Trustee shall not be liable for any loss arising
from such investment in Permitted Investments. Permitted Investments may be
purchased by or through the Trustee or any of its affiliates. All such
Permitted Investments shall be held by or on behalf of the Trustee for the
benefit of the Certificateholders and the Certificate Insurer. Other than as
permitted by the Rating Agencies and the Certificate Insurer, funds on deposit
in the Collection Account and the Reserve Fund shall be invested in Permitted
Investments that will mature so that such funds will be available at the close
of business on the Business Day immediately preceding the next Distribution
Date; provided, however, that funds invested in Permitted Investments which are
-------- -------
obligations of the Trustee may mature on such Distribution Date. Funds
deposited in the Collection Account and the Reserve Fund upon the maturity of
any Permitted Investments
46
<PAGE>
on the day immediately preceding a Distribution Date are not required to be
invested overnight.
(c) Notwithstanding anything to the contrary contained herein, the
Reserve Fund shall be deemed to be property of the Seller for federal income tax
purposes.
SECTION 6.02. Collections. The Servicer shall remit within two
-----------
Business Days of receipt thereof to the Collection Account all payments by or on
behalf of the Obligors with respect to the Loans (other than Loans repurchased
by the Seller or purchased by the Servicer) and all Liquidation Proceeds,
Recoveries and Insurance Proceeds, in each case as collected during each Monthly
Collection Period less any payments owed thereon to the Servicer. For purposes
of this Article VI the phrase "payments by or on behalf of Obligors" shall mean
payments made with respect to the Loans by Persons other than the Servicer or
the Seller.
SECTION 6.03. Application of Collections. All collections for each
--------------------------
Monthly Collection Period shall be applied by the Servicer as follows:
With respect to each Loan (other than a Loan repurchased by the Seller
or purchased by the Servicer), payments by or on behalf of the Obligor (other
than Supplemental Servicing Fees with respect to such Loan, to the extent
collected) shall be applied to interest and principal in accordance with the
Simple Interest Method and the terms of such Loan.
All amounts collected that are payable to the Servicer as Supplemental
Servicing Fees hereunder shall be deposited in the Collection Account and
allocated in accordance with Section 6.05.
------------
SECTION 6.04. Additional Deposits. The Servicer and the Seller shall
-------------------
deposit or cause to be deposited in the Collection Account the aggregate
Repurchase Deposit Amount with respect to Loans repurchased by the Seller or
purchased by the Servicer and the aggregate Substitution Adjustment Amount with
respect to the transfer by the Seller or the Servicer of Eligible Substitute
Loans, and the Seller shall deposit therein all amounts to be paid under Section
-------
4.01. The interest portion of the Repurchase Deposit Amount will be treated as
- ----
Interest
47
<PAGE>
Collections by the Trustee as set forth in the Servicer's Certificate and
allocated accordingly, and the principal portion of the Repurchase Deposit
Amount and any Substitution Adjustment Amount will be allocated as Principal
Collections and treated accordingly, in each case with respect to the Monthly
Collection Period for which such amounts are deposited.
SECTION 6.05. Permitted Withdrawals from the Collection Account. (a)
-------------------------------------------------
The Trustee may, from time to time, make withdrawals from the Collection Account
subject to the conditions and for the purposes set forth in this Agreement,
including the following:
(i) to make the allocations, deposits, distributions and payments
as provided in Section 6.06 and Section 6.07;
------------ ------------
(ii) to indemnify the Servicer to the extent required or permitted
pursuant to Section ______ or Section ____.
-------------- ------------
(iii) to pay the Seller or the Servicer, as applicable, amounts
received in respect of Defective Loans during the Monthly Collection Period
occurring in the month in which such Defective Loans were purchased or replaced
or which were otherwise reflected in the calculation of the related Repurchase
Deposit Amount or any Substitution Adjustment Amount;
(iv) to clear and terminate the Collection Account in accordance
with Section 12.01.
-------------
(b) Any provision herein to the contrary notwithstanding, if the
Servicer or the Seller deposits into the Collection Account any amount not
required to be deposited therein pursuant to Section 6.02, the Servicer may at
------------
any time instruct the Trustee to withdraw such amount from the Collection
Account and to pay such amount to the Servicer. The Servicer shall deliver an
Officer's Certificate to the Trustee which states that it is submitted pursuant
to this Section 6.05(b) and specifies any amounts deposited in error. If the
facts set forth on the face of such Officer's Certificate indicate that amounts
deposited were not required to be deposited into the Collection Account pursuant
to Section 6.02, the Trustee shall withdraw such amount and pay over such amount
------------
to the Servicer. To the extent that any amounts withdrawn are payable to the
Seller, the Servicer shall receive such amounts as custodian for the Seller.
48
<PAGE>
(c) Any provision herein to the contrary notwithstanding, the
Servicer may debit against any amount required to be deposited into the
Collection Account as set forth in the Servicer's Certificate any amount
previously deposited into the Collection Account in respect of payments by
Obligors made by checks subsequently returned for insufficient funds or other
reason for non-payment, where the Servicer had deposited such amounts to the
Collection Account in anticipation of, and prior to receiving, good funds in
respect of such check or other item of payment.
SECTION 6.06. Allocations and Deposits. On each Deposit Date, the
------------------------
Trustee shall make the following allocations and deposits to the indicated
accounts based on the information contained in the Servicer's Certificate:
(a) from Interest Collections for the related Monthly Collection
Period to the extent available in the following order of priority:
(i) to the Expense Distribution Account, an amount equal to
the Servicing Fee for the related Monthly Collection Period, all
accrued and unpaid Servicing Fees for prior Monthly Collection
Periods;
(ii) to the Expense Distribution Account, an amount equal to
the Trustee's Fee for the related Monthly Collection Period and
all accrued and unpaid Trustee's Fees for prior Monthly
Collection Periods;
(iii) to the Interest Distribution Account, first, an amount
equal to that portion of the Interest Distributable Amount
allocable to accrued interest for the related Distribution Date
and second, an amount equal to that portion of the Interest
Distributable Amount allocable to any Certificateholder's
Interest Carryover Shortfall to be paid on such Distribution
Date;
(iv) to the Expense Distribution Account, an amount equal to
the monthly premium for the Policy;
(v) to the Principal Distribution Account, an amount equal to
the aggregate Liquidation Loss Amounts with
49
<PAGE>
respect to each Loan which became a Liquidated Loan during the
related Monthly Collection Period;
(vi) to the Expense Distribution Account, an amount equal to
all prior unreimbursed draws made on the Policy together with
interest accrued thereon pursuant to the Insurance Agreement;
(vii) to the Reserve Fund, an amount sufficient to satisfy the
Specified Reserve Fund Requirement; and
(viii) to the Seller, any remaining amounts;
(b) from Principal Collections for the related Monthly Collection
Period to the extent available in the following order of priority:
(i) to the Principal Distribution Account, an amount up to the
Principal Distributable Amount for the related Distribution Date;
and
(ii) to the Seller, any remaining amounts;
(c) from the amount on deposit for such Monthly Collection Period in
the Reserve Fund in the following order of priority:
(i) an amount equal to the Reserve Fund Interest Transfer
Amount for such Deposit Date to the Interest Distribution
Account; and
(ii) an amount equal to the Reserve Fund Principal Transfer
Amount for such Deposit Date to the Principal Distribution
Account.
SECTION 6.07. Distributions. (a) On each Distribution Date, the
-------------
Trustee shall cause to be made the following distributions from the following
accounts (after giving effect to all deposits therein, including amounts
transferred from the Reserve Fund and paid under the Policy) in the amounts set
forth in the Servicer's Certificate for such Distribution Date:
50
<PAGE>
(i) from amounts deposited in the Expense Distribution Account
pursuant to Section 6.06(a)(i) and Section 6.06(b)(i), in the following order:
------------------ ------------------
First, to the Servicer, the aggregate Servicing Fee for the
-----
related Monthly Collection Period, and any unpaid Servicing Fee for prior
Monthly Collection Periods,
Second, to the Trustee, the Trustee's Fee for the related
------
Monthly Collection Period and any unpaid Trustee's Fee for prior Monthly
Collection Periods, and
Third, to the Certificate Insurer, for (i) the monthly premium
-----
payable in connection with the Policy and (ii) all other amounts then due and
owing the Certificate Insurer,
(ii) from the Interest Distribution Account, to the
Certificateholders of record as of the previous Record Date, the Interest
Distributable Amount;
(iii) from the Principal Distribution Account, to the
Certificateholders of record as of the previous Record Date, the Principal
Distributable Amount; and
(iv) to the Seller, any remaining amounts.
(b) Distributions to Certificateholders, except in the case of
distributions under Section 12.01, shall be made by check mailed by the Trustee
-------------
to each Certificateholder's respective address of record on the Certificate
Register (or, where a Clearing Agency is the Certificateholder, by delivery of
immediately available funds) and distributions to the Servicer, the Certificate
Insurer or the Seller shall be made by wire transfer of immediately available
funds.
SECTION 6.08. Reserve Fund. (a) In order to assure that sufficient
------------
amounts to make required distributions to Certificateholders will be available,
the Servicer shall establish and maintain in accordance with the Reserve Fund
Agreement an Eligible Account (the "Reserve Fund") with the Trustee, under the
------------
sole dominion and control of the Trustee, bearing a designation clearly
indicating that the funds deposited therein are held in trust for the benefit of
the Certificateholders and the Certificate Insurer. The Reserve Fund
51
<PAGE>
will include the money and other property deposited and held therein pursuant to
Section 6.06 and this Section.
- ------------
(b) On or prior to the Closing Date, the Seller shall deposit an
amount equal to the Initial Reserve Fund Deposit into the Reserve Fund.
(c) Funds on deposit in the Reserve Fund shall be invested in
Permitted Investments as set forth in Section 6.01(b).
---------------
(d) Following the payment in full of the Certificate Principal
Balance and of all other amounts owing or to be distributed under the Agreement
to Certificateholders and any Person other than the Certificate Insurer who is
entitled to payment by the Trust, any amount remaining on deposit in the Reserve
Fund shall be allocated to the Expense Distribution Account and distributed to
the Certificate Insurer to the extent of amounts payable and unpaid to the
Certificate Insurer hereunder or under the Insurance Agreement. Any amount
remaining in the Reserve Fund after such allocation to the Expense Distribution
Account and the termination of the Trust shall be distributed to the Seller.
SECTION 6.09. Statements to Certificateholders. On each Distribution
--------------------------------
Date, the Servicer shall provide to the Certificate Insurer, the Rating Agencies
and the Trustee for the Trustee to forward to each Certificateholder of record
as of the most recent Record Date, a statement substantially in the form of
Exhibit F setting forth at least the following information as to the
- ---------
Certificates:
(i) the amount being distributed to Certificateholders;
(ii) the amount of interest included in such distribution and the
portion thereof attributable to Interest Collections;
(iii) the amount, if any, of any Certificateholders' Interest
Carryover Shortfall included in such distribution (and the amount of interest
thereon);
52
<PAGE>
(iv) the amount, if any, of the remaining Certificate-holders'
Interest Carryover Shortfall after giving effect to such distribution;
(v) the amount, if any, of principal included in such distribution
and the portion thereof attributable to Principal Collections;
(vi) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(vii) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to such distribution;
(viii) the Servicing Fee for such Distribution Date;
(ix) the Certificate Principal Balance after giving effect to such
distribution;
(x) the Specified Reserve Fund Requirement and the amount on
deposit in the Reserve Fund, if any, after giving effect to such distribution;
(xi) the Pool Balance as of the end of the related Monthly
Collection Period;
(xii) the Reserve Fund Interest Transfer Amount and the Reserve Fund
Principal Transfer Amount for such Distribution Date, if any;
(xiii) the number and aggregate principal balance of the Loans which
are delinquent for 30-59 days, 60-89 days and 90 or more days, respectively, as
of the end of the related Monthly Collection Period;
(xiv) the aggregate Liquidation Loss Amount for all Loans that became
Liquidated Loans in the related Monthly Collection Period; and
(xv) the amount of any draws on the Policy.
53
<PAGE>
Each amount set forth pursuant to subclauses (i), (ii), (iii), (iv) and (v)
above shall be expressed as a dollar amount per $1,000 of original principal
balance of Certificate.
SECTION 6.10. Tax Returns. (a) Within thirty days after the end of
-----------
each calendar year, the Trustee shall furnish to each Person who at any time
during such calendar year was a Certificateholder of record and received any
payment thereon (i) a report as to the aggregate of amounts reported pursuant to
clauses (i) through (vii) of Section 6.09 for such calendar year or applicable
------------
portion thereof during which such person was a Certificateholder and (ii) such
information as may be required by the Code and regulations thereunder to enable
such Certificateholders to prepare their Federal and State income tax returns.
The obligation of the Trustee set forth in this Section 6.10 shall be deemed to
have been satisfied to the extent that substantially comparable information
shall be provided by the Servicer pursuant to any requirements of the Code.
[The Trustee shall not be required to furnish information to the Seller as
holder of the Seller's interest in excess amounts, if any, to be distributed to
the Seller.]
(b) The Servicer [at its own expense] shall prepare, or shall cause a
firm of nationally recognized accountants to prepare, any tax returns required
to be filed by the Trust, and the Trustee shall execute and file such returns if
requested to do so by the Servicer. The Trustee, upon request, shall furnish
the Servicer with all such information known to the Trustee as may be reasonably
required in connection with the preparation of all tax returns of the Trust.
[End of Article VI]
54
<PAGE>
ARTICLE VII
The Policy
SECTION 7.01. The Policy. The Servicer and the Seller agree,
----------
simultaneously with the execution and delivery of this Agreement, to cause the
Certificate Insurer to issue the Policy to the Trustee for the benefit of the
Trust in accordance with the terms thereof.
SECTION 7.02. Claims Under Policy. (a)(i) If on any Determination
-------------------
Date the Servicer has reported to the Trustee in the Servicer's Certificate that
the Servicer has determined (A) that for such Monthly Collection Period the
amount to be on deposit in the Interest Distribution Account, including any
Reserve Fund Interest Transfer Amount to be transferred on the related Deposit
Date, is insufficient to provide for the Interest Distributable Amount on such
Distribution Date or the amount to be on deposit in the Principal Distribution
Account, including any Reserve Fund Principal Transfer Amount to be transferred
on the related Deposit Date, is insufficient to provide for the Principal
Distributable Amount on such Distribution Date, then on the next Business Day
the Trustee shall furnish the Certificate Insurer and the Servicer with a
completed notice in the form set forth as Exhibit A to the Policy (the "Notice
------
for Payment"). The Notice for Payment shall specify the amount of the Interest
- -----------
Deficiency Draw Amount and/or the Principal Deficiency Draw Amount and shall
constitute a claim pursuant to the Policy. Upon receipt of any payments on
behalf of the Certificateholders under the Policy, the Trustee shall deposit any
Interest Deficiency Draw Amount in the Interest Distribution Account and deposit
any Principal Deficiency Draw Amount in the Principal Distribution Account.
Such amounts shall be distributed pursuant to Section 6.07.
------------
(ii) If on the Determination Date preceding the Final Distribution
Date the Servicer has reported to the Trustee in the Servicer's Certificate that
the Servicer has determined that an Interest Deficiency will exist or the
Certificate Principal Balance will not be reduced to zero on the Final
Distribution Date after giving effect to the transfer of any amounts to be made
pursuant to Section 6.06(e) on the Deposit Date preceding the Final Distribution
---------------
Date, then no later than 11:00 a.m. Central Standard Time on the next Business
Day the Trustee shall
55
<PAGE>
furnish the Certificate Insurer and the Servicer with a Notice for Payment
specifying the amount of the Interest Deficiency Draw Amount and/or the
Principal Deficiency Draw Amount which shall constitute a claim pursuant to the
Policy. Upon receipt of any payments on behalf of the Certificateholders under
the Policy, the Trustee shall deposit any Interest Deficiency Draw Amount in the
Interest Distribution Account and deposit any Principal Deficiency Draw Amount
in the Principal Distribution Account, and distribute such amounts to
Certificateholders on the related Distribution Date.
(b) The Trustee shall receive, as attorney-in-fact of each
Certificateholder, any payment from the Certificate Insurer and disburse the
same to each Certificateholder, for the purposes and in the respective amounts
required in accordance with the provisions of Section 6.07.
------------
(c) The Trustee shall keep complete and accurate records of the
amount of payments received from the Certificate Insurer and the Certificate
Insurer shall have the right to inspect such records at reasonable times upon
one Business Day's prior notice to the Trustee.
