HFC REVOLVING CORP
S-11/A, 1996-11-12
ASSET-BACKED SECURITIES
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<PAGE>   1
 
   
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996
    
 
                                                  REGISTRATION NOS. 333-12483
                                                               333-12483-01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               ------------------
   
                                AMENDMENT NO. 1
    
   
                                       TO
    
 
                                   FORM S-11
 
                             REGISTRATION STATEMENT
                                     Under
                           THE SECURITIES ACT OF 1933
                               ------------------
 
                      HOUSEHOLD REVOLVING HOME EQUITY LOAN
 
                                  TRUST 1996-2
   
 (Registrant and Trust in which the Certificates evidence undivided interests)
    
 
<TABLE>
<CAPTION>
                                                      STATE OF            I.R.S. EMPLOYER
                                                    INCORPORATION       IDENTIFICATION NO.
                                                    -------------       -------------------
            <S>                                     <C>                 <C>
            HFC REVOLVING CORPORATION                    DELAWARE         36-3955292
</TABLE>
 
   
   (Registrant and Originator of Trust which is the Issuer in respect of the
                                 Certificates)
    
 
                               2700 Sanders Road
                        Prospect Heights, Illinois 60070
                    (Address of principal executive offices)
 
                              JOHN W. BLENKE, ESQ.
                        Vice President -- Corporate Law
                         HOUSEHOLD INTERNATIONAL, INC.
                               2700 Sanders Road
                        Prospect Heights, Illinois 60070
                                  847-564-6150
  (Name, address, telephone number, including area code, of agent for service)
                               ------------------
 
                                   Copies to:
 
<TABLE>
<S>                                               <C>
             DAVID J. BOYD, ESQ.                            GAIL G. WATSON, ESQ.
               SIDLEY & AUSTIN                                  BROWN & WOOD
          One First National Plaza                         One World Trade Center
           Chicago, Illinois 60603                        New York, New York 10048
               (312) 853-7444                                  (212) 839-5300
</TABLE>
 
                               ------------------
 
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
 
                        CALCULATION OF REGISTRATION FEE
 
   
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
                                                   PROPOSED         PROPOSED
                                   AMOUNT          MAXIMUM          MAXIMUM         AMOUNT OF
     TITLE OF SECURITIES           BEING        OFFERING PRICE     AGGREGATE       REGISTRATION
      BEING REGISTERED         REGISTERED(1)     PER UNIT(1)   OFFERING PRICE(1)       FEE
<S>                          <C>               <C>             <C>               <C>
- -------------------------------------------------------------------------------------------------
Revolving Home Equity Loan
  Asset Backed
  Certificates...............    $776,373,000        100%         $776,373,000     $235,264.55
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
    
 
(1) Estimated solely for the purpose of calculating the Registration Fee.
   
(2) $344.83 of the registration fee was previously paid.
    
                               ------------------
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2
 
                       CROSS REFERENCE SHEET TO FORM S-11
 
   
<TABLE>
<CAPTION>
                                                                    CAPTION OR LOCATION
               ITEM AND CAPTION IN FORM S-11                           IN PROSPECTUS
- -----------------------------------------------------------  ----------------------------------
<C>  <S>                                                     <C>
  1. Forepart of the Registration Statement and Outside
     Front Cover Page of Prospectus........................  Forepart of Registration
                                                             Statement; Outside Front Cover
                                                             Page
  2. Inside Front and Outside Back Cover Page of
     Prospectus............................................  Inside Front Cover Page; Outside
                                                             Back Cover Page
  3. Summary Information, Risk Factors and Ratio of
     Earnings to Fixed Charges.............................  Prospectus Summary; Risk Factors
  4. Determination of Offering Price.......................  *
  5. Dilution..............................................  *
  6. Selling Security Holders..............................  *
  7. Plan of Distribution..................................  Underwriting
  8. Use of Proceeds.......................................  Use of Proceeds
  9. Selected Financial Data...............................  Financial Information
 10. Management's Discussion and Analysis of Financial
     Condition and Results of Operations...................  *
 11. General Information as to Registrant..................  Prospectus Summary; The Seller and
                                                             Subservicers; Description of
                                                             Certificate Insurer
 12. Policy with Respect to Certain Activities.............  Description of the Certificates
 13. Investment Policies of Registrant.....................  Description of the Certificates
 14. Description of Real Estate............................  The Revolving Home Equity Credit
                                                             Lines
 15. Operating Data........................................  *
 16. Tax Treatment of Registrant and Its Security
     Holders...............................................  Income Tax Consequences
 17. Market Price of and Dividends on the Registrant's
     Common Equity and Related Stockholder Matters.........  *
 18. Description of Registrant's Securities................  Prospectus Summary; Description of
                                                             the Certificates; Income Tax
                                                             Consequences
 19. Legal Proceedings.....................................  *
 20. Security Ownership of Certain Beneficial Owners and
     Management............................................  The Seller and Subservicers;
                                                             Description of the
                                                             Certificates -- The Trustee
 21. Directors and Executive Officers......................  *
 22. Executive Compensation................................  *
 23. Certain Relationships and Related Transactions........  *
 24. Selection, Management and Custody of Registrant's
     Investments...........................................  Description of the Certificates
 25. Policies with Respect to Certain Transactions.........  Description of the Certificates
 26. Limitations of Liability..............................  Description of the Certificates
 27. Financial Statements and Information..................  Financial Information; Description
                                                             of Certificate Insurer; Financial
                                                             Statements of the Certificate
                                                             Insurer
 28. Interests of Named Experts and Counsel................  *
 29. Disclosure of Commission Position on Indemnification
     for Securities Act Liabilities........................  Part II of the Registration
                                                             Statement
</TABLE>
    
 
- ---------------
* Not applicable or answer is negative.
<PAGE>   3
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
                                                                             
PRELIMINARY PROSPECTUS (Subject to Completion)
   
Dated November 12, 1996
    
   
                       $776,373,000 Class A Certificates
    
 
               Household Revolving Home Equity Loan Trust 1996-2
      Revolving Home Equity Loan Asset Backed Certificates, Series 1996-2
 
                         Household Finance Corporation
                                Master Servicer
                            ------------------------
 
   
    The Revolving Home Equity Loan Asset Backed Certificates, Series 1996-2
represent undivided interests in the Household Revolving Home Equity Loan Trust
1996-2 (the "Trust") consisting of, among other things, a pool of home equity
revolving credit line loans made or to be made in the future (the "Mortgage
Loans") under certain revolving home equity credit line loan agreements. The
Initial Mortgage Loans (as defined herein) are secured by mortgages (the
"Mortgages") (of which approximately 29.62% by principal balance are first
mortgages, 70.02% by principal balance are second mortgages and the remainder
are third mortgages) on residential properties that are primarily one- to
four-family properties. Only a single class of Series 1996-2 certificates is
being offered hereby (the "Class A Certificates", also referred to herein as the
"Certificates"). The aggregate undivided interest in the Trust represented by
the Certificates will initially be equal to $776,373,000, which is 97.50% of the
sum of the Cut-Off Balances of the Initial Mortgage Loans (as defined herein)
and will decline as principal is paid to the Certificateholders, except as
otherwise provided herein. Since principal payments to the Certificateholders
will vary depending upon the amount of principal collected on the Mortgage Loans
as well as other factors, the Certificates do not have a stated maturity date.
See "Maturity and Prepayment Considerations". The Trust, however, will terminate
on the Distribution Date (as defined herein) in February 2018 even if the
Certificateholders have not been paid in full. See "Description of the
Certificates -- Termination; Retirement of the Certificates". The remaining
undivided interest in the Trust not represented by the Certificates (the "Seller
Interest") will initially be equal to $19,907,720.37, which is 2.50% of the sum
of the Cut-Off Balances of the Initial Mortgage Loans.
    
 
    The Trust will be created pursuant to a pooling and servicing agreement
dated as of November 1, 1996 (the "Agreement") among HFC Revolving Corporation,
as seller (the "Seller"), Household Finance Corporation, as master servicer (the
"Master Servicer" or "HFC"), and The First National Bank of Chicago, as trustee
(the "Trustee").
 
   
    Distributions of principal and interest on the Certificates will be made to
the extent described herein on the 20th day of each month or, if such day is not
a Business Day, on the next succeeding Business Day (the "Distribution Date")
beginning December 20, 1996. On each Distribution Date, holders of the
Certificates will be entitled to receive, from and to the limited extent of
funds available in the Collection Account (as defined herein), distributions
with respect to interest and principal paid on the Mortgage Loans calculated as
set forth herein. The Certificates are not guaranteed by HFC or any affiliate
thereof. However, the Certificates will have the benefit of an irrevocable and
unconditional financial guaranty insurance policy (the "Policy") in the initial
amount of $450,000,000 issued by Capital Markets Assurance Corporation (the
"Certificate Insurer"). The Policy will be available to protect
Certificateholders against shortfalls in amounts to be distributed at the times
and to the extent described herein. See "Description of the Certificates -- The
Policy" herein.
    
 
   
    There is currently no secondary market for the Certificates. The
Underwriters intend to make a secondary market in the Certificates but have no
obligation to do so. See "Risk Factors" and "Underwriting" herein.
    
 
   
    Application will be made to list the Certificates on the Luxembourg Stock
Exchange.
    
                            ------------------------
 
   
     FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
              CERTIFICATES, SEE "RISK FACTORS" ON PAGE 24 HEREIN.
    
                            ------------------------
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO NOT
   REPRESENT INTERESTS IN OR OBLIGATIONS OF HFC REVOLVING CORPORATION,
   HOUSEHOLD FINANCE CORPORATION OR ANY AFFILIATE THEREOF, EXCEPT TO THE
      EXTENT DESCRIBED HEREIN. NEITHER THE CERTIFICATES NOR THE MORTGAGE
        LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
     EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY
     SUCH COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
        PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
           OFFENSE.
 
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
    MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
                            ------------------------
 
<TABLE>
<CAPTION>
                                                PRICE TO         UNDERWRITING        PROCEEDS TO
                                                PUBLIC(1)         DISCOUNT(2)       SELLER(2)(3)
                                            -----------------  -----------------  -----------------
<S>                                         <C>                <C>                <C>
Per Certificate...........................          %                  %                  %
Total.....................................          $                  $                  $
</TABLE>
 
- ------------
    (1) Plus accrued interest, if any, from November   , 1996.
    (2) The Seller and HFC have agreed to indemnify the Underwriters against
        certain liabilities, including liabilities under the Securities Act of
        1933, as amended.
   
    (3) Before deducting expenses, estimated to be $800,000.
    
                            ------------------------
 
   
    The Certificates are offered subject to prior sale and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
delivery of such Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company, Cedel Bank, societe anonyme, and the
Euroclear System on or about November   , 1996.
    
                            ------------------------
                              MORGAN STANLEY & CO.
                                  Incorporated
                            ------------------------
The date of this Prospectus is November   , 1996.
 

<PAGE>   4
 
     NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE SELLER, HFC OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER, SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
SELLER, HFC OR THE TRUST SINCE SUCH DATE.
 
     UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL DEALERS EFFECTING
TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
 
   
     The address and telephone number of the Seller, the originator of the
Trust, is 2700 Sanders Road, Prospect Heights, Illinois 60070, (847) 564-6335.
    
 
                             AVAILABLE INFORMATION
 
   
     The Seller, as originator of the Trust, has filed a Registration Statement
under the Securities Act of 1933, as amended (the "Securities Act"), with the
Securities and Exchange Commission (the "Commission") with respect to the
Certificates offered pursuant to this Prospectus. This Prospectus, which forms a
part of the Registration Statement, does not contain all of the information
included in the Registration Statement and the exhibits thereto. For further
information, reference is made to the Registration Statement and amendments
thereof and to exhibits thereto, which are available for inspection without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission at Seven World Trade
Center, New York, New York 10048 and at 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661, or through the Web site maintained by the Commission at
(http://www.sec.gov). Copies of the Registration Statement, the amendments
thereof and the exhibits thereto, may be obtained from the Commission at
prescribed rates.
    
 
   
     The Certificate Insurer is regulated by the Superintendent of Insurance of
the State of New York. Copies of the Certificate Insurer's financial statements
prepared in accordance with statutory accounting standards, which differ from
generally accepted accounting principles, are filed with and available from the
Insurance Department of the State of New York at prescribed rates. See
"Description of the Certificate Insurer."
    
 
                                        2
<PAGE>   5
 
                             FINANCIAL INFORMATION
     The Seller has determined that its financial statements are not material to
the offering made hereby.
     The Trust will be formed to hold the Mortgage Loans and to issue the
Certificates. The Trust will have no assets or obligations prior to the issuance
of the Certificates and will engage in no activities other than those described
herein. Accordingly, no financial statements with respect to the Trust are
included in this Prospectus.
 
                       REPORTS TO THE CERTIFICATEHOLDERS
   
     Unless and until Replacement Certificates (as defined herein) are issued,
the Trust will provide to CEDE & Co., as nominee of The Depository Trust Company
("DTC") and registered holder of the Certificates, the Luxembourg Paying Agent,
if any, and, upon request, to Participants (as defined herein), monthly and
annual reports concerning the Certificates pursuant to the Pooling and Servicing
Agreement. See "Description of the Certificates -- Reports to
Certificateholders" and "-- Evidence as to Compliance" herein. Such reports may
be made available to the owners of the Certificates (the "Certificate Owners")
upon request to their Participants. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
The Trust does not intend to provide any financial information to any holder of
the Certificates which has been examined and reported upon, with an opinion
expressed, by an independent public accountant. The Master Servicer, on behalf
of the Trust, intends to register the Certificates under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and will file with
the Commission such periodic reports with respect to the Trust as are required
by the 1934 Act, and the rules, regulations or orders of the Commission
thereunder.
    
 
                               TABLE OF CONTENTS
   
<TABLE>
<CAPTION>
                        CAPTION                         PAGE
- ------------------------------------------------------------
<S>                                                     <C>
Prospectus Summary......................................    4
Risk Factors............................................   24
  Limited Liquidity.....................................   24
  Difficulty in Pledging................................   24
  Potential Delays in Receipt of Distributions..........   24
  Borrower's Ability to Repay; Nature of Security;
    Property Values.....................................   24
  Cash Flow Variances; Collection Issues................   24
  Prepayment Considerations.............................   25
  Certificate Rating....................................   25
  Ability to Change Terms of the Mortgage Loans.........   25
  Collateral Position; Legal Considerations.............   26
  Insolvency Considerations; Treatment of Transaction;
    Perfection Issues...................................   27
  No Gross-Up for Withholding Tax.......................   28
The Seller and Subservicers.............................   28
The Master Servicer.....................................   28
Use of Proceeds.........................................   29
The HFC Revolving Home Equity Lending Program...........   29
  General...............................................   29
  Underwriting Procedures Relating to Home Equity
    Revolving Credit Line Loans.........................   29
  Home Equity Revolving Credit Line Loan Terms..........   30
  Servicing of Home Equity Revolving Credit Line
    Loans...............................................   32
Mortgage Loan Delinquency and Loss Experience...........   32
The Revolving Home Equity Credit Lines..................   34
  Conveyance of Subsequent Funding Mortgage Loans.......   41
Description of the Certificate Insurer..................   42
Maturity and Prepayment Considerations..................   42
Pool Factor and Trading Information.....................   46
Description of the Certificates.........................   46
  General...............................................   46
  Assignment of Mortgage Loans..........................   47
  Amendments to Credit Line Agreements..................   49
  Consent to Senior Liens...............................   50
  Optional Retransfers of Mortgage Loans to the
    Seller..............................................   50
  Payments on Mortgage Loans; Deposits to Collection
    Account; Deposits to Funding Account................   51
  Allocations and Collections...........................   53
  Distributions on the Certificates.....................   54
    Distributions of Interest Collections...............   54
    Seller Collections..................................   56
    Required Overcollateralization Amount...............   56
    Distributions of Principal Collections..............   56
    Distribution of Interest and Principal on the
      Certificates......................................   56
    Calculation of Certificate Rate; Limitation on
      Interest Payments on Certificates.................   57
    The Paying Agent....................................   57
  Rapid Amortization Period.............................   57
  Rapid Amortization Events.............................   58
  The Policy............................................   58
  Reports to Certificateholders.........................   59
  Collection and Other Servicing Procedures.............   60
  Hazard Insurance......................................   61
  Realization Upon Defaulted Mortgage Loans.............   62
  Servicing Compensation and Payment of Expenses........   62
 
<CAPTION>
                        CAPTION                         PAGE
- ------------------------------------------------------------
<S>                                                     <C>
  Evidence as to Compliance.............................   63
  Certain Matters Regarding the Master Servicer
    and the Seller......................................   63
  Servicing Termination Events..........................   64
  Rights Upon a Servicing Termination Event.............   65
  Amendment.............................................   65
  Termination; Retirement of the Certificates...........   66
  The Trustee...........................................   66
  Registration of Certificates..........................   66
  Certain Activities....................................   69
Description of the Receivables Purchase Agreement.......   70
  Sale of Mortgage Loans................................   70
  Representations and Warranties........................   70
  Certain Covenants.....................................   71
  Amendments............................................   71
  Sale of Credit Line Agreements........................   71
  Termination...........................................   72
Certain Legal Aspects of the Mortgage Loans.............   72
  General...............................................   72
  Foreclosure...........................................   72
  Rights of Redemption..................................   73
  Rights of Senior Mortgagees or Beneficiaries..........   74
  Bankruptcy, Anti-Deficiency Legislation and Other
    Limitations on Lenders..............................   75
  "Due-on-Sale" Clauses.................................   76
  Applicability of Usury Laws...........................   77
  Environmental Legislation.............................   77
Income Tax Consequences.................................   77
  General...............................................   77
  Treatment of the Certificates as Indebtedness.........   78
  Interest Income to Certificateholders.................   79
  Disposition of Certificates...........................   80
  Possible Characterization of the Arrangement as a
    Partnership or Association Taxable as a
    Corporation.........................................   80
  Possible Classification as a Taxable Mortgage Pool....   81
  Foreign Investors.....................................   81
  Information Reporting and Backup Withholding..........   82
  State and Local Tax Consequences......................   82
ERISA Considerations....................................   83
  General...............................................   83
  Availability of Exemptions for Certificates...........   84
  Review by Benefit Plan Fiduciaries....................   84
Legal Investment Considerations.........................   84
Underwriting............................................   85
Experts.................................................   85
Legal Matters...........................................   85
Additional Information..................................   86
Index of Defined Terms..................................   87
Global Clearance, Settlement and Tax Documentation
  Procedures............................................  A-1
  Initial Settlement....................................  A-1
  Secondary Market Trading..............................  A-1
  Certain U.S. Federal Income Tax Documentation
    Requirements........................................  A-3
Financial Statements of the Certificate Insurer.........  F-1
</TABLE>
    
 
                                        3
<PAGE>   6
 
                               PROSPECTUS SUMMARY
 
     The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus. Reference is made to the Index of Defined Terms for the location
herein of the definitions of certain capitalized terms.
 
   
TRUST............................    The Household Revolving Home Equity Loan
                                       Trust 1996-2 (the "Trust") will be formed
                                       pursuant to a pooling and servicing
                                       agreement to be dated as of November 1,
                                       1996 (the "Agreement") among HFC
                                       Revolving Corporation, as seller (the
                                       "Seller"), Household Finance Corporation,
                                       as master servicer (the "Master Servicer"
                                       or "HFC") and The First National Bank of
                                       Chicago, as trustee (the "Trustee"). The
                                       property of the Trust will include:
                                       certain existing home equity revolving
                                       credit line loans that have been made
                                       from time to time by the Subservicers (as
                                       defined herein) and conveyed to the Trust
                                       on the Closing Date (as defined
                                       herein)(the "Initial Mortgage Loans")
                                       and, to the extent of the availability
                                       thereof, newly originated home equity
                                       revolving credit line loans to be
                                       conveyed to the Trust from time-to-time
                                       on or before the last Distribution Date
                                       (as defined herein) of the Funding Period
                                       (as defined herein) (the "Subsequent
                                       Funding Mortgage Loans") (the Subsequent
                                       Funding Mortgage Loans and the Initial
                                       Mortgage Loans and any replacements for
                                       any such loans, collectively the
                                       "Mortgage Loans") evidenced by certain
                                       revolving term home equity loan notes
                                       (the "Credit Line Agreements") secured
                                       primarily by first and second mortgages
                                       on residential properties that are
                                       primarily one- to four-family properties
                                       (the "Mortgaged Property"); the
                                       collections in respect of such Mortgage
                                       Loans; property that secured a Mortgage
                                       Loan and has been acquired by foreclosure
                                       or deed in lieu of foreclosure; the funds
                                       on deposit in the Collection Account (as
                                       defined herein), excluding investment
                                       earnings thereon; the funds on deposit in
                                       the account maintained with the Trustee
                                       to purchase the Subsequent Funding
                                       Mortgage Loans (the "Funding Account");
                                       the funds on deposit in the Spread
                                       Account (as defined herein); an
                                       irrevocable and unconditional financial
                                       guaranty insurance policy (the "Policy");
                                       and rights under certain hazard insurance
                                       policies covering the Mortgaged
                                       Properties and certain other property, as
                                       described more fully herein. Only the
                                       unpaid principal balance of each Mortgage
                                       Loan at the close of the last billing
                                       cycle thereof prior to November 1, 1996
                                       in the case of an Initial Mortgage Loan,
                                       and prior to the date upon which each
                                       Subsequent Funding Mortgage Loan and any
                                       Eligible Substitute Mortgage Loan (as
                                       defined herein) is conveyed to the Trust
                                       (in each case the "Cut-Off Balance" and
                                       the "Cut-Off Date"), and any additions to
                                       each Mortgage Loan as a result of new
                                       advances made pursuant to the applicable
                                       Credit Line Agreements (collectively, the
                                       "Additional Balances") during the life of
                                       the Trust shall be property of the Trust.
    
 
                                        4
<PAGE>   7
 
                                     The Mortgage Loans and any Additional
                                       Balances have been or will be funded by
                                       the appropriate Subservicer (as defined
                                       herein) pursuant to the Credit Line
                                       Agreements and sold to the Seller in
                                       accordance with the Receivables Purchase
                                       Agreement (as defined herein) and then
                                       transferred by the Seller to the Trust
                                       pursuant to the Agreement. The obligation
                                       to fund any of the Mortgage Loans and any
                                       Additional Balances pursuant to the
                                       Credit Line Agreements will not be
                                       transferred to the Trust or the Seller.
                                       With respect to any date, the Pool
                                       Balance will be equal to the sum of the
                                       aggregate of the Trust Balances (as
                                       defined below) of all Mortgage Loans in
                                       the Trust. The Trust Balance of a
                                       Mortgage Loan (other than a Liquidated
                                       Mortgage Loan) on any day is equal to the
                                       Cut-Off Balance of such Mortgage Loan
                                       plus (i) any Additional Balances in
                                       respect of such Mortgage Loan, minus (ii)
                                       all Principal Collections (as defined
                                       herein) credited against the Trust
                                       Balance prior to such day minus (iii) all
                                       related Charge Off Amounts. The Trust
                                       Balance of a Liquidated Mortgage Loan (as
                                       defined herein) after final recovery of
                                       related Liquidation Proceeds (as defined
                                       herein) shall be zero. A Charge Off
                                       Amount is equal to the amount of the
                                       principal balance of a Charged Off
                                       Mortgage Loan (as defined below) that the
                                       Master Servicer has charged off on its
                                       servicing records in such Collection
                                       Period. A Charged Off Mortgage Loan is a
                                       defaulted Mortgage Loan that is not a
                                       Liquidated Mortgage Loan and as to which
                                       (i) collection procedures are ongoing and
                                       (ii) the Master Servicer has charged off
                                       all or a portion of the related Mortgage
                                       Loan principal balance. A Liquidated
                                       Mortgage Loan is, as of any Distribution
                                       Date, any Mortgage Loan in respect of
                                       which the Master Servicer has determined,
                                       in accordance with its servicing
                                       policies, that all Liquidation Proceeds
                                       have been recovered.
 
   
SECURITIES OFFERED...............    The Trust will offer one class of Revolving
                                       Home Equity Loan Asset Backed
                                       Certificates, Series 1996-2 pursuant to
                                       this Prospectus (the "Class A
                                       Certificates" or "Certificates"). Each
                                       Certificate represents the right to
                                       receive payments of interest at the
                                       variable rate described below (the
                                       "Certificate Rate") payable monthly and
                                       payments of principal at such time and to
                                       the extent provided below. As of the
                                       Closing Date, the principal amount of the
                                       Certificates will be $776,373,000 (the
                                       "Original Certificate Principal Balance"
                                       or the "Original Invested Amount"),
                                       representing an undivided ownership
                                       interest in 97.50% of the Pool Balance on
                                       the Closing Date. Thereafter, the
                                       Invested Amount with respect to any date
                                       will be an amount equal to the Original
                                       Invested Amount less the sum of (a) all
                                       payments made in reduction of the
                                       principal of the Certificate Principal
                                       Balance including amounts distributed to
                                       Certificateholders from amounts on
                                       deposit in the Funding Account except (i)
                                       Accelerated Principal
    
 
                                        5
<PAGE>   8
 
                                       Distribution Amounts (as defined below)
                                       and (ii) payments of the Guaranteed
                                       Principal Distribution Amount (as defined
                                       below) under the Policy, (b) all
                                       principal payments that would be made but
                                       for the Master Servicer's legal inability
                                       to deposit Collections in the Collection
                                       Account due to a final determination of a
                                       court of competent jurisdiction in any
                                       Master Servicer's, Subservicer's or
                                       Seller's insolvency proceeding and (c) an
                                       aggregate amount equal to the product of
                                       the Certificateholders' Floating
                                       Allocation Percentage and Liquidation
                                       Loss Amounts (each as defined herein)
                                       that have not been paid from Interest
                                       Collections (as defined herein). The
                                       principal amount of the outstanding
                                       Certificates (the "Certificate Principal
                                       Balance" or "Investor Certificate
                                       Principal Balance") on any date is equal
                                       to the Original Certificate Principal
                                       Balance less the aggregate of amounts
                                       actually distributed as principal on the
                                       Certificates (including Accelerated
                                       Principal Distribution Amounts and any
                                       Guaranteed Principal Distribution Amounts
                                       drawn under the Policy) to the
                                       Certificateholders. On any Distribution
                                       Date the Seller will hold the remaining
                                       undivided interest in the Pool Balance
                                       (the "Seller Interest"), which is equal
                                       to the percentage interest in the Trust
                                       determined by dividing (a) the Pool
                                       Balance as of the end of the related
                                       Collection Period minus the Invested
                                       Amount reduced by Principal Collections
                                       on deposit in the Funding Account in each
                                       case immediately following such
                                       Distribution Date, by (b) the Pool
                                       Balance as of the end of the related
                                       Collection Period.
 
                                     The Certificates represent interests in the
                                       Trust and do not represent interests in
                                       or obligations of the Seller, HFC or any
                                       affiliate thereof. Neither the
                                       Certificates nor the Mortgage Loans are
                                       insured or guaranteed by the Federal
                                       Deposit Insurance Corporation (the
                                       "FDIC") or any other governmental agency.
 
SELLER...........................    HFC Revolving Corporation is a corporation
                                       organized under the laws of the State of
                                       Delaware and is a wholly-owned special
                                       purpose subsidiary of HFC. The Seller
                                       intends to transfer the Cut-Off Balances
                                       and Additional Balances purchased from
                                       the Subservicers to the Trust pursuant to
                                       the Agreement.
 
SUBSERVICERS.....................    Household Realty Corporation, Household
                                       Finance Corporation of California,
                                       Household Finance Corporation II,
                                       Household Finance Corporation III,
                                       Household Finance Industrial Loan
                                       Company, Household Finance Realty
                                       Corporation of New York, Household
                                       Financial Center Inc., Household Finance
                                       Realty Corporation of Nevada, Household
                                       Industrial Loan Company of Kentucky,
                                       Household Finance Industrial Loan Company
                                       of Iowa, Household Finance Consumer
                                       Discount Company, Household Industrial
                                       Finance Company and Mortgage One
                                       Corporation (collectively, the
                                       "Subservicers" and each individually, a
                                       "Subservicer"), are wholly-owned
                                       subsidiaries of HFC,
 
                                        6
<PAGE>   9
 
                                       licensed to make home equity loans in the
                                       states in which the Mortgage Loans were
                                       originated. The Subservicers will sell
                                       the Cut-Off Balances with respect to the
                                       Initial Mortgage Loans on the Closing
                                       Date and intend to sell the Cut-Off
                                       Balances with respect to the Subsequent
                                       Funding Mortgage Loans, any Eligible
                                       Substitute Mortgage Loans and any
                                       Additional Balances funded pursuant to
                                       the Credit Line Agreements to the Seller
                                       pursuant to the Receivables Purchase
                                       Agreement. The Subservicers will also
                                       assign all right, title and interest in
                                       the Related Documents, other than the
                                       right or obligation to fund additional
                                       draws, to the Trustee. The Credit Line
                                       Agreements will remain in the possession
                                       of the Subservicers, except as provided
                                       herein.
 
MASTER SERVICER..................    Household Finance Corporation, a subsidiary
                                       of Household International, Inc., will be
                                       the master servicer of the Mortgage Loans
                                       and the related notes, mortgages and
                                       other related documents (collectively,
                                       the "Related Documents"). Each Mortgage
                                       Loan will be subserviced by the
                                       appropriate Subservicer on behalf of HFC
                                       as Master Servicer.
 
TRUSTEE..........................    The First National Bank of Chicago, a
                                       national banking association ("Trustee").
 
   
CERTIFICATE INSURER..............    Capital Markets Assurance Corporation, a
                                       monoline stock insurance corporation
                                       organized under the laws of the State of
                                       New York ("CapMAC" or the "Certificate
                                       Insurer").
    
 
THE MORTGAGE LOANS...............    Unless otherwise noted in this Prospectus,
                                       all statistical information included
                                       herein with respect to the Initial
                                       Mortgage Loans is as of the close of the
                                       last billing cycle for each such Mortgage
                                       Loan on or before November 1, 1996 (the
                                       "Pool Date").
 
   
                                     The Credit Line Agreements, pursuant to
                                       which the Initial Mortgage Loans are
                                       funded were originated by a Subservicer
                                       in HFC's revolving home equity credit
                                       line program. The Initial Mortgage Loans
                                       will meet the criteria specified in the
                                       Agreement as of their Cut-Off Date. The
                                       Initial Mortgage Loans are secured by
                                       mortgages (of which, approximately 29.62%
                                       by principal balance are first mortgages,
                                       approximately 70.02% by principal balance
                                       are second mortgages, and the remainder
                                       are third mortgages) on residential
                                       properties which are primarily one- to
                                       four-family properties located in 38
                                       states. As of the Pool Date, the
                                       aggregate of the Trust Balances of the
                                       Initial Mortgage Loans was
                                       $796,280,720.37 with approximately 61.97%
                                       by principal balance being adjustable
                                       rate mortgages (the "Adjustable Rate
                                       Mortgages") and the remainder being fixed
                                       rate mortgages (the "Fixed Rate
                                       Mortgages"). The combined loan-to-value
                                       ratio of a Mortgage Loan is computed at
                                       the maximum amount the borrower was
                                       permitted to draw down under the Credit
                                       Line Agreement (the
    
 
                                        7
<PAGE>   10
 
   
                                       "Credit Limit") and taking into account
                                       the amounts of any related senior
                                       mortgage loans (the "Combined Loan-
                                       to-Value Ratio"). Generally the Combined
                                       Loan-to-Value Ratio of the Initial
                                       Mortgage Loans did not exceed 100%, based
                                       upon an appraisal of the Mortgaged
                                       Property obtained by the Subservicer
                                       which originated the Mortgage Loan at the
                                       time of execution of the Credit Line
                                       Agreement governing such Mortgage Loan.
                                       The weighted average Combined
                                       Loan-to-Value Ratio of the Initial
                                       Mortgage Loans was approximately 79.97%
                                       as of the Pool Date. The term to maturity
                                       for most Initial Mortgage Loans at
                                       origination was fifteen years or, in some
                                       cases, ten years (with a portion of such
                                       Mortgage Loans being subject to call at
                                       the option of the related Subservicer
                                       commencing not earlier than six years or,
                                       in some cases, twelve years after such
                                       date of origination). The weighted
                                       average credit limit utilization rate of
                                       the Initial Mortgage Loans was
                                       approximately 96.02% as of the Pool Date.
                                       See "The HFC Revolving Home Equity
                                       Lending Program" herein.
    
 
                                     Each Initial Mortgage Loan falls within one
                                       of fourteen monthly billing cycles of the
                                       Master Servicer, ending on the 4th, 5th,
                                       6th, 8th, 10th, 11th, 12th, 16th, 17th,
                                       18th, 19th, 20th, 25th and 26th days,
                                       respectively, of each calendar month
                                       (each a "Cycle Date"). The Collection
                                       Period for any Mortgage Loan for any
                                       Distribution Date will be the one month
                                       period ending on the Cycle Date for such
                                       Mortgage Loan in the month preceding the
                                       month of the related Distribution Date.
 
   
                                     Under the terms of the Credit Line
                                       Agreements, borrowers generally may
                                       obtain advances of principal (up to the
                                       respective Credit Limits, and in certain
                                       cases in excess of the Credit Limit) and
                                       repay such principal from time to time.
                                       Billing statements are generally produced
                                       as of the related Cycle Date reflecting
                                       all payment activity and any additional
                                       borrowings by the borrower since the last
                                       Cycle Date. Minimum monthly payments are
                                       required to be made on each Mortgage
                                       Loan. The minimum monthly payment (the
                                       "Minimum Monthly Payment") for a Mortgage
                                       Loan is generally equal to the greatest
                                       of (x) a specified percentage (which
                                       ranges between 0.85% and 2.10% depending
                                       on the date the loan was originated, the
                                       related interest rate and certain factors
                                       in the borrower's credit profile) of the
                                       Loan Balance (plus any late charge fee or
                                       bad check fee ("Administrative Charges")
                                       and credit insurance charges), (y) a
                                       designated minimum dollar amount, which
                                       is generally $50, plus any Administrative
                                       Charges and credit insurance charges and
                                       (z) the amount of interest accrued during
                                       the related billing cycle plus any
                                       Administrative Charges and credit
                                       insurance charges. However, in the case
                                       of Adjustable Rate Mortgages in Illinois
                                       which were originated prior to November
                                       6, 1989, the Minimum Monthly Payment is
                                       generally
    
 
                                        8
<PAGE>   11
 
   
                                       computed solely pursuant to clause (z)
                                       above. Except for any principal
                                       amortization which may result from such
                                       Minimum Monthly Payments, there are no
                                       required payments of principal, except
                                       that the entire outstanding principal
                                       amount for most of the Mortgage Loans is
                                       due fifteen years, or, in some cases, ten
                                       years from the date of origination
                                       (unless the related Subservicer has and
                                       exercises an option to call, as described
                                       above, which option the Subservicers
                                       currently have no intention of
                                       exercising). The Subservicers intend to
                                       enforce the scheduled principal repayment
                                       date of all Mortgage Loans. However, the
                                       Subservicers may extend such date in
                                       their sole discretion. See "The HFC
                                       Revolving Home Equity Lending Program --
                                       Home Equity Revolving Credit Line Loan
                                       Terms".
    
 
   
                                     The individual principal balances of the
                                       Initial Mortgage Loans at the Pool Date
                                       ranged from approximately $250 to
                                       $336,293, and averaged approximately
                                       $32,648. As of the Pool Date, the highest
                                       Credit Limit of any Initial Mortgage Loan
                                       was $340,000, and their average Credit
                                       Limit was approximately $34,787. The
                                       weighted average remaining term to stated
                                       maturity at the Pool Date of the Initial
                                       Mortgage Loans was approximately 146
                                       months (excluding certain loans
                                       comprising .03% of the aggregate of all
                                       Trust Balances for which the stated
                                       maturity date has been extended). The
                                       latest scheduled maturity of any Initial
                                       Mortgage Loan, except as noted herein, is
                                       October 18, 2011. See "The HFC Revolving
                                       Home Equity Lending Program" herein.
    
 
                                     All of the Initial Mortgage Loans are
                                       covered by standard hazard insurance
                                       policies insuring against losses due to
                                       fire and various other causes. See
                                       "Description of the Certificates --
                                       Hazard Insurance" herein.
 
                                     The Subsequent Funding Mortgage Loans will
                                       (subject to the availability thereof and
                                       to certain limitations and conditions) be
                                       conveyed to the Trust and be originated
                                       by one or more of the Subservicers. The
                                       Subsequent Funding Mortgage Loans will
                                       meet the criteria specified in the
                                       Agreement as of their Cut-Off Date. The
                                       Trust intends to purchase the Subsequent
                                       Funding Mortgage Loans, if available from
                                       time-to-time on any Distribution Date
                                       during the Funding Period. The Subsequent
                                       Funding Mortgage Loans will be purchased
                                       with amounts on deposit in the Funding
                                       Account.
 
                                     The Seller has entered into a Receivables
                                       Purchase Agreement dated as of November
                                       1, 1996, between the Seller, as
                                       purchaser, and each Subservicer, as a
                                       seller (together with any supplements
                                       thereto, the "Receivables Purchase
                                       Agreement"). Pursuant to the Receivables
                                       Purchase Agreement, the Subservicers have
                                       sold to the Seller all of their right,
                                       title and interest in and to the Cut-Off
                                       Balances
 
                                        9
<PAGE>   12
 
                                       and all proceeds thereof including from
                                       hazard insurance policies, if any, and
                                       any title insurance relating thereto, and
                                       are obligated to sell to the Seller any
                                       Additional Balances arising under the
                                       Credit Line Agreements from time to time
                                       after the respective Cut-Off Dates.
                                       Pursuant to the Agreement, the Seller has
                                       also assigned to the Trust its rights
                                       under the Receivables Purchase Agreement.
                                       See "Description of the Receivables
                                       Purchase Agreement".
 
                                     Subject to certain conditions, if on any
                                       Retransfer Notification Date (as defined
                                       herein) the percentage of the Pool
                                       Balance allocable to the Seller Interest
                                       exceeds 2%, the Seller may, but shall not
                                       be obligated to, remove from the Trust
                                       certain Mortgage Loans, without notice to
                                       the Certificateholders (the "Removed
                                       Balances"). The Seller is permitted to
                                       designate which Mortgage Loans will be
                                       Removed Balances only upon satisfaction
                                       of certain conditions, including the
                                       following: (i) the Seller shall have
                                       delivered to the Trustee a computer file
                                       containing a list of all Mortgage Loans
                                       in the Trust after such removal; (ii) the
                                       Seller shall have represented that no
                                       selection procedures reasonably believed
                                       by the Seller to be adverse to the
                                       interests of the Certificateholders or
                                       the Certificate Insurer were utilized in
                                       selecting the Removed Balances; (iii) the
                                       Rating Agencies (as defined herein) shall
                                       have been notified of the proposed
                                       retransfer and prior to the date of
                                       retransfer shall not have notified the
                                       Seller in writing that such retransfer
                                       would result in a reduction or withdrawal
                                       of the then-current ratings assigned to
                                       the Certificates; (iv) the proposed
                                       retransfer shall not, in the reasonable
                                       belief of the Seller, cause a Rapid
                                       Amortization Event (as defined herein) to
                                       occur; (v) the Rapid Amortization Period
                                       (as defined herein) shall not have
                                       commenced; (vi) the percentage of the
                                       Pool Balance allocated to the Seller
                                       Interest (after giving effect to such
                                       removal) shall be at least equal to 2%
                                       and (vii) the Seller shall have delivered
                                       to the Trustee an officer's certificate
                                       confirming the items set forth in (i)
                                       through (vi) above. In addition, the
                                       Mortgage Loans remaining in the Trust
                                       must meet certain delinquency
                                       requirements. Notwithstanding the
                                       foregoing however, the Seller may, at its
                                       sole discretion, remove Mortgage Loans
                                       from the Trust at any time, provided (x)
                                       the percentage of the Pool Balance
                                       allocated to the Seller Interest (after
                                       giving effect to such removal) shall be
                                       at least equal to 2%, (y) the Seller
                                       shall have delivered a certificate to the
                                       Trustee identifying the Mortgage Loan to
                                       be retransferred as well as confirming
                                       the satisfaction of certain other
                                       conditions, and (z) the Mortgage Loan is
                                       being removed to facilitate the servicing
                                       of the Mortgage Loan, including
                                       modifications to the Credit Line
                                       Agreement.
 
                                     In addition to the ability of the Seller to
                                       remove the Removed Balances from the
                                       Trust as described above, the
 
                                       10
<PAGE>   13
 
                                       Seller shall, to the extent set forth in
                                       the Agreement, remove all Defective
                                       Mortgage Loans (as defined herein) from
                                       the Trust. In the event that such removal
                                       causes the Seller Interest to be reduced
                                       below 2% of the Pool Balance (after
                                       giving effect to any substitutions as
                                       described herein), the Seller will be
                                       obligated to make a deposit into the
                                       Collection Account in an amount equal to
                                       the amount by which the Seller Interest
                                       would have been, but for such deposit,
                                       reduced below 2% of such Pool Balance
                                       (the "Retransfer Deposit Amount"). See
                                       "Description of the Certificates --
                                       Assignment of Mortgage Loans" herein.
 
                                     During the term of the Trust, the Mortgage
                                       Loans and all Additional Balances will be
                                       transferred to and become property of the
                                       Trust in accordance with the terms of the
                                       Agreement. The aggregate amount of the
                                       Pool Balance at any time will fluctuate
                                       from day to day because the amount of the
                                       draws and the amount of principal
                                       payments by borrowers will usually differ
                                       on each day. Because the Seller Interest
                                       represents the interest in the Trust not
                                       represented by the Invested Amount and
                                       the aggregate undivided interest in the
                                       Mortgage Loans of the Trust evidenced by
                                       the Certificates will never exceed the
                                       Original Invested Amount regardless of
                                       the amount of the Pool Balance at any
                                       time, the amount of the Seller Interest
                                       will fluctuate from day to day as draws
                                       are made and principal is paid under the
                                       Credit Line Agreements.
 
                                     The Seller Interest will represent the
                                       right to the assets of the Trust not
                                       represented by the Invested Amount. The
                                       Seller has the right to sell, or borrow
                                       against, the Seller Interest at any time,
                                       provided (i) the Rating Agencies have
                                       notified the Seller and the Trustee in
                                       writing that such action will not result
                                       in the reduction or withdrawal of the
                                       ratings assigned to the Certificates and
                                       (ii) certain other conditions are
                                       satisfied. The Subservicers have the
                                       right to transfer their respective
                                       interests in the Credit Line Agreements
                                       and transfer their obligations under the
                                       Receivables Purchase Agreement at any
                                       time, provided (i) the transferee agrees
                                       in writing to assume all obligations of
                                       the affected Subservicer contained in the
                                       Receivables Purchase Agreement, (ii) the
                                       Rating Agencies have notified the Seller
                                       and the Trustee in writing that such
                                       transfer will not result in the reduction
                                       or withdrawal of the ratings assigned to
                                       the Certificates and (iii) certain other
                                       conditions are satisfied.
 
   
DENOMINATIONS....................    The Certificates will be issued in the
                                       aggregate principal amount set forth on
                                       the cover page hereof, in fully
                                       registered denominations of $100,000 and
                                       integral multiples of $1,000 in excess
                                       thereof. The Certificates, at the Closing
                                       Date, represent an undivided ownership
                                       interest in 97.50% of the Mortgage Loans.
    
 
                                       11
<PAGE>   14
 
   
REGISTRATION OF CERTIFICATES.....    Holders of the Certificates may elect to
                                       hold their Certificate interests through
                                       DTC, in the United States, or Cedel Bank,
                                       societe anonyme ("CEDEL") or the
                                       Euroclear System ("Euroclear"), in
                                       Europe. Transfers within DTC, CEDEL or
                                       Euroclear, as the case may be, will be in
                                       accordance with the usual rules and
                                       operating procedures of the relevant
                                       system. Cross-market transfers between
                                       persons holding directly or indirectly
                                       through DTC, on the one hand, and
                                       counterparties holding directly or
                                       indirectly through CEDEL or Euroclear, on
                                       the other, will be effected in DTC
                                       through Citibank, N.A. ("Citibank") or
                                       The Chase Manhattan Bank ("Chase"), the
                                       relevant depositaries (collectively, the
                                       "Depositaries") of CEDEL or Euroclear,
                                       respectively, and each a participating
                                       member of DTC. The Certificates will
                                       initially be registered in the name of
                                       CEDE & Co., the nominee of DTC. The
                                       interests of the Certificateholders will
                                       be represented by book-entries on the
                                       records of DTC and participating members
                                       thereof. Certificates will be available
                                       in definitive form only under the limited
                                       circumstances described herein. All
                                       references in this Prospectus to
                                       "holders", "Certificateholders" or
                                       "Investor Certificateholders" shall be
                                       deemed, unless the context clearly
                                       requires otherwise, to refer to the
                                       Certificateholders. See "Risk Factors"
                                       and "Description of the
                                       Certificates -- Registration of
                                       Certificates" herein.
    
 
INTEREST.........................    Interest on the Certificates will be
                                       distributed monthly on the 20th day of
                                       each month or, if such day is not a
                                       Business Day (as defined herein), on the
                                       next succeeding Business Day (each, a
                                       "Distribution Date"), commencing on
                                       December 20, 1996, at the Certificate
                                       Rate for the related Interest Period (as
                                       defined below). The Certificate Rate for
                                       each Distribution Date will equal the
                                       London interbank offered rate for
                                       one-month United States dollar deposits
                                       ("LIBOR"), determined as specified
                                       herein, as of the second LIBOR Business
                                       Day prior to the immediately preceding
                                       Distribution Date (or as of November   ,
                                       1996, in the case of the first
                                       Distribution Date) plus    % per annum,
                                       subject to a maximum rate as described
                                       under "Description of the Certificates"
                                       herein. In addition, if the Certificate
                                       Rate exceeds the weighted average of the
                                       Net Loan Rates, then the
                                       Certificateholders will receive such
                                       difference (the "Carryover Amount") only
                                       from Interest Collections allocable to
                                       Certificateholders as described under
                                       "Payments of Interest Collections"
                                       herein. "Net Loan Rate" with respect to
                                       any Mortgage Loan means the Loan Rate (as
                                       defined herein) of a Mortgage Loan minus
                                       the Servicing Fee (as defined herein).
                                       The Carryover Amount will not bear
                                       interest and will not be paid out of
                                       funds on deposit in the Spread Account or
                                       draws under the Policy. See "Description
                                       of the Certificates -- Distributions on
                                       the Certificates -- Calculation of
                                       Certificate Rate; Limitation on Interest
                                       Payments on Certificates". Interest
 
                                       12
<PAGE>   15
 
   
                                       on the Certificates in respect of any
                                       Distribution Date will accrue from the
                                       preceding Distribution Date (or in the
                                       case of the first Distribution Date, from
                                       the date of the initial issuance of the
                                       Certificates (the "Closing Date"))
                                       through the day preceding such
                                       Distribution Date (each such period, an
                                       "Interest Period") on the basis of a 360-
                                       day year and the actual number of days in
                                       such Interest Period. Interest for any
                                       Distribution Date due but not paid on
                                       such Distribution Date (other than any
                                       Carryover Amounts) will be due on the
                                       next succeeding Distribution Date
                                       together with additional interest on such
                                       amount at a rate equal to the Certificate
                                       Rate. Interest payments will be funded
                                       from the portion of the
                                       Certificateholders' Floating Allocation
                                       Percentage of Interest Collections
                                       collected during the related Collection
                                       Period (as defined herein) and, if
                                       necessary, from transfers from the Spread
                                       Account and draws on the Policy. See
                                       "Description of the Certificates".
    
 
   
COLLECTIONS......................    All collections on the Mortgage Loans will
                                       be allocated in accordance with the
                                       Credit Line Agreements between amounts
                                       collected in respect of interest,
                                       including Net Liquidation Proceeds (as
                                       defined below) constituting interest and
                                       Recovered Charge Off Amounts (as defined
                                       herein) (together with any earnings
                                       received on the amounts deposited in the
                                       Funding Account, the "Interest
                                       Collections"), and amounts collected in
                                       respect of principal, including
                                       Retransfer Deposit Amounts (as defined
                                       herein) and Net Liquidation Proceeds
                                       constituting principal (exclusive of
                                       Recovered Charge Off Amounts) (the
                                       "Principal Collections"). Net Liquidation
                                       Proceeds with respect to a Mortgage Loan
                                       are equal to the aggregate of all amounts
                                       received upon liquidation of such
                                       Mortgage Loan reduced by related
                                       expenses, but not including the portion,
                                       if any, of such amount that exceeds the
                                       sum of the Trust Balance of the Mortgage
                                       Loan at the end of the Collection Period
                                       immediately preceding the Collection
                                       Period in which such Mortgage Loan became
                                       a Liquidated Mortgage Loan plus accrued
                                       and unpaid interest thereon plus any
                                       Charge Off Amounts related thereto. See
                                       "Description of the
                                       Certificates -- Allocations and
                                       Collections."
    
 
   
                                     During the Funding Period, the Scheduled
                                       Principal Distribution Amount (as defined
                                       herein) will be deposited in the Funding
                                       Account. However, in the event that the
                                       amount of Principal Collections deposited
                                       in the Funding Account on any
                                       Distribution Date during the Funding
                                       Period prior to the last Distribution
                                       Date thereof exceeds 17% of the sum of
                                       the Cut-Off Balances of the Initial
                                       Mortgage Loans, the amount of such excess
                                       (after giving effect to the acquisition
                                       of any Additional Balances on or prior to
                                       such Distribution Date) will be
                                       distributed to the Certificateholders on
                                       such Distribution Date as payment of
    
 
                                       13
<PAGE>   16
 
   
                                       principal. In the event that not all of
                                       the Principal Collections on deposit in
                                       the Funding Account have been used to
                                       acquire Subsequent Funding Mortgage Loans
                                       on the last Distribution Date of the
                                       Funding Period, then such Principal
                                       Collections will be used to acquire any
                                       remaining Additional Balances on such
                                       Distribution Date and any remaining
                                       Principal Collections on deposit
                                       thereafter will be distributed to the
                                       Certificateholders on such Distribution
                                       Date as payment of principal. Following
                                       the expiration of the Funding Period and
                                       prior to the commencement of the Rapid
                                       Amortization Period, Principal
                                       Collections from the Mortgage Loans will
                                       be allocated as follows: (a) to the
                                       Certificateholders, the Scheduled
                                       Principal Distribution Amount, and (b) to
                                       the Seller, all Principal Collections not
                                       distributed to the Certificateholders.
                                       Upon the commencement of the Rapid
                                       Amortization Period, the
                                       Certificateholders will receive Principal
                                       Collections in accordance with the Fixed
                                       Allocation Percentage as described below
                                       under "Payments of Principal
                                       Collections." Payments of principal to
                                       Certificateholders over the term of the
                                       Trust will not exceed the Original
                                       Certificate Principal Balance.
    
 
                                     Principal Collections distributed to
                                       Certificateholders will reduce both the
                                       Invested Amount and the Certificate
                                       Principal Balance by the amount so
                                       distributed. Payments of the Guaranteed
                                       Principal Distribution Amount from
                                       amounts drawn under the Policy and
                                       Accelerated Principal Distribution
                                       Amounts paid from Interest Collections
                                       allocable to the Certificateholders will
                                       reduce only the Certificate Principal
                                       Balance. In addition, the Invested Amount
                                       and the Certificate Principal Balance
                                       will be reduced by Interest Collections
                                       used to pay losses allocable to the
                                       Certificateholders' interest as described
                                       below. If the Invested Amount has been
                                       reduced below the Certificate Principal
                                       Balance, the Certificateholders will be
                                       protected either by funds in the Spread
                                       Account or draws under the Policy.
 
                                     The Master Servicer will, except as
                                       otherwise described herein, generally
                                       deposit Interest Collections and
                                       Principal Collections on the Mortgage
                                       Loans allocable and distributable to the
                                       Certificateholders in an account
                                       established for such purpose under the
                                       Agreement (the "Collection Account"). See
                                       "Description of the Certificates --
                                       Payments on Mortgage Loans; Deposits to
                                       Collection Account; Deposits to Funding
                                       Account".
 
   
FUNDING ACCOUNT; FUNDING
PERIOD...........................    The Funding Account will be an Eligible
                                       Account (as defined herein) established
                                       with the Trustee on the Closing Date. On
                                       each Distribution Date during the Funding
                                       Period the Scheduled Principal
                                       Distribution Amount for such Distribution
                                       Date will be deposited in the Funding
                                       Account and may be used by the Trustee to
                                       purchase up to an aggregate of
                                       $135,367,725 of Subsequent Funding
    
 
                                       14
<PAGE>   17
 
   
                                       Mortgage Loans, which is equal to 17% of
                                       the sum of the Cut-Off Balances of the
                                       Initial Mortgage Loans. On any
                                       Distribution Date during the Funding
                                       Period on which the aggregate amount
                                       deposited into the Funding Account
                                       exceeds $135,367,725, such excess will be
                                       distributed to the Certificateholders as
                                       principal. In the event that not all of
                                       the Principal Collections on deposit in
                                       the Funding Account have been used to
                                       acquire Subsequent Funding Mortgage Loans
                                       on the last Distribution Date of the
                                       Funding Period, then such Principal
                                       Collections will be used to acquire any
                                       remaining Additional Balances on such
                                       Distribution Date and any remaining
                                       Principal Collections on deposit
                                       thereafter will be distributed to the
                                       Certificateholders as payment of
                                       principal.
    
 
   
                                     The Funding Period is the period commencing
                                       on the Closing Date and ending on the
                                       earlier of (i) the Distribution Date on
                                       which the Trustee has purchased an
                                       aggregate of $135,367,725 of Subsequent
                                       Funding Mortgage Loans from funds on
                                       deposit in the Funding Account but in no
                                       event later than the 15th Distribution
                                       Date after the Closing Date and (ii) the
                                       commencement of the Rapid Amortization
                                       Period.
    
 
   
PAYMENTS OF INTEREST
COLLECTIONS......................    The portion of Interest Collections
                                       allocable to the Certificates will equal
                                       the aggregate amount of such collections
                                       multiplied by the Certificateholders
                                       Floating Allocation Percentage. For each
                                       Distribution Date, the
                                       "Certificateholders Floating Allocation
                                       Percentage" shall mean the percentage
                                       equivalent determined by dividing the
                                       Invested Amount at the end of the related
                                       Collection Period by the sum of (a) the
                                       Pool Balance as of the end of the
                                       preceding Collection Period (adjusted for
                                       such Subsequent Funding Mortgage Loans
                                       acquired or Removed Balances removed for
                                       the preceding Distribution Date and
                                       Additional Balances added for the related
                                       Collection Period) and (b) the amount on
                                       deposit in the Funding Account as of the
                                       end of the related Collection Period. The
                                       remaining amount of Interest Collections
                                       shall be allocated to the Seller Interest
                                       as more fully described herein.
    
 
   
                                     Interest Collections allocated to the
                                       Certificates, will be applied in the
                                       following order of priority: (i) as
                                       payment of the Servicing Fee for the
                                       related Collection Period and any accrued
                                       and unpaid Servicing Fee; (ii) as payment
                                       of the accrued interest due and any
                                       overdue accrued interest (other than the
                                       Carryover Amount) on the Certificates
                                       with interest thereon at the Certificate
                                       Rate; (iii) as payment to
                                       Certificateholders of the product of the
                                       Certificateholders Floating Allocation
                                       Percentage and the Liquidation Loss
                                       Amount for such Collection Period; (iv)
                                       as payment for any Liquidation Loss
                                       Amount allocable to the
                                       Certificateholders for a previous
                                       Collection Period that was not (a) funded
                                       by Interest Collections allocable to the
                                       Certificateholders, (b) absorbed by the
                                       Overcollateraliza-
    
 
                                       15
<PAGE>   18
 
                                       tion Amount (as defined below) or (c)
                                       funded by withdrawals from the Spread
                                       Account or by draws on the Policy; (v) as
                                       payment of the premium for the Policy if
                                       not paid directly by the Master Servicer;
                                       (vi) to reimburse the Certificate Insurer
                                       for prior draws made from the Policy and
                                       other amounts due under the Insurance
                                       Agreement (as defined herein); (vii) to
                                       the extent of excess Interest Collections
                                       remaining after payment of (i) through
                                       (vi) as a principal payment to
                                       Certificateholders of an amount as
                                       principal such that the Invested Amount
                                       exceeds the Certificate Principal Balance
                                       by the Required Overcollateralization
                                       Amount, as defined herein (the aggregate
                                       of amounts, if any, paid pursuant to this
                                       clause (vii) being referred to herein as
                                       the "Accelerated Principal Distribution
                                       Amount"); (viii) to the Spread Account in
                                       accordance with the Insurance Agreement;
                                       (ix) as payment to the Certificateholders
                                       of the Carryover Amount for any prior
                                       Distribution Dates that has not
                                       previously been paid; (x) fees due to the
                                       Trustee, to the extent not paid by the
                                       Master Servicer; and (xi) to the Seller.
 
                                     Interest Collections allocated pursuant to
                                       clauses (iii), (iv), (vi) and (vii) above
                                       shall be referred to herein as the
                                       "Certificateholders Excess Interest".
                                       Interest Collections in the amount
                                       described in clause (viii) above shall be
                                       referred to herein as "Certificateholders
                                       Remaining Excess Interest." The
                                       Overcollateralization Amount on any date
                                       of determination is the amount, if any,
                                       by which the Invested Amount exceeds the
                                       Certificate Principal Balance on such
                                       day.
 
                                     Payments to Certificateholders pursuant to
                                       clause (ii) will be interest payments on
                                       the Certificates. Payments to
                                       Certificateholders pursuant to clause
                                       (iii) will be principal payments on the
                                       Certificates and will therefore reduce
                                       the Invested Amount and the Certificate
                                       Principal Balance. Although payments to
                                       Certificateholders of previously
                                       unreimbursed Liquidation Loss Amounts and
                                       the Accelerated Principal Distribution
                                       Amount pursuant to clauses (iv) and
                                       (vii), respectively, will reduce the
                                       Certificate Principal Balance, such
                                       payments will not reduce the Invested
                                       Amount. The Accelerated Principal
                                       Distribution Amount is not guaranteed by
                                       the Policy.
 
   
                                     The "Required Overcollateralization Amount"
                                       is $3,981,404. "Liquidation Loss Amount"
                                       means with respect to any (i) Charged Off
                                       Mortgage Loan, the Charge Off Amount for
                                       the Collection Period in which all or a
                                       portion of the unpaid principal balance
                                       of the Mortgage Loan was charged off by
                                       the Master Servicer, excluding the
                                       Collection Period in which such Charged
                                       Off Mortgage Loan becomes a Liquidated
                                       Mortgage Loan, and (ii) Liquidated
                                       Mortgage Loan, the unrecovered Trust
                                       Balance thereof at the end of the
                                       Collection Period in which such
                                       Liquidated
    
 
                                       16
<PAGE>   19
 
                                       Mortgage Loan became a Liquidated
                                       Mortgage Loan, after giving effect to the
                                       Net Liquidation Proceeds in connection
                                       therewith. See "Description of the
                                       Certificates -- Distributions on the
                                       Certificates."
 
   
PAYMENTS OF PRINCIPAL
COLLECTIONS......................    Except as described below, if the aggregate
                                       amount deposited into the Funding Account
                                       exceeds $135,367,725 (17% of the sum of
                                       the Cut-Off Balances of the Initial
                                       Mortgage Loans), such excess will be
                                       distributed to the Certificateholders as
                                       principal. In the event that not all of
                                       the Principal Collections on deposit in
                                       the Funding Account have been used to
                                       acquire Subsequent Funding Mortgage Loans
                                       on the last Distribution Date of the
                                       Funding Period, then such Principal
                                       Collections will be used to acquire any
                                       remaining Additional Balances on such
                                       Distribution Date and any remaining
                                       Principal Collections on deposit
                                       thereafter will be distributed to the
                                       Certificateholders as payment of
                                       principal. Following the expiration of
                                       the Funding Period and prior to the
                                       commencement of the Rapid Amortization
                                       Period, the amount of Principal
                                       Collections payable to Certificateholders
                                       as of each Distribution Date will equal,
                                       to the extent funds are available
                                       therefor, the Scheduled Principal
                                       Distribution Amount for such Distribution
                                       Date. See "Description of the
                                       Certificates -- Distributions of
                                       Principal Collections." The Scheduled
                                       Principal Distribution Amount is equal to
                                       the lesser of (i) the Maximum Principal
                                       Distribution Amount and (ii) the
                                       Alternative Principal Distribution
                                       Amount, which is the amount, but not less
                                       than zero, of Principal Collections for
                                       the related Collection Period less the
                                       aggregate of principal amounts drawn down
                                       under the Credit Line Agreements during
                                       such Collection Period. On any
                                       Distribution Date, the Seller will then
                                       be entitled to receive as a payment of
                                       principal the Principal Collections for
                                       such Distribution Date that are not
                                       distributed to the Certificateholders or
                                       deposited into the Funding Account. With
                                       respect to any Distribution Date, the
                                       Maximum Principal Distribution Amount
                                       will equal the Fixed Allocation
                                       Percentage of Principal Collections for
                                       the related Collection Period. The Fixed
                                       Allocation Percentage is initially 97.50%
                                       and for each Distribution Date will be
                                       reset to the extent that Subsequent
                                       Funding Mortgage Loans were acquired or
                                       Removed Balances were removed with
                                       respect to the immediately preceding
                                       Distribution Date. With respect to such
                                       reset, the Fixed Allocation Percentage
                                       shall be the percentage equivalent
                                       determined by dividing the Invested
                                       Amount at the end of the related
                                       Collection Period by the sum of (a) the
                                       Pool Balance as of the end of the related
                                       Collection Period (adjusted for such
                                       Subsequent Funding Mortgage Loans
                                       acquired or Removed Balances removed for
                                       the preceding Distribution Date and
                                       Additional Balances added for the related
                                       Collection Period) and (b) the amount on
                                       deposit in the Funding Account as of the
                                       end of the related Collection Period.
                                       With respect to any Distribution Date to
                                       occur after a Rapid Amortization Event,
                                       the Fixed
    
 
                                       17
<PAGE>   20
 
   
                                       Allocation Percentage will be the Fixed
                                       Allocation Percentage immediately prior
                                       to such Rapid Amortization Event.
    
 
                                     Distributions of Principal Collections
                                       based upon the Fixed Allocation
                                       Percentage may result in distributions of
                                       Principal Collections to
                                       Certificateholders in amounts that are
                                       greater relative to the declining balance
                                       of the Pool Balance than would be the
                                       case if the Certificateholders Floating
                                       Allocation Percentage were used to
                                       determine the percentage of Principal
                                       Collections distributed in respect of the
                                       Invested Amount.
 
   
                                     Upon the commencement of the Rapid
                                       Amortization Period, the Scheduled
                                       Principal Distribution Amount will no
                                       longer apply, but instead, the amount of
                                       Principal Collections payable to the
                                       Certificateholders will be equal to the
                                       Maximum Principal Distribution Amount.
                                       The Rapid Amortization Period will
                                       commence on the earlier of (x) the
                                       Distribution Date in April 2005 and (y)
                                       the day, if any, upon which a Rapid
                                       Amortization Event occurs. See
                                       "Description of the Certificates -- Rapid
                                       Amortization Period" and "-- Rapid
                                       Amortization Events."
    
 
   
POLICY...........................    On or before the Closing Date, the Policy
                                       will be issued by the Certificate Insurer
                                       pursuant to the provisions of the
                                       Agreement and the Insurance and
                                       Reimbursement Agreement (the "Insurance
                                       Agreement") to be dated as of November 1,
                                       1996 among the Seller, HFC, as Master
                                       Servicer, the Certificate Insurer and the
                                       Trustee. The Policy will unconditionally
                                       and irrevocably guarantee payment of the
                                       Deficiency Amount up to $450,000,000 in
                                       principal payments plus, until such time
                                       as the Certificate Insurer has made
                                       payments in respect of principal under
                                       the Policy in an amount equal to
                                       $450,000,000, accrued and unpaid interest
                                       on the Certificates. The Deficiency
                                       Amount is equal to the sum of the
                                       following two amounts: (a) any shortfall
                                       in the amount available from Interest
                                       Collections allocable to the Certificates
                                       and amounts on deposit in the Spread
                                       Account to pay interest accrued at the
                                       Certificate Rate (other than the
                                       Carryover Amounts) on the outstanding
                                       principal amounts of the Certificates
                                       after payments of all amounts, if any,
                                       due from the Collection Account relating
                                       to unpaid Servicing Fees and (b) after
                                       applying any amounts available in the
                                       Spread Account, the amount, if any, (the
                                       "Guaranteed Principal Distribution
                                       Amount") which is required to reduce the
                                       current Certificate Principal Balance to
                                       an amount equal to the Invested Amount
                                       after giving effect to (i) the
                                       distributions, if any, to the
                                       Certificateholders of principal on such
                                       Distribution Date, and (ii) the
                                       allocation of any Liquidation Loss
                                       Amounts to the Invested Amount on such
                                       Distribution Date.
    
 
                                     In accordance with the Insurance Agreement,
                                       the Trust will be required to establish
                                       and maintain an account (the
 
                                       18
<PAGE>   21
 
   
                                       "Spread Account") for the benefit of the
                                       Certificate Insurer and the
                                       Certificateholders, to be used prior to
                                       any draws upon the Policy. Any amounts on
                                       deposit in the Spread Account will be
                                       available to the Trustee to be
                                       transferred to the Collection Account to
                                       pay any Deficiency Amount prior to a draw
                                       under the Policy. The Insurance Agreement
                                       will require that the Certificateholders'
                                       Remaining Excess Interest be deposited
                                       into the Spread Account until funds in
                                       the Spread Account are equal to an amount
                                       specified by such agreement. Such amount
                                       may be reduced or eliminated by agreement
                                       between the Seller and the Certificate
                                       Insurer and without the consent of the
                                       Certificateholders. Any amounts on
                                       deposit in the Spread Account upon
                                       termination of the Trust and after
                                       reimbursement of amounts drawn under the
                                       Policy to the Certificate Insurer
                                       together with interest thereon and the
                                       payment of all other amounts owing to the
                                       Certificate Insurer pursuant to the
                                       Insurance Agreement will be distributed
                                       to the Seller as provided in the
                                       Insurance Agreement.
    
 
                                     In the absence of payments from the Spread
                                       Account or under the Policy,
                                       Certificateholders will directly bear the
                                       credit and other risks associated with
                                       their undivided interest in the Trust.
                                       See "Description of the Certificate
                                       Insurer -- The Policy".
 
                                     In the event that the Certificate Insurer's
                                       claims paying ratings have been lowered
                                       by any of the Rating Agencies, the Master
                                       Servicer may, but is not obligated to,
                                       upon payment of all amounts due the
                                       Certificate Insurer, replace the Policy
                                       with a financial guaranty insurance
                                       policy or policies issued by another
                                       insurer or arrange for any other form of
                                       credit enhancement, provided that the
                                       ratings on the claims paying ability of
                                       such replacement insurer are higher than
                                       those of the certificate insurer sought
                                       to be replaced (after giving effect to
                                       such downgrade). In the event of such
                                       downgrading, the Master Servicer also
                                       may, but is not obligated to, restructure
                                       the credit enhancement provided to the
                                       Certificates, including eliminating the
                                       Policy without replacement; provided that
                                       the Rating Agencies consent to such
                                       restructuring and the Rating Agencies
                                       confirm that the ratings of the
                                       Certificates will be increased from their
                                       current levels (after giving effect to
                                       such downgrading) as a result of such
                                       restructuring.
 
OVERCOLLATERALIZATION............    The distribution of Accelerated Principal
                                       Distribution Amounts, if any, to
                                       Certificateholders may result in the
                                       Invested Amount being greater than the
                                       Certificate Principal Balance, thereby
                                       creating overcollateralization. The
                                       amount, if any, of such
                                       overcollateralization would be available
                                       to absorb any Liquidation Loss Amount
                                       that is allocated to Certificateholders.
                                       Payments of Accelerated Principal
                                       Distribution Amounts are not covered by
                                       the
 
                                       19
<PAGE>   22
 
                                       Policy. Any remaining Liquidation Loss
                                       Amounts allocable to the
                                       Certificateholders and not covered by
                                       such overcollateralization will be
                                       covered by funds in the Spread Account or
                                       by draws on the Policy to the extent
                                       provided herein.
 
RECORD DATE......................    The day immediately preceding a
                                       Distribution Date.
 
SERVICING........................    The Master Servicer will be responsible for
                                       servicing, managing and making
                                       collections on the Mortgage Loans and the
                                       Related Documents. Each Mortgage Loan and
                                       the Related Documents will be subserviced
                                       by the appropriate Subservicer on behalf
                                       of HFC, as Master Servicer. The Master
                                       Servicer will cause Interest Collections,
                                       together with investment earnings from
                                       the Funding Account, if any, and
                                       Principal Collections to be deposited
                                       into the Collection Account, except
                                       during the Funding Period when certain
                                       Principal Collections will be deposited
                                       into the Funding Account, as described
                                       herein. On the fifth Business Day prior
                                       to any Distribution Date (the
                                       "Determination Date"), the Master
                                       Servicer will calculate, and instruct the
                                       Trustee regarding the amounts to be paid,
                                       as described herein, with respect to the
                                       related Collection Period to the
                                       Certificateholders. See "Description of
                                       the Certificates -- Distributions on the
                                       Certificates."
 
                                     As long as HFC is the Master Servicer it
                                       will receive, or be entitled to retain
                                       from the Certificateholder's portion of
                                       Interest Collections, on behalf of itself
                                       and the Subservicers, a portion of the
                                       Interest Collections as a monthly
                                       servicing fee (the "Servicing Fee" or
                                       "Investor Servicing Fee") in the amount
                                       of 1.00% per annum of the Invested Amount
                                       (less any amount on deposit in the
                                       Funding Account, exclusive of any
                                       investment earnings thereon), as
                                       servicing compensation from the Trust.
                                       See "Description of the
                                       Certificates -- Servicing Compensation
                                       and Payment of Expenses." In certain
                                       limited circumstances, the Master
                                       Servicer may resign or be removed, in
                                       which event either the Trustee or a
                                       third-party servicer will be appointed as
                                       a successor Master Servicer. See
                                       "Description of the
                                       Certificates -- Certain Matters Regarding
                                       the Master Servicer and the Seller."
 
   
FINAL PAYMENT OF PRINCIPAL;
TERMINATION......................    Upon payment of any amounts due the
                                       Certificate Insurer, the Trust will
                                       terminate on the Distribution Date
                                       following the earlier of (i) the date on
                                       which the Certificate Principal Balance
                                       is zero and after which there are no
                                       unreimbursed Liquidation Loss Amounts
                                       allocable to the Certificateholders, (ii)
                                       the final payment or other liquidation of
                                       the last Mortgage Loan in the Trust or
                                       the disposition of all property acquired
                                       upon foreclosure or grant of deed in lieu
                                       of foreclosure of any Mortgage Loan and
                                       (iii) the Distribution Date in February
                                       2018. The Certificateholders' interest in
                                       the Mortgage Loans will be subject
    
 
                                       20
<PAGE>   23
 
   
                                       to optional retransfer to the Seller on
                                       any Distribution Date upon the reduction
                                       of the Certificate Principal Balance to
                                       an amount less than or equal to
                                       $77,637,300 (10% of the Original
                                       Certificate Principal Balance) and all
                                       amounts due and owing to the Certificate
                                       Insurer and unreimbursed draws on the
                                       Policy, together with interest thereon as
                                       provided under the Insurance Agreement,
                                       have been paid. The "Retransfer Price"
                                       will be equal to the sum of (a) the
                                       outstanding Certificate Principal
                                       Balance, (b) accrued and unpaid interest
                                       thereon at the applicable Certificate
                                       Rate through the day preceding the final
                                       Distribution Date and (c) any
                                       unreimbursed draws upon the Policy and
                                       other amounts due to the Certificate
                                       Insurer under the Insurance Agreement.
                                       See "Description of the
                                       Certificates -- Termination; Retirement
                                       of the Certificates."
    
 
MANDATORY RETRANSFER OF CERTAIN
MORTGAGE LOANS; SUBSTITUTION OF
MORTGAGE LOANS...................    The Seller will make certain
                                       representations and warranties in the
                                       Agreement with respect to the Mortgage
                                       Loans. If the Seller breaches certain of
                                       its representations and warranties with
                                       respect to any Mortgage Loan, then
                                       depending upon the representation or
                                       warranty breached, if such breach has a
                                       material adverse effect on the interests
                                       of the Certificateholders or the
                                       Certificate Insurer and is not cured
                                       within the specified period, the Mortgage
                                       Loan will be removed from the Trust after
                                       the expiration of a specified period from
                                       the date on which the Seller becomes
                                       aware or receives notice of such breach
                                       and will be reassigned to the Seller. In
                                       such event, the Seller will have the
                                       option of substituting a new Mortgage
                                       Loan for any Defective Mortgage Loan. Any
                                       Mortgage Loan so substituted (an
                                       "Eligible Substitute Mortgage Loan")
                                       must, among other things, have a
                                       principal balance that is not
                                       substantially greater or less than the
                                       Trust Balance of the Defective Mortgage
                                       Loan it is replacing and a Loan Rate of
                                       not less than the current Loan Rate of
                                       the Defective Mortgage Loan it replaces
                                       and not more than 500 basis points in
                                       excess thereof unless the Rating Agencies
                                       and the Certificate Insurer otherwise
                                       consent to such Eligible Substitute
                                       Mortgage Loan. See "Description of the
                                       Certificates -- Assignment of Mortgage
                                       Loans" herein. If the Seller breaches
                                       certain of its representations and
                                       warranties with respect to (a) the
                                       ownership of the Trust Balances and the
                                       ability to sell the same pursuant to the
                                       Agreement or (b) the status of the
                                       transfer of the amounts due under the
                                       Mortgage Loans to the Trust as either a
                                       valid transfer and assignment of such
                                       amounts to the Trust or the grant to the
                                       Trust of a security interest in such
                                       Mortgage Loans, which breach, in either
                                       case, materially and adversely affects
                                       the Certificateholders or the Certificate
                                       Insurer, then all of the amounts due
                                       under such Mortgage Loans will be
                                       reassigned to the Seller.
 
   
                                     If the Master Servicer fails to comply in
                                       all material respects with certain
                                       representations, warranties or covenants,
                                       and
    
 
                                       21
<PAGE>   24
 
                                       such noncompliance is not cured within a
                                       specified period after the Master
                                       Servicer becomes aware or receives notice
                                       thereof and such noncompliance has a
                                       material adverse effect on the
                                       Certificateholders or the Certificate
                                       Insurer, or certain events of insolvency
                                       occur with respect to the Master
                                       Servicer, the Trustee may appoint a
                                       successor Master Servicer with the
                                       consent of the Certificate Insurer or
                                       under certain circumstances, the
                                       Certificate Insurer and
                                       Certificateholders holding not less than
                                       51% of the principal amount of the
                                       outstanding Certificates, by written
                                       notice to the Master Servicer and the
                                       Trustee, may appoint a successor Master
                                       Servicer. In the event of a transfer of
                                       servicing obligations to a successor
                                       Master Servicer, such successor Master
                                       Servicer, rather than HFC, will be
                                       responsible for any failure to comply
                                       with the Master Servicer's covenants
                                       arising thereafter. See "Description of
                                       the Certificates -- Assignment of
                                       Mortgage Loans."
 
   
TAX STATUS.......................    Special tax counsel to the Seller is of the
                                       opinion that, under existing law, the
                                       Certificates are properly characterized
                                       as indebtedness of the Seller for Federal
                                       income tax purposes and for Illinois
                                       income tax purposes. Under the Agreement,
                                       the Seller and the Certificateholders
                                       will agree to treat the Certificates as
                                       indebtedness of the Seller for Federal,
                                       state and local income and franchise tax
                                       purposes. See "Income Tax Consequences"
                                       for additional information concerning the
                                       application of Federal income tax laws.
    
 
   
INCOME TAX WITHHOLDING...........    Interest on the Certificates held by
                                       non-U.S. persons will be subject to the
                                       United States withholding tax unless the
                                       holder complies with applicable United
                                       States Internal Revenue Service (the
                                       "IRS") identification requirements.
                                       Interest on the Certificates held by U.S.
                                       persons will be subject to backup
                                       withholding unless such holder complies
                                       with applicable certification
                                       requirements of the IRS. If the law were
                                       to change and, as a result thereof,
                                       United States withholding tax were
                                       imposed on such payments even though the
                                       Certificateholder complied with the
                                       applicable identification requirements or
                                       certification requirements, the
                                       Certificateholder would receive payments
                                       net of such withholding tax, and none of
                                       the Certificate Insurer, Trust, Trustee,
                                       Seller, Master Servicer or any
                                       Subservicer would have any obligation to
                                       gross up such payments to account for
                                       such withholding tax.
    
 
LEGAL INVESTMENT
CONSIDERATIONS...................    Although, as a condition to their issuance,
                                       the Certificates will be rated in the
                                       highest rating category by the Rating
                                       Agencies, the Certificates will not
                                       constitute "mortgage related securities"
                                       for purposes of the Secondary Mortgage
                                       Market Enhancement Act of 1984 ("SMMEA")
                                       because not all of the mortgages securing
                                       the Mortgage Loans are first mortgages.
                                       Accordingly, many institutions with legal
                                       authority to invest in comparably rated
                                       securities based on first mortgage loans
                                       (i.e., "mortgage related securities"
                                       (under SMMEA)) may not be legally
                                       authorized to
 
                                       22
<PAGE>   25
 
                                       invest in the Certificates. See "Legal
                                       Investment Considerations."
 
ERISA CONSIDERATIONS.............    As more fully described under "ERISA
                                       Considerations", an employee benefit plan
                                       (a "Plan") subject to the requirements of
                                       the fiduciary responsibility provisions
                                       of the Employee Retirement Income
                                       Security Act of 1974, as amended
                                       ("ERISA"), or the provisions of Section
                                       4975 of the Code, contemplating the
                                       purchase of the Certificates should
                                       consult its counsel before making a
                                       purchase and the fiduciary and such legal
                                       advisors should consider whether the
                                       Certificates will satisfy all of the
                                       requirements of the "publicly offered
                                       securities" exemption described herein or
                                       the possible application of other ERISA
                                       prohibited transaction exemptions
                                       described herein.
 
   
CERTIFICATE RATING...............    It is a condition to the issuance of the
                                       Certificates that they be rated in the
                                       highest long term rating category by at
                                       least two nationally recognized
                                       statistical rating organizations (the
                                       "Rating Agencies"). See "Risk
                                       Factors -- Certificate Rating."
    
 
   
LISTING..........................    Application will be made to list the
                                       Certificates on the Luxembourg Stock
                                       Exchange.
    
 
                                       23
<PAGE>   26
 
                                  RISK FACTORS
 
     Limited Liquidity. There is currently no market for the Certificates. While
the Underwriters currently intend to make a market in the Certificates, they are
under no obligation to do so. There can be no assurance that a secondary market
will develop or, if a secondary market does develop, that it will provide
holders of the Certificates with liquidity of investment or that it will
continue while the Certificates remain outstanding.
 
     Issuance of the Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates -- Registration of
Certificates" herein.
 
     Difficulty in Pledging.  Since transactions in the Certificates can be
effected only through DTC, CEDEL, Euroclear, participating organizations,
indirect participants and certain banks, the ability of a Certificate Owner to
pledge a Certificate to persons or entities that do not participate in the DTC,
CEDEL or Euroclear system, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
the Certificates. See "Description of the Certificates -- Registration of
Certificates" herein.
 
     Potential Delays in Receipt of Distributions. Certificate Owners may
experience some delay in their receipt of distributions of interest and
principal on the Certificates since such distributions will be forwarded by the
Trustee to DTC and DTC will credit such distributions to the accounts of its
Participants (as defined herein) which will thereafter credit them to the
accounts of Certificate Owners either directly or indirectly through indirect
participants. See "Description of Certificates -- Registration of Certificates"
herein.
 
   
     Borrower's Ability to Repay; Nature of Security; Property Values. Required
minimum monthly payments are not, in most instances, expected to be sufficient
to fully amortize principal of a Mortgage Loan prior to maturity. As a result, a
borrower will generally be required to pay the entire principal amount of the
Mortgage Loan at its maturity. The ability of a borrower to make such a payment
may be dependent on the ability to obtain refinancing of the balance due on the
Mortgage Loan. An increase in interest rates over the Loan Rate applicable at
the time the Mortgage Loan was originated may have an adverse effect on the
borrower's ability to pay the required monthly payment. In addition, such an
increase in interest rates may reduce the borrower's ability to obtain
refinancing and to pay the balance of the Mortgage Loan at its maturity. A
borrower's payments in any month may be as low as the interest payment for such
month or as high as the entire outstanding principal balance (plus accrued
interest). Since certain mortgages securing Mortgage Loans are junior liens
subordinate to the rights of the mortgagee or beneficiary under any related
senior mortgage or deed of trust, the proceeds from any liquidation, insurance
or condemnation proceeding will be available to satisfy the outstanding balance
of a Mortgage Loan only to the extent that the claims of such senior mortgagee
or beneficiary have been satisfied in full (including any related foreclosure
costs).
    
 
     An overall decline in the residential real estate market could adversely
affect the values of the Mortgaged Properties such that the outstanding Mortgage
Loans, together with any senior financing thereon, equal or exceed the value of
the Mortgaged Properties. Such a decline would adversely affect the position of
a junior mortgagee before having such an effect on any related senior mortgagee.
A rise in interest rates over a period of time, the general condition of the
Mortgaged Property as well as other factors may have the effect of reducing the
value of the Mortgaged Property from the appraised value at the time the
Mortgage Loan was originated. Because payments in reduction of the entire
outstanding principal balance of a Mortgage Loan are generally not required
prior to maturity, if there is a subsequent reduction in value of the Mortgaged
Property the ratio of the amount of the Mortgage Loan to the value of the
Mortgaged Property may increase over what it was at the time the Mortgage Loan
was originated. Such an increase may reduce the likelihood of liquidation or
other proceeds being sufficient to satisfy the Mortgage Loan after satisfaction
of any senior liens.
 
   
     Cash Flow Variances; Collection Issues. Collections on the Mortgage Loans
may vary because, among other things, borrowers may make payments during any
month (other than the month in which the Mortgage Loan matures) as low as the
interest payment for such month or as high as the outstanding balance plus
accrued interest thereon. Collections on the Mortgage Loans may also vary due to
seasonal purchasing and payment habits of borrowers.
    
 
                                       24
<PAGE>   27
 
     General credit risk may also be greater to Certificateholders than to
holders of instruments representing interests in level payment first mortgage
loans since, except where the minimum required monthly payment exceeds accrued
interest on the Mortgage Loans or, for certain Fixed Rate Mortgages, an even
monthly payment (which includes principal and interest), no payment of principal
is required until final maturity. Generally, minimum monthly payments will at
least equal and may exceed accrued interest. Although most borrowers under home
equity loans originated by the Subservicers historically pay down all or part of
their outstanding principal balances prior to maturity, such borrowers are under
no obligation to do so and, in the event such balances have not been
substantially paid down prior to maturity, some borrowers may find themselves
unable to make the required final payment. Even assuming that the Mortgaged
Properties provide adequate security for the Mortgage Loans, substantial delay
could be encountered in connection with the liquidation of Mortgage Loans that
are delinquent and corresponding delays in the receipt of related proceeds by
Certificateholders could occur if the Certificate Insurer were unable to perform
on its obligations under the Policy. Further, liquidation expenses (such as
legal fees, real estate taxes, and maintenance and preservation expenses) will
reduce the proceeds payable to Certificateholders and thereby reduce the
security for the Mortgage Loans. In the event any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans, Certificateholders
could experience a loss if the Certificate Insurer were unable to perform on its
obligations under the Policy.
 
     Prepayment Considerations. All of the Mortgage Loans may be prepaid in
whole or in part at any time. Neither the Seller nor HFC is aware of any
publicly generated studies or statistics available on the rate of prepayment of
such loans. Generally, home equity loans are not viewed by borrowers as
permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional mortgage loans. On the other hand, because
most of the Mortgage Loans are not fully amortizing, in the absence of voluntary
borrower prepayments, the Mortgage Loans could experience slower rates of
principal payment than traditional fully amortizing mortgages. The Trust's
prepayment experience may be affected by a wide variety of factors, including
general economic conditions, interest rates, the availability of alternative
financing, homeowner mobility and any prepayment penalty incurred in connection
with the prepayment of a Mortgage Loan. In addition, substantially all of the
Mortgage Loans contain due-on-sale provisions, and the related Subservicer
intends to enforce such provisions unless (i) such enforcement is not permitted
by applicable law or (ii) the related Subservicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligation under
the Mortgage Loan. See "Maturity and Prepayment Considerations" and "Certain
Legal Aspects of the Mortgage Loans -- 'Due-on-Sale' Clauses" for a description
of certain provisions of the Credit Line Agreements that may affect the
prepayment experience on the Mortgage Loans.
 
   
     Certificate Rating. The ratings of the Certificates will depend primarily
on an assessment by the Rating Agencies of the underlying Mortgage Loans, and
upon the claims-paying ability of the Certificate Insurer. Any reduction in a
rating assigned to the claims-paying ability of the Certificate Insurer below
the ratings initially given to the Certificates will likely result in a
reduction in the ratings of the Certificates. The ratings assigned by the Rating
Agencies to the Certificates are not recommendations to purchase, hold or sell
the Certificates, inasmuch as such ratings do not comment as to the market
price, the marketability of the Certificates or suitability for a particular
investor. There is no assurance that the ratings will remain in place for any
given period of time or that the ratings will not be lowered or withdrawn by the
Rating Agencies. The ratings of the Certificates do not address the possibility
of the imposition of United States withholding tax with respect to non-U.S.
persons or the likelihood that the principal of, or interest on, the
Certificates will be paid on a scheduled date.
    
 
   
     Ability to Change Terms of the Mortgage Loans. Without removing the
Mortgage Loans from the Trust, the Master Servicer (or any Subservicer on behalf
of the Master Servicer) shall have the right to modify the terms of the Credit
Line Agreements so long as such modification (i) is permitted by the Certificate
Insurer and (ii) does not have a material adverse effect on the interests of the
Certificateholders, Certificate Insurer or the Trust. The Master Servicer (or
any Subservicer on behalf of the Master Servicer) may agree to change the Loan
Rate from a floating rate to a fixed rate, or from a fixed rate to a floating
rate, or to changes in the
    
 
                                       25
<PAGE>   28
 
   
terms of a Credit Line Agreement requested by the borrower which may have a
material adverse effect on the interests of the Certificateholders, the
Certificate Insurer or the Trust, provided that such changes are (i) in the
opinion of the Master Servicer necessary to avoid prepayment of the Mortgage
Loan and (ii) consistent with prudent business practice. In such an event the
Mortgage Loan shall be retransferred to the Master Servicer (or the appropriate
Subservicer) prior to the effectiveness of such change. See "Description of the
Certificates -- Amendments to Credit Line Agreements". There can be no assurance
that changes in applicable law, the marketplace for home equity loans or prudent
business practice will not result in changes in the terms of the Credit Line
Agreements. Changes made to the Credit Line Agreements may affect the
utilization of this product by the borrower, principal payment patterns, the
ability of the borrower to refinance the Mortgage Loan, or the lien position on
the Mortgaged Property.
    
 
   
     Collateral Position; Legal Considerations.  The Mortgage Loans will be
primarily secured by first and second mortgages. With respect to Mortgage Loans
that are secured by first mortgages, the related Subservicer will have the power
under certain circumstances to consent to a new mortgage lien on the Mortgaged
Property having priority over the Mortgage Loan owned by the Trust. Mortgage
Loans secured by second and third mortgages will be entitled to proceeds that
remain from the sale of the related Mortgaged Property after any related senior
mortgage loans and prior statutory liens have been satisfied or, if such were
satisfied by the Master Servicer, after the Master Servicer has been reimbursed.
In the event that such proceeds are insufficient to satisfy such loans and prior
liens in the aggregate and the Certificate Insurer is unable to perform its
obligations under the Policy, the Trust and, accordingly, the
Certificateholders, as the holders of interests in the Trust consisting
primarily of junior mortgage loans, bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (ii) the risk
of loss if a deficiency judgment cannot be obtained or is not realized upon to
the extent of the Trust Balance. See "Certain Legal Aspects of the Mortgage
Loans" herein.
    
 
     Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and may require licensing of the Subservicers. In
addition, many states have other laws, such as consumer protection laws, unfair
and deceptive practices acts and debt collection practices acts which may apply
to the origination or collection of the Mortgage Loans. Depending on the
provisions of the applicable law, violations of these laws may limit the ability
of the Subservicers and the Trust to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Subservicers, Seller and
possibly the Trust to damages and administrative enforcement.
 
     The Mortgage Loans will also be subject to federal laws, including:
 
     (i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Mortgage Loans and related Credit Line Agreements;
 
     (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit;
 
     (iii) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience; and
 
     (iv) for Mortgage Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the loan
documents without the borrower's consent and restricts a lender's ability to
declare a default or to suspend or reduce a borrower's credit limit to certain
enumerated events.
 
     Violations of certain provisions of these federal laws may limit the
ability of the Subservicers and the Trust to collect all or part of the
principal of or interest on the Mortgage Loans and in addition could subject the
Subservicers to damages and administrative enforcement and possibly the Seller
or the Trust.
 
     Numerous federal and state statutory provisions, including the federal
bankruptcy laws, the Soldiers' and Sailors' Civil Relief Act of 1940 and state
debtor relief laws, may adversely affect the Master Servicer's ability
 
                                       26
<PAGE>   29
 
to collect on the Mortgage Loans and would also affect the interests of the
Certificateholders in the Mortgage Loans if such laws result in Mortgage Loans
being written off as uncollectible (to the extent the consequent losses are not
paid pursuant to the Policy). See "Description of the Certificates" and "Certain
Legal Aspects of the Mortgage Loans -- Bankruptcy, Anti-Deficiency Legislation
and Other Limitations on Lenders".
 
   
     Insolvency Considerations; Treatment of Transaction; Perfection
Issues. Under the terms of the Agreement, so long as HFC's long-term senior
unsecured debt is rated at least A- by Standard & Poor's Ratings Services
("Standard & Poor's") and A3 by Moody's Investors Service, Inc. ("Moody's"),
each Subservicer will be entitled to maintain possession of the documentation
relating to each Mortgage Loan sold by it, including the Credit Line Agreements
and the Related Documents or other evidence of indebtedness signed by the
borrower, and assignments of the related mortgages in favor of the Seller and
subsequently the Trustee will not be required to be recorded. Failure to deliver
the Related Documents to the Seller and the Trustee will have the result in
most, if not all, of the states in which Related Documents will be held, and
failure to record the assignments of the related mortgages in favor of the
Seller and the Trustee will have the result in certain states in which the
Mortgaged Properties are located, of making the sale of the Cut-Off Balances,
Additional Balances and Related Documents potentially ineffective against (i)
any creditors of the Subservicers, who may have been fraudulently or
inadvertently induced to rely on the Mortgage Loans as assets of the
Subservicers, or (ii) a purchaser, in the event a Subservicer fraudulently or
inadvertently resells a Mortgage Loan to such purchaser who had no notice of the
prior sale thereof to the Seller and subsequent conveyance to the Trust and such
purchaser perfects his interest in the Mortgage Loan by taking possession of the
Related Documents or other evidence of indebtedness or otherwise. The Agreement
provides that if any loss is suffered in respect of a Mortgage Loan as a result
of a Subservicer's retention of the Mortgage Loan and Related Documents or the
failure to record the assignment of such Mortgage Loan, such Subservicer or HFC
will purchase such Mortgage Loan from the Trust. In the event that HFC's
long-term senior unsecured debt rating does not satisfy the above referenced
standards, the Related Documents pertaining to each Mortgage Loan will be
delivered to and maintained by the Trustee and assignments of the related
mortgage in favor of the Trustee will be required to be recorded (unless
satisfactory opinions of counsel are delivered to the Trustee and the
Certificate Insurer to the effect that recordation of assignments is not
required in the relevant jurisdiction to protect the interest of the Trustee in
the Mortgage Loans and Related Documents).
    
 
     The Subservicers intend that the transfer of (a) the Cut-Off Balances and
the Additional Balances to the Seller and (b) ownership of the Related Documents
to the Trustee will be treated as sales. However, in the event of an insolvency
of any Subservicer, the trustee in bankruptcy of such Subservicer may attempt to
recharacterize such transactions as a borrowing by such Subservicer secured by a
pledge of the Cut-Off Balances, the Additional Balances and the Related
Documents. If the receiver decided to challenge such transfer, delays in
payments of the Certificates and possible reductions in the amount thereof could
occur. In connection with the transfer of the Cut-Off Balances, the Seller will
have received an opinion of Sidley & Austin, special counsel to the Seller, to
the effect that although it has found no case directly on point and the
transaction includes some factors which are consistent with a different
characterization, (a) the transfer by the Subservicers of (i) the Cut-Off
Balances and the Additional Balances to the Seller and (ii) ownership of the
Related Documents to the Trustee constitute sales under applicable Illinois law
and (b) the transfer by the Seller to the Trustee of the Cut-Off Balances and
the Additional Balances is either a sale or the grant of a security interest
therein to the Trustee. Such opinion is limited to matters of Illinois and
federal law, and is not binding on any court.
 
     The Seller will, in the event that HFC's long-term unsecured debt rating is
at any time reduced below A-/A3, take certain actions that are required to
perfect the Trust's interest in the Cut-Off Balances and the Additional
Balances. Prior to taking such action, in the event of the insolvency of any
Subservicer, if the bankruptcy court determined that the sales by such
Subservicer to the Seller and to the Trust were each a secured loan, such
security interest may be deemed unperfected and the Seller and the Trustee on
behalf of the Certificateholders would each be an unsecured creditor of such
Subservicer. Similarly, in the event of the insolvency of the Seller prior to
taking such action, if the transfer by the Seller to the Trust was deemed by a
bankruptcy court to be a secured loan, the security interest may be deemed
unperfected and the Trustee on behalf of the Certificateholders would be an
unsecured creditor of the Seller. The Seller will warrant that if the
 
                                       27
<PAGE>   30
 
transfer by it to the Trust is deemed to be a grant to the Trust of a security
interest in the Cut-Off Balances and the Additional Balances, the Trust will,
after certain actions have been taken regarding perfection, have a first
priority security interest therein.
 
     In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Certificateholders from appointing a successor Master Servicer. If a
conservator, receiver or trustee were appointed by the Seller or a Subservicer,
or if certain other events relating to the bankruptcy or insolvency of the
Seller or Subservicers were to occur, Additional Balances (and Subsequent
Funding Mortgage Loans if such events occurred during the Funding Period) would
not be sold to the Seller by such Subservicer pursuant to the Receivables
Purchase Agreement or transferred by the Seller to the Trust pursuant to the
Agreement. In the event of any such occurrence with respect to the Seller, the
Rapid Amortization Period would commence.
 
     The Seller does not and will not engage in any activities except the
transactions described herein and other similar transactions (some of which have
already been entered into by the Seller) and activities incidental to, or
necessary or convenient to accomplish the foregoing. The Seller has no current
intention of filing a voluntary petition under the Bankruptcy Code of 1984, as
amended (the "Bankruptcy Code"), or any similar applicable state laws.
 
   
     No Gross-Up for Withholding Tax. A non-U.S. person who complies with the
applicable identification requirements of the IRS should generally not be
subject to United States withholding tax. See "Income Tax Consequences." If such
law were to change and, as a result thereof, United States withholding tax were
imposed on such payments, a non-U.S. person would receive such payments net of
such withholding tax, and neither the Certificate Insurer, Trust, Trustee,
Seller, Master Servicer or any Subservicer has any obligation to gross up such
payments to account for such withholding tax.
    
 
                          THE SELLER AND SUBSERVICERS
 
     The Seller was incorporated under the laws of the State of Delaware on May
5, 1994 and is a wholly-owned special purpose subsidiary of HFC. The Seller was
organized for the limited purposes of engaging in the type of transactions
described herein and other similar transactions (some of which have already been
entered into by the Seller) and any activities incidental to and necessary or
convenient for the accomplishment of such purposes. Neither HFC's nor the
Seller's board of directors intends to change the business purpose of the
Seller. The Seller's principal executive office is located at 2700 Sanders Road,
Prospect Heights, Illinois 60070.
 
     The Subservicers are wholly-owned subsidiaries of HFC that are licensed to
make home equity revolving credit line loans in the states in which the Mortgage
Loans are originated and will transfer certain rights to the Mortgage Loans, the
Cut-Off Balances and the Additional Balances to the Seller. These companies
originate home equity revolving credit line loans and, in some cases, other
types of consumer loans from branch offices located in the states in which they
are licensed to do business.
 
     Each Cut-Off Balance will be sold to the Trust by the Seller at a price
equal to its Cut-Off Balance and will be subserviced by the appropriate
Subservicer on behalf of HFC as Master Servicer. The Master Servicer will be
entitled to retain, on behalf of itself and the Subservicers, the Servicing Fee.
 
                              THE MASTER SERVICER
 
     Household Finance Corporation was incorporated in Delaware in 1925, as
successor to an enterprise which traces its origin through the same ownership to
an office established in 1878. HFC will be responsible for acting as the Master
Servicer for the Mortgage Loans. HFC is a subsidiary of Household International,
Inc. The address of its principal executive office is 2700 Sanders Road,
Prospect Heights, Illinois 60070. Its telephone number is (847) 564-5000.
 
     HFC and its subsidiaries offer a diversified range of financial services.
Their principal business is the making of cash loans, including home equity
loans secured by first and second mortgages, directly to consumers in the United
States. Loans are made through branch lending offices and by direct mail or
 
                                       28
<PAGE>   31
 
telemarketing. HFC, through banking subsidiaries, also offers both VISA* and
MasterCard* credit cards to residents throughout the United States.
 
     In conjunction with its consumer finance operations and where applicable
laws permit, HFC makes available to customers credit life, credit accident and
health, and household contents insurance. Credit life and credit accident and
health insurance are generally directly written by or reinsured with HFC's
insurance subsidiary, Household Life Insurance Company.
 
   
     As of September 30, 1996, HFC had approximately $20.3 billion in total
assets, approximately $17.7 billion in total liabilities and approximately $2.6
billion in shareholder's equity.
    
 
                                USE OF PROCEEDS
 
     The net proceeds to be received from the sale of the Certificates will be
used by the Seller to purchase the Initial Mortgage Loans from the Subservicers.
The Subservicers will use the net proceeds received from the Seller for general
corporate purposes.
 
                 THE HFC REVOLVING HOME EQUITY LENDING PROGRAM
 
GENERAL
 
   
     HFC and its subsidiaries have originated closed-end fixed-rate second
mortgages since 1972 and have offered home equity revolving credit line loans
since 1977. As of September 30, 1996, HFC and its subsidiaries had approximately
$6.7 billion aggregate principal amount of outstanding home equity revolving
credit line loans, including loans sold with servicing performed by HFC and its
subsidiaries.
    
 
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY REVOLVING CREDIT LINE LOANS
 
     All home equity revolving credit line loan applications received by HFC or
its subsidiaries are subjected to a direct credit investigation by the related
Subservicer. This investigation includes (i) obtaining and reviewing an
independent credit bureau report, (ii) verifying any senior mortgage balance and
payment history, which may be obtained from credit bureau information provided
it has been updated within two months of the application or, if not, obtained in
writing or by telephone from the holder of any senior mortgage, (iii)
verification of employment, which normally includes obtaining a W-2 form or
paystub, a minimum of two years of tax returns for self-employed individuals or
other written or telephone verification with employers, (iv) obtaining a title
search to ensure that all liens, except for any existing senior mortgage lien,
are paid off prior to, or at the time of, the funding of the loan, and (v)
obtaining an appraisal (which may be an appraisal prepared using a statistical
data base) of the property, which must be substantiated by sales data on three
comparable properties.
 
     After this investigation is conducted, a decision is made to accept or
reject the loan application. A Credit Limit is assigned based on the borrower's
ability to pay and an acceptable combined loan-to-value ratio. Generally, all
prospective borrowers must have a debt-to-income ratio of no greater than 45%,
but such requirement may be waived by senior management. In no event, may the
debt to income ratio exceed 60%. For purposes of calculating the debt to income
ratio, debt is defined as the sum of the senior mortgage payment, including
escrow payments for the hazard insurance premium, real estate taxes, mortgage
insurance premium, owners association dues and ground rents, plus payments on
installment and revolving debt (including payments on the home equity loan line
of credit computed based on the Credit Limit applied for at the then current
Loan Rate) that extends beyond 10 months, and alimony, child support or
maintenance payments, and income is defined as stable monthly gross income from
the borrower's primary source of employment, plus acceptable secondary income.
The determination of an acceptable combined loan-to-value ratio is based solely
upon the Credit Limit and does not include certain fees which may be added to
the principal balance of the loan. An acceptable combined loan-to-value ratio is
also a function of the real estate's quality, condition, appreciation history,
and prospective market conditions; however, the combined loan-to-value ratio
generally may not exceed 100%.
 
- ---------------
 
*VISA and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
 
                                       29
<PAGE>   32
 
     HFC and its subsidiaries will not make mortgages behind a negatively
amortizing senior mortgage, except when the senior mortgage is subject to a
maximum permitted indebtedness or the Credit Limit is $25,000 or less.
Generally, title insurance is obtained for all Mortgage Loans that constitute a
first mortgage or have a Credit Limit over $50,000.
 
HOME EQUITY REVOLVING CREDIT LINE LOAN TERMS
 
   
     The borrower may access the home equity revolving line of credit by writing
a check and by certain other methods. The Minimum Monthly Payment for each
Mortgage Loan is generally the greatest of (x) a specified percentage (which
ranges between 0.85% and 2.10% depending upon the date the loan was originated,
the related interest rate and certain factors in the borrower's credit profile)
of the principal balance of the Mortgage Loan, plus late charge fees and bad
check fees (the "Administrative Charges") and credit insurance charges, (y) a
designated minimum dollar amount, which is generally $50 plus Administrative
Charges and credit insurance charges and (z) the amount of accrued interest
during the related billing cycle plus Administrative Charges and credit
insurance charges. However, in the case of Adjustable Rate Mortgages in Illinois
which were originated prior to November 6, 1989, generally, the Minimum Monthly
Payment is computed only in accordance with clause (z) above. A borrower's
Minimum Monthly Payment is due on a fixed date each month which is between 22
and 25 days after the Cycle Date for the borrower's particular Mortgage Loan.
Cycle Dates for the Mortgage Loans are the 4th, 5th, 6th, 8th, 10th, 11th, 12th,
16th, 17th, 18th, 19th, 20th, 25th and 26th of every month. For example, if the
Cycle Date for a Mortgage Loan is on the 5th day of the month, an update of the
related account is completed at the close of business on the 5th. A detailed
listing of all debits and credits along with the Minimum Monthly Payment and
available line of credit is listed on the borrower's billing statement. The
billing statement would be sent to the borrower on the 6th and payment would be
due on the 27th of the month.
    
 
   
     Adjustable Rate Mortgages bear interest at rates which may change from
month to month subject to maximum and minimum per annum rates, if any, specified
in the Credit Line Agreement. The monthly periodic rate (the "Loan Rate") is
one-twelfth of the sum of the Index Rate (as defined below) plus a certain
spread (the "Margin"). Currently, the Margin range offered by a Subservicer is
from 5.50% to 8.00%. Fixed Rate Mortgages currently offered by a Subservicer
bear interest at rates generally ranging from 14.25% to 16.75%. The variable or
fixed rates of interest charged on a revolving home equity line of credit are
determined by the overall qualification of the borrower, the combined
loan-to-value ratios or equity in the property and market conditions. Interest
on the home equity revolving lines of credit is payable at the Loan Rate monthly
in arrears on the average daily outstanding principal balance.
    
 
     For any Adjustable Rate Mortgage, except for Mortgage Loans originated in
North Carolina prior to August 24, 1992, the "Index Rate" during a billing cycle
is the "prime rate" published by The Wall Street Journal on the first
publication date of the month in which the related billing cycle begins. If a
prime rate range is published, then the average of that range will be used for
Mortgage Loans originated prior to October 1, 1991 and for most other Mortgage
Loans originated after October 1, 1991 the highest rate in such range will be
used. When a change in the prime rate is published, a change in the Loan Rate
will take effect on the first day of the first complete billing cycle following
the date of the published change and the new Loan Rate will apply to new loans
and charges, as well as to the existing Loan Balance. For Adjustable Rate
Mortgages originated in North Carolina prior to August 24, 1992, the "Index
Rate" is the rate for the auction average of six month U.S. Treasury Bills
effective as of the fifteenth day of the prior month. Said rate can be found in
the Federal Reserve Bulletin. Because the billing period regarding North
Carolina Mortgage Loans between Cycle Dates contains portions of two calendar
months, use of this Index Rate may cause two different daily periodic rates to
be used to determine the monthly Loan Rate. The Credit Line Agreements further
provide that in the event of a change in law or any court ruling that prohibits
a Subservicer from using the Index Rate, or if the publication of the Index Rate
is discontinued, the related Subservicer will change the Index Rate upon
notification of such event in accordance with the Credit Line Agreement.
 
     Principal amounts may be drawn upon (up to the Credit Limit of the Mortgage
Loan, and in certain cases in excess of the Credit Limit) or repaid under the
Mortgage Loans from time to time. Except for any amortization of principal which
may occur as a result of the required Minimum Monthly Payments, there are
 
                                       30
<PAGE>   33
 
   
no required payments of principal, except that the outstanding principal amount
of most Mortgage Loans will be due fifteen years or, in some cases, ten years
from origination or, as described below in certain instances at any time after
six years or, in some cases, twelve years from the date of the applicable Credit
Line Agreement upon exercise of the related Subservicer's call option. The Loan
Rate for an Adjustable Rate Mortgage will generally not exceed 24.9% or twelve
percentage points over the initial Index Rate for such Mortgage Loan, depending
on when or where the Mortgage Loan was originated or generally be less than 8%
for a first mortgage and 10% for a second or third mortgage except for certain
Adjustable Rate Mortgage Loans originated in Wisconsin or prior to 1987.
    
 
     The Subservicers will have the right under each Mortgage Loan, on prior
notice, to change its terms, subject to complying with applicable law. Changes
may apply to both new and outstanding balances unless prohibited by applicable
law. However, termination of a borrower's Credit Limit generally will occur only
as provided below. The Trust will not have the right to amend the Mortgage
Loans.
 
   
     Most of the home equity revolving credit line loans must be repaid by the
borrower fifteen years, or in some cases, ten years after the date of the Loan
Agreement. The Subservicers intend to enforce this repayment date. However, in
accordance with its current servicing procedures, the Subservicers may extend
the principal repayment date of a Mortgage Loan if the borrower has an
acceptable credit history and meets such other conditions, if any, required by
the Subservicer. In addition, for a portion of such Mortgage Loans the
Subservicers will have the right to call for the payment of the entire
outstanding balance, plus all other accrued but unpaid charges, commencing not
earlier than six years or, in some cases, twelve years after the date of the
related Credit Line Agreement, upon at least 90 days' prior notice. The
Subservicers do not currently intend to exercise this call right with respect to
the Mortgage Loans. The Trust does not have the ability to require the Master
Servicer or a Subservicer to enforce the scheduled repayment date, if such date
has been extended, or to exercise the right to call the Mortgage Loans.
    
 
   
     The Subservicers will have the right to require the borrower to pay the
entire balance plus all other accrued but unpaid charges immediately and to
cancel any credit privileges under the Credit Line Agreement if, among other
things, the borrower fails to make two or more payments when due under the
Credit Line Agreement, the borrower has provided false, misleading or incorrect
material information to the Subservicer, the borrower dies, a bankruptcy
petition is filed by or against the borrower, the borrower sells any interest in
the property securing the Credit Line Agreement (including the creation of a
subordinate lien), foreclosure or condemnation proceedings are instituted on the
property by any lienholder or governmental agency, the borrower incurs any lien
on the property which adversely affects the property or the Subservicer's rights
in the property or the borrower fails to maintain the property, fails to pay the
real estate taxes on the property, fails to keep the property insured, abandons
the property or defaults on the Credit Line Agreement. Additionally, the
Subservicers will have the right to reduce or cancel the Credit Limit or
prohibit additional advances under the Credit Line Agreement if, among other
things, a material change in the financial condition of the borrower has
occurred (including delinquency or bankruptcy), the borrower fails to use or
occupy the property as his primary residence, frequent advances are requested by
the borrower over the Credit Limit, the maximum annual percentage rate under the
Credit Line Agreement is attained, the contractual revolving period under the
Credit Line Agreement expires, the scheduled repayment date is extended or any
borrower so requests.
    
 
     In the event of a default on a mortgage that is senior to any Mortgage
Loan, the related Subservicer will have the right in many states to satisfy the
defaulted senior mortgage in full or cure such default and bring the defaulted
senior mortgage current, in either event adding any amounts expended in
connection with such satisfaction or cure to the then current loan balance for
such Mortgage Loan. In such event, the Subservicers will either take the action
described above or may refrain from taking any action based upon reasonable
commercial practice in the home equity revolving credit line loan industry
generally. See "Certain Legal Aspects of the Mortgage Loans -- Foreclosure" and
"-- Rights of Senior Mortgagees or Beneficiaries" herein.
 
                                       31
<PAGE>   34
 
SERVICING OF HOME EQUITY REVOLVING CREDIT LINE LOANS
 
     HFC will be responsible for servicing the Mortgage Loans as agent for the
Trust. The Subservicers will perform the servicing activities on behalf of HFC
in accordance with HFC's policies and procedures for servicing real estate
secured revolving loans.
 
     With respect to real estate secured loans, the general policy of HFC is to
initiate foreclosure on the underlying property only after such loan is more
than two months delinquent, any notices required by law have been sent to the
borrower and the foreclosure is authorized by operating management. Foreclosure
proceedings may be terminated if the delinquency is cured. However, under
certain circumstances, the Subservicers may elect not to commence foreclosure if
the borrower's default is due to special circumstances which are temporary and
are not expected to last beyond a specified period. Similarly, the Subservicers
may treat such loans as current if the borrower has made one standard payment,
has, in the opinion of the Master Servicer, demonstrated an ability to pay in
the future and met such other criteria, if any, established by the Master
Servicer from time to time. All amounts delinquent, however, will remain due and
owing by the borrower. The loans of borrowers in bankruptcy proceedings will be
restructured in accordance with law and with a view to maximizing recovery of
such loans, including any deficiencies.
 
     The operating policy of HFC with respect to charged-off amounts is to
generally recognize losses on past due accounts that reach six months
contractually overdue or when HFC obtains title to the property. The charge-off
period may be extended from six months to forty-eight months after the loan has
been written down to its net realizable value if it is clear that the principal
balance thereof will be collected.
 
     Amounts of the principal balance of real estate secured loans which the
Master Servicer may charge-off will generally be computed by comparing the
estimated fair market value of the property securing such loan (the "Property
Value") to the amount of any senior indebtedness thereon and any unpaid property
taxes, realized or forecasted foreclosure expenses and other related expenses
(the "Senior Indebtedness Expenses"). Property Value may be determined by (i)
drive-by appraisals, (ii) a full interior/exterior appraisal, (iii) an opinion
rendered by a local real estate broker chosen by the Master Servicer, or (iv)
the Master Servicer's appraisal which may be prepared using a statistical
database system.
 
     To the extent the Property Value less the Senior Indebtedness Expenses (the
"Net Property Value") is less than the principal balance of such loan, the
Master Servicer may, but is not required to, write down such principal balance
to such Net Property Value. Further charge-offs may be taken from time-to-time
based upon the Master Servicer's current estimate of Net Property Value.
 
   
     Once the Mortgaged Property has been foreclosed upon and sold by a
Subservicer, generally any additional loss or recovery is recognized.
    
 
     Servicing and charge-off policies and collection practices may change over
time in accordance with HFC's business judgment, changes in HFC's real estate
secured revolving credit line loans and applicable laws and regulations, and
other considerations.
 
   
                 MORTGAGE LOAN DELINQUENCY AND LOSS EXPERIENCE
    
 
   
     HFC and its subsidiaries have recently experienced an increase in
delinquency due primarily to the seasoning of its portfolio and adverse economic
conditions, particularly in California. Total losses relating to the portfolio
have increased due to the acceleration of the disposition of property held as a
result of prior foreclosures, an increase in personal bankruptcies and a decline
in property values (particularly in California).
    
 
   
     The information in the tables below has not been adjusted to eliminate the
effect of the unseasoned nature of the home equity revolving credit line loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of Mortgage Loans serviced for each
period would be higher than those shown if a group of Mortgage Loans were
artificially isolated at a point in time and the information showed the activity
only in that isolated group. However, since most of the mortgage loans in HFC's
and its subsidiaries' home equity revolving credit line loan portfolio will not
be fully seasoned and since
    
 
                                       32
<PAGE>   35
 
   
the terms of most Mortgage Loans will not call for payment of principal in full
prior to maturity, the delinquency and loss information for such an isolated
group would also be distorted to some degree. The tables below present real
estate revolving credit line loan data applicable to substantially all of the
United States operations of HFC, including loans managed in states which are not
represented in the mortgage pool consisting of the Mortgage Loans, and include
loans sold with servicing performed by HFC and its subsidiaries, and real estate
acquired through foreclosure.
    
