-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GP+qkx71pKaLkWDC6+S4Ls7bd1aCLpu+/jjpUX83vTDxt+Vcp/DxtdPHw36HWORB sh8S++f1pg+rThvgGa/FEg== 0000950150-97-001051.txt : 19970716 0000950150-97-001051.hdr.sgml : 19970716 ACCESSION NUMBER: 0000950150-97-001051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970715 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGO FINANCIAL CORP CENTRAL INDEX KEY: 0000736035 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 135629885 STATE OF INCORPORATION: NY FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08645 FILM NUMBER: 97640636 BUSINESS ADDRESS: STREET 1: 4310 PARADISE RD CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027373700 FORMER COMPANY: FORMER CONFORMED NAME: MEGO CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED MAY 31, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MAY 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _____________ COMMISSION FILE NUMBER: 1-8645 ------------------------ MEGO FINANCIAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-5629885 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4310 PARADISE ROAD, LAS VEGAS, NEVADA 89109 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (702) 737-3700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] ------------------------ APPLICABLE ONLY TO CORPORATE ISSUERS: As of July 7, 1997, there were 18,733,121 shares of Common Stock, $.01 par value per share, of the Registrant outstanding. ================================================================================ 2 MEGO FINANCIAL CORP. AND SUBSIDIARIES INDEX
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition at May 31, 1997 and August 31, 1996 (Unaudited)........................... 1 Consolidated Statements of Operations for the Three and Nine Months Ended May 31, 1997 and May 31, 1996 (Unaudited)........................ 2 Consolidated Statements of Stockholders' Equity for the Nine Months Ended May 31, 1997 (Unaudited)......................................... 3 Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 1997 and May 31, 1996 (Unaudited)...................................... 4 Notes to Consolidated Financial Statements............................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 10 PART II OTHER INFORMATION Item 1. Legal Proceedings...................................................... 31 Item 6. Exhibits and Reports on Form 8-K....................................... 32 SIGNATURE............................................................................ 33
i 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (thousands of dollars, except per share amounts) (unaudited)
MAY 31, AUGUST 31, 1997 1996 -------- ---------- ASSETS Cash and cash equivalents............................................. $ 8,363 $ 3,185 Restricted cash....................................................... 7,857 6,657 Notes receivable, net of allowances for cancellations, valuation discounts, and credit losses of $10,288 and $12,059................. 64,407 45,220 Mortgage related securities, at fair value............................ 94,298 22,944 Excess servicing rights............................................... -- 14,268 Mortgage servicing rights............................................. 7,751 3,827 Timeshare interests held for sale..................................... 34,604 33,691 Land and improvements inventory....................................... 2,218 2,185 Other investments..................................................... 1,931 1,972 Property and equipment, net of accumulated depreciation of $15,253 and $13,550............................................................. 25,295 20,262 Deferred selling costs................................................ 2,946 2,901 Prepaid debt expenses................................................. 3,830 1,003 Prepaid commitment fee................................................ 2,637 -- Other assets.......................................................... 8,917 7,482 -------- -------- TOTAL ASSETS................................................ $265,054 $165,597 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and contracts payable......................................... $ 99,027 $ 84,449 Accounts payable and accrued liabilities............................ 26,477 19,662 Payable to assignors................................................ -- 2,579 Future estimated contingency for notes receivable sold with recourse......................................................... 15,605 9,332 Deposits............................................................ 2,474 2,971 Negative goodwill................................................... 61 82 Income taxes payable................................................ 16,677 10,980 -------- -------- Total liabilities before minority interest, subordinated debt and redeemable preferred stock....................... 160,321 130,055 -------- -------- Minority interest of consolidated subsidiary.......................... 9,066 -- -------- -------- Subordinated debt..................................................... 48,269 9,691 -------- -------- Redeemable preferred stock, Series A, 12% cumulative preferred stock, $.01 par value, $10 redemption value, 0 shares issued and outstanding at May 31, 1997 and August 31, 1996..................... -- -- -------- -------- Stockholders' equity: Preferred stock, $.01 par value (authorized -- 5,000,000 shares).... -- -- Common stock, $.01 par value (authorized -- 50,000,000 shares; issued and outstanding -- 18,733,121 at May 31, 1997 and 18,433,121 at August 31, 1996)................................... 187 184 Additional paid-in capital.......................................... 17,974 6,504 Retained earnings................................................... 29,237 19,163 -------- -------- Total stockholders' equity.................................. 47,398 25,851 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $265,054 $165,597 ======== ========
See notes to consolidated financial statements. 1 4 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (thousands of dollars, except per share amounts) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, ------------------------- ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- REVENUES: Timeshare interest sales, net............. $ 8,466 $ 7,965 $ 23,595 $ 20,159 Land sales, net........................... 4,736 4,484 12,510 15,242 Gain on sale of notes receivable.......... 16,707 1,205 37,626 12,486 Net unrealized gain on mortgage related securities............................. 2,305 2,182 5,213 2,182 Interest income........................... 4,852 2,436 11,280 5,627 Financial income.......................... 929 1,755 2,799 4,208 Amortization of negative goodwill......... 7 18 21 53 Incidental operations..................... 881 1,115 2,324 2,347 Other..................................... 995 774 2,575 2,023 ----------- ----------- ----------- ----------- Total revenues.................... 39,878 21,934 97,943 64,327 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Direct cost of: Timeshare interest sales............... 1,354 1,001 3,866 2,852 Land sales............................. 392 446 1,126 1,491 Incidental operations.................. 719 550 2,127 1,670 Commissions and selling................... 8,901 7,601 24,952 22,133 Depreciation and amortization............. 642 597 1,871 1,672 Provision for credit losses............... 7,085 318 12,601 815 Interest expense.......................... 3,980 3,088 10,493 6,012 General and administrative................ 10,344 8,257 28,119 20,740 ----------- ----------- ----------- ----------- Total costs and expenses.......... 33,417 21,858 85,155 57,385 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST.................................. 6,461 76 12,788 6,942 INCOME TAXES (BENEFIT)...................... 535 (230) 1,221 2,360 MINORITY INTEREST........................... 799 -- 1,493 -- ----------- ----------- ----------- ----------- NET INCOME.................................. 5,127 306 10,074 4,582 CUMULATIVE PREFERRED STOCK DIVIDENDS........ -- 40 -- 180 ----------- ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK....... $ 5,127 $ 266 $ 10,074 $ 4,402 =========== =========== =========== =========== EARNINGS PER COMMON SHARE: Primary: Net income............................. $ 0.27 $ 0.01 $ 0.52 $ 0.24 =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding.......................... 19,299,365 18,087,556 19,497,659 18,087,556 =========== =========== =========== =========== Fully Diluted: Net income............................. $ 0.27 $ 0.01 $ 0.52 $ 0.23 =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding.......................... 19,310,198 19,484,667 19,497,659 19,484,667 =========== =========== =========== ===========
See notes to consolidated financial statements. 2 5 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands of dollars, except per share amounts) (unaudited)
COMMON STOCK $.01 PAR VALUE ADDITIONAL ------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- ------ ---------- -------- ------- Balance at August 31, 1996................... 18,433,121 $184 $ 6,504 $19,163 $25,851 Gain on sale of stock of subsidiary, net of income taxes of $4,972..................... -- -- 8,113 -- 8,113 Issuance of warrants in connection with commitment received........................ -- -- 3,000 -- 3,000 Issuance of common stock in connection with the exercise of common stock warrants...... 300,000 3 357 -- 360 Net income for the nine months ended May 31, 1997....................................... -- -- -- 10,074 10,074 ---------- ---- ------- ------- ------- Balance at May 31, 1997...................... 18,733,121 $187 $ 17,974 $29,237 $47,398 ========== ==== ======= ======= =======
See notes to consolidated financial statements. 3 6 MEGO FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands of dollars) (unaudited)
NINE MONTHS ENDED MAY 31, ----------------------- 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................... $ 10,074 $ 4,582 --------- --------- Adjustments to reconcile net income to net cash used in operating activities: Undistributed minority interest............................................ 1,493 -- Amortization of negative goodwill.......................................... (21) (42) Charges to allowances for credit losses and cancellations.................. (7,677) (6,039) Provisions for credit losses and cancellations............................. 20,292 7,800 Cost of sales.............................................................. 4,992 4,343 Depreciation and amortization expense...................................... 1,871 1,312 Additions to excess servicing rights....................................... -- (16,076) Amortization of excess servicing rights.................................... -- 3,500 Accretion of residual interest on mortgage related securities.............. (2,684) (23) Net unrealized gain on mortgage related securities......................... (5,213) (2,182) Additions to mortgage related securities................................... (51,267) -- Payments on mortgage related securities.................................... 815 442 Amortization of mortgage related securities................................ 1,177 -- Additions to mortgage servicing rights..................................... (5,538) (2,007) Amortization of mortgage servicing rights.................................. 976 345 Loan originations and additions to notes receivable........................ (387,921) (125,210) Payments on notes receivable............................................... 23,466 17,608 Proceeds from sale of notes receivable..................................... 346,716 95,403 Purchase of land and timeshare interests................................... (5,938) (14,451) Changes in operating assets and liabilities: Decrease (increase) in restricted cash................................... (1,200) 2,172 Increase in other assets................................................. (13,322) (381) Decrease (increase) in deferred selling costs............................ (45) 788 Increase in accounts payable and accrued liabilities..................... 6,665 3,110 Decrease in deposits..................................................... (497) (1,678) Increase in income taxes payable......................................... 5,697 3,150 --------- --------- Total adjustments..................................................... (67,163) (28,116) --------- --------- Net cash used in operating activities............................. (57,089) (23,534) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................................... (6,788) (3,843) Proceeds from the sale of property and equipment............................. 29 14 Additions to other investments............................................... (785) (1,201) Decreases in other investments............................................... 826 501 --------- --------- Net cash used in investing activities............................. (6,718) (4,529) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings..................................................... 341,572 124,900 Payments on borrowings....................................................... (326,994) (97,130) Preferred stock dividends.................................................... -- (180) Redemption of preferred stock................................................ -- (1,000) Payments on payable to assignors............................................. (2,579) -- Payments on subordinated debt................................................ (1,422) (5) Issuance of subordinated debt................................................ 37,750 -- Proceeds from sale of Mego Mortgage Corporation common stock................. 20,658 -- --------- --------- Net cash provided by financing activities......................... 68,985 26,585 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 5,178 (1,478) --------- --------- CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............................... 3,185 7,338 --------- --------- CASH AND CASH EQUIVALENTS -- END OF PERIOD..................................... $ 8,363 $ 5,860 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest, net of amounts capitalized....................................... $ 7,122 $ 5,249 ========= ========= Income taxes............................................................... $ 1,691 $ 25 ========= ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Issuance of a warrant for 1,000,000 shares of common stock in connection with commitment received........................................................ $ 3,000 $ -- ========= =========
See notes to consolidated financial statements. 4 7 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three and nine months ended May 31, 1997 and May 31, 1996 (unaudited) 1. FINANCIAL STATEMENTS In the opinion of management, when read in conjunction with the audited Consolidated Financial Statements for the years ended August 31, 1996 and 1995, contained in the Form 10-K of Mego Financial Corp. (Mego Financial) filed for the year ended August 31, 1996, the accompanying unaudited Consolidated Financial Statements contain all of the information necessary to present fairly the financial position of Mego Financial and Subsidiaries at May 31, 1997 and the results of its operations for the three and nine months ended May 31, 1997 and 1996, and the cash flows for the nine months ended May 31, 1997 and 1996. All intercompany accounts between the parent and its subsidiaries have been eliminated. Certain reclassifications have been made to conform prior periods with the current period presentation. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all material adjustments necessary for the fair presentation of these statements have been included herein which are normal and recurring in nature. The results of operations for the three and nine months ended May 31, 1997 are not necessarily indicative of the results to be expected for the full year. 2. NATURE OF OPERATIONS Mego Financial was incorporated under the laws of the state of New York in 1954 under the name Mego Corp. and, in 1992, changed its name to Mego Financial Corp. Mego Financial is a specialty financial services company that, through its 81.3% owned subsidiary, Mego Mortgage Corporation (MMC) and its wholly owned subsidiary, Preferred Equities Corporation (PEC), is engaged primarily in originating, selling and servicing consumer receivables generated through home improvement and debt consolidation loans, and timeshare and land sales. Mego Financial and its subsidiaries are herein collectively referred to as the Company. 3. PREFERRED EQUITIES CORPORATION PEC markets and finances timeshare interests and land in select resort areas. By providing financing to virtually all of its customers, PEC also originates consumer receivables that it sells and services. In February 1988, Mego Financial acquired PEC, pursuant to an assignment by the assignors (Comay Corp., GRI, RRE Corp., and H&H Financial, Inc.) of their contract right to purchase PEC. To facilitate its sales of timeshare interests, the Company has entered into several trust agreements. The trustees administer the collection of the related notes receivable. The Company has assigned title to certain of its resort properties in Nevada and its interest in certain related notes receivable to the trustees. 4. MEGO MORTGAGE CORPORATION MMC originates Title I home improvement loans (Title I Loans) insured by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD) through a network of loan correspondents and home improvement contractors. In May 1996, MMC commenced the origination of conventional home improvement and debt consolidation loans through its network of loan correspondents and dealers. Mego Financial's ownership in MMC was reduced from 100% at August 31, 1996 to 81.3% in November 1996, when MMC issued 2,300,000 shares of its common stock in an underwritten public offering at $10.00 per share. Mego Financial continues to have voting control on all matters submitted to the stockholders of MMC, including the election of directors and approval of extraordinary corporate transactions. Concurrently with the common stock offering, MMC issued $40 million of 12.5% Senior Subordinated Notes due in 2001 in an underwritten public offering. The proceeds from the offerings received by MMC have been 5 8 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the three and nine months ended May 31, 1997 and May 31, 1996 (unaudited) used to repay borrowings and provide funds for originations and securitizations of loans. The proceeds received from the public stock offering in excess of the book value of Mego Financial's investment in MMC ($13.1 million, less income taxes of $5 million), have been recorded as additional paid-in capital of Mego Financial. The undistributed minority interest of MMC reflected on the Company's Consolidated Statements of Financial Condition was $9.1 million at May 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion. 5. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," (SFAS 125) which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It requires that liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets be initially measured at fair value. SFAS 125 also requires that servicing assets be measured by allocating the carrying amount between the assets sold and retained interests based on their relative fair values at the date of transfer. Additionally, this statement requires that the servicing assets and liabilities be subsequently measured by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment for asset impairment or increased obligation based on their fair values. The statement requires the Company's existing and future excess servicing rights be measured at fair market value and reclassified as interest only strip receivables, carried as mortgage related securities, and accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As required by the statement, the Company adopted the new requirements effective January 1, 1997 and applied them prospectively. The book value of the Company's mortgage related securities approximates fair value. The adoption of SFAS 125 caused PEC to begin recognizing servicing rights and notes receivable held for sale, similar to the method currently used by MMC for mortgage servicing rights under SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of SFAS No. 65." This increases the gain on sale of notes at the time of sale and reduces future servicing fee income on PEC generated receivables sold after January 1, 1997. No material impact resulted from the implementation of SFAS 125. The following table reflects the components of mortgage related securities as required by SFAS 125 at May 31, 1997: Interest only receivables (formerly excess servicing rights)....... $29,541 Interest only strip securities..................................... 6,860 Residual interest securities....................................... 57,897 ------- Total mortgage related securities............................. $94,298 =======
6 9 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the three and nine months ended May 31, 1997 and May 31, 1996 (unaudited) All mortgage related securities are classified as trading securities and are recorded at their estimated fair values. Changes in the estimated fair values are recorded in current operations. The FASB issued SFAS No. 128, "Earnings per Share" (SFAS 128) in March 1997, effective for financial statements issued after December 15, 1997. The statement provides simplified standards for the computation and presentation of earnings per share (EPS), making EPS comparable to international standards. SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS, by entities with complex capital structures, replacing "Primary" and "Fully Diluted" EPS under APB Opinion No. 15. Basic EPS excludes dilution from common stock equivalents and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from common stock equivalents, similar to fully diluted EPS, but uses only the average stock price during the period as part of the computation. Data utilized in calculating pro forma earnings per share under the SFAS 128 statement are as follows:
THREE MONTHS ENDED MAY 31, NINE MONTHS ENDED MAY 31, --------------------------- --------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Basic: Net income.......................... $ 5,127,000 $ 266,000 $10,074,000 $ 4,402,000 =========== =========== =========== =========== Weighted-average number of common shares........................... 18,733,121 18,087,556 18,582,572 18,087,556 =========== =========== =========== =========== Diluted: Net income.......................... $ 5,127,000 $ 266,000 $10,074,000 $ 4,402,000 =========== =========== =========== =========== Weighted-average number of common shares and common share equivalents outstanding.......... 19,299,365 19,150,835 19,497,659 19,118,936 =========== =========== =========== ===========
The following tables reconcile the net income applicable to common stockholders, basic and diluted shares, and EPS for the following periods:
THREE MONTHS ENDED MAY 31, 1997 THREE MONTHS ENDED MAY 31, 1996 ---------------------------------------- --------------------------------------- PER-SHARE PER-SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ----------- ---------- --------- ---------- ---------- --------- Net income................ $ 5,127,000 $ 306,000 Less: Preferred stock dividends............... -- 40,000 ---------- -------- BASIC EPS Income applicable to common stockholders..... 5,127,000 18,733,121 $0.27 266,000 18,087,556 $0.01 ===== ===== ---------- ---------- Effect of dilutive securities: Warrants.................. -- 337,662 -- 785,395 Stock options............. -- 228,582 -- 277,884 ---------- -------- ---------- DILUTED EPS Income applicable to common stockholders and assumed conversions..... $ 5,127,000 19,299,365 $0.27 $ 266,000 19,150,835 $0.01 ========== ========== ===== ======== ========== =====
7 10 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the three and nine months ended May 31, 1997 and May 31, 1996 (unaudited)
NINE MONTHS ENDED MAY 31, 1997 NINE MONTHS ENDED MAY 31, 1996 ---------------------------------------- --------------------------------------- PER-SHARE PER-SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ----------- ---------- --------- ---------- ---------- --------- Net income................ $10,074,000 $4,582,000 Less: Preferred stock dividends............... -- 180,000 ---------- -------- BASIC EPS Income applicable to common stockholders..... 10,074,000 18,582,572 $0.54 4,402,000 18,087,556 $0.24 ===== ===== ---------- ---------- Effect of dilutive securities: Warrants................ -- 658,160 -- 761,169 Stock options........... -- 256,927 -- 270,211 ---------- ---------- -------- ---------- DILUTED EPS Income applicable to common stockholders and assumed conversions..... $10,074,000 19,497,659 $0.52 $4,402,000 19,118,936 $0.23 ========== ========== ===== ======== ========== =====
6. PAYMENTS TO ASSIGNORS In January 1997, the outstanding balance of payable to assignors of $2.6 million, including accrued interest of $45,000, was paid in full. The assignors are affiliates of certain officers and directors of the Company. See Note 3 of Notes to Consolidated Financial Statements for further discussion. Additionally, effective March 1, 1997, the assignors began receiving the first of 7 equal semi-annual payments of $1,429,000 plus interest related to the repayment of the subordinated debt. These payments are collateralized by a pledge of PEC's outstanding stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Company Liquidity" for additional information. 7. INCOME TAX PROVISION The Company generally records a loss for tax purposes in the year of sale of timeshare interests and land sold on installments because it recognizes costs and expenses (other than cost of sales for which only a portion is recognized in the year of sale) at that time while recognizing associated revenues only when received in subsequent years. As a result, the Company has accumulated federal net operating loss (NOL) carryforwards and has made less than a full provision at the statutory rates for federal income taxes for the nine months ended May 31, 1997, due to partial utilization of these NOL carryforwards. No assurance can be given that the Company has sufficient NOL carryforwards to fully offset its income for the current fiscal year, that the Company will continue to generate sufficient NOL carryforwards to offset future income or that future changes in tax laws will not adversely affect the Company's tax position. 8. SUBSEQUENT EVENTS On June 26, 1997, MMC replaced its $20 million warehouse line of credit with a $40 million revolving warehouse credit facility from two new institutional lenders. The credit facility may be increased to $90 million (at MMC's option, assuming additional participants join in the facility), expires in June 1998 and is secured by loans prior to their sale. This facility provides liquidity for increased fundings for additional loan originations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- MMC -- Negative Cash Flow" for additional information. 8 11 MEGO FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the three and nine months ended May 31, 1997 and May 31, 1996 (unaudited) MMC completed a $104.6 million senior subordinated loan securitization on June 27, 1997, representing a non-monoline insured transaction collateralized by conventional home improvement and debt consolidation mortgage loans with generally high loan-to-value ratios. Pursuant to this securitization, seven classes of home loan asset-backed notes and certificates were issued and sold in a public offering. MMC continues to service the sold loans and is entitled to receive, from payments with respect to interest on the sold loans, a servicing fee equal to 1.00% per annum on the aggregate principal balance of the loans. MMC received residual instruments and contractual rights which will be recorded as mortgage related securities on the Statements of Financial Condition, representing the excess interest differential (after payment of servicing, other fees, and the contractual obligations payable to the note and certificate holders) between the interest paid by the obligors of the sold loans and the yield on the sold notes and certificates. MMC may be required to repurchase loans that do not conform to the representations and warranties made by MMC in the securitization agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" for additional information. 9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, contained elsewhere herein. GENERAL The business of the Company is primarily the generation of consumer receivables by marketing timeshare interests, retail lots and land parcels, generating home improvement and debt consolidation loans, and servicing the related notes receivable and loans. The Company, through its subsidiary PEC, provides financing to the purchasers of its timeshare interests and land. This financing is generally evidenced by notes secured by deeds of trust and mortgages as well as non-recourse installment sales contracts. These notes receivable are generally payable over a period of up to 10 years, bear interest at rates ranging from 0% to 16% and require equal monthly installments of principal and interest. MMC originates, purchases, sells, securitizes and services consumer loans consisting primarily of home improvement and debt consolidation loans, generally secured by liens on improved property, through its network of independent correspondent lenders (Correspondents) and home improvement construction contractors (Dealers). The conventional loans are purchased or originated by MMC in amounts up to a maximum of $75,000 with fixed interest rates and up to 25 year maturities, and are generally secured by a lien on the respective primary residence. The Title I Loans are purchased or originated by MMC in amounts up to a maximum of $25,000 with maturities up to 20 years and are generally secured by a lien on the improved property. During the first quarter of fiscal 1997, MMC began offering conventional home improvement loans through its dealer division and debt consolidation loans to its borrowers through both its correspondent and dealer divisions. Since MMC began offering conventional loans in May 1996, conventional loans have accounted for an increasing portion of loan originations. Conventional loan products typically have high loan-to-value ratios. 10 13 The following tables set forth certain data regarding loans originated, sold, securitized, and serviced by MMC and PEC during the three and nine months ended May 31, 1997 and 1996 (thousands of dollars):
THREE MONTHS ENDED MAY 31, ----------------------------------------- 1997 1996 ------------------ ------------------ LOAN ORIGINATIONS: PRINCIPAL AMOUNT OF LOANS ORIGINATED: Correspondents: Title I.......................................... $ 11,970 6.4% $ 21,577 45.9% Conventional..................................... 144,634 77.6 335 0.7 -------- ----- -------- ----- Total Correspondents................................ 156,604 84.0 21,912 46.6 -------- ----- -------- ----- Dealers: Title I.......................................... 12,427 6.7 11,386 24.2 Conventional..................................... 4,908 2.6 -- 0.0 -------- ----- -------- ----- Total Dealers....................................... 17,335 9.3 11,386 24.2 -------- ----- -------- ----- Notes receivable additions through sales of timeshare interests and land..................... 12,457 6.7 13,724 29.2 -------- ----- -------- ----- Total................................................. $186,396 100.0% $ 47,022 100.0% ======== ===== ======== ===== NUMBER OF LOANS ORIGINATED: Correspondents: Title I.......................................... 565 7.4% 1,357 39.3% Conventional..................................... 4,377 57.5 11 0.3 -------- ----- -------- ----- Total Correspondents................................ 4,942 64.9 1,368 39.6 -------- ----- -------- ----- Dealers: Title I.......................................... 1,018 13.4 716 20.7 Conventional..................................... 299 3.9 -- 0.0 -------- ----- -------- ----- Total Dealers....................................... 1,317 17.3 716 20.7 -------- ----- -------- ----- Notes receivable additions through sales of timeshare interests and land..................... 1,359 17.8 1,372 39.7 -------- ----- -------- ----- Total................................................. 7,618 100.0% 3,456 100.0% ======== ===== ======== =====
NINE MONTHS ENDED MAY 31, ----------------------------------------- 1997 1996 ------------------ ------------------ LOAN ORIGINATIONS: PRINCIPAL AMOUNT OF LOANS ORIGINATED: Correspondents: Title I.......................................... $ 42,481 11.0% $ 57,777 47.2% Conventional..................................... 263,395 68.5 335 0.3 -------- ----- -------- ----- Total Correspondents................................ 305,876 79.5 58,112 47.5 -------- ----- -------- ----- Dealers: Title I.......................................... 34,852 9.1 31,278 25.5 Conventional..................................... 6,932 1.8 -- 0.0 -------- ----- -------- ----- Total Dealers....................................... 41,784 10.9 31,278 25.5 -------- ----- -------- ----- Notes receivable additions through sales of timeshare interests and land..................... 37,133 9.6 33,053 27.0 -------- ----- -------- ----- Total................................................. $384,793 100.0% $122,443 100.0% ======== ===== ======== =====
11 14
NINE MONTHS ENDED MAY 31, ----------------------------------------- 1997 1996 ------------------ ------------------ NUMBER OF LOANS ORIGINATED: Correspondents: Title I.......................................... 2,058 11.7% 3,795 40.5% Conventional..................................... 8,337 47.3 11 0.1 -------- ----- -------- ----- Total Correspondents................................ 10,395 59.0 3,806 40.6 -------- ----- -------- ----- Dealers: Title I.......................................... 2,925 16.6 2,054 21.9 Conventional..................................... 392 2.2 -- 0.0 -------- ----- -------- ----- Total Dealers....................................... 3,317 18.8 2,054 21.9 -------- ----- -------- ----- Notes receivable additions through sales of timeshare interests and land..................... 3,926 22.2 3,515 37.5 -------- ----- -------- ----- Total................................................. 17,638 100.0% 9,375 100.0% ======== ===== ======== ===== LOANS SERVICED AT END OF PERIOD (INCLUDING NOTES SECURITIZED, SOLD TO INVESTORS, AND HELD FOR SALE): Title I............................................... $248,361 39.2% $170,713 59.1% Conventional.......................................... 268,065 42.3 335 0.1 Timeshare and land.................................... 116,730 18.5 117,602 40.8 -------- ----- -------- ----- Total................................................. $633,156 100.0% $288,650 100.0% ======== ===== ======== =====
The Company has entered into financing arrangements with certain purchasers of timeshare interests and land whereby no stated interest rate is charged if the aggregate down payment is at least 50% of the purchase price and the balance is payable in 24 or fewer monthly payments. Notes receivable of $6.8 million and $6 million at May 31, 1997 and August 31, 1996, respectively, made under this arrangement are included in the table above. A valuation discount is established to provide for an effective interest rate (currently 10%) on notes receivable bearing no stated interest rate at the time of sale, and is applied to the principal balance and amortized over the term of the note. The effective interest rate is based upon the economic interest rate environment and similar industry data. Land sales as of May 31, 1997, exclude $12.4 million in sales not yet recognized under GAAP since the requisite payment amounts have not yet been received. If ultimately recognized, revenues from these sales will be reduced by a related estimated provision for cancellation of $1.8 million, estimated deferred selling costs of $2.9 million and cost of sales of $1 million. The Company is obligated under certain agreements for the sale of notes receivable and certain loan agreements to maintain various minimum net worth requirements. At May 31, 1997, the most restrictive of these agreements required PEC to maintain a minimum tangible net worth of $25 million and MMC to maintain a minimum tangible net worth of $12.5 million plus any issuance of capital stock or other capital instruments since August 31, 1995, plus 50% of MMC's cumulative net income since May 1, 1996. At May 31, 1997, MMC's minimum tangible net worth requirement was $39.4 million, and MMC's tangible net worth was $48.5 million. Additionally, MMC was required to maintain a minimum level of profitability of at least $500,000 per rolling 6 month period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- MMC -- Negative Cash Flow and PEC -- Liquidity" for further information. At May 31, 1997 and August 31, 1996, receivables aggregating $46.2 million and $54.2 million, respectively, were pledged to lenders to collateralize certain of the Company's indebtedness. Receivables which qualify for the lenders' criteria may be pledged as collateral whether or not such receivables have been recognized for accounting purposes. On May 22, 1997, $63.5 million of loans were repurchased, securitized and sold by MMC, comprised of $60.8 million of limited equity conventional loans and $2.7 million of Title I Loans. Pursuant to this 12 15 securitization, asset-backed notes secured by the loans were sold in a public offering. The securitization consisted of five note classes and one certificate class. MMC continues to service the sold loans and is entitled to receive, from payments with respect to interest on the sold loans, a servicing fee equal to 1.00% per annum on the remaining principal balance of each loan. MMC received certificates and contractual rights which have been recorded as mortgage related securities on the Consolidated Statements of Financial Condition, representing the interest differential, after payment of servicing and other fees, between the interest paid by the obligors of the sold loans and the yield on the sold notes, and the receipt of the over-collateralization. MMC may be required to repurchase loans that do not conform to the representations and warranties made by MMC in the securitization agreements. MMC completed a $104.6 million senior subordinated loan securitization on June 27, 1997, representing a non-monoline insured transaction collateralized by conventional home improvement and debt consolidation mortgage loans with generally high loan-to-value ratios. Pursuant to this securitization, seven classes of home loan asset-backed notes and certificates were issued and sold in a public offering. MMC continues to service the sold loans and is entitled to receive, from payments with respect to interest on the sold loans, a servicing fee equal to 1.00% per annum on the aggregate principal balance of the loans. MMC received residual instruments and contractual rights which will be recorded as mortgage related securities on the Statements of Financial Condition, representing the excess interest differential (after payment of servicing, other fees, and the contractual obligations payable to the note and certificate holders) between the interest paid by the obligors of the sold loans and the yield on the sold notes and certificates. MMC may be required to purchase loans that do not conform to the representations and warranties made by MMC in the securitization agreements. MMC MMC recognizes revenue from the gain on sale of loans, unrealized gain on mortgage related securities, interest income and servicing income. Interest income, net, represents the interest received on loans in MMC's portfolio prior to their sale, net of interest paid under its debt agreements. Net loan servicing income represents servicing fee income and other ancillary fees received for servicing loans less the amortization of capitalized mortgage servicing rights and excess servicing rights through January 1, 1997, which was the date of adoption of SFAS 125. Mortgage servicing rights and excess servicing rights were amortized over the estimated lives of the loans. MMC primarily sells loans through securitizations, and also sells whole loans to third party purchasers. Certain of the regular interests of the related securitizations are sold, with the interest only and residual interest securities retained by MMC. MMC sells its loans through whole loan sales to third party purchasers, generally retaining the right to service the loans and to receive any amounts in excess of the guaranteed yield to the purchasers. In the third quarter of fiscal 1997, MMC recorded loan sales of $159.2 million, of which $10 million were sold with servicing released. 13 16 The following table sets forth the principal balance of loans sold or securitized and related gain on sale data for the three and nine months ended May 31, 1997 and 1996 (thousands of dollars):
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, -------------------- -------------------- 1997 1996 1997 1996 -------- ------- -------- ------- ALL LOANS SOLD: MMC Loans Sold: Title I Loans................................... $ 22,879 $31,652 $ 78,545 $88,073 Conventional.................................... 136,297 -- 248,072 -- -------- ------- -------- ------- Total........................................ $159,176 $31,652 $326,617 $88,073 ======== ======= ======== ======= Gain on sale of loans............................. $ 16,204 $ 811 $ 36,233 $11,621 ======== ======= ======== ======= Net unrealized gain on mortgage related securities...................................... $ 2,305 $ 2,182 $ 5,213 $ 2,182 ======== ======= ======== ======= LOANS SOLD EXCLUDING THOSE WITH SERVICING RELEASED: MMC Loans Sold: Title I Loans................................... $ 22,879 $31,652 $ 78,545 $88,073 Conventional(1)................................. 126,296 -- 238,071 -- -------- ------- -------- ------- Total........................................ $149,175 $31,652 $316,616 $88,073 ======== ======= ======== ======= Gain on sale of loans(2).......................... $ 15,804 $ 811 $ 35,833 $11,621 ======== ======= ======== ======= Gain on sale of loans as a percentage of principal balance of loans sold(2)........................ 10.6% 2.6% 11.3% 13.2% ======== ======= ======== ======= Gain on sale of loans plus net unrealized gain on mortgage related securities as a percentage of principal balance of loans sold(2).............. 12.1% 9.5% 13.0% 15.7% ======== ======= ======== =======
- --------------- (1) Excludes $10,001,000 of loans sold with servicing released. (2) Excludes gain on sale of $400,000 relating to the whole loan sale of $10,001,000 of loans sold with servicing released. The combined gain on sale and net unrealized gain on mortgage related securities for the 3 months ended May 31, 1997 was $18.8 million, or 11.8% of loans sold during the period, before adjustments totaling $295,000 relating to Title I Loans originated prior to March 1, 1996. The adjustments were approximately 0.2% of the original principal balances of such loans. The percentage of gain on sale of loans can vary for several reasons, including the relative amounts of conventional and Title I Loans, each of which type of loan has different (i) estimated prepayment rates, (ii) weighted-average interest rates, (iii) weighted-average maturities, and (iv) estimated future default rates. The gain on sale of loans percentage has increased since January 1, 1997, due to the reclassification of net loan servicing revenue into gain on sale of loans as a result of compliance with SFAS 125. Typically, the gain on sale of loans through securitizations is higher than on whole loan sales. As a holder of residual interest securities, MMC is entitled to receive certain excess cash flows. These excess cash flows are calculated as the difference between (a) principal and interest paid by borrowers and (b) the sum of (i) pass-through interest and principal to be paid to the holders of the regular securities and interest only securities, (ii) trustee fees, (iii) third-party credit enhancement and FHA insurance fees, (iv) servicing fees and (v) estimated loan pool losses. MMC's right to receive the excess of cash flows is subject to the satisfaction of certain over-collateralization or reserve requirements which are specific to each securitization and are used as a means of credit enhancement. 14 17 Delinquencies -- The following table sets forth the Title I Loan and conventional loan delinquency and Title I insurance claims experience of loans serviced by MMC at the dates indicated (thousands of dollars):
MAY 31, AUGUST 31, 1997 1996 -------- ---------- Delinquency period(1) 31-60 days past due................................................. 1.53% 2.17% 61-90 days past due................................................. 0.65 0.85 91 days and over past due(2)........................................ 3.06 4.53 91 days and over past due, net of claims filed(3)................... 2.32 1.94 Outstanding claims filed with HUD(4).................................. 0.74 2.59 Outstanding number of Title I insurance claims........................ 259 255 Total servicing portfolio............................................. $516,426 $214,189 Title I Loans serviced................................................ 248,361 202,766 Conventional loans serviced........................................... 268,065 11,423 Amount of FHA insurance available(5).................................. 21,413 21,205 Amount of FHA insurance available as a percentage of Title I Loans serviced...................................................... 8.62% 10.46% Losses on liquidated loans(6)......................................... $ 48 $ 32
- --------------- (1) Represents the dollar amount of delinquent loans as a percentage of the total dollar amount of loans serviced by MMC (including loans owned by MMC) as of the dates indicated. There were no conventional loan delinquencies at August 31, 1996. (2) During the year ended August 31, 1996 and the first two quarters of fiscal 1997, the processing and payment of claims filed with HUD was delayed. Claims paid by HUD during the third quarter of 1997 were $4.4 million. (3) Represents the dollar amount of delinquent loans net of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of the total dollar amount of total loans serviced by MMC (including loans owned by MMC) as of the dates indicated. (4) Represents the dollar amount of delinquent Title I Loans for which claims have been filed with HUD and payment is pending as a percentage of the total dollar amount of total loans serviced by MMC (including loans owned by MMC) as of the dates indicated. (5) If all claims filed with HUD had been processed as of May 31, 1997, the amount of FHA insurance available for all serviced Title I Loans would have been reduced to $17.7 million, which as a percentage of Title I Loans serviced, net of claims, would have been 7.2%. (6) On Title I Loans, a loss is recognized upon receipt of payment of a claim or final rejection thereof. Claims paid in a period may relate to a claim filed in an earlier period. Since MMC commenced its Title I lending operations in March 1994, there has been no final rejection of a claim by the FHA. Aggregate losses on liquidated Title I Loans relates to 560 Title I insurance claims made by MMC, as servicer, since commencing operations through May 31, 1997. Losses on Title I Loans liquidated will increase as the balance of the claims are processed by HUD. MMC has received an average payment from HUD equal to 90% of the outstanding principal balance of such Title I Loans, plus appropriate interest and costs. Pooling and servicing agreements and sales and servicing agreements relating to MMC's securitization transactions contain provisions with respect to the maximum permitted loan delinquency rates and loan default rates, which, if exceeded, would allow the termination of MMC's right to service the related loans. At May 31, 1997, the rolling three month average annual default rate on the pool of loans sold in the March 1996 and August 1996 securitization transactions exceeded 6.5%, the permitted limit set forth in the related pooling and servicing agreements. Accordingly, this condition could result in the termination of MMC's servicing rights with respect to those pools of loans by the trustee, the master servicer or the insurance company providing credit enhancement for that transaction. Although the insurance company has indicated that it, and to its knowledge, the trustee and the master servicer have no present intention to terminate MMC's servicing 15 18 rights related to those pools of loans, no assurance can be given that one or more of such parties will not exercise its right to terminate. In the event of such termination, there would be a material adverse effect on the valuation of the Company's mortgage servicing rights and the results of operations in the amount of such mortgage servicing rights ($2.6 million before income taxes at May 31, 1997) on the date of termination. The pooling and servicing agreements and sales and servicing agreements also require that certain delinquency and default rates not exceed certain thresholds. If these thresholds are exceeded, higher levels of over-collateralization are required which can cause a delay in cash receipts to MMC as a holder of the residual interest, causing an adverse valuation adjustment to the residual security. Delinquencies of loans serviced by MMC have also decreased the amount of loan servicing income recorded during the nine months ended May 31, 1997 as MMC's loan servicing income has been reduced by the amount of interest advanced to the owners of these loans. Delinquencies have increased to $27.1 million at May 31, 1997 from $16.2 million at August 31, 1996. Since MMC began originating Title I Loans in 1994, an increasing level of delinquencies has appeared as expected on such loans less than two years old. After this initial period, the level of delinquencies on such loans is not anticipated to increase. Once a loan becomes 30 days past due, a collection supervisor generally analyzes the account to determine the appropriate course of remedial action. It is MMC's policy to consult with the delinquent customer to resolve the past due balance before Title I claim processing or legal action is initiated. PEC PEC recognizes revenue primarily from sales of timeshare interests and land sales in resort areas, gain on sale of receivables and interest income. PEC also sells its consumer receivables while generally retaining the servicing rights. Revenue from sales of timeshare interests and land is recognized after the requisite rescission period has expired and at such time as the purchaser has paid at least 10% of the sales price for sales of timeshare interests and 20% of the sales price for land sales. Land sales typically meet these requirements within eight to ten months of closing, and sales of timeshare interests typically meet these requirements at the time of sale. The sales price, less a provision for cancellation, is recorded as revenue and the allocated cost related to the timeshare interest or land parcel is recorded as expense in the year that revenue is recognized. When revenue related to land sales is recognized, the portion of the sales price attributable to uncompleted required improvements, if any, is deferred. Notes receivable with payment delinquencies of 90 days or more have been considered in determining the allowance for cancellation. Cancellations occur when the note receivable is determined to be uncollectible and the related collateral, if any, has been recovered. Cancellation of a note receivable in the year the revenue is recognized is accounted for as a reversal of revenue, since the determination that a loan is uncollectible is made in such a short period of time, that it is deemed to not actually be a sale, so no revenue is recognized. Cancellation of a note receivable subsequent to the year the revenue was recognized is charged to the allowance for cancellation. Interest only strip receivables, which were formerly named excess servicing rights, are included in mortgage related securities, and are carried at fair market value. Gain on sale of notes receivable includes the present value of the differential between contractual interest rates charged to borrowers on notes receivable sold by PEC and the interest rates to be received by the purchasers of such notes receivable, after considering the effects of estimated prepayments and a normal servicing fee. PEC generally retains the servicing rights and participation in certain cash flows from the sold notes receivable. PEC generally sells its notes receivable at par value. 16 19 RESULTS OF OPERATIONS Three Months Ended May 31, 1997 compared to Three Months Ended May 31, 1996 MMC MMC originated $173.9 million of loans during the 3 months ended May 31, 1997 compared to $33.3 million of loans during the 3 months ended May 31, 1996, an increase of 422.4%. The increase is a result of the overall growth in MMC's business, including an increase in the number of active Correspondents and an increase in the number of states served. At May 31, 1997, MMC had approximately 562 active Correspondents and 463 active Dealers, compared to approximately 254 active Correspondents and 445 active Dealers at May 31, 1996. Of the $173.9 million of loans originated during the 3 months ended May 31, 1997, $149.5 million were conventional loans and $24.4 million were Title I Loans compared to $335,000 of conventional loans and $33 million of Title I Loans during the 3 months ended May 31, 1996. Total revenues increased 334.9% to $20.4 million during the 3 months ended May 31, 1997 from $4.7 million during the 3 months ended May 31, 1996. The increase was primarily the result of the increased volume of loans originated and the gain on sale of loans. Gain on sale of loans and net unrealized gain on sale of mortgage related securities increased to $18.5 million during the 3 months ended May 31, 1997 compared to $1.3 million during the 3 months ended May 31, 1996, primarily due to increased loan sales of $159.2 million during the 3 months ended May 31, 1997 compared to $31.7 million during the 3 months ended May 31, 1996. Loan servicing income decreased 43.6% to $726,000 during the 3 months ended May 31, 1997 from $1.3 million during the 3 months ended May 31, 1996. The decrease was primarily the result of increased amortization of mortgage servicing rights, reclassification of net revenue in compliance with SFAS 125, and increased interest advances and reduced servicing fees related to $27.1 million in serviced delinquent loans at May 31, 1997 compared to $12.9 million at May 31, 1996. Interest income on loans held for sale and mortgage related securities, net of interest expense, increased 182.1% to $1.1 million during the 3 months ended May 31, 1997 from $403,000 during the 3 months ended May 31, 1996. This was primarily the result of the combined increase in the size of the portfolio of loans held for sale and in the mortgage related securities portfolio to $116.3 million at May 31, 1997 from $19.8 million at May 31, 1996. The provision for credit losses increased to $7.1 million for the 3 months ended May 31, 1997 from $318,000 for the 3 months ended May 31, 1996. The increase in the provision was directly related to the increase in the volume of loans originated and the increased ratio of conventional loans to Title I Loans originated during the 3 months ended May 31, 1997 compared to the 3 months ended May 31, 1996. The provision for credit losses is based upon periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, collateral values, and estimated FHA insurance recoveries on loans originated and sold. As MMC increased its conventional loan originations as compared to Title I Loan originations, the provision for credit losses as a percentage of loans originated increased due to the greater risk of loss associated with conventional loans, which are not FHA insured. Total general and administrative expenses increased 100.8% to $6.1 million during the 3 months ended May 31, 1997 compared to $3 million during the 3 months ended May 31, 1996. The increase was primarily a result of increased payroll related to the hiring of additional underwriting, loan processing, administrative, loan quality control and other personnel as a result of the expansion of MMC's business and costs related to the opening of additional offices. Payroll and benefits expense increased 123.9% to $2.9 million during the 3 months ended May 31, 1997 from $1.3 million during the 3 months ended May 31, 1996 primarily due to an increased number of employees. The number of employees increased to 332 at May 31, 1997 from 158 at May 31, 1996 due to increased staff necessary to support the business expansion and improve quality control. Commissions and selling expenses increased 24.3% to $675,000 during the 3 months ended May 31, 1997 from $543,000 during the 3 months ended May 31, 1996, while loan originations increased by $140.6 million 17 20 to $173.9 million during the period. The sales network has expanded to substantially all states, adding new personnel and offices to further the loan origination growth strategy. Professional services decreased to $80,000 during the 3 months ended May 31, 1997 from $92,000 during the 3 months ended May 31, 1996 due primarily to decreased audit and legal fees. Other general and administrative expenses increased 82.6% to $902,000 during the 3 months ended May 31, 1997 from $494,000 during the 3 months ended May 31, 1996 due primarily to added expenses related to increased loan sub-servicing fees and management services fees paid to PEC and the ongoing expansion of facilities. Income before income taxes increased to $6.9 million for the 3 months ended May 31, 1997 from $1 million for the 3 months ended May 31, 1996, therefore, the provision for income taxes increased to $2.6 million for the 3 months ended May 31, 1997 from $255,000 for the 3 months ended May 31, 1996. As a result of the foregoing, MMC's net income increased 459.2% to $4.3 million for the 3 months ended May 31, 1997 from $764,000 for the 3 months ended May 31, 1996. PEC Total revenues for PEC increased 9.8% or $1.6 million to $18.3 million during the 3 months ended May 31, 1997 compared to $16.6 million during the 3 months ended May 31, 1996 primarily due to an increase in net sales of timeshares and increased gain on sale of receivables, partially offset by a decrease in incidental operations. Additionally, income from net retail lot sales, financial income, and interest income increased during the third quarter of fiscal 1997. Timeshare interests and land sales, net, increased to $13.2 million during the 3 months ended May 31, 1997 from $12.4 million during the 3 months ended May 31, 1996, or 6%. Gross sales of timeshare interests increased to $10.3 million during the 3 months ended May 31, 1997 from $8.8 million during the 3 months ended May 31, 1996, an increase of 18.2%. Net sales of timeshare interests increased to $8.5 million during the 3 months ended May 31, 1997 from $8 million during the 3 months ended May 31, 1996, an increase of 6.3%. The provision for cancellation represented 18.2% and 9% of gross sales of timeshare interests during the 3 months ended May 31, 1997 and 1996, respectively. The increase in the provision for cancellation was primarily due to an increase in sales volume in the current quarter and the lower provision required during the same quarter in 1996 due to a reduction of a provision for one timeshare project. During the first quarter of fiscal 1997, the Aloha Bay resort in Indian Shores, Florida was completed and 131 timeshare interests in that resort were sold through May 31, 1997. Gross sales of land decreased to $5.6 million during the 3 months ended May 31, 1997 from $5.7 million during the 3 months ended May 31, 1996, a decrease of 2.1%. Net sales of land increased to $4.7 million during the 3 months ended May 31, 1997 from $4.5 million during the 3 months ended May 31, 1996, an increase of 5.6%. The provision for cancellation represented 15.3% and 21.5% of gross sales of land during the 3 months ended May 31, 1997 and 1996, respectively. The decrease in the provision for cancellation was primarily due to a decrease in gross land sales. The decrease in gross land sales is the result of PEC's emphasis shift, as part of its strategic plan, from sales of land to sales of timeshare interests due both to its diminishing inventory of land available for sale and its increasing inventory of timeshare interests from the opening of new resorts. The shift from land sales to timeshare sales is due primarily to the reduction of PEC's current land inventory which has not been replenished with additional land due to the unavailability of suitable land at acceptable prices. Gain on sale of notes receivable increased $445,000 to $503,000 during the 3 months ended May 31, 1997 from $58,000 during the 3 months ended May 31, 1996 due to a sale of notes receivable of $10 million during the third quarter of 1997 compared to a sale of notes receivable of $646,000 during the third quarter of 1996. PEC's interest income increased slightly to $2 million during the 3 months ended May 31, 1997 from $1.8 million during the 3 months ended May 31, 1996 primarily due to a relatively flat interest rate 18 21 environment combined with a slight increase in the average balance of notes receivable outstanding during the current quarter as compared to the 3 months ended May 31, 1996. Financial income increased to $726,000 during the 3 months ended May 31, 1997 from $458,000 during the 3 months ended May 31, 1996, an increase of 58.5%, due to growth in the serviced loan portfolio. Revenues from incidental operations decreased to $881,000 during the 3 months ended May 31, 1997 from $1.1 million during the 3 months ended May 31, 1996, which was a decrease of 21%. The decrease was primarily due to a decline in utility revenues. As a result of the foregoing, total PEC revenues increased to $18.3 million during the 3 months ended May 31, 1997 from $16.6 million during the 3 months ended May 31, 1996, or 9.8%. Total costs and expenses increased to $17.5 million during the 3 months ended May 31, 1997 from $14.8 million during the 3 months ended May 31, 1996, an increase of 18.1%. The increase resulted primarily from an increase in commissions and selling expenses to $8.9 million from $7.6 million, an increase of 17.1%; an increase in general and administrative costs to $3.9 million from $3.3 million, an increase of 15.1%; an increase in interest expense of $282,000 to $1.8 million, or 18.8%, due to a higher level of borrowings; and an increase in direct costs of timeshare interest sales to $1.4 million from $1 million, an increase of 35.3%, resulting from increased timeshare interest sales. PEC's commissions and selling expenses increased primarily as a result of increased sales and costs relating to the establishment of new marketing programs during fiscal 1997, and strategies designed to increase sales of timeshare interests, market research costs, additional staffing, increased advertising costs, and additional sales offices. The increase in general and administrative costs is primarily due to increases in payroll related to hiring of additional administrative personnel and owners' association costs related to a higher level of unsold timeshare inventory. In June 1997, sales commenced at PEC's new Orlando, Florida timeshare property and 1,122 new upscale timeshare interests in Las Vegas are expected to be available for sale in July 1997. As a percentage of gross sales of timeshare interests and land, commissions and selling expenses relating thereto increased to 55.9% during the 3 months ended May 31, 1997 from 52.6% during the 3 months ended May 31, 1996 and cost of sales increased to 11% during the 3 months ended May 31, 1997 from 10% during the 3 months ended May 31, 1996. Sales prices of timeshare interests are typically lower than those of land, while selling costs per sale, other than commissions, are approximately the same in amount for timeshare interests and land; accordingly, PEC generally realizes lower profit margins from sales of timeshare interests than from sales of land. Depreciation expense increased to $469,000 during the 3 months ended May 31, 1997 from $349,000 during the 3 months ended May 31, 1996, an increase of 34.4%, resulting from additions made to property and equipment. Interest expense increased to $1.8 million during the 3 months ended May 31, 1997 from $1.5 million during the 3 months ended May 31, 1996, an increase of 18.8%. The increase is a result of an increased average outstanding balance of notes payable at May 31, 1997 from May 31, 1996. Income before income taxes decreased to $797,000 for the 3 months ended May 31, 1997 from $1.8 million for the 3 months ended May 31, 1996, therefore, the provision for income tax expense also declined to $271,000 for the 3 months ended May 31, 1997 from $627,000 for the 3 months ended May 31, 1996. As a result of the foregoing, PEC's net income decreased to $526,000 for the 3 months ended May 31, 1997 compared to $1.2 million for the 3 months ended May 31, 1996. COMPANY Net income applicable to common stock increased $4.9 million to $5.1 million during the 3 months ended May 31, 1997 from $266,000 for the 3 months ended May 31, 1996. The increase was due primarily to an increase of $3.5 million in MMC net income, a decrease in general and administrative expenses of $2.1 million, of which $1.5 million related to audit and professional fees, a decrease in interest expense to 19 22 assignors of $888,000 and other decreases in expenses of Mego Financial (parent only). These items were offset partially by a decrease of $691,000 in PEC net income as a result of increased expenses related to the expansion of selling operations. See prior discussion for MMC and PEC. Total costs and expenses during the 3 months ended May 31, 1997 were $33.4 million, an increase of 52.9% over $21.9 million during the 3 months ended May 31, 1996. Commissions and selling expenses increased 17.1% to $8.9 million during the 3 months ended May 31, 1997 compared to $7.6 million during the 3 months ended May 31, 1996 due primarily to the expansion of timeshare marketing efforts by PEC and higher volumes of loan originations by MMC and sales by PEC. General and administrative expenses increased 25.3% to $10.3 million during the 3 months ended May 31, 1997 compared to $8.3 million during the 3 months ended May 31, 1996 primarily due to the expansion of the operating staff of MMC. Provision for credit losses increased $6.8 million due to the increase in the level of conventional loan originations by MMC compared to Title I Loan originations as well as the overall increased volume of MMC's loan originations. Additionally, Mego Financial (parent only) incurred interest expense on amounts payable to assignors and continues to incur interest on subordinated debt. Total general and administrative expenses for Mego Financial (parent only) were primarily comprised of professional services, external financial reporting expenses, and regulatory and other public company corporate expenses. Provision for income taxes for the 3 months ended May 31, 1997 increased to $535,000 compared to an income tax benefit of $230,000 for the 3 months ended May 31, 1996. The increase was due to an increase in pre-tax income from $76,000 for the third quarter of 1996 to $6.5 million for the third quarter of 1997. See Note 7 of Notes to Consolidated Financial Statements for additional information. RESULTS OF OPERATIONS Nine Months Ended May 31, 1997 compared to Nine Months Ended May 31, 1996 MMC MMC originated $347.7 million of loans during the 9 months ended May 31, 1997 compared to $89.4 million of loans during the 9 months ended May 31, 1996, an increase of 288.9%. The increase is a result of the overall growth in MMC's business, including an increase in the number of active Correspondents and an increase in the number of states served. At May 31, 1997, MMC had approximately 562 active Correspondents and 463 active Dealers, compared to approximately 254 active Correspondents and 445 active Dealers at May 31, 1996. Of the $347.7 million of loans originated during the 9 months ended May 31, 1997, $270.3 million were conventional loans and $77.4 million were Title I Loans compared to $335,000 of conventional loans and $89.1 million of Title I Loans during the 9 months ended May 31, 1996. Total revenues increased 161% to $45.4 million during the 9 months ended May 31, 1997 from $17.4 million during the 9 months ended May 31, 1996. The increase was primarily the result of the increased volume of loans originated and the gain on sale of loans. Gain on sale of loans and net unrealized gain on mortgage related securities increased 200.3% to $41.4 million during the 9 months ended May 31, 1997 from $13.8 million during the 9 months ended May 31, 1996. The increase was primarily due to increased loan sales of $326.6 million during the 9 months ended May 31, 1997 compared to $88.1 million during the 9 months ended May 31, 1996. Loan servicing income decreased 36.9% to $1.9 million during the 9 months ended May 31, 1997 from $3 million during the 9 months ended May 31, 1996. The decrease was primarily the result of increased amortization of mortgage servicing rights, reclassification of net revenue in compliance with SFAS 125, and increased interest advances and reduced servicing fees related to $27.1 million in delinquent serviced loans at May 31, 1997 compared to $12.9 million at May 31, 1996. Interest income on loans held for sale and mortgage related securities, net of interest expense, increased 275.1% to $2 million during the 9 months ended May 31, 1997 from $538,000 during the 9 months ended May 31, 1996. The increase was primarily the result of the increase in the average size of the portfolio of loans held for sale, and the increased mortgage related securities portfolio. 