(d) If the payment of an Interest Deficiency Draw Amount or a
Principal Deficiency Draw Amount pursuant to the Policy is voided (a "Preference
----------
Event") under any applicable bankruptcy, insolvency, receivership or similar law
- -------
in an Insolvency Proceeding and, as a result of such a Preference Event, the
Trustee is required to return such voided payment, or any portion of such voided
payment, in its possession made in respect of the Certificates (an "Avoided
-------
Payment"), the Trustee shall furnish to the Certificate Insurer (x) a certified
- -------
copy of a final order of a court exercising jurisdiction in such Insolvency
Proceeding to the effect that the Trustee is required to return any such payment
or portion thereof during the term of the Policy because such payment was voided
under applicable law, with respect to which order the appeal period has expired
without an appeal having been filed (the "Final Order"), (y) an assignment, in
-----------
form reasonably satisfactory to the Certificate Insurer, irrevocably assigning
to the Certificate Insurer all rights and claims of the Trustee relating to or
arising under such Avoided Payment and (z) a Notice for Payment appropriately
completed and executed by the Trustee. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or
56
<PAGE>
trustee in bankruptcy named in the Final Order and not to the Trustee directly
unless the Trustee has previously paid such amounts pursuant to a court order or
otherwise. The Trustee is not permitted to make a claim on the Trust or on any
Certificateholder for payments made to Certificateholders under the Policy which
are characterized as preference payments by any bankruptcy court having
jurisdiction over any bankrupt Obligor unless ordered to do so by such
bankruptcy court.
SECTION 7.03. Surrender of Policy. The Trustee shall surrender the
-------------------
Policy to the Certificate Insurer for cancellation upon its expiration in
accordance with the terms thereof.
SECTION 7.04. Replacement Policy. In the event the rating of the
------------------
Certificate Insurer is downgraded by any Rating Agency such that the rating of
the Certificates is reduced, suspended or withdrawn, the Servicer shall be
permitted, in accordance with the terms of the Insurance Agreement, but shall
not be obligated, to substitute a new certificate insurance policy for the
Policy or may arrange for any other form of credit enhancement; provided,
--------
however, that, in each case, the rating of the Certificates following any such
- -------
substitution shall be the highest rating available for each of the Rating
Agencies and provided further that the Certificate Insurer is reimbursed for all
amounts due under this Agreement and the Insurance Agreement. It shall be a
condition to substitution of any such new certificate insurance policy or other
form of credit enhancement that there be delivered to the Trustee (i) an
Officer's Certificate by the Servicer stating that the conditions to such
substitution set forth in this Section 7.04 (other than in clause (ii)) have
been satisfied and (ii) a legal opinion, acceptable in form to the Trustee, from
counsel to the provider of such certificate insurance policy or other form of
credit enhancement with respect to the enforceability thereof and such other
matters as the Trustee may require. Upon receipt of written notice of any such
substitution from the Servicer and the taking of physical possession of the
replacement certificate insurance policy or other form of credit enhancement,
the Trustee shall, within five (5) Business Days following receipt of such
notice and such taking of physical possession, deliver the Policy marked
"Cancelled" to the Certificate Insurer, and the Certificate Insurer will have no
further liability under the Policy.
[End of Article VII]
57
<PAGE>
ARTICLE VIII
THE CERTIFICATES
SECTION 8.01. The Certificates. Unless otherwise specified in the
----------------
Agreement, the Certificates shall be issued in fully registered form in minimum
denominations of $1,000 and integral multiples thereof, except that one
Certificate may be issued in a different denomination. The Certificates shall
be executed on behalf of the Trust by manual or facsimile signature of an
authorized officer of the Trustee. Certificates bearing the manual or facsimile
signatures of individuals who were, at the time when such signatures shall have
been affixed, authorized to sign on behalf of the Trust shall be validly issued
and entitled to the benefit of the Agreement, notwithstanding that such
individuals or any of them shall have ceased to be so authorized prior to the
authentication and delivery of such Certificates or did not hold such offices at
the date of authentication and delivery of such Certificates.
A transferee of a Certificate shall become a Certificateholder and
shall be entitled to the rights and subject to the obligations of a
Certificateholder hereunder upon such transferee's acceptance of a Certificate
duly registered in such transferee's name pursuant to Section 8.03.
------------
SECTION 8.02. Authentication of Certificates. The Trustee shall
------------------------------
cause the Certificates to be executed on behalf of the Trust, authenticated and
delivered to or upon the written order of the Seller, signed by its chairman of
the board, its president, any vice president, secretary, or assistant treasurer,
without further corporate action by the Seller, in authorized denominations,
pursuant to the Agreement. No Certificate shall entitle its Holder to any
benefit under the Agreement or shall be valid for any purpose unless there shall
appear on such Certificate a certificate of authentication substantially in the
form set forth in Exhibit A, executed by the Trustee by manual signature. Such
---------
authentication shall constitute conclusive evidence that such Certificate shall
have been duly authenticated and delivered hereunder. All Certificates shall be
dated the date of their authentication.
SECTION 8.03. Registration of Transfer and Exchange of Certificates.
-----------------------------------------------------
The Certificate Registrar shall keep or cause to
58
<PAGE>
be kept, at the office or agency maintained pursuant to Section 8.08, a
------------
Certificate Register in which, subject to such reasonable regulations as it may
prescribe, the Trustee shall provide for the registration of Certificates and of
transfers and exchanges of Certificates as herein provided. Unless otherwise
specified in the Agreement, the Trustee shall be the initial Certificate
Registrar.
Upon surrender for registration of transfer of any Certificate at the
Corporate Trust Office, the Trustee shall execute, authenticate and deliver, in
the name of the designated transferee or transferees, one or more new
Certificates in authorized denominations of a like aggregate amount dated the
date of authentication by the Trustee. At the option of a Holder, Certificates
may be exchanged for other Certificates of authorized denominations of a like
aggregate amount upon surrender at the Corporate Trust Office of the
Certificates to be exchanged.
Every Certificate presented or surrendered for registration of
transfer or exchange shall be accompanied by a written instrument of transfer in
form satisfactory to the Trustee and the Certificate Registrar duly executed by
the Holder or such Holder's attorney duly authorized in writing. Each
Certificate surrendered for registration of transfer and exchange shall be
canceled and subsequently disposed of by the Trustee in accordance with its
customary procedures.
No service charge shall be made for any registration of transfer or
exchange of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.
SECTION 8.04. Mutilated, Destroyed, Lost or Stolen Certificates. If
-------------------------------------------------
(a) any mutilated Certificate shall be surrendered to the Certificate Registrar,
or if the Certificate Registrar shall receive evidence to its satisfaction of
the destruction, loss or theft of any Certificate and (b) there shall be
delivered to the Certificate Registrar, the Trustee and (unless an Insurer
Default shall have occurred and be continuing) the Certificate Insurer such
security or indemnity as may be required by them to save each of them harmless,
then in the absence of notice that such Certificate has been acquired by a
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bona fide purchaser, the Trustee on behalf of the Trust shall execute, and the
Trustee shall authenticate and deliver, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Certificate, a new Certificate of like
tenor and denomination. In connection with the issuance of any new Certificate
under this Section, the Trustee and the Certificate Registrar may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection therewith. Any duplicate Certificate issued
pursuant to this Section shall constitute conclusive evidence of ownership in
the Trust, as if originally issued, whether or not the lost, stolen or destroyed
Certificate shall be found at any time.
SECTION 8.05. Persons Deemed Owners. Prior to due presentation of a
---------------------
Certificate for registration of transfer, the Trustee or the Certificate
Registrar may treat the Person in whose name any Certificate shall be registered
as the owner of such Certificate for the purpose of receiving distributions
pursuant to Section 6.07 and for all other purposes whatsoever, and neither the
------------
Trustee, the Certificate Insurer, the Certificate Registrar nor any agent of the
Trustee, Certificate Insurer or Certificate Registrar shall be bound by any
notice to the contrary.
SECTION 8.06. Access to List of Certificateholders' Names and
-----------------------------------------------
Addresses. The Trustee shall furnish or cause to be furnished to the Servicer,
- ---------
and (unless an Insurer Default shall have occurred and be continuing) the
Certificate Insurer, within 15 days after receipt by the Trustee of a request
therefor from such party in writing, a list, in such form as such party may
reasonably require, of the names and addresses of the Certificateholders as of
the most recent Record Date. If three or more Certificateholders, or one or
more Holders of Certificates evidencing in the aggregate not less than 25% of
the Certificate Principal Balance apply in writing to the Trustee, and such
application states that the applicants desire to communicate with other
Certificateholders with respect to their rights under the Agreement or under the
Certificates and such application shall be accompanied by a copy of the
communication that such applicants propose to transmit, then the Trustee shall,
within five Business Days after the receipt for such application, afford such
applicants access during normal business hours to the current list of
Certificateholders. Each Holder, by receiving and holding a Certificate, shall
be deemed to have agreed to hold
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neither the Servicer nor the Trustee accountable by reason of the disclosure of
its name and address, regardless of the source from which such information was
derived.
SECTION 8.07. Maintenance of Office or Agency. The Trustee shall
-------------------------------
maintain in the City of New York, New York an office or offices or agency or
agencies where Certificates may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Trustee in respect of the
Certificates and the Agreement may be served. The Trustee initially designates
its office at ____________________________, _______________________________, New
York, New York _____ as its office for such purposes. The Trustee shall give
prompt written notice to the Servicer and to Certificateholders of any change in
the location of the Certificate Register or any such office or agency.
SECTION 8.08. Book-Entry Certificates. The Certificates may be
-----------------------
issued in the form of one or more typewritten Certificates representing Book-
Entry Certificates, to be delivered by, or on behalf of, the Seller to the
initial Clearing Agency, which, unless otherwise specified in the Agreement,
shall be The Depository Trust Company. In such case, the Certificates delivered
to the Depository Trust Company shall initially be registered on the Certificate
Register in the name of Cede & Co., the nominee of the initial Clearing Agency,
and no Certificate Owner will receive a definitive certificate representing such
Certificate Owner's interest in the Certificates, except as provided in Section
-------
8.10. Unless and until definitive, fully registered Certificates (the
- ----
"Replacement Certificates") have been issued to such Certificate Owners pursuant
- -------------------------
to Section 8.10:
------------
(i) the provisions of this Section shall be in full force and
effect;
(ii) the Seller, the Servicer, the Certificate Insurer, the
Certificate Registrar and the Trustee may deal with the Clearing Agency for all
purposes (including the making of distributions on such Certificates) as the
sole Holder of such Certificates and shall have no obligation to the related
Certificate Owners;
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(iii) to the extent that the provisions of this Section conflict with
any other provisions of this Agreement, the provisions of this Section shall
control;
(iv) the rights of such Certificate Owners shall be exercised only
through the Clearing Agency and shall be limited to those established by law and
agreements between such Certificate Owners and the Clearing Agency and/or the
Clearing Agency Participants. Pursuant to the Depository Agreement, unless and
until Replacement Certificates are issued pursuant to Section 8.10, the initial
------------
Clearing Agency will make book-entry transfers among the Clearing Agency
Participants and receive and transmit distributions of principal and interest on
such Certificates to such Clearing Agency Participants; and
(v) whenever the Agreement requires or permits actions to be taken
based upon instructions or directions of Holders of Certificates evidencing a
specified percentage of the Certificate Principal Balance, the Clearing Agency
shall be deemed to represent such percentage only to the extent that it has
received instructions to such effect from Certificate Owners and/or Clearing
Agency Participants owning or representing, respectively, such required
percentage of the beneficial interest in such Certificates and has delivered
such instructions to the Trustee.
SECTION 8.09. Notices to Clearing Agency. Whenever notice or other
--------------------------
communication to the Certificateholders is required under this Agreement, unless
and until Replacement Certificates shall have been issued to Certificate Owners
pursuant to Section 8.10, the Trustee and the Servicer shall give all such
------------
notices and communications specified herein to be given to Certificate Owners to
the Clearing Agency.
SECTION 8.10. Replacement Certificates. If (i) the Seller advises
------------------------
the Trustee in writing that The Depository Trust Company is no longer willing or
able to discharge properly its responsibilities under the Depository Agreement
and the Seller is unable to locate a qualified successor, (ii) the Seller at its
option advises the Trustee in writing that it elects to terminate the book-entry
system through the Clearing Agency or (iii) after the occurrence of an Event of
Default Certificate Owners having certificates evidencing no less than 51% of
the Certificate Principal Balance together advise the Trustee and the Clearing
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Agency in writing that the continuation of a book-entry system through to the
exclusion of any physical being issued to Certificate Owners is no longer in the
best interests of the Certificate Owners, then the Clearing Agency shall notify
all Certificate Owners and the Trustee of the occurrence of such event and of
the availability of Replacement Certificates to Certificate Owners requesting
the same. Upon surrender to the Trustee of the typewritten Certificates
representing the Book-Entry Certificates by the Clearing Agency, accompanied by
registration instructions, the Trustee shall execute and authenticate the
Replacement Certificates in accordance with the instructions of the Clearing
Agency. None of the Seller, the Certificate Registrar or the Trustee shall be
liable for any delay in delivery of such instructions and may conclusively rely
on, and shall be protected in relying on, such instructions. Upon the issuance
of Replacement Certificates, the Trustee shall recognize the Holders of the
Replacement Certificates as Certificateholders hereunder. The Replacement
Certificates shall be printed, lithographed or engraved or may be produced in
any other manner as is reasonably acceptable to the Trustee, as evidenced by its
execution thereof.
SECTION 8.11. Temporary Certificates. In the event that the
----------------------
Agreement provides that the Certificates are not to be issued in book-entry form
pursuant to Section 8.08, pending the preparation of definitive Certificates,
------------
the Trustee, on behalf of the Trust, may execute, authenticate and deliver,
temporary Certificates that are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Certificates in lieu of which they are issued. If
temporary Certificates are issued, the Transferor will cause definitive
Certificates to be prepared without unreasonable delay. After the preparation
of definitive Certificates, the temporary Certificates shall be exchangeable for
definitive Certificates upon surrender of the temporary Certificates at the
office or agency to be maintained as provided in Section 8.07, without charge to
------------
the Holder. Upon surrender for cancellation of any one or more temporary
Certificates, the Trustee shall execute, authenticate and deliver in exchange
therefor a like principal amount of definitive Certificates in authorized
denominations. Until so exchanged, the temporary Certificates shall in all
respects be entitled to the same benefits under the Agreement as definitive
Certificates.
[End of Article VIII]
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ARTICLE IX
The Seller and Servicer
SECTION 9.01. Representations of the Seller and Servicer. Chevy
------------------------------------------
Chase, in its capacity as Seller and Servicer, makes the following
representations on which the Certificate Insurer shall be deemed to have relied
in executing and delivering the Policy and on which the Trustee shall be deemed
to have relied in accepting the Loans in trust and executing and authenticating
the Certificates. The representations speak as of the execution and delivery of
the Agreement and as of the Closing Date, in the case of the Loans, and shall
survive the sale of the Loans to the Trust.
(i) Chevy Chase is validly existing as a federally chartered
savings bank in good standing under the laws of the United States and has the
corporate power and authority to own its assets and to transact the business in
which it is currently engaged.
(ii) Chevy Chase has the corporate power and authority to make,
execute, deliver and perform this Agreement and all of the transactions
contemplated under this Agreement, and has taken all necessary corporate action
to authorize the execution, delivery and performance of this Agreement. When
executed and delivered, this Agreement will constitute the legal, valid and
binding obligation of Chevy Chase enforceable in accordance with its terms,
except as enforcement of such terms may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, conservatorship, moratorium or other
similar laws now or hereafter in effect affecting the enforcement of creditors'
or obligees' rights generally or the rights of creditors or obligees of
federally chartered savings banks, the deposits of which are insured by the
SAIF, and except as such enforceability may be limited by general principles of
equity (whether considered in a proceeding at law or in equity).
(iii) Chevy Chase is not required to obtain the consent of any other
party or any consent, license, approval or authorization from, or registration
or declaration with, any governmental authority, bureau or agency in connection
with the execution, delivery, performance, validity or enforceability of this
Agreement, except for any such consent, license, approval or
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authorization, or registration or declaration, as shall have been obtained or
filed, as the case may be, prior to the Closing Date.
(iv) The execution, delivery and performance of this Agreement by
Chevy Chase will not violate any provision of any existing law or regulation or
any order or decree of any court applicable to Chevy Chase or any provision of
the charter or bylaws of Chevy Chase, or constitute a material breach of any
mortgage, indenture, contract or other agreement to which Chevy Chase is a party
or by which Chevy Chase may be bound.