 
   
                      MORTGAGE LOAN DELINQUENCY EXPERIENCE
    
                             (DOLLARS IN THOUSANDS)
 
   
<TABLE>
<CAPTION>
                                                                                                                 NINE MONTHS
                                                         YEAR ENDED DECEMBER 31,                                    ENDED
                                --------------------------------------------------------------------------      SEPTEMBER 30,
                                   1991            1992            1993            1994          1995(3)           1996(3)
                                ----------      ----------      ----------      ----------      ----------      -------------
<S>                             <C>             <C>             <C>             <C>             <C>             <C>
Number of mortgage loans
  managed(1)...................    153,027         149,796         151,513         148,964         147,448           139,660
Aggregate loan balance
  of mortgage
  loans managed................ $5,166,013      $5,198,702      $5,285,796      $5,169,786      $4,878,161       $ 4,514,140
Loan balance of mortgage loans
  2-3 payments past due(2)..... $   59,096      $   44,168      $   52,321      $   57,356      $   34,078       $    36,714
Loan balance of mortgage loans
  3+ payments past due(2)...... $  221,337      $  236,412      $  193,466      $  164,751      $  162,584       $   153,712
Loan balance of mortgage loans
  2+ payments past due(2)...... $  280,433      $  280,580      $  245,787      $  222,107      $  196,662       $   190,426
Loan balance of mortgage loans
  2+ payments
  past due as a
  percentage of
  aggregate loan
  balance of
  mortgage loans
  managed......................       5.43%           5.40%           4.65%           4.30%           4.03%             4.22%
</TABLE>
    
 
- ---------------
(1) "loans managed" included loans owned and loans serviced with limited
    recourse.
 
(2) Contractually past due.
 
   
(3) Prior to 1995, information was reported as of the end of the borrower's
    cycle date. Due to system enhancements, beginning in 1995 all payment
    activity from the end of the borrower's cycle date until the immediately
    succeeding month end are included and reported. If the previous reporting
    system had been utilized the "aggregate loan balance of mortgage loans
    managed" would have been $4,777,800 for December 31, 1995 and $4,420,419
    for September 30, 1996. The percentage of loans 2+ payments delinquent
    would have been 4.84% for December 31, 1995 and 5.11% for September 30,
    1996.
    
 
                                       33
<PAGE>   36
 
   
                         MORTGAGE LOAN LOSS EXPERIENCE
    
                             (DOLLARS IN THOUSANDS)
 
   
<TABLE>
<CAPTION>
                                                                                                                  NINE MONTHS
                                                              YEAR ENDED DECEMBER 31,                                ENDED
                                       ----------------------------------------------------------------------    SEPTEMBER 30,
                                          1991           1992           1993           1994         1995(3)         1996(3)
                                       ----------     ----------     ----------     ----------     ----------    -------------
<S>                                    <C>            <C>            <C>            <C>            <C>           <C>
Number of mortgage loans managed(1)...    153,027        149,796        151,513        148,964        147,448         139,660
Aggregate loan balance of mortgage
  loans managed....................... $5,166,013     $5,198,702     $5,285,796     $5,169,786     $4,878,161     $ 4,514,140
Gross charge-offs..................... $   37,573     $   43,477     $   59,060     $   52,760     $   49,489     $    34,592
Percentage(2).........................       0.74%          0.85%          1.12%          1.00%          0.97%           0.98%
</TABLE>
    
 
- ---------------
(1) "loans managed" included loans owned and loans serviced with limited
     recourse.
 
(2) As a percentage of average balance of mortgage loans managed during the
     period, annualized for partial periods.
 
   
(3) Prior to 1995, information was reported as of the end of the borrower's
     cycle date. Due to system enhancements, beginning in 1995 all payment
     activity from the end of the borrower's cycle date until the immediately
     succeeding month end are included and reported. If the previous reporting
     system had been utilized the "aggregate loan balance of mortgage loans
     managed" would have been $4,777,800 for December 31, 1995 and $4,420,419
     for September 30, 1996.
    
 
   
          Prior to 1996 any loss on the sale of foreclosed Mortgage Property was
     included as a gross charge-off. Due to a policy change, beginning January
     1, 1996 the loss on the sale of such property (net of sales commissions)
     was excluded from the gross charge-off calculation. If the previous policy
     had been utilized, the gross charge-offs for the period ended September 30,
     1996 would have been $39,394. As a result of these changes the percentage
     of gross charge-offs would have been 1.02% for the year ended December 31,
     1995 and 1.11% (annualized) for the nine months ended September 30, 1996.
    
 
                     THE REVOLVING HOME EQUITY CREDIT LINES
 
     Unless otherwise noted in this Prospectus all statistical information
included herein with respect to the Initial Mortgage Loans is as of the close of
the last billing cycle for each such Loan on or before November 1, 1996 (the
"Pool Date").
 
   
     The Initial Mortgage Loans are evidenced by loan agreements (each, a
"Credit Line Agreement") secured by mortgages or deeds of trust (of which
approximately 29.62% by principal balance are first mortgages, approximately
70.02% by principal balance are second mortgages, and the remainder are third
mortgages) on Mortgaged Properties originated in 38 states. The term to maturity
of most of the Mortgage Loans at origination will be either fifteen years or, in
some cases, ten years (a portion of such Mortgage Loans being subject to an
optional call exercisable by the related Subservicer commencing not less than
six years or, in some cases, twelve years after the date of origination). As of
the Pool Date, approximately 61.97% of the Initial Mortgage Loans by principal
balance were Adjustable Rate Mortgages, with the remainder being Fixed Rate
Mortgages.
    
 
   
     Each of the Initial Mortgage Loans owned by a Subservicer as of the Pool
Date had a current principal balance outstanding that was less than 90 days
contractually delinquent, had a Combined Loan-to-Value Ratio which was generally
not greater than 100%, represented a first, second or third lien position and,
if an Adjustable Rate Mortgage, had an Index Rate equal to the prime rate or the
rate for the auction average of six month U.S. Treasury Bills. All Initial
Mortgage Loans originated in Massachusetts had a principal balance as of the
Pool Date of at least $6,000. Each Initial Mortgage Loan was originated between
May 24, 1984 and October 18, 1996 in the ordinary course of the related
Subservicer's home equity revolving credit line loan program. The Initial
Mortgage Loans had individual Combined Loan-to-Value Ratios at the Pool Date
based upon the appraisal of the Mortgaged Property obtained by the related
Subservicer at origination generally ranging from 0% to not more than 100%. The
Combined Loan-to-Value Ratio for purposes hereof is the ratio of the principal
balance of all senior liens plus the Credit Limit of the Mortgage Loan to the
value of the
    
 
                                       34
<PAGE>   37
 
Mortgaged Property as such value was determined in an appraisal made at the time
the Mortgage Loan was originated. Such value may have declined or increased from
the time of the appraisal to the Pool Date.
 
   
     Not more than 3.59% of the aggregate principal balances of the Initial
Mortgage Loans at the Pool Date consisted of Mortgage Loans secured by attached
properties (excluding planned unit developments). As of the Pool Date, the
average principal balance of the Initial Mortgage Loans was approximately
$32,648 with the weighted average Combined Loan-to-Value Ratio of the Initial
Mortgage Loans being approximately 79.97%. As of the Pool Date the weighted
average credit limit utilization rate (computed by dividing the Cut-Off Balance
for each Initial Mortgage Loan by the related Credit Limit, which, in cases
where credit privileges have been terminated, may be the Cut-Off Balance) was
approximately 96.02% and the weighted average junior mortgage ratio (computed by
dividing the Cut-Off Balance for each Initial Mortgage Loan by the sum of such
Cut-Off Balance and the outstanding balances of all senior mortgage loans
affecting the related Mortgaged Property) was approximately 59%. Except as noted
herein, the latest scheduled maturity of any Initial Mortgage Loan is October
18, 2011.
    
 
     Set forth below is a description of certain characteristics of the Initial
Mortgage Loans as of the Pool Date:
 
                       BALANCES OF INITIAL MORTGAGE LOANS
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
                 PRINCIPAL BALANCES                      LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
$      0 to $  5,000................................        317        $     969,181.13          0.12%
$  5,001 to $ 10,000................................      1,386           11,625,356.65          1.46
$ 10,001 to $ 15,000................................      3,179           40,279,474.29          5.06
$ 15,001 to $ 20,000................................      3,428           60,359,320.71          7.58
$ 20,001 to $ 25,000................................      3,307           74,853,068.46          9.40
$ 25,001 to $ 30,000................................      2,834           78,092,261.79          9.82
$ 30,001 to $ 35,000................................      2,037           66,235,911.27          8.32
$ 35,001 to $ 40,000................................      1,662           62,492,157.03          7.85
$ 40,001 to $ 45,000................................      1,234           52,493,324.06          6.59
$ 45,001 to $ 50,000................................      1,175           56,145,491.15          7.05
$ 50,001 to $ 55,000................................        709           37,203,580.52          4.67
$ 55,001 to $ 60,000................................        563           32,510,861.96          4.08
$ 60,001 to $ 65,000................................        489           30,549,544.79          3.84
$ 65,001 to $ 70,000................................        335           22,634,087.94          2.84
$ 70,001 to $ 75,000................................        319           23,186,632.81          2.91
$ 75,001 to $ 80,000................................        249           19,301,802.87          2.42
$ 80,001 to $ 85,000................................        183           15,139,858.03          1.90
$ 85,001 to $ 90,000................................        150           13,162,586.51          1.65
$ 90,001 to $ 95,000................................        141           13,035,061.17          1.64
$ 95,001 to $100,000................................        144           14,067,107.62          1.77
$100,001 to $105,000................................         68            6,959,758.00          0.87
$105,001 to $110,000................................         67            7,209,787.61          0.91
$110,001 to $115,000................................         60            6,751,102.56          0.85
$115,001 to $120,000................................         51            6,005,797.66          0.75
$120,001 to $125,000................................         53            6,477,301.34          0.81
$125,001 and above..................................        250           38,540,302.44          4.84
                                                         ------         ---------------        ------
     Total..........................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
                                       35
<PAGE>   38
 
           CREDIT LIMIT UTILIZATION RANGES OF INITIAL MORTGAGE LOANS
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
RANGE OF CREDIT LIMIT UTILIZATION RATES                  LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
0.001% to 9.99%.....................................         73        $     129,004.82          0.02%
10.00% to 19.99%....................................         84              350,087.50          0.04
20.00% to 29.99%....................................        109              927,141.08          0.12
30.00% to 39.99%....................................        208            2,158,955.37          0.27
40.00% to 49.99%....................................        272            3,861,169.16          0.48
50.00% to 59.99%....................................        413            7,049,593.73          0.89
60.00% to 69.99%....................................        565           11,609,830.61          1.45
70.00% to 79.99%....................................        956           23,468,528.53          2.95
80.00% to 89.99%....................................      1,653           45,217,953.00          5.68
90.00% to 99.99%....................................     10,632          372,017,111.71         46.72
100% Utilization(1).................................      5,777          216,174,684.59         27.15
100.01 to 110.00%(2)................................      3,648          113,316,660.27         14.23
                                                         ------         ---------------        ------
     Total..........................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
- ---------------
   
(1) Included are 2,080 Mortgage Loans having an aggregate principal balance of
    $69,766,689.78, or 8.76% of the aggregate principal balance of all Mortgage
    Loans, for which the Credit Limits have been suspended or terminated.
    
   
(2) Within parameters established from time to time by the Subservicers,
    borrowers may exceed their Credit Limits by up to 10%.
    
 
                   LOAN RATES OF INITIAL MORTGAGE LOANS(1)(2)
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
LOAN RATES                                               LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
 6.00% to 9.99%.....................................          6        $     195,510.31          0.02%
10.00% to 10.49%....................................        226           13,206,651.53          1.66
10.50% to 10.99%....................................         98            6,044,882.67          0.76
11.00% to 11.49%....................................        447           27,817,922.11          3.49
11.50% to 11.99%....................................      1,178           40,981,610.99          5.15
12.00% to 12.49%....................................      3,478          120,201,652.06         15.10
12.50% to 12.99%....................................      1,506           68,039,785.59          8.54
13.00% to 13.49%....................................      4,574          165,597,105.06         20.80
13.50% to 13.99%....................................      2,361           74,106,174.73          9.31
14.00% to 14.49%....................................      1,616           44,404,133.16          5.58
14.50% to 14.99%....................................      1,681           47,696,646.63          5.99
15.00% to 15.49%....................................      1,392           35,565,225.17          4.47
15.50% to 15.99%....................................        427           11,790,146.59          1.48
16.00% to 16.49%....................................      3,085           81,142,092.91         10.19
16.50% to 16.99%....................................      1,948           50,312,777.82          6.32
17.00% to 17.49%....................................        280            7,116,432.47          0.89
17.50% to 17.99%....................................         38              991,284.92          0.12
18.00% to 18.49%....................................         37              756,185.70          0.09
18.50% to 18.99%....................................          3               46,376.31          0.01
19.00% to 19.49%....................................          1               10,686.35          0.00
19.50% to 19.99%....................................          2               30,689.95          0.00
20.00% and Above....................................          6              226,747.34          0.03
                                                         ------         ---------------        ------
     Total..........................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
- ---------------
   
(1) The Loan Rates for Initial Mortgage Loans with an Index Rate based on the
    prime rate are based on the prime rate as of November 1, 1996, which was
    8.25%.
    
 
   
(2) The Loan Rates for Initial Mortgage Loans with an Index Rate based on the
    auction average of six-month Treasury Bills, which represent approximately
    0.01% of the principal balance of Initial Mortgage Loans, range from 11.00%
    to 11.50%.
    
 
                                       36
<PAGE>   39
 
                  TYPE OF LOAN RATES OF INITIAL MORTGAGE LOANS
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
TYPE OF LOAN RATES                                       LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
Adjustable..........................................     15,532        $ 493,433,656.61         61.97%
Fixed...............................................      8,858          302,847,063.76         38.03
                                                         ------         ---------------        ------
     Total..........................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
         MARGIN RANGES OF ADJUSTABLE RATE INITIAL MORTGAGE LOANS(1)(2)
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
MARGIN RANGES                                            LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
Below 2.00%.........................................          7        $     604,255.37          0.08%
2.00% to 2.99%......................................        281           15,294,854.19          1.92
3.00% to 3.49%......................................        295           10,911,140.90          1.37
3.50% to 3.99%......................................      3,311          105,660,034.40         13.27
4.00% to 4.49%......................................        819           30,289,146.32          3.80
4.50% to 4.99%......................................      3,514          127,390,675.22         16.00
5.00% to 5.49%......................................        976           31,207,830.88          3.92
5.50% to 5.99%......................................      1,494           44,331,785.32          5.57
6.00% to 6.49%......................................        431           11,258,008.21          1.41
6.50% to 6.99%......................................        932           27,036,403.80          3.40
7.00% to 7.49%......................................        306            6,779,723.43          0.85
7.50% to 7.99%......................................        144            4,112,418.78          0.52
8.00% to 8.49%......................................      2,743           71,642,185.61          9.00
8.50% to 8.99%......................................         80            2,173,814.10          0.27
9.00+%..............................................        199            4,741,380.08          0.59
                                                         ------         ---------------         -----
     Total..........................................     15,532        $ 493,433,656.61         61.97%
                                                         ======         ===============         =====
</TABLE>
    
 
- ---------------
   
(1) The margins for the Initial Mortgage Loans with an Index Rate based on the
    auction average of six-month Treasury Bills, represent approximately 0.01%
    of the principal balance of Initial Mortgage Loans and range from 6.00% to
    6.50%.
    
 
   
(2) The weighted average Margin of the Adjustable Rate Mortgages which are part
    of the Initial Mortgage Loans is 5.22%.
    
 
        MAXIMUM LOAN RATES OF ADJUSTABLE RATE INITIAL MORTGAGE LOANS(1)
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
MAXIMUM RATE                                             LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
Not Available.......................................          3        $      38,022.42          0.00%
No Maximum Rate.....................................        181            4,978,087.69          0.63
Less than 16.00%....................................         12              198,866.16          0.02
16.00% to 16.99%....................................        161            5,141,035.97          0.65
18.00% to 18.99%....................................      3,363           96,339,211.58         12.10
20.00% to 20.99%....................................        964           24,459,903.39          3.07
21.00% to 21.99%....................................      6,144          211,112,000.93         26.52
22.00% to 22.99%....................................      1,282           35,685,097.39          4.48
23.00% to 23.99%....................................         11              267,144.67          0.03
24.00% to 24.99%....................................      2,250           76,711,854.23          9.63
25.00% to 25.99%....................................        685           22,901,493.52          2.88
26.00% & Above......................................        476           15,600,938.66          1.96
                                                         ------         ---------------         -----
     Total..........................................     15,532        $ 493,433,656.61         61.97%
                                                         ======         ===============         =====
</TABLE>
    
 
- ---------------
   
(1) The weighted average maximum Loan Rate of the Adjustable Rate Mortgages
    which are part of the Initial Mortgage Loans (excluding those Adjustable
    Rate Mortgages for which the maximum rate is "not available" or "no maximum
    rate") is 21.38%.
    
 
                                       37
<PAGE>   40
 
               FIXED RATE LOAN RATES OF INITIAL MORTGAGE LOANS(1)
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
LOAN RATES                                               LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
 6.00% to  9.49%....................................         4         $     128,583.80          0.01%
 9.50% to  9.99%....................................         2                66,926.51          0.01
10.00% to 10.49%....................................        26             1,765,704.92          0.22
10.50% to 10.99%....................................        47             3,587,719.78          0.45
11.00% to 11.49%....................................       285            20,208,334.36          2.54
11.50% to 11.99%....................................       377            19,225,040.50          2.41
12.00% to 12.49%....................................       252            12,823,627.72          1.61
12.50% to 12.99%....................................     1,097            51,300,116.35          6.44
13.00% to 13.49%....................................       442            19,229,643.65          2.41
13.50% to 13.99%....................................       768            26,258,550.09          3.30
14.00% to 14.49%....................................     1,160            32,110,721.98          4.03
14.50% to 14.99%....................................       734            20,035,119.14          2.52
15.00% to 15.49%....................................     1,073            28,433,875.76          3.57
15.50% to 15.99%....................................       300             8,007,729.21          1.01
16.00% to 16.49%....................................       328             8,738,546.78          1.10
16.50% to 16.99%....................................     1,790            46,292,072.89          5.81
17.00% to 17.49%....................................       114             3,268,654.98          0.41
17.50% to 17.99%....................................        33               799,269.02          0.10
18.00% to 18.49%....................................        24               547,809.25          0.07
18.50% to 18.99%....................................         1                13,163.57          0.00
19% and Above.......................................         1                 5,853.50          0.01
                                                         -----          ---------------         -----
     Total..........................................     8,858         $ 302,847,063.76         38.03%
                                                         =====          ===============         =====
</TABLE>
    
 
- ---------------
   
(1) The weighted average Loan Rate for the Fixed Rate Mortgages which are part
    of the Initial Mortgage Loans is 13.95%.
    
 
           COMBINED LOAN-TO-VALUE RATIOS OF INITIAL MORTGAGE LOANS(1)
 
   
<TABLE>
<CAPTION>
                      RANGE OF
                 ORIGINAL COMBINED                     NUMBER OF          AGGREGATE          PERCENT OF
                LOAN-TO-VALUE RATIOS                     LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
Up to 30%...........................................        796        $  16,391,249.52          2.06%
30.001% to 35.00%...................................        301            7,268,444.37          0.91
35.001% to 40.00%...................................        362            9,470,094.34          1.19
40.001% to 45.00%...................................        402           11,276,693.39          1.42
45.001% to 50.00%...................................        525           14,249,287.57          1.79
50.001% to 55.00%...................................        692           20,741,620.53          2.60
55.001% to 60.00%...................................      1,180           35,968,969.74          4.52
60.001% to 65.00%...................................        776           26,316,783.17          3.30
65.001% to 70.00%...................................      1,224           43,064,499.70          5.41
70.001% to 75.00%...................................      1,460           57,500,435.54          7.22
75.001% to 80.00%...................................      4,688          158,513,606.85         19.91
80.001% to 85.00%...................................      2,666           83,553,949.19         10.49
85.001% to 90.00%...................................      1,865           61,461,978.60          7.72
90.001% to 95.00%...................................        914           32,075,179.69          4.03
95.001% to 96.00%...................................        162            6,408,111.19          0.80
96.001% to 100.00%..................................      6,198          206,391,305.65         25.92
100% +..............................................        179            5,628,511.33          0.71
                                                         ------         ---------------        ------
          Total.....................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
- ---------------
(1) Defined to be the ratio (expressed as a percentage) of the sum of (i) the
    greater of the current principal balance or the Credit Limit of the Initial
    Mortgage Loans and (ii) any outstanding principal balances of mortgage loans
    senior to the Initial Mortgage Loans (computed at the date of origination of
    the Initial Mortgage Loans) to the value of the related Mortgaged Property
    based upon an appraisal at such date of origination.
 
                                       38
<PAGE>   41
 
           GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)(2)
    
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
STATE                                                    LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
Arizona.............................................        396        $  12,477,664.73          1.57%
California..........................................      3,229          129,167,595.27         16.23
Colorado............................................        216            7,255,436.52          0.91
Connecticut.........................................        373           13,493,893.28          1.69
Delaware............................................        164            6,015,678.81          0.76
Florida.............................................      1,239           35,408,882.52          4.45
Georgia.............................................        448           11,140,430.17          1.40
Idaho...............................................         49            1,452,269.75          0.18
Illinois............................................      1,095           32,905,463.22          4.13
Indiana.............................................        393           11,019,606.28          1.38
Iowa................................................         47            1,070,491.45          0.13
Kansas..............................................        317            8,323,394.46          1.05
Kentucky............................................         62            1,938,401.54          0.24
Louisiana...........................................         96            2,866,250.37          0.36
Maryland............................................      1,136           40,845,779.38          5.13
Massachusetts.......................................        638           26,205,208.90          3.29
Michigan............................................      2,227           59,628,435.73          7.49
Minnesota...........................................        196            4,745,042.61          0.60
Mississippi.........................................         31              753,775.82          0.09
Missouri............................................        948           23,199,066.53          2.91
Nebraska............................................        132            4,839,353.10          0.61
Nevada..............................................        153            4,901,577.37          0.62
New Hampshire.......................................        126            4,236,984.11          0.53
New Jersey..........................................        817           33,390,673.11          4.19
New Mexico..........................................         92            2,924,613.84          0.37
New York............................................      2,117           79,339,576.25          9.96
North Carolina......................................        501           14,760,123.17          1.85
Ohio................................................      1,706           49,504,204.11          6.22
Oklahoma............................................         93            2,456,631.89          0.31
Oregon..............................................        262            8,703,126.57          1.09
Pennsylvania........................................      2,955           90,122,585.78         11.32
Rhode Island........................................         81            2,713,588.65          0.34
South Carolina......................................        153            3,366,371.58          0.42
Tennessee...........................................        207            5,901,671.75          0.74
Utah................................................         55            2,056,585.32          0.26
Virginia............................................        728           24,651,193.02          3.10
Washington..........................................        707           27,723,110.74          3.48
Wisconsin...........................................        205            4,775,982.67          0.60
                                                         ------         ---------------        ------
     Total..........................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
- ---------------
   
(1) No more than 0.14% of the Initial Mortgage Loans by principal balance are
    secured by Mortgaged Properties located in any one postal zip code.
    
 
(2) The state is determined by the location of the applicable Subservicer's
    branch office which originated the loan. In a small number of cases, the
    property securing the loan may not be located in the same state as the
    branch office.
 
                                       39
<PAGE>   42
 
                    PROPERTY TYPE OF INITIAL MORTGAGE LOANS
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
                   PROPERTY TYPE                         LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
Detached............................................     21,940        $ 721,954,230.20         90.67%
Non-Detached........................................        937           28,514,977.05          3.58
PUD.................................................      1,513           45,811,513.12          5.75
                                                         ------         ---------------        ------
          Total.....................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
                   PROPERTY USE FOR INITIAL MORTGAGE LOANS(1)
 
   
<TABLE>
<CAPTION>
                                                       NUMBER OF          AGGREGATE          PERCENT OF
                    PROPERTY USE                         LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
Owner-Occupied......................................     24,033        $ 785,570,333.64         98.65%
Second Home.........................................        357           10,710,386.73          1.35
                                                         ------         ---------------        ------
          Total.....................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
- ---------------
(1) Based on information supplied by borrower in loan application.
 
          MONTHS REMAINING TO SCHEDULED MATURITY OF INITIAL MORTGAGE LOANS
 
   
<TABLE>
<CAPTION>
                MONTHS REMAINING TO                    NUMBER OF          AGGREGATE          PERCENT OF
                 SCHEDULED MATURITY                      LOANS        PRINCIPAL BALANCE       BALANCE
- ----------------------------------------------------   ---------      -----------------      ----------
<S>                                                    <C>            <C>                    <C>
 0 to 60............................................      1,005        $  23,314,655.17          2.93%
61 to 66............................................        255            7,012,999.97          0.88
67 to 72............................................        414           11,651,093.20          1.46
73 to 78............................................        402           11,137,763.65          1.40
79 to 84............................................        972           33,470,479.80          4.20
85 to 90............................................      1,444           47,886,829.17          6.01
91 to 96............................................        305            8,011,773.86          1.01
97 to 102...........................................        306            8,083,188.89          1.02
103 to 108..........................................        357           10,326,641.25          1.30
109 to 114..........................................      1,847           70,130,480.17          8.81
115 to 117..........................................      1,369           55,923,095.30          7.02
118 to 120..........................................          6               28,847.94          0.00
121 to 123..........................................          4               34,506.61          0.00
124 to 126..........................................          4               40,364.92          0.01
127 to 129..........................................          9              166,391.72          0.02
130 to 132..........................................         10              144,097.47          0.02
133 to 135..........................................          4               69,349.55          0.01
136 to 138..........................................         10              124,881.46          0.02
139 to 141..........................................         10              258,932.53          0.03
142 to 144..........................................         11              185,943.16          0.02
145 to 147..........................................          8              380,647.95          0.05
148 to 150..........................................          6              257,450.38          0.03
151 to 153..........................................          6              204,503.21          0.03
154 to 156..........................................          7              251,815.85          0.03
157 to 159..........................................          3              183,610.57          0.02
160 to 162..........................................        701           18,169,233.15          2.28
163 to 165..........................................        848           23,048,312.61          2.89
166 to 168..........................................      1,261           34,497,482.86          4.33
169 to 171..........................................        685           21,352,308.51          2.68
172 to 174..........................................      1,372           47,266,243.86          5.94
175 to 177..........................................      6,139          217,176,928.86         27.28
178 to 180..........................................      4,600          145,245,451.85         18.24
181+*...............................................         10              244,414.92          0.03
                                                         ------         ---------------        ------
     Total..........................................     24,390        $ 796,280,720.37        100.00%
                                                         ======         ===============        ======
</TABLE>
    
 
- ---------------
   
* Within parameters established by the Subservicers from time to time, the
  repayment date of a Mortgage Loan may be extended. For the Mortgage Loans
  noted, the Credit Limits have been suspended and the Subservicers are
  accepting the Minimum Monthly Payment. As a result, without any voluntary
  prepayment or default by the borrower, such loans will amortize over a period
  in excess of 15 years.
    
 
                                       40
<PAGE>   43
 
                   DAYS DELINQUENT FOR INITIAL MORTGAGE LOANS
 
   
<TABLE>
<CAPTION>
                                                                         AGGREGATE
                                                       NUMBER OF         PRINCIPAL         PERCENT OF
                  DAYS DELINQUENT                        LOANS            BALANCE           BALANCE
- ----------------------------------------------------   ---------      ---------------      ----------
<S>                                                    <C>            <C>                  <C>
0-29................................................     23,136       $750,627,673.99         94.27%
30-59...............................................      1,065         38,246,731.79          4.80
60-89...............................................        189          7,406,314.59          0.93
                                                         ------       ---------------        ------
          Totals....................................     24,390       $796,280,720.37        100.00%
                                                         ======       ===============        ======
</TABLE>
    
 
   
     No assurance can be given that the values of the Mortgaged Properties as of
the dates of origination of the related Credit Line Agreements have remained or
will remain constant or have not declined. If residential real estate markets
generally should experience an overall decline in property values such that the
outstanding Pool Balance related to the Mortgage Loans, together with any senior
financing on the Mortgaged Properties, equal or exceed the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those currently experienced in the mortgage lending
industry in general. For information concerning possible declines in value of
the Mortgaged Properties, see "Risk Factors -- Borrower's Ability to Repay;
Nature of Security; Property Values." In addition, adverse economic conditions
(which may or may not affect real property values) may affect the timely payment
by borrowers of the minimum monthly payments under the Mortgage Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to the Trust. To the extent that such losses are not covered by the
Overcollateralization Amount, if any, payments from the Spread Account or draws
on the Policy, they will be borne by Certificateholders.
    
 
     The Subservicers have sold and assigned to the Seller, and the Seller has
sold and assigned to the Trustee for the benefit of the holders of the
Certificates, all right, title and interest in the Trust Balances of the Initial
Mortgage Loans as of their Cut-Off Date (the "Cut-Off Date Pool Balance"). In
addition, Subsequent Funding Mortgage Loans acquired by the Trust and new
advances on the Mortgage Loans made during the life of the Trust pursuant to the
Credit Line Agreements (the "Additional Balances") will be funded by the
appropriate Subservicer and sold to the Seller pursuant to the Receivables
Purchase Agreement and will then be transferred by the Seller to the Trust
pursuant to the Agreement. The Subservicers will continue to service, and the
Master Servicer will master service, the Mortgage Loans, pursuant to the
Agreement, and the Master Servicer will receive a monthly servicing fee for such
services. See "Description of the Certificates -- Assignment of Mortgage Loans"
and "-- Servicing Compensation and Payment of Expenses" herein.
 
CONVEYANCE OF SUBSEQUENT FUNDING MORTGAGE LOANS
 
   
     The Agreement permits the Trust to acquire approximately $135,367,725 of
Subsequent Funding Mortgage Loans for addition to the Trust. Accordingly, the
statistical characteristics of the Mortgage Loans will vary as of any
Distribution Date on which the acquisition of these additional Mortgage Loans
occurs.
    
 
   
     The obligation of the Trust to purchase all of the Subsequent Funding
Mortgage Loans for addition to the Trust is subject to the following
requirements: (i) the weighted average Margin of all of the Subsequent Funding
Mortgage Loans is at least 5.00%; (ii) the weighted average Combined
Loan-to-Value Ratio of all of the Subsequent Funding Mortgage Loans is not more
than 83%; (iii) at least 98% of all of the Subsequent Funding Mortgage Loans are
not more than 30 days delinquent (on a contractual basis) as of their respective
Cut-Off Dates; (iv) no less than 25% of all of the Subsequent Funding Mortgage
Loans are in a first lien position; (v) the remaining term to maturity of each
Subsequent Funding Mortgage Loan may not exceed 180 months; and (vi) no
Subsequent Funding Mortgage Loan will have a Cut-Off Balance greater than
$500,000; provided, however, any of the foregoing requirements may be waived
upon the consent of the Rating Agency and the Certificate Insurer.
    
 
                                       41
<PAGE>   44
 
                     DESCRIPTION OF THE CERTIFICATE INSURER
 
   
     CapMAC is a New York-domiciled monoline stock insurance company which
engages only in the business of financial guarantee and surety insurance. CapMAC
is licensed in 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, "AAA" by Standard
& Poor's, "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps") and "AAA"
by Nippon Investors Service Inc. 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.
    
 
   
     CapMAC is a wholly-owned subsidiary of CapMAC Holdings Inc. ("Holdings").
NEITHER HOLDINGS NOR ANY OF ITS STOCKHOLDERS IS OBLIGATED TO PAY ANY CLAIMS
UNDER ANY SURETY BOND ISSUED BY CAPMAC OR ANY DEBTS OF CAPMAC OR TO MAKE
ADDITIONAL CAPITAL CONTRIBUTIONS TO CAPMAC.
    
 
   
     CapMAC is regulated by the Superintendent of Insurance of the State of New
York. In addition, CapMAC is subject to regulation by the insurance laws and
regulations of the other jurisdictions in which it is licensed. Such insurance
laws regulate, among other things, the amount of net exposure per risk that
CapMAC may retain, capital transfers, dividends, investment of assets, changes
in control, transactions with affiliates and consolidations and acquisitions.
CapMAC is subject to periodic regulatory examinations by the same regulatory
authorities.
    
 
   
     CapMAC's obligations under the Policy may be reinsured. Such reinsurance
does not relieve CapMAC of any of its obligations under the Policy.
    
 
   
     THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
    
 
   
     As at December 31, 1995 and 1994, CapMAC had qualified statutory capital
(which consists of policyholders' surplus and contingency reserve) of
approximately $240 million and $170 million, respectively, and had not incurred
any debt obligations. Article 69 of the New York State Insurance Law requires
CapMAC to establish and maintain the contingency reserve, which is available to
cover claims under surety bonds issued by CapMAC.
    
 
   
     The audited financial statements of CapMAC prepared in accordance with
generally accepted accounting principles as of December 31, 1995 and 1994 and
for each of the years in the three-year period ended December 31, 1995, and the
unaudited financial statements of CapMAC as of September 30, 1996 and 1995 and
for each of the three month periods then ended are made a part of this
Prospectus under Annex II. Copies of CapMAC's financial statements prepared in
accordance with statutory accounting standards, which differ from generally
accepted accounting principles, are filed with the Insurance Department of the
State of New York and are available upon request.
    
 
   
     CapMAC is located at 885 Third Avenue, New York, New York 10022, and its
telephone number is (212) 755-1155.
    
 
                     MATURITY AND PREPAYMENT CONSIDERATIONS
 
   
     The Agreement, except as otherwise described herein, provides that the
Certificateholders will be entitled to receive on each Distribution Date
distributions of Principal Collections, in the amounts described herein, until
the Certificate Principal Balance is reduced to zero. During the Funding Period,
the Scheduled Principal Distribution Amount will be deposited into the Funding
Account and may be used by the Trustee to purchase up to an aggregate of
$135,367,725 of Subsequent Funding Mortgage Loans, which is equal to 17% of the
sum of the Cut-Off Balances of the Initial Mortgage Loans. On any Distribution
Date during the Funding Period on which the aggregate amount deposited in the
Funding Account during the Funding Period exceeds $135,367,725, such excess will
be distributed to the Certificateholders as payment of principal. In the event
that not all of the Principal Collections on deposit in the Funding Account have
been used to acquire Subsequent Funding Mortgage Loans on the last Distribution
Date of the Funding Period, then such Principal
    
 
                                       42
<PAGE>   45
 
   
Collections will be used to acquire any remaining Additional Balances on such
Distribution Date and any remaining Principal Collections on deposit thereafter
will be distributed to the Certificateholders as payment of principal. Following
the expiration of the Funding Period and prior to the commencement of the Rapid
Amortization Period, Certificateholders will receive, to the extent of the
availability thereof, amounts from Principal Collections either based upon the
Fixed Allocation Percentage of principal received or the principal received less
amounts drawn under the Credit Line Agreements, whichever is less. Upon the
commencement of the Rapid Amortization Period, Certificateholders will receive
amounts from Principal Collections based solely upon the Fixed Allocation
Percentage. Because prior principal distributions to Certificateholders serve to
reduce the Certificateholders' Floating Allocation Percentage but do not change
the Fixed Allocation Percentage, allocations of Principal Collections based on
the Fixed Allocation Percentage may result in distributions of principal to the
Certificateholders in amounts that are, in most cases, greater relative to the
declining balance of the Pool Balance than would be the case if the
Certificateholders' Floating Allocation Percentage were used to determine the
percentage of Principal Collections distributed to Certificateholders. This is
especially true during the Rapid Amortization Period when the Maximum Principal
Distribution Amount is distributed. In addition, Interest Collections allocable
to the Certificates may be distributed to Certificateholders as part of the
Accelerated Principal Distribution Amount. Furthermore, to the extent of losses
allocable to the Certificateholders, Certificateholders will also receive as
principal reduction the amount of such losses from Certificateholders' Excess
Interest, and, if necessary, and to the extent not covered by the
Overcollateralization Amount, from any amounts on deposit in the Spread Account
and draws under the Policy. The level of losses may therefore affect the rate of
payment of principal on the Certificates.
    
 
     To the extent obligors make more draws than principal payments, the
Seller's Interest may grow. Because during the Rapid Amortization Period the
Certificateholders' share of Principal Collections is based upon the Fixed
Allocation Percentage, an increase in the Seller's Interest due to additional
draws may also result in Certificateholders receiving principal at a greater
rate. The Agreement permits the Seller, at its option, but subject to the
satisfaction of certain conditions specified in the Agreement, including the
conditions described below, to remove certain Mortgage Loans from the Trust at
any time during the life of the Trust, so long as the aggregate principal
balance of the Mortgage Loans to be removed will not result in the percentage of
the Pool Balance allocable to the Seller Interest (after giving effect to such
removal) being less than the percentage of the Pool Balance allocable to the
Seller Interest as of the Closing Date. Such removals may affect the rate at
which principal is distributed to Certificateholders by reducing the overall
Pool Balance and thus the amount of Principal Collections. See "Description of
the Certificates -- Optional Retransfers of Mortgage Loans to the Seller."
 
   
     As described herein, the actual maturity of the Certificates will depend in
part on the availability of Subsequent Funding Mortgage Loans, the timing of the
acquisition of such loans and the receipt of principal on the Mortgage Loans or
the extent of Liquidated Mortgage Loans, which will result in principal payments
on the Certificates equal to the sum of the applicable Allocation Percentage of
(i) the related Net Liquidation Proceeds included in Principal Collections and
Certificateholders Excess Interest allocated thereto and (ii) the related
Liquidation Loss Amount of such Mortgage Loans to the extent of funds collected
on the Mortgage Loans, less the Servicing Fee, together with any funds withdrawn
from the Spread Account or draws under the Policy. All of the Mortgage Loans may
be prepaid in full or in part at any time. The Subservicers, for certain
Mortgage Loans originated in Arizona, California, Connecticut, Florida, Indiana,
Missouri, Nevada, New Hampshire, Ohio and Oregon, have a right to assess a
prepayment penalty if that Mortgage Loan is prepaid in full within the first
three years of its origination date and the Subservicers have such right if a
Mortgage Loan originated in Rhode Island is prepaid in full within one year of
the origination date. The prepayment penalty varies and may be (i) a percentage
of the original Credit Limit, (ii) a percentage of the amount of the unpaid
balance, (iii) an amount equal to six months' interest on the principal balance
that was prepaid, or (iv) an amount equal to six months' interest on the amount
prepaid in excess of 20% of original principal balance. The prepayment
experience with respect to the Mortgage Loans will affect the actual maturity of
the Certificates.
    
 
     HFC is not aware of any publicly generated studies or statistics available
on the rate of prepayment of home equity loans. Generally, home equity loans are
not viewed by mortgagors as permanent financing. Accordingly, the Mortgage Loans
may experience a higher rate of prepayment than traditional mortgage
 
                                       43
<PAGE>   46
 
loans. On the other hand, because most of the Mortgage Loans are not fully
amortizing, in the absence of voluntary borrower prepayments they could
experience slower rates of principal payment than traditional fully amortizing
first mortgages. The Trust's prepayment experience may be affected by a wide
variety of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility.
 
     In addition, the Trust's prepayment experience and the rate at which the
Certificates amortize will be affected by any repurchases of Mortgage Loans by
the Master Servicer or the Subservicers pursuant to the Agreement. Substantially
all of the Mortgage Loans contain due-on-sale provisions, and the Subservicers
intend to enforce such provisions unless (i) such enforcement is not permitted
by applicable law or (ii) the related Subservicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligations
under the Mortgage Loan. The enforcement of a due-on-sale provision will have
the same effect as a prepayment of the related Mortgage Loan. See "Description
of the Certificates -- Collection and Other Servicing Procedures" and "Certain
Legal Aspects of the Mortgage Loans -- 'Due-on-Sale' Clauses" for a description
of certain provisions of the Agreement referred to below that may affect the
prepayment experience on the Mortgage Loans. The yield to an investor in
Certificates who purchased such Certificates in the secondary market at a price
that is different from par will be different if the rate of prepayment on the
Mortgage Loans is actually different than the rate anticipated by such investor
at the time such Certificates were purchased.
 
     Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the Minimum Monthly
Payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon and, in addition,
borrowers may borrow additional amounts under their respective Credit Line
Agreements. It is possible that borrowers may fail to make scheduled payments.
In addition, collections on the Mortgage Loans may also vary due to seasonal
purchasing and payment habits of borrowers.
 
     No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers will
not prepay their Mortgage Loans to any significant degree.
 
   
     The following tables set forth below are based on conditional prepayment
rate, constant draw rate (which for purposes of the assumptions is the amount of
Additional Balances on the Mortgage Loans drawn each month expressed as an
annualized percentage of the total principal of the pool of Mortgage Loans
outstanding at the beginning of such month) and optional termination assumptions
as indicated in the tables below. For the following tables, it was assumed that
the Initial Mortgage Loans have been aggregated into two pools, one pool with a
principal balance of $509,087,305.02 and a second pool with a principal balance
of $287,193,415.35. Further, Mortgage Loans with respect to the two pools are
assumed to have interest rates of 14.1091% and 12.8354%, respectively, and
interest rates net of the Servicing Fee, the insurance premium, and a certain
amount calculated to absorb losses related to defaults on the Mortgage Loans
(the "net interest rates") of 12.1091% and 10.8354%, respectively, credit limit
utilization rates of 96.77% and 94.69%, respectively, and as of the Pool Date,
remaining terms to maturity of 174 months and 95 months, respectively.
    
 
   
     In addition, it was assumed that (i) the distributions are made in
accordance with the description set forth under "Description of the Certificates
- -- Distributions on the Certificates," (ii) distributions of principal and
interest on the Certificates will be made on the 20th day of each calendar month
regardless of the day on which the Distribution Date actually occurs, (iii) no
extension past the scheduled maturity date of a Mortgage Loan is made, (iv) no
delinquencies occur, (v) scheduled monthly payments on the Mortgage Loans are
comprised of interest only payments and the only principal payments on the
Mortgage Loans are those represented by prepayments calculated under each of the
prepayment assumptions as set forth in the tables below before giving effect to
draws, (vi) monthly draws are calculated under each of the assumptions as set
forth in the tables below before giving effect to prepayments, (vii) each
Mortgage Loan is subject to a maximum credit utilization rate of 110%, (viii)
the scheduled due date for each of the Mortgage Loans is the first day of each
month, (ix) each month consists of 30 days, (x) the Closing Date is November   ,
1996, (xi) the Funding Period begins on the Closing Date and expires on the
earlier of the 15th Distribution Date or the month in which the balance in the
Funding Account is equal to 17% of the sum of the Cut-Off Balances of the
Initial Mortgage Loans, (xii) all the aggregate principal collections in the
Funding Account, up to 17% of
    
 
                                       44
<PAGE>   47
 
   
the sum of the Cut-Off Balances of the Initial Mortgage Loans, will be used to
purchase Subsequent Funding Mortgage Loans at the end of the Funding Period,
(xiii) the Subsequent Funding Mortgage Loans are purchased at the end of the
Funding Period and will have an identical interest rate, net interest rate and
remaining term to maturity as of the Pool Date as the first pool described
above, and (xiv) for each Distribution Date the Certificate Rate is equal to
5.525%.
    
 
      PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE -- AMORTIZATION
                                 SCHEDULE(1)(2)
 
   
<TABLE>
<CAPTION>
                                                             CONDITIONAL PREPAYMENT RATE (% CPR)
                                               ----------------------------------------------------------------
                PAYMENT DATE                    0%        10%       18%       22%       26%       30%       34%
- --------------------------------------------   ----       ---       ---       ---       ---       ---       ---
<S>                                            <C>        <C>       <C>       <C>       <C>       <C>       <C>
The Closing Date............................    100      100       100       100       100       100       100
November 20, 1997...........................     99       99        99        99        93        88        83
November 20, 1998...........................     99       95        89        81        72        64        57
November 20, 1999...........................     99       90        76        66        56        47        39
November 20, 2000...........................     99       85        65        53        43        34        26
November 20, 2001...........................     99       81        56        43        33        24        17
November 20, 2002...........................     99       76        48        35        25        17        11
November 20, 2003...........................     99       72        41        28        19        12         0
November 20, 2004...........................     60       45        24        15         0         0         0
November 20, 2005...........................     60       41        19        11         0         0         0
November 20, 2006...........................     60       36        15         0         0         0         0
November 20, 2007...........................     60       32        12         0         0         0         0
November 20, 2008...........................     60       28         0         0         0         0         0
November 20, 2009...........................     60       24         0         0         0         0         0
November 20, 2010...........................     60       21         0         0         0         0         0
November 20, 2011...........................      0        0         0         0         0         0         0
Weighted Average Life (years)...............   11.8      8.9       6.0       4.8       4.0       3.4       2.8
</TABLE>
    
 
- ---------------
(1) Assumes (i) that an optional termination is exercised when the outstanding
    Certificate Principal Balance is less than or equal to 10% of the Original
    Certificate Principal Balance and (ii) a constant draw rate of 5%.
 
(2) All percentages are rounded to the nearest 1%.
 
          WEIGHTED AVERAGE LIFE(1) AND FINAL SCHEDULED PAYMENT DATE(2)
         SENSITIVITY OF THE CLASS A CERTIFICATES TO PAYMENTS AND DRAWS
 
   
<TABLE>
<CAPTION>
                                                     CONDITIONAL PREPAYMENT RATE (% CPR)(3)
               ------------------------------------------------------------------------------------------------------------------
                    0%              10%              18%              22%              26%              30%              34%
CONSTANT DRAW  ------------     ------------     ------------     ------------     ------------     ------------     ------------
    RATE       WAL     DATE     WAL     DATE     WAL    DATE      WAL    DATE      WAL    DATE      WAL    DATE      WAL    DATE
- -------------  ----    ----     ----    ----     ---    -----     ---    -----     ---    -----     ---    -----     ---    -----
<S>            <C>     <C>      <C>     <C>      <C>    <C>       <C>    <C>       <C>    <C>       <C>    <C>       <C>    <C>
 0%..........  12.0    5/11     7.6     5/11     5.1     7/07     4.2     6/05     3.6    11/04     3.1    11/03     2.6    11/02
 3%..........  11.8    5/11     8.2     5/11     5.5    11/07     4.5     9/05     3.8    11/04     3.2    11/03     2.7    11/02
 5%..........  11.8    5/11     8.9     5/11     6.0     7/08     4.8     5/06     4.0    11/04     3.4     5/04     2.8     3/03
 8%..........  11.9    5/11     9.9     5/11     6.7     2/09     5.5     5/07     4.5     8/05     3.7    11/04     3.1    10/03
10%..........  12.0    5/11    10.7     5/11     7.1     4/09     6.0    10/07     4.9     3/06     4.0    11/04     3.3     4/04
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                     CONDITIONAL PREPAYMENT RATE (% CPR)(4)
                -----------------------------------------------------------------------------------------------------------------
                     0%              10%              18%             22%              26%              30%              34%
CONSTANT DRAW   ------------     ------------     -----------     ------------     ------------     ------------     ------------
     RATE       WAL     DATE     WAL     DATE     WAL    DATE     WAL    DATE      WAL    DATE      WAL    DATE      WAL    DATE
- --------------  ----    ----     ----    ----     ---    ----     ---    -----     ---    -----     ---    -----     ---    -----
<S>             <C>     <C>      <C>     <C>      <C>    <C>      <C>    <C>       <C>    <C>       <C>    <C>       <C>    <C>
 0%...........  12.0    5/11     7.6     5/11     5.3    5/11     4.5     5/11     3.8     5/11     3.2     4/11     2.8     3/08
 3%...........  11.8    5/11     8.2     5/11     5.7    5/11     4.7    12/10     3.9    11/08     3.3     1/07     2.8     8/05
 5%...........  11.8    5/11     8.9     5/11     6.2    5/11     5.0    11/10     4.1     2/09     3.5     6/07     3.0     1/06
 8%...........  11.9    5/11     9.9     5/11     6.8    5/11     5.7     8/10     4.6     4/09     3.8    12/07     3.2     8/06
10%...........  12.0    5/11    10.7     5/11     7.2    5/11     6.1     6/10     5.0     5/09     4.1     3/08     3.4    12/06
</TABLE>
    
 
- ---------------
(1)  The weighted average life of the Certificates is determined by (i)
     multiplying the amount of each principal payment by the number of years
     from the date of issuance to the related Distribution Date, (ii) adding the
     results, and (iii) dividing the sum by the Original Certificate Principal
     Balance.
 
(2)  The final scheduled payment date of the Certificates is the date on which
     the Certificate Principal Balance is reduced to zero.
 
(3)  Assumes that an optional termination is exercised when the outstanding
     Certificate Principal Balance is less than or equal to 10% of the Original
     Certificate Principal Balance.
 
(4)  Assumes no optional termination is exercised.
 
                                       45
<PAGE>   48
 
                      POOL FACTOR AND TRADING INFORMATION
 
     The "Pool Factor" is a seven-digit decimal which the Master Servicer will
compute monthly expressing the Certificate Principal Balance as of each
Distribution Date (after giving effect to the distribution on such Distribution
Date) as a proportion of the Original Certificate Principal Balance. On the
Closing Date, the Pool Factor will be 1.0000000 and will decline to reflect
reductions in the Certificate Principal Balance resulting from distributions
allocated to principal. A Certificateholder's outstanding Certificate Principal
Balance for a given month can be determined by multiplying the denomination of
the holder's Certificate by the Pool Factor for that month.
 
     Pursuant to the Agreement, monthly reports concerning the Invested Amount,
the Pool Factor and various other items of information will be made available to
the Certificateholders. In addition, within 60 days after the start of each
calendar year, beginning in 1997, information for tax reporting purposes will be
made available to each person who has been a registered Certificateholder
(expected to be Cede) during the preceding calendar year. See "Description of
the Certificates -- Registration of Certificates" and "-- Reports to
Certificateholders."
 
                        DESCRIPTION OF THE CERTIFICATES
 
     The Certificates will be issued pursuant to the Agreement. A form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries describe certain provisions
of the Agreement. The summaries do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the provisions
of the Agreement. Wherever particular sections or defined terms of the Agreement
(not otherwise defined herein) are referred to, such sections or defined terms
are hereby incorporated herein by reference. Additionally, capitalized terms
used herein that are not defined herein shall have the meanings ascribed to them
in the Agreement.
 
GENERAL
 
     The Certificates will be issued only in fully registered form, in
denominations of $100,000 and integral multiples of $1,000 in excess thereof and
will evidence specified undivided beneficial ownership interests in the Trust.
(Section 6.01) The property of the Trust will consist of, to the extent provided
in the Agreement: (i) the Mortgage Loans, including any Subsequent Funding
Mortgage Loans and any Eligible Substitute Mortgage Loans acquired by the Trust,
and Additional Balances that from time to time are subject to the Agreement;
(ii) collections in respect of such Mortgage Loans and Additional Balances;
(iii) Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure; (iv) the Collection Account (excluding net earnings thereon); (v)
the Funding Account; (vi) the Spread Account (for the benefit of the Certificate
Insurer and the Certificateholders); (vii) the Policy; and (viii) an assignment
of the Seller's interest in certain hazard insurance policies maintained by the
borrowers with respect to the Mortgaged Properties. (Article I) Definitive
Certificates, if issued, will be transferable and exchangeable at the corporate
trust office of the Trustee, which will initially act as Certificate Registrar.
See "Registration of Certificates" below. No service charge will be made for any
registration, exchange or transfer of Certificates, but the Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge.
(Section 6.02)
 
   
     The aggregate amount of the Certificateholder's undivided interest in the
Trust represented by the Certificates on the Closing Date with respect to the
Initial Mortgage Loans will equal $776,373,000 of principal (the "Original
Certificate Principal Balance" or the "Original Invested Amount"). Thereafter,
the Invested Amount with respect to any date will be an amount equal to the
Original Invested Amount minus the sum of (a) the amount, without duplication,
of principal payments previously distributed to Certificateholders (excluding
Accelerated Principal Distribution Amounts and payments of the Guaranteed
Principal Distribution Amounts paid out of draws under the Policy), (b) all
principal payments that would be made but for the Master Servicer's legal
inability to deposit collections in the Collection Account due to a final
determination of a court of competent jurisdiction in any Master Servicer's,
Subservicer's or Seller's insolvency proceeding and (c) the aggregate amount
equal to the product of the Certificateholders' Floating Allocation Percentage
    
 
                                       46
<PAGE>   49
 
   
and the Liquidation Loss Amounts that have not been previously distributed to
the Certificateholders out of Interest Collections. The aggregate principal
amount of the outstanding Certificates (the "Certificate Principal Balance") on
any date is equal to the Original Certificate Principal Balance less the
aggregate of amounts actually distributed as principal to the Certificateholders
(including Accelerated Principal Distribution Amounts and any Guaranteed
Principal Distribution Amount paid out of draws under the Policy). See
"Distributions on the Certificates" below. Each Certificate represents the right
to receive payments of interest at the applicable Certificate Rate and payments
of principal as described below funded from Interest Collections and Principal
Collections, respectively, allocated to the Certificates and, if necessary, from
draws on the Spread Account and on the Policy. The Seller will own initially the
remaining undivided interest in the Trust (the "Seller Interest") not
represented by the Invested Amount.
    
 
ASSIGNMENT OF MORTGAGE LOANS
 
     Each of the Subservicers will transfer to the Seller and the Seller will
transfer to the Trust all of its right, title and interest in and to the amounts
owing under each Mortgage Loan (including any Additional Balances thereon
arising in the future), including all Principal Collections to the extent
described herein, if any, and Interest Collections due with respect to each such
Mortgage Loan subsequent to the Cut-Off Date therefor (other than any amounts
received in respect of taxes, insurance premiums, assessments and similar items,
as provided in the Agreement). The Funding Account will also be established with
the Trustee. In addition, on or prior to the date the Certificates are initially
issued by the Trust, the Master Servicer shall cause the Policy to be delivered
to and the Spread Account to be created with the Trustee. (Section 2.01) The
Trustee, concurrently with the transfer of the Initial Mortgage Loans, will
deliver the Certificates and the Seller Certificates (as defined in the
Agreement) to the Seller. (Section 2.08) Subject to the following conditions,
among others, Subsequent Funding Mortgage Loans, to the extent of the
availability thereof and the availability of sufficient Principal Collections on
deposit in the Funding Account, will be sold to the Trust on or before the last
Distribution Date of the Funding Period and: (i) must meet the general criteria
for eligibility in accordance with the terms of the Agreement (other than
statistical information relating to the Initial Mortgage Loans or Eligible
Substitute Mortgage Loans); (ii) must be selected by the Master Servicer in a
manner it believes will not materially adversely affect the Certificateholders
or the Certificate Insurer and (iii) the Trustee shall have received written
confirmation from the Rating Agencies that such addition will not result in a
reduction or withdrawal of the then current rating of the Certificates and
written consent (not to be unreasonably withheld or delayed) from the
Certificate Insurer. (Section 2.06) In addition, any Additional Balances in
respect of such Mortgage Loans arising in the future will be transferred to the
Trust. Each Mortgage Loan transferred to the Trust will be identified on a
magnetic tape (the "Mortgage Loan Schedule") delivered to the Trustee pursuant
to the Agreement. Such schedule will include information as to the applicable
Cut-Off Balance of each Mortgage Loan, as well as information respecting the
applicable Loan Rate. (Article I) In addition, the Subservicers will assign all
right, title and interest to the Related Documents, consisting of the Credit
Line Agreements, Mortgages and other related documents to the Trustee directly.
However, the Credit Line Agreements and the other Related Documents will remain
in the possession of the applicable Subservicer, except as set forth below.
Notwithstanding the foregoing, the related Subservicer will retain all right,
title and interest in the Credit Line Agreements with respect to the right or
obligation to make future advances to the borrowers.
 
     Under the terms of the Agreement, during the period that the Certificates
are outstanding and so long as HFC's long-term senior unsecured debt is rated at
least A3 by Moody's and A- by Standard & Poor's, or such lower ratings as are
deemed acceptable by Moody's and Standard & Poor's in order to maintain their
then current ratings on the Certificates and acceptable to the Certificate
Insurer, the Subservicers shall be entitled to maintain possession of the
Related Documents with respect to each Mortgage Loan and shall not be required
to record assignments of the related mortgage either to the Seller or the
Trustee. In the event, however, that possession of any Related Documents is
required by the Master Servicer, the Master Servicer will be entitled to request
delivery thereof and to retain the same for as long as necessary for servicing
purposes. Any such Related Documents will be returned to the applicable
Subservicer (unless returned to the related borrower in connection with the
payment in full of the related Mortgage Loan) when possession thereof is no
longer required. In the event that HFC's long-term senior unsecured debt rating
does not satisfy
 
                                       47
<PAGE>   50
 
the above-described standards or any of the Subservicers ceases to be an HFC
affiliate, such Subservicer and the Seller will have 90 days to record
assignments of the mortgages for each related Mortgage Loan in favor of the
Trustee and 60 days to deliver the Related Documents pertaining to each such
Mortgage Loan to the Trustee (unless opinions of counsel satisfactory to the
Trustee, the Rating Agencies and the Certificate Insurer are delivered to the
Trustee and the Certificate Insurer to the effect that recordation of such
assignments or delivery of such documentation is not required in the relevant
jurisdiction to protect the interests of the Seller and the Trustee in the
Mortgage Loans). Under the Agreement, the Trustee is appointed attorney-in-fact
for the Subservicers and the Seller with power to prepare, execute and record
assignments of the mortgages in the event that the Subservicers and the Seller
fail to do so on a timely basis. (Section 2.01) In lieu of delivery of original
documentation, the Master Servicer may deliver documents which have been imaged
optically upon delivery of an opinion of counsel that such documents do not
impair the enforceability or the transfer to the Trust of the Mortgage Loans.
 
     In the event the Related Documents are delivered to the Trustee with regard
to any Mortgage Loan, the Trustee will review such Related Documents and if any
Related Documents are found to be defective in any material respect and such
defect is not cured within 30 days following notification thereof to the Master
Servicer by the Trustee, the Seller will be obligated to accept the retransfer
of all affected Mortgage Loans from the Trust. Upon such retransfer, such
Mortgage Loans will be deducted from the Pool Balance, thus reducing the amount
of the Seller Interest, provided that interest accrued on the aggregate
principal balance on the Mortgage Loans to the date of such retransfer shall be
property of the Trust. Upon the occurrence of any such retransfer, the Seller
may designate and sell to the Trust an Eligible Substitute Mortgage Loan to
replace such defective Mortgage Loan. If after giving effect to any such
deduction or transfer of an Eligible Substitute Mortgage Loan to the Trust the
Seller Interest would be reduced below 2% of the Pool Balance at such time, the
Seller shall deposit an amount into the Collection Account equal to the amount
that would have, but for such deposit, reduced the Seller Interest below 2% of
such Pool Balance (the "Retransfer Deposit Amount"). The Retransfer Deposit
Amount will be a Principal Collection. Any such deduction and/or deposit will be
considered a repayment in full of such Mortgage Loan. Notwithstanding the
foregoing, however, no such retransfer shall be considered to have occurred
unless any such required deposit is actually made. The obligation of the Seller
to accept a retransfer of a defective Mortgage Loan is the sole remedy regarding
any defects in the Related Documents available to the Trustee or the
Certificateholders. (Section 2.02)
 
     The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., principal balance thereof as
of the applicable Cut-Off Date and the Loan Rate). In addition, the Seller will
represent and warrant, on the Closing Date, that, among other things: (i) at the
time of transfer to the Trust, the Seller has transferred all of its right,
title and interest in each Initial Mortgage Loan and its corresponding Related
Documents, free of any lien; and (ii) each Initial Mortgage Loan was generated
under a Credit Line Agreement that complied, at the time of origination, unless
otherwise noted in the Agreement, in all material respects with applicable state
and Federal laws. Such representations and warranties will be repeated for the
Subsequent Funding Mortgage Loans and any Eligible Substitute Mortgage Loans as
of the date they are transferred to the Trust. Upon discovery of a breach of any
such representation and warranty which materially and adversely affects the
interests of the Certificateholders or the Certificate Insurer in the related
Mortgage Loan and Related Documents, the Seller will have a period of 60 days
after discovery or notice of the breach, or, with the prior written consent of
the Trustee and the Certificate Insurer, such longer period not to exceed 90
days, to effect a cure. If the breach cannot be cured within such period, the
Seller will be obligated to accept a retransfer of the Mortgage Loan from the
Trust and may substitute an Eligible Substitute Mortgage Loan therefor. To the
extent that such retransfer (after giving effect to any such substitution) would
reduce the Seller Interest below 2% of the Pool Balance at such time, the Seller
shall deposit into the Collection Account the Retransfer Deposit Amount.
Furthermore, if the Seller breaches certain of its representations and
warranties with respect to (a) the ownership of the Trust Balances and the
ability to sell the same pursuant to the Agreement or (b) the status of the
transfer of the amounts due under the Mortgage Loans to the Trust as either a
valid transfer and assignment of such amounts to the Trust or the grant to the
Trust of a security interest in such Mortgage Loans, the Seller shall accept a
retransfer of all Mortgage Loans from the Trust in
 
                                       48
<PAGE>   51
 
   
accordance with the terms of the Agreement. In the event of such retransfer, the
Seller shall deposit into the Collection Account, as the Retransfer Deposit
Amount, an amount equal to the Certificate Principal Balance plus all unpaid and
accrued interest thereon preceding the date of such retransfer together with any
unreimbursed amounts then due and owing to the Certificate Insurer under the
terms of the Insurance Agreement. The same procedure and limitations that are
set forth in the preceding paragraph for the retransfer of a Mortgage Loan
respecting which there is a defect in the Related Documents will apply to the
replacement or retransfer of a Mortgage Loan that is required to be
retransferred because of a breach of a representation or warranty in the
Agreement that materially and adversely affects the interests of the
Certificateholders, the Trust or the Certificate Insurer, including that the
obligation of the Seller to accept a retransfer of a Defective Mortgage Loan is
the sole remedy regarding any such defects available to the Trustee, the
Certificateholders or the Certificate Insurer. (Section 2.04)
    
 
     Mortgage Loans required to be retransferred to the Seller as described in
the preceding two paragraphs are referred to as "Defective Mortgage Loans."
 
     An Eligible Substitute Mortgage Loan is a Mortgage Loan which: (i) has an
outstanding principal balance not substantially in excess of, and not
substantially less than, the Trust Balance of such Defective Mortgage Loan; (ii)
has a Loan Rate of not less than the Loan Rate of the Defective Mortgage Loan
and not more than 500 basis points in excess thereof; (iii) if the Defective
Mortgage Loan was an Adjustable Rate Mortgage, has a Margin that is not less
than the Margin of the Defective Mortgage Loan and not more than 500 basis
points higher than the Margin for the Defective Mortgage Loan; (iv) has a
remaining term to maturity not more than six months earlier or later than the
remaining term to maturity of the Defective Mortgage Loan; (v) conforms to
certain of the representations and warranties of the Seller in the Agreement as
applicable to Eligible Substitute Mortgage Loans; (vi) has a Combined
Loan-to-Value Ratio that is not in excess of the Combined Loan-to-Value Ratio of
the Defective Mortgage Loan; (vii) has a Mortgage which has a lien position at
least equal to the lien position of the Mortgage relating to the Defective
Mortgage Loan; (viii) has a borrower with characteristics substantially similar
to the borrower under the Defective Mortgage Loan; and (ix) if the Defective
Mortgage Loan has an adjustable Loan Rate, has a maximum Loan Rate no lower than
the maximum Loan Rate applicable to the Defective Mortgage Loan and has a
minimum Loan Rate no lower than the minimum Loan Rate applicable to the
Defective Mortgage Loan, or each of the Rating Agencies and the Certificate
Insurer consents to such Eligible Substitute Mortgage Loan.
 
     All representations and warranties of the Seller described above relating
to each Defective Mortgage Loan will be deemed to have been made with respect to
each such Eligible Substitute Mortgage Loan except as modified to the extent
described in the Agreement. Each such representation and warranty with respect
to conditions on the Cut-Off Date shall be deemed to have been made as of the
date of substitution, except as modified to the extent described in the
Agreement. The remedies in the event of a breach of representation or warranty
with respect to an Eligible Substitute Mortgage Loan will be similar to those
described above with respect to Defective Mortgage Loans. (Sections 2.02 and
2.04)
 
     Pursuant to the Agreement, the Master Servicer will service and administer
the Mortgage Loans as more fully set forth below.
 
AMENDMENTS TO CREDIT LINE AGREEMENTS
 
     Subject to applicable law, the applicable Subservicer may change the terms
of the Credit Line Agreements at any time. Changes to the terms of a Mortgage
Loan may be agreed to by a Subservicer or the Master Servicer in the event that
such Subservicer or Master Servicer has determined that such changes are
necessary (provided that such changes will not have a material adverse effect on
the interests of the Certificateholders, the Certificate Insurer or the Trust).
In addition, certain changes may be made to the terms of a Mortgage Loan that
will have a material adverse effect on the interests of the Certificateholders
provided that any such Mortgage Loan will be retransferred to such Subservicer
or the Master Servicer pursuant to the terms of the Agreement prior to the
effectiveness of any such change.
 
                                       49
<PAGE>   52
 
CONSENT TO SENIOR LIENS
 
     The Master Servicer, acting as agent for the Trust, may permit the
placement of a subsequent senior mortgage on any Mortgaged Property, provided
that (a)(i) the Mortgage relating to the Mortgage Loan was in a first lien
position as of the applicable Cut-Off Date and (ii) such action is consistent
with prudent commercial practice; (b) such Mortgage succeeded to a first or
second lien position after the related Mortgage Loan was conveyed to the Trust
and, immediately following the placement of such senior lien, such Mortgage is
in a second or third lien position and the outstanding principal amount of the
mortgage loan secured by such senior lien and the rate at which interest accrues
thereon are no greater than those of the senior mortgage loan secured by the
Mortgaged Property as of the date the related Mortgage Loan was conveyed to the
Trust; (c) the Mortgage relating to such Mortgage Loan was in a second or third
lien position as of the applicable Cut-Off Date, the new senior lien secures a
mortgage loan that refinances an existing first or second mortgage loan and the
outstanding principal amount of the replacement first or second mortgage loan
immediately following such refinancing and the interest rate on the replacement
first or second mortgage loan are not greater than that of the existing first or
second mortgage loan at the date of such refinancing; or (d) the Mortgage
relating to such Mortgage Loan was in a second or third lien position as of the
applicable Cut-Off Date, the new senior lien secures a mortgage loan that
refinances an existing first or second mortgage loan and the then current
Combined Loan-to-Value Ratio of the senior liens and the Mortgage does not
exceed such ratio as of the applicable Cut-Off Date and the ratio of the
Mortgage to the Mortgage plus all senior liens immediately following such
refinancing is at least equal to such ratio as of the applicable Cut-Off Date.
Should a Mortgage Loan which had a first lien on the applicable Cut-Off Date and
as to which the Master Servicer consents to a senior lien pursuant to clause (a)
above be foreclosed upon (a "Special Foreclosed Mortgage Loan"), the Master
Servicer shall repurchase the Trust Balance of such Mortgage Loan, subject to
the conditions described under "Assignment of Mortgage Loans" above.
 
OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE SELLER
 
   
     Subject to the conditions specified in the Agreement, if on the 27th day of
any calendar month or the following Business Day if such day is not a Business
Day (the "Retransfer Notification Date") the percentage (after giving effect to
distributions on such date) of the Pool Balance allocated to the Seller Interest
(after giving effect to the following described proposed removal) exceeds 2%,
the Seller may, but shall not be obligated to, remove on the last Business Day
of such month from the Trust, Mortgage Loans (which may have been generated
under a Credit Line Agreement in any billing cycle) without notice to the
Certificateholders (the "Removed Balances"). The Seller will be required to
satisfy the following conditions in order to designate which Mortgage Loans will
be Removed Balances: (i) the Seller shall have represented that no selection
procedures reasonably believed by the Seller to be adverse to the interests of
the Certificateholders or the Certificate Insurer were used to select the
Removed Balances; (ii) the Seller shall have delivered to the Trustee a computer
file containing a list of all Mortgage Loans in the Trust after such removal;
(iii) the Rating Agencies shall have been notified of the proposed retransfer
and prior to the date of retransfer shall not have notified the Seller in
writing that such retransfer would result in a reduction or withdrawal of their
respective then-current ratings of the Certificates; (iv) the Rapid Amortization
Period shall not have commenced; (v) the proposed retransfer shall not, in the
reasonable belief of the Seller, cause a Rapid Amortization Event to occur; (vi)
the percentage of the Pool Balance allocated to the Seller Interest (after
giving effect to such removal) shall be at least equal to 2% and (vii) the
Seller shall have delivered an officer's certificate to the Trustee and the
Certificate Insurer confirming the items set forth in (i) through (vi) above. In
addition, the Mortgage Loans remaining in the Trust must meet certain
delinquency requirements. Notwithstanding the foregoing however, the Seller may,
at its sole discretion, remove Mortgage Loans from the Trust at any time,
provided (x) the percentage of the Pool Balance allocated to the Seller Interest
(after giving effect to such removal) shall be at least equal to 2% (y) the
Seller shall have delivered a certificate to the Trustee identifying the
Mortgage Loan to be retransferred as well as confirming the satisfaction of
certain other conditions, and (z) the Mortgage Loan is being removed to
facilitate the servicing of the Mortgage Loan, including modifications to the
Credit Line Agreement. (Section 2.07)
    
 
                                       50
<PAGE>   53
 
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT; DEPOSITS TO FUNDING
ACCOUNT
 
     The Master Servicer has established and will maintain with the Trustee a
single separate trust account (the "Collection Account") for the benefit of the
Certificateholders and the Seller as the owner of the Seller Interest, as their
interests may appear. The Collection Account will be an Eligible Account (as
defined herein). Except as otherwise described herein and subject to the
investment provision described in the following paragraphs, within two Business
Days following receipt by the Master Servicer or a Subservicer of amounts in
respect of the Mortgage Loans, excluding amounts representing administrative
charges, annual fees, taxes, assessments, credit insurance charges, insurance
proceeds to be applied to the restoration or repair of a Mortgaged Property or
similar items, the Master Servicer or Subservicer will deposit such amounts in
the Collection Account. Amounts so deposited will be invested in Permitted
Investments (as described in the Agreement) maturing no later than one Business
Day prior to the related Distribution Date or on the related Distribution Date
if approved by the Rating Agencies and the Certificate Insurer. On the fifth
Business Day prior to each Distribution Date (the "Determination Date"), the
Master Servicer will notify the Trustee of the amount of such deposit to be
included in funds available for the related Distribution Date. On or prior to
each Distribution Date, the Master Servicer will deposit to the Collection
Account amounts which are to be included in the funds available for the related
Distribution Date and which are invested in the HFC Note as provided below.
(Section 3.02)
 
     The deposit to the Collection Account of amounts received in respect of a
Mortgage Loan within two Business Days of such receipt referred to above and the
amount of any deposits to the Funding Account during the Funding Period may be
effected through investment of such receipts in a demand note issued by HFC and
payable to the Trustee (the "HFC Note") so long as either (i) the commercial
paper issued by HFC is rated at least A-1 by Standard & Poor's and P-1 by
Moody's (as is currently the case) or (ii) a Servicer Credit Facility (as
defined below) is maintained in form and substance satisfactory to the Rating
Agencies and the Certificate Insurer. In such event, the Master Servicer will
notify the Trustee of the amounts that would otherwise be so deposited and the
Trustee will record a corresponding increase of the amount owing to the Trust
under the HFC Note. Amounts owing under the HFC Note will be reduced by the
amount of, and upon the deposit to the Collection Account on or prior to the
related Distribution Date, such receipts to be included in the funds available
for the related Distribution Date.
 
   
     At any time that the commercial paper issued by HFC does not satisfy the
rating requirements specified above, HFC may effect the deposit of collections
through investment in the HFC Note referred to above so long as HFC causes to be
maintained an irrevocable letter of credit or surety bond or other credit
enhancement instrument in form and substance satisfactory to each Rating Agency
and the Certificate Insurer (a "Servicer Credit Facility"), issued by a
depository institution or insurance company acceptable to the Certificate
Insurer and having a rating on its (A) short-term obligations of at least P-1
and long-term obligations of at least A2 by Moody's and (B) short-term
obligations of A-1 and long-term obligations of A by Standard & Poor's or other
ratings if approved by the Rating Agencies and the Certificate Insurer (a
"Servicer Credit Facility Issuer") and providing that the Trustee may draw
thereon in the event that HFC, as Master Servicer, fails to make any deposit or
payment required under the Agreement (prior to any draw under the Policy).
    
 
     During the Funding Period all Principal Collections for the related
Collection Period during such Collection Period will, subject to the foregoing,
initially be deposited within two Business Days following receipt by the Master
Servicer or Subservicer into the Collection Account. On each Determination Date
during the Funding Period, the Master Servicer will notify the Trustee of the
amount of the Scheduled Principal Distribution Amount to be withdrawn from the
Collection Account and deposited into the Funding Account on the related
Distribution Date. The Funding Account will be an Eligible Account established
with the Trustee as a separate trust account for the benefit of the
Certificateholders and the Seller, as their interests may appear. Amounts so
deposited into the Funding Account will be invested in Permitted Investments
maturing no later than one Business Day prior to the related Distribution Date
or on the related Distribution Date if approved by the Rating Agencies and the
Certificate Insurer. On any Determination Date during the Funding Period, the
Master Servicer will also notify the Trustee of (i) the amount of any earnings
from such Permitted Investments, which earnings shall be deposited into the
Collection Account on the related Distribution Date to be included in Interest
Collections available for the related Distribution Date and (ii) any
 
                                       51
<PAGE>   54
 
   
Principal Collections in excess of $135,367,725 (or 17% of the sum of the
Cut-Off Balances of the Initial Mortgage Loans) which were deposited in the
Funding Account, which excess will be distributed to Certificateholders as
principal on the related Distribution Date. In the event that not all of the
Principal Collections on deposit in the Funding Account have been used to
acquire Subsequent Funding Mortgage Loans on the last Distribution Date of the
Funding Period, then such Principal Collections will be used to acquire any
remaining Additional Balances on such Distribution Date and any remaining
Principal Collections on deposit thereafter will be distributed to the
Certificateholders as payment of principal. The deposit to the Funding Account
of the Principal Collections referred to above may be effected through
investment of such Collections in the HFC Note to the same extent and in the
same manner provided above with respect to amounts to be deposited in the
Collection Account.
    
 
     An Eligible Account is an account that is (i) maintained with a depository
institution whose debt obligations at the time of any deposit therein are rated
in the highest short-term debt rating category by the Rating Agencies or (ii)
one or more accounts with a depository institution which accounts are fully
insured by either the Savings Association Insurance Fund ("SAIF") or the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation established
by such fund with a minimum long-term unsecured debt rating of Baa3 or
equivalent rating or (iii) a trust account maintained with the Trustee or (iv)
otherwise acceptable to each Rating Agency as evidenced by a letter from such
Rating Agency to the Trustee, without reduction or withdrawal of their
then-current ratings of the Certificates and acceptable to the Certificate
Insurer. (Article I)
 
   
     Permitted Investments, as specified in the Agreement, are one or more of
the following:
    
 
   
          (i) direct obligations of, or obligations fully guaranteed as to
     timely payment of principal and interest by, the United States or any
     agency or instrumentality thereof, provided that such obligations are
     backed by the full faith and credit of the United States;
    
 
   
          (ii) repurchase agreements on obligations specified in clause (i)
     maturing not more than three months from the date of acquisition thereof,
     provided that the short-term unsecured debt obligations of the party
     agreeing to repurchase such obligations are at the date of acquisition
     rated by each Rating Agency in its highest short-term rating category
     (which is A-1+ for Standard & Poor's and P-1 for Moody's);
    
 
   
          (iii) certificates of deposit, 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 U.S.
     depository institution or trust company incorporated under the laws of the
     United States or any state thereof and subject to supervision and
     examination by the federal and/or state banking authorities, provided that
     the unsecured short-term debt obligations of such depository institution or
     trust company at the date of acquisition thereof have been rated by each of
     Moody's and Standard & Poor's in its highest unsecured short-term debt
     rating category;
    
 
   
          (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
     Standard & Poor's and Moody's in their highest short-term rating
     categories;
    
 
   
          (v) short-term investment funds sponsored by any trust company or
     national banking association incorporated under the laws of the United
     States or any state thereof which on the date of acquisition has been rated
     by Standard & Poor's and Moody's in their respective highest rating
     category for long-term unsecured debt, or any other short-term investment
     fund the funds in which are invested in securities rated in the highest
     category by Standard & Poor's and Moody's and which mature on or prior to
     the next Distribution Date;
    
 
   
          (vi) interests in any money market fund which at the date of
     acquisition has a rating of Aaa by Moody's and AAAm or AAAm-G by Standard &
     Poor's or such lower rating as will not result in the qualification,
     downgrading or withdrawal of the then-current rating assigned to the
     Certificates by each Rating Agency; and
    
 
                                       52
<PAGE>   55
 
   
          (vii) 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 a reduction in the then-current rating of
     the Certificates, as evidenced by a letter to such effect from each such
     Rating Agency and the Certificate Insurer;
    
 
   
provided that no instrument described hereunder shall evidence either the right
to receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument if such interest and principal payments provide a
yield to maturity at par greater than 120% of the yield to maturity at par of
the underlying obligations; and provided, further, that no instrument described
hereunder may be purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to its stated
maturity.
    
 
     If for any Distribution Date the amount of cash available on deposit in the
Collection Account plus amounts available to be withdrawn from the Spread
Account are less than the amount of funds required to be distributed, the
Trustee, no later than 12:00 noon New York City time on the second Business Day
preceding such Distribution Date, shall notify the Certificate Insurer of the
amount to be drawn on the Policy for such Distribution Date. The amount drawn on
the Policy will be equal to the amount of such deficiency, to the extent
permitted as set forth below under the heading "The Policy." (Section 4.02)
 
ALLOCATIONS AND COLLECTIONS
 
     All collections on the Mortgage Loans will be allocated in accordance with
the Credit Line Agreements between amounts collected in respect of interest
(together with any earnings received on amounts on deposit in the Funding
Account, the "Interest Collections") and amounts collected in respect of
principal, including Retransfer Deposit Amounts and Net Liquidation Proceeds
constituting principal (the "Principal Collections"). Notwithstanding the
requirements of the Credit Line Agreements, however, for purposes hereof, Net
Liquidation Proceeds constituting interest and all Recovered Charge Off Amounts
(whether interest or principal) shall be treated as Interest Collections and not
Principal Collections. Net Liquidation Proceeds with respect to a Mortgage Loan
are equal to the aggregate of all amounts received upon liquidation of such
Mortgage Loan reduced by related expenses, but not including the Foreclosure
Profit (defined below), if any.
 
   
     The portion of Interest Collections allocable to the Certificates will
equal the aggregate amount of such collections multiplied by the
Certificateholders' Floating Allocation Percentage. For each Distribution Date,
the "Certificateholders' Floating Allocation Percentage" is the percentage
equivalent of a fraction determined by dividing the Invested Amount as of the
end of the related Collection Period by the sum of (a) the Pool Balance as of
the end of the preceding Collection Period (adjusted for Subsequent Funding
Mortgage Loans acquired or Removed Balances removed for the preceding
Distribution Date and Additional Balances added for the related Collection
Period) and (b) the amount on deposit in the Funding Account in respect of
Principal Collections as of the end of the related Collection Period. The
remaining amount of Interest Collections shall be allocated to the Seller
Interest.
    
 
   
     During the Funding Period, the Scheduled Principal Distribution Amount will
be deposited into the Funding Account. During the Funding Period if an aggregate
amount in respect of Principal Collections is deposited in excess of 17% of the
sum of the Cut-Off Balances of the Initial Mortgage Loans such excess will be
distributed to the Certificateholders as principal. In the event that not all of
the Principal Collections remaining on deposit in the Funding Account have been
used to acquire Subsequent Funding Mortgage Loans on the last Distribution Date
of the Funding Period, then such Collections will be used to acquire any
remaining Additional Balances on such Distribution Date and any remaining
Principal Collections on deposit thereafter will be distributed to the
Certificateholders as payment of principal. Following the expiration of the
Funding Period and prior to the commencement of the Rapid Amortization Period,
Principal Collections from the Mortgage Loans will be allocated as follows: (a)
to the Certificateholders, the Scheduled Principal Distribution Amount and (b)
to the Seller, all Principal Collections not distributed to the
Certificateholders. Upon the commencement of the Rapid Amortization Period, the
Certificateholders will receive Principal Collections in accordance with their
Fixed Allocation Percentage. The Fixed Allocation Percentage is initially 97.50%
and for each Distribution Date will be reset to the extent that Subsequent
Funding Mortgage Loans were acquired or Removed Balances were removed with
respect to the immediately preceding Distribution Date. With
    
 
                                       53
<PAGE>   56
 
   
respect to such reset, the Fixed Allocation Percentage shall be the percentage
equivalent determined by dividing the Invested Amount at the end of the related
Collection Period by the sum of (a) the Pool Balance as of the end of the
preceding Collection Period (adjusted for such Subsequent Funding Mortgage Loans
or Additional Balances acquired or Removed Balances removed for the preceding
Distribution Date) and (b) the amount on deposit in the Funding Account as of
the end of the related Collection Period. Payments of principal to
Certificateholders over the term of the Trust will not exceed the Original
Certificate Principal Balance. With respect to any Distribution Date to occur
after a Rapid Amortization Event, the Fixed Allocation Percentage will be the
Fixed Allocation Percentage immediately prior to such Rapid Amortization Event.
    
 
     The Trustee will deposit in the Collection Account any Deficiency Amount
drawn under the Policy.
 
     The "Recovered Charge Off Amount," with respect to any Mortgage Loan that
became a Liquidated Mortgage Loan in a Collection Period is the lesser of (a)
the amount by which Net Liquidation Proceeds allocable to principal exceeds the
Trust Balance immediately prior to foreclosure and (b) the amount equal to the
aggregate of the Charge Off Amounts that had reduced the Trust Balance of the
Mortgage Loan. "Foreclosure Profit" with respect to a Liquidated Mortgage Loan
is the amount, if any, by which (i) the aggregate of its Liquidation Proceeds
less related expenses exceeds (ii) the sum of the Trust Balance of such Mortgage
Loan immediately prior to the final recovery of its Liquidation Proceeds plus
accrued and unpaid interest thereon plus the related Charge Off Amounts.
 
     With respect to any date, the Pool Balance will be equal to the aggregate
of the Trust Balances of all Mortgage Loans in the Trust as of such date. The
Trust Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any
date is equal to the Cut-Off Balance thereof, plus (i) any Additional Balance in
respect of such Mortgage Loan, minus (ii) all Principal Collections credited
against the Trust Balance prior to such day, minus (iii) all related Charge Off
Amounts. The Trust Balance of a Liquidated Mortgage Loan (as defined herein)
after final recovery of related Liquidation Proceeds (as defined herein) shall
be zero. A Charge Off Amount is the amount equal to the amount of the Trust
Balance of a Charged Off Mortgage Loan that the Master Servicer has charged off
on its servicing records in such Collection Period. A Charged Off Mortgage Loan
is a defaulted Mortgage Loan that is not a Liquidated Mortgage Loan and as to
which (i) collection procedures are ongoing and (ii) the Master Servicer has
charged off all or a portion of the related Trust Balance.
 
DISTRIBUTIONS ON THE CERTIFICATES
 
     Beginning with the Distribution Date occurring on December 20, 1996,
distributions on the Certificates will be made by the Trustee or the Paying
Agent on each Distribution Date to the persons in whose names such Certificates
are registered at the close of business on the day prior to each Distribution
Date (the "Record Date"), except as provided in "Registration of Certificates"
below. The term "Distribution Date" means the 20th day of each month (or if such
day is not a Business Day, the next succeeding Business Day). Distributions will
be made by check or money order mailed (or upon the request of a
Certificateholder owning Certificates having denominations aggregating at least
$5,000,000, by wire transfer or otherwise) to the address of the person entitled
thereto (which, in the case of book-entry certificates, will be DTC or its
nominee) as it appears on the Certificate Register in amounts calculated as
described herein on the fifth Business Day prior to the related Distribution
Date (the "Determination Date"). However, the final distribution in respect of
the Certificates will be made only upon presentation and surrender thereof at
the office or the agency of the Trustee specified in the notice to
Certificateholders of such final distribution. (Sections 5.01 and 10.01) For
purposes of the Agreement a "Business Day" is any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in the states of New York
or Illinois are required or authorized by law to be closed.
 
     Distributions of Interest Collections. On each Distribution Date, the
Trustee or the Paying Agent will distribute the Certificateholders' Floating
Allocation Percentage of all Interest Collections collected during the preceding
Collection Period, in the following manner and order of priority:
 
          (i) as payment of the Servicing Fee for the related Collection Period
     and any accrued and unpaid Servicing Fee;
 
                                       54
<PAGE>   57
 
   
          (ii) as payment of the accrued interest due and any overdue accrued
     interest (other than the related Carryover Amount) on the Certificates with
     interest thereon at the Certificate Rate;
    
 
          (iii) as payment to Certificateholders of the product of the
     Certificateholders Floating Allocation Percentage and the Liquidation Loss
     Amount;
 
          (iv) as payment to Certificateholders of any Liquidation Loss Amount
     allocable to the Certificateholders for a previous Collection Period that
     was not previously (a) funded by Interest Collections allocable to the
     Certificateholders, (b) absorbed by the Overcollateralization Amount, or
     (c) funded by withdrawals from the Spread Account or by draws on the
     Policy;
 
          (v) as payment of the premium for the Policy to the extent not paid by
     the Master Servicer;
 
          (vi) to reimburse the Certificate Insurer for prior draws made from
     the Policy and other amounts due under the Insurance Agreement;
 
          (vii) to the extent of excess Interest Collections remaining after
     payment of (i) through (vi), as payment to Certificateholders of an amount
     as principal such that the Invested Amount exceeds the Certificate
     Principal Balance by the Required Overcollateralization Amount (the amount
     distributable pursuant to this clause being the "Accelerated Principal
     Distribution Amount");
 
          (viii) to the Spread Account in accordance with the Insurance
     Agreement;
 
          (ix) as payment to Certificateholders of any Carryover Amount for any
     prior Distribution Dates that has not previously been paid;
 
          (x) fees due to the Trustee (to the extent not paid by the Master
     Servicer); and
 
          (xi) to the Seller.
 
     Payment pursuant to clause (iii) will be a payment of principal to the
Certificateholders reducing both the Invested Amount and the Certificate
Principal Balance by the amount of such distributions. Payments pursuant to
clauses (iv) and (vii) will be payments of principal, reducing the Certificate
Principal Balance but not the Invested Amount.
 
     Interest Collections allocated pursuant to clauses (iii), (iv), (vi) and
(vii) above shall be referred to herein as the "Certificateholders' Excess
Interest." Interest Collections in the amount described in clause (viii) above
shall be referred to herein as "Certificateholders' Remaining Excess Interest."
The Overcollateralization Amount on any date of determination is the amount, if
any, by which the Invested Amount exceeds the Certificate Principal Balance on
such day.
 
   
     The "Required Overcollateralization Amount" is $3,981,404. "Liquidation
Loss Amount" means with respect to any (i) Charged Off Mortgage Loan, the Charge
Off Amount for the Collection Period in which all or a portion of the unpaid
principal balance of the Mortgage Loan was charged off by the Master Servicer,
excluding the Collection Period in which such Charged Off Mortgage Loan becomes
a Liquidated Mortgage Loan, and (ii) Liquidated Mortgage Loan, the unrecovered
Trust Balance thereof at the end of the Collection Period in which such
Liquidated Mortgage Loan became a Liquidated Mortgage Loan, after giving effect
to the Net Liquidation Proceeds in connection therewith. A "Liquidated Mortgage
Loan" means, as to any Distribution Date, any Mortgage Loan in respect of which
the Master Servicer has determined, in accordance with the servicing procedures
specified in the Agreement, as of the end of the preceding Collection Period
that all Liquidation Proceeds which it expects to recover with respect to the
disposition of the related Mortgaged Property have been recovered. Liquidation
Proceeds are the proceeds (excluding any amounts drawn on the Policy) received
in connection with the liquidation of any Mortgage Loan, whether through
trustee's sale, foreclosure sale or otherwise. The Certificateholders' Floating
Allocation Percentage of the Liquidation Loss Amount will be allocated to the
Certificateholders. Although payment of Liquidation Loss Amounts will be paid
from Certificateholders' Excess Interest, such payments are payments of
principal for purposes of calculating the Invested Amount and the Certificate
Principal Balance. No interest will accrue on any Liquidated Loss Amount not
paid to Certificateholders.
    
 
                                       55
<PAGE>   58
 
     Each Mortgage Loan falls within one of fourteen monthly billing cycles of
the Master Servicer, ending on the 4th, 5th, 6th, 8th, 10th, 11th, 12th, 16th,
17th, 18th, 19th, 20th, 25th and 26th days, respectively, of each calendar month
(each a "Cycle Date"). The Collection Period for any Mortgage Loan for any
Distribution Date is the one month period ending on the Cycle Date for such
Mortgage Loan in the month preceding the month of the related Distribution Date.
 
     Seller Collections. Prior to the commencement of the Rapid Amortization
Period, Principal Collections not distributed to the Certificateholders or
deposited to the Funding Account as a Scheduled Principal Distribution Amount
will become part of Seller Collections. Such Seller Collections may then, to the
extent described herein, be used to purchase the Additional Balances.
 
     Required Overcollateralization Amount.  The distribution of the aggregate
Accelerated Principal Distribution Amount, if any, to Certificateholders may
result in the Invested Amount being greater than the Certificate Principal
Balance, thereby creating overcollateralization. The amount, if any, of such
overcollateralization would be available to absorb any Liquidation Loss Amount
that is allocated to Certificateholders and is not covered by the
Certificateholders' Excess Interest. Payments of Accelerated Principal
Distribution Amounts are not covered by the Policy. To the extent that
overcollateralization, amounts (if any) on deposit in the Spread Account, and
available amounts under the Policy are insufficient to absorb such Liquidation
Loss Amounts, a Certificateholder may incur a loss in respect of its
Certificates.
 
   
     Distributions of Principal Collections.  During the Funding Period, the
Scheduled Principal Distribution Amount will be deposited into the Funding
Account. During the Funding Period, if there is deposited an aggregate amount in
respect of Principal Collections in excess of $135,367,725 (17% of the sum of
the Cut-Off Balances of the Initial Mortgage Loans) in the Funding Account, such
excess will be distributed to the Certificateholders as principal. In the event
that not all of the Principal Collections on deposit in the Funding Account have
been used to acquire the Subsequent Funding Mortgage Loans on the last
Distribution Date of the Funding Period, then such Principal Collections will be
used to acquire any remaining Additional Balances on such Distribution Date and
any remaining Principal Collections on deposit thereafter will be distributed to
the Certificateholders as payment of principal. Following the expiration of the
Funding Period and prior to the commencement of the Rapid Amortization Period,
the amount of Principal Collections payable to Certificateholders as of each
Distribution Date will equal, to the extent funds are available therefore, the
Scheduled Principal Distribution Amount for such Distribution Date. The
Scheduled Principal Distribution Amount shall equal the lesser of (i) the
Maximum Principal Distribution Amount and (ii) the Alternative Principal
Distribution Amount. The Alternative Principal Distribution Amount is the
amount, but not less than zero, of Principal Collections for the related
Collection Period less the aggregate of principal amounts drawn down under the
Credit Line Agreements during such Collection Period. Following the expiration
of the Funding Period and prior to the commencement of the Rapid Amortization
Period, the Seller will be entitled to receive the Principal Collections for
such Distribution Dates that are not distributed to the Certificateholders as
described above, which will be used to acquire Additional Balances on such
Distribution Dates and any remaining amount after acquiring Additional Balances
will be distributed to the Seller as payment of principal. With respect to any
Distribution Date, the Maximum Principal Distribution Amount will equal the
Fixed Allocation Percentage of Principal Collections for the related Collection
Period. Distributions of principal based upon the Fixed Allocation Percentage
may result in distributions of principal to Certificateholders in amounts that
are greater relative to the declining balance of the Pool Balance than would be
the case if the Certificateholders' Floating Allocation Percentage were used to
determine the percentage of Principal Collections distributed in respect of the
Invested Amount. The aggregate distributions of principal to the
Certificateholders will not exceed the Original Certificate Principal Balance.
    
 
     Beginning with the first Distribution Date with respect to the Rapid
Amortization Period, the Maximum Principal Distribution Amount shall be payable
to Certificateholders.
 
     Distribution of Interest and Principal on the Certificates. As described
above, Certificateholders will receive distributions of interest to the extent
funds are available therefore equal to the amount described in clause (ii) under
"Distributions of Interest Collections" above. In addition to the distribution
of Principal Collections, to the extent and at the times described above under
"Distributions of Principal Collections,"
 
                                       56
<PAGE>   59
 
Certificateholders will receive distributions allocable to principal, to the
extent Interest Collections are available therefore, equal to the amount
described in clauses (iii), (iv) and (vii) under "Distributions of Interest
Collections" above. Any such application of Interest Collections will reduce the
Certificate Principal Balance by a corresponding amount.
 
     Calculation of Certificate Rate; Limitation on Interest Payments on
Certificates.  As of any Distribution Date, interest will accrue on the
Certificates from the preceding Distribution Date (or the Closing Date in the
case of the first Distribution Date) through the day preceding such Distribution
Date (each, an "Interest Period"). All calculations of interest on the
Certificates will be made on the basis of the actual number of days in the
Interest Period and a year assumed to consist of 360 days. (Section 1.02)
 
   
     The Certificate Rate for each Distribution Date will be equal to LIBOR as
of the second LIBOR Business Day prior to the immediately preceding Distribution
Date (or as of November   , 1996, in the case of the first Distribution Date)
plus      % per annum subject to a rate cap equal to the weighted average of the
maximum Loan Rates during the preceding Collection Period less the Servicing
Fee, as may be amended from time to time. Interest for any Distribution Date due
but not paid on such Distribution Date (other than any Carryover Amounts) will
be due on the next succeeding Distribution Date together with additional
interest on such amount at a rate equal to the Certificate Rate.
    
 
     "LIBOR" means, with respect to each Distribution Date, the rate for
deposits in U.S. Dollars for a period of one month which appears on the Dow
Jones Telerate Service at Page 3750 as of 11:00 a.m., London time, on the day
that is two LIBOR Business Days prior to the preceding Distribution Date. A
"LIBOR Business Day" means any day other than a Saturday, Sunday or any other
day on which banks in the States of Illinois or New York or the City of London
may, or are required to, remain closed. If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Trustee after consultation with the
Seller), the rate will be the Reference Bank Rate. The "Reference Bank Rate"
will be determined on the basis of the rates at which deposits in U.S. Dollars
are offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the Trustee
after consultation with the Seller) as of 11:00 a.m., London time, on the day
that is two LIBOR Business Days prior to the immediately preceding Distribution
Date to prime banks in the London interbank market for a period of one month in
amounts approximately equal to the principal amount of the Certificates then
outstanding. The Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Trustee after consultation with the Seller, as of
11:00 a.m., New York City time, on such date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the principal amount of the Certificates then outstanding. If no such
quotations can be obtained, the rate will be LIBOR for the prior Distribution
Date.
 
     If the Certificate Rate exceeds the weighted average of the Net Loan Rates,
then the Certificateholders will receive such difference (the "Carryover
Amount") only from Interest Collections allocable to Certificateholders as
described under "Description of the Certificates -- Distributions on the
Certificates -- Distributions of Interest Collections." The Carryover Amount
will not bear interest and will not be supported by the Spread Account or the
Policy.
 
   
     The Paying Agent.  The Paying Agent shall initially be the Trustee,
together with any successor thereto in such capacity (the "Paying Agent"). The
Paying Agent shall have the revocable power to withdraw funds from the
Collection Account for the purpose of making distributions to the Luxembourg
Paying Agent, if any, and the Certificateholders.
    
 
   
RAPID AMORTIZATION PERIOD
    
 
   
     The Rapid Amortization Period will commence on the earlier of (x) the
Distribution Date in April 2005 and (y) the day, if any, upon which a Rapid
Amortization Event occurs. Upon the commencement of the
    
 
                                       57
<PAGE>   60
 
Rapid Amortization Period, the Principal Collections payable to the
Certificateholders will be equal to the Maximum Principal Distribution Amount.
 
RAPID AMORTIZATION EVENTS
 
     A "Rapid Amortization Event" will be deemed to occur:
 
   
          (a) upon failure on the part of the Seller (i) to make any payment or
     deposit required under the Agreement within five Business Days after the
     date such payment or deposit is required to be made; (ii) to deliver
     possession of files and record assignments when required or (iii) to
     observe or perform in any material respect any covenants or agreements
     (other than the covenants or agreements set forth in (i) and (ii) above) of
     the Seller set forth in the Agreement, which failure, in each case,
     materially and adversely affects the interests of the Certificateholders or
     the Certificate Insurer and which, in the case of (iii), continues
     unremedied and continues to materially and adversely affect the interests
     of the Certificateholders or the Certificate Insurer for a period of 60
     days after written notice;
    
 
          (b) if any representation or warranty made by the Seller in the
     Agreement proves to have been incorrect in any material respect when made,
     as a result of which the interests of the Certificateholders or the
     Certificate Insurer are materially and adversely affected, and which
     continues to be incorrect in any material respect and continues to
     materially and adversely affect the interests of the Certificateholders or
     the Certificate Insurer for a period of 60 days after written notice;
     provided, however, that a Rapid Amortization Event shall not be deemed to
     occur if the Seller has repurchased the related Mortgage Loan or all
     Mortgage Loans, if applicable, during such period (or within an additional
     60 days with the consent of the Trustee and the Certificate Insurer) in
     accordance with the provisions of the Agreement;
 
          (c) upon the occurrence of certain events of bankruptcy, insolvency or
     receivership relating to the Seller or any Subservicer;
 
          (d) if the Trust becomes subject to regulation by the Commission as an
     investment company within the meaning of the Investment Company Act of
     1940, as amended;
 
          (e) if a Servicing Termination Event relating to the Master Servicer
     occurs under the Agreement; or
 
          (f) if the aggregate principal of all draws under the Policy exceed 1%
     of the sum of (i) the Cut-Off Date Pool Balance and (ii) the amount by
     which the Pool Balance as of any date that Subsequent Funding Mortgage
     Loans are transferred to the Trust exceeds the Cut-Off Date Pool Balance.
 
     In the case of any event described in (a), (b) or (e), a Rapid Amortization
Event will be deemed to have occurred only if, after any applicable grace period
described in such clauses, either the Trustee, the Certificate Insurer (so long
as no default by the Certificate Insurer has occurred and is continuing) or,
with the consent of the Certificate Insurer (so long as no default by the
Certificate Insurer has occurred and is continuing) Certificateholders holding
Certificates evidencing not less than 51% in outstanding principal amount, by
written notice to the Seller and the Master Servicer (and to the Trustee, if
given by the Certificate Insurer or the Certificateholders) declare that a Rapid
Amortization Event has occurred as of the date of such notice. In the case of
any event described in clauses (c), (d) or (f), a Rapid Amortization Event will
be deemed to have occurred without any notice or other action on the part of the
Trustee, the Certificateholders or the Certificate Insurer immediately upon the
occurrence of such event.
 
     Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Seller and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Seller, the conservator, receiver or trustee-in-bankruptcy may have the power to
prevent the commencement of the Rapid Amortization Period.
 
THE POLICY
 
     On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Agreement and the Insurance and
Reimbursement Agreement (the "Insurance Agreement") to be dated
 
                                       58
<PAGE>   61
 
   
as of November 1, 1996, among the Seller, HFC as Master Servicer, the
Certificate Insurer and the Trustee. The Policy will unconditionally and
irrevocably guarantee payment of the Deficiency Amount up to $450,000,000 in
principal payments plus, until such time as the Certificate Insurer has made
payments in respect of principal under the Policy in an amount equal to
$450,000,000, accrued and unpaid interest on the Certificates.
    
 
   
     In accordance with the Insurance Agreement, the Trust will be required to
establish and maintain an account (the "Spread Account") for the benefit of the
Certificate Insurer and the Certificateholders, any amounts on deposit in which
will be available to the Trustee to be transferred to the Collection Account to
be used to pay any shortfall in interest and principal to the Certificates as
provided in the Agreement prior to any draw on the Policy. The Insurance
Agreement will require that the Certificateholders' Remaining Excess Interest be
deposited into the Spread Account until funds in the Spread Account are equal to
an amount specified by such agreement. Such amount can be reduced or eliminated
without the consent of the Certificateholders. Any amounts on deposit in the
Spread Account upon termination of the Trust and after reimbursement of amounts
drawn under the Policy to the Certificate Insurer plus interest and any other
amounts owing to the Certificate Insurer pursuant to the Insurance Agreement
will be distributed to the Seller as provided in the Insurance Agreement.
    
 
     In the absence of payments from the Spread Account or draws under the
Policy, Certificateholders will bear directly the credit and other risks
associated with their undivided interest in the Trust.
 
     In the event that the Certificate Insurer's claims paying ratings have been
lowered by any of the Rating Agencies, the Master Servicer may, but is not
obligated to, upon payment of all amounts due the Certificate Insurer, replace
the Policy with a financial guaranty insurance policy or policies issued by
another insurer or arrange for any other form of credit enhancement, provided
that the ratings on the claims paying ability of such replacement insurer are
higher than those of the certificate insurer sought to be replaced (after giving
effect to such downgrade). In the event of such downgrading, the Master Servicer
also may, but is not obligated to, restructure the credit enhancement provided
to the Certificates, including by eliminating the Policy without replacement;
provided that the Rating Agencies consent to such restructuring and the Rating
Agencies confirm that the ratings of the Certificates will be increased from
their current levels (after giving effect to such downgrading) as a result of
such restructuring.
 
REPORTS TO CERTIFICATEHOLDERS
 
   
     Concurrently on each Distribution Date, the Master Servicer will forward to
the Trustee and the Luxembourg Paying Agent, if any, for mailing to each
Certificateholder a statement setting forth certain information, including the
following:
    
 
   
          (i) the Certificateholders' Floating Allocation Percentage and the
     Fixed Allocation Percentage applicable to such Distribution Date;
    
 
          (ii) the amount being distributed to Certificateholders;
 
          (iii) the amount allocable to interest included in such distribution
     and the Certificate Rate;
 
   
          (iv) the amount, if any, allocable to overdue accrued interest (and
     the amount of interest thereon to the extent permitted by law) and the
     Carryover Amount, if any, included in such distribution;
    
 
          (v) the amount, if any, of remaining overdue accrued interest and
     remaining Carryover Amount, if any, after giving effect to such
     distribution;
 
   
          (vi) the amount, if any, allocable to principal in reduction of the
     principal amount of the Certificates included in such distribution;
    
 
          (vii) the amount, if any, of the reimbursement of previous Liquidation
     Loss Amounts included in such distribution which amounts are allocable to
     principal in reduction of the principal amount;
 
          (viii) the amount, if any, of the aggregate of unreimbursed
     Liquidation Loss Amounts after giving effect to such distribution;
 
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<PAGE>   62
 
          (ix) the Servicing Fee for such Distribution Date;
 
          (x) the Invested Amount, the Certificate Principal Balance and the
     Pool Factor, each after giving effect to such distribution;
 
          (xi) the amount of Principal Collections on deposit in the Funding
     Account;
 
   
          (xii) the Pool Balance as of the end of the related Collection Period;
    
 
   
          (xiii) the amount to be drawn from the Policy, if any, and the
     remaining outstanding amount of the Policy after the withdrawal;
    
 
   
          (xiv) the number and aggregate Trust Balances of Mortgage Loans as to
     which the Minimum Monthly Payment is delinquent for 30-59 days, 60-89 days
     and 90 or more days, respectively, as of the end of the related Collection
     Period;
    
 
   
          (xv) the aggregate Liquidation Loss Amount for all Mortgage Loans that
     became Liquidated Mortgage Loans in the related Collection Period;
    
 
   
          (xvi) the Certificate Rate applicable during the Interest Period
     commencing on such Distribution Date;
    
 
   
          (xvii) the book value (within the meaning of 12 C.F.R. sec.571.13 or
     comparable provision) of any Mortgaged Property acquired by the Trust
     through foreclosure or grant of deed in lieu of foreclosure;
    
 
   
          (xviii) the number and aggregate Trust Balances of the Subsequent
     Funding Mortgage Loans transferred to the Trust on the Distribution Date
     and the aggregate of the Trust Balances of all Subsequent Funding Mortgage
     Loans purchased by the Trust on all prior Distribution Dates;
    
 
   
          (xix) the number and aggregate Trust Balances of the Mortgage Loans
     retransferred on the Distribution Date and the number of Mortgage Loans and
     aggregate of the Trust Balances of all Mortgage Loans retransferred on all
     prior Distribution Dates; and
    
 
   
          (xx) earnings on all accounts.
    
 
     In the case of information furnished pursuant to clauses (ii), (iii), (iv)
and (vi) above, the amounts shall be expressed as a dollar amount per
Certificate with a $1,000 denomination.
 
   
     Within 60 days after the end of each calendar year, the Master Servicer
will be required to forward to the Trustee an annual statement containing the
information set forth in clauses (iii) and (vi) above aggregated for such
calendar year. (Section 5.03)
    
 
   
     As long as the Trust has an obligation to file periodic reports with the
Commission, in accordance with the 1934 Act and the rules and regulations of the
Commission thereunder, the Master Servicer, on behalf of the Trust, intends to
file a copy of each report prepared for a Distribution Date with the Commission
within fifteen days after said Distribution Date in the form of a Current Report
on Form 8-K. The Master Servicer, on behalf of the Trust, also intends to file
the annual statement referenced above with the Commission in the form of an
Annual Report on Form 10-K, with the report prepared by a firm of independent
public accountants relating to the servicing of the Mortgage Loans as an exhibit
to such Form 10-K. See "Description of the Certificates -- Evidence as to
Compliance".
    
 
COLLECTION AND OTHER SERVICING PROCEDURES
 
     The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the home equity loans in its servicing portfolio which are comparable to the
Mortgage Loans. Consistent with the above, the Master Servicer may in its
discretion waive any late payment charge or any assumption or other fee or
charge that may be collected in the ordinary course of servicing the Mortgage
Loans. (Section 3.02)
 
     The Master Servicer may arrange with a borrower a schedule for the payment
of interest due and unpaid for a period, including treating loans as current if
the borrower has made one standard payment and met such
 
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<PAGE>   63
 
other conditions, if any, required by the Master Servicer from time to time,
provided that such change will not have a material adverse effect on the
interests of the Certificateholders, the Certificate Insurer or the Trust. In
accordance with the terms of the Agreement, the Master Servicer may consent
under certain circumstances to the placing of a subsequent senior lien in
respect of a Mortgage Loan.
 
     In any case in which a Mortgaged Property is being conveyed by the
borrower, the Master Servicer generally shall not be obligated, to the extent it
has knowledge of such conveyance, to exercise its rights to accelerate the
maturity of such Mortgage Loan under any due-on-sale clause applicable thereto,
and shall not exercise such rights if such exercise is not permitted by
applicable law. If the Master Servicer elects not to enforce such due-on-sale
clause or is prevented from enforcing such due-on-sale clause under applicable
law, the Master Servicer may enter into an assumption and modification agreement
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 applicable
Credit Line Agreement. To the extent permitted by applicable law, such
assumption will not release the original borrower from its obligation under the
Mortgage Loan. Any fee collected by the Master Servicer for entering into an
assumption or substitution of liability agreement will be retained by the Master
Servicer as additional servicing compensation. See "Certain Legal Aspects of
Mortgage Loans -- 'Due-on-Sale' Clauses" herein. In connection with any such
assumption, the Master Servicer may not change the terms of the related Credit
Line Agreement if such changes would not be permitted in respect of the original
Credit Line Agreement. (Section 3.05)
 
HAZARD INSURANCE
 
   
     The Agreement requires the Master Servicer to insure each Mortgaged
Property acquired upon foreclosure of a Mortgage Loan, or by grant of deed in
lieu of such foreclosure, in an amount equal to the lesser of (a) the maximum
insurable value of such Mortgaged Property or (b) the unpaid principal balance
of the Mortgage Loan plus the outstanding balance of any mortgage loan senior to
such Mortgage Loan, plus accrued interest thereon at the time of foreclosure or
grant of deed in lieu of foreclosure. The Agreement provides that the Master
Servicer may satisfy its obligation by self insuring Mortgaged Properties for
which the unpaid principal balance of the related Mortgage Loans plus the
outstanding balance of any mortgage loan senior to such Mortgage Loan at the
time title was acquired, plus accrued interest (the "Combined Exposure"), was
less than $500,000 (or such other amount as the Master Servicer may in good
faith determine from time to time) and by causing hazard policies to be
maintained with respect to Mortgaged Properties for which the Combined Exposure
equals or exceeds the self insurance threshold established from time to time by
the Master Servicer by maintaining a blanket policy consistent with prudent
industry standards insuring against hazard losses on the Mortgaged Properties.
If such blanket policy contains a deductible clause, the Master Servicer will be
obligated to deposit in the Collection Account the sums which would have been
deposited therein but for such clause. (Section 3.04) The Master Servicer will
initially satisfy these requirements by maintaining a blanket policy. As set
forth above, all amounts collected by the Master Servicer (net of any
reimbursements to the Master Servicer) under any hazard policy (except for
amounts to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the Master Servicer's normal
servicing procedures) will ultimately be deposited in the Collection Account.
    
 
     In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws, and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive or an
exact description of the insurance policies relating to the Mortgaged
Properties. In addition, some states preclude lenders from requiring borrowers
to obtain insurance coverage in excess of the
 
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<PAGE>   64
 
replacement cost of the underlying mortgaged property on the borrower's
homeowners' insurance policy. When a Mortgaged Property is located in a
federally designated flood area at the time of origination of the related
Mortgage Loan, the Agreement requires the Master Servicer to cause to be
maintained for each such Mortgage Loan serviced, flood insurance (to the extent
available) in an amount equal in general to the lesser of the amount required to
compensate for any loss or damage on a replacement cost basis or the maximum
insurance available under the federal flood insurance program.
 
     The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause which in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
 
     Since residential properties have historically appreciated in value over
time, if the amount of hazard insurance maintained on the improvements securing
the Mortgage Loans were to decline as the principal balances owing thereon
decreased, hazard insurance proceeds could be insufficient to restore fully the
damaged property in the event of a partial loss.
 
     Under the terms of the Mortgage Loans, the borrowers are generally required
to present claims to insurers under hazard insurance policies maintained on the
Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present claims under any blanket insurance
policy insuring against hazard losses on the Mortgaged Properties. However, the
ability of the Master Servicer to present such claims is dependent upon the
extent to which information in this regard is furnished to the Master Servicer
by the borrowers.
 
REALIZATION UPON DEFAULTED MORTGAGE LOANS
 
     The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments; provided that if the Master Servicer has actual knowledge
or reasonably believes that any Mortgaged Property is contaminated by hazardous
or toxic wastes or substances, then the Master Servicer will 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 Master Servicer
is not commercially reasonable. In connection with such foreclosure or other
conversion, the Master Servicer will follow such practices as it deems necessary
or advisable and as are in keeping with its general mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any Mortgaged Property
unless, in its sole judgment, such foreclosure, correction or restoration will
increase Net Liquidation Proceeds. (Section 3.06) The Master Servicer will be
reimbursed out of liquidation proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Certificateholders or the Seller. Net Liquidation Proceeds with respect to a
Liquidated Mortgage Loan is the amount received upon liquidation of such
Mortgage Loan reduced by related expenses, which may include the amount advanced
in respect of a senior mortgage, but not including the portion, if any, of such
amount that exceeds the unpaid Trust Balance of the Mortgage Loan plus accrued
and unpaid interest thereon plus the related Charge Off Amounts.
 
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
 
     The servicing compensation (the "Servicing Fee") to be paid to the Master
Servicer will be paid to it from Interest Collections allocable to the
Certificateholders at a rate per annum equal to 1.00% of the Invested Amount
(less any amount in the Funding Account exclusive of any investment earnings
thereon) on the first day succeeding the preceding Distribution Date. The
Servicing Fee will be paid as described under
 
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<PAGE>   65
 
"Description of the Certificates -- Distributions on the Certificates --
Distributions of Interest Collections" above. All assumption fees, late payment
charges, prepayment penalties and other fees and charges, to the extent
collected from borrowers, will be retained by the Master Servicer as additional
servicing compensation. In addition, the Master Servicer will retain any
benefits from the investment of funds in the Collection Account.
 
     The Master Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee, the Certificate
Registrar and any Paying Agent. In addition, the Master Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of
Certificateholders to receive any related Net Liquidation Proceeds.
 