20 23 The provision for credit losses increased to $12.6 million for the 9 months ended May 31, 1997 from $815,000 for the 9 months ended May 31, 1996. The increase in the provision was directly related to the increase in the volume of loans originated and the increased ratio of conventional loans to Title I Loans originated during the 9 months ended May 31, 1997 compared to the 9 months ended May 31, 1996. The provision for credit losses is based upon periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, collateral values, and estimated FHA insurance recoveries on loans originated and sold. As MMC increased its conventional loan originations as compared to Title I Loan originations, the provision for credit losses as a percentage of loans originated increased due to the greater risk of loss associated with conventional loans, which are not FHA insured. Total general and administrative expenses increased 88.6% to $15.7 million during the 9 months ended May 31, 1997 compared to $8.4 million during the 9 months ended May 31, 1996. The increase was primarily a result of increased payroll related to the hiring of additional underwriting, loan processing, administrative, loan quality control and other personnel as a result of the expansion of MMC's business and costs related to the opening of additional offices. Payroll and benefits expense increased 103.4% to $7.2 million during the 9 months ended May 31, 1997 from $3.6 million during the 9 months ended May 31, 1996 primarily due to an increased number of employees. The number of employees increased to 332 at May 31, 1997 from 158 at May 31, 1996 due to increased staff necessary to support the business expansion and improve quality control. Commissions and selling expenses increased 22.4% to $1.9 million during the 9 months ended May 31, 1997 from $1.6 million during the 9 months ended May 31, 1996, while loan originations increased by $258.3 million or 288.9% to $347.7 million at May 31, 1997. The sales network expanded to substantially all states, adding new personnel and offices to further the loan origination growth strategy. Professional services increased 63.3% to $387,000 during the 9 months ended May 31, 1997 from $237,000 during the 9 months ended May 31, 1996 due primarily to increased audit and legal fees attributable to continued growth. Other general and administrative expenses increased 94.2% to $2.3 million during the 9 months ended May 31, 1997 from $1.2 million during the 9 months ended May 31, 1996 due primarily to increased expenses related to increased loan sub-servicing fees and management services fees paid to PEC and the ongoing expansion of facilities. Income before income taxes increased to $16.4 million for the 9 months ended May 31, 1997 from $7.5 million for the 9 months ended May 31, 1996, therefore, the provision for income taxes increased to $6.2 million for the 9 months ended May 31, 1997 compared to $2.8 million for the 9 months ended May 31, 1996. As a result of the foregoing, MMC's net income increased 118.6% to $10.1 million for the 9 months ended May 31, 1997 from $4.6 million for the 9 months ended May 31, 1996. PEC Total revenues for PEC increased 7.4% or $3.4 million to $49.7 million during the 9 months ended May 31, 1997 from $46.3 million during the 9 months ended May 31, 1996 mostly due to an increase in the aggregate net timeshare and land sales, gain on sale of notes receivable, financial income, and interest income. Timeshare interests and land sales, net, increased slightly to $36.1 million during the 9 months ended May 31, 1997 from $35.4 million during the 9 months ended May 31, 1996. Gross sales of timeshare interests increased to $29.3 million during the 9 months ended May 31, 1997 from $23.9 million during the 9 months ended May 31, 1996, an increase of 22.5%. Net sales of timeshare interests increased to $23.6 million during the 9 months ended May 31, 1997 from $20.2 million during the 9 months ended May 31, 1996, an increase of 17%. The provision for cancellation represented 19.4% and 15.6% of gross sales of timeshare interests during the 9 months ended May 31, 1997 and 1996, respectively. The increase in the provision for cancellation was primarily due to an increase in sales volume during the current 9 month period and the lower provision 21 24 required during the same period in 1996 due to a reduction of a provision for one timeshare project. During the first quarter of fiscal 1997, the Aloha Bay resort in Indian Shores, Florida was completed and 131 timeshare interests in that resort were sold through May 31, 1997. Gross sales of land decreased to $14.5 million during the 9 months ended May 31, 1997 from $18.5 million during the 9 months ended May 31, 1996, a decrease of 21.4%. Net sales of land decreased to $12.5 million during the 9 months ended May 31, 1997 from $15.2 million during the 9 months ended May 31, 1996, a decrease of 17.9%. The provision for cancellation represented 13.9% and 17.6% of gross land sales during the 9 months ended May 31, 1997 and May 31, 1996, respectively. The decrease in the provision for cancellation for land was primarily due to a decreased volume of land sales. The decrease in gross sales of land is the result of PEC shifting its emphasis as part of its strategic plan from sales of land, to sales of timeshare interests due both to its diminishing inventory of land available for sale and its increasing inventory of timeshare interests from the opening of new timeshare resorts. The shift from land sales to timeshare sales is due primarily to the reduction of PEC's current land inventory which has not been fully replenished with additional land due generally to the unavailability of suitable land at acceptable prices. Gain on sale of notes receivable increased to $1.4 million during the 9 months ended May 31, 1997 from $529,000 during the 9 months ended May 31, 1996, an increase of 163.3%. The increase is due to notes receivable sales of $19.9 million during the 9 months ended May 31, 1997 compared to notes receivable sales of $7.3 million during the 9 months ended May 31, 1996. PEC's interest income increased slightly to $5.3 million during the 9 months ended May 31, 1997 from $4.8 million during the 9 months ended May 31, 1996 primarily due to a relatively flat interest rate environment combined with a slight increase in the average balance of notes receivable outstanding. Financial income increased to $2.1 million during the 9 months ended May 31, 1997 from $1.2 million during the 9 months ended May 31, 1996, an increase of 78.7%, due to an increase in the serviced notes receivable portfolio. As a result of the foregoing, total PEC revenues increased to $49.7 million during the 9 months ended May 31, 1997 from $46.3 million during the 9 months ended May 31, 1996. Total costs and expenses increased to $50.2 million during the 9 months ended May 31, 1997 from $42.7 million during the 9 months ended May 31, 1996, an increase of 17.7%. The increase for the fiscal 1997 period resulted primarily from an increase in commissions and selling expenses to $25 million from $22.1 million, an increase of 12.7%; an increase in general and administrative costs to $11.5 million from $9.5 million, an increase of 21.8%; and an increase in interest expense to $5.3 million from $4 million, an increase of 30.6% compared to the fiscal 1996 period. PEC's commissions and selling expenses increased primarily as a result of increased sales and costs relating to the establishment of new marketing programs and strategies designed to increase sales of timeshare interests, market research costs, additional staffing, increased advertising costs, and additional sales offices. The increase in general and administrative costs is primarily due to increased payroll expenses related to the hiring of additional administrative personnel and owners' association costs related to a higher level of unsold timeshare inventory. In June 1997, sales commenced at PEC's new Orlando, Florida timeshare property and 1,122 new upscale timeshare interests in Las Vegas are expected to be available for sale in July 1997. As a percentage of gross sales of timeshare interests and land, commissions and selling expenses relating thereto increased to 57% during the 9 months ended May 31, 1997 from 52.2% during the 9 months ended May 31, 1996 and cost of sales increased to 11.4% during the 9 months ended May 31, 1997 from 10.2% during the 9 months ended May 31, 1996. Sales prices of timeshare interests are typically lower than those of land while selling costs per sale, other than commissions, are approximately the same in amount for timeshare interests and land; accordingly, PEC generally realizes lower profit margins from sales of timeshare interests than from sales of land. Depreciation expense increased to $1.4 million during the 9 months ended May 31, 1997 from $1.1 million during the 9 months ended May 31, 1996, an increase of 33.5%. The increase is a result of the additions made to property and equipment to support continued growth. 22 25 Interest expense increased to $5.3 million during the 9 months ended May 31, 1997 from $4 million during the 9 months ended May 31, 1996, an increase of 30.6%. The increase is a result of an increased average outstanding balance of notes payable at May 31, 1997 from May 31, 1996. Income before income taxes decreased to a loss of $500,000 for the 9 months ended May 31, 1997 from income of $3.6 million for the 9 months ended May 31, 1996, therefore, an income tax benefit of $170,000 was recorded for the 9 months ended May 31, 1997, compared to an income tax provision expense of $1.2 million for the 9 months ended May 31, 1996. As a result of the foregoing, PEC's net loss amounted to $330,000 for the 9 months ended May 31, 1997 compared to net income of $2.4 million for the 9 months ended May 31, 1996. Company Net income applicable to common stock increased $5.7 million to $10.1 million during the 9 months ended May 31, 1997 from $4.4 million for the 9 months ended May 31, 1996 due primarily to an increase in MMC's income and a decrease in the federal tax provision for Mego Financial (parent only). See prior discussion for MMC and PEC and Note 7 of Notes to Consolidated Financial Statements. Total costs and expenses during the 9 months ended May 31, 1997 were $85.2 million, an increase of 48.4% over $57.4 million during the 9 months ended May 31, 1996. Commissions and selling expenses increased 12.7% to $25 million during the 9 months ended May 31, 1997 from $22.1 million during the 9 months ended May 31, 1996 due primarily to the expansion of timeshare marketing efforts by PEC and higher volumes of loan originations by MMC and sales by PEC. General and administrative expenses increased 35.6% to $28.1 million during the 9 months ended May 31, 1997, compared to $20.7 million during the 9 months ended May 31, 1996 primarily due to the expansion of the operating staff of MMC. Additionally, Mego Financial (parent only) incurred interest expense on amounts payable to assignors and continues to incur interest on subordinated debt. Total general and administrative expenses for Mego Financial (parent only) were primarily comprised of professional services, external financial reporting expenses, regulatory and other public company corporate expenses. Provision for income taxes for the 9 months ended May 31, 1997 was $1.2 million compared to $2.4 million for the 9 months ended May 31, 1996. The decrease in provision is primarily due to the partial utilization of the NOL carryforwards. See Note 7 of Notes to Consolidated Financial Statements for additional information. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents for the Company was $8.4 million at May 31, 1997 compared to $3.2 million at August 31, 1996. The increase was primarily due to proceeds received from the common stock and debt offerings of MMC in November 1996. The Company's principal cash requirements relate to loan originations, the acquisition of timeshare properties and land, and the payment of commissions and selling expenses in connection with timeshare and land sales. MMC and PEC each require continued access to sources of debt financing and sales in the secondary market of loans and receivables, respectively. MMC -- Negative Cash Flow MMC has operated since March 1994, and expects to continue to operate for the foreseeable future on a negative operating cash flow basis as a result of the substantial growth of its loan originations. During the 9 months ended May 31, 1997, MMC operated on a negative operating cash flow basis due primarily to an increase in loans originated, using $63 million in operations that was funded primarily from borrowings and the proceeds of its stock and debt public offerings. In connection with whole loan sales with servicing retained and securitizations, MMC recognizes a gain on sale of the loans upon the closing of the transaction and the delivery of the loans, but does not receive the cash representing such gain until it receives the excess servicing spread, which is payable over the actual life of the loans sold. MMC incurs significant expenses in connection with securitizations and incurs tax liabilities as a result of gains on sale. MMC must maintain external sources 23 26 of cash to fund its operations and pay taxes and therefore must maintain warehouse lines of credit and other external funding sources. If the capital sources of MMC were to decrease, the rate of growth of MMC would be negatively affected. Management anticipates that in the future MMC may seek to raise funds through public or private offerings of its debt or equity securities. However, MMC has no present plans or intentions with respect to any such offerings. In November 1996, MMC issued 2,300,000 shares of its common stock in an underwritten public offering at $10.00 per share. As a result of this transaction, the parent's ownership in MMC was reduced from 100% at August 31, 1996 to 81.3%. The parent continues to have voting control on all matters submitted to stockholders of MMC, including the election of directors and approval of extraordinary corporate transactions. Concurrently with the common stock offering, MMC issued $40 million of 12.5% Senior Subordinated Notes due in 2001 in an underwritten public offering. MMC used approximately $13.9 million of the aggregate net proceeds received from the offerings to repay amounts due to Mego Financial (parent only) and PEC and approximately $21.5 million to reduce the amounts outstanding under MMC's warehouse and revolving lines of credit. Additionally, MMC repaid $3 million under a repurchase agreement. The pooling and servicing agreements and sale and servicing agreements relating to MMC's securitizations require MMC to build over-collateralization levels through retention within each securitization trust of excess servicing distributions and application thereof to reduce the principal balances of the senior interests issued by the related trust or cover interest shortfalls. This retention causes the aggregate principal amount of the loans in the related pool to exceed the aggregate principal balance of the outstanding investor notes or certificates. Such over-collateralization amounts serve as credit enhancement for the related trust and therefore are available to absorb losses realized on loans held by such trust. Higher over-collateralization levels are required on conventional loans that are securitized as compared to Title I Loans. MMC continues to be subject to the risks of default and foreclosure following the sale of loans through securitizations to the extent excess servicing distributions are required to be retained or applied to reduce principal or cover interest shortfalls, if necessary. Such retained amounts are predetermined by the entity insuring the related senior interests or the rating agencies and are a condition to obtaining insurance and/or appropriate ratings thereon. In addition, such retention delays cash distributions that otherwise would flow to MMC through its retained interests, thereby adversely affecting the flow of cash to MMC. MMC's cash requirements arise from loan originations, payments of operating and interest expenses and deposits to reserve accounts related to loan sale transactions. Loan originations are initially funded principally through MMC's new $40 million warehouse line of credit that was executed in June 1997, which replaces a previous $20 million warehouse line of credit. See Note 8 of Notes to Consolidated Financial Statements. At May 31, 1997, $19.9 million was outstanding under the $20 million warehouse line that had been temporarily increased to $30 million pending the final execution of the new $40 million warehouse line of credit in June 1997. In excess of 95% of the aggregate loans originated by MMC through May 31, 1997 had been sold. Net cash used in MMC's operating activities was funded primarily from the reinvestment of proceeds from the sale of loans in the secondary market totaling approximately $326.6 million during the 9 months ended May 31, 1997. The loan sale transactions generally required the subordination of certain cash flows payable to MMC to the payment of scheduled principal and interest due to the loan purchasers. In connection with certain of such sale transactions, a portion of amounts payable to MMC from the excess interest spread is required to be maintained in a reserve account to the extent of the subordination requirements. The subordination requirements generally provide that the excess interest spread is payable to the reserve account until a specified percentage of the principal balances of the sold loans is accumulated therein. The excess interest required to be deposited and maintained in the respective reserve accounts is not available to support the cash flow requirements of MMC. At May 31, 1997, amounts on deposit in such reserve accounts totaled $6.1 million. Adequate credit facilities and other sources of funding, including the ability of MMC to sell loans in the secondary market, are essential for the continuation of MMC's loan origination operations. At May 31, 1997, $19.9 million was outstanding under the $30 million warehouse line of credit that was in effect at that time and $10.1 million was available. The $30 million warehouse line of credit bore interest at the prime rate plus 1% 24 27 per year and was secured by loans prior to sale. The agreement with the lender required MMC to maintain a minimum tangible net worth of $12.5 million plus any issuance of capital stock or other capital instruments since August 31, 1995, plus 50% of MMC's cumulative net income after May 1, 1996, and a minimum level of profitability of at least $500,000 per rolling 6 month period. At May 31, 1997, MMC's minimum tangible net worth requirement was $39.4 million and its tangible net worth was $48.5 million. The new $40 million warehouse line of credit, which became effective after May 31, 1997, bears interest at the lower of the one-month London Interbank Offered Rate (LIBOR) + 1.50% or the Federal Funds rate plus 0.25%, expires June 26, 1998, and is secured by loans prior to sale. The agreement requires MMC to maintain adjusted minimum tangible net worth of $65 million plus 50% of MMC's cumulative net income since November 30, 1996, plus all net proceeds received by MMC through the sale or issuance of stock or additional subordinated notes. At May 31, 1997, the adjusted minimum tangible net worth as defined in the agreement was $82.9 million, and the required adjusted tangible net worth at May 31, 1997 would have been $68.8 million. Additionally, the following material covenant restrictions exist: i) the ratio of total liabilities (not including subordinated notes) divided by tangible net worth (including subordinated notes) cannot exceed 3:1, and ii) total liabilities must be less than the aggregate of 100% of cash plus 93% of loans held for sale plus 55% of restricted cash and mortgage related securities. At May 31, 1997, the ratio of total liabilities to tangible net worth was 0.66:1 and total liabilities were $54.5 million, which was $26.2 million under the maximum amount allowed. See Note 8 of Notes to Consolidated Financial Statements. In April 1997, MMC entered into a pledge and security agreement with another financial institution for an $11 million revolving credit facility, with respect to which $11 million was outstanding at May 31, 1997. The amount which can be borrowed under the agreement was increased to $15 million in June 1997. This facility is secured by a pledge of certain MMC interest only and residual class certificates relating to securitizations carried as mortgage related securities on MMC's Statements of Financial Condition, payable to MMC pursuant to its securitization agreements. A portion of the loans under the credit line agreement bears interest at one-month LIBOR +3.5%, expiring one year from the initial advance, and requires MMC to maintain a minimum net worth requirement of the greater of $35 million, or 80% of net worth, following fiscal year end 1997. The portion of the credit line agreement applicable to a repurchase agreement secured by insured interest only certificates is at one-month LIBOR +2.0%. At May 31, 1997, the required net worth was $35 million and MMC's actual net worth was $48.5 million. Additionally, the agreement requires MMC to maintain a debt-to-net-worth ratio not to exceed 2.5:1. At May 31, 1997, the ratio was 0.39:1. Certain material covenant restrictions exist in the indenture agreement regarding the $40 million in subordinated notes of MMC dated November 19, 1996. These covenants include limitations on MMC's ability to incur indebtedness, grant liens on its assets and to enter into extraordinary corporate transactions. MMC may not incur indebtedness if, on the date of such incurrence and after giving thereto, the Consolidated Leverage Ratio would exceed 2:1, subject to certain exceptions. At May 31, 1997, the Consolidated Leverage Ratio was 1.25:1. The Consolidated Leverage Ratio is the ratio of (i) total debt, including subordinated debt, but excluding the Permitted Warehouse Debt (as defined below), accounts payable outstanding less than 60 days, and the tax sharing payable to the parent from MMC to (ii) the consolidated net worth of MMC. The Permitted Warehouse Debt generally is the outstanding amount under the warehouse line of credit agreement. The Permitted Warehouse Debt cannot exceed 3 times MMC's consolidated tangible net worth. At May 31, 1997, this ratio was 0.46:1. In addition, an escalating amount of MMC's mortgage related securities are required to remain unpledged. At May 31, 1997, that requirement was $28.8 million, and at that date $66.4 million of the mortgage related securities were unpledged, resulting in $37.6 million of mortgage related securities available for pledging. While MMC believes that it will be able to maintain its existing credit facilities and obtain replacement financing as its credit arrangements mature and additional financing, if necessary, there can be no assurance that such financing will be available on favorable terms, or at all. At May 31, 1997, no commitments existed for material capital expenditures. MMC also sells loans through whole loan sales. MMC has entered into agreements with 3 financial institutions to which an aggregate of $556.4 million in principal amount of loans had been sold at May 31, 25 28 1997, for amounts ranging between 90% - 103% of the remaining principal balances, plus accrued interest. Pursuant to the agreements, the purchasers are entitled to receive interest at various rates. MMC retained the right to service the loans and the right to receive the difference (excess interest) between the sold loans' stated interest rate and the yield to the purchasers. Pursuant to the agreements, MMC is required to maintain reserve accounts ranging from 1% of the declining principal balance of the loans sold up to 100% of the principal balance of conventional loans over 150 days past due, which are funded from the excess interest received by MMC, less its servicing fee. In the first quarter of fiscal 1997, MMC entered into an agreement with a financial institution, providing for the purchase of up to $2 billion of loans over a five-year period. Pursuant to the agreement, Mego Financial issued to the financial institution a four-year warrant to purchase one million shares of Mego Financial common stock at an exercise price of $7.125 per share. The agreement also provides (i) that so long as the aggregate principal balance of loans purchased by the financial institution and not resold to third parties exceeds $100 million (temporarily increased to $150 million through August 31, 1997), the financial institution shall not be obligated to purchase, and MMC shall not be obligated to sell, loans under the agreement and (ii) that the percentage of conventional loans owned by the financial institution at any one-time and acquired pursuant to the agreement shall not exceed 65% of the total amount of loans owned by the financial institution at such time and acquired pursuant to the agreement which provision has been waived from time to time. The value of the warrants of $3 million (0.15% of the commitment amount) as of the commitment date, was charged to MMC and is being amortized as the commitment for the purchase of loans is utilized. At May 31, 1997, $1.7 billion remained available to be sold under the commitment. These warrants were recorded as additional paid-in capital of Mego Financial. During the 9 months ended May 31, 1997 and 1996, MMC used net cash of $63 million and $10.3 million, respectively, in operating activities. During the 9 months ended May 31, 1997 and 1996, MMC used net cash of $1.5 million and $488,000, respectively, in investing activities, which was substantially expended for office equipment and furnishings and data processing equipment. During the 9 months ended May 31, 1997, MMC provided net cash of $68 million from financing activities, primarily due to the issuance of subordinated debt and common stock, compared to $10.9 million during the 9 months ended May 31, 1996. PEC -- Liquidity PEC's cash requirements arise from the acquisition of timeshare properties and land, payments of operating expenses, payments of taxes to the parent, payments of principal and interest on debt obligations, and payments of commissions and selling expenses in connection with the sale of timeshare interests and land. Commissions and selling expenses payable by PEC in connection with sales of timeshare interests and land typically exceed the down payments received at the time of sale, as a result of which PEC generates a cash shortfall. This cash shortfall and PEC's other cash requirements are funded primarily through sales of receivables, PEC's lines of credit in the aggregate amount of up to $127.5 million and cash flows from operations. At May 31, 1997 no commitments existed for material capital expenditures. At May 31, 1997, PEC had arrangements with 4 institutional lenders for the financing of receivables in connection with sales of timeshare interests and land and the acquisition of timeshare properties and land, which provide for 5 lines of credit of up to an aggregate of $127.5 million. Such lines of credit are secured by timeshare and land receivables and mortgages. At May 31, 1997, an aggregate of $62.4 million was outstanding under such lines of credit, and $65.1 million was available for borrowing. At August 31, 1996, $65.9 million had been borrowed under these lines. Under the terms of these lines of credit, PEC may borrow up to a range of 70% to 85% of the balances of the pledged timeshare and land receivables. Summarized lines 26 29 of credit information and accompanying notes relating to these five lines of credit outstanding at May 31, 1997 consist of the following (thousands of dollars):
BORROWING AMOUNT AT MAXIMUM MAY 31, BORROWING REVOLVING MATURITY INTEREST 1997 AMOUNT EXPIRATION DATE(S) DATE RATE - ---------- --------- ------------------- --------------- ---------------------- $44,866(a) $75,000 May 15, 2000 Various Prime +2.0% to 2.25% 4,115(b) 15,000 May 30, 1998 Various Prime +2.0% 6,365(c) 15,000 September 29, 1997 March 29, 1999 LIBOR +4.25% 3,404(c) 15,000 February 6, 1998 August 6, 1999 LIBOR +4.25% 3,602(d) 7,500 April 30, 1998 May 31, 2002 Prime +2.0%
- --------------- (a) Restrictions include PEC's requirement to maintain a tangible net worth of at least $20 million up to $25 million. The maximum borrowing amount was increased from $57 million to $75 million as of May 15, 1997. At May 31, 1997, $30.2 million was outstanding related to financings at prime +2.0%, of which $23.5 million of loans secured by land receivables mature May 15, 2010 and $6.7 million of loans secured by timeshare receivables mature May 15, 2007. The outstanding borrowing amount includes $3.3 million in acquisition and development (A&D) financing maturing May 20, 1998 and $6.1 million maturing July 1, 2003 for the financing of corporate office buildings; both loans are amortizing loans and bear interest at prime +2.25%. The remaining outstanding receivables, A&D, and resort lobby loans outstanding of $5.3 million are at prime +2.0% and mature between January 31, 1998 and May 15, 2000. (b) Restrictions include PEC's requirement to maintain a tangible net worth of $25 million during the life of the loan. At May 31, 1997, $1.5 million was outstanding under the A&D loan which matures in November 1997 and $2.6 million, maturing June 1, 2002 was outstanding under the receivables loan. (c) Restrictions include PEC's requirement to maintain a tangible net worth of $17 million during the life of the loan. These credit lines include available financings for A&D and receivables, however only the A&D lines are currently outstanding and bear interest at 90 day LIBOR + 4.25%. The available receivable financings would be at 90 day LIBOR + 4% and have maturity dates of June 2005 and August 2005. (d) Restrictions include PEC's requirement to maintain tangible net worth of $15 million. This credit line is for the purpose of financing receivables. (e) Revolving expiration dates represent the expiration of the revolving features of the lines of credit, at which time the credit lines become loans with fixed maturities. Set forth below is a schedule of the cash shortfall arising from recognized and unrecognized sales for PEC for the periods indicated (thousands of dollars):
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, ------------------- -------------------- 1997 1996 1997 1996 ------- ------- -------- ------- Commissions and selling expenses attributable to recognized and unrecognized sales................ $ 8,643 $ 7,790 $ 25,055 $21,346 Less: Down payments................................ (3,606) (3,552) (10,348) (9,724) ------- ------- -------- ------- Cash shortfall..................................... $ 5,037 $ 4,238 $ 14,707 $11,622 ======= ======= ======== =======
During the 3 months ended May 31, 1997, PEC sold notes receivable of $10 million to a financial institution from which $8.5 million of the proceeds were used to reduce debt. The receivables, which have an average interest rate of 12.5%, were sold to yield a return of 9% to the purchasers, with all excess interest spread payable to PEC. At May 31, 1997, PEC was contingently liable to replace or repurchase notes receivable sold with recourse totaling $78.5 million. PEC sells notes receivable subject to recourse provisions as contained in each agreement. PEC is obligated under these agreements to replace or repurchase accounts that become over 90 days delinquent or otherwise subject to replacement or repurchase. The repurchase provisions provide for 27 30 substitution of receivables as recourse for $76.8 million of sold notes receivable and cash payments for repurchase relating to $1.7 million of sold notes receivable. At May 31, 1997, the undiscounted amount of the recourse obligations on such notes receivable was $12 million. PEC periodically reviews the adequacy of this liability. These reviews take into consideration changes in the nature and level of the portfolio, current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. During the 9 months ended May 31, 1997 and 1996, PEC provided net cash of $4.4 million and used net cash of $14.7 million, respectively, in operating activities. During the 9 months ended May 31, 1997 and 1996, PEC used net cash of $439,000 and $5.6 million, respectively, in investing activities. During the 9 months ended May 31, 1997 and May 31, 1996, PEC used net cash of $4.5 million and provided net cash of $20.3 million, respectively, from financing activities. Company -- Liquidity At January 31, 1995, when accrual of payments to assignors ceased, $13.3 million was payable to the assignors. On March 2, 1995, the assignors agreed to defer payment of $10 million (subordinated debt) of the amounts due to them pursuant to an amendment to the Assignment and Assumption Agreement providing for the subordination of such amounts to payment of debt for money borrowed by the Company or obligations of the Company's subsidiaries guaranteed by the Company. In January 1997, the outstanding balance of payable to assignors of $2.6 million (including interest of $45,000) was paid in full. Additionally, effective March 1, 1997, the assignors received the first of 7 equal semiannual payments of $1,429,000 plus interest related to the repayment of the subordinated debt. These payments are collateralized by a pledge of PEC's outstanding stock. Interest of $218,000 was paid during the first half of fiscal 1997 related to payable to assignors and interest on subordinated debt of $500,000 was paid during the first half of fiscal 1997. During the 9 months ended May 31, 1997 and 1996, the Company used cash of $57.1 million and $23.5 million, respectively, in operating activities. During the 9 months ended May 31, 1997 and 1996, the Company used cash of $6.7 million and $4.5 million, respectively, in investing activities. During the 9 months ended May 31, 1997 and 1996, the Company provided cash of $69 million and $26.6 million, respectively, from financing activities, which was substantially from the MMC stock and debt offerings in November 1996. The Company believes that its capital requirements will be met from cash balances, internally generated cash, existing lines of credit, sales and securitizations of loans, the modification, replacement or addition to its credit lines, and new financings. The components of the Company's debt, including lines of credit consist of the following (thousands of dollars):
MAY 31, AUGUST 31, 1997 1996 ------- ---------- Notes collateralized by receivables............................ $36,540 $ 41,568 Mortgages collateralized by real estate properties............. 27,964 31,078 Notes collateralized by excess servicing rights and mortgage related securities........................................... 10,996 10,000 Installment contracts and other notes payable.................. 23,527 1,803 ------- ------- Total.......................................................... $99,027 $ 84,449 ======= =======
FINANCIAL CONDITION May 31, 1997 compared to August 31, 1996 Cash and cash equivalents increased 162.6% to $8.4 million at May 31, 1997 from $3.2 million at August 31, 1996, primarily as a result of increased loan sales and borrowings by MMC. Restricted cash deposits increased 18% to $7.9 million at May 31, 1997 from $6.7 million at August 31, 1996, primarily due to an increase in the aggregate amount of securitizations. 28 31 Notes receivable, net, increased 42.4% to $64.4 million at May 31, 1997 from $45.2 million at August 31, 1996, primarily as a result of MMC loan originations increasing and the timing of loan sales. The Company provides allowances for credit losses and cancellations, in amounts which, in the Company's judgment, will be adequate to absorb losses on notes receivable and loans after FHA insurance recoveries on the loans, that may become uncollectible. The Company's judgment in determining the adequacy of these allowances is based on its continual review of its portfolio which utilizes historical experience and current economic factors. These reviews take into consideration changes in the nature and level of the portfolio, historical rates, collateral values, and current and future economic conditions which may affect the obligors' ability to pay, collateral values and overall portfolio quality. Changes in the allowances for cancellations and credit losses and the future estimated contingency for notes receivable sold with recourse for the three and nine months ended May 31, 1997 consist of the following (thousands of dollars): Balance at February 28, 1997............................................... $21,430 Provisions for credit losses and cancellations........................... 9,819 Reductions of allowance due to loans sold without recourse or securitized........................................................... (2,977) Amounts charged to allowances for cancellations.......................... (2,876) ------- Balance at May 31, 1997.................................................... $25,396 ======= Balance at August 31, 1996................................................. $20,939 Provisions for credit losses and cancellations........................... 20,292 Reductions of allowance due to loans sold without recourse or securitized........................................................... (7,582) Amounts charged to allowances for cancellations.......................... (8,253) ------- Balance at May 31, 1997.................................................... $25,396 =======
The allowances for credit losses and cancellations and the future estimated contingency for notes receivable sold with recourse consist of the following at these dates (thousands of dollars):
MAY 31, 1997 AUGUST 31, 1996 ------------ --------------- Allowances for credit losses and cancellations, excluding valuation discount......................... $ 9,791 $11,607 Future estimated contingency for notes receivable sold with recourse........................................ 15,605 9,332 ------- ------- Total............................................. $ 25,396 $20,939 ======= =======
Excess servicing rights decreased to $0 at May 31, 1997 from $14.3 million at August 31, 1996 due to the implementation of SFAS 125, which requires the reclassification of excess servicing rights as mortgage related securities which are carried at fair market value. The excess cash flow created through securitizations which had been recognized as excess servicing rights on loans repurchased and securitized are included in the cost basis of the mortgage related securities. Mortgage related securities were $94.3 million at May 31, 1997 and $22.9 million at August 31, 1996. The increase is due to the increased value of loans originated and securitized and the reclassification of excess servicing rights. See Note 5 of Notes to Consolidated Financial Statements. Mortgage servicing rights increased 102.5% to $7.8 million at May 31, 1997 from $3.8 million at August 31, 1996 as a result of increased loan originations with subsequent loan sales with servicing retained to $316.6 million during the first 9 months of fiscal 1997 from $88.1 million during the first 9 months of 1996. Property and equipment, net, increased 24.8% to $25.3 million at May 31, 1997 from $20.3 million at August 31, 1996 due to increased purchases of office equipment related to facility expansion and building, water, and sewer improvements. Notes and contracts payable increased 17.3% to $99 million at May 31, 1997 from $84.4 million at August 31, 1996 due to the increased borrowings by MMC and PEC to fund loans and receivables as a result of the overall growth in MMC's and PEC's business. 29 32 Accounts payable and accrued liabilities increased to $26.5 million at May 31, 1997 from $19.7 million at August 31, 1996 primarily as a result of the increased amounts due to investors on sold loans and interest payable on subordinated debt. Future estimated contingency for notes receivable sold with recourse increased 67.2% to $15.6 million at May 31, 1997 from $9.3 million at August 31, 1996. Loans sold with recourse which were reacquired and included in the 1996 securitizations decreased the amount needed for this allowance while increased loan sales increased the allowance requirements. Recourse to Mego Financial on sales of loans is limited to sales made by PEC and is governed by the agreements between the purchasers and PEC. Mego Financial is a guarantor of PEC's recourse obligations. Recourse on the whole loan sales made by MMC is limited to the future excess spread MMC will receive and existing reserves. The allowance for credit losses on loans sold with recourse represents the Company's estimate of its probable future credit losses to be incurred over the lives of the loans considering estimated future FHA insurance recoveries on Title I Loans. No allowance for credit losses on loans sold with recourse is established on loans sold through securitizations, as MMC has no recourse obligation, other than for customary representations and warranties, under those securitization agreements. Estimated credit losses on loans sold through securitizations are considered in MMC's valuation of its residual interest securities. Income taxes payable increased 51.9% to $16.7 million at May 31, 1997 from $11 million at August 31, 1996 due to taxable income for the period and taxes on the sale of MMC stock. See Note 4 of Notes to Consolidated Financial Statements for further discussion. The Company generally records a loss for tax purposes in the year of sale of timeshare interests and land sold on installments because it recognizes costs and expenses (other than cost of sales for which only a portion is recognized in the year of sale) at that time while recognizing associated revenues only when received in subsequent years. As a result, the Company has accumulated federal NOL carryforwards and has made less than a full provision at the statutory rates for federal income taxes for the nine months ended May 31, 1997, due to partial utilization of these NOL carryforwards. No assurance can be given that the Company has sufficient NOL carryforwards to fully offset its income for the current fiscal year, that the Company will continue to generate sufficient NOL carryforwards to offset future income or that future changes in tax laws will not adversely affect the Company's tax position. See Note 7 of Notes to Consolidated Financial Statements. Stockholders' equity increased 83.4% to $47.4 million at May 31, 1997 from $25.9 million at August 31, 1996 as a result of the sale of MMC stock, the issuance of a warrant valued at $3 million for the purchase of 1 million shares of Mego Financial common stock, the exercise of warrants to purchase 300,000 shares of Mego Financial common stock for an exercise price of $360,000, and net income applicable to common stock of $10.1 million during the 9 months ended May 31, 1997. In February 1997, warrants outstanding to purchase 300,000 shares of Mego Financial common stock at an exercise price of $1.20 per share were exercised in full for $360,000 and 300,000 shares of Mego Financial common stock were subsequently issued in March 1997. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities," (SFAS 125) which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. As required by the statement, the Company adopted the new requirements effective January 1, 1997 and applied them prospectively. No material impact resulted from the implementation of SFAS 125. See Note 5 of Notes to Consolidated Financial Statements. The FASB issued SFAS No. 128, "Earnings per Share," (SFAS 128) in March 1997, effective for financial statements issued after December 15, 1997. The statement provides simplified standards for the computation and presentation of earnings per share (EPS), making EPS comparable to international standards. SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS, by entities with complex capital structures, replacing "Primary" and "Fully Diluted" EPS under Accounting Principles Board Opinion No. 15. See Note 5 of Notes to Consolidated Financial Statements for further discussion and SFAS 128 pro forma calculations. 30 33 In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," (SFAS 123), which establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 is effective for fiscal years beginning after December 15, 1995. The Company intends to provide the pro forma and other additional disclosure about stock-based employee compensation in its financial statements for the year ending August 31, 1997 as required by SFAS 123. CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations and beliefs concerning future events, including the sufficiency of the Company's cash flow for the Company's future liquidity and capital resource needs. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the following: decline in demand for home improvement and debt consolidation loans; decline in demand for timeshare interests; increases in the level of delinquencies on the Company's loans and receivables; the effect of general economic conditions generally and specifically changes in interest rates; the effect of competition; the Company's dependence on the ability to sell its loans and receivables; and the regulation of the Company by federal, state and local regulatory authorities. Actual events or results may differ as a result of these and other factors. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 26, 1996, in the matter of "In re Mego Financial Corp. Securities Litigation," Master File No. CV-9-95-01082-LDG (RLH) (the "Litigation"), in the United States District Court for the District of Nevada (the "Court"), which matter was described in the Company's Form 10-K for the fiscal year ended August 31, 1996 (the "1996 10-K"), Michael Nadler ("Nadler") filed a purported class action complaint against the Company, certain of the Company's officers and directors, and the Company's independent auditors. On February 13, 1997, defendants moved to dismiss Nadler's complaint. On March 13, 1997, Nadler filed a "Motion for the Filing of a Consolidated Complaint and a Class Certification Motion, the Holding of a Pretrial Conference and the Suspension of Briefing on Defendants' Motions to Dismiss." The Company opposed that motion. On March 31, 1997, the Court issued an Order that, among other things, denied, without prejudice to refiling after either the filing of a consolidated complaint or a ruling on Nadler's motion for the filing of a consolidated complaint, defendants' motions to dismiss Nadler's complaint. On May 31, 1997, the Court issued an Order denying Nadler's "Motion to Compel Compliance with Local Rule 26-6" against the Company and its officers and directors, and granting that motion against other parties, who have moved for reconsideration. On May 12, 1997, counsel for the plaintiffs in the Dunleavy and Peyser actions, which were described in the 1996 10-K, and counsel for the defendants executed a Memorandum of Understanding with respect to a proposed settlement. The proposed settlement, which is subject to a number of conditions, including approval by the Court, calls for certification, for settlement purposes only, of a class consisting of all purchasers of Mego Financial stock (excluding the defendants and their respective directors, executive officers, partners and affiliates and their respective immediate families, heirs, successors and assigns) during the period from January 14, 1994 through November 9, 1995, inclusive, and for creation of a settlement fund of $1.725 million. The portion of this amount to be contributed by the Company, net of anticipated insurance proceeds, is not expected to have a material, adverse effect on the Company. The parties anticipate submitting papers to the Court in due course seeking approval of the settlement. Final approval of the settlement is expected to dispose of all class claims in the Litigation, including those asserted by Nadler. The Company believes that it has substantial defenses to all of the complaints that have been filed against it; however, the Company presently cannot predict the outcome of this matter. 31 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION -------------- ------------------------------------------------------------------------- 10.113 Employment Agreement between Jerome C. Cohen and Mego Financial Corp. dated September 1, 1996. 10.114 Purchase and Servicing Agreement between Preferred Equities Corporation as Seller and BankBoston, N.A. as Purchaser dated May 30, 1997. 10.115 Second Amended and Restated and Consolidated Loan and Security Agreement between Preferred Equities Corporation as Borrower and FINOVA Capital Corporation as lender, dated May 15, 1997. 10.116 Form of Owners Association Agreement between Resort Condominiums International, Inc. and Homeowners Associations with schedule listing the associations. 10.117 Loan Purchase Agreement dated as of November 1, 1996 between Financial Asset Securities Corp. and Mego Mortgage Corporation. 10.118 Pooling and Servicing Agreement dated as of November 1, 1996 among Financial Asset Securities Corp., Mego Mortgage Corporation, Norwest Bank Minnesota, N.A. and First Trust of New York, National Association. 10.119 Home Loan Purchase Agreement dated as of February 1, 1997 between Financial Asset Securities Corp. and Mego Mortgage Corporation. 10.120 Sale and Servicing Agreement dated as of February 1, 1997 among Mego Mortgage Home Loan Owner Trust 1997-1, Financial Asset Securities Corp., Mego Mortgage Corporation, Norwest Bank Minnesota, N.A. and First Trust of New York, National Association. 10.121 Trust Agreement dated as of February 1, 1997 among Financial Asset Securities Corp., Mego Mortgage Corporation, Wilmington Trust Company and First Trust of New York, National Association. 10.122 Home Loan Purchase Agreement dated as of May 1, 1997 between Financial Asset Securities Corp. and Mego Mortgage Corporation. 10.123 Sale and Servicing Agreement dated as of May 1, 1997 among Mego Mortgage Home Loan Owner Trust 1997-2, Financial Asset Securities Corp., Mego Mortgage Corporation, Norwest Bank Minnesota N.A. and First Trust of New York, National Association. 10.124 Trust Agreement dated as of May 1, 1997 among Financial Asset Securities Corp., Mego Mortgage Corporation, Wilmington Trust Company and First Trust of New York, National Association. 10.125 Home Loan Purchase Agreement dated as of June 14, 1997 between Financial Asset Securities Corp. and Mego Mortgage Corporation. 10.126 Sale and Servicing Agreement dated as of June 14, 1997 among Mego Mortgage Home Loan Owner Trust 1997-3, Financial Asset Securities Corp., Mego Mortgage Corporation, Norwest Bank Minnesota N.A. and First Trust of New York, National Association. 10.127 Trust Agreement dated as of June 14, 1997 among Financial Asset Securities Corp., Mego Mortgage Corporation, Wilmington Trust Company and First Bank National Association. 27.1 Financial Data Schedule (for SEC use only)
No reports on Form 8-K were filed during the period. 32 35 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEGO FINANCIAL CORP. By: /s/ CHARLES G. BALTUSKONIS ------------------------------------ Charles G. Baltuskonis Vice President and Chief Accounting Officer Date: July 14, 1997 33 EX-10.113 2 EMPLOYMENT AGREEMENT 1 Exhibit 10.113 EMPLOYMENT AGREEMENT AGREEMENT made as of the 1st day of September, 1996, by and between MEGO FINANCIAL CORP., a New York corporation (herein called "Company"), and JEROME J. COHEN (herein called "Employee"). BACKGROUND OF AGREEMENT The Company and the Employee mutually desire to agree upon the terms of the Employee's future employment with Company and are entering into this Agreement to set forth all of such terms and agreement. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, and in consideration of the mutual covenants herein contained, agree as follows: 1. EMPLOYMENT The Company hereby employs the Employee, and the Employee hereby accepts employment upon the terms and conditions set forth herein. 2. DUTIES The Employee shall be an executive officer of the Company, and his duties and powers in such capacity shall be such as may be determined by the Board of Directors of the Company; provided that until action by the said Board of Directors, the powers and duties shall be those of President of the Company and its subsidiaries, and such powers and duties shall only be determined so that they are at all times consistent with those of an executive officer. During the term of this Agreement, the Employee shall also serve, without additional compensation, as a Director or Officer of the Company or any of its subsidiaries. 3. EXTENT OF SERVICES Employee agrees to devote as much time to the Company's business as necessary to fulfill his fiduciary responsibility. During the term of this Agreement, Employee agrees not to be engaged in the operation of any other business requiring any substantial amount of his 1 2 business time, and except for such time as may be approved in connection with the affairs of such other companies as are approved by the Board of Directors of the Company. However, this provision shall not be deemed to prevent the Employee from investing and managing his assets in such form or manner as will not unreasonably interfere with the services to be rendered by Employee hereunder, or to prevent him from acting as a director, trustee, officer of; or upon a committee of, any other firm, trust or corporation where such positions do not unreasonably interfere with the services to be rendered by the Employee hereunder. 4. COMPENSATION 4.1 As compensation for all services rendered by Employee to Company and its subsidiaries during the term hereof, Company agrees to pay and Employee agrees to accept the Basic Salary (as hereinafter defined) set forth in Section 4.2 hereof and the Incentive Bonus (as hereinafter defined) set forth in Section 4.3 hereof. However, neither the provisions for the Basic Salary or the Incentive Bonus nor any other provision of this Agreement shall be deemed to preclude Employee from being eligible to receive, or to participate in or to continue to participate in, any supplemental employee benefits which the Board of Directors of the Company may, from time to time, generally make available to, or provide for, executive and management employees of the Company or of any one or more of its subsidiaries, including such benefit plans as are now in force. 4.2 The Basic Salary (herein called "Basic Salary") for the term of this Agreement shall be $300,000 per annum payable in agreed monthly installments or otherwise as mutually agreed. Notwithstanding the foregoing, the Employee's Basic Salary may be reduced in accordance with the provisions of Section 6 below. 4.3 For each fiscal year of the Company, commencing with fiscal 1997 and ending with fiscal 2001, the Employee shall receive, in addition to the Basic Salary as hereinabove defined, a sum of money (herein called the "Incentive Bonus") in an amount equal to two and one-half percent (2-1/2%) of the Incentive Income of the Company as defined in, and calculated pursuant to, the Executive Incentive Compensation Plan of the Company adopted by the Company's Board of 2 3 Directors on June 22, 1994, a copy of which is attached hereto as Exhibit "A". Such amount shall be due and payable whether or not the Company's Executive Incentive Compensation Plan shall be in effect for such fiscal year, and shall be paid no later than ninety days after the amount of Incentive Income can be calculated. Notwithstanding the foregoing, the Employee's Incentive Bonus may be reduced or eliminated in accordance with the provisions of Section 6 below. 5. TERM The term of this Agreement shall commence on September 1, 1996, and shall continue until January 31, 2002. 6. DISABILITY In the event that, while this Agreement is in force, Employee shall become disabled for any reason whatsoever so as to prevent him from performing his duties hereunder, and such disability shall continue for any consecutive period of six months or more, Company shall pay and Employee shall accept, from and after the end of such six-month period, (the "Disability Date") for the balance of the remaining term of this Agreement, an annual income benefit equal to one-half of the Basic Salary which was being received hereunder by Employee at the commencement of such six-month period. During such six-month period, Employee shall be entitled to compensation payable pursuant to Section 4 hereof. In addition, for the fiscal year in which the Disability Date may occur, the Incentive Bonus due and payable to the Employee shall be reduced to an amount calculated by multiplying the amount of the Incentive Bonus which would otherwise be due and payable to the Employee had he not become disabled, by a fraction, the numerator of which is the number of days from the commencement of the fiscal year through the Disability Date and the denominator of which is 365. The Employee shall not be entitled to any Incentive Bonus for a fiscal year commencing after the Disability Date. 7. EXPENSES The parties recognize that in the course of performing his duties hereunder, Employee will necessarily incur expenses in connection with his duties. Company agrees to reimburse Employee upon 3 4 presentation of vouchers for reasonable expenses incurred by Employee in performance of his duties hereunder. Moreover, while this Agreement shall be in force, Company shall provide Employee with appropriate offices, in Las Vegas, Nevada, secretarial help, administrative staff and automobile and other transportation facilities in Las Vegas. 8. VACATION For and during each year of employment, Employee shall be entitled to reasonable vacation periods consistent with his position with the Company. 9. MEDICAL EXPENSES In addition to any other benefits which may be due to Employee, Company shall, to the extent that any medical insurance program established by Company, the premiums for which are to be paid by the Company, shall be insufficient to meet any medical expenses of Employee incurred from and after September 1, 1996, and prior to January 31, 2002, expend and pay over or reimburse to Employee the full amount by which such medical expenses shall exceed the benefits provided by such insurance. 10. SITUS This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 11. ENTIRE AGREEMENT This Agreement constitutes the full and complete understanding and agreement of the parties and, effective September 1, 1996, supersedes all prior understandings and agreements between Employee and the Company or any of its subsidiaries concerning the subject matter of this Agreement, and may not be modified or amended orally, but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 12. BINDING EFFECT This Agreement and all of the terms hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, administrators and assigns. 4 5 13. SEVERABILITY In the event that is shall be determined, to the mutual satisfaction of the parties hereto, or by a final order of a court of competent jurisdiction, that any term or provision herein set forth is prohibited by, or is unlawful or unenforceable under any applicable law of any jurisdiction, such provision shall, as to jurisdiction, be ineffective to the extent of such prohibition without invalidating the remaining provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ATTEST: MEGO FINANCIAL CORP. /s/ DON A MAYERSON /s/ ROBERT NEDERLANDER - ------------------------------ ------------------------------ Don A. Mayerson Robert Nederlander Secretary Chairman of the Board and Chief Executive Officer /s/ JEROME J. COHEN ------------------------------ Jerome J. Cohen Employee 5 EX-10.114 3 PURCHASE AND SERVICING AGREEMENT 1 EXHIBIT 10.114 PURCHASE AND SERVICING AGREEMENT This Purchase and Servicing Agreement, dated as of May 30, 1997, is between Preferred Equities Corporation, a Nevada corporation having an address of and office at 4310 Paradise Road, Las Vegas, Nevada 89109-6597 (hereafter referred to as "Seller") and BankBoston, N.A., a national banking association having an address of and office at 100 Federal Street, Boston, Massachusetts 02110 ATTN: Real Estate Department-Amy Weinstock and also having an office at 115 Perimeter Center Place N.E., Suite 500, Atlanta, Georgia 30346 ATTN: John Pearson (hereafter referred to as "Purchaser"). WITNESSETH: Whereas, Seller is the owner of the Receivables (as defined in Section 1.01 below) created by the sale of building lots in the Subdivision Project (as defined in Section 1.01 below) and by the sale of timeshare interests under deeds, Agreements for Deed (as defined in Section 1.01 below) and Right to Use Agreements (as defined in Section 1.01 below) in the Timeshare Project (as defined in Section 1.01 below); and Whereas, on the Initial Closing Date, Seller desires to sell, transfer, assign and convey to Purchaser the Receivables set forth on Schedule A hereto and on the Subsequent Closing Date Seller desires to sell, transfer, assign and convey to Purchaser additional Receivables to be identified after the Initial Closing Date; and Whereas, Purchaser desires to purchase from Seller on the Initial Closing Date and on the Subsequent Closing Date, the Receivables, on the terms and conditions set forth in this Agreement; and Whereas, Seller has agreed in connection with and in partial consideration for the purchase by Purchaser of the Receivables to continue to service the Receivables; and Whereas, Purchaser has requested that Seller continue to service the Receivables on the terms and conditions set forth in this Agreement. Now therefore, in consideration of the premises and mutual agreements herein contained, Seller and Purchaser agree as follows: 1 2 ARTICLE I. Definitions Section 1.01 Definitions. Whenever in this Agreement the following words and phrases are used, unless the context otherwise requires, such words and phrases shall have the meaning ascribed to them as set forth below: "Accrued Interest" on a Receivable means that amount of interest accrued on the Principal Balance of such Receivable but not paid by or on behalf of the Obligor as of such date. "Affiliate" when used with respect to any person or entity, shall mean any other person or entity which, directly or indirectly, controls or is controlled by or is under common control with such person. For purposes of this definition "control" including the correlative meanings of the terms "controlled by" and "under common control with", with respect to any person, shall mean possession, directly or indirectly of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise. "Agency Agreement" shall mean that certain Agency Agreement dated as of May 30, 1997 among Seller, Purchaser and Custodian as the same may be amended or modified from time to time, and any agreement entered into in replacement therefor. "Agent" means Bank of America, NT & SA, a banking corporation or its successors or assigns which shall act as Agent for Purchaser under the Agency Agreement. "Agreement" means this Purchase and Servicing Agreement, as amended or modified from time to time. "Agreement for Deed" means a written agreement for the purchase and sale of a timeshare interest in the Timeshare Project, under which Seller is the vendor thereunder, providing for delivery of a deed to the vendee thereunder to the related Financed Property upon payment and performance of the Obligor's obligations as vendee thereunder. "Amount Financed" in respect of a Receivable means the original amount advanced under the Receivable toward the purchase price of the Financed Property and related costs. "Annual Percentage Rate" of a Receivable means the annual rate of interest stated in the Receivable for purposes of the Federal Truth In Lending disclosure stated therein, which may differ from the contract rate stated therein. 2 3 "Business Day" means a day other than a Saturday, Sunday or other day on which Purchaser is not open for transaction of substantially all of its banking functions or a day other than when banks in Las Vegas, Nevada are authorized or required by law or regulation to close. "Closing Date" means the Initial Closing Date and/or the Subsequent Closing Date as applicable to the context in which the term is used. "Collected Interest" means the portion of all payments received (from whatever source including all late fees and other administrative fees or payments received on any Receivable) during a Collection Period from Receivables that is allocable to interest pursuant to the terms of such Receivable. "Collected Principal" means the portion of all payments received (from whatever source) during a Collection Period on a Receivable that is allocable to principal pursuant to the terms of such Receivable. "Collection Period" means each calendar month until this Agreement shall terminate pursuant to Article VIII. "Consolidated" or "consolidated" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more persons or entities of the amounts signified by such term for all such persons or entities determined on a consolidated basis in accordance with generally acceptable accounting principles. "Credit and Collection Policies" shall mean the credit and collection policies of Seller set forth on Schedule B hereto. "Custodian" shall mean Bank of New York or its successors or assigns, which shall act as custodian and bailee for Purchaser under the Custodial Agreement. "Custodial Agreement" means the Custodial Agreement dated May 30, 1997 among Seller, Purchaser and Custodian as the same may be amended or modified from time to time and any agreement entered into in replacement therefor. "Custodian Receivable File" means the documents specified in Section 2.06(a). "Cutoff Date" means, for the Initial Closing Date, April 30, 1997 and for the Subsequent Closing Date the close of business on a date specified as the Cutoff Date by Seller and agreed to by Purchaser with respect to the purchase by Purchaser from Seller of a Pool. 3 4 "Deed of Trust Agreement" means a written agreement for the purchase and sale of Financed Property in the Timeshare Project or the Subdivision Project under which Seller conveys title thereto to the Obligor with the unpaid purchase price therefor evidenced by a promissory note and secured by a deed of trust or mortgage on the related Financed Property in favor of Seller. "Defaulted Receivable" means a Receivable (a) as to which Seller has knowledge that a bankruptcy or insolvency of any Obligor under the Receivable has occurred or that eventual payment in full is unlikely, or (b) in respect of which any principal or interest due thereunder is 90 days or more overdue as determined in accordance with the Credit and Collection Polices, or (c) in respect of which payments have been rescheduled or extended or other terms have been modified or waived within the one-year period preceding the Cutoff Date with respect to such Receivable, or (d) in respect of which Seller shall have taken any steps to realize upon such Receivable pursuant to Section 3.03, or (e) in respect of which any action is taken to enforce or perfect any other Lien on the related Financed Property including those arising from applicable Taxes or assessments, or (f) at the option of Purchaser, any event of default by the Obligor under the Receivable, which event is known to Seller (other than a default under (b) above) has occurred and remains uncured for more than fourteen (14) months, including any failure to pay applicable Taxes or assessments (whether or not expressly required under the terms of the Receivable), or (g) as to which the Obligor has exercised any right to exchange the Financed Property for other property or is otherwise released from Obligor's obligations under any Receivable by Seller, including any Receivable in respect of which an upgrading or downgrading contract is entered into as contemplated by Section 3.06(a) or (h) for which a Custodian Receivable File has been delivered to Custodian and there shall be missing items in such file as shall be identified on an exception list as is more particularly set forth in Section 1.2 of the Custodial Agreement, which items shall not have been furnished within thirty (30) days after delivery of such Custodian Receivable File unless Purchaser shall have waived the furnishing of such items or consented to the Receivable not being designated as a Defaulted Receivable; and which, in the case of each of clauses (a) through (h), shall not have been repurchased from Purchaser by or on behalf of Seller or replaced pursuant to Section 4.02. "Distribution Date" means the third Business Day after the Report Date for each Collection Period. "Event of Transfer" means any event or condition specified in Section 7.01. 4 5 "Financed Property" means, in respect of a Receivable, the land in the case of a Land Receivable, or the timeshare interest or right to use interest in the case of a Timeshare Receivable, together with all hereditaments and appurtenances thereto, securing (or as to which title is retained to secure) an Obligor's indebtedness under such Receivable. "Generally Accepted Accounting Principles" shall mean generally accepted accounting principles applied on a consistent basis. "Guarantor" shall mean Mego Financial Corp., a New York corporation, which owns all of the issued and outstanding capital stock of Seller. "Guaranty Agreement" means that certain Guaranty Agreement, dated as of May 30, 1997, by Guarantor in favor of Purchaser, as the same may be amended or modified from time to time. "Initial Closing Date" means May 30, 1997. "Land Receivable" means a Receivable arising from the sale of land in the Subdivision Project by the Seller. "Lien" means a security interest, lien, title retention arrangement, charge, pledge, preference or encumbrance of any kind, including tax liens, mechanics' liens and any liens that attach by operation of law. "Minimum Reserve Account Amount" means as of the Cutoff Date and on each subsequent Record Date an amount equal to 5% of the Pool on each such date. "Obligor" means the purchaser or the co-purchasers of the Financed Property purchased in part or in whole by the execution and delivery of such Receivable, or any other Person who owes or may be liable for payments under such Receivable. "Opinion of Counsel" means a written opinion of independent counsel acceptable to the Purchaser. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof, or any other entity of whatever nature. 5 6 "Pool" means the aggregate outstanding Principal Balance of the Receivables purchased by Purchaser on the Initial Closing Date and the aggregate outstanding Principal Balance of the Receivables purchased by Purchaser on the Subsequent Closing Date and thereafter the aggregate outstanding Principal Balance of the Receivables purchased by Purchaser on each of the Closing Dates less the Principal Balance of Defaulted Receivables plus the Principal Balance of Replacement Receivables calculated separately for each such Pool purchased. "Principal Balance" of a Receivable, as of any date means the Amount Financed minus that portion of all payments received prior to such date allocable to principal of such Receivable. "Purchaser" means BankBoston, N.A., a national banking association and its successors and assigns (but such term shall not include any Person repurchasing Receivables pursuant to the terms of this Agreement). "Receivable" means an installment contract (which shall be either a Deed of Trust Agreement or an Agreement for Deed or a Right to Use Agreement) entered into between Seller and an Obligor in respect of Financed Property which installment contract is purchased by Purchaser from Seller or is collaterally assigned by Seller to Purchaser to constitute all or a portion of the Reserve Account, pursuant to this Agreement, and includes all promissory notes, mortgages, deeds of trust, land contracts, agreements for deed and other property, right, title and interest conveyed pursuant to Section 2.01. A Receivable repurchased by or on behalf of Seller or replaced pursuant to Section 4.02, shall be removed and shall not thereafter be deemed a Receivable for purposes of this Agreement. Each Replacement Receivable assigned by Seller pursuant to Section 4.02 shall be included in the Pool and thereafter be deemed a Receivable for all purposes of this Agreement. "Receivable Files" means the documents specified in Section 2.06(a) and (b). "Record Date" means the last day of a Collection Period. "Replacement Receivable" means a Receivable assigned to Purchaser by Seller pursuant to Section 4.02 in replacement of a Defaulted Receivable. "Replacement Request" means each request by Seller that Purchaser accept Replacement Receivables pursuant to Section 4.02. "Report Date" means for each Collection Period the fifteenth calendar day of the month following each Collection Period. 6 7 "Repurchase Amount" of any Receivable means, as of a Record Date, the Principal Balance thereof. "Reserve Account" means the account established pursuant to Section 5.01. "Reserve Account Balance" shall mean the balance of the Reserve Account at any time. "Right To Use Agreement" means a written agreement wherein installment payments are due by the Obligor thereunder for the right to use a specified accommodation or type of accommodation for a stated period of time on either a fixed period or floating, discretionary period basis at the Timeshare Project under which the Seller is the grantor. "Servicer Receivable File" means the documents specified in Section 2.06(b). "Subdivision Project" means the Calvada Valley Subdivision, the Calvada North Subdivision, the Calvada Meadows Subdivision, the Country View Estates Subdivision, the Golden Spring Ranch Subdivision (Units No. 1-8 inclusive), the Vegas Acres Subdivision (Unit No.2), the Calvada 9B Subdivision, and the Country Place II Subdivision projects located in Nye County, Nevada, which comprise a part of the Calvada subdivisions, for which Seller has acted as the seller of lots therein. "Subsequent Closing Date" means any date up to and including October 24, 1997 as is agreed to be the Subsequent Closing Date by Purchaser and Seller, upon which date Purchaser acquires title to a Pool of Receivables. "Subsidiary" of any person shall mean any other person (whether now existing or hereafter organized or acquired) in which (other than directors qualifying shares required by law) at least a majority of the securities or other ownership interests of each class having ordinary voting power or analogous right (other than securities or other ownership interests which have such power or right only by reason of the happening of a contingency), at the time as of which any determination is being made, are owned, beneficially and of record, by such person or by one or more of the other subsidiaries of such person or by any combination thereof, provided, however, that for purposes of this Agreement no New York corporations which, on the date of this Agreement, would otherwise constitute Subsidiaries, shall be deemed Subsidiaries. "Tangible Net Worth" of any person or entity shall mean, as of any date, (a) the amount of any capital stock, paid in capital and similar equity accounts plus (or minus in the case of a deficit) the capital surplus and retained earnings of such person 7 8 or entity and the amount of any foreign currency translation adjustment account shown as a capital account of such person or entity, less (b) the net book value of all items of the following character which are included in the assets of such person or entity: (i) good will, including without limitation, the excess of cost over book value of any asset, (ii) organization or experimental expenses, (iii) unamortized debt discount and expense, (iv) patents, trademarks, trade names and copyrights, (v) treasury stock, (vi) deferred taxes and deferred charges, (vii) franchises, licenses and permits, and (viii) other assets which are deemed intangible assets under generally accepting accounting principles, provided, however, that, notwithstanding the foregoing, no deduction shall be made pursuant to clause (b) in respect of any asset presently shown on the balance sheet of the Seller as "Deferred Selling Expense" as determined in accordance with generally accepted accounting principles. "Taxes" mean real property taxes and assessments, and other similar fees and taxes relating to a Financed Property. "Timeshare Project" means the White Sands Waikiki Resort Club located in the metropolitan area of Honolulu, Hawaii which has been dedicated to timeshare ownership by Seller pursuant to White Sands Waikiki Resort Club Notice of Timeshare Plan filed in the Office of Assistant Registrar of the Land Court of the State of Hawaii as Document No. 1205652, and the Reno Spa Resort Club located in the metropolitan area of Reno, Nevada which has been dedicated to timeshare ownership by Seller pursuant to Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded in the Official Records of Washoe County, Nevada on April 18, 1984 in Book 2002 at Page 0651 as Document No. 919447, and the Brigantine Villas located in the metropolitan area of Atlantic City, New Jersey which has been dedicated to timeshare ownership by Seller pursuant to Declaration of Conditions, Covenants and Restrictions recorded in the Office of the Clerk of Atlantic County in Book 4731 of Deeds at Page 134, and the Brigantine Inn Resort Club located in the metropolitan area of Atlantic City, New Jersey which has been dedicated to timeshare ownership by Seller pursuant to Declaration of Conditions, Covenants and Restrictions recorded in the Office of the Clerk of Atlantic County in Book 4057 of Deeds at Page 1, and the Grand Flamingo Villas resort located in the metropolitan area of Las Vegas, Nevada which has been dedicated to timeshare ownership by Seller pursuant to Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded in the Official Records of Clark County, Nevada on November 10, 1983 in Book 1832 as Document No. 1791580, and the Grand Flamingo Towers resort located in the metropolitan area of Las Vegas, Nevada which has been dedicated to timeshare ownership by Seller pursuant to Declarations of Timeshare Ownership Covenants, Conditions and Restrictions recorded in the Official Records of Clark County, Nevada on August 23, 1984 in Book 1978 as Document 8 9 No. 1937487, and the Grand Flamingo Terraces resort located in the metropolitan area of Las Vegas, Nevada which has been dedicated to timeshare ownership by Seller pursuant to Declaration of Timeshare Plan Ownership Covenants, Conditions and Restrictions recorded in the Official Records of Clark County, Nevada on December 12, 1989 in Book 891212 as Document No. 00188, and the Grand Flamingo Suites resort located in the metropolitan area of Las Vegas, Nevada which has been dedicated to timeshare ownership by Seller pursuant to Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded in the Official Records of Clark County, Nevada on November 8, 1991 in Book 911108 as Document No. 00235, and the Grand Flamingo Winnick resort located in the metropolitan area of Las Vegas, Nevada which has been dedicated to timeshare ownership by Seller pursuant to Declaration of Timeshare Ownership Covenants, Conditions and Restrictions recorded in the Official Records of Clark County, Nevada on March 19, 1993 in Book 930319 as Document No. 00051, and the Grand Flamingo Fountains resort located in the metropolitan area of Las Vegas, Nevada which has been dedicated to timeshare ownership by Seller pursuant to Declaration of Timeshare Ownership recorded in the Official Records of Clark County, Nevada on May 26, 1983 in Book 930526 as Document No. 00566 and the Aloha Bay, A Condominium-Indian Shores resort located in Indian Shores, Florida which has been dedicated to timeshare ownership by Seller pursuant to a Declaration of condominium for Aloha Bay, A Condominium recorded in the Official Records Book of Pinellas County Florida as Instrument #96-266636 in Book 9477 at Page 1645 and the Suites at Steamboat resort located in Steamboat Springs, Colorado which has been dedicated to timeshare ownership by Steamboat Suites, Inc., a subsidiary of Seller pursuant to an Amended and Restated Condominium Declaration with Timeshare Ownership Covenants, Conditions and Restrictions for The Suites at Steamboat, a Condominium recorded in the official records of Routt County as Instrument #446385 on March 22, 1995 in Book 706 at page 337. "Timeshare Receivable" means a Receivable arising from the sale of a timeshare interest by Seller, whether in fee or by a Right to Use Agreement in the Timeshare Project. "Trust Agreements" shall mean (a) that certain Amended, Restated and Consolidated Trust Agreement-Grand Flamingo Towers, dated as of March 19, 1990, among Valley Bank of Nevada (now known as Bank of America NT & SA), as trustee, Vacation Spa Resorts, a Tennessee corporation, whose existence ceased upon merger into Seller on March 11, 1993 and the Grand Flamingo Owners Association, (b) that certain Amended, Restated and Consolidated Trust Agreement-Grand Flamingo Villas, dated as of March 19, 1990, among Valley Bank of Nevada (now known as Bank of America NT & SA), as trustee, Vacation Spa Resorts, a Tennessee corporation, whose existence ceased upon merger into Seller on March 11, 1993 and the Grand Flamingo Villas Owners Association, 9 10 (c) that certain Trust Agreement-Grand Flamingo Terraces, dated as of December 8, 1989, among Valley Bank of Nevada (now known as Bank of America NT & SA), as trustee, Seller and Grand Flamingo Terraces Owners Association and (d) that certain Trust Agreement dated November 13, 1991 between Valley Bank of Nevada (now known as Bank of America NT & SA) and Seller with reference to the property known as the Grand Flamingo Suites. "Trustee" shall mean Bank of America NT & SA, a Nevada banking corporation, in its capacity as trustee under the Trust Agreements, and any successor to any of its rights and duties under the Trust Agreements. "UCC" means the Uniform Commercial Code as in effect in a respective jurisdiction. SECTION 1.02 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 a writing include printing, typing, lithography, 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" means "including without limitation". SECTION 1.03 Simple Interest Method. All allocations of payments to principal and interest and determinations of periodic charges and the like shall be made using the simple interest method, based on the actual number of days elapsed and the actual number of days in the calendar year. Each payment on a Receivable shall be applied first to the amount of late payment charges or similar fees or reimbursable advances not included in the Amount Financed, then to interest accrued on such Receivable to the date of receipt and then to reduce the principal amount outstanding on the Receivable. 