(v) No litigation or administrative proceeding of or before any
court, tribunal or governmental body is currently pending, or to the knowledge
of Chevy Chase threatened, against Chevy Chase or any of its properties or with
respect to this Agreement or the Certificates which could have a material
adverse effect on the transactions contemplated by this Agreement.
(vi) Chevy Chase has fully complied, and will continue to maintain
full compliance, with the provisions of Section 13(e) of the Federal Deposit
Insurance Act, as amended (12 U.S.C. (S) 1823(e)).
Upon discovery by the Seller, the Servicer, the Certificate Insurer or the
Trustee of a breach of any of the representations and warranties in this Section
9.01 which materially and adversely affects the interests of the
Certificateholders, such party shall give prompt written notice of such breach
to the other parties. Within sixty (60) days after its discovery or receipt of
notice of any such breach, or, with the prior written consent of an Officer of
the Trustee and the Certificate Insurer, within such longer period specified in
such consent, the Servicer shall cure such breach in all material respects.
SECTION 9.02. Liability of the Servicer. The Servicer shall be
-------------------------
liable in accordance herewith only to the extent of the obligations specifically
imposed upon and undertaken by the Servicer herein.
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SECTION 9.03. Merger or Consolidation of, or Assumption of the
------------------------------------------------
Obligations of, the Servicer or Seller. Any corporation into which the Servicer
- --------------------------------------
or Seller may be merged or consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Servicer or Seller shall be a
party, or any corporation succeeding to the business of the Servicer or Seller
by any sale or transfer by the Servicer or Seller of all or substantially all of
its property and assets to such corporation, shall be the successor of the
Servicer or Seller hereunder, and shall execute and deliver to the Trustee and
the Certificate Insurer an agreement in form reasonably satisfactory to the
Trustee and the Certificate Insurer which contains an assumption by such
successor entity of the due and punctual performance and observance of each
covenant and condition to be performed or observed by the Servicer or Seller
under this Agreement.
SECTION 9.04. Limitation on Liability of the Servicer and Others.
--------------------------------------------------
(a) No recourse under or upon any obligation or covenant of this Agreement, or
of any Certificate, or for any claim based thereon or otherwise in respect
thereof, shall be had against any incorporator, shareholder, officer or
director, as such, past, present or future, of the Servicer, either directly or
through the Servicer, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise other than
for the willful misconduct or bad faith of any such person; it being expressly
understood that this Agreement and the obligations issued hereunder are solely
corporate obligations, and that no such personal liability whatsoever shall
attach to, or is or shall be incurred by the incorporators, shareholders,
officers or directors, as such, of the Servicer or of any successor corporation,
or any of them, because of the issuance of the Certificates, or under or by
reason of the obligations, covenants or agreements contained in this Agreement
or in any of the Certificates or implied therefrom; and that any and all such
personal liability, either at common law or in equity or by constitution or
statute, of, and any and all such rights and claims against, every such
incorporator, shareholder, officer or director, as such, because of the issuance
of the Certificates, or under or by reason of the obligations or covenants
contained in this Agreement or in any of the Certificates or implied therefrom,
are hereby expressly waived and released as a condition of, and as a
consideration
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for, the execution of this Agreement and the issuance of the Certificates. The
Servicer and any director, officer, employee or agent of the Servicer may rely
in good faith on any document of any kind prima facie properly executed and
-----------
submitted by any Person respecting any matters arising hereunder.
(b) The Servicer shall not be under any liability to the Trust or the
Certificateholders for taking any action or for refraining from taking any
action pursuant to this Agreement, or for errors in judgment; provided, however,
-------- -------
that this provision shall not protect the Servicer against any liability which
would otherwise be imposed upon the Servicer by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties as Servicer
hereunder. The Servicer shall not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its duties to
service the Loans in accordance with this Agreement which in its reasonable
opinion may involve it in any expense or liability; provided, however, that the
-------- -------
Servicer, in its sole discretion, may undertake any such action which it may
deem necessary or desirable in respect of this Agreement, and the rights and
duties of the parties hereto and the interests of the Certificateholders
hereunder. In such event, the reasonable legal expenses and costs of such
action and any liability resulting therefrom shall be expenses, costs and
liabilities of the Trust, and the Servicer shall be entitled to be reimbursed
therefor pursuant to Section 6.05. The Servicer's right to reimbursement
------------
pursuant to this Section 9.04(b) shall survive any resignation or termination of
the Servicer pursuant to Section 9.06 or Section 10.01 with respect to any
------------ -------------
losses, expenses, costs or liabilities arising prior to such resignation or
termination, or arising from events that occurred prior to such resignation or
termination.
(c) The Servicer and any director, officer, employee or agent of the
Servicer shall be indemnified by the Trust and held harmless to the extent
provided herein against any loss, liability or expense incurred in connection
with any legal action relating to this Agreement or the Certificates, other than
any loss, liability or expense related to any specific Loan or Loans (except as
any such loss, liability or expense shall be otherwise reimbursable pursuant to
this Agreement) and any loss, liability or expense incurred by the Servicer by
reason of willful misfeasance, bad faith or gross negligence by the Servicer in
the
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performance of its duties hereunder or by reason of its reckless disregard of
its obligations and duties hereunder. The Servicer and any director, officer,
employee or agent of the Servicer shall be entitled to such indemnity pursuant
to Section 6.05. The Servicer's right to indemnity pursuant to this Section
------------
9.04(c) shall survive any resignation or termination of the Servicer pursuant to
Section 9.06 or Section 10.01 with respect to any losses, expenses, costs or
- ------------ -------------
liabilities arising prior to such resignation or termination, or arising from
events that occurred prior to such resignation or termination. Any claims under
this Section 9.04(c) by or on behalf of the Certificateholders or the Trust
shall be made only against the Servicer who shall be liable to the extent
provided herein with respect to its own acts and omissions as well as the acts
and omissions of its directors, officers, employees and agents.
SECTION 9.05. Delegation of Duties. In the ordinary course of
--------------------
business the Servicer at any time may, with the consent of the Certificate
Insurer, delegate any of its duties hereunder to any Person, including any of
its affiliates, who agrees to conduct such duties in accordance with standards
comparable to those with which the Servicer complies pursuant to Section 5.01.
------------
Such delegation shall not relieve the Servicer of its liabilities and
responsibilities with respect to such duties and shall not constitute a
resignation within the meaning of Section 9.06. The Servicer shall provide each
------------
Rating Agency, the Trustee and the Certificate Insurer with written notice prior
to the delegation of any of its duties to any Person other than any of the
Servicer's affiliates or their respective successors and assigns.
SECTION 9.06. Servicer Not to Resign. Subject to the provisions of
----------------------
Section 9.03 and the last sentence of this paragraph, the Servicer shall not
- ------------
resign from the obligations and duties hereby imposed on it except upon
determination that the performance of its obligations or duties hereunder is no
longer permissible under applicable law or is in material conflict by reason of
applicable law with any other activities carried on by it or its subsidiaries or
other affiliates, the other activities of the Servicer so causing such a
conflict being of a type and nature carried on by the Servicer or such
subsidiaries or other affiliates at the date of this Agreement.
Any resignation under this Section 9.06 shall not relieve the Servicer
of responsibility for any of the obligations
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specified in Section 10.01 and Section 10.02 as obligations that survive the
------------- -------------
resignation or termination of the Servicer; provided, however, that no
-------- -------
resignation by the Servicer shall become effective until the Trustee or a
successor servicer shall have assumed the responsibilities and obligations of
the Servicer in accordance with Section 10.02. The Servicer shall have no
-------------
claim (whether by subrogation or otherwise) or other action against any
Certificateholder for any amounts paid by the Servicer pursuant to any provision
of this Agreement. Any determination permitting the resignation of the Servicer
shall be evidenced by an Opinion of Counsel to such effect delivered to the
Trustee and the Certificate Insurer.
SECTION 9.07. Limitation on Liability of Certain Persons. Except as
------------------------------------------
provided in Section 9.08 hereof, no recourse under or upon any obligation or
------------
covenant of this Agreement, or of any Certificate, or for any claim based
thereon or otherwise in respect thereof, shall be had against any incorporator,
shareholder, officer or director, as such, past, present or future, of the
Seller or of any successor corporation, either directly or through the Seller,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise other than for the willful
misconduct or bad faith of any such person; it being expressly understood that
this Agreement and the obligations issued hereunder are solely corporate
obligations, and that no such personal liability whatever shall attach to, or is
or shall be incurred by the incorporators, shareholders, officers or directors,
as such, of the Seller, or any of them, because of the issuance of the
Certificates, or under or by reason of the obligations, covenants or agreements
contained in this Agreement or in any of the Certificates or implied therefrom;
and that any and all such personal liability, either at common law or in equity
or by constitution or statute, of, and any and all such rights and claims
against, every such incorporator, shareholder, officer or director, as such,
because of the issuance of the Certificates, or under or by reason of the
obligations, covenants or agreements contained in this Agreement or in any of
the Certificates or implied therefrom, are hereby expressly waived and released
as a condition of, and as a consideration for, the execution of this Agreement
and the issuance of the Certificates. The Seller and any director, officer,
employee or agent of the Seller may rely in good faith on any document of any
kind prima
-----
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<PAGE>
facie properly executed and submitted by any Person respecting any matters
- -----
arising hereunder.
SECTION 9.08. Liability of Seller. Notwithstanding Section 9.07 (and
------------------- ------------
notwithstanding any other provisions of this Agreement) the Seller by entering
into this Agreement, by its acceptance thereof, agrees to be liable, directly to
the Trustee or any other injured party, for the entire amount of any losses,
claims, damages or liabilities (other than those that would be incurred by a
Certificateholder as an investor in the Certificates if the Certificates were
notes secured by the Loans including, but not limited to, as a result of the
performance of the Loans, market fluctuations, a shortfall or failure to make
payment under the Policy or other similar market or investment risks associated
with ownership of the Certificates) arising out of or based on the arrangement
created by this Agreement or the actions of the Servicer taken pursuant hereto
including those due to environmental liabilities relating to the Loans (to the
extent that, if the Trust assets at the time the claim is made were used to pay
in full all outstanding Certificates, the Trust assets that would remain after
the Certificateholders were paid in full would be insufficient to pay any such
losses, claims, damages or liabilities) as though this Agreement created a
partnership under the New York Revised Uniform Partnership Act in which the
Seller was a general partner. The rights created by this Section 9.08 shall run
directly to and be enforceable by the injured party subject to the limitations
hereof.
SECTION 9.09. Seller May Own Certificates. The Seller and any Person
---------------------------
controlling, controlled by or under common control with the Seller may in its
individual or any other capacity become the owner or pledgee of Certificates
with these and rights as it would have if it were not the Seller or such an
affiliate thereof, except as otherwise provided in the definition of the term
"Certificateholder" specified in Section 1.01. Certificates so owned by or
------------
pledged to the Seller or such controlling or commonly controlled Person shall
have an equal and proportionate benefit under the provisions of this Agreement,
without preference, priority or distinction as among all of the Certificates,
except as otherwise provided in the definition of the term "Certificateholder"
specified in Section 1.01.
------------
[End of Article IX]
70
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ARTICLE X
Default
SECTION 10.01. Events of Default. If any one of the following events
-----------------
("Events of Default") shall occur and be continuing:
-----------------
(i) any failure by the Servicer to deposit into the Collection
Account any deposit required to be made under the terms of this Agreement which
continues unremedied for a period of five (5) Business Days after the date upon
which written notice of such failure shall have been given to the Servicer and
the Certificate Insurer by the Trustee or to the Servicer and the Trustee by the
Certificate Insurer or to the Servicer, the Trustee and the Certificate Insurer
by the Holders of Certificates evidencing in the aggregate not less than 51% of
the Certificate Principal Balance; or
(ii) failure on the part of the Servicer duly to observe or perform
in any material respect any other covenants or agreements of the Servicer set
forth in the Insurance Agreement or in this Agreement, which breach (A)
materially and adversely affect the interests of Certificateholders or the
Certificate Insurer and (B) continues unremedied for a period of sixty (60) days
after the date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer and the Certificate Insurer by
the Trustee, or to the Servicer and the Trustee by the Certificate Insurer, or
to the Servicer, the Certificate Insurer and the Trustee by the Holders of
Certificates evidencing in the aggregate not less than 51% of the Certificate
Principal Balance; or
(iii) the entry against the Servicer of a decree or order by a court
or agency or supervisory authority having jurisdiction in the premises for the
appointment of a conservator, receiver or liquidator in any insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings, or for the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period of
one hundred twenty (120) days; or
(iv) the consent by the Servicer to the appointment of a conservator
or receiver or liquidator in any insolvency,
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readjustment of debt, marshaling of assets and liabilities or similar
proceedings of or relating to the Servicer or of or relating to substantially
all of its property; or any action by the Servicer to admit in writing its
inability to pay its debts generally as they become due, to file a petition to
take advantage of any applicable insolvency or reorganization statute or to make
an assignment for the benefit of its creditors;
then, and in each and every such case, so long as an Event of Default shall not
have been remedied by the Servicer, either the Certificate Insurer (so long as
no Insurer Default has occurred and is continuing) or the Trustee or Holders of
Certificates evidencing not less than 51% of the Certificate Principal Balance
with the consent of the Certificate Insurer (if no Insurer Default has occurred
and is continuing) by notice then given in writing to the Servicer (and to the
Trustee if given by the Certificate Insurer or the Certificateholders), may, and
at the direction of the Certificate Insurer (so long as no Insurer Default has
occurred and is continuing) or the Holders of Certificates evidencing in the
aggregate no less than 51% of the aggregate Certificate Principal Balance, shall
terminate all of the rights and obligations of the Servicer as servicer under
this Agreement.
Any written notice of termination provided to the Servicer pursuant to
this Section 10.01 shall be simultaneously provided to the Certificate Insurer
and the Rating Agencies. On or after the receipt by the Servicer of such
written notice, all authority and power of, and all benefits accruing to, the
Servicer under this Agreement, whether with respect to the Certificates or the
Loans or otherwise, shall pass to and be vested in the Trustee or such successor
Servicer as may be appointed under Section 10.02 pursuant to and under this
-------------
Section 10.01; and, without limitation, the Trustee is hereby authorized and
empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact
or otherwise, any and all documents and other instruments, and to do or
accomplish all other acts or things necessary or appropriate to effect the
purposes of such notice of termination, whether to complete the transfer and
endorsement of the Loans and related documents, or otherwise. The predecessor
Servicer shall cooperate with the successor Servicer and the Trustee in
effecting the termination of the responsibilities and rights of the Servicer
hereunder, including, without limitation, the transfer to the successor Servicer
for the administration by
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<PAGE>
it of all cash amounts that shall at the time be owned by the predecessor
Servicer for deposit, or that shall thereafter be received by the Servicer with
respect to the Loans.
No Holder of Certificates will have any right under this Agreement to
institute any proceeding in its name with respect to this Agreement unless such
holder previously has given to the Trustee and the Certificate Insurer written
notice of default and unless Holders of Certificates evidencing in the aggregate
not less than 25% of the Certificate Principal Balance with the consent of the
Certificate Insurer have made written request upon the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity, and the Trustee for 60 days has neglected or refused to
institute any such proceeding. The Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by this Agreement or to make
any investigation of matters arising hereunder or to institute, conduct or
defend any litigation hereunder or in relation hereto at the request, order or
direction of any of the Holders of Certificates or the Certificate Insurer
covered by this Agreement, unless such Holders of Certificates or the
Certificate Insurer have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities that may be incurred therein or
thereby.
SECTION 10.02. Trustee to Act; Appointment of Successor. (a)
----------------------------------------
Upon the Servicer's receipt of notice of termination pursuant to Section 10.01
-------------
or the Servicer's resignation in accordance with the terms of Section 9.06, the
------------
Trustee shall be the successor in all respects to the Servicer in its capacity
as servicer under this Agreement and the transactions set forth or provided for
herein and shall be subject to all the responsibilities, duties and liabilities
relating thereto placed on the predecessor Servicer by the terms and provisions
hereof; provided, however, that the responsibilities and duties of the
-------- -------
predecessor Servicer with respect to the removal of Loans pursuant to Section
-------
4.01 shall not terminate with regard to actions taken prior to the appointment
- ----
of the successor Servicer. As compensation therefor, the Trustee shall be
entitled to the Servicing Fee as compensation. Notwithstanding the above, if
the Trustee is unable or unwilling to act as successor Servicer, the Certificate
Insurer shall appoint a successor Servicer. If an Insurer
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Default shall have occurred and is continuing, or the Certificate Insurer fails
to make such appointment within 60 days after receiving notice from the Trustee
that it is unable or unwilling to act as Servicer, the Trustee shall petition a
court of competent jurisdiction to appoint any established housing and home
finance institution having a net worth of not less than $10,000,000 as the
successor to the predecessor Servicer hereunder. In connection with such
appointment and assumption, the Trustee may make such arrangements for the
compensation of such successor out of payments on Loans as it and such successor
shall agree, which in no event shall be greater than 1.50%. The Trustee and
such successor shall take such action, consistent with this Agreement, as shall
be necessary to effectuate any such succession (including, without limitation,
the transfer or replacement of hazard insurance required pursuant to Section
-------
5.03 hereof). Any successor Servicer shall execute and deliver to the
- ----
Certificate Insurer an undertaking to be bound by the terms of the Insurance
Agreement in the form attached as Exhibit I.