EVIDENCE AS TO COMPLIANCE
 
     The Agreement provides for delivery on or before April 30 in each year,
beginning April 30, 1998, to the Trustee, the Certificate Insurer and the Rating
Agencies of an annual statement signed by an officer of the Master Servicer to
the effect that the Master Servicer has fulfilled its material obligations under
the Agreement throughout the preceding calendar year, except as specified in
such statement. (Section 3.09)
 
     On or before April 30 of each year, beginning with April 30, 1998, the
Master Servicer will furnish a report prepared by a firm of independent public
accountants to the Trustee, the Certificate Insurer and the Rating Agencies to
the effect that such accountants have examined certain documents and the records
relating to servicing of mortgage loans under agreements (including the
Agreement) substantially similar to the Agreement and such examination, which
has been conducted substantially in compliance with the audit guide for audits
of non-supervised mortgagees approved by the Department of Housing and Urban
Development, has disclosed no items of non-compliance with the provisions of the
Agreement which, in the opinion of the firm, are material, except for such items
of non-compliance as shall be referred to in the report. (Section 3.10)
 
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
 
   
     The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliates or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee and the Certificate Insurer in writing and such proposed successor
servicer is reasonably acceptable to the Trustee and the Certificate Insurer;
(b) the Rating Agencies have confirmed to the Trustee that the appointment of
such proposed successor servicer as the Master Servicer will not result in the
reduction or withdrawal of the then-current rating of the Certificates; and (c)
the proposed successor servicer has agreed in writing to assume the obligations
of the Master Servicer under the Agreement. No such resignation will become
effective until the Trustee or a successor servicer has assumed the Master
Servicer's obligations and duties under the Agreement. (Section 7.04)
    
 
     The Master Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Master Servicer. Notwithstanding any such arrangement, the Master
Servicer will remain liable and obligated to the Trustee, the Certificate
Insurer, and the Certificateholders for the Master Servicer's duties and
obligations under the Agreement, without any diminution of such duties and
obligations and as if the Master Servicer itself were performing such duties and
obligations. (Section 7.05)
 
     The Agreement will also provide that neither the Master Servicer, the
Seller, nor any director, officer, employee or agent of the Master Servicer or
the Seller will be under any liability to the Trust or the Certificateholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Agreement, or for errors in judgment; provided, however,
that neither the Master Servicer, the Seller nor
 
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<PAGE>   66
 
any such person will be protected against any liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will further provide that the Master Servicer,
the Seller and any director, officer, employee or agent of the Master Servicer
or the Seller is entitled to indemnification by the Trust and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the Agreement will provide that neither the Master
Servicer nor the Seller will be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its respective duties under
the Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer or the Seller may, however, in its or their
discretion undertake any such action which it or they may deem necessary or
desirable with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Certificateholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom and any claims by the Master Servicer or the Seller for
indemnification will be expenses, costs and liabilities of the Trust and the
Master Servicer or the Seller, as the case may be, will be entitled to be
reimbursed therefor and indemnified pursuant to the terms of the Agreement out
of funds otherwise distributable to Certificateholders. The Master Servicer's
and the Seller's right to such indemnity or reimbursement shall survive any
resignation or termination of the Master Servicer 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).
(Section 7.03)
 
   
     Any corporation into which the Master Servicer or the Seller may be merged
or consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer or the Seller shall be a party, or
any corporation succeeding to the business of the Master Servicer or the Seller
shall be the successor of the Master Servicer or the Seller under the Agreement,
without the execution or filing of any paper or any further act on the part of
any of the parties to the Agreement, anything in the Agreement to the contrary
notwithstanding. (Section 7.02)
    
 
SERVICING TERMINATION EVENTS
 
     "Servicing Termination Events" will consist of: (i) any failure by the
Master Servicer to deposit in the Collection Account or Funding Account, as
applicable, any deposit required to be made under the Agreement, which failure
continues unremedied for five Business Days after the giving of written notice
of such failure to the Master Servicer by the Trustee or the Certificate
Insurer, or to the Master Servicer and the Trustee by Certificateholders holding
Certificates evidencing not less than 51% of the then-outstanding principal
amount; (ii) any failure by the Master Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the Agreement
which materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer and continues unremedied for 60 days after the giving
of written notice of such failure to the Master Servicer by the Trustee or the
Certificate Insurer, or to the Master Servicer and the Trustee by
Certificateholders evidencing not less than 51% of the then-outstanding
principal amount; or (iii) the occurrence of certain events of bankruptcy,
insolvency or receivership relating to the Master Servicer as set forth in the
Agreement which, in the case of the occurrence of such events without the
consent of the Master Servicer, continue unremedied for 60 days; or (iv) a
determination by the Certificate Insurer that the Master Servicer has failed to
service in accordance with historical or industry standards or in a manner which
is consistent for all mortgage loans serviced by the Master Servicer.
 
     Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of five Business Days or
referred to under clause (ii) above, if applicable, for a period of 60 days,
shall not constitute a Servicing Termination Event if such delay or failure
could not be prevented by the exercise of reasonable diligence by the Master
Servicer and such delay or failure was caused by an act of God or other similar
occurrence. Upon the occurrence of any such event the Master Servicer shall not
be relieved from using its best efforts to perform its obligations in a timely
manner in accordance with the terms of the
 
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<PAGE>   67
 
Agreement and the Master Servicer shall provide the Trustee, the Seller, the
Certificate Insurer and the Certificateholders prompt notice of such failure or
delay by it, together with a description of its efforts to so perform its
obligations.
 
RIGHTS UPON A SERVICING TERMINATION EVENT
 
     So long as a Servicing Termination Event remains unremedied, either (a) the
Trustee or (b) (so long as no default by the Certificate Insurer has occurred
and is continuing) (i) the Certificate Insurer or (ii) with the consent of the
Certificate Insurer, the holders of Certificates evidencing not less than 51% of
the then-outstanding principal amount may terminate all of the rights and
obligations of the Master Servicer under the Agreement and in and to the
Mortgage Loans, whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under such Agreement and will be
entitled to similar compensation arrangements. In the event that the Trustee
would be obligated to succeed the Master Servicer but is unwilling or unable so
to act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution or other mortgage loan or
home equity loan servicer with all licenses and permits required to perform its
obligations under the Agreement and having a net worth of at least $50,000,000
and reasonably acceptable to the Certificate Insurer and the Rating Agencies to
act as successor to the Master Servicer under the Agreement. Pending such
appointment, the Trustee will be obligated to act in such capacity unless
prohibited by law. Such successor will be entitled to receive the same
compensation that the Master Servicer would otherwise have received (or such
lesser compensation as the Trustee and such successor may agree). (Sections 8.01
and 8.02) A receiver or conservator for the Master Servicer may be empowered to
prevent the termination and replacement of the Master Servicer where the only
Servicing Termination Event that has occurred is an Insolvency Event (as defined
in the Agreement).
 
AMENDMENT
 
     The Agreement may be amended from time to time by the Master Servicer, the
Seller, the Trustee and with the consent of the Certificate Insurer and the
Servicer Credit Facility Issuer, if any, (which consent shall not be
unreasonably withheld) but without the consent of the Certificateholders to (i)
cure any ambiguity, to correct or supplement any provisions therein which may be
defective or inconsistent with any other provisions of the Agreement, (ii) add
to the duties of the Seller or the Master Servicer, (iii) add or amend any
provisions of the Agreement as required by the Rating Agencies in order to
maintain or improve any rating of the Certificates (it being understood that,
after obtaining the ratings in effect on the Closing Date, neither the Seller,
the Trustee nor the Master Servicer is obligated to obtain, maintain or improve
any such rating), (iv) add any other provisions with respect to matters or
questions arising under the Agreement or the Policy, as the case may be,
including provisions relating to the issuance of definitive Certificates to
Certificateholders provided that book-entry registration of the Certificates is
no longer permitted, which provisions shall not be inconsistent with the
provisions of the Agreement or the Policy, as the case may be; or (v) modify or
eliminate certain provisions of the Agreement relative to the Policy or the
Spread Account.
 
     The Agreement may also be amended from time to time by the Master Servicer,
the Seller, and the Trustee, and the Master Servicer, the Certificate Insurer
and the Servicer Credit Facility Issuer, if any, may from time to time consent
to the amendment of the Policy or the Servicer Credit Facility, as the case may
be, with the consent of Certificateholders evidencing not less than 51% of the
then-outstanding aggregate principal amount of Certificates and in the case of
an amendment to the Agreement, with the consent of the Certificate Insurer and
the Servicer Credit Facility Issuer, if any, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Agreement or of modifying in any manner the rights of the
Certificateholders, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, collections of payments on
Mortgage Loans or distributions 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 holders of all Certificates then outstanding or (iii) materially
adversely affect the interests of the Certificate Insurer or any Servicer Credit
Facility Issuer without the consent of the Certificate Insurer or any Servicer
Credit Facility Issuer so affected
 
                                       65
<PAGE>   68
 
   
or (iv) result in a downgrade of the ratings of the Certificates without the
consent of the holders of all Certificates then outstanding and the Certificate
Insurer. (Section 12.01)
    
 
TERMINATION; RETIREMENT OF THE CERTIFICATES
 
   
     Upon payment of any amounts due the Certificate Insurer, the Trust will
terminate on the Distribution Date following the earlier of (i) the date
immediately following the date on which the Certificate Principal Balance is
reduced to zero and after which there are no unreimbursed Liquidation Loss
Amounts allocable to the Certificateholders, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust or the disposition of all
property acquired upon foreclosure or grant of deed in lieu of foreclosure of
any Mortgage Loan and (iii) the Distribution Date in February 2018. The
remaining Mortgage Loans will be subject to optional retransfer to the Seller
for an amount equal to the Retransfer Price on any Distribution Date after the
Certificate Principal Balance is reduced to an amount less than or equal to 10%
of the Original Certificate Principal Balance and all amounts due and owing to
the Certificate Insurer and unreimbursed draws on the Policy, together with
interest thereon, as provided under the Insurance Agreement have been paid. The
Retransfer Price will be equal to the sum of (a) the outstanding Certificate
Principal Balance, (b) accrued and unpaid interest thereon at the applicable
Certificate Rate through the day preceding the final Distribution Date, (c) any
unreimbursed draws upon the Policy and other amounts due under the Insurance
Agreement. In no event, however, will the Trust created by the Agreement
continue in perpetuity. Written notice of termination of the Agreement will be
given to each Certificateholder, and the final distribution will be made only
upon surrender and cancellation of the Certificates at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
(Section 10.01). The right of the Seller to accept any transfer referred to
above is conditioned upon the Certificate Principal Balance being less than or
equal to 10% of the Original Certificate Principal Balance. The Retransfer Price
will be distributed to the Certificateholders in lieu of the amount that would
otherwise be distributed if such optional retransfer were not exercised, which
will be applied as provided in the Agreement.
    
 
THE TRUSTEE
 
     The commercial bank or trust company serving as Trustee may have normal
banking relationships with the Seller and/or its affiliates, including the
Master Servicer. The Trustee in its individual or any other capacity may become
an owner of the Certificates with the same rights as it would have if it were
not the Trustee.
 
     The Trustee may resign at any time, in which event the Seller will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Seller or the Certificate Insurer may also remove the Trustee if
the Trustee ceases to be eligible to continue as such under the Agreement or if
the Trustee becomes insolvent. Upon becoming aware of such circumstances, the
Seller will be obligated to appoint a successor Trustee, as approved by the
Certificate Insurer and the Servicer Credit Facility Issuer, if any. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee. (Section 9.07)
 
REGISTRATION OF CERTIFICATES
 
     Holders of Certificates may hold their Certificates through DTC (in the
United States) or CEDEL or Euroclear (in Europe) if they are participants of
such systems, or indirectly through organizations which are participants in such
systems.
 
   
     The Certificates will initially be registered in the name of CEDE & Co.,
the nominee of DTC (the "Global Certificates"). CEDEL and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in CEDEL's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for CEDEL and Chase will act as depositary for Euroclear (in such
capacities, individually the "Depositary" and collectively the "Depositaries").
    
 
                                       66
<PAGE>   69
 
   
     Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures. See Annex I
hereto.
    
 
     Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
 
   
     Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax documentation procedures relating to the Certificates, see "Income Tax
Consequences -- Foreign Investors" and "-- Information Reporting and Backup
Withholding" and "Global Clearance, Settlement and Tax Documentation Procedures"
in Annex I hereto.
    
 
     Certificateholders who are not Participants but desire to purchase, sell or
otherwise transfer ownership of Certificates may do so only through Participants
or indirect participants (unless and until Replacement Certificates, as defined
below, are issued). In addition, Certificateholders will receive all
distributions of principal of, and interest on, the Certificates from the
Trustee through DTC and Participants. Certificateholders will not receive or be
entitled to receive certificates representing their respective interests in the
Certificates, except under the limited circumstances described below.
 
     Unless and until Replacement Certificates are issued, it is anticipated
that the only "Certificateholder" of the Certificates will be CEDE & Co., as
nominee of DTC. Certificateholders will not be Certificateholders as that term
is used in the Agreement. "Certificate Owners" are only permitted to exercise
the rights of Certificateholders indirectly through Participants and DTC.
 
   
     While the Certificates are represented by the Global Certificates (except
under the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "Rules"), DTC is
required to make book-entry transfers among Participants on whose behalf it acts
with respect to the Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Certificates. Participants
and indirect participants with whom Certificate Owners have accounts with
respect to Certificates are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners. Accordingly, although Certificate Owners will not possess
physical certificates, the Rules provide a mechanism by which Certificate Owners
will receive distributions and will be able to transfer their interests.
    
 
     Unless and until Replacement Certificates are issued, Certificate Owners
who are not Participants may transfer ownership of Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Certificates, by book-entry transfer, through
DTC for the account of the purchasers of such Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Certificates will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the Participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing Certificate Owners.
 
                                       67
<PAGE>   70
 
     DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
1934 Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("indirect participants").
 
     CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
 
     Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
 
     The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
 
     Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
 
                                       68
<PAGE>   71
 
   
     Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Income Tax Consequences" and Annex I. CEDEL or the Euroclear Operator, as
the case may be, will take any other action permitted to be taken by a
Certificateholder under the Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
    
 
     Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Replacement Certificates"), only if (i) DTC or HFC advises the Trustee in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as nominee and depository with respect to the Certificates and
HFC or the Trustee is unable to locate a qualified successor, (ii) HFC, at its
sole option and with the consent of the Trustee, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a Servicing
Termination Event, DTC, at the direction of Certificateholders holding
Certificates evidencing not less than 51% of the then-outstanding principal
balance, advises the Trustee in writing that the continuation of a book-entry
system through DTC (or a successor thereto) to the exclusion of any physical
certificates being issued to Certificate Owners is no longer in the best
interests of Certificate Owners. Upon issuance of Replacement Certificates to
Certificate Owners, such Certificates will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Trustee with respect to transfers, notices and distributions.
 
     DTC has advised HFC and the Trustee that, unless and until Replacement
Certificates are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC may take
actions, at the direction of the related Participants, with respect to some
Certificates which conflict with actions taken with respect to other
Certificates.
 
     Because DTC can only act on behalf of Participants, who in turn act on
behalf of indirect participants and certain banks, the ability of holders of
beneficial interests in the Certificates to pledge such Certificates to persons
or entities that do not participate in the DTC system, or otherwise take actions
in respect of such Certificates, may be limited due to the lack of a definitive
certificate for such Certificates.
 
     Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
 
   
     If the Certificates are accepted for listing on the Luxembourg Stock
Exchange, a paying agent shall be maintained in respect of the Certificates in
Luxembourg (the "Luxembourg Paying Agent") for so long as the Certificates are
so listed. The Luxembourg Paying Agent shall act as the transfer agent in
Luxembourg should the Global Certificates be exchanged for Replacement
Certificates.
    
 
CERTAIN ACTIVITIES
 
     No Certificateholder will have any right under the Agreement to institute
any proceeding in its name with respect to such Agreement unless such holder
previously has given to the Trustee written notice of default and unless holders
of Certificates evidencing not less than 51% of the then-outstanding principal
amount have made written requests to 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. (Section 12.03) However, the Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the Agreement
or to make any investigation of matters arising thereunder or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the holders of Certificates covered by
such Agreement, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby. (Section 9.02)
 
                                       69
<PAGE>   72
 
   
     The Trust will not: (i) borrow money; (ii) make loans (other than pursuant
to the HFC Note); (iii) invest in securities for the purpose of exercising
control; (iv) underwrite securities; (v) except as provided in the Agreement,
engage in the purchase and sale (or turnover) of investments; (vi) offer
securities in exchange for property (except Certificates for the Mortgage
Loans); (vii) repurchase or otherwise reacquire its securities; or (viii) issue
senior securities. See "-- Evidence as to Compliance" above for information
regarding reports as to the compliance by the Master Servicer with the terms of
the Agreement.
    
 
               DESCRIPTION OF THE RECEIVABLES PURCHASE AGREEMENT
 
     The Mortgage Loans to be transferred to the Trust by the Seller will be
acquired by the Seller from the Subservicers pursuant to the Receivables
Purchase Agreement entered into by and between the Seller, as purchaser of the
Mortgage Loans, and the Subservicers, as owners of the Credit Line Agreements
and sellers of the Mortgage Loans (a form of the Receivables Purchase Agreement
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part). Under the Receivables Purchase Agreement, the Subservicers have agreed
to sell or transfer the Mortgage Loans in accordance with the terms set forth
therein, including the applicable Cut-Off Balances and the Additional Balances
created in specified Credit Line Agreements, to the Seller. Pursuant to the
Agreement, such balances are immediately transferred by the Seller to the Trust,
and the Seller has assigned its rights in, to and under the Receivables Purchase
Agreement with respect to such balances to the Trust. The following summary
describes certain terms of the Receivables Purchase Agreement and is qualified
in its entirety by reference to the Receivables Purchase Agreement.
 
SALE OF MORTGAGE LOANS
 
     Pursuant to the Receivables Purchase Agreement, the Subservicers will sell
to the Seller all their right, title and interest in and to all of the Mortgage
Loans, consisting of the applicable Cut-Off Balances arising from the Credit
Line Agreements and all of the Additional Balances thereafter created from such
Credit Line Agreements. The purchase price of the purchased Mortgage Loans will
not be less than the principal amount thereof as of the time of sale.
 
   
     In connection with such sale of the Mortgage Loans to the Seller, the
Subservicers have agreed to assign all right, title and interest in and to the
Related Documents, consisting of the Credit Line Agreements, the Mortgages and
other related documents, to the Trustee, but will maintain possession of such
documents unless HFC fails to maintain certain ratings. The Subservicers have or
will indicate in their computer files that the Mortgage Loans have been sold to
the Seller by the Subservicers and that such Mortgage Loans have been sold or
transferred by the Seller to the Trust. In addition, the Subservicers have or
will provide to the Seller a computer file or a microfiche list containing a
true and complete list showing each Mortgage Loan, identified by account number
and by total outstanding balance on the applicable Cut-Off Date. The records and
agreements relating to the Mortgage Loans, including the promissory notes,
related mortgage and other Related Documents, are not segregated by the
Subservicers from other documents and agreements relating to other home equity
credit line accounts and receivables and are not stamped or marked to reflect
the sale or transfer of the Mortgage Loans to the Seller, but the computer
records of the Subservicers are or will be marked to evidence such sale or
transfer. The Subservicers have filed or will file a UCC financing statement
meeting the requirements of state law in Illinois and in each of the
jurisdictions in which the books and records relating to the Mortgage Loans are
maintained. See "Risk Factors  -- Insolvency Considerations; Treatment of
Transaction; Perfection Issues" and "Certain Legal Aspects of the Mortgage
Loans".
    
 
REPRESENTATIONS AND WARRANTIES
 
     In the Receivables Purchase Agreement, each Subservicer represents and
warrants to the Seller to the effect that, among other things, as of the Closing
Date, it is duly chartered and in good standing and that it has the authority to
consummate the transactions contemplated by the Receivables Purchase Agreement.
 
     Each Subservicer also represents and warrants to the Seller relating to the
Mortgage Loans to the effect, among other things, that in the event of a breach
of any representation and warranty set forth in the Agreement which results in
the requirement that the Seller accept retransfer of a Mortgage Loan from the
 
                                       70
<PAGE>   73
 
Trust, then the applicable Subservicer shall repurchase such Mortgage Loan from
the Seller on the date of such transfer. The purchase price for such a Mortgage
Loan shall be the principal balance thereof and the accrued and unpaid interest
thereon and any premium paid by the Seller therefor.
 
     Each Subservicer also represents and warrants to the Seller to the effect,
among other things, that as of the Closing Date and each date when the
Subsequent Funding Mortgage Loans, any Eligible Substitute Mortgage Loans and
any Additional Balances are sold to the Seller, that (a) the Receivables
Purchase Agreement constitutes a legal, valid and binding obligation of the
Subservicers and (b) the transfer of the amounts owing under the Mortgage Loans
under the Receivables Purchase Agreement constitutes a valid sale to the Seller
of all right, title and interest of the Subservicers in and to the Mortgage
Loans, the Cut-Off Balances and the Additional Balances, whether then existing
or thereafter created in the Credit Line Agreements and in the proceeds thereof.
If the breach of any of the representations and warranties described in this
paragraph results in the obligation of the Seller under the Agreement to accept
retransfer of the Mortgage Loans, the Subservicers will repurchase the Mortgage
Loans retransferred to the Seller.
 
CERTAIN COVENANTS
 
     In the Receivables Purchase Agreement, the Subservicers covenant to perform
their obligations under the Credit Line Agreements and the Subservicers'
policies and procedures relating to the Credit Line Agreements unless the
failure to do so would not have a material adverse effect on the rights of the
Trust, as assignee of the Mortgage Loans, the Certificate Insurer or the
Certificateholders. In that regard, the Subservicers may change the terms and
provisions of such Credit Line Agreements or policies and procedures at any time
in any respect (including, without limitation, the calculation of the amount, or
the timing, of charge-offs and changes in the Loan Rates) so long as any such
changes are made in accordance with all applicable laws and such changes will
not have a material adverse effect on the interests of the Certificateholders,
the Certificate Insurer or the Trust, or in any other respect as provided in the
Agreement.
 
     In addition, the Subservicers expressly acknowledge and consent to the
Seller's assignment of its rights relating to the Mortgage Loans under the
Receivables Purchase Agreement to the Trustee for the benefit of the
Certificateholders and the Certificate Insurer. The Subservicers also agree, for
the benefit of the Trust, that any amounts payable by the Subservicers to the
Seller pursuant to the Receivables Purchase Agreement that are to be paid by the
Seller to the Trustee for the benefit of the Certificateholders will be paid by
the Subservicers, on behalf of the Seller, directly to the Trustee.
 
AMENDMENTS
 
     The Receivables Purchase Agreement may be amended by the Seller and the
Subservicers without the consent of the Certificateholders (i) to cure any
ambiguity, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to add any other provisions
with respect to matters or questions arising under the Receivables Purchase
Agreement which are not inconsistent with the provisions of the Receivables
Purchase Agreement, (iv) to change or modify the purchase price to be paid for
the Mortgage Loans, and (v) to change, modify, delete, or add any other
obligation or duty of the Subservicers or the Seller. No amendment pursuant to
clause (v) above shall be effective unless the Rating Agencies have notified the
Subservicers and the Seller in writing that such amendment will not result in a
reduction or withdrawal of the rating of the Certificates and the Certificate
Insurer has consented thereto as required by the Insurance Agreement.
 
SALE OF CREDIT LINE AGREEMENTS
 
     The Subservicers have the right to transfer their respective interests in
the Credit Line Agreements provided that if such transferee is not an affiliate
of the Master Servicer, (i) the consent of the Certificate Insurer is obtained
and (ii) the Rating Agencies have notified the Seller and the Subservicers that
such transfer will not result in a reduction or withdrawal of the rating of the
Certificates.
 
                                       71
<PAGE>   74
 
TERMINATION
 
   
     The Receivables Purchase Agreement will terminate immediately after the
Trust terminates. In addition, if a conservator, trustee or receiver is
appointed for the Subservicers, the Subservicers will immediately cease to sell
or transfer Subsequent Funding Mortgage Loans, Eligible Substitute Mortgage
Loans and Additional Balances to the Seller and promptly give notice of such
event to the Seller, the Trustee and the Certificate Insurer.
    
 
                  CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
 
GENERAL
 
     The Mortgage Loans will be secured either by trust deeds or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property is located. A mortgage creates a lien upon the real property encumbered
by the mortgage. It is not prior to the lien for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally on
the order of filing with a state or county office. There are two parties to a
mortgage, the mortgagor, who is the homeowner or borrower, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. A deed of trust formally has three
parties: the homeowner or borrower called the trustor (similar to a mortgagor),
a lender (similar to the mortgagee) called the beneficiary, and a third-party
grantee, called the trustee. Under a deed of trust, the trustor grants the
property, irrevocably until the debt is paid, "in trust, with the power of sale"
to the trustee to secure payment of the obligation. The trustee's authority
under a deed of trust and the mortgagee's authority under a mortgage are
governed by law, the express provisions of the deed of trust or the mortgage,
and, in some cases under a trust deed, the direction of the beneficiary.
 
FORECLOSURE
 
     Foreclosure of a deed of trust is accomplished in most cases by a
non-judicial trustee's sale under the power-of-sale provision in the deed of
trust. Prior to such sale, the trustee must record a notice of default and send
a copy to the trustor, to any person who has recorded a request for a copy of a
notice of default and notice of sale, to any successor in interest to the
trustor, to the beneficiary of any junior deed of trust and to certain other
persons. In certain states where a beneficiary under a junior deed of trust has
recorded a request for a notice of default, a copy of the notice must be sent to
the beneficiary following recordation of such notice of default. The Seller may
not always record a request for a notice of default. The trustor, any successor
in interest to the trustor, or any beneficiary under a junior deed of trust or
any other persons having a subordinate lien or encumbrance of record may
generally, during a reinstatement period, cure the default by paying the entire
amount of the debt then due, exclusive of principal due only because of
acceleration upon default, plus costs and expenses actually incurred in
enforcing the obligation and statutorily limited attorney's and trustee's fees.
When the beneficiary under a junior deed of trust cures the default and
reinstates the senior deed of trust, the amount paid by the beneficiary so to
cure generally becomes a part of the indebtedness secured by the junior deed of
trust. After expiration of the applicable reinstatement period, and before the
trustee's sale, notice of sale must generally be posted in a public place and
published at certain intervals for a prescribed period prior to the sale. A copy
of the notice of sale must generally be posted on the property, and sent to the
trustor, to each person who has requested a copy, to any successor in interest
to the trustor, to the beneficiary of any junior deed of trust and to any other
person to whom a notice of default must be sent, before the sale, and must
generally be recorded in the county in which the property is located before the
sale.
 
     Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon the mortgagor(s) and
all parties having a subordinate interest in the real property. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating necessary parties defendant. Judicial foreclosure proceedings are
generally not contested by any of the parties defendant due to the lack of
mortgagor's equity in the property. However, when the mortgagee's right to
foreclose is contested, the legal proceedings necessary to resolve the issue can
be time consuming. After the completion of judicial foreclosure, the court would
issue a judgment of foreclosure and would generally appoint a referee, sheriff,
or other court officer to conduct the sale of the property.
 
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<PAGE>   75
 
     The referee's or trustee's sale must be conducted by public auction and
must be held in the county where all or some part of the property subject to the
mortgage or the deed of trust is located. At the sale, the referee or trustee
may require a bidder to show evidence of ability to deposit with the referee or
trustee the full amount of the bidder's final bid in cash (or an equivalent
thereto satisfactory to the trustee) prior to and as a condition to recognizing
such bid, and may conditionally accept and hold these amounts for the duration
of the sale. The mortgagee or the beneficiary of the mortgage or deed of trust
under foreclosure generally need not bid cash at the sale, but may instead make
a "credit bid" to the extent of the total amount due under the mortgage or deed
of trust, including costs and expenses actually incurred in enforcing the
mortgage, as well as referee's or trustee's fees and expenses.
 
     After judicial confirmation of the sale and subject to the mortgagor's or
trustor's right of redemption, if any, under state law, the referee or trustee
will execute and deliver a deed or trustee's deed to the purchaser of the
property. A sale conducted in accordance with a judicial foreclosure or the
terms of the power of sale contained in the deed of trust is generally presumed
to be conducted regularly and fairly and, on a conveyance of the property by
deed or trustee's deed, confers absolute legal title to the property to the
purchaser, free of all junior mortgages or deeds of trust and free of all other
liens and claims subordinate to the mortgage or deed of trust under which the
sale is made (with the exception of certain governmental liens). The purchaser's
title is, however, subject to all senior liens and other senior claims. Thus, if
the mortgage or deed of trust being foreclosed is a junior mortgage or deed of
trust such as some of the Mortgage Loans, the referee or trustee will convey
title to the property to the purchaser, subject to the underlying first mortgage
or deed of trust and any other prior liens and claims. A foreclosure under a
junior mortgage or deed of trust has no effect on the first mortgage or deed of
trust, with the possible exception of the right of a senior mortgagee or
beneficiary to accelerate its indebtedness under a "due-on-sale" clause
contained in the senior mortgage or deed of trust. See " 'Due-on-Sale' Clauses"
below.
 
     The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the obligor is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. Following the sale, in some
states the mortgagee or beneficiary under the foreclosed lien generally may not
obtain a deficiency judgment against the mortgagor or trustor.
 
     A judicial foreclosure (which is the only form of foreclosure allowed in
some states and is necessary to obtain a deficiency judgment in others) is
subject to most of the delays and expenses of other lawsuits, sometimes
requiring up to several years to complete. Following a judicial foreclosure
sale, the mortgagor or trustor or his successor in interest may redeem by paying
the amount of the sale plus statutory interest, for a period established by
state statute, which may vary from three months to two years, depending on state
law and the circumstances of the sale. Foreclosed junior lien holders may also
redeem by paying the amount of the sale or other amount established by the
judgment of foreclosure, plus statutory interest, subject to the mortgagor's or
trustor's superior right to redeem from them.
 
     Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
 
RIGHTS OF REDEMPTION
 
     In some states, after sale pursuant to a deed of trust or judicial
foreclosure of a mortgage, the borrower and foreclosed junior lienors are given
a statutory time period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued statutory interest and expenses of
foreclosure. In other states, redemption may be authorized
 
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<PAGE>   76
 
if the former borrower pays only a portion of the sums due. The effect of a
statutory right of redemption is generally to diminish the ability of the lender
to sell the foreclosed property. Exercise of the right of redemption would
defeat the title of any purchaser from the lender subsequent to foreclosure or
sale under a deed of trust and before expiration of the redemption period.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of maintenance until the
redemption period has expired.
 
RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES
 
     The Mortgage Loans will be secured by mortgages or deeds of trust most of
which are second mortgages or deeds of trust and the remainder of which are
first, or to a very limited extent, third mortgages or deeds of trust. The
rights of the Trust (and therefore the Certificateholders), as beneficiary under
a junior deed of trust or as mortgagee under a junior mortgage, are subordinate
to those of the mortgagee or beneficiary under the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive hazard insurance and condemnation proceeds and to cause the property
securing the Mortgage Loan to be sold upon default of the mortgagor or trustor,
thereby extinguishing the junior mortgagee's or junior beneficiary's lien unless
the Subservicers assert their subordinate interest in a Mortgaged Property in
foreclosure litigation or satisfy the defaulted senior loan. As discussed more
fully below, in many states a junior mortgagee or beneficiary may satisfy a
defaulted senior loan in full, or may cure such default and bring the senior
loan current, in either event adding the amounts expended to the balance due on
the junior loan. Although the Subservicers generally do not cure defaults under
a senior deed of trust, it is the Subservicers' standard practice to protect
their interest by attending any such sale and bidding for property if it is in
the Subservicers' best interests to do so.
 
     The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of the Subservicers, confers on the mortgagee
or beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or beneficiary
may determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under the underlying first mortgage
or deed of trust will have the prior right to collect any insurance proceeds
payable under a hazard insurance policy and any award of damages in connection
with the condemnation and to apply the same to the indebtedness secured by the
first mortgage or deed of trust. Proceeds, however, may be used by the mortgagee
to repair or rebuild. In cases where proceeds are utilized to repay
indebtedness, proceeds in excess of the amount of senior mortgage indebtedness
will be applied to the indebtedness of a junior mortgage or trust deed.
 
     The form of mortgage or deed of trust used by most institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws in most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an "obligatory" or "optional" advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as amounts initially made under the mortgage or deed
of trust, notwithstanding that there may be intervening junior mortgages or
deeds of trust and other liens between the date of recording of the mortgage or
deed of trust and the date of the future advance, and notwithstanding that the
mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts
and has actual knowledge of the intervening junior mortgages or deeds of trust
and other liens, the advance may be subordinate to such intervening junior
mortgages or deeds of trust and other liens. Priority of advances under the
clause rests, in many other states, on state statutes giving priority to all
advances made under the loan agreement to a "credit limit" amount stated in the
recorded mortgage.
 
     Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property
 
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<PAGE>   77
 
and, when due, all encumbrances, charges and liens on the property which appear
prior to the mortgage or deed of trust, to provide and maintain fire insurance
on the property, to maintain and repair the property and not to commit or permit
any waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee or beneficiary
under the mortgage or deed of trust. Upon a failure of the mortgagor or trustor
to perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the mortgagor or trustor. All sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust.
 
BANKRUPTCY, ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
 
     Numerous state and federal laws, including the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended (the "Civil Relief Act") and the federal
bankruptcy code, may adversely affect a lender's ability to realize the full
value of its security. Under the terms of the Civil Relief Act, a borrower who
enters military service after the origination of such borrower's home equity
line of credit (including a borrower who is a member of the National Guard or is
in reserve status at the time of the origination of the home equity credit line
account and is later called to active duty) may not be charged interest above an
annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. Any shortfall
resulting from the application of the Civil Relief Act, to the extent not
covered by collections on the Mortgage Loans, disbursements from the Spread
Account or amounts drawn under the Policy could result in losses to the holders
of the Certificates. In addition, the Civil Relief Act imposes limitations which
would impair the ability of a lender to foreclose on a home equity loan during
the borrower's period of active duty status. Thus, in the event that such
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion. Under
the federal bankruptcy code, the filing of a petition in bankruptcy will stay
the exercise of a power of sale and the commencement or continuation of a
foreclosure action. Moreover, a court which determines the value of a mortgaged
property to be less than the principal balance of the loan it secures may
(subject to certain protections available to the lender) stop a lender from
foreclosing on the mortgaged property and, as a part of a rehabilitation plan,
reduce the amount of secured indebtedness to the appraised value of the
mortgaged property as it exists at the time of the proceeding (leaving the
lender as a general unsecured creditor for the difference between that value and
the amount of its outstanding mortgage indebtedness). A bankruptcy court may
also grant a debtor a reasonable time to cure a payment default, reduce monthly
payments due under a mortgage loan, or change the rate of interest on a mortgage
loan.
 
     Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the mortgagee or beneficiary to obtain a
deficiency judgment against the mortgagor or trustor following foreclosure
pursuant to a mortgage or sale under a deed of trust. A deficiency judgment is a
personal judgment against the former mortgagor or trustor equal in most cases to
the difference between the net amount realized upon the foreclosure or sale of
the real property and the amount due to the mortgagee or beneficiary. Other
statutes may require the mortgagee or beneficiary to exhaust the security
afforded under the mortgage or deed of trust by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor or
trustor. Finally, other statutory provisions may limit any deficiency judgment
against the former mortgagor or trustor following a judicial sale to the excess
of the outstanding debt over the fair market value of the property at the time
of the public sale. The purpose of these statutes is to prevent a mortgagee or
beneficiary from obtaining a large deficiency judgment against the former
mortgagor or trustor as a result of low or no bids at the sale.
 
     In addition to anti-deficiency and related legislation, numerous other
statutory provisions, including state laws affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon its security. Federal law and certain state laws provide priority to
certain tax liens over the lien of mortgages or deeds of trust. Numerous federal
and some state consumer protection laws impose substantive requirements upon
mortgage lenders in connection with the origination and the servicing of
mortgage loans. These laws include the Home Equity Loan Consumer Protection Act
of 1988, Federal Truth-in-Lending Act,
 
                                       75
<PAGE>   78
 
Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act and related statutes. These federal laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the law. In some cases this
liability may affect transferees of such mortgage loans.
 
     Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
suffering from temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property or the borrower executing a second mortgage or deed of trust
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due process
concerns for adequate notice require that the borrowers under deeds of trust or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust, or under a
mortgage having power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
 
"DUE-ON-SALE" CLAUSES
 
     Substantially all of the Credit Line Agreements contain due-on-sale
clauses. These clauses permit the related Subservicer to accelerate the maturity
of the loan on notice, which is usually thirty days, if the borrower sells,
transfers or conveys the property. The enforceability of these clauses has been
the subject of legislation or litigation in many states, and in some cases the
enforceability of these clauses was limited or denied. However, sec.341 of the
Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act")
preempts state constitutional, statutory and case law that prohibit the
enforcement of many due-on-sale clauses and permits lenders to enforce most of
these clauses in accordance with their terms, subject to certain limited
exceptions.
 
     Exempted from the general rule of enforceability of due-on-sale clauses are
mortgage loans (originated other than by federal savings and loan associations
and federal savings banks) that were made during the period beginning on the
date a state, by statute or final appellate court decision having statewide
effect, prohibited the exercise of due-on-sale clauses and ending October 15,
1982 ("Window Period Loans"). However, this exception applies only to transfers
of property which secures Window Period Loans occurring between October 15, 1982
and October 15, 1985 and does not restrict enforcement of a due-on-sale clause
in connection with transfers of property which secures Window Period Loans
occurring after October 15, 1985 unless the property which secures such Window
Period Loans is located in one of the five states identified below.
 
     Therefore, most standard due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
after October 15, 1982 to restrict the enforceability of such clauses with
respect to mortgage loans that were (i) originated or assumed after the date a
state prohibited enforcement of due-on-sale clauses and before October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. The Federal Home Loan Mortgage
Corporation has taken the position in its published mortgage servicing standards
that five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of Window Period Loans.
 
     The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of
 
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<PAGE>   79
 
the property may have occurred. These include intrafamily transfers, certain
transfers by operation of law, leases of fewer than three years with no option
to purchase, and the creation of a junior encumbrance.
 
     The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
 
APPLICABILITY OF USURY LAWS
 
   
     Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March, 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. As of the Pool Date,
approximately 29.62% of the Initial Mortgage Loans by principal balance were
first mortgage loans. A similar federal statute was in effect with respect to
certain mortgage loans made during the first three months of 1980. The Office of
Thrift Supervision is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a law
or constitutional provision which expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is authorized
by the law to adopt a provision limiting discount points or other charges on
mortgage loans covered by Title V. Certain states have taken action to reimpose
interest rate limits and/or to limit discount points or other charges. In the
Agreement, the Seller represents and warrants that each Mortgage Loan was
originated in compliance with applicable state law in all material respects.
    
 
ENVIRONMENTAL LEGISLATION
 
     Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is uncertain whether they would be
imposed on a secured lender (such as the Trust). In the event that title to a
Mortgaged Property securing a Mortgage Loan was acquired on behalf of the Trust
and cleanup costs were incurred in respect of the Mortgaged Property, the
Certificateholders may incur a loss if such costs were required to be paid by
the Trust.
 
   
                            INCOME TAX CONSEQUENCES
    
 
GENERAL
 
     Set forth below is a general discussion of the anticipated material Federal
income tax consequences of the purchase, ownership and disposition of the
Certificates. This discussion does not address every aspect of the Federal
income tax laws that may be relevant to Certificateholders in light of their
personal investment circumstances or to certain types of Certificateholders
subject to special treatment under the Federal income tax laws (for example,
banks and life insurance companies) and is generally limited to investors who
will hold Certificates as capital assets. Accordingly, investors should consult
their own tax advisors regarding Federal, state, local, foreign and any other
tax consequences to them of the purchase, ownership and disposition of the
Certificates in their own particular circumstances. This discussion is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury regulations thereunder, and rulings and court decisions in
effect as of the date hereof, all of which are subject to change, possibly
retroactively. No ruling on any of the issues discussed below has been or will
be sought from the Internal Revenue Service (the "IRS") and no assurance can be
given that the IRS will not take contrary positions. It is anticipated that the
Trust will not be indemnified for any Federal income tax that may be imposed
upon it, and the imposition of any such
 
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<PAGE>   80
 
taxes on the Trust could result in a reduction in the amounts available for
distribution to the Certificateholders.
 
TREATMENT OF THE CERTIFICATES AS INDEBTEDNESS
 
     Sidley & Austin, special tax counsel to the Seller ("Tax Counsel"), is of
the opinion that, although no transaction closely comparable to that
contemplated herein has been the subject of any Treasury regulation, revenue
ruling or judicial decision, based upon its analysis of the factors discussed
below and in the opinion letter filed as an Exhibit hereto (the "Opinion
Letter") the Seller is properly treated as the owner of the Mortgage Loans for
Federal income tax purposes and, accordingly, the Certificates, when issued,
will be properly characterized for Federal income tax purposes as indebtedness
of the Seller that is secured by the Mortgage Loans.
 
     Based on the foregoing, for Federal income tax purposes (i) Certificates
held by a thrift institution taxed as a "mutual savings bank" or "domestic
building and loan association" will not represent interests in "qualifying real
property loans" within the meaning of Section 593(d) of the Code; (ii)
Certificates held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v); (iii) interest
on Certificates held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B); (iv)
Certificates held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Code Section
856(c)(5)(A); (v) Certificates held by a real estate mortgage investment conduit
will not constitute "qualified mortgages" within the meaning of Code Section
860G(a)(3); and (vi) Certificates held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(4)(A)(i).
 
     The Seller and Certificateholders will express in the Agreement the intent
that, for Federal, state and local income and franchise tax purposes, and for
the purposes of any other tax imposed on or measured by income, the Certificates
will be indebtedness of the Seller secured by the Mortgage Loans. The Seller, by
entering into the Agreement, each Certificateholder, by the acceptance of a
Certificate, and each Certificate Owner, by virtue of accepting a beneficial
interest in a Certificate, will agree to treat the Certificates (or the
beneficial interests therein) as indebtedness of the Seller secured by the
Mortgage Loans for Federal, state and local income and franchise tax purposes
and for the purposes of any other tax imposed on or measured by income. However,
because different criteria are used in determining the non-tax accounting
treatment of a transaction, the Seller will treat the Agreement for financial
accounting purposes as a transfer of an ownership interest in the Mortgage Loans
and not as creating a debt obligation of the Seller.
 
     The economic substance of a transaction generally determines its Federal
income tax consequences and the form of a transaction, while a relevant factor,
is generally not conclusive evidence of its economic substance. In appropriate
circumstances the courts have allowed taxpayers, as well as the IRS, to treat a
transaction in accordance with its economic substance, notwithstanding that
participants characterized the transaction differently for nontax purposes. In
some instances, however, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. As set forth more fully in the
Opinion Letter, Tax Counsel believes that the rationale of those cases will not
apply to this transaction.
 
     The determination of whether the economic substance of a transfer of an
interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished (and the transferee has obtained) substantial incidents of
ownership in the property. Among the primary factors considered are whether the
transferee has obtained the opportunity for gain if the property increases in
value, has assumed the risk of loss if the property decreases in value and, in
the case of accounts receivable such as the Mortgage Loans, whether the
transferee, at the time of transfer, has a fixed interest in the proceeds of the
receivable when collected. Based upon its analysis of such factors, as described
more fully in the Opinion Letter, Tax Counsel is of the opinion that the
Certificates are properly characterized for Federal income tax purposes as
indebtedness of the Seller secured by the Mortgage Loans. Contrary
 
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<PAGE>   81
 
characterizations that could be asserted by the IRS are described under
"Possible Characterization of the Arrangement as a Partnership or Association
Taxable as a Corporation" below. Except as otherwise expressly indicated, the
following discussion assumes that the Certificates are properly treated as debt
obligations of the Seller for Federal income tax purposes.
 
INTEREST INCOME TO CERTIFICATEHOLDERS
 
   
     It is anticipated that the Certificates will be issued at par value (or at
an insubstantial discount from par value) and, although the matter is not free
from doubt, it appears that stated interest on the Certificates generally will
be taxable as ordinary income for Federal income tax purposes when received or
accrued by Certificateholders in accordance with their respective method of tax
accounting, and except as indicated, no original issue discount ("OID") will
arise with respect to the Certificates. It is possible, however, that under
regulations of the U.S. Treasury Department, interest payable on the
Certificates (or a portion of such interest), as well as any discount from par
value, will constitute OID. Such regulations treat interest as OID unless such
interest is "unconditionally payable." Because the Certificateholders do not
have available default remedies ordinarily available to holders of debt
instruments, the IRS could take the position that the interest payable on the
Certificates is not "unconditionally payable" within the meaning of such
regulation (unless the Certificates are considered to have terms and conditions
that make the likelihood of late payment a "remote contingency" within the
meaning of such regulations). If the IRS were successful in asserting such a
position, all or a portion of the taxable income to be recognized with respect
to the Certificates would be includible in the income of a Certificateholder as
received. Any amount treated as OID would not, however, be includible again when
the interest is actually received. If the yield on the Certificates is not
materially different from the coupon, this treatment would have no significant
effect on Certificateholders using the accrual method of accounting. However,
cash method Certificateholders would be required to report income with respect
to the Certificates in advance of the receipt of cash attributable to such
income. Even if the interest on the Certificates is considered to be
"unconditionally payable", the Certificateholders may be required to accrue any
Carryover Amount in income in advance of the receipt of cash with respect to
such Carryover Amount regardless of whether such Certificateholders are on the
cash or accrual method of accounting.
    
 
   
     If the Certificates were treated as being issued with OID, the following
rules would apply. The excess of the payments with respect to the Certificates
over their issue price (in this case, the first price at which a substantial
amount of the Certificates is sold, excluding sales to brokers or similar
persons acting in the capacity of underwriters, placement agents or wholesalers)
would constitute OID. A Certificateholder must include OID in income as interest
over the term of the Certificate under a constant yield method. In general, OID
must be included in income in advance of the receipt of cash representing that
income. In the case of a debt instrument as to which the repayment of principal
may be accelerated as a result of the prepayment of other obligations securing
the debt instrument, the periodic inclusion of OID is determined under a special
provision by taking into account prepayment assumptions used in pricing the debt
instrument and actual prepayment experience. If this provision applies to the
Certificates, the amount of OID which will accrue in any given "accrual period"
may either increase or decrease depending upon the actual prepayment rate. In
the event of a Carryover Amount, an accrual basis taxpayer will likely be
required to accrue the amount of each Carryover Amount even though such
Carryover Amount will not be paid until a later time. The amount and rate of
accrual of OID with respect to securities similar to the Certificates are
calculated based on a reasonable assumed prepayment rate (the "Prepayment
Assumption") and adjustments are made in the amount and rate of accrual of such
discount to reflect differences between the actual prepayment rate and the
Prepayment Assumption. It is anticipated that future Treasury regulations will
provide that the assumed prepayment rate for securities such as the Certificates
will be the rate used in pricing the initial offering of the securities. The
Prepayment Assumption for the Certificates will be a 26% conditional prepayment
rate ("CPR"), but no representation is made that, in fact, the Mortgage Loans
will be prepaid at a rate based on the Prepayment Assumption or at any other
rate. CPR is the amount of principal of the pool of Mortgage Loans prepaid each
month expressed as an annualized percentage of the total principal of the pool
of Mortgage Loans outstanding at the beginning of each month and for this
purpose all payments of principal are considered to be prepayments.
    
 
                                       79
<PAGE>   82
 
     A Certificateholder who purchases a Certificate at a market discount may be
subject to the "market discount" rules of the Code. These rules provide, in
part, for the treatment of gain attributable to accrued market discount as
ordinary income upon the receipt of partial principal payments or on the sale or
other disposition of the Certificate, and for the deferral of interest
deductions with respect to debt incurred to acquire or carry the market discount
Certificate.
 
     If a Certificate is purchased by a Certificateholder at a premium, such
premium will be amortized as an offset to interest income (with a corresponding
reduction in the Certificateholder's basis) under a constant yield method over
the term of the Certificate if an election under Section 171 of the Code is made
or is previously in effect.
 
DISPOSITION OF CERTIFICATES
 
     If a Certificate is sold, exchanged or otherwise disposed of, a
Certificateholder generally will recognize gain or loss in an amount equal to
the difference between the amount realized on the sale, exchange or disposition
and the Certificateholder's adjusted tax basis in the Certificate. The adjusted
tax basis of a Certificate generally will equal the cost of the Certificate to
the Certificateholder, increased by any OID or market discount previously
includible in the Certificateholder's gross income, and reduced by the portion
of the basis of the Certificate allocable to payments on the Certificate
previously received by the Certificateholder and any amortized premium. Subject
to the market discount rules, gain or loss on the sale or other disposition of a
Certificate will generally be capital gain or loss if the Certificate is held by
the Certificateholder as a capital asset. Capital gain or loss will be long-term
if the Certificate is held by the Certificateholder for more than one year and
otherwise will be short-term.
 
POSSIBLE CHARACTERIZATION OF THE ARRANGEMENT AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
 
     Although, as described above, it is the opinion of Tax Counsel that the
Certificates are properly characterized as debt of the Seller for Federal income
tax purposes, such opinion is not binding on the IRS or the courts and no
assurance can be given that this characterization would prevail. If the IRS were
to contend successfully that the Certificates were not debt obligations of the
Seller for Federal income tax purposes, the arrangement among the Seller and the
Certificateholders might be classified for Federal income tax purposes as either
a partnership (including a publicly traded partnership) or an association
taxable as a corporation that owns the Mortgage Loans.
 
     If the Certificates were treated as interests in a partnership, the
partnership would probably be treated as a "publicly traded partnership." A
publicly traded partnership is taxed in the same manner as a corporation unless
at least 90% of its gross income consists of specified types of "qualifying
income." Such qualifying income includes, among other things, "interest" that is
not "derived in the conduct of a financial or insurance business." If a deemed
partnership between the Seller and the Certificateholders were to qualify for
the foregoing exception from taxation as a corporation, the deemed partnership
would not be subject to Federal income tax but each item of income, gain, loss,
and deduction generated as a result of the ownership of the Mortgage Loans by
the partnership would be passed through to the Seller and the Certificateholders
as partners in such a partnership according to their respective interests
therein.
 
     The income reportable by the Certificateholders as partners could differ
from the income reportable by the Certificateholders as holders of debt
obligations of the Seller. For example, a cash basis Certificateholder might be
required to report income when it accrued to the partnership rather than when it
is received by the Certificateholder. Moreover, an individual's share of
expenses of the partnership would be miscellaneous itemized deductions that, in
the aggregate, are allowed as deductions only to the extent they exceed two
percent of the individual's adjusted gross income, and an individual
Certificateholder's deduction for such holder's share of expenses of the
partnership would be subject to reduction under Section 68 of the Code if the
individual's adjusted gross income exceeded certain limits. As a result, the
individual might be taxed on a greater amount of income than the stated rate on
the Certificates.
 
                                       80
<PAGE>   83
 
     If, alternatively, the arrangement created by the Agreement were treated as
either an association taxable as a corporation or a "publicly traded
partnership" taxable as a corporation, the resulting entity may be subject to
Federal income taxes at corporate tax rates on its taxable income from the
Mortgage Loans. Because the Seller will not provide any indemnity for income
taxes such a tax might result in reduced distributions to Certificateholders and
Certificateholders might be liable for a share of such a tax. Moreover,
distributions by the entity would probably not be deductible in computing the
entity's taxable income and all or part of the distributions to
Certificateholders would generally be treated as dividend income to the
Certificateholders.
 
     Since the Seller will treat the Certificates as indebtedness for Federal
income tax purposes, the Seller will not comply with the tax reporting
requirements that would apply under these alternative characterizations of the
Certificates.
 
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
 
     In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated federal
income tax return with another corporation. Any entity (or a portion of any
entity) will be a taxable mortgage pool if (i) substantially all of its assets
consist of debt instruments, more than 50% of which are real estate mortgages,
(ii) the entity is the obligor under debt obligations with two or more
maturities, and (iii) under the terms of the entity's debt obligations (or an
underlying arrangement), payments on such debt obligations bear a relationship
to payments on the debt instruments held by the entity.
 
   
     Tax Counsel is of the opinion that the arrangement created by the Agreement
will not be a taxable mortgage pool under Section 7701(i) of the Code because,
in Tax Counsel's opinion, such arrangement should not be viewed as the obligor
under debt obligations with two or more maturities, payments on which
obligations bear a relationship to payments on the Mortgage Loans.
    
 
     The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully that the arrangement created by the Agreement
is a taxable mortgage pool, such arrangement would be subject to Federal
corporate income tax on its taxable income generated by ownership of the
Mortgage Loans. Such a tax might reduce amounts available for distributions to
Certificateholders. The amount of such a tax would depend upon whether
distributions to Certificateholders would be deductible as interest expense in
computing the taxable income of such an arrangement as a taxable mortgage pool.
 
FOREIGN INVESTORS
 
   
     Subject to the discussion of backup withholding below, and assuming the
Certificates represent debt obligations of the Seller for Federal income tax
purposes, (i) payments of principal and interest (including OID) paid to a
nonresident alien individual, foreign corporation, foreign partnership or
foreign estate or trust (a "Foreign Holder") will be exempt from withholding of
U.S. Federal income tax, provided that in the case of interest, (a) the
beneficial owner of the Certificate does not actually or constructively own ten
percent or more of the total combined voting power of all classes of stock of
the Seller entitled to vote, (b) the beneficial owner of the Certificate is not
a controlled foreign corporation that is related, directly or indirectly, to the
Seller through stock ownership, and (c) either (A) the beneficial owner of the
Certificate certifies to the Seller or its agent, under penalties of perjury,
that it is a Foreign Holder and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"Financial Institution"), and holds the Certificates in such capacity, certifies
to the Seller or its agent, under penalties of perjury, that such statement has
been received from the beneficial owner by it or by a Financial Institution
between it and the beneficial owner and furnishes the Seller or its agent with a
copy thereof; and (ii) a Foreign Holder of a Certificate will generally not be
subject to withholding of U.S. Federal income tax on any gain realized upon the
sale or other disposition of a Certificate. The foregoing discussion assumes
that the Foreign Holder is not engaged in a trade or business in the U.S.
    
 
   
     On April 15, 1996, proposed Treasury Regulations (the "1996 Proposed
Regulations") were issued which, if adopted in final form, could affect the U.S.
taxation of Foreign Holders. The 1996 Proposed Regulations are generally
proposed to be effective for payments after December 31, 1997, regardless of the
    
 
                                       81
<PAGE>   84
 
   
issue date of the instrument with respect to which such payments are made,
subject to certain transition rules. It cannot be predicted at this time whether
the 1996 Proposed Regulations will become effective as proposed or what, if any,
modifications may be made to them. Prospective investors are urged to consult
their tax advisors with respect to the effect the 1996 Proposed Regulations may
have if adopted.
    
 
   
     If the IRS were to contend successfully that the Certificates represent
interests in a partnership (not taxable as a corporation), a Foreign Holder
might be required to file a U.S. individual or corporate income tax return and
pay tax on its share of partnership income at regular U.S. rates, including the
branch profits tax in the case of a corporation, and would be subject to
withholding tax on its share of partnership income. If the Certificates were
recharacterized as interests in an association taxable as a corporation or a
"publicly traded partnership" taxable as a corporation, to the extent
distributions under the Agreement were treated as dividends, a nonresident alien
individual or foreign corporation would generally be subject to withholding tax
on the gross amount of such dividends at the rate of 30% (or lower rate as
provided by an applicable treaty). In either case, and assuming the Certificates
are recharacterized as partnership interests or equity interests in a
corporation, a Foreign Holder might be subject to Federal income tax on any gain
from the sale of the Certificates.
    
 
   
     The Small Business Job Protection Act of 1996 (the "Act") changed the
definition of a "foreign" trust generally for tax years beginning after December
31, 1996. Under prior law, the definition was based on whether a trust's foreign
source income would be subject to U.S. tax. The new definition contains two
objective requirements which, if satisfied, will cause a trust to be treated as
a U.S. trust. It looks first to whether the trust's administration is subject to
a U.S. court's "primary supervision" and second to whether U.S. fiduciaries
control all substantial decisions of the trust. If both these requirements are
met, the trust is a U.S. trust. All other trusts are "foreign" trusts. A U.S.
trust that becomes a foreign trust (including by reason of the Act) may be
subject to federal tax on the deemed transfer of its assets (including the
Certificates) as a result of this change in status.
    
 
INFORMATION REPORTING AND BACKUP WITHHOLDING
 
     The Master Servicer will be required to report annually to the IRS, and to
each Certificateholder of record, the amount of interest paid (and OID accrued,
if any) on the Certificates (and the amount of interest withheld for Federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificateholders and the IRS will receive tax and other
information from Participants and Indirect Participants rather than from the
Master Servicer. (The Master Servicer, however, will respond to requests for
necessary information to enable Participants, Indirect Participants and certain
other persons to complete their reports.) Each non-exempt Certificateholder will
be required to provide, under penalty of perjury, a certificate on IRS Form W-9
containing his or her name, address, correct Federal taxpayer identification
number and a statement that he or she is not subject to backup withholding.
Should a non-exempt Certificateholder fail to provide the required
certification, the Participants or Indirect Participants (or the Master Servicer
or Paying Agent) will be required to withhold 31% of the interest (and
principal) otherwise payable to the holder, and remit the withheld amount to the
IRS as a credit against the holder's Federal income tax liability.
 
     ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CERTIFICATES.
 
STATE AND LOCAL TAX CONSEQUENCES
 
     General.  State tax consequences to each Certificateholder will depend upon
the provisions of the state tax laws to which the Certificateholder is subject.
Most states modify or adjust the taxpayer's Federal adjusted gross or taxable
income to arrive at the amount of income potentially subject to state tax.
Individuals generally are subject to state tax on 100% of such state-modified
income in the state in which they are residents, and to tax in states in which
they are not residents on income earned in or derived from sources in those
states. Corporations and other business taxpayers generally pay state tax only
on that portion of state-modified
 
                                       82
<PAGE>   85
 
income assigned to the taxing state under the state's own apportionment and
allocation rules. Because each state's tax law varies, it is impossible to
predict the tax consequences to the Certificateholders in all of the state
taxing jurisdictions in which they are already subject to tax.
 
     Illinois.  The activities to be undertaken by the Master Servicer and the
Subservicers in servicing and collecting the Mortgage Loans will take place in
Illinois. Illinois imposes an income tax on corporations doing business in
Illinois measured by their net income apportioned to Illinois. This discussion
is based upon present provisions of Illinois law and regulations, and applicable
judicial or ruling authority, all of which are subject to change, which change
may be retroactive. No ruling on any of the issues discussed below will be
sought from the Illinois Department of Revenue.
 
   
     Assuming the Certificates are treated as indebtedness for Federal income
tax purposes, this treatment will also apply for Illinois tax purposes. Pursuant
to this treatment, Certificateholders not otherwise subject to Illinois tax will
not become subject to such tax solely because of their ownership of the
Certificates. Certificateholders already subject to taxation in Illinois as
corporations, however, could be required to pay tax on the income generated from
ownership of these Certificates.
    
 
   
     In the alternative, if the Certificates were treated as interests in a
partnership (not taxable as a corporation) for Federal income tax purposes, the
same treatment should also apply for Illinois tax purposes. In such case,
Illinois could view the partnership as doing business in Illinois, and the
entity could be subject to Illinois personal property replacement income taxes.
Such taxes could result in reduced distributions to Certificateholders. Also, a
Certificateholder not otherwise subject to taxation in Illinois could become
subject to Illinois income taxes as a result of its mere ownership of
Certificates.
    
 
   
     If the Certificates were instead treated as ownership interests in an
association taxable as a corporation or a "publicly traded partnership" taxable
as a corporation, then the entity could be subject to Illinois income tax. Such
taxes could result in reduced distributions to Certificateholders. A
Certificateholder not otherwise subject to tax in Illinois would not become
subject to Illinois taxes as a result of its mere ownership of such an interest.
    
 
     Because each state's income tax laws vary, it is impossible to predict the
income tax consequences to the Certificateholders in all of the state taxing
jurisdictions in which they are already subject to tax. There can be no
assurance that other states will not claim that the Master Servicer or
Subservicers have not undertaken activities in such states. If such a claim were
made, no assurances can be given as to whether the Certificates would be treated
as indebtedness by any particular state. Certificateholders are urged to consult
their own tax advisors with respect to state taxes.
 
                              ERISA CONSIDERATIONS
 
GENERAL
 
     Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan from engaging in certain
transactions involving "plan assets" with persons that are "parties in
interests" under ERISA or "disqualified persons" under the Code with respect to
the Plan. A violation of these "prohibited transactions" rules may generate
excise tax and other liabilities under ERISA and the Code for such person. For
example, a prohibited transaction would arise, unless an exemption were
available, if the Certificates were viewed as debt of the Seller and the Seller
were a disqualified person or party in interest with respect to a plan that
acquired Certificates.
 
     Moreover, additional prohibited transactions could arise if the assets of
the Trust were deemed to constitute assets of any plan that owned Certificates.
The Department of Labor ("DOL") has issued a final regulation (the "Plan Assets
Regulation") concerning the definition of what constitutes the "plan assets" of
an employee benefit plan subject to ERISA or the Code, or an individual
retirement account ("IRA") (collectively referred to as "Benefit Plans"). Under
the Plan Assets Regulation the assets and properties of certain corporations,
partnerships and certain other entities in which a Benefit Plan acquires an
"equity interest" could be deemed to hold plan assets of each Benefit Plan
unless one of the exceptions under the Plan Assets Regulations is applicable to
the Trust.
 
                                       83
<PAGE>   86
 
AVAILABILITY OF EXEMPTIONS FOR CERTIFICATES
 
   
     The Plan Assets Regulation contains an exception (the "Publicly-Offered
Securities Exemption") that provides that if a Benefit Plan acquires a
"publicly-offered security", the issuer of the security is not deemed to hold
plan assets. A publicly-offered security is a security that is (i) freely
transferable, (ii) part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another and (iii) either is (A)
part of a class of securities registered under Section 12(g) of the 1934 Act or
(B) sold to the plan as part of an offering of securities to the public pursuant
to an effective registration statement under the Securities Act and the class of
securities of which such security is a part is registered under the 1934 Act
within 120 days (or such later time as may be allowed by the Commission) after
the end of the fiscal year of the issuer during which the offering of such
securities to the public occurred.
    
 
   
     It is anticipated that the Certificates will meet the criteria of the
Publicly-Offered Securities Exemptions as set forth above. The Underwriters
expect (although no assurance can be given) that the Certificates will be held
by at least 100 independent persons at the conclusion of the offering; there are
no restrictions imposed on the transfer of the Certificates; and the
Certificates will be sold as part of an offering pursuant to an effective
registration statement under the Securities Act, and then will be timely
registered under the 1934 Act. The Underwriters will notify the Trustee as to
whether or not the Certificates will be held by 100 independent persons at the
conclusion of the offering. The Seller will not, however, determine whether the
100-investor requirement of the Publicly-Offered Securities Exemption is
satisfied with respect to the Certificates.
    
 
   
     If the Certificates fail to meet the criteria of the Publicly-Offered
Securities Exemption and the Trust's assets are deemed to include assets of
Benefit Plans that are holders of Certificates, transactions involving the Trust
and "parties in interest" or "disqualified persons" with respect to such plans
might be prohibited under Section 406 of ERISA and Section 4975 of the Code
unless another ERISA prohibited transaction exemption is applicable. Thus, for
example, if a participant in any Benefit Plan is an obligor or guarantor of one
of the Mortgage Loans under DOL interpretations the purchase of the Certificates
by such plan could constitute a prohibited transaction. There are five class
exemptions issued by the DOL that may apply in such event; DOL Prohibited
Transaction Exemption 84-14 (Class Exemption for Certain Transactions Determined
by a Qualified Professional Asset Manager), 91-38 (Class Exemption for Certain
Transactions Involving Bank Collective Investment Funds), 90-1 (Class Exemptions
for Transactions Involving Insurance Company Pooled Separate Accounts), 95-60
(Class Exemption for Transactions Involving Insurance Company General Accounts)
and 96-23 (Class Exemption for Certain Transactions Determined by an In-house
Asset Manager). There is no assurance that these exemptions, even if all of the
conditions specified therein are satisfied, will apply to all transactions
involving the Trust's assets.
    
 
REVIEW BY BENEFIT PLAN FIDUCIARIES
 
     Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is especially important that any Benefit
Plan fiduciary who proposes to cause a Benefit Plan to purchase Certificates
should consult with its own counsel with respect to the potential consequences
under ERISA and the Code of the Benefit Plan's acquisition and ownership of
Certificates. Assets of a Benefit Plan should not be invested in the
Certificates unless it is clear that the assets of the Trust will not be plan
assets or unless it is clear that a prohibited transaction class exemption will
apply and exempt all potential prohibited transactions.
 
                        LEGAL INVESTMENT CONSIDERATIONS
 
     Although, as a condition to their issuance, the Certificates will be rated
in the highest rating category by the Rating Agencies, the Certificates will not
constitute "mortgage related securities" for purposes of SMMEA because not all
the mortgages securing the Mortgage Loans are first mortgages. Accordingly, many
institutions with legal authority to invest in comparably rated securities based
on first mortgage loans may not be legally authorized to invest in the
Certificates, which because they evidence interests in a pool that includes
second mortgage loans are not "mortgage related securities" under SMMEA.
 
                                       84
<PAGE>   87
 
                                  UNDERWRITING
 
   
     Subject to the terms and conditions set forth in the Underwriting Agreement
dated November   , 1996 (the "Underwriting Agreement") among the Seller, the
Subservicers, HFC and the Underwriters named below (the "Underwriters"), the
Seller has agreed to sell to the Underwriters and each of the Underwriters has
agreed to purchase, the principal amount of the Certificates set forth opposite
its name below.
    
 
<TABLE>
<CAPTION>
                                                                                PRINCIPAL AMOUNT
                                UNDERWRITERS                                    OF CERTIFICATES
- -----------------------------------------------------------------------------   ----------------
<S>                                                                             <C>
Morgan Stanley & Co. Incorporated............................................     $
                                                                                  ------------
Total........................................................................     $
                                                                                  ============
</TABLE>
 
   
     The Underwriters propose to offer all of the Certificates in part directly
to retail and institutional purchasers at the initial public offering prices set
forth on the cover page of this Prospectus and in part to certain securities
dealers at such prices less concessions not to exceed 0.  % of the Original
Certificate Principal Balance. The Underwriters may allow, and such dealers may
reallow, concessions not to exceed      % of the Original Certificate Principal
Balance to certain brokers and dealers. After the Certificates are released for
sale to the public, the offering price and other selling terms may be varied by
the Underwriters.
    
 
     The Seller and HFC have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
 
   
     The Certificates are a new issue of securities with no established trading
market. The Seller has been advised that the Underwriters intend to make a
market in the Certificates but are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Certificates.
    
 
   
     Application will be made to list the Certificates on the Luxembourg Stock
Exchange.
    
 
                                    EXPERTS
 
   
     The financial statements of Capital Markets Assurance Corporation as of
December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995 are attached hereto as Annex II and have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, as set forth in
their report thereon and are included in reliance upon the authority of said
firm as experts in accounting and auditing.
    
 
   
     The report of KPMG Peat Marwick LLP covering the financial statements noted
above refers to Capital Markets Assurance Corporation's adoption at December 31,
1993 of Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
    
 
                                 LEGAL MATTERS
 
   
     Certain legal matters relating to the Certificates will be passed upon for
the Seller by John W. Blenke, Vice President -- Corporate Law for Household
International, Inc., the parent company of HFC and the Seller, and by Sidley &
Austin, Chicago, Illinois, special counsel to the Seller. In addition, Sidley &
Austin has passed upon the federal income tax consequences with respect to the
Certificates and the legal characterization of certain aspects of the
transaction between the Subservicers and the Seller, the Subservicers and the
Trust, and the Seller and the Trust. Certain legal matters will be passed upon
for the Underwriters by Brown & Wood LLP, New York, New York. Certain legal
matters will be passed upon for the Certificate Insurer by Shaw, Pittman, Potts
& Trowbridge, New York, New York. As of the date of this Prospectus,
    
 
                                       85
<PAGE>   88
 
Mr. Blenke is a full-time employee and an officer of Household International,
Inc. and beneficially owns, and holds options to purchase, shares of Common
Stock of Household International, Inc.
 
   
                             ADDITIONAL INFORMATION
    
 
   
     Application will be made to list the Certificates on the Luxembourg Stock
Exchange. The legal notice relating to the issue of the Certificates and copies
of the respective constitutional documents of the Trust, the Seller and the
Certificate Insurer will be lodged with the Chief Registrar of the District
Court in Luxembourg ("Grettier en Chef du Tribunal d'Arrondissement de et a
Luxembourg"), where such documents may be inspected and copies thereof obtained.
The Seller will undertake to maintain a paying agent in Luxembourg so long as
the Certificates are listed on the Luxembourg Stock Exchange.
    
 
   
     All consents, approvals, authorizations or other orders of all regulatory
authorities required by the Seller, the Trust and the Certificate Insurer under
the laws of their respective jurisdictions have been given for the issue of the
Certificates and for the Trust and the Certificate Insurer to undertake and
perform their respective obligations under the Agreement, the Policy and the
Certificates.
    
 
   
     The creation and issue of the Certificates has been authorized by a
resolution of the Board of Directors of the Seller on November 11, 1996.
    
 
   
     The Trust, the Seller, and the Certificate Insurer are not involved in any
litigation, arbitration or administrative proceedings relating to claims or
amounts which are material in the context of the issue of the Certificates nor,
so far as they are aware, are any such litigation, arbitration or administration
proceedings pending or threatened.
    
 
   
     Since December 31, 1995, there has been no material adverse change in the
financial position or prospects of the Seller or the Certificate Insurer.
    
 
   
     The Certificates have been accepted for clearance through Euroclear and
Cedel with a common code of 00-. The ISIN (International Securities
Identification Number) for the Certificates is XS00-.
    
 
   
     Copies of the respective constitutional documents of the Seller and the
Certificate Insurer and copies of the Agreement (which sets out the terms and
conditions of the Certificates), the Policy and any notices or reports prepared
by the Master Servicer relating to the Trust may be inspected at, or may be
obtained from, so long as any of the Certificates are listed on the Luxembourg
Stock Exchange, the Luxembourg Paying Agent during the business hours of any
business day.
    
 
                                       86
<PAGE>   89
 
                             INDEX OF DEFINED TERMS
 
<TABLE>
<CAPTION>
                                                                                    PAGE(S)
                                                                                   ----------
<S>                                                                                <C>
</TABLE>
 
   
<TABLE>
<S>                                                                                <C>
1934 Act.........................................................................           3
Accelerated Principal Distribution Amount........................................      16, 55
Additional Balances..............................................................       4, 41
Adjustable Rate Mortgages........................................................           7
Administrative Charges...........................................................       8, 30
Agreement........................................................................        1, 4
Alternative Principal Distribution Amount........................................      17, 56
Bankruptcy Code..................................................................          28
Benefit Plans....................................................................          83
BIF..............................................................................          52
Business Day.....................................................................          54
CapMAC...........................................................................           7
Carryover Amount.................................................................      12, 57
CEDEL............................................................................          11
CEDEL Participants...............................................................          68
Certificate Insurer..............................................................        1, 7
Certificate Owners...............................................................           3
Certificate Principal Balance....................................................       6, 47
Certificate Rate.................................................................       5, 12
Certificateholders...............................................................          12
Certificateholders' Excess Interest..............................................      16, 55
Certificateholders' Floating Allocation Percentage...............................      15, 53
Certificateholders' Remaining Excess Interest....................................      16, 55
Certificates.....................................................................        1, 5
Charge Off Amount................................................................       5, 54
Charged Off Mortgage Loan........................................................       5, 54
Chase............................................................................          12
Citibank.........................................................................          12
Civil Relief Act.................................................................          75
Class A Certificates.............................................................        1, 5
Closing Date.....................................................................          12
Code.............................................................................          77
Collection Account...............................................................      14, 51
Collection Period................................................................       8, 56
Combined Exposure................................................................          61
Combined Loan-to-Value Ratio.....................................................       8, 34
Commission.......................................................................           2
Cooperative......................................................................          68
CPR..............................................................................          79
Credit Limit.....................................................................           9
Credit Line Agreements...........................................................       4, 34
Cut-Off Balances.................................................................           4
Cut-Off Date.....................................................................           4
Cut-Off Date Pool Balance........................................................          41
Cycle Date.......................................................................       8, 56
</TABLE>
    
 
                                       87
<PAGE>   90
 
   
<TABLE>
<CAPTION>
                                                                                    PAGE(S)
                                                                                   ----------
<S>                                                                                <C>
Defective Mortgage Loans.........................................................          49
Deficiency Amount................................................................          18
Depositary(ies)..................................................................      12, 66
Determination Date...............................................................  20, 51, 54
Distribution Date................................................................   1, 12, 54
DOL..............................................................................          83
DTC..............................................................................      3, A-1
due-on-sale......................................................................          76
Duff & Phelps....................................................................          42
Eligible Account.................................................................          52
Eligible Substitute Mortgage Loan................................................      21, 49
ERISA............................................................................          22
Euroclear........................................................................          11
Euroclear Operator...............................................................          68
Euroclear Participants...........................................................          68
FDIC.............................................................................           6
Financial Institution............................................................          81
Fixed Allocation Percentage......................................................      17, 53
Fixed Rate Mortgages.............................................................           7
Foreclosure Profit...............................................................          54
Foreign Holder...................................................................          81
Funding Account..................................................................   4, 14, 51
Funding Period...................................................................          15
Garn-St. Germain Act.............................................................          76
Global Certificates..............................................................          66
Global Securities................................................................         A-1
Guaranteed Principal Distribution Amount.........................................          18
HFC..............................................................................        1, 4
HFC Note.........................................................................          51
holders..........................................................................          12
Holdings.........................................................................          42
Index Rate.......................................................................          30
indirect participants............................................................          68
Initial Mortgage Loans...........................................................           4
Insurance Agreement..............................................................      18, 58
Interest Collections.............................................................      13, 53
Interest Period..................................................................      12, 57
Invested Amount..................................................................       5, 49
Investor Certificate Principal Balance...........................................           6
Investor Certificateholders......................................................          12
Investor Servicing Fee...........................................................          20
IRA..............................................................................          83
IRS..............................................................................          22
LIBOR............................................................................      12, 57
LIBOR Business Day...............................................................          57
Liquidated Mortgage Loan.........................................................       5, 55
Liquidation Loss Amount..........................................................      16, 55
Liquidation Proceeds.............................................................          55
</TABLE>
    
 
                                       88
<PAGE>   91
 
   
<TABLE>
<CAPTION>
                                                                                    PAGE(S)
                                                                                   ----------
<S>                                                                                <C>
Loan Rate........................................................................          30
Luxembourg Paying Agent..........................................................          69
Margin...........................................................................          30
Master Servicer..................................................................    1, 4, 28
Maximum Principal Distribution Amount............................................      17, 56
Minimum Monthly Payment..........................................................       8, 30
Moody's..........................................................................          27
Mortgages........................................................................           1
Mortgage Loan Schedule...........................................................          47
Mortgage Loans...................................................................        1, 4
Mortgaged Property...............................................................           4
net interest rate................................................................          44
Net Liquidation Proceeds.........................................................  13, 53, 62
Net Loan Rate....................................................................          12
Net Property Value...............................................................          32
OID..............................................................................          79
Opinion Letter...................................................................          78
Original Certificate Principal Balance...........................................       5, 46
Original Invested Amount.........................................................       5, 46
Overcollateralization Amount.....................................................      16, 55
Participants.....................................................................          68
Paying Agent.....................................................................          57
Permitted Investments............................................................          52
Plan.............................................................................          22
Plan Assets Regulation...........................................................          83
Policy...........................................................................        1, 4
Pool Balance.....................................................................       5, 54
Pool Date........................................................................       7, 34
Pool Factor......................................................................          46
Prepayment Assumption............................................................          79
Principal Collections............................................................      13, 53
Property Value...................................................................          32
publicly-offered securities......................................................          84
Publicly-Offered Securities Exemption............................................          84
Rapid Amortization Event.........................................................          58
Rapid Amortization Period........................................................      18, 57
Rating Agencies..................................................................          23
Receivables Purchase Agreement...................................................           9
Record Date......................................................................          54
Recovered Charge Off Amount......................................................          54
Reference Bank Rate..............................................................          57
Related Documents................................................................           7
Removed Balances.................................................................      10, 50
Replacement Certificates.........................................................          69
Required Overcollateralization Amount............................................      16, 55
Retransfer Deposit Amount........................................................      11, 48
Retransfer Notification Date.....................................................          50
Retransfer Price.................................................................      21, 66
</TABLE>
    
 
                                       89
<PAGE>   92
 
   
<TABLE>
<CAPTION>
                                                                                    PAGE(S)
                                                                                   ----------
<S>                                                                                <C>
Rules............................................................................          67
SAIF.............................................................................          52
Scheduled Principal Distribution Amount..........................................      17, 56
Securities Act...................................................................           2
Seller...........................................................................        1, 4
Seller Collections...............................................................          56
Seller Interest..................................................................    1, 6, 47
Senior Indebtedness Expenses.....................................................          32
Servicer Credit Facility.........................................................          51
Servicer Credit Facility Issuer..................................................          51
Servicing Fee....................................................................      20, 62
Servicing Termination Events.....................................................          64
SMMEA............................................................................          22
Special Foreclosed Mortgage Loan.................................................          50
Spread Account...................................................................      18, 59
Standard & Poor's................................................................          27
Subsequent Funding Mortgage Loans................................................           4
Subservicer......................................................................       6, 28
Tax Counsel......................................................................          78
Terms and Conditions.............................................................          68
Title V..........................................................................          77
Trust............................................................................        1, 4
Trust Balance....................................................................       5, 54
Trustee..........................................................................     1, 4, 7
Underwriters.....................................................................          85
Underwriting Agreement...........................................................          85
U.S. Person......................................................................     86, A-4
Window Period Loans..............................................................          76
</TABLE>
    
 
                                       90
<PAGE>   93
 
                                    ANNEX I
         GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
 
     Except in certain limited circumstances, the globally offered Revolving
Home Equity Loan Asset Backed Certificates, Series 1996-2 (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of The Depository Trust
Company ("DTC"), CEDEL or Euroclear. The Global Securities will be tradeable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
 
     Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
 
     Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset Backed
Certificates issues.
 
     Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
 
     Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
 
INITIAL SETTLEMENT
 
     All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
 
     Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
 
     Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
 
SECONDARY MARKET TRADING
 
     Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
 
     Trading between DTC Participants.  Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset Backed Certificates issues in same-day funds.
 
     Trading between CEDEL and/or Euroclear Participants.  Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
 
                                       A-1
<PAGE>   94
 
     Trading between DTC seller and CEDEL or Euroclear purchaser.  When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of (i) the actual number of days in
such accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
 
     CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
 
     As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance the settlement.
Under this procedure, CEDEL Participants or Euroclear Participants purchasing
Global Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
 
     Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
 
     Trading between CEDEL or Euroclear seller and DTC purchaser.  Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of (i) the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be backed-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account,
 
                                       A-2
<PAGE>   95
 
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
 
     Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
 
     (a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
 
     (b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
 
     (c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
 
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
 
     A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
 
     Exemption for non-U.S. Persons (Form W-8).  Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
 
     Exemption for non-U.S. Persons with effectively connected income (Form
4224).  A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
 
     Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001).  Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner or
his agent.
 
     Exemption for U.S. Persons (Form W-9).  U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
 
     U.S. Federal Income Tax Reporting Procedure.  The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the
 
                                       A-3
<PAGE>   96
 
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
 
   
     The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate (or, for tax
years ending on or before December 31, 1996, a trust) the income of which is
includible in gross income for United States tax purposes, regardless of its
source or (iv) for tax years beginning after December 31, 1996 (unless earlier
elected), any trust if a court within the United States is able to exercise
primary jurisdiction over the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust.
    
 
   
     On April 15, 1996, proposed Treasury Regulations were issued which, if
adopted in final form, could affect the tax documentation requirements described
above. Prospective investors are urged to consult their tax advisors with
respect to the effect the proposed regulations may have if adopted.
    
 
   
     THIS SUMMARY DOES NOT DEAL WITH ALL ASPECTS OF UNITED STATES FEDERAL INCOME
TAX WITHHOLDING THAT MAY BE RELEVANT TO FOREIGN HOLDERS OF THE GLOBAL
SECURITIES. INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS FOR SPECIFIC
TAX ADVICE CONCERNING THEIR HOLDING AND DISPOSING OF THE GLOBAL SECURITIES.
    
 
                                       A-4
<PAGE>   97
 
[LOGO]
 
                                    ANNEX II
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
                              FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1994 AND 1993
                  (WITH INDEPENDENT AUDITORS' REPORT THEREON)
 
                                       F-1
<PAGE>   98
 
[PEAT MARWICK LETTERHEAD]
 
                          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, 1995 and 1994 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, 1995. 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, 1995 and 1994 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995 in conformity with generally accepted accounting principles.
 
As discussed in note 2, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," at December 31, 1993.
 
                                          [KPMG Peat Marwick LLP SIG]
 
January 25, 1996
 
[COPYWHITE]
 
                                       F-2
<PAGE>   99
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                                 BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31, 1995   DECEMBER 31, 1994
                                                            -----------------   -----------------
<S>                                                         <C>                 <C>
                                             ASSETS
INVESTMENTS:
Bonds at fair value (amortized cost $210,651 at December
  31, 1995 and $178,882 at December 31, 1994).............      $ 215,706            172,016
Short-term investments (at amortized cost which
  approximates fair value)................................         68,646              2,083
Mutual funds at fair value (cost $16,434 at December 31,
  1994)...................................................             --             14,969
                                                                 --------           --------
  Total investments.......................................        284,352            189,068
                                                                 --------           --------
Cash......................................................            344                 85
Accrued investment income.................................          3,136              2,746
Deferred acquisition costs................................         35,162             24,860
Premiums receivable.......................................          3,540              3,379
Prepaid reinsurance.......................................         13,171              5,551
Other assets..............................................          3,428              3,754
                                                                 --------           --------
  TOTAL ASSETS............................................      $ 343,133            229,443
                                                                 ========           ========
                              LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Unearned premiums.........................................      $  45,767             25,905
Reserve for losses and loss adjustment expenses...........          6,548              5,191
Ceded reinsurance.........................................          2,469              1,497
Accounts payable and other accrued expenses...............         10,844             10,372
Current income taxes......................................            136                 --
Deferred income taxes.....................................         11,303              3,599
                                                                 --------           --------
  Total liabilities.......................................         77,067             46,564
                                                                 --------           --------
STOCKHOLDER'S EQUITY:
Common stock..............................................         15,000             15,000
Additional paid-in capital................................        205,808            146,808
Unrealized appreciation (depreciation) on investments, net
  of tax..................................................          3,286             (5,499)
Retained earnings.........................................         41,972             26,570
                                                                 --------           --------
  Total stockholder's equity..............................        266,066            182,879
                                                                 --------           --------
  TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..............      $ 343,133            229,443
                                                                 ========           ========
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       F-3
<PAGE>   100
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                              STATEMENTS OF INCOME
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                               YEAR ENDED          YEAR ENDED          YEAR ENDED
                                            DECEMBER 31, 1995   DECEMBER 31, 1994   DECEMBER 31, 1993
                                            -----------------   -----------------   -----------------
<S>                                         <C>                 <C>                 <C>
REVENUES:
Direct premiums written....................     $  56,541             43,598              24,491
Assumed premiums written...................           935              1,064                 403
Ceded premiums written.....................       (15,992)           (11,069)             (3,586)
                                                 --------           --------            --------
  Net premiums written.....................        41,484             33,593              21,308
Increase in unearned premiums..............       (12,242)           (10,490)             (3,825)
                                                 --------           --------            --------
  Net premiums earned......................        29,242             23,103              17,483
Net investment income......................        11,953             10,072              10,010
Net realized capital gains.................         1,301                 92               1,544
Other income...............................         2,273                120                 354
                                                 --------           --------            --------
  Total revenues...........................        44,769             33,387              29,391
                                                 --------           --------            --------
EXPENSES:
Losses and loss adjustment expenses........         3,141              1,429                 902
Underwriting and operating expenses........        13,808             11,833              11,470
Policy acquisition costs...................         7,203              4,529               2,663
                                                 --------           --------            --------
  Total expenses...........................        24,152             17,791              15,035
                                                 --------           --------            --------
  Income before income taxes...............        20,617             15,596              14,356
                                                 --------           --------            --------
INCOME TAXES:
Current income tax.........................         2,113                865               1,002
Deferred income tax........................         3,102              2,843               2,724
                                                 --------           --------            --------
  Total income taxes.......................         5,215              3,708               3,726
                                                 --------           --------            --------
  NET INCOME...............................     $  15,402             11,888              10,630
                                                 ========           ========            ========
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       F-4
<PAGE>   101
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                       STATEMENTS OF STOCKHOLDER'S EQUITY
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                               YEAR ENDED          YEAR ENDED          YEAR ENDED
                                            DECEMBER 31, 1995   DECEMBER 31, 1994   DECEMBER 31, 1993
                                            -----------------   -----------------   -----------------
<S>                                         <C>                 <C>                 <C>
COMMON STOCK:
Balance at beginning of period.............     $  15,000             15,000              15,000
                                                 --------           --------            --------
  Balance at end of period.................        15,000             15,000              15,000
                                                 --------           --------            --------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period.............       146,808            146,808             146,808
Paid-in capital............................        59,000                 --                  --
                                                 --------           --------            --------
  Balance at end of period.................       205,808            146,808             146,808
                                                 --------           --------            --------
UNREALIZED (DEPRECIATION) APPRECIATION ON
  INVESTMENTS, NET OF TAX:
Balance at beginning of period.............        (5,499)             3,600                  --
Unrealized appreciation (depreciation) on
  investments..............................         8,785             (9,099)              3,600
                                                 --------           --------            --------
  Balance at end of period.................         3,286             (5,499)              3,600
                                                 --------           --------            --------
RETAINED EARNINGS:
Balance at beginning of period.............        26,570             14,682               4,052
Net income.................................        15,402             11,888              10,630
                                                 --------           --------            --------
  Balance at end of period.................        41,972             26,570              14,682
                                                 --------           --------            --------
  TOTAL STOCKHOLDER'S EQUITY...............     $ 266,066            182,879             180,090
                                                 ========           ========            ========
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       F-5
<PAGE>   102
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                            STATEMENTS OF CASH FLOWS
                             (DOLLAR IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                YEAR ENDED          YEAR ENDED          YEAR ENDED
                                             DECEMBER 31, 1995   DECEMBER 31, 1994   DECEMBER 31, 1993
                                             -----------------   -----------------   -----------------
<S>                                          <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................     $  15,402            11,888               10,630
                                                 ---------           --------             --------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
  Reserve for losses and loss adjustment
     expenses................................         1,357             1,429                  902
  Unearned premiums..........................        19,862            15,843                4,024
  Deferred acquisition costs.................       (10,302)           (9,611)              (9,815)
  Premiums receivable........................          (161)           (2,103)                (432)
  Accrued investment income..................          (390)             (848)                (110)
  Income taxes payable.......................         3,621             2,611                2,872
  Net realized capital gains.................        (1,301)              (92)              (1,544)
  Accounts payable and other accrued
     expenses................................           472             3,726                1,079
  Prepaid reinsurance........................        (7,620)           (5,352)                (199)
  Other, net.................................           992               689                1,201
                                                 ---------           --------             --------
     Total adjustments.......................         6,530             6,292               (2,022)
                                                 ---------           --------             --------
  NET CASH PROVIDED BY OPERATING
     ACTIVITIES..............................        21,932            18,180                8,608
                                                 ---------           --------             --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.....................      (158,830)          (77,980)            (139,061)
Proceeds from sales of investments...........        49,354            39,967               24,395
Proceeds from maturities of investments......        28,803            19,665              106,042
                                                 ---------           --------             --------
  NET CASH USED IN INVESTING ACTIVITIES......       (80,673)          (18,348)              (8,624)
                                                 ---------           --------             --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution.........................        59,000                --                   --
                                                 ---------           --------             --------
  NET CASH PROVIDED BY FINANCING
     ACTIVITIES..............................        59,000                --                   --
                                                 ---------           --------             --------
Net increase (decrease) in cash..............           259              (168)                 (16)
Cash balance at beginning of period..........            85               253                  269
                                                 ---------           --------             --------
  CASH BALANCE AT END OF PERIOD..............     $     344                85                  253
                                                 =========           ========             ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
Income taxes paid............................     $   1,450             1,063                  833
                                                 =========           ========             ========
</TABLE>
 
                See accompanying notes to financial statements.
 
                                       F-6
<PAGE>   103
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1995 AND 1994
 
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 guaranty 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 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 "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by S&P 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
 
          At December 31, 1993, the Company adopted the provisions of Statement
     of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
     Investments in Debt and Equity Securities." Under SFAS No. 115, the Company
     can classify its debt and marketable equity securities in one of three
     categories: trading, available-for-sale, or held-to-maturity. Trading
     securities are bought and held principally for the purpose of selling them
     in the near term. Held-to-maturity securities are those securities in which
     the Company has the ability and intent to hold the securities until
     maturity. All other securities not included in trading or held-to-maturity
     are classified as available-for-sale. As of December 31, 1995 and 1994, all
     of the Company's securities have been classified as available-for-sale.
 
 
                                       F-7
<PAGE>   104
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
          Available-for-sale securities are recorded at fair value. Fair value
     is 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.
 
          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) 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 year ended December 31, 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. 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 based on expected levels of defaults resulting from credit
     failures on currently insured issues. This SLR is based on estimates of the
     portion of earned premiums required to cover those claims.
 
 
                                       F-8
<PAGE>   105
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
          A case basis loss reserve is established for insured obligations when,
     in the judgement 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.
 
          Management believes that the current level of reserves is adequate to
     cover the estimated liability for claims and the related adjustment
     expenses with respect to financial guaranties issued by CapMAC. The
     establishment of the appropriate level of loss reserves is an inherently
     uncertain process involving numerous estimates and subjective judgments by
     management, and therefore there can be no assurance that losses in CapMAC's
     insured portfolio will not exceed the loss reserves.
 
     F) DEPRECIATION
 
          Leasehold improvements, furniture and fixtures are being 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.
 
     H) RECLASSIFICATIONS
 
          Certain prior year balances have been reclassified to conform to the
     current year presentation.
 
 
                                       F-9
<PAGE>   106
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
3) INSURED PORTFOLIO
 
     At December 31, 1995 and 1994, the principal amount of financial
obligations insured by CapMAC was $16.9 billion and $11.6 billion, respectively,
and net of reinsurance (net principal outstanding), was $12.6 billion and $9.4
billion, respectively, with a weighted average life of 6.0 years and 5.0 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, 1995 and 1994, the statutory qualified capital was
approximately $240 million and $170 million, respectively.
 
<TABLE>
<CAPTION>
                                                             NET PRINCIPAL OUTSTANDING
                                                      ----------------------------------------
                                                                                DECEMBER 31,
                                                      DECEMBER 31, 1995             1994
                                                      -----------------       ----------------
            TYPE OF OBLIGATIONS INSURED               AMOUNT        %         AMOUNT       %
- ----------------------------------------------------  -------     -----       ------     -----
                                                                   $ IN MILLIONS
<S>                                                   <C>         <C>         <C>        <C>
Consumer receivables................................  $ 6,959      55.1       $4,740      50.4
Trade and other corporate obligations...............    4,912      38.9        4,039      43.0
Municipal/government obligations....................      757       6.0          618       6.6
                                                      -------     -----       ------     -----
     TOTAL..........................................  $12,628     100.0       $9,397     100.0
                                                      =======     =====       ======     =====
</TABLE>
 
     At December 31, 1995, approximately 85% 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 DECEMBER 31, 1995       YEAR ENDED DECEMBER 31, 1994       YEAR ENDED DECEMBER 31, 1993
- ------------------------------     ------------------------------     ------------------------------
                        % OF                               % OF                               % OF
        NAME          REVENUES             NAME          REVENUES             NAME          REVENUES
- --------------------- --------     --------------------- --------     --------------------- --------
<S>                   <C>          <C>                   <C>          <C>                   <C>
Citicorp                15.2       Citicorp                16.3       Citicorp                13.7
                                                                      Merrill Lynch & Co.     14.1
</TABLE>
 
 
                                      F-10
<PAGE>   107
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4) INVESTMENTS
 
     At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. 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, 1995 and
1994 were as follows ($ in thousands):
 
<TABLE>
<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>
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 1994
                                                    --------------------------------------------------
                                                                   GROSS         GROSS       ESTIMATED
                                                    AMORTIZED    UNREALIZED    UNREALIZED      FAIR
          SECURITIES AVAILABLE-FOR-SALE               COST         GAINS         LOSSES        VALUE
- --------------------------------------------------  ---------    ----------    ----------    ---------
<S>                                                 <C>          <C>           <C>           <C>
U.S. Treasury obligations.........................  $   4,295         --            153         4,142
Mortgage-backed securities of U.S. government
  instrumentalities and agencies..................     40,973         --          2,986        37,987
Obligations of states, municipalities and
  political subdivisions..........................    128,856        364          3,994       125,226
Corporate and asset-backed securities.............      6,841         15            112         6,744
Mutual funds......................................     16,434         --          1,465        14,969
                                                     --------      -----            ---       -------
     TOTAL........................................  $ 197,399        379          8,710       189,068
                                                     ========      =====            ===       =======
</TABLE>
 
     The Company's investment in mutual funds in 1994 represents an investment
in an open-end management investment company which invests primarily in
investment-grade fixed-income securities denominated in foreign and United
States currencies.
 
 
                                      F-11
<PAGE>   108
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 by contractual maturity are shown below ($ in
thousands):
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31, 1995
                                                                         -----------------------
                                                                         AMORTIZED    ESTIMATED
                     SECURITIES AVAILABLE-FOR-SALE                         COST       FAIR VALUE
- -----------------------------------------------------------------------  ---------    ----------
<S>                                                                      <C>          <C>
Less than one year to maturity.........................................  $   5,569        5,572
One to five years to maturity..........................................     37,630       38,553
Five to ten years to maturity..........................................     99,567      102,264
Greater than ten years to maturity.....................................     35,903       37,101
                                                                          --------      -------
  Sub-total............................................................    178,669      183,490
Mortgage-backed securities.............................................    100,628      100,862
                                                                          --------      -------
     TOTAL.............................................................  $ 279,297      284,352
                                                                          ========      =======
</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 $49
million, $40 million and $24 million in 1995, 1994 and 1993, respectively. Gross
realized capital gains of $1,320,000, $714,000 and $1,621,000, and gross
realized capital losses of $19,000, $622,000 and $77,000 were realized on those
sales for the years ended December 31, 1995, 1994 and 1993, respectively.
 
     Investments include bonds having a fair value of approximately $3,985,000
and $3,873,000 (amortized cost of $3,970,000 and $4,011,000) which are on
deposit at December 31, 1995 and 1994, 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
                                           DECEMBER 31, 1995    DECEMBER 31, 1994    DECEMBER 31, 1993
                                           -----------------    -----------------    -----------------
                                                                 $ IN THOUSANDS
<S>                                        <C>                  <C>                  <C>
Bonds....................................       $11,105                9,193                7,803
Short-term investments...................         1,245                  484                  572
Mutual funds.............................          (162)                 579                1,801
Investment expenses......................          (235)                (184)                (166)
                                                -------               ------               ------
     TOTAL...............................       $11,953               10,072               10,010
                                                =======               ======               ======
</TABLE>
 
 
                                      F-12
<PAGE>   109
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The change in unrealized appreciation (depreciation) on available-for-sale
securities is included in a separate component of stockholder's equity as shown
below:
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED           YEAR ENDED
                                                            DECEMBER 31, 1995    DECEMBER 31, 1994
                                                            -----------------    -----------------
                                                                        $ IN THOUSANDS
<S>                                                         <C>                  <C>
Balance at beginning of period............................       $(5,499)               3,600
Change in unrealized appreciation (depreciation)..........        13,386              (13,786)
Income tax effect.........................................        (4,601)               4,687)
                                                                 -------              -------
Net change................................................         8,785               (9,099)
                                                                 -------              -------
     BALANCE AT END OF PERIOD.............................       $ 3,286               (5,499)
                                                                 =======              =======
</TABLE>
 
     No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 10% of stockholder's equity as of December
31, 1995.
 
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
                                           DECEMBER 31, 1995    DECEMBER 31, 1994    DECEMBER 31, 1993
                                           -----------------    -----------------    -----------------
                                                                 $ IN THOUSANDS
<S>                                        <C>                  <C>                  <C>
Balance at beginning of period...........       $24,860               15,249                5,434
Additions................................        17,505               14,140               12,478
Amortization (policy acquisition
  costs).................................        (7,203)              (4,529)              (2,663)
                                                -------               ------               ------
     BALANCE AT END OF PERIOD............       $35,162               24,860               15,249
                                                =======               ======               ======
</TABLE>
 
6) EMPLOYEE BENEFITS
 
     On June 25, 1992, CapMAC entered into a Service Agreement with CapMAC
Financial Services, Inc. ("CFS"), which was then a newly formed wholly owned
subsidiary of Holdings. Under the Service Agreement, CFS has agreed to provide
various services, including underwriting, reinsurance, data processing and other
services to CapMAC in connection with the operation of CapMAC's insurance
business. CapMAC pays CFS an arm's length 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 $13,484,000,
$11,081,000 and $9,789,000 in 1995, 1994 and 1993, respectively.

     CFS maintains an incentive compensation plan for its employees. The plan is
an annual discretionary bonus award based upon Holdings' and an individual's
performance. CFS also has a health and welfare plan and a 401(k) plan to cover
substantially all of its employees. CapMAC reimburses CFS for all out-of-pocket
expenses incurred by CFS in providing services to CapMAC, including awards given
under the incentive compensation plan and benefits provided under the health and
welfare plan. For the years ended December 31, 1995, 1994 and 1993, the Company
had provided approximately $7,804,000, $5,253,000 and $3,528,000, respectively,
for the annual discretionary bonus plan.
 
 
                                      F-13
<PAGE>   110
     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. The cash amount will be 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
 
     On June 25, 1992, Holdings adopted 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"). The ESOP Trust
purchased 750,000 shares at $13.33 per share of Holdings' stock. The ESOP Trust
financed its purchase of common stock with a loan from Holdings in the amount of
$10 million. The ESOP loan is evidenced by a promissory note delivered to
Holdings. An amount representing unearned employee compensation, equivalent in
value to the unpaid balance of the ESOP loan, is recorded as a deduction from
stockholder's equity (unallocated ESOP shares).
 
     CFS is required to make contributions to the ESOP Trust, which enables the
ESOP Trust to service its loan to Holdings. The ESOP expense is calculated using
the shares allocated method. Shares are released for allocation to the
participants and held in trust for the employees based upon the ratio of the
current year's principal and interest payment to the sum of principal and
interest payments estimated over the life of the loan. As of December 31, 1995
approximately 262,800 shares were allocated to the participants. Compensation
expense related to the ESOP was approximately $2,087,000, $2,086,000 and
$1,652,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
 
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).

                                     F-14

<PAGE>   111
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following is a summary of the activity in the case basis loss reserve
account and the components of the liability for losses and loss adjustment
expenses ($ in thousands):
 
<TABLE>
<S>                                                                                   <C>
CASE BASIS LOSS RESERVE:
Net balance at January 1, 1995.....................................................   $   --
                                                                                      ------
INCURRED RELATED TO:
  Current year.....................................................................    2,473
  Prior years......................................................................       --
                                                                                      ------
Total incurred.....................................................................    2,473
                                                                                      ------
PAID INCURRED TO:
  Current year.....................................................................    1,853
  Prior years......................................................................       --
                                                                                      ------
Total paid.........................................................................    1,853
                                                                                      ------
Balance at December 31, 1995.......................................................      620
                                                                                      ------
Reinsurance recoverable............................................................       69
                                                                                      ------
Supplemental loss reserve..........................................................    5,859
                                                                                      ------
     TOTAL.........................................................................   $6,548
                                                                                      ======
</TABLE>
 
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 1995 and 34% in 1994 and 1993:
 
<TABLE>
<CAPTION>
                                                                                   YEAR ENDED
                                       YEAR ENDED            YEAR ENDED           DECEMBER 31,
                                    DECEMBER 31, 1995     DECEMBER 31, 1994           1993
                                    -----------------     -----------------     ----------------
                                    AMOUNT        %       AMOUNT        %       AMOUNT       %
                                    -------     -----     -------     -----     -------     ----
                                                           $ IN THOUSANDS
<S>                                 <C>         <C>       <C>         <C>       <C>         <C>
Expected tax expense computed at
  the statutory rate..............  $ 7,216      35.0     $ 5,303      34.0     $ 4,881     34.0
Increase (decrease) in tax
  resulting from:
  Tax-exempt interest.............   (2,335)    (11.3)     (1,646)    (10.6)     (1,140)    (7.9)
  Other, net......................      334       1.6          51       0.4         (15)    (0.1)
                                    -------     -----     -------     -----     -------     -----
     TOTAL INCOME TAX EXPENSE.....  $ 5,215      25.3     $ 3,708      23.8     $ 3,726     26.0
                                    =======     =====     =======     =====     =======     =====
</TABLE>
 
                                      F-15
<PAGE>   112
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31, 1995    DECEMBER 31, 1994
                                                            -----------------    -----------------
                                                                        $ IN THOUSANDS
<S>                                                         <C>                  <C>
DEFERRED TAX ASSETS:
Unrealized capital losses on investments.................        $    --               (2,833)
Deferred compensation....................................         (1,901)              (1,233)
Losses and loss adjustment expenses......................         (1,002)                (936)
Unearned premiums........................................           (852)                (762)
Other, net...............................................            (98)                (228)
                                                                 -------               ------
  Total gross deferred tax assets........................         (3,853)              (5,992)
                                                                 -------               ------
DEFERRED TAX LIABILITIES:
Deferred acquisition costs...............................         12,307                8,453
Unrealized capital gains on investments..................          1,769                   --
Deferred capital gains on investments....................            654                  726
Other, net...............................................            426                  412
                                                                 -------               ------
  Total gross deferred tax liabilities...................         15,156                9,591
                                                                 -------               ------
  NET DEFERRED TAX LIABILITY.............................        $11,303                3,599
                                                                 =======               ======
</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) 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, 1995, 1994 and 1993. No dividends could be
paid during these periods because CapMAC had negative earned surplus. Statutory
surplus at December 31, 1995 and 1994 was approximately $195,018,000 and
$139,739,000, 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 $9,000,000, $4,543,000 and $4,528,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. Statutory net income
differs from net income determined under GAAP principally due to deferred
acquisition costs, SLR and deferred income taxes.
 
                                      F-16
<PAGE>   113
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
11) COMMITMENTS AND CONTINGENCIES
 
     On January 1, 1988, the Company assumed from Citibank, N.A. the obligations
of a sublease agreement for space occupied in New York. On November 21, 1993,
the sublease was terminated and a new lease was negotiated which expires on
November 20, 2008. CapMAC has a lease agreement for its London office 
beginning October 1, 1992 and expiring October 1, 2002. As of December 31, 
1995, future minimum payments under the lease agreements are as follows:
 
<TABLE>
<CAPTION>
                                                                                    PAYMENT
                                                                                 --------------
                                                                                 $ IN THOUSANDS
<S>                                                                              <C>
1996..........................................................................      $  2,255
1997..........................................................................         2,948
1998..........................................................................         3,027
1999..........................................................................         3,476
2000 and thereafter...........................................................        36,172
                                                                                     -------
  TOTAL.......................................................................      $ 47,878
                                                                                     =======
</TABLE>
 
     Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,939,000, $2,243,000 and
$2,065,000, respectively.
 
     CapMAC has available a $100,000,000 standby corporate liquidity facility
(the "Liquidity Facility") 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. For the years ended
December 31, 1995, 1994 and 1993, no draws had been made under the Liquidity
Facility.
 
12) REINSURANCE
 
     In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts 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
                                        ------------------------------------------------------------
                                               1995                 1994                 1993
                                        ------------------    -----------------    -----------------
                                        WRITTEN     EARNED    WRITTEN    EARNED    WRITTEN    EARNED
                                        --------    ------    -------    ------    -------    ------
                                                               $ IN THOUSANDS
<S>                                     <C>         <C>       <C>        <C>       <C>        <C>
Direct...............................   $ 56,541    36,853     43,598    28,561     24,491    20,510
Assumed..............................        935       761      1,064       258        403       364
Ceded................................    (15,992)   (8,372)   (11,069)   (5,716)    (3,586)   (3,391)
                                        --------    ------    -------    ------     ------    ------
  NET PREMIUMS.......................   $ 41,484    29,242     33,593    23,103     21,308    17,483
                                        ========    ======    =======    ======     ======    ======
</TABLE>
 
 
                                      F-17
<PAGE>   114
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
     Although the reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders, it is the industry practice of insurers
for financial statement purposes to treat reinsured risks as though they were
risks for which the ceding insurer was only contingently liable. 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, 1995 and 1994, CapMAC had ceded loss reserves of $69,000 and $0,
respectively and had ceded unearned premiums of $13,171,000 and $5,551,000,
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. In the 1994 policy year, the agreement provided $5 million of loss
coverage in excess of the premium deposit amounts of $2 million retained in the
Lureco Trust Account. No losses were applied against the Lureco Trust Account or
ceded to the Lureco Treaty in 1994. The agreement was renewed for the 1995
policy year and provides $5 million of loss coverage in excess of the premium
deposit amount of $4.5 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.
 
     In addition to its capital (including statutory contingency reserves) and
other reinsurance available to pay claims under its insurance contracts, on June
25, 1992, CapMAC entered into a Stop Loss Reinsurance Agreement (the "Stop-loss
Agreement") with Winterthur Swiss Insurance Company ("Winterthur") which is
rated "AAA" by S&P and "Aaa" by Moody's. At the same time, CapMAC and Winterthur
also entered into a Quota Share Reinsurance Agreement (the "Winterthur Quota
Share Agreement") pursuant to which Winterthur had the right to reinsure on a
quota share basis 10% of each policy written by CapMAC.
 
     The Winterthur Stop-loss Agreement had an original term of seven years and
was renewable for successive one-year periods. In April 1995, Winterthur
notified CapMAC that it was canceling the Winterthur Stop-loss Agreement and the
Winterthur Quota Share Agreement effective June 30, 1996.
 
     CapMAC elected to terminate the Winterthur Stop-loss Agreement effective
November 30, 1995 and, on the same date, entered into a Stop-loss Reinsurance
Agreement with Mitsui Marine (the "Mitsui Stop-loss Agreement"). Under the
Mitsui Stop-loss Agreement, Mitsui 
 
                                      F-18
<PAGE>   115
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
Marine would 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.
 
     The Winterthur Quota Share Agreement was canceled November 30, 1995. On
January 1, 1996, CapMAC reassumed the liability, principally unearned premium,
for all policies reinsured by Winterthur. As a result, CapMAC reassumed
approximately $1.4 billion of principal insured by Winterthur as of December 31,
1995. In connection with the commutation, Winterthur will return the unearned
premiums as of December 31, 1995, net of ceding commission and federal excise
tax. Such amount is expected to total approximately $2.0 million.
 
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, 1995 and 1994. SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," define the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31, 1995           DECEMBER 31, 1994
                                                 -----------------------     -----------------------
                                                 CARRYING     ESTIMATED      CARRYING     ESTIMATED
                                                  AMOUNT      FAIR VALUE      AMOUNT      FAIR VALUE
                                                 --------     ----------     --------     ----------
                                                                   $ IN THOUSANDS
<S>                                              <C>          <C>            <C>          <C>
FINANCIAL ASSETS:
Investments....................................  $284,352       284,352       189,068       189,068
OFF-BALANCE-SHEET INSTRUMENTS:
Financial Guarantees Outstanding...............  $     --       147,840            --        93,494
Ceding Commission..............................  $     --        44,352            --        28,048
                                                 --------       -------       -------       -------
</TABLE>
 
     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments summarized above:
 
INVESTMENTS
 
     The fair values of fixed maturities and mutual funds are based upon quoted
market prices. The fair value of short-term investments approximates amortized
cost.
 
 
                                      F-19
<PAGE>   116
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, 1995 and 1994. The amount calculated is equivalent to the
consideration that would be paid 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 installment
premium 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 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 net reduction in installment
revenue, resulting in lower revenues.
 
14) CAPITALIZATION
 
     The Company's certificate of incorporation authorizes the issuance of
15,000,000 shares of common stock, par value $1.00 per share. Authorized, issued
and outstanding shares at December 31, 1995 and 1994 were 15,000,000 at $1.00
per share.
 
     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.


                                     F-20
<PAGE>   117
 
                     CAPITAL MARKETS ASSURANCE CORPORATION
 
                              FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1996
                                  (UNAUDITED)
 
                                      F-21
<PAGE>   118








                              INFORMATION TO COME










 
 
                                      F-22
<PAGE>   119
 
                                    PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
   
     Unless noted, set forth below is an estimate of the amount of fees and
expenses (other than underwriting discounts and commissions) to be incurred by
HFC Revolving Corporation (the "Seller") in connection with the issuance and
distribution of the Class A Certificates.
    
 
   
<TABLE>
<S>                                                                               <C>
SEC Filing Fee.................................................................   $235,264.55*
Trustee's Fees and Expenses....................................................     20,000.00
Legal Fees and Expenses........................................................    100,000.00
Accounting Fees and Expenses...................................................     60,000.00
Printing and Engraving Expenses................................................     90,000.00
Blue Sky Qualification and Legal Investment Fees and Expenses..................     20,000.00
Rating Agency Fees.............................................................    250,000.00
Miscellaneous..................................................................     24,735.45
                                                                                  -----------
          Total................................................................   $800,000.00
                                                                                  ===========
</TABLE>
    
 
- -------------------------
   
* Actual.
    
 
   
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
    
 
   
     (b) Exhibits
    
 
   
<TABLE>
        <S>      <C>   <C>
         1         --  Form of Underwriting Agreement.
         3.1       --  Certificate of Incorporation, as amended, of HFC Revolving Corporation
                       (the "Seller").
         3.2       --  By-Laws of the Seller.
         4         --  Form of Pooling and Servicing Agreement among the Seller, the Master
                       Servicer and the Trustee, including the form of the Certificate and other
                       exhibits thereto.
         5.1       --  Opinion of J. W. Blenke, Esq., Vice President--Corporate Law of Household
                       International, Inc.
         5.2       --  Opinion of Sidley & Austin with respect to characterization of certain
                       aspects of the transaction between the Subservicers and the Seller, the
                       Subservicers and the Trust, and the Seller and the Trust.
         8         --  Opinion of Sidley & Austin with respect to tax matters.
        10.1       --  Form of Receivables Purchase Agreement between the Seller as purchaser,
                       and Household Realty Corporation, Household Finance Corporation II,
                       Household Finance Corporation III, Household Finance Realty Corporation of
                       New York, Household Finance Corporation of California, Household Finance
                       Industrial Loan Company, Household Financial Center, Inc., Household
                       Finance Realty Corporation of Nevada, Household Industrial Loan Company of
                       Kentucky, Household Finance Industrial Loan Company of Iowa, Household
                       Finance Consumer Discount Company, Household Industrial Finance Company
                       and Mortgage One Corporation, as sellers (the "Subservicers").
        10.2       --  Form of Transfer Agreement between the Trustee and the Subservicers.
        10.3       --  Form of Certificate Insurance Policy.
        23.1       --  Consents of J. W. Blenke and Sidley & Austin are included in opinions
                       filed as Exhibits 5.1, 5.2 and 8 hereto, respectively.
        23.2*      --  Consent of KPMG Peat Marwick LLP, certified public accountants.
        24+        --  Powers of Attorney.
</TABLE>
    
 
- -------------------------
   
+ Previously filed.
    
   
* To be filed by Amendment.
    
 
                                      II-1
<PAGE>   120
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment to the Registration Statement
on Form S-11 (Nos. 333-12483 and 333-12483-01) to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Prospect Heights, and State
of Illinois, on the 12th day of November, 1996.
    
 
                                          HFC REVOLVING CORPORATION
 
   
                                          By:          /s/ J. W. Blenke
    
 
                                            ------------------------------------
   
                                                       J. W. Blenke,
    
   
                                                Vice President and Secretary
    
 
   
     Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form S-11 (Nos. 333-12483 and 333-12483-01) has
been signed below by the following persons in the capacities indicated on the
12th day of November, 1996.
    
 
   
<TABLE>
<CAPTION>
              SIGNATURE                                         TITLE
- -------------------------------------   -----------------------------------------------------
<C>                                     <S>
                  *                     President (Principal Executive Officer) and Director
- -------------------------------------
           (R. F. Elliott)
                  *                     Senior Vice President and Treasurer (Principal
- -------------------------------------   Financial Officer)
          (B. B. Moss, Jr.)
          /s/ J. W. Blenke              Vice President, Secretary and Director
- -------------------------------------
           (J. W. Blenke)
                  *                     Vice President, Assistant Treasurer and Director
- -------------------------------------
            (S. H. Smith)
                  *                     Senior Vice President and Controller (Principal
- -------------------------------------   Accounting Officer)
         (D. A. Schoenholz)
*By:       /s/  J. W. Blenke
- -------------------------------------
            J. W. Blenke
          Attorney-in-fact
</TABLE>
    
 
                                      II-2
<PAGE>   121
 
                               INDEX TO EXHIBITS
   
<TABLE>
<CAPTION>
                                                                                        SEQUENTIALLY
EXHIBIT                                                                                   NUMBERED
NUMBER                                                                                      PAGE
- ------                                                                                  ------------
<S>     <C>   <C>                                                                       <C>
 1        --  Form of Underwriting Agreement.
 3.1      --  Certificate of Incorporation, as amended, of HFC Revolving Corporation
              (the "Seller").
 3.2      --  By-Laws of the Seller.
 4        --  Form of Pooling and Servicing Agreement among the Seller, the Master
              Servicer and the Trustee, including the form of the Certificate and
              other exhibits thereto.
 5.1      --  Opinion of J. W. Blenke, Esq., Vice President -- Corporate Law of
              Household International, Inc.
 5.2      --  Opinion of Sidley & Austin with respect to the characterization of
              certain aspects of the transaction between the Subservicers and the
              Seller, the Subservicers and the Trust, and the Seller and the Trust.
 8        --  Opinion of Sidley & Austin with respect to tax matters.
10.1      --  Form of Receivables Purchase Agreement between the Seller as purchaser,
              and Household Realty Corporation, Household Finance Corporation II,
              Household Finance Corporation III, Household Finance Realty Corporation
              of New York, Household Finance Corporation of California, Household
              Finance Industrial Loan Company, Household Financial Center, Inc.,
              Household Finance Realty Corporation of Nevada, Household Industrial
              Loan Company of Kentucky, Household Finance Industrial Loan Company of
              Iowa, Household Finance Consumer Discount Company, Household Industrial
              Finance Company and Mortgage One Corporation, as sellers (the
              "Subservicers").
10.2      --  Form of Transfer Agreement between the Trustee and the Subservicers.
10.3      --  Form of Certificate Insurance Policy.
23.1      --  Consents of J. W. Blenke and Sidley & Austin are included in opinions
              filed as Exhibits 5.1, 5.2 and 8 hereto, respectively.
23.2*     --  Consent of KPMG Peat Marwick LLP, Certified public accountants.
24+       --  Powers of Attorney.
</TABLE>
    
 
- -------------------------
+ Previously filed.
 
   
* To be filed by Amendment.
    