10 11 ARTICLE II The Receivables SECTION 2.01 Conveyance of Receivables. In consideration of the payment of the purchase price by Purchaser pursuant to Section 2.02, on the Initial Closing Date and on the Subsequent Closing Date, Seller hereby agrees to sell, transfer, assign, and otherwise convey to Purchaser without recourse (but subject to Seller's obligations herein) the following: (i) The Receivables listed in Schedule A to this Agreement (and on the Subsequent Closing Date the Receivables listed on Schedule A-1 to be attached to this Agreement) together with all monies paid thereon on or after the Cutoff Date and all monies due and to become due thereon on or after the Cutoff Date and all other rights and claims arising thereunder or related thereto; (ii) All right, title and interest of Seller in any promissory notes or other instruments or agreements evidencing the indebtedness of the Obligors under such Receivables and all rights of payment thereunder; (iii) All right, title and interest of Seller in the liens, security interests and other legal and beneficial rights and claims in and to the related Financed Property, including those arising or held under any related mortgages, deeds of trust, land contracts, Agreements for Deed, Right to Use Agreement and trust agreements (including the Trust Agreements) pertaining to any such Financed Property; (iv) All right, title and interest of Seller in any proceeds of any physical damage and title insurance policies attributable to such Financed Property and in any proceeds of any mortgage, credit life, accident, health and disability and hospitalization insurance policies covering any such Receivables or any Obligor with respect thereto; (v) All right, title and interest of Seller in any recourse to others for payment of or relating and attributable to such Receivables; (vi) All right, title and interest of Seller in any collateral, guaranty or other credit support that shall secure any of such Receivables and in any deposits, impounds, and other funds that may be payable from time to time to holders of such Receivables; 11 12 (vii) All accounts, contract rights, general intangibles, instruments or documents evidencing, arising out of or relating and attributable to such Receivables; (viii) All right, title and interest of Seller in all files, documents, surveys, certificates, correspondence, appraisals, computer programs, tapes, disks, cards, accounting records and other books, records, information and data of Seller pertaining to such Receivables; (ix) All right, title and interest of Seller relating and attributable to such Receivables or such Financed Property not otherwise described in this Section 2.01; and (x) All proceeds of the foregoing (including insurance and condemnation proceeds). It is expressly acknowledged that the foregoing does not include an assignment of any property of any owners association for the Timeshare Project. SECTION 2.02 Payment of Purchase Price: Conditions Precedent. (a) On the Initial Closing Date, Purchaser will purchase up to Ten Million ($10,000,000) Dollars of Receivables in the aggregate in substantially equal amounts of Land Receivables and Timeshare Receivables from Seller. The Receivables which Purchaser has agreed to purchase as of the Initial Closing Date are set forth on Schedule A to this Agreement and shall be subject to the terms and conditions of this Agreement on the Closing Date. In addition, Purchaser has agreed to purchase of up to Ten Million ($10,000,000) Dollars of Receivables in the aggregate on the Subsequent Closing Date, which shall occur on or before the Cutoff Date, in substantially equal amounts of Land Receivables and Timeshare Receivables from Seller on such Subsequent Closing Date. The Receivables to be purchased by Purchaser on the Subsequent Closing Date shall be acceptable in all respect to Purchaser and shall be set forth, on or before the Subsequent Closing Date, on a Schedule A-1 to be appended to this Agreement with such subsequent purchase being subject to the terms and conditions of this Agreement. 12 13 (b) Purchaser agrees, subject to the terms and conditions of this Agreement, to pay on the Closing Date, as the purchase price for the conveyance of such Receivables, the amount of the Pool. (c) Unless waived by Purchaser, the obligation of Purchaser to pay the purchase price is subject to receipt by Purchaser of the following documents and completion of the following matters, all in form, scope and substance satisfactory to Purchaser in its sole discretion: (i) Articles of Incorporation; Etc. Certificates of recent date of the appropriate authority or official of Nevada for Seller and New York for Guarantor listing all charter documents of Seller and Guarantor on file in that office and certifying as to the respective good standing and corporate existence of Seller and Guarantor, together with copies of such charter documents of Seller and Guarantor certified as of a date acceptable to Purchaser by such authority or official and certified as true and correct as of the Closing Date by a duly authorized officer of Seller and Guarantor respectively; (ii) By-Laws; Resolutions. Copies of the By-Laws of Seller and Guarantor together with all authorizing resolutions and evidence of other corporate action taken by Seller and Guarantor to authorize the execution, delivery and performance by Seller and Guarantor of this Agreement and the Guaranty Agreement, as the case may be and the consummation of the transactions contemplated hereby, certified as true and correct as of the Closing Date by a duly authorized officer of Seller and Guarantor respectively; (iii) Officer's Certificates. Certificates of incumbency of Seller and Guarantor containing, and attesting to the genuineness of, the signatures of those officers authorized to act on behalf of Seller and Guarantor in connection with this Agreement and the Guaranty Agreement, as the case may be, and the consummation of the transactions contemplated hereby, certified as true and correct as of the Closing Date by a duly authorized officer of Seller and Guarantor respectively; 13 14 (iv) Assignment of Receivables. A blanket assignment with respect to the Receivables listed on Schedule A and Schedule A-1 deemed by Purchaser to be acceptable for purchase, duly executed and delivered by Seller, together with endorsement by Seller (and all prior holders) of all promissory notes and other instruments evidencing any Receivable (or satisfactory arrangements therefor) and assignment of the Right to Use Agreement, deed of trust, mortgage or Agreement for Deed executed by the Obligor to secure any Receivable sufficient to assign the right, title and interest of Seller thereunder of record to Purchaser and evidence that no prior holder has any right, title or interest in or to any of the Receivables; (v) Perfection of Assignment. Evidence of the due execution and delivery of, and the recordation and filing of, and other action (including payment of any applicable taxes or fees) in connection with, assignments of deeds of trust, assignments of mortgages, Agreements for Deed, financing statements and similar documents which Purchaser deems necessary or desirable to create, to preserve or perfect the right, title and interest in such Receivables intended to be granted to Purchaser hereunder in such jurisdictions as Purchaser may deem necessary or appropriate, together with (i) such title insurance and UCC record searches in such offices as Purchaser may request and (ii) a receipt for the applicable Custodian Receivable Files to be retained by the Custodian pursuant to Section 2.06 and confirmation that all such Receivables have been endorsed in blank (or satisfactory arrangements made therefor) and contain no legends, notations or indications of claims of others (or satisfactory arrangements for cancellation thereof); (vi) Other Agreements. The Custodial Agreement, the Agency Agreement and Guaranty Agreement duly executed and delivered by the parties thereto; 14 15 (vii) Lockbox and Reserve Account. The Reserve Account shall have been established as provided in Section 5.01; in an amount which, together with any cash amounts then held in the Reserve Account, is not less than the Minimum Reserve Account Amount. The lock box account contemplated by the Custodial Agreement shall have been established with the Custodian and undertakings requested by Purchaser shall have been received from any prior holders of such Receivables regarding delivery of any payments thereon to Purchaser; (viii) Opinion of Counsel. The favorable written opinion of Lionel, Sawyer & Collins as counsel for Seller and an opinion of counsel for Guarantor with respect to such matters as Purchaser may reasonably request; (ix) Representation and Warranties: No Event of Transfer. The representations and warranties contained in Section 2.03 and 6.01 hereof and in Section 5 of the Guaranty Agreement shall be true and correct on and as of the Closing Date and no Event of Transfer or no event or condition which might become such an Event of Transfer with notice or lapse of time, or both, shall exist or shall have occurred and be continuing on the Closing Date and Purchaser shall have received a certificate to such effect certified as true and correct as of the Closing Date by a duly authorized officer of Seller and Guarantor respectively; (x) Consumer and Project Documents. Purchaser shall have received copies of (A) the forms of all contract documents, disclosures, applications and related documentation utilized in originating the Receivables, (B) the declarations of covenants, conditions and restrictions for the Timeshare Project, (C) the articles of incorporation, by-laws and the rules and regulations of the owners associations for the Timeshare Project; and (D) all other related documents, including association budgets, assessment information, the property reports and public offering statements filed with the Department of Housing and Urban Development and the Nevada Division of Real Estate with respect to the Subdivision Project, the Trust Agreements, property reports and public offering statements filed with the Nevada, Florida and Colorado Divisions of Real Estate with respect to the Timeshare Project, and evidence that the declarations of covenants for the Subdivision Project and the Timeshare Project have been duly recorded in accordance with 15 16 applicable law, each certified as true and correct as of the Closing Date by a duly authorized officer of Seller; (xi) Management and Other Agreements. If requested by Purchaser at any time, a list of all material management, maintenance, service, supply, employment and other contracts in effect with respect to the management and operation of the Timeshare Project, together with copies thereof certified as true and correct as of the Closing Date by a duly authorized officer of Seller; (xii) Timeshare Exchange. If requested by Purchaser at any time, a copy of all contracts with Resort Condominiums International relating to the Timeshare Project and evidence that the Timeshare Project is in good standing and the owners of timeshare interests therein are eligible to purchase memberships in and thereby to enjoy exchange privileges through such organization; (xiii) Zoning. Etc. If requested by Purchaser at any time, evidence satisfactory to Purchaser that the Timeshare Project and the Subdivision Project each complies with all applicable covenants, restrictions, zoning, development, building, use and similar laws, ordinances and codes and that adequate utilities and access are available, including certificates of occupancy and/or use; (xiv) Statutory Compliance. Evidence as Purchaser may request at any time that the Timeshare Project complies with applicable provisions of applicable law, including any regulatory permits issued thereunder, and that the Subdivision Project is in compliance with Chapter 278 and 119 of the Nevada Revised Statutes and Seller is in compliance with all applicable provisions of the Federal Interstate Land Sales Act, and all other applicable laws affecting the sale of interests in the Timeshare Project or the Subdivision Project; (xv) Insurance. Evidence of appropriate liability and casualty insurance covering the Timeshare Project and, if applicable, the Subdivision Project, including standard mortgagee clauses and such other endorsements and coverages as Purchaser may request, issued by companies, in amounts, and upon other terms satisfactory to Purchaser, which insurance without limitation will be in an amount not less than the full insurable value of the related property; 16 17 (xvi) Surveys/Plats. An as-built survey of the Timeshare Project and plat of the Subdivision Project, together with a certificate of the surveyor stating that no portion of the Timeshare Project and a certificate of Seller or satisfactory alternative evidence that no portion of the Subdivision Project is located in a flood hazard area designated by the Federal Emergency Management Agency or, if located in such an area, evidence of flood insurance; (xvii) Environmental Matters. Copies of such environmental assessments and analyses prepared by such environmental consultants and otherwise acceptable to Purchaser as Purchaser may request with respect to the Timeshare Project and the Subdivision Project; and (xviii) Prior Transaction Cross Default and Collateralization. Seller and Purchaser shall have entered into such agreements as are deemed necessary by Purchaser to have any and all reserve account amounts existing from time to time, under the portfolio purchases by Purchaser from Oxford Finance Company effected on or about December 31, 1992 and under a portfolio purchase of July 6, 1994 and under a portfolio purchase of August 31, 1995, granted as additional collateral security to Purchaser to secure the payment and performance of Sellers obligations under this Agreement. (xix) Miscellaneous. Delivery of such other documents and completion of such other matters as Purchaser may reasonably request. SECTION 2.03 Representations and Warranties of Seller. Seller hereby makes the following representations and warranties to Purchaser on which Purchaser will rely in purchasing the Receivables or in accepting an assignment of Replacement Receivables pursuant to Section 4.02. Such representations and warranties shall speak as of the Closing Date (or the immediately preceding Record Date, in the case of Replacement Receivables assigned pursuant to Section 4.02), unless otherwise specified, and shall survive the sale, transfer and assignment of the Receivables to Purchaser. For purposes of the following representations and warranties made with respect to any Replacement Receivables, references to Cutoff Date and Closing Date shall be deemed references to the immediately preceding Record Date. 17 18 (i) Receivable Term. Each receivable conveyed to the Purchaser shall have a remaining term to maturity of not greater than 117 months. (ii) Annual Percentage Rate. Each Receivable conveyed hereby shall have an Annual Percentage Rate equal to or greater than 9.5%. As of the Cutoff Date, the weighted average Annual Percentage Rate of the Receivables is not less than 9.75%. (iii) Characteristics of Receivables. Each Receivable (a) shall have been originated by Seller in the States of Nevada, Hawaii, California, Colorado, Florida or New Jersey for the original retail sale of the related Financed Property in the ordinary course of Seller's business, and shall have been fully and properly executed by the parties thereto, (b) all Timeshare Receivables identified in Schedule A or Schedule A-1 to this Agreement as arising from sales of Financed Property in the White Sands Timeshare Development constitute Right to Use Agreements and in the Reno Spa, Grand Flamingo Villas and Grand Flamingo Towers Timeshare Developments constitute Agreements for Deed and all other Receivables constitute Deed of Trust Agreements, (c) in the case of the Land Receivables, the Financed Property was unimproved at the time of sale and comprises single family residential lots (except as otherwise specified in Schedule A or Schedule A-1), (d) shall contain customary and enforceable provisions such that the rights and remedies of the holder thereof shall be adequate for realization against the Financed Property of the benefits of the lien or vendor's interest, and in the case of Receivables constituting Deed of Trust Agreements, shall be eligible for summary remedies in lieu of judicial foreclosure proceedings and, in the case of those Timeshare Receivables constituting Agreements for Deed, the holder shall be entitled to terminate such agreement after default and reasonable notice to the Obligor, and to retain all payments made without necessity for legal proceedings to obtain marketable title to the related Financed Property, and in the case of all Receivables no Obligor shall be entitled to recover or obtain any rebate of amounts previously paid in respect of such Receivable, (e) shall provide for level monthly payments (excepting the final monthly payment thereon which may be a lesser amount than such level monthly payments) in US dollars by the related Obligor, who is a natural person and is a citizen and resident, at the time of origination, of one of the United States or Canada, provided, that up 18 19 to twelve (12%) of the portion of the aggregate Pool attributable to Receivables may be from citizens and residents of countries other than the United States if all other conditions of this Section 2.03 and this Subsection of each of such Receivables are complied with, but not more than ten (10%) percent of such Receivables where the Obligor is a citizen or resident of a country other than the United States shall be from citizens and/or residents of Canada, (f) pursuant to which all payments may properly be applied on a Receivable first to any late payment charges or similar fees or reimbursable advances not included in the Amount Financed, then to the amount of interest accrued on such Receivables to the date of receipt and then to reduce the principal amount outstanding on the Receivable, and such allocations of payments to such amounts may properly be applied in accordance with the simple interest method described in Section 1.03, (g) shall be on the applicable forms of Seller delivered to Purchaser pursuant to Section 2.02(c)(x), and such forms comprise all of the agreements entered into with the Obligors relating to the Receivable and the Financed Property (except for agreements arising from the confirmation of reservations for occupancy of the Timeshare Project in the ordinary course of business), (h) shall be originated to an individual consumer end user of the Financed Property and shall not constitute except in the case of the White Sands Timeshare Development a "Vacation Resort Assurance Certificate" or other "right to use" interest in the case of the Timeshare Project, (i) shall require that the Obligor pay all applicable Taxes in the case of the Land Receivables and, under the declarations of covenants for the Timeshare Project (other than the White Sands resort), the Obligors under the Timeshare Receivables (other than the White Sands resort) are required to pay assessments to provide for payment of all applicable Taxes, maintenance and physical damage insurance covering the Financed Property, (j) shall have not been repurchased by Seller pursuant to an agreement providing for the sale of receivables (except as otherwise specified in Schedule A or Schedule A-1), (k) shall have complied at the time of origination with the Credit and Collection Policies of Seller set forth in Schedule B hereto, (l) is not subject to any unexpired rescission or similar right under law or otherwise, (m) shall be a contract which has a paid in equity of not less than ten (10%) percent of the original sale price which sum has been paid in cash to Seller except in the case of a Replacement Receivable which results from a trade up or down and shall have a paid in equity of not less than ten (10%) percent of the original sale price 19 20 of the original contract and the Obligor under such Receivable shall not at the time of transfer to Purchaser of such Receivable be greater than thirty (30) days delinquent in payment of principal and interest without the prior consent of Purchaser and if any such Receivable is accepted, the Obligor of such Receivable must make a regular monthly payment of principal and interest within thirty (30) days of the Cutoff Date or such Receivable will be deemed a Defaulted Receivable, (n) shall contain a requirement for periodic payments of at least monthly frequency in equal amounts of principal and interest providing for a complete amortization of the principal and interest obligation represented by the Receivable over the initial contract term, and (o) shall have an Obligor who has not had filed against such Obligor or is not on the Cutoff Date the subject of a voluntary or involuntary Chapter 7, 11 or 13 bankruptcy petition or proceeding. (iv) Schedule of Receivables. Schedule A to this Agreement lists all of the Receivables being purchased on the Initial Closing Date and the information set forth in Schedule A shall be true and correct in all material respects as of the close of business on the Cutoff Date and no selection procedures materially adverse to Purchaser shall have been utilized in selecting the Receivables from all receivables owned by Seller which meet the selection criteria specified in this Agreement. Schedule A-1 to this Agreement lists all of the Receivables being purchased on the Subsequent Closing Date and the information set forth in Schedule A-1 shall be true and correct in all material respects as of the close of business on the Cutoff Date and no selection procedures materially adverse to Purchaser shall have been utilized in selecting the Receivables from all receivables owned by Seller which meet the selection criteria specified in this Agreement. (v) Compliance with Law. Each Receivable and each sale of the related Financed Property shall have complied at the time it was originated or made, and shall comply at the Cutoff Date, with all applicable requirements of federal, state, and local laws, and regulations thereunder, including, to the extent applicable, the laws of any jurisdiction in which any Receivable was originated, the Interstate Land Sales Full Disclosure Act, usury laws, the Federal Truth-In-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Federal Trade Commission Act, the National Flood 20 21 Insurance Act of 1968, the Flood Disaster Protection Act of 1973, Federal Reserve Board Regulations B and Z, state adaptations of the National Consumer Act and of the Uniform Consumer Credit Code, and Chapters 116, 119, ll9A, 278, 278A and 278B of the Nevada Revised Statutes. (vi) Binding Obligation. Each Receivable shall constitute the genuine, legal, valid, and binding payment obligation in writing of the Obligor, enforceable by the holder thereof in accordance with its terms subject to applicable bankruptcy, insolvency, reorganization and other laws affecting generally the enforcement of creditors' rights. (vii) Lien on or Interest in Financed Property. At the time of the sale, assignment, and transfer thereof to Purchaser under this Agreement, (a) each Receivable constituting a Deed of Trust Agreement shall be secured by a validly perfected first priority lien on the beneficial interest of Obligor in the Financed Property in favor of Seller, (b) each Receivable constituting a note shall be secured by a validly filed first priority mortgage lien on the interest of Obligor in the Financed Property in favor of Seller or secured by a validly filed deed of trust granted by Obligor on the Financed Property providing Seller with a validly filed first priority lien on the beneficial interest of Obligor in the Financed Property, (c) each Receivable constituting a Right To Use Agreement shall provide Seller or its assignee with a right to terminate the interest of Obligor in the Financed Property upon default by Obligor in the performance of the terms of such Receivable, and (d) each Receivable constituting an Agreement for Deed shall have created a valid, subsisting, perfected and enforceable right in favor of Seller to obtain fee simple title to the related Financed Property after default by and reasonable notice to the Obligor thereunder, and all necessary and appropriate action with respect to such Receivables shall have been taken to perfect such right in the related Financed Property in favor of Seller as vendor. (viii) Receivables in Force. No Receivable shall have been satisfied, subordinated, or rescinded, nor shall any Financed Property have been released from the Lien granted by the related deed of trust, mortgage or the vendor's interest under the related Agreement for Deed, in whole or in part. (ix) No Defenses. No facts shall exist which would give rise to any consumer complaint, right of 21 22 rescission, set off, claim, counterclaim, or defense, credit allowance, payment compromise or extension of payment obligation nor shall the same have been asserted or threatened, with respect to any Receivable. (x) No Liens. No Liens or claims shall exist, including Liens for work, labor, or materials relating to any Financed Property, that shall be Liens prior to, or equal or coordinate with, the Lien granted by the Receivable, except for Liens for Taxes not due and payable and Liens disclosed in the title policies issued pursuant to Section 2.O2(c)(v). (xi) Insurance. Adequate physical damage insurance covering the Financed Property subject to any Timeshare Receivable is in force on the Cutoff Date. (xii) Good Title. It is the intention of Seller and Purchaser that the transfer and assignment herein contemplated, taken as a whole, constitute a sale of the Receivables from Seller to Purchaser and effect a valid sale, transfer and assignment of the Receivables by Seller enforceable against creditors of and purchasers from Seller, and that the beneficial interest in and title to the Receivables, not be part of Seller's estate in the event of the filing of a bankruptcy, insolvency, receivership or other petition by or against Seller under any bankruptcy, insolvency, receivership or other similar law. At the time of the transfer and assignment herein contemplated, Seller has good and marketable title to each Receivable free and clear of all Liens except for Liens for Taxes not yet due and payable and, immediately upon the transfer thereof, Purchaser shall have good and marketable title to each Receivable, free and clear of all Liens and rights of others, except for Liens for Taxes not yet due and payable; and the sale, transfer and assignment shall have been perfected under the UCC and applicable real property law on the applicable Cutoff Date (except for filing and recording of UCC financing statements and real estate assignments which may be made subsequent to the Cutoff Date). Notwithstanding the foregoing, in the event that the transfer and assignment herein contemplated is not construed as a sale, Seller hereby grants, assigns and transfers to Purchaser a first-priority security interest in and to the property conveyed to Purchaser pursuant to Section 2.01 to secure the repayment of the purchase price paid by Purchaser pursuant to Section 2.02(b), amounts to be paid to Purchaser pursuant to Section 5.03 hereof and all other obligations of Seller and the Custodian owing to Purchaser in connection with the transactions 22 23 contemplated by this Agreement. No Receivables shall have been sold, transferred, assigned or pledged by Seller to any Person other than Purchaser, except that certain Receivables may have been previously sold by Seller and certain of the Receivables may have been previously pledged by Seller to Finova Capital Corporation, Greyhound Real Estate Finance company, Bank of America NT & SA, Dorfinco Corporation, NBD Bank, or Heller Financial, Inc. or as specified on Schedule A or Schedule A-1 to this Agreement, and Seller has delivered sufficient discharges, termination statements and other documents to Purchaser and taken other action pursuant to Section 2.02(c)(v) to effectively terminate and discharge all right, title and interest of such Persons in the Receivables. (xiii) Lawful Assignment. No Receivable shall have been originated in, or shall be subject to the laws of, any jurisdiction under which the sale, transfer, and assignment of such Receivable under this Agreement shall be unlawful, void, or voidable or subject to satisfaction of any unfulfilled condition or requirement, or shall subject Purchaser to any licensing or regulatory requirements. (xiv) All Recordings and Filings Made, Etc. All filings, notices and other action, including assignments of deeds of trust and agreements for deed and UCC filings, necessary in any jurisdiction to sell, transfer and assign the Receivables to Purchaser, and to perfect the sale, transfer and assignment of the Receivables to Purchaser shall have been made, including notice to the Trustee that the Receivables constituting Agreements for Deed have been transferred and assigned to Purchaser. (xv) One Original. There shall be only one executed copy designated as the original of the Right To Use Agreement evidencing those Timeshare Receivables arising out of the White Sands Timeshare Project and only one executed copy designated as the original of the Agreements for Deed evidencing those Timeshare Receivables arising out of the Reno Spa Resort Club, Grand Flamingo Villas and Grand Flamingo Towers Timeshare Projects and, in all other cases, there shall be only one original executed promissory note evidencing the indebtedness under each Receivable constituting a Deed of Trust Agreement. (xvi) Accuracy of Information. All information furnished by Seller and the Guarantor to Purchaser is, and all information furnished by Seller and the 23 24 Guarantor to Purchaser will be, true and accurate in all material respects. (xvii) Improvements and Buildings: Etc. Seller has completed all improvements to the Subdivision Project and the Timeshare Project which have been promised or committed in any way to any Obligor or which are otherwise required by law or by an applicable zoning, development, building, use or similar laws, ordinances or codes; and the buildings and improvements which are a part of the Timeshare Project, including all foundations, walls, roof, ceilings, plumbing, heating, ventilation, and air conditioning equipment, are in good order, repair and operating condition, without material structural or mechanical defects, and are in full compliance with all laws, ordinances and codes applicable to their construction and current use and Seller has no knowledge of any hidden structural defects, infestation or damage by termites or other destructive elements; neither the Subdivision Project nor the Timeshare Project is situated, used or operated in violation of any zoning, building, health, environmental, labor or other law, ordinance or code (except as disclosed in writing to Purchaser) and Seller has received no notice of any such violation, and Seller has obtained, or caused to be obtained, all necessary or appropriate licenses, permits and authorizations from any governmental authority as may be required for the use and operation of the Subdivision Project and the Timeshare Project; Seller has furnished to Purchaser a list of all material management, maintenance, service, supply, employment and other contracts in effect with respect to the operation and management of the Timeshare Project, together with true and correct copies thereof, pursuant to Section 2.O2(c)(xi); and all Financed Property has vehicular access from public streets and roads and such access is not limited or restricted and all utilities are available (or, in the case of the Subdivision Project, can be extended) to the Financed Property in capacities sufficient to serve the Financed Property for its intended purposes, provided that certain Financed Property in the Subdivision Project does not have available public water or sanitary sewer which must be provided by private well and septic systems. (xviii) Tax Assessment, Etc. All Taxes assessed against the Financed Property in the Subdivision Project are assessed to and payable by the Obligor under the related Receivable, and Taxes on the Timeshare Project are assessed in gross and are payable by the respective owners associations responsible for 24 25 management of the Timeshare Project and not by the Obligor under the related Receivable except by way of assessments by such associations against the Obligors; and neither Seller nor Purchaser shall have responsibility for the payment of any Taxes assessed against any Financed Property in the Subdivision Project unless Seller or Purchaser acquires record title to such Financed Property; Purchaser shall not have responsibility for the payment of any assessment against any of the Financed Property in the Timeshare Project unless Purchaser acquires record title to such Financed Property or terminates an Agreement for Deed and thereby acquires the sole beneficial interest therein. (xix) No Licenses, Etc. It is not necessary for Purchaser to obtain any license, permit or authorization, or to make any regulatory declaration, registration or filing, pursuant to the law of any State outside Georgia or Massachusetts in connection with the purchase of the Receivables or any of the other transactions contemplated by this Agreement which Purchaser has not obtained or made. (xx) Trust Agreements. The rights of Seller in respect of those Timeshare Receivables constituting Agreements for Deed for Financed Property in (a) Grand Flamingo Towers are governed by that certain Amended, Restated and Consolidated Trust Agreement-Grand Flamingo Towers, dated as of March 19, 1990, among the Trustee, Vacation Spa Resort, a Tennessee corporation, whose existence ceased upon merger into Seller on March 11, 1993 and Grand Flamingo Owners Association, and (b) Grand Flamingo Villas are governed by that certain Amended, Restated and Consolidated Trust Agreement-Grand Flamingo Villas, dated as of March 19, 1990, among the Trustee, Vacation Spa Resort, a Tennessee corporation, whose existence ceased upon merger into Seller on March 11, 1993 and Grand Flamingo Villas Owners Association; which agreements are valid, binding, enforceable and subsisting, have not been amended or modified (and will not be amended or modified without the consent of Purchaser), all right, title and interest of Seller in the Financed Property thereunder has been assigned to Purchaser pursuant to Section 2.01 of this Agreement, and all necessary or appropriate action has been taken thereunder as of the Closing Date to perfect the sale, transfer and assignment of those Timeshare Receivables constituting Agreements for Deed to Purchaser and to perfect the rights of Purchaser under such Trust Agreements as against Seller and all third parties (subject to any 25 26 rights of Obligors under Agreements for Deed). (xxi) Subsidiaries. Schedule C hereto correctly sets forth the corporate name, jurisdiction of incorporation and ownership percentage with respect to each Subsidiary of the Seller. Each such Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly qualified to do business in each additional jurisdiction where the failure to so qualify could have a material adverse effect on the Subsidiary or on the transactions contemplated by this Agreement. Each Subsidiary of the Seller has and will have all requisite corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted. All outstanding shares of capital stock of each class of each Subsidiary of the Seller, have been and will be validly issued and are fully paid and non assessable and, except as otherwise indicated in Schedule C hereto or disclosed in writing to the Purchaser from time to time, are and will be owned, beneficially and of record, by the Seller or another Subsidiary of the Seller free and clear of any Liens, charges, encumbrances or rights of others whatsoever. SECTION 2.04 Repurchase or Replacement Upon Seller's Breach. Seller or Purchaser, as the case may be, shall inform the other party promptly, in writing, upon the discovery of any breach of Seller's representations and warranties pursuant to Section 2.03. Unless the breach shall have been cured to the reasonable satisfaction of Purchaser on or before the second Record Date following such discovery, Seller shall repurchase or replace pursuant to Section 4.02 any Receivable affected by the breach. As consideration for the repurchase or replacement of a Receivable, Seller shall remit the Repurchase Amount of, or assign a Replacement Receivable for, such Receivable as of such Record Date, in the manner specified in Article IV. SECTION 2.05 Repurchase or Replacement of Defaulted Receivables. Seller agrees that it shall repurchase any Receivable sold to Purchaser under this Agreement which constitutes a Defaulted Receivable as of any Record Date, unless such Defaulted Receivable is replaced pursuant to Section 4.02. As consideration for the repurchase of a Receivable, Seller shall remit the Repurchase Amount of, or assign a Replacement Receivable for, such Receivable as of such Record Date, in the manner specified in Article IV. 26 27 SECTION 2.06 Custody of Receivable Files. (a) On or before the Closing Date, Purchaser shall revocably appoint the Custodian, and the Custodian shall accept such appointment, pursuant to the Custodial Agreement to act as the agent of Purchaser as custodian of the following documents or instruments which Seller shall deliver to the Custodian with respect to each Receivable (collectively, a "Custodian Receivable File"): (i) The original promissory note evidencing the indebtedness under the Receivable, endorsed by Seller in blank, or, in the case of a Timeshare Receivable evidenced by an Agreement for Deed or Right To Use Agreement, by the original agreement evidencing the indebtedness under such Receivable; and (ii) The recorded deed of trust or mortgage creating the Lien on the Financed Property in favor of Seller where the Receivable is not evidenced by an Agreement for Deed or Right to Use Agreement. (b) On or before the Closing Date, Seller shall segregate the original copies of the following documents or instruments which shall be held with respect to each Receivable for the benefit of the Purchaser (collectively, a "Servicer Receivable File"): (i) The original application for membership fully executed by the Obligor, if any; (ii) The disclosure statement required by the Federal Truth-in-Lending Act if not included in the purchase agreement referred to in clause (iii); (iii) The original purchase agreement entered into by the Obligor with Seller (other than original Agreements for Deed held by the Custodian pursuant to Section 2.06 (a)(i); (iv) The acknowledgement of receipt by the Obligor of the Federal property report for all Land Receivables; and (v) Any and all other documents that Seller shall keep on file, in accordance with applicable law or its customary procedures, relating to a Receivable, an Obligor or any Financed Property. 27 28 SECTION 2.07 Duties of Custodian and Seller as Servicer. (a) Safekeeping. Custodian shall hold the Custodian Receivable Files on behalf of Purchaser pursuant to the Custodial Agreement and Seller shall hold the Servicer Receivable Files on behalf of Purchaser. Seller shall maintain, or cause the Custodian to maintain, such accurate and complete accounts, records, and computer systems pertaining to the Receivables as shall be reasonably requested by Purchaser or as required under the Custodial Agreement or the Agency Agreement. Seller shall promptly report to Purchaser any failure on the Custodian's part to hold the Custodian Receivable Files or to maintain accounts, records and computer systems as herein provided and promptly take appropriate action to remedy any such failure. (b) Maintenance of and Access to Records. Seller shall make available to Purchaser or its duly authorized representatives, attorneys, or auditors the Servicer Receivable Files and Seller shall make available to Purchaser or its duly authorized representatives, attorneys or auditors, the related accounts, records and computer systems maintained by Seller at such times as Purchaser shall reasonably instruct. Seller shall maintain each Servicer Receivable File at its chief executive office. (c) Release of Documents. Upon written request from Purchaser, Seller shall deliver any document in the Servicer Receivable Files to Purchaser, Purchaser's agent or Purchaser's designee, as the case may be, at such place or places as Purchaser may designate, as soon as practicable. SECTION 2.08 Effective Period and Termination. The Custodian's appointment as Custodian shall become effective as of the Closing Date with respect to purchased Receivables (or the date of receipt with respect to Replacement Receivables) and shall continue in full force and effect until terminated pursuant to the Custodial Agreement. If Purchaser shall terminate the rights and obligations of Seller, as servicer, under Section 7.01, Seller shall take any and all action requested by Purchaser to effect delivery of the Servicer Receivable Files to Purchaser or Purchaser's agent at such place or places as Purchaser may designate. SECTION 2.09 Further Assurances. (a) Within thirty days after the Closing Date, Seller shall have given notice to the applicable Obligors and shall have taken all other action to require that all payments under the Receivables are paid directly by the Obligors to the Lockbox (as defined in the Agency Agreement) maintained by the Custodian for the benefit of Purchaser under the Agency Agreement. 28 29 (b) Seller will from time to time do and perform, and cause to be done and performed, any and all acts and execute any and all documents (including, without limitation, the execution, amendment or supplementation of any mortgage, deed of trust, agreement for deed, assignments, financing statements and continuation statements relating to the Receivables for filing under applicable law (including the provisions of the UCC), the execution, amendment or supplementation of any instrument of transfer, and the making of notations on the records of Seller of title and delivery of the Receivables to the Custodian as Purchaser's bailee) as may be requested by Purchaser in order to effect the purposes of this Agreement and the sale of the Receivables hereunder and to perfect, preserve and protect the interest of Purchaser in the Receivables against all Persons whomsoever. SECTION 2.10 Power of Attorney. Without limiting the generality of the sale, transfer and assignment of the Receivables, but in furtherance thereof, Seller hereby grants Purchaser (and all Persons designated by Purchaser) an irrevocable power of attorney, with full power of substitution, coupled with an interest, (a) to notify any or all Obligors that a Receivable has been sold to Purchaser, (b) to do and perform any and all acts and execute any and all documents in the name and on behalf of Seller as Purchaser may deem necessary or appropriate in order to effect the purposes of this Agreement and the sale of the Receivables hereunder and to perfect, preserve and protect the interest of Purchaser in the Receivables against all Persons whomsoever, and (c) to endorse the name of Seller upon any checks, drafts, or similar items which are received in payment of, or in connection with any Receivable, and to do all things necessary in order to reduce the same to money. Seller will from time to time execute and deliver to Purchaser such additional powers of attorney as Purchaser may request to give effect to the sale, transfer and assignment of the Receivables and the other provisions of this Agreement. ARTICLE III Administration and Servicing of Receivables SECTION 3.01 Duties of Seller as Servicer. From and after the Closing Date, the Seller, as servicer shall administer the Receivables with reasonable care and in compliance with all applicable laws, using that degree of skill and attention that a prudent servicer would exercise with respect to comparable receivables that it services for itself and others. Seller's duties as servicer shall include posting of all payments, responding to inquiries by federal, state, or local governmental authorities regarding the Receivables, investigating delinquencies, sending monthly statements to Obligors, responding 29 30 to inquiries by Obligors with respect to the Receivables, reporting tax information and complying with all other requirements under applicable law and its customary practices. Seller, as servicer, shall follow the same standards, policies, and procedures in performing its duties as servicer as it follows with respect to comparable receivables that it services for itself and others and as specifically outlined in the Credit and Collection Policies. Without limiting the generality of the foregoing Seller, as servicer, shall be authorized and empowered by Purchaser to execute and deliver, on behalf of Purchaser, 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 Receivables or the Financed Property upon appropriate payment in full of the related Receivable and satisfaction of all obligations of the Obligor to Purchaser thereunder. SECTION 3.02 Collection of Receivables Payments. Seller and Purchaser shall cause the Custodian to be the sole recipient of all payments on the Receivables pursuant to the terms of the Agency Agreement. The Seller shall make reasonable efforts to collect all payments called for under the terms and provisions of the Receivables as and when the same shall become due, and shall follow such collection procedures as it follows with respect to comparable receivables that it services for itself and others and as specifically outlined in the Credit and Collection Policies. Seller may not waive any late payment charge or any other fee that may be due in the ordinary course of servicing a Receivable except as expressly provided in the Credit and Collection Policies. Seller will at no time be more lenient or less careful in its application of standards, policies and procedures with respect to servicing the Receivables than it is with respect to comparable receivables that it services for itself and others and will act in a manner so as to enhance the collectability of the Receivables. The Seller will not modify or waive any provision of the Credit and Collection Policies without prior written notice to and the written consent of Purchaser. In the event that Seller shall receive any such payments, Seller agrees to deposit daily to the Lockbox Account (as defined in the Agency Agreement), in the form received and with all necessary endorsements, all payments by or on behalf of Obligors on the Receivables, as collected during the Collection Period, and the funds therein shall be held as provided in the Agency Agreement pending payment to Purchaser as provided therein. Seller shall further take such actions as may be reasonably requested by Purchaser to assure that any payments on the Receivables which may be received by third parties shall be deposited in the Lockbox Account or as otherwise specified by Purchaser. Seller shall provide prompt notice to Purchaser of any payments on the Receivables known to Seller which are not paid initially to the Lockbox Account. In addition, if requested by Purchaser, Seller, as servicer, shall cause notice to be given promptly to the 30 31 Obligors of the sale, transfer and assignment of the Receivables to Purchaser in a manner acceptable to Purchaser. In addition to the notification required pursuant to Section 2.09(a), Seller shall, upon request of Purchaser, take such further action as may be necessary after such initial notice to the Obligors to assure that all payments under the Receivables continue to be paid directly by the Obligors to the Lockbox (as defined in the Agency Agreement) maintained by the Custodian for the benefit of Purchaser under the Agency Agreement. SECTION 3.03 Realization Upon Receivables. On behalf of Purchaser and if requested by Purchaser, the Seller, as servicer, shall use its best efforts, consistent with prudent servicing procedures and as specifically outlined in the Credit and Collection Policies, to foreclose or otherwise recover and convert the ownership of the Financed Property securing any Receivable which constitutes a Defaulted Receivable and which has not been repurchased by Seller. In the enforcement or collection of the Receivables, as provided above in this Section 3.03, the Seller, as servicer, shall be entitled to sue thereon in its own name if possible, or if, but only if, Purchaser provides its express prior written consent, as agent of Purchaser. In no event shall the Seller be entitled to take any action which would make Purchaser a party to any litigation without Purchaser's express prior written consent. Purchaser shall have no obligation to Seller to take any action or commence any proceedings to realize upon any Receivable or to enforce any of its rights or remedies with respect thereto. SECTION 3.04 Operation and Maintenance of Timeshare Project. (a) The operation and management of the Timeshare Project has been delegated by the owners associations responsible therefor, as of the date of this Agreement, to the Seller or in the case of the Brigantine Inn Timeshare Project to Brigantine Inn Management, Inc. a Subsidiary of Seller, and in the case of the Brigantine Inn Villas Timeshare Project to Brigantine Preferred Properties, Inc., a Subsidiary of Seller pursuant to the management agreements referred to in Section 2.02(c)(xi) hereof. The Seller agrees that neither it nor Brigantine Inn Management, Inc. nor Brigantine Preferred Properties, Inc. shall resign as manager of the Timeshare Project or the Brigantine Inn or Brigantine Inn Villas Timeshare Projects and shall use its best efforts to remain as such manager until the termination of this Agreement, and shall at all times exercise that degree of skill and attention that a good manager would exercise with respect to comparable projects that it manages for itself or others and in a manner that will cause the image and quality of the Timeshare Project to be maintained at a level not less than that existing on the date of this Agreement. (b) Without limiting the foregoing, and whether or not the Seller is acting as manager for the Timeshare Project, if Seller 31 32 shall determine that an owners association has allowed the liability coverage or the physical damage insurance covering any Financed Property in the Timeshare Project to lapse or has not obtained adequate insurance coverage, Seller shall cause such association to obtain such insurance or shall obtain insurance at its own expense sufficient to insure Purchaser against liability claims in at least such amounts as exist on the date of this Agreement and to insure Purchaser's interest in the Financed Property. Adequate insurance coverage shall mean casualty and physical damage insurance as described above and extended coverage in an amount sufficient to permit rebuilding of the Timeshare Project to at least its condition on the date of this Agreement or, if the Timeshare Project is not rebuilt, to result in payment to Purchaser as mortgagee of an amount not less than the Principal Balance, Accrued Interest and other amounts owing on the Receivables arising out of the Timeshare Project. Seller shall provide Purchaser with evidence that adequate insurance coverage is in force with standard mortgagee clauses in favor of Purchaser or naming Purchaser as additional insured, as appropriate, annually during the term of this Agreement. (c) Seller shall cause to be paid when due all Taxes which create or could give rise to a Lien on the Financed Property in the Timeshare Project that is prior to, or equal or coordinate with, the Lien granted by the related Receivable. Seller's present policy is to purchase lien rights of owners associations with respect to deficient assessments against interests in the Timeshare Project or to loan or advance funds to the respective owners association if required in order to maintain adequate funding for the operation and maintenance of the Timeshare Project, and Seller agrees that during the term of this Agreement to continue to purchase such rights or to make such loans or advances in an amount sufficient to permit such associations to operate and maintain the Timeshare Project as contemplated in this Section and to pay all applicable Taxes. Seller, for itself and all of its affiliates, agrees that all lien rights acquired as a result of any such purchase or loan or advance are expressly subordinate and subject to the lien and security interest of Purchaser in the related Financed Property. It is expressly acknowledged and agreed that the proceeds of any single interest insurance or similar insurance or indemnity with respect to any of the Receivables, if any, are conveyed to Purchaser pursuant to Section 2.01 and Seller shall take or cause to be taken all action necessary to preserve rights thereunder. If Seller determines that liability insurance or physical damage insurance has lapsed with respect to any Financed Property in the Timeshare Project or that the coverage is not adequate, Seller will notify Purchaser of such determination. Seller shall cause any physical damage insurance maintained on the Financed Property in the Timeshare Project and other insurance maintained with respect to any Receivable to provide that the loss payable thereunder shall be payable to Purchaser as its interest may appear and that 32 33 Purchaser is named as additional insured with respect to liability insurance. (d) Seller for itself and all Subsidiaries managing a Timeshare Project covenants and agrees that Seller will and will cause all Subsidiaries to use its and their best efforts to remain in management of each project comprising the Timeshare Project and further covenants and agrees that neither it nor any Subsidiary shall voluntarily resign from its position as manager for each resort comprising the Timeshare Project where it is so acting on the Closing Date. If Seller or any of its Subsidiaries resigns from the management of a resort comprising a Timeshare Project without the consent of Purchaser, Purchaser may, at its discretion and option, deem all Receivables from the resort from which Seller or its Subsidiary has resigned as Defaulted Receivables as of the next Record Date. SECTION 3.05 Maintenance of Liens in Financed Property. Seller shall take such steps as are necessary to maintain perfection of the lien created by each Receivable in the respective Financed Property. Purchaser hereby authorizes, and the Seller hereby agrees, to take such steps as are necessary to preserve and protect such lien on behalf of Purchaser. SECTION 3.06 Covenants of Seller as Servicer. Seller, as servicer, hereby makes the following covenants on which Purchaser will rely in purchasing the Receivables: (a) Security Interest to Remain in Force. The Financed Property securing each Receivable shall not be released from the lien granted by the Receivable in whole or in part, except as contemplated in Section 3.01 and except that Seller, as servicer, may permit the release of the Financed Property securing any Receivable as part of a transaction where the related Obligor is entering into an upgrading or downgrading contract for the purchase of other property owned by Seller provided that (i) the Receivable to which such Financed Property relates shall be repurchased or replaced pursuant to Section 4.02 by Seller as a Defaulted Receivable on the Report Date next following the month in which such transaction is consummated and (ii) no Event of Transfer, or event or condition which would notice or lapse of time, or both, could become such an Event of Transfer shall have occurred and be existing on the date such transaction is made. (b) No Impairment. The Seller, as servicer, shall observe and perform, or cause to be observed or performed, all contractual undertakings and legal obligations to the Obligor under each Receivable, and shall not permit any subordination or rescission of any Receivable or other impairment of the rights of Purchaser in the Receivables in any other way, and shall take all action necessary to secure all available rights of recourse, if any, with respect to the Receivables against other third parties; 33 34 (c) Amendments. The Seller, as servicer, shall not increase the number of payments under a Receivable, nor increase the Amount Financed under a Receivable, nor agree to any decrease in the Amount Financed or reduction in the amount of any payments under a Receivable, nor grant or permit, except as permitted pursuant to Section 3.06(a), any modification or adjustment with respect to any Receivable; and (d) Performance. The Seller, as servicer, shall observe and perform all of its obligations and duties as servicer under this Agreement in conformity with applicable law and the terms and conditions of this Agreement. SECTION 3.07 Replacement Upon Breach. Seller and Purchaser, as the case may be, shall inform the other party promptly, in writing, upon the discovery of any breach by the Seller, as servicer, of its obligations under Section 3.06. Unless the breach shall have been cured to the reasonable satisfaction of Purchaser by the second Record Date following such discovery, Seller shall replace pursuant to Section 4.02, any Receivable affected by such breach, as of such Record Date, without recourse to or warranty by Purchaser. SECTION 3.08 Servicing Expenses. The Seller shall be liable for all expenses incurred by it in connection with its activities hereunder, including taxes imposed, expenses incurred in connection with distributions and reports to Purchaser and expenses incurred for the account of the Obligor in connection with realizing upon Receivables as provided under Section 3.03. Seller shall pay all fees and charges of the Custodian in connection with the Custodial Agreement and the Agency Agreement and of the Trustee under the Trust Agreements. Seller, as servicer, shall not be entitled to receive any compensation for its services hereunder or otherwise retain any receipts or payments (from whatever source) on the Receivables. SECTION 3.09 Seller Certificate. On or before the Distribution Date in each calendar month, Seller, as servicer, shall deliver to Purchaser a certificate in form acceptable to Purchaser, certified as true and correct by the President or any Vice President of the Seller containing information with respect to the last Collection Period and all information necessary to make the distributions under Article IV. Seller, as servicer, also shall specify in such certificate (a) those Receivables which constitute Defaulted Receivables as of the Record Date for such Collection Period and with each such certificate delivered, those Receivables in respect of which the Seller, as servicer, has knowledge that the Obligors have failed to pay applicable assessments or Taxes when due; it being understood that the Seller shall not be required to undertake title searches in this respect and (b) those Receivables which are to be purchased or replaced by Seller as of the Record Date, pursuant to Section 34 35 2.04, 2.O5 and 3.07. Upon request by Purchaser, Seller shall promptly provide to Purchaser such further information pertinent to the Receivables or this Agreement as Purchaser may reasonably request. SECTION 3.10 Monthly Statement as to Compliance. The Seller shall deliver to Purchaser, on or before the Report Date a certificate signed by the President or any Vice President of Seller stating that (a) a review of the activities of the Seller, as servicer, during the preceding calendar month and of its performance under this Agreement has been made under such officer's supervision and (b) to the best of such officer's knowledge, based on such review, the Seller has fulfilled all its obligations under this Agreement throughout such month, 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. ARTICLE IV Distributions, Replacements and Reassignments Section 4.01 Distributions. On the Distribution Date (or in the case of Section 4.01(e) not later than the Report Date) with respect to each Record Date, the following distributions shall be made: (a) By Agent to Purchaser pursuant to the Agency Agreement and to the extent not previously paid thereunder (or by such Person that may then be receiving such amounts if the Agency Agreement shall be terminated), an amount equal to all Collected Interest together with all Collected Principal received by Agent during the preceding Collection Period. (b) By the Seller to Purchaser, an amount equal to the Repurchase Amount of all Receivables to be repurchased as of such Record Date by the Seller pursuant to Section 3.07, which are not replaced pursuant to Section 4.02. (c) By Seller to Purchaser, an amount equal to the Repurchase Amount of all Receivables to be repurchased as of such Record Date by such Seller pursuant to Section 2.04, which are not replaced pursuant to Section 4.02. (d) By Seller to Purchaser, an amount equal to the Repurchase Amount of all Defaulted Receivables to be repurchased as of such Record Date by such Seller pursuant to Section 2.05, which are not replaced pursuant to Section 4.02. (e) By Purchaser to Seller, on or before each Report Date the Receivables or amount in cash thereof which shall be 35 36 withdrawn from the Reserve Account, equal to the amount, if any, by which the Reserve Account Balance, as of such Record Date and after giving effect to deposits and charges thereto pursuant to Article V, exceeds the Minimum Reserve Account Amount as of such Record Date, but only if no Event of Transfer and no event or condition which with notice or lapse of time, or both, could become an Event of Transfer has occurred and is then continuing. (f) By Seller to Purchaser, an amount with respect to such Record Date equal to the amount, if any, by which the Minimum Reserve Account Amount as of such Record Date exceeds the Reserve Account Balance as of such Record Date, which shall be deposited in the Reserve Account pursuant to Section 5.04. (g) By Seller to Purchaser, an amount equal to the amount payable to Purchaser pursuant to Section 5.03, if applicable. SECTION 4.02 Replacement of Receivables. (a) In lieu of repurchasing Receivables pursuant to Section 3.06(a), 3.07, 2.04 and 2.05, and payment of the related Repurchase Amount pursuant to Section 3.06 (a), 4.01(b), (c) and (d), Seller may propose to transfer, assign and otherwise convey Replacement Receivables to Purchaser as of the respective Record Date, in replacement for Receivables otherwise required to be so repurchased. Purchaser shall not be obligated to accept such proposal and may accept some or all of the proposed Replacement Receivables. If Purchaser does not accept such proposal, or accepts such proposal in part, Seller shall propose to transfer, assign and otherwise convey additional Replacement Receivables to Purchaser as of the respective Record Date, in replacement for Receivables otherwise required to be so repurchased. Purchaser shall not be obligated to accept such additional proposal and may accept some or all of the proposed Replacement Receivables. If Purchaser does not accept after the additional offer of Replacement Receivables, or accepts such proposal in part, the Seller shall repurchase for cash all such Receivables not so replaced pursuant to Section 3.06(a) 3.07, 2.04 or 2.05, as the case may be. For purposes of determining the amount of the payment, if any, to be made in respect of the repurchase of Receivables, Seller shall receive a credit against the Repurchase Amount for Replacement Receivables so assigned in an amount equal to the Principal Balance of the Replacement Receivable as of such Record Date. (b) Each request for replacement of Receivables pursuant to this Section 4.O2 shall be made by Seller no later than the applicable Report Date and shall be effected by a Replacement Request. If the Purchaser fails to notify Seller of its acceptance, in whole or in part, of such offer to replace Receivables prior to such Distribution Date, the Seller shall repurchase all such receivables to be repurchased on such Distribution Date pursuant to Section 3.06 (a), 3.07, 2.04 or 36 37 2.05, as the case may be. Such replacement shall be consummated by the execution and delivery of the documentation described in Section 2.02(c)(iv) and (v), and such other documents and completion of such other matters as the Purchaser may reasonably request. To the extent that the Principal Balance as of such Record Date of the Replacement Receivables to be assigned on any Distribution Date exceeds the Principal Balance of the Receivables so replaced, as of such Record Date, such excess shall be applied, upon request of the Seller, in replacement, in whole or in part, for other Receivables pursuant to this Section 4.02 on succeeding Distribution Dates. SECTION 4.03 Manner of Payment: Net Distributions. All distributions to be made to the Purchaser pursuant to Section 4.01 shall be made by wire transfer of immediately available funds to BankBoston, N.A., 100 Federal Street, Boston, Massachusetts 02110, ABA # 011000390, Account Name: BankBoston, N.A. PEC Portfolio Collection Account #4, Account Number 606- 48765. As provided in Section 3.09, Seller, as servicer, shall make a computation of the remittances to be made pursuant to Section 4.01 above, and the remittances shall be made, on a net basis, provided, however, that the Purchaser shall not be obligated to make any distribution to the Seller if any Event of Transfer, or any event or condition which with notice or lapse of time, or both, could become an Event of Transfer shall have occurred and is continuing. Nonetheless, Seller, as servicer, shall account for all of the above described amounts as if such amounts were deposited and distributed separately. In addition to the deposits and distributions to be made pursuant to Section 4.01, the Purchaser shall make those deposits to and charges against the Reserve Account provided for in Article V. SECTION 4.04 Reassignments. Upon repurchase or replacement of a Receivable, the Purchaser shall execute and deliver, without recourse or warranty (except that its signatures are genuine or authorized and against its actions that impair its good title to the instruments), any documents reasonably requested by the Seller from time to time evidencing or confirming the reassignment of the repurchased or replaced Receivable and the related Financed Property and the release of such repurchased or replaced Receivable from any UCC-1 financing statement filed in connection with the assignment of such Receivable to Purchaser so long as (i) the form of the proposed document is prepared at the expense of Seller and furnished to Purchaser, (ii) the form and substance of the proposed document are satisfactory to Purchaser and its counsel, and (iii) Purchaser and its counsel are afforded a reasonable time to review and process the proposed document, which amount of time shall not in any event be less than ten days. ARTICLE V Reserve Account 37 38 SECTION 5.01 Establishment of Reserve Account. On or prior to the Closing Date, Seller will establish by pledge and delivery to Custodian, cash and/or Receivables acceptable to Purchaser in its sole discretion, in an amount sufficient to equal the Minimum Reserve Account Amount. Such cash and/or Receivables shall be placed in a custodial reserve account (referred to as the "Reserve Account") for the benefit of Purchaser who shall have a security interest in such Reserve Account. Such Reserve Account shall be established for the benefit of Purchaser and shall be for the sole use of Purchaser until such time as Purchaser shall have recovered and been repaid the purchase price, its yield of 9.00% on the unreimbursed portion of the purchase price outstanding from time to time from the Pool at the Initial Closing Date, such yield on the unreimbursed portion of the purchase price outstanding from time to time from the Pool at the Subsequent Closing Date as is agreed to between Purchaser and Seller after Purchaser has had an opportunity to conduct due diligence on the Pool offered and after Purchaser has obtained the necessary approvals for such purchase, all reasonable costs and expenses incurred in connection with this transaction and all sums due from Seller to Purchaser pursuant to a Purchase Agreement of December 31, 1992 between The Oxford Finance Companies, Inc. and Purchaser, a Purchase and Servicing Agreement of July 6, 1994 between Purchaser and Seller or a Purchase and Servicing Agreement of August 31, 1995 between Purchaser and Seller. Seller hereby grants to Purchaser a first priority lien on and security interest in, as collateral security for the payment and performance of the obligations of the Seller and the Custodian under the terms of this Agreement, the Custodial Agreement and the Agency Agreement, the Reserve Account, the cash and/or Receivables placed therein from time to time and any investments thereof and proceeds of such investments. Purchaser may at any time and from time to time, without notice to Seller (any requirement for such notice being expressly waived by Seller) set off and apply against any and all of the obligations of Seller hereafter existing under this Agreement, the Custodial Agreement or the Agency Agreement any and all monies held in the Reserve Account and all investments thereof and proceeds of such investments and any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Purchaser to or for the credit or the account of Seller and any property of Seller from time to time in possession of Purchaser, irrespective of whether or not Purchaser shall have made any demand hereunder and although such obligations may be contingent and matured. The rights of Purchaser under this Section 5.01 are in addition to other rights and remedies (including other rights of set off) which Purchaser may have. 38 39 In order to deposit Receivables into the Reserve Account, Seller shall execute a collateral assignment to Purchaser of such Receivables, together with any necessary appropriately recorded collateral assignment of deeds of trust or mortgages, and together with an appropriate UCC-1 filing, so as to perfect Purchaser's security interest in such Receivables. In determining the Reserve Account Balance at any time, Seller shall receive credit for the aggregate Principal Balance of all Receivables collaterally assigned to Purchaser which are not Defaulted Receivables at such time. Provided the Reserve Account Balance is at least equal to the Minimum Reserve Account Amount, Seller may remove Defaulted Receivables from the Reserve Account without payment or substitution therefor. Seller may at any time remove from the Reserve Account any Receivable or Receivables which are not Defaulted Receivables and substitute therefor (a) cash in the amount of the aggregate Principal Balance of such Receivable or Receivables being removed from the Reserve Account or (b) a Receivable or Receivables with an aggregate principal balance at least equal to the aggregate principal balance of the Receivable or Receivables being removed from the Reserve Account, which substitute Receivable or Receivables shall be acceptable to Purchaser. At such time as the Seller is permitted under this Agreement to remove any Receivables from the Reserve Account, Purchaser shall promptly reassign such Receivables to Seller and execute any necessary recordable assignments of deeds of trust or mortgages and execute any UCC releases as are necessary to transfer such Receivables back to Seller free and clear of Purchaser's security interest therein. Seller shall also advise the Custodian and Agent under the Custodial Agreement and Agency Agreement of such reassignment. SECTION 5.02 Charges Against Reserve Account. If, on any Distribution Date, Seller, Custodian or Agent shall fail to make any distribution, in whole or in part, required to be made to Purchaser pursuant to Section 4.01(b), (c) or (d) or Seller shall fail to replace Receivables as provided in Section 4.02, or the Pool shall fail to equal the unreimbursed purchase price as of the preceding Record Date, Purchaser shall charge against the Reserve Account as of the preceding Record Date and withdraw from the Reserve Account any cash and/or Receivables having a Principal Balance equal to the aggregate unpaid Repurchase Amount of the affected Receivables for the preceding Collection Period or such amount of Receivables necessary for Purchaser to have in its constructive possession and control through Custodian a Pool equalling the unreimbursed purchase price. Such Receivables withdrawn from the Reserve Account shall become the property of Purchaser. So long as the Minimum Reserve Account Amount is maintained by Seller, Seller may request and 39 40 receive from Purchaser and from the Reserve Account any Defaulted Receivable. SECTION 5.03 Other Charges Against the Reserve Account. As of each Record Date, if an Obligor or an Obligor's representative or successor successfully shall assert a claim (including the avoidance of a preferential transfer under bankruptcy law) that results in a liability of Purchaser to such Obligor, Seller shall, on each Distribution Date, pay to Purchaser an amount equal to any loss incurred by Purchaser as of the Record Date due to such claim pursuant to Section 4.01(g). Seller shall pursue reasonable remedies against any necessary or proper parties, as appropriate, to recover the amount of any loss to Purchaser caused by such claim. Nothing in this Section 5.03 shall limit or impair any right of Purchaser to indemnification under this Agreement in connection with any such loss. SECTION 5.04 Other Deposits To and Charges Against Reserve Account. On each Distribution Date, if payments of Collected Interest made to the Purchaser for a Collection Period with respect to the Receivables exceed or are less than an amount equal to the per annum yield specified in Section 5.01 computed, from time to time, on the Pool as reduced by payments received during such Collection Period by the Purchaser, then an amount equal to such excess shall be deposited by Purchaser into, and the amount of any such deficiency shall be paid by Seller to the Reserve Account, as the case may be. In addition, Seller shall pay the additional amounts for deposit to the Reserve Account provided for in Section 4.01 (f), if any, and such amounts, together with any amounts paid by Guarantor pursuant to the Guaranty Agreement shall be deposited by Purchaser into the Reserve Account. SECTION 5.05 Minimum Reserve Account Amount. As of each Record Date, the Reserve Account Balance shall equal the Minimum Reserve Account Amount. Seller shall deposit with Purchaser or with Custodian such additional Receivables, acceptable to Purchaser in its sole discretion, valued at the then present Principal Balance, as are necessary on or before each Record Date to insure that at all times Seller shall maintain in the Reserve Account the Minimum Reserve Account Amount but if any such Receivable is rejected by Purchaser, Purchaser shall have the right to substitute cash in lieu thereof. Purchaser shall have the right in its sole and absolute discretion to require Seller to provide either a different type of replacement (land sale or timeshare) contract or to make a cash payment or deposit to insure that the Minimum Reserve Account Amount is in effect on each Record Date. 40 41 SECTION 5.06 Termination of Reserve Account. If, after payment in full of all of the Receivables sold to Purchaser by Seller and after satisfaction of all obligations of the Seller (whether as Seller or as servicer) hereunder, any monies or Receivables shall remain in the Reserve Account, Purchaser shall remit any remaining balance of monies to Seller and assign any remaining Receivables to Seller. ARTICLE VI Seller as Servicer SECTION 6.01 Representations of Seller and of Seller as Servicer. Seller for itself and as servicer make the following representations on which Purchaser shall rely in purchasing the Receivables (or, except as noted in any Replacement Request in accepting any assignment of Replacement Receivables pursuant to Section 4.02). The representations shall speak as of the Closing Date (or the Distribution Date in the case of Replacement Receivables assigned pursuant to Section 4.02), and shall survive the sale, transfer and assignment of the Receivables to Purchaser. (i) Organization and Good Standing. Seller shall have been duly organized and shall be validly existing as a corporation in good standing under the laws of the State of Nevada with the power and authority to own its respective properties and to conduct its respective business as such properties shall be currently owned and such business is presently conducted, and Seller had, at all relevant times, and shall have, all requisite power, authority, and legal right to acquire and own the Receivables. (ii) Due Qualification. Seller shall be duly qualified to do business as a foreign corporation in good standing (to the extent the failure to so qualify could have a material adverse effect on it or on the Receivables or the transactions contemplated hereby) and shall have obtained all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of property or the conduct of its business, including the undertakings under this Agreement, shall require such qualifications, licenses or approvals. 