---------
(b) Any successor Servicer, including the Trustee during the term of
its service as Servicer, shall maintain in force (i) a policy or policies of
insurance covering errors and omissions in the performance of its obligations as
Servicer hereunder, and (ii) a fidelity bond in respect of its officers,
employees and agents to the same extent as the Servicer is so required pursuant
to Section 5.10.
------------
SECTION 10.03. Notification to Certificateholders. Upon any
----------------------------------
termination or appointment of a successor to the Servicer pursuant to this
Article X, the Trustee shall give prompt written notice thereof to
Certificateholders at their respective addresses appearing in the Certificate
Register and to the Certificate Insurer and the Rating Agencies.
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SECTION 10.04. Waiver of Past Defaults. So long as no Insurer
-----------------------
Default shall have occurred and be continuing, the Certificate Insurer (or, if
an Insurer Default shall have occurred and be continuing, the Holders of
Certificates evidencing in the aggregate not less than 51% of the Certificate
Principal Balance) may, on behalf of all Holders of Certificates, waive any
default by the Servicer in the performance of its obligations hereunder and its
consequences by the Servicer or the Seller. Upon any such waiver of a past
default, such default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been remedied for every purpose of the
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right consequent thereon.
[End of Article X]
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ARTICLE XI
The Trustee
SECTION 11.01. Duties of Trustee. (a) If an Event of Default has
-----------------
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by the Agreement and use the same degree of care and skill in their
exercise as a prudent person would exercise or use under the circumstances in
the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in the Agreement and no implied covenants
or obligations shall be read into the Agreement against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of the Agreement; provided, however,
that the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of the Agreement.
(c) The Trustee shall take and maintain custody of the Loan Schedule
included as an exhibit to the Agreement and shall retain all Servicer's
Certificates identifying Loans that are repurchased by the Seller or purchased
by the Servicer, Liquidated Loans, and Defective Loans which have been replaced
by Eligible Substitute Loans.
(d) The Trustee shall not be liable with respect to any action taken,
suffered or omitted to be taken in good faith in accordance with the Agreement
or at the direction of the Certificate Insurer or at the direction of Holders of
Certificates evidencing in the aggregate not less than 25% of the Certificate
Principal Balance relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred upon the Trustee under the Agreement;
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(e) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of clause (d) of this
Section;
(ii) the Trustee shall not be liable for any error of judgment made
in good faith by a Trustee Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction received by
it pursuant to the Agreement.
(f) No provision of the Agreement shall require the Trustee to expend
or risk its own funds or otherwise incur financial liability in the performance
of any of its duties hereunder or in the exercise of any of its rights or
powers, if it shall have reasonable grounds to believe that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
SECTION 11.02. Certain Matters Affecting Trustee. Except as
---------------------------------
otherwise provided in Section 11.01:
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in any such document.
(b) The Trustee may consult with counsel, and the advice or opinion
of counsel with respect to legal matters or relating to the Agreement or the
Certificates shall be full and complete authorization and protection from
liability in respect of any action taken, suffered or omitted by it under the
Agreement in good faith and in accordance with such advice or opinion of such
counsel.
(c) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Agreement, or to institute, conduct or
defend any litigation under the Agreement at the request, order or direction of
the
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Certificate Insurer or any of the Certificateholders pursuant to the provisions
of the Agreement, unless the Certificate Insurer or such Certificateholders, as
the case may be, shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred
therein or thereby.
(d) The Trustee shall not be liable for any action taken, suffered or
omitted by it in good faith which it believes to be authorized or within its
rights or powers conferred upon it by the Agreement; provided, that such conduct
does not constitute willful misconduct, bad faith or negligence on the part of
the Trustee.
(e) The Trustee may execute any of the trusts or powers or perform
any duties hereunder either directly or by or through agents or attorneys or a
custodian, and the Trustee shall not be responsible for any misconduct or
negligence of any such agent, attorney or custodian appointed with due care by
it hereunder.
SECTION 11.03. Trustee Not Liable for Certificates or Loans. The
--------------------------------------------
recitals contained herein and in the Certificates (other than the certificate of
authentication on the Certificates) shall be taken as the statements of the
Seller or the Servicer, as the case may be, and the Trustee assumes no
responsibility for the correctness thereof. The Trustee shall make no
representations as to the validity or sufficiency of the Agreement or of the
Certificates (other than the certificate of authentication on the Certificates),
or of any Loan or related document. The Trustee shall at no time have any
responsibility or liability for or with respect to any offering materials used
in connection with the sale of the Certificates, the legality, validity and
enforceability of any Loan, or the perfection and priority of any security
interest created by any Loan in any Mortgaged Property or the maintenance of any
such perfection and priority, or for or with respect to the efficacy of the
Trust, the representations, warranties and covenants of the Trust or its ability
to generate the payments to be distributed to Certificateholders under the
Agreement, including, without limitation: the existence, condition and ownership
of any Mortgaged Property; the existence and enforceability of any insurance
thereon; the existence and contents of any Loan or any computer or other record
thereof; the validity of the assignment of any Loan to the Trust or of any
intervening assignment; the
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completeness of any Loan; the performance or enforcement of any Loan; the
compliance by the Seller or the Servicer with any covenant, warranty or
representation made under the Agreement or in any related document and the
accuracy of any such covenant, warranty or representation or any action of the
Servicer taken in the name of the Trustee.
SECTION 11.04. Trustee May Own Certificates. The Trustee in its
----------------------------
individual or any other capacity may become the owner or pledgee of Certificates
and may deal with the Seller and the Servicer in banking transactions with the
same rights as it would have if it were not Trustee.
SECTION 11.05. Trustee's Fees and Expenses. The Trustee shall be
---------------------------
entitled to receive the Trustee's Fee allocated to it pursuant to Section 6.06
------------
for all services rendered by it in the execution of the trust created by the
Agreement and in the exercise and performance of any of the Trustee's powers and
duties under the Agreement. The Trustee's Fee shall be the only fee payable to
the Trustee for its services as Trustee, provided that the Trustee shall be
entitled to their out-of-pocket expenses in accordance with the Agreement. The
Trustee shall be entitled to be reimbursed by the Servicer for its reasonable
expenses under the Agreement, including the reasonable compensation, expenses
and disbursements of such agents, representatives, experts and counsel as the
Trustee may employ in connection with the exercise and performance of its rights
and duties under the Agreement.
SECTION 11.06. Eligibility Requirements for Trustee. The Trustee
------------------------------------
shall at all times be a corporation or association having an office in the same
state as the location of the Corporate Trust Office; organized and doing
business under the laws of any state or the United States of America; authorized
under any laws to exercise corporate trust powers; having a combined capital and
surplus of at least $10,000,000 and subject to supervision or examination by
federal or state authorities; and (so long as an Insurer Default shall not have
occurred and be continuing) satisfactory to the Certificate Insurer, and having
(or having a parent that has) a rating of at least Baa3 by Moody's. If such
corporation shall publish reports of condition at least annually pursuant to law
or to the requirements of the aforesaid supervising or examining authority, then
for the purpose of this Section, the combined capital and surplus of such
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<PAGE>
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. In case at any time the
Trustee shall cease to be eligible in accordance with the provisions of this
Section, the Trustee shall resign immediately in the manner and with the effect
specified in Section 11.07.
-------------
SECTION 11.07. Resignation or Removal of Trustee. The Trustee may at
---------------------------------
any time resign and be discharged from the trusts hereby created by giving
written notice thereof to the Servicer and the Certificate Insurer. Upon
receiving such notice of resignation, the Servicer shall promptly appoint a
successor Trustee (consented to and approved in writing by the Certificate
Insurer, such consent not to be unreasonably withheld) by written instrument, in
duplicate, one copy of which instrument shall be delivered to the resigning
Trustee and one copy to the successor Trustee. If no successor Trustee shall
have been so appointed and have accepted appointment within 30 days after the
giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
If at any time the Trustee shall cease to be eligible in accordance
with the provisions of Section 11.06 and shall fail to resign after written
-------------
request therefor by the Servicer or the Certificate Insurer, or if at any time
the Trustee shall be legally unable to act, or shall be adjudged bankrupt or
insolvent, or a receiver of the Trustee or of its property shall be appointed,
or any public officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation, then the Servicer or the Certificate Insurer may remove the
Trustee. If the Servicer or the Certificate Insurer shall remove the Trustee
under the authority of the immediately preceding sentence, the Servicer shall
(so long as an Insurer Default shall not have occurred and be continuing) with
the written consent of the Certificate Insurer, or (unless an Insurer Default
shall have occurred and be continuing) at the written request of the Certificate
Insurer, or the Certificate Insurer shall, promptly appoint a successor Trustee
(which successor Trustee, if appointed by the Certificate Insurer, shall be
subject to the prior written consent of the Servicer, which consent shall not be
unreasonably withheld) by written instrument, in duplicate, one copy of which
instrument shall be delivered to the outgoing Trustee so removed and one
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<PAGE>
copy to the successor Trustee, and the Servicer shall pay all fees and expenses
owed to the outgoing Trustee. Any successor trustee shall (so long as an
Insurer Default shall not have occurred and be continuing) be acceptable to the
Certificate Insurer.
Any resignation or removal of the Trustee and appointment of a
successor Trustee pursuant to any of the provisions of this Section shall not
become effective until acceptance of appointment by the successor Trustee
pursuant to Section 11.08 and payment of all fees and expenses owed to the
-------------
outgoing Trustee. The Servicer shall provide notice of such resignation or
removal of the Trustee to each of the Rating Agencies.
SECTION 11.08. Successor Trustee. Any successor Trustee appointed
-----------------
pursuant to Section 11.07 shall execute, acknowledge and deliver to the Servicer
-------------
and the Certificate Insurer and to its predecessor Trustee an instrument
accepting such appointment under the Agreement as Trustee and thereupon the
resignation or removal of the predecessor Trustee shall become effective and
such successor Trustee, without any further act, deed or conveyance, shall
become fully vested with all the rights, powers, duties and obligations of its
predecessor under the Agreement, with like effect as if originally named as
Trustee. The predecessor Trustee shall upon payment of its fees and expenses
deliver to the successor Trustee all documents and statements and monies held by
it under the Agreement; and the Servicer and the predecessor Trustee shall
execute and deliver such instruments and do such other things as may reasonably
be required for fully and certainly vesting and confirming in the successor
Trustee all such rights, powers, duties and obligations.
No successor Trustee shall accept appointment as provided in this
Section unless at the time of such acceptance such successor Trustee shall be
eligible pursuant to Section 11.06.
-------------
Upon acceptance of appointment by a successor Trustee pursuant to this
Section, the Servicer shall mail notice thereof to all Certificateholders, the
Certificate Insurer and the Rating Agencies. If the Servicer shall fail to mail
such notice within 10 days after acceptance of appointment by the successor
Trustee,
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the successor Trustee shall cause such notice to be mailed at the expense of the
Servicer.
SECTION 11.09. Merger or Consolidation of Trustee. Any corporation
----------------------------------
into which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be eligible pursuant to Section 11.06, without the execution
-------------
or filing of any instrument or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding. The Trustee shall mail
notice of any such merger or consolidation to the Rating Agencies and the
Certificate Insurer.
SECTION 11.10. Appointment of Co-Trustee or Separate Trustee.
---------------------------------------------
Notwithstanding any other provisions of the Agreement, at any time, for the
purpose of meeting any legal requirements of any jurisdiction in which any part
of the Trust or any Mortgaged Property is located, the Servicer, the Certificate
Insurer (provided an Insurer Default shall not have occurred and be continuing)
and the Trustee shall have the power and shall execute and deliver all
instruments to appoint one or more Persons approved by the Trustee to act as co-
trustee, jointly with the Trustee, or separate trustee or separate trustees, of
all or any part of the Trust, and to vest in such Person, in such capacity and
for the benefit of the Certificateholders, such title to the Trust or any part
thereof and, subject to the other provisions of this Section, such powers,
duties, obligations, rights, and trusts as the Servicer, the Certificate Insurer
and the Trustee may consider necessary or desirable. If the Servicer and the
Certificate Insurer shall not have joined in (or rejected the entity named in
the request) such appointment within 15 days after the receipt by it of a
request so to do, the Trustee alone shall have the power to make such
appointment. No co-trustee or separate trustee under the Agreement shall be
required to meet the terms of eligibility as a successor Trustee pursuant to
Section 11.06 and no notice of the appointment of any co-trustee or separate
- -------------
trustee shall be required pursuant to Section 11.08.
-------------
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Each separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) All rights, powers, duties and obligations conferred or imposed
upon any such separate trustee or co-trustee shall be conferred upon and
exercised or performed by the Trustee and such separate trustee or co-trustee
jointly (it being understood that such separate trustee or co-trustee is not
authorized to act separately without the Trustee joining in such act), except to
the extent that under any law of any jurisdiction in which any particular act or
acts are to be performed, the Trustee shall be incompetent or unqualified to
perform such act or acts, in which event such rights, powers, duties and
obligations (including the holding of title to the Trust or any portion thereof
in any such jurisdiction) shall be exercised and performed singly by such
separate trustee or co-trustee, but solely at the direction of the Trustee;
(ii) No trustee under the Agreement shall be personally liable by
reason of any act or omission of any other trustee under the Agreement; and
(iii) Provided no Insurer Default shall have occurred and be
continuing, the Certificate Insurer may, and, in the event an Insurer Default
shall have occurred and be continuing, then, the Servicer and the Trustee acting
jointly may, at any time accept the resignation of or remove any separate
trustee or co-trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to the Agreement and the conditions
of this Article. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Trustee or separately, as
may be provided therein, subject to all the provisions of the Agreement,
specifically including every provision of the Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Each
such instrument shall be filed with the Trustee and a copy thereof given to the
Servicer.
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Any separate trustee or co-trustee may at any time appoint the Trustee
its agent or attorney-in-fact with full power and authority, to the extent not
prohibited by law, to do any lawful act under or in respect of the Agreement on
its behalf and in its name. If any separate trustee or co-trustee shall die,
become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor co-trustee or separate trustee.
SECTION 11.11. Representations and Warranties of Trustee. The
-----------------------------------------
Trustee shall make the following representations and warranties on which the
Seller and Certificateholders shall be deemed to rely:
(i) The Trustee is a national banking association duly organized,
validly existing and in good standing under the laws of its place of
organization.
(ii) The Trustee has full corporate power, authority and legal right
to execute and deliver, and to perform its obligations under, the Agreement as
Trustee, and shall have taken all necessary action to authorize the execution
and delivery of, and the performance of its obligations under, the Agreement.
(iii) The Agreement shall have been duly executed and delivered by
the Trustee.
SECTION 11.12. No Bankruptcy Petition. The Trustee, by entering into
----------------------
the Agreement, and each Certificateholder, by accepting a Certificate, hereby
covenant and agree that they will not at any time, prior to the date that is one
year and one day after the termination of the Agreement, institute against, or
join any other Person in instituting against, the Trust any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings, or other
similar proceedings under any federal or state bankruptcy or similar law in
connection with the Certificates or the Agreement.
SECTION 11.13. Trustee's Certificate. On or as soon as practicable
---------------------
after each Record Date as of which Loans shall be assigned to the Seller or the
Servicer pursuant to Section 11.14, the Trustee shall execute a Trustee's
-------------
Certificate (in the form of
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Exhibit E-1 or Exhibit E-2, as applicable), based on the information contained
- ----------- -----------
in the Servicer's Certificate for the related Monthly Collection Period, amounts
deposited to the Collection Account and notices received pursuant to the
Agreement, identifying the Loans repurchased by to the Seller or Loans for which
Eligible Substitute Loans have been delivered by the Seller pursuant to Section
-------
3.02 Section 4.01 or Section 5.01(d), or purchased by the Servicer or Loans for
- ---- ------------ ---------------
which Eligible Substitute Loans have been delivered by the Servicer pursuant to
Section 15.01, during such Monthly Collection Period, and shall deliver such
- -------------
Trustee's Certificate, accompanied by a copy of the Servicer's Certificate for
such Monthly Collection Period, to the Seller or the Servicer, as applicable.