<PAGE>   1
                                                                       EXHIBIT 1


                                  $___________

               HOUSEHOLD REVOLVING HOME EQUITY LOAN TRUST 1996-2

             Revolving Home Equity Loan Asset Backed Certificates,
                                 Series 1996-2,
                                    Class A

                         HOUSEHOLD FINANCE CORPORATION
                               (Master Servicer)

                           HFC REVOLVING CORPORATION
                                    (Seller)

                         FORM OF UNDERWRITING AGREEMENT


                                                           _______________, 1996


MORGAN STANLEY & CO. INCORPORATED
     as Representatives of the Underwriters
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036

Ladies and Gentlemen:

       HFC Revolving Corporation, a Delaware corporation (the "Seller"), has
authorized the issuance by Household Revolving Home Equity Loan Trust 1996-2
(the "Trust") of $____________ principal amount of Revolving Home Equity Loan
Asset Backed Certificates, Series 1996-2, Class A (the "Class A Certificates"),
and has authorized the sale of the Class A Certificates (the "Underwritten
Certificates") to the several underwriters named in Schedule I hereto
(collectively, the "Underwriters"), for whom you are acting as representatives
(the "Representatives").  Each Class A Certificate will represent a fractional
undivided interest in the Trust.  The assets of the Trust will include, among
other things, a pool of home equity revolving credit line loans that have been
made from time to time under certain home equity revolving credit line loan
agreements and conveyed to the Trust at the Closing Time (as defined herein)
(the "Initial Mortgage Loans") and, to the extent of the availability thereof,
newly originated home equity revolving credit line loans to be conveyed to the
Trust from time to time on or before the last Distribution Date of the Funding
Period (the "Subsequent Mortgage Loans") and any eligible mortgage loan
substituted for a defective loan pursuant to the Pooling and Servicing
Agreement (as defined below) (each, an "Eligible Substitute Mortgage Loan" and,
together with the Initial Mortgage Loans and the Subsequent Mortgage Loans, the
"Mortgage Loans"), including any additional principal amounts (the "Additional
Balances") advanced to a mortgagor under any Mortgage Loan after the date as of
which such Mortgage Loan is conveyed to the Trust, secured primarily by first
and second mortgages on
<PAGE>   2
residential properties that are primarily one- to four-family properties,
certain monies due thereunder and an irrevocable and unconditional financial
guaranty insurance policy (the "Policy") to be issued by ______________________
(the "Certificate Insurer") pursuant to an insurance and reimbursement
agreement dated as of _______________, 1996 (the "Insurance Agreement") among
the Certificate Insurer, the Seller, The First National Bank of Chicago, as
trustee (the "Trustee"), and Household Finance Corporation, as master servicer
(the "Master Servicer" or "HFC").  The Seller has acquired or will acquire the
Mortgage Loans pursuant to the Receivables Purchase Agreement, as described
below.  The Class A Certificates will be issued in an aggregate principal
amount of $____________, which is equal to approximately _____% of the
aggregate principal balance of the Initial Mortgage Loans as of their Cut-Off
Date.  Simultaneously with the issuance of the Class A Certificates and the
sale of the Underwritten Certificates to the Underwriters as contemplated
herein, the Trust will also issue the Revolving Home Equity Loan Asset Backed
Certificates, Series 1996-2, Seller Certificate (the "Seller Certificate" and,
together with the Class A Certificates, the "Certificates"), evidencing the
remaining interest in the Trust not evidenced by the Class A Certificates.  The
Certificates will be issued pursuant to a Pooling and Servicing Agreement to be
dated as of __________________, 1996 (the "Pooling and Servicing Agreement"),
among the Seller, the Master Servicer and the Trustee.  The Seller is a
subsidiary of HFC.  Capitalized terms used but not otherwise defined herein
shall have the meanings assigned thereto in the Pooling and Servicing Agreement
or the Prospectus, as applicable.

       The Seller has entered into a Receivables Purchase Agreement dated as of
_______________, 1996 (the "Receivables Purchase Agreement"), between the
Seller, as purchaser, and each of (i) Household Realty Corporation, (ii)
Household Finance Corporation of California, (iii) Household Finance
Corporation II, (iv) Household Finance Corporation III, (v) Household Finance
Industrial Loan Company, (vi) Household Finance Realty Corporation of New York,
(vii) Household Financial Center Inc., (viii) Household Finance Realty
Corporation of Nevada, (ix) Household Industrial Loan Company of Kentucky, (x)
Household Finance Industrial Loan Company of Iowa, (xi) Household Finance
Consumer Discount Company, (xii) Household Industrial Finance Company and
(xiii) Mortgage One Corporation (collectively, the "Subservicers" and each
individually, a "Subservicer").  Pursuant to the Receivables Purchase
Agreement, the Subservicers will sell to the Seller all of their right, title
and interest in and to the unpaid principal balances of the Initial Mortgage
Loans and, to the extent of the availability thereof, the Subsequent Mortgage
Loans, as well as any Eligible Substitute Mortgage Loans, in each case as of
the applicable Cut-Off Date, and certain other rights with respect to the
collateral supporting each Mortgage Loan, and each Subservicer is obligated to
sell to the Seller any Additional Balances resulting from advances made under
the Mortgage Loans to the related mortgagors subsequent to such Cut-Off Date.
Pursuant to the Pooling and Servicing Agreement, the Seller will assign to the
Trust all of its right, title and interest in and to each Trust Balance and all
interest and principal payments in respect thereof received on or after the
applicable Cut-Off Date or, with respect to any Additional Balance, on or after
the date of transfer to the Trust.  In addition, the Subservicers have entered
into an agreement dated as of ______________, 1996 (the "Transfer Agreement"),
between the Trustee and each of the Subservicers, pursuant to which the
Subservicers will assign to the Trust all of their right, title and interest in
and to the Mortgage Loans (collectively, the "Transferred Assets") not
otherwise transferred pursuant to the Receivables Purchase Agreement, other
than the right or obligation to fund additional draws.





                                       2
<PAGE>   3
       The Certificates are more fully described in the Registration Statement
(as defined below) which the Seller has furnished to Morgan Stanley & Co.
Incorporated, as Representatives of the Underwriters.

       The Seller and HFC understand that the Underwriters propose to make a
public offering of the Underwritten Certificates as soon as the Underwriters
deem advisable after the date hereof.

       The Seller and the Trust have filed with the Securities and Exchange
Commission (the "Commission") on ___________, 1996 a registration statement on
Form S-11, including a form of prospectus relating to the Class A Certificates
(Nos. 333-________ and 333-________-01) and have filed such amendments thereto
as may have been required to the date hereof, and pursuant to the provisions
hereof shall file such post-effective amendments thereto as may hereafter be
required pursuant to the Securities Act of 1933, as amended (the "1933 Act"),
and the rules and regulations of the Commission thereunder (the "Rules and
Regulations").  Such registration statement (as amended, if applicable) and the
prospectus relating to the offering of the Class A Certificates constituting a
part thereof filed by the Seller are referred to herein as the "Registration
Statement" and the "Prospectus," respectively; and any reference herein to any
amendment or supplement with respect to the Registration Statement or the
Prospectus shall be deemed to refer to and include any information deemed to be
a part thereof pursuant to Rule 430A under the 1933 Act.

       SECTION 1.  Representations and Warranties of the Seller and the
Subservicers.  Each of the Subservicers and the Seller, each as to itself,
represents and warrants to, and agrees with the Underwriters that:

       (a)    The Registration Statement has become effective under the 1933
Act.  The Registration Statement complies, and any amendment to the
Registration Statement at the time such amended Registration Statement becomes
effective will comply, in all material respects with the requirements of the
1933 Act and the Rules and Regulations.  The Registration Statement at the time
such Registration Statement became effective did not, and any amendment to the
Registration Statement at the time such amended Registration Statement becomes
effective will not, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.  The Prospectus as of its date did not, and
the Prospectus as amended or supplemented as of the Closing Time (as defined
herein) will not, contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this subsection
shall not apply to omissions of information from the Registration Statement or
Prospectus that are solely included in the Computational Materials distributed
by an Underwriter in violation of Section 2(a) hereof or statements in, or
omissions from, the Registration Statement or Prospectus made in reliance upon
and in conformity with information furnished to the Seller in writing by the
Underwriters or the Certificate Insurer expressly for use in the Registration
Statement or Prospectus.  Assuming compliance by each Underwriter with Section
2(a) hereof, the conditions to the use by the Seller of a registration
statement on Form S-11 under the 1933 Act, as set forth in the General
Instructions to Form S-11, have been satisfied with respect to the Registration
Statement and the Prospectus.  There are no contracts or documents of the
Seller that are required to be filed as exhibits to the Registration Statement





                                       3
<PAGE>   4
pursuant to the 1933 Act or the Rules and Regulations that have not been so
filed on or prior to the effective date of the Registration Statement.

       (b)    Since the respective dates as of which information is given in
the Prospectus, or the Prospectus as amended and supplemented at the Closing
Time, there has not been any material adverse change in the general affairs,
management, financial condition, or results of operations of any of the
Subservicers or the Seller or of their subsidiaries, otherwise than as set
forth or contemplated in the Prospectus or the Prospectus as amended and
supplemented at the Closing Time.

       (c)    Each of the Subservicers and the Seller has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of its respective jurisdiction of incorporation, with the full right,
power and authority (corporate and other) to own, lease and operate its
properties and conduct its business as described in the Prospectus and to enter
into and perform its obligations under this Agreement, the Pooling and
Servicing Agreement, the Receivables Purchase Agreement, the Transfer Agreement
and the Insurance Agreement, as applicable, and to cause the Certificates to be
issued; each of the Subservicers and the Seller is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction
which requires such qualification, except where failure to be so qualified
would not have a material adverse effect on the business or financial condition
of any such Subservicer or the Seller; and each Subservicer is duly authorized
under the statutes that regulate the business of making loans or of financing
the sale of goods (commonly called "small loan laws," "consumer finance laws,"
or "sales finance laws"), or is permitted under the general interest statutes
and related laws and court decisions, to conduct in the various jurisdictions
in which any of them do business the businesses as currently conducted therein
by any of them.

       (d)    There are no legal or governmental proceedings pending to which
any Subservicer or the Seller is a party or of which any property of any
Subservicer or the Seller is the subject, which if determined adversely to any
Subservicer or the Seller would individually or in the aggregate have a
material adverse effect on the financial position, shareholders' equity or
results of operations of such Subservicer or the Seller; and to the best
knowledge of the Subservicers and the Seller, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others.

       (e)    This Agreement has been duly authorized, executed and delivered
by the Seller and each Subservicer, and the Pooling and Servicing Agreement,
the Receivables Purchase Agreement and the Insurance Agreement, when executed
and delivered as contemplated hereby and thereby, will have been duly
authorized, executed and delivered by the Seller, and the Receivables Purchase
Agreement and the Transfer Agreement, when executed and delivered as
contemplated hereby and thereby, will have been duly authorized, executed and
delivered by each Subservicer, and this Agreement constitutes, and the Pooling
and Servicing Agreement, the Receivables Purchase Agreement, the Transfer
Agreement and the Insurance Agreement when executed and delivered as
contemplated herein and therein will constitute, legal, valid and binding
instruments enforceable against the Seller or the Subservicers, as applicable,
in accordance with their respective terms, subject as to enforceability (i) to
applicable bankruptcy, reorganization, insolvency, moratorium or other similar
laws affecting creditors' rights generally, (ii) to general principles of
equity (regardless of whether enforcement is sought in a proceeding in equity
or at law) and (iii) with respect to rights of





                                       4
<PAGE>   5
indemnity under this Agreement and the Insurance Agreement, to limitations of
public policy under applicable securities laws.

       (f)    The issuance and delivery of the Certificates, the consummation
of any other of the transactions contemplated herein or in the Pooling and
Servicing Agreement, the Receivables Purchase Agreement, the Transfer Agreement
and the Insurance Agreement, and the fulfillment of the terms of this
Agreement, the Receivables Purchase Agreement, the Transfer Agreement, the
Pooling and Servicing Agreement and the Insurance Agreement, do not and will
not conflict with or violate any term or provision of the Certificate or
Articles of Incorporation or Bylaws of any of the Subservicers or the Seller,
any statute, order or regulation applicable to any of the Subservicers or the
Seller of any court, regulatory body, administrative agency or governmental
body having jurisdiction over any of the Subservicers or the Seller and do not
and will not conflict with, result in a breach or violation or the acceleration
of, or constitute a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the property or assets of any of
the Subservicers or the Seller pursuant to the terms of, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which any of the Subservicers or the Seller is a party or by which any of the
Subservicers or the Seller may be bound or to which any of the property or
assets of any of the Subservicers or the Seller may be subject, except for
conflicts, violations, breaches, accelerations and defaults which would not,
individually or in the aggregate, be materially adverse to any of the
Subservicers or the Seller or materially adverse to the transactions
contemplated by this Agreement.

       (g)    Arthur Andersen LLP is an independent public accountant with
respect to the Subservicers and the Seller as required by the 1933 Act and the
Rules and Regulations.

       (h)    The direction by the Seller to the Trustee to execute,
countersign, issue and deliver the Certificates has been duly authorized by the
Seller, and assuming the Trustee has been duly authorized to do so, when
executed, countersigned, issued and delivered by the Trustee in accordance with
the Pooling and Servicing Agreement, the Certificates will be validly issued
and outstanding and will be entitled to the benefits provided by the Pooling
and Servicing Agreement.

       (i)    No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body of the United
States is required for the issuance or sale of the Class A Certificates, or the
consummation by any of the Subservicers or the Seller of the other transactions
contemplated by this Agreement, the Pooling and Servicing Agreement, the
Receivables Purchase Agreement, the Transfer Agreement or the Insurance
Agreement, except the registration under the 1933 Act of the Class A
Certificates and such consents, approvals, authorizations, registrations or
qualifications as may be required under State securities or Blue Sky laws in
connection with the issuance of the Class A Certificates and the purchase and
distribution of the Underwritten Certificates by the Underwriters or as have
been obtained.

       (j)    Each of the Subservicers and the Seller possesses all material
licenses, certificates, authorities or permits issued by the appropriate state,
federal or foreign regulatory agencies or bodies necessary to conduct the
business now conducted by it and as described in the Prospectus, and none of
the Subservicers or the Seller has received notice of proceedings relating to
the revocation or modification of any such license, certificate, authority





                                       5
<PAGE>   6
or permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the conduct
of its business, operations or financial condition.

       (k)    At the time of execution and delivery of the Receivables Purchase
Agreement and the Transfer Agreement, with respect to the Initial Mortgage
Loans, and, with respect to the Subsequent Mortgage Loans and Eligible
Substitute Mortgage Loans, as of the date on which such Mortgage Loan is
transferred to the Trust (each, a "Transfer Date"), each Subservicer (i) will
have good and marketable title to the Trust Balance of each such Mortgage Loan
being transferred by it to the Seller and to the Transferred Assets being
transferred by it to the Trustee, free and clear of any lien, mortgage pledge,
charge, encumbrance, adverse claim or other security interest (collectively
"Liens"), (ii) will not have assigned to any person any of its right, title or
interest in or to such Trust Balances or Transferred Assets or under the
Receivables Purchase Agreement or Transfer Agreement and (iii) will have the
power and authority to sell such Trust Balances to the Seller and to assign the
Transferred Assets to the Trustee; and upon the consummation of the sale and
the assignment provided for pursuant to the terms of the Receivables Purchase
Agreement and the Transfer Agreement, respectively, the Seller and the Trustee
will have acquired beneficial ownership of all the related Subservicer's right,
title and interest in and to the Trust Balances and Transferred Assets,
respectively, other than the right or obligation to fund additional draws.

       (l)    At the time of execution and delivery of the Pooling and
Servicing Agreement, with respect to the Initial Mortgage Loans, and as of the
applicable Transfer Date, with respect to the Subsequent Mortgage Loans and
Eligible Substitute Mortgage Loans, the Seller (i) will have good and
marketable title to the Trust Balance of each such Mortgage Loan being
transferred by it to the Trustee pursuant to the Pooling and Servicing
Agreement, free and clear of Liens, (ii) will not have assigned to any person
any of its right, title or interest in or to such Trust Balances or under the
Receivables Purchase Agreement, the Pooling and Servicing Agreement or the
Certificates being issued pursuant thereto and (iii) will have the power and
authority to sell such Trust Balances to the Trustee and to sell the
Underwritten Certificates to the Underwriters, and upon execution and delivery
of the Pooling and Servicing Agreement and the Transfer Agreement by the
Trustee, the Trustee will have acquired beneficial ownership of all of the
Seller's right, title and interest in and to the Mortgage Loans, other than the
right or obligation to fund additional draws, and upon delivery to the
Underwriters of the Underwritten Certificates the Underwriters will have good
and marketable title to the Underwritten Certificates, in each case free of
Liens except, in the case of the Mortgage Loans, to the extent disclosed in the
Prospectus.

       (m)    As of the Cut-Off Date for the Initial Mortgage Loans, each of
the Initial Mortgage Loans will meet the eligibility criteria described in the
Prospectus and as of the Cut-Off Date for the Subsequent Mortgage Loans and any
Eligible Substitute Mortgage Loans, each of the Subsequent Mortgage Loans and
Eligible Substitute Mortgage Loans, as applicable, will meet the eligibility
criteria applicable thereto described in the Pooling and Servicing Agreement.

       (n)    None of the Subservicers, the Seller or the Trust created by the
Pooling and Servicing Agreement will conduct their operations while any of the
Class A Certificates are outstanding in a manner that would require any
Subservicer, the Seller or the Trust to be registered as an "investment
company" under the Investment Company Act of 1940, as amended (the "1940 Act"),
as in effect on the date hereof.





                                       6
<PAGE>   7
       (o)    At the Closing Time, the Certificates and the Pooling and
Servicing Agreement will conform in all material respects to the descriptions
thereof contained in the Prospectus.

       (p)    At the Closing Time, the Class A Certificates shall have been
rated in the highest rating category by at least two nationally recognized
rating agencies.

       (q)    Any taxes, fees and other governmental charges in connection with
the execution, delivery and issuance of this Agreement, the Pooling and
Servicing Agreement, the Receivables Purchase Agreement, the Transfer
Agreement, the Insurance Agreement and the Certificates have been paid or will
be paid at or prior to the Closing Time.

       (r)    At the Closing Time, each of the representations and warranties
of the Seller with respect to the Initial Mortgage Loans set forth in the
Pooling and Servicing Agreement and the Insurance Agreement will be true and
correct in all material respects.

       Any certificate signed by an officer of any Subservicer or the Seller
and delivered to you or counsel for the Underwriters in connection with an
offering of the Underwritten Certificates shall be deemed, and shall state that
it is, a representation and warranty as to the matters covered thereby to each
person to whom the representations and warranties in this Section 1 are made.

       SECTION 2.    Representations and Warranties of the Underwriters.  Each
Underwriter severally, and not jointly, represents and warrants to, and agrees
with the other Underwriters, the Subservicers, the Seller and HFC that:

       (a)    During the period commencing on the effective date of the
Registration Statement and ending on the date the Prospectus is delivered to a
prospective investor, such Underwriter has not furnished and will not furnish,
in writing or by electronic transmission, Computational Materials relating to
the Class A Certificates to any such prospective investor except as otherwise
contained in the Preliminary Prospectus dated ______________, 1996 relating to
the Class A Certificates.  For purposes of this Underwriting Agreement,
"Computational Materials" shall mean any "written ABS Term Sheet" or
"computational materials" as such terms are defined in the letter dated
February 17, 1995 of the Office of Chief Counsel, Division of Corporation
Finance of the Securities and Exchange Commission to the Public Securities
Association (including computer generated tables displaying information
relating to the yield, average life, duration, expected maturity, interest rate
sensitivity or cash flow characteristics of the Class A Certificates under a
variety of possible prepayment scenarios, certain factual information regarding
the financial terms of the offering, including the anticipated ratings for each
class of Certificates, as well as background information concerning the
Mortgage Loans, or any descriptive data about the underlying Mortgage Loans,
such as their individual and weighted average coupons, maturities and loan-to-
value ratios or geographical distribution of the Mortgage Properties related
thereto, and the proposed structure of the Class A Certificates); provided,
however, that Computational Materials shall not be deemed to include any
materials which do not otherwise constitute a prospectus within the meaning of
Section 2(10) under the 1933 Act or which are permitted by the Rules and
Regulations, including, but not limited to, Rule 134 and Rule 139 thereunder.

       (b)    Each Underwriter acknowledges that the Subservicers, the Seller
or HFC will not be deemed to have breached any representation and warranty or
to have failed to satisfy any





                                       7
<PAGE>   8
other agreement contained herein, to the extent any such breach or failure on
the part of such party resulted solely from an Underwriter's breach of the
representation and warranty set forth in clause (a) above; provided, however,
that the rights and obligations otherwise available pursuant to Sections 9 and
10 hereof are not limited solely as a result of an Underwriter's breach of the
representation and warranty set forth in clause (a) above.

       SECTION 3.    Purchase and Sale.  The commitment of the Underwriters to
purchase the Underwritten Certificates pursuant to this Agreement shall be
deemed to have been made on the basis of the representations and warranties of
each Subservicer and the Seller herein contained and shall be subject to the
terms and conditions herein set forth.  The Seller agrees to instruct the
Trustee to issue, and agrees to sell to the Underwriters, and the Underwriters
agree, severally and not jointly (except as provided in Section 13 hereof), to
purchase from the Seller, at the purchase price for each Underwritten
Certificate set forth on Schedule A hereto, the respective principal amount of
Underwritten Certificates set forth opposite the name of such Underwriter on
Schedule A hereto.

       SECTION 4.    Delivery and Payment.  Payment of the purchase price for,
and delivery of, any Underwritten Certificates to be purchased by the
Underwriters shall be made at the office of Sidley & Austin, One First National
Plaza, Chicago, Illinois, or at such other place as shall be agreed upon by
you, the Seller and HFC, at 10:00 A.M. New York City time on _____________,
1996 or at such other time or date as shall be agreed upon in writing by you,
the Seller and HFC (the "Closing Time").  The Underwritten Certificates will be
delivered in book-entry form through the facilities of the Depository Trust
Company, CEDEL S.A. and the Euroclear System.  Payment shall be made to the
Seller by wire transfer of same day funds payable to the account of the Seller.
Delivery of the Underwritten Certificates shall be made to you for the
respective accounts of the Underwriters against payment of the purchase price
thereof.  Such Underwritten Certificates shall be in such denominations and
registered in such names as you may request in writing at least one business
day prior to the Closing Time.  Such Underwritten Certificates, which may be in
temporary form, will be made available for examination and packaging by you no
later than 3:00 P.M. New York City time on the first business day prior to the
Closing Time.

       SECTION 5.    Offering by the Underwriters.  It is understood that the
Underwriters propose to offer the Underwritten Certificates for sale to the
public as set forth in the Prospectus.

       SECTION 6.    Covenants of the Seller and HFC.  The Seller and HFC
covenant with each of the Underwriters as follows:

       (a)    If at any time when the Prospectus as amended or supplemented is
required by the 1933 Act to be delivered in connection with sales of the
Underwritten Certificates by the Underwriters, any event shall occur or
condition exist as a result of which it is necessary, in the opinion of your
counsel or counsel for the Seller, to further amend or supplement the
Prospectus as then amended or supplemented in order that the Prospectus as
amended or supplemented will not include an untrue statement of a material fact
or omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or if it
shall be necessary, in the opinion of any such counsel at any such time to
amend or supplement the Registration Statement or the Prospectus as then
amended or supplemented in order to comply with the requirements of the





                                       8
<PAGE>   9
1933 Act or the Rules and Regulations thereunder, or if required by such Rules
and Regulations, including Rule 430A thereunder, to file a post-effective
amendment to such Registration Statement (including an amended Prospectus), the
Seller will promptly prepare and file with the Commission such amendment or
supplement as may be necessary to correct such untrue statement or omission or
to make the Registration Statement comply with such requirements, and within
two business days will furnish to the Underwriters as many copies of the
Prospectus, as amended or supplemented, as you shall reasonably request;
provided, however, that the Seller shall not be required to amend or supplement
the Registration Statement or the Prospectus as a result of any Underwriter's
breach of the representation and warranty set forth in Section 2(a) hereof.

       (b)    The Seller will give you reasonable notice of its intention to
file any amendment to the Registration Statement, the Prospectus or the
Prospectus as amended or supplemented, pursuant to the 1933 Act, will furnish
you with copies of any such amendment or supplement proposed to be filed a
reasonable time in advance of filing, and will not file any such amendment or
supplement to which you or your counsel shall object.

       (c)    The Seller will notify you immediately, and confirm the notice in
writing, (i) of the effectiveness of any amendment to the Registration
Statement, (ii) of the mailing or the delivery to the Commission for filing of
any supplement to the Prospectus or the Prospectus as amended or supplemented,
(iii) of the receipt of any comments from the Commission with respect to the
Registration Statement or the Prospectus or the Prospectus as amended or
supplemented, (iv) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information and (v) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose.  The Seller will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.

       (d)    The Seller will deliver to you as many signed and as many
conformed copies of the Registration Statement (as originally filed) and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated by reference in the Prospectus) as
you may reasonably request.

       (e)    The Seller will make generally available to holders of the Class
A Certificates as soon as practicable, but in any event not later than 120 days
after the close of the period covered thereby, an earnings statement of the
Trust (which need not be audited) complying with Section 11(a) of the 1933 Act
and the Rules and Regulations (including, at the option of the Seller, Rule
158) and covering a period of at least twelve consecutive months beginning not
later than the first day of the first fiscal quarter following the Closing
Time.

       (f)    The Seller will endeavor, in cooperation with you, to qualify the
Class A Certificates for offering and sale under the applicable securities laws
of such states and other jurisdictions of the United States as you may
designate, and will maintain or cause to be maintained such qualifications in
effect for as long as may be required for the distribution of the Class A
Certificates.  The Seller will file or cause the filing of such statements and
reports as may be required by the laws of each jurisdiction in which the Class
A Certificates have been qualified as above provided.





                                       9
<PAGE>   10
       (g)    Neither the Seller nor HFC will, without your prior written
consent, publicly offer or sell or contract to sell any mortgage pass-through
certificates, mortgage pass-through notes or collateralized mortgage
obligations or other similar securities representing interests in or secured by
other mortgage-related assets originated or owned by the Seller or HFC for a
period of five days following the commencement of the offering of the
Underwritten Certificates to the public.

       (h)    So long as the Class A Certificates shall be outstanding, the
Seller will deliver to the Underwriters the annual statement as to compliance
delivered to the Trustee pursuant to Section 3.09 of the Pooling and Servicing
Agreement and the annual statement of a firm of independent public accountants
furnished to the Trustee pursuant to Section 3.10 of the Pooling and Servicing
Agreement, as soon as such statements are furnished to the Trustee.

       (i)    The Seller will apply the net proceeds from the sale of the Class
A Certificates in the manner set forth in the Prospectus.

       (j)    If, between the date hereof and the Closing Time, to the
knowledge of HFC or the Seller there are any legal or governmental proceedings
instituted or threatened against HFC or the Seller which, if determined
adversely to HFC or the Seller, would individually or in the aggregate have a
material adverse effect on the financial condition, shareholders' equity or
results of operations of HFC or the Seller, HFC and the Seller, as applicable,
will give prompt written notice thereof to the Underwriters.

       SECTION 7.    Conditions to the Underwriters' Obligations.  The
obligations of the Underwriters to purchase the Underwritten Certificates
pursuant to this Agreement are subject to the accuracy on and as of the Closing
Time of the representations and warranties on the part of the Subservicers and
the Seller herein contained, to the material accuracy of the statements of
officers of the Subservicers, the Seller and HFC, respectively, made pursuant
hereto, to the performance by the Subservicers, the Seller and HFC of all of
their respective obligations hereunder and to the following conditions at the
Closing Time:

       (a)  (i)  The Registration Statement shall have been declared effective
under the 1933 Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, any price-related
information previously omitted from the effective Registration Statement
pursuant to Rule 430A under the 1933 Act shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) under the 1933 Act within the
prescribed time period, and the Seller shall have provided evidence
satisfactory to the Underwriters of such timely filing, or a post-effective
amendment to the Registration Statement providing such information shall have
been promptly filed with the Commission and declared effective in accordance
with the requirements of Rule 430A under the 1933 Act, and prior to the Closing
Time the Seller shall have provided evidence satisfactory to the Underwriters
of such effectiveness and (ii) there shall not have come to your attention any
facts that would cause you to believe that the Prospectus, at the time it was
required to be delivered to a purchaser of the Class A Certificates, contained
an untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.





                                       10
<PAGE>   11
       (b)    The Underwriters shall have received the favorable opinion, dated
the date of the Closing Time, of Sidley & Austin, as special counsel to the
Seller and HFC, in the form attached hereto as Exhibit A.

       (c)    The Underwriters shall have received the favorable opinion, dated
the date of the Closing Time, of John W. Blenke, Esq., Assistant General
Counsel of Household International, Inc., the parent company of HFC, in form
and substance satisfactory to the Underwriters, to the effect that:

              (i)    HFC has been duly incorporated and is validly existing as
       a corporation in good standing under the laws of the State of Delaware,
       with corporate power to own its properties, to conduct its business as
       described in the Prospectus and to enter into and perform its
       obligations under this Agreement, the Pooling and Servicing Agreement
       and the Insurance Agreement.

              (ii)   The Seller has been duly incorporated and is validly
       existing as a corporation in good standing under the laws of the State
       of Delaware, with corporate power to own its properties, to conduct its
       business as described in the Prospectus and to enter into and perform
       its obligations under this Agreement, the Pooling and Servicing
       Agreement, the Receivables Purchase Agreement and the Insurance
       Agreement.

              (iii)  Each of the Subservicers has been duly incorporated and is
       validly existing as a corporation in good standing under the laws of its
       jurisdiction of incorporation, with corporate power to own its
       properties, to conduct its business as described in the Prospectus and
       to enter into and perform its obligations under this Agreement, the
       Receivables Purchase Agreement and the Transfer Agreement.

              (iv)   HFC has full corporate power and authority to serve in the
       capacity of master servicer of the Mortgage Loans as contemplated in the
       Pooling and Servicing Agreement.

              (v)    Each of the Subservicers, the Seller and HFC is duly
       authorized under relevant statutes, laws and court decisions, to conduct
       in the various jurisdictions in which they do business the respective
       businesses therein currently conducted by them, except where failure to
       be so permitted or failure to be so authorized will not have a material
       adverse effect on the business or financial condition of the
       Subservicers, the Seller or HFC, and the Subservicers are duly
       authorized under the statutes which regulate the business of making
       loans or of financing the sale of goods (commonly called "small loan
       laws," "consumer finance laws" or "sales finance laws"), or are
       permitted under the general interest statutes and related laws and court
       decisions, to conduct in the various jurisdictions in which any of them
       do business the businesses as currently conducted therein by any of
       them.

              (vi)   None of the Subservicers, the Seller or HFC is in
       violation of its Certificate or Articles of Incorporation or Bylaws or,
       to the best of such counsel's knowledge, in default in the performance
       or observance of any material obligation, agreement, covenant or
       condition contained in any contract, indenture, mortgage, loan
       agreement, note, lease or other instrument known to such counsel to
       which any of the





                                       11
<PAGE>   12
       Subservicers, the Seller or HFC is a party or by which it or its
       properties may be bound, which default might result in any material
       adverse changes in the financial condition, earnings, affairs or
       business of any of the Subservicers, the Seller or HFC or which might
       materially and adversely affect the properties or assets, taken as a
       whole, of any of the Subservicers, the Seller or of HFC.

              (vii)  This Agreement, the Pooling and Servicing Agreement and
       the Insurance Agreement have been duly authorized, executed and
       delivered by the Seller and the Master Servicer and, with respect to
       this Agreement, by the Subservicers and HFC, and, assuming the due
       authorization, execution and delivery of such agreements by the other
       parties thereto, such agreements constitute the valid and binding
       obligation of each of the Seller and the Master Servicer and, with
       respect to this Agreement, of the Subservicers and HFC, enforceable
       against each of the Seller and the Master Servicer and, with respect to
       this Agreement, the Subservicers and HFC, in accordance with their
       respective terms, and the Receivables Purchase Agreement has been duly
       authorized, executed and delivered by the Seller and the Subservicers
       and the Transfer Agreement has been duly authorized, executed and
       delivered by the Subservicers, and the Receivables Purchase Agreement
       and the Transfer Agreement constitute valid and binding obligations of
       the Seller and the Subservicers, as applicable, enforceable against the
       Seller and the Subservicers in accordance with their terms, except that
       in each case as to enforceability (A) such enforcement may be subject to
       bankruptcy, insolvency, reorganization, moratorium or other similar laws
       now or hereafter in effect relating to creditors' rights generally, (B)
       the remedy of specific performance and injunctive and other forms of
       equitable relief may be subject to equitable defenses and to the
       discretion of the court before which any proceeding therefor may be
       brought and (C) the enforceability as to rights to indemnification under
       this Agreement and the Insurance Agreement (to the extent
       indemnification under such Agreements relates to liability under the
       1933 Act) may be subject to limitations of public policy under
       applicable securities laws.

              (viii) The issuance and delivery of the Certificates, the
       consummation of any other of the transactions contemplated herein or in
       the Pooling and Servicing Agreement, the Receivables Purchase Agreement
       or the Insurance Agreement, or the fulfillment of the terms of this
       Agreement, the Pooling and Servicing Agreement or the Insurance
       Agreement do not and will not conflict with or violate any term or
       provision of the Certificate or Articles of Incorporation or Bylaws of
       the Seller or, to the best of such counsel's knowledge, any statute,
       order or regulation applicable to the Seller of any court, regulatory
       body, administrative agency or governmental body having jurisdiction
       over the Seller and do not and will not conflict with, result in a
       breach or violation or the acceleration of, or constitute a default
       under, or result in the creation or imposition of any lien, charge or
       encumbrance upon any of the property or assets of the Seller pursuant to
       the terms of, any indenture, mortgage, deed of trust, loan agreement or
       other agreement or instrument known to such counsel to which the Seller
       is a party or by which the Seller may be bound or to which any of the
       property or assets of the Seller may be subject except for conflicts,
       violations, breaches, accelerations and defaults which would not,
       individually or in the aggregate, be materially adverse to the Seller or
       materially adverse to the transactions contemplated by this Agreement.





                                       12
<PAGE>   13
              (ix)   The consummation of any of the transactions contemplated
       herein or in the Pooling and Servicing Agreement, the Receivables
       Purchase Agreement or the Transfer Agreement, and the fulfillment of the
       terms of the Pooling and Servicing Agreement, the Receivables Purchase
       Agreement or the Transfer Agreement, do not and will not conflict with
       or violate any terms or provision of the Certificate or Articles of
       Incorporation or Bylaws of any of the Subservicers or, to the best of
       such counsel's knowledge, any statute, order or regulation applicable to
       any of the Subservicers and do not and will not conflict with, result in
       a breach or violation or the acceleration of, or constitute a default
       under or result in the creation or imposition of any lien, charge or
       encumbrance upon any of the property or assets of any of the
       Subservicers pursuant to the terms of, any indenture, mortgage, deed of
       trust, loan agreement or other agreement or instrument known to such
       counsel to which any of the Subservicers may be bound or to which any of
       the property or assets of any of the Subservicers may be subject except
       for conflicts, violations, breaches, accelerations and defaults which
       would not, individually or in the aggregate, be materially adverse to
       the applicable Subservicers or materially adverse to the transactions
       contemplated by this Agreement.

              (x)    The consummation of any of the transactions contemplated
       herein or in the Pooling and Servicing Agreement or the Insurance
       Agreement, or the fulfillment of the terms of this Agreement or the
       Pooling and Servicing Agreement or the Insurance Agreement, do not and
       will not conflict with or violate any term or provision of the
       Certificate or Articles of Incorporation or Bylaws of HFC or, to the
       best of such counsel's knowledge, any statute, order or regulation
       applicable to HFC, and do not and will not conflict with, result in a
       breach or violation or the acceleration of, or constitute a default
       under, or result in the creation or imposition of any lien, charge or
       encumbrance upon any of the property or assets of HFC pursuant to the
       terms of, any indenture, mortgage, deed of trust, loan agreement or
       other agreement or instrument known to such counsel to which HFC is a
       party or by which HFC may be bound or to which any of the property or
       assets of HFC may be subject except for conflicts, violations, breaches,
       accelerations and defaults which would not, individually or in the
       aggregate, be materially adverse to HFC or materially adverse to the
       transactions contemplated by this Agreement.

              (xi)   The direction by the Seller to the Trustee to execute,
       issue, countersign and deliver the Certificates has been duly authorized
       by the Seller and, assuming that the Trustee has been duly authorized to
       do so and when executed and countersigned and delivered by the Trustee
       against payment of the agreed upon consideration therefor in accordance
       with the Pooling and Servicing Agreement, the Certificates will be
       validly issued and outstanding and will be entitled to the benefits of
       the Pooling and Servicing Agreement.

              (xii)  To the best of such counsel's knowledge, no consent,
       approval, authorization, order, registration or qualification of or with
       any court or governmental agency or body of the United States is
       required for the issuance of the Class A Certificates and the sale of
       the Underwritten Certificates to the Underwriters, or the consummation
       by the Subservicers, the Seller and HFC of the other transactions
       contemplated by this Agreement, the Pooling and Servicing Agreement, the
       Receivables Purchase Agreement, the Transfer Agreement and the Insurance
       Agreement, except the registration under the 1933 Act of the Class A
       Certificates and





                                       13
<PAGE>   14
       such consents, approvals, authorizations, registrations or
       qualifications as may be required under State securities or Blue Sky
       laws in connection with the issuance of the Class A Certificates and the
       purchase and distribution of the Underwritten Certificates by the
       Underwriters or as have been obtained.

              (xiii) The Registration Statement is effective under the 1933 Act
       and to the best of such counsel's knowledge and information, no stop
       order suspending the effectiveness of the Registration Statement has
       been issued under the 1933 Act or proceedings therefor initiated or
       threatened by the Commission.

              (xiv)  The conditions to the use by the Seller of a registration
       statement on Form S-11 under the 1933 Act, as set forth in the General
       Instructions to Form S-11, have been satisfied with respect to the
       Registration Statement and the Prospectus.  To the best of such
       counsel's knowledge, there are no contracts or documents of the Seller
       which are required to be filed as exhibits to the Registration Statement
       pursuant to the 1933 Act or the Rules and Regulations thereunder which
       have not been so filed.  The statements in the Prospectus under the
       caption "Risk Factors--Legal Considerations" and under the caption
       "Certain Legal Aspects of the Mortgage Loans", to the extent that
       statements in such sections constitute matters of law or legal
       conclusions with respect thereto, have been reviewed by attorneys under
       such counsel's supervision and are complete and correct in all material
       respects.

              (xv)   There are no actions, proceedings or investigations
       pending before or, to the best knowledge of such counsel, threatened by
       any court, administrative agency or other tribunal to which any of the
       Subservicers, HFC or the Seller is a party or of which any of their
       respective properties is the subject (A) which if determined adversely
       to any of the Subservicers, HFC or the Seller would have a material
       adverse effect on the business or financial condition of any of the
       Subservicers, HFC or the Seller, (B) asserting the invalidity of the
       Pooling and Servicing Agreement, the Receivables Purchase Agreement, the
       Transfer Agreement and the Insurance Agreement, or the Certificates, (C)
       seeking to prevent the issuance of the Certificates or the consummation
       by any of the Subservicers, HFC or the Seller of any of the transactions
       contemplated by the Pooling and Servicing Agreement, the Receivables
       Purchase Agreement, the Transfer Agreement, the Insurance Agreement and
       this Agreement, as the case may be, or (D) which might materially and
       adversely affect the performance by any of the Subservicers, HFC or the
       Seller of their respective obligations under, or the validity or
       enforceability of, the Pooling and Servicing Agreement, the Receivables
       Purchase Agreement, the Transfer Agreement, the Insurance Agreement,
       this Agreement, or the Certificates.

              (xvi)  The Registration Statement at the time it became
       effective, and any amendment thereto at the time such amendment becomes
       effective (other than the information set forth under "Description of
       the Certificate Insurer," "Experts" and financial statements and other
       financial and statistical information contained therein, as to which
       such counsel need express no opinion), complied as to form in all
       material respects with the applicable requirements of the 1933 Act and
       the Rules and Regulations thereunder.





                                       14
<PAGE>   15
              (xvii) Such counsel has no reason to believe that (A) the
       Registration Statement and the Prospectus, as of the date the
       Registration Statement became effective, or the Registration Statement
       (excluding the exhibits thereto) as of the date that the most recent
       post-effective amendment thereto became effective, contained or contains
       any untrue statement of a material fact or omitted or omits to state any
       material fact required to be stated therein or necessary in order to
       make the statements therein not misleading or (B) the Prospectus, as of
       its date and the date of such opinion, contained or contains any untrue
       statement of a material fact or omitted or omits to state any material
       fact necessary in order to make the statements therein, in the light of
       the circumstances under which they were made, not misleading (it being
       understood that such counsel need express no opinion as to information
       set forth under the caption "Description of the Certificate Insurer,"
       "Experts" and the financial statements or other financial and
       statistical data contained or incorporated by reference in the
       Registration Statement).

       Such opinion may express its reliance as to factual matters on the
representations and warranties made by the parties hereto, and on certificates
or other documents furnished by officers of such parties to the instruments and
documents referred to therein.  Such opinion may be qualified, insofar as it
concerns the enforceability of the documents referred to therein, to the extent
that such enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights in general, or by general principles of equity (regardless of whether
such enforcement is considered in a proceeding in equity or at law) and no
opinion need be given as to the enforceability of Section 9 of this Agreement.

       (d)    The Underwriters shall have received the favorable opinion of
counsel to the Trustee, dated the date of the Closing Time, addressed to the
Underwriters and in form and scope satisfactory to counsel to the Underwriters,
to the effect that:

              (i)    The Trustee has duly authorized, executed and delivered
       the Pooling and Servicing Agreement, the Transfer Agreement and the
       Insurance Agreement, which constitute the valid and legally binding
       agreements of the Trustee, are enforceable against the Trustee in
       accordance with their terms, subject, as to enforcement of remedies, (A)
       to applicable bankruptcy, insolvency, reorganization, and other similar
       laws affecting the rights of creditors generally and (B) to general
       principles of equity (regardless of whether such enforceability is
       considered in a proceeding in equity or at law).

              (ii)   The Trustee has duly executed and countersigned the
       Certificates issued on the date thereof on behalf of the Trust.

              (iii)  The execution and delivery by the Trustee of the Pooling
       and Servicing Agreement, the Transfer Agreement and the Insurance
       Agreement and the performance by the Trustee of its obligations
       thereunder do not conflict with or result in a violation of the
       Organization Certificate or Bylaws of the Trustee.

              (iv)   The Trustee has full power and authority to execute and
       deliver the Pooling and Servicing Agreement, the Transfer Agreement and
       the Insurance Agreement and to perform its obligations thereunder.





                                       15
<PAGE>   16
              (v)    To the best of such counsel's knowledge, there are no
       actions, proceedings or investigations pending or threatened against or
       affecting the Trustee before or by any court, arbitrator, administrative
       agency or other governmental authority which, if adversely decided,
       would materially and adversely affect the ability of the Trustee to
       carry out the transactions contemplated in the Pooling and Servicing
       Agreement, the Transfer Agreement and the Insurance Agreement.

              (vi)   No consent, approval or authorization of, or registration,
       declaration or filing with, any court or governmental agency or body of
       the United States of America or any state thereof is required for the
       execution, delivery or performance by the Trustee of the Pooling and
       Servicing Agreement, the Transfer Agreement and the Insurance Agreement.

       (e)    The Underwriters shall have received the favorable opinion or
opinions, dated the date of the Closing Time, of Brown & Wood LLP, as counsel
for the Underwriters, with respect to the issuance of the Class A Certificates
and the sale of the Underwritten Certificates to the Underwriters, the
Registration Statement, this Agreement, the Prospectus and such other related
matters as the Underwriters may require.

       (f)    The Underwriters shall have received the favorable opinion, dated
the date of the Closing Time, of Shaw, Pittman, Potts & Trowbridge, special
counsel for the Certificate Insurer, in form and scope satisfactory to counsel
for the Underwriters, to the effect that:

              (i)    The Certificate Insurer is a monoline stock insurance
       corporation, duly incorporated, validly existing and in good standing
       under the laws of the State of New York.

              (ii)   The Certificate Insurer has the corporate power to execute
       and deliver, and to take all action required of it under, the Insurance
       Agreement, the Indemnification Agreement (as defined herein) and the
       Policy.

              (iii)  The execution, delivery and performance by the Certificate
       Insurer of the Insurance Agreement, the Indemnification Agreement and
       the Policy do not require the consent or approval of, the giving of
       notice to, the prior registration with, or the taking of any other
       action in respect of, any state or other governmental agency or
       authority that has not previously been obtained or effected.

              (iv)   The Policy, the Insurance Agreement and the
       Indemnification Agreement have been duly authorized, executed and
       delivered by the Certificate Insurer and, assuming due authorization,
       execution and delivery of the Insurance Agreement and the
       Indemnification Agreement by the parties thereto (other than the
       Certificate Insurer), each of the Policy, the Insurance Agreement and
       the Indemnification Agreement constitutes the legally valid and binding
       obligation of the Certificate Insurer, enforceable in accordance with
       its respective terms subject, as to enforcement, to (A) bankruptcy,
       reorganization, insolvency, moratorium and other similar laws relating
       to or affecting the enforcement of creditors' rights generally,
       including, without limitation, laws relating to fraudulent transfers or
       conveyances, preferential transfers and equitable subordination,
       presently or from time to time in effect, and general principles of
       equity (regardless of whether such enforcement is considered in a
       proceeding in





                                       16
<PAGE>   17
       equity or at law), as such laws may be applied in any such proceeding
       with respect to the Certificate Insurer, (B) the qualification that the
       remedy of specific performance may be subject to equitable defenses and
       to the discretion of the court before which any proceedings with respect
       thereto may be brought and (C) the enforceability of rights to
       indemnification under the Indemnification Agreement may be subject to
       limitations of public policy under applicable securities laws.

       (g)    The Underwriters shall have received an opinion, dated the date
of the Closing Time, of Sidley & Austin, as special counsel to the Seller and
HFC, addressed to the Seller and satisfactory to the Certificate Insurer,
Standard & Poor's Ratings Services and Moody's Investors Service, Inc. relating
to the sale of the Trust Balances by the Subservicers to the Seller and by the
Seller to the Trust, and the transfer of the Related Assets to the Trustee, and
such counsel shall have consented to reliance by the Certificate Insurer,
Standard & Poor's Ratings Services and Moody's Investors Service, Inc. and the
Underwriters on such opinion as though such opinion had been addressed to each
such party.

       (h)    Each of the Subservicers, the Seller and HFC shall have furnished
to the Underwriters a certificate signed on behalf of the Subservicers, the
Seller and HFC by an accounting or financial officer thereof, dated the date of
the Closing Time, as to (i) the accuracy of the representations and warranties
of the Subservicers and the Seller herein at and as of the Closing Time, (ii)
there being no legal or governmental proceedings pending, other than those, if
any, referred to in the Prospectus or the Prospectus as amended or
supplemented, as the case may be, to which any of the Subservicers, the Seller
or HFC is a party or of which any property of any of the Subservicers, the
Seller or HFC is the subject, which, in the judgment of any of the
Subservicers, the Seller or HFC, as applicable, have a reasonable likelihood of
resulting in a material adverse change in the financial condition,
shareholders' equity or results of operations of the Subservicers, the Seller
or HFC; and to the best knowledge of each of the Subservicers, the Seller or
HFC, as applicable, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others, (iii) the performance by the
Subservicers, the Seller and HFC of all of their respective obligations
hereunder to be performed at or prior to the Closing Time, and (iv) such other
matters as you may reasonably request.

       (i)    The Trustee shall have furnished to the Underwriters a
certificate of the Trustee, signed by one or more duly authorized officers of
the Trustee, dated the date of the Closing Time, as to the due authorization,
execution and delivery of the Pooling and Servicing Agreement and the Transfer
Agreement by the Trustee and the acceptance by the Trustee of the trust created
by the Pooling and Servicing Agreement and the due execution and delivery of
the Certificates by the Trustee thereunder and such other matters as you shall
reasonably request.

       (j)    An Indemnification Agreement shall have been entered into between
the Certificate Insurer, HFC, the Seller and the Underwriters, in which the
Certificate Insurer will represent to the Underwriters, among other
representations, that (i) the information under the captions "Description of
the Certificate Insurer," "Description of the Certificates--The Policy" and
"Financial Statements of the Certificate Insurer" in the Prospectus was
approved by the Certificate Insurer and does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make such
statements therein, in the light of the circumstances under which they were
made, not misleading and (ii) there has been no change





                                       17
<PAGE>   18
in the financial condition of the Certificate Insurer since ________________
which would have a material adverse effect on the Certificate Insurer's ability
to meet its obligations under the Policy.

       (k)    The Policy shall have been issued by the Certificate Insurer
pursuant to the Insurance Agreement and shall have been duly countersigned by
an authorized agent of the Certificate Insurer, if so required under applicable
state law or regulation.

       (l)    The Class A Certificates shall have been rated "AAA" by Standard
& Poor's Ratings Services and "Aaa" by Moody's Investors Service, Inc.

       (m)    Counsel and special counsel to HFC and the Seller shall have
furnished to the Underwriters any opinions supplied to the rating agencies
relating to certain matters with respect to the Class A Certificates.

       (n)    The Underwriters shall have received from Arthur Andersen LLP, or
other independent certified public accountants acceptable to the Underwriters,
a letter, dated as of the date of this Agreement in the form heretofore agreed
to.

       (o)    Prior to the Closing Time, Brown & Wood LLP, as counsel for the
Underwriters, shall have been furnished with such documents and opinions as
they may reasonably require for the purpose of enabling them to pass upon the
issuance of the Class A Certificates and the sale of the Underwritten
Certificates to the Underwriters as herein contemplated and related proceedings
or in order to evidence the accuracy and completeness of any of the
representations and warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Seller and HFC in connection
with the issuance of the Class A Certificates and the sale of the Underwritten
Certificates to the Underwriters as herein contemplated shall be satisfactory
in form and substance to the Underwriters and Brown & Wood LLP.

       (p)    Since the respective dates as of which information is given in
the Prospectus, there shall not have been any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial condition, stockholders' equity or results of operations
of the Seller, any of the Subservicers or HFC otherwise than as set forth or
contemplated in the Prospectus, the effect of which is in the judgment of the
Underwriters so material and adverse as to make it impracticable or inadvisable
to proceed with the public offering or the delivery of the Class A Certificates
on the terms and in the manner contemplated in the Prospectus.

       (q)    Prior to the Closing Time the Subservicers, the Seller and HFC
shall have furnished to you such further information, certificates and
documents as you may reasonably request.

       If any condition specified in this Section 7 shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be
terminated by you by notice to the Seller at any time at or prior to the
Closing Time, and such termination shall be without liability of any party to
any other party except as provided in Section 8.





                                       18
<PAGE>   19
       SECTION 8.    Payment of Expenses.  The Seller, the Subservicers and HFC
jointly and severally agree to pay all expenses incident to the performance of
their obligations under this Agreement, including without limitation those
related to (i) the filing of the Registration Statement and all amendments
thereto, (ii) the preparation, issuance and delivery of the Certificates, (iii)
the fees and disbursements of Sidley & Austin, as special counsel for the
Seller and HFC, and Arthur Andersen LLP, accountants of the Seller and HFC,
(iv) the qualification of the Class A Certificates under securities and Blue
Sky laws and the determination of the eligibility of the Class A Certificates
for investment in accordance with the provisions of subsection 6(f) including
filing fees, and the fees and disbursements of Brown & Wood LLP, as counsel for
the Underwriters (not to exceed $28,000, in connection therewith and in
connection with the preparation of any Blue Sky Survey, (v) the printing and
delivery to the Underwriters, in such quantities as you may reasonably request,
of copies of the Registration Statement and Prospectus and all amendments and
supplements thereto, and of any Blue Sky Survey, (vi) the delivery to the
Underwriters, in such quantities as you may reasonably request, of copies of
the Pooling and Servicing Agreement and the Insurance Agreement, (vii) the fees
charged by nationally recognized statistical rating agencies for rating the
Class A Certificates, (viii) the fees and expenses of the Trustee and its
counsel and (ix) the fees and expenses of the Certificate Insurer and its
counsel.

       If this Agreement is terminated by you in accordance with the provisions
of Section 7, the Seller, the Subservicers and HFC shall reimburse you for all
reasonable out-of-pocket expenses, including the fees and disbursements of
Brown & Wood LLP, as counsel for the Underwriters.

       SECTION 9.    Indemnification.  (a)  HFC and the Seller jointly and
severally agree to indemnify and hold harmless the Underwriters and each
person, if any, who controls the Underwriters within the meaning of Section 15
of the 1933 Act as follows:

              (i)    against any and all loss, liability, claim, damage and
       expense whatsoever, as incurred, arising out of any untrue statement or
       alleged untrue statement of a material fact contained in the
       Registration Statement (or any amendment thereto), including the
       information deemed to be a part of the Registration Statement pursuant
       to Rule 430A under the 1933 Act, if applicable, or the omission or
       alleged omission therefrom of a material fact required to be stated
       therein or necessary to make the statements therein not misleading or
       arising out of any untrue statement or alleged untrue statement of a
       material fact contained in the Prospectus (or any amendment or
       supplement thereto) or the omission or alleged omission therefrom of a
       material fact necessary in order to make the statements therein, in
       light of the circumstances under which they were made, not misleading,
       unless (a) such untrue statement or omission or alleged untrue statement
       or omission was made in reliance upon and in conformity with written
       information furnished to the Seller, or information electronically
       transmitted to the Seller, by the Underwriters or the Certificate
       Insurer expressly for use in the Registration Statement (or any
       amendment thereto), (b) such loss, liability, claim, damage or expense
       is incurred by an Underwriter solely as a result of the distribution by
       it of Computational Materials in violation of Section 2(a) hereof or (c)
       such untrue statement or omission or alleged untrue statement or
       omission was made in any Preliminary Prospectus and corrected in the
       Prospectus and (1) any such loss, claim, damage or liability suffered or
       incurred by an Underwriter resulted from an action, claim or suit by any
       person who purchased the Underwritten Certificates from





                                       19
<PAGE>   20
       such Underwriter in the offering and (2) such Underwriter failed to
       deliver or provide a copy of the Prospectus dated _______________, 1996
       to such person at or prior to the confirmation of the sale of such
       Underwritten Certificates in any case where such delivery is required by
       the 1933 Act;

              (ii)   against any and all loss, liability, claim, damage and
       expense whatsoever, as incurred, to the extent of the aggregate amount
       paid in settlement of any litigation, or investigation or proceeding by
       any governmental agency or body, commenced or threatened, or of any
       claim whatsoever based upon any such untrue statement or omission, or
       any such alleged untrue statement or omission, if such settlement is
       effected with the written consent of the Seller; and

              (iii)  against any and all expense whatsoever (including the fees
       and disbursements of counsel chosen by you) as reasonably incurred in
       investigating, preparing to defend or defending against or appearing as
       a third party witness with respect to any litigation, or investigation
       or proceeding by any governmental agency or body, commenced or
       threatened, or any claim whatsoever based upon any such untrue statement
       or omission, as such expense is incurred and to the extent that any such
       expense is not paid under (i) or (ii) above.

       This indemnity agreement will be in addition to any liability which the
Seller may otherwise have.

       (b)    Each of the Underwriters severally agrees to indemnify and hold
harmless the Seller, each of its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Seller within
the meaning of Section 15 of the 1933 Act (each, an "Indemnified Party")
against any and all loss, liability, claim, damage and expense, as incurred,
described in the indemnity contained in subsection (a) of this Section 9,
arising out of any untrue statements or omissions, or alleged untrue statements
or omissions, made in the Registration Statement (or any amendment thereto) or
the Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Seller by such Underwriter
expressly for use in the Registration Statement (or any amendment thereto) or
the Prospectus (or any amendment or supplement thereto).  The parties hereto
acknowledge that the only information supplied to the Seller by the
Underwriters expressly for use in the Registration Statement or the Prospectus
is limited to the information set forth in the second sentence of the fourth
paragraph on the cover, the first paragraph on page 2, and the second paragraph
under the caption "Underwriting" in the Prospectus.  In addition, each
Underwriter severally agrees to indemnify and hold harmless each Indemnified
Party against any and all loss, liability, claim, damage and expense, as
incurred, arising solely out of any breach of such Underwriter's representation
and warranty set forth in Section 2(a) hereof.  This indemnity agreement will
be in addition to any liability that the Underwriters may otherwise have.

       (c)    Each indemnified party shall give prompt notice to each
indemnifying party of any action commenced against it with respect to which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve it from any liability which it may have hereunder
unless it has been materially prejudiced by such failure to notify or from any
liability which it may have otherwise than on account of this indemnity
agreement.  An indemnifying party may participate at its own expense in the
defense of such action.  In no





                                       20
<PAGE>   21
event shall the indemnifying parties be liable for the fees and expenses of
more than one counsel for all indemnified parties in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, unless (i) if the
defendants in any such action include one or more of the indemnified parties
and the indemnifying party, and one or more of the indemnified parties shall
have employed separate counsel after having reasonably concluded that there may
be legal defenses available to it or them that are different from or additional
to those available to the indemnifying party or to one or more of the other
indemnified parties or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of the commencement of
the action.

       SECTION 10.  Contribution.  In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 9 is for any reason held to be unenforceable by the indemnified parties
although applicable in accordance with its terms, HFC and the Seller on the one
hand, and the Underwriters (or Underwriter, if such loss, liability, claim,
damage or expense arises solely as a result of such Underwriter's breach of the
representation and warranty set forth in Section 2(a) hereof), on the other,
shall contribute to the aggregate losses, liabilities, claims, damages and
expenses of the nature contemplated by said indemnity agreement incurred by the
Seller and one or more of the Underwriters (i) except for any Underwriter's
indemnification arising solely from a breach of its representation and warranty
set forth in Section 2(a) hereof, in such proportion as shall be appropriate to
reflect the relative benefits to HFC and the Seller on the one hand and the
Underwriters on the other in connection with the matter to which the
indemnification relates, which relative benefits shall be deemed to be in such
proportions the Underwriters shall be responsible for that portion represented
by the percentage that the underwriting discount on the cover of the Prospectus
at the Closing Time bears to the initial public offering price for the
Underwritten Certificates as set forth thereon, and HFC and the Seller shall be
jointly and severally responsible for the balance or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law or otherwise
prohibited hereby, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of HFC and the Seller on the one hand and the Underwriters or Underwriter, as
applicable, on the other in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, or actions in respect
thereof, as well as any other relevant equitable considerations; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
Relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
HFC or the Seller, on the one hand, or the Underwriters, on the other hand, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.  HFC, the Seller and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 10 were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this Section 10.  The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions in respect thereof) referred to in the first
sentence of this Section 10 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating,





                                       21
<PAGE>   22
preparing to defend or defending against any action or claim that is the
subject of this Section 10.  Notwithstanding the provisions of this Section 10,
except for any loss, claim, damage, liability or expense resulting solely from
any Underwriter's breach of the representation and warranty set forth in
Section 2(a) hereof, no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Underwritten
Certificates underwritten by such Underwriter and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay in respect of such losses,
liabilities, claims, damages and expenses.  The Underwriters' obligations in
this Section 10 to contribute are several in proportion to their respective
underwriting obligations and not joint, and no Underwriter shall be required to
contribute to any loss, liability, claim, damage or expense as a result of
another Underwriter's breach of the representation and warranty set forth in
Section 2(a) hereof.  Each party entitled to contribution agrees that upon the
service of a summons or other initial legal process upon it in any action
instituted against it in respect to which contribution may be sought, it shall
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought for any obligation it may have hereunder or otherwise (except as
specifically provided in Section 9 hereof).  For purposes of this Section 10,
each person, if any, who controls any Underwriter within the meaning of Section
15 of the 1933 Act shall have the same rights to contribution as such
Underwriter, and each respective director of the Seller, each respective
officer of the Seller who signed the Registration Statement, and each person,
if any, who controls the Seller within the meaning of Section 15 of the 1933
Act shall have the same rights to contribution as the Seller.

       SECTION 11.  Representations, Warranties and Agreements to Survive
Delivery.  All representations, warranties and agreements contained in this
Agreement or contained in certificates of officers of the Subservicers, the
Seller or HFC submitted pursuant hereto shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriters or controlling person thereof, or by or on behalf of the
Subservicers, the Seller or HFC and shall survive delivery of any Underwritten
Certificates to the Underwriters.

       SECTION 12.  Termination of Agreement.  You, as representatives of the
Underwriters, may terminate this Agreement, immediately upon notice to the
Seller, at any time at or prior to the Closing Time (i) if there has been an
outbreak or material escalation of hostilities involving the United States of
America where armed conflict appears imminent, or the declaration by the United
States of America of a national emergency or war, if the effect of any such
event in the Underwriters' reasonable judgment makes it impracticable or
inadvisable to proceed with the public offering of the Underwritten
Certificates or (ii) if trading generally on the New York Stock Exchange has
been suspended, or minimum prices have been established by the exchange or by
order of the Commission or any other governmental authority, or if a banking
moratorium has been declared by either federal or New York State authorities.
In the event of any such termination, the covenant set forth in subsection
6(b), the provisions of Section 8, the indemnity agreement set forth in Section
9, and the provisions of Sections 10 and 15 shall remain in effect.

       SECTION 13.  Default by One or More of the Underwriters.  If one or more
of the Underwriters participating in the public offering of the Underwritten
Certificates shall fail at the Closing Time to purchase the Underwritten
Certificates which it is (or they are) obligated





                                       22
<PAGE>   23
to purchase hereunder (the "Defaulted Certificates"), then such of the
non-defaulting Underwriters shall have the right, within 24 hours thereafter,
to make arrangements for one or more of the non-defaulting Underwriters, or any
other underwriters, to purchase all, but not less than all, of the Defaulted
Certificates in such amounts as may be agreed upon and upon the terms herein
set forth.  If, however, you have not completed such arrangements within such
24-hour period, then:

              (i)    if the aggregate principal amount of Defaulted
       Certificates does not exceed 10% of the aggregate principal amount of
       the Underwritten Certificates to be purchased pursuant to this
       Agreement, the non-defaulting Underwriters named in this Agreement shall
       be obligated to purchase the full amount thereof in the proportions that
       their respective underwriting obligations hereunder bear to the
       underwriting obligations of all such non-defaulting Underwriters, or

              (ii)   if the aggregate principal amount of Defaulted
       Certificates exceeds 10% of the aggregate principal amount of the
       Underwritten Certificates to be purchased pursuant to this Agreement,
       this Agreement shall terminate, without any liability on the part of any
       non-defaulting Underwriters.

       No action taken pursuant to this Section 13 shall relieve any defaulting
Underwriter from the liability with respect to any default of such Underwriter
under this Agreement.

       In the event of a default by any Underwriters as set forth in this
Section 13, either you or the Seller shall have the right to postpone the
Closing Time for a period not exceeding five Business Days in order that any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements may be effected.

       SECTION 14.  Notices.  All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication.  Notices to the
Underwriters shall be directed to them at the address set forth on the first
page hereof.  Notices to the Seller or HFC shall be directed to Household
Finance Corporation, 2700 Sanders Road, Prospect Heights, Illinois 60070, to
the attention of the Secretary, with a copy to the Treasurer.

       SECTION 15.  Parties.  This Agreement shall inure to the benefit of and
be binding upon the Underwriters, the Subservicers, the Seller and HFC, and
their respective successors.  Nothing expressed or mentioned in this Agreement
is intended nor shall it be construed to give any person, firm or corporation,
other than the parties hereto and their respective successors and the
controlling persons and officers and directors referred to in Sections 9 and 10
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or with respect to this Agreement or any provision herein
contained.  This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the parties and their
respective successors and said controlling persons and officers and directors
and their heirs and legal representatives (to the extent of their rights as
specified herein) and except as provided above for the benefit of no other
person, firm or corporation.  No purchaser of Underwritten Certificates from
the Underwriters shall be deemed to be a successor by reason merely of such
purchase.





                                       23
<PAGE>   24
       SECTION 16.  Governing Law and Time.  This Agreement shall be governed
by the law of the State of New York and shall be construed in accordance with
such law.  Specified times of day refer to New York City time.

       SECTION 17.  Counterparts.  This Agreement may be executed in
counterparts, each of which shall constitute an original of any party whose
signature appears on it, and all of which shall together constitute a single
instrument.





                                       24
<PAGE>   25
       If the foregoing is in accordance with the Underwriters' understanding
of our agreement, please sign and return to us a counterpart hereof, whereupon
this instrument along with all counterparts will become a binding agreement
among the Underwriters, the Seller, HFC and the Subservicers in accordance with
its terms.

                                       Very truly yours,

                                       HFC REVOLVING CORPORATION



                                       By:                                      
                                           -------------------------------------
                                           Name:  John W. Blenke
                                           Title: Vice President and Secretary


                                       HOUSEHOLD FINANCE CORPORATION



                                       By:                                      
                                           -------------------------------------
                                           Name:  John W. Blenke
                                           Title: Vice President and Asst.
                                                  Secretary



                                       HOUSEHOLD REALTY CORPORATION, HOUSEHOLD
                                       FINANCE CORPORATION OF CALIFORNIA,
                                       HOUSEHOLD FINANCE CORPORATION II,
                                       HOUSEHOLD FINANCE CORPORATION III,
                                       HOUSEHOLD FINANCE INDUSTRIAL LOAN
                                       COMPANY, HOUSEHOLD FINANCE REALTY
                                       CORPORATION OF NEW YORK, HOUSEHOLD
                                       FINANCIAL CENTER INC., HOUSEHOLD FINANCE
                                       REALTY CORPORATION OF NEVADA, HOUSEHOLD
                                       INDUSTRIAL LOAN COMPANY OF KENTUCKY,
                                       HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY
                                       OF IOWA, HOUSEHOLD FINANCE CONSUMER
                                       DISCOUNT COMPANY, HOUSEHOLD INDUSTRIAL
                                       FINANCE COMPANY and MORTGAGE ONE
                                       CORPORATION



                                       By:                                      
                                           -------------------------------------
                                           Name:  B. B. Moss, Jr.
                                           Title: Vice President and Treasurer
<PAGE>   26

CONFIRMED AND ACCEPTED, as of
the date first above written:


MORGAN STANLEY & CO. INCORPORATED
  as Representatives of the Underwriters



                              
- ------------------------------
Name:
Title:
<PAGE>   27
                                   Schedule A

                                  Underwriting


CLASS A

Class A Pass-Through Rate:  LIBOR plus _____%
Purchase Price Percentage:   _____%

<TABLE>
<CAPTION>
                                                                Principal Amount
                                                                ----------------
<S>                                                                  <C>      
Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . .      $        
 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $        
 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $        
 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $        
                                                                     ---------
                                                      Total          $        
                                                                     =========
</TABLE>





<PAGE>   28
                                   EXHIBIT A

                     Opinion of Sidley & Austin pursuant to
                   Section 7(b) of the Underwriting Agreement



                                                             _____________, 1996


MORGAN STANLEY & CO. INCORPORATED
     as Representatives of the Underwriters
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036

                 Re:  Household Revolving Home Equity Loan Asset Backed
                      Certificates, Series 1996-2, Class A

Ladies and Gentlemen:

       We address this opinion to you pursuant to Section 7(b) of the
Underwriting Agreement dated _______________, 1996 (the "Underwriting
Agreement") among HFC Revolving Corporation (the "Seller"), Household Finance
Corporation, a Delaware corporation (the "Company"), and Household Realty
Corporation, Household Finance Corporation of California, Household Finance
Corporation II, Household Finance Corporation III, Household Finance Industrial
Loan Company, Household Finance Realty Corporation of New York, Household
Financial Center Inc., Household Industrial Finance Company, Household Finance
Realty Corporation of Nevada, Household Industrial Loan Company of Kentucky,
Household Finance Industrial Loan Company of Iowa, Household Finance Consumer
Discount Company, and Mortgage One Corporation (collectively, the
"Subservicers" and each individually, a "Subservicer") and the underwriters
referred to therein (together, the "Underwriters").  The Seller has entered
into a Receivables Purchase Agreement dated as of ______________, 1996 (the
"Receivables Purchase Agreement"), between the Seller, as purchaser, and each
of the Subservicers, as sellers.  Pursuant to the Receivables Purchase
Agreement, the Subservicers have sold to the Seller all of their right, title
and interest in and to the unpaid principal balances of the Initial Mortgage
Loans as of the Cut-Off Date and certain other rights with respect to the
collateral supporting each Mortgage Loan, and each is obligated to sell to the
Seller any additions to such principal balances as the result of advances made
to the related mortgagors subsequent to the Cut-Off Date.  Pursuant to the
Pooling and Servicing Agreement referred to below, the Seller will assign to
the Trust its rights under the Receivables Purchase Agreement.  In addition,
the Subservicers have entered into an agreement dated as of ______________,
1996 (the "Transfer Agreement"), between the Trustee and each of the
Subservicers, pursuant to which the Subservicers will assign to the Trust all
of their right, title and interest in and to the Mortgage Loans not otherwise
transferred pursuant to the Receivables Purchase Agreement, other than the
right or obligation to fund additional draws.  The Subservicers are wholly-
owned subsidiaries of HFC.  The Underwriting Agreement relates to the issuance
and sale of $______________ aggregate principal amount of Revolving Home Equity
Loan Asset Backed Certificates, Series 1996-2, Class A (the "Investor
Certificates").





                                      A-1
<PAGE>   29
The Investor Certificates are to be issued together with the Revolving Home
Equity Loan Asset Backed Certificates, Series 1996-2, Seller Certificates (the
"Seller Certificates" and together with the Investor Certificates, the
"Certificates") pursuant to the terms of a Pooling and Servicing Agreement
dated as of ________________, 1996 (the "Agreement") among the Company, as
master servicer, the Seller and The First National Bank of Chicago, as trustee
(the "Trustee").  Capitalized terms used herein shall have the meanings
ascribed to them in the Underwriting Agreement unless herein otherwise defined.

       As special counsel for the Seller and the Company, we have, among other
things (i) participated in the preparation of the Agreement and (ii) cooperated
with officers of the Seller and the Company, representatives of the
Underwriters and independent accountants in the preparation of the Registration
Statement on Form S-11 (Registration Nos. 333-_______ and 333-_______-01) filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), and the Prospectus dated
______________, 1996 in the form in which it was transmitted for filing with
the Commission pursuant to Rule 424(b) of the Rules and Regulations under the
Act (the "Final Prospectus").

       We advise you that in our opinion:

       (i)    The Agreement is not required to be qualified under the Trust
Indenture Act;

       (ii)   Neither the Seller nor the Trust created by the Agreement is an
"investment company" or under the "control" of an "investment company" as such
terms are defined in the Investment Company Act of 1940;

       (iii)  The Certificates and the Agreement conform in all material
respects to the respective descriptions thereof in the Final Prospectus; and

       (iv)   The statements in the Final Prospectus under the captions
"Prospectus Summary--Tax Status" and "--Income Tax Withholding" and "Certain
Income Tax Consequences" and the second paragraph under the caption "Risk
Factors--Insolvency Considerations" to the extent that they constitute matters
of law or legal conclusions with respect thereto, have been prepared or
reviewed by us and correctly represent our opinion.

       The opinions set forth herein are subject to the following
qualifications:

       No opinion is expressed as to the effect of the compliance or
noncompliance of the Seller or the Trustee with any state or federal laws or
regulations applicable to them because of their legal or regulatory status or
the nature of their respective businesses, or to the due authorization,
execution and delivery of the Agreement and the Certificates.  As to such
matters, we have relied upon the opinion of John W. Blenke, Esq., Assistant
General Counsel of Household International, Inc., of even date herewith,
delivered pursuant to Section 7(c) of the Underwriting Agreement, and have made
no independent investigation of the matters referred to in such opinion.

       In expressing the foregoing opinions, we have examined originals, or
copies of originals certified to our satisfaction, of such agreements,
documents, certificates and other statements of public officials and
responsible officers of each of the Seller, the Company and the Trustee and
other papers and matters of fact and law as we have deemed relevant and
necessary as





                                      A-2
<PAGE>   30
a basis for the opinions we expressed herein.  We have relied, with respect to
factual matters, on representations and warranties made by, and on certificates
and other documents furnished by responsible officers of each of the Trustee,
the Seller and the Company.  In expressing the foregoing opinions, we have
assumed, with your permission, (i) the authenticity of all documents submitted
to us as originals and the conformity with the original documents of any copies
of such documents submitted to us for our examination, (ii) that each of the
Seller and the Trustee has been duly organized and is validly existing and in
good standing under the laws of its jurisdiction of incorporation and (iii) the
due execution and delivery, pursuant to due authorization, of the agreements
and documents referred to above by the Trustee.

       The opinions expressed herein are only with respect to federal laws of
the United States and the laws of the State of Illinois.  We consent to the
reliance on this opinion by [Certificate Insurer], Standard & Poor's Ratings
Services and Moody's Investors Service, Inc.  Subject to the foregoing
sentence, this opinion is being delivered solely for the benefit of the persons
to whom it is addressed.  Accordingly, it may not be quoted, filed with any
government authority or other regulatory agency or otherwise circulated or
utilized for any purpose without our prior written consent.

                                        Very truly yours,





                                      A-3

<PAGE>   1
                                                                EXHIBIT 3.1

                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                          (HFC REVOLVING CORPORATION)



         HFC Revolving Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:

         FIRST:  That the Board of Directors of the Corporation by the
unanimous written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendments
to the Certificate of Incorporation of the Corporation.

         RESOLVED, that Article FOURTH of the Certificate of Incorporation be
amended by deleting and restating such Article to read, in its entirety,
as follows:

                 FOURTH.  The amount of the total authorized capital stock of
         the Corporation is One Thousand Six Dollars  ($1,006.00) consisting
         of: One Thousand Shares (1,000) of a class of common stock of the par
         value of One Dollar ($1.00) per share designated as Common Stock; One
         Share (1) of a class of special voting preferred stock of the par
         value of One Dollar ($1.00) per share designated as Class SV Preferred
         Stock; One Share (1) of a class of special voting preferred stock of
         the par value of One Dollar ($1.00) per share designated as Class SV-A
         Preferred Stock; One Share (1) of a class of special voting preferred
         stock of the par value of One Dollar ($1.00) per share designated as
         Class SV-B Preferred Stock; One Share (1) of a class of special voting
         preferred stock of the par value of One Dollar ($1.00) per share
         designated as Class SV-C Preferred Stock; One Share (1) of a class of
         special voting preferred stock of the par value of One Dollar ($1.00)
         per share designated as Class SV-D Preferred Stock; and One Share (1)
         of a class of special voting preferred stock of the par value of One
         Dollar ($1.00) per share designated as Class SV-E Preferred Stock.

                 The holder of Common Stock shall be entitled to all of the
         rights and privileges pertaining to common stock without any
         limitations, prohibitions, restrictions, or qualifications under the
         General Corporation Law of the State of Delaware.
<PAGE>   2


                 The holder of the Class SV Preferred Stock, the holder of the
         Class SV-A Preferred Stock, the holder of the Class SV-B Preferred
         Stock, the holder of the Class SV-C Preferred Stock, the holder of the
         Class SV-D Preferred Stock and the holder of the Class SV-E Preferred
         Stock shall not be entitled to any rights or privileges (including,
         but not limited to, rights of the holder to receive dividends) under
         the General Corporation Law of the State of Delaware except that the
         holder of each such class shall be entitled to vote with respect to
         any matters to come before the stockholders of the Corporation with
         respect to the consent of all holders of the Class SV Preferred Stock,
         all holders of the Class SV-A Preferred Stock, all holders of the
         Class SV-B Preferred Stock, all holders of the Class SV-C Preferred
         Stock, all holders of the Class SV-D Preferred Stock and all holders
         of the Class SV-E Preferred Stock required by Article Fifteenth hereof
         and shall be entitled to receive only upon liquidation an amount equal
         to One Dollar ($1.00) per share, which is to be received prior to any
         distribution to holders of Common Stock.

         FURTHER RESOLVED, that Article FIFTEENTH of the Certificate of
Incorporation be amended by deleting and restating such paragraph to read, in
its entirety, as follows:

                 FIFTEENTH.  Notwithstanding any other provision of the
         Certificate of Incorporation and any provision of law that otherwise
         so empowers the Corporation, the Corporation shall not, without the
         unanimous consent of all of the holders of the Class SV Preferred
         Stock, Class SV-A Preferred Stock,  Class SV-B Preferred Stock, Class
         SV-C Preferred Stock, Class SV-D Preferred Stock and Class SV-E
         Preferred Stock of the Corporation, institute proceedings to be
         adjudicated insolvent, or consent to the institution of any bankruptcy
         or insolvency case or proceedings against it, or file or consent to a
         petition under any applicable federal or state law relating to
         bankruptcy, seeking the Corporation's liquidation or reorganization or
         any other relief for the Corporation as debtor, or consent to the
         appointment of a receiver, liquidator, assignee, trustee, custodian or
         sequestrator (or other similar official) of the Corporation or a
         substantial part of its property, or make any assignment for the
         benefit of creditors, or admit in writing its inability to pay its
         debts generally as they become due, or take any corporate action in
         furtherance of any such action.  This Article





                                      -2-
<PAGE>   3

         Fifteenth may not be amended without the consent of all the
         stockholders of the Corporation entitled to vote on the matters
         contained in this Article Fifteenth.

         SECOND:  That in lieu of a meeting and vote of stockholders,
the stockholders have given unanimous written consent to said amendment in
accordance with the provision of Section 228 of the General Corporation Law of
the State of Delaware.

         THIRD:  That the aforesaid amendments to the Certificate of
Incorporation, set forth in Paragraph FIRST hereinabove, has been duly adopted
in accordance with the provision of Sections 242 AND 228 of the General
Corporation Law of the State of Delaware.

         IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by S. H. Smith, its Vice President, Assistant Treasurer and Director,
and by J. W. Blenke, its Vice President, Secretary and Director, this 11th day
of November, 1996.


                                               HFC REVOLVING CORPORATION



                                               By: 
                                                  -------------------------
                                                   S. H. Smith
                                                   Vice President and
                                                   Assistant Treasurer



ATTEST:




- ----------------------------
J. W. Blenke
Vice President and Secretary





                                      -3-
<PAGE>   4

                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                          (HFC REVOLVING CORPORATION)



         HFC Revolving Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:

         FIRST:  That the Board of Directors of the Corporation by the
unanimous written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendments
to the Certificate of Incorporation of the Corporation.

         RESOLVED, that Article FOURTH of the Certificate of Incorporation be
amended by deleting and restating such Article to read, in its entirety,
as follows:

                 FOURTH.  The amount of the total authorized capital stock of
         the Corporation is One Thousand Five Dollars  ($1,005.00) consisting
         of: One Thousand Shares (1,000) of a class of common stock of the par
         value of One Dollar ($1.00) per share designated as Common Stock; One
         Share (1) of a class of special voting preferred stock of the par
         value of One Dollar ($1.00) per share designated as Class SV Preferred
         Stock; One Share (1) of a class of special voting preferred stock of
         the par value of One Dollar ($1.00) per share designated as Class SV-A
         Preferred Stock; One Share (1) of a class of special voting preferred
         stock of the par value of One Dollar ($1.00) per share designated as
         Class SV-B Preferred Stock; One Share (1) of a class of special voting
         preferred stock of the par value of One Dollar ($1.00) per share
         designated as Class SV-C Preferred Stock; and One Share (1) of a class
         of special voting preferred stock of the par value of One Dollar
         ($1.00) per share designated as Class SV-D Preferred Stock.

                 The holder of Common Stock shall be entitled to all of the
         rights and privileges pertaining to common stock without any
         limitations, prohibitions, restrictions, or qualifications under the
         General Corporation Law of the State of Delaware.

                 The holder of the Class SV Preferred Stock, the holder of the
         Class SV-A Preferred Stock, the holder of the Class SV-B Preferred
         Stock, the holder of the Class SV-C Preferred Stock and the holder of
         the Class SV-D Preferred Stock shall not be entitled to any rights or
         privileges (including, but not limited to, rights of the holder to
         receive dividends) under the General Corporation Law of the State of
         Delaware except that the holder of each such class shall be entitled
         to vote
<PAGE>   5

         with respect to any matters to come before the stockholders of the
         Corporation with respect to the consent of all holders of the Class SV
         Preferred Stock, all holders of the Class SV-A Preferred Stock, all
         holders of the Class SV-B Preferred Stock, all holders of the Class
         SV-C Preferred Stock and all holders of the Class SV-D Preferred Stock
         required by Article Fifteenth hereof and shall be entitled to receive
         only upon liquidation an amount equal to One Dollar ($1.00) per share,
         which is to be received prior to any distribution to holders of Common
         Stock.

         FURTHER RESOLVED, that Article FIFTEENTH of the Certificate of
Incorporation be amended by deleting and restating such paragraph to read, in
its entirety, as follows:

                 FIFTEENTH.  Notwithstanding any other provision of the
         Certificate of Incorporation and any provision of law that otherwise
         so empowers the Corporation, the Corporation shall not, without the
         unanimous consent of all of the holders of the Class SV Preferred
         Stock, Class SV-A Preferred Stock,  Class SV-B Preferred Stock, Class
         SV-C Preferred Stock and Class SV-D Preferred Stock of the
         Corporation, institute proceedings to be adjudicated insolvent, or
         consent to the institution of any bankruptcy or insolvency case or
         proceedings against it, or file or consent to a petition under any
         applicable federal or state law relating to bankruptcy, seeking the
         Corporation's liquidation or reorganization or any other relief for
         the Corporation as debtor, or consent to the appointment of a
         receiver, liquidator, assignee, trustee, custodian or sequestrator (or
         other similar official) of the Corporation or a substantial part of
         its property, or make any assignment for the benefit of creditors, or
         admit in writing its inability to pay its debts generally as they
         become due, or take any corporate action in furtherance of any such
         action.  This Article Fifteenth may not be amended without the consent
         of all the stockholders of the Corporation entitled to vote on the
         matters contained in this Article Fifteenth.

         SECOND:          That in lieu of a meeting and vote of stockholders,
the stockholders have given unanimous written consent to said amendment in
accordance with the provision of Section 228 of the General Corporation Law of
the State of Delaware.

         THIRD:  That the aforesaid amendments to the Certificate of
Incorporation, set forth in Paragraph FIRST hereinabove, has been duly adopted
in accordance with the provision of Sections 242 AND 228 of the General
Corporation Law of the State of Delaware.





                                      -2-
<PAGE>   6

         IN WITNESS WHEREOF, the Corporation has caused this certificate to by
signed by S. H. Smith, its Vice President, Assistant Treasurer and Director,
and by J. W. Blenke, its Vice President, Secretary and Director, this 1st day
of May, 1996.


                                                   HFC REVOLVING CORPORATION



                                                   By: S. H. Smith
                                                       ----------------------
                                                       S. H. Smith



ATTEST:


J. W. Blenke
- ----------------
J. W. Blenke





                                      -3-
<PAGE>   7

                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                          (HFC REVOLVING CORPORATION)



         HFC Revolving Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:

         FIRST:  That the Board of Directors of the Corporation by the
unanimous written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendments
to the Certificate of Incorporation of the Corporation.

         RESOLVED, that Article FOURTH of the Certificate of Incorporation be
amended by deleting and restating such Article to read, in its entirety, as
follows:

                 FOURTH.  The amount of the total authorized capital stock of
         the Corporation is One Thousand Four Dollars  ($1,004.00) consisting
         of One Thousand Shares (1,000) of a class of common stock of the par
         value of One Dollar ($1.00) per share designated as Common Stock, One
         Share (1) of a class of special voting preferred stock of the par
         value of One Dollar ($1.00) per share designated as Class SV Preferred
         Stock, One Share (1) of a class of special voting preferred stock of
         the par value of One Dollar ($1.00) per share designated as Class SV-A
         Preferred Stock, One Share (1) of a class of special voting preferred
         stock of the par value of One Dollar ($1.00) per share designated as
         Class SV-B Preferred Stock and One Share (1) of a class of special
         voting preferred stock of the par value of One Dollar ($1.00) per
         share designated as Class SV-C Preferred Stock.

                 The holder of Common Stock shall be entitled to all of the
         rights and privileges pertaining to common stock without any
         limitations, prohibitions, restrictions, or qualifications under the
         General Corporation Law of the State of Delaware.

                 The holder of the Class SV Preferred Stock, the holder of
         Class SV-A Preferred Stock, the holder of the Class SV-B Preferred
         Stock and the holder of the Class SV-C Preferred Stock shall not be
         entitled to any rights or privileges (including, but not limited to,
         rights of the holder to receive dividends) under the General
         Corporation Law of the State of Delaware except that the holder of
         each such class shall be entitled to vote with respect to any matters
         to come before the stockholders of the Corporation with respect to the
         consent of all holders of the Class SV Preferred Stock, all
<PAGE>   8

         holders of the Class SV-A Preferred Stock, all holders of the Class
         SV-B Preferred Stock and all holders of the Class SV-C Preferred Stock
         required by Article Fifteenth hereof and shall be entitled to receive
         only upon liquidation an amount equal to One Dollar ($1.00) per share,
         which is to be received prior to any distribution to holders of Common
         Stock.

         FURTHER RESOLVED, that Article FIFTEENTH of the Certificate of
Incorporation be amended by deleting and restating such paragraph to read, in
its entirety, as follows:

                 FIFTEENTH.  Notwithstanding any other provision of the
         Certificate of Incorporation and any provision of law that otherwise
         so empowers the Corporation, the Corporation shall not, without the
         unanimous consent of all of the holders of the Class SV Preferred
         Stock, Class SV-A Preferred Stock,  Class SV-B Preferred Stock and
         Class SV-C Preferred Stock of the Corporation, institute proceedings
         to be adjudicated insolvent, or consent to the institution of any
         bankruptcy or insolvency case or proceedings against it, or file or
         consent to a petition under any applicable federal or state law
         relating to bankruptcy, seeking the Corporation's liquidation or
         reorganization or any other relief for the Corporation as debtor, or
         consent to the appointment of a receiver, liquidator, assignee,
         trustee, custodian or sequestrator (or other similar official) of the
         Corporation or a substantial part of its property, or make any
         assignment for the benefit of creditors, or admit in writing its
         inability to pay its debts generally as they become due, or take any
         corporate action in furtherance of any such action.  This Article
         Fifteenth may not be amended without the consent of all the
         stockholders of the Corporation entitled to vote on the matters
         contained in this Article Fifteenth.

         SECOND:          That in lieu of a meeting and vote of stockholders,
the stockholders have given unanimous written consent to said amendment in
accordance with the provision of Section 228 of the General Corporation Law of
the State of Delaware.

         THIRD:  That the aforesaid amendments to the Certificate of
Incorporation, set forth in Paragraph FIRST hereinabove, has been duly adopted
in accordance with the provision of Sections 242 AND 228 of the General
Corporation Law of the State of Delaware.





                                      -2-
<PAGE>   9

         IN WITNESS WHEREOF, the Corporation has caused this certificate to by
signed by S. H. Smith, its Vice President, Assistant Treasurer and Director,
and by J. W. Blenke, its Vice President, Secretary and Director, this 1st day
of November, 1995.


                                                    HFC REVOLVING CORPORATION



                                                    By: S. H. Smith
                                                       ---------------------
                                                        S. H. Smith





ATTEST:


J. W. Blenke
- -------------------
J. W. Blenke




                                      -3-
<PAGE>   10

                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                          (HFC REVOLVING CORPORATION)



         HFC Revolving Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:

         FIRST:  That the Board of Directors of the Corporation by the
unanimous written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendments
to the Certificate of Incorporation of the Corporation.

         RESOLVED, that Article FOURTH of the Certificate of Incorporation be
amended by deleting and restating such Article to read, in its entirety, as
follows:

                 FOURTH.  The amount of the total authorized capital stock of
         the Corporation is One Thousand Three Dollars  ($1,003.00) consisting
         of One Thousand Shares (1,000) of a class of common stock of the par
         value of One Dollar ($1.00) per share designated as Common Stock, One
         Share (1) of a class of special voting preferred stock of the par
         value of One Dollar ($1.00) per share designated as Class SV Preferred
         Stock, One Share (1) of a class of special voting preferred stock of
         the par value of One Dollar ($1.00) per share designated as Class SV-A
         Preferred Stock and One Share (1) of a class of special voting
         preferred stock of the par value of One Dollar ($1.00) per share
         designated as Class SV-B Preferred Stock.

                 The holder of Common Stock shall be entitled to all of the
         rights and privileges pertaining to common stock without any
         limitations, prohibitions, restrictions, or qualifications under the
         General Corporation Law of the State of Delaware.

                 The holder of the Class SV Preferred Stock, the holder of
         Class SV-A Preferred Stock and the holder of the Class SV-B Preferred
         Stock shall not be entitled to any rights or privileges (including,
         but not limited to,
<PAGE>   11

         rights of the holder to receive dividends) under the General
         Corporation Law of the State of Delaware except that the holder of
         each such class shall be entitled to vote with respect to any matters
         to come before the stockholders of the Corporation with respect to the
         consent of all holders of the Class SV Preferred Stock, all holders of
         the Class SV-A Preferred Stock and all holders of the Class SV-B
         Preferred Stock required by Article Fifteenth hereof and shall be
         entitled to receive only upon liquidation an amount equal to One
         Dollar ($1.00) per share, which is to be received prior to any
         distribution to holders of Common Stock.

                 FURTHER RESOLVED, that Article FIFTEENTH of the Certificate of
         Incorporation be amended by deleting and restating such paragraph to 
         read, in its entirety, as follows:

                 FIFTEENTH.  Notwithstanding any other provision of the
         Certificate of Incorporation and any provision of law that otherwise
         so empowers the Corporation, the Corporation shall not, without the
         unanimous consent of all of the holders of the Class SV Preferred
         Stock, Class SV-A Preferred Stock and Class SV-B Preferred Stock of
         the Corporation, institute proceedings to be adjudicated insolvent, or
         consent to the institution of any bankruptcy or insolvency case or
         proceedings against it, or file or consent to a petition under any
         applicable federal or state law relating to bankruptcy, seeking the
         Corporation's liquidation or reorganization or any other relief for
         the Corporation as debtor, or consent to the appointment of a
         receiver, liquidator, assignee, trustee, custodian or sequestrator (or
         other similar official) of the Corporation or a substantial part of
         its property, or make any assignment for the benefit of creditors, or
         admit in writing its inability to pay its debts generally as they
         become due, or take any corporate action in furtherance of any such
         action.  This Article Fifteenth may not be amended without the consent
         of all the stockholders of the Corporation entitled to vote on the
         matters contained in this Article Fifteenth.

         SECOND:          That in lieu of a meeting and vote of stockholders,
the stockholders have given unanimous written consent to said amendment in
accordance with the provision of Section 228 of the General Corporation Law of
the State of Delaware.

         THIRD:  That the aforesaid amendments to the Certificate of
Incorporation, set forth in Paragraph FIRST hereinabove, has been duly adopted
in accordance with the provision of Sections 242 AND 228 of the General
Corporation Law of the State of Delaware.





<PAGE>   12

         IN WITNESS WHEREOF, the Corporation has caused this certificate to by
signed by S. H. Smith, its Vice President, Assistant Treasurer and Director,
and by J. W. Blenke, its Vice President, Secretary and Director, this 13th day
of April, 1995.


                                        HFC REVOLVING CORPORATION



                                        By: S. H. Smith
                                           ---------------------------
                                            S. H. Smith



ATTEST:


J. W. Blenke
- ---------------------------
J. W. Blenke





<PAGE>   13





                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                          (HFC REVOLVING CORPORATION)


     HFC Revolving Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:

     FIRST:  That the Board of Directors of the Corporation by the unanimous
written consent of its members, filed with the minutes of the Board, adopted a
resolution proposing and declaring advisable the following amendments to the
Certificate of Incorporation of the Corporation.

     RESOLVED, that Article FOURTH of the Certificate of Incorporation be
amended by deleting and restating such Article to read, in its entirety,
as follows:

               FOURTH.  The amount of the total authorized capital stock of the
          Corporation is One Thousand Two Dollars  ($1,002.00) consisting of One
          Thousand Shares (1,000) of a class of common stock of the par value of
          One Dollar ($1.00) per share designated as Common Stock, One Share (1)
          of a class of special voting preferred stock of the par value of One
          Dollar ($1.00) per share designated as Class SV Preferred Stock and
          One Share (1) of a class of special voting preferred stock of the par
          value of One Dollar ($1.00) per share designated as Class SV-A
          Preferred Stock.

               The holder of Common Stock shall be entitled to all of the rights
          and privileges pertaining to common stock without any limitations,
          prohibitions, restrictions, or qualifications under the General
          Corporation Law of the State of Delaware.

               The holder of the Class SV Preferred Stock and the holder of
          Class SV-A Preferred Stock shall not be entitled to any rights or
          privileges (including, but not limited to, rights of the holder to
          receive dividends) under the General Corporation Law of the State of
          Delaware except that the holder of each such class shall be entitled
          to vote with respect to any matters to come
<PAGE>   14

         before the stockholders of the Corporation with respect to the consent
         of all holders of the Class SV Preferred Stock and all holders of the
         Class SV-A Preferred Stock required by Article Fifteenth hereof and
         shall be entitled to receive only upon liquidation an amount equal to
         One Dollar ($1.00), which is to be received prior to any distribution
         to holders of Common Stock.

                 FURTHER RESOLVED, that Article FIFTEENTH of the Certificate of
         Incorporation be amended by deleting and restating such paragraph to
         read, in its entirety, as follows:

                 FIFTEENTH.  Notwithstanding any other provision of the
         Certificate of Incorporation and any provision of law that otherwise
         so empowers the Corporation, the Corporation shall not, without the
         unanimous consent of all of the holders of the Class SV Preferred
         Stock and Class SV-A Preferred Stock of the Corporation, institute
         proceedings to be adjudicated insolvent, or consent to the institution
         of any bankruptcy or insolvency case or proceedings against it, or
         file or consent to a petition under any applicable federal or state
         law relating to bankruptcy, seeking the Corporation's liquidation or
         reorganization or any other relief for the Corporation as debtor, or
         consent to the appointment of a receiver, liquidator, assignee,
         trustee, custodian or sequestrator (or other similar official) of the
         Corporation or a substantial part of its property, or make any
         assignment for the benefit of creditors, or admit in writing its
         inability to pay its debts generally as they become due, or take any
         corporate action in furtherance of any such action.  This Article
         Fifteenth may not be amended without the consent of all the
         stockholders of the Corporation entitled to vote on the matters
         contained in this Article Fifteenth.

   SECOND:       That in lieu of a meeting and vote of stockholders, the
stockholders have given unanimous written consent to said amendment in
accordance with the provision of Section 228 of the General Corporation Law of
the State of Delaware.

   THIRD:        That the aforesaid amendments to the Certificate of
Incorporation, set forth in Paragraph FIRST hereinabove, has been duly adopted
in accordance with the provision of Sections 242 AND 228 of the General
Corporation Law of the State of Delaware.

   IN WITNESS WHEREOF, the Corporation has caused this certificate to by signed
by S. H. Smith, its Vice President,
<PAGE>   15



Assistant Treasurer and Director, and by J. W. Blenke, its Vice President,
Secretary and Director, this 24th day of October, 1994.


                                        HFC REVOLVING CORPORATION




                                        By: S. H. Smith
                                           ----------------------
                                            S. H. Smith





ATTEST:


J. W. Blenke
- ---------------------
J. W. Blenke
<PAGE>   16

                          CERTIFICATE OF INCORPORATION

                                       OF

                           HFC REVOLVING CORPORATION

         FIRST.  The name of the corporation is HFC REVOLVING CORPORATION (the
"Corporation").

         SECOND.  Its registered office in the State of Delaware is located at
1209 Orange Street, City of Wilmington, County of New Castle, State of
Delaware.  The name and address of its resident agent at such address is The
Corporation Trust Company.

         THIRD.  The nature of the business, or objects or purposes proposed to
be transacted, promoted or carried on are:

         (a)     to borrow money on a non-recourse basis, in connection with
                 the issuance of any securities relating to any other
                 transaction permitted by this paragraph Third, to make
                 deposits of money in bank accounts, to grant security
                 interests in such deposits for its own benefit or the benefit
                 of others and to purchase or otherwise acquire securities
                 evidencing ownership of, or other interests in, assets
                 securitized by third parties which securities have been rated
                 by a nationally recognized rating agency.

         (b)     to acquire from Household Finance Corporation, or subsidiaries
                 thereof, hold, sell and pledge closed or open-ended mortgage
                 loans or amounts owing on such loans ("Mortgage Loans") and to
                 enter into agreements for the servicing of Mortgage Loans.

         (c)     to enter into any agreement (including, without limitation,
                 any agreement creating a trust) providing for the
                 authorization, issuance, sale and delivery of pass-through
                 certificates ("Certificates") whether directly or through a
                 trust, secured or supported by Mortgage Loans or collections
                 thereon.

         (d)     to hold, pledge or otherwise deal with any Certificate
                 representing a residual interest or other ownership interest
                 in the Mortgage Loans ("Seller Certificates").

         (e)     to invest proceeds from Mortgage Loans, funds received in
                 respect of any Seller Certificates, and any other income as
                 determined by the Corporation's board of directors, including
                 investing in other Mortgage Loans.

         (f)     to engage in any lawful act or activity for which corporations
                 may be organized under the laws of the State of Delaware that
                 are incidental to and necessary or convenient for the
                 accomplishment of the purposes stated in (a) through (e)
                 above; provided that the Corporation
<PAGE>   17

                 shall not engage in the business of personal finance, consumer
                 finance, sales finance, commercial finance, banking or
                 factoring.

         FOURTH.  The amount of the total authorized capital stock of the
Corporation is One Thousand One Dollars ($1,001.00) consisting of One Thousand
Shares (1,000) of a class of common stock of the par value of One Dollar
($1.00) designated as Common Stock and One Share (1) of a class of special
voting preferred stock of the par value of One Dollar ($1.00) designated as
Class SV Preferred Stock

         The holder of Common Stock shall be entitled to all of the rights and
privileges pertaining to common stock without any limitations, prohibitions,
restrictions, or qualifications under the General Corporation Law of the State
of Delaware.

         The holder of Class SV Preferred Stock shall be entitled to no rights
or privileges (including, but not limited to, no rights of the holder to
receive dividends) under the General Corporation Law of the State of Delaware
except that the holder shall be entitled to vote with respect to any matters to
come before the stock holders of the Corporation with respect to the consent of
all holders of the Class SV Preferred Stock required by Article Fifteenth
hereof and shall be entitled to receive only upon liquidation an amount equal
to One Dollar ($1.00), which is to be received prior to any distribution to
holders of Common Stock.

         FIFTH.  The name and post office address of the sole incorporator
signing the certificate of incorporation is as follows:

                 NAME                           POST OFFICE ADDRESS
                 ----                           -------------------
         John W. Blenke                         2700 Sanders Road
                                                Prospect Heights, IL  60070

         SIXTH.  The names and post office addresses of the first board of
directors, which shall be three in number, are as follows:

                 NAME                           POST OFFICE ADDRESS
                 ----                           -------------------
         R. F. Elliott                          2700 Sanders Road
                                                Prospect Heights, IL  60070
                                                
         S. H. Smith                            2700 Sanders Road
                                                Prospect Heights, IL  60070
                                                
                                                
         J. W. Blenke                           2700 Sanders Road
                                                Prospect Heights, IL  60070





                                      -2-
<PAGE>   18


         SEVENTH.  The Corporation is to have perpetual existence.

         EIGHTH.  Provisions for the management of the business and for the
conduct of the affairs of this Corporation and provisions creating, defining,
limiting and regarding the powers of the Corporation, the directors and
stockholders are as follows:

                 (1)      subject to the bylaws, if any, adopted by the
         stockholders, the board of directors shall have the power to make,
         alter, amend or repeal the bylaws of the Corporation.

                 (2)      the board of directors shall have the power to make,
         adopt, alter, amend and repeal the bylaws of this Corporation without
         the assent or vote of the stockholders, including, without limitation,
         the power to fix, from time to time, the number of directors which
         shall constitute the whole board of directors of this Corporation
         subject to the right of the stockholders to alter, amend and repeal
         the bylaws made by the board of directors.

                 (3)  Election of directors of this Corporation need not be by
         written ballot unless the bylaws so provide.


                 (4)      The directors in their discretion may submit any
         contract or act for approval or ratification at any annual meeting of
         the stockholders or at any meeting of the stockholders called for the
         purpose of considering any such act or contract, and any contract or
         act that shall be approved or be ratified by the vote of the holders
         of a majority of the stock of this Corporation which is represented in
         person or by proxy at such meeting and entitled to vote thereat
         (provided that a lawful quorum of stockholders be there represented in
         person or by proxy) shall be as valid and as binding upon this
         Corporation and upon all the stockholders as though it had been
         approved or ratified by every stockholder of this Corporation, whether
         or not the contract or act would otherwise be open to legal attack
         because of directors' interest, or for any other reason.

                 (5)      In addition to the powers and authority hereinbefore
         or by statute expressly conferred upon them, the board of directors of
         this Corporation are hereby expressly empowered to exercise all such
         powers and to do all such acts and things as may be exercised or done
         by this Corporation; subject, nevertheless, to the provisions of the
         statutes of the State of Delaware and of the Certificate of
         Incorporation as they may be amended, altered or changed from time to
         time and to any bylaws from time to time made by the directors or
         stockholders; provided, however, that no bylaw so made shall





                                      -3-
<PAGE>   19

         invalidate any prior act of the board of directors which would have
         been valid if such bylaw had not been made.

                 (6)      Whenever this Corporation shall be authorized to
         issue more than one class of stock, the holders of the stock of any
         class which is not otherwise entitled to voting power shall not be
         entitled to vote upon the increase or decrease in the number of
         authorized shares of such class.

         NINTH.  To the fullest extent permitted by the General Corporation Law
of Delaware as the same exists or may hereafter be amended, a director of this
Corporation shall not be personally liable to this Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
If the General Corporation Law of Delaware is amended after approval by the
stockholders of this provision to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of this Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of Delaware, as so amended.
Any repeal or modification of this Article NINTH by the stockholders of this
Corporation shall not adversely affect any right or protection of a director of
this Corporation existing at the time of such repeal or modification or with
respect to events occurring prior to such time.

         TENTH.  (A)  This Corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of this Corporation),
by reason of the fact that he is or was a director, officer, employee or agent
of this Corporation, or is or was serving at the request of this Corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such act, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of this Corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.  The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of this Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.





                                      -4-
<PAGE>   20


                 (B)      This Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of this Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of this Corporation, or is or was serving at the
request of this Corporation as a director, officer, employee or agent of
another Corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of this Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to this Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of the State of
Delaware or such other court shall deem proper.

                 (C)      Expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon the receipt of an undertaking by or on behalf of such director
or officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the Corporation as authorized in Section 145
of the Delaware General Corporation Law.  Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the board of directors deems appropriate.

                 (D)      In addition to the right of indemnification provided
for in this Article TENTH, this Corporation shall, to the fullest and broadest
extent permitted by applicable law, including, without limitation, Section 145
of the Delaware General Corporation Law as it may be amended from time to time,
indemnify all persons whom it may indemnify pursuant thereto.

                 (E)      The right of indemnification provided by this Article
TENTH shall apply as to action by any person in his or her official capacity
and as to action in another capacity while holding such office and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.





                                      -5-
<PAGE>   21

                 (F)      The right of indemnification provided by this Article
TENTH shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.

                 (G)      The right of indemnification provided by this Article
TENTH shall be deemed to be a contract between this Corporation and each
director, officer, employee or agent of this Corporation who serves in such
capacity, both as to action in his official capacity and as to action in
another capacity while holding such office, at any time while this Article
TENTH and the relevant provisions of the General Corporation Law of the State
of Delaware and other applicable law, if any, are in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter brought or threatened based in
whole or in part upon any such state of facts.

                 (H)      Notwithstanding any provision of this Article TENTH
to the contrary, this Corporation may, but shall not be obligated to, purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of this Corporation, or is or was serving at the
request of this Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his or her status as such, whether or not this
Corporation would have the power to indemnify him or her against such
liability.

                 (I)      For purposes of this Article TENTH, references to
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries, and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner he or she reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have





                                      -6-
<PAGE>   22

acted in a manner "not opposed to the best interests of the corporation" as
referred to in this Article TENTH.

         ELEVENTH.  Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code, or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs.  If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation, as a consequence of such compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders of
this Corporation, as the case may be, and also on this Corporation.

         TWELFTH.  This Corporation reserves the right to amend, alter, change
or repeal any provision contained in the articles of incorporation, in the
manner now or hereafter prescribed by statute, or by the certificate of
incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.

         THIRTEENTH.  The Corporation shall be operated in such a manner that
it would not be substantially consolidated in the trust estate of any other
individual, corporation, partnership, joint venture, trust or unincorporated
organization or any other legal entity, whether acting in an individual,
fiduciary or other capacity (each, a "Person") in the event of a bankruptcy or
insolvency of such Person and in such regard, the Corporation shall:

         (a)     not become involved in the day-to-day management of any other
                 Person;

         (b)     not engage in transactions with any other Person except as
                 expressly set forth herein and matters necessarily incident
                 thereto;





                                      -7-
<PAGE>   23


         (c)     maintain separate corporate records and books of account and a
                 separate business office from any direct shareholder;

         (d)     maintain its assets separately from the assets of any other
                 Person (including through the maintenance of a separate bank
                 account);

         (e)     maintain separate financial statements, books and records from
                 any other Person;

         (f)     not guarantee any other Person's obligations or advance funds
                 to any other Person for the payment of expenses or otherwise;

         (g)     conduct all business correspondence of the Corporation and
                 other communications in the Corporation's own name, on its own
                 stationery and through a separately-listed telephone number;
                 and

         (h)     not act as an agent of any other Person in any capacity.

         FOURTEENTH.   Notwithstanding any other provision of the Certificate
of Incorporation and any provision of law that otherwise so empowers the
Corporation, the Corporation shall not, without the unanimous consent of the
Board of Directors of the Corporation:

         (a)     amend, alter, change or repeal Article THIRD or THIRTEENTH 
                 hereof or this Article FOURTEENTH.

         (b)     engage in any business or activity other than as authorized by
                 Article THIRD hereof;

         (c)     dissolve or liquidate, in whole or in part; or

         (d)     consolidate with or merge into any other entity or convey,
                 transfer or lease its properties and assets substantially as
                 an entirety to any entity, or permit any entity to merge into
                 the Corporation or convey, transfer or lease its properties
                 and assets substantially as an entirety to the Corporation.

         FIFTEENTH.  Notwithstanding any other provision of the Certificate of
Incorporation and any provision of law that otherwise so empowers the
Corporation, the Corporation shall not, without the unanimous consent of all of
the holders of the Class SV Preferred Stock of the Corporation, institute
proceedings to be adjudicated insolvent, or consent to the institution of any
bankruptcy or insolvency case or proceedings against it, or file or





                                      -8-
<PAGE>   24

consent to a petition under any applicable federal or state law relating to
bankruptcy, seeking the Corporation's liquidation or reorganization or any
other relief for the Corporation as debtor, or consent to the appointment of a
receiver, liquidator, assignee, trustee, custodian or sequestrator (or other
similar official) of the Corporation or a substantial part of its property, or
make any assignment for the benefit of creditors, or admit in writing its
inability to pay its debts generally as they become due, or take any corporate
action in furtherance of any such action.  This Article Fifteenth may not be
amended without the consent of all the stockholders of the Corporation entitled
to vote on the matters contained in this Article Fifteenth.

         I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a Corporation pursuant to the General Corporation Law of the
State of Delaware, do make and file this certificate of incorporation, hereby
declaring and certifying that the facts herein stated are true, and accordingly
have hereunto set my hand this 5th day of May, 1994.


John W. Blenke
- ------------------------------------
John W. Blenke



In the presence of:

Patrick D. Schwartz
- ------------------------------------





                                      -9-

<PAGE>   1
                                                                    EXHIBIT 3.2

      _________________________________________________________________


                                   BYLAWS OF

                           HFC REVOLVING CORPORATION

                           (as approved May 5, 1994)

      _________________________________________________________________



                                   ARTICLE I.

                        DEFINITIONS, PLACES OF MEETINGS.


         SECTION 1.  Definitions.  When used herein, "Board" shall mean the
Board of Directors of this Corporation, and "Chairman" shall mean Chairman of 
the Board of Directors.

         SECTION 2.  Places of Meetings of Stockholders and Directors.
Meetings of stockholders and of the Board shall be held at such place, within 
or outside the State of Delaware, as specified by the person or persons calling
the meeting.


                                  ARTICLE II.

                             STOCKHOLDERS MEETINGS.

 
         SECTION 1.  Annual Meetings of Stockholders.  The annual meeting of
stockholders shall be held on the third Wednesday in September at 9:30 a.m.
unless the Board shall fix a different date or time.

         SECTION 2.  Special Meetings.

         CALL.  Special meetings of the stockholders may be called at any time
by the Chairman of the Board, the President, or one or more members of the
Board of Directors.

         REQUISITES OF CALL.  A call for a special meeting of stockholders
shall be in writing, filed with the Secretary, and shall specify the time and
place of holding such meeting and the purpose or purposes for which it is
called.





                                      -1-
<PAGE>   2

         SECTION 3.  Notice of Meetings.  Written notice of a meeting of
stockholders setting forth the place, date, and hour of the meeting and the
purpose or purposes for which the meeting is called shall be mailed not less
than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at the meeting.

         SECTION 4.  Quorum.  At any meeting of stockholders, and except as
otherwise required by law, the Certificate of Incorporation, or the bylaws, the
holders of one-third of all the outstanding shares entitled to vote, present in
person or by proxy, shall constitute a quorum for the transaction of business,
and a majority vote of such quorum shall prevail, except with respect to the
election of directors in which case a plurality of the votes of such quorum
shall prevail.  Where a separate vote by class or classes is required, and
except as otherwise provided by law, the Certificate of Incorporation, or the
bylaws, one-third of the outstanding shares of such class or classes, present
in person or by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter, and a majority vote of such quorum shall
prevail, except with respect to the election of directors in which case a
plurality of the votes of such quorum shall prevail.

         If the stockholders necessary for a quorum shall fail to be present in
person or by proxy at the time and place fixed for any meeting, the holders of
a majority of the shares entitled to vote who are present in person or by proxy
may adjourn the meeting from time to time, until a quorum is present, and at
any such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the original meeting.

         SECTION 5.  Proxies.  At each meeting of stockholders the proxies shall
be delivered to the Secretary and, unless otherwise required by law, all
questions touching the validity or sufficiency of the proxies shall be decided
by the Secretary.

         SECTION 6.  List of Stockholders.  The Secretary shall prepare, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder.  Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall
be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held.  The list shall be produced and kept at
the time and





                                      -2-
<PAGE>   3

place of the meeting during the whole time thereof and may be inspected by any
stockholder present.


                                  ARTICLE III.

                              BOARD OF DIRECTORS.


         SECTION 1.  General Powers.  The business and affairs of this
Corporation shall be managed under the direction of the Board.

         NUMBER.  The number of directors shall be fixed from time to time by
resolution of the Board.

         TENURE.  The directors shall be elected at the annual meeting of
stockholders.  Each director shall hold office until his successor is elected
and qualified or until his earlier resignation or removal.

         VACANCIES.  Unless otherwise provided by law, the Certificate of
Incorporation or the bylaws, vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office though less than a quorum.

         Unless otherwise provided by law or the Certificate of Incorporation,
whenever the holders of any class or classes of stock or series thereof are
entitled to elect one or more directors by the provisions of the Certificate of
Incorporation, vacancies and newly created directorships of such class or
classes or series may be filled by a majority of the directors elected by such
class or classes or series thereof then in office, or by a sole remaining
director so elected, or if there is no remaining director elected by such class
or classes or series thereof, then by a majority of the remaining directors of
the entire Board.

         SECTION 2.  Annual Meetings of Board.  The annual meeting of the Board
shall be held following the annual meeting of stockholders, or as soon
thereafter as practicable, and shall be a meeting of the directors elected at
such meeting of stockholders.  No notice shall be required.

         SECTION 3.  Regular Meetings of Board.  Regular meetings of the Board
shall be held at such times and places as the Board may fix.  No notice shall
be required.

         SECTION 4.  Special Meetings of the Board.  Special meetings of the
Board shall be held whenever called by the Chairman, the President, or any one
or more directors.  At least twenty-four





                                      -3-
<PAGE>   4

hours' written or oral notice of each special meeting shall be given to each
director.  If mailed, notice must be deposited in the United States mail at
least seventy-two hours before the meeting.

         SECTION 5.  Quorum.  Forty percent of the members of the Board shall
constitute a quorum for the transaction of business, but if at any meeting of
the Board there is less than a quorum the majority of those present may adjourn
the meeting from time to time until a quorum is present.  At any such adjourned
meeting, a quorum being present, any business may be transacted which might
have been transacted at the original meeting.

         Except as otherwise provided by law, the Certificate of Incorporation,
or the bylaws, all actions of the Board shall be decided by vote of a majority
of those present.

         SECTION 6.  Committees.  The Board may, by resolution passed by a
majority of the entire Board, designate one or more committees of directors
which to the extent provided in the resolution shall have and may execute
powers and authority of the Board in the management of the business and affairs
of the Corporation.  A majority of the members of any such committee shall
constitute a quorum for the transaction of business by such committee, and
except as otherwise provided by law, the Certificate of Incorporation, or the
bylaws, all actions of such committee shall be decided by vote of a majority of
those present.

         SECTION 7.  Action Without a Meeting.  Any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be
taken without a meeting (including the annual meeting of the Board) if all the
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee.


                                  ARTICLE IV.

                                   OFFICERS.


         SECTION 1.  Officers.  The General Officers of the Corporation shall be
a President, such number of Vice Presidents as may be determined by the Board,
a Secretary and a Treasurer.  The President shall be a director.

         The Board or the President may from time to time designate, employ, or
appoint such other officers and assistant officers, agents, employees, counsel,
and attorneys at law or in fact as it





                                      -4-
<PAGE>   5

shall deem desirable for such periods and on such terms as it may deem
advisable, and such persons shall have such titles, only such power and
authority, and perform such duties as the Board or the President may determine.

         SECTION 2.  Duties of President.  The President shall be the principal
executive officer and shall have general authority over the business and
affairs of the Corporation subject to the control and direction of the Board
and, in general, perform all other duties incident to the office of President
and shall perform such other duties as may be prescribed by the Board or the
bylaws.  In the absence or inability of the Chairman of the Board to act, the
President shall also perform the duties of the Chairman at Board meetings.