41 42 (iii) Power and Authority. Seller shall have the power and authority to execute and deliver this Agreement and to carry out its terms and Seller shall have full power and authority to sell, transfer, assign and service the Receivables and shall have duly authorized such sale, transfer, assignment, servicing and deposit to and with Purchaser by all necessary corporate action; and the execution, delivery, and performance of this Agreement shall have been duly authorized by Seller by all necessary corporate action. (iv) Valid Sale: Binding Obligations. This Agreement shall effect a valid sale, transfer, and assignment of the Receivables and create in Purchaser a valid and perfected first-priority lien on and security interest in the Reserve Account and all monies therein, and investments and proceeds thereof, by Seller, enforceable against creditors of and purchasers from Seller; and this Agreement shall constitute a legal, valid, and binding obligation of Seller enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors rights in general and by general principles of equity, regardless of whether such enforceability shall be considered in a proceeding in equity or at law. (v) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof shall not conflict with, or result in any breach of, any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles or certificate of incorporation, charter, or bylaws of Seller, or conflict with or breach any of the material terms or provisions of, or constitute (with or without notice or lapse of time) a default under, any indenture, agreement, or other instrument to which Seller is a party or by which it or its property shall be bound; nor result in the creation or imposition of any Lien upon any of their respective properties pursuant to the terms of any such indenture, agreement, or other instrument (other than this Agreement); nor violate any law or any order, rule or regulation applicable to Seller of any court or of any federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over Seller or their respective properties; and no governmental and nongovernmental consents, approvals, authorizations, declarations, registrations or filings are or will be required on the part of Seller in connection with the execution, delivery and performance of this Agreement or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Agreement, except for filings contemplated by Section 2.02 and routine filings required to maintain corporate standing and currently effective governmental registrations, licenses and permits. 42 43 (vi) No Proceedings. There are no proceedings or investigations pending, or threatened, before any court, regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Seller or its properties: (a) asserting the invalidity of this Agreement or the Receivables, (b) seeking to prevent the sale of the Receivables or the consummation of any of the transactions contemplated by this Agreement, or (c) seeking any determination or ruling that are expected to materially and adversely affect the performance by Seller of its obligations under, or the validity or enforceability of, this Agreement or the Receivables. (vii) Location of Chief Executive Office. The chief executive office of Seller is located at The PEC Building, 4310 Paradise Road, Las Vegas, Nevada 89109-6572. (viii) Accuracy of Information. All factual information furnished by Seller to Purchaser is, and all such factual information hereafter furnished by Seller to Purchaser will be, true and accurate in all material respects. (ix) No Finders or Brokers. Seller has not engaged any finder or broker in connection with the transactions contemplated by this Agreement and no fees or commissions are payable by Seller in connection herewith. SECTION 6.02 Indemnities of Seller. Seller shall indemnify, defend and hold harmless Purchaser from and against any taxes that may at any time be asserted against Purchaser with respect to the sale of the Receivables to Purchaser, including any Taxes relating to any Financed Property, and any sales, gross receipts, general corporation, tangible or intangible personal property, privilege, or license taxes and including any such taxes imposed by the State of Nevada, or any political subdivision or taxing authority thereof, on the Receivables or any income therefrom, or on the Financed Property or on Purchaser as a result of the purchase of the Receivables hereunder (but not including any taxes imposed on the overall net income of Purchaser by the jurisdictions, or any political subdivision or taxing authority of any such jurisdictions, in which Purchaser has its principal office). Seller shall defend, indemnify, and hold harmless Purchaser from and against any and all costs, expenses, losses, damages, claims, and liabilities, arising out of or resulting from the management, use, ownership, or operation of any Financed Property by Seller or any Affiliate or other Person acting on its behalf. 43 44 Seller shall indemnify Purchaser for any and all costs, expenses, losses, damages, claims, and liabilities of any kind whatsoever that may be imposed on, incurred, or asserted against Purchaser as the result of any act or omission attributable to the original Custodian or any successor Custodian approved in writing by Seller (which approval shall not be unreasonably withheld), in any way relating to the maintenance and custody by the Custodian of the Custodian Receivable Files or arising from the transaction contemplated by the Custodial Agreement or the Agency Agreement. Seller shall indemnify, defend, and hold harmless Purchaser from and against any and all other costs, expenses, losses, claims, damages, and liabilities to the extent that such cost, expense, loss, claim, damage, or liability arose out of, or was imposed upon Purchaser through, the purchase of the Receivables or its participation in any of the transactions contemplated by this Agreement, whether attributable to Seller, any Obligor or any other Person (other than a successor Custodian or servicer which has not been approved in writing by Seller, which approval shall not be unreasonably withheld) including failure of Seller as servicer to provide notice of sale of any Financed Property to the related Obligor and failure to comply with applicable laws in collecting the Receivables or to acts or omissions of any successor Custodian which has been approved in writing by the Seller as servicer (which approval shall not be unreasonably withheld). Indemnification under this Section shall include reasonable fees and expenses of counsel and expenses of investigation and litigation, including fees and expenses of counsel and other expenses incurred in investigating, or preparing a defense of, any threatened litigation or claim asserted but shall not include any cost, expense, loss, claim, damage or liability to the extent attributable to the willful misconduct or gross negligence of Purchaser or to acts or omissions of any successor Custodian or servicer which has not been approved in writing by Seller (which approval shall not be unreasonably withheld). If Seller shall have made any indemnity payments pursuant to this Section 6.02 and Purchaser thereafter collects any of such amounts from others, Purchaser shall promptly repay such amounts to the Seller without interest. Without affecting the survival of any other provision of this Agreement, the indemnities contained in this Section 6.02 shall survive any payment of the amounts owing under, or any repurchase or replacement by Seller of any Receivable and shall survive the termination of this Agreement under Article VIII. 44 45 SECTION 6.03 Protection of Title to the Receivables. Etc. (a) Seller shall execute and file such assignments of agreements for deed and deeds of trust, mortgages, financing statements and other documents and cause to be executed, recorded and filed such continuation statements and shall take or cause to be taken such other actions, all in such manner and in such places as may be required by law and as otherwise requested by Purchaser to preserve, maintain, and protect the interest of Purchaser under this Agreement in the Receivables and in the proceeds thereof. Seller shall deliver (or cause to be delivered) to Purchaser file-stamped copies of, or filing receipts for, any document recorded or filed as provided above, as soon as available following such filing. (b) Seller shall not change its name, identity, or corporate structure in any manner that would, could or might make any financing statement or continuation statement filed pursuant to this Agreement seriously misleading within the meaning of Section 9-402(7) of the UCC, unless it shall have given Purchaser at least 60 days prior written notice thereof and shall have taken such action as Purchaser may request under Section 6.03(a) in connection therewith. (c) Seller shall give Purchaser at least 60 days' prior written notice of any relocation of their chief executive office if, as a result of such relocation, the applicable provisions of the UCC would require the filing of any amendment of any previously filed financing or continuation statement or of any new financing statement and shall have taken such action as Purchaser may request under Section 6.03(a) in connection therewith. Seller shall at all times maintain its chief executive office, and the servicer shall at all times maintain each office from which it shall service Receivables, within the United States of America. (d) Seller shall maintain accounts and records as to each Receivable accurately and in sufficient detail to permit (i) the reader thereof to know at any time the status of such Receivable, including payments and recoveries made and payments owing (and the nature of each) and (ii) reconciliation between payments or recoveries on (or with respect to) each Receivable and the amounts from time to time distributed in respect of such Receivable. (e) Seller shall if requested by Purchaser, place or cause the Custodian to place, on such documents in any Custodian Receivable File or any Servicer Receivable File or any folder or file cabinet containing such documents or folders a notation that the related Receivable has been sold, transferred and assigned to Purchaser pursuant to this Agreement and shall further obliterate any such notations indicating any transfer, assignment, pledge or interest of any other Person therein. 45 46 Seller shall maintain its computer systems so that, from and after the time of sale under this Agreement of the Receivables to Purchaser, Seller's and the master computer records (including archives) of Seller and Seller as servicer that shall refer to a Receivable indicate clearly that such Receivable is owned by Purchaser. Indication of Purchaser's ownership of a Receivable shall be deleted from or modified on the master computer system of Seller and Seller as servicer when, and only when, the Receivable shall have been paid in full or repurchased from Purchaser. (f) If at any time Seller shall propose to sell, grant a security interest in, or otherwise transfer any interest in any Receivables to any prospective purchaser, lender, or other transferee, Seller shall give to such prospective purchaser, lender, or other transferee computer tapes, records, or print-outs (including any restored from archives) that, if they shall refer in any manner whatsoever to any Receivable, shall indicate clearly that such Receivable has been sold and is owned by Purchaser. (g) Upon request, servicer shall furnish to Purchaser, promptly after request, such further information pertinent to the Receivables or this Agreement as Purchaser may request. SECTION 6.04 Additional Covenants of Seller. (a) Seller shall not create, incur or suffer to exist, or purport to create, incur or suffer to exist, any Lien on the Receivables or the Reserve Account, except in favor of Purchaser; (b) Seller shall take all actions necessary to assure that all owners of any Financed Property in the Timeshare Project shall have the right to apply for (subject to payment of applicable membership charges) exchange privileges through Resort Condominiums International or another international exchange organization acceptable to Purchaser, and Seller shall not cause or permit (where it has a right to consent or object thereto) any change of the Trustee under the Trust Agreements without the prior written consent of Purchaser, which consent will not be unreasonably withheld; (c) Seller shall maintain all licenses and permits and other authority required in connection with the management of the Timeshare Project and the performance of their respective obligations under this Agreement; (d) Seller as soon as available and in any event within 60 days after the end of each fiscal quarter of Seller shall furnish the consolidated balance sheet of the Seller and its respective Subsidiaries as of the end of such quarter, and the related consolidated statements of income and cash flows for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, all in reasonable detail and duly certified (subject to the year-end audit adjustments) by the chief financial officer of the 46 47 Seller as having been prepared in accordance with generally accepted accounting principles (except those relating to inclusion of footnotes), together with a certificate of the chief financial officer of the Seller and the Guarantor, respectively, stating (i) that no event or condition which, with notice or lapse of time, or both, would constitute an Event of Transfer has occurred and is continuing or, if an Event of Transfer has occurred and is continuing, a statement setting forth the details thereof and the action which the Seller has taken and proposes to take with respect thereto, and (ii) a computation (which computation shall accompany such certificate and shall be in reasonable detail) which shows compliance with subparagraphs (f) through (h) hereof; (e) Seller as soon as available and in any event within 120 days after the end of each fiscal year of the Seller shall furnish a copy of the consolidated balance sheet of the Seller and its respective Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, shareholders' equity and cash flows of the Seller and its respective Subsidiaries for such fiscal year, certified without qualifications unacceptable to the Purchaser by Deloitte & Touche, or other independent certified public accountants selected by the Seller and acceptable to the Purchaser, together with a certificate of such accountants stating (i) that they have reviewed this Agreement and stating further whether, in the course of their review of such financial statements, they have become aware of any event or condition which, with notice or lapse of time, or both, would constitute an Event of Transfer hereunder, and if such an event or condition then exists and is continuing, a statement setting forth the nature and status thereof, and (ii) a computation (which computation shall accompany such certificate and shall be in reasonable detail) which shows compliance with subparagraphs (f) through (h) hereof; (f) Seller shall not permit or suffer Consolidated Tangible Net Worth of the Seller and its Subsidiaries to be less than $25,000,000 at any time; (g) Seller shall not permit or suffer to be less than $5,000,000 at any time the aggregate of (i) cash and (ii) the outstanding principal balance of receivables of the type comprising Receivables under the Purchase Agreement, for which no payment of principal or interest is more than sixty days past due in accordance with the Credit and Collection Policies and which are not subject to any Lien, except Liens for Taxes not yet due and payable in the case of Timeshare Receivables and Liens for Taxes that have not been enforced by the applicable taxing authority in the case of Land Receivables; (h) Seller shall not make any loan or permit the advance of any funds or property or any other extension of credit to any Guarantor or any entity substantially controlled by the shareholders of Guarantor if the aggregate outstanding principal amount thereof would exceed $2,000,000 (the limitation contained in this sub-section shall be interpreted consistently with a similar covenant in the Purchase and Servicing Agreements between Purchaser and Seller of July 6, 1994 and August 31, 1995), or make or extend any guaranty or 47 48 similar commitment on behalf of any Affiliate or subsidiary of Guarantor; provided, however, that the foregoing shall not be deemed to impose any limitation on (i) the payment of dividends or (ii) the making of any loan, advance or extension of credit to any wholly-owned Subsidiary of the Seller; provided, however, that notwithstanding the foregoing, neither the Seller nor any of its Subsidiaries shall make any such loan, advance or extension of credit, guaranty or similar commitment to Guarantor for the purpose, directly or indirectly, of providing financing for any other Subsidiary or Affiliate of Guarantor; and (i) Seller shall take such steps as are necessary to insure that no material change in the management of Seller or Guarantor shall occur such that at least three (3) of the following individuals shall at all times remain member of the senior management group of Seller- Robert Nederlander, Jerome Cohen, Don Mayerson and/or Herbert Hirsch. SECTION 6.05 Reliance by Seller as Servicer. Seller as servicer and any director or officer or employee or agent of Seller may rely in good faith on the advice of counsel or on any document of any kind prima facie properly executed and submitted by any Person respecting any matter arising under the Agreement. Except as provided in this Agreement, Seller shall not be under any obligation to appear in, prosecute, or defend any legal action that shall be unrelated to its obligations under this Agreement, and that in its opinion may involve it in any expense or liability, provided, however, that Seller may, with the express prior written consent of Purchaser and at Seller's expense unless otherwise agreed, undertake any reasonable action that it may deem necessary or desirable in respect of this Agreement and the rights and duties of the parties to this Agreement. SECTION 6.06 Seller as Servicer Not To Resign: New Servicer. Seller as servicer shall not resign from its obligations and duties under this Agreement except upon determination that the performance of its duties shall no longer be permissible under applicable law. Any such determination permitting the resignation of the servicer shall be evidenced by an Opinion of Counsel to such effect delivered to Purchaser. No such resignation shall become effective until Purchaser or a successor servicer shall have assumed the responsibilities and obligations of the servicer in accordance with Section 7.02, unless otherwise required by a binding order of any court, or governmental or administrative entity. ARTICLE VII Transfer of Servicing 48 49 SECTION 7.01 Events of Transfer. If any one of the following events or conditions shall occur and be continuing: (a) Any failure by Seller to deliver or pay when due to Purchaser any proceeds or payment required to be so delivered or paid under the terms of this Agreement or to deliver any certificate required to be delivered pursuant to Section 3.09, if such failure shall continue unremedied for a period of three Business Days after written notice of such failure is given to Seller by Purchaser; or (b) Failure on the part of the Seller to duly observe or to perform in any material respect any other covenants or agreements set forth in this Agreement or in the Custodial Agreement or Agency Agreement, which failure shall continue unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to Seller by Purchaser; or (c) Any material representation made by Seller in Section 6.01 shall prove to have been incorrect in any material respect when made or deemed made; then, and in each and every case, Purchaser, by notice in writing to Seller may (i) terminate all of the rights and obligations of Seller as servicer under this Agreement or (ii) defer the rights of Seller to receive any distribution pursuant to Section 4.01(e) until termination of this Agreement pursuant to Section 8.01, or (iii) any one or more of the foregoing. On or after the receipt by the Seller as servicer of such written notice of termination, all authority and power of the Seller as servicer under this Agreement, whether with respect to the Receivables or otherwise, shall pass to and be vested in Purchaser pursuant to this Section 7.01; and, without limitation, Purchaser shall be hereby authorized and empowered to execute and deliver, on behalf of Seller as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement of the Custodian Receivable Files or the Servicer Receivable Files, or otherwise. Seller shall cooperate with the Purchaser in effecting the termination of the responsibilities and rights of the Seller as servicer under this Agreement, including the transfer to Purchaser for administration by it of all monies and cash that shall at the time be held for deposit or shall thereafter be received with respect to a Receivable. Without limiting the generality of the foregoing, Seller at its own expense will deliver, and if requested by Purchaser, will cause the Custodian to deliver, upon such termination, to Purchaser all of the Custodian Receivable Files and Servicer Receivable Files and such other memorialized data, documents and records related thereto (including without limitation true copies 49 50 of any microfilms, computer tapes and data and computer memories and any documentary evidence of title to any Financed Property or other documentary evidence as is required to perfect a lien and security interest in such Financed Property) as Purchaser may reasonably deem necessary to enable it to enforce its rights thereunder and to protect its position as owner thereof and to administer the Receivables as successor servicer. After any such termination and delivery, neither Seller nor the Custodian if requested by Purchaser will hold or retain any executed counterpart or other copy of any Receivable or related material without clearly marking the same to indicate conspicuously that the same is not the original and that transfer thereof does not transfer any rights against the related Obligor or any other Person. SECTION 7.02. Purchaser to Act; Appointment of Successor. Upon Seller as servicer's, receipt of notice of termination pursuant to Section 7.01 or resignation pursuant to Section 6.06, Purchaser shall be successor in all respects to the Seller as servicer under this Agreement, and shall succeed to all the rights, responsibilities, duties and liabilities relating thereto placed on Seller as servicer by the terms and provisions of this Agreement. As compensation therefor, Purchaser shall be entitled to receive from the proceeds of the Receivables notwithstanding the provisions of Section 5.03 or any provision of this Agreement to the contrary all costs and expenses of any kind incurred directly or with others in connection therewith, which shall include customary profit and overhead allocation if incurred directly by Purchaser. Purchaser shall provide Seller with a statement thereof, which shall be conclusive absent manifest error. However, receipt of such proceeds by Purchaser shall not affect the right of Purchaser to receive or recover damages sustained by reason of any breach of this Agreement by Seller or any payment which may then be due under the terms of this Agreement to Purchaser. Notwithstanding the above, Purchaser may appoint any Person as the successor to Seller as servicer under this Agreement. In connection with such appointment, Purchaser may make such arrangements for the reasonable compensation and payment of such successor out of payments on Receivables or otherwise as it and such successor shall agree. Purchaser and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. 50 51 SECTION 7.03 Waiver of Past Defaults. Purchaser may waive any default by Seller in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Event of Transfer arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon except to the extent expressly so waived. No course of dealing on the part of Purchaser, nor any delay or failure on the part of Purchaser in exercising any right, power or privilege hereunder shall operate as a waiver of such right, power or privilege or otherwise prejudice Purchaser's rights and remedies hereunder; nor shall any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other right, power or privilege. No right or remedy conferred upon or reserved to Purchaser under this Agreement is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy granted thereunder or now or hereafter existing under any applicable law. ARTICLE VIII Termination SECTION 8.01 Termination. This Agreement and the respective rights and obligations of Seller and Purchaser shall terminate, except for the indemnities under Section 6.02 and the representations and warranties under Sections 2.03 and 6.01 which shall survive such termination, upon the payment in full of all of the Receivables in accordance with their terms and the satisfaction of all obligations of Seller to Purchaser hereunder and under a Purchase Agreement of December 31, 1992 between The Oxford Finance Company and Purchaser, a Purchase and Servicing Agreement of July 6, 1994 between Purchaser and Seller or a Purchase and Servicing Agreement of August 31, 1995 between Purchaser and Seller. The Seller shall promptly notify the Purchaser of any prospective termination pursuant to this Section 8.01. ARTICLE IX Miscellaneous Provisions SECTION 9.01 Amendment. This Agreement may be amended only by writing executed on behalf of the Purchaser and Seller. SECTION 9.02 Counterparts. For the purpose of 51 52 facilitating the execution of this Agreement 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 all of which counterparts shall constitute but one and the same instrument. SECTION 9.03 Governing Law. The Agreement shall be construed in accordance with the laws of the Commonwealth of Massachusetts and the obligations, rights, and remedies of the parties under this Agreement shall be determined in accordance with such laws, without giving effect to any conflicts of laws principles. Seller further agrees that any legal action or proceeding with respect to this Agreement, or the transactions contemplated hereby, may be brought in any court of the Commonwealth of Massachusetts, or in any court of the United States of America sitting in Massachusetts, and each of them hereby submits to and accepts generally and unconditionally the jurisdiction of those courts with respect to its person and property. Nothing in this paragraph shall affect the right of Purchaser to bring any such action or proceeding against Seller or its property in the courts of any other jurisdiction. Each of them hereby irrevocably waives any objection to the laying of venue of any such action or proceeding in the above described courts and further waives trial by jury. To the extent that service of process by mail is permitted by applicable law, such service shall be made by registered or certified mail, return receipt requested, to the address and in the manner set forth in Section 9.04 and Purchaser shall further use its best efforts to effect personal service. SECTION 9.04 Notices. All demands, notices, and communications under this Agreement shall be in writing, personally delivered or mailed by certified mail, return receipt requested, and shall be deemed to have been duly given upon receipt (a) in the case of Seller or Seller as servicer, to The PEC Building, 4310 Paradise Road, Las Vegas, Nevada 89109, Attention: Frederick H. Conte, Executive Vice President, Telephone: (702) 737-3700, Facsimile: (702) 3694398, with a copy to Jerome J. Cohen, President, 1125 N.E. 125th Street, Suite 206, North Miami, Florida, 33161, Telephone: (305) 895-6500, Facsimile: (305) 899-1824, with a further copy to Mego Financial Corp., 4310 Paradise Road, Las Vegas, Nevada 89109, Attention: Frederick H. Conte, Telephone: (702) 737-3700, Facsimile: (702) 369-4398, or at such other address as shall be designated by Seller or Seller as servicer by written notice to the Purchaser, (b) in the case of Purchaser, at 100 Federal Street, Boston, Massachusetts 02110 Attention: Real Estate Department-Amy Weinstock Telephone: 617-434-2979, Facsimile: (617) with a copy to BankBoston, N.A., 115 Perimeter Center Place N.E., Suite 500, Atlanta, Georgia 30346 Attention: John Pearson, Assistant Vice President, Facsimile: (770) 390-8434 or to such other address as shall be designated by Purchaser by written notice to Seller. 52 53 SECTION 9.05 Severability of Provisions. If any or more of the covenants, agreements, provisions, or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions, or terms shall be deemed severable from the remaining covenants, agreements, provisions, or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. SECTION 9.06 Officer's Certificates; Assignment. Certificates to be provided by officers of Seller or the Guarantor pursuant to this Agreement or the Guaranty Agreement shall be deemed given by such officer on behalf of such corporation, and the officer or officers signing any such certificate shall not incur personal liability therefor except to the extent that such liability would attach under applicable law due to fraud, intentional misrepresentation or intentional wrongdoing. This Agreement may not be assigned, in whole or in part, by Seller without the prior written consent of Purchaser. SECTION 9.07 Section References. All section references shall be to Sections in this Agreement unless otherwise specified. SECTION 9.08 Expenses. Seller agrees to pay, or reimburse Purchaser for the payment of, on demand, the reasonable fees and expenses of counsel to Purchaser, in connection with the preparation, execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, any amendment or modification hereof and the administration of and compliance with this Agreement and the transactions contemplated hereby, the occurrence of any Event of Transfer or the enforcement of the obligations of Seller. SECTION 9.09 Allocation of Collections. If an Obligor is obligated under one or more Receivables and also under one or more other assets owned by Seller or assigned by Seller to third parties, then any payment on any such asset received from such Obligor shall, if identified by such Obligor as being made with respect to a particular item or asset, be applied to such item, and otherwise shall be allocated by the Seller as servicer to the Receivables before allocation to any other amount due, including assessments required to be paid in respect of any Financed Property in the Timeshare Project or escrows of any payments in respect of Taxes in the case of the Land Receivables. Seller shall not take any action to cause any Obligor to identify any payment to any particular item or asset in reference to the Receivables. SECTION 9.10 Non-Assumption by Purchaser of Obligations. No obligation or liability to any Obligor under any of the Receivables is intended to be assumed by Purchaser hereunder and 53 54 any such assumption is, to the maximum extent permitted and valid under applicable law, hereby expressly disclaimed. SECTION 9.11 Prohibition On Use of Name. Seller and Guarantor are prohibited from using the name of Purchaser or the name of any Affiliate of Purchaser in connection with any of their respective activities, except as required in Seller or Guarantor's dealings with governmental agencies (including the Securities and Exchange Commission, Stock Exchanges and the National Association of Securities Dealers), financing institutions and internal business matters. SECTION 9.12 Audits. Purchaser shall have the right to make periodic audits of the Obligor files, Obligor documents, books and records of Seller and Guarantor related to the Receivables at its discretion and at the expense of Seller but such audit expense shall not exceed Six Thousand ($6,000) Dollars on an annual basis provided Seller is not in breach of any provision of this Agreement. SECTION 9.13 Brokers. Purchaser and Seller represent and warrant to each other that neither has engaged the services of any broker nor had discussions with any party entitled to a finder's fee or commission in connection with the purchase contemplated by this Agreement. 54 55 IN WITNESS WHEREOF, the parties have caused this Purchase and Servicing Agreement to be duly executed by their respective officers as of the day and year first above written. PREFERRED EQUITIES CORPORATION, as Seller /s/ RICHARD L. RODRIGUEZ - ------------------------------------------------ By: Richard L. Rodriguez Title: Vice President PREFERRED EQUITIES CORPORATION, as Servicer /s/ RICHARD L. RODRIGUEZ - ------------------------------------------------ By: Richard L. Rodriguez Title: Vice President BANKBOSTON, N.A., A NATIONAL BANKING ASSOCIATION, as Purchaser /s/ JOHN T. PEARSON - ------------------------------------------------ By: John T. Pearson Title: Assistant Vice President 55 EX-10.115 4 SECOND AMENDED & RESTATED & CONSOLIDATED LOAN 1 EXHIBIT 10.115 SECOND AMENDED AND RESTATED AND CONSOLIDATED LOAN AND SECURITY AGREEMENT BY THIS SECOND AMENDED AND RESTATED AND CONSOLIDATED LOAN AND SECURITY AGREEMENT entered into as of the _____ day of May, 1997, between FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), formerly known as Greyhound Financial Corporation and successor-by-merger to Greyhound Real Estate Finance Company, an Arizona corporation ("GREFCO"), having a business and mailing address at 7272 East Indian School Road, Suite 410, Scottsdale, Arizona 85251, and PREFERRED EQUITIES CORPORATION, a Nevada corporation ("Borrower"), having its principal place of business and mailing address at 4310 Paradise Road, Las Vegas, Nevada 89109, hereby confirm and agree as follows: RECITALS A. GREFCO and Borrower entered into a Loan and Security Agreement, dated as of February 1, 1988 which evidenced a loan from GREFCO to Borrower (the "Original PEC Loan Agreement"). B. GREFCO and Borrower entered into an Amended and Restated Loan and Security Agreement dated as of May 10, 1989 (the "Restated PEC Loan Agreement") which amended and restated the Original PEC Loan Agreement in its entirety. C. The Restated PEC Loan Agreement was amended by an Amendment Number One to Amended and Restated Loan and Security Agreement dated as of June 14, 1989 (the "First PEC Amendment"), by an Amendment No. 2 to Amended and Restated Loan and Security Agreement dated as of April 16, 1990 (the "Second PEC Amendment"), by an Amendment No. 3 to Amended and Restated Loan and Security Agreement dated as of May 31, 1991 (the "Third PEC Amendment"), by an Amendment No. 4 to Amended and Restated Loan and Security Agreement dated as of January 13, 1992 (the "Fourth PEC Amendment"), by an Amendment No. 5 to Amended and Restated Loan and Security Agreement dated as of February 23, 1993 (the "Fifth PEC Amendment"), by an Amendment No. 6 to Amended and Restated Loan and Security Agreement dated as of June 28, 1993 (the "Sixth PEC Amendment"), by an Amendment No. 7 to Amended and Restated Loan and Security Agreement dated as of January 24, 1994 (the "Seventh PEC Amendment"), by an Amendment No. 8 to Amended and Restated Loan and Security Agreement dated as of April 15, 1994 (the "Eighth PEC Amendment"), by an Amendment No. 9 to Amended and Restated Loan and Security Agreement dated as of August 31, 1994 (the "Ninth PEC Amendment"), by an Amendment No. 10 to Amended and Restated Loan and Security Agreement dated as of January 26, 1995 (the "Tenth PEC Amendment"), by an Amendment No. 11 to Amended and Restated Loan and Security Agreement dated as of September 22, 1995 (the "Eleventh PEC Amendment"), by an Amendment No. 12 to Amended and Restated 2 Loan and Security Agreement dated as of September 29, 1995 (the "Twelfth PEC Amendment"), by an Amendment No. 13 to Amended and Restated Loan and Security Agreement dated as of December 13, 1995 (the "Thirteenth PEC Amendment"), by an Amendment No. 14 to Amended and Restated Loan and Security Agreement dated as of June 5, 1996 (the "Fourteenth PEC Amendment"), and by an Amendment No. 15 to Amended and Restated Loan and Security Agreement dated as of August 16, 1996 (the "Fifteenth PEC Amendment"). The Restated PEC Loan Agreement, as amended by the First PEC Amendment, the Second PEC Amendment, the Third PEC Amendment, the Fourth PEC Amendment, the Fifth PEC Amendment, the Sixth PEC Amendment, the Seventh PEC Amendment, the Eighth PEC Amendment, the Ninth PEC Amendment, the Tenth PEC Amendment, the Eleventh PEC Amendment, the Twelfth PEC Amendment, the Thirteenth PEC Amendment, the Fourteenth PEC Amendment and the Fifteenth PEC Amendment, is hereinafter collectively referred to as the "Existing PEC Loan Agreement." D. GREFCO and Vacation Spa Resorts, Inc., a Tennessee corporation ("VSR"), entered into a Loan and Security Agreement dated as of March 30, 1989 (the "Original VSR Loan Agreement") that evidenced a loan from GREFCO to VSR. E. The Original VSR Loan Agreement was amended by an Amendment Number One to Loan and Security Agreement and Promissory Note dated as of June 14, 1989 (the "First VSR Amendment"), an Amendment No. 2 to Loan and Security Agreement dated as of April 16, 1990 (the "Second VSR Amendment"), an Amendment No. 3 to Loan and Security Agreement dated as of May 31, 1991 (the "Third VSR Amendment"), an Amendment No. 4 to Loan and Security Agreement dated as of February 23, 1993 (the "Fourth VSR Amendment"), an Amendment No. 5 to Loan and Security Agreement dated as of October 15, 1993 (the "Fifth VSR Amendment") and an Amendment No. 6 to Loan and Security Agreement dated as of August 31, 1994 (the "Sixth VSR Amendment"), and an Amendment No. 7 to Loan and Security Agreement dated as of August 16, 1996 (the "Seventh VSR Amendment"). The Original VSR Loan Agreement, as amended by the First VSR Amendment, the Second VSR Amendment, the Third VSR Amendment, the Fourth VSR Amendment, the Fifth VSR Amendment, the Sixth VSR Amendment and the Seventh VSR Amendment, is hereinafter collectively referred to as the "Existing VSR Loan Agreement." F. GREFCO was a wholly-owned subsidiary of Lender. Pursuant to a plan of liquidation, GREFCO was liquidated into Lender. Further, pursuant to such plan of liquidation, GREFCO assigned all of GREFCO's rights under the Existing PEC Loan Agreement and under the Existing VSR Loan Agreement to Lender. G. Pursuant to that Agreement and Plan of Merger dated as of July 24, 1992 by and between Borrower and VSR, and those Articles of Merger of Vacation Spa Resorts, Inc. with and into Preferred Equities Corporation dated as of March 10, 1993, VSR was, effective March 11, 1993, merged into Borrower. As a result of such merger, Borrower -2- 3 has succeeded to all rights and privileges of VSR and has become responsible and liable for all liabilities and obligations of VSR. H. Pursuant to that certain Assumption Agreement (With Consent and Agreement of Guarantor) dated June 28, 1993 between Lender and Borrower, Borrower acknowledged and agreed that it was irrevocably and unconditionally liable for the repayment of the loan made pursuant to the Existing VSR Loan Agreement and for the payment, performance and observance of all of the obligations, covenants and representations and warranties of VSR as set forth in the Existing VSR Loan Agreement and in the documents executed in connection therewith as if Borrower was an original party to such agreement and documents. I. Borrower and Lender have agreed to consolidate the Existing PEC Loan Agreement and Existing VSR Loan Agreement (collectively the "Existing Loan Agreement") and thereafter to further modify and amend and restate in its entirety the Existing Loan Agreement, in accordance with the provisions of this Second Amended and Restated and Consolidated Loan and Security Agreement. It is the purpose and intent of Borrower and Lender that this Second Amended and Restated and Consolidated Loan and Security Agreement shall set forth all existing terms and conditions of the Loan described herein, and all previous and prior terms, conditions and provisions of the Loan as set forth in the Existing PEC Loan Agreement and the Existing VSR Loan Agreement are collectively merged herein and all inconsistent or contrary provisions of the Existing PEC Loan Agreement and/or the Existing VSR Loan Agreement shall be of no further force or effect. J. Additionally, Borrower has requested, and Lender has agreed to fund (pursuant to the terms and conditions of this Agreement), Advances under the Mortgage Loan Facility to finance the acquisition and renovation of an Additional Project consisting of three (3) buildings located at 184 Winnick Avenue, 190 Winnick Avenue and 196 Winnick Avenue in Las Vegas, Nevada, more particularly described in EXHIBIT "I-P" attached hereto (the "Second Winnick Building Addition"), and including eighteen (18) time-share units. Borrower has also requested, and Lender has agreed, in accordance with and subject to the conditions of this Agreement, to make Advances of the Receivables Loan, from time to time, against Instruments or Contracts arising from the Second Winnick Building Addition. NOW, THEREFORE, in consideration of these recitals, the covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which consideration are hereby acknowledged, Lender and Borrower agree as follows: -3- 4 ARTICLE I DEFINITIONS Except where the context shall clearly otherwise require a different interpretation, all capitalized terms used throughout this Agreement shall have the meaning indicated or assigned to them, whether set forth above or below or elsewhere in this Agreement. "ADDITIONAL PROJECT": shall mean the real property, together with the buildings and improvements thereon, and interests and appurtenances thereto, of any one or more additional time-share or lot projects which are specifically approved by Lender pursuant to this Agreement . "ADDITIONAL PROJECT DEVELOPER": shall mean Borrower or one or more Subsidiaries of Borrower from which the Borrower has acquired receivables which are to become Receivables Collateral for or arising from the sale of a Unit or Lot in a Project. "ADVANCE": shall mean the monies or funds advanced from time to time by Lender to Borrower in accordance with the terms and conditions of this Agreement. "AGENCY AGREEMENT": shall mean that certain Agency Agreement, dated as of February 1, 1988, among Lender, Borrower and Collection Agent, together with all exhibits and schedules attached thereto and all renewals, extensions, amendments, replacements, restatements, supplements or modifications from time to time made thereto. "AGREEMENT": shall mean this Second Amended and Restated and Consolidated Loan and Security Agreement, together with all exhibits and schedules attached hereto and all renewals, extensions, amendments, replacements, restatements, supplements or modifications from time to time made hereto or thereto. "ALOHA BAY": shall mean that certain time-share resort facility commonly known as Aloha Bay, consisting of thirty-two (32) time-share units located in Pinellas County, Florida, as more particularly described in EXHIBIT "I-A" attached hereto. "ALOHA BAY MATURITY DATE": shall mean May 20, 1998. "ALOHA BAY MORTGAGE": shall mean that certain Mortgage, Assignment of Rents and Proceeds and Security Agreement dated as of September 22, 1995 and recorded against Aloha Bay on September 26, 1995 as Instrument No. 95-241270, Book 9117, Page 280, Official Records of Pinellas County, Florida, together with any modifications, amendments or supplements from time to time made thereto, whether now or hereafter existing. -4- 5 "ALOHA BAY NOTE": shall mean that certain Promissory Note of Borrower dated as of September 22, 1995 in the original principal amount of $3,600,000.00 evidencing the Advances of the Loan made by Lender to Borrower with respect to Aloha Bay, together with any modifications, amendments, restatements or supplements from time to time made thereto, whether now or hereafter existing. "ALOHA BAY RELEASE FEES": shall have the meaning set forth in PARAGRAPH 3.9 of this Agreement. "ANNUAL SERVICE FEES": shall mean those fees due under the terms and conditions of the Contracts or Instruments payable by Purchasers to any Trustee or to any Association for providing hotel services, maintenance, repairs, replacements, tax payments, hazard insurance, and the like. "APPLICABLE TRUST": shall mean any Trust which has assigned to Lender its right, title and interest in and to any Contract or Instrument. "APPLICABLE USURY LAW": shall mean the usury law applicable pursuant to the choice of law of the parties set forth in ARTICLE XI, PARAGRAPH 11.10 hereof. "ASSIGNMENTS": shall mean and refer to the Assignment of Instruments and the Assignment of Contracts delivered by Borrower and/or any Trust with respect thereto to Lender concurrently with each Advance under the terms of which Borrower unconditionally transfers and assigns, with full recourse, and any Applicable Trust unconditionally transfers and assigns, without recourse, all of Borrower's or such Trust's title and interest in and to the Eligible Receivables described therein free and clear of all claims, demands, liens and encumbrances of third parties, as collateral security for the Loan, together with all documents and assignments issued in connection therewith. "ASSOCIATION (FOUNTAINS)": shall mean the Grand Flamingo Fountains Owners Association, a Nevada nonstock, nonprofit corporation. "ASSOCIATION (RENO)": shall mean the Reno Spa Resort Owners Association, a Nevada nonstock, nonprofit corporation. "ASSOCIATION (SUITES)": shall mean the Grand Flamingo Suites Owners Association, a Nevada nonstock, nonprofit corporation. "ASSOCIATION (TERRACES)": shall mean the Grand Flamingo Terraces Owners Association, a Nevada nonstock, nonprofit corporation -5- 6 "ASSOCIATION (TERRACES FOUR)": shall mean the Grand Flamingo Terraces Four Owners Association, a Nevada nonstock, nonprofit corporation. "ASSOCIATION (TOWERS)": shall mean the Grand Flamingo Owners Association, a Nevada nonstock, nonprofit corporation. "ASSOCIATION (VILLAS)": shall mean the Grand Flamingo Villas Owners Association, a Nevada nonstock, nonprofit corporation. "ASSOCIATION (WINNICK)": shall mean the Grand Flamingo Winnick Owners Association, a Nevada nonstock, nonprofit corporation. "ASSOCIATIONS": shall mean the Association (Fountains), the Association (Reno), the Association (Suites), the Association (Terraces), the Association (Terraces Four), the Association (Towers), the Association (Villas) and the Association (Winnick), collectively. "BORROWER": shall mean Preferred Equities Corporation, a Nevada corporation, with its principal place of business and mailing address at 4310 Paradise Road, Las Vegas, Nevada 89109. "BORROWING BASE": shall mean, as of the date of any determination thereof, an amount equal to the lesser of (a) 85% of the unpaid principal balance payable under the Eligible Receivables, or (b) 90% of the then present value assigned to the unmatured installments of principal and interest payable under the Eligible Receivables, discounted at Lender's prevailing discount rate calculated as set forth in PARAGRAPH 7.6(I)(C); provided, however, that the maximum Borrowing Base allocable to Eligible Receivables arising from the sale of Units in Project (Reno) shall not in any event exceed $4,000,000.00; and provided, further, that the maximum Borrowing Base allocable to Eligible Receivables arising from the sale of Lots shall not in any event exceed $35,000,000.00 in the aggregate; and provided, further, that the maximum Borrowing Base allocable to Eligible Receivables arising from Unsolidified Lot Sales shall be equal to 65% of the unpaid principal balance of all Eligible Receivables consisting of Receivables Collateral constituting Unsolidified Lot Sales, not to exceed at any time, however, the lesser of (i) an amount equal to ten percent (10%) of the total unpaid principal balance of all Eligible Receivables consisting of Receivables Collateral which are not constituted of Unsolidified Lot Sales if the Borrowing Base allocable to Eligible Receivables arising from the sale of Unsolidified Lot Sales exceeds at any time the amount of $2,500,000.00, or (ii) $3,500,000.00. "CLOSING DATE": shall mean that date that all of the conditions precedent described in ARTICLE XII below have been satisfied, which date shall not occur later than May 15, 1997. -6- 7 "COLLECTION AGENT": shall mean Bank of America, N.T. & S.A., or should such entity cease to act as collection agent under the Agency Agreement, its successor as collection agent under the Agency Agreement. "CONTRACT": shall mean a contract of sale, for a fee or right to use interest in a Unit or a Lot in any portion of the Project, which is assigned to Lender. "CONTROL GROUP": shall mean: (a) Guarantor and any successor thereof; (b) Robert Nederlander, Jerome J. Cohen, Wilbur L. Ross, Jr., Eugene I. Schuster, Herbert B. Hirsch, Don A. Mayerson, John E. McConnaughy, Jr., or any of them; and (c) Persons which beneficially own, directly or indirectly, five percent (5%) or more of the outstanding capital stock of any class or classes having by the terms thereof the ordinary voting power to elect a majority of the directors of Guarantor or Borrower (irrespective of whether at the time capital stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency). "CUSTODIAL AGREEMENT": shall mean that certain Custodial Agreement, dated as of April 16, 1990, among Lender, Borrower, and Custodian, substantially in the form of EXHIBIT "I-B" hereto, together with all exhibits and schedules attached thereto and all renewals, extensions, amendments, restatements, replacements, supplements or modifications from time to time made thereto. "CUSTODIAN": shall mean Bank of America, N.T. & S.A., on behalf of Bank of New York, in its sole capacity as custodian under the Custodial Agreement, or should such entity cease to act as custodian under the Custodial Agreement, its successor as custodian under the Custodial Agreement. "DOCUMENTS": shall mean the Receivables Note, the Ida Building One Note, the Ida Building Two Note, the Office Note, the Aloha Bay Note, the Winnick Building Addition Note, the Ida Building Addition Note, the Towers Note, the Second Winnick Building Addition Note, the Guarantee, the Huerfano County Deed of Trust, the Headquarters Deed of Trust, the FCFC Deed of Trust, the Ida Building One Deed of Trust, the Ida Building Two Deed of Trust, the Aloha Bay Mortgage, the Winnick Building Addition Deed of Trust, the Ida Building Addition Deed of Trust, the Second Winnick Building Addition Deed of Trust, the Assignments, the Contracts, the Instruments, the Agency Agreement, the Custodial Agreement, the Oversight Agreement, this Agreement, and any and all other documents and instruments executed in connection with the Loan, together -7- 8 with any and all renewals, extensions, amendments, restatements or replacements thereof, whether now or hereafter existing. "ELIGIBLE RECEIVABLES": shall mean Contracts and Instruments which conform to the criteria and standards set forth in EXHIBIT "I-C" attached hereto and by this reference incorporated herein; provided, however, that Lender, in its sole discretion and upon terms and conditions satisfactory to Lender, may waive specific criteria and/or standards with respect to certain otherwise ineligible Instruments and Contracts; provided, however, that any such waiver may be revoked, at any time, with respect to any such otherwise ineligible Instruments or Contracts against which Advances are not outstanding. An Instrument or Contract that has qualified as an Eligible Receivable shall cease to be an Eligible Receivable upon the date of the occurrence of any of the following: (a) any one installment due with respect to an Eligible Receivable becomes more than fifty-nine (59) days past due, or (b) the Eligible Receivable otherwise fails to continue to meet the requirements of an Eligible Receivable. "EVENT OF DEFAULT": the meaning set forth in ARTICLE IX hereof. "EXISTING PEC LOAN AGREEMENT": shall have the meaning set forth in the Recitals to this Agreement. "EXISTING VSR LOAN AGREEMENT": shall have the meaning set forth in the Recitals to this Agreement. "FCFC DEED OF TRUST": shall mean that certain Deed of Trust, Assignment of Rents and Proceeds and Security Agreement dated as of June 5, 1996 and recorded against the FCFC Property on June 7, 1996 in Book 960607 as Instrument No. 01797, Official Records of Clark County, Nevada, together with any modifications, amendments or supplements from time to time made thereto, whether now or hereafter existing. "FCFC PROPERTY": shall mean that certain office building located at 1500 East Tropicana, Las Vegas, Nevada, and legally described in EXHIBIT "I-D" attached hereto. "FCN": shall mean First Corporation of Nevada, a Nevada corporation. "FPSI": shall mean FINOVA Portfolio Services, Inc., an Arizona corporation, a wholly owned subsidiary of Lender, formerly known as GFC Portfolio Services, Inc. "FOUNTAINS": shall mean that certain time-share resort facility commonly known as Grand Flamingo Fountains, consisting of twelve (12) time-share units and more particularly described on EXHIBIT "I-E" attached hereto. -8- 9 "GAAP": shall mean generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board and such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "GFC": shall mean GRAND FLAMINGO CORPORATION, a Nevada corporation. "GUARANTEE": shall mean that certain Amended and Restated Guarantee and Subordination Agreement between Guarantor and Lender and dated as of May 10, 1989. "GUARANTOR": shall mean Mego Financial Corp., a New York corporation (formerly named Mego Corp.). "HEADQUARTERS BUILDING": shall mean that certain office building located at 4310 Paradise Road, Las Vegas, Nevada, and more particularly described in EXHIBIT "I-F" attached hereto. "HEADQUARTERS DEED OF TRUST": shall mean that certain Deed of Trust, Assignment of Rents and Proceeds and Security Agreement, dated as of June 28, 1993, and recorded against the Headquarters Building on June 30, 1993 in Book 930630, Instrument No. 02521, Official Records of Clark County, Nevada, together with any and all amendments, supplements or modifications from time to time made thereto, whether now or hereafter existing. "Huerfano County Deed of Trust": shall mean that certain Deed of Trust, Assignment of Rents and Security Agreement, dated as of February 1, 1988, which was delivered by Borrower to Lender and recorded against that portion of the Project located in Huerfano County, Colorado on February 2, 1988 at Reception No. 968 in Book M, Page 312, Official Records of Huerfano County, Colorado, together with any and all amendments, supplements or modifications from time to time made thereto, whether now or hereafter existing. "IDA BUILDING ADDITION": shall mean that certain time-share resort facility located at 190 and 196 Ida Street, Las Vegas, Nevada, consisting of twenty-four (24) time-share units and more particularly described in EXHIBIT "I-G" attached hereto. "IDA BUILDING ADDITION DEED OF TRUST": shall mean that certain Deed of Trust, Assignment of Rents and Proceeds and Security Agreement dated as of December 13, 1995 and recorded against the Ida Building Addition on March 25, 1996 in Book 960325, Instrument No. 01233, Official Records of Clark County, Nevada, together with any and all -9- 10 amendments, supplements or modifications from time to time made thereto, whether now or hereafter existing. "IDA BUILDING ADDITION INCENTIVE FEE": shall have the meaning set forth in PARAGRAPH 7.16 of this Agreement. "IDA BUILDING ADDITION MATURITY DATE": shall mean that date which occurs twenty-four (24) months following the date that Lender makes the last Advance under the Mortgage Loan Facility with respect to the Ida Building Addition (or in the event there is no such day in the 24th month, on the last day of such month). "IDA BUILDING ADDITION NOTE": shall mean that certain Promissory Note of Borrower dated December 13, 1995, executed and delivered to Lender in the amount of $1,500,000.00, evidencing Advances of the Loan made under the Mortgage Loan Facility with respect to the Ida Building Addition, together with any modifications, amendments, restatements or supplements from time to time made thereto, whether now or hereafter existing. "IDA BUILDING ADDITION RELEASE FEE": shall have the meaning set forth in PARAGRAPH 3.14 of this Agreement. "IDA BUILDING ONE": shall mean that certain time-share resort facility located at 170 and 178 Ida Street, Las Vegas, Nevada, consisting of 48 time-share units and more particularly described in EXHIBIT "I-H" attached hereto. "IDA BUILDING ONE DEED OF TRUST": shall mean that certain Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Ida Building One] dated as of January 26, 1995 and recorded against Ida Building One on January 31, 1995 in Book 950131, Instrument No. 01454, Official Records of Clark County, Nevada, together with any and all amendments, supplements or modifications from time to time made thereto, whether now or hereafter existing. "IDA BUILDING ONE INCENTIVE FEE": shall have the meaning set forth in PARAGRAPH 7.13 of this Agreement. "IDA BUILDING ONE MATURITY DATE": shall mean January 31, 1998. "IDA BUILDING ONE NOTE": shall mean that certain Promissory Note of Borrower dated as of January 26, 1995, executed and delivered to Lender in the amount of $2,999,700.00, evidencing the Advances of the Loan made under the Mortgage Loan Facility with respect to Ida Building One, together with any modifications, amendments, restatements or supplements from time to time made thereto, whether now or hereafter existing. -10- 11 "IDA BUILDING ONE RELEASE FEES": shall have the meaning set forth in PARAGRAPH 3.12 of this Agreement. "IDA BUILDING TWO": shall mean that certain time-share resort facility located at 165, 171 and 177 Ida Street, Las Vegas, Nevada, consisting of 18 time-share units more particularly described in EXHIBIT "I-I" attached hereto. "IDA BUILDING TWO DEED OF TRUST": shall mean that certain Deed of Trust, Assignment of Rents and Proceeds and Security Agreement [Ida Building Two] dated as of April 27, 1995 and recorded against Ida Building Two on May 26, 1995 in Book 950526, Instrument No. 01127, Official Records of Clark County, Nevada, together with any and all amendments, supplements or modifications from time to time made thereto, whether now or hereafter existing. "IDA BUILDING TWO INCENTIVE FEE": shall have the meaning set forth in PARAGRAPH 7.14 of this Agreement. "IDA BUILDING TWO MATURITY DATE": shall mean January 31, 1998. "IDA BUILDING TWO NOTE": shall mean that certain Promissory Note of Borrower dated as of April 27, 1995, executed and delivered to Lender in the amount of $1,755,000.00, evidencing the Advances of the Loan made under the Mortgage Loan Facility with respect to Ida Building Two, together with any modifications, amendments, restatements or supplements from time to time made thereto, whether now or hereafter existing. "IDA BUILDING TWO RELEASE FEES": shall have the meaning set forth in PARAGRAPH 3.13 of this Agreement. "INSTRUMENT": shall collectively mean a Purchaser Note, the Purchaser Mortgage which secures same and all other documents, instruments or other writings whatsoever which evidence or secure the obligations and indebtedness of a Purchaser of a Lot or Unit in the Project, and which is assigned to Lender. "LICENSE AGREEMENT": shall have the meaning set forth in PARAGRAPH 8.32 hereof. "LOAN": shall mean the lines of credit and other loans extended by Lender to Borrower in accordance with the terms of this Agreement in a principal amount not to exceed at any time outstanding the Maximum Loan Amount. "LOT": a lot in any Project as shown on the recorded subdivision plat thereof. -11- 12 "MAXIMUM LOAN AMOUNT": shall mean Seventy-five Million United States Dollars (U.S. $75,000,000.00). "MORTGAGE": shall mean a mortgage or deed of trust or other form of indenture under the terms of which the Person executing and delivering such Mortgage shall grant, convey, sell and assign to Lender a first lien upon real property. "MORTGAGE LOAN FACILITY": shall mean that portion of the Loan not to exceed $15,000,000.00 under which Advances may be made to Borrower on a revolving basis in order to finance Borrower's acquisition and refurbishment of time-share resort facilities. The Advances outstanding under the Mortgage Loan Facility as of the Closing Date include the Advances of the Loan evidenced by the Ida Building One Note, the Ida Building Two Note, the Ida Building Addition Note, the Winnick Building Addition Note, the Second Winnick Building Addition Note (to the extent that any Advances are made under the Second Winnick Building Addition Note as of the Closing Date) and the Towers Note, but do not include the amounts outstanding under the Aloha Bay Note and the Office Note. "MORTGAGE LOAN FACILITY BORROWING TERM": shall mean the period of time during which Lender is committed to make Advances under the Mortgage Loan Facility pursuant to this Agreement, which commitment shall terminate twelve (12) months after the Closing Date. "MORTGAGE LOAN FACILITY MATURITY DATE": shall mean, with respect to any Additional Project funded under the Mortgage Loan Facility, the date which shall occur two (2) years after the date on which the last Advance is made with respect to such Additional Project. "MORTGAGE LOAN FEE": shall mean a fee in an amount equal to one-half percent (1/2%) of each of the Advances made by Lender to Borrower under the Mortgage Loan Facility, which is due and payable in full by Borrower on the date that each such Advance is made under the Mortgage Loan Facility. "NOTES": shall mean the Receivables Note, the Aloha Bay Note, the Office Note, the Ida Building One Note, the Ida Building Two Note, the Ida Building Addition Note, the Winnick Building Addition Note, the Second Winnick Building Addition Note, the Towers Note, any other Project Note and any additional promissory notes executed by Borrower executed and delivered to Lender with respect to the Loan pursuant to the terms and conditions of this Agreement. "OBLIGATIONS": shall mean each and every obligation, duty, covenant, undertaking and condition which Borrower is required or has agreed to perform under the Documents, and each and every other obligation of Borrower now or hereafter owing to Lender. -12- 13 "OFFICE NOTE": shall mean the Second Amended and Restated Promissory Note [Headquarters and FCFC Property] dated as of June 5, 1996, executed and delivered to Lender in the original principal amount of $6,773,778.74, evidencing the Advances made with respect to the FCFC Property and the Headquarters Building, together with any modifications, amendments, restatements or supplements from time to time made thereto, whether now or hereafter existing. "OFFICE NOTE MATURITY DATE": shall mean July 1, 2003. "OVERDUE RATE": shall mean the interest rate payable by Borrower under the terms of the Note for delinquent monthly installments or in the event that an Event of Default occurs. "OVERSIGHT AGREEMENT": shall mean that certain Oversight and Agency Agreement between Lender, Borrower and FPSI dated as of August 31, 1994, as from time to time amended, renewed or restated. "PERFORM", "PERFORMED" or "PERFORMANCE": shall mean the timely, faithful and complete payment and performance of all Obligations by the Borrower. "PERMITTED ENCUMBRANCES": shall mean each and every restriction, reservation and easement of record, inchoate mechanics' liens and inchoate liens for taxes and assessments, which individually and in the aggregate do not render title to the property which they encumber unmarketable. "PERSON": shall mean any adult individual, partnership, corporation, trust, unincorporated organization or other form of business entity whatsoever, or any government or agency or political subdivision thereof. "PROJECT": shall mean each of, or collectively, as the context may require, the Winnick Building Addition, the Ida Building Addition, Aloha Bay, Ida Building One, Ida Building Two, South Park Ranches, Suites Phase I, Suites Phase II, Fountains, Winnick, the Second Winnick Building Addition, Project (Reno), Project (Towers), Project (Villas), Project (Terraces-Phase 1), Project (Terraces-Phase 2), any Additional Projects, and those certain real estate developments which are owned by the Borrower or the Trustee, located in Nye County and Clark County in the State of Nevada, and Huerfano County in the State of Colorado, which are more particularly described in EXHIBIT "I-J" hereto. "PROJECT (RENO)": shall mean the real property together with the buildings and improvements thereon, and interests and appurtenances thereto, and commonly known as the "Reno Spa Resort Club," as more particularly described in EXHIBIT "I-K" hereto. -13- 14 "PROJECT (TERRACES-PHASE 1): shall mean the real property, together with the buildings and improvements thereon, and interests and appurtenances thereto, as more particularly described in EXHIBIT "I-L" hereto. "PROJECT (TERRACES-PHASE 2): shall mean the real property, together with the buildings and improvements thereon, and interests and appurtenances thereto, as more particularly described in EXHIBIT "I-M" hereto. "PROJECT (TOWERS)": shall mean the real property, together with the buildings and improvements thereon, and interests and appurtenances thereto, commonly known as the "Grand Flamingo Towers," as more particularly described in EXHIBIT "I-N" hereto. "PROJECT (VILLAS)": shall mean the real property, together with the buildings and improvements thereon, and interests and appurtenances thereto, commonly known as the "Grand Flamingo Villas," as more particularly described in EXHIBIT "I-O" hereto. "PROJECT INCENTIVE FEE": shall mean that Incentive Fee payable with respect to each Additional Project for which Advances under the Mortgage Loan Facility are made by Lender to Borrower, as more particularly described in PARAGRAPH 7.19 of this Agreement. "PROJECT NOTE": shall have the meaning set forth in PARAGRAPH 2.3.6 below. "PROJECT RELEASE FEE": shall mean that release fee payable with respect to each Additional Project under which Advances of the Mortgage Loan Facility are made by Lender to Borrower, as more particularly described in PARAGRAPH 3.17 of this Agreement. "PURCHASER": shall mean a Person who buys a Lot or Unit in any Project from Borrower or an Additional Project Developer. "PURCHASER MORTGAGES": shall mean all deeds of trust, mortgages, security agreements, financing statements, or other security instruments of every type and nature on or affecting a Lot or Unit in any Project or any interest therein and which secure the Contracts and Instruments assigned to Lender or evidence any rights of Borrower or any Trust in or to such Contracts or Instruments. "PURCHASER NOTE": shall mean a promissory note executed and delivered by a Purchaser to evidence such Person's indebtedness to Borrower with respect to the purchase of a Lot or Unit by such Purchaser. "RECEIVABLES BORROWING TERM": shall mean the period of time during which Lender is committed to make Advances of the Receivables Loan under this Agreement which commitment shall terminate on the first to occur of (a) that date that is thirty-six (36) months -14- 15 after the date of the first Advance under the Receivables Loan after the Closing Date, or (b) May 31, 2000. "RECEIVABLES COLLATERAL": shall mean: (a) all right, title and interest of Borrower, Trustee, any Co-Trustee or any other vendor in those certain Contracts and Instruments, whether now existing or hereafter arising, which are, now or hereafter, assigned, endorsed or delivered to Lender, or Lender's agent, (and which have not been reassigned by Lender) pursuant hereto or against which an Advance has been made (and replacements or substitutions thereof), including, without limitation, all proceeds, property, property rights, privileges and benefits arising out of, from the enforcement of, or in connection with the