The Trustee's Certificate submitted with respect to such Distribution Date shall
operate, as of such Distribution Date, as an assignment, without recourse,
representation or warranty, to the Seller or the Servicer, as applicable, of all
the Trustee's right, title and interest in and to any such Loan repurchased by
the Seller or purchased by the Servicer or any Loan for which an Eligible
Substitute Loan has been delivered and to the other property conveyed to the
Trust with respect thereto, and all security and documents relating thereto,
such assignment being an assignment outright and not for security.
SECTION 11.14. Trustee's Assignment of Loans. With respect to all
-----------------------------
Loans repurchased by the Seller or Loans for which Eligible Substitute Loans
have been delivered by the Seller pursuant to Section 3.02 or Section 4.01 or
------------ ------------
repurchased by the Seller pursuant to Section 5.01(d), or purchased by the
---------------
Servicer pursuant to Section 5.01, the Trustee shall by a Trustee's Certificate
------------
(in the form of Exhibit E-1 or Exhibit E-2, as applicable) assign, without
----------- -----------
recourse, representation or warranty, to the Seller or the Servicer, as
applicable, all the Trustee's right, title and interest in and to any such Loan
and the other property conveyed to the Trust with respect thereto, and all
security and documents relating thereto, such assignment being an assignment
outright and not for security.
SECTION 11.15. Appointment of Paying Agent. The Trustee is empowered
---------------------------
to appoint a Paying Agent for the purpose of making distributions to
Certificateholders pursuant to Section 16.06. Any Paying Agent appointed
-------------
hereunder must be approved by the Certificate Insurer and satisfy the
eligibility requirements for the Trustee as set forth in Section 11.06, and if
-------------
such Paying
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<PAGE>
Agent subsequently shall fail to satisfy such eligibility requirements, then,
unless such Paying Agent shall promptly resign as such, the Trustee, if the
Trustee has been notified in writing or otherwise has actual knowledge of such
failure, shall terminate the appointment of such Paying Agent. The Trustee
hereby appoints itself as Paying Agent.
The Trustee shall cause such Paying Agent other than itself to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee that such Paying Agent shall hold all sums held by it for the
payment to Certificateholders in trust for the benefit of the
Certificateholders and the Certificate Insurer entitled thereto until such sums
shall be paid to such Certificateholders.
SECTION 11.16. Limitation of Liability of Trustee. Notwithstanding
----------------------------------
anything contained herein to the contrary (i) this Agreement has been accepted
by U.S. Bank National Association not in its individual capacity but solely as
Trustee, and in no event shall U.S. Bank National Association have any liability
for the representations, warranties, covenants, agreements or other obligations
of the Seller hereunder or in any of the certificates, notices or agreements
delivered pursuant hereto, as to all of which recourse shall be had solely to
the assets of the Seller and (ii) under no circumstances shall U.S. Bank
National Association be liable for the payment of any indebtedness or expenses
of the Trust; provided, however, nothing contained herein shall relieve U.S.
-------- -------
Bank National Association of its obligations contained herein in its capacity as
successor Servicer and as Trustee.
SECTION 11.17. Streit Act. Any provisions required to be contained
----------
in this Agreement by Section 126 of Article 4-A of the New York Real Property
Law are hereby incorporated, and such provisions shall be in addition to those
conferred or imposed by this Agreement; provided, however, that to the extent
-------- -------
that such Section 126 shall not apply to this Agreement, such Section 126 shall
not have any effect, and if such Section 126 should at any time be repealed or
cease to apply to this Agreement, or be construed by judicial decision to be
inapplicable, such Section 126 shall cease to have any further effect upon the
provisions of this Agreement. In case of a conflict between the provisions of
this Agreement and any mandatory provision of Article 4-A of the New York Real
Property Law, such mandatory provisions of such
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Article 4-A shall prevail, provided, however, that if such Article 4-A shall not
-------- -------
apply to this Agreement, or be construed by judicial decision to be
inapplicable, such mandatory provisions of such Article 4-A shall cease to have
any further effect upon the provisions of this Agreement.
[End of Article XI]
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ARTICLE XII
Termination
SECTION 12.01. Termination. (a) The respective obligations and
-----------
responsibilities of the Servicer, the Seller and the Trustee created hereby
(other than the obligation of the Trustee to make certain payments to
Certificateholders after the final Distribution Date and the obligation of the
Servicer to send certain notices as hereinafter set forth) shall terminate upon
the last action required to be taken by the Trustee on the final Distribution
Date pursuant to this Article XII following the earliest of (i) the Distribution
Date on which the Certificate principal Balance has been reduced to zero and all
amounts owing to the Certificate Insurer have been paid; (ii) the final payment
or other liquidation of the last Loan and the disposition of any amounts
received or property acquired upon liquidation of any remaining Loans and (iii)
the Stated Maturity Date; provided, however, that in no event shall the trust
-------- -------
created by the Agreement continue beyond the expiration of 21 years from the
death of the last survivor of the descendants of Joseph P. Kennedy, the late
ambassador of the United States to the Court of St. James, living on the date of
the Agreement. The Servicer shall promptly notify the other parties hereto and
the Certificate Insurer of any prospective termination pursuant to this Section.
(b) The Seller shall have the right to exercise the option to effect
the repurchase by the Seller of each outstanding Loan on any Distribution Date
on or after the Distribution Date immediately prior to which the Pool Balance is
less than or equal to $4,865,535_ (five percent (5%) of the Original Pool
Balance) and all amounts due and owing to the Certificate Insurer and
unreimbursed draws on the Policy, together with interest thereon, as provided in
the Insurance Agreement, have been paid. The purchase price shall equal the
outstanding Pool Balance plus (i) any unreimbursed Servicer Advances and other
----
unreimbursed expenses plus (ii) accrued interest thereon at the weighted average
----
of the Loan Rates less, for so long as Chevy Chase is the Servicer, the
----
Servicing Fee Rate, through the day preceding the Distribution Date on which the
Loans are repurchased.
(c) Notice of any termination of the Trust, specifying the
Distribution Date or Distribution Date upon which
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Certificateholders shall surrender their Certificates to the Trustee for payment
of the final distribution and cancellation of the Certificates, shall, upon
receipt by the Trustee from the Servicer of such notice, be given by the Trustee
by letter to Certificateholders mailed not earlier than the 15th day and not
later than the 25th day of the month next preceding the specified Distribution
Date or Distribution Date stating (A) the Distribution Date or Distribution Date
upon which final payment of the Certificates shall be made upon presentation and
surrender of the Certificates at the office of the Trustee therein designated,
(B) the amount of such final payment and (C) that the Record Date otherwise
applicable to such Distribution Date or Distribution Date is not applicable,
payments being made only upon presentation and surrender of the Certificates at
the office of the Trustee therein specified. The Trustee shall give such notice
to the Certificate Registrar (if other than the Trustee) at the time such notice
is given to Certificateholders. Upon presentation and surrender of the
Certificates, the Trustee shall cause to be distributed to Certificateholders
amounts distributable on such Distribution Date or Distribution Date pursuant to
Section 6.07.
- ------------
In the event that all of the Certificateholders shall not surrender
their Certificates for cancellation within six months after the date specified
in the above mentioned written notice, the Trustee shall give a second written
notice to the remaining Certificateholders to surrender their Certificates for
cancellation and receive the final distribution with respect thereto. If within
one year after such second notice all of the Certificates shall not have been
surrendered for cancellation, the Trustee may take appropriate steps, or may
appoint an agent to take appropriate steps, to contact the remaining
Certificateholders concerning surrender of their Certificates, and the cost
thereof shall be paid out of the funds and other assets that shall remain
subject to the Agreement. Any funds remaining in the Trust after exhaustion of
such remedies shall be distributed by the Trustee to the Seller. As soon as
practicable after the termination of the Trust, the Trustee shall surrender the
Policy to the Certificate Insurer for cancellation.
[End of Article XII]
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ARTICLE XIII
Miscellaneous Provisions
SECTION 13.01. Amendment. (a) This Agreement may be amended from
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time to time by the Servicer, the Seller and the Trustee with the consent of the
Certificate Insurer (which consent shall not be unreasonably withheld) without
the consent of any of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct any defective provisions or to correct or supplement any provisions
herein which may be inconsistent with any other provisions herein, (iii) to add
or delete any other provisions with respect to matters or questions arising
hereunder that are not inconsistent herewith, (iv) to add or amend any
provisions herein as required by the Rating Agencies in order to maintain or
improve the rating of the Certificates (it being understood that, after
obtaining the ratings in effect on the Closing Date, neither the Seller nor the
Servicer is obligated to obtain, maintain or improve any such rating) or (v) to
add any other provisions herein with respect to matters or questions arising
hereunder; provided, however, that, as evidenced by an Opinion of Counsel, in
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each case such action shall not adversely affect in any material respect the
interests of any Certificateholder (and provided that any such amendment will be
deemed not to materially and adversely affect the Certificateholders if the
person requesting such amendment obtains a letter from each Rating Agency
stating that such amendment would not result in a downgrading or withdrawal of
the rating of the Certificates and provided further that any such amendment will
be deemed not to materially and adversely affect the Certificate Insurer if each
Rating Agency has confirmed that such amendment would not result in a reduction
below investment grade of the Certificates without regard to the Policy).
This Agreement may also be amended from time to time by the Servicer,
the Seller and the Trustee, with the consent of the Certificate Insurer and the
Holders of Certificates evidencing not less than 51% of the Certificate
Principal Balance, and the Servicer, the Trustee and the Certificate Insurer may
from time to time consent to the amendment of the Policy for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or the Policy, as the case may be, or of modifying
in any manner the rights of the Certificateholders; provided, however, that no
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such amendment
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shall (i) reduce in any manner the amount of, or delay the timing of,
collections of payments of Loans or distributions or payments under the Policy
which are required to be made on any Certificate, without the consent of the
Holder of such Certificate, or (ii) reduce the aforesaid percentage required to
consent to any such amendment, without the consent of the Holder of each
Certificate then outstanding.
Prior to the execution of any such amendment made with the consent of
the Certificateholders, the Trustee shall furnish written notification of the
substance of such amendment to each Rating Agency and the Certificate Insurer.
Promptly after the execution of any such amendment made with the consent of the
Certificateholders, the Trustee shall furnish written notification of the
substance of such amendment to each Certificateholder and fully executed
original counterparts of the instruments effecting any such amendment to the
Certificate Insurer.
It shall not be necessary for the consent of Certificateholders under
this Section 13.01 to approve the particular form of any proposed amendment or
consent, but it shall be sufficient if such consent shall approve the substance
thereof. The manner of obtaining such consents and of evidencing the
authorization of the execution thereof by Certificateholders shall be subject to
such reasonable requirements as the Trustee may prescribe.
The Trustee may, but shall not be obligated to, enter into any such
amendment which affects the Trustee's own rights, duties or immunities under
this Agreement or otherwise.
(b) In connection with any amendment pursuant to this Section 13.01,
as a condition precedent to the effectiveness thereof, each of the Trustee and
the Certificate Insurer shall (i) receive an Opinion of Counsel (a) that such
amendment will not adversely affect the federal income tax characterization of
the Certificates, (b) that such amendment will not cause the Trust to be treated
as an association (or publicly traded partnership) taxable as a corporation, (c)
that such amendment will not cause or constitute an event in which gain or loss
would be recognized by any Certificateholder and (d) that such amendment will
not cause adverse federal income tax consequences to the Trust or the
Certificateholders and (ii) be entitled to
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receive and rely on an Opinion of Counsel to the effect that such amendment is
authorized or permitted by this Agreement.
(c) Notwithstanding anything to the contrary contained in Section
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13.01(a), the provisions of the Agreement relating to (i) the Reserve Fund or
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the Specified Reserve Fund Requirement, and (ii) any additional sources of funds
which may be added to the Reserve Fund or uses of funds on deposit in the
Reserve Fund may be amended in any respect by the Seller, the Servicer, the
Trustee and the Certificate Insurer without the consent of, or notice to, the
Certificateholders.
SECTION 13.02. Recordation of Agreement. This Agreement is subject
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to recordation in all appropriate public offices for real property records in
all the counties or other comparable jurisdictions in which any or all of the
Mortgaged Properties are situated, and in any other appropriate public recording
office or elsewhere, such recordation to be effected by the Servicer and at its
expense on direction by the Trustee or the Certificate Insurer, but only upon
direction of the Trustee or the Certificate Insurer accompanied by an Opinion of
Counsel to the effect that such recordation materially and beneficially affects
the interests of Certificateholders or the Certificate Insurer.
For the purpose of facilitating the recordation of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute but one and
the same instrument.
SECTION 13.03. Limitation on Rights of Certificateholders. The death
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or incapacity of any Certificateholder shall not operate to terminate this
Agreement or the Trust, nor entitle such Certificateholder's legal
representatives or heirs to claim an accounting or to take any action or
commence any proceeding in any court for a partition or winding up of the Trust,
nor otherwise affect the rights, obligations and liabilities of the parties
hereto or any such party.
No Certificateholder shall have any right to vote (except as provided
in Section 13.01 (subject in all events to
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the delegation of such voting rights described therein)) or in any manner
otherwise control the operation and management of the Trust, or the obligations
of the parties hereto, nor shall any Certificateholder be under any liability to
any third person by reason of any action taken by the parties to this Agreement
pursuant to any provision hereof.
No Certificateholder shall have any right by virtue or by availing
itself of any provisions of this Agreement to institute any suit, action or
proceeding in equity or at law upon or under or with respect to this Agreement,
unless such Holder previously shall have given to the Trustee a written notice
of default and of the continuance thereof, as hereinbefore provided, and unless
also the Holders of Certificates evidencing not less than 25% of the aggregate
Certificate Principal Balance of Certificates, with the consent of the
Certificate Insurer, shall have made written request upon the Trustee to
institute such action, suit or proceeding in its own name as Trustee hereunder
and shall have offered to the Trustee such reasonable indemnity as it may
require against the costs, expenses and liabilities to be incurred therein or
thereby, and the Trustee, for sixty (60) days after its receipt of such notice,
request and offer of indemnity, shall have neglected or refused to institute any
such action, suit or proceeding; it being understood and intended, and being
expressly covenanted by each Certificateholder with every other
Certificateholder and the Trustee, that no one or more Holders of Certificates
shall have any right in any manner whatever by virtue or by availing itself or
themselves of any provisions of this Agreement to affect, disturb or prejudice
the rights of the Holders of any other of the Certificates, or to obtain or seek
to obtain priority over or preference to any other such Holder, or to enforce
any right under this Agreement, except in the manner herein provided and for the
equal, ratable and common benefit of all Certificate-holders. For the
protection and enforcement of the provisions of this Section 13.03, each and
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every Certificateholder and the Trustee shall be entitled to such relief as can
be given either at law or in equity.
SECTION 13.04. Protection of Title to Trust. (a) The Seller shall
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execute and file such financing statements and cause to be executed and filed
such continuation statements, all in such manner and in such places as may be
required by law fully to preserve, maintain and protect the interest of the
Certificateholders, the Certificate Insurer and the Trustee in
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the Loans and in the proceeds thereof. The Seller shall deliver (or cause to be
delivered) to the Trustee and the Certificate Insurer file-stamped copies of, or
filing receipts for, any document filed as provided above, as soon as available
following such filing.
(b) Neither the Seller nor the Servicer shall change its name,
identity or corporate structure in any manner that would, could or might make
any financing statement or continuation statement filed in accordance with
paragraph (a) above seriously misleading within the meaning of Section 9-402(7)
of the UCC, unless it shall have given the Trustee and Certificate Insurer at
least 20 days' prior written notice thereof and shall have promptly filed
appropriate amendments to all previously filed financing statements or
continuation statements. Promptly upon such filing, the Seller or the Servicer,
as the case may be, shall deliver an Opinion of Counsel, in form and substance
reasonably satisfactory to the Certificate Insurer, to the effect that either
(A) all financing statements and continuation statements have been executed and
filed that are necessary fully to preserve and protect the interest of the Trust
in the portion of the Trust Property with respect to which the filing of
financing statements is sufficient to perfect a security interest, including the
Loans, and reciting the details of such filings or referring to prior Opinions
of Counsel in which such details are given, or (B) no such action shall be
necessary to preserve and protect such interest.