         SECTION 3.  Duties of Vice Presidents.  In the absence or inability to
act of the President, the senior of the Vice Presidents available at the time
shall perform the duties of the President.  Each Vice President shall have such
other powers and perform such other duties as may be prescribed by the
President or the Board.  The order of seniority among the Vice Presidents shall
be as designated from time to time in writing by the President of the
Corporation and filed with the Secretary.

         SECTION 4.  Duties of Secretary.  The Secretary shall record the
proceedings of meetings of the stockholders and directors, give notices of
meetings, and shall, in general, perform all duties incident to the office of
Secretary and such other duties as may be prescribed by the Board.

         SECTION 5.  Duties of Treasurer.  The Treasurer shall be the principal
financial officer and shall have custody of all funds, securities, evidences of
indebtedness, and other similar property of the Corporation, and shall, in
general, perform all duties incident to the office of Treasurer and such other
duties as may be prescribed by the Board.


                                   ARTICLE V.

                           MISCELLANEOUS PROVISIONS.


         SECTION 1.  Waiver of Notice.  Whenever notice is required to be given,
a written waiver thereof signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice. 
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting,





                                      -5-
<PAGE>   6

at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.

         SECTION 2.  Record Date.  In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board may fix, in advance, a
record date, which shall not be more than sixty nor less than ten days before
the date of such meeting, nor more than sixty days prior to any other action;
except that the establishment of a record date for determination of
stockholders entitled to express consent to corporate action in writing without
a meeting shall be established pursuant to Article VI of the bylaws.

         SECTION 3.  Amendment of Bylaws.  The bylaws may be amended at any time
by action of the Board.


                                  ARTICLE VI.

                         CONSENTS TO CORPORATE ACTION.


         SECTION 1.  Action by Written Consent.  Unless otherwise provided in
the Certificate of Incorporation, any action which is required to be or may be
taken at any annual or special meeting of stockholders of the Corporation,
subject to the provisions of Sections (2) and (3) of this Article VI, may be
taken without a meeting, without prior notice and without a vote if a consent
in writing, setting forth the action so taken, shall have been signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or to take such action at a meeting at
which all shares entitled to vote thereon were present and voted; provided,
however, that prompt notice of the taking of the corporate action without a
meeting and by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.

         SECTION 2.  Determination of Record Date for Action by Written 
Consent.  The record date for determining stockholders entitled to express 
consent to corporate action in writing without a meeting shall be fixed by the 
Board of Directors of the Corporation.  Any stockholder seeking to have the 
stockholders authorize or take corporate action by written consent without a 
meeting shall, by written notice to the Secretary, request the Board of 
Directors to fix a record date.  Upon receipt of such a request, the Secretary 
shall, as promptly as practicable, call a special meeting of the





                                      -6-
<PAGE>   7

Board of Directors to be held as promptly as practicable.  At such meeting, the
Board of Directors shall fix a record date; that record date, however, shall
not be more than 10 days after the date upon which the resolution fixing the
record date is adopted by the Board nor more than 15 days from the date of the
receipt of the stockholder's request.  Notice of the record date shall be
published in accordance with the rules and policies of any stock exchange on
which securities of the Corporation are then listed, if applicable.  Should the
Board fail to fix a record date as provided for in this Section 2, then the
record date shall be the day on which the first written consent is duly
delivered pursuant to applicable state law, or, if prior action is required by
the Board with respect to such matter, the record date shall be at the close of
business on the day on which the Board adopts the resolution taking such
action.

         SECTION 3.  Procedures for Written Consent.  In the event of the
delivery to the Corporation of a written consent or consents purporting to
represent the requisite voting power to authorize or take corporate action
and/or related revocations, the Secretary of the Corporation shall provide for
the safekeeping of such consents and revocations.  The Corporation shall
promptly engage one or more inspectors of elections for the purpose of promptly
performing a ministerial review of the validity of the consents and
revocations.  No action by written consent without a meeting shall be effective
until such inspectors have completed their review, determined that the
requisite number of valid and unrevoked consents has been obtained to authorize
or take the action specified in the consents, and certified such determination
for entry in the records of the Corporation kept for the purpose of recording
the proceedings of meetings of stockholders.





                                      -7-

<PAGE>   1
                                                                       EXHIBIT 4

================================================================================




                           HFC REVOLVING CORPORATION,
                                   as Seller,



                                      and



                         HOUSEHOLD FINANCE CORPORATION,
                              as Master Servicer,



                                      and



                      THE FIRST NATIONAL BANK OF CHICAGO,
                                   as Trustee



                            _______________________


                    FORM OF POOLING AND SERVICING AGREEMENT

                       Dated as of _______________, 1996

                            _______________________



             Revolving Home Equity Loan Asset Backed Certificates,

                                 Series 1996-2



================================================================================
<PAGE>   2
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
 <S>                                                                        <C>
                                    ARTICLE I

                                   Definitions

         Section 1.01.    Definitions . . . . . . . . . . . . . . . . . . .    1
         Section 1.02.    Interest Calculations . . . . . . . . . . . . . .   18
         Section 1.03.    Usage of Terms  . . . . . . . . . . . . . . . . .   18

                                   ARTICLE II

 Conveyance of Mortgage Loans; Original Issuance of Certificates; Tax Treatment

         Section 2.01.    Acknowledgment; Conveyance of Initial Mortgage
                          Loans; Retention of Obligation to Fund
                          Advances Under Loan Agreements; Custody of
                          Mortgage Files  . . . . . . . . . . . . . . . . .   19
         Section 2.02.    Acceptance by Trustee; Retransfer of Mortgage
                          Loans; Conveyance of Eligible Substitute
                          Mortgage Loans  . . . . . . . . . . . . . . . . .   23
         Section 2.03.    Representations and Warranties Regarding the
                          Master Servicer; Certain Covenants of the
                          Master Servicer . . . . . . . . . . . . . . . . .   26
         Section 2.04.    Representations and Warranties of the Seller
                          Regarding this Agreement and the Mortgage
                          Loans; Retransfer of Certain Mortgage Loans . . .   27
         Section 2.05.    Covenants of the Seller . . . . . . . . . . . . .   34
         Section 2.06.    Conveyance of the Subsequent Mortgage Loans . . .   35
         Section 2.07.    Retransfers of Mortgage Loans at Election of
                          Seller  . . . . . . . . . . . . . . . . . . . . .   37
         Section 2.08.    Execution and Authentication of Certificates  . .   39
         Section 2.09.    Tax Treatment . . . . . . . . . . . . . . . . . .   39

                                   ARTICLE III

                 Administration and Servicing of Mortgage Loans

         Section 3.01.    The Master Servicer . . . . . . . . . . . . . . .   40
         Section 3.02.    Collection of Certain Mortgage Loan Payments;
                          Mortgage Loan Payment Record  . . . . . . . . . .   42
         Section 3.03.    Withdrawals from the Collection Account;
                          Permitted Debits to the Mortgage Loan Payment
                          Record  . . . . . . . . . . . . . . . . . . . . .   46
         Section 3.04.    Maintenance of Hazard Insurance; Property
                          Protection Expenses . . . . . . . . . . . . . . .   47
         Section 3.05.    Assumption and Modification Agreements  . . . . .   48
         Section 3.06.    Realization Upon Defaulted Mortgage Loans . . . .   49
         Section 3.07.    Trustee to Cooperate  . . . . . . . . . . . . . .   49
         Section 3.08.    Servicing Compensation; Payment of Certain
                          Expenses by Master Servicer . . . . . . . . . . .   50
         Section 3.09.    Annual Statement as to Compliance . . . . . . . .   50
</TABLE>





                                       i
<PAGE>   3
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
   <S>                                                                      <C>
         Section 3.10.    Annual Servicing Report . . . . . . . . . . . . .   51
         Section 3.11.    Annual Opinion of Counsel . . . . . . . . . . . .   51
         Section 3.12.    Access to Certain Documentation and
                          Information Regarding the Mortgage Loans  . . . .   51
         Section 3.13.    Maintenance of Certain Servicing Insurance
                          Policies  . . . . . . . . . . . . . . . . . . . .   51
         Section 3.14.    Reports to the Securities and Exchange
                          Commission  . . . . . . . . . . . . . . . . . . .   52
         Section 3.15.    Information Required by the Internal Revenue
                          Service Generally and Reports of Foreclosures
                          and Abandonments of Mortgaged Property  . . . . .   52
         Section 3.16.    Additional Covenants of HFC . . . . . . . . . . .   52

                                   ARTICLE IV

                              Servicing Certificate


         Section 4.01.    Servicing Certificate . . . . . . . . . . . . . .   53
         Section 4.02.    Credit Enhancement Instrument; Spread Account . .   56
         Section 4.03.    Replacement Credit Enhancement Instruments  . . .   57

                                    ARTICLE V

   Payments and Statements to Certificateholders; Rights of Certificateholders


         Section 5.01.    Distributions . . . . . . . . . . . . . . . . . .   58
         Section 5.02.    Calculation of the Class A Certificate Rate . . .   60
         Section 5.03.    Statements to Certificateholders  . . . . . . . .   60
         Section 5.04.    Rights of Certificateholders  . . . . . . . . . .   62
         Section 5.05.    Funding Account . . . . . . . . . . . . . . . . .   62

                                   ARTICLE VI

                                The Certificates


         Section 6.01.    The Certificates  . . . . . . . . . . . . . . . .   64
         Section 6.02.    Registration of Transfer and Exchange of Class
                          A Certificates  . . . . . . . . . . . . . . . . .   64
         Section 6.03.    Mutilated, Destroyed, Lost or Stolen
                          Certificates  . . . . . . . . . . . . . . . . . .   66
         Section 6.04.    Persons Deemed Owners . . . . . . . . . . . . . .   67
         Section 6.05.    Restrictions on Transfer of Seller
                          Certificates  . . . . . . . . . . . . . . . . . .   67
         Section 6.06.    Appointment of Paying Agent . . . . . . . . . . .   68
         Section 6.07.    Actions of Certificateholders . . . . . . . . . .   68
</TABLE>





                                       ii
<PAGE>   4
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
         <S>                                                                <C>
                                   ARTICLE VII

                       The Master Servicer and the Seller


         Section 7.01.    Liability of the Master Servicer and the
                          Seller  . . . . . . . . . . . . . . . . . . . . .   69
         Section 7.02.    Merger or Consolidation of, or Assumption of
                          the Obligations of, the Master Servicer or the
                          Seller  . . . . . . . . . . . . . . . . . . . . .   69
         Section 7.03.    Limitation on Liability of the Master Servicer
                          and Others  . . . . . . . . . . . . . . . . . . .   69
         Section 7.04.    Master Servicer Not to Resign . . . . . . . . . .   70
         Section 7.05.    Delegation of Duties  . . . . . . . . . . . . . .   71

                                  ARTICLE VIII

                         Events of Servicing Termination


         Section 8.01.    Events of Servicing Termination . . . . . . . . .   71
         Section 8.02.    Trustee to Act; Appointment of Successor  . . . .   73
         Section 8.03.    Notification to Certificateholders  . . . . . . .   74

                                   ARTICLE IX

                                   The Trustee


         Section 9.01.    Duties of Trustee . . . . . . . . . . . . . . . .   74
         Section 9.02.    Certain Matters Affecting the Trustee . . . . . .   75
         Section 9.03.    Trustee Not Liable for Certificates or
                          Mortgage Loans  . . . . . . . . . . . . . . . . .   76
         Section 9.04.    Trustee May Own Certificates  . . . . . . . . . .   77
         Section 9.05.    Master Servicer to Pay Trustee's Fees and
                          Expenses  . . . . . . . . . . . . . . . . . . . .   77
         Section 9.06.    Eligibility Requirements for Trustee  . . . . . .   78
         Section 9.07.    Resignation or Removal of Trustee . . . . . . . .   78
         Section 9.08.    Successor Trustee . . . . . . . . . . . . . . . .   78
         Section 9.09.    Merger or Consolidation of Trustee  . . . . . . .   79
         Section 9.10.    Appointment of Co-Trustee or Separate Trustee . .   79
         Section 9.11.    Trustee May Enforce Claims Without Possession
                          of Certificates . . . . . . . . . . . . . . . . .   80
         Section 9.12.    Inspection of Mortgage Files  . . . . . . . . . .   81

                                    ARTICLE X

                                   Termination


         Section 10.01.   Termination . . . . . . . . . . . . . . . . . . .   81
</TABLE>





                                      iii
<PAGE>   5
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
                                   ARTICLE XI

                            Rapid Amortization Events


         Section 11.01.   Rapid Amortization Events . . . . . . . . . . . .   83
         Section 11.02.   Additional Rights Upon the Occurrence of
                          Certain Events  . . . . . . . . . . . . . . . . .   84

                                   ARTICLE XII

                            Miscellaneous Provisions


         Section 12.01.   Amendment . . . . . . . . . . . . . . . . . . . .   86
         Section 12.02.   Recordation of Agreement  . . . . . . . . . . . .   87
         Section 12.03.   Limitation on Rights of Certificateholders  . . .   87
         Section 12.04.   Governing Law . . . . . . . . . . . . . . . . . .   88
         Section 12.05.   Notices . . . . . . . . . . . . . . . . . . . . .   88
         Section 12.06.   Severability of Provisions  . . . . . . . . . . .   89
         Section 12.07.   Assignment  . . . . . . . . . . . . . . . . . . .   89
         Section 12.08.   Certificates Nonassessable and Fully Paid . . . .   89
         Section 12.09.   Third-Party Beneficiaries . . . . . . . . . . . .   89
         Section 12.10.   Counterparts  . . . . . . . . . . . . . . . . . .   89
         Section 12.11.   Effect of Headings and Table of Contents  . . . .   89
         Section 12.12.   Limitation on Voting of Preferred Stock . . . . .   89



EXHIBIT A        FORM OF CLASS A CERTIFICATE  . . . . . . . . . . . . . . .  A-1
EXHIBIT B        FORM OF SELLER CERTIFICATE . . . . . . . . . . . . . . . .  B-1
EXHIBIT C        MORTGAGE LOAN SCHEDULE . . . . . . . . . . . . . . . . . .  C-1
EXHIBIT D        FORM OF CONTENT OF ANNUAL OPINION OF COUNSEL . . . . . . .  D-1
EXHIBIT E        FORM OF INVESTMENT LETTER  . . . . . . . . . . . . . . . .  E-1
EXHIBIT F        FORM OF TRUST RECEIPT  . . . . . . . . . . . . . . . . . .  F-1
EXHIBIT G-1      FORM OF MASTER NOTE  . . . . . . . . . . . . . . . . . . .  G-1
EXHIBIT G-2      FORM OF FUNDING MASTER NOTE  . . . . . . . . . . . . . . .  G-2
</TABLE>





                                       iv
<PAGE>   6
         This Pooling and Servicing Agreement, dated as of ______________,
1996, among HFC Revolving Corporation, as Seller, Household Finance
Corporation, as Master Servicer, and The First National Bank of Chicago, a
national banking association, as Trustee,

                                WITNESSETH THAT:

         In consideration of the mutual agreements herein contained, the
parties hereto agree as follows:

                                   ARTICLE I

                                  Definitions

         Section 1.01.  Definitions.   Whenever used in this Agreement, the
following words and phrases, unless the context otherwise requires, shall have
the meanings specified in this Article.

         Accelerated Principal Distribution Amount:   With respect to any
Distribution Date, the amount, if any, required to reduce the Class A
Certificate Principal Balance (after giving effect to the distribution of all
other amounts actually distributed on the Class A Certificates on such
Distribution Date) so that the Invested Amount (after giving effect to other
distributions to be made on the Class A Certificates on such Distribution Date)
exceeds the Class A Certificate Principal Balance (as so reduced) by the
Required Overcollateralization Amount; provided, however, that the Accelerated
Principal Distribution Amount, if any, with respect to a Distribution Date
shall be limited to the amount by which Class A Interest Collections for such
date exceed the aggregate amount distributable therefrom on such date pursuant
to clauses (i) through (vi) of Section 5.01.

         Additional Balance:   As to any Mortgage Loan and day, the unpaid
balance of any principal advanced to the related Mortgagor after the date as of
which the related Cut-Off Date Trust Balance is calculated.

         Affiliate:   With respect to any Person, any other Person controlling,
controlled by or under common control with such  Person.  For purposes of this
definition, "control" means the power to direct the management and policies of
a Person, directly or indirectly, whether through ownership of voting
securities, by contract or otherwise, and "controlling" and "controlled" shall
have meanings correlative to the foregoing.

         Aggregate Class A Liquidation Loss Amount:   With respect to any
Collection Period, the amount equal to the product of (i) the Class A
Certificateholders' Floating Allocation Percentage for such Collection Period
and (ii) the aggregate of the Liquidation Loss Amounts for such Collection
Period.

         Agreement:   This Pooling and Servicing Agreement and all amendments
hereof and supplements hereto.

         Alternative Principal Distribution Amount:   As to any Distribution
Date, the amount (but not less than zero) equal to the Principal Collections
for the related Collection Period less the aggregate of principal amounts drawn
down under the Loan Agreements during the related Collection Period.





<PAGE>   7
         Authorized Newspaper:   A newspaper of general circulation in the
Borough of Manhattan, The City of New York, printed in the English language and
customarily published on each Business Day, whether or not published on
Saturdays, Sundays and holidays.

         BIF:   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 Certificate:   Any Class A Certificate registered in the
name of the Depository or its nominee, ownership of which is reflected on the
books of the Depository or on the books of a person maintaining an account with
such Depository (directly or as an indirect participant in accordance with the
rules of such Depository).

         Business Day:   Any day other than (i) a Saturday or a Sunday or (ii)
a day on which banking institutions in the State of New York or Illinois are
required or authorized by law to be closed.

         Certificate:   A Class A Certificate or a Seller Certificate.

         Certificate Owner:   The Person who is the beneficial owner of a
Book-Entry Certificate.

         Certificate Register and Certificate Registrar:   The register
maintained and the registrar appointed pursuant to Section 6.02.

         Certificateholder or Holder:   The Person in whose name a Certificate
is registered in the Certificate Register, except that, solely for the purpose
of giving any consent, direction, waiver or request pursuant to this Agreement,
(i) any Class A Certificate registered in the name of the Seller (unless to the
knowledge of a Responsible Officer of the Trustee the Seller is acting as
trustee or nominee for a Person who is not an Affiliate of the Seller and who
makes the voting decision with respect to such Class A Certificate) or the
Master Servicer or any Person known to a Responsible Officer of the Trustee to
be an Affiliate of either the Seller or the Master Servicer and (ii) any Class
A Certificate for which the Seller (unless to the knowledge of a Responsible
Officer of the Trustee (A) the Seller is acting as trustee or nominee for a
Person who is not an Affiliate of the Seller and who makes the voting decision
with respect to such Class A Certificate or (B) the Seller is the owner of all
the Class A Certificates) or the Master Servicer or any Person known to a
Responsible Officer of the Trustee to be an Affiliate (other than an Affiliate
that has purchased any Class A Certificate on the Closing Date) of either the
Seller or the Master Servicer is the Certificate Owner shall be deemed not to
be outstanding and the Percentage Interest evidenced thereby shall not be taken
into account in determining whether the requisite amount of Percentage
Interests necessary to effect any such consent, direction, waiver or request
has been obtained.

         Charge Off Amount:   As to any Charged Off Mortgage Loan and
Collection Period, an amount equal to the amount of the Trust Balance that the
Master Servicer has charged off on its servicing records during such Collection
Period.





                                       2
<PAGE>   8
         Charged Off Mortgage Loan:   A defaulted Mortgage Loan that is not a
Liquidated Mortgage Loan and as to which (i) collection procedures are ongoing
and (ii) the Master Servicer has charged off all or a portion of the related
Trust Balance.

         Class A Carry Forward Interest:   As to any Distribution Date, the
amount by which interest accrued on the Class A Certificates at the Class A
Certificate Rate for the related Interest Period exceeds the Class A Interest
Payment Cap for such Distribution Date.

         Class A Certificate Distribution Amount:   With respect to any
Distribution Date, the aggregate amount distributable in respect of principal
and interest on the Class A Certificates pursuant to this Agreement.

         Class A Certificate Interest:   With respect to any Distribution Date,
interest for the related Interest Period at the applicable Class A Certificate
Rate on the Class A Certificate Principal Balance on the first day of such
Interest Period (after giving effect to the distribution made on the first day
of such Interest Period); provided that Class A Certificate Interest shall not
exceed the Class A Interest Payment Cap for such Distribution Date.

         Class A Certificate Principal Balance:   With respect to any
Distribution Date, the Original Class A Certificate Principal Balance minus the
aggregate amount of distributions allocable to principal on the Class A
Certificates.

         Class A Certificate Rate:   With respect to the first Interest Period,
_____% and for any subsequent Interest Period, LIBOR plus _____%; provided,
however, that in no event shall the Class A Certificate Rate exceed the
Weighted Average Maximum Loan Rate for the related Collection Period minus
_____%.

         Class A Certificateholder:   A Holder of a Class A Certificate.

         Class A Certificateholders' Floating Allocation Percentage:   With
respect to the initial Distribution Date and the initial Collection Period, the
percentage equivalent of a fraction, the numerator of which is the Invested
Amount as of the Closing Date and the denominator of which is the Pool Balance
as of the Closing Date.  With respect to any Distribution Date and the related
Collection Period thereafter, the percentage equivalent of a fraction, the
numerator of which is the Invested Amount as of the end of the related
Collection Period and the denominator of which is (a) the Pool Balance as of
the end of the preceding Collection Period, plus (b) the aggregate of the Cut-
Off Date Trust Balances of any Subsequent Mortgage Loans and any Additional
Balances sold to the Trust in each case during the related Collection Period,
plus (c) the amount on deposit in the Funding Account at the end of the related
Collection Period, minus (d) the aggregate Trust Balances of any Mortgage Loans
that were retransferred pursuant to Section 2.07(a) during the related
Collection Period.

         Class A Certificates:   Any certificate executed on behalf of the
Trust by the Trustee and authenticated by the Trustee substantially in the form
set forth in Exhibit A hereto.

         Class A Fixed Allocation Percentage:   With respect to any
Distribution Date prior to the first Reset Date, _____%, and with respect to
any Distribution Date that is a Reset Date and for each Distribution Date
thereafter until the next Reset Date, the percentage equivalent of a fraction,
the numerator of which is the Invested Amount as of the end of the related





                                       3
<PAGE>   9
Collection Period, and the denominator of which is (a) the Pool Balance as of
the end of the preceding Collection Period, plus (b) the aggregate of the Cut-
Off Date Trust Balances of any Subsequent Mortgage Loans and any Additional
Balances sold to the Trust in each case during the related Collection Period,
plus (c) the amount on deposit in the Funding Account at the end of the related
Collection Period, minus (d) the aggregate Trust Balances of any Mortgage Loans
that were retransferred pursuant to Section 2.07(a) during the related
Collection Period.  With respect to any Distribution Date to occur after a
Rapid Amortization Event, the Class A Fixed Allocation Percentage shall be the
Class A Fixed Allocation Percentage immediately prior to such Rapid
Amortization Event.

         Class A Interest Collections:   With respect to any day during a
Collection Period, the product of (i) the Interest Collections received on such
day and (ii) the Class A Certificateholders' Floating Allocation Percentage for
such Collection Period .

         Class A Interest Payment Cap:   With respect to any Distribution Date,
an amount equal to accrued interest on the Class A Certificate Principal
Balance for the related Interest Period at the Weighted Average Loan Rate for
the Collection Period preceding the month in which such Interest Period ends,
minus _____%.

         Class A Loss Reduction Amount:   With respect to any Distribution
Date, the portion, if any, of the Aggregate Class A Liquidation Loss Amount for
the related Collection Period that has not been distributed to Class A
Certificateholders on such Distribution Date.

         Class A Servicing Fee:   With respect to any Distribution Date, the
product of (i) the Servicing Fee Rate and (ii) the Invested Amount less the
amount on deposit in the Funding Account (net of reinvestment earnings thereon)
in each case on the first day succeeding the preceding Distribution Date.

         Closing Date:   ______________, 1996.

         Code:   The Internal Revenue Code of 1986, as the same may be amended
from time to time (or any successor statute thereto).

         Collection Account:   The custodial account or accounts created and
maintained for the benefit of the Certificateholders pursuant to Section
3.02(b).  The Collection Account shall be an Eligible Account.

         Collection Period:   With respect to any Distribution Date and
Mortgage Loan, the one-month period ending on the related Cycle Date in the
month immediately preceding the month in which such Distribution Date occurs.
When used with respect to all the Mortgage Loans and any Distribution Date, the
term "Collection Period" shall mean each of the respective Collection Periods
applicable to each of the Mortgage Loans that commenced in the second preceding
calendar month and ended in the calendar month immediately preceding the month
in which such Distribution Date occurs.

         Combined Loan-to-Value Ratio:   With respect to any Mortgage Loan as
of any date, the percentage equivalent of the fraction, the numerator of which
is the sum of (i) the applicable Credit Limit and (ii) the outstanding
principal balance of any senior mortgage loans





                                       4
<PAGE>   10
that are secured by the same Mortgaged Property, and the denominator of which
is the Valuation of the related Mortgaged Property as of such date.

         Corporate Trust Office:   The principal office of the Trustee at which
at any particular time its corporate trust business shall be administered,
which office on the Closing Date is located at the address set forth in Section
12.05.

         Credit Enhancement Draw Amount:   With respect to any Distribution
Date, the sum of (x) the amount, if any, by which (A) the aggregate amount
specified in clauses (i) and (ii) of Section 5.01(a) exceeds (B) the sum of the
Class A Interest Collections and any amount on deposit in the Spread Account
for such Distribution Date and (y) the Guaranteed Principal Distribution Amount
for such Distribution Date.

         Credit Enhancement Instrument:   The Surety Bond SB _______ dated as
of the Closing Date, issued by the Credit Enhancer to the Trustee for the
benefit of the Class A Certificateholders.

         Credit Enhancer:   [Credit Enhancer], a ______________ insurance
corporation organized under the laws of the State of ______________.

         Credit Enhancer Default:   The occurrence and continuance of the
failure of the Credit Enhancer to make a payment required under the Credit
Enhancement Instrument.

         Credit Limit:   As to any Mortgage Loan, the maximum principal balance
permitted under the terms of the related Loan Agreement.

         Cut-Off Date:   With respect to each Initial Mortgage Loan, the close
of business on the related Cycle Date immediately prior to ______________, 1996
and, with respect to each Subsequent Mortgage Loan or Eligible Substitute
Mortgage Loan, the close of business on the related Cycle Date immediately
prior to the date on which such Subsequent Mortgage Loan or Eligible Substitute
Mortgage Loan, respectively, was transferred to the Trust.

         Cut-Off Date Pool Balance:   The aggregate of the Cut-Off Date Trust
Balances of the Initial Mortgage Loans.

         Cut-Off Date Trust Balance:   With respect to any Mortgage Loan, the
outstanding principal balance thereof reflected on the servicing records of the
related Subservicer at the close of business on the related Cut-Off Date after
deduction of all amounts of principal received with respect thereto on such
date.

         Cycle Date:   As to any Mortgage Loan, the day of the month on which
the related billing cycle for such Mortgage Loan ends, which day is, with
respect to the Initial Mortgage Loans, either the 4th, 5th, 6th, 8th, 10th,
11th, 12th, 16th, 17th, 18th, 19th, 20th, 25th or 26th day of each month.

         Defective Mortgage Loan:   A Mortgage Loan subject to retransfer
pursuant to Section 2.02 or 2.04.

         Definitive Certificates:   As defined in Section 6.02(c).





                                       5
<PAGE>   11
         Depository:   The initial Depository shall be The Depository Trust
Company, the nominee of which is Cede & Co., as the registered Holder of Class
A Certificates evidencing $___________ in initial aggregate principal amount of
the Class A Certificates.  The Depository shall at all times be a "clearing
corporation" as defined in Section 8-102(3) of the UCC of the State of New
York.

         Depository Participant:   A broker, dealer, bank or other financial
institution or other Person for whom from time to time the Depository effects
book-entry transfers and pledges of securities deposited with the Depository.

         Determination Date:   With respect to any Distribution Date, the fifth
Business Day prior to such Distribution Date.

         Distribution Date:   The 20th day of each month (or if such 20th day
is not a Business Day, then the next succeeding Business Day),  beginning in
the month immediately following the month of the initial issuance of the
Certificates.

         Electronic Ledger:   The electronic master record of home equity
credit line mortgage loans maintained by the Master Servicer.

         Eligible Account:   An account that is either (i) maintained with a
depository institution whose short-term debt obligations at the time of any
deposit therein are rated in the highest short-term debt rating category by the
Rating Agencies, (ii) an account or accounts maintained with a depository
institution with a long-term unsecured debt rating by each Rating Agency that
is at least investment grade, provided that the deposits in such account or
accounts are fully insured by either the BIF or the SAIF, (iii) a segregated
trust account maintained on the corporate trust side with the Trustee in its
fiduciary capacity, or (iv) an account otherwise acceptable to the Credit
Enhancer and each Rating Agency, as evidenced by a letter to such effect from
the Credit Enhancer and each such Rating Agency to the Trustee, without
reduction or withdrawal of the then-current ratings of the Certificates.

         Eligible Substitute Mortgage Loan:   A Mortgage Loan substituted by
the Seller for a Defective Mortgage Loan pursuant to Section 2.02 or 2.04,
which on the date of such substitution must (i) have a Trust Balance not
substantially greater or less than the Trust Balance of such Defective Mortgage
Loan; (ii) have a Loan Rate of not less than the Loan Rate of the Defective
Mortgage Loan and not more than 500 basis points in excess thereof; (iii) if
the Defective Mortgage Loan was an adjustable rate Mortgage Loan, (A) have a
Margin that is not less than the Margin for the Defective Mortgage Loan, or
more than 500 basis points higher than the Margin for the Defective Mortgage
Loan; and (B) have a Maximum Loan Rate and a minimum Loan Rate that are not
lower than the Maximum Loan Rate and minimum Loan Rate, respectively, of the
Defective Mortgage Loan; (iv) have a remaining term to maturity not more than
six months earlier or later than the remaining term to maturity of the
Defective Mortgage Loan; (v) comply with the representations and warranties set
forth in Section 2.04(b), except those representations and warranties set forth
in clauses (xi), (xvi), (xxvii), (xxix), (xxx), and (xxxi) in said Section
2.04; (vi) have a Combined Loan-to-Value Ratio that is not greater than the
Combined Loan-to-Value Ratio of the Defective Mortgage Loan as of the date of
origination of such Defective Mortgage Loan; (vii) have a lien position at
least equal to the lien position of the Mortgage relating to the Defective
Mortgage Loan; and (viii) be the obligation of a Mortgagor whose credit profile
is substantially similar to that of the Mortgagor





                                       6
<PAGE>   12
under the Defective Mortgage Loan, unless with respect to (i) through (viii)
above, each of the Rating Agencies and the Credit Enhancer consents to such
Eligible Substitute Mortgage Loan.

         Event of Servicing Termination:   As defined in Section 8.01.

         Excess Funding Amount:   With respect to any Distribution Date, the
excess of (i) the amount on deposit in the Funding Account in respect of
Principal Collections after making deposits therein on such Distribution Date
plus the aggregate of any amounts withdrawn from the Funding Account pursuant
to Section 5.05(c)(ii) on all prior Distribution Dates over (ii) _____% of the
Cut-Off Date Pool Balance.

         Federal National Mortgage Association:   FNMA.

         FDIC:   The Federal Deposit Insurance Corporation or any successor
thereto.

         Foreclosure Profit:   With respect to a Liquidated Mortgage Loan, the
amount, if any, by which (i) the aggregate of its Liquidation Proceeds less
Liquidation Expenses exceeds (ii) the sum of the related Trust Balance plus
accrued and unpaid interest thereon plus the related Charge-Off Amounts of such
Liquidated Mortgage Loan immediately prior to the final recovery of its
Liquidation Proceeds.

         Funding Account:   The custodial account or accounts created and
maintained with the Trustee for the benefit of the Class A Certificateholders
pursuant to Section 5.05.  The Funding Account shall be an Eligible Account.

         Funding Master Note:   A demand note executed by the Master Servicer
and payable to the Trustee, evidencing deposits to the Funding Account and owed
to the Trustee from time to time, substantially in the form of Exhibit G-2
hereto.

         Funding Period:   The period commencing on the Closing Date and ending
on the earlier of (i) the Distribution Date on which the Trustee has purchased
an aggregate of $___________  of Subsequent Mortgage Loans from amounts on
deposit in the Funding Account, but in no event later than the 15th
Distribution Date and (ii) the commencement of the Rapid Amortization Period.

         Guaranteed Principal Distribution Amount:   With respect to any
Distribution Date, the lesser of (i) the amount, if any, required to reduce the
Class A Certificate Principal Balance (after giving effect to the distributions
allocable to principal on the Class A Certificates out of Interest Collections,
Principal Collections, all distributions to the Class A Certificateholders
pursuant to Section 5.01(b) from amounts on deposit in the Funding Account, and
amounts withdrawn from the Spread Account on such Distribution Date) to the
Invested Amount immediately following such Distribution Date and (ii) the Net
Insured Principal Amount (as defined in the Credit Enhancement Instrument) for
such Distribution Date.

         HFC:   Household Finance Corporation, a Delaware corporation, and its
successors.

         Initial Mortgage Loan:   Each mortgage loan (including the rights to
receive payments thereunder) that is transferred and assigned to the Trustee on
the Closing Date pursuant to Section 2.01, together with the Related Documents
and the rights thereunder conveyed to the





                                       7
<PAGE>   13
Trustee pursuant to the Transfer Agreement (exclusive of such Mortgage Loans
that are retransferred to the Seller from time to time pursuant to Sections
2.02, 2.04 and 2.07), and held as a part of the Trust.

         Insolvency Event:   As defined in Section 11.02.

         Insurance Agreement:   The Insurance and Reimbursement Agreement dated
as of ______________, 1996 among HFC, as Master Servicer, the Seller, the
Credit Enhancer and the Trustee, including any amendments and supplements
thereto.

         Insurance Proceeds:   Proceeds paid by any insurer (other than the
Credit Enhancer) pursuant to any insurance policy covering a Mortgage Loan, or
by the Master Servicer pursuant to the last sentence of Section 3.04, net of
any component thereof covering any expenses incurred by or on behalf of the
Master Servicer in connection with obtaining such Insurance Proceeds and
exclusive of any portion thereof that is applied to the restoration or repair
of the related Mortgaged Property, released to the Mortgagor in accordance with
the Master Servicer's normal servicing procedures or required to be paid to any
holder of a mortgage senior to such Mortgage Loan.

         Interest Collections:   Any payments that constitute interest by or on
behalf of Mortgagors and any other amounts constituting interest (including
without limitation such portion of Insurance Proceeds, Net Liquidation Proceeds
and accrued interest paid by the Master Servicer in purchasing a Mortgage Loan
pursuant to Section 3.01) collected by the Master Servicer under the Mortgage
Loans (excluding any fees (including annual fees) or late charges or similar
administrative fees paid by Mortgagors), any investment earnings on amounts in
the Funding Account and, without duplication, all Recovered Charge Off Amounts,
whether or not any portions thereof may be considered principal pursuant to the
terms of the related Loan Agreement.  Except as otherwise set forth herein, the
terms of the related Loan Agreement shall determine whether an amount
constitutes principal or interest.

         Interest Period:   With respect to any Distribution Date other than
the first Distribution Date, the period beginning on the preceding Distribution
Date and ending on the day preceding such Distribution Date, and in the case of
the first Distribution Date, the period beginning on the Closing Date and
ending on the day preceding the first Distribution Date.

         Invested Amount:   With respect to any date, an amount equal to (i)
the Original Invested Amount minus (ii) the sum of (a) all distributions to
Class A Certificateholders in respect of Scheduled Principal Distribution
Amounts, (b) (x) all payments pursuant to Section 5.01(a)(iii) from Class A
Interest Collections, and (y) all distributions to the Class A
Certificateholders pursuant to Section 5.01(b) from amounts on deposit in the
Funding Account, (c) all Class A Loss Reduction Amounts and (d) all principal
payments that would be made to Certificateholders but for the Master Servicer's
legal inability to deposit collections in the Collection Account due to a final
determination of a court of competent jurisdiction in any Master Servicer's,
Subservicer's or the Seller's insolvency.

         LIBOR:   With respect to each Distribution Date, the rate for deposits
in U.S. Dollars for a period of one month which appears on the Dow Jones
Telerate Service at Page 3750 as of 11:00 A.M., London time, on the day that is
two LIBOR Business Days prior to the preceding Distribution Date.  If such rate
does not appear on such page (or such other page





                                       8
<PAGE>   14
as may replace that page on that service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
selected by the Trustee after consultation with the Seller), the rate will be
the Reference Bank Rate.  The "Reference Bank Rate" will be determined on the
basis of the rates at which deposits in U.S. Dollars are offered by the
reference banks (which shall be three major banks that are engaged in
transactions in the London interbank market, selected by the Trustee after
consultation with the Seller) as of 11:00 A.M., London time, on the day that is
two LIBOR Business Days prior to the immediately preceding Distribution Date to
prime banks in the London interbank market for a period of one month in amounts
approximately equal to the principal amount of the Certificates then
outstanding.   The Trustee will request the principal London office of each of
the reference banks to provide a quotation of its rate.  If at least two such
quotations are provided, the rate will be the arithmetic mean of the
quotations.  If on such date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Trustee after consultation
with the Seller, as of 11:00 A.M., New York City time, on such date for loans
in U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the principal amount of the Certificates then
outstanding.  If no such quotations can be obtained, the rate will be LIBOR for
the prior Distribution Date.

         LIBOR Business Day:   Any day other than (i) a Saturday or a Sunday or
(ii) any other day on which banking institutions in the State of New York or
Illinois or in the City of London, England are required or authorized by law to
be closed.

         Lien:   Any mortgage, deed of trust, pledge, conveyance,
hypothecation, assignment, participation, deposit arrangement, encumbrance,
lien (statutory or other), preference, priority right or interest or other
security agreement or preferential  arrangement of any kind or nature
whatsoever, including, without limitation, any conditional sale or other title
retention agreement, any financing lease having substantially the same economic
effect as any of the foregoing or the filing of any financing statement under
the UCC (other than any such financing statement filed for informational
purposes only) or comparable law of any jurisdiction to evidence any of the
foregoing; provided, however, that any assignment pursuant to Section 6.05 or
7.02 hereof shall not be deemed to constitute a Lien.

         Liquidated Mortgage Loan:   As to any Distribution Date, any Mortgage
Loan in respect of which the Master Servicer has determined, in accordance with
the servicing procedures specified herein, as of the end of the related
Collection Period that all Liquidation Proceeds which it expects to recover
with respect to the disposition of the related REO have been recovered.

         Liquidation Expenses:   Out-of-pocket expenses (exclusive of overhead)
that are incurred by the Master Servicer in connection with the liquidation of
any Mortgage Loan and not recovered under any insurance policy, such expenses
including, without limitation, reasonable legal fees and expenses, any
unreimbursed amount expended pursuant to Section 3.06 (including, without
limitation, amounts advanced to correct defaults on any mortgage loan that is
senior to such Mortgage Loan and amounts advanced to keep current or pay off a
mortgage loan that is senior to such Mortgage Loan) with respect to the related
Mortgage Loan and any related and unreimbursed expenditures for real estate
property taxes or for property restoration, preservation or insurance against
casualty loss or damage.





                                       9
<PAGE>   15
         Liquidation Loss Amount:   With respect to any (i) Charged Off
Mortgage Loan and any Collection Period (other than the Collection Period in
which all or a portion of such Charged Off Mortgage Loan becomes a Liquidated
Mortgage Loan), the related Charge Off Amount and (ii) Liquidated Mortgage
Loan, the excess of the related Trust Balance at the end of the Collection
Period in which such Liquidated Mortgage Loan became a Liquidated Mortgage Loan
over the portion of related Net Liquidation Proceeds applied in reduction of
the related Trust Balance in accordance with the related Loan Agreement.

         Liquidation Proceeds:   Proceeds (including Insurance Proceeds but not
including amounts drawn under the Credit Enhancement Instrument) received in
connection with the liquidation of any Mortgage Loan, whether through trustee's
sale, foreclosure sale or otherwise.

         Loan Agreement:   With respect to any Mortgage Loan, the related
credit line account agreement or promissory note, as applicable, executed by
the Mortgagor and any amendment or modifications thereof.

         Loan Rate:   With respect to any Mortgage Loan as of any day, the per
annum rate of interest applicable under the related Loan Agreement to the
calculation of interest for such day on the Trust Balance.

         Margin:   With respect to each Mortgage Loan with an adjustable Loan
Rate, the spread over the applicable index, as specified in the related Loan
Agreement.

         Master Note:   A demand note executed by the Master Servicer and
payable to the Trustee, evidencing receipts in respect of the Mortgage Loans
owed to the Trustee from time to time, substantially in the form of Exhibit G-1
hereto.

         Master Servicer:   Household Finance Corporation, a Delaware
corporation, or its successor in interest, or any successor master servicer
appointed as herein provided.

         Master Servicer Credit Facility:   Any surety bond, letter of credit
or similar agreement obtained by the Master Servicer pursuant to Section
3.02(c).

         Master Servicer Credit Facility Amount:   As of any Determination Date
upon which a Master Servicer Credit Facility is maintained pursuant to Section
3.02(c), the maximum amount of coverage thereunder in accordance with the terms
thereof.

         Master Servicer Credit Facility Issuer:   At any time with respect to
any Master Servicer Credit Facility, the institution that is then obligated
under such Master Servicer Credit Facility.

         Maximum Loan Rate:   As to any Mortgage Loan the lesser of the maximum
rate permitted by law and the highest rate at which interest can accrue
pursuant to the terms of the related Loan Agreement.

         Maximum Principal Distribution Amount:   With respect to any
Distribution Date, the applicable Class A Fixed Allocation Percentage of the
Principal Collections for the related Collection Period.





                                       10
<PAGE>   16
         Minimum Monthly Payment:   With respect to any Mortgage Loan and any
month, the minimum amount required to be paid by the related Mortgagor in that
month.

         Minimum Seller Interest:   With respect to any date, _____%.

         Moody's:   Moody's Investors Service, Inc. or its successor in
interest.

         Mortgage:   The mortgage, deed of trust or other instrument creating a
first, second or third lien on an estate in fee simple interest in real
property securing a Mortgage Loan.

         Mortgage File:   The mortgage documents (including without limitation
the related Mortgage Note) listed in Section 2.01 pertaining to a particular
Mortgage Loan and any additional documents required to be added to the Mortgage
File pursuant to this Agreement, which documents may be physical documents or,
pursuant to the terms of Section 2.01, may be optical images or other
representations thereof.

         Mortgage Loan:   Each Initial Mortgage Loan, Subsequent Mortgage Loan
and Eligible Substitute Mortgage Loan.

         Mortgage Loan Payment Record:   With respect to the Trust, the record
maintained by the Master Servicer pursuant to Section 3.02(c).

         Mortgage Loan Schedule:   With respect to any date, the schedule of
Mortgage Loans included in the Trust on such date.  The initial Mortgage Loan
Schedule is the schedule delivered by the Seller to the Trustee on the Closing
Date, which schedule sets forth as to each Initial Mortgage Loan as of the
related Cut-Off Date (i) the Cut-Off Date Trust Balance, (ii) the Credit Limit,
(iii) the Margin, if any, to be used to arrive at the Loan Rate, (iv) the
Maximum Loan Rate, and (v) the account number.  The Mortgage Loan Schedule will
be amended from time to time to reflect the removal of Mortgage Loans and the
conveyance of Additional Balances, the Subsequent Mortgage Loans and any
Eligible Substitute Mortgage Loan to the Trust, and when so amended shall
include the information set forth above with respect to each Subsequent
Mortgage Loan and each Eligible Substitute Mortgage Loan as of their respective
Cut-Off Dates.

         Mortgage Note:   With respect to a Mortgage Loan, the revolving home
equity loan note or other evidence of indebtedness under which the related
Mortgagor agrees to pay the indebtedness evidenced thereby and secured by the
related Mortgage.

         Mortgaged Property:   The underlying property securing a Mortgage
Loan.

         Mortgagor:   The obligor or obligors under a Loan Agreement.

         Net Insured Principal Amount:  The meaning assigned to such term in
the Credit Enhancement Instrument.

         Net Liquidation Proceeds:   With respect to any Liquidated Mortgage
Loan, Liquidation Proceeds, less the sum of (x) Liquidation Expenses and (y)
any Foreclosure Profit.





                                       11
<PAGE>   17
         Officer's Certificate:   A certificate signed by the President, a
Senior Vice President, a Vice President, the Treasurer, Assistant Treasurer,
Controller or Assistant Controller of the Seller or the Master Servicer, as the
case may be, and delivered to the Trustee.

         Opinion of Counsel:   A written opinion of counsel acceptable to the
Trustee, who may be counsel for the Master Servicer or the Seller and who, in
the case of opinions delivered to the Credit Enhancer, is reasonably acceptable
to it.

         Original Invested Amount:   $___________.

         Original Class A Certificate Principal Balance:   $___________.

         Overcollateralization Amount:   As of any date of determination, the
amount, if any, by which the Invested Amount exceeds the Class A Certificate
Principal Balance.

         Paying Agent:   Any paying agent appointed pursuant to Section 6.06.

         Percentage Interest:   As to any Class A Certificate, the percentage
obtained by dividing the principal denomination of such Certificate by the
aggregate of the principal denominations of all Class A Certificates.

         Permitted Investments:   One or more of the following (excluding any
callable investments purchased at a premium):

                 (i)      direct obligations of, or obligations fully
         guaranteed as to timely payment of principal and interest by, the
         United States or any agency or instrumentality thereof, provided that
         such obligations are backed by the full faith and credit of the United
         States;

                 (ii)     repurchase agreements on obligations specified in
         clause (i) maturing not more than three months from the date of
         acquisition thereof, provided that the short-term unsecured debt
         obligations of the party agreeing to repurchase such obligations are
         at the date of acquisition rated by each Rating Agency in its highest
         short-term rating category (which is A-1+ for Standard & Poor's and
         P-1 for Moody's);

                 (iii)    certificates of deposit, 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 U.S. depository institution or trust
         company incorporated under the laws of the United States or any state
         thereof and subject to supervision and examination by federal and/or
         state banking authorities, provided that the unsecured short-term debt
         obligations of such depository institution or trust company at the
         date of acquisition thereof have been rated by each of Moody's and
         Standard & Poor's in its highest unsecured short-term debt rating
         category;

                 (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 Standard & Poor's and Moody's in their
         highest short-term rating categories;





                                       12
<PAGE>   18
                 (v)      short term investment funds sponsored by any trust
         company or national banking association incorporated under the laws of
         the United States or any state thereof which on the date of
         acquisition has been rated by Standard & Poor's and Moody's in their
         respective highest rating category for long-term unsecured debt, or
         any other short-term investment fund the funds in which are invested
         in securities rated in the highest rating category by Standard &
         Poor's and Moody's and which mature on or prior to the next
         Distribution Date;

                 (vi)     interests in any money market fund which at the date
         of acquisition has a rating of Aaa by Moody's and AAAm or AAAm-G by
         Standard & Poor's or such lower rating as will not result in the
         qualification, downgrading or withdrawal of the then-current rating
         assigned to the Class A Certificates by each Rating Agency; and

                 (vii)    other obligations or securities that are acceptable
         to each Rating Agency and the Credit Enhancer as a Permitted
         Investment hereunder and will not result in a reduction in the
         then-current rating of the Class A Certificates, as evidenced by a
         letter to such effect from such Rating Agency and the Credit Enhancer;

provided that no instrument described hereunder shall evidence either the right
to receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument if such interest and principal payments provide a
yield to maturity at par greater than 120% of the yield to maturity at par of
the underlying obligations; and provided, further, that no instrument described
hereunder may be purchased at a price greater than par if such instrument may
be prepaid or called at a price less than its purchase price prior to its
stated maturity.

         The Trustee is hereby authorized to execute purchases and sales
directed by the Master Servicer through the facilities of its own trading or
capital markets operations.  The Trustee shall send to the Master Servicer
statements reflecting the monthly activity for each such purchase and sale made
hereunder for the preceding month.  Although the Master Servicer recognizes
that it may obtain a broker confirmation or written monthly statement
containing comparable information at no additional cost, the Master Servicer
hereby agrees that confirmations of investments are not required to be issued
by the Trustee for each month in which a monthly statement is rendered.  No
statement need be rendered pursuant to the provision hereof if no activity
occurred in the account for such month.

         Person:   Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, or
government or any agency or political subdivision thereof.

         Pool Balance:   With respect to any date, the aggregate of the Trust
Balances of all Mortgage Loans as of such date.

         Pool Factor:   With respect to any Distribution Date, the percentage,
carried to seven places, obtained by dividing the Class A Certificate Principal
Balance for such Distribution Date by the Original Class A Certificate
Principal Balance.

         Preferred Stock:   As defined in Section 12.12.





                                       13
<PAGE>   19
         Principal Collections:   (a) Any payments that constitute principal by
or on behalf of Mortgagors and any other amounts constituting principal
(including but not limited to such portion of Insurance Proceeds, the principal
portion of any purchase price for a Mortgage Loan purchased by the Master
Servicer pursuant to Section 3.01 and such portion of Net Liquidation Proceeds,
but excluding Foreclosure Profits and Recovered Charge Off Amounts) collected
by the Master Servicer under the Mortgage Loans and (b) any Retransfer Deposit
Amounts deposited into the Collection Account by the Seller pursuant to Section
2.02.  The terms of the related Loan Agreement shall determine whether an
amount is principal or interest.

         Rapid Amortization Commencement Date:   The earlier of the
Distribution Date in April 2005, and the Distribution Date relating to the
Collection Period in which a Rapid Amortization Event is deemed to occur
pursuant to Section 11.01.

         Rapid Amortization Event:   As defined in Section 11.01.

         Rapid Amortization Period:   The period commencing on the earlier of
(x) the Distribution Date in October 2004 and (y) the date as of which a Rapid
Amortization Event, if any, occurs.

         Rating Agencies:   Standard & Poor's and Moody's or their respective
successors.  If such agency or a successor is no longer in existence, "Rating
Agency" shall be such statistical credit rating agency, or other comparable
Person, designated by the Seller, notice of which designation shall be given to
the Trustee.  References herein to the highest short term unsecured rating
category of a Rating Agency shall mean A-1+ or better in the case of Standard &
Poor's and P-1 or better in the case of Moody's and in the case of any other
Rating Agency shall mean such equivalent ratings.  References herein to the
highest long-term rating category of a Rating Agency shall mean "AAA" in the
case of Standard & Poor's and "Aaa" in the case of Moody's and in the case of
any other Rating Agency, such equivalent rating.

         Receivables Purchase Agreement:   The receivables purchase agreement
dated as of ______________, 1996, between the Seller and the Related Document
Sellers pursuant to which the Related Document Sellers convey to the Seller all
of their right, title and interest in and to the Cut-Off Date Trust Balances
and the Additional Balances, if any.

         Record Date:   The last day preceding the related Distribution Date;
provided, however, that following the date on which Definitive Certificates are
available pursuant to Section 6.02(c) the Record Date shall be the last day of
the month preceding the month in which the related Distribution Date occurs.

         Recovered Charge Off Amount:   With respect to any Mortgage Loan that
became a Liquidated Mortgage Loan in a Collection Period, the amount, if any,
by which (i) its Net Liquidation Proceeds that are allocable to principal in
accordance with the Loan Agreement exceeds (ii) its Trust Balance immediately
prior to foreclosure up to an amount of all related Charge Off Amounts, but in
no event less than zero.

         REO:   A Mortgaged Property that is acquired by the Trust in a
foreclosure or by grant of deed in lieu of foreclosure.





                                       14
<PAGE>   20
         Related Documents:   As such term is defined in the Receivables
Purchase Agreement.

         Related Document Sellers:   As defined in Section 2.01.

         Replacement Event:   As defined in Section 4.03.

         Required Overcollateralization Amount:   $___________.

         Reset Date:   Any Distribution Date immediately following either a
Distribution Date in which Subsequent Funding Mortgage Loans are acquired by
the Trust pursuant to Section 2.06 or a Collection Period in which Mortgage
Loans are retransferred from the Trust pursuant to Section 2.07(a).

         Responsible Officer:   When used with respect to the Trustee, any
officer in the Corporate Trustee Administration Department of the Trustee with
direct responsibility for the administration of this Agreement.

         Retransfer Date:   As defined in Section 2.07.

         Retransfer Deposit Amount:   As defined in Sections 2.02 and 2.04.

         Retransfer Notice Date:   As defined in Section 2.07.

         Retransfer Price:   An amount equal to the sum of (i) the outstanding
Class A Certificate Principal Balance, (ii) accrued and unpaid interest thereon
at the Class A Certificate Rate through the day preceding the final
Distribution Date pursuant to Section 10.01(a) and (iii) any unreimbursed draws
under the Credit Enhancement Instrument and other amounts due and unpaid under
the Insurance Agreement.

         Revolving Credit Agreement:   The revolving credit agreement dated as
of ______________, 1996, between the Master Servicer and the Seller, as amended
or supplemented from time to time.

         SAIF:   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.

         Scheduled Principal Distribution Amount:   With respect to any
Distribution Date prior to the Rapid Amortization Commencement Date, an amount
equal to the lesser of (i) the Maximum Principal Distribution Amount and (ii)
the Alternative Principal Distribution Amount.  With respect to any
Distribution Date on or after the Rapid Amortization Commencement Date, an
amount equal to the Maximum Principal Distribution Amount.

         Seller:   HFC Revolving Corporation, a Delaware corporation, and its
successors in interest.





                                       15
<PAGE>   21
         Seller Certificates:   The certificates executed on behalf of the
Trust by the Trustee and authenticated by the Trustee substantially in the form
set forth in Exhibit B hereto.

         Seller Certificateholders:   The Holders of the Seller Certificates.

         Seller Collections:   The sum of Seller Interest Collections and
Seller Principal Collections.

         Seller Interest:   As to any Distribution Date, the percentage
interest in the Trust determined by dividing (a) the Pool Balance as of the
last day of the related Collection Period minus the Invested Amount immediately
following such Distribution Date reduced by the Principal Collections on
deposit in the Funding Account immediately following such Distribution Date by
(b) the Pool Balance as of the last day of the related Collection Period;
provided that any reduction in the Seller Interest as a result of Mortgage
Loans retransferred to the Seller pursuant to Section 2.02 or 2.04 shall be
limited to an amount that would not reduce the Seller Interest below the
Minimum Seller Interest on such Distribution Date after giving effect to such
retransfers.

         Seller Interest Collections:   Interest Collections that are not Class
A Interest Collections.

         Seller Monthly Servicing Fee:   With respect to any Distribution Date,
the product of (i) the Servicing Fee Rate and (ii) the Seller Principal Balance
on the first day succeeding the preceding Distribution Date.

         Seller Principal Balance:   As of the date of determination thereof,
the amount equal to (i) the Pool Balance minus (ii) the Invested Amount as of
the close of business on such day reduced by the Principal Collections on
deposit in the Funding Account.

         Seller Principal Collections:   On any Distribution Date, the
Principal Collections received during the related Collection Period minus the
amount of such Principal Collections required to be distributed to Class A
Certificateholders pursuant to Section 5.01(b) or deposited to the Funding
Account pursuant to Section 5.05(a) on such Distribution Date.

         Servicing Certificate:   A certificate completed by and executed on
behalf of the Master Servicer in accordance with Section 4.01.

         Servicing Fee:   The fee payable to the Master Servicer pursuant to
Section 3.08.

         Servicing Fee Rate:   A rate equal to [1.00]% per annum.

         Servicing Officer:   Any officer of the Master Servicer or other
individual designated by an officer of the Master Servicer involved in, or
responsible for, the administration and servicing of the Mortgage Loans, whose
name and specimen signature appear on a list of servicing officers furnished to
the Trustee on the Closing Date (with a copy to the Credit Enhancer) by the
Master Servicer, as such list may be amended from time to time.

         Spread Account:   The account created and maintained by the Trustee
pursuant to Section 4.02.





                                       16
<PAGE>   22
         Spread Account Master Note:   As defined in the Insurance Agreement.

         Spread Account Maximum:   As defined in the Insurance Agreement.

         Standard & Poor's:   Standard & Poor's Rating Services or its
successor in interest.

         Subsequent Funding Mortgage Loan:   Each mortgage loan acquired
pursuant to Section 2.06 with funds on deposit in the Funding Account during
the Funding Period (including the rights to receive payments thereunder) that
is transferred and assigned to the Trustee pursuant to Section 2.06 on the
related Subsequent Transfer Date, together with the Related Documents and the
rights thereunder conveyed to the Trustee pursuant to the Transfer Agreement
(exclusive of such Mortgage Loans that are retransferred to the Seller from
time to time pursuant to Sections 2.02, 2.04 and 2.07), and held as a part of
the Trust.

         Subsequent Mortgage Loan:   Each Subsequent Funding Mortgage Loan.

         Subsequent Transfer Date:   With respect to Subsequent Funding
Mortgage Loans, any Distribution Date during the Funding Period.

         Subservicers:   As defined in Section 2.01.

         Transfer Agreement:   The agreement dated as of ______________, 1996
between the Trustee and Related Document Sellers pursuant to which the Related
Document Sellers shall convey to the Trustee all of their right, title and
interest in and to the Transferred Assets (as defined in the Transfer
Agreement), including the Loan Agreements and the Mortgages related to the
Trust Balances being conveyed to the Trustee by the Seller pursuant to this
Agreement.

         Transfer Date:   With respect to the Cut-Off Date Trust Balances of
(i) the Initial Mortgage Loans, the Closing Date; (ii) the Subsequent Mortgage
Loans, the related Subsequent Transfer Date; and (iii) the Eligible Substitute
Mortgage Loans, the respective dates on which such Eligible Substitute Mortgage
Loans are conveyed to the Trust under the terms hereof.

         Trust:   The trust created by this Agreement, the corpus of which
consists of the Mortgage Loans, such assets as shall from time to time be
identified as deposited in the Collection Account (exclusive of net earnings
thereon), the Funding Account and the Spread Account in accordance with this
Agreement, property that secured a Mortgage Loan and that has become REO, the
interest of the Seller in certain hazard insurance policies maintained by the
Mortgagors or the Master Servicer in respect of the Mortgage Loans, the Credit
Enhancement Instrument, the Spread Account, the Collection Account, the Funding
Account, the Master Servicer Credit Facility, if any, the Master Note, if any,
the Funding Master Note, if any, the Spread Account Master Note, if any, and
all proceeds of each of the foregoing.

         Trust Balance:   As to any Mortgage Loan (other than a Liquidated
Mortgage Loan) and date, the related Cut-Off Date Trust Balance, plus (i) any
Additional Balance in respect of such Mortgage Loan, minus (ii) the sum of (x)
all Principal Collections credited against the Trust Balance and (y) any
related Charge-Off Amounts prior to such date.  For purposes of this
definition, a Liquidated Mortgage Loan shall be deemed to have a Trust Balance
equal to the





                                       17
<PAGE>   23
Trust Balance of the related Mortgage Loan immediately prior to the final
recovery of related Liquidation Proceeds and a Trust Balance of zero
thereafter.

         Trustee:   The First National Bank of Chicago, a national banking
association, or any successor Trustee appointed in accordance with this
Agreement that has accepted such appointment in accordance with this Agreement.

         UCC:   The Uniform Commercial Code, as amended from time to time, as
in effect in any specified jurisdiction.

         Unpaid Class A Carry Forward Interest:   As to any Distribution Date,
the aggregate of Class A Carry Forward Interest from prior Distribution Dates
that has not previously been paid.

         Unpaid Class A Certificate Interest Penalty Rate:  A rate equal to
[2.00]% per annum.

         Unpaid Class A Certificate Interest Shortfall:   With respect to any
Distribution Date, the aggregate amount, if any, of Class A Certificate
Interest up to the Class A Interest Payment Cap that was accrued in respect of
a prior Distribution Date and has not been distributed to Class A
Certificateholders.

         Valuation:   With respect to any Mortgaged Property and time referred
to herein, the appraised value of the Mortgaged Property based upon the most
recent appraisal made by or on behalf of the Seller or the originator of the
related Mortgage Loan.

         Weighted Average Loan Rate:   As to any Collection Period, the average
of the daily Loan Rates for such Collection Period weighted on the basis of the
related Trust Balances outstanding at the end of such Collection Period for
each Mortgage Loan as determined by the Master Servicer in accordance with the
Master Servicer's normal servicing procedures.

         Weighted Average Maximum Loan Rate:   As to any Collection Period, the
average of the Maximum Loan Rates for such Collection Period weighted on the
basis of the related Trust Balances outstanding at the end of such Collection
Period for each Mortgage Loan as determined by the Master Servicer in
accordance with the Master Servicer's normal servicing procedures.

         Section 1.02.  Interest Calculations.   All calculations of interest
hereunder that are made in respect of the Trust Balance of a Mortgage Loan
shall be made on a daily basis using a 360-day year.  All calculations of
interest on the Class A Certificates shall be made on the basis of the actual
number of days in an Interest Period and a year assumed to consist of 360 days.
The calculation of the Servicing Fee shall be made on the basis of a 360-day
year consisting of twelve 30-day months.

         Section 1.03.  Usage of Terms.  With respect to all terms in this
Agreement the singular includes the plural and the plural the singular; words
importing any gender include the other gender; references to "writing" include
printing, typing, lithography, optical imaging, and other means of reproducing
words in a visible form; references to agreements and other contractual
instruments include all subsequent amendments thereto or changes therein
entered into in accordance with their respective terms and not prohibited by
this Agreement; references to Persons include their permitted successors and
assigns; and the term "including"





                                       18
<PAGE>   24
means "including without limitation."  The term "related Collection Period" as
used herein with respect to any Distribution Date shall mean the Collection
Period immediately preceding such Distribution Date and the term "preceding
Collection Period" as used herein with respect to any Distribution Date shall
mean the Collection Period preceding the related Collection Period for such
Distribution Date.



                                   ARTICLE II

 Conveyance of Mortgage Loans; Original Issuance of Certificates; Tax Treatment

         Section 2.01.  Acknowledgment; Conveyance of Initial Mortgage Loans;
Retention of Obligation to Fund Advances Under Loan Agreements; Custody of
Mortgage Files.  (a)  The Trustee acknowledges that Household Realty
Corporation, Household Finance Corporation of California, Household Finance
Corporation II, Household Finance Corporation III, Household Finance Industrial
Loan Company, Household Finance Realty Corporation of New York, Household
Financial Center Inc., Household Finance Realty Corporation of Nevada,
Household Industrial Loan Company of Kentucky, Household Finance Industrial
Loan Company of Iowa, Household Finance Consumer Discount Company, Household
Industrial Finance Company and Mortgage One Corporation (collectively, the
"Related Document Sellers" or the "Subservicers") have each conveyed or will
convey (i) to the Seller pursuant to the Receivables Purchase Agreement, their
right, title and interest in and to the Trust Balance of each Initial Mortgage
Loan, each Subsequent Mortgage Loan and each Eligible Substitute Mortgage Loan,
and all Interest Collections and Principal Collections in respect of any such
Mortgage Loan received after the applicable Cut-Off Date and (ii) to the
Trustee pursuant to the Transfer Agreement, their right, title and interest in
and to the corresponding Related Documents and certain other rights.  The
Trustee will hold the Related Documents hereunder for the benefit of the
Certificateholders and the Credit Enhancer.  The Seller, concurrently with the
execution and delivery of this Agreement, does hereby transfer, assign, set
over and otherwise convey to the Trust without recourse (subject to Sections
2.02 and 2.04) (i) all of its right, title and interest in and to the Trust
Balance of each Initial Mortgage Loan and all Interest Collections and
Principal Collections in respect thereof received on or after the Cut-Off Date
for the Initial Mortgage Loans or, with respect to any Additional Balance with
respect thereto, on and after the date of transfer to the Trust and (ii) to the
extent not otherwise conveyed pursuant to the Transfer Agreement, all other
assets, other than the Subsequent Mortgage Loans and Eligible Substitute
Mortgage Loans, included or to be included in the Trust (as specified in the
definition of "Trust") for the benefit of Certificateholders and the Credit
Enhancer, as their interests appear; provided, however, that the Related
Document Sellers, pursuant to the Receivables Purchase Agreement and the
Transfer Agreement, retain, and neither the Trustee nor the Trust assumes, the
obligation under any Loan Agreement with respect to an Initial Mortgage Loan
that provides for the funding of future advances to the Mortgagor thereunder,
which obligation shall not be affected by the resignation or termination of
Household Finance Corporation as Master Servicer pursuant to Section 7.04 or
8.01 or the termination of any Subservicer, and neither the Trust nor the
Trustee shall be obligated or permitted to fund any such future advances.
Future advances made to a Mortgagor under a Loan Agreement with respect to any
Initial Mortgage Loan shall be part of the related Trust Balance and
transferred to the Trust pursuant to this Section 2.01 and, therefore, will
constitute a part of the Trust property upon the sale thereof to the Seller
under the Receivables Purchase Agreement.  In





                                       19
<PAGE>   25
addition, on or prior to the Closing Date, the Master Servicer shall cause the
Credit Enhancer to deliver the Credit Enhancement Instrument to the Trustee.
In the event a Master Servicer Credit Facility is obtained pursuant to Section
3.02(c), the Master Servicer promptly shall deliver to the Trustee such Master
Servicer Credit Facility in the Master Servicer Credit Facility Amount.

         (b)     The Seller agrees to take, or to cause to be taken, such
actions and to execute such documents (including without limitation the filing
of all necessary continuation statements for the UCC-1 financing statement
filed in the State of Illinois (which shall have been filed as promptly as
practicable but in no event later than 15 days following the Closing Date with
respect to the Initial Mortgage Loans or, to the extent not already included in
such filing made with respect to the Initial Mortgage Loans, the applicable
Transfer Date with respect to the Subsequent Mortgage Loans and any Eligible
Substitute Mortgage Loan) describing the applicable Cut-Off Date Trust Balances
and Additional Balances related to such Mortgage Loans and naming the Seller as
debtor and the Trustee as secured party, and any amendments to the UCC-1
financing statement required to reflect a change in the name or corporate
structure of the Seller, or the filing of any additional UCC-1 financing
statement due to any change in the principal office of the Seller) as are
necessary to perfect and protect the Certificateholders' and Credit Enhancer's
interests in each Cut-Off Date Trust Balance and the Additional Balances and
the proceeds thereof (other than delivering to the Trustee possession of the
Mortgage Files, which possession will, subject to the terms hereof, be
maintained by the Subservicers on behalf of the Master Servicer as custodian
and bailee for the Trustee).  The Master Servicer shall cause each Subservicer
to file as promptly as practicable, but in no event later than 15 days
following the Closing Date with respect to the Initial Mortgage Loans or, to
the extent not already included in such filing made with respect to the Initial
Mortgage Loans, the applicable Transfer Date with respect to the Subsequent
Mortgage Loans and any Eligible Substitute Mortgage Loan, in the appropriate
public filing office or offices UCC-1 financing statements and continuation
statements naming such Subservicer as seller and the Seller as buyer, to file
appropriate continuation statements thereto, to file amendments thereto in the
case of a name change or change in corporate structure and to file appropriate
additional UCC-1 financing statements, if any, if such Subservicer changes its
principal office.

         (c)     In connection with such transfer and assignment by the Seller,
the Master Servicer, acting through the Subservicers, acknowledges hereby that
it is holding, with respect to the Initial Mortgage Loans, and will hold, with
respect to the Subsequent Mortgage Loans and any Eligible Substitute Mortgage
Loan, on and from the applicable Transfer Date, as custodian and bailee for the
Trustee the following documents or instruments with respect to each such
Mortgage Loan:

                 (i)      the related Loan Agreement (or Loan Agreements if
         more than one original has been executed) and any evidence of
         indebtedness executed by the related Mortgagor in connection
         therewith;

                 (ii)     any related amendments to the Loan Agreement or
         Mortgage, any related modification or assumption agreements and any
         related previous assignments of the Mortgage Loan;

                 (iii)    the related Mortgage with evidence of recording
         indicated thereon; and





                                       20
<PAGE>   26
                 (iv)     if the Mortgage Loan has a Credit Limit of $[50,000]
         or more (excluding Mortgage Loans originated in New Jersey for the
         period beginning [January 1, 1986 and ending April 30, 1987]),
         evidence of title insurance;

provided, however, that as to any Mortgage Loan, if, as evidenced by an Opinion
of Counsel delivered to and in form and substance satisfactory to the Trustee
and the Credit Enhancer, (x) an optical image or other representation of the
related documents specified in clauses (i) through (iv) above are enforceable
in the relevant jurisdictions to the same extent as the original of such
document and (y) such optical image or other representation does not impair the
ability of an owner of such Mortgage Loan to transfer its interest in such
Mortgage Loan, such optical image or other representation may be held by the
Master Servicer, acting through the Subservicers, as custodian for the Trustee
in lieu of the physical documents specified above.

         Except as hereinafter provided, the Master Servicer, acting through
the Subservicers, shall be entitled to maintain possession of all of the
foregoing documents and instruments and shall not be required to deliver any of
them to the Trustee.  In the event, however, that possession of any of such
documents or instruments is required by any Person (including the Trustee)
acting as successor master servicer pursuant to Section 7.04 or 8.02 in order
to carry out the duties of Master Servicer hereunder, then such successor shall
be entitled to request delivery, at the expense of the Master Servicer, of such
documents or instruments by the Master Servicer and to retain such documents or
instruments for servicing purposes; provided that the Trustee or such servicers
shall maintain such documents at such offices as may be required by any
regulatory body having jurisdiction over such Mortgage Loans.

         The Master Servicer's right to maintain possession, directly or
through the Subservicers, of the documents enumerated above shall continue so
long as (i) the long-term unsecured debt of HFC is assigned ratings of at least
A- by Standard and Poor's and A-3 by Moody's, or such lower ratings as shall be
acceptable to the Rating Agencies in order to maintain their then current
ratings of the Class A Certificates and acceptable to the Credit Enhancer, and
(ii) each of the Subservicers remains an affiliate of HFC.  At such time as
either of the conditions specified in the preceding sentence is not satisfied,
as promptly as practicable, but in no event more than 90 days thereafter with
respect to the actions required under clause (i) below or more than 60 days
thereafter with respect to the actions required under clause (ii) below, the
Master Servicer shall cause each Subservicer, at such Subservicer's expense or,
at the Master Servicer's discretion, the Master Servicer's expense, to (i)
either (x) record an assignment of Mortgage in favor of the Trustee (which may
be a blanket assignment if permitted by applicable law) with respect to each of
the Mortgage Loans being subserviced by it in the appropriate real property or
other records or (y) deliver to the Trustee the assignment of such Mortgage in
favor of the Trustee in form for recordation, together with an Opinion of
Counsel addressed to the Trustee and the Credit Enhancer to the effect that
recording is not required to protect the Trustee's right, title and interest in
and to the related Mortgage Loan or, in case a court should recharacterize the
sale of the Mortgage Loans as a financing, to perfect a first priority security
interest in favor of the Trustee in the related Mortgage Loan, which Opinion of
Counsel also shall be reasonably acceptable to each of the Rating Agencies (as
evidenced in writing) and the Credit Enhancer, and (ii) unless an Opinion of
Counsel, reasonably acceptable to the Trustee, the Rating Agencies (as
evidenced in writing) and the Credit Enhancer, is delivered to the Trustee and
the Credit Enhancer to the effect that delivery of the Mortgage Files is not
necessary to protect the Trustee's right, title





                                       21
<PAGE>   27
and interest in and to the related Mortgage Loans, deliver the related Mortgage
Files to the Trustee to be held by the Trustee in trust, upon the terms herein
set forth, for the use and benefit of all present and future
Certificateholders, and the Trustee shall retain possession thereof except to
the extent the Master Servicer or Subservicers require any Mortgage Files for
normal servicing as contemplated by Section 3.07.  Each of the Seller and each
Subservicer hereby appoints the Trustee its attorney-in-fact to prepare,
execute and record any assignments of Mortgages required under this Section
2.01 in the event that the Seller or any Subservicer should fail to do so on a
timely basis.

         Within 60 days following delivery, if any, of the Mortgage Files to
the Trustee pursuant to the preceding paragraph, the Trustee shall review each
such Mortgage File to ascertain that all required documents set forth in this
Section 2.01 have been executed and received and that such documents relate to
the Mortgage Loans identified on the Mortgage Loan Schedule, and in so doing
the Trustee may rely on the purported due execution and genuineness of any
signature thereon.  If within such 60-day period the Trustee finds any document
constituting a part of a Mortgage File not to have been executed or received or
to be unrelated to the Mortgage Loans identified in said Mortgage Loan Schedule
or, if in the course of its review, the Trustee determines that such Mortgage
File is otherwise defective in any material respect, the Trustee shall promptly
upon the conclusion of its review notify the Seller and the Credit Enhancer,
and the Seller shall have a period of 30 days after such notice within which to
correct or cure any such defect; provided, however, that if such defect shall
not have been corrected or cured within such 30-day period due to the failure
of the related office of real property or other records to return any document
constituting a part of a Mortgage File, the Seller shall so notify the Trustee
and the Credit Enhancer and the period during which such defect may be
corrected or cured shall be extended for one additional 30-day period.

         The Trustee shall have no responsibility for reviewing any Mortgage
File except as expressly provided in this Section 2.01.  In reviewing any
Mortgage File pursuant to this Section, 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, if applicable, to determine if the Trustee is the assignee or
endorsee), 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, whether any Person executing any
document is authorized to do so or whether any signature thereon is genuine,
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.

         (d)     The Master Servicer hereby confirms to the Trustee that on or
prior to the Closing Date with respect to the Initial Mortgage Loans and on or
prior to the applicable Transfer Date with respect to the Subsequent Mortgage
Loans and any Eligible Substitute Mortgage Loan, the portions of the Electronic
Ledger relating to such Mortgage Loans have been or will have been clearly and
unambiguously marked, and the appropriate entries have been or will have been
made in its general accounting records, to indicate that such Mortgage Loans
have been sold and transferred to the Trustee and constitute part of the Trust
in accordance with the terms hereof.





                                       22
<PAGE>   28
         Section 2.02.  Acceptance by Trustee; Retransfer of Mortgage Loans;
Conveyance of Eligible Substitute Mortgage Loans.   (a)  The Trustee hereby
acknowledges its receipt of the Credit Enhancement Instrument, its acceptance
of the transfer and assignment of the Mortgage Notes and the Mortgages, and
declares that the Trustee holds and will hold such documents and interests and
all amounts received by it thereunder and hereunder in trust, upon the terms
herein set forth, for the use and benefit of all present and future
Certificateholders and the Credit Enhancer.  If the Trustee has reviewed
Mortgage Files pursuant to Section 2.01, and has given notice to the Seller and
the Credit Enhancer of a defect in any Mortgage File pursuant to such Section
2.01 and the time to cure such defect has expired, or if at any time any loss
is suffered by the Trustee on behalf of the Certificateholders or the Credit
Enhancer, in respect of any Mortgage Loan as a result of (i) a defect in any
document constituting a part of its Mortgage File or (ii) an assignment of the
related Mortgage to the Trustee not having been recorded as required by Section
2.01, then on the Business Day next preceding the Distribution Date immediately
following the Collection Period in which the time to cure such default expired
or such loss occurred, all right, title and interest of the Trust in and to
such Mortgage Loan shall be deemed to be retransferred, reassigned and
otherwise reconveyed, without recourse, representation or warranty, to the
Seller on such Business Day and the Trust Balance of such Mortgage Loan shall
be deducted from the Pool Balance; provided, however, that interest accrued on
the Trust Balance of such Mortgage Loan to the date of such retransfer shall be
the property of the Trust and shall be deposited to the Collection Account as
Interest Collections pursuant to Section 3.02.  Upon the occurrence of any such
event,  or upon the retransfer of a Defective Mortgage Loan to the Seller for
any reason set forth in this Agreement, the Seller shall have the option of
conveying an Eligible Substitute Mortgage Loan in substitution for such
Defective Mortgage Loan pursuant to this Section 2.02.  The Master Servicer
shall determine if, after giving effect to the addition to the Pool Balance of
the Trust Balance of any Eligible Substitute Mortgage Loan conveyed to the
Trustee pursuant to the previous sentence, the deduction from the Pool Balance
of the Trust Balance of such Defective Mortgage Loan would, but for the proviso
in the definition of Seller Interest, cause the Seller Interest to be less than
the Minimum Seller Interest, in which event the Master Servicer shall so inform
the Seller and the Seller shall deliver written notice of such potential
deficiency to the Trustee and the Master Servicer, and within two Business Days
after the Business Day of such retransfer the Seller shall deposit into the
Collection Account an amount in immediately available funds equal to the amount
necessary (the "Retransfer Deposit Amount"), to make the Seller Interest (but
for the proviso in the definition thereof) equal to the Minimum Seller
Interest.  The Seller shall enforce its rights under the Receivables Purchase
Agreement to require the related Subservicer to effect such repurchase or
substitution of one or more Eligible Substitute Mortgage Loans, and the Seller
hereby appoints the Trustee its attorney-in-fact to enforce such rights against
the Subservicers to the extent that the Seller does not enforce its rights or
does not effect such repurchase or substitution, and the Trustee hereby accepts
such appointment.  Such reduction of the Seller Interest (after giving effect
to the substitution of one or more Eligible Substitute Mortgage Loans) and the
actual payment of any Retransfer Deposit Amount shall be deemed to be payment
in full for such Defective Mortgage Loan.  Upon receipt of an Officer's
Certificate from the Master Servicer to the effect that any Retransfer Deposit
Amount in respect of a Defective Mortgage Loan has been deposited into the
Collection Account or that the Seller Interest was not reduced below the
Minimum Seller Interest as a result of the deemed retransfer of a Defective
Mortgage Loan, then as promptly as practicable following such deemed
retransfer, the Trustee shall execute such documents and instruments of
transfer presented by the Seller and shall retransfer the Related Documents to
the appropriate Related Document Seller, without





                                       23
<PAGE>   29
recourse, representation or warranty, and take such other actions as shall
reasonably be requested by the Seller to effect the retransfer by the Trust of
such Defective Mortgage Loan pursuant to this Section.

         In the event that on any day within 30 days of the date on which the
retransfer of a Defective Mortgage Loan from the Trust to the Seller is
effected pursuant to this Section, (A) the applicable representations and
warranties in Section 2.04 with respect to such Defective Mortgage Loan shall
be true and correct in all material respects on such date and (B) any defect in
the Mortgage File for such Mortgage Loan has been cured, the Seller and the
Related Document Seller may, but shall not be required to, retransfer in the
aggregate such Mortgage Loan to the Trust by delivering the Mortgage File for
such Mortgage Loan to the Master Servicer or the Trustee, as applicable
pursuant to Section 2.01, whereupon the Trust Balance of such Mortgage Loan
shall be included in the Pool Balance.  Upon the retransfer to the Trust
pursuant to this Section 2.02 of a Mortgage Loan that was formerly a Defective
Mortgage Loan, the Seller shall be deemed to have made the applicable
representations and warranties in Section 2.04 as of the date of such
retransfer, and shall execute all such necessary documents and instruments of
transfer or assignment and shall cause the Related Document Seller to execute
such documents and instruments of transfer and take such other actions as shall
be necessary to effect the retransfer of such Mortgage Loan to the Trust.  It
is understood and agreed that the obligation of the Seller to accept a
retransfer of a Defective Mortgage Loan and deposit any related Retransfer
Deposit Amount (after giving effect to any conveyance of Eligible Substitute
Mortgage Loans to the Trustee) into the Collection Account shall constitute the
sole remedy respecting such Defective Mortgage Loan available to
Certificateholders, the Trustee and the Credit Enhancer against the Seller, and
such obligation on the part of the Seller shall survive any resignation or
termination of Household Finance Corporation as Master Servicer pursuant to
Section 7.04 or 8.01.

         (b)     Subject to the satisfaction of the conditions set forth in
Section 2.01 and paragraph (c) below, in consideration of the Trustee's
agreement to deliver certain Defective Mortgage Loans to or upon the order of
the Master Servicer, upon (i) the delivery to the Trustee by the Master
Servicer, the Seller or any Subservicer, as applicable, of an Eligible
Substitute Mortgage Loan in substitution for such Defective Mortgage Loan and
(ii) compliance by the Master Servicer, the Seller or such Subservicer, as
applicable, with certain other conditions with respect to such substitution as
set forth in this Agreement, the Seller shall, on the applicable Transfer Dates
transfer, assign, set over and otherwise convey to the Trust without recourse
(subject to this Section 2.02 and Section 2.04) all of its right, title and
interest in and to the Trust Balances of such Eligible Substitute Mortgage
Loans and all Interest Collections and Principal Collections in respect thereof
received on or after the related Cut-Off Dates or, with respect to any
Additional Balances with respect thereto, on or after the dates of transfer to
the Trust; provided, however, that the Related Document Sellers, pursuant to
the Receivables Purchase Agreement and the Transfer Agreement, shall retain,
and neither the Trustee nor the Trust shall assume, the obligation under any
Loan Agreement with respect to an Eligible Substitute Mortgage Loan that
provides for the funding of future advances to the Mortgagor thereunder, which
obligation shall not be affected by the resignation or termination of HFC as
Master Servicer pursuant to Section 7.04 or 8.01 or the termination of any
Subservicer, and neither the Trust nor the Trustee shall be obligated or
permitted to fund any such future advances.  Future advances made to a
Mortgagor under a Loan Agreement with respect to an Eligible Substitute
Mortgage Loan shall be part of the related Trust Balance and transferred to the
Trust pursuant to this Section 2.02, and, therefore, will constitute part of





                                       24
<PAGE>   30
the Trust property upon the sale thereof to the Seller under the Receivables
Purchase Agreement.

         On each applicable Transfer Date, the Trustee shall acknowledge that
the Related Document Sellers have conveyed each of their right, title and
interest in and to each Eligible Substitute Mortgage Loan and the corresponding
Related Documents and certain other rights to the Trustee pursuant to the
Transfer Agreement, and the Trustee shall hold such documents hereunder for the
benefit of the Certificateholders.

         (c)     The obligation of the Trustee to accept the transfer of an
Eligible Substitute Mortgage Loan and the other property and rights related
thereto described in paragraph (b) above is subject to the satisfaction of each
of the following conditions on or prior to the related Transfer Date:

                 (i)      the Seller shall have delivered to the Trustee a
         revised Mortgage Loan Schedule indicating the conveyance of such
         Eligible Substitute Mortgage Loan to the Trustee and the removal of
         the Trust Balance of the related Defective Mortgage Loan from the
         Trust;

                 (ii)     the Seller shall have deposited in the Collection
         Account all Principal Collections and Interest Collections in respect
         of such Eligible Substitute Mortgage Loan received after the Cut-Off
         Date for such Eligible Substitute Mortgage Loan;

                 (iii)    the representations and warranties of the Seller in
         Section 2.04(a) and in Section 2.04(b) to the extent such
         representations and warranties in Section 2.04(b) do not pertain
         exclusively to the Initial Mortgage Loans, are true and correct as of
         the related Transfer Date;

                 (iv)     the Master Servicer, acting through the Subservicers,
         shall acknowledge in writing that it is holding as custodian and
         bailee for the Trustee the documents or instruments with respect to
         such Eligible Substitute Mortgage Loan specified in Section 2.01 or,
         if so required by such Section, that it has delivered the related
         Mortgage Files to the Trustee and complied with all other requirements
         with respect to the assignment of the related Mortgages specified
         therein;

                 (v)      the Master Servicer shall represent and warrant that
         no selection procedures reasonably believed by the Master Servicer to
         be adverse to the interests of the Class A Certificateholders or the
         Credit Enhancer were utilized in selecting such Eligible Substitute
         Mortgage Loan;

                 (vi)     no Eligible Substitute Mortgage Loan shall be more
         than 89 days delinquent as of the applicable Transfer Date and
         delinquent Eligible Substitute Mortgage Loans may be substituted only
         for delinquent Defective Mortgage Loans; and

                 (vii)    the Seller shall have delivered to the Trustee an
         Officer's Certificate confirming the satisfaction of each condition
         precedent specified in this paragraph (c).

         Notwithstanding any other provision of this Section, a retransfer of a
Defective Mortgage Loan to the Seller pursuant to this Section that would cause
the Seller Interest (but





                                       25
<PAGE>   31
for the proviso in the definition thereof) to be less than the Minimum Seller
Interest (after giving effect to the conveyance, if any, of an Eligible
Substitute Mortgage Loan in substitution for such Defective Mortgage Loan)
shall not occur if the Seller fails to deposit in the Collection Account the
related Retransfer Deposit Amount, if any, as required by this Section with
respect to the retransfer of such Defective Mortgage Loan.

         Section 2.03.  Representations and Warranties Regarding the Master
Servicer; Certain Covenants of the Master Servicer.   The Master Servicer
represents and warrants that as of the Closing Date and the Subsequent Transfer
Date:

                 (i)      The Master Servicer is a corporation duly organized,
         validly existing and in good standing under the laws of the State of
         Delaware and has the corporate power to own its assets and to transact
         the business in which it is currently engaged.  The Master Servicer is
         duly qualified to do business as a foreign corporation and is in good
         standing in each jurisdiction in which the character of the business
         transacted by it or properties owned or leased by it require such
         qualification and in which the failure to so qualify would have a
         material adverse effect on the business, properties, assets, or
         condition (financial or other) of the Master Servicer;

                 (ii)     The Master Servicer has the power and authority to
         make, execute, deliver and perform its obligations under this
         Agreement and to perform its obligations with respect to all of the
         transactions contemplated under this Agreement, and has taken all
         necessary corporate action to authorize the execution, delivery and
         performance of its obligations under this Agreement.  When executed
         and delivered, this Agreement will constitute the legal, valid and
         binding obligation of the Master Servicer enforceable in accordance
         with its terms, except as enforcement of such terms may be limited by
         bankruptcy, insolvency or similar laws affecting the enforcement of
         creditors' rights generally and by the availability of equitable
         remedies (whether in a proceeding at law or in equity);

                 (iii)    The Master Servicer is not required to obtain the
         consent of any other Person 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 such consents, licenses, approvals or
         authorizations, or registrations or declarations, as shall have been
         obtained or filed, as the case may be;

                 (iv)     The execution and delivery of this Agreement and the
         performance of the transactions contemplated hereby by the Master
         Servicer will not violate any provision of any existing law or
         regulation or any order or decree of any court applicable to the
         Master Servicer or any provision of the Certificate of Incorporation
         or Bylaws of the Master Servicer, or constitute a material breach of
         any mortgage, indenture, contract or other agreement to which the
         Master Servicer is a party or by which the Master Servicer may be
         bound; and

                 (v)      No litigation or administrative proceeding of or
         before any court, tribunal or governmental body is currently pending,
         or to the knowledge of the Master Servicer threatened, against the
         Master Servicer or any of its properties or with respect to this
         Agreement or the Certificates which in the opinion of the Master
         Servicer has a





                                       26
<PAGE>   32
         reasonable likelihood of resulting in a material adverse effect on the
         transactions contemplated by this Agreement.

The representations and warranties set forth in this Section shall survive the
sale and assignment of the Mortgage Loans to the Trust.  Upon discovery of a
breach of any representations and warranties which materially and adversely
affects the interests of the Certificateholders or the Credit Enhancer, the
Person discovering such breach shall give prompt written notice to the other
parties and to the Credit Enhancer.  Within 60 days (or such longer period as
permitted by prior written consent of a Responsible Officer of the Trustee and
the Credit Enhancer) of its discovery or its receipt of notice of such breach,
the Master Servicer shall cure such breach in all material respects.

         Section 2.04.  Representations and Warranties of the Seller Regarding
this Agreement and the Mortgage Loans; Retransfer of Certain Mortgage Loans.
(a)  The Seller represents and warrants that as of the applicable Transfer
Date:

                 (i)      The Seller is a corporation duly organized, validly
         existing and in good standing under the laws of the State of Delaware
         and has the corporate power to own its assets and to transact the
         business in which it is currently engaged.  The Seller is duly
         qualified to do business as a foreign corporation and is in good
         standing in each jurisdiction in which the character of the business
         transacted by it or properties owned or leased by it require such
         qualification and in which the failure to so qualify would have a
         material adverse effect on the business, properties, assets or
         condition (financial or other) of the Seller;

                 (ii)     The Seller has the power and authority to make,
         execute, deliver and perform its obligations under this Agreement and
         to perform its obligations with respect to all of the transactions
         contemplated under this Agreement, and has taken all necessary
         corporate action to authorize the execution, delivery and performance
         of its obligations under this Agreement.  When executed and delivered,
         this Agreement will constitute the legal, valid and binding obligation
         of the Seller enforceable in accordance with its terms, except as
         enforcement of such terms may be limited by bankruptcy, insolvency or
         similar laws affecting the enforcement of creditors' rights generally
         and by the availability of equitable remedies (whether in a proceeding
         at law or in equity);

                 (iii)    The Seller is not required to obtain the consent of
         any other Person 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
         such consents, licenses, approvals or authorizations, or registrations
         or declarations, as shall have been obtained or filed, as the case may
         be;

                 (iv)     The execution and delivery of this Agreement and the
         performance of the transactions contemplated hereby by the Seller will
         not violate any provision of any existing law or regulation or any
         order or decree of any court applicable to the Seller or any provision
         of the Certificate of Incorporation or Bylaws of the Seller, or
         constitute a material breach of any mortgage, indenture, contract or
         other agreement to which the Seller is a party or by which the Seller
         may be bound; and





                                       27
<PAGE>   33
                 (v)      No litigation or administrative proceeding of or
         before any court, tribunal or governmental body is currently pending,
         or to the knowledge of the Seller threatened, against the Seller or
         any of its properties or with respect to this Agreement or the
         Certificates which in the opinion of the Seller has a reasonable
         likelihood of resulting in a material adverse effect on the
         transactions contemplated by this Agreement.

         (b)     The Seller represents and warrants to the Trustee for the
benefit of the Certificateholders as of the respective Cut-Off Date for each
applicable Mortgage Loan transferred to the Trust (and to the extent expressly
stated therein as of such other time) that, as to such Mortgage Loan:

                 (i)      This Agreement constitutes a legal, valid and binding
         obligation of the Seller, enforceable against the Seller in accordance
         with its terms, except as enforceability may be limited by applicable
         bankruptcy, insolvency, reorganization, moratorium or other similar
         laws now or hereafter in effect affecting the enforcement of
         creditors' rights in general and except as such enforceability may be
         limited by general principles of equity (whether considered in a
         proceeding at law or in equity);

                 (ii)     This Agreement constitutes either (A) a valid
         transfer and assignment to the Trustee of all right, title and
         interest of the Seller in and to the Cut-Off Date Trust Balances with
         respect to the applicable Mortgage Loans, all monies due or to become
         due with respect thereto, and all proceeds of such Cut-Off Date Trust
         Balances with respect to the Mortgage Loans and such funds as are from
         time to time deposited in the Collection Account (excluding any
         investment earnings thereon) and all other property specified in the
         definition of "Trust" as being part of the corpus of the Trust
         conveyed to the Trust by the Seller, and upon payment for the
         Additional Balances, will constitute a valid transfer and assignment
         to the Trustee of all right, title and interest of the Seller in and
         to the Additional Balances, all monies due or to become due with
         respect thereto, and all proceeds of such Additional Balances and all
         other property specified in the definition of "Trust" relating to the
         Additional Balances or (B) a grant of a security interest (as defined
         in the UCC as in effect in Illinois) in such property to the Trustee
         on behalf of the Trust, which is enforceable with respect to the
         Cut-Off Date Trust Balances and Additional Balances, and the proceeds
         thereof and such funds as are from time to time deposited in the
         Collection Account (excluding any investment earnings thereon).  If
         this Agreement constitutes the grant of a security interest to the
         Trust in such property, and if the Trustee obtains and maintains
         possession of the Mortgage File for each Mortgage Loan, the Trust
         shall have a first priority perfected security interest in such
         property, subject to the effect of Section 9-306 of the UCC with
         respect to collections on the Mortgage Loans that are deposited in the
         Collection Account in accordance with the next to last paragraph of
         Section 3.02(b);

                 (iii)    As of the Closing Date with respect to the Initial
         Mortgage Loans and the applicable Transfer Date with respect to the
         Subsequent Mortgage Loans and any Eligible Substitute Mortgage Loan
         and as of the date any Additional Balance is created, the information
         set forth in the Mortgage Loan Schedule for such Mortgage Loans is
         true and correct in all material respects;





                                       28
<PAGE>   34
                 (iv)     The applicable Cut-Off Date Trust Balance has not
         been assigned or pledged, and the Seller has good and marketable title
         thereto, and the Seller is the sole owner and holder of such Cut-Off
         Date Trust Balance free and clear of any and all liens, claims,
         encumbrances, participation interests, equities, pledges, charges or
         security interests of any nature, and has full right and authority,
         under all governmental and regulatory bodies having jurisdiction over
         the ownership of the applicable Mortgage Loan, to sell, assign or
         transfer the same pursuant to this Agreement;

                 (v)      The related Mortgage Note and the Mortgage with
         respect to each Mortgage Loan have not been assigned or pledged, and
         the Related Document Seller has good and marketable title thereto, and
         the Related Document Seller is the sole owner and holder of the
         Mortgage Loan free and clear of any and all liens, claims,
         encumbrances, participation interests, equities, pledges, charges or
         security interests of any nature, and has full right and authority,
         under all governmental and regulatory bodies having jurisdiction over
         the ownership of the applicable Mortgage Loans, to sell and assign the
         same pursuant to the Transfer Agreement;

                 (vi)     The related Mortgage is a valid and subsisting first,
         second or third lien, as set forth on the Mortgage Loan Schedule with
         respect to each related Mortgage Loan, on the property therein
         described, and as of the applicable Cut-Off Date the related Mortgaged
         Property is free and clear of all encumbrances and liens having
         priority over the first, second or third lien, as applicable, of such
         Mortgage except for liens for (i) real estate taxes and special
         assessments not yet delinquent; (ii) any first and if applicable,
         second mortgage loan secured by such Mortgaged Property and specified
         on the Mortgage Loan Schedule; (iii) covenants, conditions and
         restrictions, rights of way, easements and other matters of public
         record as of the date of recording that are acceptable to mortgage
         lending institutions generally; and (iv) other matters to which like
         properties are commonly subject which do not materially interfere with
         the benefits of the security intended to be provided by such Mortgage;

                 (vii)    As of the Closing Date with respect to the Initial
         Mortgage Loans and the applicable Transfer Date with respect to the
         Subsequent Mortgage Loans and any Eligible Substitute Mortgage Loan,
         to the best knowledge of the Seller, there is no valid offset, defense
         or counterclaim of any obligor under any Loan Agreement or Mortgage;

                 (viii)   To the best knowledge of the Seller, as of the
         Closing Date with respect to the Initial Mortgage Loans and the
         applicable Transfer Date with respect to the Subsequent Mortgage Loans
         and any Eligible Substitute Mortgage Loan, there is no delinquent
         recording or other tax or fee or assessment lien against any related
         Mortgage Property;

                 (ix)     As of the Closing Date with respect to the Initial
         Mortgage Loans and the applicable Transfer Date with respect to the
         Subsequent Mortgage Loans and any Eligible Substitute Mortgage Loan,
         to the Seller's knowledge, there is no proceeding pending or
         threatened for the total or partial condemnation of the related
         Mortgaged Property, and such property is free of material damage and
         is in good repair;

                 (x)      As of the Closing Date with respect to the Initial
         Mortgage Loans and the applicable Transfer Date with respect to the
         Subsequent Mortgage Loans and any





                                       29
<PAGE>   35
         Eligible Substitute Mortgage Loan, there are no mechanics' or similar
         liens or claims which have been filed for work, labor or material
         affecting the related Mortgaged Property which are, or may be, liens
         prior or equal to the lien of the related Mortgage, except liens which
         are fully insured against by the title insurance policy referred to in
         clause (xiv);

                 (xi)     As of the applicable Cut-Off Date for the Mortgage
         Loans, no Minimum Monthly Payment is more than 89 days delinquent
         (measured on a contractual basis); and with respect to the Initial
         Mortgage Loans no more than _____% (by Cut-Off Date Pool Balance) were
         30-59 days delinquent (measured on a contractual basis) and no more
         than _____% (by Cut-Off Date Pool Balance) were 60-89 days delinquent
         (measured on a contractual basis);

                 (xii)    For each Mortgage Loan, the related Mortgage File
         contains each of the documents and instruments specified to be
         included therein (including, with respect to the Initial Mortgage
         Loans, an appraisal (which may be an appraisal prepared using a
         statistical data base));

                 (xiii)   The related Mortgage Note and the related Mortgage at
         the time they were made complied in all material respects with
         applicable state and federal laws, including, without limitation,
         usury, truth-in-lending, real estate settlement procedures, consumer
         credit protection, equal credit opportunity or disclosure laws
         applicable to the Mortgage Loan;

                 (xiv)    A lender's title insurance policy or binder was
         issued on the date of origination of each Mortgage Loan with a Credit
         Limit of $[50,000] or more (excluding Mortgage Loans originated in New
         Jersey for the period beginning [January 1, 1986 and ending April 30,
         1987]), and each such policy is valid and remains in full force and
         effect, and a title search or other assurance of title customary in
         the relevant jurisdiction was obtained with respect to each Mortgage
         Loan as to which no title insurance policy or binder was issued;

                 (xv)     None of the Mortgaged Properties is a mobile home or
         a manufactured housing unit that is not permanently attached to its
         foundation;

                 (xvi)    As of the Cut-Off Date for the Initial Mortgage Loans
         no more than _____% of such Mortgage Loans, by aggregate principal
         balance, are secured by Mortgaged Properties located in one United
         States postal zip code and no more than _____% of such Mortgage Loans,
         by aggregate principal balance, are secured by Mortgaged Properties
         located in planned unit developments;

                 (xvii)   As of the applicable Cut-Off Date, (i) the Combined
         Loan-to-Value Ratio for each Mortgage Loan was not in excess of _____%
         and (ii) not more than _____% of the Initial Mortgage Loans, by
         aggregate principal balance as of the related Cut-Off Date, exceeds
         the applicable Credit Limit by up to _____%;

                 (xviii)  No selection procedure reasonably believed by the
         Seller to be adverse to the interests of the Certificateholders or the
         Credit Enhancer was utilized in selecting the Mortgage Loans;





                                       30
<PAGE>   36
                 (xix)    The Seller has not transferred the Mortgage Loans to
         the Trust with any intent to hinder, delay or defraud any of its
         creditors;

                 (xx)     The Minimum Monthly Payment with respect to any
         Mortgage Loan is not less than the interest accrued at the applicable
         Loan Rate on the average daily Trust Balance during the interest
         period relating to the date on which such Minimum Monthly Payment is
         due;

                 (xxi)    Within 15 days of the Closing Date with respect to
         the Initial Mortgage Loans and, to the extent not already included in
         such filing with respect to the Initial Mortgage Loans, the applicable
         Transfer Date with respect to the Subsequent Mortgage Loans and any
         Eligible Substitute Mortgage Loan, the Seller and each Subservicer
         will file UCC-1 financing statements with respect to the Mortgage
         Loans in accordance with Section 2.01 hereof;

                 (xxii)   Each Loan Agreement and each Mortgage is in
         substantially the form previously provided to the Trustee by the
         Seller and each Mortgage Loan is an enforceable obligation of the
         related Mortgagor;

                 (xxiii)  To the best knowledge of the Seller, as of the
         Closing Date with respect to the Initial Mortgage Loans and the
         applicable Transfer Date with respect to the Subsequent Mortgage Loans
         and any Eligible Substitute Mortgage Loan, the physical property
         subject to each Mortgage is free of material damage and is in good
         repair;

                 (xxiv)   As of the Closing Date with respect to the Initial
         Mortgage Loans and the applicable Transfer Date with respect to the
         Subsequent Mortgage Loans and any Eligible Substitute Mortgage Loan,
         the Seller has not received a notice of default of any senior mortgage
         loan related to a Mortgaged Property that has not been cured by a
         party other than the related Subservicer;

                 (xxv)    The definition of Prime Rate or auction average 6
         month U.S. Treasury Bills rate, as the case may be, in each Loan
         Agreement relating to a Mortgage Loan that has an adjustable Loan Rate
         does not differ materially from the definition in the form of loan
         agreement previously provided to the Trustee and referred to in clause
         (xxii) above;

                 (xxvi)   None of the Mortgage Loans is a reverse mortgage loan
         or included in the "Ever Yours Program";

                 (xxvii)  No Initial Mortgage Loan had an original term to
         maturity in excess of 180 months.  The weighted average remaining term
         to maturity of the Initial Mortgage Loans on a contractual basis as of
         the Cut-Off Date for the Initial Mortgage Loans is approximately 145
         months.  For the Mortgage Loans having adjustable Loan Rates, which,
         in the case of the Initial Mortgage Loans, comprise approximately
         _____% of the Initial Mortgage Loans (by Cut-Off Date Pool Balance),
         on each date that the Loan Rates have been adjusted, such adjustments
         were made in compliance with the related Mortgage and Mortgage Note
         and applicable law.  Over the term of any such Mortgage Loan, the Loan
         Rate may not exceed the related Maximum Loan Rate, if any.  The
         Initial Mortgage Loans have minimum Loan Rates which range between
         _____% and





                                       31
<PAGE>   37
         _____%.  The Margins for the Initial Mortgage Loans having adjustable
         Loan Rates range between _____% and _____% and the weighted average
         Margin for such Mortgage Loans is approximately _____% as of the Cut-
         Off Date for the Initial Mortgage Loans.  As of the Cut-Off Date for
         the Initial Mortgage Loans, the Loan Rates on such Initial Mortgage
         Loans range between _____% and _____% and the weighted average Loan
         Rate is approximately _____%.

                 (xxviii) Each Mortgaged Property consists of a single parcel
         of real property with a one-to-four unit single family residence 
         erected thereon, or an individual condominium unit, planned unit
         development unit or townhouse, generally approvable by FNMA;

                 (xxix)   With respect to the Initial Mortgage Loans as of the
         applicable Cut-Off Date, (a) no more than _____% (by Cut-Off Date Pool
         Balance) of the Initial Mortgage Loans are secured by real property
         improved by individual condominium units, planned development units,
         townhouses or two-to-four family residences erected thereon, and (b)
         at least _____% (by Cut-Off Date Pool Balance) of the Initial Mortgage
         Loans are secured by real property with a detached one-family
         residence erected thereon;

                 (xxx)    As of the Cut-Off Date for the Initial Mortgage
         Loans, the Credit Limits on the Initial Mortgage Loans range between
         approximately $___________  and $___________ with an average of
         approximately $__________.  As of the Cut-Off Date for the Initial
         Mortgage Loans, no Initial Mortgage Loan had a principal balance in
         excess of approximately $___________  and the average principal
         balance of the Initial Mortgage Loans is equal to approximately _____%
         of their average Credit Limit; and

                 (xxxi)   Approximately _____% and _____% of the Initial
         Mortgage Loans, by aggregate principal balance as of the Cut-Off Date
         for the Initial Mortgage Loans, are first and second liens,
         respectively and the remainder are third liens.

         (c)     It is understood and agreed that the representations and
warranties set forth in this Section 2.04 shall survive the transfer of the
Mortgage Loans to the Trust and the delivery, if any, of the respective
Mortgage Files to the Trustee and the termination of the rights and obligations
of the Master Servicer pursuant to Section 7.04 or 8.01.  Upon discovery by the
Seller, the Master Servicer, the Credit Enhancer or a Responsible Officer of
the Trustee of a breach of any of the foregoing representations and warranties
(other than the representations and warranties set forth in Sections 204(b)(i),
(ii) and (iv) without regard to any limitation set forth therein concerning the
knowledge of the Seller as to the facts stated therein which breach materially
and adversely affects the interests of the Trust or the Class A
Certificateholders or the Credit Enhancer in the related Mortgage Loan, the
party discovering such breach shall give prompt written notice to the other
parties and the Credit Enhancer.  The Seller shall, within 60 days of discovery
or receipt of notice of a breach of any such representation or warranty, or,
with the prior written consent of a Responsible Officer of the Trustee and the
Credit Enhancer, such longer period not to exceed 90 days specified in such
consent, cure such breach in all material respects or shall, not later than the
Business Day next preceding the Distribution Date in the month following the
end of the Collection Period in which any such cure period expired (or such
later date as permitted by written consent of the Credit Enhancer), accept a
retransfer of any such Defective Mortgage Loan from the Trust and may, at its
option, substitute an Eligible Substitute Mortgage Loan for such Defective
Mortgage Loan in the same manner and subject to the same conditions as set
forth in Section





                                       32
<PAGE>   38
2.02.  The Seller shall enforce its rights against the related Subservicer
under the Receivables Purchase Agreement in respect of such breach and has
appointed the Trustee its attorney-in-fact to do so to the extent that the
Seller does not enforce such right, and the Trustee hereby accepts such
appointment.  Upon accepting such retransfer and depositing the Retransfer
Deposit Amount, if any, to the Collection Account, the Seller shall be entitled
to receive an instrument of assignment or transfer from the Trustee to the same
extent as set forth in Section 2.02 with respect to the retransfer of Mortgage
Loans under that Section.  In the event the Seller fails to accept any such
retransfer in the manner and at the time required, the Master Servicer shall be
obligated to deposit the applicable Retransfer Deposit Amount into the
Collection Account in the same manner and subject to the same conditions as set
forth in Section 2.02.  It is understood and agreed that the obligation of the
Seller or the Master Servicer to accept a retransfer of a Mortgage Loan as to
which a breach has occurred and is continuing and to make any required deposit
in the Collection Account (after giving effect to the transfer of an Eligible
Substitute Mortgage Loan, if any, in substitution for such retransferred
Defective Mortgage Loan) shall constitute the sole remedy respecting such
breach available to Class A Certificateholders, the Trustee on behalf of Class
A Certificateholders and the Credit Enhancer, and such obligation of the Seller
shall survive any resignation or termination of HFC as the Master Servicer
hereunder.

         In the event of a breach of any of the representations and warranties
set forth in Sections 204(b)(i), (ii) or (iv) hereof, the party discovering
such breach shall give prompt written notice to the Seller, the Master
Servicer, the Credit Enhancer and a Responsible Officer of the Trustee.  Within
two Business Days after the Trustee receives notice of any such breach, the
Trustee shall send written notice thereof to the Credit Enhancer.  Within 10
days of the delivery of such notice of breach to the Credit Enhancer, the
Credit Enhancer shall give written notice to the Seller directing the Seller to
accept retransfer of all of the Mortgage Loans (with the appropriate Related
Document Sellers accepting retransfer of all appropriate Related Documents)
within 60 days of such notice, or such longer period (not to exceed an
additional 30 days) as may be agreed by the Trustee and by the Credit Enhancer,
which agreement shall not be unreasonably withheld.  In the event that at the
time of such breach a Credit Enhancer Default shall have occurred and be
continuing the Trustee shall, instead of the notice to the Credit Enhancer
provided above, within the same time period provided in the preceding sentence,
send written notice to the Class A Certificateholders describing such breach
and requesting that such Holders, within 60 days of their receipt of such
notice, instruct the Trustee in writing whether or not to direct the Seller to
accept assignment of all of the Mortgage Loans as provided below or to refrain
from so doing.  Promptly following such 60 day period, the Trustee, unless it
shall have received written instructions to the contrary from Holders of Class
A Certificates evidencing not less than 51% of the aggregate Percentage
Interests of the Class A Certificates and the Credit Enhancer (provided no
Credit Enhancer Default shall have occurred and be continuing), shall direct
the Seller to accept reassignment of all the Mortgage Loans.  The Seller shall
accept reassignment of such Mortgage Loans on the Distribution Date immediately
succeeding the expiration of such applicable period and shall deposit in the
Collection Account an amount (which, for purposes of this paragraph shall be
deemed the "Retransfer Deposit Amount") equal to the Class A Certificate
Principal Balance on the Distribution Date on which the retransfer is scheduled
to occur plus, in all cases, an amount equal to all interest accrued but unpaid
on the Class A Certificate Principal Balance through the day preceding such
Distribution Date, and shall pay to the Credit Enhancer any unreimbursed
payments under the Credit Enhancement Instrument and other amounts due and
unpaid under the Insurance Agreement.  The payment of such





                                       33
<PAGE>   39
Retransfer Deposit Amount and the transfer of all other amounts deposited for
the preceding month in the Collection Account will be considered a prepayment
in full of the Class A Certificates and will be distributed upon presentation
and surrender of the Class A Certificates in lieu of the amount that would
otherwise be distributed on such Distribution Date if such retransfer had not
occurred.  The obligation of the Seller to accept a retransfer of the Mortgage
Loans and to deposit to the Collection Account the applicable Retransfer
Deposit Amount shall constitute the sole remedy available to the Trustee or the
Class A Certificateholders respecting any such breach of the representations
and warranties set forth in Sections 204(b)(i), (ii) and (iv).

         Section 2.05.  Covenants of the Seller.  The Seller hereby covenants
that:

         (a)     Security Interests.  Except for the transfers contemplated
hereunder, the Seller will not sell, pledge, assign or transfer to any other
Person, or grant, create, incur or assume any Lien on, any Mortgage Loan,
whether now existing or hereafter created, or any interest therein or in any
other property specified in the definition "Trust" (other than REOs) as being
part of the corpus of the Trust; the Seller will give notice to the Trustee of
the existence of any Lien on any Mortgage Loan immediately upon discovery
thereof; and the Seller, at its expense, will defend the right, title and
interest of the Trust in, to and under the Mortgage Loans, whether now existing
or hereafter created, against all claims of third parties claiming through or
under the Seller; provided, however, that nothing in this Section 2.05(a) shall
prevent or be deemed to prohibit the Seller from suffering to exist upon any of
the Mortgage Loans any Liens for municipal or other local taxes and other
governmental charges if such taxes or governmental charges shall not at the
time be due and payable or if the Seller shall currently be contesting the
validity thereof in good faith by appropriate proceedings and shall have set
aside on its books adequate reserves with respect thereto.

         (b)     Negative Pledge.  The Seller hereby agrees not to transfer,
assign, exchange, pledge, hypothecate, grant a security interest in, or
otherwise convey the Seller Certificates except in accordance with Sections
6.05 and 7.02.

         (c)     The Seller hereby agrees that:

                 (i)      the Seller will compensate all of its directors,
         officers, consultants and agents directly, from the Seller's own bank
         accounts, for services provided to the Seller by such directors,
         officers, consultants and agents and, to the extent any director,
         consultant or agent of the Seller is also a director, officer,
         employee, consultant or agent of the Master Servicer or any other
         Person (including any Subservicer), the Seller and the Master Servicer
         and such other Person will allocate among themselves the services and
         attendant salaries of shared directors, officers, consultants, and
         agents on a basis that reflects the actual services rendered;

                 (ii)     the Seller will obtain services such as accounting,
         receivables collection, payroll, employee benefits, and computer
         services and services relating to the administering, servicing and
         collection of receivables from the Master Servicer in accordance with
         this Agreement;

                 (iii)    the Seller, the Subservicers and the Master Servicer
         will share certain overhead expenses, although the amount the Seller
         will be charged for such use will





                                       34
<PAGE>   40
         be based on actual use to the extent practicable and, to the extent
         such allocation is not practicable, on a basis reasonably related to
         use;

                 (iv)     the Seller will use its own letterhead and will hold
         itself out as a separate entity (and will require all directors and
         officers of the Seller in conducting business on behalf of the Seller
         to identify themselves as such and not as employees, directors or
         officers of the Master Servicer or any other Person);

                 (v)      the Seller will observe all corporate and other legal
         formalities of the Seller;

                 (vi)     separate financial records are and will continue to
         be maintained to reflect the assets and liabilities of the Seller,
         which financial records are and will be subject to audit by
         independent public accountants at the reasonable request of the Board
         of Directors of the Seller;

                 (vii)    the Seller will not commingle its assets with the
         assets of the Master Servicer or any Subservicer.  All demand deposit
         accounts and other bank accounts of the Seller will be maintained
         separately from those of the Master Servicer and the Subservicers.
         Monetary transactions between the Seller and the Master Servicer or
         any Subservicer are and will continue to be properly reflected in the
         Seller's financial records;

                 (viii)   the Seller will not guaranty obligations of the
         Master Servicer or any Subservicer;

                 (ix)     except for issuances of the Seller's special voting
         preferred stock, the Seller will not take any action, including,
         without limitation, the issuance of additional Certificates or stock
         of the Seller or the incurrence of additional debt (other than as
         permitted or contemplated by this Agreement, the Receivables Purchase
         Agreement, the Transfer Agreement, the Credit Enhancement Instrument
         and the Revolving Credit Agreement between HFC and the Seller and any
         similar revolving credit agreements between HFC (or any affiliate) and
         the Seller in connection with trusts similar to the Trust) unless the
         Rating Agencies have advised in writing that such action will not
         reduce the current rating of the Class A Certificates, and the Seller
         will give advance written notice of any proposed amendment to such
         Revolving Credit Agreement to the Rating Agencies; and

                 (x)      the Seller covenants and agrees that it shall not pay
         cash dividends to HFC (a) unless the Seller's Board of Directors shall
         have determined that the amount of such cash dividend is not expected
         to be required by the Seller to fulfill its obligations to purchase
         Additional Balances to be sold to the Trust hereunder or (b) if the
         payment of such dividend would cause the debt-to-equity ratio of the
         Seller to exceed the then-current debt-to-equity ratio of the Master
         Servicer.