Contracts, Instruments, property rights or the policies of insurance referred to below, including, without limitation, all cash, checks, notes, chattel paper, drafts and other instruments for the payment of money, all property returned by or reclaimed or repossessed from customers, all rights of foreclosure, termination, dispossession, repossession, all documents, instruments, accounts, contracts, liens and security instruments and all guarantees relating to or arising out of the Contracts or Instruments whether such guarantees are given by individuals, corporations or partnerships or by any federal, state or local governmental or quasi-governmental entities, all collateral, security deposits, tax escrows and down payments (to the extent the same may be pledged under applicable law), or other security securing the obligations of any person under or relating to the Contracts or Instruments, all credit balances in favor of Borrower on Lender's books, and all rights and remedies of whatever kind or nature Borrower or any Trust may hold or acquire for the purpose of securing or enforcing the Contracts or Instruments, and all general intangibles relating to or arising out of the Contracts or Instruments or policies of insurance referred to below; provided, however, that the foregoing shall not include any Annual Service Fees or proceeds thereof; (b) subject to the prior rights, if any, of third parties, all property rights relating to or arising out the Contracts or Instruments, policies of insurance relating to or arising out of such Contracts or Instruments (to the extent the same may be pledged under the Trust Agreements), including, without limitation, all general intangibles relating to or arising out of such policies of insurance, and all collateral, security deposits and down payments (to the extent the same may be pledged under applicable law), or other security securing the obligations of any Purchaser under or relating to such Contracts or Instruments; (c) all proceeds of insurance (to the extent permitted by applicable law, the Trust Agreements and any declaration of covenants, conditions and restrictions), including, without limitation, property, casualty and title insurance, -15- 16 affecting such Contracts and Instruments or the portion of the Project affected by such Contracts and Instruments or delivered in connection therewith; (d) all rights, if any, under escrow agreements and all impound and/or reserve accounts pertaining to the foregoing; (e) all files, books and records of Borrower pertaining to any of the foregoing, including all records, ledgers, and computer programs, discs or tapes, files, printouts, runs and other computer prepared information indicating, summarizing, or evidencing such Contracts and Instruments or related to any Project; and (f) the proceeds from the foregoing. "RECEIVABLES LOAN": shall mean that portion of the Loan not to exceed $75,000,000.00, less the aggregate outstanding principal balance of (a) all Advances made under the Mortgage Loan Facility, (b) the Aloha Bay Note, and (c) the Office Note. "RECEIVABLES LOAN FEE": shall mean that loan fee payable by Borrower in consideration of Lender's execution of this Agreement and the commitments made by Lender hereunder, in the amount of up to $250,000.00. A portion of the Receivables Loan Fee in an amount equal to $180,000.00 shall be paid by Borrower simultaneously with the first Advance under the Receivables Loan after the Closing Date. The balance of the Receivables Loan Fee ($70,000.00) shall be paid if and when the outstanding principal balance of all Advances of the Receivables Loan equals or exceeds $68,000,000.00. "RECEIVABLES MATURITY DATE": shall mean the date which shall occur (a) seven (7) years after the date on which the last Advance of the Receivables Loan is made under the terms of this Agreement with respect to Receivables Collateral secured by Units, and (b) ten (10) years after the date on which the last Advance of the Receivables Loan is made under the terms of this Agreement with respect to Receivables Collateral secured by Lots. "RECEIVABLES NOTE": shall mean the "Second Amended and Restated Promissory Note" evidencing the Receivables Loan, dated of even date herewith, consolidating the indebtedness owed by Borrower under the Existing PEC Loan Agreement and under the Existing VSR Loan Agreement, as further amended, renewed and restated. "RELEASE CONDITIONS": shall mean the satisfaction of each of the following conditions: (a) No Event of Default shall have occurred or be continuing and no event shall then exist, which with notice, passage of time or both would constitute an Event of Default; -16- 17 (b) The Unit or Lot to be released must have been sold by Borrower in the ordinary course of Borrower's business in a bona fide arms-length transaction; (c) The Purchaser of the Unit or Lot shall not be affiliated with Borrower or with any of the Control Group; (d) Lender shall have received a written request for such release in which Borrower certifies as to compliance with items (a) through (c) above, and further certifies that all other requirements for such release have been satisfied; (e) Borrower has paid all of Lender's out-of-pocket expenses incurred in connection with such release and has submitted to Lender all necessary documents for the same. For the purposes hereof, a Person shall be deemed affiliated with Borrower or the Control Group if it is a shareholder, officer, director, agent, employee, salesman, broker or creditor of Borrower or the Control Group, or relative of Borrower or the Control Group or of any of the foregoing, or any other Person related to or affiliated with Borrower or the Control Group, including, without limitation, the Guarantor and any independent contractors. "SECOND WINNICK BUILDING ADDITION": shall have the meaning set forth in Recital "J". "SECOND WINNICK BUILDING ADDITION ADVANCES": shall mean those Advances against the Maximum Loan Amount and the Mortgage Loan Facility in the amount of up to $1,818,000.00 made or to be made by Lender to Borrower, the proceeds of which are to be used to pay a portion of Borrower's costs in acquiring and renovating the Second Winnick Building Addition. "SECOND WINNICK BUILDING ADDITION DEED OF TRUST": shall mean that certain Deed of Trust, Assignment of Rents and Proceeds and Security Agreement dated of even date with this Agreement and to be recorded against the Second Winnick Building Addition, together with any and all amendments, supplements or modifications from time to time made thereto. "SECOND WINNICK BUILDING ADDITION INCENTIVE FEE": shall have the meaning set fort in PARAGRAPH 7.18 of this Agreement. "SECOND WINNICK BUILDING ADDITION MATURITY DATE": shall mean that date which occurs twenty-four (24) months following the date that Lender makes the last Advance under the Mortgage Loan Facility with respect to the Second Winnick Building Addition (or in the event there is no such day in the 24th month, on the last day of such month). -17- 18 "SECOND WINNICK BUILDING ADDITION NOTE": shall mean that certain Promissory Note of Borrower of even date with this Agreement, executed and delivered to Lender in the amount of up to $1,818,000.00, evidencing the Second Winnick Building Addition Advances. "SECOND WINNICK BUILDING ADDITION RELEASE FEES": shall have the meaning set forth in PARAGRAPH 3.16 of this Agreement. "SECURITY": shall have the same meaning as set forth in Section 2(1) of the Securities Act of 1933, as amended. "SECURITY INTEREST": a direct and exclusive first priority security interest or lien which has been perfected under the Uniform Commercial Code, or applicable real property law of the state(s) in which any such security interest or lien must be perfected; provided, however, that with respect to any portion of the Receivables Collateral not covered by the Uniform Commercial Code, it shall mean a direct and exclusive first lien on such property which has been perfected in the manner provided by law. "SOUTH PARK RANCHES": shall mean that certain subdivision known as South Park Ranches, located in Park County, Colorado, more fully described on EXHIBIT "I-Q" attached hereto. "SUBSIDIARIES": shall mean, with respect to any Person: (a) any corporation in which such Person, directly or indirectly through its Subsidiaries, owns more than fifty percent (50%) of the outstanding capital stock of any other class or classes having by the terms thereof the ordinary voting power to elect a majority of the directors of such corporation's stock (irrespective of whether at the time the capital stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency); and (b) any partnership, association, joint venture, or other entity in which such Person, directly or indirectly through its Subsidiaries, has more than a fifty percent (50%) equity interest at the time. "SUITES PHASE I": shall mean that certain time-share resort commonly known as Grand Flamingo Suites-Phase I located in Las Vegas, Nevada and more fully described on EXHIBIT "I-R" attached hereto. "SUITES PHASE II": shall mean that certain time-share resort commonly known as Grand Flamingo Suites-Phase II located in Las Vegas, Nevada and more fully described on EXHIBIT "I-S" attached hereto. -18- 19 "TERM": shall mean the duration of this Agreement commencing as of the year and day first above written and terminating on the date Borrower has performed all of the Obligations required of or agreed to by Borrower under the Documents. "TITLE COMPANY": shall mean a title insurance company acceptable to Lender in its sole but reasonable discretion. "TITLE POLICY": shall mean a Lender's policy of title insurance issued by a Title Company insuring the validity and priority of the lien of each Purchaser's Mortgage against a Lot or Unit of a Purchaser, which is to be assigned to Lender by Borrower hereunder, as a first lien upon the Lot or Unit, or in the event that a Lot or Unit is the subject of a Contract, a Lender's policy of title insurance issued by the Title Company insuring the validity and priority of the lien of Lender's Mortgage against such Lot or Unit, as a first lien upon the Lot or Unit. The term "Title Policy" shall also mean, as the context may require, a Lender's Policy of Title Insurance issued by a Title Company insuring the validity and priority of the lien of Lender's Mortgage recorded against any real property owned by Borrower as additional security for the performance by Borrower of its Obligations under this Agreement. "TOWERS ADVANCES": shall mean those Advances against the Maximum Loan Amount and the Mortgage Loan Facility in the total amount of $1,286,126.00 made by Lender to Borrower, the proceeds of which were to be used to pay a portion of Borrower's costs of the Towers Lobby Expansion. "TOWERS CLUB": shall have the meaning set forth in PARAGRAPH 8.32 hereof. "TOWERS LOBBY EXPANSION": shall mean the expansion, renovation and refurbishment of the lobby area within the Towers Club. "TOWERS NOTE": shall mean that Promissory Note of Borrower dated as of December 13, 1995, as amended pursuant to that Amendment No. 1 to Promissory Note [Towers Lobby] dated as of August 16, 1996, evidencing the Towers Advances, as may be further amended, restated, supplemented, replaced or modified from time to time after the date hereof. "TOWERS NOTE PRINCIPAL REDUCTION FEE": shall have the meaning set forth in SECTION 2.3.7.5. "TRUST (RENO)": shall mean the trust established pursuant to the Trust Agreement (Reno). "TRUST (SUITES)": shall mean the trust established pursuant to the Trust Agreement (Suites). -19- 20 "TRUST (TERRACES): shall mean the trust established pursuant to the Trust Agreement (Terraces). "TRUST (TOWERS)": shall mean the trust established pursuant to the Trust Agreement (Towers). "TRUST (VILLAS)": shall mean the trust established pursuant to the Trust Agreement (Villas). "TRUST AGREEMENT (RENO)": shall mean that certain Amended, Restated and Consolidated Trust Agreement-Reno Spa Resort Club, dated as of March 19, 1990, among Trustee (Reno), VSR and the Association (Reno), together with all exhibits and schedules attached thereto and all renewals, extensions, amendments, reinstatements, replacements, supplements or modifications from time to time made thereto. "TRUST AGREEMENT (SUITES)": shall mean that certain Trust Agreement dated as of November 13, 1991, between the Trustee (Suites), and Borrower, as trustor and beneficiary, together with all exhibits and schedules attached thereto and all renewals, extensions, amendments, restatements, replacements, supplements or modifications from time to time made thereto. "TRUST AGREEMENT (TERRACES)": shall mean that certain Trust Agreement dated as of December 8, 1989 between Valley Bank of Nevada and VSR, together with all exhibits and schedules attached thereto and all renewals, extensions, amendments, restatements, replacements, supplements or modifications from time to time made thereto. "TRUST AGREEMENT (TOWERS)": shall mean that certain Amended, Restated and Consolidated Trust Agreement [Grand Flamingo Towers] dated as of March 19, 1990, among Valley Bank of Nevada, VSR and Association (Towers), together with all exhibits and schedules attached thereto and all renewals, extensions, amendments, restatements, replacements, supplements or modifications from time to time made thereto. "TRUST AGREEMENT (VILLAS)": shall mean that certain Amended, Restated and Consolidated Trust Agreement [Grand Flamingo Villas] dated as of March 19, 1990, among Valley Bank of Nevada, VSR and Association (Villas), together with all exhibits and schedules attached thereto and all renewals, extensions, amendments, restatements, replacements, supplements or modifications from time to time made thereto. "TRUST AGREEMENTS": shall mean the Trust Agreement (Reno), the Trust Agreement (Towers), the Trust Agreement (Terraces), the Trust Agreement (Villas) and the Trust Agreement (Suites), collectively. -20- 21 "TRUST AGREEMENTS (LAS VEGAS)": shall mean the Trust Agreement (Towers), the Trust Agreement (Villas), the Trust Agreement (Terraces) and the Trust Agreement (Suites), collectively. "TRUSTEE": shall mean the respective Trustee or Trustees under each of the Trust Agreements or its successor as trustee or attorney-in-fact, as applicable. "TRUSTEE (RENO)": shall mean Bank of America, N.T. & S.A., a national banking corporation (successor-in-interest to Valley Bank of Nevada), in its capacity as Trustee of the Trust Agreement (Reno), its successors and assigns. "TRUSTEE (SUITES)": shall mean Bank of America, N.T. & S.A., a national banking corporation, in its sole capacity as trustee under the Trust Agreement (Suites), or should such entity cease to act as trustee under the Trust Agreement (Suites), its successor as trustee under the Trust Agreement (Suites). "TRUSTEE (TERRACES)": shall mean Bank of America, N.T. & S.A., a national banking association, in its sole capacity as trustee under the Trust Agreement (Terraces), or should such entity cease to act as trustee under the Trust Agreement (Terraces), its successor as trustee under the Trust Agreement (Terraces). "TRUSTEE (TOWERS)": shall mean Bank of America, N.T. & S.A., a national banking association, in its sole capacity as trustee under the Trust Agreement (Towers), or should such entity cease to act as trustee under the Trust Agreement (Towers), its successor as trustee under the Trust Agreement (Towers). "TRUSTEE (VILLAS)": shall mean Bank of America, N.T. & S.A., a national banking association, in its sole capacity as trustee under the Trust Agreement (Villas), or should such entity cease to act as trustee under the Trust Agreement (Villas), its successor as trustee under the Trust Agreement (Villas). "TRUSTS": shall mean the Trust (Reno), the Trust (Towers), the Trust (Terraces), the Trust (Villas) and Trust (Suites), collectively. "UNIT": shall mean a real property fee or right-to-use interest in all or a portion of the Project or any Additional Project which permits the purchaser or owner thereof the right to occupy a dwelling unit therein for a one-week interval of time during the calendar year or in which such purchaser or owner has an interest as a tenant-in-common in such dwelling unit and related undivided interest in common elements appurtenant thereto, together with the right to use such unit for a one-week period of time during any calendar year. -21- 22 "UNSOLIDIFIED LOT SALES": shall mean an Instrument or Contract which arises out of the sale of a Lot by Borrower to a Purchaser where such Purchaser has not personally inspected the Lot with a representative of Borrower and where the Instrument or Contract provides a specific period of time after the date of purchase (the "Rescission Period") within which the Purchaser may cancel the Instrument or Contract as a result of the fact that the Purchaser had not inspected the Lot prior to purchase. An Instrument or Contract shall cease to be deemed to be an Unsolidified Lot Sale after the expiration of the Rescission Period in the event that the Purchaser has not canceled or otherwise rescinded the Instrument or Contract. "UPGRADE": shall mean the process whereby a Purchaser has arranged for the termination or modification of an existing Contract or Instrument with respect to a certain Lot or Unit and has simultaneously entered into a new or revised Contract or Instrument for the purchase of a more expensive Lot or Unit. In no event shall an Upgrade mean rewriting of an existing Contract or Instrument, or the entering into of a new Contract or Instrument, so as to eliminate the default of the contract obligor thereunder. "VSR": shall have the meaning set forth in the Recitals in this Agreement. "WINNICK": shall mean that certain time-share resort facility commonly known as Grand Flamingo Winnick, consisting of twelve (12) time-share units and more particularly described in EXHIBIT "I-T" attached hereto. "WINNICK BUILDING ADDITION": shall mean that certain time-share resort facility commonly known as Plaza, consisting of twenty-two (22) time-share units and more particularly described in EXHIBIT "I-U" attached hereto. "WINNICK BUILDING ADDITION DEED OF TRUST": shall mean that certain Deed of Trust, Assignment of Rents and Proceeds and Security Agreement dated as of December 13, 1995 and recorded against the Winnick Building Addition on March 25, 1996 in Book 960325, Instrument No. 01237, Official Records of Clark County, Nevada, together with any and all amendments, supplements or modifications from time to time made thereto, whether now or hereafter existing. "WINNICK BUILDING ADDITION INCENTIVE FEE": shall have the meaning set forth in PARAGRAPH 7.17 of this Agreement. "WINNICK BUILDING ADDITION MATURITY DATE": shall mean February 28, 1999. "WINNICK BUILDING ADDITION NOTE": shall mean that certain Promissory Note of Borrower dated as of December 13, 1995, executed and delivered to Lender in the amount of $2,100,000.00, evidencing the Advances of the Loan made under the Mortgage -22- 23 Loan Facility made with respect to the Winnick Building Addition, together with any modifications, amendments, restatements or supplements from time to time made thereto, whether now or hereafter existing. "WINNICK BUILDING ADDITION RELEASE FEES": shall have the meaning set forth in PARAGRAPH 3.15 of this Agreement. ARTICLE II THE LOAN 2.1 THE LOAN. Subject to the terms and conditions of this Agreement, Lender hereby agrees to make a Loan to Borrower in the amounts and for the purposes hereinafter described. The Loan shall be constituted of the Receivables Loan, the Mortgage Loan Facility, a $3,600,000.00 nonrevolving mortgage loan previously made with respect to Aloha Bay (the "Aloha Bay Loan"), and a $6,773,778.74 nonrevolving mortgage loan previously made with respect to the Headquarters Building and the FCFC Property (the "Office Loan"). 2.2 RECEIVABLES LOAN. Upon Borrower's request, subject to the conditions precedent stated in ARTICLE V hereof and elsewhere in this Agreement, Lender hereby agrees that the Receivables Loan will be disbursed to Borrower, from time to time, in periodic advances, but in no event after the Receivables Borrowing Term has expired, in amounts not to exceed those determined by subtracting (a) the difference between the unpaid principal balance outstanding under the Loan at the time of each Advance over the outstanding principal balance of the aggregate of (i) Advances made under the Mortgage Loan Facility, (ii) the Aloha Bay Loan, and (iii) the Office Loan, from (b) the Borrowing Base, determined as of the date thereof after giving effect to all Eligible Receivables then assigned to (and not reassigned by) Lender; provided, however, that the outstanding principal amount of the Loan shall not exceed at any time the Maximum Loan Amount, and; provided, further, that the principal amount of any and all indebtedness of Borrower to Lender which is secured by Receivables Collateral encumbering Lots shall not exceed $35,000,000.00. 2.2.1 Advances of the Receivables Loan will not be made more frequently than once every month in amounts of not less than $100,000.00. 2.2.2 No Advances under the Receivables Loan will be made after the Receivables Borrowing Term has expired unless Lender, in its sole discretion, shall agree in writing to make additional Advances. 2.2.3 Borrower shall use the proceeds of the Receivables Loan for purposes of providing working capital to Borrower. -23- 24 2.2.4 Except as hereinafter set forth, payments of principal and interest outstanding under the Receivables Loan shall be made in accordance with the terms and provisions of the Receivables Note. 2.2.5 Lender's obligation to make Advances of the Receivables Loan, from time to time, against Instruments or Contracts arising from the sale of Lots or Units in any Project is subject to and conditioned upon such Instruments or Contracts qualifying as Eligible Receivables and is furthermore subject to and conditioned upon the satisfaction of all other conditions precedent to the making of the Advance, as set forth in this Agreement. In connection therewith, but without limiting the generality of the foregoing, Lender's obligation to make Advances of the Receivables Loan against Instruments or Contracts arising from the sale of Lots or Units in any Additional Project is subject to Lender's receipt and approval of copies of the registrations/consents to sell/public offering statements/prospectuses and/or approvals thereof required to be issued by or used in all jurisdictions in which such Lots or Units will be offered for sale. 2.2.6 Notwithstanding anything contained in this Agreement or in any other agreement between Lender and Borrower, Lender shall have no obligation, under any circumstances, to make any Advance of the Receivables Loan with respect to any Eligible Receivable arising from the sale of Lot 26, Filing 54, in South Park Ranches. 2.3 MORTGAGE LOAN FACILITY. Upon Borrower's request, and subject to the conditions precedent stated in PARAGRAPH 5.2.2 hereof and elsewhere in this Agreement, Lender hereby agrees that Advances under the Mortgage Loan Facility will be disbursed to Borrower, from time to time, in periodic Advances, but in no event after the Mortgage Loan Facility Borrowing Term has expired, in amounts not to exceed ninety percent (90%) of the total bona fide out-of-pocket costs and expenses incurred by Borrower in acquiring and renovating any Project which has been approved by Lender (exclusive of any overhead of or profits to Borrower or any of the Control Group (for the purposes of the foregoing, the term "overhead" shall not be deemed to include reasonable and customary salaries paid to employees of Borrower performing renovations with respect to such Project)); provided, however, that the outstanding principal amount of all Advances made under the Mortgage Loan Facility at any time shall not exceed $15,000,000.00. 2.3.1 Advances under the Mortgage Loan Facility shall not be made more frequently than once every month. 2.3.2 No Advances under the Mortgage Loan Facility will be made after the Mortgage Loan Facility Borrowing Term has expired unless Lender, in its sole discretion, shall agree in writing to make additional Advances thereunder. -24- 25 2.3.3 Borrower shall use the proceeds of Advances made under the Mortgage Loan Facility for the purposes of acquiring, renovating and refurbishing Projects and Additional Projects which have been approved by Lender. Lender and Borrower hereby acknowledge and agree that Lender shall have no obligation to approve Additional Projects for funding under the Mortgage Loan Facility unless Lender has otherwise inspected and approved such Additional Project in its sole discretion, and Borrower has agreed that, if so approved by Lender, Lender shall have the right to elect to make Advances under the Receivables Loan against Eligible Receivables arising from Instruments or Contracts resulting from the sale of Units in such Additional Project. 2.3.4 Advances under the Mortgage Loan Facility shall not be made with respect to any Projects consisting of Lots. 2.3.5 Disbursements of any Advances requested by Borrower under the Mortgage Loan Facility shall be made in accordance with Lender's customary construction draw procedures and guidelines then in effect with respect to construction loans, or as reimbursements for amounts expended by Borrower as established by evidence satisfactory to Lender. 2.3.6 Except as otherwise provided in this Agreement, payments of principal and interest outstanding under any Advances made under the Mortgage Loan Facility shall be made in accordance with the terms and provisions of a separate promissory note to be executed by Borrower and delivered to Lender at the time of the initial Advance made by Lender under the Mortgage Loan Facility with respect to the Additional Project (hereinafter, a "Project Note"). Unless otherwise agreed by Lender and Borrower, the terms and conditions of each such Project Note shall be as set forth in that form of Project Note attached hereto as EXHIBIT 2.3.6. Each Project Note shall be in a principal amount equal to the total amount of Advances under the Mortgage Loan Facility available to Borrower with respect to such Additional Project, shall accrue interest at an annual interest rate equal to Prime (as defined in the Project Note) plus two percent (2%) per annum, subject to adjustment on each Interest Rate Change Date (as described in the Project Note). Each Project Note shall be repaid through the payment to Lender of Project Release Fees and shall be paid in full as of the applicable Mortgage Loan Facility Maturity Date. For purposes of this Agreement, the Ida Building Addition Note, the Ida Building One Note, the Ida Building Two Note, the Winnick Building Addition Note, the Second Winnick Building Addition Note and the Towers Note shall be deemed to be Project Notes. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have no right to prepay any Project Note other than as set forth in the respective Project Note. Notwithstanding anything contained herein to the contrary, the outstanding obligations of Borrower under the Aloha Bay Loan and the Office Loan -25- 26 shall not be part of the Mortgage Loan Facility and shall not reduce or limit the total Advances available to Borrower under the Mortgage Loan Facility. 2.3.7 EXISTING PROJECT NOTES. 2.3.7.1 IDA BUILDING ONE NOTE. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in this Agreement, the terms and conditions of the Ida Building One Note and this PARAGRAPH 2.3.7.1 shall apply with respect to repayment of the Ida Building One Note. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have no right to prepay the Ida Building One Note, other than through the application of Ida Building One Release Fees against the principal balance thereof, as provided below. The principal balance of the Ida Building One Note shall be repaid as follows: At such time as Borrower conveys a Unit in Ida Building One to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Ida Building One Note in an amount equal to the Ida Building One Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Ida Building One Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on the Ida Building One Maturity Date. Ida Building One Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Ida Building One Note. 2.3.7.2 IDA BUILDING TWO NOTE. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in this Agreement, the terms and conditions of the Ida Building Two Note and this PARAGRAPH 2.3.7.2 shall apply with respect to repayment of the Ida Building Two Note. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have no right to prepay the Ida Building Two Note, other than through the application of Ida Building Two Release Fees against the principal balance thereof, as provided below. The principal balance of the Ida Building Two Note shall be repaid as follows: At such time as Borrower conveys a Unit in Ida Building Two to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Ida Building Two Note in an amount equal to the Ida Building Two Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Ida Building Two Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on the Ida Building Two Maturity Date. Ida Building Two Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be -26- 27 applied toward the next principal installment to become due under the Ida Building Two Note. 2.3.7.3 IDA BUILDING ADDITION NOTE. Lender hereby agrees that Borrower shall continue to have the right to receive Advances under the Mortgage Loan Facility with respect to the Ida Building Addition provided that the Borrower satisfies the following requirements for such Advances which are set forth in EXHIBIT 5.2.2 in connection therewith: 15, 18, 19, 20 and 21, and provides to Lender a Request for Advance and Certification as described in PARAGRAPH 5.8 below. Borrower shall not be entitled to receive any further Advances under the Mortgage Loan Facility with respect to the Ida Building Addition after December 31, 1997. Lender and Borrower hereby agree that, notwithstanding any provisions to the contrary in this Agreement, the terms and conditions of the Ida Building Addition Note and this PARAGRAPH 2.3.7.3 shall apply with respect to the repayment of the Ida Building Addition Note. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have the right to prepay the Ida Building Addition Note only in the event and upon the condition that Borrower (a) pays all sums due and payable to Lender in connection with the Ida Building Addition Note, (b) has given Lender at least thirty (30) days prior written notice of the prepayment, and (c) pays to Lender at the time of prepayment a prepayment premium equal to one percent (1%) of the then unpaid principal balance of the Ida Building Addition Note, together with any unpaid portion of the Ida Building Addition Incentive Fee as described in PARAGRAPH 7.16 below. Except as provided in the foregoing, Borrower shall have no right to prepay the Ida Building Addition Note, other than through the application of Ida Building Addition Release Fees against the principal balance thereof, as provided below. The principal balance of the Ida Building Addition Note shall be repaid as follows: At such time as Borrower conveys a Unit in the Ida Building Addition to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Ida Building Addition Note in an amount equal to the Ida Building Addition Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Ida Building Addition Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on the Ida Building Addition Maturity Date. Ida Building Addition Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Ida Building Addition Note. 2.3.7.4 WINNICK BUILDING ADDITION NOTE. Lender and Borrower hereby agree that, notwithstanding any provisions to the contrary in this Agreement, the terms and conditions of the Winnick Building Addition -27- 28 Note and this PARAGRAPH 2.3.7.4 shall apply with respect to the repayment of the Winnick Building Addition Note. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have the right to prepay the Winnick Building Addition Note only in the event and upon the condition that Borrower (a) pays all sums due and payable to Lender in connection with the Winnick Building Addition Note, (b) has given Lender at least thirty (30) days prior written notice of the prepayment, and (c) pays to Lender at the time of prepayment a prepayment premium equal to one percent (1%) of the then unpaid principal balance of the Winnick Building Addition Note, together with any unpaid portion of the Winnick Building Addition Incentive Fee as described in PARAGRAPH 7.17 below. Except as provided in the foregoing, Borrower shall have no right to prepay the Winnick Building Addition Note, other than through the application of Winnick Building Addition Release Fees against the principal balance thereof, as provided below. The principal balance of the Winnick Building Addition Note shall be repaid as follows: At such time as Borrower conveys a Unit in the Winnick Building Addition to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Winnick Building Addition Note in an amount equal to the Winnick Building Addition Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Winnick Building Addition Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on the Winnick Building Addition Maturity Date. Winnick Building Addition Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Winnick Building Addition Note. 2.3.7.5 TOWERS NOTE. Lender and Borrower hereby agree that, notwithstanding any provision to the contrary in this Agreement, the terms and conditions of the Towers Note and this PARAGRAPH 2.3.7.5 shall apply with respect to repayment of the Towers Note. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have the right to prepay the Towers Note only in the event and upon the condition that Borrower (a) pays all sums due and payable to Lender in connection with the Towers Note, (b) has provided Lender with at least thirty (30) days prior written notice of the prepayment, and (c) pays to Lender at the time of prepayment a prepayment premium equal to one percent (1%) of the then unpaid principal balance of the Towers Note. Except as provided in the foregoing, Borrower shall have no right to prepay the Towers Note, other than through the application of Towers Note Principal Reduction Fees against the principal balance thereof, as hereinafter provided. The principal balance of the Towers Note shall be repaid as follows: At such time as Borrower conveys a Unit in Ida Building One, Ida Building Two, the Winnick Building Addition or the Ida -28- 29 Building Addition to a Purchaser at any time after (a) thirty (30) days after the last Towers Advance is made to Borrower, or (b) November 30, 1998, whichever occurs first, Borrower shall make a principal reduction payment to Lender under the Towers Note in an amount equal to $350.00 (the "Towers Note Principal Reduction Fee"). The Towers Note Principal Reduction Fee shall be paid to Lender simultaneously with the payment of the Ida Building One Release Fee, Ida Building Two Release Fee, Winnick Building Addition Release Fee or the Ida Building Addition Release Fee, as the case may be, until the Towers Note is paid in full, whereupon the Towers Note Principal Reduction Fee shall no longer be required to be paid in connection with the foregoing-described release fees. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Towers Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on the earlier of (i) that date which occurs twenty-five (25) months following the date that Lender makes the last Towers Advance (or in the event there is no such day in the 25th month, on the last day of such month), or (ii) November 30, 1998. Towers Note Principal Reduction Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Towers Note. 2.3.7.6 SECOND WINNICK BUILDING ADDITION NOTE. Lender and Borrower hereby agree that, notwithstanding any provisions to the contrary in this Agreement, the terms and conditions of the Second Winnick Building Addition Note and this PARAGRAPH 2.3.7.6 shall apply with respect to the repayment of the Second Winnick Building Addition Note. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have the right to prepay the Second Winnick Building Addition Note only in the event and upon the condition that Borrower (a) pays all sums due and payable to Lender in connection with the Second Winnick Building Addition Note, (b) has given Lender at least thirty (30) days prior written notice of the prepayment, and (c) pays to Lender at the time of prepayment a prepayment premium equal to one percent (1%) of the then unpaid principal balance of the Second Winnick Building Addition Note, together with any unpaid portion of the Second Winnick Building Addition Incentive Fee as described in PARAGRAPH 7.18 below. Except as provided in the foregoing, Borrower shall have no right to prepay the Second Winnick Building Addition Note, other than through the application of Second Winnick Building Addition Release Fees against the principal balance thereof, as provided below. The principal balance of the Second Winnick Building Addition Note shall be repaid as follows: At such time as Borrower conveys a Unit in the Second Winnick Building Addition to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Second Winnick Building Addition Note in an -29- 30 amount equal to the Second Winnick Building Addition Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Second Winnick Building Addition Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on the Second Winnick Building Addition Maturity Date. Second Winnick Building Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Second Winnick Building Addition Note. 2.4 OFFICE LOAN. Borrower hereby acknowledges that it has received all Advances of the Loan that it has requested and/or shall ever be entitled to under the Office Loan. Lender and Borrower hereby agree that, notwithstanding any provisions to the contrary in this Agreement, the terms and conditions of the Office Note shall apply with respect to the repayment of the Office Loan. All Obligations of Borrower arising under or evidenced by the Office Note, if not sooner paid, shall be due and payable in full on the Office Note Maturity Date. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have no right to prepay the Office Note other than as set forth in the Office Note. 2.5 ALOHA BAY LOAN. Borrower hereby acknowledges that it has received all Advances of the Loan that it has requested and/or shall ever be entitled to under the Aloha Bay Loan. Lender and Borrower hereby agree that, notwithstanding any provisions to the contrary in this Agreement, the terms and conditions of the Aloha Bay Note and this PARAGRAPH 2.5 shall apply with respect to the repayment of the Aloha Bay Loan. Notwithstanding the provisions of PARAGRAPH 7.3.1 of this Agreement, Borrower shall have no right to prepay the Aloha Bay Note, other than through the application of Aloha Bay Release Fees against the principal balance thereof, as provided below. The principal balance of the Aloha Bay Note shall be repaid as follows: At such time as Borrower conveys a Unit in Aloha Bay to a Purchaser, Borrower shall make a principal reduction payment to Lender under the Aloha Bay Note in an amount equal to the Aloha Bay Release Fee. Notwithstanding anything herein to the contrary, if not sooner paid, the entire remaining balance of the Aloha Bay Note, together with all accrued and unpaid interest and all other sums due and owing thereon, shall be due and payable in full on the Aloha Bay Maturity Date. Aloha Bay Release Fees paid to Lender in connection with the release of Units from the Security Interests shall be applied toward the next principal installment to become due under the Aloha Bay Note. 2.6 All Advances of the Loan, whether made under the Receivables Loan and evidenced by the Receivables Note, or made under the Mortgage Loan Facility and evidenced by a Project Note, or made under the Aloha Bay Loan and evidenced by the Aloha Bay Note or made under the Office Loan and evidenced by the Office Note, shall be deemed to be a single Loan. -30- 31 ARTICLE III SECURITY FOR THE LOAN 3.1 (a) As security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower and Trustees hereby grant, transfer and assign to Lender a Security Interest in and to all of Borrower's right, title and interest in and to all of the following: (i) all Receivables Collateral, whether now existing or hereafter arising; (ii) all Purchaser Mortgages, whether now existing or hereafter arising; (iii) all Title Policies, whether now existing or hereafter arising, insuring any of the Purchaser Mortgages; and (iv) the proceeds from the foregoing; and Lender's Security Interest in such Receivables Collateral shall be absolute, continuing and applicable to all existing and future Advances and shall secure the repayment of the Loan and the Performance of all Obligations throughout the Term of the Loan. (b) As further security for Borrower's payment and Performance of all Obligations owed to Lender under the Documents, Borrower hereby grants, transfers and assigns to Lender a Security Interest in and to all of Borrower's right, title and interest in and to all of the following: (i) All right, title and interest of Borrower in and to all of the Trusts, whether such interest be as trustor, beneficiary, or otherwise; (ii) All distributions not distributed prior to an Event of Default, property, property rights, privileges, contract rights, accounts, general intangibles, and benefits of Borrower arising out of or from any of the Trusts or any such trust corpus; (iii) The proceeds from the foregoing; and -31- 32 (iv) Borrower's rights as "declarant," "developer," "owner" or otherwise under the governing documents or restrictive covenants affecting any Project, if any, including, without limitation, owners' association charters or articles or certificates of incorporation, bylaws and rules and regulations related thereto, whether now or hereafter existing (collectively, "Project Documents"); provided, however, that in the event that (A) the Receivables Borrowing Term shall expire or the Loan shall reach the Maximum Loan Amount, and (B) Lender shall not agree to extend the Receivables Borrowing Term or increase the Maximum Loan Amount, as applicable, for such period or for such amount as Borrower shall request, upon terms and conditions substantially similar to those provided in this Agreement, and (C) Borrower and another lender shall enter into financing arrangements which provide for such additional borrowing term or loan amount and pursuant to which Borrower, the Trustee, the Trusts or any of them grants a Security Interest in, or otherwise assigns, their respective right, title and interest in and to any of the Trusts in which Lender has a Security Interest, Lender agrees to enter into such intercreditor agreements, in form and substance reasonably satisfactory to Lender, as shall be necessary to share with such other lender, on a pari passu basis, Lender's Security Interest in the right, title and interest of Borrower, the Trustee or any of the Trusts, as applicable, in and to such Trusts and to consent to a senior assignment to such lender of any receivables collateral, other than any of the Receivables Collateral, with respect to any Project. Except as expressly provided in this Agreement, or in any other Document, Lender's Security Interest in the Collateral described in this paragraph or any other collateral given pursuant to or in connection with this Agreement shall be absolute, continuing and applicable to all existing and future Advances and shall secure the repayment of the Loan and the Performance of all Obligations throughout the Term of the Loan. 3.2 At or prior to the time each Advance under the Receivables Loan is made hereunder, Borrower shall have delivered, or caused to have been delivered, to Lender (a) an executed Assignment of the Eligible Receivables that enter into the Borrowing Base calculation against which the Advance is to be made; (b) the original Purchaser Notes or Contracts executed by the Purchaser; (c) the recorded Purchaser Mortgage; and (d) the Title Policy insuring the Purchaser Mortgage as a first lien upon the Lot or Unit acquired by the Person executing the Purchaser Note; provided, however, that the delivery of items (b), (c) and (d) may be made only once during any calendar month. 3.3 Each Purchaser Note shall be duly endorsed "Pay to the order of FINOVA Capital Corporation". -32- 33 3.4 (a) During the Receivables Borrowing Term, if an Eligible Receivable which comprises a part of the Receivables Collateral shall cease to qualify as, or is otherwise determined not to be an Eligible Receivable, and without such Eligible Receivable the principal amount of the Receivables Loan shall exceed the Borrowing Base, Borrower shall, within thirty (30) days thereafter, pay the Lender an amount equal to that portion of the Receivables Loan, together with interest, costs, and expenses, if any, attributable to such ineligible Receivables Collateral or shall replace such ineligible Receivables Collateral with other Eligible Receivables which have value equal to or greater than that attributable to the ineligible Receivables Collateral being replaced. (b) Following the Receivables Borrowing Term, if an Eligible Receivable which comprises a part of the Receivables Collateral shall cease to qualify as, or is otherwise determined not to be an Eligible Receivable, and without such Eligible Receivable the principal amount of the Receivables Loan shall exceed the Borrowing Base, Borrower shall, within thirty (30) days thereafter, pay to Lender an amount equal to that portion of the Receivables Loan, together with interest, costs, and expenses, if any, attributable to such ineligible Receivables Collateral or shall replace such ineligible Receivables Collateral with other Eligible Receivables which have value equal to or greater than that attributable to the ineligible Receivables Collateral being replaced. 3.5 Concurrently with the delivery of the replacement Eligible Receivables to Lender, Borrower will deliver to Lender all of the items which Borrower is required to deliver to Lender pursuant to PARAGRAPH 5.2.1 hereof, together with a Borrower's certificate in form and substance identical to EXHIBIT "3.5" attached hereto. 3.6 Upon substitution of the Eligible Receivables for the ineligible Receivables Collateral, or payment of an amount equal to that portion of the Loan, together with interest, costs, and expenses, if any, attributable to such ineligible Receivables Collateral, in accordance with PARAGRAPH 3.4 hereof, Lender shall release, reassign and/or endorse, as applicable, to Borrower, without recourse or warranty of any kind (other than that Lender has not made any prior assignment of, and has not created any rights of third parties with respect to, such ineligible Receivables Collateral), the replaced ineligible Receivables Collateral and all Purchaser Mortgages securing such replaced Receivables Collateral, and terminate its Security Interest therein and in the Lots or Units which are the subject thereof, provided that no Event of Default, and no act or event which after the giving of notice or the lapse of time, or both, would constitute an Event of Default, has occurred and is continuing. The release, reassignment and/or endorsement instrument shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Said instrument must be in form and substance reasonably satisfactory to Lender. -33- 34 Upon Borrower's written request, Lender agrees to release those Contracts and Instruments, and any and all property rights incidental thereto, which Borrower demonstrates to the reasonable satisfaction of Lender: (a) have been paid in full by the obligor(s) thereunder; or (b) provided no Event of Default, and no act or event which after the giving of notice or the lapse of time, or both, would constitute an Event of Default, has occurred and is continuing, have been replaced with Eligible Receivables which have an aggregate value equal to or greater than that attributable to the Receivables Collateral being released; or (c) during the Receivables Borrowing Term, provided no Event of Default, and no act or event which after the giving of notice or the lapse of time, or both, would constitute an Event of Default, has occurred and is continuing, following the release of such Receivables Collateral, the principal amount of the Receivables Loan outstanding hereunder shall not be in excess of the Borrowing Base; or (d) following the Receivables Borrowing Term, provided no Event of Default, and no act or event which after the giving of notice or the lapse of time, or both, would constitute an Event of Default, has occurred and is continuing, following the release of such Eligible Receivables, the principal amount outstanding under the Receivables Loan shall not be in excess of the Borrowing Base. 3.7 Provided that there is no Event of Default, and no act or event which after the giving of notice or the lapse of time, or both, would constitute an Event of Default, has occurred and is continuing, under any other agreement between Borrower and Lender, Lender shall release, reassign and/or endorse, as applicable, all of the Receivables Collateral and all Purchaser Mortgages securing the Receivables Collateral, and terminate its Security Interest therein and in the Lots or Units which are the subject thereof, upon the payment, in full, of all of Borrower's indebtedness to Lender arising under this Agreement. Any release, reassignment and/or endorsement made pursuant to this PARAGRAPH 3.7 shall be made without recourse or warranty of any kind (other than the warranties contemplated by PARAGRAPH 3.6 of this Agreement). 3.8 Notwithstanding anything contained herein to the contrary, Lender agrees that it will not disturb the rights of any Purchaser; provided, however, that nothing herein is intended or shall be construed to abrogate or restrict any rights or remedies against a Purchaser or with respect to a Purchaser's Contract in the event that a Purchaser is in default under such Contract. -34- 35 3.9 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused to be executed and recorded for the benefit of Lender the Aloha Bay Mortgage, subject to the limitations contained therein. At such time as all principal, interest and other sums payable under the Aloha Bay Note have been paid in full, Lender shall, upon the request of Borrower, release and terminate the Aloha Bay Mortgage and any accompanying UCC Financing Statements and related Security Interests, provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in form and substance reasonably satisfactory to Lender. Lender also hereby agrees that it will release from the effect of the Security Interest granted herein and in the Aloha Bay Mortgage, and from the effect of any UCC Financing Statements, Units in Aloha Bay which are sold by Borrower to Purchasers upon (a) the payment to Lender of a release fee (the "Aloha Bay Release Fee") equal to $2,900.00 per Unit, (b) the payment of an incentive fee (as provided in PARAGRAPH 7.15 below) in the amount of $20.00 per Unit until such time as Borrower has repaid the Aloha Bay Note in full, and thereafter in the amount of $2,900.00 per Unit until such time as Borrower has paid to Lender a total incentive fee as to Aloha Bay of $32,640.00, all as provided in PARAGRAPH 7.15 below, and (c) the satisfaction of the Release Conditions. Upon the release of a Unit from the Aloha Bay Mortgage, such release shall also constitute a release from the lien of the Aloha Bay Mortgage, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that, notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral. Payments of interest due under the Aloha Bay Note shall not be credited against any Aloha Bay Release Fees. 3.10 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused to be executed and recorded for the benefit of Lender the Headquarters Deed of Trust. At such time as the outstanding principal balance of the Office Note has been reduced, either through ordinary payments of principal as required under the Office Note or through prepayments of principal, to $4,273,778.74, or less, Lender shall, upon the request of Borrower, release and terminate the Headquarters Deed of Trust and any accompanying UCC Financing Statements and related Security Interests, provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default, and provided, further, that Borrower has satisfied all other conditions precedent to such release as set forth in the Headquarters Deed of Trust. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in form and substance reasonably satisfactory to Lender. -35- 36 3.11 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused to be executed and recorded for the benefit of Lender the FCFC Deed of Trust. At such time as the outstanding principal balance of the Office Note has been reduced, either through ordinary payments of principal as required under the Office Note or through prepayments of principal, to $2,273,778.74, or LESS, Lender shall, upon the request of Borrower, release and terminate the FCFC Deed of Trust and any accompanying UCC Financing Statements and related Security Interests, provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default, and provided, further, that Borrower has satisfied all other conditions precedent with respect to such release as set forth in the FCFC Deed of Trust. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in form and substance reasonably satisfactory to Lender. 3.12 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused to be executed and recorded for the benefit of Lender the Ida Building One Deed of Trust. At such time as all principal, interest and other sums payable under the Ida Building One Note have been paid in full, Lender shall, upon the request of Borrower, release and terminate the Ida Building One Deed of Trust and any accompanying UCC Financing Statements and related Security Interests, provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in form and substance reasonably satisfactory to Lender. Lender also hereby agrees that it will release from the effect of the Security Interest granted herein, and in the Ida Building One Deed of Trust and from the effect of any accompanying UCC Financing Statements, Units in Ida Building One which are sold by Borrower to Purchasers upon (a) the payment to Lender of a release fee (the "Ida Building One Release Fee") equal to $1,650.00 per Unit, (b) the payment of the Ida Building One Incentive Fee (as provided in PARAGRAPH 7.13 below) in the amount of $20.00 per Unit until such time as Borrower has repaid the Ida Building One Note in full, and thereafter in the amount of $1,650.00 per Unit until such time as Borrower has paid to Lender a total Ida Building One Incentive Fee as to Ida Building One of $48,960.00, all as provided in PARAGRAPH 7.13 below, (c) if applicable, the payment to Lender of the Towers Note Principal Reduction Fee, and (d) the satisfaction of the Release Conditions. Upon the release of a Unit from the Ida Building One Deed of Trust, such release shall also constitute a release from the lien of the Ida Building One Deed of Trust, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that, notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute -36- 37 Receivables Collateral. Payments of interest due under the Ida Building One Note shall not be credited against any Ida Building One Release Fees. 3.13 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused to be executed and recorded for the benefit of Lender the Ida Building Two Deed of Trust. At such time as all principal, interest and other sums payable under the Ida Building Two Note have been paid in full, Lender shall, upon the request of Borrower, release and terminate the Ida Building Two Deed of Trust and any accompanying UCC Financing Statements and related Security Interests, provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in form and substance reasonably satisfactory to Lender. Lender also hereby agrees that it will release from the effect of the Security Interests granted herein and in the Ida Building Two Deed of Trust, and from the effect of any accompanying UCC Financing Statements, Units in Ida Building Two which are sold by Borrower to Purchasers upon (a) the payment to Lender of a release fee (the "Ida Building Two Release Fee") equal to $2,550.00 per Unit, (b) the payment of the Ida Building Two Incentive Fee (as provided in PARAGRAPH 7.14 hereof) in the amount of $20.00 per Unit until such time as Borrower has repaid the Ida Building Two Note in full, and thereafter in the amount of $2,550.00 per Unit until such time as Borrower has paid to Lender a total Ida Building Two Incentive Fee as to Ida Building Two of $18,360.00, all as provided in PARAGRAPH 7.14 hereof, (c) if applicable, the payment to Lender of the Towers Note Principal Reduction Fee, and (d) the satisfaction of the Release Conditions. Upon the release of a Unit from the Ida Building Two Deed of Trust, such release shall also constitute a release from the lien of the Ida Building Two Deed of Trust, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that, notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral. Payments of interest due under the Ida Building Two Note shall not be credited against any Ida Building Two Release Fees. 3.14 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused to be executed and recorded for the benefit of Lender the Ida Building Addition Deed of Trust. At such time as all principal, interest and other sums payable under the Ida Building Addition Note have been paid in full, Lender shall, upon the request of Borrower, release and terminate the Ida Building Addition Deed of Trust and any accompanying UCC Financing Statements and related Security Interests provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such -37- 38 instruments shall be in form and substance reasonably satisfactory to Lender. Lender also hereby agrees that it will release from the effect of the Security Interests granted herein and in the Ida Building Addition Deed of Trust, and from the effect of any accompanying UCC Financing Statements, Units in the Ida Building Addition which are sold by Borrower to Purchasers upon (a) the payment to Lender of a release fee (the "Ida Building Addition Release Fee") equal to $1,650.00 per Unit, (b) the payment of the Ida Building Addition Incentive Fee (as provided in PARAGRAPH 7.16 below) in the amount of $20.00 per Unit until such time as Borrower has repaid the Ida Building Addition Note in full, and thereafter in the amount of $1,650.00 per Unit until such time as Borrower has paid to Lender a total Ida Building Addition Incentive Fee as to Ida Building Addition of $24,480.00, all as provided in PARAGRAPH 7.16 below, (c) if applicable, the payment to Lender of the Towers Note Principal Reduction Fee, and (d) the satisfaction of the Release Conditions. Upon the release of a Unit from the Ida Building Addition Deed of Trust, such release shall also constitute a release from the lien of the Ida Building Addition Deed of Trust, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that, notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral. Payments of interest due under the Ida Building Addition Note shall not be credited against any Ida Building Addition Release Fees. 3.15 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused to be executed and recorded for the benefit of Lender the Winnick Building Addition Deed of Trust. At such time as all principal, interest and other sums payable under the Winnick Building Addition Note have been paid in full, Lender shall, upon the request of Borrower, release and terminate the Winnick Building Addition Deed of Trust and any accompanying UCC Financing Statements and related Security Interests provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in form and substance reasonably satisfactory to Lender. Lender also hereby agrees that it will release from the effect of the Security Interests granted herein and in the Winnick Building Addition Deed of Trust, and from the effect of any UCC Financing Statements, Units in the Winnick Building Addition which are sold by Borrower to Purchasers upon (a) the payment to Lender of a release fee (the "Winnick Building Addition Release Fee") equal to $2,500.00 per Unit, (b) the payment of the Winnick Building Addition Incentive Fee (as provided in PARAGRAPH 7.17 below) in the amount of $20.00 per Unit until such time as Borrower has repaid the Winnick Building Addition Note in full, and thereafter in the amount of $2,500.00 per Unit until such time as Borrower has paid to Lender a total Winnick Building Addition Incentive Fee as to Winnick Building Addition of $22,440.00, all as provided in PARAGRAPH 7.17 below, (c) if applicable, the payment to Lender of the Towers Note Principal Reduction Fee, and (d) the satisfaction of the Release Conditions. Upon the -38- 39 release of a Unit from the Winnick Building Addition Deed of Trust, such release shall also constitute a release from the lien of the Winnick Building Addition Deed of Trust, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that, notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral. Payments of interest due under the Winnick Building Addition Note shall not be credited against any Winnick Building Addition Release Fees. 3.16 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused to be executed and recorded for the benefit of Lender, or will cause to be recorded as soon as possible after the Closing Date, the Second Winnick Building Addition Deed of Trust. At such time as all principal, interest and other sums payable under the Second Winnick Building Addition Note have been paid in full, Lender shall, upon the request of Borrower, release and terminate the Second Winnick Building Addition Deed of Trust and any accompanying UCC Financing Statements and related Security Interests provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in form and substance reasonably satisfactory to Lender. Lender also hereby agrees that it will release from the effect of the Security Interests granted herein and in the Second Winnick Building Addition Deed of Trust, and from the effect of any accompanying UCC Financing Statements, Units in the Second Winnick Building Addition which are sold by Borrower to Purchasers upon (a) the payment to Lender of a release fee (the "Second Winnick Building Addition Release Fee") equal to $2,645.00 per Unit, (b) the payment of the Second Winnick Building Addition Incentive Fee (as provided in PARAGRAPH 7.18 below) in the amount of $20.00 per Unit until such time as Borrower has repaid the Second Winnick Building Addition Note in full, and thereafter in the amount of $2,645.00 per Unit until such time as Borrower has paid to Lender a total Second Winnick Building Addition Incentive Fee as to Second Winnick Building Addition of $18,360.00, all as provided in PARAGRAPH 7.18 below, (c) if applicable, the payment to Lender of the Towers Note Principal Reduction Fee, and (d) the satisfaction of the Release Conditions. Upon the release of a Unit from the Second Winnick Building Addition Deed of Trust, such release shall also constitute a release from the lien of the Second Winnick Building Addition Deed of Trust, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that, notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral. Payments of interest due under the Second Winnick Building Addition Note shall not be credited against any Second Winnick Building Addition Release Fees. -39- 40 3.17 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower will cause to be executed and recorded for the benefit of Lender a Mortgage with respect to each Additional Project under which Advances of the Mortgage Loan Facility are made by Lender to Borrower. At such time as all principal, interest and other sums payable under a Project Note have been paid in full, Lender shall, upon the request of Borrower, release and terminate the Mortgage recorded with respect to such Project and any accompanying UCC Financing Statements and related Security Interests, provided that there does not then exist an Event of Default or any act or event which with notice or passage of time, or both, would constitute an Event of Default. All instruments effecting such release and termination shall be prepared by Borrower and submitted to Lender unless Lender otherwise specifies in its sole discretion. Such instruments shall be in form and substance reasonably satisfactory to Lender. Lender also hereby agrees that it will release from the effect of the Security Interests granted herein, and from the effect of any such Mortgage or accompanying UCC Financing Statements filed and recorded with respect thereto, Units in the Project which are sold by Borrower to Purchasers upon (a) the payment to Lender of a release fee (the "Project Release Fee") equal to a specific amount per Unit which is agreed to by Lender and Borrower at the time of the initial Advance under the Mortgage Loan Facility with respect to such Project, (b) the payment of the Project Incentive Fee (as provided in PARAGRAPH 7.19 below) in an amount equal to $20.00 per Unit in such Project until such time as Borrower has repaid the respective Project Note in full, and thereafter in the amount of the Project Release Fee per Unit until such time as the Borrower has paid to Lender a total Project Incentive Fee as to the Project equal in amount to $20.00 multiplied by the number of Units in such Project, and (c) the satisfaction of the Release Conditions. Upon the release of a Unit from the Mortgage recorded with respect to such Project, such release shall also constitute a release from the lien of such Mortgage, and from the lien of Lender's Security Interest, of any Purchaser Notes or Purchaser Mortgages subsequently arising from the sale of such Unit; provided, however, that, notwithstanding the foregoing, such Purchaser Notes and Purchaser Mortgages shall continue to be subject to Lender's Security Interest to the extent that such Purchaser Notes or Purchaser Mortgages constitute Receivables Collateral. The Project Release Fee applicable to each Project with respect to which Advances under the Mortgage Loan Facility are made shall be set forth in the Mortgage to be recorded with respect to such Project. Payments of interest due under the Project Note shall not be credited against any Project Release Fees. 3.18 No release of a Unit or release or satisfaction of any Mortgage provided by Borrower as additional security for the Loan shall impair or affect Lender's remaining Security Interests or any term or provision of this Agreement. -40- 41 ARTICLE IV ADDITIONAL SECURITY 4.1 As additional security for Borrower's Performance of all Obligations owed to Lender under the Documents, Borrower has caused the Guarantee to be executed and delivered to Lender. ARTICLE V ADVANCES 5.1 Lender shall have no obligation to make any Advance hereunder until such time as all of the conditions precedent set forth in the following paragraphs and elsewhere in this Agreement have been satisfied, at Borrower's sole expense, as determined by Lender in its sole discretion. 5.2 Borrower shall have delivered to Lender the following in form and substance satisfactory to Lender, and when required, in recordable form: 5.2.1 RECEIVABLES ADVANCES. With respect to Advances of the Receivables Loan, Borrower shall have delivered, or caused to be delivered, to Lender the following: (a) At least five (5) business days prior to the date of such Advance, copies of the Eligible Receivables against which such Advance is to be made, including, without limitation, Contracts, Purchaser Notes, Purchaser Mortgages, Title Policies insuring such Purchaser Mortgages, and, upon the request of Lender, all other documents and exhibits, including, without limitation, any advertising materials, which have been or are being used by Borrower in connection with the Project or the sale of Eligible Receivables therein; (b) The items described in EXHIBIT "5.2.1" attached hereto; and (c) Such other items as Lender requests which are reasonably necessary to evaluate the request for the Advance and the satisfaction of the conditions precedent thereto. 5.2.2 ADVANCES UNDER MORTGAGE LOAN FACILITY. With respect to Advances under the Mortgage Loan Facility, Borrower shall have delivered, or caused to be delivered, to Lender the following: -41- 42 (a) The items described in EXHIBIT "5.2.2" attached hereto; (b) The Mortgage Loan Fee payable with respect to the Advance; and (c) Such other items as Lender requests which are reasonably necessary to evaluate the request for the Advance under the Mortgage Loan Facility and the satisfaction of the conditions precedent thereto. 5.3 No material adverse change shall have occurred in any portion of the Project or in Borrower's or Guarantor's business or financial condition since the date of the latest financial and operating statements given to Lender by or on behalf of Borrower or Guarantor, except as previously disclosed to and permitted, in writing, by Lender. 5.4 There shall have been no materially adverse changes in the warranties and representations made by Borrower and/or Guarantor in the Documents, except as previously disclosed to and permitted, in writing, by Lender. 5.5 Neither an Event of Default nor an act or event which after notice and/or lapse of time or both would constitute an Event of Default shall have occurred and be continuing. 5.6 The interest rate applicable to the Advance (before giving effect to any savings clause) will not exceed the maximum contract rate permitted by the Applicable Usury Law. 5.7 All indebtedness (subject to PARAGRAPH 8.24 hereof, other than indebtedness for reasonable salaries in the normal course of business) owed by Borrower to any shareholder or affiliate of Borrower shall be, upon the occurrence and continuation of an Event of Default, subordinated to indebtedness owed by Borrower to Lender in a form satisfactory to Lender. 5.8 Advances shall be requested in writing on Lender's standard "Request for Advance and Certification" form by Borrower by those officers or agents of Borrower named in authorizing resolutions of Borrower from time to time delivered to Lender and which are in form and substance satisfactory to Lender. 5.9 Advances may be disbursed by checks or drafts payable to Borrower; after Borrower's written request, by wire transfer to Borrower's account, as designated in writing by Borrower from time to time; or, at the option of Lender after Borrower's written -42- 43 request, to others, either severally or jointly with Borrower, for the credit or benefit of Borrower. 5.10 Lender shall have no obligation to make any Advance unless at least two of the following Persons, or, in the event of the death, incapacity, retirement, or requested disassociation for just cause of any of such Persons, any substitute therefor reasonably satisfactory to Lender, shall remain engaged in the active management of Borrower on a nonexclusive nonfull-time basis and shall perform duties substantially similar to those presently performed by such Persons in their present executive offices: Mr. Jerome J. Cohen, Mr. Herbert B. Hirsch and Mr. Don A. Mayerson. 5.11 Although Lender shall have no obligation to make an Advance unless and until all of the conditions thereto set forth herein have been satisfied, Lender may, at its sole discretion, make Advances prior to that time without waiving or releasing any of the Obligations, but Borrower shall continue to be required to strictly perform all such Obligations. 5.12 Lender shall have no obligation to make any Advance against any Eligible Receivables arising from any Additional Project or the sale of any Units or Lots therein until: (a) Borrower shall have delivered to Lender the following loan documents duly executed in form and substance satisfactory to Lender, and when required such loan documents shall be in recordable form: (i) A favorable opinion from counsel to the Borrower, in form and substance satisfactory to Lender, as to such matters as Lender may reasonably require; and (ii) A certificate from the President, a Vice President or the Treasurer of Borrower, in form satisfactory to Lender, as to such matters as Lender may reasonably require. (b) Borrower shall have delivered, or caused to be delivered, to Lender the following additional items: (i) Maps or surveys of the Additional Project certified by a licensed engineer or surveyor, acceptable to Lender, showing the dimensions of the Additional Project, together with a certificate from the President, a Vice President or the Treasurer of Borrower, satisfactory to Lender, that the Additional Project complies with all applicable laws, rules, regulations, and public and private restrictions affecting the use of the Additional Project; -43- 44 (ii) Evidence that the Additional Project is not located within a special flood hazard area or evidence, satisfactory to Lender, that the Additional Project is insured, upon such terms and in such amounts as shall be satisfactory to Lender, against risks or physical damage caused by flooding; (iii) Copies of any trust agreement relating to the Additional Project, which shall be in form and substance satisfactory to Lender; (iv) An Environmental Certificate with Representations, Covenants and Warranties, with respect to the Additional Project in form and substance acceptable to Lender. (c) Lender shall have made a site inspection of the Additional Project and the Additional Project shall not have been determined by Lender to be unsatisfactory. (d) All sales and promotional documents and project documents relating to the Additional Project and the related Receivables Collateral shall have been submitted to Lender and shall not have been determined by Lender to be unsatisfactory. (e) Lender shall have given Borrower written notice confirming the satisfaction of the conditions set forth in SUBPARAGRAPHS (c) AND (d) of this PARAGRAPH 5.12. 