(c) Each of the Seller and the Servicer shall have an obligation to
give the Trustee and Certificate Insurer at least 30 days' prior written notice
of any relocation of its principal executive office if, as a result of such
relocation, the applicable provisions of the UCC would require the filing of any
amendment of any previously filed financing or continuation statement or of any
new financing statement, and shall promptly file any such amendment or new
financing statement. The Servicer shall at all times maintain its principal
executive office and each office from which it shall service Loans within the
United States of America.
(d) The Servicer shall maintain accounts and records as to each Loan
accurately and in sufficient detail to permit (i) the reader thereof to know at
any time the status of such Loan, including payments and recoveries made and
payments owing (and
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the nature of each) and (ii) reconciliation between payments or recoveries on
(or with respect to) each Loan and the amounts from time to time deposited in
the Collection Account in respect of such Loan.
(e) The Servicer shall maintain its computer systems so that, from
and after the time of sale under the Agreement of the Loans to the Trustee, the
Servicer's Electronic Ledger (including any back-up archives) that refer to a
Loan shall indicate clearly the interest of the Trust in such Loan, and that
such Loan is owned by the Trust. Indication of the Trust's ownership of a Loan
shall be deleted from or modified on the Servicer's computer systems when, and
only when, such Loan shall have been paid in full or repurchased.
(f) If at any time the Seller or the Servicer shall propose to sell,
grant a security interest in, or otherwise transfer any interest in Closed-end
Home Equity Loans or Home Loans to any prospective purchaser, lender or other
transferee, the Servicer shall give to such prospective purchaser, lender or
other transferee computer tapes, records or print-outs (including any restored
from back-up archives) that, if they shall refer in any manner whatsoever to any
Loan, shall indicate clearly that such Loan has been sold and is owned by the
Trustee.
(g) The Servicer shall permit the Trustee and the Certificate Insurer
and their respective agents at any time during normal business hours to inspect,
audit and make copies of and abstracts from the Servicer's records regarding any
Loan or any other portion of the Trust Property. The preceding sentence shall
not create any duty or obligation on the part of the Trustee to perform any such
acts.
(h) Upon request, the Servicer shall furnish to the Trustee or the
Certificate Insurer, within ten Business Days, a list of all Loans (by contract
number and name of Obligor) then held as part of the Trust, together with a
reconciliation of such list to the Loan Schedule and to each of the Officer's
Certificates furnished before such request indicating removal of Loans from the
Trust.
(i) The Servicer shall deliver to the Trustee and the Certificate
Insurer:
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(1) promptly after the execution and delivery of the Agreement and,
if required pursuant to Section 13.01, of each amendment, an Opinion of Counsel
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stating that, in the opinion of such Counsel, in form and substance reasonably
satisfactory to the Certificate Insurer, either (A) all financing statements and
continuation statements have been executed and filed that are necessary fully to
preserve and protect the interest of the Trust in the portion of the Trust
Property with respect to which the filing of financing statements is sufficient
to perfect a security interest, including the Loans, and reciting the details of
such filings or referring to prior Opinions of Counsel in which such details are
given, or (B) no such action shall be necessary to preserve and protect such
interest; and
(2) within 90 days after the beginning of each calendar year
beginning with the first calendar year beginning more than three months after
the Cut-off Date, an Opinion of Counsel, dated as of a date during such 90-day
period, stating that, in the opinion of such counsel, either (A) all financing
statements and continuation statements have been executed and filed that are
necessary fully to preserve and protect the interest of the Trust in the portion
of the Trust Property with respect to which the filing of financing statements
is sufficient to perfect a security interest, including the Loans, and reciting
the details of such filings or referring to prior Opinions of Counsel in which
such details are given, or (B) no such action shall be necessary to preserve and
protect such interest.
Each Opinion of Counsel referred to in clause (l) or (2) above shall specify any
action necessary (as of the date of such opinion) to be taken in the following
year to preserve and protect such interest.
SECTION 13.05. Separate Counterparts. The Agreement may be executed
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by the parties hereto in separate counterparts, each of which when so executed
and delivered shall be an original, but all such counterparts shall together
constitute but one and the same instrument.
SECTION 13.06. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN
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ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS WITHOUT REFERENCE TO THE CONFLICTS OF LAW PROVISIONS THEREOF;
PROVIDED,
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HOWEVER, THAT THE IMMUNITIES AND STANDARD OF CARE OF THE TRUSTEE IN THE
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ADMINISTRATION OF ITS TRUST HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE
JURISDICTION IN WHICH ITS PRINCIPAL PLACE OF BUSINESS IS LOCATED.
SECTION 13.07. Notices. All demands, notices and communications
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hereunder shall be in writing and personally delivered, mailed by certified
mail, return receipt requested, or telecopied, and shall be deemed to have been
duly given upon receipt, (a) in the case of the Seller or the Servicer, c/o
Chevy Chase Bank, F.S.B., 8401 Connecticut Avenue, Chevy Chase, Maryland 20815,
Attention: _____________________________________, telecopy: (301) ___-____, (c)
in the case of the Trustee or Paying Agent, at the Corporate Trust Office; (d)
in the case of the Certificate Insurer, to Capital Markets Assurance
Corporation, 885 Third Avenue, New York, New York 10022; Attention: Managing
Director-Consumer Structured Finance, telecopy (212) 891-1456 (e) in the case of
Moody's, ABS Monitoring Department, 4th Floor, 99 Church Street, New York, New
York 10007, telecopy: (212) 553-4773 and (f) in the case of Standard & Poor's,
Mortgage-Backed Securities Surveillance Department, 25 Broadway, New York, New
York 10004, telecopy: (212)412-0323, or, as to each party, at such other address
or telecopy number as shall be designated by such party in a written notice to
each other party. Any notice required or permitted to be mailed to a
Certificateholder shall be given by first class mail, postage prepaid, at the
address of such Holder as shown in the Certificate Register. Any notice so
mailed within the time prescribed in this Agreement shall be conclusively
presumed to have been duly given, whether or not the Certificateholder receives
such notice. The Trustee has agreed herein to provide notices to the Rating
Agencies as a matter of courtesy and accommodation and shall incur no liability
to any Person for any failure to provide any such notices.
SECTION 13.08. Severability of Provisions. If any one or more of the
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covenants, agreements, provisions or terms of this Agreement shall be for any
reason whatsoever held invalid, then such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement or of the Certificates
or the rights of the Holders thereof.
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SECTION 13.09. Assignment. Notwithstanding anything to the contrary
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contained herein, except as provided in Section 9.03 and Section 9.06, this
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Agreement may not be assigned by the Seller or the Servicer without the prior
written consent of the Certificate Insurer. The Seller shall not sell, transfer
or assign any of its rights hereunder except (i) to the Certificate Insurer and
(ii) to any other third party the right to receive distributions from the Seller
Distribution Account (including but not limited to amounts to be released from
the Reserve Fund) (such transfer to any third party other than the Certificate
Insurer, a "Permitted Transfer"). In connection with any Permitted Transfer, as
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a condition precedent to the effectiveness thereof, the Trustee shall receive an
Opinion of Counsel (a) that such Permitted Transfer will not adversely affect
the federal income tax characterization of the Certificates, (b) that such
Permitted Transfer will not cause the Trust to be treated as an association (or
publicly traded partnership) taxable as a corporation, (c) that such Permitted
Transfer will not cause or constitute an event in which gain or loss would be
recognized by any Certificateholder and (d) that such Permitted Transfer will
not cause adverse federal income tax consequences to the Trust or the
Certificateholders. Any purported sale, transfer, or assignment of the Seller's
rights hereunder, including a Permitted Transfer, in violation of the foregoing
shall be void ab initio.
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SECTION 13.10. Certificates Nonassessable and Fully Paid. The
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parties agree that the Certificateholders shall not be personally liable for
obligations of the Trust, that the beneficial ownership interests represented by
the Certificates shall be nonassessable for any losses or expenses of the Trust
or for any reason whatsoever, and that Certificates upon execution,
authentication and delivery thereof by the Trustee pursuant to Section 8.02 are
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and shall be deemed fully paid.
SECTION 13.11. Counterparts. This instrument may be executed in any
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number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
SECTION 13.12. Effect of Headings and Table of Contents. The Article
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and Section headings herein and the Table
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of Contents are for convenience only and shall not affect the construction
hereof.
SECTION 13.13. Third Party Beneficiary. This Agreement shall inure
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to the benefit of and be binding upon the parties hereto, and, in addition,
shall inure to the benefit of Certificateholders and, to the extent provided
herein, the Certificate Insurer and their respective successors and permitted
assigns. Except as otherwise provided in this Agreement, no other Person shall
have any right or obligation hereunder.
SECTION 13.14. Merger and Integration. Except as specifically stated
----------------------
otherwise herein, this Agreement sets forth the entire understanding of the
parties relating to the subject matter hereof, and all prior understandings,
written or oral, and all contemporaneous oral understandings, are superseded by
this Agreement. This Agreement may not be modified, amended, waived or
supplemented except as provided herein.
SECTION 13.15. Certificate Insurer as Controlling Party. Each
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Certificateholder by purchase of the Certificates held by it acknowledges that
the Trustee on behalf of the Trust, as partial consideration of the issuance of
the Policy, has agreed that the Certificate Insurer shall have certain rights
hereunder for so long as no Insurer Default shall have occurred and be
continuing. So long as an Insurer Default has occurred and is continuing, any
provision giving the Certificate Insurer the right to direct, appoint or consent
to, approve of, or take any action under this Agreement shall be inoperative
during the period of such Insurer Default and such right shall instead vest in
the Trustee acting at the direction of the Holders of Certificates. The
Certificate Insurer may disclaim any of its rights and powers under this
Agreement (but not its duties and obligations under the Policy) upon delivery of
a written notice to the Trustee. The Certificate Insurer may give or withhold
any consent hereunder in its reasonable discretion.
SECTION 13.16. Representation of Certificateholders. Each
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Certificateholder, by virtue of its acceptance of a Certificate, is deemed to
have represented that it is not an employee benefit plan or other retirement
arrangement subject to Title I of the Employee Retirement Income Security Act of
1974, as amended, and or Section 4975 of the Internal Revenue Code of 1986, as
amended, or an entity whose underlying assets include
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plan assets by reason of such plan or account investing in such an entity
(including insurance company separate or general accounts and collective
investment funds).
SECTION 13.17 Grant of Security Interest. In the event that,
--------------------------
notwithstanding the intent of the Seller, the transfer and assignment of any
Trust Property contemplated hereby is held not to be a sale, this Agreement
shall constitute a grant of a security interest to the Trustee for the benefit
of the Certificateholders and the Certificate Insurer in the property referred
to in Section 3.01 and Section 3.02, and the Eligible Accounts constituting the
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Reserve Fund and any earnings thereon, and any investments held therein or
purchased with funds deposited therein from time to time, but specifically
excluding any rights the Seller has hereunder to distributions or payments made
from any such Account, whether or not such payment or distribution should be
deemed as constitute "proceeds" of any such Account or of any investment held
therein or purchased with funds deposited therein.
[End of Article XIII]
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IN WITNESS WHEREOF, the Seller, the Servicer and the Trustee have
caused this Agreement to be duly executed and delivered by their respective duly
authorized officers as of the day and the year first above written.
CHEVY CHASE BANK, F.S.B.
as Seller and Servicer,
By: _______________________________
Name:
Title:
U.S. BANK NATIONAL ASSOCIATION,
doing business as First Bank
National Association, as Trustee,
By: _______________________________
Name:
Title:
<PAGE>
State of New York )
) ss.:
County of New York )
On the ___ day of September 1997, before me, a notary public in and for the
State of New York, personally appeared Mark Holles, known to me who, being by me
duly sworn, did depose and say that he is Vice President of Chevy Chase Bank,
F.S.B., a federal savings bank organized under the laws of the United States,
being among the parties that executed the foregoing instrument; and that he
signed his name thereto by like authority.
Notary Public
[Notarial Seal]
<PAGE>
State of New York )
) ss.:
County of New York )
On the ___ day of September 1997 before me, a notary public in and for
the State of New York, personally appeared _______________________, known to me
who, being by me duly sworn, did depose and say that he is a ______________ of
U.S. Bank National Association, doing business as First Bank National
Association, one of the parties that executed the foregoing instrument; and that
he signed his name thereto by authority of the Board of Directors of said Bank.
Notary Public
[Notarial Seal]
<PAGE>
Exhibit 5.1
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Opinion of Orrick, Herrington & Sutcliffe LLP
With Respect to Securities Being Registered
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<PAGE>
Exhibit 5.1
September 18, 1997
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-3,
filed by Chevy Chase Bank, F.S.B. (the "Registrant"), with the Securities and
Exchange Commission on February 27, 1996 and Amendment No. 1 thereto filed on
March 19, 1996 (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act") of Asset-
Backed Securities (the "Securities"). The Securities are issuable in series
(each, a "Series") under either a separate Pooling and Servicing Agreement,
Trust Agreement or Indenture (each, an "Agreement") by and among the Registrant,
the Servicer named therein and the Trustee named therein. The Securities of each
Series are to be sold as set forth in the Registration Statement, any amendment
thereto, and the prospectus and prospectus supplement relating to such Series.
We have examined such instruments, documents and records as we deemed
relevant and necessary as a basis of our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that when the issuance of
each Series of Securities has been duly authorized by appropriate corporate
action and the Securities of such Series have been duly executed, authenticated
and delivered in accordance with the Agreement relating to such Series and sold,
the Securities will be legally issued, fully paid, binding obligations of the
trust created by the Agreement and the holders of the Securities will be
entitled to the benefits of the Agreement except as enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, arrangement,
fraudulent conveyance, moratorium, or other laws relating to or affecting the
rights of creditors generally and general principles of equity, including
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing,
<PAGE>
Chevy Chase Bank, F.S.B.
Page 2
and the possible unavailability of specific performance or injunctive relief,
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the prospectus contained therein, as supplemented by
the prospectus supplement related to a series of Securities. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ ORRICK, HERRINGTON & SUTCLIFFE LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
Exhibit 8.1
-----------
Opinion of Orrick, Herrington & Sutcliffe LLP
With Respect to Certain Tax Matters
-----------------------------------
<PAGE>
Exhibit 8.1
September 18, 1997
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Ladies and Gentlemen:
We have advised Chevy Chase Bank, F.S.B. (the "Registrant") with
respect to certain federal income tax aspects of the issuance by the Registrant
of its Asset-Backed Securities, issuable in series (the "Securities"). Such
advice conforms to the description of selected federal income tax consequences
to holders of the Securities that appears under the heading "Federal Income Tax
Consequences" in the prospectus (the "Prospectus") forming a part of the
Registration Statement on Form S-3 (File No. 333-1682) as prepared for filing by
the Registrant with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act") on February 27, 1996 and Amendment No. 1
thereto filed on March 19, 1996 (the "Registration Statement"). Such description
does not purport to discuss all possible income tax ramifications of the
proposed issuance, but with respect to those tax consequences which are
discussed, in our opinion the description is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in the
Prospectus and in the other documents reviewed by us. Our opinion as to the
matters set forth herein could change with respect to a particular series of
Securities as a result of changes in facts and circumstances, changes in the
terms of the documents reviewed by us, or changes in the law subsequent to the
date hereof. As the Registration Statement contemplates series of Securities
with numerous different characteristics, the particular characteristics of each
series of Securities must be considered in determining the applicability of this
opinion to a particular series of Securities.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the Prospectus contained therein, as supplemented by
the prospectus supplement relating to a
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series of Securities. In giving such consent, we do not consider that we are
"experts," within the meaning of the term as used in the Act or the rules and
regulations of the Commission issued thereunder, with respect to any part of the
Registration Statement, (including this opinion) as an exhibit or otherwise.
Very truly yours,
/s/ ORRICK, HERRINGTON & SUTCLIFFE LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
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Consent of Independent Certified Public Accountants
The Board of Directors
Capital Markets Assurance Corporation:
We consent to the use of our report included in the Form 8-K of Chevy Chase
Bank, F.S.B. related to the Registration Statement on Form S-3 (No. 333-1682),
and to the referencence to our firm under the heading "Experts" in the Chevy
Chase Home Loan Trust 1997-1 Prospectus Supplement.