         Section 2.06.  Conveyance of the Subsequent Mortgage Loans.  (a)
Subject to the satisfaction of the conditions set forth in Section 2.01 and
paragraph (b) below, in consideration of the Trustee's delivery on a Subsequent
Transfer Date to or upon the order of the Seller of all or a portion of the
amount in respect of Principal Collections in the Funding





                                       35
<PAGE>   41
Account the Seller shall, to the extent of the availability thereof, on the
related Subsequent Transfer Date transfer, assign, set over and otherwise
convey to the Trust without recourse (subject to Sections 2.02 and 2.04) all of
its right, title and interest in and to the Trust Balances of the Subsequent
Mortgage Loans and all Interest Collections and Principal Collections in
respect thereof received after the Cut-Off Date for the Subsequent Mortgage
Loans or, with respect to any Additional Balances with respect thereto, on or
after the date of transfer to the Trust; provided, however, that the Related
Document Sellers, pursuant to the Receivables Purchase Agreement and the
Transfer Agreement, shall retain, and neither the Trustee nor the Trust shall
assume, the obligation under any Loan Agreement for a Subsequent Mortgage Loan
that provides for the funding of future advances to the Mortgagor thereunder,
which obligation shall not be affected by the resignation or termination of HFC
as Master Servicer pursuant to Section 7.04 or 8.01 or the termination of any
Subservicer, and neither the Trust nor the Trustee shall be obligated or
permitted to fund any such future advances.  Future advances made to a
Mortgagor under a Loan Agreement relating to a Subsequent Mortgage Loan shall
be part of the related Trust Balance and transferred to the Trust pursuant to
this Section 2.06, and, therefore, part of the Trust property upon the sale
thereof to the Seller under the Receivables Purchase Agreement.

         On each Subsequent Transfer Date, the Trustee shall acknowledge that
the Related Document Sellers have conveyed each of their right, title and
interest in and to each Subsequent Mortgage Loan and to the corresponding
Related Documents and certain other rights to the Trustee pursuant to the
Transfer Agreement, and the Trustee shall hold such documents hereunder for the
benefit of the Certificateholders.

         (b)     The obligation of the Trustee to accept the transfer of the
Subsequent Mortgage Loans and the other property and rights related thereto
described in paragraph (a) above is subject to the satisfaction of each of the
following conditions on or prior to the Subsequent Transfer Date:

                 (i)      the Seller shall have provided the Trustee with a
         letter from the Credit Enhancer consenting to such transfer of the
         Subsequent Mortgage Loans (which consent shall not be unreasonably
         withheld or delayed);

                 (ii)     the Seller shall have delivered to the Trustee a
         revised Mortgage Loan Schedule, listing the Subsequent Mortgage Loans;

                 (iii)    the Seller shall have deposited in the Collection
         Account all Principal Collections and Interest Collections in respect
         of such Subsequent Mortgage Loans received after the Cut-Off Date for
         the Subsequent Mortgage Loans;

                 (iv)     the representations and warranties of the Seller in
         Section 2.04(a) and in Section 2.04(b), to the extent such
         representations and warranties do not pertain exclusively to the
         Initial Mortgage Loans, are true and correct with respect to the
         Subsequent Mortgage Loans as of the related Subsequent Transfer Date;

                 (v)      the Seller shall have provided the Trustee with a
         letter from each Rating Agency confirming that the transfer of the
         Subsequent Mortgage Loans shall not result in a reduction or
         withdrawal of its then-current rating of the Class A Certificates;





                                       36
<PAGE>   42
                 (vi)     the Master Servicer, acting through the Subservicers,
         shall acknowledge in writing that it is holding as custodian and
         bailee for the Trustee the documents or instruments with respect to
         the Subsequent Mortgage Loans specified in Section 2.01 or, if so
         required by such Section, that it has delivered the related Mortgage
         Files to the Trustee and complied with all other requirements with
         respect to the assignment of the related Mortgages specified therein;

                 (vii)    the Master Servicer shall represent and warrant that
         no selection procedures reasonably believed by the Master Servicer to
         be adverse to the interests of the Class A Certificateholders or the
         Credit Enhancer were utilized in selecting the Subsequent Mortgage
         Loans; and

                 (viii)   the Seller shall have delivered to the Trustee an
         Officer's Certificate confirming the satisfaction of each condition
         precedent specified in this paragraph (b).

         (c)     The obligation of the Trust to purchase any Subsequent
Mortgage Loans on a Subsequent Transfer Date is subject to the following
requirements:  (i) the remaining term to maturity of each such Subsequent
Mortgage Loan may not exceed 180 months; (ii) the weighted average Margin of
the Subsequent Mortgage Loans (by aggregate Cut-Off Date Trust Balance with
respect to such Subsequent Mortgage Loans) plus any Subsequent Mortgage Loans
previously transferred to the Trust is at least _____%; (iii) the weighted
average Combined Loan-to-Value Ratio of the Subsequent Mortgage Loans (by
aggregate Cut-Off Date Trust Balance with respect to such Subsequent Mortgage
Loans) plus any Subsequent Mortgage Loans previously transferred to the Trust
is not more than _____%; (iv) no such Subsequent Mortgage Loan will have a Loan
Balance in excess of $[500,000]; (v) no less than _____% of the Subsequent
Mortgage Loans plus any Subsequent Mortgage Loans previously transferred to the
Trust (by aggregate Cut-Off Date Trust Balance with respect to such Subsequent
Mortgage Loans) are first liens; and (vi) at least _____% of such Subsequent
Mortgage Loans plus any Subsequent Mortgage Loans previously transferred to the
Trust (by aggregate Cut-Off Date Trust Balance with respect to such Subsequent
Mortgage Loans) are not more than 30 days delinquent (on a contractual basis)
in the payment of a Minimum Monthly Payment as of the Cut-Off Date for such
Subsequent Mortgage Loans.  On the last Distribution Date of the Funding
Period, the Seller shall have provided the Trustee, the Rating Agencies and the
Credit Enhancer with an opinion of counsel to the effect that such transfer
constitutes a sale of the Trust Balances of the Subsequent Mortgage Loans to
the Seller and a sale of or grant of a security interest in the Subsequent
Mortgage Loans to the Trustee; provided, however, in the event of a change of
law during the Funding Period that materially affects the method of perfecting
the security interest in the Subsequent Mortgage Loans, the Seller shall either
(i) provide the Trustee, the Rating Agencies and the Credit Enhancer with an
opinion of counsel to the effect that such transfer constitutes a sale of the
Trust Balances of the Subsequent Mortgage Loans to the Seller and a sale of or
grant of a security interest in the Subsequent Mortgage Loans to the Trustee,
or (ii) take such action as is necessary to perfect the interests of the Trust
in the Subsequent Mortgage Loans, other than perfection by delivery of the
Subsequent Mortgage Loans, unless all Mortgage Loans are required to be
delivered to the Trustee pursuant to Section 2.01(c).

         Section 2.07.  Retransfers of Mortgage Loans at Election of Seller.
(a)  Subject to the conditions set forth below, the Seller may, but shall not
be obligated to, require the retransfer of Mortgage Loans from the Trust to the
Seller as of the close of business on the last Business





                                       37
<PAGE>   43
Day of any calendar month (the "Retransfer Date"), provided that (x) on the
27th day of such calendar month (or on the following Business Day if such day
is not a Business Day) (the "Retransfer Notice Date"), the Seller shall give
the Trustee a notice of the proposed retransfer that contains a list of the
Mortgage Loans to be retransferred and (y) the following conditions shall be
satisfied:

                 (i)      The Rapid Amortization Period shall not have
         commenced;

                 (ii)     On the Retransfer Notice Date, the Seller Interest
         (after giving effect to the removal from the Trust of the Mortgage
         Loans proposed to be retransferred) is at least equal to the Minimum
         Seller Interest;

                 (iii)    The retransfer of any Mortgage Loans on any
         Retransfer Date prior to the commencement of the Rapid Amortization
         Period shall not, in the reasonable belief of the Seller, cause a
         Rapid Amortization Event to occur or an event which with notice or
         lapse of time or both would constitute a Rapid Amortization Event;

                 (iv)     On or before the Retransfer Date, the Master Servicer
         shall have delivered to the Trustee a revised Mortgage Loan Schedule,
         or if the aggregate amount of the Cut-Off Date Trust Balances of the
         Mortgage Loans retransferred pursuant to this Section 2.07 is less
         than _____% of the Cut-Off Date Pool Balance and the retransfer of the
         Mortgage Loans is to facilitate the servicing of the Mortgage Loans
         pursuant to Section 3.01, a list of Mortgage Loans to be removed from
         the Trust, (in each case, with a copy to the Credit Enhancer)
         reflecting the proposed retransfer and on the Retransfer Date shall
         have marked the Electronic Ledger to show that the Mortgage Loans
         retransferred to the Seller are no longer owned by the Trust;

                 (v)      If the aggregate amount of the Cut-Off Date Trust
         Balances of the Mortgage Loans retransferred pursuant to this Section
         2.07 is less than _____% of the Cut-Off Date Pool Balance, as of the
         Retransfer Notice Date, not more than _____% of the Trust Balances of
         the Mortgage Loans remaining in the Trust (after giving effect to the
         proposed retransfer) are delinquent more than 60 days; if the
         aggregate amount of the Cut-Off Date Trust Balances of the Mortgage
         Loans retransferred pursuant to this Section 2.07 is equal to or
         greater than _____% and less than _____% of the Cut-Off Date Pool
         Balance, as of the Retransfer Notice Date, not more than _____% of the
         Trust Balances of the Mortgage Loans remaining in the Trust (after
         giving effect to the proposed retransfer) are delinquent more than 60
         days; if the aggregate amount of the Cut-Off Date Trust Balances of
         the Mortgage Loans retransferred pursuant to this Section 2.07 is
         equal to or greater than _____% of the Cut-Off Date Pool Balance, as
         of the Retransfer Notice Date, not more than _____% of the Trust
         Balances of the Mortgage Loans remaining in the Trust (after giving
         effect to the proposed retransfer) are delinquent more than 60 days;

                 (vi)     The Seller shall represent and warrant that no
         selection procedures reasonably believed by the Seller to be
         materially adverse to the interests of the Class A Certificateholders
         or the Credit Enhancer were utilized in selecting the Mortgage Loans
         to be removed from the Trust;





                                       38
<PAGE>   44
                 (vii)    If either (a) the aggregate amount of the Cut-Off
         Date Trust Balances of the Mortgage Loans retransferred pursuant to
         this Section 2.07 is equal to or greater than _____% of the Cut-Off
         Date Pool Balance and the retransfer of the Mortgage Loans is to
         facilitate the servicing of the Mortgage Loan pursuant to Section
         3.01, or (b) the Mortgage Loan is being removed for any reason other
         than to facilitate the servicing of the Mortgage Loan, each Rating
         Agency shall have received on or prior to the Retransfer Notice Date
         notice in a form acceptable to the Rating Agencies of such proposed
         retransfer of Mortgage Loans and, prior to the Retransfer Date, shall
         not have notified the Seller in writing that such retransfer of
         Mortgage Loans would result in a reduction or withdrawal of its then
         current rating of the Class A Certificates; and

                 (viii)   The Seller shall have delivered to the Trustee and
         the Credit Enhancer an Officer's Certificate certifying that the items
         set forth in subparagraphs (i) through (vii), inclusive, have been
         performed or are true and correct, as the case may be.  The Trustee
         may conclusively rely on such Officer's Certificate, shall have no
         duty to make inquiries with regard to the matters set forth therein
         and shall incur no liability in so relying.

         (b)     Upon receiving the information required by Section 2.07(a)
from the Seller, the Master Servicer shall perform in a timely manner those
acts required of it in Section 2.07(a)(iv).  Upon satisfaction of the above
conditions, on the Retransfer Date the Trustee (or the Master Servicer on its
behalf), subject to the last paragraph in Section 2.01, shall deliver to the
Seller the Mortgage File for each Mortgage Loan being retransferred, and the
Trustee shall execute and deliver to the Seller such other documents prepared
by the Seller as shall be reasonably necessary to retransfer such Mortgage
Loans to the Seller.  Any such retransfer of the Trust's right, title and
interest in and to Mortgage Loans shall be without recourse, representation or
warranty by or of the Trust or the Trustee to the Seller.  Upon reasonable
request from the Rating Agencies, the Master Servicer shall deliver, with
fifteen Business Days of such request, to the Rating Agencies, a list of all
Mortgage Loans removed from the Trust pursuant to this Section 2.07.

         Section 2.08.  Execution and Authentication of Certificates.  The
Trustee shall execute on behalf of the Trust and shall authenticate and deliver
to or upon the order of the Seller (except that the Seller Certificates shall
be in the name of the Seller), in exchange for the Initial Mortgage Loans,
concurrently with the sale, assignment and conveyance to the Trust of the
Initial Mortgage Loans, Class A Certificates in authorized denominations and
the Seller Certificates, together evidencing the ownership of the entire Trust.

         Section 2.09.  Tax Treatment.  It is the intention of the Seller and
the Class A Certificateholders that the Class A Certificates will be
indebtedness of the Seller 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 Trustee and each Class A Certificateholder (or
Certificate Owner) by acceptance of its Class A Certificate (or, in the case of
a Certificate Owner, by virtue of such Certificate Owner's acquisition of a
beneficial interest therein) agrees to treat the Class A Certificates (or
beneficial interest therein), for purposes of federal, state and local income
or franchise taxes and any other tax imposed on or measured by income, as
indebtedness of the Seller secured by the Mortgage Loans and to report the
transactions contemplated by this Agreement on all applicable tax returns in a
manner consistent with such treatment.  Each Certificateholder agrees that it
will cause any Certificate Owner acquiring an





                                       39
<PAGE>   45
interest in a Certificate through it to comply with this Agreement as to
treatment as indebtedness for federal, state and local income and franchise tax
purposes and for purposes of any other tax imposed on or measured by income.


                                  ARTICLE III

                 Administration and Servicing of Mortgage Loans

         Section 3.01.  The Master Servicer.  The Master Servicer shall, or
shall cause the related Subservicer to, service and administer the Mortgage
Loans in a manner consistent with the terms of this Agreement and with general
industry practice and shall have full power and authority, acting alone or
through such Subservicer, to do any and all things in connection with such
servicing and administration which it may deem necessary or desirable, it being
understood, however, that the Master Servicer shall at all times remain
responsible to the Trustee and the Credit Enhancer and the Certificateholders
for the performance of its duties and obligations hereunder in accordance with
the terms hereof.  Any amounts received by the related Subservicer in respect
of a Mortgage Loan shall be deemed to have been received by the Master Servicer
whether or not actually received by it.  Without limiting the generality of the
foregoing, the Master Servicer shall, and is hereby authorized and empowered by
the Trustee to, execute and deliver, on behalf of itself, the
Certificateholders 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 Mortgage Loans and with
respect to the Mortgaged Properties.  Upon the written request of the Master
Servicer, the Seller and the Trustee shall furnish the Master Servicer with any
powers of attorney and other documents necessary or appropriate to enable the
Master Servicer to carry out its servicing and administrative duties hereunder.
The Master Servicer in such capacity may also consent to the placing of a lien
senior to that of the Mortgage on the related Mortgaged Property, provided that

                 (a)      the Mortgage relating to the Mortgage Loan (i) was in
         a first lien position as of the applicable Cut-Off Date and (ii) was
         in a first lien position immediately prior to the placement of such
         senior lien and (iii) the ratio of (A) the sum of the Credit Limit of
         such Mortgage Loan and the unpaid principal balance of the lien senior
         to that of the Mortgage on the related Mortgaged Property immediately
         following such placement to (B) the Valuation of the Mortgaged
         Property at the time the Mortgage Loan was originated is not greater
         than (1) with respect to Mortgage Loans with a Combined Loan-to-Value
         Ratio of _____% or less, _____%, (2) with respect to Mortgage Loans
         with a Combined Loan-to-Value Ratio in excess of _____% and not
         greater than _____%, _____% and (3) with respect to Mortgage Loans
         with a Combined Loan-to-Value Ratio greater than _____%, _____%;

                 (b)      such Mortgage succeeded to a first or second lien
         position after the related Mortgage Loan was conveyed to the Trust
         and, immediately following the placement of such senior lien, such
         Mortgage is in a second or, if at the time the Mortgage Loan was in a
         third lien position, a third lien position, and the outstanding
         principal amount of the mortgage loan secured by such subsequent
         senior lien and the rate at which interest accrues thereon are





                                       40
<PAGE>   46
         no greater than those of the senior mortgage loan secured by the
         Mortgaged Property as of the date the related Mortgage Loan was
         conveyed to the Trust;

                 (c)      the Mortgage relating to such Mortgage Loan was in a
         second or third lien position as of the applicable Cut-Off Date, the
         new senior lien secures a mortgage loan that refinances an existing
         first or second mortgage loan and the outstanding principal amount of
         the replacement first or second mortgage loan immediately following
         such refinancing and the rate at which interest accrues thereon are
         not greater than that of such existing first or second mortgage loan
         at the date of such refinancing; or

                 (d)  the Mortgage relating to such Mortgage Loan was in a
         second or third lien position as of the applicable Cut-Off Date, the
         new senior lien secures a mortgage loan that refinances an existing
         first or second mortgage loan and (1) the then-current Combined Loan-
         to-Value Ratio of the senior liens and the Mortgage does not exceed
         such ratio as of the applicable Cut-Off Date and (2) the ratio of the
         Mortgage to the Mortgage plus all senior liens immediately following
         such refinancing is at least equal to such ratio as of the applicable
         Cut-Off Date;

         and provided, further, in the case of (a), (b) and (c) above, such
         senior lien does not secure a note that provides for negative
         amortization.

         The Master Servicer shall purchase any Mortgage Loan with respect to
which (a) any loss is suffered by the Credit Enhancer or the Trustee, on behalf
of the Certificateholders, as a result of (i) a failure to file any UCC-1
financing statements required by either Section 2.01 or Section 2.06 or (ii) a
failure to publish, on or prior to the Closing Date with respect to any Initial
Mortgage Loan or on or prior to the applicable Transfer Date with respect to
any Subsequent Mortgage Loan or Eligible Substitute Mortgage Loan, such notices
reflecting the sale of such Mortgage Loan as are described in Section 3440.1(h)
of the California Civil Code or (iii) if such Mortgage Loan has a Credit Limit
of $[50,000] or more and was not originated in the State of New Jersey during
the period beginning [January 1, 1986 and ending April 30, 1987], title to the
related Mortgaged Property not being covered under a customary lender's title
insurance policy or (b) the Master Servicer has consented to the placing of a
subsequent senior lien pursuant to clause (a) above and foreclosure proceedings
are commenced with respect to such Mortgaged Property.  Any such purchase by
the Master Servicer shall occur on the Business Day immediately preceding the
Distribution Date following the Collection Period during which such loss occurs
and shall be accomplished by the deposit by the Master Servicer into the
Collection Account of an amount equal to the Trust Balance of the applicable
Mortgage Loan plus accrued and unpaid interest thereon at the Loan Rate to the
end of the Collection Period in which such purchase occurs.  Upon making any
such purchase the Master Servicer shall be entitled to receive an instrument of
assignment or transfer from the Trustee to the same extent as set forth in
Section 2.02.

         The Master Servicer (or any Subservicer on behalf of the Master
Servicer) may enter into a modification with the related Mortgagor of any Loan
Agreement that is not otherwise purchased by the Master Servicer or
retransferred to the Seller pursuant to Section 2.07, so long as (i) such
modification is permitted by the Credit Enhancer (unless a Credit Enhancer
Default has occurred and is continuing, in which case no such permission shall
be required),





                                       41
<PAGE>   47
(ii) the Master Servicer (or such Subservicer on behalf of the Master Servicer)
determines that such modification is necessary and (iii) such modification
shall not have a material adverse effect on the interests of the
Certificateholders, the Credit Enhancer or the Trust; provided, however, the
Master Servicer (or any Subservicer acting on behalf of the Master Servicer)
shall not, prior to the removal from the Trust, modify a Loan Agreement to
change the Loan Rate from a floating rate to a fixed rate of interest per annum
or from a fixed rate to a floating rate of interest per annum.  In addition,
the Master Servicer may agree to changes in the terms of a Mortgage Loan
requested by a Mortgagor which may have a material adverse effect on the
interests of Certificateholders or the Credit Enhancer, provided that the
Master Servicer (i) has determined that such changes are necessary to avoid
prepayment of the Mortgage Loan and that such changes are consistent with
prudent business practice as evidenced by an Officer's Certificate signed by a
Servicing Officer to such effect delivered to the Trustee and the Credit
Enhancer and (ii) purchases such Mortgage Loan on the Business Day immediately
preceding the Distribution Date following the Collection Period during which
such determination is made and prior to the effectiveness of such change, if
such Mortgage Loan has not been removed from the Trust by the Seller pursuant
to Section 2.07(a).  In the event that such purchase does not occur, no change
will be made to the terms of the related Mortgage Loan.  Such purchase shall be
accomplished in the same manner and subject to the same conditions set forth in
Section 2.02.  Upon making any such purchase, the Master Servicer shall be
entitled to receive an instrument of assignment or transfer from the Trustee to
the same extent as set forth in Section 2.02.  Notwithstanding the foregoing
however, the Master Servicer may make any changes to any of the Loan Agreements
with any Mortgagor or modify its collection or servicing policies as to a
particular Mortgagor if requested by the Seller.  In such an event, the Seller
agrees to cause the Trust to retransfer the affected Mortgage Loan to the
Seller in accordance with Section 2.07(a).

         The relationship of the Master Servicer (and of any successor to the
Master Servicer as master 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.

         In the event that the rights, duties and obligations of the Master
Servicer are terminated hereunder, any successor to the Master Servicer may, in
its sole discretion and to the extent permitted by applicable law, terminate
the existing subservicer arrangements with any subservicer or assume the
terminated Master Servicer's rights under such subservicing arrangements, which
termination or assumption will not violate the terms of such arrangements.

         Section 3.02.  Collection of Certain Mortgage Loan Payments; Mortgage
Loan Payment Record.  (a)  The Master Servicer shall make reasonable efforts to
collect all payments called for under the terms and provisions of the Mortgage
Loans, and shall, to the extent such procedures shall be consistent with this
Agreement, follow such collection procedures as it follows with respect to
mortgage loans in its servicing portfolio comparable to the Mortgage Loans.
Consistent with, and without limiting the generality of, the foregoing, the
Master Servicer may in its discretion (i) waive any late payment charge or any
assumption fees or other fees that may be collected in the ordinary course of
servicing the Mortgage Loans, (ii) arrange with a Mortgagor a schedule for the
payment of delinquent amounts, provided such arrangement is consistent with the
Master Servicer's policies with respect to the mortgage





                                       42
<PAGE>   48
loans it owns or services and (iii) and treat a Loan Agreement as current if
the Mortgagor has made one scheduled payment to cure the delinquency status of
such Mortgage Loan.

         (b)     The Master Servicer shall establish and maintain with the
Trustee a separate trust account (the "Collection Account") titled "The First
National Bank of Chicago, as Trustee, in trust for the registered holders of
Revolving Home Equity Loan Asset Backed Certificates, Series 1996-2."  In the
event that a successor Trustee is appointed as provided in Section 9.07, a new
Collection Account shall be promptly established at and maintained by such
successor Trustee, and the title of the new Collection Account shall be
"[Successor Trustee], as Trustee, in trust for the registered holders of
Revolving Home Equity Loan Asset Backed Certificates, Series 1996-2", and any
amounts in the old Collection Account shall be transferred to the new
Collection Account.  The Collection Account shall be an Eligible Account.
Except as provided below, the Master Servicer shall on the Closing Date, with
respect to the Initial Mortgage Loans, and on the applicable Transfer Date,
with respect to the Subsequent Mortgage Loans and any Eligible Substitute
Mortgage Loan, deposit to the Collection Account any amounts representing
payments on and any collections in respect of such Mortgage Loans received
after the applicable Cut-Off Date and prior to the Closing Date or applicable
Transfer Date, as the case may be, and thereafter deposit to the Collection
Account on a daily basis within two Business Days following receipt thereof the
following payments and collections received or made by it (without
duplication):

                 (i)      Interest Collections on the Mortgage Loans;

                 (ii)     Principal Collections on the Mortgage Loans;

                 (iii)    any Retransfer Deposit Amount in respect of Mortgage
         Loans that are repurchased or replaced by an Eligible Substitute
         Mortgage Loan by the Seller pursuant to Section 2.02 or 2.04;

                 (iv)     the aggregate purchase price of the Mortgage Loans
         purchased by the Master Servicer pursuant to Section 3.01;

                 (v)      Net Liquidation Proceeds;

                 (vi)     Insurance Proceeds (including, for this purpose, any
         amount required to be paid by the Master Servicer pursuant to Section
         3.04 and excluding the portion of Insurance Proceeds, if any, that has
         been applied to the restoration or repair of the related Mortgaged
         Property or to the payment of any senior mortgage loan or that has
         been released to the related Mortgagor in accordance with the normal
         servicing procedures of the Master Servicer); and

                 (vii)    amounts required to be paid by the Seller in
         connection with the termination of the Trust pursuant to Section
         10.01.

The foregoing requirements respecting deposits to the Collection Account are
exclusive, it being understood that, without limiting the generality of the
foregoing, fees (including annual fees) or late charge penalties payable by
Mortgagors, or amounts received by the Master Servicer or a Subservicer for the
accounts of Mortgagors for application towards the payment





                                       43
<PAGE>   49
of taxes, insurance premiums, assessments and similar items for the account of
the related Subservicer, if any, need not be deposited to the Collection
Account.

         The Trustee shall hold amounts deposited in the Collection Account as
trustee for the Certificateholders and for the Credit Enhancer.  In addition,
the Master Servicer shall notify the Trustee and the Credit Enhancer in writing
on each Determination Date of the amount of payments and collections in the
Collection Account allocable to Interest Collections and Principal Collections
for the following Distribution Date and the amount allocable to Interest
Collections and Principal Collections for the second following Distribution
Date.  Following such notification, the Master Servicer, in its capacity as
custodian for the Seller, shall be entitled to withdraw from the Collection
Account and retain any amounts that constitute income and gain realized from
the investment of such payments and collections.

         The Master Servicer may cause the institution maintaining the
Collection Account to invest any funds in the Collection Account in Permitted
Investments (including obligations of the Master Servicer or of any of its
affiliates, if such obligations otherwise qualify as Permitted Investments),
which shall mature or otherwise be available not later than the Business Day
next preceding the Distribution Date or, with the approval of the Credit
Enhancer and the Rating Agencies, on the Distribution Date next following the
date of such investment (except that any investment in an obligation of the
institution with which the Collection Account is maintained may mature on or
before 12:00 noon, Chicago time, on such Distribution Date) and shall not be
sold or disposed of prior to its maturity.  In the event the Trustee is at any
time maintaining the Collection Account, any request by the Master Servicer to
invest funds on deposit in the Collection Account shall be in writing, shall be
delivered to the Trustee at or before 10:30 A.M., Chicago time, if such
investment is to be made on such day, and shall certify that the requested
investment is a Permitted Investment that matures at or prior to the time
required hereby.  Any such investment shall be registered in the name of the
Trustee as trustee hereunder or in the name of its nominee and to the extent
such investments are certificated they shall be maintained in the possession of
the Trustee in the state of its Corporate Trust Office.  Except as provided
above, all income and gain realized from any such investment shall be for the
benefit of the Master Servicer and shall be subject to its withdrawal or order
from time to time.  The amount of any losses incurred in respect of the
principal amount of any such investments shall be deposited in the Collection
Account by the Master Servicer out of its own funds immediately as realized.

         (c)     The deposit to the Collection Account referred to in Section
3.02(b) and the deposit to the Funding Account pursuant to Section 5.05(a) may
be effected by the recordation of payments and collections in the case of the
Collection Account on the Master Note and in the case of the Funding Account on
the Funding Master Note (which notes shall have been executed and delivered to
the Trustee at least five (5) Business Days prior to the first such recordation
or, in the case of the first Collection Period, on the Closing Date) so long as
either of the following conditions is satisfied:  (x) commercial paper issued
by the Master Servicer is rated at least A-1 by Standard & Poor's and P-1 by
Moody's; or (y) a Master Servicer Credit Facility is maintained in effect by
the Master Servicer acceptable in form and substance to each Rating Agency and
the Credit Enhancer (such acceptability to be evidenced by a written
confirmation of the Credit Enhancer and each Rating Agency to the effect, in
the case of the Rating Agencies, that, so long as the Master Servicer Credit
Facility is maintained, the then-current rating of the Class A Certificates
will not be adversely affected if, instead of making the deposits referred to
in Section 3.02(b) and Section 5.05(a) within the periods





                                       44
<PAGE>   50
specified therein, receipt by the Master Servicer of such amounts is recorded
on the Master Note and the Funding Master Note respectively), issued by a
depository institution or insurance company acceptable to the Credit Enhancer
and having a rating on its (A) short-term obligations of at least P-1 by
Moody's and A-1 by Standard & Poor's and (B) long-term obligations of at least
A-2 by Moody's and A by Standard & Poor's, or other ratings approved by the
Rating Agencies and the Credit Enhancer; provided, however, that the amount of
payments and collections recorded and outstanding on the Master Note pursuant
to this subclause (y) shall not exceed _____% of the Master Servicer Credit
Facility Amount.  To the extent and for so long as such conditions are met, the
Master Servicer shall, within two Business Days of receipt of any payments and
collections allocable to Principal Collections and Interest Collections, notify
the Trustee, the Credit Enhancer and the Master Servicer Credit Facility Issuer
in writing of the amounts that would otherwise be deposited in the Collection
Account pursuant to Section 3.02(b) and Section 5.05(a), and the Master
Servicer shall establish and maintain for the Trust a Mortgage Loan Payment
Record on which the payments on and collections in respect of the Mortgage
Loans for each of the categories specified in Section 3.02(b) and Section
5.05(a) shall be credited, and the Master Servicer shall notify the Trustee,
the Credit Enhancer and the Master Servicer Credit Facility Issuer in writing
as promptly as practicable (but in any event prior to the related Determination
Date with respect to each Distribution Date) of the amounts so credited for
each of the categories specified in such Sections that are to be included in
Interest Collections and Principal Collections for the related Distribution
Date and of the amounts so credited that will constitute a part of Interest
Collections and Principal Collections for the second following Distribution
Date.

         If for any period during which the Master Servicer is recording
payments and collections in respect of the Mortgage Loans or deposits as the
case may be on the Master Note or the Funding Master Note as applicable (1)
pursuant to subclause (x) of the preceding paragraph and the ratings of the
Master Servicer's commercial paper are downgraded, suspended or withdrawn so
that the rating requirements specified in such subclause are no longer
satisfied, or (2) pursuant to subclause (y) of the preceding paragraph and
either (a) the Rating Agencies or the Credit Enhancer advise the Master
Servicer that the Master Servicer Credit Facility is no longer sufficient and,
in the case of the Rating Agencies, that continuing to record payments and
collections on the Master Note or the Funding Master Note instead of depositing
such amounts to the Collection Account or Funding Account, as applicable,
pursuant to Sections 3.02(b) and 5.05(a) will adversely affect the then-current
rating of the Class A Certificates or (b) the amount recorded and outstanding
on the Master Note exceeds _____% of the Master Servicer Credit Facility
Amount, then, the Master Servicer shall, within two (2) Business Days following
the date of such event, deposit such payments and collections (or in the case
of clause (2)(b) above, only the portion of such payments and collections in
excess of _____% of the Master Servicer Credit Facility Amount), in next day
funds in the Collection Account and the Funding Account, as applicable, as
determined by the Master Servicer; provided, however, that such deposits shall
in no event be made later than 11:00 A.M. on the Business Day preceding the
related Distribution Date.

         The foregoing requirements respecting credits to the Mortgage Loan
Payment Record are exclusive, it being understood that, without limiting the
generality of the foregoing, the Master Servicer need not enter in the Mortgage
Loan Payment Record amounts representing fees (including annual fees) or late
charge penalties payable by Mortgagors, or amounts received by the Master
Servicer for the accounts of Mortgagors for application towards the payment of
taxes, insurance premiums, assessments and similar items.





                                       45
<PAGE>   51
         The Mortgage Loan Payment Record shall be made available for
inspection during normal business hours of the Master Servicer upon request of
the Trustee, the Credit Enhancer, any Master Servicer Credit Facility Issuer or
the firm of independent accountants acting pursuant to Section 3.10.

         In the event a Master Note shall have been delivered to the Trustee
pursuant to the first paragraph of this Section 3.02(c), the Trustee shall
record on the back thereof an increase in the amount owed to the Trust equal to
the amount of payments and collections received in respect of the Mortgage
Loans and Additional Balances reflected in each notification received by the
Trustee pursuant to the first paragraph of this Section 3.02(c), within two
Business Days of receipt of such notification.  Amounts owing under the Master
Note shall be reduced by the amount of Interest Collections and Principal
Collections deposited to the Collection Account in next day funds prior to
11:00 A.M. on the Business Day preceding the related Distribution Date (for
purposes of this subclause, the portion of such Principal Collections to be
transferred to the Funding Account, up to an aggregate amount equal to _____%
of the Cut-Off Date Pool Balance on any Distribution Date prior to the last
Distribution Date in the Funding Period shall not be required to be included in
Principal Collections and such amount shall not reduce amounts owing under the
Master Note).

         In the event a Funding Master Note shall have been delivered to the
Trustee pursuant to the first paragraph of this Section 3.02(c), the Trustee
shall record on the back thereof an increase in the amount owed to the Trust
equal to the amount of payments in respect of Principal Collections to be
deposited to the Funding Account on each Distribution Date during the Funding
Period.  Amounts owing under the Funding Master Note shall be reduced by the
amount of Principal Collections deposited to the Funding Account in next day
funds prior to 11:00 A.M. on the related Subsequent Transfer Date to pay any
Excess Funding Amount pursuant to Section 5.05(c)(i)(B), to acquire Subsequent
Mortgage Loans pursuant to Section 5.05(c)(ii) or on the last Distribution Date
of the Funding Period, to acquire Subsequent Mortgage Loans or Additional
Balances, or for deposit to the Collection Account for distribution as
Principal Collections, in each case pursuant to Section 5.05(c)(iii).

         (d)     So long as the conditions of Section 3.02(c) above are
satisfied, the Master Servicer shall deposit in the Collection Account all
amounts received with respect to the Mortgage Loans (whether or not allocable
to principal of or interest on the Trust Balance) which are reflected on the
Mortgage Loan Payment Record and which will constitute Interest Collections or
Principal Collections for the next Distribution Date, not later than the
Business Day preceding such Distribution Date, subject to withdrawal to the
same extent as debits to the Mortgage Loan Payment Record are permitted
pursuant to clauses (i) - (v), inclusive, of Section 3.03.  Amounts deposited
in the Collection Account from payments on the Funding Master Note pursuant to
Section 3.02 shall be deemed to be made from the Funding Account.

         Section 3.03.  Withdrawals from the Collection Account; Permitted
Debits to the Mortgage Loan Payment Record.  From time to time, withdrawals may
be made from the Collection Account or debits may be made to the Mortgage Loan
Payment Record, as the case may be, by the Master Servicer for the following
purposes:

                 (i)      To reimburse the Master Servicer to the extent
         permitted by Section 7.03;





                                       46
<PAGE>   52
                 (ii)     To make deposits into the Collection Account and
         Funding Account pursuant to Section 3.02;

                 (iii)    To pay to the Seller amounts on deposit in the
         Collection Account or credited to the Mortgage Loan Payment Record
         that are not to be included in the distributions and payments pursuant
         to Section 5.01 to the extent provided by Section 3.02(b);

                 (iv)     To make distributions and payments pursuant to
         Sections 5.01 and 5.05; and

                 (v)      To pay to the party legally entitled by a final order
         of a court of competent jurisdiction in an insolvency proceeding an
         amount equal to any preference claim made with respect to amounts paid
         with respect to the Mortgage Loans; provided that, if any such amount
         is later determined not to be a preference by such court of competent
         jurisdiction and is returned to the Master Servicer or any
         Subservicer, such amount shall be redeposited into the Collection
         Account by the Master Servicer.

         In addition, if the Master Servicer deposits in the Collection Account
or credits to the Mortgage Loan Payment Record any amount not required to be
deposited therein or credited thereto or any amount in respect of payments by
Mortgagors made by checks subsequently returned for insufficient funds or other
reason for non-payment, it may at any time withdraw such amount from the
Collection Account or debit such amount on the Mortgage Loan Payment Record,
and any such amounts shall not be included in Interest Collections and
Principal Collections, any provision herein to the contrary notwithstanding.
Any withdrawal or debit permitted by this Section 3.03 may be accomplished by
delivering an Officer's Certificate to the Trustee which describes the purpose
of such withdrawal or debit (including, without limitation, that any such
amount was deposited in the Collection Account or credited to the Mortgage Loan
Payment Record in error or, in the case of returned checks, that such amounts
were properly debited, respectively).  Upon receipt of any such Officer's
Certificate, the Trustee shall withdraw or debit such amount for the account of
the Master Servicer.  All funds deposited or credited by the Master Servicer in
the Collection Account or to the Mortgage Loan Payment Record, respectively,
shall be held by the Trustee in trust for the Certificateholders and the Credit
Enhancer, until disbursed in accordance with Section 5.01 or withdrawn or
debited in accordance with this Section.

         Section 3.04.  Maintenance of Hazard Insurance; Property Protection
Expenses.  The Master Servicer shall cause to be maintained for each Mortgage
Loan hazard insurance naming the Master Servicer or the related Subservicer 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 Mortgaged
Property or (ii) the combined principal balance owing on such Mortgage Loan and
any mortgage loan senior to such Mortgage Loan from time to time.  The Master
Servicer shall also maintain on property acquired upon foreclosure, or by grant
of deed in lieu of foreclosure, hazard insurance with extended coverage in an
amount which is at least equal to the lesser of (i) the maximum insurable value
of the Mortgaged Property or (ii) the combined unpaid principal balance owing
on such Mortgage Loan and any mortgage loans senior to such Mortgage Loans at
the time of such foreclosure or grant of deed in lieu of foreclosure plus
accrued interest thereon.  Amounts collected by the Master Servicer under any
such policies shall be either deposited in the Collection Account or credited
to the Mortgage Loan Payment





                                       47
<PAGE>   53
Record to the extent called for by Section 3.02.  In cases in which any
Mortgaged Property is located in a federally designated flood area, the hazard
insurance to be maintained for the related Mortgage Loan shall include flood
insurance.  All such flood insurance shall be in such amounts as are required
under applicable guidelines of FNMA.  The Master Servicer shall be under no
obligation to require that any Mortgagor maintain earthquake or other
additional insurance and shall be under no obligation itself to maintain any
such additional insurance on property acquired in respect of a Mortgage 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.  With respect
to Mortgaged Properties acquired by the Master Servicer as provided herein, the
Master Servicer may satisfy its obligation set forth in the first sentence of
this Section 3.04 by self insuring Mortgaged Properties for which the aggregate
unpaid principal balance of the related Mortgage Loans plus the outstanding
balance of any mortgage loans senior to such Mortgage Loans at the time title
was acquired, plus accrued interest (the "Combined Exposure"), was less than
$[500,000] (or such other amount as the Master Servicer may in good faith
determine from time to time) and by causing hazard policies to be maintained
with respect to Mortgaged Properties for which the Combined Exposure equals or
exceeds the self insurance threshold established from time to time by the
Master Servicer by maintaining a blanket policy consistent with prudent
industry standards insuring against hazard losses on the Mortgaged Properties.
Such policy may contain a deductible clause, in which case the Master Servicer
shall, 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
3.04, and there shall have been a loss which would have been covered by such
policy, credit to the Mortgage Loan Payment Record or deposit in the Collection
Account, as the case may be, the amount not otherwise payable under the blanket
policy because of such deductible clause.

         Section 3.05.  Assumption and Modification Agreements.  In any case in
which a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer shall exercise or refrain from exercising its
right to accelerate the maturity of such Mortgage Loan consistent with the
then-current practice of the Master Servicer and without regard to the
inclusion of such Mortgage Loan in the Trust and not in the Master Servicer's
portfolio.  If it elects not to enforce its right to accelerate or if it is
prevented from doing so by applicable law, the Master Servicer (so long as such
action conforms with the Master 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 Loan Agreement and, to the extent permitted by applicable law,
the Mortgagor remains liable thereon.  The Master Servicer shall notify the
Trustee that any assumption and modification agreement has been completed by
delivering to the Trustee an Officer's Certificate certifying that such
agreement is in compliance with this Section 3.05 and by forwarding to the
applicable Subservicer on behalf of the Seller or the Trustee, as applicable,
the original copy of such assumption and modification agreement.  Any such
assumption and modification agreement shall, for all purposes, be considered a
part of the related Mortgage File to the same extent as all other documents and
instruments constituting a part thereof.  No change in the terms of the related
Loan Agreement may be made by the Master Servicer in connection with any such
assumption to the extent that such change would not be permitted to be made in
respect of the original Loan Agreement pursuant to the third paragraph of
Section 3.01 and unless the conditions specified in the third paragraph of
Section 3.01 are satisfied.  Any fee collected by the Master Servicer for
entering into any such agreement will be retained by the Master Servicer as
additional servicing compensation.





                                       48
<PAGE>   54
         Section 3.06.  Realization Upon Defaulted Mortgage Loans.  The Master
Servicer shall join the Related Document Seller as called for by the Transfer
Agreement and foreclose upon or otherwise comparably convert to ownership
Mortgaged Properties securing such of the Mortgage Loans as come into and
continue in default when, in the opinion of the Master Servicer based upon the
practices and procedures referred to in the following sentence, no satisfactory
arrangements can be made for collection of delinquent payments pursuant to
Section 3.02; provided that if the Master Servicer has actual knowledge or
reasonably believes that any Mortgaged Property is affected by hazardous or
toxic wastes or substances and that the acquisition of such Mortgaged Property
would not be commercially reasonable, then the Master Servicer will not cause
the Trust to acquire title to such Mortgaged Property in a foreclosure or
similar proceeding.  In connection with such foreclosure or other conversion,
the Master 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) and procedures as it shall deem necessary or advisable and as
shall be normal and usual in its general mortgage servicing activities.  The
foregoing is subject to the proviso that the Master Servicer shall not be
required to expend its own funds in connection with any foreclosure or towards
the correction of any default on a related senior mortgage loan or restoration
of any property unless it shall determine that such expenditure will increase
Net Liquidation Proceeds.  The Master Servicer will be reimbursed out of
Liquidation Proceeds for advances of its own funds to pay Liquidation Expenses
before any Net Liquidation Proceeds are contributed to Certificateholders or
the Seller.

         In the event that title to any Mortgaged Property is acquired in
foreclosure or by grant of deed in lieu of foreclosure, the deed or certificate
of sale shall (i) so long as the long-term unsecured debt of HFC is assigned
ratings of at least A- by Standard & Poor's and A-3 by Moody's, be issued in
the name of the related Subservicer and (ii) if the conditions in clause (i)
above are not met, be issued to the Trustee, or to its nominee on behalf of the
Certificateholders.

         Section 3.07.  Trustee to Cooperate.  On or before each Distribution
Date, the Master Servicer will notify the Trustee of the payment in full during
the related Collection Period of the Trust Balance of any Mortgage Loan with
respect to which the Credit Limit has been reduced to zero which notification
shall be by a certification (which certification shall include a statement to
the effect that all amounts received in connection with such payment which are
required to be deposited in the Collection Account or credited to the Mortgage
Loan Payment Record pursuant to Section 3.02 have been so deposited or
credited) of a Servicing Officer.  Upon any such payment in full, the Master
Servicer is authorized to execute, pursuant to the authorization contained in
Section 3.01, if the assignments of Mortgage have been recorded as required
hereunder, an instrument of satisfaction regarding the related Mortgage, which
instrument of satisfaction shall be recorded by the Master Servicer if required
by applicable law and be delivered to the Person entitled thereto.  It is
understood and agreed that no expenses incurred in connection with such
instrument of satisfaction or transfer shall be reimbursed from amounts
deposited in the Collection Account or Funding Account or credited to the
Mortgage Loan Payment Record.  If the Trustee is holding the Mortgage Files,
from time to time and as appropriate for the servicing or foreclosure of any
Mortgage Loan, the Trustee shall, upon request of the Master Servicer and
delivery to the Trustee of a trust receipt substantially in the form of Exhibit
F hereto signed by a Servicing Officer, release the related Mortgage File to
the Master Servicer, and the Trustee shall execute such documents as shall be
necessary to the prosecution of any such proceedings or the taking of other
servicing





                                       49
<PAGE>   55
actions.  Such trust receipt shall obligate the Master Servicer to return the
Mortgage File to the Trustee when the need therefor by the Master Servicer no
longer exists unless the Mortgage Loan shall be liquidated, in which case, upon
receipt of a certificate of a Servicing Officer similar to that hereinabove
specified, the trust receipt shall be released by the Trustee to the Master
Servicer.

         In order to facilitate the foreclosure of the Mortgage securing any
Mortgage Loan that is in default following recordation of the assignments of
Mortgage in accordance with the provisions hereof, the Trustee shall, if the
Master Servicer so requests in writing and supplies the Trustee with
appropriate forms therefor, assign such Mortgage Loan for the purpose of
collection to the Master Servicer or to the related Subservicer (any such
assignment shall unambiguously indicate that the assignment is for the purpose
of collection only), and, upon such assignment, such assignee for collection
will thereupon bring all required actions in its own name and otherwise enforce
the terms of the Mortgage Loan and deposit or credit the Net Liquidation
Proceeds received with respect thereto in the Collection Account or the
Mortgage Loan Payment Record, as the case may be.  In the event that all
delinquent payments due under any such Mortgage Loan are paid by the Mortgagor
and any other defaults are cured then the assignee for collection shall
promptly reassign such Mortgage Loan to the Trustee and return it to the place
where the related Mortgage File was being maintained.

         Section 3.08.  Servicing Compensation; Payment of Certain Expenses by
Master Servicer.  The Master Servicer shall be entitled to receive the Class A
Servicing Fee pursuant to Section 5.01(a)(i) as compensation for its services
in connection with servicing the Mortgage Loans.  The Seller Monthly Servicing
Fee shall be paid to the Master Servicer by the Seller and shall not be the
responsibility or liability of the Trust, the Trustee or the Class A
Certificateholders.  Additional servicing compensation in the form of late
payment charges or other receipts not required to be deposited in the
Collection Account shall be retained by the Master Servicer.  The Master
Servicer shall be required to pay all expenses incurred by it in connection
with its activities hereunder (including payment of Trustee fees and all other
fees and expenses not expressly stated hereunder to be for the account of the
Certificateholders) and shall not be entitled to reimbursement therefor except
as specifically provided herein.

         Section 3.09.  Annual Statement as to Compliance.  (a) The Master
Servicer will deliver to the Trustee, the Credit Enhancer and the Rating
Agencies, on or before [April 30 of each year, beginning April 30, 1998], an
Officer's Certificate stating that (i) a review of the activities of the Master
Servicer during the preceding calendar year and of its performance under this
Agreement has been made under such officer's supervision and (ii) to the best
of such officer's knowledge, based on such review, the Master Servicer has
fulfilled all its material obligations under this Agreement throughout such
year, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officer and the nature
and status thereof.

         (b)     The Master Servicer shall deliver to the Trustee, the Credit
Enhancer and each of the Rating Agencies, promptly after having obtained
knowledge thereof, but in no event later than five Business Days thereafter,
written notice by means of an Officer's Certificate of any event which with the
giving of notice or the lapse of time or both, would become an Event of
Servicing Termination.





                                       50
<PAGE>   56
         Section 3.10.  Annual Servicing Report.  On or before [April 30 of
each year, beginning April 30, 1998], the Master Servicer at its expense shall
cause a firm of nationally recognized independent public accountants (who may
also render other services to the Master Servicer) to furnish a report to the
Trustee, the Credit Enhancer and each Rating Agency to the effect that such
firm has examined certain documents and records relating to the servicing of
mortgage loans by the Master Servicer during the most recent calendar year then
ended under pooling and servicing agreements (including this Agreement)
substantially similar to this Agreement and that such examination, which has
been conducted substantially in compliance with the audit guide for audits of
non-supervised mortgagees approved by the Department of Housing and Urban
Development for use by independent public accountants (to the extent that the
procedures in such audit guide are applicable to the servicing obligations set
forth in such agreements), 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 3.11.  Annual Opinion of Counsel.  On or before [April 30 of
each year, beginning April 30, 1998], the Master Servicer at its expense shall
deliver to the Trustee and the Credit Enhancer an Opinion of Counsel
substantially in the form set forth in Exhibit D hereto.

         Section 3.12.  Access to Certain Documentation and Information
Regarding the Mortgage Loans.  (a)  The Master Servicer and the Seller shall
provide to the Trustee, the Credit Enhancer, Class A Certificateholders that
are federally insured savings and loan associations, the Office of Thrift
Supervision, the successor to the Federal Home Loan Bank Board, the FDIC and
the supervisory agents and examiners of the Office of Thrift Supervision access
to the documentation regarding the Mortgage Loans required by applicable
regulations of the Office of Thrift Supervision and the FDIC (acting as
operator of the SAIF or the BIF), such access being afforded without charge but
only upon reasonable request and during normal business hours at the offices of
the Master Servicer, the related Subservicer or the Seller as determined by the
Master Servicer.  Nothing in this Section 3.12 shall derogate from the
obligation of the Master Servicer to observe any applicable law prohibiting
disclosure of information regarding the Mortgagors, and the failure of the
Master Servicer to provide access as provided in this Section 3.12 as a result
of such obligation shall not constitute a breach of this Section 3.12.

         (b)     The Master Servicer shall supply information in such form as
the Trustee shall reasonably request to the Trustee and the Paying Agent, on or
before the start of the third Business Day preceding the related Distribution
Date, as is required in the Trustee's reasonable judgment to enable the Paying
Agent or the Trustee, as the case may be, to make the required distributions
and to furnish the required reports to Certificateholders and to make any claim
under the Credit Enhancement Instrument.

         Section 3.13.  Maintenance of Certain Servicing Insurance Policies.
The Master Servicer shall during the term of its service as master servicer
maintain in force (i) a policy or policies of insurance covering errors and
omissions in the performance of its obligations as master 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 FNMA for persons performing servicing for mortgage loans
purchased by such Association.





                                       51
<PAGE>   57
         Section 3.14.  Reports to the Securities and Exchange Commission.  The
Master 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 and regulations of the Securities and Exchange Commission thereunder.

         Section 3.15.  Information Required by the Internal Revenue Service
Generally and Reports of Foreclosures and Abandonments of Mortgaged Property.
The Master Servicer shall prepare and deliver, or cause to be prepared and
delivered, to the Trustee all federal and state information reports when and as
required by all applicable state and federal income tax laws including, to the
extent applicable, returns reporting a cancellation of indebtedness as
prescribed by Section 6050P of the Code.  In particular, with respect to the
requirement under Section 6050J of the Code to the effect that the Trustee
shall make reports of foreclosures and abandonments of any mortgaged property
for each year beginning in 1996, the Master Servicer, in order to facilitate
this reporting process, shall provide to the Trustee in a timely fashion each
year as required by law reports relating to each instance occurring during the
previous calendar year in which the Master Servicer or any Subservicer (i) on
behalf of the Trustee acquired an interest in any Mortgaged Property through
foreclosure or other comparable conversion in full or partial satisfaction of a
Mortgage Loan or (ii) knew or had reason to know that any Mortgaged Property
has been abandoned.  The reports from the Master Servicer shall be in form and
substance sufficient to enable the Trustee to meet the reporting requirements
imposed by Section 6050J of the Code.

         Section 3.16.  Additional Covenants of HFC.  HFC hereby agrees that:

                 (i)      it will maintain its books and records to clearly
         note the separate corporate existence of the Seller, each Subservicer
         and the Master Servicer;

                 (ii)     the Seller, the Subservicers and HFC will share
         certain overhead expenses, although the amount the Seller will be
         charged for such use will be based on actual use to the extent
         practicable and, to the extent such allocation is not practicable, on
         a basis reasonably related to use;

                 (iii)    separate financial records will be maintained to
         reflect the assets and liabilities of the Seller, HFC and each
         Subservicer, which financial records are and will be subject to audit
         by independent public accountants at the reasonable request of the
         Board of Directors of the Seller, HFC or such Subservicer, as the case
         may be;

                 (iv)     except as permitted hereunder, there will be no
         commingling of the assets of the Seller with the assets of HFC or any
         Subservicer.  All demand deposit accounts and other bank accounts of
         the Seller will be maintained separately from those of HFC and the
         Subservicers.  Monetary transactions between the Seller and HFC or any
         Subservicer are and will continue to be properly reflected in their
         respective financial records;

                 (v)      HFC at all times will recognize, and will take all
         steps within its power to maintain, the corporate existence of the
         Seller and Subservicers as being separate and apart from its own
         corporate existence and will not refer to the Seller or any
         Subservicer as a department or division of HFC; and





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<PAGE>   58
                 (vi)     Except as otherwise expressly provided herein, HFC
         will not guaranty any obligations of the Seller.


                                   ARTICLE IV

                             Servicing Certificate

         Section 4.01.  Servicing Certificate.  Not later than each
Determination Date, the Master Servicer shall deliver to the Trustee, the
Paying Agent, the Credit Enhancer and each Rating Agency a Servicing
Certificate (in written form or the form of computer readable media or such
other form as may be agreed to by the Trustee and the Master Servicer),
together with an Officer's Certificate to the effect that such Servicing
Certificate is true and correct in all material respects, stating the related
Collection Period, Distribution Date, the series number of the Certificates,
the date of this Agreement, and:

                 (i)      the aggregate amount of collections on the Mortgage
         Loans received in such Collection Period;

                 (ii)     the aggregate amount of Interest Collections for such
         Collection Period;

                 (iii)    the aggregate amount of Principal Collections for
         such Collection Period;

                 (iv)     the Class A Certificateholder Floating Allocation
         Percentage and the Class A Fixed Allocation Percentage for such
         Collection Period;

                 (v)      the Class A Interest Collections for such Collection
         Period;

                 (vi)     the amount of Principal Collections to be deposited
         to the Funding Account pursuant to Section 5.05(a);

                 (vii)    the Seller Interest Collections for such Collection
         Period;

                 (viii)   the Seller Principal Collections for such Collection
         Period;

                 (ix)     Class A Certificate Interest and the Class A
         Certificate Rate for the related Interest Period;

                 (x)      the amount, if any, of such Class A Certificate
         Interest that is not payable on account of insufficient Class A
         Interest Collections;

                 (xi)     the portion of (a) the Unpaid Class A Certificate
         Interest Shortfall, if any, plus (b) interest thereon at a rate equal
         to the sum of the Class A Certificate Rate applicable from time to
         time and, to the extent permitted by law, the Unpaid Class A
         Certificate Interest Penalty Rate to be distributed on such
         Distribution Date;

                 (xii)    the Unpaid Class A Certificate Interest Shortfall, if
         any, remaining after the distribution on such Distribution Date;





                                       53
<PAGE>   59
                 (xiii)   the Accelerated Principal Distribution Amount and the
         portion thereof that will be distributed in respect of the Class A
         Certificates pursuant to Section 5.01(a)(vii);

                 (xiv)    the Scheduled Principal Distribution Amount,
         separately stating the components thereof;

                 (xv)     the amount of any Retransfer Deposit Amount deposited
         to the Collection Account by the Seller pursuant to Section 2.02 or
         2.04, separately stating the portion of each such amount that is to be
         distributed in respect of the Class A Certificates on such
         Distribution Date pursuant to Section 5.01(b);

                 (xvi)    the Class A Servicing Fee for such Collection Period
         and any accrued and unpaid Class A Servicing Fees for previous
         Collection Periods;

                 (xvii)   the Aggregate Class A Liquidation Loss Amount for
         such Collection Period;

                 (xviii)  the aggregate amount, if any, of Class A Loss
         Reduction Amounts for previous Distribution Dates that have not been
         previously reimbursed to Class A Certificateholders pursuant to
         5.01(a)(iv);

                 (xix)    the Pool Balance as of the end of such Collection
         Period and the Pool Balance as of the end of the preceding Collection
         Period;

                 (xx)     the Invested Amount as of the end of such Collection
         Period;

                 (xxi)    the Class A Certificate Principal Balance and the
         Pool Factor after giving effect to the distribution on such
         Distribution Date and to any reduction on account of the Aggregate
         Class A Liquidation Loss Amount;

                 (xxii)   the Seller Principal Balance and Seller Interest
         after giving effect to the distribution on such Distribution Date;

                 (xxiii)  the aggregate amount of Additional Balances created
         during such Collection Period;

                 (xxiv)   the number and aggregate Trust Balances of Mortgage
         Loans (x) as to which the Minimum Monthly Payment is delinquent for
         30- 59 days, 60-89 days and 90 or more days, respectively, and (y)
         that have become REO, in each case as of the end of such Collection
         Period;

                 (xxv)    whether a Rapid Amortization Event has occurred since
         the prior Determination Date, specifying each such Rapid Amortization
         Event if one has occurred;

                 (xxvi)   whether an Event of Servicing Termination has
         occurred since the prior Determination Date, specifying each such
         Event of Servicing Termination if one has occurred;





                                       54
<PAGE>   60
                 (xxvii)  the amount to be distributed to the Credit Enhancer
         pursuant to Section 5.01(a)(v);

                 (xxviii) the amount to be distributed to the Spread Account
         pursuant to Section 5.01(a)(viii);

                 (xxix)   in the event the Master Servicer Credit Facility is
         then in effect, the Master Servicer Credit Facility Amount after
         giving effect to all drawings made under the Master Servicer Credit
         Facility to and including the date of such statement;

                 (xxx)    the amount referred to in clause (iii) of Section
         5.01(a) and the Guaranteed Principal Distribution Amount distributable
         in respect of the Class A Certificates for such Distribution Date;

                 (xxxi)   the Credit Enhancement Draw Amount, if any, for such
         Distribution Date;

                 (xxxii)  the amount of Unpaid Class A Carry Forward Interest
         to be included in such distribution and the amount of Unpaid Class A
         Carry Forward Interest remaining after giving effect to the
         distribution on such Distribution Date;

                 (xxxiii) the amount to be reimbursed to the Credit Enhancer
         pursuant to Section 5.01(a)(vi);

                 (xxxiv)  the amount to be paid to the Trustee pursuant to
         Section 5.01(a)(x);

                 (xxxv)   the amount to be distributed to the Seller pursuant
         to Section 5.01(a)(xi);

                 (xxxvi)  Weighted Average Loan Rate and Weighted Average
         Maximum Loan Rate for such Collection Period;

                 (xxxvii) the amount on deposit in the Funding Account as of
         such Distribution Date;

                 (xxxviii) the amount of investment earnings, if any, on
         amounts in the Funding Account to be deposited in the Collection
         Account for such Distribution Date;

                 (xxxix)  with respect to each Distribution Date during the
         Funding Period, the Excess Funding Amount, the amounts used to acquire
         Subsequent Mortgage Loans pursuant to Section 5.05(c)(ii) (or
         5.05(c)(iii)(A) as applicable), the amounts used to acquire Additional
         Balances pursuant to Section 5.05(c)(iii)(B) and the amounts deposited
         into the Collection Account pursuant to Section 5.05(c)(iii)(C) for
         distribution to Class A Certificateholders on such Distribution Date;

                 (xl)     the aggregate of the Trust Balances of the Subsequent
         Funding Mortgage Loans purchased on the related Subsequent Transfer
         Date and the aggregate of the Trust Balances of the Subsequent Funding
         Mortgage Loans purchased on all prior Subsequent Transfer Dates;





                                       55
<PAGE>   61
                 (xli)    the number of the Mortgage Loans and aggregate of the
         Trust Balances of the Mortgage Loans retransferred on the related
         Retransfer Date and the number of the Mortgage Loans and aggregate of
         the Trust Balances of the Mortgage Loans retransferred on all prior
         Retransfer Dates;

                 (xlii)   [RESERVED];

                 (xliii)  Class A Interest Payment Cap;

                 (xliv)   Amounts deposited in the Collection Account pursuant
         to Sections 3.02(d) and 5.06(e);

                 (xlv)    Cumulative draws under the Policy; and

                 (xlvi)   Net Yield (as defined in the Insurance Agreement).

The Trustee shall conclusively rely upon the information contained in a
Servicing Certificate for purposes of making distributions pursuant to Section
5.01, shall have no duty to inquire into such information and shall have no
liability in so relying.  The format and content of the Servicing Certificate
may be modified by the mutual agreement of the Master Servicer, the Trustee and
the Credit Enhancer.  The Master Servicer shall give notice of any such change
to the Rating Agencies.

         Section 4.02.  Credit Enhancement Instrument; Spread Account.  (a)
The Trustee shall establish and maintain with itself a separate trust account
(the "Spread Account") entitled "The First National Bank of Chicago, as
Trustee, in trust for the registered holders of Revolving Home Equity Loan
Asset Backed Certificates, Series 1996-2 and the Credit Enhancer".  The Spread
Account shall be an Eligible Account.  The Spread Account shall be maintained
by the Trustee for the benefit of the Class A Certificateholders and the Credit
Enhancer and withdrawals therefrom shall be made by the Trustee to be deposited
to the Collection Account to pay amounts referred to in clauses (i) and (ii) of
Section 5.01(a) for any Distribution Date and to pay the amount, if any, by
which the Class A Certificate Principal Balance for any Distribution Date
exceeds the Invested Amount for such date in each case after all distributions
of amounts available for distribution from the Collection Account on such
Distribution Date pursuant to Sections 3.02(d), 5.01 and 5.05 (in accordance
with the payment priority set forth in the Insurance Agreement) prior to any
draw under the Credit Enhancement Instrument, and thereafter to pay such other
amounts as are specified in the Insurance Agreement (in accordance with the
conditions and priorities set forth therein).  Deposits into the Spread Account
shall be made pursuant to Section 5.01(a)(viii).  Funds in the Spread Account
shall be property of the Trust.  In the event that a successor Trustee is
appointed as provided in Section 9.07, a new Spread Account shall be promptly
established at and maintained by such successor Trustee, and the title of the
new Spread Account shall be "[Successor Trustee], as Trustee, in trust for the
registered holders of Revolving Home Equity Loan Asset Backed Certificates,
Series 1996-2 and the Credit Enhancer," and any amounts in the former Spread
Account shall be transferred to the new Spread Account.  Any amounts remaining
on deposit in the Spread Account upon termination of the Trust shall be
released in accordance with the terms set forth in the Insurance Agreement.





                                       56
<PAGE>   62
         Amounts deposited in the Spread Account shall be invested in Permitted
Investments (unless otherwise permitted under the Insurance Agreement) that
mature no later than the Business Day preceding the following Distribution
Date.

         (b)     The Trustee shall submit, if a Credit Enhancement Draw Amount
is specified in any Servicing Certificate, the Notice for Payment (as defined
in the Credit Enhancement Instrument) in the amount of the Credit Enhancement
Draw Amount to the Credit Enhancer no later than 12:00 noon, New York City
time, on the second Business Day prior to the applicable Distribution Date.
Upon receipt of such Credit Enhancement Draw Amount in accordance with the
terms of the Credit Enhancement Instrument, the Trustee shall deposit such
Credit Enhancement Draw Amount in the Collection Account for distribution to
Certificateholders pursuant to Section 5.01(d).

         (c)     In the event that the Master Servicer is at the time recording
collections in respect of the Mortgage Loans on the Master Note pursuant to
subclause (y) of the first paragraph of Section 3.02(c) and fails to deposit on
or before 11:00 A.M. New York time on the Business Day prior to a Distribution
Date funds in the amount specified by it in clauses (ii), (iii) and (xv) of the
related Servicing Certificate, the Trustee shall, to the extent it shall be a
beneficiary under any Master Servicer Credit Facility, make a proper demand
under such Master Servicer Credit Facility that the Master Servicer Credit
Facility Issuer pay as promptly as practicable to the Trustee (but in no event
later than the time specified in the Master Servicer Credit Facility on the
Business Day immediately preceding the related Distribution Date) for deposit
in the Collection Account the lesser of (i) the aggregate of the amounts
specified in clauses (ii), (iii) and (xv) of such Servicing Certificate for
such Distribution Date, and (ii) the amount by which the total amount deposited
by the Master Servicer in the Collection Account is less than the aggregate of
the amounts specified in clauses (ii), (iii) and (xv) of such Servicing
Certificate for such Distribution Date, but in no event shall the amount of
such demand exceed the Master Servicer Credit Facility Amount.

         Section 4.03.  Replacement Credit Enhancement Instruments.  In the
event of a Credit Enhancer Default or if the claims paying ability rating of
the Credit Enhancer is downgraded (in each case a "Replacement Event"), the
Master Servicer may, in accordance with and upon satisfaction of the conditions
set forth in the Credit Enhancement Instrument, (x) substitute a new surety
bond or surety bonds for the existing Credit Enhancement Instrument or may
arrange for any other form of credit enhancement, provided that, in such event,
the claims paying ability ratings of the entity providing the substitute Credit
Enhancement Instrument are higher than those of the Credit Enhancer sought to
be replaced (after giving effect to such downgrade) and (y) restructure the
form of credit enhancement, including by eliminating the Credit Enhancement
Instrument without replacement, provided that the Rating Agencies shall have
consented to such restructuring and shall have confirmed that the ratings of
the Certificates shall be increased from their current levels (after giving
effect to such downgrade) as a result of such restructuring.  It shall be a
condition to substitution of any new credit enhancement that there be delivered
to the Trustee (i) an Officer's Certificate by the Master Servicer stating that
the conditions to such substitution set forth in clauses (x) and (y) of this
Section 4.03 (to the extent applicable) have been satisfied, (ii) an Opinion of
Counsel, acceptable in form to the Trustee, from counsel to the provider of
such new credit enhancement with respect to the enforceability thereof and such
other matters as the Trustee may require and (iii) an Opinion of Counsel to the
effect that such substitution would not adversely affect in any material
respect the tax status of the Class A Certificates or result in





                                       57
<PAGE>   63
a material modification to this Agreement or of the Class A Certificates as
described in Section 1001 of the Code and the regulations thereunder.  Upon
receipt of written notice of any such substitution from the Master Servicer and
the taking of physical possession of the new credit enhancement, the Trustee
shall, within five Business Days following receipt of such notice and such
taking of physical possession, deliver the replaced Credit Enhancement
Instrument to the Credit Enhancer.


                                   ARTICLE V

   Payments and Statements to Certificateholders; Rights of Certificateholders

         Section 5.01.  Distributions.  (a)  Distributions of Class A Interest
Collections.  On each Distribution Date, the Trustee or the Paying Agent shall
distribute the Class A Interest Collections collected during the related
Collection Period, in the following amounts and order of priority to the
following Persons (based on the information set forth in the Servicing
Certificate for such Distribution Date):

                 (i)      the Class A Servicing Fee for the related Collection
         Period and any previously accrued and unpaid Class A Servicing Fee, to
         the Master Servicer;

                 (ii)     the remaining amount, if any, after giving effect to
         clause (i) above, to the Class A Certificateholders in payment of the
         following:

                                  (x)      the Class A Certificate Interest for
                          such Distribution Date; and

                                  (y)      the Unpaid Class A Certificate
                          Interest Shortfall, if any, for such Distribution
                          Date plus, to the extent legally permissible,
                          interest thereon at a per annum rate equal to the sum
                          of the Class A Certificate Rate applicable from time
                          to time plus, to the extent permitted by law, the
                          Unpaid Class A Certificate Interest Penalty Rate;

                 (iii)    the Aggregate Class A Liquidation Loss Amount for
         such Collection Period to the Class A Certificateholders as principal
         in reduction of the Class A Certificate Principal Balance;

                 (iv)     to the Class A Certificateholders as principal in
         reduction of the Class A Certificate Principal Balance, the aggregate
         amount of the Class A Loss Reduction Amounts, if any, for previous
         Distribution Dates that have not been (A) previously reimbursed to
         Class A Certificateholders pursuant to this clause (iv) or (B)
         previously absorbed by the Overcollateralization Amount;

                 (v)      the premium due under the Credit Enhancement
         Instrument to the Credit Enhancer to the extent not paid by the Master
         Servicer;

                 (vi)     to reimburse the Credit Enhancer for previously
         unreimbursed Credit Enhancement Draw Amounts and other amounts due
         under the Insurance Agreement;





                                       58
<PAGE>   64
                 (vii)    the Accelerated Principal Distribution Amount, if
         any, to the Class A Certificateholders;

                 (viii)   the remaining amount, if any, after giving effect to
         clauses (i) through (vii) above, to the Spread Account up to the
         Spread Account Maximum;

                 (ix)     the amount, if any, of any Unpaid Class A Carry
         Forward Interest to the Class A Certificateholders;

                 (x)      fees due to the Trustee to the extent not paid by the
         Master Servicer; and

                 (xi)     any remaining amount to the Seller.

         (b)     Distribution of Principal Collections to Class A
Certificateholders.  On each Distribution Date during the Funding Period, the
Scheduled Principal Distribution Amount shall be deposited to the Funding
Account and shall not be distributed to Class A Certificateholders; provided,
however, that on each Distribution Date during the Funding Period, the Trustee
shall distribute as principal to the Class A Certificateholders on such
Distribution Date amounts deposited in the Collection Account pursuant to
Sections 5.05(c)(i)(B) and 5.05(c)(iii)(C).  On each Distribution Date
commencing with the first Distribution Date after the Funding Period and until
the Class A Certificate Principal Balance is reduced to zero, the Trustee shall
distribute the Principal Collections to Class A Certificateholders in an amount
equal to the lesser of (i) the Scheduled Principal Distribution Amount for such
date and (ii) the Class A Certificate Principal Balance after giving effect to
the distributions made pursuant to Section 5.01(a) on such Distribution Date.

         (c)     Distribution of the Credit Enhancement Draw Amount.  With
respect to any Distribution Date, to the extent that Class A Interest
Collections and amounts withdrawn from the Spread Account and deposited to the
Collection Account on such Distribution Date applied in the order specified in
Section 5.01(a) are insufficient to make distributions as provided in clauses
(i) and (ii) thereof, the Trustee will make such payments from the amount drawn
under the Credit Enhancement Instrument for such Distribution Date pursuant to
Section 4.02(b).  For any Distribution Date as to which there is a Guaranteed
Principal Distribution Amount, the Trustee shall distribute the Guaranteed
Principal Distribution Amount to Class A Certificateholders from the amount
drawn under the Credit Enhancement Instrument for such Distribution Date
pursuant to Section 4.02(b).

         The aggregate amount of principal distributed to the Class A
Certificateholders under this Agreement shall not exceed the Original Class A
Certificate Principal Balance.

         (d)     Method of Distribution.  The Trustee shall make distributions
in respect of a Distribution Date to each Class A Certificateholder of record
on the related Record Date (other than as provided in Section 10.01 respecting
the final distribution) by check or money order mailed to such Class A
Certificateholder at the address appearing in the Certificate Register, or upon
written request by a Class A Certificateholder delivered to the Trustee at
least five Business Days prior to such Record Date, by wire transfer (but only
if such Certificateholder is the Depository or such Certificateholder owns of
record one or more Class A Certificates having principal denominations
aggregating at least $5,000,000), or by such other means of





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<PAGE>   65
payment as such Class A Certificateholder and the Trustee shall agree.  The
Master Servicer, as agent for the Trustee, shall make distributions to the
Holders of Seller Certificates of record in accordance with Section 5.01(f).
Distributions among Class A Certificateholders shall be made in proportion to
the Percentage Interests evidenced by the Class A Certificates held by such
Certificateholders.

         (e)     Distributions on Book-Entry Certificates.  Each distribution
with respect to a Book-Entry Certificate shall be paid to the Depository, which
shall credit the amount of such distribution to the accounts of its Depository
Participants in accordance with its normal procedures.  Each Depository
Participant shall be responsible for disbursing such distribution to the
Certificate Owners that it represents and to each indirect participating
brokerage firm (a "brokerage firm" or "indirect participating firm") for which
it acts as agent.  Each brokerage firm shall be responsible for disbursing
funds to the Certificate Owners that it represents.  All such credits and
disbursements with respect to a Book-Entry Certificate are to be made by the
Depository and the Depository Participants in accordance with the provisions of
the Class A Certificates.  None of the Trustee, the Paying Agent, the
Certificate Registrar, the Seller or the Master Servicer shall have any
responsibility therefor except as otherwise provided by applicable law.

         (f)     Distributions to Holders of Seller Certificates.  On the
Business Day immediately following each Determination Date the Trustee shall,
based upon the information set forth in the Servicing Certificate for the
related Distribution Date, distribute to the Seller the Seller Collections for
the related Collection Period.

         Section 5.02.  Calculation of the Class A Certificate Rate.  (a)  On
the second LIBOR Business Day immediately preceding each Distribution Date
(referred to in this sentence as the "current Distribution Date"), the Trustee
shall determine LIBOR and the Class A Certificate Rate for the Distribution
Date next succeeding such current Distribution Date and inform the Master
Servicer (at the facsimile number given to the Trustee in writing) of such
rate.

         Section 5.03.  Statements to Certificateholders.  On each
Determination Date, the Master Servicer shall forward to the Trustee and the
Paying Agent for mailing to each Class A Certificateholder, and concurrently
with each distribution to Class A Certificateholders, the Trustee shall mail to
each Class A Certificateholder, a statement with respect to such distribution
setting forth:

                 (i)      the Class A Certificateholder Floating Allocation
         Percentage and the Class A Fixed Allocation Percentage applicable to
         such Distribution Date;

                 (ii)     the Class A Certificate Distribution Amount;

                 (iii)    the amount of such distributions allocable to Class A
         Certificate Interest and the related Class A Certificate Rate;

                 (iv)     the amount, if any, of Unpaid Class A Certificate
         Interest Shortfall (and any interest accrued thereon at a per annum
         rate equal to the sum of the Class A Certificate Rate and, to the
         extent permitted by law, the Unpaid Class A Certificate Interest
         Penalty Rate) and the amounts, if any, representing Unpaid Class A
         Carry Forward Interest included in such distribution;





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<PAGE>   66
                 (v)      the amount, if any, of the remaining Unpaid Class A
         Certificate Interest Shortfall and remaining Unpaid Class A Carry
         Forward Interest after giving effect to such distributions;

                 (vi)     the amount, if any, of such distributions allocable
         to principal, separately stating the components thereof;

                 (vii)    the amount, if any, of the reimbursement of previous
         Class A Loss Reduction Amounts in such distributions;

                 (viii)   the amount, if any, of the aggregate of unreimbursed
         Class A Loss Reduction Amounts remaining after giving effect to such
         distributions;

                 (ix)     the Class A Servicing Fee for such Distribution Date;

                 (x)      the Invested Amount, the Class A Certificate
         Principal Balance and the Pool Factor, each after giving effect to
         such distribution;

                 (xi)     the amount of Principal Collections on deposit in the
         Funding Account as of such Distribution Date;

                 (xii)    the Pool Balance as of the end of the related
         Collection Period;

                 (xiii)   the Credit Enhancement Draw Amount, if any, and the
         Net Insured Principal Amount on the following Distribution Date;

                 (xiv)    the number and aggregate Trust Balances of Mortgage
         Loans as to which the Minimum Monthly Payment is delinquent for 30-59
         days, 60-89 days and 90 or more days, respectively, as of the end of
         the related Collection Period;

                 (xv)     the aggregate Liquidation Loss Amount for all
         Mortgage Loans that became Liquidated Mortgage Loans during the
         related Collection Period;

                 (xvi)    the book value (within the meaning of 12 C.F.R.
         Section  571.13 or comparable provision) of any real estate acquired
         through foreclosure or grant of a deed in lieu of foreclosure;

                 (xvii)   the Class A Certificate Rate applicable to the
         distributions on the following Distribution Date;

                 (xviii)  the number and aggregate Trust Balances of Subsequent
         Funding Mortgage Loans on the Subsequent Transfer Date and the
         aggregate of the Trust Balances of the Subsequent Funding Mortgage
         Loans purchased on all prior Subsequent Transfer Dates;

                 (xix)    the number of the Mortgage Loans and aggregate of the
         Trust Balances of the Mortgage Loans retransferred on the related
         Retransfer Date and the number of the Mortgage Loans and aggregate of
         the Trust Balances of the Mortgage Loans retransferred on all prior
         Retransfer Dates;





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                 (xx)     [RESERVED];

                 (xxi)    [RESERVED]; and

                 (xxii)   earnings on all accounts.

         In the case of information furnished pursuant to clauses (ii), (iii)
(in respect of Class A Certificate Interest), (iv) and (vi) above, the amounts
shall be expressed as a dollar amount per Class A Certificate with a $1,000
denomination.

         The Master Servicer shall also give such statement to each Rating
Agency at the time it gives such statement to the Trustee and the Paying Agent.

         Within 60 days after the end of each calendar year, the Master
Servicer shall prepare or cause to be prepared and shall forward to the Trustee
the information set forth in clauses (iii) and (vi) above aggregated for such
calendar year.  Such obligation of the Master Servicer shall be deemed to have
been satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer pursuant to any requirements of the Code.

         Except as provided in the next sentence, the Master Servicer shall
prepare or cause to be prepared tax information returns (in a manner consistent
with the treatment of the Class A Certificates as indebtedness of the Seller)
and any other tax forms required to be distributed or filed by the Seller (with
a copy to the Trustee) or the Trustee in respect of the Class A Certificates
and shall deliver such information or forms for filing by the Seller or the
Trustee as required at least ten days prior to the date such information
returns or forms are required by law to be distributed or filed.  The Master
Servicer shall prepare or cause to be prepared (in a manner consistent with the
treatment of the Class A Certificates as indebtedness of the Seller) Internal
Revenue Service Form 1099 (or any successor form) in respect of distributions
by the Trustee (or the Paying Agent) on the Class A Certificates and shall file
and distribute such forms as required by law.

         Section 5.04.  Rights of Certificateholders.  The Class A Certificates
shall represent fractional undivided interests in the Trust, including the
right to receive the distributions at the times and in the amounts specified in
this Agreement; the Seller Certificates shall represent the remaining interest
in the Trust (other than the Spread Account, Funding Account and the Spread
Account Master Note and the Credit Enhancement Instrument).

         Section 5.05.  Funding Account.  (a)  The Trustee shall establish and
maintain with itself a separate trust account (the "Funding Account") entitled
"The First National Bank of Chicago, as Trustee, in trust for the registered
holders of Revolving Home Equity Loan Asset Backed Certificates, Series 1996-2,
Funding Account."  The Funding Account shall be an Eligible Account.  On each
Distribution Date during the Funding Period, the Trustee shall withdraw from
the Collection Account and deposit to the Funding Account the Scheduled
Principal Distribution Amount for such Distribution Date; provided, however, if
permitted by Section 3.02(c) hereof, such deposit may be effected by the
recordation of such amount in the Funding Master Note pursuant to such Section
3.02(c).

         (b)     The Master Servicer may cause the institution maintaining the
Funding Account to invest any funds in the Funding Account in Permitted
Investments (including obligations of





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<PAGE>   68
the Master Servicer or of any of its affiliates, if such obligations otherwise
qualify as Permitted Investments or the Funding Master Note), which shall
mature or otherwise be available not later than the Business Day next preceding
the Distribution Date or, with the approval of the Credit Enhancer and the
Rating Agencies, on the Distribution Date next following the date of such
investment (except that any investment in an obligation of the institution with
which the Funding Account and Collection Account is maintained may mature on or
before 12:00 noon, Chicago time, on such Distribution Date) and shall not be
sold or disposed of prior to its maturity.  At any time when the Trustee is
maintaining the Funding Account, any request by the Master Servicer to invest
funds on deposit in the Funding Account shall be in writing, shall be delivered
to the Trustee at or before 10:30 A.M., Chicago time, if such investment is to
be made on such day, and shall certify that the requested investment is a
Permitted Investment which matures at or prior to the time required hereby.
Any such investment shall be registered in the name of the Trustee as trustee
hereunder or in the name of its nominee, and to the extent such investments are
certificated they shall be maintained in the possession of the Trustee in the
state of its Corporate Trust Office.  All income and gain realized from any
such investment shall be for the benefit of the Class A Certificateholders and
shall be subject to withdrawal by the Trustee for distribution to the
Certificateholders as provided in subsection (c)(i) below.  The amount of any
losses incurred in respect of the principal amount of any such investment shall
be deposited in the Funding Account by the Master Servicer out of its own funds
immediately as realized.

         (c)     From time to time withdrawals shall be made from the Funding
Account or debits shall be made to the Mortgage Loan Payment Record, as the
case may be, by the Trustee as follows:

                 (i)      on each Distribution Date during the Funding Period,
         to deposit to the Collection Account (A) all income realized from
         Permitted Investments during the related Interest Period on Principal
         Collections on deposit in the Funding Account for distribution as
         Class A Interest Collections in accordance with Section 5.01(a); and
         (B) the Excess Funding Amount for distribution as Principal
         Collections in accordance with Section 5.01(b);

                 (ii)     on each Distribution Date during the Funding Period
         other than the last Distribution Date during the Funding Period, any
         amounts in respect of Principal Collections on deposit in the Funding
         Account shall be withdrawn and applied to purchase the Subsequent
         Funding Mortgage Loans, if any, transferred to the Trust pursuant to
         Section 2.06, provided, however, that the aggregate amount withdrawn
         from the Funding Account pursuant to this Section 5.05(c)(ii) shall
         not exceed _____% of the Cut-Off Date Pool Balance;

                 (iii)    on the last Distribution Date of the Funding Period,
         any amounts in respect of Principal Collections on deposit in the
         Funding Account shall be withdrawn and applied in the following order:

                          (A)     to purchase the Subsequent Funding Mortgage
                 Loans, if any, transferred to the Trust pursuant to Section
                 2.06; provided, however, that the aggregate amount withdrawn
                 from the Funding Account to acquire Subsequent Funding
                 Mortgage Loans shall not exceed _____% of the Cut-Off Date
                 Pool Balance;





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<PAGE>   69
                          (B)     to the Seller, in payment for Additional
                 Balances, in a maximum amount equal to the excess, if any, of
                 the aggregate of principal amounts drawn down under the Loan
                 Agreements during the related Collection Period over Principal
                 Collections received during such Collection Period; and

                          (C)     to the Collection Account, any remaining
                 amounts on deposit in the Funding Account in respect of
                 Principal Collections, for distribution to the Class A
                 Certificateholders pursuant to Section 5.01(b).


                                   ARTICLE VI

                                The Certificates

         Section 6.01.  The Certificates.  The Class A Certificates and Seller
Certificates shall be substantially in the forms set forth in Exhibits A and B,
respectively, and shall, on original issue, be executed by the Trustee on
behalf of the Trust and authenticated and delivered by the Trustee to or upon
the order of the Seller concurrently with the sale and assignment to the
Trustee of the Trust.  The Class A Certificates shall be initially evidenced by
one or more certificates representing the entire Original Class A Certificate
Principal Balance, and shall be held in minimum dollar denominations of
$100,000 and integral multiples of $1,000 in excess thereof.  The sum of the
denominations of all outstanding Class A Certificates shall equal the Original
Class A Certificate Principal Balance.  The Seller Certificates shall be
issuable as one or more certificates representing the entire interest in the
assets of the Trust other than that represented by the Class A Certificates and
shall initially be issued to the Seller.

         The Certificates shall be executed on behalf of the Trust by manual or
facsimile signature of any officer of the Trustee duly authorized to execute
such Certificates on behalf of the Trust.  Certificates bearing the manual or
facsimile signatures of individuals who were, at the time when such signatures
were affixed, authorized to sign on behalf of the Trustee shall bind the
Trustee, notwithstanding that such individuals or any of them 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 such Certificate.  No Certificate
shall be entitled to any benefit under this Agreement, or be valid for any
purpose, unless such Certificate shall have been manually authenticated by the
Trustee substantially in the form provided for herein, and such authentication
upon any Certificate shall be conclusive evidence, and the only evidence, that
such Certificate has been duly authenticated and delivered hereunder.  All
Certificates shall be dated the date of their authentication.  Subject to
Section 6.02(c), the Class A Certificates shall be Book-Entry Certificates.
The Seller Certificates shall not be Book-Entry Certificates.

         Section 6.02.  Registration of Transfer and Exchange of Class A
Certificates.  (a)  The Certificate Registrar shall cause to be kept at its
corporate trust office (which shall be the Corporate Trust Office if the
Trustee is the Certificate Registrar) a Certificate Register in which, subject
to such reasonable regulations as it may prescribe, the Certificate Registrar
shall provide for the registration of Class A Certificates and of transfers and
exchanges of Class A Certificates as herein provided.  The Trustee shall
initially serve as Certificate Registrar for the purpose of registering Class A
Certificates and transfers and exchanges of Class A Certificates as herein
provided.





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<PAGE>   70
         Upon surrender for registration of transfer of any Class A Certificate
at any office or agency of the Certificate Registrar maintained for such
purpose pursuant to the foregoing paragraph, the Trustee shall execute on
behalf of the Trust and shall authenticate and deliver in the name of the
designated transferee or transferees, one or more new Class A Certificates of
the same aggregate Percentage Interest.

         At the option of the Class A Certificateholders, Class A Certificates
may be exchanged for other Certificates of like Class in authorized
denominations and the same aggregate Percentage Interests, upon surrender of
the Certificates to be exchanged at any such office or agency.  Whenever any
Class A Certificates are so surrendered for exchange, the Trustee shall execute
on behalf of the Trust and shall authenticate and deliver the Class A
Certificates which the Class A Certificateholder making the exchange is
entitled to receive.  Every Class A Certificate presented or surrendered for
registration of transfer or exchange shall (if so required by the Trustee or
the Certificate Registrar) be duly endorsed by, or be accompanied by a written
instrument of transfer in form satisfactory to the Trustee and the Certificate
Registrar duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing.

         (b)     Except as provided in paragraph (c) below, the Book-Entry
Certificates shall at all times remain registered in the name of the Depository
or its nominee and at all times:  (i) transfers of the Class A Certificates may
not be registered by the Trustee except to another Depository; (ii) the
Depository shall maintain book-entry records with respect to the Certificate
Owners and with respect to ownership and registration of transfers of such
Class A Certificates; (iii) ownership and registration of transfers of the
Class A Certificates on the books of the Depository shall be governed by
applicable rules established by the Depository; (iv) the Depository may collect
its usual and customary fees, charges and expenses from its Depository
Participants; (v) the Trustee shall deal with the Depository as representative
of the Certificate Owners of the Class A Certificates for purposes of
exercising the rights of Holders under this Agreement, and requests and
directions for and votes of such representative shall not be deemed to be
inconsistent if they are made with respect to different Certificate Owners; and
(vi) the Trustee may rely and shall be fully protected in relying upon
information furnished by the Depository with respect to its Depository
Participants and furnished by the Depository Participants with respect to
indirect participating firms and Persons shown on the books of such indirect
participating firms as direct or indirect Certificate Owners.

         All transfers by Certificate Owners of Book-Entry Certificates shall
be made in accordance with the procedures established by the Depository
Participant or brokerage firm representing such Certificate Owners.  Each
Depository Participant shall only transfer ownership interests represented by
Book-Entry Certificates of Certificate Owners that it represents or of
brokerage firms for which it acts as agent in accordance with the Depository's
normal procedures.

         (c)     If (i) (x) the Depository or the Master Servicer advises the
Trustee in writing that the Depository is no longer willing or able to
discharge properly its responsibilities as Depository, and (y) the Trustee or
the Master Servicer is unable to locate a qualified successor, (ii) the Master
Servicer, at its sole option, elects to terminate the book-entry system through
the Depository or (iii) after the occurrence of an Event of Servicing
Termination, the Depository, at the direction of Class A Certificate Owners
representing Percentage Interests aggregating not less than 51%, advises the
Trustee in writing that the





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continuation of a book-entry system through the Depository to the exclusion of
definitive, fully registered Class A Certificates (the "Definitive
Certificates") to Certificate Owners is no longer in the best interests of the
Certificate Owners, then upon surrender to the Certificate Registrar of the
Class A Certificates by the Depository, accompanied by registration
instructions from the Depository for registration, the Trustee shall execute on
behalf of the Trust and shall authenticate the Definitive Certificates.  None
of the Seller, the Master Servicer, the Credit Enhancer 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 Definitive Certificates, all references herein to obligations imposed upon
or to be performed by the Depository shall be deemed to be imposed upon and
performed by the Trustee, to the extent applicable with respect to such
Definitive Certificates, and the Trustee, the Certificate Registrar, the Master
Servicer and the Seller shall recognize the Holders of the Definitive
Certificates as Certificateholders hereunder.

         No service charge shall be made for any registration of transfer or
exchange of Class A Certificates, but the Certificate Registrar 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.

         All Class A Certificates surrendered for registration of transfer or
exchange shall be cancelled by the Certificate Registrar.

         (d)     The Credit Enhancer shall be entitled to request in writing
and obtain from the Trustee a list of the names and addresses of the
Certificateholders.  Unless Definitive Certificates have been issued to
Certificateholders, the Master Servicer shall furnish or cause to be furnished
to the Credit Enhancer, as promptly as is reasonably practicable, following a
request therefor from the Credit Enhancer in writing, a list, in such form as
the Credit Enhancer may reasonably require, of the names and addresses of the
Depository Participants having an interest in the Certificates through the
Depository as of the most recent Record Date and shall cause the Depository to
forward materials to Depository Participants on behalf of the Credit Enhancer,
and otherwise shall facilitate communications between the Credit Enhancer and
the Certificateholders as the Credit Enhancer may request.  In the event that
Definitive Certificates shall have been issued, the Trustee and the Seller
shall provide the names and addresses of the Certificateholders as of the most
recent Record Date.

         Section 6.03.  Mutilated, Destroyed, Lost or Stolen Certificates.  If
(i) any mutilated Certificate is surrendered to the Certificate Registrar or
the Certificate Registrar receives evidence to its satisfaction of the
destruction, loss or theft of any Certificate, and (ii) there is delivered to
the Trustee, the Master Servicer and the Certificate Registrar such security or
indemnity as may be required by them to save each of them harmless, then, in
the absence of notice to the Trustee or the Certificate Registrar that such
Certificate has been acquired by a bona fide purchaser, the Trustee shall
execute on behalf of the Trust and shall authenticate and deliver, in exchange
for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a
new Certificate of like Class, tenor and Percentage Interest.  Upon the
issuance of any new Certificate under this Section 6.03, the Trustee or the
Certificate Registrar may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Trustee and the
Certificate Registrar) connected therewith.  Any duplicate Certificate issued
pursuant to this Section 6.03 shall constitute complete and indefeasible
evidence of ownership





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<PAGE>   72
in the Trust, as if originally issued, whether or not the lost, stolen or
destroyed Certificate shall be found at any time.

         Section 6.04.  Persons Deemed Owners.  Prior to due presentation of a
Certificate for registration of transfer, the Master Servicer, the Seller, the
Trustee, the Certificate Registrar and any agent of the Master Servicer, the
Seller, the Trustee or the Certificate Registrar may treat the Person in whose
name any Certificate is registered as the owner of such Certificate for the
purpose of receiving distributions pursuant to Section 5.01 and for all other
purposes whatsoever, and none of the Master Servicer, the Seller, the Trustee,
the Certificate Registrar or any agent of any of them shall be affected by
notice to the contrary.

         Section 6.05.  Restrictions on Transfer of Seller Certificates.  (a)
The Seller Certificates shall be assigned, transferred, exchanged, pledged,
hypothecated or otherwise conveyed (collectively, for purposes of this Section
6.05, "transferred" or a "transfer") only in accordance with this Section 6.05.

         (b)     No transfer of a Seller Certificate shall be made unless such
transfer is exempt from the registration requirements of the Securities Act of
1933, as amended, and any applicable state securities laws or is made in
accordance with said Act and laws.  The Trustee shall, and the Master Servicer
and the Credit Enhancer may, require a written Opinion of Counsel acceptable to
and in form and substance satisfactory to the Trustee and the Master Servicer
and the Credit Enhancer that such transfer may be made pursuant to an
exemption, describing the applicable exemption and the basis therefor, from
said Act and laws or is being made pursuant to said Act and laws, which Opinion
of Counsel shall not be an expense of the Trustee or the Master Servicer, and
the Trustee shall require the transferee to execute an investment letter
substantially in the form of Exhibit E hereto acceptable to and in form and
substance satisfactory to the Trustee and the Master Servicer certifying to the
Trustee and the Master Servicer the facts surrounding such transfer, which
investment letter shall not be an expense of the Trustee, the Seller or the
Master Servicer.  The Holder of a Seller Certificate desiring to effect such
transfer shall, and does hereby agree to, indemnify the Seller, the Master
Servicer and the Trustee against any liability that may result if the transfer
is not so exempt or is not made in accordance with such federal and state laws.

         (c)     The Seller Certificates shall not be transferred except upon
satisfaction of the following conditions precedent:  (i) the Person that
acquires a Seller Certificate shall (A) be organized and existing under the
laws of the United States of America or any state thereof or the District of
Columbia, (B) expressly assume, by an agreement supplemental hereto, executed
and delivered to the Trustee and the Credit Enhancer, the performance of every
covenant and obligation of the Seller hereunder with respect to the Mortgage
Loans evidenced by the Seller Certificates, and (C) as part of its acquisition
of a Seller Certificate, acquire all rights of the Seller or any transferee
under this Section 6.05(c) to amounts payable to the Seller or such transferee
hereunder; (ii) the Seller shall deliver to the Trustee and the Credit Enhancer
an Officer's Certificate stating that such transfer and such supplemental
agreement comply with this Section 6.05(c) and that all conditions precedent
provided by this subsection 6.05(c) have been complied with and an Opinion of
Counsel stating that all conditions precedent provided by this subsection
6.05(c) have been complied with, and the Trustee may conclusively rely on such
Officer's Certificate, shall have no duty to make inquiries with regard to the
matters set forth therein and shall incur no liability in so relying; (iii) the
Seller shall deliver to the Trustee a letter from each Rating Agency confirming
that its rating (with or





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<PAGE>   73
without giving effect to the Credit Enhancement Instrument) of the Class A
Certificates, after giving effect to such transfer, will not be reduced or
withdrawn; (iv) the Seller shall deliver to the Trustee and the Credit Enhancer
an Opinion of Counsel to the effect that (a) such transfer will not adversely
affect the treatment of the Class A Certificates after such transfer as debt
for federal and applicable state income tax purposes, (b) such transfer will
not have any material adverse impact on the federal income taxation of a Class
A Certificateholder or any Certificate Owner and (c) such transfer will not
cause the arrangement created by this Agreement to be treated as a taxable
mortgage pool as defined in Section 7701(i) of the Code; and (v) all filings
and other actions necessary to continue the perfection of the interest of the
Trust in the Mortgage Loans and the other property conveyed hereunder shall
have been taken or made.  Notwithstanding the foregoing, the requirement set
forth in subclause (i)(A) of this Section 6.05(c) shall not apply in the event
the Trustee and the Credit Enhancer shall have received a letter from each
Rating Agency confirming that its rating of the Class A Certificates, after
giving effect to a proposed transfer to a Person that does not meet the
requirement set forth in subclause (i)(A), shall not be reduced or withdrawn.

         Section 6.06.  Appointment of Paying Agent.  (a)  The Paying Agent
shall make distributions to Class A Certificateholders from the Collection
Account pursuant to Section 5.01 and shall report the amounts of such
distributions to the Trustee.  The duties of the Paying Agent may include the
obligation (i) to withdraw funds from the Collection Account pursuant to
Section 3.03 for the purpose of making the distributions referred to above and
(ii) to distribute statements and provide information to Certificateholders as
required hereunder.  The Paying Agent hereunder shall at all times be a
corporation duly incorporated and validly existing under the laws of the United
States of America or any state thereof, authorized under such laws to exercise
corporate trust powers and subject to supervision or examination by federal or
state authorities.  The Paying Agent shall initially be the Trustee.  The
Trustee may appoint a successor to act as Paying Agent, which appointment shall
be reasonably satisfactory to the Seller and the Credit Enhancer.

         (b)     The Trustee shall cause the Paying Agent (if other than the
Trustee) 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, if any, held by it for payment to the Class A Certificateholders in trust
for the benefit of the Class A Certificateholders entitled thereto until such
sums shall be paid to such Certificateholders and shall agree that it shall
comply with all requirements of the Code regarding the withholding of payments
in respect of federal income taxes due from Certificate Owners and otherwise
comply with the provisions of this Agreement applicable to it.

         Section 6.07.  Actions of Certificateholders.  (a)  Any request,
demand, authorization, direction, notice, consent, waiver or other action
provided by this Agreement to be given or taken by Certificateholders may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Certificateholders in person or by their agents duly
appointed in writing; and except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, when required, to the Seller or the Master Servicer.  Proof
of execution of any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Agreement and conclusive in favor
of the Trustee, the Seller and the Master Servicer, if made in the manner
provided in this Section.





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<PAGE>   74
         (b)     The fact and date of the execution by any Certificateholder of
any such instrument or writing may be proved in any reasonable manner which the
Trustee deems sufficient.

         (c)     Any request, demand, authorization, direction, notice,
consent, waiver or other act by a Certificateholder shall bind every Holder of
every Certificate issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof, in respect of anything done, or omitted
to be done, by the Trustee, the Seller or the Master Servicer in reliance
therein, whether or not notation of such action is made upon such Certificate.

         (d)     The Trustee may require such additional proof of any matter
referred to in this Section 6.07 as it shall deem necessary.


                                  ARTICLE VII

                       The Master Servicer and the Seller

         Section 7.01.  Liability of the Master Servicer and the Seller.  The
Master Servicer shall be liable in accordance herewith only to the extent of
the obligations specifically imposed upon and undertaken by the Master Servicer
herein.  The Seller shall be liable in accordance herewith only to the extent
of the obligations specifically imposed upon and undertaken by the Seller.

         Section 7.02.  Merger or Consolidation of, or Assumption of the
Obligations of, the Master Servicer or the Seller.  Any corporation into which
the Master Servicer or Seller may be merged or consolidated, or any corporation
resulting from any merger, conversion or consolidation to which the Master
Servicer or the Seller shall be a party, or any corporation succeeding to the
business of the Master Servicer or the Seller, shall be the successor of the
Master Servicer or the Seller, as the case may be, hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding.

         Section 7.03.  Limitation on Liability of the Master Servicer and
Others.  None of the Master Servicer, the Seller, or any director, officer,
employee or agent of the Master Servicer or the Seller shall be under any
liability to the Trust or the Certificateholders for any action taken or for
refraining from the taking of any action by the Master Servicer or the Seller,
as applicable, in good faith pursuant to this Agreement, or for errors in
judgment; provided, however, that this provision shall not protect the Master
Servicer, the Seller or any such person against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties hereunder, and that this provision shall not be
construed to entitle the Master Servicer to indemnity in the event that amounts
advanced by the Master Servicer to retire any senior Lien exceed Net
Liquidation Proceeds realized with respect to the related Mortgage Loan.  The
Master Servicer, the Seller and any director, officer, employee or agent of the
Master Servicer or the Seller 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.  The Master Servicer, the Seller and any director,
officer, employee or agent of the Master Servicer or the Seller shall be
indemnified by the Trust and





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held harmless 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 Mortgage Loan or
Mortgage 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 reason of willful misfeasance, bad faith or gross
negligence in the performance of duties hereunder or by reason of reckless
disregard of obligations and duties hereunder.  Neither the Master Servicer nor
the Seller shall be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective duties under this
Agreement, and which in its opinion may involve it in any expense or liability;
provided, however, that the Master Servicer or the Seller may, in its sole
discretion, 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 and any claims by the Master Servicer or the Seller hereunder for
indemnification shall be expenses, costs and liabilities of the Trust, and the
Master Servicer or the Seller, as the case may be, shall be entitled to be
reimbursed therefor and indemnified pursuant to the terms hereof from amounts
deposited in the Collection Account as provided by Section 3.03; provided that
any indemnification pursuant to this Section 7.03 shall be payable only out of
Class A Interest Collections available after the application thereof pursuant
to all clauses of Section 5.01(a) other than clause (x) thereof and shall not
otherwise constitute a claim against the Trust.  The Master Servicer's right to
indemnity or reimbursement pursuant to this Section 7.03 shall survive any
resignation or termination of the Master Servicer pursuant to Section 7.04 or
8.01 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).  The Master Servicer shall have no claim
(whether by subrogation or otherwise) or other action against any
Certificateholder or the Credit Enhancer for any amounts paid by the Master
Servicer pursuant to any provision of this Agreement.

         Section 7.04.  Master Servicer Not to Resign.  Subject to the
provisions of Section 7.02, the Master Servicer shall not resign from the
obligations and duties hereby imposed on it except (i) upon determination that
the performance of its obligations or duties hereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it or its subsidiaries
or Affiliates, the other activities of the Master Servicer so causing such a
conflict being of a type and nature carried on by the Master Servicer or its
subsidiaries or Affiliates at the date of this Agreement or (ii) upon
satisfaction of the following conditions:  (a) the Master Servicer has proposed
a successor servicer to the Trustee in writing and such proposed successor
servicer is reasonably acceptable to the Trustee; (b) each Rating Agency shall
have delivered a letter to the Trustee stating that the appointment of such
proposed successor servicer as Master Servicer hereunder will not result in the
reduction or withdrawal of the then-current rating of the Class A Certificates;
(c) such proposed successor servicer is reasonably acceptable to the Credit
Enhancer, as evidenced by a letter to the Trustee; and (d) such proposed
successor servicer has agreed in writing to assume the obligations of Master
Servicer hereunder and under the Insurance Agreement and the Master Servicer
has delivered to the Trustee and the Credit Enhancer an Opinion of Counsel to
the effect that all conditions precedent to the resignation of the Master
Servicer and the appointment of and acceptance by the proposed successor
servicer have been satisfied; provided, however, that in the case of clause (i)
above no such resignation by the Master Servicer shall become effective until
the Trustee shall have assumed the Master Servicer's responsibilities and
obligations hereunder or the Trustee shall have





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designated a successor servicer in accordance with Section 8.02.  Any such
resignation shall not relieve the Master Servicer of responsibility for any of
the obligations specified in Sections 8.01 and 8.02 as obligations that survive
the resignation or termination of the Master Servicer.  Any such determination
permitting the resignation of the Master Servicer pursuant to clause (i) above
shall be evidenced by an Opinion of Counsel to such effect delivered to the
Trustee and the Credit Enhancer.

         Section 7.05.  Delegation of Duties.  In the ordinary course of
business, the Master Servicer at any time may 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
Master Servicer complies pursuant to Section 3.01.  Such delegation shall not
relieve the Master Servicer of its liabilities and responsibilities with
respect to such duties and shall not constitute a resignation within the
meaning of Section 7.04.  The Master Servicer shall provide each Rating Agency,
the Credit Enhancer and the Trustee with written notice prior to the delegation
of any of its duties to any Person other than any of the Master Servicer's
Affiliates or their respective successors and assigns.


                                  ARTICLE VIII

                        Events of Servicing Termination

         Section 8.01.  Events of Servicing Termination.  If any one of the
following events ("Events of Servicing Termination") shall occur and be
continuing:

                 (i)      Any failure by the Master Servicer to deposit in the
         Collection Account or Funding Account, as applicable, any deposit
         required to be made under the terms of this Agreement which continues
         unremedied for a period of five Business Days after the date upon
         which written notice of such failure shall have been given to the
         Master Servicer by the Trustee or the Credit Enhancer or to the Master
         Servicer and the Trustee by Holders of Class A Certificates evidencing
         not less than 51% of the aggregate Percentage Interests of the Class A
         Certificates; or

                 (ii)     Any failure on the part of the Master Servicer duly
         to observe or perform in any material respect any other covenants or
         agreements of the Master Servicer set forth in the Certificates or in
         this Agreement, which failure (A) materially and adversely affects the
         interests of Certificateholders or the Credit Enhancer and (B)
         continues unremedied for a period of 60 days after the date on which
         written notice of such failure, requiring the same to be remedied,
         shall have been given to the Master Servicer by the Trustee or the
         Credit Enhancer or to the Master Servicer and the Trustee by the
         Holders of Class A Certificates evidencing not less than 51% of the
         aggregate Percentage Interests of the Class A Certificates; or

                 (iii)    The entry against the Master Servicer of a decree or
         order by a court or agency or supervisory authority having
         jurisdiction in the premises for the appointment of a trustee,
         conservator, receiver or liquidator in any insolvency,
         conservatorship, receivership, readjustment of debt, marshalling 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 60 consecutive days;
         or





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                 (iv)     The consent by the Master Servicer to the appointment
         of a trustee, conservator, receiver or liquidator in any insolvency,
         conservatorship, receivership, readjustment of debt, marshalling of
         assets and liabilities or similar proceedings of or relating to the
         Master Servicer or of or relating to substantially all of its
         property; or the Master Servicer shall admit in writing its inability
         to pay its debts generally as they become due, file a petition to take
         advantage of any applicable insolvency or reorganization statute, make
         an assignment for the benefit of its creditors, or voluntarily suspend
         payment of its obligations;

then, (a) in the case of a Trigger Event under Section 6.01(a)(iv) of the
Insurance Agreement, the Credit Enhancer (so long as no Credit Enhancer Default
shall have occurred) or (b) in the case of the events described in clauses (i),
(ii), (iii) or (iv) so long as an Event of Servicing Termination shall not have
been remedied by the Master Servicer, either the Trustee, the Credit Enhancer
so long as no Credit Enhancer Default shall have occurred and be continuing or,
with the consent of the Credit Enhancer so long as no Credit Enhancer Default
shall have occurred and be continuing, the Holders of Class A Certificates
evidencing not less than 51% of the aggregate Percentage Interests of the Class
A Certificates, by notice then given in writing to the Master Servicer (and to
the Trustee if given by the Credit Enhancer or Class A Certificateholders) may
terminate all of the rights and obligations of the Master Servicer as servicer
under this Agreement; provided, however, that the responsibilities and duties
of the initial Master Servicer with respect to the purchase of Mortgage Loans
pursuant to Section 3.01 shall not terminate.  Any such notice to the Master
Servicer shall also be given to each Rating Agency and the Credit Enhancer.  On
or after the receipt by the Master Servicer of such written notice, all
authority and power of, and all benefits accruing to, the Master Servicer under
this Agreement, whether with respect to the Certificates or the Mortgage Loans
or otherwise, shall pass to and be vested in the Trustee or, if a successor
Master Servicer has been appointed under Section 8.02, such successor Master
Servicer pursuant to and under this Section 8.01; and, without limitation, the
Trustee is hereby authorized and empowered to execute and deliver, on behalf of
the Master 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 each Mortgage Loan and
related documents, or otherwise.  The Master Servicer agrees to cooperate with
the Trustee in effecting the termination of the responsibilities and rights of
the Master Servicer hereunder, including, without limitation, the transfer to
the Trustee for the administration by it of all cash amounts that shall at the
time be held by the terminated Master Servicer and to be deposited by it in the
Collection Account, or that have been deposited by the terminated Master
Servicer in the Collection Account or thereafter received by the terminated
Master Servicer with respect to the Mortgage Loans.

         Notwithstanding the foregoing, a delay in or failure of performance
under Section 8.01(i) for a period of five Business Days or under Section
8.01(ii) for a period of 60 days, shall not constitute an Event of
Servicing Termination if such delay or failure could not be prevented by the
exercise of reasonable diligence by the Master Servicer and such delay or
failure was caused by an act of God, acts of declared or undeclared war, public
disorder, rebellion or sabotage, epidemics, landslides, lightning, fire,
hurricanes, earthquakes, floods or similar causes.  The preceding sentence
shall not relieve the Master Servicer from using its best efforts to perform
its obligations in a timely manner in accordance with the terms of this
Agreement, and the Master Servicer shall provide the Trustee, the Seller, the





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Credit Enhancer and the Class A Certificateholders with an Officers'
Certificate giving prompt notice of such failure or delay by it, together with
a description of its efforts to so perform its obligations.  The Master
Servicer shall immediately notify the Trustee and the Credit Enhancer in
writing of any Events of Servicing Termination.

         Section 8.02.  Trustee to Act; Appointment of Successor.  (a)  On and
after the time the Master Servicer receives a notice of termination pursuant to
Section 8.01 or 7.04, the Trustee shall be the successor in all respects to the
Master 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 Master
Servicer by the terms and provisions hereof; provided, however, that the
responsibilities and duties of HFC as Master Servicer with respect to the
purchase of the Mortgage Loans pursuant to Section 3.01 shall not terminate.
As compensation therefor, the Trustee shall be entitled to such compensation as
the Master Servicer would have been entitled to hereunder if no such notice of
termination had been given.  Notwithstanding the above, (i)  if the Trustee is
unwilling to act as successor Master Servicer, or (ii) if the Trustee is
legally unable so to act, the Trustee may (in the situation described in clause
(i)) or shall (in the situation described in clause (ii)) appoint, or petition
a court of competent jurisdiction to appoint, any housing and home finance
institution or other mortgage loan or home equity loan servicer having all
licenses and permits required in order to perform its obligations hereunder and
a net worth of not less than $50,000,000 as the successor to the Master
Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer hereunder;
provided that any such successor Master Servicer shall be acceptable to the
Credit Enhancer, as evidenced by the Credit Enhancer's prior written consent,
which consent shall not be unreasonably withheld; and provided, further, that
the appointment of any such successor Master Servicer will not result in the
qualification, reduction or withdrawal of the then-current ratings assigned to
the Class A Certificates by the Rating Agencies, as evidenced by a writing to
such effect delivered to the Trustee.  Pending appointment of a successor to
the Master Servicer hereunder, unless the Trustee is prohibited by law from so
acting, the Trustee shall act in such capacity as hereinabove provided.  In
connection with such appointment and assumption, the successor shall be
entitled to receive compensation out of payments on Mortgage Loans in an amount
equal to the compensation which the Master Servicer would otherwise have
received pursuant to Section 3.08 (or such lesser compensation as the Trustee
and such successor shall agree).  The Trustee and such successor shall take
such action, consistent with this Agreement, as shall be necessary to
effectuate any such succession.

         (b)     Any successor, including the Trustee, to the Master Servicer
as master servicer shall during the term of its service as master servicer (i)
continue to service and administer the Mortgage Loans for the benefit of
Certificateholders and (ii) maintain in force a policy or policies of insurance
covering errors and omissions in the performance of its obligations as Master
Servicer hereunder and a fidelity bond in respect of its officers, employees
and agents to the same extent as the Master Servicer is so required pursuant to
Section 3.13.  The appointment of a successor Master Servicer shall not affect
any liability of the predecessor Master Servicer which may have arisen under
this Agreement prior to its termination as Master Servicer (including, without
limitation, any deductible under an insurance policy pursuant to Section 3.04),
nor shall any successor Master Servicer be liable for any acts or omissions of
the predecessor Master Servicer or for any breach by such Master Servicer or
the Seller of any





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of their representations or warranties contained herein or in any related
document or agreement.

         Section 8.03.  Notification to Certificateholders.  Upon any
termination or appointment of a successor to the Master Servicer pursuant to
this Article VIII, the Trustee shall give prompt written notice thereof to the
Certificateholders at their respective addresses appearing in the Certificate
Register, the Credit Enhancer and each Rating Agency.


                                   ARTICLE IX

                                  The Trustee

         Section 9.01.  Duties of Trustee.  The Trustee, prior to the
occurrence of an Event of Servicing Termination and after the curing of all
Events of Servicing Termination which may have occurred, undertakes to perform
such duties and only such duties as are specifically set forth in this
Agreement.  If an Event of Servicing Termination of which a Responsible Officer
of the Trustee shall have actual knowledge has occurred (which has not been
cured), the Trustee shall exercise such rights and powers vested in it by this
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
his own affairs.

         The Trustee, upon receipt of all resolutions, certificates,
statements, opinions, reports, documents, orders or other instruments furnished
to the Trustee which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they
conform to the requirements of this Agreement.

         No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own misconduct; provided, however, that:

                 (i)      prior to the occurrence of an Event of Servicing
         Termination of which a Responsible Officer of the Trustee shall have
         actual knowledge, and after the curing of all such Events of Servicing
         Termination which may have occurred, the duties and obligations of the
         Trustee shall be determined solely by the express provisions of this
         Agreement, the Trustee shall not be liable except for the performance
         of such duties and obligations as are specifically set forth in this
         Agreement, no implied covenants or obligations shall be read into this
         Agreement against the Trustee and, in the absence of bad faith on the
         part of the Trustee, the Trustee may conclusively rely, as to the
         truth of the statements and the correctness of the opinions expressed
         therein, upon any certificates or opinions furnished to the Trustee
         and conforming to the requirements of this Agreement;

                 (ii)     the Trustee shall not be personally liable for an
         error of judgment made in good faith by a Responsible Officer of the
         Trustee, unless it shall be proved that the Trustee was negligent in
         performing its duties in accordance with the terms of this Agreement;





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                 (iii)    the Trustee shall not be personally liable with
         respect to any action taken, suffered or omitted to be taken by it in
         good faith in accordance with the consent or direction of the Credit
         Enhancer or in accordance with the direction of the Holders of Class A
         Certificates evidencing not less than 51% of the aggregate Percentage
         Interests of the Class A Certificates relating to the time, method and
         place of conducting any proceeding for any remedy available to the
         Trustee, or exercising any trust or power conferred upon the Trustee,
         under this Agreement; and

                 (iv)     the Trustee shall not be charged with knowledge of
         any failure by the Master Servicer to comply with the obligations of
         the Master Servicer referred to in clauses (i) and (ii) of Section
         8.01 unless a Responsible Officer of the Trustee obtains actual
         knowledge of such failure or the Trustee receives written notice of
         such failure from the Master Servicer, the Credit Enhancer or the
         Holders of Class A Certificates evidencing not less than 51% of the
         aggregate Percentage Interests of the Class A Certificates.

         The Trustee shall not be required 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 there is
reasonable ground for believing that the repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it, and
none of the provisions contained in this Agreement shall in any event require
the Trustee to perform, or be responsible for the manner of performance of, any
of the obligations of the Master Servicer under this Agreement, except during
such time, if any, as the Trustee shall be the successor to, and be vested with
the rights, duties, powers and privileges of, the Master Servicer in accordance
with the terms of this Agreement.  The Trustee shall provide prior written
notice to the Credit Enhancer of any decision it proposes to make pursuant to
this paragraph.