5.13 If Lender is requested to accept an assignment from Borrower of any Receivables Collateral arising from the sale of one or more Units or Lots in an Additional Project and the Receivables Collateral was originated as a result of any sales by an Additional Project Developer other than Borrower, then: (a) All covenants, conditions, restrictions and other terms of this Agreement which refer to the Borrower, other than provisions providing for or requiring payment of money to Lender, shall be deemed to include reference to the Additional Project Developer to the extent such covenants, conditions, restrictions and other terms concern or relate to the sale of the Units or Lots which generated such Receivables Collateral, the performance of obligations of the seller to Purchasers of such Units or Lots and/or the preservation, protection, collection, verification and/or value of such Receivables Collateral; (b) Borrower shall cause the Additional Project Developer which originated the Receivables Collateral to perform, observe and comply with all covenants, conditions, restrictions and other terms of this Agreement which concern or relate to such Receivables Collateral and/or the Additional Project in question; and -44- 45 (c) Borrower shall, upon written request of Lender and as may be deemed necessary or desirable by Lender on a case-by-case basis, cause the Additional Project Developer to make and enter into any direct undertakings with Lender that Lender may deem necessary or appropriate to assure the preservation, protection, collection, verification and/or value of such Receivables Collateral. None of the provisions of this PARAGRAPH 5.13 or any direct undertaking to Lender contemplated by subparagraph (c) above is intended or shall be construed to modify, waive, release or otherwise abrogate any provision of this Agreement or of the other Documents which imposes any obligation or liability on Borrower. ARTICLE VI HAZARDOUS WASTES 6.1 Neither the Borrower nor, to the best knowledge of the Borrower, any other Person has ever caused or permitted any Hazardous Material to be placed, held, located or disposed of on, under or at any Project or any part thereof or from any Project in violation of law into the atmosphere or any watercourse, body of water, or wetlands or any other real property legally or beneficially owned (or any interest or estate in which is owned) by the Borrower (including, without limitation, any property owned by a land trust the beneficial interest in which is owned, in whole or in part, by the Borrower), and neither any Project, any part thereof, nor any other real property legally or beneficially owned (or any interest or estate in which is owned) by the Borrower (including, without limitation, any property owned by a land trust the beneficial interest in which is owned, in whole or in part, by the Borrower) has ever been used (whether by the Borrower or, to the best knowledge of the Borrower, by any other Person) as a treatment, storage or disposal (whether permanent or temporary) site for any Hazardous Material. For purposes of this Agreement, "Hazardous Material" means and includes any hazardous substance or any pollutant or contaminant defined as such in (or for purposes of) the Comprehensive Environmental Response, Compensation, and Liability Act, any so-called "Superfund" or "Superlien" law, the Toxic Substances Control Act, or any other Federal, state or local statute, law, ordinance, code, rule, regulation, order or decree, regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect, asbestos or any substance or compound containing asbestos, or any other hazardous, toxic or dangerous, waste, substance or material. 6.2 Borrower will not place, hold, locate or dispose of on, under or at the Project or any part thereof or from the Project into the atmosphere or any watercourse, body of water or wetlands or any other real property legally or beneficially owned (or any interest or estate in which is owned) by the Borrower (including, without limitation, any property owned by a land trust the beneficial interest in which is owned, in whole or in part, by the -45- 46 Borrower) any Hazardous Material in violation of law, nor will Borrower permit or cause any other Person to do any of the aforesaid. 6.3 Borrower hereby indemnifies the Lender and agrees to hold the Lender harmless from and against any and all losses, liabilities, damages, injuries, costs, expenses and claims or any and every kind whatsoever, including reasonable attorneys' fees, paid, incurred or suffered by, or asserted against, the Lender for, with respect to, or as a direct or indirect result of, the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or release from, any Project or from any Project into or upon the land, the atmosphere, or any watercourse, body of water or wetland of any Hazardous Material (including, without limitation, any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under the Comprehensive Environmental Response, Compensation and Liability Act, any so-called "Superfund" or "Superlien" law, or any other Federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Material). ARTICLE VII NOTES: MAINTENANCE OF BORROWING BASE; PAYMENTS; SERVICING AND COLLECTION 7.1 The Receivables Loan shall be evidenced by the Receivables Note and shall be repaid in immediately available funds according to the terms thereof and such provisions of this Agreement as are applicable. Advances made under the Mortgage Loan Facility with respect to any Additional Project shall be evidenced by a separate Project Note in a form acceptable to Lender, executed and delivered simultaneously with the initial Advance under the Mortgage Loan Facility with respect to an approved Additional Project and payable to Lender upon the terms and conditions contained therein and in this Agreement, as applicable. The Advances made under the Mortgage Loan Facility with respect to Ida Building One, Ida Building Two, Ida Building Addition, Winnick Building Addition, Towers and the Second Winnick Building Addition shall continue to be evidenced by the Ida Building One Note, the Ida Building Two Note, the Ida Building Addition Note, the Winnick Building Addition Note, the Towers Note and the Second Winnick Building Addition Note, respectively. The Obligations of Borrower to Lender under the Aloha Bay Note shall continue to be evidenced and governed by the Aloha Bay Note, and the Obligations of Borrower under the Office Note shall continue to be evidenced and governed by the Office Note. 7.2 If at any time the aggregate outstanding principal amount of the Receivables Loan shall exceed the Borrowing Base, for any reason whatsoever (including, without limitation, the termination or modification of an existing Contract or Instrument with respect to a certain Lot or Unit, and the simultaneous entering into of a new or revised -46- 47 Contract or Instrument for the purchase of a less expensive Lot or Unit), Borrower shall immediately notify Lender of such fact and make a mandatory prepayment, without premium or penalty, in the amount necessary (including accrued interest) to reduce the outstanding principal amount of the Receivables Loan to the existing Borrowing Base. If a mandatory prepayment is required, Borrower shall have the right, in lieu of payment to eliminate all, or any part, of the excess borrowing and thereby avoid the obligation to make a mandatory prepayment by (a) promptly notifying Lender in writing of Debtor's intention to assign new Eligible Receivables so as to increase the Borrowing Base to the required amount and (b) promptly effecting the assignment of the new Eligible Receivables, but in no event later than five (5) business days after the Borrowing Base deficiency occurred. Such assignment shall be made in compliance with the conditions precedent stated in ARTICLE V hereof. Any mandatory prepayments to be made by Debtor pursuant to this PARAGRAPH 7.2 will not affect any other Obligation of Borrower arising under the other provisions of this Agreement or the Receivables Note. 7.3 Provided (a) Borrower pays all sums then due and payable to Lender in connection with the Loan, and (b) Borrower has given Lender at least thirty (30) days prior written notice of the prepayment and paid to Lender at the time of prepayment a prepayment premium equal to a percentage, as set forth in the schedule below, of the then unpaid principal balance of the Loan, Borrower shall have the option to prepay the Loan in full, but not in part. The prepayment premium schedule is as follows: MONTHS PREMIUM 1 - 18 3% 19 - 36 2% 37 - 54 1% 55 or thereafter 0% If there should occur a casualty to or condemnation of any Project or an acceleration of maturity following an Event of Default and such occurrence results in prepayment of the Loan, a prepayment premium will be required in the amount specified above. Notwithstanding anything contained herein to the contrary, there shall be no prepayment premium if prepayment is occasioned solely by reason of: (i) a payment or prepayment of a Contract or Instrument by the obligor(s) thereunder; (ii) a reduction of the outstanding principal balance of the Loan with the proceeds of a sale of any Contract or Instrument to Lender; or (iii) a mandatory partial prepayment made in order for the Receivables Loan to be in conformance with the Borrowing Base. 7.3.1 Notwithstanding anything contained in this Agreement to the contrary, and except as may be specifically set forth in any Project Notes, the Aloha Bay Note or the Office Note, Borrower shall have the right to make one or more partial prepayments of the Loan from time to time during the Receivables Borrowing -47- 48 Term so long as: (a) each such partial prepayment, equals or exceeds the minimum sum of $2,000,000.00; (b) the aggregate outstanding principal balance of the Loan is not reduced to an amount less than $35,000,000.00 as a result thereof; (c) Borrower pays to Lender, at the time of such prepayment, a prepayment premium equal to one percent (1%) of the amount of the partial prepayment; and (d) Borrower has given Lender at least thirty (30) days prior written notice of each such prepayment; provided, however, that any payments or prepayments referred to in items (i), (ii) and (iii) of PARAGRAPH 7.3 hereof shall not be subject to any prepayment premium. 7.3.2 For purposes of determining the month in which any full prepayment occurs pursuant to PARAGRAPH 7.3 hereof, the elapsed time of the Loan shall be measured from the earlier to occur of: (a) the date of the first Advance under the Receivables Loan which is made after the Closing Date, or (b) May 7, 1997. In the event Lender and Borrower agree to renew or extend the Borrowing Term under this Agreement subsequent to the date of this Agreement, the elapsed time of the Loan shall be measured from the date of the first Advance to Borrower on or after the date of the most recent such renewal or extension of the Borrowing Term for the purposes of determining the year in which any full prepayment occurs pursuant to PARAGRAPH 7.3 hereof. 7.4 The Collection Agent, as agent for Lender, shall collect the payments on the Eligible Receivables used in making the Borrowing Base computations or otherwise constituting part of the Receivables Collateral and remit them to Lender according to the terms of the Agency Agreement; and Borrower will immediately forward all such payments received by it to the Collection Agent for Lender. 7.5 Notwithstanding the terms of the Agency Agreement, Borrower's obligation to make the payments called for in the Documents will not be deemed satisfied nor will Borrower be credited for such payments until Lender actually receives such payments from Collection Agent in New York, New York, or such other place as Lender shall designate from time to time. 7.6 For the purpose of determining the adequacy of such payments, Borrower will furnish to Lender, at Borrower's sole cost and expense, no later than the 15th calendar day of each month commencing with the full calendar month following the date hereof, a report meeting the following requirements: (i) shows as of the end of the prior month with respect to the Receivables Collateral which is used in making Borrowing Base computations or otherwise constitutes part of the Receivables Collateral: -48- 49 (A) all payments received during the prior month on the Receivables Collateral, allocated as between principal, interest, late charges, taxes, and the like, (B) the closing balance as of the end of the prior month on each of the Receivables Collateral, (C) The present value of the cash flow (if required by Lender) discounted at a rate equal to the greater of: (1) Prime plus two percent (2%); or (2) twelve percent (12%) per annum (for purposes of this clause, "Prime" shall have the same meaning as defined in the Receivables Note), and (D) extensions, refinances, prepayments, and other similar adjustments; (ii) itemizes the Receivables Collateral which is used in making Borrowing Base computations or otherwise constitutes part of the Receivables Collateral to show delinquencies of 30, 60, 90 and in excess of 90 days; and (iii) reconciles the prior month's aggregate ending balance of Receivables Collateral to the current month's aggregate ending balance of Receivables Collateral, reflecting all changes to the principal balance payable under the Receivables Collateral (i.e., new accounts funded against or used as replacements of ineligible Receivables Collateral, principal payments and Receivables Collateral released due to cash-outs or replacements). 7.7 On the basis of such reports, Lender will compute the amount, if any, which was due and payable by Borrower on the last day of the preceding month and will notify Borrower as soon as possible of any amount due. 7.8 If such reports are not timely received, Lender may estimate the amount which was due and payable; and, in such event, Borrower will pay upon demand the amount estimated by Lender to be due and payable. 7.9 If payment is made on the basis of Lender's estimate and thereafter reports required by this paragraph are received by Lender, the estimated payment amount shall be adjusted by an additional payment or a refund to the correct amount, as the reports may indicate; such additional amount to be paid by Borrower upon demand and such refund to be made by Lender within five (5) business days after receipt by Lender of a written request therefor by Borrower. In addition, at each calendar quarter, Borrower will deliver to Lender a current list of the names, addresses and phone numbers of the Purchasers related to Eligible Receivables added or deleted since the last quarter. -49- 50 7.10 Lender shall have the exclusive right at any time and from time to time in its sole discretion to substitute a successor or successors to any Collection Agent acting under the Agency Agreement. 7.11 Subject to Lender's rights upon the occurrence of an Event of Default, all proceeds from the Receivables Collateral (except payments which are identified by Purchasers as tax or maintenance and other assessment payments and are required to be so treated by Borrower) which are received during the Term hereof shall be applied FIRST to the payment of all costs, fees and expenses which Borrower is required to pay by the Documents, SECOND to accrued and unpaid interest due on the Receivables Note, THIRD to the unpaid principal balance of the Receivables Note, AND THEN to the other Obligations in such order and manner as Lender may determine; provided, however, that so long as no Event of Default has occurred and is continuing, such proceeds shall not be applied to any amounts of principal outstanding under any Project Note, the Aloha Bay Note or the Office Note. Except as applied for the benefit of Borrower pursuant to the foregoing, unless and until all such Obligations have been Performed, Borrower shall have no right to any portion of the proceeds of the Receivables Collateral (except payments which are identified by Purchaser as tax or maintenance or other assessment payments and are required to be so treated by Borrower). 7.12 To the extent not previously paid in accordance with PARAGRAPH 7.11 hereof, Borrower will pay, or cause to be paid, when due all payments required to be made pursuant to the Receivables Note or the other Documents notwithstanding the fact that the future proceeds from the Receivables Collateral shall be sufficient for that purpose; and all amounts payable by Borrower under the Receivables Note, or the other Documents, shall be paid without notice (except as otherwise expressly provided therein), demand, counterclaim, set-off deduction, recoupment or defense, and without abatement, suspension, deferment, diminution or pro-ration by reason of any circumstance or occurrence whatsoever, Borrower's obligation to make such payments being absolute and unconditional. 7.13 As additional consideration to Lender, Borrower shall pay to Lender an Ida Building One Incentive Fee (the "Ida Building One Incentive Fee") equal to $48,960.00 (less any amounts received by Lender and applied toward payment of such fee prior to the date of this Agreement) with respect to the Units sold in Ida Building One or released from the Ida Building One Deed of Trust. The Ida Building One Incentive Fee shall be paid in installments of $20.00 per Unit sold or released in Ida Building One until such time as the Borrower has repaid the Ida Building One Note in full. Thereafter, the Ida Building One Incentive Fee shall be paid in installments of $1,650.00 per Unit sold or released in Ida Building One until the entire Ida Building One Incentive Fee is paid in full. Payments of the Ida Building One Incentive Fee, in installments of $20.00 per Unit, shall be made together with Ida Building One Release Fees described in PARAGRAPH 3.12 above, until the Ida Building One Note is repaid in full; thereafter, payments of the Ida Building One Incentive Fee, in installments of $1,650.00 per Unit, shall be made at the earlier of the conveyance to a -50- 51 Purchaser of each sold Unit in Ida Building One or the release of such Unit from the Ida Building One Deed of Trust. The Ida Building One Incentive Fee shall be in addition to the principal and interest payments due under the Ida Building One Note. The Ida Building One Incentive Fee may be prepaid in whole or in part at any time. The Ida Building One Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Ida Building One Deed of Trust. 7.14 As additional consideration to Lender, Borrower shall pay to Lender an Ida Building Two Incentive Fee (the "Ida Building Two Incentive Fee"), equal to $18,360.00 (less any amounts received by Lender and applied toward payment of such fee prior to the date of this Agreement) with respect to the Units sold in Ida Building Two or released from the Ida Building Two Deed of Trust. The Ida Building Two Incentive Fee shall be paid in installments of $20.00 per Unit sold or released in Ida Building Two until such time as the Ida Building Two Note is paid in full. Thereafter, the Ida Building Two Incentive Fee shall be paid in installments of $2,550.00 per Unit sold or released in Ida Building Two until the entire Ida Building Two Incentive Fee Two is paid in full. Payments of the Ida Building Two Incentive Fee, in installments of $20.00 per Unit, shall be made together with Ida Building Two Release Fees described in PARAGRAPH 3.13 above, until the Ida Building Two Note is repaid in full; thereafter, payments of the Ida Building Two Incentive Fee, in installments of $2,550.00 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in Ida Building Two or the release of such Unit from the Ida Building Two Deed of Trust. The Ida Building Two Incentive Fee described herein shall be in addition to the principal and interest payments due under the Ida Building Two Note. The Ida Building Two Incentive Fee may be prepaid in whole or in part at any time. The Ida Building Two Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Ida Building Two Deed of Trust. 7.15 As additional consideration to Lender, Borrower shall pay to Lender an Aloha Bay Incentive Fee (the "Aloha Bay Incentive Fee"), equal to $32,640.00 (less any amounts received by Lender and applied toward payment of such fee prior to the date of this Agreement) with respect to the Units sold in Aloha Bay or released from the Aloha Bay Mortgage. The Aloha Bay Incentive Fee shall be paid in installments of $20.00 per Unit sold or released in Aloha Bay until such time as the Borrower has repaid the Aloha Bay Note in full. Thereafter, the Aloha Bay Incentive Fee shall be paid in installments of $2,900.00 per Unit sold or released in Aloha Bay until the entire Aloha Bay Incentive Fee is paid in full. Payments of the Aloha Bay Incentive Fee, in installments of $20.00 per Unit, shall be made together with Aloha Bay Release Fees described in PARAGRAPH 3.9 above, until the Aloha Bay Note is repaid in full; thereafter, payments of the Aloha Bay Incentive Fee, in installments of $2,900.00 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in Aloha Bay or the release of such Unit from the Aloha Bay Mortgage. The Aloha Bay Incentive Fee described herein shall be in addition to the principal and interest payments due under the Aloha Bay Note. The Aloha Bay Incentive Fee may be prepaid in whole or in part at any time. The Aloha Bay Incentive Fee payable pursuant to -51- 52 this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Aloha Bay Mortgage. 7.16 As additional consideration to Lender, Borrower shall pay to Lender an Ida Building Addition Incentive Fee (the "Ida Building Addition Incentive Fee"), equal to $24,480.00 (less any amounts received by Lender and applied toward payment of such fee prior to the date of this Agreement) with respect to the Units sold in the Ida Building Addition or released from the Ida Building Addition Deed of Trust. The Ida Building Addition Incentive Fee shall be paid in installments of $20.00 per Unit sold or released in the Ida Building Addition until such time as the Ida Building Addition Note is paid in full. Thereafter, the Ida Building Addition Incentive Fee shall be paid in installments of $1,650.00 per Unit sold or released in the Ida Building Addition until the entire Ida Building Addition Incentive Fee Addition is paid in full. Payments of the Ida Building Addition Incentive Fee, in installments of $20.00 per Unit, shall be made together with Ida Building Addition Release Fees described in PARAGRAPH 3.14 above, until the Ida Building Addition Note is repaid in full; thereafter, payments of the Ida Building Addition Incentive Fee, in installments of $1,650.00 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in the Ida Building Addition or the release of such Unit from the Ida Building Addition Deed of Trust. The Ida Building Addition Incentive Fee described herein shall be in addition to the principal and interest payments due under the Ida Building Addition Note. The Ida Building Addition Incentive Fee may be prepaid in whole or in part at any time. The Ida Building Addition Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Ida Building Addition Deed of Trust. 7.17 As additional consideration to Lender, Borrower shall pay to Lender a Winnick Building Addition Incentive Fee (the "Winnick Building Addition Incentive Fee"), equal to $22,440.00 (less any amounts received by Lender and applied toward payment of such fee prior to the date of this Agreement) with respect to the Units sold in Winnick Building Addition or released from the Winnick Building Addition Deed of Trust. The Winnick Building Addition Incentive Fee shall be paid in installments of $20.00 per Unit sold or released in the Winnick Building Addition until such time as the Borrower has repaid the Winnick Building Addition Note in full. Thereafter, the Winnick Building Addition Incentive Fee shall be paid in installments of $2,500.00 per Unit sold or released in the Winnick Building Addition until the entire Winnick Building Addition Incentive Fee is paid in full. Payments of the Winnick Building Addition Incentive Fee, in installments of $20.00 per Unit, shall be made together with Winnick Building Addition Release Fees described in PARAGRAPH 3.15 above, until the Winnick Building Addition Note is repaid in full; thereafter, payments of the Winnick Building Addition Incentive Fee, in installments of $2,500.00 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in the Winnick Building Addition or the release of such Unit from the Winnick Building Addition Deed of Trust. The Winnick Building Addition Incentive Fee described herein shall be in addition to the principal and interest payments due under the Winnick Building Addition Note. The Winnick Building Addition Incentive Fee may be prepaid in whole or in part at -52- 53 any time. The Winnick Building Addition Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Winnick Building Addition Deed of Trust. 7.18 As additional consideration to Lender, Borrower shall pay to Lender a Second Winnick Building Addition Incentive Fee (the "Second Winnick Building Addition Incentive Fee"), equal to $18,360.00 with respect to the Units sold in the Second Winnick Building Addition or released from the Second Winnick Building Addition Deed of Trust. The Second Winnick Building Addition Incentive Fee shall be paid in installments of $20.00 per Unit sold or released in the Second Winnick Building Addition until such time as the Borrower has repaid the Second Winnick Building Addition Note in full. Thereafter, the Second Winnick Building Addition Incentive Fee shall be paid in installments of $2,645.00 per Unit sold or released in the Second Winnick Building Addition until the entire Second Winnick Building Addition Incentive Fee is paid in full. Payments of the Second Winnick Building Addition Incentive Fee, in installments of $20.00 per Unit, shall be made together with the Second Winnick Building Addition Release Fees described in PARAGRAPH 3.16 above until the Second Winnick Building Addition Note is repaid in full; thereafter, payments of the Second Winnick Building Addition Incentive Fee, in installments of $2,645.00 per Unit, shall be made at the earlier of the conveyance to a Purchaser of each sold Unit in the Second Winnick Building Addition or the release of such Unit from the Second Winnick Building Addition Deed of Trust. The Second Winnick Building Addition Incentive Fee described herein shall be in addition to the principal and interest payments due under the Second Winnick Building Addition Note. The Second Winnick Building Addition Incentive Fee may be prepaid in whole or in part at any time. The Second Winnick Building Addition Incentive Fee payable pursuant to this subparagraph is the same Incentive Fee payable under Paragraph 6.1 of the Second Winnick Building Addition Deed of Trust. 7.19 As additional consideration to Lender, Borrower shall pay to Lender a Project incentive fee (the "Project Incentive Fee") with respect to each Additional Project for which Advances under the Mortgage Loan Facility are made by Lender to Borrower, which Project Incentive Fee shall be in an amount equal to $20.00 multiplied by the number of Units contained within such Additional Project. The Project Incentive Fee shall be paid in installments of $20.00 per Unit sold or released in the Additional Project until such time as the Borrower has repaid the Project Note with respect to such Additional Project in full. Thereafter, the Project Incentive Fee payable with respect to such Additional Project shall be paid in installments equal to the amount of the Project Release Fee payable with respect to such Additional Project per Unit sold or released until the entire Project Incentive Fee payable with respect to such Additional Project is paid in full. Payments of the Project Incentive Fee, in installments of $20.00 per Unit, shall be made together with the Project Release Fees described in PARAGRAPH 3.17 above until the Project Note executed and delivered with respect to such Additional Project is repaid in full; thereafter, payments of the Project Incentive Fee with respect to such Additional Project, in installments equal to the Project Release Fee applicable thereto, shall be made at the earlier of the conveyance to a -53- 54 Purchaser of each sold Unit in the Additional Project or the release of such Unit from the Mortgage recorded with respect to such Additional Project. The Project Incentive Fee described herein shall be in addition to the principal and interest payments due under the Project Note executed and delivered by Borrower with respect to such Additional Project. The Project Incentive Fee may be prepaid in whole or in part at any time. ARTICLE VIII BORROWER'S REPRESENTATIONS, WARRANTIES AND COVENANTS 8.1 General Representations and Warranties of Borrower: Borrower warrants and represents the truth and accuracy of each of the following warranties and representations, both on the date hereof and on the dates of each transaction made pursuant to this Agreement. Each of the warranties and representations shall inure to the benefit of Lender, its successors and assigns. 8.2 (a) Except as expressly permitted by PARAGRAPH 8.15 hereof, Borrower is, and will continue to be during the Term hereof, duly organized, validly existing and in good standing under the laws of the State of Nevada and is, and will continue to be during the Term hereof, qualified to do business and in good standing in each jurisdiction in which it is selling Lots or Units or where the location or nature of its properties used or its business makes such qualification necessary (except where failure to do so would not adversely affect Lender's ability to realize upon the Receivables Collateral or any other security for the Performance of the Obligations or materially adversely affect the business or financial condition of Borrower or the ability of Borrower to complete Performance of the Obligations). Borrower has, and will continue to have, powers adequate for making and Performing under the Documents, for undertaking and Performing the Obligations, and for carrying on its business and owning its properties. (b) Borrower and the Applicable Trusts have good right and power to grant the Security Interest in the Receivables Collateral and other security for the Obligations and to execute and deliver this Agreement and the other Documents and, in the case of Borrower, to Perform the Obligations. All action necessary and required by Borrower's and the Applicable Trusts' governing documents and all applicable laws for the obtaining of the Loan and for the execution and delivery of this Agreement and all other Documents executed and delivered in connection with the Loan has been duly and effectively taken; and this Agreement is and shall be, and all other Documents are and shall be, legal, valid, binding and enforceable against Borrower and the Applicable Trusts, to the extent they are parties thereto, in accordance with their respective terms, and do not violate the usury laws of the State of Arizona, Colorado, Florida or Nevada, as applicable. The execution, delivery and Performance of the provisions of this Agreement and all of the other Documents will -54- 55 not violate, constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the properties or assets of Borrower or the Applicable Trusts pursuant to, the terms of any provision of: any law, regulation, judgment, decree, order, franchise or permit applicable to Borrower or the Applicable Trusts; the governing documents of Borrower or any of the Applicable Trusts; or any contract or other agreement or instrument to which Borrower or any Applicable Trust is a party or by which Borrower or the Applicable Trusts or Borrower's or the Applicable Trusts' properties or assets are bound. No consent of any government or agency thereof, or any other person, firm or entity not a party hereto is or will be required as a condition to the execution, delivery, Performance or enforceability of the Documents. (c) So long as any Applicable Trust continues to have an interest in any Receivables Collateral or in any Project, such Applicable Trust is, and will continue to be, duly created and validly existing under the laws of its state of creation, and each Applicable Trust has, and will continue to have during the Term hereof, all requisite power, authority and rights adequate for executing and delivering the Documents, to the extent it is a party thereto, for undertaking and performing the obligations undertaken by it, and for carrying on its business and owning its properties. 8.3 (a) Except as specifically set forth in EXHIBIT 8.3(a) attached hereto, there is no action, litigation or other proceeding pending or, to Borrower's knowledge, threatened before any arbitration tribunal, court, governmental agency or administrative body against Borrower or any of the Applicable Trusts, which, if adversely determined, might adversely affect Lender's ability to realize upon the Receivables Collateral or any other security for the Performance of the Obligations, or materially and adversely affect any Project, the business or financial condition of Borrower or any of the Applicable Trusts, or the ability of Borrower to complete Performance of the Obligations; or which questions the validity of the Documents. (b) If Borrower, any of the Applicable Trusts or Guarantor becomes a party to any action, litigation or other proceeding which asserts a material claim against Borrower, any of the Applicable Trusts and/or Guarantor, or Borrower or any of the Applicable Trusts receives a notice of noncompliance or becomes the subject of an investigation by a governmental agency or administrative body with respect to any portion of the Project, then Borrower will, within ten (10) days after it obtains knowledge thereof, notify Lender of such action, litigation, proceeding, notice or investigation and the particulars thereof. Thereafter, if requested by Lender, Borrower will report to Lender with respect to the status of such matter and the particulars thereof. Borrower shall pay, or cause the payment of, any judgment or decree for money damages or a fine or penalty against Borrower or any of the Applicable Trusts in excess of $100,000.00; provided, however, that such payment -55- 56 shall not be required hereby so long as the same is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and an adequate reserve or bond or other appropriate provision, if any, shall have been made therefor as required to be in conformity with GAAP. Nothing herein is intended to or shall be construed to limit any right of Borrower to exercise any rights or remedies against any third parties that may be liable for payments of or contributions to any such money damages, fines or penalties. 8.4 (a) Before Lender shall be obligated to make Advances of the Receivables Loan against Eligible Receivables arising from the sale of Lots or Units in jurisdictions other than the State in which the Project from which such Lot or Unit arose is located and those other jurisdictions which are listed in EXHIBIT 8.4(a) hereto, Borrower will provide Lender with evidence, satisfactory to Lender, that Borrower has complied with all laws of such jurisdiction governing the proposed conduct of Borrower. (b) Except for violations which do not individually or in the aggregate affect Lender's ability to realize upon the Receivables Collateral or any other security for the Performance of the Obligations or do not materially and adversely affect the business or financial condition of Borrower or the Applicable Trusts or the ability of Borrower to complete Performance of the Obligations, Borrower and the Applicable Trusts have complied, and will comply, with all laws and regulations of the United States, the State, County, if any, and municipal jurisdiction in which Lots or Units have been sold or offered for sale. (c) Without limiting the generality of any other representation or warranty contained herein, the use and occupancy of any Project will not violate any private covenant or restriction or any zoning, use or similar law, ordinance or regulation affecting the use or occupancy of any Project which violation might materially and adversely affect the business or financial condition of Borrower or any of the Applicable Trusts or the ability of Borrower to complete Performance of the Obligations. 8.5 (a) Each Contract or Instrument at the time it is assigned to Lender in connection with the Receivables Loan and this Agreement shall be an Eligible Receivable. Borrower and the Applicable Trusts have performed all of their obligations to Purchasers required to be performed at the time any Eligible Receivable has been delivered to Lender or its agent. Borrower further warrants and guarantees the value and enforceability of the Receivables Collateral. (b) Except for Upgrades, Borrower, without the prior written consent of Lender, will not cancel or materially modify, or consent to or acquiesce in any cancellation or material modification to, or solicit the prepayment of any Contract -56- 57 or Instrument used in making Borrowing Base computations or which otherwise constitutes part of the Receivables Collateral; or waive the timely performance of the obligations of the Purchaser thereunder; provided, however, that so long as no Event of Default, and no act or event which after the giving of notice or the lapse of time, or both, would constitute an Event of Default, has occurred and is continuing: (i) Borrower and/or the Applicable Trusts may solicit the prepayment of such Contract or Instrument and accept less than the entire remaining principal balance as payment in full thereon so long as the amount to be received on such Contract or Instrument is at least equal to 85% of the unpaid principal balance payable under such Contract or Instrument, (ii) Borrower and/or the Applicable Trusts may terminate or, subject to subparagraph (d) hereof, modify a Contract or Instrument with respect to a certain Lot or Unit and simultaneously enter into a new or revised Contract or Instrument for the purchase of a less expensive Lot or Unit so long as no deficiency in the Borrowing Base will occur as a result of such termination or modification; provided, however, that in no event shall such termination or modification occur so as to eliminate the default of the contract obligor thereunder, and (iii) notwithstanding clause (ii) above, Borrower may modify ineligible Receivables Collateral in the ordinary course of Borrower's business. Borrower and the Applicable Trusts will not pay or advance directly or indirectly for the account of any Purchaser any sum owing by the Purchaser under any of the Eligible Receivables used in making Borrowing Base computations or which otherwise constitute part of the Receivables Collateral. (c) Borrower at all times will fulfill and will cause its affiliates, agents and independent contractors and the Applicable Trusts at all times to fulfill in all material respects all obligations of any nature whatsoever to Purchasers under all Eligible Receivables which are used in making Borrowing Base computations or otherwise constitute part of the Receivables Collateral. (d) To the extent that copies have been requested by Lender, true and complete copies of the Eligible Receivables and other agreements and disclosures required by applicable law and exhibits thereto which have been and are being used by Borrower in connection with the Project and the sale or offering for sale of Lots or Units therein have been delivered to Lender. To the extent that Lender has requested copies thereof, such documents are the only ones which have been used in connection with the Project and the sale of Lots or Units therein. Borrower and the Applicable Trusts, without the prior written consent of the Lender, will not materially modify the form of any such documents, unless required by law. (e) Borrower will maintain, or will cause to be maintained, in good condition and repair all amenities and common areas which have been promised or represented as being available to Purchasers and all such promised roads and off-site improvements which have not been dedicated to or accepted by the responsible governmental authority or utility. Borrower will maintain, or will cause the -57- 58 Applicable Trusts to maintain, a reasonable reserve to assure compliance with the terms of the foregoing sentence. 8.6 SUBJECT ONLY TO THE PROVISIONS OF PARAGRAPH 3.8 HEREOF, LENDER DOES NOT ASSUME AND SHALL HAVE NO RESPONSIBILITY, OBLIGATION OR LIABILITY TO PURCHASERS, LENDER'S RELATIONSHIP BEING THAT ONLY OF A CREDITOR WHO HAS TAKEN, AS SECURITY FOR INDEBTEDNESS OWED TO IT, A COLLATERAL ASSIGNMENT FROM BORROWER OF RECEIVABLES COLLATERAL. EXCEPT AS REQUIRED BY LAW, OR ANY GOVERNMENTAL AGENCY, BORROWER WILL NOT, AT ANY TIME, USE THE NAME OR MAKE REFERENCE TO LENDER WITH RESPECT TO ANY PROJECT, OR THE SALE OF INSTRUMENTS, CONTRACTS OR OTHERWISE, WITHOUT THE EXPRESS WRITTEN CONSENT OF LENDER. 8.7 Borrower will undertake the collection of amounts delinquent under each Eligible Receivable which is used in making Borrowing Base computations or otherwise constituting part of the Receivables Collateral, will bear the entire expense of such collection work, and will diligently and timely do such work respecting collection, including forfeiture or foreclosure proceedings. Lender shall have no obligation to undertake any collection, eviction or foreclosure action against the obligor under any Eligible Receivable or to otherwise realize upon any Eligible Receivable. 8.8 Borrower will maintain a secure place in its offices at the address specified above proper and accurate books, records, ledgers, computer tapes, disks and records correspondence and other papers relating to the Receivables Collateral. Lender may notify the appropriate Purchasers of the existence of Lender's interest as assignee in the Receivables Collateral and request from such Purchasers any information relating to the Receivables Collateral. Borrower will cooperate with Lender in giving such notice and will do so under its letterhead if requested. 8.9 Except for the sales of Lots or Units and the granting of deeds to Purchasers who are entitled thereto under their respective contracts of sales, Borrower and the Applicable Trusts, without the prior written consent of Lender, will not: (a) sell, convey, pledge, hypothecate, encumber or otherwise transfer any security for the Performance of the Obligations; (b) permit or suffer to exist any liens, security interests or other encumbrances on any security for the Performance of the Obligations, except for the Permitted Encumbrances and liens and Security Interests expressly granted to Lender or as otherwise contemplated by PARAGRAPH 3.1 hereof; or (c) amend any of the Trust Agreements; provided, however, that nothing contained herein shall be construed to restrict or otherwise limit the Applicable Trusts or any Trustee from fulfilling their respective obligations under the terms and provisions of the Trust Agreements; and provided, further, that Borrower shall have the right to terminate any Trust Agreement, or replace any Trustee under an Applicable Trust, so long as such termination or Trustee replacement does not adversely affect any Security -58- 59 Interest of Lender under this Agreement (except for the Security Interest in the Applicable Trust) or Borrower's financial condition at the time of such termination or Trustee replacement. 8.10 Borrower shall perform, and shall cause the Trustee of any Applicable Trust to perform, all of their respective now existing and hereafter arising obligations to any Purchasers. Furthermore, Borrower shall perform, and shall cause the Trustee of any Applicable Trust to perform, all of their respective now existing and hereafter arising obligations under the Trust Agreements. Borrower will not be in default in Performance of its Obligations hereunder as a result of a wrongful act or omission of any Trustee while Borrower is diligently pursuing appropriate legal proceedings for injunctive relief against any Trustee and/or taking steps to replace any Trustee. Borrower shall perform all of its obligations under any agreement between Borrower and any Trustee relating to the payment of compensation to such Trustee for its services rendered and expenses incurred in connection with the administration of the Trustee's duties under the Applicable Trust. 8.11 (a) Borrower will keep or cause to be kept insured against risks of physical damage the improved common areas in any Project and other amenities which have been promised or represented as being available to Purchasers for use by them under policies of "all-risk" insurance in an amount not less than the full insurable value on a replacement cost basis. All such insurance shall be without cost or expense to Lender and shall provide for thirty (30) days notice to Lender of cancellation or material change. Borrower will further insure, or cause to be insured, against such other risks with respect to any Project and Receivables Collateral as Lender may from time to time reasonably require. (b) Borrower will maintain such other insurance with respect to its business and properties as is normally maintained by prudent persons engaged in similar businesses or owning similar property similarly situated. 8.12 (a) This Agreement and the other Documents, certificates, financial statements and written materials furnished to Lender by or on behalf of Borrower in connection with the transactions contemplated hereby do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein not misleading. Other than trends in the national economy, of which Borrower expresses no opinion, there is no fact known to Borrower which materially and adversely affects or in the future may (so far as Borrower can now foresee) materially adversely affect the Receivables Collateral or any other security for the Performance of the Obligations or the business or financial condition of Borrower, the Applicable Trusts or any Project which has not been set forth in this Agreement or in the other Documents, certificates, financial statements or written materials furnished to Lender in connection with the transactions contemplated hereby; provided, however, that Lender acknowledges that Borrower -59- 60 may, after the date hereof, elect to terminate one or more of the Applicable Trusts. In connection with any such termination, however, Borrower hereby represents that Lender's Security Interests (except for the Security Interest in the Applicable Trust) shall not be adversely affected by any such termination, nor shall any such termination adversely affect the financial condition of Borrower. (b) The fact that Lender's representatives may have made certain examinations and inspections or received certain information pertaining to the Receivables Collateral or any Project and the proposed operation thereof does not in any way affect or reduce the full scope and protection of the warranties, representations and Obligations contained herein, which have induced Lender to enter into this Agreement. 8.13 (a) Borrower will maintain a standard, modern system of accounting and will keep and maintain all books and records in accordance with GAAP on a consistent basis. (b) On or before the 15th day of each month, Borrower will furnish or cause to be furnished to Lender (i) the reports of Collection Agent and Borrower required pursuant to PARAGRAPH 7.6 hereof, and (ii) a sales report for the prior month showing the number of sales of Lots or Units and the aggregate dollar amount thereof, including down payments. (c) Borrower will furnish or cause to be furnished to Lender, as soon as the same are available and, in any event, within one hundred twenty (120) days of each fiscal year and within sixty (60) days after the end of each interim quarterly fiscal period of the subject, a copy of the current financial statements of the Borrower and the Guarantor. Such financial statements shall contain a balance sheet as of the end of the relevant fiscal period and statements of income and of changes in financial position for such fiscal period (together, in each case, with the comparable figures for the corresponding period of the previous fiscal year), all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied throughout the period involved and with prior periods and, in the case of an audited statement, in accordance with generally accepted auditing standards; provided, however, that interim quarterly statements shall be subject to change as resulting from year-end adjustments and additions of appropriate footnotes. All financial statements required pursuant hereto shall be certified to, as the case may be, by the chief financial officer of the subject of such statements; provided, however, that if the statement is an annual statement, the financial statement shall be audited by a nationally recognized firm of certified public accountants reasonably satisfactory to Lender. Together with such financial statements, Borrower will deliver to Lender (i) if such financial statements shall have been audited, a certificate from the auditors stating that in making the examination necessary for the audit they obtained no -60- 61 knowledge of any default by Borrower in the Performance of any of the Obligations, or if they shall have obtained knowledge of any such default, specifying the same; and (ii) a certificate signed by the chief financial officer of Borrower stating that there exists no Event of Default and no condition, event or act, which with notice or lapse of time or both, would become an Event of Default or, if any such Event of Default or any such condition, event or act exists, specifying the nature and period of existence thereof and what action Borrower proposes to take with respect thereto. (d) Promptly upon receipt thereof, Borrower will deliver copies of each other report submitted to Borrower or Guarantor by independent public accountants in connection with any annual, interim, or special audit or examination made by them of the books, records or financial statements of Borrower or Guarantor. (e) Promptly upon their becoming available, to the extent requested by Lender, Borrower will deliver copies of each financial statement, report, notice, or proxy statement sent by Borrower, any of the Applicable Trusts or Guarantor to stockholders generally, or to any governmental organization or authority in connection with the Borrower's, any of the Applicable Trusts' or Guarantor's business, including, without limitation, any report or notice sent to the United States Department of Housing and Urban Development and all departments and agencies of the States of Colorado, Nevada, Florida and Illinois and the Canadian Provinces of British Columbia and Ontario, and each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by Borrower, any of the Applicable Trusts or Guarantor with, or received by Borrower, any of the Applicable Trusts or Guarantor in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency. (f) To the extent requested by Lender, Borrower will deliver to Lender from time to time, as available, and promptly upon amendment or effective date, current price lists, sales literature, registrations/consents to sell, and other items, data or information requested by Lender which relate to any Project or any portion thereof. (g) Immediately upon becoming aware of the existence of an Event of Default, or a condition or event which after the giving of notice or the lapse of time, or both, would constitute an Event of Default, Borrower will deliver to Lender written notice specifying therein the nature of the Event of Default, condition or event, as applicable, and the action Borrower is taking or proposes to take with respect thereto. (h) Immediately upon becoming aware that the holder of any obligation or of any indebtedness or other Security of Borrower, any of the Applicable -61- 62 Trusts or Guarantor has given notice or has taken action with respect to a claimed default or event of default by Borrower, any of the Applicable Trusts or Guarantor thereunder, Borrower will deliver to Lender written notice specifying the notice given or action taken by such holder and the nature of the claimed default or event of default and what action Borrower, such Applicable Trust or Guarantor, as the case may be, is taking or proposes to take with respect thereto. (i) Immediately upon becoming aware of any developments or other information which may materially and adversely affect the properties, business, prospects, profits or condition (financial or otherwise) of Borrower, any of the Applicable Trusts or Guarantor or the ability of any of them to perform this Agreement, Borrower will deliver telephonic or telegraphic notice specifying the nature of such development or information and such anticipated effect. (j) So long as the same shall be pertinent to the Loan, any Project, the Documents or any transactions contemplated therein, Borrower will at its expense (i) permit Lender and its representatives at all reasonable times to inspect, audit and copy, as appropriate, any Project or any portion thereof, Borrower's facilities, activities, books of account, logs and records, (ii) cause its employees, agents and accountants to give their full cooperation and assistance in connection with any such visits of inspection or financial conferences and (iii) make available such further information concerning its business and affairs as Lender may from time to time reasonably request; provided, however, that Borrower shall not be liable for the resulting costs of Lender's staff salaries. (k) Borrower will furnish or cause to be furnished to Lender, as soon as the same are available, and in any event within one hundred twenty (120) days following the end of each fiscal year of the subject, a copy of the financial statements for each of the Associations. Such financial statements shall contain a balance sheet as of the end of the fiscal year, and a statement of income and of cash flows for such fiscal year (together, in each case, with comparable figures for the corresponding period of the previous fiscal year), all in reasonable detail, prepared in accordance with GAAP, consistently applied, throughout the period involved and consistent with prior periods and, in the case of an audited statement, with generally accepted auditing standards. All financial statements required pursuant hereto shall be certified to, as the case may be, by the chief financial officer of the subject of such statements; provided, however, that if the statement is an annual statement and audited statements of the subject have been previously prepared, the statements shall be certified by a nationally recognized firm of accountants reasonably satisfactory to Lender. 8.14 Borrower will cause any and all indebtedness (subject to PARAGRAPH 8.24 hereof, other than indebtedness for reasonable salaries in the normal course -62- 63 of business) owing by it to its shareholders, directors or officers, as the case may be, Guarantor, or any member of the Control Group to be, upon the occurrence and continuation of an Event of Default, subordinated in all aspects to the Obligations. 8.15 Borrower will not, and will not permit any of the Applicable Trusts to, without Lender's prior written consent: (a) sell, lease, transfer or dispose of all or substantially all of its assets to another entity; or (b) consolidate with or merge into another entity, permit any other entity to merge into it or consolidate with it, or permit any transfer of the ownership of, or power to control, Borrower. Notwithstanding the foregoing, the Applicable Trusts shall be permitted to transfer title to any Projects or Units or Lots and/or other assets therein to Borrower in connection with any termination of such Trust, so long as Lender's Security Interest (other than in the Applicable Trust) and Borrower's financial condition are not adversely affected thereby. 8.16 Neither Borrower nor any of the Applicable Trusts are in default of any payment on account of indebtedness for borrowed money or of any repurchase obligations in connection with a receivables purchase financing, or in violation of or in default under any material term in any material agreement, instrument, order, decree or judgment of any court, arbitration or governmental authority to which it is a party or by which it is bound. 8.17 Borrower and each of the Applicable Trusts have filed all tax returns and paid all taxes, assessments, levies and penalties, if any, in respect thereof required to be filed by it or paid by it to any governmental or quasi-governmental authority or subdivision; provided, however, that the foregoing items need not be paid while being contested in good faith and by appropriate proceedings (in the written opinion of Borrower's independent counsel, which shall be submitted to Lender, in any case involving over $50,000.00); and provided, further, that adequate accounting reserves (in the written opinion of Borrower's independent accountants, which shall be delivered to Lender) have been established with respect thereto, and provided, further, that any of Borrower's or the Applicable Trusts' title to, and its right to use, its properties shall not be materially and adversely affected thereby. All real estate taxes and assessments have been paid which are due and owing in connection with the common areas of any Project and other amenities which have been promised or represented as being available to Purchasers for use by them. Borrower will use its best efforts to provide to Lender not more than thirty (30) days after such taxes and assessments would become delinquent if not paid evidence that all such taxes and assessments on the Project common areas have been paid in full. 8.18 Borrower will pay to Lender on demand all out-of-pocket costs and expenses (excluding Lender's staff salaries) incurred or to be incurred by Lender in connection with the initiation, documentation and closing of the Loan, the making of Advances hereunder, the protection of the security for the Performance of the Obligations, or the enforcement of the Obligations against Borrower or Guarantor, including, without limitation, travel costs, all attorneys' fees, all filing and recording fees, all charges for -63- 64 consumer credit reports, all revenue and documentary stamp and intangible taxes, and all fees and expenses of Collection Agent to perform the services contemplated hereunder and under the terms of the Agency Agreement, and all fees and expenses of the Custodian to perform the services contemplated hereunder and under the terms of the Custodial Agreement. 8.19 Borrower will INDEMNIFY, SAVE AND HOLD HARMLESS, and defend Lender, its successors, assigns and shareholders (including corporate shareholders), and the directors, officers, employees, agents and servants of the foregoing, from any and all losses, costs, expenses (including, without limitation, court costs and attorneys' fees), demands, claims, suits, proceedings (whether civil or criminal), orders, judgments, penalties, fines and other sanctions arising from or brought in connection with (a) any Project, the security for the Performance of the Obligations, Lender's status by virtue of the Assignments, creation of Security Interests, the terms of the Documents or the transactions related thereto, or any act or omission of Borrower, Collection Agent or Custodian, or the employees or agents of either of them, whether actual or alleged, including, without limitation, violations of Regulation Z of the Board of Governors of the Federal Reserve System or any other law, rule or regulation relating to the Receivables Collateral and sales of Lots or Units, and (b) any and all brokers' commissions or finders' fees or other costs of similar type, or claims by any broker, agent or other party in connection with the transactions contemplated by this Agreement. On written request by a Person covered by the above agreement of indemnity, Borrower will undertake, at its own cost and expense, on behalf of such indemnitee, using counsel satisfactory to the indemnitee, the defense of any legal action or proceeding to which such Person shall be a party, provided that such action or proceeding shall result from, or grow or arise out of any of the events set forth in this paragraph. Lender represents and warrants to Borrower that Lender has no knowledge of broker involvement in the transactions contemplated by the Documents. 8.20 Borrower will not directly or indirectly invest all or any part of the proceeds of the Loan in any investment security subject to the margin requirements of Regulation "G". 8.21 Borrower will execute or cause to be executed all documents and do or cause to be done all acts necessary for Lender to perfect and to continue the perfection of the Security Interest of Lender in the Receivables Collateral, the Applicable Trusts or the other security for the Performance of the Obligations or otherwise to effect the intent and purposes of the Documents. Borrower will prosecute or defend any action involving the priority, validity or enforceability of the Security Interest granted to Lender; provided, however, that, at Lender's option, Lender may do so at Borrower's expense. 8.22 Borrower is fully familiar with all of the terms and conditions of the Documents and is not in default thereunder. No act or event has occurred which after notice and/or lapse of time would constitute such a default or an Event of Default. -64- 65 8.23 FINANCIAL COVENANTS. Borrower hereby covenants and agrees to comply with the financial covenants hereinafter set forth in this PARAGRAPH 8.23 during the entire Term of the Loan, which financial covenants shall be tested on a semiannual basis, upon the expiration of the second fiscal quarter and fourth fiscal quarter of Borrower. The compliance of Borrower with respect to the financial covenants set forth below shall be confirmed by Borrower's delivery to Lender of a certification in the form attached hereto as EXHIBIT 8.23, which certification shall be signed by a duly-authorized officer of Borrower and shall be delivered to Lender within sixty (60) days after the expiration of each second fiscal quarter and within one hundred twenty (120) days after the expiration of each fourth fiscal quarter of Borrower: (a) Tangible Net Worth. Until the full and complete Performance of all of Borrower's Obligations under the Loan, the Consolidated Tangible Net Worth of Borrower and its Subsidiaries shall be, at all times, not less than $20,000,000.00 (the "Tangible Net Worth Base"); provided, however, that the Tangible Net Worth Base shall be increased each fiscal quarter by an amount equal to fifty percent (50%) of the consolidated net income (if any) of Borrower and its Subsidiaries, commencing with Borrower's fiscal quarter ending November 30, 1997; and provided, further, that the Tangible Net Worth Base shall not be increased to more than $25,000,000.00. In the event that Borrower and its Subsidiaries do not realize any net income for any fiscal quarter, or if there is a net loss for such quarter, the Tangible Net Worth Base applicable to the next successive fiscal quarter shall remain unchanged and shall not in any event be reduced or decreased. For purposes of this PARAGRAPH 8.23, "Consolidated Tangible Net Worth" shall mean, on the date of determination thereof, the consolidated net worth of Borrower and its Subsidiaries, as determined in accordance with GAAP, after deducting the value of patents, trademarks, goodwill and other intangible assets, the value of assets treated as "questionable" by the accounting firm which shall have prepared Borrower's most recent financial statement, and after deducting all amounts due Borrower from its affiliates or from Guarantor (provided that the deduction for any amounts owed to Borrower from Mego Mortgage shall include only amounts which are owed in excess of $1,000,000.00). It is agreed that intangible assets shall not include deferred selling expenses determined in accordance with GAAP or interest-only strip securities and other related mortgage securities, both of which shall be deemed to be tangible assets. For the purposes of determining the quarterly increases in the Tangible Net Worth Base, the net income of Borrower and its Subsidiaries shall be determined in accordance with GAAP. (b) Consolidated Debt to Consolidated Tangible Net Worth. The ratio of consolidated total liabilities of Borrower and its Subsidiaries to the Consolidated Tangible Net Worth of Borrower and its Subsidiaries shall not, at any time, be greater than 4:1. -65- 66 (c) Dividends. Borrower will not declare or pay any dividends so long as any Event of Default, or any failure by Borrower or Guarantor to make any payment when due, has occurred and is continuing. (d) Marketing Costs to Net Sales. On the final day of Borrower's second (2nd) fiscal quarter and fourth (4th) fiscal quarter for each of Borrower's fiscal years, the ratio of the total of Borrower's costs and expenses for commissions and selling relating to retail lot sales and time-share sales (exclusive of any fees payable by Borrower to Hospitality Franchise Systems, Inc.) ("Marketing Costs") for the immediately preceding four (4) fiscal quarters to the total of Borrower's processed sales of retail lots and time-share interests for the same period (each net of cancellations of such sales) ("Net Sales") shall not be greater than 1.1:2; provided, however, that a breach of this covenant shall not be an Event of Default, but in the event that there are two (2) consecutive occurrences of a breach of this covenant or in the event a breach of this covenant continues without cure for a period in excess of sixty (60) days after the end of any test quarter, Lender shall have no further obligation to make any Advances hereunder, including, without limitation, any Receivables Advances or any Advances under the Mortgage Loan Facility until such breach is cured. 8.24 Borrower will not directly or indirectly make or permit any of its Subsidiaries to make loans to any member of the Control Group of Borrower (other than to the Guarantor or any Subsidiaries of Borrower), or to any member of the Control Group of Guarantor, including, without limitation, and in any event, loans to any one or more of Messrs. Robert Nederlander, Jerome J. Cohen, Eugene I. Schuster, Herbert B. Hirsch and Don A. Mayerson, which in the aggregate exceed $1,000,000.00 outstanding at any time. Borrower will not directly or indirectly provide or permit any of its Subsidiaries to provide compensation for services rendered, including, without limitation, consulting fees, management fees, salaries, bonuses or any other nondividend compensation, to members of the Control Group for services rendered which in the aggregate exceeds $1,500,000.00 per annum. The compliance of Borrower with respect to the foregoing covenant shall be confirmed on a semiannual basis by Borrower's delivery to Lender of the certification described in PARAGRAPH 8.23 above within sixty (60) days after the expiration of each second fiscal quarter and within one hundred twenty (120) days after the expiration of each fourth fiscal quarter of Borrower. 8.25 Borrower and its Subsidiaries will not have or incur any nontax sharing indebtedness (as hereinafter defined) to Guarantor, its successors or assigns, which results in the aggregate outstanding principal balance of all nontax sharing indebtedness of Borrower and its Subsidiaries to Guarantor exceeding the sum of $2,000,000.00 in the aggregate. As used herein, the term "nontax sharing indebtedness" means all indebtedness other than amounts payable to Guarantor pursuant to tax sharing arrangements among Guarantor and its Subsidiaries. The compliance of Borrower with respect to the foregoing covenant shall be -66- 67 confirmed on a semiannual basis by Borrower's delivery to Lender of the certification described in PARAGRAPH 8.23 above within sixty (60) days after the expiration of each second fiscal quarter and within one hundred twenty (120) days after the expiration of each fourth fiscal quarter of Borrower. 8.26 The representations, warranties and covenants contained in this ARTICLE VIII are in addition to, and not in derogation of, the representations and warranties elsewhere contained herein in the other Documents. 8.27 Except as disclosed to and permitted, in writing, by Lender, the representations and warranties contained in this Agreement are continuing and shall be deemed to be made and reaffirmed prior to the making of each Advance under this Agreement. 8.28 To the extent that Borrower reacquires any Units in a Project owned by an Applicable Trust following their sale to Purchasers, Borrower shall reconvey the same to the Trustee under such Applicable Trust promptly upon such reacquisition, but only to the extent such reconveyance is required under the Applicable Trust and, if so, then such Units shall be reconveyed to the Trustee under such Applicable Trust subject only to those matters to which such Units were subject to immediately prior to their transfer to the Purchaser thereof and to nondelinquent ad valorem taxes for the current year. 8.29 Borrower shall not, without the prior written consent of Lender, sell Units under a Land Sales Contract. For purposes hereof, a Land Sales Contract shall mean a contract for deed, contract to convey, agreement for sale or any similar contract pursuant to which Borrower has conveyed to Purchaser equitable title in the Unit and under which the Borrower is obligated to convey to the Purchaser the remainder of Borrower's title, whether legal or equitable, on payment in full of all monies due under the contract. Land Sales Contract do not include purchase contracts or similar executory contracts which are intended to control the rights and obligations of parties pending a closing of a sale or purchase transaction, including, without limitation, the "Grand Flamingo Suites Purchase Agreement" a copy of which was previously delivered to Lender. 8.30 Borrower shall give to Lender, as soon as is reasonably possible following the giving or receipt thereof, copies of any nonroutine notices given to or received by any Trustee. 8.31 On or before June 30 and December 31 of each year during the Term, Borrower shall give to Lender a current report concerning the status of the litigation matters described in the attached EXHIBIT "8.31". 8.32 Borrower shall (a) maintain or cause to be maintained, in full force and effect during the Term, a license agreement (the "License Agreement") providing for access -67- 68 by Purchasers of Units in each of Suites Phase II, Fountains, Winnick, Ida Building One, Ida Building Two, Winnick Building Addition, Ida Building Addition and Second Winnick Building Addition to common recreational areas and facilities and other amenities of the Grand Flamingo Towers Resort Club (the "Towers Club"), or (b) provide or cause to be provided to such Purchasers, alternate recreational areas and facilities and other amenities reasonably equivalent to those provided by the Towers Club pursuant to the License Agreement, as originally executed, in the event the License Agreement is terminated prior to the expiration of the Term. 8.33 (a) Borrower represents and warrants that each Trustee under any Applicable Trust is lawfully seized of a good and marketable title in fee simple in the Project which is the subject of the Applicable Trust and the buildings and other improvements erected thereon, and that such Project is free from liens, claims, restrictions or encumbrances, except for such liens, claims, restrictions or encumbrances as are approved by Lender. (b) Borrower does hereby warrant and shall forever defend the title of any Project owned by an Applicable Trust against the claims of all Persons whatsoever, subject to the right, title and interest of the Trustee of the Applicable Trust, Purchasers, Persons claiming by, through or under the Trustee of the Applicable Trust or Purchasers and to matters approved by Lender. 8.34 Throughout the Term, Borrower shall permit FPSI to oversee all of the servicing activities with respect to Receivables Collateral that are pledged by Borrower to Lender, which oversight functions shall be performed by FPSI pursuant to the Oversight Agreement. Lender shall cause FPSI to waive any fee otherwise payable to it as a result of such oversight activities; however, Borrower shall have the responsibility for reimbursing FPSI for any actual out-of-pocket costs and expenses incurred by it to the extent provided in the Oversight Agreement. ARTICLE IX DEFAULTS 9.1 The occurrence of any of the following events or conditions shall constitute an Event of Default by Borrower under the Documents: (a) Lender fails to receive from Borrower when due and payable (i) any amount that Borrower is obligated to pay on any Note executed by Borrower pursuant to the terms of this Agreement, or (ii) any other payment due under the Documents; and such failure shall continue for five (5) days after notice thereof to Borrower, except for the payment of the final installment due under any of the Notes, for which no grace period is allowed; -68- 69 (b) any representation or warranty of Borrower contained in the Documents or in any certificate furnished under the Documents proves to be, in any material respect, false or misleading as of the date deemed made; (c) there is a default in the Performance of the Obligations set forth in PARAGRAPHS 3.3, 8.9 OR 8.15 hereof; (d) there is a default in the Performance of any other Obligations or a violation of any term, covenant or provision of the Documents (other than a default or violation referred to elsewhere in this PARAGRAPH 9.1 or under PARAGRAPH 8.23(d) hereof) and such default or violation continued unremedied (i) for a period of five (5) days after notice thereof to Borrower in the case of a default or violation of PARAGRAPHS 8.8, 8.12 OR 8.13 hereof or any other default or violation which can be cured by the payment of money alone, or (ii) for a period of thirty (30) days after notice to Borrower in the case of any other default or violation; (e) an "Event of Default," as defined elsewhere herein or in any of the other Documents, occurs, or an act or event occurs under any of the Documents, whether or not denominated as an "Event of Default," which expressly entitles Lender to accelerate any of the Obligations and/or exercise its other remedies upon the occurrence of an Event of Default hereunder; (f) any material default by Borrower or any of the Applicable Trusts under any other agreement evidencing, guaranteeing, or securing borrowed money or a receivables purchase financing has occurred permitting the acceleration of such indebtedness or repurchase obligations, which accelerated payment or repurchase obligations are in excess of $100,000.00 in the aggregate; (g) any final, nonappealable judgment or decree for money damages or for a fine or penalty against Borrower or any of the Applicable Trusts which is not paid and discharged or stayed within thirty (30) days thereafter and when aggregated with all other judgment(s) or decree(s) that have remained unpaid and undischarged or unstayed for such period is in excess of $100,000.00; (h) any party holding a lien or security interest in the Receivables Collateral or any other security for the Performance of the Obligations or a lien on any common areas or other amenities in any Project commences proceedings for foreclosure or similar sale thereof and such sale or proceeding is not discharged in full or stayed within thirty (30) days after commencement thereof; (i) (i) Borrower, any of the Applicable Trusts or Guarantor becomes insolvent or unable to pay its debts when due or generally fails to pay its -69- 70 debts when due; (ii) Borrower, any of the Applicable Trusts or Guarantor files a petition in any bankruptcy, reorganization, winding-up or liquidation proceeding or other proceeding analogous in purpose or effect relating to such entity; applies for or consents to the appointment of a receiver, trustee or other custodian for the bankruptcy, reorganization, winding-up or liquidation of such entity; makes an assignment for the benefit of creditors; or admits in writing that it is unable to pay its debts; (iii) any court order or judgment is entered confirming the bankruptcy or insolvency of Borrower, any of the Applicable Trusts or Guarantor or approving any reorganization, winding-up or liquidation of such entity or a substantial portion of its assets; (iv) there is instituted against Borrower, any of the Applicable Trusts or Guarantor any bankruptcy, reorganization, winding-up or liquidation proceeding or other proceeding analogous in purpose or effect and the same is not dismissed within sixty (60) days after the institution thereof; or (v) a receiver, trustee or other custodian is appointed for any part of the Receivables Collateral or any Project or all or a substantial portion of the assets of Borrower, any of the Applicable Trusts or any Guarantor; (j) Performance by Borrower, any of the Applicable Trusts or Guarantor of any material obligation under any Document or the Guarantee, as the case may be, is rendered unenforceable in any material respect, or the Guarantor repudiates, rescinds, limits or annuls its Guarantee; (k) there occurs a material adverse change in any Project or in the business or financial condition of Borrower, any of the Applicable Trusts or Guarantor or in the Receivables Collateral or any other security for the Performance of the Obligations, which change is not enumerated in this PARAGRAPH 9.1 and as the result of which Lender in good faith deems the prospect of Performance of the Obligations impaired or its security therefor imperiled; (l) Borrower is in default of that license agreement between Borrower and Hospitality Franchise Systems, Inc. dated as of April 18, 1995, as amended, modified, restated or replaced, to the extent such default has a material and adverse effect on any Project. 