/s/ KPMG Peat Marwick LLP
New York, New York
September 18, 1997
<PAGE>
KPMG
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
Independent Auditors' Report
----------------------------
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year 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 financial position of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 29, 1997
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
------
December 31 December 31
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $294,861 at December 31,
1996 and $210,651 at December 31, 1995) $ 297,893 215,706
Short-term investments (at amortized cost which approximates
fair value) 16,810 68,646
- ------------------------------------------------------------------------------------------------------
Total investments 314,703 284,352
- ------------------------------------------------------------------------------------------------------
Cash 371 344
Accrued investment income 3,807 3,136
Deferred acquisition costs 45,380 35,162
Premiums receivable 5,141 3,540
Prepaid reinsurance 18,489 13,171
Other assets 6,424 3,428
- ------------------------------------------------------------------------------------------------------
Total assets $ 394,315 343,133
======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Liabilities:
Unearned premiums $ 68,262 45,767
Reserve for losses and loss adjustment expenses 10,985 6,548
Ceded reinsurance 1,738 2,469
Accounts payable and other accrued expenses 8,019 10,844
Current income taxes 679 136
Deferred income taxes 15,139 11,303
- ------------------------------------------------------------------------------------------------------
Total liabilities 104,822 77,067
- ------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000 shares are
authorized, issued and outstanding at December 31, 1996 and 1995 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 1,970 3,286
Retained earnings 64,048 41,972
- ------------------------------------------------------------------------------------------------------
Total stockholder's equity 289,493 266,066
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 394,315 343,133
======================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31,1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Direct premiums written $ 71,752 56,541 43,598
Assumed premiums written 1,086 935 1,064
Ceded premiums written (15,104) (15,992) (11,069)
- -----------------------------------------------------------------------------------------------------
Net premiums written 57,734 41,484 33,593
Increase in unearned premiums (17,177) (12,242) (10,490)
- -----------------------------------------------------------------------------------------------------
Net premiums earned 40,557 29,242 23,103
Net investment income 16,992 11,953 10,072
Net realized capital gains 236 1,301 92
Other income 146 2,273 120
- -----------------------------------------------------------------------------------------------------
Total revenues 57,931 44,769 33,387
- -----------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 4,815 3,141 1,429
Underwriting and operating expenses 14,613 13,808 11,833
Policy acquisition costs 7,824 7,203 4,529
- -----------------------------------------------------------------------------------------------------
Total expenses 27,252 24,152 17,791
- -----------------------------------------------------------------------------------------------------
Income before income taxes 30,679 20,617 15,596
- -----------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 5,235 2,113 865
Deferred income tax 3,368 3,102 2,843
- -----------------------------------------------------------------------------------------------------
Total income taxes 8,603 5,215 3,708
- -----------------------------------------------------------------------------------------------------
Net Income $ 22,076 15,402 11,888
=====================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 205,808 146,808 146,808
Capital contribution 2,667 59,000 -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 208,475 205,808 146,808
- ---------------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation)
on investments, net of tax:
Balance at beginning of year 3,286 (5,499) 3,600
Unrealized appreciation (depreciation)
on investments (1,316) 8,785 (9,099)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 1,970 3,286 (5,499)
- ---------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 41,972 26,570 14,682
Net income 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 64,048 41,972 26,570
- ---------------------------------------------------------------------------------------------------------
Total stockholder's equity $ 289,493 266,066 182,879
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollar in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,076 15,402 11,888
- ----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment expenses 4,437 1,357 1,429
Unearned premiums, net 22,496 19,862 15,843
Deferred acquisition costs (10,218) (10,302) (9,611)
Premiums receivable (1,601) (161) (2,103)
Accrued investment income (671) (390) (848)
Income taxes payable 3,911 3,621 2,611
Net realized capital gains (236) (1,301) (92)
Accounts payable and other accrued expenses 1,020 472 3,726
Prepaid reinsurance (5,318) (7,620) (5,352)
Other, net (3,396) 992 689
- ----------------------------------------------------------------------------------------------------------
Total adjustments 10,424 6,530 6,292
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,500 21,932 18,180
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (199,989) (158,830) (77,980)
Proceeds from sales of investments 57,210 49,354 39,967
Proceeds from maturities of investments 110,306 28,803 19,665
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (32,473) (80,673) (18,348)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution - 59,000 -
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities - 59,000 -
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 27 259 (168)
Cash balance at beginning of year 344 85 253
- ----------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 371 344 85
==========================================================================================================
Supplemental disclosure of cash flow information:
Income taxes paid $ 4,525 1,450 1,063
==========================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1996 and 1995
1) Background
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a New
York- domiciled monoline stock insurance company which engages only in the
business of financial guarantee and surety insurance. CapMAC is a wholly
owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is licensed
in all 50 states in addition to the District of Columbia, the Commonwealth
of Puerto Rico and the territory of Guam. CapMAC insures structured
asset-backed, corporate, municipal and other financial obligations in the
U.S. and international capital markets. CapMAC also provides financial
guarantee reinsurance for structured asset- backed, corporate, municipal
and other financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group ("S&P"), "AAA"
by Duff & Phelps Credit Rating Co. ("Duff & Phelps"), and "AAA" by Nippon
Investors Service, Inc., a Japanese rating agency. Such ratings reflect
only the views of the respective rating agencies, are not recommendations
to buy, sell or hold securities and are subject to revision or withdrawal
at any time by such rating agencies.
2) Significant Accounting Policies
Significant accounting policies used in the preparation of the accompanying
financial statements are as follows:
a) Basis of Presentation
The accompanying financial statements are prepared on the basis of
generally accepted accounting principles ("GAAP"). Such accounting
principles differ from statutory reporting practices used by insurance
companies in reporting to state regulatory authorities.
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 and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management believes
the most significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and disclosures of
financial guarantees outstanding. Actual results could differ from
those estimates.
b) Investments
As of December 31, 1996 and 1995, all of the Company's securities have
been classified as available-for-sale. Available-for-sale securities
are recorded at fair value. Fair value is generally based upon quoted
market prices. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholder's
equity until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer. A decline in the fair
value of any available-for-sale security below cost that is deemed
other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security.
1
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Short-term investments are those investments having a maturity of less than
one year at purchase date. Short-term investments are carried at amortized
cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized
gains and losses are included in earnings and are derived using the FIFO
(first-in, first-out) method for determining the cost of securities sold.
c) Premium Revenue Recognition
Premiums which are payable monthly to CapMAC are reflected in income when
due, net of amounts payable to reinsurers. Premiums which are payable
quarterly, semi-annually or annually are reflected in income, net of
amounts payable to reinsurers, on an equal monthly basis over the
corresponding policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one year are
earned, net of amounts payable to reinsurers, by allocating premium to each
bond maturity based on the principal amount and earning it straight-line
over the term of each bond maturity. For the years ended December 31, 1996
and 1995, 91% of net premiums earned were attributable to premiums payable
in installments and 9% were attributable to premiums collected on an
up-front basis.
d) Deferred Acquisition Costs
Certain costs incurred by CapMAC, which vary with and are primarily related
to the production of new business, are deferred. These costs include direct
and indirect expenses related to underwriting, marketing and policy
issuance, rating agency fees and premium taxes, net of reinsurance ceding
commissions. The deferred acquisition costs are amortized over the period
in proportion to the related premium earnings. The actual amount of premium
earnings may differ from projections due to various factors such as renewal
or early termination of insurance contracts or different run-off patterns
of exposure resulting in a corresponding change in the amortization pattern
of the deferred acquisition costs.
e) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a
supplemental loss reserve ("SLR") and a case basis loss reserve. The SLR is
established for expected levels of losses resulting from credit failures on
currently insured issues and reflects the estimated portion of earned
premiums required to cover those losses.
A case basis loss reserve is established for insured obligations when, in
the judgment of management, a default in the timely payment of debt service
is imminent. For defaults considered temporary, a case basis loss reserve
is established in an amount equal to the present value of the anticipated
defaulted debt service payments over the expected period of default. If the
default is judged not to be temporary, the present value of all remaining
defaulted debt service payments is recorded as a case basis loss reserve.
Anticipated salvage recoveries are considered in establishing case basis
loss reserves when such amounts are reasonably estimable. Case basis loss
reserves may be allocated from any SLR outstanding at the time the case
basis reserves are established.
2
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Management believes that the current level of reserves is adequate to cover
the ultimate net cost of claims and the related expenses with respect to
financial guarantees issued by CapMAC. The establishment of the appropriate
level of loss reserves is an inherently uncertain process involving
estimates and subjective judgments by management, and therefore there can
be no assurance that ultimate losses in CapMAC's insured portfolio will not
exceed the current estimate of loss reserves.
f) Depreciation
Leasehold improvements, furniture, fixtures and electronic data processing
equipment are being amortized or depreciated over the lease term or useful
life, whichever is shorter, using the straight-line method.
g) Income Taxes
Deferred income taxes are provided with respect to temporary differences
between the financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
3
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
3) Insured Portfolio
At December 31, 1996 and 1995, the principal amount of financial
obligations insured by CapMAC was $24.5 billion and $16.9 billion,
respectively, and net of reinsurance (net principal outstanding), was $19.7
billion and $12.6 billion, respectively, with a weighted average life of
6.4 years and 6.0 years, respectively. CapMAC's insured portfolio was
broadly diversified by geographic distribution and type of insured
obligations, with no single insured obligation in excess of statutory
single risk limits, after giving effect to any reinsurance and collateral,
which are a function of CapMAC's statutory qualified capital (the sum of
statutory capital and surplus and mandatory contingency reserve). At
December 31, 1996 and 1995, the statutory qualified capital was
approximately $260 million and $240 million, respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
December 31, 1996 December 31, 1995
------------------------------ -----------------------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer receivables $ 10,362 52.8 $ 6,959 55.1
Trade and other corporate
obligations 8,479 43.1 4,912 38.9
Municipal/government obligations 814 4.1 757 6.0
- -------------------------------------------------------------------------------------------------------------
Total $ 19,655 100.0 $ 12,628 100.0
=============================================================================================================
</TABLE>
At December 31, 1996 and 1995, the principal and interest amount of
financial obligations insured by CapMAC was $29.8 billion and $20.3
billion, respectively, and net of reinsurance (net principal and interest
outstanding) was $23.3 billion and $15.1 billion, respectively. At December
31, 1996, approximately 93% of CapMAC's insured portfolio was comprised of
structured asset-backed transactions. Under these structures, a pool of
assets covering at least 100% of the principal amount guaranteed under its
insurance contract is sold or pledged to a special purpose bankruptcy
remote entity. CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying
assets. CapMAC, therefore, evaluates all the factors affecting past and
future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction is
reviewed to ensure that an appropriate legal structure is used to protect
against the bankruptcy risk of the originator of the assets. Along with the
legal structure, an additional level of first loss protection is also
created to protect against losses due to credit or dilution. This first
level of loss protection is usually available from reserve funds, excess
cash flows, overcollateralization, or recourse to a third party. The level
of first loss protection depends upon the historical losses and dilution of
the underlying assets, but is typically several times the normal historical
loss experience for the underlying type of assets.
During 1995, the Company sold without recourse its interest in potential
cash flows from transactions included in its insured portfolio and
recognized $2,200,000 of income which has been included in other income in
the accompanying financial statements.
The following entities each accounted for, through referrals and otherwise,
10% or more of total revenues for each of the periods presented:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
------------------------ ------------------------ ------------------------
% of % of % of
Revenues Revenues Revenues
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Citicorp 14.5 15.2 16.3
</TABLE>
4
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
4) Investments
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value for available-for-sale securities by major security
type at December 31, 1996 and 1995 were as follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1996
- -----------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,059 10 - 4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 109,436 265 1,160 108,541
Obligations of states, municipalities
and political subdivisions 177,811 4,602 555 181,858
Corporate and asset-backed
securities 20,365 23 153 20,235
- -----------------------------------------------------------------------------------------------------
Total $ 311,671 4,900 1,868 314,703
=====================================================================================================
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
- -----------------------------------------------------------------------------------------------------
Total $ 279,297 5,222 167 284,352
=====================================================================================================
</TABLE>
5
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt securities at
December 31, 1996 by contractual maturity are shown below ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1996
- -----------------------------------------------------------------------------
Amortized Estimated
Securities Available-for-sale Cost Fair Value
- -----------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 11,627 11,644
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 82,337 83,503
- -----------------------------------------------------------------------------
Sub-total 202,235 206,162
Mortgage-backed securities 109,436 108,541
- -----------------------------------------------------------------------------
Total $ 311,671 314,703
=============================================================================
</TABLE>
Actual maturities may differ from contractual maturities because borrowers may
call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investment securities were approximately $57.2 million,
$49.3 million and $39.9 million in 1996, 1995 and 1994, respectively. Gross
realized capital gains of $772,000, $1,320,000 and $714,000, and gross realized
capital losses of $536,000, $19,000 and $622,000 were realized on those sales
for the years ended December 31, 1996, 1995 and 1994, respectively.
Investments include bonds having a fair value of approximately $3,884,000 and
$3,985,000 which are on deposit at December 31, 1996 and 1995, respectively,
with state regulators as required by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $ 15,726 11,105 9,193
Short-term investments 1,534 1,245 484
Mutual funds - (162) 579
Investment expenses (268) (235) (184)
- ---------------------------------------------------------------------------------------------
Total $ 16,992 11,953 10,072
=============================================================================================
</TABLE>
6
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The change in unrealized appreciation (depreciation) on available-for-sale
securities is included as a separate component of stockholder's equity as
shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 3,286 (5,499)
Change in unrealized (depreciation) appreciation (2,024) 13,386
Income tax effect 708 (4,601)
- -----------------------------------------------------------------------------------------------
Net change (1,316) 8,785
- -----------------------------------------------------------------------------------------------
Balance at end of year $ 1,970 3,286
===============================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 2% of stockholder's equity as of
December 31, 1996 and 1995, respectively.
5) Deferred Acquisition Costs
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 35,162 24,860 15,249
Additions 18,042 17,505 14,140
Amortization (policy
acquisition costs) (7,824) (7,203) (4,529)
- -----------------------------------------------------------------------------------------------------
Balance at end of year $ 45,380 35,162 24,860
=====================================================================================================
</TABLE>
6) Employee Benefits
CapMAC has a service agreement with CapMAC Financial Services, Inc.
("CFS"). Under the service agreement, CFS has agreed to provide various
services, including underwriting, reinsurance, marketing, data processing
and other services to CapMAC in connection with the operation of CapMAC's
insurance business. CapMAC pays CFS a fee for providing such services, but
not in excess of CFS's cost for such services. CFS incurred, on behalf of
CapMAC, total compensation expenses, excluding bonuses, of $13,374,000,
$13,484,000 and $11,081,000 in 1996, 1995 and 1994, respectively.
The Company, through CFS, maintains an incentive compensation plan for its
employees. The plan is an annual discretionary bonus award. For the years
ended December 31, 1996, 1995 and 1994, the Company had provided
approximately $8,810,000, $7,804,000 and $5,253,000, respectively, for the
plan. CFS also provides health and welfare benefits to substantially all of
its employees. The Company incurred $551,943, $598,530, and $562,508 of
expense for the years ended December 31, 1996, 1995 and 1994, respectively,
for such plan. The Company also has a defined contribution retirement plan
which allows participants to make voluntary contributions by salary
reduction pursuant to section 401 (k) of the Internal Revenue Code. The
Company provides for the administrative cost for the 401 (k) plan.
7
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers agreed
to defer receipt of such cash amount in exchange for receiving the same
number of new shares of restricted stock of Holdings as the number of RSU's
such officers previously held. During 1995 and 1994, the expense was $1.3
million and $0.1 million, respectively. During 1996, Holdings assumed the
liability of $3.7 million less the related deferred tax asset of $1.1
million as capital contribution. The cash amount is held by Holdings and
invested in accordance with certain guidelines. Such amount, including the
investment earnings thereon, will be paid to each officer upon the
occurrence of certain events but no later than December 2000.
7) Employee Stock Ownership Plan
Holdings maintains an Employee Stock Ownership Plan ("ESOP") to provide its
employees the opportunity to obtain beneficial interests in the stock of
Holdings through a trust (the "ESOP Trust"). Compensation expense related
to the ESOP and allocated to CapMAC was approximately $2,764,000,
$2,087,000 and $2,086,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
8
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
8) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995, CapMAC incurred its first claim on a financial guarantee policy.
Based on its current estimate, the Company expects the aggregate amount of
claims and related expenses not to exceed $2.7 million, although no
assurance can be given that such claims and related expenses will not
exceed that amount. Such loss amount was covered through a recovery under a
quota share reinsurance agreement of $0.2 million and a reduction in the
SLR of $2.5 million. The portion of such claims and expenses not covered
under the quota share agreement is being funded through payments to CapMAC
from the Lureco Trust Account (see note 12).