         Section 9.02.  Certain Matters Affecting the Trustee.  Except as
otherwise provided in Section 9.01:

                 (i)      the Trustee may request and rely upon, and shall be
         protected in acting or refraining from acting upon, any resolution,
         Officer's Certificate, certificate of auditors or any other
         certificate, statement, instrument, opinion, report, notice, request,
         consent, order, appraisal, bond or other paper or document reasonably
         believed by it to be genuine and to have been signed or presented by
         the proper party or parties;

                 (ii)     the Trustee may consult with counsel and any written
         advice or opinion of counsel shall be full and complete authorization
         and protection in respect of any action taken or suffered or omitted
         by it hereunder in good faith and in accordance with such advice or
         Opinion of Counsel;

                 (iii)    the Trustee shall be under no obligation to exercise
         any of the rights or powers vested in it by this Agreement, or to
         institute, conduct or defend any litigation hereunder or in relation
         hereto, at the request, order or direction of any of the
         Certificateholders, pursuant to the provisions of this Agreement,
         unless such Certificateholders shall have offered to the Trustee
         reasonable security or indemnity against the costs, expenses and
         liabilities which may be incurred therein or thereby; nothing
         contained herein shall, however, relieve the Trustee of the
         obligations, upon





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         the occurrence of an Event of Servicing Termination of which a
         Responsible Officer of the Trustee has actual knowledge (which has not
         been cured), to exercise such of the rights and powers vested in it by
         this Agreement, and to 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 his own affairs;

                 (iv)     the Trustee shall not be personally liable for any
         action taken, suffered or omitted by it in good faith and believed by
         it to be authorized or within the discretion or rights or powers
         conferred upon it by this Agreement;

                 (v)      prior to the occurrence of an Event of Servicing
         Termination of which a Responsible Officer of the Trustee has actual
         knowledge and after the curing of all Events of Servicing Termination
         which may have occurred, the Trustee shall not be bound to make any
         investigation into the facts or matters stated in any resolution,
         certificate, statement, instrument, opinion, report, notice, request,
         consent, order, approval, bond or other paper or documents, unless
         requested in writing to do so by Holders of Class A Certificates
         evidencing not less than 51% of the aggregate Percentage Interests of
         the Class A Certificates; provided, however, that if the payment
         within a reasonable time to the Trustee of the costs, expenses or
         liabilities likely to be incurred by it in the making of such
         investigation is, in the opinion of the Trustee, not reasonably
         assured to the Trustee by the security afforded to it by the terms of
         this Agreement, the Trustee may require reasonable indemnity against
         such cost, expense or liability as a condition to such proceeding.
         The reasonable expense of every such examination shall be paid by the
         Master Servicer or, if paid by the Trustee, shall be reimbursed by the
         Master Servicer upon demand.  Nothing in this clause (v) shall
         derogate from the obligation of the Master Servicer to observe any
         applicable law prohibiting disclosure of information regarding the
         Mortgagors; and

                 (vi)     the Trustee may execute any of the trusts or powers
         hereunder or perform any duties hereunder either directly or by or
         through agents or attorneys or a custodian (except that the Trustee
         shall not be responsible for selecting the Master Servicer as
         custodian and bailee).

         Section 9.03.  Trustee Not Liable for Certificates or Mortgage Loans.
The recitals contained herein and in the Certificates (other than the
authentication of the Trustee on the Certificates) shall be taken as the
statements of the Master Servicer, and the Trustee assumes no responsibility
for the correctness of the same.  The Trustee makes no representations as to
the validity or sufficiency of this Agreement or of the Certificates (other
than the signature and authentication of the Trustee on the Certificates) or of
any Mortgage Loan or related document.  The Trustee shall not be accountable
for the use or application by the Master Servicer of any of the Certificates or
of the proceeds of such Certificates, or for the use or application of any
funds paid to the Seller or the Master Servicer in respect of the Mortgage
Loans or deposited in or withdrawn from the Collection Account by the Master
Servicer.  The Trustee shall at no time have any responsibility or liability
for or with respect to the legality, validity and enforceability of any
Mortgage or any Mortgage Loan, or the perfection and priority of any Mortgage
or the maintenance of any such perfection and priority, or for or with respect
to the sufficiency of the Trust or its ability to generate the payments to be
distributed to Certificateholders under this Agreement, including, without
limitation:  the existence, condition and ownership of any Mortgaged Property;
the existence and enforceability of any





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hazard insurance thereon (other than if the Trustee shall assume the duties of
the Master Servicer pursuant to Section 8.02); the existence and contents of
any Mortgage Loan on any computer or other record thereof (other than if the
Trustee shall assume the duties of the Master Servicer pursuant to Section
8.02); the validity of the assignment of any Mortgage Loan to the Trust or of
any intervening assignment; the completeness of any Mortgage Loan; the
performance or enforcement of any Mortgage Loan (other than if the Trustee
shall assume the duties of the Master Servicer pursuant to Section 8.02); the
compliance by the Seller or the Master Servicer with any warranty or
representation made under this Agreement or in any related document or the
accuracy of any such warranty or representation prior to the Trustee's receipt
of notice or other discovery of any non-compliance therewith or any breach
thereof; any investment of monies by or at the direction of the Master Servicer
or the Credit Enhancer or any loss resulting therefrom, it being understood
that the Trustee shall remain responsible for any Trust property that it may
hold in its individual capacity; the acts or omissions of the Seller, the
Master Servicer (other than if the Trustee shall assume the duties of the
Master Servicer pursuant to Section 8.02), any Subservicer (other than if the
Trustee shall assume the duties of the Master Servicer pursuant to Section 8.02
and shall engage such Subservicer as its subservicer) or any Mortgagor; any
action of the Master Servicer (other than if the Trustee shall assume the
duties of the Master Servicer pursuant to Section 8.02), or any Subservicer
(other than if the Trustee shall assume the duties of the Master Servicer
pursuant to Section 8.02 and shall engage such Subservicer as its subservicer)
taken in the name of the Trustee; or any action by the Trustee taken at the
instruction of the Master Servicer in accordance with the terms of this
Agreement (other than if the Trustee shall assume the duties of the Master
Servicer pursuant to Section 8.02) or the Credit Enhancer; provided, however,
that the foregoing shall not relieve the Trustee of its obligation to perform
its duties under this Agreement.  The Trustee shall have no responsibility for
filing any financing or continuation statement in any public office at any time
or to otherwise perfect or maintain the perfection of any security interest or
lien granted to it hereunder (unless the Trustee shall have become the
successor Master Servicer) or to prepare or file any Securities and Exchange
Commission filing for the Trust or to record this Agreement.

         Section 9.04.  Trustee May Own Certificates.  The Trustee in its
individual or any other capacity may become the owner or pledgee of
Certificates with the same rights as it would have if it were not Trustee.

         Section 9.05.  Master Servicer to Pay Trustee's Fees and Expenses.
The Master Servicer covenants and agrees to pay to the Trustee from time to
time, and the Trustee shall be entitled to, reasonable compensation (which
shall not be limited by any provision of law in regard to the compensation of a
trustee of an express trust) for all services rendered by it in the execution
of the trusts hereby created and in the exercise and performance of any of the
powers and duties hereunder of the Trustee, and the Master Servicer will pay or
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any of the provisions of this Agreement (including the reasonable compensation
and the expenses and disbursements of its counsel and of all persons not
regularly in its employ) except any such expense, disbursement or advance as
may arise from its negligence or bad faith.  In addition, the Master Servicer
and the Seller, jointly and severally, covenant and agree to indemnify the
Trustee from, and hold it harmless against, any and all losses, liabilities,
damages, claims or expenses other than those resulting from the Trustee's
willful malfeasance, bad faith or gross negligence or by reason of the
Trustee's reckless disregard of its obligations and duties hereunder.





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         Section 9.06.  Eligibility Requirements for Trustee.  The Trustee
hereunder shall at all times be a corporation duly incorporated and validly
existing under the laws of the United States of America or any state thereof,
authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000 and subject to supervision
or examination by federal or state authority.  If such corporation publishes
reports of condition at least annually, pursuant to law or to the requirements
of the aforesaid supervising or examining authority, then for the purposes of
this Section 9.06, the combined capital and surplus of such corporation shall
be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published.  The principal office of the Trustee
(other than the initial Trustee) shall be in a state with respect to which an
Opinion of Counsel has been delivered to such Trustee at the time such Trustee
is appointed Trustee to the effect that the Trust will not be a taxable entity
under the laws of such state.  In case at any time the Trustee shall cease to
be eligible in accordance with the provisions of this Section 9.06, the Trustee
shall resign immediately in the manner and with the effect specified in Section
9.07.

         Section 9.07.  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 Seller, the Master Servicer, the Credit Enhancer
and each Rating Agency.  Upon receiving such notice of resignation, the Seller
shall promptly appoint a successor Trustee (approved in writing by the Credit
Enhancer, so long as such approval is not 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; provided, however,
that any such successor Trustee shall be subject to the prior written approval
of the Master Servicer.  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 9.06 and shall fail to resign after written
request therefor by the Seller or the Credit Enhancer, or if at any time the
Trustee shall be legally unable to act, or shall be adjudged a 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 Seller or the Credit Enhancer may remove the Trustee.  If
the Seller or the Credit Enhancer removes the Trustee under the authority of
the immediately preceding sentence, the Seller shall promptly appoint a
successor Trustee (approved in writing by the Credit Enhancer and the Master
Servicer Credit Facility Issuer, if any, so long as such approval is not
unreasonably withheld) by written instrument, in duplicate, one copy of which
instrument shall be delivered to the Trustee so removed and one copy to the
successor Trustee.

         Any resignation or removal of the Trustee and appointment of a
successor Trustee pursuant to any of the provisions of this Section 9.07 shall
not become effective until acceptance of appointment by the successor Trustee
as provided in Section 9.08.

         Section 9.08.  Successor Trustee.  Any successor Trustee appointed as
provided in Section 9.07 shall execute, acknowledge and deliver to the Seller
and to its predecessor Trustee and the Credit Enhancer an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor Trustee shall become effective and





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<PAGE>   84
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 hereunder, with like effect as if originally named as Trustee.  The
Seller, the Master 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 9.08 unless at the time of such acceptance such successor Trustee shall
be eligible under the provisions of Section 9.06 and shall have a credit rating
of A-3 by Moody's or be otherwise acceptable to Moody's.

         Upon acceptance of appointment by a successor Trustee as provided in
this Section 9.08, the Master Servicer shall mail notice of the succession of
such Trustee hereunder to all Holders of Certificates at their addresses as
shown in the Certificate Register and to each Rating Agency.  If the Master
Servicer fails to mail such notice within 30 days after acceptance of
appointment by the successor Trustee, the successor Trustee shall cause such
notice to be mailed at the expense of the Master Servicer.

         Section 9.09.  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 business of the Trustee, shall be
the successor of the Trustee hereunder, provided that such corporation shall be
eligible under the provisions of Section 9.06, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding.

         Section 9.10.  Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any other provisions of this 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 may at the time be located, the Seller
and the Trustee acting jointly shall have the power and shall execute and
deliver all instruments to appoint one or more Persons approved by the Trustee
and the Credit Enhancer to act as co-trustee or co-trustees, jointly with the
Trustee, or separate trustee or separate trustees, of all or any part of the
Trust, and to vest in such Person or Persons, 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 9.10, such
powers, duties, obligations, rights and trusts as the Master Servicer and the
Trustee may consider necessary or desirable.  Any such co-trustee or separate
trustee shall be subject to the written approval of the Master Servicer.  If
the Master Servicer shall not have joined in such appointment within 15 days
after the receipt by it of a request so to do, or in the case an Event of
Servicing Termination shall have occurred and be continuing, the Trustee alone
shall have the power to make such appointment.  No co-trustee or separate
trustee hereunder shall be required to meet the terms of eligibility as a
successor Trustee under Section 9.06 and no notice to Certificateholders of the
appointment of any co-trustee or separate trustee shall be required under
Section 9.08.

         Every separate trustee and co-trustee shall, to the extent permitted
by law, be appointed and act subject to the following provisions and
conditions:





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<PAGE>   85
                 (i)      all rights, powers, duties and obligations conferred
         or imposed upon the Trustee shall be conferred or imposed 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
         (whether as Trustee hereunder or as successor to the Master Servicer
         hereunder), 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 hereunder shall be held personally liable
         by reason of any act or omission of any other trustee hereunder; and

                 (iii)    the Master Servicer and the Trustee acting jointly
         may at any time accept the resignation of or remove any separate
         trustee or co-trustee, except that following the occurrence of an
         Event of Servicing Termination which has not been cured, the Trustee
         acting alone may 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 this Agreement and
the conditions of this Article IX.  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 this Agreement, specifically including every provision of this
Agreement relating to the conduct of, affecting the liability of, or affording
protection to, the Trustee.  Every such instrument shall be filed with the
Trustee and a copy thereof given to the Seller and the Master Servicer.

         Any separate trustee or co-trustee may, at any time, constitute 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 this
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 Trustee.

         Section 9.11.  Trustee May Enforce Claims Without Possession of
Certificates.  All rights of action and claims under this Agreement or the
Certificates may be prosecuted and enforced by the Trustee without the
possession of any of the Certificates or the production thereof in any
proceeding relating thereto.  Any such proceeding instituted by the Trustee
shall be brought in its own name or in its capacity as Trustee.  Any recovery
of judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, be for the benefit of the Certificateholders.





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<PAGE>   86
         Section 9.12.  Inspection of Mortgage Files.  Following the time that
the Mortgage Files have been delivered to the Trustee upon reasonable prior
notice and during regular business hours, the Trustee shall permit
representatives of applicable state regulatory bodies or the Credit Enhancer to
inspect the Mortgage Files on the Trustee's premises or shall provide such
documents at such places required by State regulations, including the offices
of the Subservicers.  Any loss incurred by the Trustee in fulfilling such
obligations shall be paid by the Master Servicer.


                                   ARTICLE X

                                  Termination

          Section 10.01.  Termination.  (a)  The respective obligations and
responsibilities of the Master 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, the obligations of the
Seller and the Master Servicer under Section 9.05 and the obligation of the
Master 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 X following the earlier of (i) the
retransfer, under the conditions specified in Section 10.01(b), to the Seller of
the Class A Certificateholders' interest in each Mortgage Loan and all property
acquired in respect of any Mortgage Loan remaining in the Trust for an amount
equal to the Retransfer Price, (ii) the day following the Distribution Date on
which the distribution made to Class A Certificateholders has reduced the Class
A Certificate Principal Balance to zero and after which there is no unreimbursed
Class A Loss Reduction Amount, or any amount owing to the Credit Enhancer under
the Insurance Agreement, (iii) the final payment or other liquidation of the
last Mortgage Loan remaining in the Trust (including without limitation the
disposition of the Mortgage Loans pursuant to Section 11.02) or the disposition
of all property acquired upon foreclosure or grant of deed in lieu of
foreclosure of any Mortgage Loan or (iv) the Distribution Date in February 2018;
provided that in no event shall the Trust created hereby 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 hereof.  Upon termination in accordance with clause
(i), (ii) or (iv) of this Section 10.01, the Trustee shall execute such
documents and instruments of transfer, in each case without recourse,
representation or warranty, presented by the Seller and take such other actions
as the Seller may reasonably request to effect the retransfer of the Mortgage
Loans to the Seller.

         (b)     The Seller shall have the right to exercise the option to
effect the retransfer to the Seller of each Mortgage Loan pursuant to Section
10.01(a) above on any Distribution Date on or after the Distribution Date
immediately prior to which the Class A Certificate Principal Balance is less
than or equal to ten percent (10%) of the Original Class A Certificate
Principal Balance and all amounts due and owing to the Credit Enhancer for
unpaid premiums and unreimbursed draws on the Credit Enhancement Instrument,
together with interest thereon as provided under the Insurance Agreement, have
been paid.  The Seller shall give the Master Servicer written notification of
its election to exercise such option no later than five Business Days prior to
the first date on which the Trustee is required to notify the Class A
Certificateholders pursuant to paragraph (c) below.





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<PAGE>   87
         (c)     Notice of any termination, specifying the Distribution Date
(which shall be a date that would otherwise be a Distribution Date) upon which
the Class A Certificateholders may surrender their Class A Certificates to the
Trustee for payment of the final distribution and cancellation, shall be given
promptly by the Trustee (upon receipt of written directions from the Master
Servicer, if the Seller is exercising its right to retransfer the Mortgage
Loans) by letter to Class A Certificateholders and the Credit Enhancer mailed
not earlier than the 15th day and not later than the 25th day of the month next
preceding the month of such final distribution specifying (i) the Distribution
Date upon which final distribution of the Class A Certificates will be made
upon presentation and surrender of Class A Certificates at the office or agency
of the Trustee therein designated, (ii) the amount of any such final
distribution and (iii) that the Record Date otherwise applicable to such
Distribution Date is not applicable, distributions being made only upon
presentation and surrender of the Class A Certificates at the office or agency
of the Trustee therein specified.  In the event written directions are
delivered by the Master Servicer to the Trustee as described in the preceding
sentence, the Seller shall deposit in the Collection Account on or before the
Distribution Date for such final distribution in immediately available funds an
amount which, when added to the funds on deposit in the Collection Account that
are payable to the Class A Certificateholders, will be equal to the Retransfer
Price.

         (d)     Upon presentation and surrender of the Class A Certificates,
the Trustee shall cause to be distributed to the holders of Class A
Certificates on the Distribution Date for such final distribution, in
proportion to the Percentage Interests of their respective Class A
Certificates, an amount equal to (i) if such final distribution is not being
made pursuant to a retransfer to the Seller pursuant to Section 10.01(a)(i),
the amounts referred to in Sections 5.01(a)(iii), (iv), (v) and 5.01(b) for
such Distribution Date and (ii) if such final distribution is being made
pursuant to such retransfer, the amount specified in Section 10.01(a)(i).  The
distribution on such final Distribution Date pursuant to a retransfer pursuant
to Section 10.01(a)(i) shall be in lieu of the distribution otherwise required
to be made on such Distribution Date in respect of the Certificates.  On the
final Distribution Date, prior to making the distributions called for above,
the Trustee will, pursuant to written instructions from the Master Servicer,
withdraw from the Collection Account and remit to the Credit Enhancer the
lesser of (x) the amount available for distribution on such final Distribution
Date, net of any portion thereof necessary to pay the amounts described in
clauses (d)(i) and (ii) above and (y) the unpaid amounts due and owing to the
Credit Enhancer for unpaid premiums and unreimbursed draws on the Credit
Enhancement Instrument, together with interest thereon as provided under the
Insurance Agreement.

         (e)     In the event that all of the Class A Certificateholders shall
not surrender their Class A Certificates for final payment and cancellation on
or before such final Distribution Date, the Trustee shall on such date cause
all funds in the Collection Account not distributed in final distribution to
Class A Certificateholders to be withdrawn therefrom and credited to the
remaining Class A Certificateholders by depositing such funds in a separate
escrow account for the benefit of such Class A Certificateholders and the
Seller (if the Seller has exercised its right to retransfer the Mortgage Loans)
or the Trustee (in any other case) and the Trustee shall give a second written
notice to the remaining Class A Certificateholders to surrender their Class A
Certificates for cancellation and receive the final distribution with respect
thereto.  If within one year after the second notice all the Class A
Certificates shall not have been surrendered for cancellation, any funds
deposited in such escrow account and remaining unclaimed shall be paid by the
Trustee to the Master Servicer and thereafter Class





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<PAGE>   88
A Certificateholders shall look only to the Master Servicer with respect to any
claims in respect of such funds.


                                   ARTICLE XI

                           Rapid Amortization Events

         Section 11.01.  Rapid Amortization Events.  If any one of the
following events shall occur:

         (a)     failure on the part of the Seller (i) to make any payment or
deposit required by the terms of this Agreement, on or before the date
occurring five Business Days after the date such payment or deposit is required
to be made hereunder, or (ii) to deliver possession of files and record
assignments when required or (iii) duly to observe or perform in any material
respect any other covenants or agreements of the Seller set forth in this
Agreement, which failure, in each case, materially and adversely affects the
interests of the Certificateholders and which, in the case of clause (iii),
continues unremedied and continues to affect materially and adversely the
interests of the Certificateholders or the Credit Enhancer for a period of 60
days after the date on which written notice of such failure, requiring the same
to be remedied, shall have been given to the Credit Enhancer or the Seller by
the Trustee or the Credit Enhancer, or to the Seller and the Trustee by the
Holders of Class A Certificates evidencing not less than 51% of the aggregate
Percentage Interests of the Class A Certificates;

         (b)     any representation or warranty made by the Seller in this
Agreement shall prove to have been incorrect in any material respect when made,
as a result of which the interests of the Class A Certificateholders or the
Credit Enhancer are materially and adversely affected, and which continues to
be incorrect in any material respect and continues to affect materially and
adversely the interests of the Certificateholders or the Credit Enhancer for a
period of 60 days after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Seller by the
Trustee or the Credit Enhancer, or to the Seller and the Trustee and the Credit
Enhancer by the Holders of Class A Certificates evidencing not less than 51% of
the aggregate Percentage Interests of the Class A Certificates; provided,
however, that a Rapid Amortization Event pursuant to this subparagraph (b)
shall not be deemed to have occurred hereunder if the Seller has accepted
retransfer of the related Mortgage Loan or Mortgage Loans during such period
(or such longer period (not to exceed an additional 60 days) as the Trustee and
the Credit Enhancer may specify) in accordance with the provisions hereof;

         (c)     the Seller shall voluntarily or inadvertently go into
liquidation, consent to the appointment of a conservator or receiver or
liquidator or similar person in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or relating to
the Seller or of or relating to all or substantially all of its property, or a
decree or order of a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a conservator, receiver,
liquidator or similar person in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for the
winding-up or liquidation of its affairs, shall have been entered against the
Seller and such decree or order shall have remained in force undischarged or
unstayed for a period of 30 days; or the Seller shall admit in writing its
inability to pay its debts generally as they become due,





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<PAGE>   89
file a petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of its creditors or
voluntarily suspend payment of its obligations;

         (d)     the Trust shall become subject to registration as an
"investment company" under the Investment Company Act of 1940, as amended;

         (e)     any Event of Servicing Termination shall occur;

         (f)     the aggregate of Credit Enhancement Draw Amounts exceeds
_____% of the sum of (i) the Cut-Off Date Pool Balance; and (ii) the amount by
which the Pool Balance as of any date that Subsequent Funding Mortgage Loans
are transferred to the Trust exceeds the Cut-Off Date Pool Balance;

         (g)     the occurrence of an Insolvency Event (as defined in Section
11.02 hereof) with respect to any Subservicer;

then, in the case of any event described in subparagraph (a), (b) or (e) after
the applicable grace period, if any, set forth in such subparagraphs, either the
Trustee, the Credit Enhancer so long as no Credit Enhancer Default has occurred
and is continuing or, with the consent of the Credit Enhancer so long as no
Credit Enhancer Default has occurred and is continuing, the Holders of Class A
Certificates evidencing not less than 51% of the aggregate Percentage Interests
of the Class A Certificates, by notice given in writing to the Seller and the
Master Servicer (and to the Trustee if given by the Credit Enhancer or the Class
A Certificateholders) may declare that a rapid amortization event (a "Rapid
Amortization Event") has occurred as of the date of such notice, and in the case
of any event described in subparagraphs (c), (d), (f) or (g), a Rapid
Amortization Event shall occur without any notice or other action on the part of
the Trustee, the Class A Certificateholders or the Credit Enhancer immediately
upon the occurrence of such event.  The Seller and the Master Servicer shall
give prompt notice of the occurrence of a Rapid Amortization Event to the
Trustee and the Credit Enhancer.

         Section 11.02.  Additional Rights Upon the Occurrence of Certain
Events.  (a)  If the Seller voluntarily goes into liquidation or consents to
the appointment of a conservator or receiver or liquidator or similar person in
any insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the Seller or of or relating to all or
substantially all its property, or a decree or order of a court or agency or
supervisory authority having jurisdiction in the premises for the appointment
of a conservator or receiver or liquidator or similar person in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall have
been entered against the Seller and such decree shall have remained in force
undischarged or unstayed for a period of 30 days; or the Seller shall admit in
writing its inability to pay its debts generally as they become due, file a
petition to take advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors or voluntarily
suspend payment of its obligations (such voluntary liquidation, appointment,
entering of such decree, admission, filing, making, suspension or violation, an
"Insolvency Event" and as used in Section 11.01(g) above such Events shall
relate to any Subservicer and not to the Seller), the Seller shall, on the day
of such appointment, voluntary liquidation, entering of such decree, admission,
filing, making, suspension or inability, as the case may be (the "Appointment
Day"), promptly give notice to the Trustee and the Credit Enhancer of such
Insolvency Event.  Within 15 days of the receipt by the Trustee and the Credit
Enhancer





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<PAGE>   90
of the Seller's notice of an Insolvency Event, the Trustee shall (i) publish a
notice in Authorized Newspapers that an Insolvency Event has occurred and that
the Trustee intends to direct the Master Servicer to sell, dispose of or
otherwise liquidate the Mortgage Loans in a commercially reasonable manner and
(ii) send written notice to the Class A Certificateholders describing the
provisions of this Section 11.02 and requesting instructions from such Holders,
which notice shall request each Class A Certificateholder to advise the Trustee
in writing that it elects one of the following options:  (A) the Class A
Certificateholder wishes the Trustee to instruct the Master Servicer not to
sell, dispose of or otherwise liquidate the Mortgage Loans, or (B) the Class A
Certificateholder wishes the Trustee to instruct the Master Servicer to sell,
dispose of or otherwise liquidate the Mortgage Loans, or (C) the Class A
Certificateholder refuses to advise the Trustee as to whether or not the
Trustee shall instruct the Master Servicer to sell, dispose of or otherwise
liquidate the Mortgage Loans.  If after 90 days from the day notice pursuant to
clause (i) above is first published (the "Publication Date"), the Trustee shall
not have received written instructions of the Credit Enhancer or of Holders of
Class A Certificates evidencing not less than 51% of the aggregate Percentage
Interests of the Class A Certificates to the effect that the Trustee shall not
instruct the Master Servicer to sell, dispose of, or otherwise liquidate the
Mortgage Loans, or otherwise be prohibited by applicable law from any such
action, the Trustee shall instruct the Master Servicer to proceed to sell,
dispose of, or otherwise liquidate the Mortgage Loans in a commercially
reasonable manner and on commercially reasonable terms, which shall include the
solicitation of competitive bids, and shall proceed to consummate the sale,
liquidation or disposition of the Mortgage Loans as provided above with the
highest bidder for the Mortgage Loans; provided, however, that (i) such sale,
disposition or other liquidation shall not be made without the prior written
consent of the Credit Enhancer so long as no Credit Enhancer Default shall have
occurred and be continuing, and (ii) if a net loss would be realized as a
result of the sale, liquidation or disposition of the Mortgage Loans, the
consent of all Class A Certificateholders must be obtained prior to any such
sale, liquidation or disposition.  The Seller shall be permitted to bid for the
Mortgage Loans.  The Trustee may obtain a prior determination from such
conservator or receiver that the terms and manner of any proposed sale,
disposition or liquidation are commercially reasonable.  The provisions of
Sections 11.01 and 11.02 shall not be deemed to be mutually exclusive.
Notwithstanding the foregoing, neither the Master Servicer nor the Trustee
shall be required to proceed with such sale if any such action would violate
any stay or injunction imposed by any bankruptcy law or bankruptcy court.

         (b)     The proceeds from the sale, disposition or liquidation of the
Mortgage Loans pursuant to Section 11.02(a) above shall be treated as
collections on the Mortgage Loans received during the Rapid Amortization
Period; provided that the amount of such proceeds which are allocable to Class
A Interest Collections shall be deemed to be the sum of (x) all accrued and
unpaid interest on the Class A Certificates through the Interest Period
immediately preceding the Distribution Date on which such proceeds are
distributed to the Class A Certificateholders and (y) any unreimbursed Class A
Loss Reduction Amounts, and that the remaining amount of such proceeds which
are allocable to the Class A Certificateholders shall be deemed to be a
distribution in respect of principal on the Class A Certificates.  On the day
following the Distribution Date on which such proceeds are distributed to the
Class A Certificateholders, the Trust shall terminate.





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                                  ARTICLE XII

                            Miscellaneous Provisions

          Section 12.01.  Amendment.  This Agreement may be amended from time to
time by the Master Servicer, the Seller and the Trustee, in each case without
the consent of any of the Certificateholders, but only with the consent of the
Credit Enhancer and any Master Servicer Credit Facility Issuer, if any (which
consent shall not be unreasonably withheld), (i) to cure any ambiguity, (ii) to
correct any defective provisions or to correct or supplement any provisions
herein that may be inconsistent with any other provisions herein, (iii) to add
to the duties of the Seller or the Master Servicer, (iv) to add any other
provisions with respect to matters or questions arising under this Agreement or
the Credit Enhancement Instrument, as the case may be, which shall not be
inconsistent with this Agreement, (v) to add or amend any provisions of this
Agreement as required by any Rating Agency or any other nationally recognized
statistical rating agency in order to maintain or improve any rating of the
Class A Certificates (it being understood that, after obtaining the ratings in
effect on the Closing Date, neither the Trustee, the Seller nor the Master
Servicer is obligated to obtain, maintain or improve any such rating); (vi)
modify or eliminate provisions of this Agreement relating to the Credit
Enhancement Instrument or the Spread Account provided, however, that the
amendment shall not materially and adversely affect the interests of any Class A
Certificateholder, the Credit Enhancer or any Master Servicer Credit Facility
Issuer; provided, further, that any amendment shall not be deemed to adversely
affect in any material respect the interests of the Certificateholders if the
person requesting such amendment obtains a letter from each Rating Agency
stating that the amendment would not result in the downgrading or withdrawal of
the respective ratings then assigned to the Class A Certificates.

         This Agreement also may be amended from time to time by the Master
Servicer, the Seller and the Trustee, and the Master Servicer, the Credit
Enhancer and any Master Servicer Credit Facility Issuer, may from time to time
consent to the amendment of the Credit Enhancement Instrument or the Master
Servicer Credit Facility, as the case may be, with the consent of the Holders
of the Class A Certificates evidencing not less than 51% of the aggregate
Percentage Interests of the Class A Certificates, and in the case of an
amendment to this Agreement, with the consent of the Credit Enhancer and the
Master Servicer Credit Facility Issuer, if any, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment shall (i) reduce
in any manner the amount of, or delay the timing of, collections of payments on
Mortgage Loans or distributions or payments under the Credit Enhancement
Instrument 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 Holders
of all Class A Certificates then outstanding or (iii) adversely affect in any
material respect the interests of the Credit Enhancer or any Master Servicer
Credit Facility Issuer without the consent of such Credit Enhancer or Master
Servicer Credit Facility Issuer, as applicable, or (iv) result in a downgrading
of the ratings of the Class A Certificates without the consent of the Holders
of all Class A Certificates then outstanding and the Credit Enhancer.

         Following the execution and delivery of any such amendment hereto or
to the Credit Enhancement Instrument or the Master Servicer Credit Facility, if
any, to which the Credit Enhancer or the Master Servicer Credit Facility Issuer
was required to consent, the Master Servicer shall reimburse the Credit
Enhancer and any Master Servicer Credit Facility Issuer for





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<PAGE>   92
the reasonable out-of-pocket costs and expenses incurred by each of them in
connection with such amendment.

         Prior to the execution of any such amendment, the Master Servicer
shall furnish written notification of the substance of such amendment to each
Rating Agency.  In addition, promptly after the execution of any such amendment
made with the consent of the Class A Certificateholders, the Trustee shall
furnish written notification of the substance of such amendment to each Class A
Certificateholder and fully executed original counterparts of the instruments
effecting such amendment to the Credit Enhancer and any Master Servicer Credit
Facility Issuer.

         It shall not be necessary for the consent of Class A
Certificateholders under this Section 12.01 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.

         Prior to the execution of any amendment to this Agreement, the Trustee
shall be entitled to receive and rely upon an Opinion of Counsel stating that
the execution of such amendment is authorized or permitted by this Agreement.
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.

         Section 12.02.  Recordation of Agreement.  This Agreement is subject
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 Master
Servicer and at its expense on direction by the Trustee (which shall not have
any duty to determine whether such recordation should be made), but only upon
direction of the Trustee or the Master Servicer accompanied by an Opinion of
Counsel to the effect that such recordation materially and beneficially affects
the interests of Certificateholders.

         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 12.03.  Limitation on Rights of Certificateholders.  The death
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 of them.

         No Certificateholder shall have any right to vote (except as provided
in Sections 8.01, 9.01, 9.02, 11.01 and 12.01) or in any manner otherwise
control the operation and management of the Trust, or the obligations of the
parties hereto, nor shall anything herein set forth, or contained in the terms
of the Certificates, be construed so as to constitute the Certificateholders
from time to time as partners or members of an association; nor shall any





                                       87
<PAGE>   93
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 Class A Certificates evidencing not less than 51% of the
aggregate Percentage Interests of the Class A Certificates 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 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 Certificateholders.  For the protection and enforcement
of the provisions of this Section 12.03, each and every Certificateholder and
the Trustee shall be entitled to such relief as can be given either at law or
in equity.

         Section 12.04.  Governing Law.  THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH
SUCH LAWS.

         Section 12.05.  Notices.  All demands, notices (whether or not any
notice is referred to herein as a notice, a written notice or a notice in
writing) and communications hereunder shall be in writing and shall be deemed
to have been duly given if personally delivered at or mailed by certified mail,
return receipt requested, or telecopied to (a) in the case of the Seller or the
Master Servicer, c/o Household Finance Corporation, 2700 Sanders Road, Prospect
Heights, Illinois 60070, Attention: Treasurer, (b) in the case of the Trustee,
at the Corporate Trust Office, One First National Plaza, Suite 0126, Chicago,
Illinois 60670, Attn: Corporate Trust Administration, (c) in the case of the
Credit Enhancer, 885 Third Avenue, New York, New York 10022, Attention:
Managing Director, Consumer Structured Finance, (d) in the case of any Master
Servicer Credit Facility Issuer, to such address as shall be designated by such
party in a written notice to each other party, (e) in the case of Moody's, Home
Equity Loan Monitoring Group, 4th Floor, 99 Church Street, New York, New York
10007, and (f) in the case of Standard & Poor's, 26 Broadway (15th Floor), New
York, New York 10004, Attention: Residential Mortgage Surveillance Department,
or, as to each party, at such other address 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.





                                       88
<PAGE>   94
         Section 12.06.  Severability of Provisions.  If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be for any
reason whatsoever held invalid, then such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity
or enforceability of the other provisions of this Agreement or of the
Certificates or the rights of the Holders thereof.

         Section 12.07.  Assignment.  Notwithstanding anything to the contrary
contained herein, except as provided in Sections 6.05, 7.02 and 7.04, this
Agreement may not be assigned by the Seller or the Master Servicer without the
prior written consent of the Credit Enhancer and Holders of the Class A
Certificates evidencing Percentage Interests aggregating not less than 66-2/3%.

         Section 12.08.  Certificates Nonassessable and Fully Paid.  The
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 the Certificates upon execution by
the Trustee on behalf of the Trust and the authentication and delivery thereof
by the Trustee pursuant to Section 2.08 or 6.01 are and shall be deemed fully
paid.

         Section 12.09.  Third-Party Beneficiaries.  The Credit Enhancer shall
be an express third party beneficiary of the Agreement.  This Agreement will
inure to the benefit of and be binding upon the parties hereto, the
Certificateholders, the Certificate Owners, the Credit Enhancer, the Master
Servicer Credit Facility Issuer and their respective successors and permitted
assigns.  Except as otherwise provided in this Agreement, no other person will
have any right or obligation hereunder.

         Section 12.10.  Counterparts.  This instrument may be executed in any
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 12.11.  Effect of Headings and Table of Contents.  The Article
and Section headings herein and the Table of Contents are for convenience only
and shall not affect the construction hereof.

         Section 12.12.  Limitation on Voting of Preferred Stock.  The Trustee
shall hold all of the Class SV-E preferred stock ("Preferred Stock") of the
Seller in trust, for the benefit of the Certificateholders, and shall vote such
stock only pursuant to the written instructions of Holders of Class A
Certificates evidencing not less than 51% of the Percentage Interests of the
Class A Certificates.  Concurrently with the retransfer of the Mortgage Loans
to the Seller pursuant to Section 10.01, the Trustee shall transfer to the
Seller for cancellation all shares of Preferred Stock held by the Trustee.





                                       89
<PAGE>   95
         IN WITNESS WHEREOF, the Seller, the Master Servicer and the Trustee
have caused this Agreement to be duly executed by their respective officers all
as of the day and year first above written.


                                       HFC REVOLVING CORPORATION,
                                         as Seller



                                       By:                                      
                                          --------------------------------------
                                          Name:
                                          Title:



                                       HOUSEHOLD FINANCE CORPORATION,
                                         as Master Servicer



                                       By:                                      
                                          --------------------------------------
                                          Name:
                                          Title:



                                       THE FIRST NATIONAL BANK OF CHICAGO,
                                         as Trustee



                                       By:                                      
                                          --------------------------------------
                                          Name:
                                          Title:
<PAGE>   96
State of Illinois  }
                   }  ss.:
County of Cook     }


                 On this _____ day of _____________, 1996 before me, a notary
public in and for the State of Illinois, personally appeared
________________________________, known to me who, being by me duly sworn,
did depose and say that he resides at ________________________________________
_________________; that he is the ____________________________________________
of HFC Revolving Corporation, a Delaware corporation, one of the parties
that executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corporation;
and that he signed his name thereto by like order.



                                                                                
                                       -----------------------------------------
                                       Notary Public

[Seal]





State of Illinois  }
                   } ss.:
County of Cook     }


                 On this _____ day of _____________, 1996 before me, a notary
public in and for the State of Illinois, personally appeared
________________________________, known to me who, being by me duly sworn,
did depose and say that he resides at ________________________________________
_________________; that he is the ____________________________________________
of Household Finance Corporation, a Delaware corporation, one of the parties 
that executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the Board of Directors of said corporation;
and that he signed his name thereto by like order.



                                                                                
                                       -----------------------------------------
                                       Notary Public

[Seal]
<PAGE>   97
State of Illinois  }
                   } ss.:
County of Cook     }


                 On this _____ day of _____________, 1996 before me, a notary
public in and for the State of Illinois, personally appeared
________________________________, known to me who, being by me duly sworn,
did depose and say that he resides at ________________________________________
_________________; that he is the ____________________________________________
of The First National Bank of Chicago, a national banking association, one
of the parties that executed the foregoing instrument; and that he signed his
name thereto by order of the Board of Directors of said association.



                                                                                
                                       -----------------------------------------
                                       Notary Public

[Seal]
<PAGE>   98
                                                                       EXHIBIT A



                         [FORM OF CLASS A CERTIFICATE]


       UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY TO THE TRUSTEE OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT IS MADE TO CEDE
& CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.


Date of Pooling and Servicing Agreement:               Variable Certificate Rate
As of _________________, 1996

Cut-Off Date:                                                      Denomination:
________________, 1996                                       $__________________

First Distribution Date:                       Aggregate Principal Amount of all
________________, 1996                       Class A Certificates:  $___________

CUSIP No. 441919 ___ __                                    Certificate No.  00  
                                                                              --


             REVOLVING HOME EQUITY LOAN ASSET BACKED CERTIFICATES,
                                 SERIES 1996-2
                              CLASS A CERTIFICATE

              evidencing a percentage interest in the distributions allocable
              to the Class A Certificates evidencing an undivided interest in a
              Trust consisting of a pool of home equity revolving credit line
              mortgage loans acquired by the Seller and serviced by

                         HOUSEHOLD FINANCE CORPORATION

       This Certificate does not represent an obligation of or interest in HFC
Revolving Corporation (the "Seller") or the Trustee referred to below or any of
their affiliates.  Neither this Certificate nor the underlying Mortgage Loans
are guaranteed or insured by any governmental agency or instrumentality.

       This certifies that Cede & Co. is the registered owner of the Percentage
Interest evidenced by this Certificate (obtained by dividing the denomination
of this Certificate by the aggregate of the denominations of all Class A
Certificates) in certain monthly distributions with respect to a Trust
consisting primarily of a pool of mortgage loans (the "Mortgage Loans"),





                                      A-1
<PAGE>   99
transferred by the Seller and serviced by Household Finance Corporation (in
such capacity, the "Master Servicer", including any successor Master Servicer
under the Agreement referred to below).  The Trust was created pursuant to a
Pooling and Servicing Agreement dated as specified above (the "Agreement")
among the Seller, the Master Servicer and The First National Bank of Chicago,
as trustee (including any Successor Trustee under the Agreement, the
"Trustee"), a summary of certain of the pertinent provisions of which is set
forth hereafter.  To the extent not defined herein, the capitalized terms used
herein have the meanings assigned in the Agreement.  This Certificate is issued
under and is subject to the terms, provisions and conditions of the Agreement,
to which Agreement the Holder of this Certificate by virtue of the acceptance
hereof assents and by which such Holder is bound.

       Pursuant to the terms of the Agreement, a distribution will be made on
the 20th day of each month or if such day is not a Business Day, then the next
succeeding Business Day (the "Distribution Date"), commencing on the first
Distribution Date specified above, to the Person in whose name this Certificate
is registered at the close of business on the last day preceding such
Distribution Date, or, if Definitive Certificates are available pursuant to the
Agreement, on the last day of the month preceding the month in which the
related Distribution Date occurs (in each case, the "Record Date"), in an
amount equal to the product of the Percentage Interest evidenced by this
Certificate and the amounts required to be distributed to Holders of Class A
Certificates on such Distribution Date under the terms of the Agreement.

       This Certificate is entitled to the benefits of a financial guarantee
insurance policy issued by the Credit Enhancer.  With respect to each
Distribution Date, an amount equal to the Credit Enhancement Draw Amount (as
defined in the Agreement), if any, will be drawn under the policy and, to the
extent provided in the Agreement, included in the distribution to
Certificateholders on such Distribution Date.  The obligation of the Credit
Enhancer under the Credit Enhancement Instrument is unconditional and
irrevocable.

       Distributions on this Certificate will be made by the Paying Agent by
check mailed to the Person entitled thereto as the name and address of such
Person shall appear on the Certificate Register or, upon written request by
such Person delivered to the Paying Agent at least five Business Days prior to
the related Record Date, by wire transfer (but only if such Person owns of
record one or more Class A Certificates having principal denominations
aggregating at least $5,000,000), or by such other means of payment as such
Person and the Paying Agent shall agree.  Notwithstanding the above, the final
distribution on this Certificate will be made after due notice by the Paying
Agent of the pendency of such distribution and only upon presentation and
surrender of this Certificate at the office or agency appointed by the Trustee
for that purpose.

       It is the intention of the Seller and the Class A Certificateholders
that the Class A Certificates will be indebtedness of the Seller 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 Trustee and the Holder
of this Certificate (or Certificate Owner) by acceptance of this Certificate
(or, in the case of a Certificate Owner, by virtue of such Certificate Owner's
acquisition of a beneficial interest herein) agree to treat the Class A
Certificates (or beneficial interest therein), for purposes of federal, state
and local income or franchise taxes and any other tax imposed on or measured by
income, as indebtedness of the Seller secured by the Mortgage Loans and to
report the transactions contemplated by the Agreement on all applicable tax
returns in a manner consistent with such treatment.  Each Holder of this





                                      A-2
<PAGE>   100
Certificate agrees that it will cause any Certificate Owner acquiring an
interest in this Certificate through it to comply with the Agreement as to
treatment as indebtedness for federal, state and local income and franchise tax
purposes and for purposes of any other tax imposed on or measured by income.

       This Certificate is one of the Class A Certificates from a duly
authorized issue of Certificates designated as Revolving Home Equity Loan Asset
Backed Certificates, Series 1996-2 (herein called the "Certificates"), and
representing, to the extent specified in the Agreement, an undivided ownership
interest in (i) each Mortgage Loan, (ii) such assets as shall from time to time
be deposited in the Collection Account (exclusive of net earnings thereon), the
Funding Account and the Spread Account in accordance with the Agreement, (iii)
property acquired by the Trust by foreclosure or grant of deed in lieu of
foreclosure or otherwise, (iv) the interest of the Seller in certain hazard
insurance policies in respect of the Mortgage Loans, (v) the Credit Enhancement
Instrument, (vi) the Spread Account, (vii) the Collection Account, (viii) the
Funding Account, (ix) the Master Servicer Credit Facility, if any, (x) the
Master Note, if any, (xi) the Funding Master Note, if any, (xii) the Spread
Account Master Note, if any, and (xiii) the proceeds of all of the foregoing.

       The Certificates are limited in right of payment to certain payments on
and collections in respect of the Mortgage Loans, all as more specifically set
forth in the Agreement.  The Certificateholder, by its acceptance of this
Certificate, agrees that it will look solely to the funds on deposit in the
Collection Account for payment hereunder and that the Trustee in its individual
capacity is not personally liable to the Certificateholders for any amount
payable under this Certificate or the Agreement or, except as expressly
provided in the Agreement, subject to any liability under the Agreement.

       This Certificate does not purport to summarize the Agreement and
reference is made to the Agreement for the interests, rights and limitations of
rights, benefits, obligations and duties evidenced hereby, and the rights,
duties and immunities of the Trustee.

       As provided in the Agreement, withdrawals from the Collection Account
may be made from time to time for purposes other than distributions to the
Class A Certificateholders and, subject to certain conditions in the Agreement,
Mortgage Loans may, at the election of the Seller, be removed from the Trust
and retransferred to the Seller.

       The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Seller and the Master Servicer, and the rights of the Certificateholders under
the Agreement, at any time by the Master Servicer, the Seller and the Trustee
with the consent of (i) the Holders of Class A Certificates evidencing not less
than 51% of the aggregate Percentage Interests of the Class A Certificates and
(ii) the Credit Enhancer and any Master Servicer Credit Facility Issuer.  Any
such consent by the Holder of this Certificate shall be conclusive and binding
on such Holder and upon all future Holders of this Certificate and of any
Certificate issued upon registration of the transfer hereof or in exchange
herefor or in lieu hereof whether or not notation of such consent is made upon
this Certificate.  The Agreement also permits the amendment thereof, in certain
limited circumstances, without the consent of the Holders of any of the Class A
Certificates.

       As provided in the Agreement and subject to certain limitations set
forth therein, the transfer of this Certificate is registrable in the
Certificate Register of the Certificate Registrar





                                      A-3
<PAGE>   101
upon surrender of this Certificate for registration of transfer at the office
or agency maintained by the Certificate Registrar for such purpose, accompanied
by a written instrument of transfer in form satisfactory to the Trustee and the
Certificate Registrar duly executed by the Holder hereof or such Holder's
attorney duly authorized in writing, and thereupon one or more new Class A
Certificates of authorized denominations, if applicable, and evidencing the
same aggregate Percentage Interest will be issued to the designated transferee
or transferees.

       The Certificates are issuable only as registered Certificates without
coupons in denominations specified in the Agreement.  As provided in the
Agreement and subject to certain limitations therein set forth, Certificates
are exchangeable for new Certificates of a like Class and tenor in authorized
denominations and evidencing the same aggregate Percentage Interest, as
requested by the Holder surrendering the same.

       No service charge will be made for any such registration of transfer or
exchange, but the Trustee or the Certificate Registrar may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection therewith.

       The Trustee, the Master Servicer, the Seller, and the Certificate
Registrar and any agent of the foregoing may treat the Person in whose name
this Certificate is registered as the owner hereof for all purposes, and none
of the Trustee, the Master Servicer, the Seller, the Certificate Registrar or
any such agent shall be affected by any notice to the contrary.

       The obligations and responsibilities created by the Agreement and the
Trust created thereby shall terminate upon the last action required to be taken
by the Trustee on the final Distribution Date following the earlier of (i) the
day following the Distribution Date on which the Class A Certificate Principal
Balance has been reduced to zero and after which there is no unreimbursed Class
A Loss Reduction Amount or any amount owing to the Credit Enhancer under the
Insurance Agreement, (ii) the retransfer to the Seller of each Mortgage Loan
and all property acquired in respect of any Mortgage Loan remaining in the
Trust for an amount  determined as provided in the Agreement, (iii) the final
payment or other liquidation of the last Mortgage Loan remaining in the Trust
(including, without limitation, the disposition of any Mortgage Loans pursuant
to Section 11.02 of the Agreement) or the disposition of all property acquired
upon foreclosure or by grant of deed in lieu of foreclosure of any Mortgage
Loan or (iv) the Distribution Date in February 2018; provided that in no event
shall the Trust 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 hereof.  The
retransfer to the Seller of each Mortgage Loan and of property acquired in
respect of any Mortgage Loan will result in early retirement of the
Certificates.  Such right of retransfer to the Seller may be exercised on any
Distribution Date on or after the Distribution Date immediately prior to which
the Class A Certificate Principal Balance is less than ten percent (10%) of the
Original Class A Certificate Principal Balance and all amounts due and owing to
the Credit Enhancer for unpaid premiums and unreimbursed draws on the Credit
Enhancement Instrument, together with interest thereon, have been paid in full.
Upon termination in accordance with clause (i), (ii) or (iv) of Section
10.01(a) of the Agreement, the Trustee shall execute such documents and
instruments of transfer presented by the Seller and take such other actions as
the Seller may reasonably request to effect the retransfer of the Mortgage
Loans to the Seller.





                                      A-4
<PAGE>   102
       Unless the certificate of authentication hereon has been executed by or
on behalf of the Trustee, by manual or facsimile signature, this Certificate
shall not be entitled to any benefit under the Agreement, or be valid for any
purpose.

       IN WITNESS WHEREOF, the Trustee on behalf of the Trust has caused this
Certificate to be duly executed under its official seal.


Dated:

                                       HOUSEHOLD REVOLVING HOME EQUITY LOAN
                                       TRUST 1996-2

                                       By:  The First National Bank of Chicago,
                                            as Trustee


[SEAL]                                 By:                                      
                                           -------------------------------------
                                           Authorized Officer


Certificate of Authentication:

This is one of the Class A
Certificates referenced in the
within-mentioned Agreement.

THE FIRST NATIONAL BANK OF CHICAGO,
  as Trustee


By:                               
    ------------------------------
       Authorized Officer





                                      A-5
<PAGE>   103
                                                                       EXHIBIT B

                          [FORM OF SELLER CERTIFICATE]


THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND LAWS OR
IS SOLD OR TRANSFERRED IN TRANSACTIONS WHICH ARE EXEMPT FROM REGISTRATION UNDER
SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN ACCORDANCE WITH
THE PROVISIONS OF SECTION 6.05 OF THE POOLING AND SERVICING AGREEMENT REFERRED
TO HEREIN.


             REVOLVING HOME EQUITY LOAN ASSET BACKED CERTIFICATES,
                                 SERIES 1996-2
                               SELLER CERTIFICATE

              evidencing a percentage interest in the distributions allocable
              to the Seller Certificates evidencing an interest in a Trust
              consisting of a pool of home equity revolving credit line
              mortgage loans acquired by the Seller and serviced by

                         HOUSEHOLD FINANCE CORPORATION


Date of Pooling and Servicing Agreement:                ___% Percentage Interest
As of _______________, 1996

Cut-off Date:                                                Certificate No. ___
________________, 1996

First Distribution Date:
________________, 1996


       This Seller Certificate does not represent an obligation of or interest
in HFC Revolving Corporation (the "Seller") or the Trustee referred to below or
any of their affiliates.  Neither this Seller Certificate nor the underlying
Mortgage Loans are guaranteed or insured by any governmental agency or
instrumentality.

       This certifies that _______________________ is the registered owner of
the Percentage Interest evidenced by this Seller Certificate in the entire
interest not allocated to the Class A Certificates in certain distributions
with respect to a Trust consisting primarily of a pool of mortgage loans (the
"Mortgage Loans"), transferred by the Seller and serviced by Household Finance
Corporation (in such capacity, the "Master Servicer", including any successor
Master Servicer under the Agreement referred to below).  The Trust was created
pursuant to a Pooling and Servicing Agreement dated as specified above (the
"Agreement") among the Seller, the Master Servicer and The First National Bank
of Chicago, as trustee (including any Successor





                                      B-1
<PAGE>   104
Trustee under the Agreement, the "Trustee"), a summary of certain of the
pertinent provisions of which is set forth hereafter.  To the extent not
defined herein, the capitalized terms used herein have the meanings assigned in
the Agreement.  This Seller Certificate is issued under and is subject to the
terms, provisions and conditions of the Agreement, to which Agreement the
Holder of this Seller Certificate by virtue of the acceptance hereof assents
and by which such Holder is bound.

       This certificate is one of the Seller Certificates from a duly
authorized issue of Certificates designated as Revolving Home Equity Loan Asset
Backed Certificates, Series 1996-2 (herein called the "Certificates"), and
representing, to the extent specified in the Agreement, an undivided ownership
interest in (i) each Mortgage Loan, (ii) such assets as shall from time to time
be deposited in the Collection Account (exclusive of any net earnings thereon)
in accordance with the Agreement, (iii) property acquired by the Trust by
foreclosure or grant of deed in lieu of foreclosure or otherwise, (iv) the
interest of the Seller in certain hazard insurance policies in respect of the
Mortgage Loans, (v) the Collection Account, (vi) the Master Servicer Credit
Facility, if any, (vii) the Master Note, if any, (viii) the Funding Master
Note, if any, and (ix) the proceeds of all of the foregoing.

       Payments in respect of the Mortgage Loans will be allocated between the
Class A Certificates and the Seller Certificates and paid to the registered
Holder of the Seller Certificates as provided in the Agreement.

       The Certificates are limited in right of payment to certain payments on
and collections in respect of the Mortgage Loans, all as more specifically set
forth in the Agreement.  The Certificateholder, by its acceptance of this
Seller Certificate, agrees that it will look solely to the funds available in
accordance with the terms of the Agreement for payment hereunder and that the
Trustee in its individual capacity is not personally liable to the
Certificateholders for any amount payable under this Seller Certificate or the
Agreement or, except as expressly provided in the Agreement, subject to any
liability under the Agreement.

       This Seller Certificate does not purport to summarize the Agreement and
reference is made to the Agreement for the interests, rights and limitations of
rights, benefits, obligations and duties evidenced hereby, and the rights,
duties and immunities of the Trustee.

       The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Seller and the Master Servicer, and the rights of the Certificateholders under
the Agreement, at any time by the Master Servicer, the Seller and the Trustee,
with the consent of (i) the Holders of Class A Certificates evidencing not less
than 51% of the aggregate Percentage Interests of the Class A Certificates and
(ii) the Credit Enhancer and any Master Servicer Credit Facility Issuer.  Any
such consent shall be conclusive and binding on the Holder of this Seller
Certificate and upon all future Holders of this Seller Certificate and of any
Certificate issued upon the transfer hereof or in exchange herefor or in lieu
hereof.  The Agreement also permits the amendment thereof, in certain limited
circumstances, without the consent of the Holders of any of the Certificates.

       No transfer of this Seller Certificate shall be made unless such
transfer is exempt from the registration requirements of the Securities Act of
1933, as amended, and any applicable state securities laws or is made in
accordance with said Act and laws.  There shall be delivered to the Trustee,
and to the Master Servicer and Credit Enhancer (at the request of





                                      B-2
<PAGE>   105
either or both of them), an Opinion of Counsel acceptable to and in form and
substance satisfactory to the Trustee, the Master Servicer and the Credit
Enhancer that such transfer is exempt (describing the applicable exemption and
the basis therefor) from or is being made pursuant to the registration
requirements of the Securities Act of 1933, as amended, and of any applicable
state statute, which Opinion of Counsel shall not be an expense of the Trustee
or the Master Servicer, and there shall be delivered to the Trustee an
investment letter executed by the proposed transferee in form and substance
satisfactory to the Trustee and the Master Servicer certifying the facts
surrounding such Transfer, which investment letter shall not be an expense of
the Trustee, the Seller or the Master Servicer.  The Holder hereof desiring to
effect such Transfer shall, and does hereby agree to, indemnify the Trustee,
the Seller and the Master Servicer against any liability that may result if the
transfer is not so exempt or is not made in accordance with such federal and
state laws.

       As provided in the Agreement and subject to certain limitations set
forth therein, and subject to the restrictions set forth on the first page
hereof, neither this Seller Certificate nor any legal or beneficial interest
herein may be, directly or indirectly, purchased, transferred, sold, pledged,
assigned or otherwise disposed of, and any proposed transferee hereof shall not
become the registered Holder hereof, without the satisfaction of the conditions
set forth in Section 6.05 of the Agreement.

       No service charge will be made for any such registration of transfer or
exchange, but the Trustee or the Certificate Registrar may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection therewith.

       The Trustee, the Master Servicer, the Seller, the Credit Enhancer and
the Certificate Registrar and any agent of the foregoing may treat the Person
in whose name this Seller Certificate is registered as the owner hereof for all
purposes, and none of the Trustee, the Master Servicer, the Seller, the Credit
Enhancer, the Certificate Registrar or any such agent shall be affected by any
notice to the contrary.

       The obligations and responsibilities created by the Agreement and the
Trust created thereby shall terminate upon the last action required to be taken
by the Trustee on the final Distribution Date following the earlier of (i) the
day following the Distribution Date on which the Class A Certificate Principal
Balance has been reduced to zero and after which there is no unreimbursed Class
A Loss Reduction Amount or any amount owing to the Credit Enhancer under the
Insurance Agreement, (ii) the retransfer to the Seller of all Mortgage Loans
and all property acquired in respect of any Mortgage Loan remaining in the
Trust for an amount determined as provided in the Agreement, (iii) the final
payment or other liquidation of the last Mortgage Loan remaining in the Trust
(including, without limitation, the disposition of any Mortgage Loans pursuant
to Section 11.02 of the Agreement) or the disposition of all property acquired
upon foreclosure or by grant of deed in lieu of foreclosure of any Mortgage
Loan or (iv) the Distribution Date in February 2018; provided that in no event
shall the Trust 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 hereof.  The
retransfer to the Seller of each Mortgage Loan and of property acquired in
respect of any Mortgage Loan will result in early retirement of the
Certificates.  Such right of retransfer to the Seller may be exercised on any
Distribution Date on or after the Distribution Date immediately prior to which
the Class A Certificate Principal Balance is less than ten percent (10%) of the
Original Class A Certificate Principal Balance and all amounts





                                      B-3
<PAGE>   106
owing to the Credit Enhancer for unpaid premiums and unreimbursed draws on the
Credit Enhancement Instrument together with interest thereon, have been paid in
full.  Upon termination in accordance with clause (i), (ii) or (iv) of Section
10.01(a) of the Agreement, the Trustee shall execute such documents and
instruments of transfer presented by the Seller and take such other actions as
the Seller may reasonably request to effect the retransfer of the Mortgage
Loans to the Seller.

       Unless the certificate of authentication hereon has been executed by or
on behalf of the Trustee, by manual or facsimile signature, this Seller
Certificate shall not be entitled to any benefit under the Agreement, or be
valid for any purpose.

       IN WITNESS WHEREOF, the Trustee on behalf of the Trust has caused this
Seller Certificate to be duly executed.


Dated:
                                       HOUSEHOLD REVOLVING HOME EQUITY LOAN
                                       TRUST 1996-2

                                       By:  The First National Bank of Chicago,
                                            as Trustee


                                       By:                                      
                                           -------------------------------------
                                           Authorized Officer


Certificate of Authentication:

This is one of the Seller
Certificates referenced in the
within-mentioned Agreement.

THE FIRST NATIONAL BANK OF CHICAGO,
  as Trustee


By:                               
    ------------------------------
       Authorized Officer





                                      B-4
<PAGE>   107
                                                                       EXHIBIT C



                             MORTGAGE LOAN SCHEDULE


                            [Intentionally Omitted]





                                      C-1
<PAGE>   108
                                                                       EXHIBIT D

                 [FORM OF CONTENT OF ANNUAL OPINION OF COUNSEL]


       1.     The Cut-Off Date Trust Balances and the Additional Balances will
constitute either "instruments," "chattel paper" or "general intangibles," in
each case as defined under Section 9-105 or 9-106 of the Uniform Commercial
Code (the "UCC").  It is noted that Seller has provided a certificate on which
we have relied for purposes of rendering the foregoing opinion to the effect
that the Cut-Off Date Trust Balances and the Additional Balances are evidenced
by Documentation in substantially the form attached to the Certificate.  We
have not reviewed any Documentation pursuant to which the Cut-Off Date Trust
Balances and the Additional Balances have been evidenced.  We call your
attention to the fact that the Cut-Off Date Trust Balances and the Additional
Balances arose under differing documentation and it is likely that some of said
documentation shall not conform to the Documentation in the form attached to
the Officer's Certificates.

       2.     If the transfer of the Cut-Off Date Trust Balances and the
Additional Balances by the Seller to the Trustee pursuant to the Pooling and
Servicing Agreement, constitutes a sale of the Cut-Off Date Trust Balances to
the Trust:

              (i)    with respect to Cut-Off Date Trust Balances, such sale
       transfers all the right, title and interest of the Seller in and to such
       Cut-Off Date Trust Balances and proceeds thereof to the Trust; and

              (ii)   with respect to Additional Balances which come into
       existence after the Cut-Off Date, upon the creation of such Additional
       Balances and the subsequent transfer of such Additional Balances to the
       Trustee and receipt by the Seller of the consideration therefor, such
       sale will transfer all the right, title and interest of the Seller in
       and to such Additional Balances and proceeds thereof to the Trust;

and, in either case, no further action (other than the filing of continuation
statements or other appropriate financing statements as discussed below) will
thereafter be required to transfer to the Trustee an ownership interest in the
Cut-Off Date Trust Balances and the Additional Balances.  We note that, unless
the obligor in respect of Cut-Off Date Trust Balances and the Additional
Balances has received notice of the assignment thereof, bona fide payments made
by such obligor to the assignor (or, in certain circumstances, a second
assignee) of such Cut-Off Date Trust Balances and the Additional Balances will
discharge such obligor's obligations to the extent of such payment.  The Seller
has given us a certificate to the effect that it has good and marketable title
to the Cut-Off Date Trust Balances and the Additional Balances (and we have
relied thereon without independent investigation) free and clear of all Liens.

       3.     If the transfer of the Cut-Off Date Trust Balances and the
Additional Balances from the Seller to the Trustee, pursuant to the Pooling and
Servicing Agreement, does not constitute a sale of the Cut-Off Date Trust
Balances and the Additional Balances to the Trustee, then the Pooling and
Servicing Agreement creates a valid security interest in favor of the Trustee,
for the benefit of the Certificateholders, in the Seller's right, title and
interest in and to the Cut-Off Date Trust Balances and the Additional Balances
and in proceeds thereof securing the obligations of the Seller thereunder.
Such security interest would be perfected





                                      D-1
<PAGE>   109
as to "instruments," as defined under Section 9-105 of the UCC, by possession
and as to "general intangibles" or "chattel paper" as defined in Sections 9-105
and 9-106 of the UCC by filing under the UCC.  If the Trustee were in
possession of such "instruments" on the date hereof, which as noted above it is
not and based solely upon the UCC Search, it would have a first priority
security interest in the Cut-Off Date Trust Balances and Additional Balances.

       Except as stated in the prior sentence, we express no opinion with
respect to the perfection of a security interest in such Cut-Off Date Trust
Balances and the Additional Balances which are evidenced by instruments (as
defined in Section 9-105(1)(i) of the UCC) which are not in the possession of
the Trustee.





                                      D-2
<PAGE>   110
                                                                       EXHIBIT E

           FORM OF INVESTMENT LETTER FOR HOLDER OF SELLER CERTIFICATES

       1.     The Purchaser is acquiring the Seller Certificate (the
"Certificate") as principal for its own account for the purpose of investment
and not with a view to or for the sale in connection with any distribution
thereof, subject nevertheless to any requirement of law that the disposition of
the Purchaser's property shall at all times be and remain within its control.

       2.     The Purchaser has knowledge and experience in financial and
business matters and is capable of evaluating the merits and risks of its
investment in the Certificate and is able to bear the economic risk of such
investment.  The Purchaser is an "accredited investor" within the meaning of
Rule 501(a) under the rules and regulations of the Securities and Exchange
Commission under the Securities Act of 1933, as amended.  The Purchaser has
been given such information concerning the Certificate, the underlying Mortgage
Loans and the Master Servicer as it has requested.

       3.     The Purchaser will comply with all applicable federal and state
securities laws in connection with any subsequent resale by the Purchaser of
the Certificate.

       4.     The Purchaser understands that the Certificate has not been and
will not be registered under the Securities Act of 1933, as amended, or any
state securities laws and may be resold (which resale is not currently
contemplated) only if an exemption from registration is available, that none of
the Seller, the Master Servicer or the Trustee is required to register the
Certificate and that any transfer must comply with Section 6.05 of the Pooling
and Servicing Agreement.  In connection with any resale of the Certificate, the
Purchaser shall not make any general solicitation or advertisement.

       5.     The Purchaser agrees that it will obtain from any purchaser of
the Certificate from it the same representations, warranties and agreements
contained in the foregoing paragraphs 1 through 4 and in this paragraph 5.

       6.     The Purchaser hereby directs the Trustee to register the
Certificate acquired by the Purchaser in the name of its nominee as follows:
______________________________________.



                                       Very truly yours,



                                                                                
                                       -----------------------------------------
                                       NAME OF PURCHASER

                                       By:                                      
                                           -------------------------------------
                                       Name:                                    
                                             -----------------------------------
                                       Title:                                   
                                              ----------------------------------





                                      E-1
<PAGE>   111
                                                                       EXHIBIT F

                                 TRUST RECEIPT

Loan Information

       Name of Mortgagor:                                            
                            -----------------------------------------

       Servicer Loan No.:                                            
                            -----------------------------------------

       The undersigned Master Servicer hereby acknowledges that it has received
from The First National Bank of Chicago, as Trustee under the Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") dated as of
________________, 1996 among the Trustee, HFC Revolving Corporation, as Seller,
and Household Finance Corporation, as Master Servicer, the documents referred
to below (the "Documents").  All capitalized terms not otherwise defined in
this Trust Receipt shall have the meanings given them in the Pooling and
Servicing Agreement.

( )    Promissory Note

( )    Mortgage

( )    Deed of Trust

( )    Assignment of Mortgage or Deed of Trust to                            .
                                                  --------------------------- 

( )    Other documents, including any amendments, assignments or other
       assumptions of the Mortgage Note or Mortgage.

       ( )                                                         
            -------------------------------------------------------

       ( )                                                         
            -------------------------------------------------------

       ( )                                                         
            -------------------------------------------------------

       ( )                                                         
            -------------------------------------------------------

       The undersigned Master Servicer hereby acknowledges and agrees as
follows:

       (1)    The Master Servicer shall hold and retain possession of the
              Documents in trust for the benefit of the Trustee solely for the
              purposes provided in the Pooling and Servicing Agreement.

       (2)    The Master Servicer shall not cause or knowingly permit the
              Documents to become subject to, or encumbered by, any claim,
              liens, security interest, charges, writs of attachment or other
              impositions nor shall the Master Servicer assert or seek to
              assert any claims or rights of setoff to or against the Documents
              or any proceeds thereof.





                                      F-1
<PAGE>   112
       (3)    The Master Servicer shall return each and every Document
              previously requested from the Mortgage File to the Trustee when
              the need therefor no longer exists, unless the Mortgage Loan
              relating to the Documents has been liquidated and the proceeds
              thereof have been remitted to the Collection Account and except
              as expressly provided in the Pooling and Servicing Agreement.



                                       HOUSEHOLD FINANCE CORPORATION


                                       By:                                      
                                           -------------------------------------
                                           Name:
                                           Title:





                                      F-2
<PAGE>   113
                                                                     EXHIBIT G-1

                              FORM OF MASTER NOTE
                                                               Chicago, Illinois
                                                     _____________________, 1996

       For value received, HOUSEHOLD FINANCE CORPORATION, a Delaware
corporation (the "Borrower"), promises, subject to the provisions of Section
3.02 of the Pooling and Servicing Agreement referred to below, to pay to the
order of The First National Bank of Chicago and its successors as trustee (the
"Trustee") under the Pooling and Servicing Agreement dated as of
__________________, 1996 (the "Pooling and Servicing Agreement") among the
Borrower, as Master Servicer, Household Revolving Corporation, as Seller, and
the Trustee on the earlier of (i) the Business Day next preceding each related
Distribution Date and (ii) the date on which demand therefor is made by the
Trustee, the aggregate amount of all payments on and collections in respect of
the Mortgage Loans received by the Master Servicer during any Collection Period
that constitute Interest Collections or Principal Collections to be distributed
under Section 5.01 of the Pooling and Servicing Agreement on the related
Distribution Date in accordance with the requirements of Section 3.02 of the
Pooling and Servicing Agreement and are to be included in available funds for
the related Distribution Date (the "Master Loans").  All such payments shall be
made in lawful money of the United States in immediately available funds by
deposit to the Collection Account maintained pursuant to the Pooling and
Servicing Agreement.  The holder of this Note is hereby authorized by the
Borrower to endorse on the schedule forming a part hereof appropriate notations
evidencing the date and amount of each Master Loan made by the Trustee to the
Borrower with respect thereto.  The amount owing under this Master Note in
respect of the Master Loans shall be reduced by all payments of the amounts
referred to above.

       The Borrower, for itself and its successors and assigns, waives with
respect to this Note, presentment for payment, demand, protest and notice of
dishonor, to the extent permitted by law.  Capitalized terms defined in said
Pooling and Servicing Agreement and not otherwise defined herein are used
herein as therein defined.




                                       HOUSEHOLD FINANCE CORPORATION



                                       By:                                      
                                          --------------------------------------
                                           Name:
                                           Title:





                                      G-1
<PAGE>   114
                                                                     EXHIBIT G-2

                          FORM OF FUNDING MASTER NOTE
                                                               Chicago, Illinois
                                                     _____________________, 1996

       For value received, HOUSEHOLD FINANCE CORPORATION, a Delaware
corporation (the "Borrower"), promises, subject to the provisions of Section
3.02 of the Pooling and Servicing Agreement referred to below, to pay to the
order of The First National Bank of Chicago and its successors as trustee (the
"Trustee") under the Pooling and Servicing Agreement dated as of
________________, 1996 (the "Pooling and Servicing Agreement") among the
Borrower, as Master Servicer, Household Revolving Corporation, a Seller, and
the Trustee on the earlier of (i) the Business Day next preceding each related
Distribution Date, and (ii) the date on which demand therefor is made by the
Trustee, the aggregate amount of all deposits to be made into the Funding
Account pursuant to the Pooling and Servicing Agreement, together with interest
thereon at the Borrower's 30-day commercial paper rate in effect at the time
interest accrues on this Note from and including the last date to which
interest has been paid to but not including the date of such payment (the
"Master Loans").  Interest shall be due and payable on each Distribution Date
during the Funding Period in an amount equal to interest accrued during the
related Interest Period at the Borrower's 30-day commercial paper rate in
effect at the beginning of such Interest Period on the amount to be on deposit
in the Funding Account at the beginning of such Interest Period.  All such
payments shall be made in lawful money of the United States in immediately
available funds by deposit to the Collection Account maintained pursuant to the
Pooling and Servicing Agreement.  The holder of this Note is hereby authorized
by the Borrower to endorse on the schedule forming a part hereof appropriate
notations evidencing the date and amount of each Master Loan made by the
Trustee to the Borrower with respect thereto.  The amount owing under this
Master Note in respect to the Master Loans shall be reduced by payment by the
Borrower of the amounts referred to above.

       The Borrower, for itself and its successors and assigns, waives with
respect to this Note, presentment for payment, demand, protest and notice of
dishonor, to the extent permitted by law.  Capitalized terms defined in said
Pooling and Servicing Agreement and not otherwise defined herein are used
herein as therein defined.




                                       HOUSEHOLD FINANCE CORPORATION



                                       By:                                      
                                          --------------------------------------
                                           Name:
                                           Title:





                                      G-2

<PAGE>   1
                           [HOUSEHOLD LETTERHEAD]




                                                                     EXHIBIT 5.1
November 12, 1996



Household Revolving Home Equity
  Loan Trust 1996-2
HFC Revolving Corporation
2700 Sanders Road
Prospect Heights, Illinois  60070


Ladies and Gentlemen:

I am the Vice President-Corporate Law of Household International, Inc.,
indirectly the owner of all of the issued and outstanding common stock of HFC
Revolving Corporation, a Delaware corporation ("Seller").  I refer to
Registration Statement Nos. 333-12483 and 12483-01 on Form S-11 (the
"Registration Statement") filed on September 20, 1996 with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Act of 1933,
as amended (the "Act"), pertaining to the Certificates (as herein defined).
Terms used herein that are not defined herein shall have the meanings ascribed
thereto in the Registration Statement.

The Registration Statement relates to a financing program which involves the
initial transfer by the Seller, to Household Revolving Home Equity Loan Trust
1996-2, an independent trust (the "Trust") of approximately $796.3 million
aggregate principal amount of home equity revolving credit line loans (the
"Initial Mortgage Loans") purchased by the Seller from the Subservicers and
secured by mortgages on residential properties, in exchange for $776,373,000
principal amount of Household Revolving Home Equity Loan Certificates, Series
1996-2 (the "Certificates").  During the Funding Period it is anticipated that
the Trust will acquire Subsequent Funding Mortgage Loans, which together with
the Initial Mortgage Loans and any additional principal balances generated
thereunder, including any substitutions thereof, are referred to as the
"Mortgage Loans".  The Certificates will represent undivided interests in the
Trust Balances of all of such Mortgage Loans.  The Trust will be created
pursuant to a Pooling and Servicing Agreement
<PAGE>   2

Household Revolving Home Equity
  Loan Trust 1996-2
HFC Revolving Corporation
November 12, 1996
Page 2



to be dated as of November 1, 1996 (the "Pooling and Servicing Agreement")
among the Seller, Household Finance Corporation ("HFC"), as Master Servicer,
and The First National Bank of Chicago, as Trustee, in substantially the form
filed as an Exhibit to the Registration Statement.  Pursuant to a Certificate
Guaranty Insurance Policy ("Policy") issued pursuant to an Insurance and
Reimbursement Agreement to be dated as of November 1, 1996 (the "Insurance
Agreement") among the Seller, HFC, individually and as Master Servicer, and
Capital Markets Assurance Corporation (the "Certificate Insurer"), the
Certificate Insurer will be obligated to remit to the holders of the
Certificates on each Distribution Date the Deficiency Amount, if any, as
defined in the Policy.

I am familiar with the proceedings to date with respect to the proposed
offering and sale to the public of the Certificates and have examined such
records, documents and matters of law and satisfied myself as to such matters
of fact as I have considered relevant for the purposes of this opinion.

Based on the foregoing, it is my opinion that when:

                 1)  the Registration Statement shall become effective under
         the Act,

                 2)  the Pooling and Servicing Agreement shall be duly executed
         and delivered by the parties thereto,

                 3)  the Insurance Agreement shall be duly executed and
         delivered by the parties thereto,

                 4)  the Certificates shall have been duly issued and delivered
         by the Trustee in accordance with the Pooling and Servicing Agreement
         and delivered by the Seller in accordance with the Underwriting
         Agreement among HFC, the Seller and the Underwriters named therein
         (the "Underwriting Agreement") or otherwise, and

                 5)  the Seller shall have received the agreed purchase price
         for the Certificates in accordance with the Underwriting Agreement or
         otherwise,

the Certificates will be fully paid and non-assessable, validly issued and
outstanding and will be entitled to the benefits of the Pooling and Servicing
Agreement.
<PAGE>   3

Household Revolving Home Equity
  Loan Trust 1996-2
HFC Revolving Corporation
November 12, 1996
Page 3




I do not find it necessary for the purposes of this opinion, and accordingly do
not purport to cover herein, the application of the "Blue Sky" or securities
laws of the various states to sales of the Certificates.

I hereby consent to the use of this opinion as an exhibit to the
above-mentioned Registration Statement and to the references to me in such
Registration Statement.  In giving said consent I do not admit that I am in the
category of persons where consent is required under Section 7 of the Act or the
rules and regulations of the Commission thereunder.

Very truly yours,


John W. Blenke
John W. Blenke


JWB:cjl

<PAGE>   1
                                                                     EXHIBIT 5.2



                        [SIDLEY & AUSTIN LETTERHEAD]



                               November 12, 1996



HFC Revolving Corporation
2700 Sanders Road
Prospect Heights, Illinois 60070


Ladies and Gentlemen:

     We refer to the registration statement on Form S-11 (registration nos.
333-12483 and 333-12483-01) (the "Registration Statement").  The Registration
Statement relates to $776,373,000 aggregate principal amount of Home Equity
Loan Asset Backed Certificates (the "Certificates") to be issued pursuant to a
Pooling and Servicing Agreement to be dated as of November 1, 1996 (the
"Pooling and Servicing Agreement") among HFC Revolving Corporation, as seller
(the "Seller"), Household Finance Corporation, as Master Servicer, and The
First National Bank of Chicago, as Trustee.

     Generally, the Pooling and Servicing Agreement provides for (a) the
creation of the Household Revolving Home Equity Loan Trust 1996-2 (the
"Trust"), (b) the transfer to the Trust of ownership of balances of certain
mortgage loans and the documents relating thereto (the "Related Documents")
from the originators of such mortgage loans to the Seller and by the Seller to
the Trust (in the case of such balances) and from such originators directly to
the Trust (in the case of such Related Documents) and (c) the issuance of the
Certificates, payments of principal and interest on which are derived from such
mortgage loans.

     In rendering the opinion expressed below, we have relied upon the accuracy
and completeness of the facts, information and representations contained in the
form of Pooling and Servicing Agreement filed as an exhibit to the Registration
Statement, the Registration Statement and such other documents as we have
deemed relevant and necessary.  Such opinion is







<PAGE>   2
SIDLEY & AUSTIN                                                         CHICAGO


HFC Revolving Corporation
November 12, 1996
Page 2


conditioned, among other things, not only on such accuracy and completeness
as of the date hereof, but also the continuing accuracy and completeness as of
the closing date for the issuance of the Certificates.  Moreover, we have
assumed the absence of any change to any of such instrument between the date
hereof and such closing date. We have also assumed that the transactions
contemplated by the Pooling and Servicing Agreement will be consummated in
accordance with the such Agreement and as described in the Registration
Statement.

     Based upon and subject to the foregoing, this will confirm that the
statements contained in the Registration Statement in the second paragraph
under the caption "Risk Factors-Insolvency Considerations; Treatment of
Transaction; Perfection Issues" relating to the opinion to be delivered by this
Firm correctly summarize such opinion.

     We assume no obligation to update or supplement this letter to reflect any
facts or circumstances which may hereafter come to our attention with respect
to the opinion expressed above, including any changes in applicable law which
may hereafter occur.

     We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to all references our Firm included in or made part
of the Registration Statement.

                                        Very truly yours,



                                        SIDLEY & AUSTIN


<PAGE>   1
                                                                EXHIBIT 8



                          [SIDLEY & AUSTIN LETTERHEAD]



                               November 12, 1996

HFC Revolving Corporation
2700 Sanders Road
Prospect Heights, Illinois 60070

Household Finance Corporation
2700 Sanders Road
Prospect Heights, Illinois 60070

Ladies and Gentlemen:

        We have acted as special tax counsel to HFC Revolving Corporation, as
seller (the "Seller"), and Household Finance Corporation, as master servicer
(the "Master Servicer"), with respect to the formation of Household Revolving
Home Equity Loan Trust 1996-2 (the "Trust") and the issuance of certificates
(the "Certificates") representing interests in the Trust pursuant to a Pooling
and Servicing Agreement dated as of November 1, 1996 (the "Agreement") among
the Seller, the Master Servicer and The First National Bank of Chicago, as
trustee (the "Trustee"). In such capacity, you have requested our opinion as
to whether for federal income tax purposes: (i) the Certificates, when issued,
will be properly characterized as indebtedness of the Seller secured by the
Mortgage Loans and (ii) the arrangement created by the Agreement will
constitute a "taxable mortgage pool" within the meaning of section 7701(i) of
the Internal Revenue Code of 1986, as amended (the "Code").

        In the preparation of this opinion, we have examined a preliminary
prospectus (the "Preliminary Prospectus") included in Amendment No. 1 to the
Registration Statement on Form S-11 (Registration Nos. 333-12483 and
333-12483-01 to be filed with the Securities and Exchange Commission on
November 12, 1996, and a form of the Agreement filed therewith. Capitalized
terms not defined herein are intended to have the meanings specified in the
Preliminary Prospectus. We have also relied, with your consent and without
independent verification, upon statements, data and representations provided on
your behalf by Household 
<PAGE>   2
                          [SIDLEY & AUSTIN LETTERHEAD]

HFC Revolving Corporation
Household Finance Corporation
November 12, 1996
Page 2

International, Inc., the corporate parent of the Master Servicer, including, but
not limited to, certain written representations made by Mr. Steven H. Smith,
Director - Asset Securitization of Household International, Inc., by letter to
us dated November 12, 1996 (the "Representation Letter"), which representations
are summarized herein.

        Our opinion is based upon the Code, administrative rulings, judicial
decisions, Treasury Regulations, and other applicable authorities, which are
subject to change, and which changes could apply retroactively. In addition,
our opinion is not binding upon the courts or the Internal Revenue Service (the
"Service"), and there can be no assurance that positions contrary to those
stated in our opinion would not be taken by the Service or that any such
contrary position would not be sustained by the courts.

        Based upon and subject to the foregoing, and subject to the discussion
set forth below, in our opinion, although no transaction closely comparable to
that described in the Preliminary Prospectus has been the subject of any
Treasury Regulation, revenue ruling or judicial decision, for federal income
tax purposes: (i) the Certificates, when issued, will properly be characterized
as indebtedness of the Seller secured by the Mortgage Loans; and (ii) the
arrangement created by the Agreement will not be a "taxable mortgage pool"
within the meaning of section 7701(i) of the Code.

            I. Characterization of the Certificates as Indebtedness

        The following is a discussion of whether the Certificates are properly
characterized for federal income tax purposes as indebtedness of the Seller
secured by the Mortgage Loans, rather than as a direct or indirect ownership
interest in all or a portion of the Mortgage Loans. Notwithstanding our opinion
set forth above, certain characteristics of the Certificates and the
arrangement among the Seller and the Certificateholders indicate that the
Certificates might be characterized by the Service or a court as a direct or
indirect ownership interest in the Mortgage Loans, rather than indebtedness of
the Seller secured by the Mortgage Loans.

<PAGE>   3
                          [SIDLEY & AUSTIN LETTERHEAD]


HFC Revolving Corporation
Household Finance Corporation
November 12, 1996
Page 3



        In general, the economic substance of a transaction, rather than its
form, determines the proper characterization of the transaction for federal
income tax purposes. (1)  Set out below is a discussion of the relevant factors
that must be taken into account in determining whether the Certificates should
be treated, in substance, as indebtedness of the Seller secured by the Mortgage
Loans. See "Substance of the Transaction," below. Even though as a general rule
the economic substance of a transaction determines its proper tax
characterization, some courts have held that, in certain circumstances,
taxpayers are bound by the form of the transaction selected, even if the
characterization of the economic substance of the transaction would be different
from the form in which the transaction was cast. (2)  Accordingly, also set out
below is a discussion of the relevance of the form in which the transaction is
cast in properly treating the Certificates as indebtedness of the Seller. See
"Importance of Form of Transaction," below.

A.  Substance of the Transaction

        Whether a transfer of receivables should be treated in substance as a
sale or as a pledge securing a financing is dependent on the facts and
circumstances surrounding the particular transaction. Although no single test
governs this determination, the critical inquiry focuses on whether the
transferor has relinquished substantial incidents of ownership. Town & Country
Food Co. v. Commissioner, 51 T.C. 1049, 1057 (1969), acq. 1969-2 C.B. xxv;
Mapco Inc. v. United States, 556


- ---------------- 
(1)  See, e.g., Helvering v. F. & R. Lazarus & Co., 308 U.S.
     252 (1939) (a transaction in which the taxpayer transferred title to
     property to a trustee which then issued certificates of equitable ownership
     to investors was held to be a loan); Gatlin v. Commissioner, 34 B.T.A. 50
     (1936) (notwithstanding the form of the agreement, the taxpayer was
     sustained in his position that funds obtained under a sales contract for
     accounts receivable were in fact loans); Rev. Rul. 61-181, 1961-2 C.B. 21
     (trust certificates issued to investors by a trustee pursuant to a trust
     agreement between the trustee and a municipality were held to be debt of
     the municipality issued to investors).

(2)  See, e.g., Commissioner v. Danielson, 378 F.2d 771 (3rd Cir. 1967), cert.
     denied, 389 U.S. 858 (1967).

 
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F.2d 1107, 1110 (Ct. Cl. 1977); General Counsel Memorandum ("G.C.M.") 39584
(Dec. 3, 1986).(3)

        The factors considered and weighed by the courts and the Service, as
applied to this transaction, are discussed below.

   (1)  Whether the receivables transfer agreement provides merely for a payment
        to the transferor of an amount equal to the discounted value of the
        receivables or, in contrast, provides for repayment to the transferee
        not in excess of the amount paid by the transferee plus interest on 
        the unrepaid amount.

        A mere transfer of property for a fixed price equal to the discounted
present value of the receivables is indicative of a sale, whereas an
obligation, secured by property, to repay to the transferee an amount not in
excess of the discounted present value together with interest on the
outstanding unrepaid balance is indicative of a loan. Federated Department
Stores, Inc. v. Commissioner, 51 T.C. 500, 515 (1968), aff'd, 426 F.2d 417 (6th
Cir. 1970), nonacq. 1971-2 C.B. 4; G.C.M. 34602 (Sept. 9, 1971). Thus, where
receivables have been transferred for an amount that represents the discounted
present value of the revenue stream and where no interest is payable with
respect to amounts that have not been repaid, the transaction has been held to
be a sale. Elmer v. Commissioner, 65 F.2d 568 (2d Cir. 1933). See also Altmann
v. Commissioner, 27 T.C.M. 1 (1968). Where, however, a fixed amount equal to
the transfer price is to be repaid to the transferee and interest accrues on
the unrepaid portion of the transfer price, the transaction has been
characterized as a loan. Hydrometals, Inc. v. Commissioner, 31 T.C.M. 1260
(1972), aff'd, 485 F.2d 1236 (5th Cir. 1973), cert. denied, 416 U.S. 938
(1974); United Surgical Steel Co. v. Commissioner, 54 T.C. 1215, 1229 (1970),
acq. 1971-2 C.B. 3; Town & Country Food Co., 51 T.C. 1049; G.C.M. 34602 (Sept.
9, 1971).



- ------------
(3)     Private letter rulings and general counsel memoranda generally have no
        precedential value, but are indicative of the position of the Service
        on the subject at issue.

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        In this transaction, Certificateholders will advance a fixed amount
equal to the Original Certificate Principal Balance. Interest will accrue on
the Certificate Principal Balance outstanding from time to time, and such
interest will accrue at a rate different from the interest payable on the
Mortgage Loans. Therefore, this factor indicates that the Certificates should
be treated for federal income tax purposes as indebtedness of the Seller
secured by the Mortgage Loans.

  (2)   Which party bears the risk of loss and obtains the possibility
        of gain with respect to the receivables.

        Perhaps most important to the inquiry of whether a transaction will be
characterized as a loan or as a sale are factors relating to whether the
transferor or the transferee has the economic benefits and burdens of ownership
(i.e., which party has the risk of loss and the possibility of gain) with
respect to the receivables in question. G.C.M. 39584 (Dec. 3, 1986).

        (a)     Benefits and Burdens of Collections on the Mortgage Loans.

        The owner of receivables generally has the risk of loss and
possibility for gain related to collections on the receivables. With respect to
risk of loss related to collections, courts have held that the retention by the
transferor of the risk of loss upon a default in the payment of the receivables
is an indication that a transaction is a loan, rather than a sale.
Burford-Toothaker Tractor Co. v. United States, 262 F.2d 891 (5th Cir. 1959)
(transaction held to be loan where transferor responsible for recouping
transferee's loss in event of obligor default); Hydrometals, Inc., 31 T.C.M. at
1265 (transaction held to be loan where transferor required to provide
certificates of deposit as security for full repayment of advances made by
transferee); see also United Surgical Steel Co., 54 T.C. at 1229; Town & Country
Food Co., 51 T.C. at 1052; Motor Securities Co. v. Commissioner, 11 T.C.M. 
1074 (1952).

        Transactions have also been found to be loans, rather than sales, where
the transferor bears a significant portion of the risk of loss even if recourse
is limited. See, e.g., Federated Department Stores, Inc., 51 T.C. at 510, 515;
Coulter Electronics, Inc. v. Commissioner, 59 T.C.M. 350, aff'd without
published opinion, 943 F.2d 1318 (11th Cir. 1991); G.C.M. 39584 (Dec. 3, 1986).
Cf. Mathers v. Commissioner, 57 T.C. 666 (1972), acq. 1973-2 C.B. 2
(transaction structured as loan held sale where transferee had full recourse
from transferor and retained 10% of face amount of each transferred receivable
as reserve



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        account for satisfaction of delinquent installments or other expenses of
        transferee). Where recourse is limited, consideration may be given to
        whether the transaction was negotiated at arm's-length and whether
        historic losses exceed the amount of the transferor's recourse
        liability. G.C.M. 39584 (Dec. 3, 1986) (concluding that a loan existed
        where a reserve account was established to cover defaults, and noting
        that the transferee would not likely accept a reserve account consisting
        of a lesser percentage of total accounts than the transferor's default
        experience indicated was warranted); G.C.M. 37848 (Feb. 5, 1979)
        (stating that in the absence of a guarantee the amount of the holdback
        by the transferee and the transferor's bad debt history are relevant to
        a determination of who bears the risk of loss); G.C.M. 34602 (Sept. 9,
        1971) (stating that a merchant retains the principal economic benefits
        and burdens of ownership when it transfers an installment obligation to
        a bank, finance company, or credit subsidiary and the transferee retains
        a holdback more than sufficient to protect it from economic loss under
        the collection experience of the merchant).(4)

                 With respect to possibility for gain related to collections,
        courts have held that a transfer of receivables is a loan rather than a
        sale where the transferor collects the receivables and is entitled to
        retain amounts collected to the extent that they exceed the amount owed
        to the transferee. See Martin v. Commissioner, 56 T.C. 1255, 1259
        (1971), aff'd, 72-2 U.S.T.C. Paragraph 9637 (5th Cir. 1972); United
        Surgical Steel Co., 54 T.C. at 1229; Town & Country Food Co., 51 T.C. at
        1052, 1057; Southeastern Finance Co. v. Commissioner, 4 T.C. 1069
        (1945), aff'd, 153 F.2d 205 (5th Cir. 1946); Gatlin v. Commissioner, 34
        B.T.A. 50 (1936). In contrast, if the transferee is entitled to all
        amounts collected on the receivables, it is likely that the transaction
        will be characterized as a sale. Elmer, 65 F.2d at 569. See also
        Mathers, 57 T.C. at 668 (transaction held to be 

        ----------------
        (4)      In Rev. Rul. 54-43, 1954-1 C.B. 119, the Service seemed to
                 assert the view that a transfer involving less than full
                 recourse to the transferor is inherently in the nature of a
                 sale. In holding such a transfer to be a sale, the Service
                 distinguished other cases holding for loan treatment wherein
                 "there was positive unlimited liability on the part of the
                 transferors of the accounts to repurchase or pay them in the
                 event of default." However, Rev. Rul. 54-43 is inconsistent
                 with the later authorities cited above. Moreover, although Rev.
                 Rul. 54-43 has not been revoked, it has been renounced by the
                 Service. See G.C.M. 35036 (September 13, 1972).
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sale where transferee had entire upside potential notwithstanding that
transferor liable for defaults on recourse basis and that ten percent of face
amount of receivables held in reserve); Nickoll v. Commissioner, 10 T.C.M. 861
(1951) (transaction held to be sale where parties provided that all proceeds of
accounts receivable would be sole property of transferee).

     In this transaction, the Certificateholders have no recourse to the assets
of the Seller or its affiliates to cover defaults on the Mortgage Loans. The
Certificateholders, therefore, have a theoretical risk of loss in the event of
significant defaults or delinquencies on the Mortgage Loans, which the Service
could contend indicates that the Certificateholders directly or indirectly own
the Mortgage Loans.

     However, as discussed more fully below, a number of features of the
transaction provide protection to the Certificateholders against defaults on the
Mortgage Loans, and the direct or indirect effect of those features is that the
Seller has the risk of loss and opportunity for gain related to collections on
the Mortgage Loans.

     First, the Certificateholders will be allocated the Floating Allocation
Percentage of all Interest Collections collected during the preceding
Collection Period, to be applied in the following priority: (i) to pay the
Servicing Fee, (ii) to pay interest on the Certificates, (iii) to pay
Certificateholders the product of the Certificateholders Floating Allocation
Percentage and the Liquidation Loss Amount (generally, the Charge Off Amount
for the Mortgage Loans for the related Collection Period and the unrecovered
Trust Balance of a Liquidated Mortgage Loan) for the related Collection Period,
(iv) to pay the Liquidation Loss Amount allocable to Certificateholders for a
previous Collection Period that was not paid through one of the sources
described herein, (v) to pay the premiums for the Policy (as described below)
to the extent not paid by the Master Servicer, (vi) to reimburse prior draws
made from the Policy and other amounts due under the Insurance Agreement, (vii)
to pay the Accelerated Principal Distribution Amount, (viii) to fund the Spread
Account, (ix) to pay to the Certificateholders any Carryover Amount for any
prior Distribution Dates, (x) to pay fees due to the Trustee, to the extent not
paid by the Master Servicer and (xi) to pay to the Seller. Thus, to the extent
not required to make payments of a higher priority, interest allocated to the
Certificateholders will be used to reimburse Certificateholders for Liquidation
Loss Amounts allocated to the Certificateholders. Interest so used will reduce
amounts, if any, that otherwise would be paid to the Seller.

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        The Certificateholders will also have the benefit of the
Overcollateralization Amount and the Spread Account. As noted above, Interest
Collections will be used to pay Certificateholders the Accelerated Principal
Distribution Amount (i.e., a principal payment to Certificateholders such that
the Invested Amount exceeds the Certificate Principal Balance by the Required
Overcollateralization Amount), thereby creating overcollateralization. Interest
Collections will also be used to fund the Spread Account. Both the
Overcollateralization Amount and the Spread Account will be available to absorb
any Liquidation Loss Amount that is allocated to Certificateholders.

        In the Representation Letter, it is represented to us that the
expected present value, as of the Closing Date, of Interest Collections
available to be paid as Certificateholders Excess Interest is equal to at least
14.75% of the Original Invested Amount, using a 12% discount rate.

        In addition, Certificateholders will have the benefit of the Policy,
under which the Certificate Insurer will unconditionally and irrevocably
guarantee payment of the Deficiency Amount up to $450 million in principal
payments, plus, until such time as the Certificate Insurer has made payments in
respect of principal under the Policy in an amount equal to $450 million,
accrued and unpaid interest on the Certificates. In the event of any draw on
the Policy, such draw will be reimbursed to the Certificate Insurer from
amounts otherwise payable to the Seller, to the extent of such amounts. To this
extent, the Seller will bear the cost of amounts paid under the Policy.

        Therefore, based on the foregoing, the Certificateholders are afforded
certain protections against defaults on the Mortgage Loans, and amounts paid to
Certificateholders in respect to defaults on Mortgage Loans are expected to
reduce amounts that the Seller otherwise would receive. The protection afforded
the Certificateholders against defaults is evidenced by the AAA/Aaa rating the
Certificates are expected to receive from independent rating agencies.

        In rendering this opinion, we have relied on the representation made in
the Representation Letter that, based on the historic default experience of
receivables similar to the Mortgage Loans, it is reasonable to expect that the
protections provided to Certificateholders summarized above will fully protect
the Certificateholders from defaults on the Mortgage Loans and that any amount
paid to Certificateholders in respect of defaults on the Mortgage Loans will
reduce amounts otherwise payable to the Seller. Based on the foregoing, the
Seller should 
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be regarded as having retained the risk of loss related to collections on the
Mortgage Loans.

        Just as the Seller has retained the risk of loss related to collections
on the Mortgage Loans, the Seller likewise has retained the possibility for
gain related to collections on the Mortgage Loans. In the event that defaults
and delinquencies with respect to the Mortgage Loans are less than anticipated,
the Seller will profit because the Trust assets will be larger at the time the
Certificates are no longer outstanding and such assets will be distributed to
the Seller.

        (b)  Benefits and Burdens of Changes in Market Interest Rates.

        In general, an owner of receivables also has the risk of loss and
possibility for gain related to changes in market interest rates. The
transferor may retain the risk of loss and possibility for gain related to
changes in market interest rates where the interest to be received on the
transferred receivables and the interest to be paid to the transferee differ,
and the amount of the difference will vary as prevailing market interest rates
change from time to time. In G.C.M. 39584 (Dec. 3, 1986), the transferor
transferred receivables to a transferee and received an amount equal to the
discounted present value of the receivables. The transferor was entitled to
receive from time to time, in addition to the initial amount, any excess of the
fixed finance charges on the receivables over a floating rate of interest on
the unrecovered portion of the purchase price. In considering whether the
transferor obtained the possibility of gain from the appreciation in the
receivables, the Service noted that the lower the market interest rates the
greater the amount received by the transferor, and concluded that the
transferor (and not the transferee) stood to gain from a drop in interest
rates. Likewise, in Yancey Bros. Co. v. United States, 319 F. Supp. 441, 446
(N.D. Ga. 1970), the court held that a pledge of receivables as security for
demand loans should be respected as a pledge (rather than a sale) noting that,
when market interest rates increased, the lenders required the interest rate
under the demand loans to increase correspondingly. It concluded that the
transferor was subject to the "vicissitudes of the 'money market,'" and that
the economics of the transaction could be "sharply distinguished" from the
economics of merely discounting notes, because in the latter case the discount
charged could not be changed during the life of the discounted contract.
Similarly, in Rev. Rul. 78-118, 1978-1 C.B. 219, the Export-Import Bank of the
United States ("Eximbank") lent funds to a foreign corporation under a
promissory note bearing interest at a 
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fixed rate, and Eximbank funded the loan by borrowing funds from a U.S. bank
under an agreement providing for a floating rate of interest. Principal and
interest payable to the U.S. bank were to be paid out of amounts received from
the foreign corporation. If, however, the fixed rate was less than the floating
rate, Eximbank was obligated to pay the difference to the taxpayer. Conversely,
if the floating rate was less than the fixed rate, the U.S. bank would receive
a lesser amount and Eximbank would retain the difference. In ruling that the
two loans should be treated as separate loans for tax purposes, the Service
noted that "each agreement calls for a separate obligation with a separate
interest rate. Neither interest rate is related to the other. In the instant
case, Eximbank may make a profit on the spread between interest payable and
interest receivable. However, Eximbank could suffer a loss if the interest
spread is unfavorable."

        In this case, most of the Initial Mortgage Loans bear interest based on
the prime rate, subject to certain maximum rates imposed by state law. However,
approximately 38.03% of the Initial Mortgage Loans, by principal balance, bear
interest at a fixed rate (the "Fixed Rate Mortgages"). In contrast, the
Certificates are expected to bear interest based on LIBOR, but not in excess of
the weighted average of the maximum Loan Rates permitted under the Credit Line
Agreements less the Servicing Fee. In the event the Certificate Rate exceeds
the weighted average of the Net Loan Rates, such excess (the "Carryover
Amount") will be paid to the Certificateholders from Interest Collections as
described above.

        You have provided us with information, on which we have relied in
rendering this opinion, demonstrating that in recent years there has been a
high degree of correlation between changes in the prime rate and changes in
LIBOR, although from time to time the difference between the prime rate and
LIBOR has changed slightly.

        In this case, upon payment of all amounts due to the Certificateholders
and the Certificate Insurer, the Seller retains all amounts remaining in the
Trust and therefore generally will suffer a detriment with respect to periods
during which the "spread" between the rate payable on the Mortgage Loans and
the rate payable on the Certificates decreases, and will realize a benefit with
respect to periods during which such "spread" increases. Therefore, the Seller
has retained some benefits and burdens relating to changes in market interest
rates, particularly, although not exclusively, with respect to the Fixed Rate
Mortgages, and this transaction is different from

        
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merely discounting the Mortgage Loans to a buyer at a fixed price. However,
based on the historical information referred to above, the prime rate and LIBOR
can be expected to increase and decrease from time to time by substantially the
same amount and therefore the "spread" between the rate payable on the variable
rate Mortgage Loans and the rate payable on the Certificates cannot be expected
to vary significantly during the period the Certificates are outstanding.
Nevertheless, because of the significant percentage of Fixed Rate Mortgages, we
believe the Seller has retained a meaningful amount of the benefits and burdens
relating to changes in market interest rates.

        (c) Correlation Between Receipts on Mortgage Loans and Payments
            on Certificates.

        The Service could contend that the Certificateholders directly or
indirectly own the Mortgage Loans based on the correlation (in timing and
amount) between amounts of interest and principal received on the Mortgage
Loans and amounts of interest and principal paid on the Certificates. To the
extent such a correlation exists, the Service may contend that the
Certificateholders have a fixed interest in certain payments on the Mortgage
Loans and therefore have a direct or indirect ownership interest in the
Mortgage Loans. In holding that a transfer of receivables constitutes a sale
rather than a secured financing for federal income tax purposes, some
authorities have noted that where there exists a direct relationship
between the terms of the transferor's loan and the terms of the transferred
obligations, the transferor does not have risk of loss or opportunity for 
gain on the obligations and, therefore, cannot be considered their owner. 
See Branham v. Commissioner, 51 T.C. 175, 180 (1968) (transaction
held to be a sale where there was a "coincidence of terms and
amounts" owned to transferees and owned under transferred receivables);
Bogatin v. United States, 78-2 U.S.T.C. Paragraph 9733 (W.D. Tenn. 1978) 
(transaction held to be sale where transferor's note to bank had terms very
similar to installment obligation); Town & Country Food Co., 51 T.C. 1049
(transaction held to be a loan where repayment of transferor's indebtedness to
transferee "was not geared to the [transferor's] collections upon its
installment obligations"); Rev. Rul. 65-185, 1965-2 C.B. 153. But see Schaeffer
v. Commissioner, 41 T.C. M. 752, 756 (1981) (transaction held to be loan where
court found some differences between terms of loan and those of installment
obligation, but emphasized "we do not here say that the two notes must contain
any dissimilarities").

        In this case, the Certificateholders Floating Allocation Percentage of
all Interest Collections on the Mortgage


 
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Loans will be allocated to the Certificateholders to pay, among other things,
interest on the Certificates. Similarly, principal paid on the Certificates
will, in the absence of defaults, be funded from the Certificateholders Fixed
Allocation Percentage of Principal Collections on the Mortgage Loans.

     There are, however, significant differences between the terms of the
Certificates and the terms of the Mortgage Loans with regard to interest rates,
payments of principal and maturity dates. First, as noted above, interest is
payable on the Mortgage Loans based primarily either on the prime rate or a
fixed rate, whereas the interest rate on the Certificates is based on LIBOR,
and the interest rate on the Mortgage Loans is expected to exceed the interest
rate on the Certificates.

     Second, Certificateholders also will, under certain circumstances, be
allocated a disproportionately high share of the Principal Collections on the
Mortgage Loans. During the Rapid Amortization Period, approximately 97.50% of
the Principal Collections generally will be allocated to the
Certificateholders, even though Additional Balances drawn under the Credit
Line Agreements and added to the Pool Balance are anticipated to cause the
Certificateholders to hold less than a 97.50% interest in the Trust.

     Third, subject to certain conditions, the Seller has the option of
requiring the Trust to retransfer Mortgage Loans to the Seller. The Seller is
also obligated to replace defective Mortgage Loans with Eligible Substitute
Mortgage Loans.

     Finally, prior to the commencement of the Rapid Amortization Period, the
Trustee will use a portion of the Principal Collections to purchase Additional
Balances generated pursuant to the Credit Line Agreements and newly originated
home equity revolving credit line loans ("Subsequent Funding Mortgage Loans").
Under the Agreement, prior to the commencement of the Rapid Amortization
Period, Principal Collections payable to the Certificateholders (the "Scheduled
Principal Distribution Amount") will equal the lesser of (i) the Maximum
Principal Distribution Amount (generally 97.50%) and (ii) the Alternative
Principal Distribution Amount (generally Principal Collections for the
Collection Period less the aggregate of principal amounts drawn down under the
Credit Line Agreements during such Collection Period). Under the foregoing
formula, if both Principal Collections and new principal draws are significant,
only a portion will be paid to Certificateholders and a significant amount of
the Principal Collections will be distributed to the Seller to reimburse the
Seller for Additional 
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Balances. In that case, a disproportionate amount of Principal Collections will
be paid to the Seller. Moreover, the Trust will have an initial Funding Period,
during which the Scheduled Principal Distribution Amount will be deposited in
the Funding Account instead of being distributed to Certificateholders. Amounts
so deposited will generally be used to acquire Subsequent Funding Mortgage
Loans and Additional Balances in an aggregate amount equal to at least 17% of
the sum of the Cut-Off Balances of the Initial Mortgage Loans. It should be
noted, however, that amounts in excess of such percentage (even if deposited in
the Funding Account) will be distributed to Certificateholders as principal.

        The effect of the foregoing is that, prior to the commencement of the
Rapid Amortization Period, the portion of the aggregate Principal Collections
anticipated to be paid to the Certificateholders is expected to be less than
the payments that would have been made to such Certificateholders if such
Collections were passed through to such Certificateholders on a pro rata basis.
In this regard, it is represented to us in the Representation Letter that,
based on the historical payment and draw characteristics of the Credit Line
Agreements and revolving term equity loan agreements substantially similar to
the Credit Line Agreements, under the provisions of the Agreement summarized
above, it is reasonable to assume that, prior to the commencement of the Rapid
Amortization Period, Principal Collections equaling at least 25.0% of the
unpaid principal balance of the Initial Mortgage Loans as of the Cut-Off Date
will be used to purchase Additional Balances or Subsequent Funding Mortgage
Loans. 

        Based on the foregoing, although there is a general correlation between
principal and interest received on the Mortgage Loans and principal and
interest paid on the Certificates, that correlation is significantly weakened
by the aspects of the transaction discussed above. The aspects of the
transaction discussed above support the conclusion that the Certificates should
be treated as indebtedness of the Seller for federal income tax purposes, and
we do not believe an assertion by the Service that the Certificateholders
directly or indirectly own the Mortgage Loans based on such a correlation
between payments on the Mortgage Loans and the Certificates would be given
significant weight by a court.

        (3)  The Transferee's Ability to Dispose of the Receivables.

        A transferee's ability to dispose of the transferred receivables is a
factor indicating that a sale of the receivables has occurred. See East Coast
Equipment Co. v. Commissioner, 21

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T.C. 112, (1953), aff'd, 222 F.2d 676 (3d Cir. 1955); G.C.M. 34602 (September
9, 1971); Private Letter Ruling ("PLR") 8002124 (October 17, 1979); PLR 7916081
(January 19, 1979). Cf. Southeastern Finance Co., 4 T.C. 1069; G.C.M. 39584
(Dec. 3 1986) (transaction held to be loan where transferee has limited rights
of alienation); PLR 8136037 (June 10, 1981) (same).

        Although the Certificates are freely transferrable, neither the
Certificateholders nor the Trust may transfer their interest in the Mortgage
Loans free of the Seller's rights with respect to collections on the Mortgage
Loans.

        (4)     Whether the obligors on the receivables are notified of the
                change in ownership.

        The failure to provide notice of the transfer to the obligors on the
receivables is indicative of a loan. Mapco Inc., 556 F.2d at 1111; Yancey Bros.
Co., 319 F. Supp. 441; United Surgical Steel Co., 54 T.C. at 1229-31; G.C.M.
39584 (Dec. 3, 1986); cf. Branham, 51 T.C. at 180 (transaction structured as
loan held sale where receivable transferred without notification to obligor).
Moreover, even if notice is to be provided, if this arises only upon an event
of default on the part of the transferor, this factor will not be deemed
inconsistent with a finding that a loan exists. PLR 8643002 (June 20, 1986);
PLR 8136037 (June 10, 1981).

        The parties to the transaction do not intend to notify the Mortgagors
of the transfer of the Mortgage Loans to the Trust. This factor therefore
supports the conclusion that the Certificates are properly treated as
indebtedness of the Seller for federal income tax purposes.

        (5)     Whether the transferor or transferee is obligated to collect
                and service the receivables and to bear the expenses relating 
                thereto.

        A further factor that is relevant to a determination of ownership is
whether the transferor or the transferee collects and services the receivables.
Compare Martin, 56 T.C. at 1259 (transaction held to be loan where transferor
handled collections and servicing); United Surgical Steel Co., 54 T.C. at 1229
(same); Town & Country Food Co., 51 T.C. at 1053 (same); Gatlin, 34 B.T.A. 50
(same); PLR 8643002 (June 20, 1986) (same); G.C.M. 34602 (Sept. 9, 1971)
(transaction found to be loan where transferor liable for collection expenses);
with Elmer, 65 F.2d at 569 (transaction held to be sale where transferee
handled collections); Bogatin 78-2 U.S.T.C. Paragraph 9733 (transaction held to 
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be sale where transferee made collections on transferred receivable); Packard
Cleveland Motor Co. v. Commissioner, 14 B.T.A. 118 (1928) (same). The fact that
receivables are collected and serviced by the transferor will not, however,
preclude a finding of a sale if the transferee has the right to make
collections and if the transferor acts on behalf of the transferee as its
agent. Mathers, 57 T.C. at 675. Conversely, a transaction has been held to be a
loan where the transferor did not handle collections. PLR 8803026 (October 22, 
1987).

        The Master Servicer will be responsible for the servicing, management,
collection and administration of the Mortgage Loans. The Subservicers will
perform the servicing activities on behalf of the Master Servicer in accordance
with the Master Servicer's policies and procedures for servicing real estate
secured by revolving loans. Furthermore, the Master Servicer will act as agent
for the Trust in servicing the Mortgage Loans. Although the Master Servicer
will receive a portion of the Interest Collections as a monthly servicing fee
in the amount of 1.0% per annum of the Invested Amount, the Seller, rather than
the Certificateholders, is expected to effectively bear the cost of such
services. This allocation of cost supports the conclusion that the Seller will
not be treated as having sold the Mortgage Loans to the Certificateholders for
federal income tax purposes and therefore that the Certificates are properly
treated as indebtedness of the Seller for such purposes.

   (6)  Whether the transferor is required to hold the transferee harmless from
        and against any actions brought against the transferee that arise out
        of the transferor's actions as collection agent, and which party is 
        liable for property, excise, sales or similar taxes.

        The fact that the transferor bears the expenses incurred in connection
with the collection of receivables, indemnifies the transferee from and against
all claims arising out of the transferor's actions as collection agent and is
liable for property, excise, sales or similar taxes, have all been found to be
indicative that a transaction is a loan rather than a sale. Yancey Bros., Co.,
319 F. Supp. at 445-46 (transaction held to be loan where transferor liable for
taxes); Schaeffer, 41 T.C.M. at 757 (transaction held to be loan where Tax
Court "impressed" that transferor paid state income tax on interest received on
receivable); Town & Country Food Co., 51 T.C. 1049 (transaction held to be loan
where transferor continued to pay taxes and insurance on transferred
receivables). See also United Surgical Steel Co., 54 T.C. 1215; G.C.M. 39584
(Dec. 3, 1986); G.C.M.
<PAGE>   16
                          [SIDLEY & AUSTIN LETTERHEAD]


HFC Revolving Corporation
Household Finance Corporation
November 12, 1996
Page 16

37848 (Feb. 5, 1979); PLR 8803026 (Oct. 22, 1987); PLR 8643002 (June 20, 1986);
cf. PLR 7922055 (Feb. 28, 1979) (transaction held to be sale where transferee
liable for taxes on amounts collected on transferred receivables).

          The Agreement provides that neither the Master Servicer nor the Seller
will be under any liability to the Trust or the Certificateholders for any
action taken or refraining from the taking of any action in good faith pursuant
to the Agreement, or for errors in judgment. However, neither the Master
Servicer nor the Seller will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder.

          Although the Seller has not agreed to indemnify the Trust for taxes
(an expense specifically focused on by several of the authorities cited above),
the parties have agreed to treat the transaction as a loan for federal income
tax purposes and therefore the Seller will report the Interest Collections as
income and report the interest on the Certificates as a deduction. On balance,
therefore, we believe the indemnification factor supports characterization of
the Certificates as indebtedness of the Seller for federal income tax purposes.

     (7)  Whether the transferee has the right to inspect the books and records
          of the transferor.

          The right to inspect the books and records of the transferor is
consistent with the role of a lender rather than that of a purchaser. Brierly v.
Commercial Credit Co., 43 F.2d 724 (D. Pa. 1929), aff'd, 43 F.2d 730 (3d Cir.
1930) (transaction held to be loan where transferee's auditors given full access
to transferor's books); United Surgical Steel Co., 54 T.C. at 1230. In this
connection, the Service has noted that the "right of inspection is common in
lending transactions as opposed to sales." G.C.M. 39584 (Dec. 3, 1986). Accord
PLR 8803026 (Oct. 22, 1987); PLR 8643002 (June 20, 1986); PLR 8136037 (June 10,
1981). In addition, the requirements that the transferor keep its records in a
manner satisfactory to the transferee and provide periodic financial statements
to the transferee point to the conclusion that the transferee is looking to the
credit of the transferor, as borrower, and not solely to the receivables for
repayment of funds advanced. United Surgical Steel Co., 54 T.C. at 1230.

          Although the Master Servicer will forward to the Trustee for mailing
to each Certificateholder a statement setting
<PAGE>   17
                          [SIDLEY & AUSTIN LETTERHEAD]


        HFC Revolving Corporation
        Household Finance Corporation
        November 12, 1996
        Page 17

        forth certain information relating to the Mortgage Loans and the
        Certificates, neither the Trustee nor any Certificateholder has the
        right to inspect the books and records of the Master Servicer or the
        Seller. However, the Agreement requires the Master Servicer, at its
        expense, to cause a firm of nationally recognized independent public
        accountants to furnish an annual report to the Trustee, the Certificate
        Insurer and the Rating Agencies to the effect that such accountants have
        examined certain documents and records relating to the servicing of
        mortgage loans and such examination has disclosed no material items of
        non-compliance with the Agreement, except for such items of
        non-compliance as will be referred to in the report. This factor
        therefore is not inconsistent with treating the Certificates as
        indebtedness of the Seller for federal income tax purposes.

                (8)  The intent of the parties.