9.2 At any time after an Event of Default has occurred and while it is continuing, Lender shall have the right to do any one or more of the following: (a) cease to make further Advances; (b) declare all Notes evidencing the Loan, together with prepayment premiums and all other sums owing by Borrower to Lender in connection with the Documents, immediately due and payable without notice, presentment, demand or protest, which are hereby waived by Borrower; -70- 71 (c) with respect to the Receivables Collateral, (i) institute collection actions against all Persons obligated therein, (ii) enter into modification agreements and make extension agreements with respect to payments and other performances, (iii) release Persons liable for the payment and performance thereof or the securities for such payment and performance, and (iv) settle and compromise disputes with respect to payments and performances claimed due thereon, all without notice to Borrower, without being called to account therefor by Borrower and without relieving Borrower from Performance of the Obligations; and (d) proceed to protect and enforce its rights and remedies under this Agreement or any other Documents and to foreclose or otherwise realize upon its security for the Performance of the Obligations, or to exercise any other rights and remedies available to it at law, in equity or by statute. The rights and powers granted pursuant to this paragraph are not intended to limit the rights and powers granted elsewhere herein. 9.3 Notwithstanding anything contained in the Documents to the contrary, Lender shall have the right to cease to make further Advances at any time that a condition or event which after the giving of notice or the lapse of time, or both, would constitute an Event of Default, has occurred and is continuing. 9.4 Notwithstanding anything in the documents to the contrary, while an Event of Default exists, any cash received and retained by Lender in connection with the Receivables Collateral may be applied to payment of the Obligations in the manner provided in PARAGRAPH 9.6 hereof. 9.5 (a) Pursuant to its rights under PARAGRAPH 9.2 hereof, following an Event of Default, and subject to the terms and conditions hereof, Lender may sell, assign and deliver the Receivables Collateral and any and all other security for the Obligations, or any part thereof, at public or private sale, conducted in a commercially reasonable manner by an officer, or agent of, or auctioneer or attorney for, Lender at Lender's place of business or elsewhere, for cash, upon credit or future delivery, and at such price or prices as Lender shall reasonably determine, and Lender may be the purchaser of any or all of the Receivables Collateral or any other security for the Obligations so sold. Lender may, in its reasonable discretion, at any such sale, restrict the prospective bidders or purchasers as to number, nature of business and investment intention, and, without limitation, may require that the Persons making such purchases represent and agree to the satisfaction of Lender that they are purchasing the Receivables Collateral or any other security for the Obligations for their account, for investment, and not with a view to the distribution or resale of any thereof. Lender shall have no obligation to delay sale of any Receivables Collateral or any other -71- 72 security for the Obligations to be registered for public sale under the Securities Act of 1933, as amended, and any applicable state securities laws. Private sales made without registration shall not be deemed to have been made in a commercially unreasonable manner by virtue of any terms less favorable to the seller resulting from the private nature of such sales. In view of the fact that federal and state securities or other laws may impose certain restrictions on the method by which a sale of Receivables Collateral or any other security for the Obligations may be effected after an Event of Default, Borrower agrees that upon the occurrence and continuation of an Event of Default, Lender may, from time to time, attempt to sell all or any part of the Receivables Collateral or any other security for the Obligations by a private placement restricting the bidder and prospective purchasers, and in so doing, Lender may solicit offers to buy the Receivables Collateral or any other security for the Obligations, or any part of it for cash, from a limited number of purchasers deemed by Lender, in its reasonable judgment, to be respectable parties who might be interested in purchasing the Receivables Collateral or any other security for the Obligations, and if Lender, solicits such offers from not less than three (3) such investors, then the acceptance by Lender of the highest offer obtained therefrom shall be deemed to be a commercially reasonable method of disposition of such collateral. Lender shall give Borrower at least fifteen (15) days prior written notice, which 15-day notice shall be deemed to be reasonable (notwithstanding provisions of subparagraph (b) below), of the day on or after which any such private placement is to be made. (b) Without prejudice to the right of Lender to make such sale within such shorter period as may be reasonable under the circumstances, foreclosure sale of all or any part of the Receivables Collateral and any and all other security for the Obligations shall be deemed held pursuant to reasonable notice if held: (i) Forty-five (45) days after notice is given, based upon default consisting of insolvency, bankruptcy or other default of a nature which cannot be corrected by Borrower, or default for which no grace period is specified herein; or (ii) Sixty (60) days after notice of an act, circumstance or event which, if uncorrected, after expiration of any applicable grace period, shall constitute a default hereunder. Where any notice to Borrower and grace period thereafter is required under this Agreement, such grace period shall be deducted from the 60-day notice of foreclosure sale specified in item (ii) above, so that the maximum period between notice to Borrower of an act, circumstance or event which, if uncorrected after elapse of any applicable grace period, would constitute an Event of Default and the foreclosure sale -72- 73 of the Receivables Collateral and any and all other security for the Obligations based upon such Event of Default shall in no event be required to exceed sixty (60) days. (c) At any sale following an Event of Default, the Receivables Collateral and any and all other security for the Obligations may be sold as an entirety or in partial interests. Lender shall not be obligated to make any sale pursuant to any notice previously given. In case of any sale of all or any part of the Receivables Collateral or any other security for the Obligations on credit or for future delivery, the Receivables Collateral or any other security for the Obligations so sold may be retained by Lender until the selling price is paid by the purchaser thereof, but Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the collateral so sold; and in case of any such failure, such Receivables Collateral or such other security for the Obligations may again be sold under and pursuant to and in compliance with the provisions hereof. (d) In connection with sales made following an Event of Default, Lender may, in the name and stead of Borrower or in its own name, make and execute all conveyances, assignments and transfers of the Receivables Collateral sold pursuant to this Agreement; and Lender is hereby appointed Borrower's attorney-in-fact for this purpose. Nevertheless, Borrower will, if so requested by Lender, ratify and confirm any sale or sales by executing and delivering to Lender, or to such purchaser or purchasers, all such instruments as may, in the judgment of Lender, be advisable for that purpose. (e) The receipt by Lender of the purchase money paid at any sale made following an Event of Default shall be a sufficient discharge therefor to any purchaser of the Receivables Collateral or any portion thereof, and no such purchaser, after paying such purchase money and receiving such receipt, shall be bound to see to the application of such purchase money or any part thereof or in any manner whatsoever be answerable for any loss, misapplication or nonapplication of any such purchase money, or any part thereof, or be bound to inquire as to the authorization, necessity, expediency or regularity of any such sale. (f) Each purchaser at any sale following an Event of Default shall hold the Receivables Collateral and such other security for the Obligations so sold absolutely free from every claim or right of Borrower, including, without limitation, any equity or right of redemption of Borrower, which Borrower hereby specifically waives to the extent Borrower may lawfully do so. Lender, its employees and agents shall after such sale be fully discharged from any liability or responsibility in any matter relating to the Receivables Collateral and such other security that is sold and resulting from any action or inaction on the part of such purchaser or any successor-in-interest of such purchaser. -73- 74 9.6 The proceeds of any sale of all or any part of the Receivables Collateral and such other security for the Obligations shall be applied in the following order or priorities; first, to the payment of all costs and expenses of such sale, including, without limitation, reasonable compensation to Lender and its agents, attorneys' fees, and all other expenses, liabilities and advances incurred or made by Lender, its agents and attorneys, in connection with such sale, and any other unreimbursed expenses for which Lender may be reimbursed pursuant to the Documents; second, to the payment of the Obligations, in such order and manner as Lender shall in its discretion determine, with no amounts applied to payment of principal until all interest has been paid; and third, to the payment to Borrower, its successors or assigns, or to whomsoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 9.7 Lender may, at its option, and without any obligation to do so (but subject to any prior notice requirements, if any, contained in any Mortgage with respect to the exercise of any similar rights of Lender under such Mortgage), pay, perform and discharge any and all amounts, costs, expenses and liabilities herein agreed to be paid or performed by Borrower if Borrower fails to do so; and for such purposes Lender may use the proceeds of the Receivables Collateral or any other security for the Obligations and is hereby appointed Borrower's attorney-in-fact. All amounts expended by Lender in so doing or in exercising its remedies hereunder following an Event of Default shall become part of the Obligations secured hereby, shall be immediately due and payable by Borrower to Lender upon demand therefor, and shall bear interest at the Overdue Rate from the dates of such expenditures until paid. Exercise by Lender of its option under this paragraph will not cure any default of Borrower. 9.8 No remedy herein or in any other Document conferred on or reserved to Lender is intended to be exclusive of any other remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder, under any other Document or now or hereafter existing at law or in equity. Notwithstanding anything herein to the contrary, in any nonjudicial, public or private sale or sales under the Uniform Commercial Code or applicable real property law or in any judicial foreclosure and sale of the Receivables Collateral or any other security for the Obligations, the Receivables Collateral or any other security for the Obligations may be sold in any manner whatsoever not prohibited by law. No delay or omission to exercise any right or power shall be construed to be a waiver of any default or acquiescence therein or a waiver of any right or power; and every such right and power may be exercised from time to time and as often as may be deemed expedient. Lender's acceptance of any performance due hereunder which does not comply strictly with the terms hereof shall not be deemed to be a waiver of any right of Lender to strict Performance by Borrower. Acceptance of past due amounts or partial payments shall not constitute a waiver of full and timely payment of the Obligations. No Event of Default, declaration of the unpaid principal of the Loan to be immediately due and -74- 75 payable or exercise of any other right to remedy upon default shall stay, waive, or otherwise affect Lender's right to receive payments on and other proceeds of the Receivables Collateral. 9.9 Borrower, for itself and for all who may claim through or under it, hereby expressly waives and releases all right to have the Receivables Collateral or any other security for the Performance of the Obligations, or any part thereof, marshaled on any foreclosure, sale or other enforcement hereof. 9.10 While an Event of Default exists, Borrower will, on the request of Lender, assemble the Receivables Collateral not already in Lender's possession and make it available to Lender at a time and place reasonably convenient to Lender. ARTICLE X POWER OF ATTORNEY For the purpose of enabling Lender to protect and preserve its Security Interest in the Receivables Collateral, the Applicable Trusts and all other security for the Obligations and its rights and remedies under this Agreement and the Documents, Borrower does hereby constitute and appoint Lender, and its successors and assigns, to be Borrower's true and lawful attorney-in-fact upon the occurrence of an Event of Default, and during the continuance thereof, to perform any act, take any action, execute and sign any document, statement, instrument or other writing, and to do and perform any and all deeds and things in the name, place, and stead of Borrower, which Lender in its discretion shall determine necessary or required to protect and preserve its Security Interest in the Receivables Collateral, the Applicable Trusts or any other security for the Obligations and its rights and remedies under this Agreement and the Documents, or which Borrower is required or obligated to perform under the terms of this Agreement or the Documents. ARTICLE XI CONSTRUCTION AND GENERAL TERMS 11.1 All monies payable under the Project Notes, the Aloha Bay Note or the Office Note shall be paid to Lender at the address first set forth in this Agreement. All payments to be made under the Receivables Note shall be made to the Collection Agent. 11.2 This Agreement and the other Documents exclusively and completely state the rights and obligations of Lender and Borrower with respect to the Loan. No modification, variation, termination, discharge or abandonment hereof and no waiver of any of the provisions or conditions shall be valid unless in writing and signed by duly authorized representatives of Lender and Borrower or successors, transferees or assigns of either, subject, however, to the limitations on assignment hereby by Borrower. This Agreement -75- 76 supersedes any and all prior agreements or understandings, written or oral, between Borrower and Lender (other than in the other Documents) concerning this transaction. 11.3 The powers and agency hereby granted by Borrower are coupled with an interest and are irrevocable and are granted as cumulative to the remedies for collection of the indebtedness secured hereby provided by law. 11.4 This Agreement may be executed simultaneously in any number of identical copies each of which shall constitute an original for all purposes. 11.5 Any notice required or permitted to be given hereunder shall be in writing and shall be (a) personally delivered to the party being notified by courier or overnight courier, (b) transmitted by legible facsimile transmission so long as a hard copy of such notice is simultaneously sent by the notifying party by courier or overnight courier, or (c) transmitted by postage prepaid, certified or registered mail to such party at its address after its signature on the signature page hereof or such other address as the party being notified may have otherwise designated in a notice given as provided in this paragraph. Such notice shall be deemed to be effective, unless actual receipt is expressly elsewhere specified herein, upon (x) the date of receipt or (y) the date five (5) days after posting if transmitted by mail, whichever shall first occur. 11.6 All the covenants, promises, stipulations and agreements of Borrower and all the rights and remedies of the Lender in this Agreement contained shall bind Borrower, and, subject to the restrictions on merger, consolidation and assignment herein contained, its successors and assigns, and shall inure to the benefit of Lender, its successors and assigns, whether so expressed or not. Borrower may not assign its rights herein and no Person shall be deemed a third party beneficiary of this Agreement. 11.7 If any one or more of the provisions contained in this Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 11.8 Time is of the essence in the Performance of the Obligations. 11.9 All headings are inserted for convenience only and shall not affect any construction or interpretation of this Agreement. The provisions of this Agreement shall apply to the parties according to the context hereof and without regard to the number or gender of words and expressions used herein. Unless otherwise indicated, all references herein to clauses and other subdivisions refer to the corresponding paragraphs, clauses and other subdivisions of this Agreement; the words "hereof", "hereto", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular paragraph, clause or other subdivision hereof; and reference to a numbered or lettered subdivision of an Article, -76- 77 or paragraph shall include relevant matter within the Article or paragraph which is applicable to but not within such numbered or lettered subdivision. 11.10 THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED AND SHALL BE PERFORMED IN THE STATE OF ARIZONA. THE PROVISIONS OF THIS AGREEMENT AND ALL RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ARIZONA AND TO THE EXTENT THEY PREEMPT SUCH LAWS, THE LAWS OF THE UNITED STATES. BORROWER (A) HEREBY IRREVOCABLY SUBMITS ITSELF TO THE PROCESS, JURISDICTION AND VENUE OF THE COURTS OF THE STATE OF ARIZONA, MARICOPA COUNTY, AND TO THE PROCESS, JURISDICTION, AND VENUE OF THE UNITED STATES DISTRICT COURT FOR ARIZONA, FOR THE PURPOSES OF SUIT, ACTION OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE SUBJECT MATTER HEREOF BROUGHT BY LENDER AND (B) WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING ANY CLAIM THAT BORROWER IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. 11.11 It is the intent of the parties hereto to comply with the Applicable Usury Law. Accordingly, notwithstanding any provisions to the contrary in this Agreement or in any of the other Documents in no event shall this Agreement or the Documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law. If (a) any such excess of interest otherwise would be contracted for, charged or received from Borrower or otherwise in connection with the Obligations or (b) the maturity of the Obligations is accelerated in whole or in part, or (c) all or part of the principal or interest of the Obligations shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received in connection with the Obligations would exceed the maximum contract rate permitted by the Applicable Usury Law then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Borrower nor any other Person now or hereafter liable for the payment hereof will be obligated to pay the amount of such interest to the extent that it is in excess of the maximum contract rate permitted by the Applicable Usury Law, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount of the Obligations of Borrower or refunded to Borrower, at Lender's option, and (4) the effective rate of interest will be automatically reduced to the maximum contract rate permitted by the Applicable Usury Law. Without limiting the generality of the foregoing, to the extent permitted by the Applicable Usury Law: (x) all calculations of the rate of interest which are made for the purpose of determining whether such rate would -77- 78 exceed the maximum contract rate permitted by the Applicable Usury Law shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the Obligations, all interest at any time contracted for, charged or received from Borrower or otherwise in connection with the Obligations; and (y) in the event that the effective rate on the Obligations should at any time exceed the maximum contract rate permitted by the Applicable Usury Law, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law, shall be paid to Lender from time to time, if and when the effective interest rate on the Obligations otherwise falls below the maximum contract rate permitted by the Applicable Usury Law, to the extent that interest paid to the date of calculation does not exceed the maximum contract rate permitted by the Applicable Usury Law, until the entire amount of interest which would have otherwise been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Should the maximum contract rate permitted by the Applicable Usury Law be increased at any time hereafter because of a change in the law, then to the extent not prohibited by the Applicable Usury Law, such increases shall apply to all Obligations regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the maximum contract rate permitted by the Applicable Usury Law be decreased because of a change in the law, such decreases shall not apply to the Obligations regardless if resulting from an advance of the Loan made after the effective date of such decrease. 11.12 This Agreement is an amendment, restatement and consolidation in full of the Existing PEC Loan Agreement and the Existing VSR Loan Agreement and all matters formerly governed by the Existing PEC Loan Agreement and the Existing VSR Loan Agreement shall now be governed by this Agreement. This Agreement shall not, however, constitute a waiver of any existing default or breach of a covenant and shall have no retroactive effect whatsoever; provided, however, that any and all written waivers given heretofore are hereby extended to the date hereof. Within thirty (30) days after the Closing Date, Lender shall return to Borrower the original Amended and Restated Promissory Note executed and delivered by Borrower to Lender pursuant to the terms of the Existing PEC Loan Agreement and the original Amended and Restated Promissory Note executed by VSR and delivered to Lender pursuant to the terms of the Existing VSR Loan Agreement. In addition, upon Lender's receipt of written confirmation from Title Company, satisfactory to Lender in its sole discretion, that all Purchaser Mortgages for each Lot in the Project encumbered by the Huerfano Deed of Trust have been reconveyed, Lender shall execute and deliver to Borrower for recording in the Official Records of Huerfano County, Colorado, a Full Release and Reconveyance of the Huerfano County Deed of Trust. ARTICLE XII CONDITIONS PRECEDENT Lender's obligations under this Agreement and its further obligations to make any Advances described in this Agreement are subject to the following conditions precedent, -78- 79 all of which must be satisfied on or prior to the Closing Date (unless otherwise hereinafter specifically provided): 1. Borrower shall have delivered to Lender the following executed documents, all in form satisfactory to Lender: (a) This Agreement; (b) The Receivables Note; (c) From the Guarantor of the Loan, a "Consent of Guarantor" in a form acceptable to Lender; (d) From each of the Trustees under any Trust, an Acknowledgment and Consent in the form attached hereto, which shall be executed and delivered to Lender within thirty (30) days after the Closing Date; (e) An opinion from Borrower's counsel and an opinion from Guarantor's counsel, each of which counsel shall be acceptable to Lender, with respect to such matters as Lender shall require; (f) A corporate resolution of Borrower in form and substance acceptable to Lender; (g) A corporate resolution of Guarantor in form and substance acceptable to Lender; (h) A First Amendment to Promissory Note with respect to the Ida Building One Note; (i) A First Amendment to Promissory Note with respect to the Ida Building Two Note; (j) A First Amendment to Promissory Note with respect to the Ida Building Addition Note; (k) A First Amendment to Promissory Note with respect to the Winnick Building Addition Note; (l) A Second Amendment to Promissory Note with respect to the Towers Note; -79- 80 (m) A Fifth Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the Headquarters Deed of Trust; (n) A Fourth Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the Ida Building One Deed of Trust; (o) A Third Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the Ida Building Two Deed of Trust; (p) A Third Modification of Mortgage, Assignment of Rents and Proceeds and Security Agreement with respect to the Aloha Bay Mortgage; (q) A Second Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the Winnick Building Addition Deed of Trust; (r) A Second Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the Ida Building Addition Deed of Trust; (s) A Second Modification of Deed of Trust, Assignment of Rents and Proceeds and Security Agreement with respect to the FCFC Deed of Trust; (t) Such other documents or instruments required by Lender to fully perfect the liens and Security Interests of Lender described or contemplated herein; (u) Such other items as Lender may require. 2. Borrower shall have obtained and delivered to Lender, at Borrower's expense, appropriate date-down endorsements to the existing Title Policies issued in favor of Lender with respect to each of the Headquarters Deed of Trust, the FCFC Deed of Trust, the Ida Building One Deed of Trust, the Ida Building Two Deed of Trust, the Ida Building Addition Deed of Trust, the Winnick Building Addition Deed of Trust and the Aloha Bay Mortgage, which endorsements shall insure that such Mortgages continue to be first and prior liens on the property which are the subject matters thereof subject only to such additional exceptions as may be approved by Lender and -80- 81 notwithstanding the effect of the recordation of the modifications described in PARAGRAPHS 1(m), 1(n), 1(o), 1(p), 1(q), 1(r) OR 1(s) above. 3. Lender shall have received evidence that, as of the Closing Date, there has been no material adverse change in the financial condition of Borrower or Guarantor from the financial statements and other documents most recently submitted to Lender. 4. Lender shall have received, reviewed and approved current lien, tax lien, litigation and judgment searches with respect to the each of Borrower and Guarantor. In connection therewith, Borrower shall have delivered to Lender, and Lender shall have reviewed and approved to its satisfaction, an updated report and analysis with respect to all litigation matters involving Borrower and Guarantor. 5. Lender shall have received, reviewed and approved such documents or other evidence as Lender shall require to establish that any and all indebtedness owed by Borrower to Heller Financial and Textron Financial is currently paid and Borrower is in good standing and in compliance with all of its obligations to Heller Financial and Textron Financial. 6. Lender shall have received, reviewed and approved to its satisfaction management letters written by Deloitte & Touche to Guarantor and Borrower with respect to their 1996 fiscal year, together with any responses to such management letters by Borrower or Guarantor. 7. Lender shall have received, reviewed and approved to its satisfaction financial statements for Guarantor and Borrower for the fiscal quarter ending November 30, 1996. In addition, as a condition subsequent, Borrower shall have delivered to Lender not later than June 1, 1997, and Lender shall have reviewed and approved to its reasonable satisfaction, financial statements for Guarantor and Borrower for the fiscal quarter ending February 28, 1997. The failure of Borrower to deliver such financial statements as of June 1, 1997 shall be deemed to be an Event of Default under this Agreement. 8. Borrower shall have paid all closing costs, title company charges, recording fees and taxes, appraisal fees and expenses, survey fees, travel expenses, architect/engineer inspection fees and expenses, fees and expenses of Lender's counsel, and all other costs and expenses incurred by Lender in connection with the preparation and closing of this Agreement. 9. Lender's obligation to make the Second Winnick Building Addition Advances under the Mortgage Loan Facility is subject to the satisfaction by Borrower of the additional conditions precedent and conditions subsequent set forth in EXHIBIT "12.10" attached hereto. -81- 82 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by Persons duly authorized on the day and year first above written. "BORROWER" "LENDER" PREFERRED EQUITIES CORPORATION, FINOVA CAPITAL CORPORATION, a Nevada corporation a Delaware corporation By: /s/ DENAY R. MIDDLETON By: /s/ KEVIN WALSH --------------------------------- -------------------------------- Name: Denay R. Middleton Name: Kevin Walsh ------------------------------- ------------------------------ Title: Vice President Title: Vice President ------------------------------ ----------------------------- WITNESSED: ATTEST: /s/ Elaine H. Holley /s/ [SIG] - ------------------------------------ ----------------------------------- Asst. Secretary /s/ [SIG] - ------------------------------------ WITNESSED: /s/ SHARON WILLIAMS ----------------------------------- /s/ PATRICIA H. STEINER ----------------------------------- Send notices to: Send notices to: Preferred Equities Corporation FINOVA Capital Corporation 4310 Paradise Road 7272 East Indian School Road Las Vegas, Nevada 89109 Suite 410 Attn: President Scottsdale, Arizona 85251 Attn: Vice President - Group Counsel -82- 83 With a copy to: With a copy to: Mr. Jerome J. Cohen FINOVA Capital Corporation 1125 N.E. 125th Street 7272 East Indian School Road Suite 206 Suite 410 North Miami, Florida 33161 Scottsdale, Arizona 85251 Attn: Vice President - Operations Management -83- 84 STATE OF ARIZONA ) ) ss. COUNTY OF MARICOPA ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared DONALD R. MIDDLETON, known to me to be the VICE PRESIDENT of PREFERRED EQUITIES CORPORATION, a Nevada coarporation, who acknowledged to me that the same was the free act and deed of such corporation and that s/he being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this 16th day of May, 1997. /s/ Sandra M. Ulright -------------------------------------- NOTARY SEAL: Notary Public STATE OF ARIZONA ) ) ss. COUNTY OF MARICOPA ) BEFORE ME, the undersigned authority, a Notary Public in and for the County and State aforesaid, on this day personally appeared KEVIN WALSH, known to me to be the VICE PRESIDENT of FINOVA CAPITAL CORPORATION, a Delaware orporation, who acknowledged to me that the same was the free act and deed of such corporation and that s/he being authorized by proper authority to do so, executed the same on behalf of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE this 21st day of May, 1996. /s/ [SIG] -------------------------------------- NOTARY SEAL: Notary Public -84- 85 LIST OF EXHIBITS Exhibit "I-A" - Legal description of Aloha Bay Exhibit "I-B" - Copy of Custodial Agreement Exhibit "I-C" - Conditions of Eligible Receivables Exhibit "I-D" - Legal description of FCFC Property, 1500 East Tropicana, Las Vegas, Nevada Exhibit "I-E" - Legal description of Grand Flamingo Fountains, Las Vegas, Nevada Exhibit "I-F" - Legal description of Headquarters Building, 4310 Paradise Road, Las Vegas, Nevada Exhibit "I-G" - Legal description of Ida Building Addition, 190 and 196 Ida Street, Las Vegas, Nevada Exhibit "I-H" - Legal description of Ida Building One, 170 and 178 Ida Street, Las Vegas, Nevada Exhibit "I-I" - Legal description of Ida Building Two, 165, 171 and 177 Ida Street, Las Vegas, Nevada Exhibit "I-J" - Legal description of portions of the Project located in Huerfano County, Colorado Exhibit "I-K" - Legal description of Project (Reno), also known as Reno Spa Resort Club Exhibit "I-L" - Legal description of Project (Terraces - Phase I) Exhibit "I-M" - Legal description of Project (Terraces - Phase II) Exhibit "I-N" - Legal description of Project (Towers) Exhibit "I-O" - Legal description of Project (Villas) -85- 86 Exhibit "I-P" - Legal description of Second Winnick Building Addition, 184, 190 and 196 Winnick Avenue, Las Vegas, Nevada Exhibit "I-Q" - Legal description of South Park Ranches, Park County, Colorado Exhibit "I-R" - Legal description of Grand Flamingo Suites - Phase I, Las Vegas, Nevada Exhibit "I-S" - Legal description of Grand Flamingo Suites - Phase II, Las Vegas, Nevada Exhibit "I-T" - Legal description of Grand Flamingo Winnick, Las Vegas, Nevada Exhibit "I-U" - Legal description of Winnick Building Addition, also known as Courtyard, Las Vegas, Nevada Exhibit 2.3.6 - Form of Project Note Exhibit 3.5 - Request for Advance and Certification by Borrower Exhibit 5.2.1 - List of Requirements for Receivables Advances Exhibit 5.2.2 - List of Requirements for Advances Under Mortgage Loan Facility Exhibit 8.3(a) - Litigation Schedule Exhibit 8.4(a) - List of States in Which Lots and Units Are Sold by Borrower Exhibit 8.23 - Certification of Financial Covenants Exhibit 8.31 - List of Current Litigation Matters Exhibit 12.10 - List of Additional Conditions Precedent and Subsequent With Respect to Funding of Second Winnick Building Addition -86- EX-10.116 5 FORM OF OWNERS ASSOCIATION AGREEMENT 1 EXHIBIT 10.116 [RCI LOGO] OWNERS ASSOCIATION AGREEMENT This OWNERS ASSOCIATION AGREEMENT ("Agreement") is made and entered into at Indianapolis, Indiana, by and between RESORT CONDOMINIUMS INTERNATIONAL, INC., an Indiana corporation having offices and its principal place of business at One RCI Plaza, 3502 Woodview Trace, Indianapolis, Indiana, U.S.A. ("RCI"), , an owners association comprised of the owners of Timeshare Interests at the Resort, having its principal place of business at 4310 Paradise Road, Las Vegas, Nevada 89109-6597, ("Association"). RECITALS A. RCI makes available the RCI Exchange Program to individuals who purchase or acquire Timeshare Interests in RCI Affiliated Resorts. B. Association represents owners of Timeshare Interests at the resort project(s) described as follows: Name, location and street address of each Resort project affiliated hereby: (use additional sheets if necessary) C. Association has submitted to RCI an Application for Affiliation, a copy of which is incorporated by reference herein in its entirety, and desires the Resort to become an RCI Affiliated Resort, and for Association to offer to Purchasers and owners of Timeshare Interests in the Resort the opportunity to become RCI Members and to be eligible to participate in the RCI Exchange Program. D. RCI desires the Resort to become an RCI Affiliated Resort and for Association to perform services and duties associated with the RCI Exchange Program in accordance with the terms and conditions of this Agreement. NOW THEREFORE, in consideration of the mutual covenants and obligations contained in this Agreement, the parties hereby agree as follows: ARTICLE I -- DEFINITIONS For the purposes of this Agreement, the terms listed below shall, unless the context otherwise requires, bear the following meanings: 1.1 APPLICATION FOR AFFILIATION: The Association's Application for Resort Affiliation, including any attachments thereto, which is required to be submitted by Association to RCI in connection with this Agreement. 1.2 CONFIRMED EXCHANGE: RCI's written or oral notification to the Resort and RCI Member or Exchange Guest that accommodations at the Resort or another resort have been reserved for use by the RCI Member or Exchange Guest. 1.3 ENROLLMENT APPLICATION: The form of application from time to time prescribed by RCI for the enrollment of Purchasers in the RCI Exchange Program. 1.4 EXCHANGE GUEST(S): Person(s) who have received a Confirmed Exchange to the Resort from RCI. 1.5 MARKS: Those trademarks set forth below, or other trademarks as may be included and licensed by RCI to Association from time to time. 2 1.6 PRESALE: That status where the Resort or a Unit at the Resort is under construction, renovation or refurbishment and is considered by RCI to be not ready for occupancy by an Exchange Guest(s). 1.7 PROSPECTIVE PURCHASER: Prospective purchasers of a Timeshare Interest or other interest at the Resort or any other RCI Affiliated Resort. 1.8 PURCHASERS: Persons who purchase Timeshare Interests in the Resort, including persons who are already RCI Members at time of purchase. 1.9 RCI AFFILIATED RESORTS: Resorts subject to resort affiliation agreements with RCI, including those resorts described in Recital B. 1.10 RCI EXCHANGE PROGRAM: RCI's program of facilitating the exchange of Timeshare Interests. 1.11 RCI PROCEDURES MANUAL: Any manual(s) of policies and/or procedures for Associations as published and amended by RCI from time to time. 1.12 RCI SUBSCRIBING MEMBERS OR RCI MEMBERS: Purchasers whose Enrollment Applications are accepted by RCI and who comply with the Terms and Conditions of RCI Membership. 1.13 RCI SUBSCRIPTION FEE: The annual fee from time to time payable by RCI Members in respect of RCI's directory, magazine(s) or other publications and such other benefits incident to the subscription. 1.14 RCI TERMS AND CONDITIONS: Those terms and conditions of RCI membership contained in RCI's Endless Vacation Special Resort Edition magazine as amended from time to time by RCI in its discretion. 1.15 RESELLERS: Any brokers, marketers, marketing companies or management companies engaged by Association. 1.16 RESORT: The resort project(s) or other lodging or vacation accommodation(s): (1) described in Recital B and (2) all subsequent buildings or phases of the resort project(s) or other lodging or vacation accommodation(s) which meet RCI standards. 1.17 TIMESHARE INTERESTS: Possessory, occupancy or usage rights in timeshare resorts or other lodging or vacation accommodation(s), whole-owner condominiums or similar vacations ownership plans. 1.18 UNIT: A unit of accommodation of movable or immovable property designed for separate occupancy in connection with the use of a Timeshare Interest. ARTICLE 2 -- RCI'S DUTIES AND OBLIGATIONS 2.1 PROVIDE EXCHANGE PROGRAM. RCI shall make the RCI Exchange Program available to RCI Subscribing Members and perform its functions with respect to the RCI Exchange Program in accordance with its obligations under this Agreement, the RCI Terms and Conditions of Membership and the RCI Procedures Manual. 2.2 PROCESS ENROLLMENT APPLICATIONS. RCI shall process, promptly and fairly, Enrollment Applications and will notify Association if RCI rejects an Enrollment Application. 2.3 FEES. If an Enrollment Application is rejected by RCI or is canceled by the Purchaser as a result of the Purchaser's cancellation or recission of a contract to purchase a Timeshare Interest, RCI will refund fees previously remitted to RCI which correspond to such rejected or canceled Enrollment Application in accordance with the procedures set forth in the RCI Procedures Manual. 2.4 MATERIALS. RCI, will provide to Association a sufficient quantity of forms as required by RCI to administer the RCI Exchange Program at no charge. Association may order and shall pay RCI's published rates for additional materials such as the Endless Vacation Special Resort Edition, the RCI Disclosure Guide to Vacation Exchange and other materials to distribute as may be required by law. ARTICLE 3 -- ASSOCIATION'S OBLIGATIONS 3.1 ENROLLMENT APPLICATION AND FEES. If Association or its Resellers offer Timeshare Interests in the Resort to Purchasers or Prospective Purchasers, it agrees it shall on a weekly basis and no later than thirty (30) days after a Purchaser's date of purchase: 3.1.1 submit to RCI a fully completed Enrollment Application for each new Purchaser; 3.1.2 pay to RCI in a form acceptable to RCI and without setoff or deduction, a sum equal to the number of Purchasers since the last payment was made multiplied by the applicable fee(s) required for each Purchaser; and 3.1.3 submit a sales report in a form prescribed by RCI. 3.2 PROMOTION OF EXCHANGE PROGRAM. Association shall, in a manner that complies with the terms of this Agreement and the RCI Procedures Manual, promote RCI and the RCI Exchange Program to owners of Timeshare Interests in the Resort. Such efforts shall include but not be limited to: 3.2.1 distributing or arranging for the distribution of the Endless Vacation Special Resort Edition magazine to all new Purchasers at the Resort; 3.2.2 making the Endless Vacation Special Resort Edition magazine and Enrollment Applications available to all Purchasers and owners of Timeshare Interests in the Resort; and 3.2.3 encouraging continued membership in the RCI Exchange Program. 2 3 3.3 MINIMUM PERFORMANCE REQUIREMENT. Association acknowledges that if its enrolled membership is not more than one hundred (100), it is not economically viable for RCI to maintain the Affiliation, and this Agreement is likewise terminable at the sole option and discretion of RCI upon sixty (60) days notice to Association. 3.4 PHOTOGRAPHS, NAMES AND LOGOS. Association agrees to provide to RCI at least two (2) photographs or representative images of the Resort. Association agrees that these images, along with the name(s) and logo(s) of the Resort, are for non-exclusive use by RCI or its licensees, at RCI's sole discretion, for the promotion of the RCI Exchange Program. Association represents and warrants to RCI that: (a) Association owns, has acquired or licensed the trademark and copyright rights in and to such images, names and logos and (b) Association has obtained, and has on file at its office, releases or consents from or for every person, entity or thing as may be required by law or otherwise for the reproduction of each such photograph or image as contemplated herein. Further, Association hereby releases, discharges and agrees to indemnify and hold RCI harmless from and against any and all liability, demand, claim, cost, expense, loss or damage (including attorneys' fees) caused by or arising from the reproduction and distribution of such images or use of such images, names or logos. This indemnification and hold harmless provision shall survive the termination of this Agreement for all applicable statutes of limitation. 3.5 MANAGEMENT DUTIES. Association agrees: 3.5.1 on RCI's request, to promote new services and benefits provided by RCI to RCI Members; 3.5.2 to perform services and other duties associated with the operation of the RCI Exchange Program in accordance with the RCI Procedures Manual and other materials furnished to it by RCI from time to time; 3.5.3 to maintain high qualitative and managerial standards throughout the Resort (including maintenance of an efficient and effective reservations system) and in particular to maintain high standards of hospitality, service, cleanliness, maintenance and appearance and a comprehensive maintenance program; 3.5.4 to operate its business in a commercially reasonable fashion that will enable it to meet its obligations; 3.5.5 to honor all Confirmed Exchanges at the Resort; 3.5.6 to provide all RCI Members and Exchange Guests with the services and facilities referred to in the Application for Affiliation and this Agreement; 3.5.7 to provide all RCI Members and Exchange Guests with the same rights and privileges at the same rates afforded generally to Purchasers at the Resort; 3.5.8 to act in a reasonable and co-operative manner to satisfy any complaints; 3.5.9 to the extent permissible by law, to submit to RCI upon RCI's request, not to exceed once annually, a report containing the name, current billing address and current ownership information for each Purchaser at the Resort. This report shall be current as of one month prior to the date such report is submitted to RCI; 3.5.10 not to require Exchange Guests staying at the Resort to attend a sales presentation; 3.5.11 to collect any bed tax, transient occupancy tax or other local rate tax or charge on use or occupancy of the Resort's accommodations from owners of the Timeshare Interests at the Resort, unless the imposition of such tax is precluded by law, in which case to collect the applicable taxes from Exchange Guests; 3.5.12 to provide RCI with Certificates of Insurance reflecting: (1) those property and casualty coverages in effect as described in Section 5.3.3 and (2) naming RCI as an additional insured under such general liability policy as required by Section 5.3.3; and 3.5.13 to inform RCI before the appointment or replacement of any management and/or maintenance company relating to the Resort (whose appointment shall not, for the avoidance of doubt, affect the Association's obligations of management and maintenance of the Resort). 3.6 CHANGE IN INFORMATION. Association agrees to immediately notify RCI of any change in any information set forth in the Application for Affiliation or of any other fact or circumstances affecting the operation of the RCI Exchange Program with respect to the Resort. 3.7 NON-INTERFERENCE. During the term of this Agreement and following its termination, Association shall not in any manner: 3.7.1 encourage any Purchaser or any other timeshare owner or RCI Member, to modify, amend, rescind, contravene or cancel their RCI membership; 3.7.2 encourage any owners association, club, developer or RCI Affiliated Resort to modify, amend, rescind, contravene or cancel its affiliation agreement with RCI; or 3.7.3 interfere or facilitate interference in any respect with the contractual relationship between RCI (including any RCI subsidiary, parent, associated or affiliated company or other entity in which RCI or its principal holds a controlling ownership interest) and any party contracting with RCI. 3.8 NON-DISCLOSURE. During the term of this Agreement and after its termination, Association agrees that it shall not use for its own benefit (other than as permitted under this Agreement) or disclose to any third party, directly or indirectly, any information with respect to: (a) the terms of this Agreement or this Agreement's prior drafts or documents used in this Agreement's negotiations, (b) any proposals produced by RCI and distributed to Association, (c) any RCI proprietary information (including but not limited to any trade secrets, any confidential business information not readily available to the general public, or any confidential information regarding the operation of the RCI Exchange Program) to which it may be privy, (d) RCI membership numbers or exchange activity of any RCI Member or 3 4 Exchange Guest, or (e) the names, addresses or telephone numbers of RCI Members. However, disclosure of the terms of this Agreement may be permitted where such disclosure is required by law, provided that Association gives RCI at least twenty (20) days written notice prior to such disclosure. Notwithstanding the above, Association agrees that direct or indirect disclosure of any of the above information to any other exchange company, timeshare or vacation ownership developer or timeshare owners association is expressly prohibited by this Section under any circumstances. 3.9 DENIAL OF ACCESS. 3.9.1 If Association fails to honor a Confirmed Exchange into the Resort or if an Exchange Guest is otherwise denied access to a unit at the Resort for which that Exchange Guest has a Confirmed Exchange, then Association shall immediately and at its own expense secure alternative accommodations of similar size and quality for the same time period for the Exchange Guest and shall reimburse RCI for any costs incurred by RCI in connection with such failure to honor the Confirmed Exchange or such denial of access. 3.9.2 Neither Association nor RCI shall have any obligation to secure alternate accommodations for an Exchange Guest arriving at the Resort during an interval other than that for which the Exchange Guest has been confirmed by RCI. ARTICLE 4 -- RELATIONSHIP OF THE PARTIES 4.1 REPRESENTATION OF RELATIONSHIP. Association shall fully and accurately describe the RCI Exchange Program and Association's relationship with RCI to Prospective Purchasers, Purchasers and owners of Timeshare Interests in the Resort. To this end, Association: 4.1.1 shall not misrepresent in any way the RCI Exchange Program to Purchasers, Prospective Purchasers or owners of Timeshare Interests in the Resort, nor make any representation which could lead to any confusion on the part of any Purchaser, Prospective Purchaser or owner of Timeshare Interests in the Resort as to the RCI Exchange Program or the services and benefits offered in connection therewith; 4.1.2 shall deliver, in writing and in easily readable print, and prior to the execution of any contract for purchase, the following or substantially similar language to Prospective Purchasers or Purchasers: RCI conducts an exchange program made available to purchasers at this resort. No joint venture, partnership or contract of agency exists between RCI and the owners association of this resort; however the owners association of this resort is a party to an agreement with RCI through which the owners association submits applications on behalf of purchasers to become members of RCI's Exchange Program. RCI's responsibility for representations concerning the RCI Exchange Program is limited to those representations made in materials supplied by RCI. While it is anticipated that the owners association of this resort and RCI will maintain an ongoing relationship, there is no assurance that the agreement between the owners association of this resort and RCI will continue. Similarly, RCI makes no representations as to the continued viability of this resort. Your decision to purchase should be based primarily upon the benefits to be gained from ownership and use of your timeshare interests in the resort and not upon the RCI Exchange Program. 4.1.3 shall not amend, summarize, change or modify any material supplied by RCI without RCI's prior written consent, or delete, alter or obscure any proprietary notice or legend contained thereon. 4.1.4 shall not use the name, photograph or image of any other RCI Affiliated Resort or any other resort or hotel in any material to be used in a sales presentation. Further, those names, photographs and images may not be used in any other manner without obtaining the prior written consent of: (a) RCI, (b) the owner of such other RCI Affiliated Resort or other resort, hotel, or other lodging or vacation accommodation (c) the owner of the copyright in the photograph or image, and (d) any other person whose permission is legally required to use such name, photograph or image. SEE ATTACHED ADDENDUM 4.1.5 shall not offer the RCI Exchange Program as an investment, in conjunction with the sale of a security, through an emphasis on any profit or appreciation, or in connection with any rental pool; and 4.1.6 shall not promote the RCI Exchange Program or other services available from RCI as the main or principal reason for purchase of any Timeshare Interest nor represent Association's affiliation to the RCI Exchange Program as a warranty or indication of the Association's or Resort's status or condition. 4.2 ACKNOWLEDGEMENT. Association acknowledges that: 4.2.1 RCI has the right to accept or reject any Enrollment Application submitted to it; and 4.2.2 It shall have each Purchaser at the Resort who chooses not to become an RCI Member acknowledge in writing that he understands that he does not become an RCI Member unless an appropriate Enrollment Application is tendered to and accepted by RCI and the appropriate fees are received by RCI. 4 5 4.3 APPOINTMENT OF RESELLERS. Association will insure that Resellers do not make any representations related to RCI or the RCI Exchange Program in connection with the sale of Timeshare Interests in the Resort unless and until the Association requests and receives RCI's approval to sublicense to the particular Reseller(s) the right to use the RCI Marks and RCI materials for the sole purpose of promoting the RCI Exchange Program and obtaining RCI Enrollment Application Forms on the Association's behalf. RCI will grant such approval only upon fulfillment of the following conditions: 4.3.1 Association gives RCI at least thirty (30) days prior written notice of its intent to engage the Reseller for the above purposes; 4.3.2 Association provides RCI with its thirty (30) day notice a copy of its proposed agreement with the Reseller, which agreement shall contain the same trademark provisions as contained in this Agreement, including but not limited to those in Section 4.3.5 and Article 6 herein; 4.3.3 Association provides RCI with its thirty (30) day notice a Reseller's Acknowledgement in the form required by RCI from time to time; 4.3.4 Association acknowledges and agrees that RCI may, at any time during the thirty (30) day notice period referred to above: (a) request additional information regarding the Reseller from Association; and (b) refuse at its sole discretion to grant Association's request for approval to sublicense to Reseller the right to use the RCI Marks and RCI materials for the sole purpose of promoting the RCI Exchange Program and obtaining RCI Enrollment Application Forms on the Association's behalf. If notice of refusal from RCI is not given during such thirty (30) day period, Association may grant the Reseller a sublicense as described herein; 4.3.5 Association acknowledges and agrees that immediately on termination of this Agreement, the Reseller shall cease using RCI Marks and RCI materials, cease promoting the RCI Exchange Program, and further cease obtaining RCI Enrollment Application Forms. Association shall notify all Resellers in writing of such termination and Association shall collect all RCI materials, all materials bearing one or more of the RCI Marks, and all RCI Enrollment Application Forms held by or on behalf of all Resellers. Association agrees that it will promptly notify RCI in writing of the Reseller's cessation of the previously authorized activities and will certify to RCI that it has collected all such materials from the Reseller. Association shall be liable to RCI for all acts or omissions of the Reseller arising out of any such failure to timely cease such activities and any damages which RCI may suffer as a result of Reseller's activities following termination will be covered under the Association's obligation to indemnify RCI as set forth in this Agreement. 4.3.6 Association acknowledges and agrees that, RCI, in addition to any other rights it may enjoy under this Agreement hereby reserves the right to require termination of the Reseller in the event Reseller engages in any act or omission which would constitute a breach of this Agreement if committed by Association. 4.4 RESPONSIBILITIES OF ASSOCIATION. Association acknowledges and agrees that, the appointment of Resellers notwithstanding, it is and remains at all times directly and primarily responsible for (a) the submission to RCI of RCI Enrollment Applications and fees; (b) the content and correctness of RCI Enrollment Applications; (c) all acts or omissions or Resellers; and (d) ensuring that any and all Resellers fully comply with the terms of this Agreement. ARTICLE 5 -- ACKNOWLEDGEMENTS, REPRESENTATIONS AND WARRANTIES 5.1 ACKNOWLEDGEMENTS. Association acknowledges and agrees that: 5.1.1 it will offer the RCI Exchange Program only to Purchasers or owners of Timeshare Interests in the Resort(s) identified in Recital B; 5.1.2 it will not offer the RCI Exchange Program to Purchasers or owners of Timeshare Interests at any other resort without entering into a separate Agreement with RCI for such resort or adding such resort to this Agreement by Addendum; 5.1.3 RCI memberships are available to natural persons, and if a Timeshare Interest is purchased by a corporation, partnership or other business entity, RCI membership must be in the name of the natural person authorized by such entity to utilize the purchased Timeshare Interest; 5.1.4 through the RCI Exchange Program, RCI has the right to confirm any individuals into Units at the Resort which have been deposited with RCI provided, however, such Exchange Guests comply with the rules and regulations of the Resort; 5.1.5 the RCI Terms and Conditions, including but not limited to the services and benefits provided by RCI to RCI Members, exchange privileges, the practices, procedures and priorities for effecting exchanges and the fees payable by RCI Members govern the relationship between RCI and RCI Members, and may be changed by RCI from time to time in its discretion; 5.1.6 the use of RCI Guest Certificates is personal to RCI Members and no commercial use of RCI Guest Certificates may be made by Purchasers, Association, or any or Association's officers, directors, employees, sales representatives, brokers or agents; 5.1.7 RCI has the right to inspect the Resort and the sales records of Association with respect to the Resort upon reasonable notice and during regular business hours; 5.1.8 Association shall not assign or sublicense any or all or its rights under this Agreement to any person without RCI's prior written approval and any such attempted assignment of sublicense shall be null and void; 5.1.9 RCI may assign its rights and duties under this Agreement or any Enrollment Application or agreement with an RCI Member in which case this Agreement shall remain in full force and effect; and 5 6 5.1.10 except for sales in the ordinary course of business to Purchasers for use other than a commercial use, it will not transfer any interest in the Resort unless the transferee agrees to be bound by the terms and conditions of this Agreement in the same manner as the Association hereunder. 5.2 ACKNOWLEDGEMENT OF RELATIONSHIP. Association hereby acknowledges that: 5.2.1 it has no power to bind RCI in any manner; 5.2.2 Association and Resort are independent and outside the control of RCI and that nothing in this Agreement creates a relationship of agency, employment, partnership or joint venture between RCI and the Association; 5.2.3 the product(s) of Association (including but not limited to Timeshare Interests) are separate and distinct from the services offered through the RCI Exchange Program; and 5.2.4 it is not relying on RCI or the RCI Exchange Program for the sale of its product(s). 5.3 REPRESENTATIONS AND WARRANTIES. Association represents and warrants to RCI that: 5.3.1 the statements made by it in the Application for Affiliation are not misleading and are true and correct in all material respects and that all the facilities referred to in the Application for Affiliation will be available to Exchange Guests in the manner described in the Application for Affiliation; 5.3.2 it owns or has the legal right to convey Timeshare Interests to Purchasers; 5.3.3 it maintains with a reputable insurer property and casualty insurance to cover loss or damage to the Resort, as well as general liability insurance naming RCI as an additional insured in an amount sufficient to cover its risk; 5.3.4 it has thoroughly examined the RCI Exchange Program as set forth in the RCI Procedures Manual and other materials furnished to it by RCI and that it is familiar with the operation of the RCI Exchange Program; 5.3.5 except as previously disclosed in writing to RCI, there is no litigation, proceeding, claim, complaint, investigation or similar action pending or threatened against it which would materially and adversely affect the performance of its obligations or the continued operation of the Resort; 5.3.6 by entering into this Agreement, it will not be in breach of the provisions of any other agreement, lease, charter, by-law or any other instrument or obligation; 5.3.7 it is in compliance with all applicable laws, rules and regulations; and 5.3.8 the execution of this Agreement has been duly authorized by all necessary actions, the persons executing this Agreement are authorized to do so and this Agreement constitutes its legal and binding obligation. The representations and warranties contained herein are of a continuing nature, and unless otherwise disclosed to RCI in writing, shall be considered reaffirmed by Association with each submission of Enrollment Applications. ARTICLE 6 -- TRADEMARKS 6.1 LICENSE. Upon the terms and conditions of this Agreement, and the policies and procedures established by RCI from time to time governing the use of the Marks, RCI grants to Association a non-exclusive license to use the Marks only on and in connection with its services in promotion the RCI Exchange Program, submitting Enrollment Applications of Purchasers at the Resort to RCI, and coordinating activities and performing services associated with the operation of the RCI Exchange Program at the Resort. Association shall not use or permit use of the Marks, in whole or in part, on or in connection with any other business, including but not limited to travel related services, financing services, reservation services, resort management services or resort rental enterprises. Except as expressly provided herein at Section 4.3, Association shall not permit or authorize any other person or entity or any kind to use the Marks in any manner. 6.2 ACKNOWLEDGEMENT. Association acknowledges that: (a) RCI is the owner in the Unites Sates and various other countries of the Marks, and (b) RCI has the right to exclude others from using the Marks or any variant or combination of the Marks determined to be confusingly similar to the Marks. Association shall not register or attempt to register the Marks or any other trademark or tradename confusingly similar to one or more of the Marks in its own name or that of any person or entity. Further, Association shall not contest to the validity of the Marks or any registration of the Marks by RCI. 6.3 QUALITY AND CONTROL. RCI has the right to control all uses of the Marks. Association agrees to maintain such quality standards for its services, in connection with which the Marks are used, equal to the quality of services of RCI. Association may use the Marks on its promotional materials, advertising and owner communications only as prescribed by RCI policies and procedures in the RCI Procedures Manual and other materials furnished to Association from time to time. Association agrees to comply with all requests of RCI with respect to the appearance and use of the Marks, including any requests to change the form or style of the Marks. Association shall at all times consistently use the Marks so as to ensure that RCI's rights are adequately preserved. Association agrees to promptly submit to RCI one copy of all printed or visual material bearing one or more of the Marks for prior written approval. RCI reserves the right to withdraw approval should it be determined, in RCI's sole discretion, that such materials misrepresent or do not accurately reflect RCI or the RCI Exchange Program. Association shall not do anything itself, or aid or assist any other party to do anything which would infringe, violate, damage, dilute, harm or contest the rights or RCI in and to the Marks. In addition, Association confirms that all use of the Marks by it or any of its approved sublicensees shall inure to RCI's benefit. Association shall at any time execute any documents reasonably required by RCI to confirm RCI's ownership of all rights in and to the Marks. 6 7 ARTICLE 7 -- TERMINATION & REMEDIES 7.1 GENERAL RIGHTS OF TERMINATION. Either party may terminate participation in this Agreement: 7.1.1 In the event of a breach of any of the terms, conditions, covenants, representations or warranties contained in this Agreement, following written notice to the other party stating the grounds for such termination, unless the breaching party cures the asserted breach to the reasonable satisfaction of the party giving such notice within thirty (30) days of the date of notice; 7.1.2 Immediately by giving the other party written notice if the other party commits a breach of any of the provisions of this Agreement which breach is incapable of cure; or 7.1.3 by giving the other party hereto at least 180 days written notice prior to the expiration of the initial term or any renewal term of its intent to terminate this Agreement at the end of such term. 7.2 RCI'S RIGHT OF TERMINATION. Without prejudice to any other rights of termination RCI may have under this Agreement, RCI may terminate its participation in this Agreement with respect to any or all of the Resorts listed in Recital B: 7.2.1 immediately upon written notice to the Association in the event the Association: (a) becomes insolvent as defined in the Uniform Commercial Code or makes an assignment for the benefit of its creditors; (b) initiates a proceeding, whether voluntarily or involuntarily, under any chapter or part of the Federal Bankruptcy Code; (c) is a party to a proceeding for the reorganization or for the adjustment of any of its debts under any act or law, for the relief of debtors now or hereafter existing; (d) has a receiver or trustee appointed for it or for a substantial part of any of its assets; or (e) is a party to any proceeding seeking its dissolution or its full or partial liquidation; 7.2.2 immediately upon written notice to the Association if any Reseller commits any act or omission which would constitute a breach of this agreement if committed by Association which, if capable of remedy, has not been remedied within thirty (30) days notice from RCI; 7.2.3 immediately upon written notice to the Association if the Association transfers a controlling interest in the Resort without RCI's prior written consent; 7.2.4 immediately upon written notice to the Association if the Association attempts to assign or sublicense all or any portion of its rights and duties under this Agreement without RCI's prior written approval; 7.2.5 immediately upon written notice to the Association if the Association is in fundamental or material breach of a term of this Agreement or engages in fraudulent, deceptive or dishonest conduct in connection with this Agreement (whether or not capable of remedy); 7.2.6 upon written notice to Association of not less than six (6) months in the event the Association enters into any agreement or arrangement other than with RCI that provides for internal or external exchange services to owners of Timeshare Interests in the Resort. In any event, Association agrees to provide RCI with ninety (90) days written notice prior to entering into such agreement or arrangement; 7.2.7 immediately upon written notice to Association if any representation or warranty contained herein is not true at the time it is made or considered reaffirmed; 7.2.8 immediately upon written notice Association if any representation or warranty contained herein ceases to be true during the term of this Agreement and any renewals thereto; and 7.2.9 as provided for elsewhere in this Agreement. 7.3 ASSOCIATION'S ACKNOWLEDGEMENTS. 7.3.1 RCI's exercise of its right to terminate pursuant to this Agreement shall in no way limit or impair its right to seek other legal or equitable remedies in connection with a breach by Association. 7.3.2 Termination of this Agreement for whatever reason shall not in any way affect the right of RCI to receive fees that have accrued and remain unpaid. 7.4 OBLIGATIONS UPON TERMINATION. Upon termination of this Agreement: 7.4.1 RCI and Association shall honor all Confirmed Exchanges and exchange privileges of Exchange Guests that are confirmed or accrued prior to termination; 7.4.2 RCI and Association shall honor all Confirmed Exchanges and exchange privileges of RCI Members who are owners of Timeshare Interests in the Resort that are confirmed or accrued prior to termination of this Agreement; 7.4.3 RCI at its sole discretion, may allow RCI Members who are owners of Timeshare Interests in the Resort to participate in the RCI Exchange Program following termination of this Agreement provided that the Resort maintains high qualitative and managerial standards. Association agrees to honor all present and future Confirmed Exchanges or exchange privileges of Purchasers, owners of Timeshare Interests in the Resort and Exchange Guests; 7.4.4 Association shall immediately discontinue promoting, selling, marketing or offering the RCI Exchange Program in any form to Purchasers, Prospective Purchasers or owners of Timeshare Interests in the Resort; 7.4.5 Association shall immediately cease using and thereafter abstain from using all RCI videos and other materials bearing any of the RCI Marks, and return the same to RCI within fifteen (15) days after termination of this Agreement; 7 8 7.4.6 Association shall immediately cease using and thereafter abstain from using the Marks and any name or mark similar thereto; and 7.4.7 Association shall immediately ensure that the agreement with any RCI approved Reseller is correspondingly immediately terminated with respect to any activities related to RCI and/or use of the Marks, as detailed in Article 4 herein. 7.5 SUSPENSION. Upon breach by Association, RCI may, without prejudice to its right to terminate this Agreement, suspend operation of the RCI Exchange Program at the Resort or impose such conditions or limitations thereon as RCI deems necessary or appropriate from time to time. 7.6 EQUITABLE RELIEF. Association acknowledges that damages cannot adequately compensate RCI for a breach of any of the provisions of this Agreement, and, therefore, the parties agree that RCI shall be entitled to a remedy of specific performance of injunctive relief, as appropriate, in the event of a breach or threatened breach of any such provisions by Association, in addition to any other appropriate legal or equitable remedies. 7.7 WAIVER. Upon the termination of this Agreement, Association hereby expressly waives any claim for a refund of any applicable fees remitted during the term of this Agreement. 7.8 LIMITATIONS. Failure to cease using any one or more of the Marks by Association or its Resellers following termination of this Agreement shall entitle RCI to liquidated damages from the Association in the amount of One Thousand Dollars (US$1,000) per day, which Association agrees is reasonable. This liquidated damages remedy shall be in addition to any other remedies, legal or equitable available to RCI. ARTICLE 8 -- GENERAL 8.1 TERM. This Agreement shall become effective on the date it is executed by RCI in Indianapolis, Indiana, U.S.A. and shall be for an initial term of five (5) years. Thereafter, this Agreement will automatically renew for additional five (5) year terms, until such time as notice of intent to terminate is given by either party pursuant to Section 7.1; provided, however, that Association is in compliance with this Agreement at the expiration of the initial term and subsequent renewal terms. 8.2 NOTICES. All notices and other communications made pursuant to this Agreement shall be in writing and shall be deemed to have been given if mailed by registered or certified mail, return receipt requested, or transmitted by facsimile with printed confirmation of receipt together with mailing of an original, to the appropriate party(ies) at the following address (or such other address as shall be specified by notice given pursuant to this Section 8.2): (a) if to Association: 4310 Paradise Road Las Vegas, Nevada 89109 (b) if to RCI: RESORT CONDOMINIUMS INTERNATIONAL, INC. One RCI Plaza 3502 Woodview Trace P.O. Box 80229 Indianapolis, Indiana 46280-0229 U.S.A. Attention: Legal Services 8.3 LEGAL AND BINDING OBLIGATION. Association and the individual executing this Agreement on behalf of Association, respectively, represent and warrant to RCI that this Agreement has been duly and validly executed and delivered by Association and constitutes a legal, valid, binding and enforceable agreement of Association. 8.4 OBLIGATIONS BINDING ON REAL ESTATE. Association agrees that their obligations under this Agreement shall run with real estate comprising the Resort and shall be binding upon any transferee of (or successor to) an interest in the Resort which operates such interest for commercial purposes. 8 9 8.5 INDEMNIFICATION. Association agrees to indemnify and hold RCI harmless from and against any and all claims, demands, obligations, deficiencies, judgments, damages, suits, losses, penalties, expenses, costs (including reasonable attorneys' fees) and liabilities of any kind, type or nature whatsoever directly or indirectly resulting from, arising out of or in connection with: 8.5.1 any inaccuracy in a representation or warranty or any breach of any of its obligations in this Agreement; 8.5.2 a failure to observe policies and procedures established by RCI; 8.5.3 the wrongful denial of access to a Unit to any Exchange Guest; 8.5.4 any death or personal injury or damage to or loss of property sustained by Exchange Guests while at the Resort; 8.5.5 any acts or omissions by any of its respective directors, officers, partners, employees, representatives, agents, brokers, salesmen, independent contractors, or associates which would constitute a breach of this Agreement if committed by Association; 8.5.6 any acts or omissions of Reseller or Reseller's directors, officers, partners, employees, representatives, agents, salesmen or associates which would constitute a breach of this Agreement if committed by Association; and 8.5.7 alleged or actual infringement of any trademark, copyright, trade secret, patent, publicity rights, privacy rights, moral rights or false advertising or unfair competition (but excluding any such actions on RCI Marks). 8.6 SEVERABILITY. If any provision of this Agreement is declared by any judicial or other competent authority to be void, voidable, illegal or otherwise unenforceable or indications of the same are received by either of the parties from any relevant competent authority, the parties shall amend the provision in such reasonable manner as achieves the intention of the parties without illegality or, at the discretion of RCI, such provision may be severed from this Agreement and the remaining provisions of this Agreement shall remain in full force and effect; provided, however, that if, in RCI's judgment, the effect of such declaration is to defeat the original intention of the parties, RCI shall be entitled to terminate this Agreement by thirty (30) days' notice to the Association. 8.7 GENERAL. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. The Recitals are hereby incorporated in this Agreement. All references in this Agreement to particular Recitals and Sections are references to Recitals and Sections of this Agreement. If there is any difference or conflict between the English text of this Agreement and any translation, the English text shall prevail. Failure of any party to insist on strict compliance with the provisions of this Agreement shall not constitute waiver of that party's right to demand later compliance with the same or other provisions of this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. This Agreement and Association's Application for Affiliation and all attachments thereto constitute the entire understanding and agreement between the parties concerning the subject matter of this Agreement. This Agreement may be modified only by a writing executed by the parties with the same formality with which this Agreement has been executed. All understandings between the parties are merged into this Agreement, and there are no representations, warranties, covenants, obligations, understandings or agreements, oral or otherwise, in relation thereto between the parties other than those incorporated herein. This Agreement is for the exclusive benefit of Association and RCI; nothing herein shall be construed to create a third-party beneficiary of any Purchaser, RCI Member or other individual or entity. Association acknowledges that this Agreement has been executed, made and entered into in Indianapolis, Indiana, U.S.A., and consents to the personal jurisdiction of the courts of the State of Indiana. This Agreement shall in all respects be interpreted and construed in accordance with and governed by the laws of the State of Indiana, U.S.A., and any action at law or in equity under this Agreement shall be submitted exclusively to the jurisdiction of the courts of Marion County, Indiana, U.S.A., unless RCI determines it its sole discretion that, because of the injunctive or other equitable relief sought by it, the action should be brought in a jurisdiction in which Association or the Resort are located. This Agreement and all of its provisions shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 9 10 ("Association") By: /s/ FREDERICK H. CONTE ---------------------------------- Frederick H. Conte, President AGREED TO AND ACCEPTED THIS 12th DAY OF APRIL, 1997 RESORT CONDOMINIUMS INTERNATIONAL, INC. By: /s/ JOHN B. REINHARDT ---------------------------------- John B. Reinhardt, Vice President 10 11 ADDENDUM TO RCI OWNERS ASSOCIATION AGREEMENT This Addendum to the RCI Owners Association Agreement ("Addendum") is made and entered into on 12th day of April 1997, by and between ("Association") and RESORT CONDOMINIUMS INTERNATIONAL, INC. ("RCI") WHEREAS, RCI and Association desire to amend certain provisions contained in the RCI Owners Association Agreement ("Agreement") executed contemporaneously herewith. NOW THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. The Agreement is hereby specifically incorporated as part hereof. In all respects other than as specifically herein modified, the terms and conditions of the Agreement shall continue in full force and effect. 2. To the extent any conflict of terms and conditions exist between this Addendum and the Agreement, then the terms and conditions of this Addendum shall supersede and control. 3. Capitalized terms as used herein, unless otherwise defined, have the same definition as used in the Agreement. 4. Preferred Equities Corporation ("PEC") will comply to Article 4.1.4 with the exception of PEC's internal resorts. PEC reserves the present and future right to use our own resorts, even though RCI affiliated, in any material to be used in a sales presentation or any other manner without obtaining the prior written consent of RCI. IN WITNESS WHEREOF, the parties have executed this Addendum to RCI Owners Association Agreement as of the day and year first above written. ("Association") By: [SIG] ---------------------------------------- Frederick H. Conte, President RESORT CONDOMINIUMS INTERNATIONAL, INC. ("RCI") By: [SIG] ---------------------------------------- John B. Reinhardt, Senior Vice President 12 The following schedule relates to Exhibit 10.116 and sets forth the names of all Homeowners Associations that have the identical contract agreements as this exhibit (10.116) in all respects except for the name for the association. The other associations which have the same Resort Condominiums International, Inc. agreements are as follows: Aloha Bay Condominium Homeowner's Association Brigantine Inn Condominium Association, Inc. Brigantine Villas Condominium Association, Inc. The Grand Flamingo Fountains Owners Association The Grand Flamingo Plaza Owners Association The Grand Flamingo Suites Owners Association The Grand Flamingo Terraces Owners Association Grand Flamingo Terraces IV Owners Association The Grand Flamingo Towers Owners Association The Grand Flamingo Villas Owners Association The Grand Flamingo Winnick Owners Association Hilltop Resort Owners Association, Inc. Pine Grove Condominium Owners Association Reno Spa Resort Owners Association RVS - Orlando Condominium Association, Inc. Association of Owners of White Sands Waikiki Resort Club EX-10.117 6 LOAN PURCHASE ARGEEMENT 1 EXHIBIT 10.117 EXECUTION COPY ================================================================================ FINANCIAL ASSET SECURITIES CORP., as Purchaser, and MEGO MORTGAGE CORPORATION, as Seller, LOAN PURCHASE AGREEMENT ================================================================================ Dated as of November 1, 1996 2 Table of Contents