The following is a summary of the activity in the case basis loss reserve
account and the components of the reserve for losses and loss adjustment
expenses ($ in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Case basis loss reserve:
Net balance at January 1 $ 620 - -
- -------------------------------------------------------------------------------------------------
Incurred related to:
Current year - 2,473 -
Prior years - - -
- -------------------------------------------------------------------------------------------------
Total incurred - 2,473 -
- -------------------------------------------------------------------------------------------------
Paid related to:
Current year - 1,853 -
Prior years 309 - -
- -------------------------------------------------------------------------------------------------
Total paid 309 1,853 -
- -------------------------------------------------------------------------------------------------
Net balance at December 31 311 620 -
Reinsurance recoverable - 69 -
- -------------------------------------------------------------------------------------------------
Gross balance at December 31 311 689 -
- -------------------------------------------------------------------------------------------------
Supplemental loss reserve
Balance at January 1 5,859 5,191 3,762
- -------------------------------------------------------------------------------------------------
Additions to supplemental loss reserve 4,815 3,141 1,429
Allocated to case basis reserve - (2,473) -
- -------------------------------------------------------------------------------------------------
Balance at December 31 10,674 5,859 5,191
- -------------------------------------------------------------------------------------------------
Total reserve for losses and loss adjustment
expenses $ 10,985 6,548 5,191
=================================================================================================
</TABLE>
9
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
9) Income Taxes
Pursuant to a tax sharing agreement with Holdings, the Company is included
in Holdings' consolidated U.S. Federal income tax return. The Company's
annual Federal income tax liability is determined by computing its pro rata
share of the consolidated group Federal income tax liability.
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in 1994:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
$ in thousands Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 10,738 35.0 $7,216 35.0 $5,303 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,916) (9.5) (2,335) (11.3) (1,646) (10.6)
Other, net 781 2.5 334 1.6 51 0.4
- -----------------------------------------------------------------------------------------------------
Total income tax expense $ 8,603 28.0 $5,215 25.3 $3,708 23.8
=====================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 200 1,901
Losses and loss adjustment expenses 1,527 1,002
Unearned premiums 866 852
Other, net 96 98
- -----------------------------------------------------------------------------------------
Total gross deferred tax assets 2,689 3,853
- -----------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 15,883 12,307
Unrealized capital gains on investments 1,061 1,769
Other, net 884 1,080
- -----------------------------------------------------------------------------------------
Total gross deferred tax liabilities 17,828 15,156
- -----------------------------------------------------------------------------------------
Net deferred tax liability $ 15,139 11,303
=========================================================================================
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management
believes that the deferred tax assets will be fully realized in the future.
10
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
10) Insurance Regulatory Restrictions
CapMAC is subject to insurance regulatory requirements of the State of New
York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that may be
paid without obtaining approval for such dividends from the Superintendent
of Insurance to the lower of (i) net investment income as defined or (ii)
10% of statutory surplus as of December 31 of the preceding year. No
dividends were paid by CapMAC to Holdings during the years ended December
31, 1996, 1995 and 1994. No dividends could be paid during these periods
because CapMAC had negative earned surplus. Statutory surplus at December
31, 1996 and 1995 was approximately $193,726,000 and $195,018,000,
respectively. Statutory surplus differs from stockholder's equity
determined under GAAP principally due to the mandatory contingency reserve
required for statutory accounting purposes and differences in accounting
for investments, deferred acquisition costs, SLR and deferred taxes
provided under GAAP. Statutory net income was $18,737,000, $9,000,000 and
$4,543,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Statutory net income differs from net income determined under
GAAP principally due to deferred acquisition costs, SLR and deferred income
taxes.
11) Commitments and Contingencies
The Company's lease agreement for the space occupied in New York expires on
November 20, 2008. CapMAC has a lease agreement for its London office,
which expires on October 1, 2002. As of December 31, 1996, future minimum
payments under the lease agreements are as follows:
<TABLE>
<CAPTION>
$ in thousands Payment
-------------------------------------------------------------------------
<S> <C>
1997 $ 2,647
1998 2,715
1999 3,077
2000 3,152
2001 and thereafter 28,660
-------------------------------------------------------------------------
Total $ 40,251
=========================================================================
</TABLE>
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1996, 1995 and 1994 amounted to $1,618,000, $1,939,000 and
$2,243,000, respectively.
CapMAC has available a $150,000,000 standby corporate liquidity facility
(the "Liquidity Facility") scheduled to terminate in September 1999. The
Liquidity Facility is provided by a consortium of banks, headed by Bank of
Montreal, as agent, which is rated "A-1+" and "P-1" by S&P and Moody's,
respectively. Under the Liquidity Facility, CapMAC will be able, subject to
satisfying certain conditions, to borrow funds from time to time in order
to enable it to fund any claim payments or payments made in settlement or
mitigation of claim payments under its insurance contracts. There have been
no draws under the Liquidity Facility.
CapMAC has agreed to make an investment of 50 million French Francs
(approximately $10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. This investment is
anticipated to be made in 1997.
11
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
12) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty and facultative reinsurance contracts, both on a pro rata and excess
of loss basis, primarily designed to minimize losses from large risks and
protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
------------------------ ---------------------- -----------------------
$ in thousands Written Earned Written Earned Written Earned
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 71,752 48,835 56,541 36,853 43,598 28,561
Assumed 1,086 1,508 935 761 1,064 258
Ceded (15,104) (9,786) (15,992) (8,372) (11,069) (5,716)
- -----------------------------------------------------------------------------------------------------
Net premiums $ 57,734 40,557 41,484 29,242 33,593 23,103
=====================================================================================================
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its original
liability to its policyholders. A contingent liability exists with respect
to the aforementioned reinsurance arrangements, which may become a
liability of CapMAC in the event the reinsurers are unable to meet
obligations assumed by them under the reinsurance contracts. At December
31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and $69,000,
respectively, and had ceded unearned premiums of $18,489,000 and
$13,171,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco Treaty")
with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The agreement
reinsured and indemnified the Company for any loss incurred by CapMAC
during the agreement period up to the limits of the agreement. The Lureco
Treaty provides that the annual reinsurance premium payable by CapMAC to
Lureco, after deduction of the reinsurer's fee payable to Lureco, be
deposited in a trust account (the "Lureco Trust Account") to be applied by
CapMAC, at its option, to offset losses and loss expenses incurred by
CapMAC in connection with incurred claims. Amounts on deposit in the Lureco
Trust Account which have not been applied against claims are contractually
due to CapMAC at the termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been reflected
as assets by CapMAC during the term of the agreement. Premiums in excess of
the deposit amounts have been recorded as ceded premiums in the statements
of income. For the 1996 policy year, the agreement provides $7 million of
loss coverage in excess of the premium deposit amount of $5 million
retained in the Lureco Trust Account. Additional coverage is provided for
losses incurred in excess of 200% of the net premiums earned up to $4
million for any one agreement year. In September 1995, a claim of
approximately $2.5 million on an insurance policy was applied against the
Lureco Trust Account.
12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
In addition to its capital (including statutory contingency reserves),
CapMAC has other reinsurance available to pay claims under its insurance
contracts. Effective November 30, 1995, CapMAC entered into a Stop-loss
Reinsurance Agreement with Mitsui Marine and Fire Insurance Co. (the
"Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss Agreement, Mitsui
Marine and Fire Insurance Co. ("Mitsui") will be required to pay any losses
in excess of $100 million in the aggregate incurred by CapMAC during the
term of the Mitsui Stop-loss Agreement on the insurance policies in effect
on December 1, 1995 and written during the one-year period thereafter, up
to an aggregate limit payable under the Mitsui Stop-loss Agreement of $50
million. The Mitsui Stop-loss Agreement has a term of seven years and is
subject to early termination by CapMAC in certain circumstances. Effective
January 1, 1997 the stop-loss reinsurance coverage increased to $75 million
in excess of incurred losses of $150 million increasing annually based on
increases in CapMAC's statutory qualified capital. The new stop-loss
reinsurance is provided by Mitsui, AXA Re Finance S.A. ("AXA Re") and
Munchener Ruckversicherungs-Gesellschaft ("Munich Re").
On November 30, 1995, CapMAC canceled the quota share reinsurance agreement
with Winterthur Swiss Insurance Company ("Winterthur") pursuant to which
Winterthur had the right to reinsure on a quota share basis 10% of each
policy written by CapMAC. As a result, CapMAC reassumed approximately $1.4
billion of principal insured by Winterthur on January 1, 1996. In
connection with the commutation, Winterthur returned $2.0 million of
unearned premiums, net of ceding commission and Federal excise tax.
13) Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1996 and 1995. The
fair value amounts were determined by the Company using independent market
information when available, and appropriate valuation methodologies when
market information was not available. Such valuation methodologies require
significant judgment and are not necessarily indicative of the amount the
Company could recognize in a current market exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Available-for-sale securities $ 314,703 314,703 284,352 284,352
----------------------------------------------------------------------------------------------------
Off-Balance-Sheet Instruments:
Financial guarantees outstanding $ - 219,989 - 147,840
Less: ceding commission - 65,997 - 44,352
----------------------------------------------------------------------------------------------------
Net financial guarantees outstanding $ - 153,992 103,488
====================================================================================================
</TABLE>
13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments summarized above:
Available-for-sale Securities
The fair values of fixed maturities are based upon quoted market prices.
The fair value of short-term investments approximates amortized cost.
Financial Guarantees Outstanding
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2) the
fair value of installment revenue which is derived by calculating the
present value of the estimated future cash inflow to CapMAC of policies in
force having installment premiums, net of amounts payable to reinsurers, at
a discount rate of 7% at December 31, 1996 and 1995. The amount calculated
is assumed to be equivalent to the consideration that would be paid by
CapMAC under market conditions prevailing at the reporting dates to
transfer CapMAC's financial guarantee business to a third party under
reinsurance and other agreements. Ceding commission represents the expected
amount that would be paid to CapMAC to compensate CapMAC for originating
and servicing the insurance contracts. In constructing estimated future
cash inflows, management makes assumptions regarding prepayments for
amortizing asset-backed securities which are consistent with relevant
historical experience. For revolving programs, assumptions are made
regarding program utilization based on discussions with program users. The
amount of future installment revenue actually realized by the Company could
be reduced in the future due to factors such as early termination of
insurance contracts, accelerated prepayments of underlying obligations or
lower than anticipated utilization of insured structured programs, such as
commercial paper conduits. Although increases in future installment revenue
earnings due to renewals of existing insurance contracts historically have
been greater than reductions in future installment revenue due to factors
such as those described above, there can be no assurance that future
circumstances might not cause a material net reduction in the future
installment revenue.
14) Capitalization
In 1995, $59.0 million of the proceeds received by Holdings from the sale
of shares in connection with an initial public offering and private
placements were contributed to CapMAC.
14
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
------
June 30, 1997
(Unaudited) December 31,1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $307,166 at June 30,
1997 and $294,861 at December 31, 1996) $ 307,821 297,893
Short-term investments (at amortized cost which
approximates fair value) 17,053 16,810
- -------------------------------------------------------------------------------------------------------
Total investments 324,874 314,703
- -------------------------------------------------------------------------------------------------------
Cash 4,506 371
Accrued investment income 3,835 3,807
Deferred acquisition costs 50,327 45,380
Premiums receivable 5,826 5,141
Prepaid reinsurance 20,787 18,489
Other assets 10,464 6,424
- -------------------------------------------------------------------------------------------------------
Total assets $ 420,619 394,315
=======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Liabilities:
Unearned premiums $ 71,800 68,262
Reserve for losses and loss adjustment expenses 13,861 10,985
Ceded reinsurance 2,766 1,738
Accounts payable and other accrued expenses 14,433 8,019
Current income taxes 203 679
Deferred income taxes 15,700 15,139
- -------------------------------------------------------------------------------------------------------
Total liabilities 118,763 104,822
- -------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000
shares are authorized, issued and outstanding at June 30,
1997 and December 31, 1996 15,000 15,000
Additional paid-in capital 208,475 208,475
Unrealized appreciation on investments, net of tax 425 1,970
Retained earnings 77,956 64,048
- -------------------------------------------------------------------------------------------------------
Total stockholder's equity 301,856 289,493
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 420,619 394,315
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written $ 18,726 18,622 35,180 32,777
Assumed premiums written 655 150 916 1,024
Ceded premiums written (6,272) (5,103) (10,621) (7,013)
- -------------------------------------------------------------------------------------------------------------
Net premiums written 13,109 13,669 25,475 26,788
Increase in unearned premiums (877) (3,681) (1,240) (7,972)
- -------------------------------------------------------------------------------------------------------------
Net premiums earned 12,232 9,988 24,235 18,816
Net investment income 4,684 4,112 9,386 7,989
Net realized capital gains 506 19 2,549 168
Other income 45 25 88 79
- -------------------------------------------------------------------------------------------------------------
Total revenues 17,467 14,144 36,258 27,052
- -------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,333 1,109 2,876 2,184
Underwriting and operating expenses 4,208 3,385 8,879 7,362
Policy acquisition costs 2,472 2,059 5,053 4,123
- -------------------------------------------------------------------------------------------------------------
Total expenses 8,013 6,553 16,808 13,669
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 9,454 7,591 19,450 13,383
- -------------------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 2,277 1,316 4,150 1,981
Deferred income tax 473 1,148 1,392 1,971
- -------------------------------------------------------------------------------------------------------------
Total income taxes 2,750 2,464 5,542 3,952
- -------------------------------------------------------------------------------------------------------------
Net Income $ 6,704 5,127 13,908 9,431
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
- --------------------------------------------------------------------------------------------------------
<S> <C>
Common stock:
Balance at beginning of period $ 15,000
- --------------------------------------------------------------------------------------------------------
Balance at end of period 15,000
- --------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 208,475
- --------------------------------------------------------------------------------------------------------
Balance at end of period 208,475
- --------------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation)
on investments, net of tax:
Balance at beginning of period 1,970
Unrealized depreciation on investments (1,545)
- --------------------------------------------------------------------------------------------------------
Balance at end of period 425
- --------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 64,048
Net income 13,908
- --------------------------------------------------------------------------------------------------------
Balance at end of period 77,956
- --------------------------------------------------------------------------------------------------------
Total stockholder's equity $ 301,856
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,908 9,431
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment expenses 2,876 1,821
Unearned premiums, net 3,538 10,977
Deferred acquisition costs (4,947) (4,742)
Premiums receivable (685) 308
Accrued investment income (28) (579)
Income taxes payable 916 2,113
Net realized capital gains (2,549) (168)
Accounts payable and other accrued expenses 6,414 2,581
Prepaid reinsurance (2,298) (3,004)
Other, net (2,765) (183)
- -------------------------------------------------------------------------------------------------------------
Total adjustments 472 9,124
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,380 18,555
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (112,743) (121,115)
Proceeds from sales of investments 74,768 19,875
Proceeds from maturities of investments 27,730 82,800
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,245) (18,440)
- -------------------------------------------------------------------------------------------------------------
Net increase in cash 4,135 115
Cash balance at beginning of period 371 344
- -------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 4,506 459
=============================================================================================================
Supplemental disclosures of cash flow
information:
Income taxes paid $ 4,550 1,725
Tax and loss bonds purchased $ 76 112
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Notes to Unaudited Consolidated Financial Statements
June 30, 1997
1. Background
Capital Markets Assurance Corporation ("CapMAC") is a New York-domiciled
monoline stock insurance company which engages only in the business of
financial guaranty and surety insurance. CapMAC is a wholly owned
subsidiary of CapMAC Holdings Inc. ("Holdings"). In early 1997, CapMAC made
an investment of 50 million French francs (approximately 10 million U.S.
dollars) in CapMAC Assurance, S.A., an insurance subsidiary to be
established in Paris, France. CapMAC Assurance, S.A., is licensed to write
financial guarantee insurance in the European Union member states.
CapMAC is licensed in all 50 states in addition to the District of
Columbia, the Commonwealth of Puerto Rico and the territory of Guam. CapMAC
insures structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also
provides financial guaranty reinsurance for structured asset-backed,
corporate, municipal and other financial obligations written by other major
insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating agency.
Such ratings reflect only the views of the respective rating agencies, are
not recommendations to buy, sell or hold securities and are subject to
revision or withdrawal at any time by such rating agencies.
2. Basis of Presentation
CapMAC's consolidated unaudited interim financial statements have been
prepared on the basis of generally accepted accounting principles and, in
the opinion of management, reflect all adjustments necessary for a fair
presentation of the CapMAC's financial condition, results of operations and
cash flows for the periods presented. The results of operations for the six
months ended June 30, 1997 may not be indicative of the results that may be
expected for the full year ending December 31, 1997. These consolidated
financial statements and notes should be read in conjunction with the
financial statements and notes included in the audited financial statements
of CapMAC as of December 31, 1996 and 1995, and for each of the years in
the three-year period ended December 31, 1996.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