                     The articulated intent of the parties and the form in which
        the transaction has been cast are given varying weight by the courts. In
        holding in United Surgical Steel Co. that a loan should be respected as
        a loan, for example, the Tax Court emphasized not only the substance of
        the transaction but also its form. Id. at 1229. Similarly, in East Coast
        Equipment Co., 222 F.2d at 677, in holding that the transaction was a
        sale, the court accorded considerable weight to the fact that the
        transaction was in form a purchase and was so treated by the transferee.
        See also Mathers, 57 T.C. at 676 (transaction held to be sale where Tax
        Court noted that, although parties "may have thought of the transaction
        as loans . . . there is no evidence that [the transferor] was liable as
        a borrower"); Nickoll, 10 T.C.M. 861 (transaction held to be sale where
        parties used terms such as "sell" and "purchase price" in transfer
        agreement); Alworth-Washburn Co. v. Commissioner, 25 B.T.A. 140 (1932),
        aff'd, 67 F.2d 694 (D.C. Cir. 1933). Generally, however, whereas intent
        is considered relevant, substance, if found to be different from
        manifest intent, is controlling. Mapco Inc., 556 F.2d at 1109. Branham,
        51 T.C. 175. The Service has held to be a loan a transaction which the
        transferor treated as a sale for book purposes and as a loan for tax
        purposes. PLR 8643002 (June 20, 1986).
 
                     Although HFC Revolving Corporation is designated in the
        Agreement as the "Seller," Section 2.01 of the Agreement provides that
        the Seller transfers, assigns, sets over and otherwise conveys to the
        Trust all of its right, title and interest in and to each Mortgage Loan
        and all other assets included or to be included in the Trust for the
        benefit of the Certificateholders 
        
        
<PAGE>   18
                          [SIDLEY & AUSTIN LETTERHEAD]


HFC Revolving Corporation
Household Finance Corporation
November 12, 1996
Page 18


and the Certificate Insurer, as their interests appear. The terms of the
Agreement therefore do not express an intention on the part of the parties to
treat the transfer by the Seller as a sale, because the assignment is for the
benefit of the Certificate Insurer as well as the Certificateholders and is
consistent with a pledge of assets to secure debt. Furthermore, Section 2.09 of
the Agreement states that it is the intention of the Seller and the
Certificateholders that the Certificates will be indebtedness of the Seller for
federal, state and local income and franchise tax purposes and for purposes of
any other tax imposed on or measured by income. This factor is not, therefore,
inconsistent with the treatment of the Certificates as indebtedness of the
Seller for federal income tax purposes.

B. Importance of Form of Transaction.

        Some courts have held that, in certain circumstances, taxpayers are
bound by the form of the transaction selected, notwithstanding that the
characterization of the economic substance of the transaction would be
different from the form in which the transaction was cast. See, e.g.,
Commissioner v. Danielson, 378 F.2d 771 (3rd Cir. 1967), cert. denied, 389 U.S.
858 (1967). In this transaction, however, the form of the transaction is, in
our view for the reasons set forth below, consistent with the characterization
of the Certificates as indebtedness of the Seller. Accordingly, we conclude
that these authorities should not apply to this transaction and should not
cause the transaction to be treated for federal income tax purposes as a sale
of the Mortgage Loans to the Certificateholders.

        The Preliminary Prospectus, the Agreement and the Certificates each
state that the Seller and the Certificateholders will treat the Certificates as
indebtedness of the Seller to the Certificateholders for federal, state and
local income and franchise tax purposes. The language in the Agreement noted
above whereby the Seller agrees to transfer all of its right, title and
interest in and to each Mortgage Loan to the Trust is consistent with language
of transfer in other security arrangements where debtors pledge assets to secure
debt. See, e.g., Treas. Reg. Section 1.61-13(b). It should be noted, however,
that the Certificates state that they represent "to the extent specified in the
Agreement, an undivided ownership interest" in each Mortgage Loan.

        The Certificates do not provide the Certificateholders with any
specific rights in any Mortgage Loan, but rather provide only for rights to
cash flow from the pool of Mortgage Loans.

<PAGE>   19
                          [SIDLEY & AUSTIN LETTERHEAD]

HFC Revolving Corporation
Household Finance Corporation
November 12, 1996
Page 19

The fact that the Seller intends to report the transaction as a sale for
financial accounting purposes is not inconsistent with characterizing the
transaction as a financing for federal income tax purposes. See, e.g., Thor
Power Tool Co. v. Commissioner, 439 U.S. 522, 538-44 (1979); Frank Lyon Co. v.
United States, 435 U.S. 561, 577 (1978). Contrast Notice 94-47, 1994-19 
I.R.B. 9 (among the factors to be considered in determining the
characterization of financial instruments for federal income tax purposes is
"whether the instruments are intended to be treated as debt or equity for
non-tax purposes, including regulatory, rating agency, or financial accounting
purposes"). 

        If some provisions of the documents relating to the transaction were
determined to be inconsistent with the treatment of the Certificates as
indebtedness, and the form of the transaction were therefore considered to be
ambiguous, many cases hold that the economic substance of the transaction
controls the characterization of the transaction for federal income tax
purposes. See, e.g., Illinois Power Co. v. Commissioner, 87 T.C. 1417, 1432
(1986), acq. in result 1990-2 C.B. 1; Elrod v. Commissioner, 87 T.C. 1046, 1065
(1986); Smith v. Commissioner, 82 T.C. 705, 713-714 (1984); Morrison v.
Commissioner, 59 T.C. 248, 256 (1972), acq. 1973-2 C.B. 3; Kreider v.
Commissioner, 762 F.2d 580, 588 (7th Cir. 1985); Comdisco Inc. v. United
States, 756 F.2d 569, 578 (7th Cir. 1985); Coulter Electronics, Inc., 59 T.C.M.
350; Watts Copy Sys., Inc. v. Commissioner, 67 T.C.M. 2480, 2484 (1994).

        Courts have allowed or required taxpayers, as well as the Service, to
treat a transaction in accordance with its economic substance even though the
transaction participants have cast it in a different form for non-tax purposes.
See, e.g., Helvering v. Lazarus, 308 U.S. 252 (1939); Gatlin, 34 B.T.A. 50;
Rev. Rul. 61-181, 1961-2 C.B. 21. While the court in Danielson required the
taxpayer to respect the form of transaction, courts have held that Danielson
should not be applied in situations in which the Service does not face the
potential for being "whipsawed" -- i.e., faced with conflicting tax claims by
different parties to a transaction. See Comdisco Inc., 756 F.2d 569. This
transaction does not give the parties an incentive to take conflicting
positions with respect to the characterization of the transaction for federal
income tax purposes, and, in fact, the Certificateholders and the Seller have
agreed in the Agreement to treat the Certificates as indebtedness of the Seller
for such purposes. Because the Service will not be faced with the possibility
of conflicting taxpayer positions, Danielson and related cases should not, in
our opinion, prevent the parties 
<PAGE>   20
HFC Revolving Corporation
Household Finance Corporation
November 12, 1996
Page 20

from treating the Certificates in accordance with their economic substance as
indebtedness of the Seller.

C.      Characterization of the Trust

                Assuming that the Certificates represent indebtedness of the
Seller, the Certificateholders will be considered to own indebtedness of the
Seller secured by a pledge of the Mortgage Loans.  The Trust is similar to
trusts established to hold collateral pledged as security in connection with
financing transactions and thus will, in our opinion, not be regarded as an
entity separate from the Seller for federal income tax purposes.  See, e.g.,
Rev. Rul 76-265, 1976-2 C.B. 448; Rev. Rul 61-181 1961-2 C.B. 21; see also
Treas. Reg. Section 1.61-13(b); Rev. Rul. 73-100, 1973-1 C.B. 613.

                II.  Characterization of the Transaction as Not a Taxable
                     Mortgage Pool

                In relevant part, section 7701(i) of the Code provides that any
entity (or a portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated federal income tax return with another corporation.  Any entity
(or a portion of any entity) will be a taxable mortgage pool if (i)
substantially all its assets consist of debt instruments, more than 50% of
which are real estate mortgages, (ii) the entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the
entity's debt obligations (or underlying arrangement), payments on such debt
obligations bear a relationship to the debt instruments held by the entity.

                The Representation Letter states that it is intended that
distributions on the Certificates will cause each of the Certificates to have
the same maturity.

                Based on the foregoing, it is our opinion that the arrangement
created by the Agreement will not be a taxable mortgage pool under section
7701(i) of the Code because no entity (or portion thereof) will be the obligor
under debt obligations with two or more maturities, payments on which bear a
relationship to the payments on the Mortgage Loans.  See Treas. Reg. Section
301.7701(i)-1(e).

                                  * * * * *

                The statements contained in the Preliminary Prospectus under
the heading "Income Tax Consequences" to the extent they

<PAGE>   21
                          [SIDLEY & AUSTIN LETTERHEAD]


HFC Revolving Corporation
Household Finance Corporation
November 12, 1996
Page 21


constitute matters of federal or Illinois income tax law or legal conclusions
with respect thereto, have been prepared or reviewed by us, and, in our opinion,
are correct in all material respects.

        We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this Firm under the caption
"Income Tax Consequences" and "Legal Matters" in the Preliminary Prospectus
included in the Registration Statement. By giving such consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules promulgated thereunder.

        This opinion is rendered as of the date hereof based on the law and
facts in existence on the date hereof, and we do not undertake, and hereby
disclaim, any obligation to advise you of any changes in law or fact, whether or
not material, which may be brought to our attention at a later date.

                        Very truly yours,

                        SIDLEY & AUSTIN


<PAGE>   1
                                                                   EXHIBIT 10.1



       _________________________________________________________________





                          HOUSEHOLD REALTY CORPORATION
                  HOUSEHOLD FINANCE CORPORATION OF CALIFORNIA
                        HOUSEHOLD FINANCE CORPORATION II
                       HOUSEHOLD FINANCE CORPORATION III
                   HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY
                HOUSEHOLD FINANCE REALTY CORPORATION OF NEW YORK
                        HOUSEHOLD FINANCIAL CENTER INC.
                 HOUSEHOLD FINANCE REALTY CORPORATION OF NEVADA
                 HOUSEHOLD INDUSTRIAL LOAN COMPANY OF KENTUCKY
               HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY OF IOWA
                  HOUSEHOLD FINANCE CONSUMER DISCOUNT COMPANY
                      HOUSEHOLD INDUSTRIAL FINANCE COMPANY
                            MORTGAGE ONE CORPORATION
                                    Sellers


                                      and



                           HFC REVOLVING CORPORATION
                                     Buyer


       _________________________________________________________________




                         RECEIVABLES PURCHASE AGREEMENT
                          Dated as of November 1, 1996



       _________________________________________________________________
<PAGE>   2

                               TABLE OF CONTENTS


ARTICLE I  DEFINITIONS    . . . . . . . . . . . . . . . . . . . . . . . . .  2
                                                                           
         Section 1.1  Definitions . . . . . . . . . . . . . . . . . . . . .  2
         Section 1.2  Other Definitional Provisions . . . . . . . . . . . .  4

ARTICLE II  PURCHASE AND CONVEYANCE OF LOAN BALANCES  . . . . . . . . . . .  5

         Section 2.1  Purchase  . . . . . . . . . . . . . . . . . . . . . .  5
                                                                            
ARTICLE III  CONSIDERATION AND PAYMENT  . . . . . . . . . . . . . . . . . .  8
                                                                            
         Section 3.1  Purchase Price  . . . . . . . . . . . . . . . . . . .  8
         Section 3.2  Settlement  . . . . . . . . . . . . . . . . . . . . .  8
                                                                            
ARTICLE IV  REPRESENTATIONS AND WARRANTIES  . . . . . . . . . . . . . . . .  8
                                                                            
         Section 4.1  Sellers Representations and Warranties  . . . . . . .  9
         Section 4.2  Representations and Warranties of the
                        Sellers Relating to the Agreement and
                        the Mortgage Loans  . . . . . . . . . . . . . . . . 11
         Section 4.3  Representations and Warranties of                    
                        Revolving . . . . . . . . . . . . . . . . . . . . . 17

ARTICLE V  COVENANTS OF THE SELLERS . . . . . . . . . . . . . . . . . . . . 18
                                                                           
         Section 5.1  Sellers Covenants . . . . . . . . . . . . . . . . . . 18
                                                                           
ARTICLE VI  REPURCHASE OBLIGATION . . . . . . . . . . . . . . . . . . . . . 20

         Section 6.1  Reassignment of Ineligible Mortgage
                        Loans . . . . . . . . . . . . . . . . . . . . . . . 20
         Section 6.2  Reassignment of Certificateholders'                  
                        Interest in Trust Portfolio . . . . . . . . . . . . 20

ARTICLE VII  CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 21

         Section 7.1  Conditions to Revolving's Obligations
                        Regarding Initial Mortgage Loans  . . . . . . . . . 21
         Section 7.2  Conditions to Revolving's Obligations
                        Regarding Subsequent Funding Mortgage
                        Loans, Eligible Substitute Mortgage
                        Loans and Additional Loan Balances  . . . . . . . . 22
         Section 7.3  Conditions Precedent to the Sellers'
                        Obligations . . . . . . . . . . . . . . . . . . . . 22

ARTICLE VIII  TERM & PURCHASE TERMINATION . . . . . . . . . . . . . . . . . 23

         Section 8.1  Term  . . . . . . . . . . . . . . . . . . . . . . . . 23
         Section 8.2  Purchase Termination  . . . . . . . . . . . . . . . . 23

<PAGE>   3



ARTICLE IX  MISCELLANEOUS PROVISIONS  . . . . . . . . . . . . . . . . . . . 24

         Section 9.1  Amendment . . . . . . . . . . . . . . . . . . . . . . 24
         Section 9.2  Governing Law . . . . . . . . . . . . . . . . . . . . 24
         Section 9.3  Notices . . . . . . . . . . . . . . . . . . . . . . . 24
         Section 9.4  Severability of Provisions  . . . . . . . . . . . . . 25
         Section 9.5  Assignment  . . . . . . . . . . . . . . . . . . . . . 25
         Section 9.6  Acknowledgment and Agreement of each
                        Seller  . . . . . . . . . . . . . . . . . . . . . . 25
         Section 9.7  Further Assurances  . . . . . . . . . . . . . . . . . 26
         Section 9.8  No Waiver; Cumulative Remedies  . . . . . . . . . . . 26
         Section 9.9  Counterparts  . . . . . . . . . . . . . . . . . . . . 26
         Section 9.10 Binding Effect; Third-Party Beneficiaries . . . . . . 26
         Section 9.11 Merger and Integration  . . . . . . . . . . . . . . . 26
         Section 9.12 Headings  . . . . . . . . . . . . . . . . . . . . . . 27
         Section 9.13 Schedules and Exhibits  . . . . . . . . . . . . . . . 27
         Section 9.14 Survival of Representations and
                        Warranties  . . . . . . . . . . . . . . . . . . . . 27

Schedule 1:  LIST OF LOAN BALANCES OF INITIAL MORTGAGE
               LOANS

Schedule 2:  LIST OF LOAN BALANCES OF SUBSEQUENT FUNDING
               MORTGAGE LOANS AND ANY ELIGIBLE SUBSTITUTE
               MORTGAGE LOANS

Exhibit A:   FORM OF SETTLEMENT STATEMENT
                                         
<PAGE>   4

                              RECEIVABLES PURCHASE
                                   AGREEMENT


                 RECEIVABLES PURCHASE AGREEMENT, dated as of November 1, 1996,
by and among HOUSEHOLD REALTY CORPORATION, HOUSEHOLD FINANCE CORPORATION OF
CALIFORNIA, HOUSEHOLD FINANCE CORPORATION II, HOUSEHOLD FINANCE CORPORATION
III, HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY, HOUSEHOLD FINANCE REALTY
CORPORATION OF NEW YORK, HOUSEHOLD FINANCIAL CENTER INC., HOUSEHOLD FINANCE
REALTY CORPORATION OF NEVADA, HOUSEHOLD INDUSTRIAL LOAN COMPANY OF KENTUCKY,
HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY OF IOWA, HOUSEHOLD FINANCE CONSUMER
DISCOUNT COMPANY, HOUSEHOLD INDUSTRIAL FINANCE COMPANY and MORTGAGE ONE
CORPORATION and any of their successors, (the "Sellers"), and HFC REVOLVING
CORPORATION, ("Revolving").

                             W I T N E S S E T H;

                 WHEREAS, Revolving desires to purchase from time to time
certain Mortgage Loans (hereinafter defined) due or to become due to the
Sellers under certain credit line agreements of the Sellers;

                 WHEREAS, the Sellers desire to sell from time to time and
assign certain Mortgage Loans to Revolving upon the terms and conditions
hereinafter set forth;

                 WHEREAS, it is contemplated that the Mortgage Loans purchased
hereunder will be transferred by Revolving to the Trust (hereinafter defined)
in connection with the issuance of certain Certificates (hereinafter defined);

                 WHEREAS, it is contemplated that pursuant to the Transfer
Agreement the Sellers will sell contemporaneously with the sale of the Mortgage
Loans hereunder, all their additional right, title and interest in and to the
Related Documents (other than the obligation to fund any Subsequent Funding
Mortgage Loans, Eligible Substitute Mortgage Loans or any Additional Loan
Balances) to the Trustee for the benefit of the Certificateholders; and

                 WHEREAS, the Sellers agree that all covenants and agreements
made by the Sellers herein with respect to the Mortgage Loans shall also be for
the benefit of the Trustee and all holders of the Certificates;

                 NOW, THEREFORE, it is hereby agreed by and between Revolving
and the Sellers as follows:





                                       1
<PAGE>   5

                                   ARTICLE I

                                  DEFINITIONS

                 Section 1.1.  Definitions.  All capitalized terms used herein
or in any certificate, document, or Conveyance Paper made or delivered pursuant
hereto, and not defined herein or therein, shall have the meaning ascribed
thereto in the Pooling and Servicing Agreement whenever used herein or therein;
in addition,  the following words and phrases shall have the following
meanings:

                 "Addition Date" shall mean:  (i) with respect to Subsequent
Funding Mortgage Loans, any Distribution Date during the Funding Period on
which Subsequent Funding Mortgage Loans are purchased by Revolving and (ii)
with respect to any Eligible Substitute Mortgage Loan, the Business Day on
which such Eligible Substitute Mortgage Loan is purchased by Revolving.

                 "Additional Loan Balances" shall mean collectively any
additions to each Mortgage Loan as a result of new principal advances made
under the applicable Credit Line Agreements.

                 "Agreement" shall mean this Receivables Purchase Agreement and
all amendments hereof and supplements hereto.

                 "Appointment Date" shall have the meaning specified in Section
8.2.

                 "Certificate Insurer" shall mean Capital Markets Assurance
Corporation or any successor insurer pursuant to Section 4.03 of the Pooling
and Servicing Agreement.

                 "Certificates" shall mean the Household Revolving Home Equity
Loan Asset Backed Certificates, Series 1996-2 representing undivided interests
in the Trust.

                 "Closing Date" shall mean November __, 1996.

                 "Conveyance" shall have the meaning specified in Section
2.1(a).

                 "Conveyance Papers" shall have the meaning specified in
Section 4.1(c).

                 "Credit Line Agreement" shall mean any note or other agreement
under which a Mortgage Loan is made or which evidences a Mortgage Loan.

                 "Cut-Off Date" shall mean with respect to each Mortgage Loan,
the close of the last billing cycle therefor prior to the purchase by Revolving
(which shall be the immediately preceding





                                       2
<PAGE>   6

billing cycle date prior to November 1, 1996 in the case of the Initial
Mortgage Loans).

                 "Dissolution Event" shall have the meaning specified in
Section 8.2.

                 "Eligible Substitute Mortgage Loans" shall mean the aggregate
unpaid principal balances of those loans made under certain Credit Line
Agreements as of their Cut-Off Date to be substituted for any Defective
Mortgage Loans pursuant to Sections 2.02 and 2.04 of the Pooling and Servicing
Agreement, which on the date of such substitution must at least meet the
criteria set forth in the definition of Eligible Substitute Mortgage Loans set
forth in the Pooling and Servicing Agreement.

                 "Initial Mortgage Loans"  shall mean the aggregate unpaid
principal balances of those loans made under certain Credit Line Agreements as
of the Pool Date to be conveyed to Revolving pursuant to this Agreement and
listed on Schedule 1 hereto.

                 "Insurance Agreement" shall mean the Insurance and
Reimbursement Agreement dated as of May 1, 1996 among Revolving, the Master
Servicer, the Trustee and Capital Markets Assurance Corporation or any
agreement among Revolving, the Master Servicer, the Trustee and a successor to
Capital Markets Assurance Corporation as contemplated by Section 4.03 of the
Pooling and Servicing Agreement.

                 "Mortgage Loans " shall mean collectively, the Initial
Mortgage Loans, the Subsequent Funding Mortgage Loans and any Eligible
Substitute Mortgage Loans.

                 "Pool Date" shall mean, for the Initial Mortgage Loans, the
close of the last billing cycle for such loans immediately prior to November 1,
1996.

                 "Pooling and Servicing Agreement" shall mean the Pooling and
Servicing Agreement dated as of the date hereof among Household Finance
Corporation, as Master Servicer, Revolving, and the Trustee, and all amendments
thereto.

                 "Portfolio Reassignment Price" shall mean the amount payable
by Revolving to the Trustee pursuant to Sections 2.02 and 2.04 of the Pooling
and Servicing Agreement as set forth in Section 6.2 hereof.

                 "Purchased Assets" shall have the meaning set forth in Section
2.1(a).

                 "Purchase Price" shall have the meaning set forth in Section
3.1.





                                       3
<PAGE>   7

                 "Related Documents" shall have the meaning set forth in
Section 2.1(a).

                 "Repurchase Price" shall have the meaning set forth in Section
6.1(b).

                 "Revolving" shall mean HFC Revolving Corporation, a Delaware
corporation.

                 "Sellers" shall have the meaning set forth in the preamble.

                 "Settlement Statement" shall mean a document substantially in
the form of Exhibit A hereto.

                 "Subsequent Funding Mortgage Loans"  shall mean, to the extent
of the availability thereof, the aggregate unpaid principal balance of those
loans designated by the Master Servicer made under certain Credit Line
Agreements as of their Cut-Off Date to be conveyed to Revolving on any
Distribution Date during the Funding Period pursuant to this Agreement.

                 "Transfer Agreement" shall mean the Transfer Agreement dated
as of the date hereof with respect to the Transferred Assets among the Sellers
and the Trustee, and all amendments thereto.

                 "Transferred Assets" shall mean all rights relating to the
Mortgage Loans other than the rights conveyed to Revolving pursuant to this
Agreement.

                 "Trust" shall mean the trust created by the Pooling and
Servicing Agreement.

                 "Trustee" shall mean The First National Bank of Chicago, a
national banking corporation, the institution executing the Pooling and
Servicing Agreement as, and acting in the capacity of, Trustee thereunder, or
its successor in interest, or any successor trustee appointed as provided in
the Pooling and Servicing Agreement.

                 Section 1.2.  Other Definitional Provisions.  (a)  All terms
defined in this Agreement shall have the same meanings defined when used in any
certificate, other document, or Conveyance Paper made or delivered pursuant
hereto unless otherwise defined therein.

                 (b)      The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement or any Conveyance Paper
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement; and Section, Subsection, Schedule and Exhibit references
contained in this





                                       4
<PAGE>   8

Agreement are references to Sections, Subsections, Schedules and Exhibits in or
to this Agreement unless otherwise specified.

                 (c)  All determinations of the principal or finance charge
balance of Mortgage Loans, and of any collections thereof, shall be made in
accordance with the Pooling and Servicing Agreement.


                                   ARTICLE II

                    PURCHASE AND CONVEYANCE OF LOAN BALANCES

         Section 2.1.  Purchase.  (a)  Each Seller does hereby sell, transfer,
assign, set over and otherwise convey to Revolving, without recourse, all of
its right, title and interest in, to and under (i) the Initial Mortgage Loans,
and (ii) all monies due and/ or to become due and all amounts hereafter
received with respect thereto (including, without limitation, all Principal
Collections and Interest Collections thereon) and all proceeds (including,
without limitation, "proceeds" as defined in Article 9 of the UCC as in effect
in the State of Illinois) thereof and all insurance proceeds related thereto.
Each Seller does hereby further agree that on each Distribution Date of the
Funding Period, upon the request of Buyer it shall, to the extent of the
availability thereof and to the extent of funds available from Principal
Collections on deposit in the Funding Account, sell, transfer, assign, set over
and otherwise convey to Revolving, without recourse, all of its right, title
and interest in, to and under (x) the Subsequent Funding Mortgage Loans and (y)
all monies due and/or to become due and all amounts thereafter received with
respect thereto (including, without limitation, all Principal Collections and
Interest Collections thereon) and all proceeds (including, without limitation,
"proceeds" as defined in Article 9 of the UCC as in effect in the State of
Illinois) thereof and all insurance proceeds related thereto. Each Seller also
agrees that it shall, upon the request of Revolving, to the extent of the
availability thereof, sell, transfer, assign, set over and otherwise convey to
Revolving, without recourse, all of its right, title and interest in, to and
under (1) the Eligible Substitute Mortgage Loans and (2) all monies due and/or
to become due and all amounts thereafter received with respect thereto
(including, without limitation, all Principal Collections and Interest
Collections thereon) and all proceeds (including, without limitation, all
"proceeds" as defined in Article 9 of the UCC as in effect in the State of
Illinois) thereof and all insurance proceeds related thereto. In addition, each
Seller shall sell, transfer, assign, set over and otherwise convey to
Revolving, without recourse, all of its right, title and interest in, to and
under (A) the applicable Additional Loan Balances existing as of the
immediately preceding Business Day which have not previously been so conveyed
to Revolving and (B)  all monies due and or to become due and all amounts
hereafter





                                       5
<PAGE>   9

received with respect thereto (including, without limitation, all Principal
Collections and Interest Collections thereon) and all proceeds (including,
without limitation, "proceeds" as defined in Article 9 of the UCC as in effect
in the State of Illinois) thereof and all insurance proceeds related thereto.
All of the assets and rights transferred and to be transferred pursuant to this
Section 2.1(a) are hereinafter referred to collectively as the "Purchased
Assets" and the sales, transfers, assignments and conveyances of the Purchased
Assets contemplated by this Section 2.1(a) are hereinafter referred to
collectively as the "Conveyance".  The Purchased Assets shall not include any
right to enforce payment of the Credit Line Agreements, Mortgages and other
instruments, documents and agreements relating to the Mortgage Loans (the
"Related Documents").

                 (b) In further consideration of the Purchase Price set forth
in Section 3.1, each Seller hereby agrees to assign to the Trustee all of its
right, title and interest in and to the Credit Line Agreements and the
Mortgages securing the Mortgage Loans, and all other Related Documents pursuant
to the terms of the Transfer Agreement, except that each Seller shall retain
the obligation to fund the Initial Mortgage Loans, Subsequent Funding Mortgage
Loans, any Eligible Substitute Mortgage Loans and any Additional Loan Balances
and shall have an interest in the Credit Line Agreements to the extent of any
of the Initial Mortgage Loans, Subsequent Funding Mortgage Loans, Eligible
Substitute Mortgage Loans and Additional Loan Balances until, in each case,
purchased by Revolving.

                 (c) In connection with the Conveyance and in compliance with
the Transfer Agreement, each Seller agrees and confirms that it is entitled to
retain possession of the applicable Credit Line Agreements, Mortgages and other
Related Documents as long as the long-term senior unsecured debt of Household
Finance Corporation is rated at least A- by Standard & Poor's Ratings Service
and A3 by Moody's Investors Service, Inc.   In the event that HFC's long-term
senior unsecured debt rating does not satisfy the standards specified in the
immediately preceding sentence, each Seller will deliver the Related Documents
pertaining to each Mortgage Loan to the Trustee.  Similarly, each Seller hereby
acknowledges that in the event that any loss is suffered by the Trust in
respect of a Mortgage Loan purchased by Revolving as a result of such Seller's
retention of such Related Documents, such Seller will repurchase such Mortgage
Loan from Revolving simultaneously on or immediately after Revolving
repurchases such Mortgage Loans from the Trust in accordance with the terms of
the Pooling and Servicing Agreement.


                 (d)  In connection with such Conveyance, each Seller agrees
(i) to record and file, at its own expense, any financing statement (and
continuation statements with respect to such financing statements when
applicable) with respect to the Mortgage Loans now existing and hereafter
created, meeting the requirements





                                       6
<PAGE>   10

of applicable state law in such manner and in such jurisdictions as are
necessary to perfect, and maintain perfection of, the Conveyance of such
Purchased Assets from such Seller to Revolving, (ii) such financing statement
shall name the appropriate Seller, as seller, and Revolving, as purchaser, of
the Purchased Assets and (iii) to deliver a file-stamped copy of such financing
statements or other evidence of such filings (excluding such continuation
statements, which shall be delivered as filed) to Revolving (or to the Trustee,
if Revolving so directs) promptly upon the Closing Date with respect to the
Mortgage Loans.

                 (e)  In connection with such Conveyance and in connection with
each Seller's transfers under the Transfer Agreement, each Seller further
agrees that it will, at its own expense, on or prior to the Closing Date with
respect to the Initial Mortgage Loans and on or prior to the applicable
Addition Date with respect to the Subsequent Funding Mortgage Loans or any
Eligible Substitute Mortgage Loans (i) indicate in its or its agent's computer
files or microfiche lists that the applicable Credit Line Agreements and
Mortgages have been sold to the Trustee pursuant to the Transfer Agreement and
the Mortgage Loans listed in an applicable Schedule to this Agreement have been
conveyed to Revolving in accordance with this Agreement and that such Mortgage
Loans will be further conveyed by Revolving to the Trustee pursuant to the
Pooling and Servicing Agreement for the benefit of the Certificateholders by
including an appropriate code for such Mortgage Loans in such computer file and
microfiche list and (ii) deliver to Revolving (or to the Trustee, if Revolving
so directs) a computer file or microfiche list containing a true and complete
list of all such Mortgage Loans specifying for each such Mortgage Loan, as of
the applicable Cut-Off Date (a) the account number, (b) the aggregate unpaid
principal amount thereof, (c) the aggregate accrued and unpaid interest
thereon,  (d) the Credit Limit, (e) the applicable margin, if any, used to
compute the Loan Rate and (f) the Maximum Loan Rate.  Such computer file or
microfiche list shall be marked as a Schedule to this Agreement, shall be
delivered to Revolving (or to the Trustee, if so directed by Revolving) as
proprietary and confidential, and is hereby incorporated into and made a part
of this Agreement.  Each Seller further agrees to make the same indications in
its or its agent's computer files and the same deliveries to the Trustee as set
forth in clauses (i) and (ii) of this Section 2.1(e) with respect to Additional
Loan Balances purchased by Revolving and transferred to the Trustee and agrees
not to alter the code referenced in clause (i) of this paragraph with respect
to any of the Mortgage Loans purchased by Revolving during the term of this
Agreement unless and until the related Mortgage Loans have been reconveyed to
the appropriate Seller.  In connection with such Conveyance, the Sellers also
confirm that the total principal amount of the Initial Mortgage Loans as of the
Pool Date to be conveyed hereunder on the Closing Date is $796,280,720.37.





                                       7
<PAGE>   11

                 (f)  The parties hereto intend that the conveyance to
Revolving of each Sellers's right, title and interest in and to the Mortgage
Loans, and the Additional Loan Balances when transferred, shall constitute an
absolute sale, conveying good title free and clear of any liens, claims,
encumbrances or right of others from the Sellers to Revolving and that the
Purchased Assets shall not be part of the applicable Seller's estate in the
event of the insolvency of such Seller or a conservatorship, receivership or
similar event with respect thereto.


                                  ARTICLE III

                           CONSIDERATION AND PAYMENT

                 Section 3.1.  Purchase Price.  The Purchase Price for the
Initial Mortgage Loans conveyed to Revolving under this Agreement shall be
payable on the Closing Date and shall be an amount equal to $796,280,720.37
(which is equal to 100% of the principal amount of such Initial Mortgage Loans)
plus an amount which is equal to the aggregate amount of accrued and unpaid
interest on the Initial Mortgage Loans plus a premium equal to the present
value of the aggregate anticipated excess spread on such Initial Mortgage Loans
less the applicable servicing fees, cost of funds, credit enhancement fees and
expected losses (calculated on an historical basis), on a discounted basis
calculated as of the Closing Date.  This computation of initial purchase price
assumes no reinvestment in Additional Loan Balances.  The Purchase Price for
any Subsequent Funding Mortgage Loans, Eligible Substitute Mortgage Loans and
Additional Loan Balances, as applicable, conveyed to Revolving under this
Agreement shall be payable as of the date of the purchase thereof by Revolving
for a price, in each case, equal to the aggregate principal amount of such
Subsequent Funding Mortgage Loans, Eligible Substitute Mortgage Loans and
Additional Loan Balances, as applicable, so conveyed plus the aggregate amount
of accrued and unpaid interest thereon plus a premium equal to the present
value of the aggregate anticipated excess spread on such Subsequent Funding
Mortgage Loans, Eligible Substitute Mortgage Loans and Additional Loan
Balances, as applicable, less the applicable servicing fees, cost of funds,
credit enhancement fees and expected losses (calculated on an historical
basis), on a discounted basis, calculated as of the Addition Date or the date
on which sold to Revolving, as applicable, with respect thereto; provided, that
in no event will the Purchase Price for the Subsequent Funding Mortgage Loans
exceed the sum of all Principal Collections deposited to the Funding Account
during the Funding Period.

                 Section 3.2.  Settlement.  On each Distribution Date, each
Seller shall deliver to Revolving a Settlement Statement in substantially the
form of Exhibit A, showing the aggregate Purchase Price of the Additional Loan
Balances, as applicable, conveyed by





                                       8
<PAGE>   12

such Seller to Revolving during the previous Collection Period, the aggregate
Repurchase Price of Mortgage Loans repurchased by such Seller during such
Collection Period, if any, and the amount of Mortgage Loans outstanding during
such Collection Period; provided, that on each Distribution Date during the
Funding Period, each Seller shall include in such Settlement Statement the
aggregate Purchase Price for any Subsequent Funding Mortgage Loans purchased on
such Distribution Date; provided, further, that on the Distribution Date
following the conveyance to Revolving of any Eligible Substitute Mortgage Loans
to Revolving, each Seller shall include in such Settlement Statement the
aggregate Purchase Price for its Eligible Substitute Mortgage Loans.


                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

                 Section 4.1.  Sellers Representations and Warranties.  Each
Seller, severally and not jointly, hereby represents and warrants to, and
agrees with, Revolving as of the Closing Date and on each Addition Date, that:

                  (a)  Organization and Good Standing of Sellers.  It is a
corporation duly organized, validly existing and in good standing under the
laws of the State of its incorporation and has, in all material respects, full
power and authority to own its properties and conduct its business as such
properties are presently owned and such business is presently conducted, and to
execute, deliver and perform its obligations under this Agreement and the
Transfer Agreement and when this Agreement and the Transfer Agreement have been
executed and delivered, this Agreement and the Transfer Agreement will
constitute the legal, valid and binding obligation of such Seller enforceable
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights generally and by the availability of equitable remedies (whether in a
proceeding at law or in equity).

                  (b)  Due Qualification.  It is duly qualified to do business
and is in good standing as a foreign corporation (or is exempt from such
requirements) and has obtained all necessary licenses and approvals, in each
jurisdiction in which failure to so qualify or to obtain such licenses and
approvals would render any Credit Line Agreement relating to any Mortgage Loan
unenforceable by it, Revolving or the Trustee and would have a material adverse
effect on its business, properties, assets or condition (financial or other).

                 (c)  Due Authorization.  The execution, delivery and
performance of this Agreement, the Transfer Agreement and any other document or
instrument delivered pursuant hereto or thereto (such





                                       9
<PAGE>   13

other documents or instruments, collectively, the "Conveyance Papers") and the
consummation of the transactions provided for in this Agreement or any other
Conveyance Papers have been duly authorized by all necessary corporate action
on its part.

                 (d)  No Conflict.  Its execution and delivery of this
Agreement, the Transfer Agreement and the Conveyance Papers, the performance of
the transactions contemplated by this Agreement, the Transfer Agreement and the
Conveyance Papers, and the fulfillment of the terms of this Agreement, the
Transfer Agreement and the Conveyance Papers applicable to it will not violate
any existing law or regulation or any order or decree of any court applicable
to it or any provision of its certificate of incorporation or bylaws, or
constitute (with or without notice or lapse of time or both) a material default
under, any indenture, contract, agreement, mortgage, deed of trust, or other
instrument to which it is a party or by which it or any of its properties are
bound.

                 (e)      No Violation.  The execution, delivery and
performance of this Agreement, the Transfer Agreement and the Conveyance Papers
and the fulfillment of the terms contemplated herein and therein applicable to
it will materially comply with currently existing applicable laws.

                 (f)  No Proceedings.  There are no proceedings or
investigations pending or, to the best of its knowledge, threatened against it,
before any court, regulatory body, administrative agency or other tribunal or
governmental instrumentality (i) asserting the invalidity of this Agreement,
the Transfer Agreement or the Conveyance Papers, (ii) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement, the
Transfer Agreement or the Conveyance Papers, (iii) seeking any determination or
ruling that, in its judgment, has a reasonable likelihood of resulting in a
material adverse effect on the transactions contemplated by this Agreement, the
Transfer Agreement or the Conveyance Papers, (iv) seeking any determination or
ruling that would materially and adversely affect the validity or enforcement
of this Agreement, the Transfer Agreement or the Conveyance Papers or (v)
seeking to affect adversely the income tax attributes of the Trust under United
States Federal or Illinois income tax systems.

                 (g)      All Consents.  All authorizations, consents, orders
or approvals of any court or other governmental authority required to be
obtained by it in connection with the execution and delivery of this Agreement,
the Transfer Agreement or the Conveyance Papers and the performance of the
transactions contemplated by this Agreement, the Transfer Agreement or the
Conveyance Papers have been obtained.

                 The representations and warranties set forth in this Section
4.1 shall survive the transfer and assignment of the





                                       10
<PAGE>   14

Mortgage Loans to Revolving and the transfer of the remaining right, title and
interest under the Mortgage Loans to the Trustee under the Transfer Agreement.
Upon discovery by any of the Sellers or Revolving of a breach of any of the
foregoing representations and warranties, the party discovering such breach
shall give written notice to the other parties within three Business Days
following such discovery.

                 Section 4.2.  Representations and Warranties of the Sellers
Relating to the Agreement and the Mortgage Loans.

                 (a)  Representations and Warranties.  Each Seller (referred to
individually in this Section 4.2 as "the Seller") hereby, severally and not
jointly, represents and warrants to Revolving as of the respective Cut-Off Date
with respect to each Mortgage Loan it sells (and to the extent expressly stated
below at such other time) that, as to such Mortgage Loan:

                 (i)  This Agreement constitutes a legal, valid and binding
         obligation of the Seller, enforceable against the Seller in accordance
         with its terms, except as enforceability may be limited by applicable
         bankruptcy, insolvency, reorganization, moratorium or other similar
         laws now or hereafter in effect affecting the enforcement of
         creditors' rights in general and except as such enforceability may be
         limited by general principles of equity (whether considered in a
         proceeding at law or in equity);

                 (ii)  This Agreement constitutes a valid transfer and
         assignment to Revolving of all right, title and interest of the Seller
         in and to the applicable Mortgage Loans, all monies due or to become
         due with respect thereto, and all proceeds of such Mortgage Loans and
         all other property specified in the definition of "Purchased Assets"
         relating to such Mortgage Loans, and upon payment for the Additional
         Loan Balances, will constitute a valid transfer and assignment to
         Revolving of all right, title and interest of the Seller in and to the
         Additional Loan Balances, all monies due or to become due with respect
         thereto, and all proceeds thereof and all other property specified in
         the definition of "Purchased Assets" relating to such Additional Loan
         Balances;

                 (iii)  As of the Closing Date with respect to the Initial
         Mortgage Loans, Schedule 1 to this Agreement; as of the applicable
         Addition Date with respect to the Subsequent Funding Mortgage Loans
         and any Eligible Substitute Mortgage Loans, Schedule 2 to this
         Agreement; and, as of the date any Additional Loan Balance is created,
         the related computer file or microfiche list referred to in Section
         2.1(e), are true, accurate and complete listings in all material
         respects of all such Mortgage Loans and Additional Loan Balances, and
         the information contained therein with respect to the identity of





                                       11
<PAGE>   15

         such Mortgage Loans is true and correct in all material respects.  As
         of the Pool Date with respect to the Initial Mortgage Loans sold to
         Revolving by the Sellers, the aggregate principal amount of such
         Initial Mortgage Loans transferred to Revolving which are to be
         subsequently transferred to the Trust was $796,280,720.37;

                 (iv)  The applicable Mortgage Loans as of their respective
         Cut-Off Dates have not been assigned or pledged, and the Seller has
         good and marketable title thereto, and the Seller is the sole owner
         and holder of such Mortgage Loans free and clear of any and all liens,
         claims, encumbrances, participation interests, equities, pledges,
         charges or security interests of any nature and has full right and
         authority, under all governmental and regulatory bodies having
         jurisdiction over the ownership of the applicable Mortgage Loans, to
         sell, assign or transfer the same pursuant to this Agreement.

                 (v)  Except for the Seller's assignment of the Transferred
         Assets to the Trustee pursuant to the Transfer Agreement, the related
         Credit Line Agreement and the Mortgage with respect to each Mortgage
         Loan have not been assigned or pledged, and the Seller has good and
         marketable title thereto, and the Seller is the sole owner and holder
         of the Mortgage Loans free and clear of any and all liens, claims,
         encumbrances, participation interests, equities, pledges, charges or
         security interests of any nature and has full right and authority,
         under all governmental and regulatory bodies having jurisdiction over
         the ownership of the applicable Mortgage Loans, to sell and assign the
         same pursuant to this Agreement and the Transfer Agreement;

                 (vi)  As to each Seller's Mortgage Loans, the related Mortgage
         is a valid and subsisting first, second or third lien on the property
         therein described, and as of the applicable Cut-Off Date the related
         Mortgaged Property is free and clear of all encumbrances and liens
         having priority over the first, second or third lien of such Mortgage,
         as applicable, except for liens for (i) the real estate taxes and
         special assessments not yet delinquent; (ii) any first and, if
         applicable, second mortgage loan secured by such Mortgaged Property;
         (iii) covenants, conditions and restrictions, rights of way, easements
         and other matters of public record as of the date of recording of such
         Mortgages, which are acceptable to mortgage lending institutions
         generally, and (iv) other matters to which like properties are
         commonly subject which do not materially interfere with the benefits
         of the security intended to be provided by such Mortgage;

                 (vii)  As of the Closing Date with respect to the Initial
         Mortgage Loans, and the applicable Addition Date on which the





                                       12
<PAGE>   16

         Subsequent Funding Mortgage Loans or any Eligible Substitute Mortgage
         Loans are sold, to the best knowledge of the Seller, there is no valid
         offset, defense or counterclaim of any obligor under any Credit Line
         Agreement or Mortgage;

                 (viii)  To the best knowledge of the Seller, as of the Closing
         Date with respect to the Initial Mortgage Loans, and the applicable
         Addition Date on which the Subsequent Funding Mortgage Loans or any
         Eligible Substitute Mortgage Loans are sold, there is no delinquent
         recording or other tax or fee or assessment lien against any related
         Mortgage Property;

                 (ix)  As of the Closing Date with respect to the Initial
         Mortgage Loans and the applicable Addition Date on which Subsequent
         Funding Mortgage Loans or any Eligible Substitute Mortgage Loans are
         sold, to the Seller's knowledge, there is no proceeding pending or
         threatened for the total or partial condemnation of the related
         Mortgaged Property, and such property is free of material damage and
         is in good repair;

                 (x)  As of the Closing Date with respect to the Initial
         Mortgage Loans and the applicable Addition Date on which Subsequent
         Funding Mortgage Loans or any Eligible Substitute Mortgage Loans are
         sold, there are no mechanics' or similar liens or claims which have
         been filed for work, labor or material affecting the related Mortgaged
         Property which are, or may be, liens prior or equal to, the lien of
         the related Mortgage, except liens which are fully insured against by
         the title insurance policy referred to in clause (xii);

                 (xi)  As to each of the Seller's Mortgage Loans, the related
         Credit Line Agreement and the related Mortgage at the time they were
         made complied in all material respects with applicable state and
         federal laws including, without limitation, usury, truth-in-lending,
         real estate settlement procedures, consumer credit protection, equal
         credit opportunity or disclosure laws applicable to such Mortgage
         Loan;

                 (xii)  A lender's title insurance policy or binder was issued
         on the date of origination of each of the Seller's Initial Mortgage
         Loans, Subsequent Funding Mortgage Loans and any Eligible Substitute
         Mortgage Loans with a Credit Limit of $50,000 or more (excluding such
         Mortgage Loans originated in New Jersey for the period beginning
         January 1, 1986 and ending April 30, 1987), and each such policy is
         valid and remains in full force and effect, and a title search or
         other assurance of title customary in the relevant jurisdiction was
         obtained with respect to each such Mortgage Loan as to which no title
         insurance policy or binder was issued;





                                       13
<PAGE>   17

                 (xiii)   No selection procedure reasonably believed by the
         Seller to be adverse to the interests of the Certificateholders or the
         Certificate Insurer was utilized in selecting the Initial Mortgage
         Loans, Subsequent Funding Mortgage Loans or any Eligible Substitute
         Mortgage Loans, as applicable, transferred hereunder;

                 (xiv)  The Seller has transferred Mortgage Loans with any
         intent to hinder, delay or defraud any of its creditors;

                 (xv)  The Minimum Monthly Payment with respect to any Mortgage
         Loan is not less than the interest accrued at the applicable Loan Rate
         on the average daily Trust Balance during the interest period relating
         to the date on which such Minimum Monthly Payment is due;

                 (xvi)  Within 15 days of the Closing Date with respect to the
         Initial Mortgage Loans and, to the extent not already included n such
         filing with respect to the Initial Mortgage Loans, the applicable
         Addition Date with respect to the Subsequent Funding Mortgage Loans
         and any Eligible Mortgage Loan, each Seller will file UCC-1 financing
         statements in accordance with Section 2.1 hereof;

                 (xvii)  To the best knowledge of the Seller, as of the Closing
         Date with respect to the Initial Mortgage Loans and the applicable
         Addition Date on which the Subsequent Funding Mortgage Loans or any
         Eligible Substitute Mortgage Loans are sold, the physical property
         constituting the Mortgaged Property subject to each related Mortgage
         Loan is free of material damage and is in good repair;

                 (xviii)  None of the Mortgaged Properties is a mobile home or
         a manufactured housing unit that is not permanently attached to its
         foundation;

                 (xix)  As of the applicable Cut-Off Date for the Mortgage
         Loans, no Minimum Monthly Payment is more than 89 days delinquent
         (measured on a contractual basis) and with respect to the Initial
         Mortgage Loans as of the Pool Date no more than 4.80% (by Cut-Off Date
         Pool Balance) were 30 - 59 days delinquent (measured on a contractual
         basis) and no more than 0.93% (by Cut-Off Date Pool Balance) were 60 -
         89 days delinquent (measured on a contractual basis);

                 (xx)  For each Mortgage Loan, the related Mortgage File
         contains each of the documents and instruments specified to be
         included therein (including with respect to the Initial Mortgage
         Loans, an appraisal, which may be an appraisal prepared using a
         statistical data base);





                                       14
<PAGE>   18

                 (xxi)  As of the Pool Date for the Initial Mortgage Loans no
         more than ____% of such Mortgage Loans, by aggregate principal
         balance, are secured by Mortgaged Properties located in one United
         States postal zip code and no more than ____% of such Mortgage Loans,
         by aggregate principal balance, are secured by Mortgaged Properties
         located in planned unit developments;

                 (xxii)  As of the applicable Cut-Off Date, (i) the Combined
         Loan-to-Value Ratio for each Mortgage Loan was not in excess of ____%
         and (ii) not more than 14.23% of the Initial Mortgage Loans by
         aggregate principal balance as of the Pool Date exceeds the applicable
         Credit Limit by up to 10%;

                 (xxiii)  No Initial Mortgage Loan had an original term to
         maturity in excess of 180 months.  The weighted average remaining term
         to maturity of the Initial Mortgage Loans on a contractual basis as of
         the Pool Date for the Initial Mortgage Loans is approximately 145
         months.  For the Mortgage Loans having adjustable Loan Rates, which,
         in the case of the Initial Mortgage Loans, comprise approximately
         61.97% of the Initial Mortgage Loans by aggregate principal balance as
         of the Pool Date, on each date that the Loan Rates have been adjusted,
         such adjustments were made in compliance with the related Mortgage and
         Mortgage Note and applicable law.  Over the term of any such Mortgage
         Loan, the Loan Rate may not exceed the related Maximum Loan Rate, if
         any.  The Initial Mortgage Loans have minimum Loan Rates which range
         between 0.00% and ____%.  The Margins for the Initial Mortgage Loans
         having adjustable Loan Rates range between 0.00% and ____%, and the
         weighted average Margin for such Mortgage Loans is approximately ____%
         as of the Pool Date.  As of the Pool Date for the Initial Mortgage
         Loans, the Loan Rates on such Initial Mortgage Loans range between
         ____% and ____% and the weighted average Loan Rate is approximately
         ____%;

                 (xxiv)  Each Mortgaged Property consists of a single parcel of
         real property with a one-to-four unit single family residence erected
         thereon, or an individual condominium unit, planned unit development
         unit or townhouse, generally approvable by FNMA.  With respect to the
         aggregate principal balance of all Initial Mortgage Loans as of the
         Pool Date, (a) no more than 9.33% (by aggregate principal balance as
         of such date) of the Initial Mortgage Loans are secured by real
         property improved by individual condominium units, planned development
         units, townhouses or two-to-four family residences erected thereon,
         and (b) at least 90.67% (by aggregate principal balance as of such
         date) of the Initial Mortgage Loans are secured by real property with
         a detached one-family residence erected thereon;





                                       15
<PAGE>   19

                 (xxv)  As of the Pool Date, the Credit Limits on the Initial
         Mortgage Loans range between approximately $____ and $____ with an
         average of $____.  As of the Pool Date, no Initial Mortgage Loan had a
         principal balance in excess of approximately $____ and the average
         principal balance of the Initial Mortgage Loans is equal to
         approximately ____% of their average Credit Limit;

                 (xxvi)  Approximately 29.62% and 70.02% of the Initial
         Mortgage Loans, by aggregate principal balance as of the Pool Date,
         are first and second liens, respectively, and the remainder of the
         Initial Mortgage Loans are third liens;

                 (xxvii)  As of the Closing Date with respect to the Initial
         Mortgage Loans and the applicable Addition Date with respect to the
         Subsequent Funding Mortgage Loans and any Eligible Substitute Mortgage
         Loans, the Seller has not received a notice of default of any senior
         mortgage loan related to a Mortgaged Property which has not been cured
         by a party other than the Seller;

                 (xxviii)  None of the Mortgage Loans is a reverse mortgage
         loan or included in the "Ever Yours" program;

                 (xxix)  Each Credit Line Agreement and each Mortgage is in
         substantially the form previously provided to Revolving by the Seller
         and each Mortgage Loan is an enforceable obligation of the related
         Mortgagor;

                 (xxx)  The definition of Prime Rate or auction average six
         month U.S. Treasury Bills rate, as the case may be, in each Credit
         Line Agreement relating to a Mortgage Loan that has an adjustable Loan
         Rate does not differ materially from the definition in the form of
         loan agreement previously provided to Revolving and referred to in
         clause (xxix) above;

                 (xxxi)  As of the Addition Date with respect to any Eligible
         Substitute Mortgage Loan, no Eligible Substitute Mortgage Loan is more
         than 89 days delinquent; and

                 (xxxii)  As of the Addition Date with respect to any
         Subsequent Funding Mortgage Loans, the following requirements with
         respect to such Loan shall have been satisfied:  (i) the remaining
         term to maturity of each Subsequent Funding Mortgage Loan may not
         exceed 180 months; (ii) the Subsequent Funding Mortgage Loans will
         have a weighted average Margin of at least ____% (iii) the Subsequent
         Funding Mortgage Loans will have a weighted average Combined
         Loan-to-Value Ratio of not more than ____%; (iv) no Subsequent Funding
         Mortgage Loan will have a Loan Balance in excess of $500,000; (v) no
         less than ____% of the Subsequent Funding Mortgage Loans (by aggregate
         Cut-Off Date Trust Balance with respect to the Subsequent Funding





                                       16
<PAGE>   20

         Mortgage Loans) are first liens; and (vi) at least ____% of all of the
         Subsequent Funding Mortgage Loans (by aggregate Cut-Off Date Trust
         Balance with respect to the Subsequent Funding Mortgage Loans) are not
         more than 30 days delinquent (on a contractual basis) in the payment
         of a minimum Monthly Payment as of the Cut-Off Date for the Subsequent
         Funding Mortgage Loans.

                 (b)  Notice of Breach.  The representations and warranties set
forth in this Section 4.2 shall survive the transfer and assignment of the
Purchased Assets to Revolving.  Upon discovery by either the Sellers or
Revolving of a breach of any of the representations and warranties set forth in
this Section 4.2 (without regard to any limitation set forth therein concerning
the knowledge of any Seller as to the facts stated therein), the party
discovering such breach shall give written notice to the other party within
three Business Days following such discovery.  The Sellers hereby acknowledge
that Revolving intends to rely on the representations hereunder in connection
with representations made by Revolving to secured parties, assignees or
subsequent transferees including but not limited to transfers made by Revolving
to the Trust pursuant to the Pooling and Servicing Agreement.

                 Section 4.3.  Representations and Warranties of Revolving.  As
of the Closing Date and as of the Addition Date on which Revolving acquires the
Subsequent Funding Mortgage Loans and Eligible Substitute Mortgage Loans, if
any, Revolving hereby represents and warrants to, and agrees with, the Sellers
that:

                 (a)  Organization and Good Standing.  Revolving is a
corporation duly organized and validly existing under the laws of the State of
Delaware and has, in all material respects, full power and authority to own its
properties and conduct its business as such properties are presently owned and
such business is presently conducted and to execute, deliver, and perform its
obligations under this Agreement and the Conveyance Papers.

                 (b)  Due Authorization.  The execution and delivery of this
Agreement and the Conveyance Papers and the consummation of the transactions
provided for in this Agreement and the Conveyance Papers have been duly
authorized by Revolving by all necessary corporate action on the part of
Revolving.

                 (c)  No Conflict.  The execution and delivery of this
Agreement and the Conveyance Papers, the performance of the transactions
contemplated by this Agreement and the Conveyance Papers, and the fulfillment
of the terms hereof or thereof, will not conflict with, result in any breach of
any of the material terms and provisions of, or constitute (with or without
notice or lapse of time or both) a material default under, any indenture,





                                       17
<PAGE>   21

contract, agreement, mortgage, deed of trust or other instrument to which
Revolving is a party or by which it or its properties is bound.

                 (d)      No Violation.  The execution, delivery and
performance of this Agreement and the Conveyance Papers and the fulfillment of
the terms contemplated herein and therein applicable to Revolving will
materially comply with currently existing state or federal laws applicable to
Revolving.

                 (e)  No Proceedings.  There are no proceedings or
investigations pending or, to the best knowledge of Revolving, threatened
against Revolving, before any court, regulatory body, administrative agency, or
other tribunal or governmental instrumentality, (i) asserting the invalidity of
this Agreement or the Conveyance Papers, (ii) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement or the
Conveyance Papers, (iii) seeking any determination or ruling that, in the
reasonable judgment of Revolving, would materially and adversely affect the
performance by Revolving of its obligations under this Agreement or the
Conveyance Papers, or (iv) seeking any determination or ruling that would
materially and adversely affect the validity or enforceability of this
Agreement or the Conveyance Papers.

                 (f)  All Consents.  All authorizations, consents, orders or
approvals of any court or other governmental authority required to be obtained
by Revolving in connection with the execution and delivery of this Agreement
and the Conveyance Papers and the performance of the transactions contemplated
by this Agreement and the Conveyance Papers or the fulfillment of the terms of
this Agreement and the Conveyance Papers have been obtained.

                 The representations and warranties set forth in this Article
IV shall survive the Conveyance of the Mortgage Loans to Revolving and
termination of the rights and obligations of Revolving and the Sellers under
this Agreement.  Upon discovery by Revolving or the Sellers of a breach of any
of the foregoing representations and warranties, the party discovering such
breach shall give prompt written notice to the others.


                                   ARTICLE V

                            COVENANTS OF THE SELLERS

                 Section 5.1.  Sellers Covenants.  Each of the Sellers hereby
covenants and agrees with Revolving as follows:

                 (a)  Security Interests.  Except for the conveyances hereunder
and to the Trustee pursuant to the Transfer Agreement and subject to the
transactions permitted pursuant to Section 9.5





                                       18
<PAGE>   22

hereof, such Seller will not sell, pledge, assign or transfer to any other
Person, or grant, create, incur, assume or suffer to exist any Lien on any
Mortgage Loan or the Purchased Assets, whether now existing or hereafter
created, or any interest therein, and such Seller, at its expense, shall defend
the right, title and interest of Revolving in, to and under the Purchased
Assets, whether now existing or hereafter created, against all claims of third
parties claiming through or under Revolving or such Seller; provided, however,
that nothing in this Section 5.1(a) shall prevent or be deemed to prohibit such
Seller from suffering to exist upon any of the applicable Mortgage Loans any
Liens for municipal or other governmental charges if such taxes or governmental
charges shall not at the time be due and payable or if such Seller shall
currently be contesting the validity thereof in good faith by appropriate
proceedings and shall have set aside on its books adequate reserves with
respect thereto.

                 (b)  Delivery of Collections or Recoveries.  In the event that
any of the Sellers receives Interest Collections or Principal Collections, the
applicable Seller agrees to pay to Revolving (or to the Master Servicer if
Revolving so directs) all such Collections as soon as practicable after receipt
thereof.

                 (c)  Notice of Liens.  Each of the Sellers shall notify
Revolving promptly after becoming aware of any Lien on any Mortgage Loan or the
Purchased Assets other than the conveyances hereunder or pursuant to the
Transfer Agreement or the Pooling and Servicing Agreement.

                 (d)  Credit Line Agreements and Guidelines.  Subject to
compliance with all applicable laws and Section 3.01 of the Pooling and
Servicing Agreement, the Seller may change the terms and provisions of its
respective Credit Line Agreements in any respect (including, without
limitation, the calculation of the amount or the timing of charge-offs and the
finance charges to be assessed on advances made thereunder) as long as such
changes have been permitted by the Certificate Insurer (unless a Credit
Enhancer Default has occurred and is continuing), the Seller determines that
such changes are necessary and such changes will not have a material adverse
effect on the interests of the Certificateholders, the Certificate Insurer or
the Trust.  Notwithstanding the foregoing, the Seller may make changes to the
terms and conditions of its respective Credit Line Agreements that will have a
material adverse effect on the interests of the Certificateholders provided
that the Seller repurchases such Credit Line Agreement and related Mortgage
Loans prior to the effectiveness of any such changes.





                                       19
<PAGE>   23

                                   ARTICLE VI

                             REPURCHASE OBLIGATION

                 Section 6.1.  Reassignment of Ineligible Mortgage Loans.  (a)
In the event any representation or warranty under Section 4.2 is not true and
correct in any material respect as of the date specified therein and as a
result of such breach Revolving is required to accept reassignment of Defective
Mortgage Loans pursuant to Section 2.02 of the Pooling and Servicing Agreement,
the applicable Seller shall accept reassignment of Revolving's interest in the
applicable Defective Mortgage Loans on the terms and conditions set forth in
Section 6.1(b).

                 (b)  Each Seller shall accept reassignment of any applicable
Defective Mortgage Loans originally transferred by it to Revolving on or prior
to the end of the Collection Period in which such reassignment obligation
arises, and shall pay for such reassigned Defective Mortgage Loans the entire
principal balance thereof plus accrued and unpaid interest thereon, plus any
applicable premium previously received by such Seller pursuant to Section 3.1
hereof in connection with such Mortgage Loans repurchased minus any Principal
Collections credited to such Defective Mortgage Loan thereof prior to such
retransfer date (the "Repurchase Price").  Upon reassignment of Defective
Mortgage Loans, Revolving shall automatically and without further action be
deemed to sell, transfer, assign, set-over and otherwise convey to the
applicable Seller, without recourse, representation or warranty, all the right,
title and interest of Revolving in and to such Defective Mortgage Loans, all
monies due or to become due with respect thereto and all proceeds thereof.  The
appropriate Sellers shall forward the Repurchase Price to Revolving or any
portion thereof to the Trustee upon the direction of Revolving and such
reassigned Defective Mortgage Loans shall be treated by Revolving as collected
in full as of the date on which the Repurchase Price therefor was received by
Revolving or the Trustee.  Revolving shall execute such documents and
instruments of transfer or assignment and take such other actions as shall
reasonably be requested by the Sellers to effect the conveyance of such
Defective Mortgage Loans pursuant to this subsection.  The Sellers acknowledge
that Revolving has appointed the Trustee its attorney in fact to collect the
Repurchase Price up to the Retransfer Deposit Amount and to enforce its rights
hereunder.

                 Section 6.2.  Reassignment of Certificateholders' Interest in
Trust Portfolio.  In the event any representation or warranty set forth in
Section 4.2 is not true and correct in any material respect and as a result of
such breach Revolving is required to accept a reassignment of all the affected
Mortgage Loans pursuant to Section 2.04 of the Pooling and Servicing Agreement,
the applicable Seller shall be obligated to accept a





                                       20
<PAGE>   24

reassignment of Revolving's interest in such Mortgage Loans on the terms set
forth below.

                 The Sellers shall pay to Revolving by depositing in the
Collection Account, pursuant to Section 9.6 hereof, in immediately available
funds not later than the close of business in Chicago, Illinois, two Business
Days prior to the  Distribution Date following the expiration of the cure
period provided in Section 2.04 of the Pooling and Servicing Agreement, in
payment for such reassignment, an amount equal to the Certificate Principal
Balance on such Distribution Date plus an amount equal to all interest accrued
but unpaid on the Investor Certificate Principal Balance through the day
immediately preceding such Distribution Date plus any unreimbursed amounts
owing to the Certificate Insurer with respect to any Credit Enhancement Draw
Amount plus interest thereon as set forth in the Insurance Agreement (the
"Portfolio Reassignment Price").


                                  ARTICLE VII

                              CONDITIONS PRECEDENT

                 Section 7.1.  Conditions to Revolving's Obligations Regarding
Initial Mortgage Loans.  The obligations of Revolving to purchase the Initial
Mortgage Loans on the Closing Date shall be subject to the satisfaction of the
following conditions:

                 (a)  All information concerning the Initial Mortgage Loans
provided as of the Pool Date shall be true and correct as of the Pool Date in
all material respects;

                 (b)  Each Seller shall have delivered to Revolving (or to the
Trustee, which Revolving hereby directs) a computer file or microfiche list
containing a true and complete list of all information specified in Section 2.1
(e) hereof and shall have substantially performed all other obligations
required to be performed by the provisions of this Agreement;

                 (c)  Each Seller shall have prepared for recording and filing,
at its expense, any financing statement with respect to the Initial Mortgage
Loans now existing and hereafter created for the transfer of accounts (as
defined in Section 9-106 of the UCC as in effect in the State of Illinois)
meeting the requirements of applicable state law in such manner and in such
jurisdictions as would be necessary to perfect the sale of such Mortgage Loans
from such Seller to Revolving if the Initial Mortgage Loans or Additional Loan
Balances relating thereto were deemed to constitute accounts receivable under
applicable law, and shall deliver a file-stamped copy of such financing
statements or other evidence of such filings to the Trustee as agent for
Revolving;





                                       21
<PAGE>   25

                 (d)  On or before the Closing Date, Revolving and the Trustee
shall have entered into the Pooling and Servicing Agreement and the closing
under the Pooling and Servicing Agreement shall take place simultaneously with
the initial closing hereunder; and

                 (e)  All corporate and legal proceedings and all instruments
and opinions in connection with the transactions contemplated by this Agreement
shall be satisfactory in form and substance to Revolving, and Revolving shall
have received from each Seller copies of all documents (including, without
limitation, records of corporate proceedings) relevant to the transactions
herein contemplated as Revolving may reasonably have requested.

                 Section 7.2.  Conditions to Revolving's Obligations Regarding
Subsequent Funding Mortgage Loans, Eligible Substitute Mortgage Loans and
Additional Loan Balances.  The obligations of Revolving to purchase any
Subsequent Funding Mortgage Loans, Eligible Substitute Mortgage Loans and any
Additional Loan Balances created on or after the Pool Date shall be subject to
the satisfaction of the following conditions:

                 (a)  All representations and warranties of each Seller
contained in Section 4.1 and 4.2 of this Agreement shall be true and correct
with the same effect as though such representations and warranties had been
made on such date;

                 (b)  All information concerning the Subsequent Funding
Mortgage Loans, any Eligible Substitute Mortgage Loans and Additional Loan
Balances provided or to be provided to Revolving shall be true and correct in
all material respects; and

                 (c)      Each Seller shall have indicated in its computer
files or microfiche list that the Subsequent Funding Mortgage Loans, any
Eligible Substitute Mortgage Loans and Additional Loan Balances created in
respect of any Credit Line Agreement to which such Subsequent Funding Mortgage
Loans, any Eligible Substitute Mortgage Loans and Additional Loan Balances
relate have been sold to Revolving in accordance with this Agreement and
transferred to the Trust pursuant to the Pooling and Servicing Agreement for
the benefit of the Certificateholders.

                 Section 7.3.  Conditions Precedent to the Sellers'
Obligations.  The obligations of each of the Sellers to sell the Initial
Mortgage Loans on the Closing Date and to sell the Subsequent Funding Mortgage
Loans and any Eligible Substitute Mortgage Loans on the applicable Addition
Date therefor shall, in each case, be subject to the satisfaction of the
following conditions:

                 (a)      All representations and warranties of Revolving
contained in this Agreement shall be true and correct with the same





                                       22
<PAGE>   26

effect as though such representations and warranties had been made on such
date;

                 (b)      Payment or provision for payment of the applicable
Purchase Price in accordance with the provisions of Article III hereof shall
have been made; and

                 (c)      All corporate and legal proceedings and all
instruments in connection with the transactions contemplated by this Agreement
shall be satisfactory in form and substance to the Sellers, and such Sellers
shall have received from Revolving copies of all documents (including, without
limitation, records of corporate proceedings) relevant to the transactions
herein contemplated as such Sellers may reasonably have requested.


                                  ARTICLE VIII

                          TERM & PURCHASE TERMINATION

                 Section 8.1.  Term.  This Agreement shall commence as of the
date of execution and delivery hereof and shall continue until the Trust shall
have terminated as provided in Article X of the Pooling and Servicing
Agreement.

                 Section 8.2.  Purchase Termination.  If any Seller voluntarily
goes into liquidation or consents to the appointment of a conservator, receiver
or liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceeding of or relating to such Seller or of or
relating to all or substantially all its property, or a decree or order of 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, marshalling of assets and liabilities or similar
proceeding, or for the winding-up or liquidation of its affairs, shall have
been entered against such Seller; or such Seller shall admit in writing its
inability to pay its debts generally as they become due, file a petition to
take advantage of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors or voluntarily suspend payment of
its obligations (such voluntary liquidation, appointment, entering of such
decree, admission, filing, making or suspension, a "Dissolution Event"), such
Seller shall on the day of such appointment, voluntary liquidation, entering of
such decree, admission, filing, making or suspension, as the case may be (the
"Appointment Date"), immediately cease to transfer Additional Loan Balances,
Subsequent Funding Mortgage Loans and Eligible Substitute Mortgage Loans, in
each case as and if applicable, to Revolving and shall promptly give notice to
Revolving and the Trustee of such Dissolution Event.  Notwithstanding any
cessation of the transfer to Revolving of Additional Loan Balances, Subsequent
Funding Mortgage Loans and Eligible Substitute Mortgage Loans, in each case





                                       23
<PAGE>   27

as and if applicable, Mortgage Loans transferred to Revolving prior to the
occurrence of such Dissolution Event and Principal Collections and Interest
Collections, insurance proceeds and other monies in respect of such Mortgage
Loans whenever received, shall continue to be property of Revolving available
for transfer by Revolving to the Trust pursuant to the Pooling and Servicing
Agreement.


                                   ARTICLE IX

                            MISCELLANEOUS PROVISIONS

                 Section 9.1.  Amendment.  This Agreement and any Conveyance
Papers and the rights and obligations of the parties hereunder may not be
changed orally, but only by an instrument in writing signed by Revolving and
the Sellers (provided that a Seller and Revolving may change the terms as it
applies to their agreements to each other without the written consent of the
other Sellers) in accordance with this Section 9.1.  This Agreement and any
Conveyance Papers may be amended from time to time by Revolving and the Sellers
(i) to cure any ambiguity, (ii) to correct or supplement any provisions herein
which may be inconsistent with any other provisions herein or in any such other
Conveyance Papers, (iii) to add any other provisions with respect to matters or
questions arising under this Agreement or any Conveyance Papers which shall not
be inconsistent with the provisions of this Agreement or any Conveyance Papers,
(iv) to change or modify the Purchase Price to be received by the applicable
Seller for the Mortgage Loans, and (v) to change, modify, delete or add any
other obligation of the Sellers or Revolving; provided however, that no
amendment pursuant to clause (v) of this Section 9.1 shall be effective unless
the Rating Agencies have notified the Sellers and Revolving in writing that
such amendment will not result in a reduction or withdrawal of the rating of
the Certificates and the prior written consent of the Certificate Insurer as
required by the Insurance Agreement is obtained.  Any reconveyance executed in
accordance with the provisions hereof shall not be considered to be an
amendment to this Agreement.

                 SECTION 9.2.  GOVERNING LAW.  THIS AGREEMENT AND THE
CONVEYANCE PAPERS SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF ILLINOIS, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE
OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED
IN ACCORDANCE WITH SUCH LAWS.

                 Section 9.3.  Notices.  All demands, notices and
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered at or mailed by registered mail, return
receipt requested, to (a) the Sellers, 2700 Sanders Road, Prospect Heights,
Illinois 60070, Attention:  Director Asset-Securitization, Treasury Department
and (b) in the





                                       24
<PAGE>   28

case of Revolving, HFC Revolving Corporation, 2700 Sanders Road, Prospect
Heights, Illinois 60070, Attention: Secretary, (facsimile (847) 564- 6366) or,
as to each party, at such other address as shall be designated by such party in
a written notice to each other party.

                 Section 9.4.  Severability of Provisions.  If any one or more
of the covenants, agreements, provisions or terms of this Agreement or any
Conveyance Papers shall for any reason whatsoever be held invalid, then such
covenants, agreements, provisions, or terms shall be deemed severable from the
remaining covenants, agreements, provisions and terms of this Agreement or any
Conveyance Papers and shall in no way affect the validity or enforceability of
the other provisions of this Agreement or of any Conveyance Papers.

                 Section 9.5.  Assignment.  Notwithstanding anything to the
contrary contained herein, other than Revolving's assignment of its right,
title, and interest in, to, and under this Agreement to the Trustee for the
benefit of the Certificateholders as contemplated by the Pooling and Servicing
Agreement and Section 9.6 hereof and the transfer by the Sellers to the Trustee
pursuant to the Transfer Agreement of the Transferred Assets, this Agreement
and all other Conveyance Papers may not be assigned by the parties hereto;
provided, however, that (i) each Seller shall have the right to assign its
right, title and interest, in, to and under this Agreement, to  (a) any entity
affiliated with Household Finance Corporation and (b) any other entity provided
that the Rating Agencies have advised Revolving and the Sellers that such
assignment will not result in the reduction or withdrawal of the rating of the
Certificates and that the Certificate Insurer has given its prior written
consent to such assignment, which consent shall not be unreasonably withheld
and (ii) Revolving shall have the right to assign this Agreement to (a) any
affiliate of Household Finance Corporation and (b) any other entity provided
that the Rating Agencies have advised Revolving that such assignment will not
result in the reduction or withdrawal of the rating of the Certificates and
that the Certificate Insurer has given its prior written consent to such
assignment, which consent shall not to be unreasonably withheld.

                 Section 9.6.  Acknowledgment and Agreement of each Seller.  By
execution below, each Seller expressly acknowledges and agrees that all of
Revolving's right, title, and interest in, to, and under this Agreement,
including, without limitation, all of Revolving's right, title, and interest in
and to the Mortgage Loans and other Purchased Assets purchased pursuant to this
Agreement, shall be assigned by Revolving to the Trustee for the benefit of the
Certificateholders and the Certificate Insurer pursuant to the Pooling and
Servicing Agreement, and each of the Sellers consents to such assignment.
Additionally, each of the Sellers agrees for the benefit of the Trustee and the
Certificate Insurer that any





                                       25
<PAGE>   29

amounts payable by such Seller to Revolving hereunder which are to be paid by
Revolving to the Trustee for the benefit of the Certificateholders, to the
extent required by and pursuant to the terms of the Pooling and Servicing
Agreement (including, without limitation, payments to be made under Article
III, Section 6.1 and 6.2 hereof) shall be paid by such Seller, on behalf of
Revolving, directly to the Trustee.  Any payment required to be made on or
before a specified date in same-day funds may be made on the prior business day
in next-day funds.

                 Section 9.7.  Further Assurances.  Revolving and each Seller
agree to do and perform, from time to time, any and all acts and to execute any
and all further instruments required or reasonably requested by the other
parties more fully to effect the purposes of this Agreement and the Conveyance
Papers, including, without limitation, the execution of any financing
statements or continuation statements or equivalent documents relating to the
Purchased Assets for filing under the provisions of the UCC (as in effect in
the State of Illinois) or other law of any applicable jurisdiction.

                 Section 9.8.  No Waiver; Cumulative Remedies.  No failure to
exercise and no delay in exercising, on the part of Revolving or any Seller,
any right, remedy, power or privilege hereunder, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power
or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege.  The rights, remedies,
powers and privileges herein provided are cumulative and not exhaustive of any
rights, remedies, powers and privileges provided by law.

                 Section 9.9.  Counterparts.  This Agreement and all Conveyance
Papers may be executed in two or more counterparts (and by different parties on
separate counterparts), each of which shall be an original, but all of which
together shall constitute one and the same instrument.

                 Section 9.10.  Binding Effect; Third-Party Beneficiaries.
This Agreement and the Conveyance Papers will inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns.  The Trustee and the Certificate Insurer, and no other party, shall be
considered a third-party beneficiary of this Agreement.

                 Section 9.11.  Merger and Integration.  Except as specifically
stated otherwise herein, this Agreement and the Conveyance Papers set forth the
entire understanding of the parties relating to the subject matter hereof, and
all prior understandings, written or oral, are superseded by this Agreement and
the Conveyance Papers.  This Agreement and the Conveyance





                                       26
<PAGE>   30

Papers may not be modified, amended, waived or supplemented except as provided
herein.

                 Section 9.12.  Headings.  The headings are for purposes of
reference only and shall not otherwise affect the meaning or interpretation of
any provision hereof.

                 Section 9.13.  Schedules and Exhibits.  The schedules and
exhibits attached hereto and referred to herein shall constitute a part of this
Agreement and are incorporated into this Agreement for all purposes.

                 Section 9.14.    Survival of Representations and Warranties.
All representations, warranties and agreements contained in this Agreement, or
contained in certificates of officers of any Seller submitted pursuant hereto,
or contained in any assignment permitted hereunder, shall remain operative and
in full force and effect and shall survive conveyance of the Purchased Assets
by Revolving to the Trustee pursuant to the Pooling and Servicing Agreement.

                 IN WITNESS WHEREOF, Revolving and the Sellers have caused this
Agreement to be duly executed by their respective officers as of the day and
year first above written.

                 HOUSEHOLD REALTY CORPORATION
                 HOUSEHOLD FINANCE CORPORATION OF CALIFORNIA
                 HOUSEHOLD FINANCE CORPORATION II
                 HOUSEHOLD FINANCE CORPORATION III
                 HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY
                 HOUSEHOLD FINANCE REALTY CORPORATION OF NEW YORK
                 HOUSEHOLD FINANCIAL CENTER INC.
                 HOUSEHOLD FINANCE REALTY CORPORATION OF NEVADA
                 HOUSEHOLD INDUSTRIAL LOAN COMPANY OF KENTUCKY
                 HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY OF IOWA
                 HOUSEHOLD FINANCE CONSUMER DISCOUNT COMPANY
                 HOUSEHOLD INDUSTRIAL FINANCE COMPANY
                 MORTGAGE ONE CORPORATION


                 BY: 
                    -------------------------------
                      B. B. Moss, Vice President


                 HFC REVOLVING CORPORATION

                 BY 
                    -------------------------------
                      J. W. Blenke, Vice President
                         and Secretary





                                       27
<PAGE>   31

                                                                      Schedule 1


                LIST OF LOAN BALANCES OF INITIAL MORTGAGE LOANS


 Deemed Incorporated Herein By Reference to the Mortgage Schedule delivered on
the Closing Date pursuant to the Pooling and Servicing Agreement.
<PAGE>   32

                                                                      Schedule 2


                            LIST OF LOAN BALANCES OF
                   SUBSEQUENT FUNDING MORTGAGE LOANS AND ANY
                       ELIGIBLE SUBSTITUTE MORTGAGE LOANS


To be delivered on the Addition Date upon which the Subsequent Funding Mortgage
Loans and any Eligible Substitute Mortgage Loans are conveyed to Revolving.
Upon such Addition Date, deemed to be incorporated herein by reference to the
applicable Mortgage Schedule delivered on such Addition Date pursuant to the
Pooling and Servicing Agreement.
<PAGE>   33

                                                                       EXHIBIT A
                                               to Receivables Purchase Agreement



                          FORM OF SETTLEMENT STATEMENT

                         RECEIVABLES PURCHASE AGREEMENT

                     Current Settlement Date:  ____________




                 __________________________________ (the"Seller") and HFC
Revolving Corporation ("Revolving"), pursuant to the Receivables Purchase
Agreement (the "Receivables Purchase Agreement") dated as of November 1, 1996,
by and among the Seller, other sellers named therein and Revolving, do hereby
agree and certify as follows:

                 1.       Capitalized terms used in this Settlement Statement
         have their respective meanings in the Receivables Purchase Agreement.
         As used herein, the term " Collection Period" shall mean the
         Collection Period immediately preceding the calendar month in which
         this Settlement Statement is delivered.  This Settlement Statement is
         being delivered pursuant to Section 3.2 of the Receivables Purchase
         Agreement.  References hereto to certain sections are references to
         the respective sections in the Receivables Purchase Agreement.

                 2.       The date of this Settlement Statement is a
         Distribution Date under the Pooling and Servicing Agreement.

A.       MORTGAGE LOANS AND PURCHASE PRICE FOR COLLECTION PERIOD

                 3.       The Purchase Price of the Loan Balances 
                          conveyed to Revolving during the Collection 
                          Period is equal to  . . .                   $________

                 4.       The Principal Collections on the Loan 
                          Balances during the Collection Period 
                          are equal to . . .                          $________

                 5.       The Interest Collections on the Loan
                          Balances during the Collection Period 
                          are equal to   . . . .                      $________

                 6.       The total adjusted Purchase Price for 
                          the Collection Period (Item 3 minus the 
                          sum of Items 4 and 5) is equal to           $________
<PAGE>   34

B.       REPURCHASED MORTGAGE LOANS AND REPURCHASE PRICE FOR COLLECTION PERIOD

                 7.       The Repurchase Price for any Mortgage Loans 
                          required to be repurchased by [Seller] 
                          pursuant to Section 6.1 of the Receivables 
                          Purchase Agreement with respect to the 
                          Collection Period is equal to      . . . .  $________

                 8.       The Portfolio Reassignment Price for 
                          Mortgage Loans reassigned pursuant to 
                          Section 6.2 of the Receivables Purchase 
                          Agreement is equal to  . . . .              $________

C.       TOTAL AMOUNT PAYABLE BY REVOLVING TO SELLER FOR COLLECTION PERIOD

                 9.       Item 6 less the sum of Items 7 and 8 above 
                          is equal to . . . . . . . . . . .           $________

                10.       If the amount of Item 9 is a negative number, 
                          Seller shall pay the absolute value of such 
                          amount to Revolving.





<PAGE>   35



                             INITIAL MORTGAGE LOANS
                            whose CLTV exceeds 100%

<PAGE>   1




                                                                    EXHIBIT 10.2


      ___________________________________________________________________



                          HOUSEHOLD REALTY CORPORATION
                  HOUSEHOLD FINANCE CORPORATION OF CALIFORNIA
                        HOUSEHOLD FINANCE CORPORATION II
                       HOUSEHOLD FINANCE CORPORATION III
                   HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY
                HOUSEHOLD FINANCE REALTY CORPORATION OF NEW YORK
                        HOUSEHOLD FINANCIAL CENTER INC.
                 HOUSEHOLD FINANCE REALTY CORPORATION OF NEVADA
                 HOUSEHOLD INDUSTRIAL LOAN COMPANY OF KENTUCKY
               HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY OF IOWA
                  HOUSEHOLD FINANCE CONSUMER DISCOUNT COMPANY
                      HOUSEHOLD INDUSTRIAL FINANCE COMPANY
                            MORTGAGE ONE CORPORATION
                                    Sellers


                                      and


                       THE FIRST NATIONAL BANK OF CHICAGO
                                   as Trustee




      ___________________________________________________________________


                               TRANSFER AGREEMENT
                          Dated as of November 1, 1996


      ___________________________________________________________________
<PAGE>   2

                               TABLE OF CONTENTS


<TABLE>                                                                 
<S>                                                                        <C>
ARTICLE I        DEFINITIONS                                            
                                                                        
         Section 1.1.     Definitions . . . . . . . . . . . . . . .        2
         Section 1.2.     Other Definitional Provisions . . . . . .        2
                                                                        
                                                                        
ARTICLE II    TRANSFERS OF RELATED DOCUMENTS                            
                                                                        
         Section 2.1.     Transfer to Trustee . . . . . . . . . . .        3
         Section 2.2.     Transfer to Sellers . . . . . . . . . . .        3
         Section 2.3.     Possession of Related Documents . . . . .        4
         Section 2.4.     UCC Financing Statements  . . . . . . . .        4
         Section 2.5.     Absolute Transfer . . . . . . . . . . . .        5
                                                                        
                                                                        
ARTICLE III   ENFORCEMENT OF RELATED DOCUMENTS. . . . . . . . . . .        5
                                                                        
                                                                        
ARTICLE IV    REPRESENTATIONS AND WARRANTIES                            
                                                                        
         Section 4.1.     Sellers' Representations and Warranties .        5
         Section 4.2.     Representations and Warranties of the         
                               Sellers Relating to the Receivables      
                               Purchase Agreement and the Mortgage      
                               Loans  . . . . . . . . . . . . . . .        5
         Section 4.3.     Notice of Breach  . . . . . . . . . . . .        6
                                                                        
                                                                        
ARTICLE V        COVENANTS OF THE SELLERS                               
                                                                        
         Section 5.1.     Covenants  . . . . . . . . . . . . . . . .       6
                                                                        
                                                                        
ARTICLE VI    RECONVEYANCE                                              
                                                                        
         Section 6.1.     Reconveyance of the Related Documents  . .       6
                                                                        
                                                                        
ARTICLE VII   CONDITIONS PRECEDENT                                      
                                                                        
         Section 7.1.     Conditions Precedent . . . . . . . . . . .       6
                                                                        
                                                                        
ARTICLE VIII  TERM                                                      
                                                                        
         Section 8.1.     Term . . . . . . . . . . . . . . . . . . .       7
                                                                        
</TABLE>                                                                
                                                                        
                                                                        
                                      -i-                               
<PAGE>   3
                                                                        
<TABLE>                                                                 
<S>                                                                        <C>
ARTICLE IX    MISCELLANEOUS PROVISIONS                                  
                                                                        
         Section 9.1.     Amendment. . . . . . . . . . . . . . . . .       7
         Section 9.2.     GOVERNING LAW. . . . . . . . . . . . . . .       7
         Section 9.3.     Notices. . . . . . . . . . . . . . . . . .       7
         Section 9.4.     Severability of Provisions . . . . . . . .       7
         Section 9.5.     Assignment . . . . . . . . . . . . . . . .       8
         Section 9.6.     Further Assurances . . . . . . . . . . . .       8
         Section 9.7.     No Waiver; Cumulative Remedies . . . . . .       8
         Section 9.8.     Counterparts . . . . . . . . . . . . . . .       8
         Section 9.9.     Binding Effect; Third-Party                   
                                  Beneficiaries. . . . . . . . . . .       8
         Section 9.10.    Merger and Integration . . . . . . . . . .       8
         Section 9.11.    Headings . . . . . . . . . . . . . . . . .       9
         Section 9.12.    Survival of Representations and               
                                  Warranties . . . . . . . . . . . .       9


</TABLE>



                                      -ii-
<PAGE>   4

                               TRANSFER AGREEMENT


              TRANSFER AGREEMENT, dated as of November 1, 1996, by and among
HOUSEHOLD REALTY CORPORATION, HOUSEHOLD FINANCE CORPORATION OF CALIFORNIA,
HOUSEHOLD FINANCE CORPORATION II, HOUSEHOLD FINANCE CORPORATION III, HOUSEHOLD
FINANCE INDUSTRIAL LOAN COMPANY, HOUSEHOLD FINANCE REALTY CORPORATION OF NEW
YORK, HOUSEHOLD FINANCIAL CENTER INC., HOUSEHOLD FINANCE REALTY CORPORATION OF
NEVADA, HOUSEHOLD INDUSTRIAL LOAN COMPANY OF KENTUCKY, HOUSEHOLD FINANCE
INDUSTRIAL LOAN COMPANY OF IOWA, HOUSEHOLD FINANCE CONSUMER DISCOUNT COMPANY,
HOUSEHOLD INDUSTRIAL FINANCE COMPANY and MORTGAGE ONE CORPORATION and any of
their successors, (the "Sellers"), and THE FIRST NATIONAL BANK OF CHICAGO, not
individually but in its capacity as trustee ("Trustee") under the Pooling and
Servicing Agreement described below.

                              W I T N E S S E T H;

              WHEREAS, the Sellers and HFC Revolving Corporation ("Revolving")
are parties to that certain Receivables Purchase Agreement of even date
herewith (as the same may be amended, supplemented or otherwise modified from
time to time, the "Receivables Purchase Agreement"), pursuant to which the
Sellers have agreed to sell, and Revolving has agreed to purchase, among other
things, certain "Mortgage Loans" under certain "Credit Line Agreements" (each
as defined in the Receivables Purchase Agreement) of the Sellers;

              WHEREAS, Revolving, Household Finance Corporation, as Master
Servicer, and the Trustee are parties to that certain Pooling and Servicing
Agreement of even date herewith (as the same may be amended, supplemented or
otherwise modified from time to time, the "Pooling and Servicing Agreement")
pursuant to which, among other things, the Trustee has agreed to purchase from
Revolving the Mortgage Loans purchased by Revolving under the Receivables
Purchase Agreement;

              WHEREAS, the Sellers will benefit directly from the transactions
contemplated by the Pooling and Servicing Agreement in that the Trustee's
payments of the purchase price for the Mortgage Loans purchased under the
Pooling and Servicing Agreement will provide Revolving with certain of the
funds it needs to satisfy its purchase obligations under the Receivables
Purchase Agreement;

              WHEREAS, as a condition precedent to the Trustee's entering into
the Pooling and Servicing Agreement, the Trustee has required that the Sellers
enter into this Agreement to convey all of the Sellers' remaining right, title
and interest in the Mortgage Loans and Related Documents (the "Transferred
Assets") to the Trustee;





                                      -1-
<PAGE>   5

              WHEREAS, the Additional Balances will be reconveyed to the
Sellers for the ultimate transfer to the Trustee pursuant to the Receivables
Purchase Agreement;

              NOW, THEREFORE, in consideration of the recitals hereto and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Sellers and the Trustee agree as follows:

                                   ARTICLE I

                                  DEFINITIONS

              Section 1.1.        Definitions.  All capitalized terms used
herein or in any certificate or document made or delivered pursuant hereto, and
not defined herein or therein, shall have the meaning ascribed thereto in the
Receivables Purchase Agreement whenever used in this Agreement (including,
without limitation, terms defined in the Receivables Purchase Agreement by
reference to definitions in the Pooling and Servicing Agreement).  In addition,
the following words and phrases shall have the following meanings:

              "Agreement" shall mean this Transfer Agreement and all amendments
and other modifications hereof and supplements hereto.

              "Fees and Charges" shall mean all fees, charges and amounts which
are owing or collected under or with respect to the Mortgage Loans and which do
not constitute principal or interest thereon, including, without limitation,
prepayment charges, annual fees, bad or returned check charges, extraordinary
charges under Credit Line Agreements, and Foreclosure Profits.

              Section 1.2.  Other Definitional Provision.  (a) All terms
defined in this Agreement shall have the same defined meanings when used in any
certificate or other document made or delivered pursuant hereto unless
otherwise defined herein.

              (b)  The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement; and Section,
Subsection, Schedule and Exhibit references contained in this Agreement shall
refer to Sections, Subsections, Schedules and Exhibits in or to this Agreement
unless otherwise specified.

              (c)  All determinations of the principal or finance charge
balance of Mortgage Loans, and of any collections thereof, shall be made in
accordance with the Pooling and Servicing Agreement.





                                      -2-
<PAGE>   6

                                   ARTICLE II

                         TRANSFERS OF RELATED DOCUMENTS

              Section 2.1.  Transfer to Trustee.  In consideration of the
Trustee's execution and delivery of the Pooling and Servicing Agreement, each
Seller severally,and not jointly, does hereby (i) sell, transfer, assign, set
over and otherwise convey to the Trustee, without recourse and subject only to
the prior transfer of the Initial Mortgage Loans to Revolving pursuant to the
Receivables Purchase Agreement, all of its remaining right, title, and interest
in, to and under the Transferred Assets relating to the Initial Mortgage Loans,
including, without limitation, such Seller's right to all Additional Loan
Balances thereon, and upon such conveyance the Trustee shall have full rights
to enforce and receive all benefits under the applicable Related Documents as
owner thereof to the same extent as such Seller had prior to such conveyance,
and (ii) agree that on the applicable Addition Date it will, subject to the
availability thereof, sell, transfer, assign, set over and otherwise convey to
the Trustee, without recourse and subject  to the prior transfer of the
Subsequent Funding Mortgage Loans or any Eligible Substitute Mortgage Loans to
Revolving pursuant to the Receivables Purchase Agreement, all of its remaining
right, title and interest in, to and under the Transferred Assets relating to
such Subsequent Funding Mortgage Loans or any Eligible Substitute Mortgage
Loans, including, without limitation, such Seller's right to all Additional
Loan Balances thereon, and upon such conveyance the Trustee shall have full
rights to enforce and receive all benefits under the applicable Related
Documents as owner thereof to the same extent as such Seller had prior to such
conveyance; provided, however, that in connection with each such conveyance,
the Trustee shall not assume, or be deemed to have assumed, the obligation of
any Seller under the Mortgage Loans or the Related Documents to fund such
Mortgage Loans or Additional Loan Balances.  All such obligations are expressly
retained by the Sellers.

              Section 2.2.  Transfer to Sellers.  After giving effect to, and
in consideration of, the transfers contemplated by Section 2.1, with respect to
the Initial Mortgage Loans, the Trustee hereby sells, transfers, assigns, sets
over and otherwise conveys back to each applicable Seller, without recourse,
(and hereby agrees that on the applicable Addition Date with respect to the
Subsequent Funding Mortgage Loans or any Eligible Substitute Mortgage Loans
acquired by the Trustee it will sell, transfer, assign, set over and otherwise
convey back to each applicable Seller, without recourse) all of the Trustee's
right, title and interest (if any), as of the date hereof, or such later
Addition Date, as appropriate, in, to and under (i) the applicable Additional
Loan Balances and Fees and Charges arising under the Transferred Assets
transferred to the Trustee by such Seller pursuant to Section 2.1 and (ii) all
monies due and/or to become due and all amounts received with respect thereto
(including, without limitation, all Principal





                                      -3-
<PAGE>   7

Collections and Interest Collections thereon) and all proceeds (including,
without limitation, "proceeds" as defined in Article 9 of the UCC as in effect
in the State of Illinois) thereof and all insurance proceeds related to such
Additional Loan Balances and Fees and Charges.  The foregoing sale, transfer
and assignment shall not include any sale, transfer or assignment of the right
to enforce payment of any of the Additional Loan Balances or any Fees and
Charges.

              Section 2.3.  Possession of Related Documents.  In connection
with the foregoing conveyance of the Transferred Assets, each Seller and the
Trustee agree that the related Seller shall retain possession of the applicable
Credit Line Agreements and other Related Documents, as custodian for and on
behalf of the Trustee and the Certificateholders as long as the long-term
senior unsecured debt of Household Finance Corporation is rated at least A- by
Standard & Poor's Ratings Service and A3 by Moody's Investors Service, Inc.  If
Household Finance Corporation's long-term senior unsecured debt rating does not
satisfy the standards specified in the immediately preceding sentence, each
Seller will deliver the Related Documents related to the Mortgage Loans
transferred by it to the Trustee.  Similarly, each Seller hereby acknowledges
that if any loss is suffered by the Trust in respect of a Mortgage Loan as a
result of such Seller's retention of such Related Documents, such Seller shall
repurchase such Mortgage Loan from Revolving simultaneously with Revolving's
repurchase of such Mortgage Loan from the Trustee and repurchase the
corresponding Related Documents from the Trustee in accordance with the terms
of the Pooling and Servicing Agreement and Receivables Purchase Agreement,
respectively.  In addition, each Seller hereby agrees that it will purchase the
applicable Mortgage Loans from Revolving, and the corresponding Related
Documents from the Trustee in other circumstances to the extent required by and
pursuant to the terms of the Pooling and Servicing Agreement and Receivables
Purchase Agreement.

              Section 2.4.  UCC Financing Statements.  In conjunction with the
conveyance described in Section 2.1, each Seller agrees (i) to record and file,
at its own expense, any financing statement (and continuation statements with
respect to such financing statements when applicable) with respect to the
Transferred Assets that the Trustee may reasonably request, meeting the
requirements of applicable state law in such manner and in such jurisdictions
as are necessary to perfect, and maintain perfection of, the conveyances
described herein from such Seller to the Trustee, (ii) such financing statement
shall name the appropriate Seller, as seller, and the Trustee, as purchaser, of
the Related Documents and (iii) to deliver a file-stamped copy of such
financing statements or other evidence of such filings (excluding such
continuation statements, which shall be delivered as filed) to the Trustee
promptly after the Closing Date.





                                      -4-
<PAGE>   8

              Section 2.5.  Absolute Transfer.  The parties hereto intend,
subject to Section 2.2 hereof, that the conveyance of each Seller's right,
title and interest in and to the Transferred Assets shall constitute an
absolute transfer, conveying good title free and clear of any liens, claims,
encumbrances or rights of others (other than the Conveyance pursuant to the
Receivables Purchase Agreement) from such Seller to the Trustee and that the
Transferred Assets shall not be part of the applicable Seller's estate in the
event of the insolvency of such Seller or a conservatorship, receivership or
similar event with respect thereto.

                                  ARTICLE III

                        ENFORCEMENT OF RELATED DOCUMENTS

              If the Trustee, the Master Servicer or any Subservicer elects to
enforce any of the Related Documents at a time when Household Finance
Corporation is not serving as Master Servicer, then the Trustee shall cause the
Person then serving as Master Servicer, and the Persons then serving as
Subservicers, to notify the Sellers before or promptly after commencement of
any enforcement action or proceeding and to permit the Sellers, at their own
cost, to join or intervene in any such action or proceeding in order to protect
their rights (if any) in, to and under the Additional Loan Balances, the Fees
and Charges, the Subsequent Funding Mortgage Loans or Eligible Substitute
Mortgage Loans (if applicable) and the Related Documents.

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

              Section 4.1.  Sellers' Representations and Warranties.  Each
Seller severally and not jointly represents and warrants to the Trustee as of
the Closing Date and each Addition Date, that each of the representations and
warranties made by such Seller to Revolving pursuant to Section 4.1 of the
Receivables Purchase Agreement is true and correct.

              Section 4.2.  Representations and Warranties of the Sellers
Relating to the Receivables Purchase Agreement and the Mortgage Loans. (a) Each
Seller severally and not jointly represents and warrants to the Trustee as of
the date of this Agreement and as of the Closing Date with respect to the
Initial Mortgage Loans that:

              (i)  Each of the representations and warranties made by  such
         Seller to Revolving pursuant to Section 4.2 of the Receivables
         Purchase Agreement is true and correct.

              (ii)  This Agreement constitutes a valid transfer and assignment
         to the Trustee by each Seller of all of its right, title and interest
         in and to the Related Documents, all monies





                                      -5-
<PAGE>   9

         due to become due with respect thereto and all proceeds of such
         Mortgage Loans, subject to Section 2.2 hereof and to the Conveyance to
         Revolving under the Receivables Purchase Agreement.

(b)      Each Seller severally and not jointly represents and warrants to the
Trustee as of the Addition Date with respect to which the Subsequent Funding
Mortgage Loans and any Eligible Substitute Mortgage Loans are conveyed to the
Trustee that each of the representations and warranties relating to such Loans
made by such Seller to Revolving pursuant to Section 4.2 of the Receivables
Purchase Agreement is true and correct.

              Section 4.3.  Notice of Breach.  The representations and
warranties under this Article IV shall survive the conveyance of the Related
Documents to the Trustee.  Upon discovery by either the Sellers or the Trustee
of a breach of any of the representations and warranties under Sections 4.1 or
4.2, the party discovering such breach shall give written notice to the other
parties within three Business Days following such discovery.

                                   ARTICLE V

                            COVENANTS OF THE SELLERS

              Section 5.1.  Covenants.  Each Seller severally and not jointly
covenants and agrees with the Trustee that it will observe and perform, for the
benefit of the Trustee, all of the covenants set forth in Article V of the
Receivables Purchase Agreement to be performed by it.

                                   ARTICLE VI

                                  RECONVEYANCE

              Section 6.1.  Reconveyance of the Related Documents.  In the
event any Seller accepts a reconveyance of Revolving's interest in one or more
Mortgage Loans pursuant to the Receivables Purchase Agreement, then such Seller
shall also accept reconveyance of the related Related Documents held by the
Trustee.

                                  ARTICLE VII

                              CONDITIONS PRECEDENT

              Section 7.1.  Conditions Precedent.  This Agreement shall become
effective when it has been executed and delivered by all the parties hereto and
when all of the conditions precedent set forth in Section 7.1 of the
Receivables Purchase Agreement have been satisfied.





                                      -6-
<PAGE>   10

                                  ARTICLE VIII

                                      TERM

              Section 8.1.  Term.  Subject to Article VII hereof, this
Agreement shall commence as of November 1, 1996, and shall continue until the
Trust shall have been terminated as provided in Article X of the Pooling and
Servicing Agreement.

                                   ARTICLE IX

                            MISCELLANEOUS PROVISIONS

              Section 9.1.  Amendment.  This Agreement and the rights and
obligations of the parties hereunder may not be changed orally, but only by an
instrument in writing signed by the Trustee and the Sellers in accordance with
this Section 9.1.  This Agreement may be amended from time to time by the
Trustee and the Sellers (i) to cure any ambiguity, (ii) to correct or
supplement any provisions herein which may be inconsistent with any other
provisions herein, (iii) to add any other provisions with respect to matters or
questions arising under this Agreement which shall not be inconsistent with the
provisions of this Agreement, and (iv) to change, modify, delete or add any
other obligation of the Sellers or the Trustee; provided however, that no
amendment pursuant to clause (iv) of this Section 9.1 shall be effective unless
the Certificate Insurer has given its prior written consent and the Rating
Agencies have notified Revolving and the Trustee in writing that such amendment
will not result in a reduction or withdrawal of the rating of the Certificates.
Any reconveyance executed in accordance with the provisions hereof shall not be
considered to be an amendment to this Agreement.

              SECTION 9.2.  GOVERNING LAW.  THIS AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.

              Section 9.3.  Notices. All demands, notices and communications
hereunder shall be in writing and shall be given (i) to the Sellers in the
manner and at the addresses specified in the Receivables Purchase Agreement,
and (ii) to the Trustee or the Certificate Insurer in the manner and at the
address specified in the Pooling and Servicing Agreement, or, as to each party,
at such other address as shall be designated by such party in a written notice
to each other party.

              Section 9.4.  Severability of Provisions.  If any one or more of
the covenants, agreements, provisions or terms of this Agreement shall for any
reason whatsoever be held invalid, then such covenants, agreements, provisions,
or terms shall be deemed





                                      -7-
<PAGE>   11

severable from the remaining covenants, agreements, provisions, and terms of
this Agreement and shall in no way effect the validity or enforceability of the
other provisions of this Agreement.

              Section 9.5.  Assignment.  Notwithstanding anything to the
contrary contained herein, this Agreement may not be assigned by the parties
hereto; provided, however, that each Seller shall have the right to assign its
right, title and interest, in, to and under this Agreement, to (a) any entity
affiliated with Household Finance Corporation and (b) any other entity provided
that the Rating Agencies have advised the Trustee and such Seller that such
assignment will not result in a reduction or withdrawal of the rating of the
Certificates and that the Certificate Insurer was given its prior written
consent to such assignment, which consent shall not be unreasonably withheld.

              Section 9.6.  Further Assurances.  The Trustee and each Seller
agrees to do and perform, from time to time, any and all acts and to execute
any and all further instruments required or reasonably requested by the other
parties more fully to effect the purposes of this Agreement, including, without
limitation, the execution of any financing statements or continuation
statements or equivalent documents relating to the Related Documents for filing
under the provisions of the UCC (as in effect in the State of Illinois) or
other law of any applicable jurisdiction.

              Section 9.7.  No Waiver; Cumulative Remedies.  No failure to
exercise and no delay in exercising, on the part of the Trustee or any Seller,
any right, remedy, power or privilege hereunder, shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, remedy, power
or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege.  The rights, remedies,
powers and privileges herein provided are cumulative and not exhaustive of any
rights, remedies, powers and privileges provided by law.

              Section 9.8.  Counterparts.  This Agreement may be executed in
two or more counterparts (and by different parties on separate counterparts),
each of which shall be an original, but all of which together shall constitute
one and the same instrument.

              Section 9.9.  Binding Effect; Third-Party Beneficiaries.  This
Agreement will inure to the benefit of and be binding upon the parties hereto
and their respective successors and permitted assigns.  The Certificate
Insurer, and no other party, shall be considered a third-party beneficiary of
this Agreement.

              Section 9.10.  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, are





                                      -8-
<PAGE>   12

superseded by this Agreement.  This Agreement may not be modified, amended,
waived or supplemented except as provided herein.

              Section 9.11.  Headings.  The headings are for purposes of
reference only and shall not otherwise affect the meaning or interpretation of
any provision hereof.

              Section 9.12.  Survival of Representations and Warranties.  All
representations, warranties and agreements contained in this Agreement, shall
remain operative and in full force and effect and shall survive conveyance of
the Related Documents by the Sellers to the Trustee pursuant hereto.

              IN WITNESS WHEREOF, the Trustee and the Sellers have caused this
Agreement to be duly executed by their respective officers as of the day and
year first above written.

                                  HOUSEHOLD REALTY CORPORATION
                                  HOUSEHOLD FINANCE CORPORATION OF
                                    CALIFORNIA
                                  HOUSEHOLD FINANCE CORPORATION II
                                  HOUSEHOLD FINANCE CORPORATION III
                                  HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY
                                  HOUSEHOLD FINANCE REALTY CORPORATION
                                    OF NEW YORK
                                  HOUSEHOLD FINANCIAL CENTER INC.
                                  HOUSEHOLD FINANCE REALTY CORPORATION OF
                                    NEVADA
                                  HOUSEHOLD INDUSTRIAL LOAN COMPANY OF
                                    KENTUCKY
                                  HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY OF
                                    IOWA
                                  HOUSEHOLD FINANCE CONSUMER DISCOUNT COMPANY
                                  HOUSEHOLD INDUSTRIAL FINANCE COMPANY
                                  MORTGAGE ONE CORPORATION


                                  By:_______________________________________
                                           B. B. Moss, Vice President


                                  THE FIRST NATIONAL BANK OF CHICAGO, not
                                  individually but as Trustee under the
                                  Pooling and Servicing Agreement


                                  By:_______________________________________





                                      -9-

<PAGE>   1
                                                                    EXHIBIT 10.3


                             [FORM OF SURETY BOND]

                               NOVEMBER __, 1996

                                                          SURETY BOND NO. SB____

RE:                      HOUSEHOLD REVOLVING HOME EQUITY LOAN TRUST 1996-2 (THE
                         "TRUST") REVOLVING HOME EQUITY LOAN ASSET BACKED 
                         CERTIFICATES, SERIES 1996-2, CLASS A (THE 
                         "CERTIFICATES").
                         
                         
INSURED OBLIGATION:      OBLIGATION OF THE TRUST TO PAY, ON OR PRIOR TO THE 
                         SURETY BOND TERMINATION DATE, UP TO $[               ]
                         IN AGGREGATE PRINCIPAL AMOUNT OF THE CERTIFICATES, 
                         PLUS ACCRUED AND UNPAID INTEREST DUE ON THE 
                         CERTIFICATES.
                         
BENEFICIARY:             THE FIRST NATIONAL BANK OF CHICAGO, AS TRUSTEE OF THE 
                         TRUST, TOGETHER WITH ANY SUCCESSOR TRUSTEE DULY
                         QUALIFIED UNDER THE POOLING AND SERVICING AGREEMENT 
                         (THE "TRUSTEE"), FOR THE BENEFIT OF THE HOLDERS
                         OF THE CERTIFICATES.

        CAPITAL MARKETS ASSURANCE CORPORATION ("CapMAC"), in consideration of
the payment of the premium and subject to the terms of this surety bond (the
"Surety Bond"), does hereby unconditionally and irrevocably guarantee to the
Beneficiary, payment of the Insured Obligation.  CapMAC agrees to pay to the
Beneficiary, an amount equal to the sum of:

        (a) for any Distribution Date, the amount by which (i) the Class A
    Servicing Fee payable pursuant to Section 5.01(a)(i); and (ii) the Class A
    Certificate Interest payable pursuant to Section 5.01(a)(ii) under the
    Pooling and Servicing Agreement exceeds (iii) the sum of (A) Class A
    Interest Collections and (B) amounts on deposit in the Spread Account on
    such Distribution Date; and

        (b) for any Distribution Date, the lesser of (i) the amount, if any, by
    which the Class A Certificate Principal Balance after giving effect to all
    other amounts allocable and distributable to principal on the Certificates
    on such Distribution Date, including withdrawal of amounts from the Spread
    Account, exceeds the Invested Amount after giving effect to the allocation
    of all amounts in reduction thereof as of the date immediately following
    such Distribution Date, and (ii) the Net Insured Principal Amount (as
    defined below) on such Distribution Date,

<PAGE>   2

provided, however, that in no event shall the aggregate amount of payments made
hereunder in respect of the principal of the Certificates exceed the Insured
Principal Amount (as defined below).

         Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to them in the Pooling and Servicing Agreement dated
as of November 1, 1996 (the "Pooling and Servicing Agreement") by and among
Household Finance Corporation, as master servicer, the Seller (as defined
therein) and the Trustee.

         "Insured Principal Amount" means $[                       ].

         "Net Insured Principal Amount" means on any day an amount equal to the
Insured Principal Amount less the sum of: (i) the aggregate of all amounts
theretofore paid by CapMAC in respect of principal of the Certificates pursuant
to all Notices for Payment (as defined below) hereunder and (ii) the aggregate
of all amounts theretofore withdrawn from the Spread Account in respect of
payments of the principal of the Certificates.

         CapMAC will pay or cause to be paid to the Beneficiary, irrevocably
and unconditionally and without the prior assertion of any defenses to payment,
including fraud in inducement or fact, the amount demanded in a Notice for
Payment, not to exceed the sum of (i) the Net Insured Principal Amount on the
Distribution Date relating to the Notice for Payment and (ii) the amount
calculated pursuant to clause (a) of the first paragraph of this Surety Bond
for the Distribution Date relating to the Notice for Payment, in immediately
available funds on the later of (a) 11:00 a.m. New York City time on the
Business Day immediately preceding a Distribution Date and, (b) 11:00 a.m. New
York City time on the Business Day next succeeding presentation to CapMAC (as
hereinafter provided) of a notice for payment in the form of Exhibit A hereto
("Notice for Payment"), appropriately completed and executed by the
Beneficiary.

         A Notice for Payment under this Surety Bond must be received by CapMAC
by 2:00 p.m. New York City time on any Business Day by (i) delivery of the
original Notice for Payment to CapMAC at its address set forth below, or (ii)
facsimile transmission of the original Notice for Payment to CapMAC at its
facsimile number set forth below.  If presentation is made by facsimile
transmission, the Beneficiary shall (i) simultaneously confirm transmission by
telephone to CapMAC at its telephone number set forth below, and (ii) as soon
as reasonably practicable, deliver the original Notice for Payment to CapMAC at
its address set forth below.  Any Notice for Payment received by CapMAC after
2:00 p.m.  New York City time, on a Business Day, or on any day that is not a
Business Day, will be deemed to be received by CapMAC at 9:00 a.m., New York
City time, on the next succeeding Business Day.

         CapMAC hereby waives and agrees not to assert any and all rights to
require the Beneficiary to make demand on or to proceed against any person,
party or security prior to demanding payment under this Surety Bond.

         No defenses, set-offs and counterclaims of any kind available to
CapMAC so as to deny payment of any amount due in respect of this Surety Bond
will be valid and CapMAC hereby





<PAGE>   3

waives and agrees not to assert any and all such defenses, set-offs and
counterclaims, including, without limitation, any such rights acquired by
subrogation, assignment or otherwise.

         Any rights of subrogation acquired by CapMAC as a result of any
payment made under this Surety Bond shall, in all respects, be subordinate and
junior in right of payment to the prior indefeasible payment in full of all
amounts due the Trustee on account of payments due under the Certificates.

         This Surety Bond is neither transferable nor assignable except, in
whole but not in part, to a successor Trustee duly appointed and qualified
under the Pooling and Servicing Agreement.  Such transfer and assignment shall
be effective upon receipt by CapMAC of a copy of the instrument effecting such
transfer and assignment signed by the transferor and by the transferee, and a
certificate, properly completed and signed by the transferor and the
transferee, in the form of Exhibit C hereto (which shall be conclusive evidence
of such transfer and assignment), and, in such case, the transferee instead of
the transferor shall, without the necessity of further action, be entitled to
all the benefits of and rights under this Surety Bond in the transferor's
place, provided that, in such case, the Notice for Payment presented hereunder
shall be a certificate of the transferee and shall be signed by one who states
therein that he is a duly authorized officer of the transferee.

         All notices, presentations, transmissions, deliveries and
communications made by the Beneficiary to CapMAC with respect to this Surety
Bond shall specifically refer to the number of this Surety Bond and shall be
made to CapMAC at:

                          Capital Markets Assurance Corporation
                          885 Third Avenue, 14th Floor
                          New York, N.Y. 10022

                          Attention: Managing Director,
                                            Credit Enhancement
                          Telephone: (212) 891-4271
                          Facsimile:  (212) 755-5462

or such other address, officer, telephone number or facsimile number as CapMAC
may designate to the Beneficiary in writing from time to time.  Each such
notice, presentation, delivery and communication shall be effective only upon
actual receipt by CapMAC.

         The obligations of CapMAC under this Surety Bond are irrevocable,
primary, absolute and unconditional (except as expressly provided herein) and
neither the failure of the Trustee, the Seller, the Master Servicer or any
other person, to perform any covenant or obligation in favor of CapMAC (or
otherwise), nor the failure or omission to make a demand permitted hereunder,
nor the commencement of any bankruptcy, debtor or other insolvency proceeding
by or against the Trustee, the Seller, the Master Servicer or any other person
shall in any way affect or limit CapMAC's obligations under this Surety
Bond.  If an action or proceeding to enforce this Surety





<PAGE>   4

Bond is brought, the Beneficiary shall be entitled to recover from CapMAC costs
and expenses reasonably incurred, including without limitation reasonable fees
and expenses of counsel.

         There shall be no acceleration payment due under this Surety Bond
unless such acceleration is at the sole option of CapMAC.

         This Surety Bond and the obligations of CapMAC hereunder shall
terminate upon (the "Surety Bond Termination Date") the earliest to occur of
(a) the date that CapMAC receives: (i) written notice from the Trustee,
substantially in the form of Exhibit B hereto, stating that the termination of
the Trust has occurred, and (ii) the original of this Surety Bond; (b) the date
CapMAC receives, on any Business Day following (i) a downgrade of its claims
paying ability rating by any Rating Agency or (ii) the occurrence of a Credit
Enhancer Default, written notice from the Master Servicer terminating this
Surety Bond, provided, however, that no termination under this clause (b) shall
be effective until (I) all amounts owed to CapMAC under the Insurance Agreement
on the date such written notice is received by CapMAC are paid in full in cash
and (II) the original of this Surety Bond is received by CapMAC; (c) the
Distribution Date occurring in [January, 2018]; and (d) the date on which the
Net Insured Principal Amount is reduced to zero.

         This Surety Bond shall be returned to CapMAC on the Surety Bond
Termination Date.

         This Surety Bond is not covered by the property/casualty insurance
fund specified in Article Seventy-six of the New York State insurance law.

         This Surety Bond sets forth in full the undertaking of CapMAC, and
shall not be modified, altered or affected by any other agreement or
instrument, including any modification or amendment to any other agreement or
instrument, or by the merger, consolidation or dissolution of the Trust or any
other Person and may not be canceled or revoked prior to the time it is
terminated in accordance with the express terms hereof.

         THIS SURETY BOND SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK.

         IN WITNESS WHEREOF, CapMAC has caused this Surety Bond to be executed
on the date first written above.

                     CAPITAL MARKETS ASSURANCE CORPORATION


             By:__________________________________________________


             By:__________________________________________________
                              Authorized Producer







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