Page ---- ARTICLE I. DEFINITIONS Section 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II. SALE OF LOANS; PAYMENT OF PURCHASE PRICE Section 2.1 Sale of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.2 [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.3 Obligations of Seller Upon Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.4 Payment of Purchase Price for the Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III. REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH Section 3.1 Seller Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE IV. SELLER'S COVENANTS Section 4.1 Covenants of the Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE V. INDEMNIFICATION BY THE SELLER Section 5.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 5.2 Limitation on Liability of the Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE VI. TERMINATION Section 6.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE VII. MISCELLANEOUS PROVISIONS Section 7.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 7.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.6 Further Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.7 Intention of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3 Section 7.8 Successors and Assigns; Assignment of Purchase Agreement . . . . . . . . . . . . . . . . . . . . 12 Section 7.9 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 7.10 Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
EXHIBITS AND SCHEDULES Schedule I Schedule of Loans ii 4 LOAN PURCHASE AGREEMENT (the "Purchase Agreement"), dated as of November 1, 1996, between Mego Mortgage Corporation ("Mego" or the "Seller") and FINANCIAL ASSET SECURITIES CORP., ("FASCO" and together with any assignee of FASCO, the "Purchaser"). W I T N E S S E T H WHEREAS, the Seller is the owner of a pool of (i) fixed-rate home improvement and home equity loans and retail installment sale contracts (the "Mortgage Loans") secured by first and junior mortgages, deeds of trust and security deeds on certain residential and investment properties (the "Properties") and (ii) fixed-rate home improvement loans and retail installment sale contracts unsecured by an interest in real property (the "Unsecured Loans" and together with the Mortgage Loans, the "Loans") as listed on Schedule I hereto referred to below and the Related Documents thereto (as defined below); WHEREAS, a predominate portion all of the Loans will be partially insured under the FHA Title I program (the "FHA Loans") and the remaining Loans are home improvement or home equity loans that have been originated by the Seller and are not insured under the FHA Title I program; WHEREAS, the parties hereto desire that the Seller sell all its right, title and interest in and to the Loans and the Related Documents to the Purchaser pursuant to the terms of this Purchase Agreement; and WHEREAS, pursuant to the terms of a Pooling and Servicing Agreement, dated as of November 1, 1996 (the "Pooling and Servicing Agreement"), among FASCO, as depositor (the "Depositor"), Mego, as Seller, servicer (the "Servicer") and claims administrator (the "Claims Administrator"), Norwest Bank Minnesota, N.A., as master servicer (the "Master Servicer"), and First Trust of New York, National Association, as trustee (the "Trustee") and contract of insurance holder (the "Contract of Insurance Holder"), the Purchaser will sell, transfer, assign and otherwise convey to the Trustee for the benefit of the Holders of the Certificates and the Certificate Insurer (each as defined herein), all its right, title and interest in and to the Loans and this Purchase Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.1 Definitions. Capitalized terms used but not defined herein have the meanings assigned thereto in the Pooling and Servicing Agreement. Registration Statement. The Purchaser's registration statement on Form S-3 (No. 33-99018), in the form in which it became effective under the Securities Act of 1933, as amended, on December 11, including any documents incorporated by reference therein. 1 5 Base Prospectus. The prospectus, dated December 11, 1996, attached to the Prospectus Supplement relating to the Class A Certificates. ARTICLE II. SALE OF LOANS; PAYMENT OF PURCHASE PRICE Section 2.1 Sale of Loans. The Seller, concurrently with the execution and delivery of this Purchase Agreement, does hereby sell, assign, set over, and otherwise convey to the Purchaser, without recourse other than as expressly provided herein and in the Pooling and Servicing Agreement, and with respect to the FHA Loans, in accordance with the requirements for transfer of an insured loan under Title I and 24 CFR Section 201.32(c), all of its right, title and interest in, to and under the following, whether now existing or hereafter acquired and wherever located: (i) as of the Cut-Off Date, the Loans delivered to the Trustee on the Closing Date, including the related Principal Balance and all payments and collections on account thereof received on or with respect to such Loans after the Cut-Off Date (including amounts due prior to the Cut-Off Date but received thereafter), (ii) the rights to the FHA Insurance reserves attributable to the FHA Loans as of the Cut-Off Date under Title I, (iii) the Files, (iv) the Insurance Policies and any proceeds from any Insurance Policies, (v) the Mortgages and security interests in Properties which secure the Mortgage Loans, (vi) any and all documents or electronic records relating to the Loans, (vii) all proceeds of any of the foregoing. Section 2.2 [Reserved]. Section 2.3 Obligations of Seller Upon Sale. In connection with any transfer pursuant to Section 2.1 hereof, the Seller further agrees, at its own expense, on or prior to the Closing Date (a) to indicate in its books and records that the Loans have been sold to the Purchaser pursuant to this Purchase Agreement and (b) to deliver to the Purchaser a computer file containing a true and complete list of all Loans specifying for each Loan, as of the Cut-Off Date, (i) its account number and (ii) its Principal Balance. Such file, which forms a part of Exhibit B to the Pooling and Servicing Agreement, shall also be marked as Schedule I to this Purchase Agreement and is hereby incorporated into and made a part of this Purchase Agreement. The Seller agrees to prepare, execute and file UCC-1 financing statements with the County Clerk of Cobb (which shall have been filed on or before the Closing Date with respect to the Loans describing the Loans and naming the Seller as debtor and, the Purchaser as secured party (and indicating that such loans have been assigned to the Trustee) all necessary continuation statements and any amendments to the UCC-1 financing statements required to reflect a change in the name or corporate structure of the Seller or the filing of any additional UCC-1 financing statements due to the change in the principal office of the Seller, as are necessary to perfect the sale of the Trustee's interest in each Loan and the proceeds thereof. In connection with any conveyance by the Seller, the Seller shall on behalf of the Purchaser deliver to, and deposit with the Trustee, as assignee of the Purchaser, on or before the Closing Date the following documents or instruments with respect to each Loan 2 6 (the "Related Documents"); provided, that the documents or instruments listed in clause (f) below may be held in the custody of the Seller on behalf of the Trustee. With respect to each Loan: (a) The original Note, showing a complete chain of endorsements or assignments from the named payee to the Trust and endorsed without recourse to the order of the Trustee which latter endorsement may be executed with a facsimile signature; (b) If such Loan is a Mortgage Loan, the original Mortgage with evidence of recording indicated thereon (except that a true copy thereof certified by an appropriate public official may be substituted); provided, however, that if the Mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Purchase Agreement solely because of a delay caused by the public recording office where such Mortgage has been delivered for recordation, there shall be delivered to the Trustee a copy of such Mortgage certified as a true copy in an Officer's Certificate, which Officer's Certificate shall certify that such Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Trustee such Mortgage with evidence of recording indicated thereon upon receipt thereof from the public recording official (or a true copy thereof certified by an appropriate public official may be delivered to the Trustee); (c) If such Loan is a Mortgage Loan, an original assignment of the Mortgage to the Trustee, in recordable form. Such assignment may be a blanket assignment, to the extent that blanket assignments are effective under applicable law, for Mortgages covering Properties situated in the same county. If the assignment of Mortgage is in blanket form, an assignment of Mortgage need not be included in the individual File; (d) If such Loan is a Mortgage Loan, all original intermediate assignments of the Mortgage, showing a complete chain of assignments from the named mortgagee to the assignor to the Trustee, with evidence of recording thereon (or true copies thereof certified by appropriate public officials may be substituted); provided, however, that if the intermediate assignments of mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Purchase Agreement solely because of a delay caused by the public recording office where such assignments of Mortgage have been delivered for recordation, there shall be delivered to the Trustee a copy of each such assignment of Mortgage certified as a true copy in an Officer's Certificate, which Officer's Certificate shall certify that each such assignment of Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Trustee such assignments of Mortgage with evidence of recording indicated thereon upon its receipt thereof from the public recording official (or true copies thereof certified by an appropriate public official may be delivered to the Trustee); (e) An original of each assumption or modification agreement, if any, relating to such Loan; and 3 7 (f) (i) If such Loan is an FHA Loan, an original or copy of a notice signed by the Obligor acknowledging HUD insurance, (ii) an original or copy of truth-in-lending disclosure, (iii) an original or copy of the credit application, (iv) an original or copy of the consumer credit report, (v) an original or copy of verification of employment and income, or verification of self-employment income, (vi) if such Loan is an FHA Loan and a Mortgage Loan, an original or copy of evidence of the Obligor's interest in the Property, (vii) an original or copy of contract of work or written description with cost estimates, (viii) if such Loan is an FHA Loan either (A) an original or copy of the completion certificate or an original or copy of notice of non-compliance, if applicable or (B) an original or copy of report of inspection of improvements to the Property or an original or copy of notice of non-compliance, if applicable, (ix) if such Loan is a Mortgage Loan, to the extent not included in (iii), an original or a copy of a written verification that the Obligor at the time of origination was not more than 30 days delinquent on any senior mortgage or deed of trust on the Property, (x) (A) if such Loan is an FHA Loan for which an appraisal is required pursuant to the applicable regulations, an original or a copy of an appraisal of the Property as of the time of origination of such FHA Loan or (B) if such Loan is a Non-FHA Loan and secured by a Mortgage (1) if the original principal balance is greater than $25,000 but less than $50,000, a copy of the HUD-1A Closing Statement indicating the sale price, or an existing Uniform Residential Appraisal Report, or a Drive-By Appraisal documented on Freddie Mac form 704, or a tax assessment, or (2) if the original principal balance exceeds $50,000, a full Uniform Residential Appraisal Report prepared by a national appraisal firm, (xi) an original or a copy of a title search as of the time of origination with respect to the Property, and (xii) if such Loan is an FHA Loan, any other documents required for the submission of a claim with respect to such FHA Loan to the FHA. With respect to any documents referred to clauses (b) and (d) above that are not delivered to the Trustee because of a delay caused by the public recording office, such documents shall be delivered to the Trustee in accordance with the terms of such clauses by the Seller if such documents are received by it or by the Purchaser if such documents are received by it. The Seller further hereby confirms to the Purchaser that, as of the Closing Date it has caused the portions of the Seller's electronic ledger relating to the Loans to be clearly and unambiguously marked to indicate that the Loans have been sold to the Purchaser. The Purchaser hereby acknowledges its acceptance of all right, title and interest to the Loans and other property, now existing and hereafter created, conveyed to it pursuant to Section 2.1 hereof. The parties hereto intend that each of the transactions set forth herein be a sale by the Seller to the Purchaser of all the Seller's right, title and interest in and to the Loans and other property described above. In the event the transactions set forth herein are deemed not to be a sale, the Seller hereby grants to the Purchaser a security interest in all of the Seller's right, title and interest in, to and under the Loans and other property described above, whether now existing or hereafter created, to secure all of the Seller's obligations hereunder; and this Purchase Agreement shall constitute a security agreement under applicable law. 4 8 Section 2.4 Payment of Purchase Price for the Loans. (a) In consideration of the sale of the Loans from the Seller to the Purchaser on the Closing Date, the Purchaser agrees to pay to the Seller on the Closing Date by transfer of immediately available funds, an amount equal to $66,905,578.21 (before deducting expenses payable by the Seller to the Purchaser) (the "Purchase Price"). (b) Within 60 days of the Closing Date, the Seller, at its own expense, shall cause the Trustee to record each assignment of Mortgage in favor of the Trustee (which may be a blanket assignment if permitted by applicable law) in the appropriate real property or other records; provided, however, the Trustee need not record any assignment which relates to a Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by the Seller (at the Seller's expense) to the Trustee and the Certificate Insurer, the recordation of such assignment is not necessary to protect the Trustee's, the Certificate Insurer's and the Certificateholders' interest in the related Loan. With respect to any assignment of Mortgage as to which the related recording information is unavailable within 60 days following the Closing Date, such assignment of Mortgage shall be submitted for recording within 30 days after receipt of such information but in no event later than one year after the Closing Date. The Trustee shall be required to retain a copy of each assignment of Mortgage submitted for recording. In the event that any such assignment of Mortgage is lost or returned unrecorded because of a defect therein, the Seller shall promptly prepare a substitute assignment of Mortgage or cure such defect, as the case may be, and thereafter the Trustee shall be required to submit each such assignment of Mortgage for recording. ARTICLE III. REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH Section 3.1 Seller Representations and Warranties. (a) The Seller represents and warrants to the Purchaser as of the Cut-Off Date and the Closing Date that: (i) The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted; (ii) The Seller has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Purchase Agreement and each other Transaction Document to which it is a party; has duly authorized the execution, delivery and performance of this Purchase Agreement and each other Transaction Document to which it is a party; has duly executed and delivered this Purchase Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and delivered by the other parties hereto, this Purchase Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies, 5 9 regardless of whether such enforceability is considered in a proceeding in equity or at law; (iii) Neither the execution and delivery of this Purchase Agreement or any of the other Transaction Documents to which the Seller is a party, the consummation of the transactions required of it herein or under any other Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Purchase Agreement or any of the other Transaction Documents will conflict with or result in a breach of any of the terms, conditions or provisions of the Seller's charter or by-laws or any legal restriction or any material agreement or instrument to which the Seller is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject; (iv) There is no action, suit, proceeding, investigation or litigation pending against the Seller or, to its knowledge, threatened, which, if determined adversely to the Seller, would materially adversely affect the sale of the Loans, the execution, delivery or enforceability of this Purchase Agreement or any other Transaction Document, or which would have a material adverse affect on the financial condition of the Seller; (v) No consent, approval, authorization or order of any court or governmental agency or body is required for: (a) the execution, delivery and performance by the Seller of, or compliance by the Seller with, this Purchase Agreement, (b) the sale of the Loans or (c) the consummation of the transactions required of it by this Purchase Agreement; (vi) The Seller is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Seller or its properties or might have consequences that would materially and adversely affect its performance hereunder; (vii) The Seller received fair consideration and reasonably equivalent value in exchange for the sale of the Loans to the Purchaser; (viii) The Seller is a non-supervised lender in good standing under 24 CFR Section 202.5 and is authorized to originate, purchase, hold, service and/or sell loans insured under 24 CFR part 201; and (ix) The Seller has transferred the Loans without any intent to hinder, delay or defraud any of its creditors. 6 10 (b) The Seller further represents and warrants to the Purchaser that with respect to the Loans as of the Closing Date each of the representations and warranties contained in Section 2.03(b) of the Pooling and Servicing Agreement are true and correct. It is understood and agreed that the representations and warranties set forth in this Section 3.1(b) shall survive delivery of the respective Files to the Trustee on behalf of the Purchaser. In the event that (a) any of the representations and warranties of the Seller in Section 2.03(b) of the Pooling and Servicing Agreement are determined to be untrue in a manner that materially and adversely affects the interests of the Certificateholders or the Certificate Insurer in any Loan with respect to which such representation or warranty is made and (b) the Seller shall fail to cure such breach within the time period specified in Section 2.04 of the Pooling and Servicing Agreement, the Seller shall be obligated to repurchase or substitute the affected Loan(s) in accordance with the provisions of Section 2.04 of the Pooling and Servicing Agreement. With respect to representations and warranties made by Mego pursuant to this Section 3.1(b) that are made to the Seller's best knowledge, if it is discovered by any of the Depositor, the Seller, the Trustee or the Certificate Insurer that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Loan, notwithstanding the Seller's lack of knowledge, such inaccuracy shall be deemed a breach of the applicable representation and warranty. ARTICLE IV. SELLER'S COVENANTS Section 4.1 Covenants of the Seller. The Seller hereby covenants that except for the transfer hereunder, the 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 Loan, or any interest therein; and the Seller will defend the right, title and interest of the Trust, as assignee of the Purchaser, in, to and under the Loans, against all claims of third parties claiming through or under the Seller. ARTICLE V. INDEMNIFICATION BY THE SELLER Section 5.1 Indemnification. The Seller agrees to indemnify and hold harmless the Purchaser from and against any loss, liability, expense, damage, claim or injury (other than those resulting solely from defaults on the Loans) arising out of or based on this Agreement including, without limitation, in connection with the origination or prior servicing of the Loans by reason of any acts, omissions, or alleged acts or omissions arising out of activities of the Seller, originator or prior servicer, including reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim; provided that the Seller shall not indemnify the Purchaser if such loss, liability, expense, damage or injury is due to the Purchaser's willful misfeasance, bad faith or negligence or by reason of the Purchaser's reckless disregard of its obligations 7 11 hereunder. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof. Section 5.2 Limitation on Liability of the Seller. None of the directors or trustees or officers or employees or agents of the Seller shall be under any liability to the Purchaser, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consideration for, the execution of this Purchase Agreement; provided, however, that this provision shall not protect any such Person against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder. Except as expressly provided herein and in the Pooling and Servicing Agreement, the Seller shall not be under any liability to the Trust, the Trustee or the Certificateholders. The Seller and any director or officer or employee or agent of 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. Section 5.3 Indemnification (a) The Seller agrees to indemnify and hold harmless the Purchaser, the directors of the Purchaser and each person, if any, who controls the Purchaser within the meaning of Section 15 of the Securities Act of 1933 (the "Act") or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), from and against any and all losses, claims, damages, liabilities or judgments (including without limiting the foregoing the reasonable legal and other expenses incurred in connection with any action, suit or proceeding or any claim asserted) arising out of (i) any untrue statement or alleged untrue statement of a material fact contained under any of the captions "Property of the Trust," "Mego Mortgage Corporation," "The Title I Loan Program and the Contract of Insurance" and "Description of the Loans" in the Prospectus Supplement or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading or (ii) any information concerning the Seller, the Loans or the Seller's operations based on any untrue statement or alleged untrue statement of a fact contained in any information provided by the Seller to the Purchaser, or any material omission from the information purported to be provided thereby, and disseminated to any Rating Agency, the Certificate Insurer, KPMG Peat Marwick LLP or prospective investors (directly or indirectly through available information systems) in connection with the issuance, marketing or offering of the Class A Certificates. This indemnity agreement will be in addition to any liability which the Seller may otherwise have pursuant to this Agreement. (b) The Purchaser agrees to indemnify and hold harmless the Seller and each person, if any, who controls the Seller within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities caused by (A) any untrue statement or alleged untrue statement of a material fact contained in (i) the Prospectus Supplement under the caption "Description of the Certificates," (ii) the Base Prospectus or (iii) the Registration Statement (other than the information with respect to the Seller contained in the Prospectus Supplement) or (B) any omission or alleged omission to state a material fact, in the case of the Registration Statement (other than the information with respect to the Seller contained in the Prospectus Supplement), required to be stated therein or necessary to make the statements therein not misleading, and in the case of the section of the Prospectus Supplement specified in clause (A) (i) of this sentence and the Base Prospectus, necessary in order to make the statements made therein, in the light of the 8 12 circumstances under which they were made, not misleading. This indemnity agreement will be in addition to any liability which the Purchaser may have pursuant to Agreement. (c) In case any action or proceeding (including any governmental or regulatory investigation or proceeding) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (hereinafter called the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (hereinafter called the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate and shall pay the fees and disbursements of such counsel related to such proceeding. In any such action or proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (1) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (2) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for any indemnified party and each person, if any, who controls such indemnified party within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, and it is also understood that expenses shall be reimbursed as they are incurred. In the case of any such separate firm for any indemnified party and any director, officer and control person of the indemnified party, such firm shall be designated in writing by such indemnified party. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in this Section 5.3 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnified party on the one hand and the indemnifying party on the other from the sale of the Loans or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, 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 the indemnified party on the one hand and the indemnifying party on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. For purposes of the 9 13 foregoing, the benefit received by the Seller from the sale of the Loans shall be deemed to equal the amount of the gross proceeds received by the Seller from such sale, and the benefit received by the Purchaser for such sale shall be deemed to equal the Formula Amount (as defined below). The relative fault of the Purchaser on the one hand and the Seller on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Purchaser or by the Seller and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Seller and the Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 5.3(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.3(d), in no event shall the Purchaser be required to contribute any amount in excess of $583,808.78. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. ARTICLE VI. TERMINATION Section 6.1 Termination. The respective obligations and responsibilities of the Seller and the Purchaser created hereby shall terminate, except for the Seller's and Purchaser's indemnity obligations as provided herein, upon the termination of the Trust as provided in Article IX of the Pooling and Servicing Agreement. ARTICLE VII. MISCELLANEOUS PROVISIONS Section 7.1 Amendment. This Purchase Agreement may be amended from time to time by the Seller and the Purchaser, with the consent of the Certificate Insurer, by written agreement signed by the Seller and the Purchaser. Section 7.2 Governing Law. This Purchase Agreement shall be governed by and construed in accordance with the laws of the State of New York and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 7.3 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, postage prepaid, addressed as follows: 10 14 (a) if to the Seller: Mego Mortgage Corporation 1000 Park Wood Circle Atlanta, Georgia 30339 Attention: Jeff S. Moore, President or, such other address as may hereafter be furnished to the Purchaser in writing by the Seller. (b) if to FASCO Financial Asset Securities Corp. 600 Steamboat Road Greenwich, Connecticut 06830 Attention: Charles A. Forbes or such other address as may hereafter be furnished to the Seller in writing by the Purchaser. Section 7.4 Severability of Provisions. If any one or more of the covenants, agreements, provisions of terms of this Purchase Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Purchase Agreement and shall in no way affect the validity of enforceability of the other provisions of this Purchase Agreement. Section 7.5 Counterparts. This Purchase Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original and such counterparts, together, shall constitute one and the same agreement. Section 7.6 Further Agreements. The Purchaser and the Seller each agree to execute and deliver to the other such amendments to documents and such additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Purchase Agreement or in connection with the offering of securities representing interests in the Loans. Without limiting the generality of the foregoing, as a further inducement for the Purchaser to purchase the Loans from the Seller, the Seller will cooperate with the Purchaser in connection with the sale of any of the securities representing interests in the Loans. In that connection, the Seller will provide to the Purchaser any and all information and appropriate verification of information, whether through letters of its auditors and counsel or otherwise, as the Purchaser shall reasonably request and will provide to the Purchaser such additional representations and warranties, covenants, opinions of counsel, letters from auditors, and certificates of public officials or officers of the Seller as are reasonably required in connection with such transactions and the offering of securities rated "Aaa" and "AAA" by Moody's Investors Service, Inc. and Standard & Poor's Rating Services, respectively. 11 15 Section 7.7 Intention of the Parties. It is the intention of the parties that the Purchaser is purchasing, and the Seller is selling, the Loans rather than pledging the Loans to secure a loan by the Purchaser to the Seller. Accordingly, the parties hereto each intend to treat the transaction for federal income tax purposes and all other purposes as a sale by the Seller, and a purchase by the Purchaser, of the Loans. The Purchaser will have the right to review the Loans and the related Files to determine the characteristics of the Loans which will affect the federal income tax consequences of owning the Loans and the Seller will cooperate with all reasonable requests made by the Purchaser in the course of such review. Section 7.8 Successors and Assigns; Assignment of Purchase Agreement. The Agreement shall bind and inure to the benefit of and be enforceable by the Seller, the Purchaser and the Trustee. The obligations of the Seller under this Purchase Agreement cannot be assigned or delegated to a third party without the consent of the Purchaser, which consent shall be at the Purchaser's sole discretion, except that the Purchaser acknowledges and agrees that the Seller may assign its obligations hereunder to any Person into which the Seller is merged or any corporation resulting from any merger, conversion or consolidation to which the Seller is a party or any Person succeeding to the business of the Seller. The parties hereto acknowledge that FASCO is acquiring the Loans for the purpose of contributing them to the Trust that will issue the Certificates representing undivided interests in such Loans. As an inducement to FASCO to purchase the Loans, the Seller acknowledges and consents to the assignment by FASCO to the Trustee of all of FASCO's rights against the Seller pursuant to this Purchase Agreement and to the enforcement or exercise of any right or remedy against the Seller pursuant to this Purchase Agreement by the Trustee under the Pooling and Servicing Agreement. Such enforcement of a right or remedy by the Trustee shall have the same force and effect as if the right or remedy had been enforced or exercised by FASCO directly. Section 7.9 Survival. The representations and warranties set forth in Article III and the provisions of Article V shall survive the purchase of the Loans hereunder. Section 7.10 Third-Party Beneficiaries. This Purchase Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Except as otherwise provided in this Section 7.10 no other Person shall have the right or obligation hereunder. Upon issuance of the Policies (as defined in the Pooling and Servicing Agreement), this Purchase Agreement shall also inure to the benefit of the Certificate Insurer. Without limiting the generality of the foregoing, all covenants and agreements in this Purchase Agreement which expressly confer rights upon the Certificate Insurer shall be for the benefit of and run directly to the Certificate Insurer, and the Certificate Insurer shall be entitled to rely on and enforce such covenants to the same extent as if it were a party to this Purchase Agreement. The Certificate Insurer may disclaim any of its rights and powers under this Purchase Agreement (but not its duties and obligations under the Policies) upon delivery of a written notice to the Trustee. 12 16 IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Loan Purchase Agreement to be duly executed on their behalf by their respective officers thereunto duly authorized as of the day and year first above written. FINANCIAL ASSET SECURITIES CORP., as Purchaser By: ---------------------------------- Name: Kari Skilbred Title: Vice President MEGO MORTGAGE CORPORATION, as Seller By:_________________________________ Name: James L. Belter Title: Executive Vice President 17 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 17th day of December, 1996 before me, a Notary Public in and for said State, personally appeared Kari Skilbred, known to me to be a Vice President of FINANCIAL ASSET SECURITIES CORP., the corporation that executed the within instrument, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ___________________________ Notary Public 18 STATE OF ) ) ss.: COUNTY OF ) On the ____th day of December, 1996 before me, a Notary Public in and for said State, personally appeared James L. Belter, known to me to be the Executive Vice President of MEGO MORTGAGE CORPORATION, the company that executed the within instrument, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ____________________________ Notary Public 19 SCHEDULE I Loan Schedule See Exhibit B to Pooling and Servicing Agreement EX-10.118 7 POOLING AND SERVICING AGREEMENT 1 EXHIBIT 10.118 EXECUTION COPY -------------------------------- FINANCIAL ASSET SECURITIES CORP. as Depositor, MEGO MORTGAGE CORPORATION, as Seller, Servicer and Claims Administrator, NORWEST BANK MINNESOTA, N.A., as Master Servicer AND FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION as Trustee and Contract of Insurance Holder POOLING AND SERVICING AGREEMENT (Mego Mortgage Home Loans) Dated as of November 1, 1996 ------------------------- Home Loan Asset-Backed Certificates, Series 1996-3 (Issuable in Classes) ------------------------- 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I Definitions Section 1.01. Defined Terms................................................ 1 Section 1.02. Rules of Interpretation...................................... 31 Section 1.03. Interest Calculations........................................ 31 ARTICLE II Transfer and Assignment of Loans; Issuance of Certificates Section 2.01. Transfer and Assignment of Loans............................. 32 Section 2.02. Acceptance by Trustee........................................ 35 Section 2.03. Representations and Warranties of Mego....................... 37 Section 2.04. Defective Loans.............................................. 45 Section 2.05. Representations and Warranties of the Depositor.............. 48 Section 2.06. Execution, Countersignature and Delivery of Certificates..... 49 ARTICLE III Administration and Servicing of Loans; Claims Administration Section 3.01. Servicing Standard........................................... 51 Section 3.02. Servicing Arrangements....................................... 52 Section 3.03. Servicing Record............................................. 53 Section 3.04. Annual Statement as to Compliance; Notice of Master Servicer Termination Event................................... 57 Section 3.05. Annual Independent Accountants' Report; Servicer Review Report....................................................... 57 Section 3.06. Access to Certain Documentation and Information Regarding Loans........................................................ 59 Section 3.07. [Reserved]................................................... 59 Section 3.08. Advances..................................................... 59 Section 3.09. Reimbursement of Interest Advances and Foreclosure Advances..................................................... 60 Section 3.10. Modifications, Waivers, Amendments and Consents.............. 61 Section 3.11. Due-On-Sale; Due-on-Encumbrance.............................. 61 Section 3.12. Claim for FHA Insurance and Foreclosure...................... 62 Section 3.13. Sale of Foreclosed Properties................................ 67 Section 3.14. Management of Real Estate Owned.............................. 68 Section 3.15. Inspections.................................................. 69 Section 3.16. Maintenance of Insurance..................................... 69
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PAGE ---- Section 3.17. Release of Files............................................. 70 Section 3.18. Certain Tax Matters.......................................... 71 Section 3.19. Filing of Continuation Statements............................ 71 Section 3.20. Fidelity Bond................................................ 72 Section 3.21. Errors and Omissions Insurance............................... 72 ARTICLE IV Distributions to Certificateholders Section 4.01. General Provisions Relating to Distributions to Certificateholders........................................... 73 Section 4.02. Distributions to Certificateholders.......................... 73 Section 4.03. Collection Accounts and FHA Premium Accounts and the FHA Reserve Fund................................................. 74 Section 4.04. Distribution Accounts........................................ 75 Section 4.05. Distributions................................................ 75 Section 4.06. FHA Premium Accounts......................................... 79 Section 4.07. General Provisions Regarding the Accounts; Eligible Accounts. 80 Section 4.08. Statements to Certificateholders............................. 81 Section 4.09. [Reserved]................................................... 82 Section 4.10. Claims Under the Policies.................................... 82 ARTICLE V The Certificates Section 5.01. The Certificates............................................. 84 Section 5.02. Registration of Transfer and Exchange of Certificates........ 84 Section 5.03. Mutilated, Destroyed, Lost or Stolen Certificates............ 87 Section 5.04. Persons Deemed Owners........................................ 88 Section 5.05. Trustee to Make Payments From Trust Only..................... 88 ARTICLE VI The Master Servicer Section 6.01. Liability of the Master Servicer............................. 89 Section 6.02. Merger or Consolidation of, or Assumption of, the Master Servicer..................................................... 89 Section 6.03. Limitation on Liability of the Master Servicer and Others.... 90 Section 6.04. Master Servicer Not to Resign; Expenses; Assignment.......... 90 Section 6.05. Master Servicer May Own Certificates......................... 91 Section 6.06. Representations and Warranties of the Master Servicer........ 91 Section 6.07. General Covenants of the Master Servicer..................... 93 ARTICLE VII
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PAGE ---- Master Servicer Termination Events Section 7.01. Master Servicer Termination Events; Waiver................... 95 Section 7.02. Consequences of a Master Servicer Termination Event.......... 96 Section 7.03. Appointment of Successor..................................... 97 Section 7.04. Notification to Certificateholders........................... 98 Section 7.05. Waiver of Past Defaults...................................... 98 ARTICLE VIII Concerning the Trustee Section 8.01. Duties of the Trustee and Contract of Insurance Holder...... 99 Section 8.02. Certain Matters Affecting the Trustee....................... 100 Section 8.03. Trustee Not Liable for Certificates or Loans................ 102 Section 8.04. Trustee May Own Certificates................................ 102 Section 8.05. Trustee's Fees and Expenses; Indemnification................ 103 Section 8.06. Eligibility Requirements for Trustee........................ 103 Section 8.07. Resignation and Removal of the Trustee...................... 103 Section 8.08. Successor Trustee........................................... 104 Section 8.09. Merger or Consolidation of the Trustee...................... 105 Section 8.10. Appointment of Co-Trustee or Separate Trustee............... 105 Section 8.11. Appointment of Custodians................................... 106 Section 8.12. Certain Tax Matters......................................... 107 Section 8.13. Representations and Warranties of the Trustee............... 109 Section 8.14. Streit Act.................................................. 111 Section 8.15. Rights to Direct Trustee.................................... 111 Section 8.16. Reports to the Securities and Exchange Commission........... 111 ARTICLE IX Termination Section 9.01. Termination................................................. 112 ARTICLE X Miscellaneous Provisions Section 10.01. Amendment................................................... 115 Section 10.02. Recordation of Agreement.................................... 116 Section 10.03. Rights of Certificateholders................................ 116 Section 10.04. GOVERNING LAW............................................... 117 Section 10.05. Notices..................................................... 117 Section 10.06. Severability of Provisions.................................. 119 Section 10.07. Waiver of Notice............................................ 120
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PAGE ---- Section 10.08. Access to List of Holders................................... 120 Section 10.09. Third-Party Beneficiaries................................... 120 Section 10.10. The Certificate Insurer..................................... 120 Section 10.11. Consent to Jurisdiction..................................... 121 Section 10.12. Trial by Jury Waived........................................ 121 Section 10.13. Separate Counterparts....................................... 121 ARTICLE XI Class R Certificate Transfer Restrictions Section 11.01. Restrictions on Transfer.................................... 122 ARTICLE XII Concerning the Contract of Insurance Holder Section 12.01. Compliance with Title I and Filing of FHA Claims............ 125 Section 12.02. Regarding the Contract of Insurance Holder.................. 126
Exhibit A: Form of Servicing Agreement Exhibit B: Loan Schedule Exhibit C-1: Form of Class A Certificate Exhibit C-2: Form of Class S Certificate Exhibit D: Form of Class R Certificate Exhibit E-1: Form of Master Servicer Certificate -- Group I Exhibit E-2: Form of Master Servicer Certificate -- Group II Exhibit F-1: Form of Monthly Statement to the Certificateholders -- Group I Exhibit F-2: Form of Monthly Statement to the Certificateholders -- Group II Exhibit G: Underwriting Guidelines Exhibit H: [Reserved] Exhibit I: Form of "qualified institutional buyer" Transferee's Certificate Exhibit J: Form of "accredited investor" Transferee's Certificate Exhibit K: Form of Transferor's Certificate Exhibit L: Form of Transfer Affidavit for the Class R Certificate Exhibit M: Depository Agreement Exhibit N-1: Form of Policy-Group 1 Certificates Exhibit N-2: Form of Policy-Group 2 Certificates
(iv) 6 POOLING AND SERVICING AGREEMENT, dated as of November 1, 1996, among MEGO MORTGAGE CORPORATION ("Mego", the "Seller", the "Servicer" and the "Claims Administrator", as applicable), FINANCIAL ASSET SECURITIES CORP., as Depositor (the "Depositor"), FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Trustee and Contract of Insurance Holder (in each respective capacity, the "Trustee" and the "Contract of Insurance Holder") and NORWEST BANK MINNESOTA, N.A., as Master Servicer (the "Master Servicer"). W I T N E S S E T H: In consideration of the mutual agreements herein contained, Mego, as Seller, Servicer and Claims Administrator, the Depositor, the Master Servicer, the Trustee, and the Contract of Insurance Holder agree as follows for the benefit of each of them, the Certificate Insurer and for the benefit of the Holders from time to time of Home Loan Asset-Backed Certificates, Series 1996-3 issued hereunder: ARTICLE I Definitions Section 1.01. Defined Terms. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the meanings specified in this Article. Accountant's Report. As defined in Section 3.05(a). Accounts. The Distribution Accounts, the FHA Premium Accounts and the Collection Accounts. Acquisition Date. With respect to any Foreclosed Property, the first day on which such Foreclosed Property is considered to be acquired by the Trust within the meaning of Treasury Regulation Section 1.856-6(b)(1) (i.e., the first day on which the Trust is treated as the owner of such Foreclosed Property for federal income tax purposes). Additional Trustee Fee. With respect to each Distribution Date and Loan Group, the excess of $542, with respect to the Group I Loans, and $292, with respect to the Group II Loans, over the Trustee Fee received by the Trustee in respect of such Loan Group on such Distribution Date. Aggregate Class A Certificate Balance. With respect to any date of determination and Certificate Group, the aggregate of the Class A Certificate Balances as of such date for all Classes of Class A Certificates of such Certificate Group. Aggregate Interest Distribution. With respect to any Distribution Date and Certificate Group, the aggregate of the Class Interest Distributions for each Class of Certificates in such Certificate Group. 1 7 Aggregate Principal Balance. With respect to any date of determination and Loan Group, the sum of the Principal Balances for all Loans in such Loan Group. Agreement. This Pooling and Servicing Agreement and all amendments hereof and supplements hereto. Amount Available. With respect to any Distribution Date, the related Determination Date and each Certificate Group, an amount equal to the sum of (i) the Collected Amount for the related Loan Group in respect of such Distribution Date, plus (ii) Insured Payments for such Certificate Group, if any, received by the Trustee with respect to such Distribution Date. Annual Default Percentage (Three Month Average). With respect to any Determination Date and Loan Group I, the average of the percentage equivalents of the fractions for each of the three immediately preceding Due Periods, the numerator of which is the product of (i) the aggregate of the Principal Balances of all Loans in Loan Group I that became Credit Support Multiple Defaulted Loans during such Due Period immediately prior to such Loans in Loan Group I becoming Credit Support Multiple Defaulted Loans times (ii) 12, and the denominator of which is the Aggregate Principal Balance of the Loans in Loan Group I as of the end of such Due Period. Anticipated Termination Date. The Distribution Date next following the Monthly Cut-Off Date specified in a Notice of Termination delivered to the Trustee pursuant to Section 9.01(d), or the Distribution Date specified in a Notice of Termination delivered to the Trustee by the Master Servicer pursuant to Section 9.01(e), as the case may be. 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 of the Class A Certificates, which shall be registered in the name of the Depository or its nominee, the 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 a Saturday, a Sunday or a day on which the Certificate Insurer and banking institutions in the City of New York or the City in which the Corporate Trust Office is located or the city in which the Master Servicer's or Servicer's servicing operations are located are authorized or obligated by law, executive order or government decree to be closed. Calendar Month. The period from and including the first day of a calendar month to and including the last day of such calendar month. Certificate. Any one of the Home Loan Asset-Backed Certificates, Series 1996- 3 executed by the Trustee on behalf of the Trust and countersigned by the Trustee. 2 8 Certificate Group. Each of the Group I Certificates and the Group II Certificates. Certificate Insurer. MBIA Insurance Corporation, a stock insurance company organized and created under the laws of the State of New York, and any successors thereto. Certificate Insurer Default. The existence and continuance of any of the following: (a) the Certificate Insurer fails to make a payment required under a Policy in accordance with its terms; or (b) (i) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Certificate Insurer in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, rehabilitation, reorganization or other similar law or (B) a decree or order adjudging the Certificate Insurer a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, rehabilitation, arrangement, adjustment or composition of or in respect of the Certificate Insurer under any applicable United States federal or state law, or appointing a custodian, receiver, liquidator, rehabilitator, assignee, trustee, sequestrator or other similar official of the Certificate Insurer or of any substantial part of its property, or ordering the winding-up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (ii) the commencement by the Certificate Insurer of a voluntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the Certificate Insurer to the entry of a decree or order for relief in respect of the Certificate Insurer in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Certificate Insurer, or the filing by the Certificate Insurer of a petition or answer or consent seeking reorganization or relief under any applicable United States federal or state law, or the consent by the Certificate Insurer to the filing of such petition or to the appointment of or the taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Certificate Insurer or of any substantial part of its property, or the making by the Certificate Insurer of an assignment for the benefit of its creditors, or the failure by the Certificate Insurer to pay debts generally as they become due, or the admission by the Certificate Insurer in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Certificate Insurer in furtherance of any such action. Certificate Owner. With respect to any Class A Certificate held in book-entry form, the Person who is the beneficial owner of such Certificate, as reflected on the books of the Clearing Agency (directly as a Depository Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). 3 9 Certificate Rate. As to each Class of Senior Certificates, the per annum rate set forth as follows: Class IA-1: 6.50%, Class IA-2: 6.84%, Class IA-3: 7.23%, Class IIA: 6.98%, Class IS: 0.45% and Class IIS: 0.50%; provided, however, with respect to any Distribution Date after the first Distribution Date and each Class of Group IA Certificates, if the Maximum Rate for such Distribution Date is less than the rate designated to such Class in the immediately preceding clause, the Certificate Rate for such Distribution Date shall be the Maximum Rate. Certificate Register and Certificate Registrar. The register established, and the registrar appointed, pursuant to Section 5.02. Certificateholder or Holder. The Person in whose name a Certificate of any Class is registered in the Certificate Register. Civil Relief Act. The Soldiers' and Sailors' Civil Relief Act of 1940, as amended. Civil Relief Act Interest Shortfall. With respect to any Distribution Date and Loan Group, for any Loan in such Loan Group as to which there has been a reduction in the amount of interest collectible thereon for the most recently ended Due Period as a result of the application of the Civil Relief Act, the amount by which (i) interest collectible on such Loan during such Due Period is less than (ii) one month's interest on the Principal Balance of such Loan at the Loan Rate for such Loan before giving effect to the application of the Civil Relief Act. Claims Administrator. Mego Mortgage Corporation, a corporation organized under the laws of the State of Delaware, and its successors and assigns. Class. With respect to each of the Class IA-1, Class IA-2, Class IA-3, Class IIA, Class IS, Class IIS and Class R, all of the Certificates of such Class. Class A Certificate. Any Certificate substantially in the form attached hereto as Exhibit C-1 and designated as a Class A Certificate pursuant to Section 5.01. Class A Certificate Balance. With respect to a Class of the Group IA Certificates as of any date of determination, the Initial Class A Certificate Balance for such Class, reduced by the sum of all Class A Principal Distributions and Class A Guaranteed Principal Distribution Amounts previously distributed with respect to such Class and with respect to a Class of the Group IIA Certificates as of any date of determination, the Initial Class A Certificate Balance for such Class, reduced by the sum of all Class A Principal Distributions and Class A Guaranteed Principal Distribution Amounts previously distributed with respect to such Class and all Insurance Default Amounts previously calculated as of such date of determination. Payments in respect of Loss Carryforward Amounts to holders of the Class of IIA Certificates pursuant to Section 4.05(b)(ix) shall not reduce the Class A Certificate Balance of such Class. Class A Guaranteed Principal Distribution Amount. With respect to any Distribution Date and Certificate Group, the positive excess, if any, of (i) the Aggregate Class A Certificate Balance for such Certificate Group as of such Distribution Date (taking into 4 10 account distributions on such Distribution Date pursuant to clause (viii) of Section 4.05(a) in the case of the Group I Certificates and clause (viii) of Section 4.05(b) in the case of the Group II Certificates) over (ii) the Aggregate Principal Balance of the Loans in the related Loan Group as of the end of the related Due Period; provided, that on the Final Scheduled Distribution Date for the related Certificate Group, the Class A Guaranteed Principal Distribution Amount for such Certificate Group shall equal the amount referred to in clause (i) of this definition for such Distribution Date. Class A Monthly Principal Amount. With respect to any Distribution Date and Certificate Group, the amount equal to the sum of the following amounts (without duplication) with respect to the immediately preceding Due Period: (i) that portion of all Payments received on Loans in the related Loan Group allocable to principal, including all full and partial principal prepayments (excluding such payments in respect of such Loans that became Defaulted Loans on or prior to the end of the preceding Due Period), (ii) the Principal Balance as of the end of the immediately preceding Due Period of each Loan in the related Loan Group that became a Defaulted Loan for the first time during the such Due Period, (iii) the portion of the Purchase Price allocable to principal of all Defective Loans in the related Loan Group with respect to such Due Period and the portion of the purchase amount, if any, set forth in 9.01(d) allocable to principal with respect to the Loans in the related Loan Group, (iv) any Substitution Adjustments deposited to the related Distribution Account pursuant to Section 2.04(d) on the previous Determination Date, and (v) only with respect to the Group I Certificates, the amount of Distributable Excess Spread, if any, in respect of such Distribution Date. Class A Principal Distribution. With respect to any Distribution Date and Certificate Group (other than the related Final Scheduled Distribution Date), (a) in the case of the Group I Certificates, the sum of the related Class A Monthly Principal Amount for such Distribution Date and any outstanding related Class A Principal Shortfall as of the close of business on the preceding Distribution Date and (b) in the case of the Group IIA Certificates, the related Class A Monthly Principal Amount for such Distribution Date; provided, however, that the Class A Principal Distribution for each Certificate Group shall not exceed the Aggregate Class A Certificate Balance of such Certificate Group. The "Class A Principal Distribution" on the Final Scheduled Distribution Date for a Certificate Group will equal the remaining Aggregate Class A Certificate Balance of such Certificate Group as of such Distribution Date. Class A Principal Shortfall. As of the close of any Distribution Date and any Class of Group IA Certificates, the excess of the sum of the related Class A Monthly Principal Amount and any outstanding Class A Principal Shortfall for such Certificate Group from the preceding Distribution Date, over the amount in respect of principal that is actually distributed to such Group IA Certificates on such preceding Distribution Date. Class Interest Distribution. With respect to any Distribution Date and each Class of Senior Certificates, the sum of (i) the applicable Class Monthly Interest Amount for such Class on such Distribution Date and (ii) the applicable Class Interest Shortfall for such Class on such Distribution Date. Class Interest Shortfall. With respect to any Class of Senior Certificates and any Distribution Date, the sum of (a) the excess of the related Class Monthly Interest Amount for 5 11 the preceding Distribution Date and any outstanding Class Interest Shortfall with respect to such Certificates on such preceding Distribution Date, over the amount in respect of interest that is actually distributed to the related Class of Senior Certificateholders on such preceding Distribution Date plus (b) interest on such excess, to the extent permitted by law, at the applicable Certificate Rate from such preceding Distribution Date through the current Distribution Date. Class Monthly Interest Amount. With respect to any Distribution Date and each Class of Senior Certificates, 30 days of interest at the applicable Certificate Rate for such Class, on, with respect to the Class A Certificates, the related Class A Certificate Balance as of the close of business on the immediately preceding calendar month, or, with respect to each Class of Class S Certificates, the related Class S Notional Amount for such Distribution Date, in each case reduced by an amount equal to such Class' pro rata share (based on the amount of interest to which such Class would have otherwise been entitled) of the sum of (i) the Civil Relief Act Interest Shortfall and (ii) the Net Prepayment Interest Shortfall, if any, for such Distribution Date. Class R Certificate. Any Certificate substantially in the form attached hereto as Exhibit D and designated as a Class R Certificate pursuant to Section 5.01. Class S Certificate. Any Certificate substantially in the form attached hereto as Exhibit C-2 and designated as Class S pursuant to Section 5.01. Class IS Notional Amount. As to any Distribution Date and the Class IS Certificates, the Aggregate Principal Balance of the Loans in Loan Group I as of the opening of business on the first day of the calendar month preceding the calendar month of such Distribution Date (i.e., if the Distribution Date is June 25, the first day of the calendar month preceding the calendar month of such Distribution Date is May 1), or in the case of the first Distribution Date, the Initial Loan Group I Principal Balance. Class IIS Notional Amount. As to any Distribution Date and the Class IIS Certificates, the Aggregate Principal Balance of the Loans in Loan Group II as of the opening of business on the first day of the calendar month preceding the calendar month of such Distribution Date (i.e., if the Distribution Date is June 25, the first day of the calendar month preceding the calendar month of such Distribution Date is May 1), or in the case of the first Distribution Date, the Initial Loan Group II Principal Balance. Class Vote. As long as Certificates of any Class of Senior Certificates is Outstanding, a determination by the Holders of Outstanding Certificates of such Class representing more than 50% of the aggregate of the Voting Rights of such Class (or such higher percentage for such Classes as shall be specified in the applicable provisions hereunder) with respect to which votes are cast on the issue on or prior to 30 days after receipt of notice given as provided in Section 10.05(b), and after all the Classes of Senior Certificates are no longer Outstanding, by the Holders of Outstanding Class R Certificates representing more than 50% of the Residual Interests of such Class R Certificates; provided, that the Certificate Insurer shall be deemed to have 100% of the Voting Rights so long as no Certificate Insurer Default exists. 6 12 Clearing Agency. An organization registered as a "clearing agency" pursuant to Section 17A of the Exchange Act. Closing Date. December 17, 1996. Code. The Internal Revenue Code of 1986, as it may be amended from time to time, and any successor statutes thereto. Collateral Performance Percentages. The Annual Default Percentage (Three Month Average), the Pool Annual Default Percentage (Three Month Average), the 30+ Delinquency Percentage (Rolling Three Month), the 60+ Delinquency Percentage (Rolling Three Month), the Pool 60+ Delinquency Percentage (Rolling Three Month) and the Cumulative Default Percentage. Collected Amount. With respect to any Determination Date, the Distribution Date and each Loan Group, the sum of the amount on deposit in the Distribution Account for the related Certificate Group on such Determination Date plus the amounts required to be deposited into the related Distribution Account pursuant to Sections 2.04(d), 4.03(b) and 4.03(d) in respect of the related Loan Group and Distribution Date. Collection Account. As to each Loan Group, each of the accounts denominated as a Collection Account and maintained or caused to be maintained by the Trustee as described in Section 4.03. Contract of Insurance. The contract of insurance under Title I covering the Loans held under the name First Trust of New York, National Association, or any successor thereto, as Contract of Insurance Holder hereunder. Contract of Insurance Holder. First Trust of New York, National Association, its successors in interest, and any successor thereto pursuant to the terms of this Agreement. Corporate Trust Office. The office of the Trustee at which at any particular time its corporate trust business shall be principally administered, located on the Closing Date at First Trust of New York, National Association, 180 East 5th Street, St. Paul, Minnesota 55101, Attention: Structured Finance. Credit File. With respect to any Loan, all of the related documents listed in Section 2.01(b)(A)(vi) and any additional documents required to be added thereto pursuant to this Agreement. Credit Support Multiple Defaulted Loan. A Loan with respect to which (a) a claim has been submitted to the FHA in respect of such Loan pursuant to the Contract of Insurance, (b) foreclosure proceedings have been commenced on the related Property, (c) any portion of a Monthly Payment is more than 180 calendar days past due and unpaid by the Obligor; or (d) the Servicer has determined in accordance with customary servicing practices, that the Loan is uncollectible. 7 13 Cumulative Default Percentage. As of any Determination Date and Group I Loans, the aggregate of the Principal Balances of all Credit Support Multiple Defaulted Loans of the Group I Loans (immediately prior to such Loans becoming Credit Support Multiple Defaulted Loans) as of the prior Monthly Cut-Off Date since the Closing Date, divided by the aggregate of the Initial Loan Group I Principal Balance. Custodial Agreement. Any agreement entered into between the Trustee and a Custodian pursuant to Section 8.11. Custodian. As of the Closing Date, the Trustee, and as of any subsequent date of determination, any Person (other than Mego, the Depositor, the Master Servicer or any of their respective affiliates) with whom the Trustee has entered into a Custodial Agreement pursuant to Section 8.11 in effect as of the date of determination. Cut-Off Date. With respect to any Loan, either the opening of business on November 1, 1996, or, if such Loan is originated on or after November 1, 1996, such Loan's date of origination. Defaulted Loan. A Loan with respect to which: (i) a claim has been paid or finally rejected pursuant to the Contract of Insurance, (ii) the Property has been repossessed and sold, or (iii) any portion of a Monthly Payment is more than 180 calendar days past due (without giving effect to any grace period). Defective Loan. A Loan required to be purchased or repurchased pursuant to Section 2.04. Deficiency Amount. As to any Distribution Date and Certificate Group, an amount equal to the sum of (a) the amount by which the Aggregate Interest Distribution for such Distribution Date and Certificate Group exceeds the amount on deposit in the related Distribution Account available to be distributed therefor on such Distribution Date and (b) the Class A Guaranteed Principal Distribution Amount for such Certificate Group for such Distribution Date. Denomination. With respect to the Class A Certificates, the portion of the Initial Class A Certificate Balance represented by such Certificate as specified on the face thereof. Depository. The initial Depository shall be The Depository Trust Company, the nominee of which is CEDE & Co., as the registered Holder of the Book-Entry Certificates. The Depository shall at all times be a "clearing corporation" as defined in Section 8-102(3) of the Uniform Commercial Code of the State of New York. Depository Agreement. The agreement entered among the Depositor, the Trustee, and the Depository, in connection with the issuance of the Class A Certificates, substantially in the form of Exhibit M. Depository Participant. A broker, dealer, bank or other financial institution or other Person for whom from time to time a Depository effects book-entry transfers and pledges of securities deposited with the Depository. 8 14 Determination Date. Except as provided in the next sentence, with respect to any Distribution Date, the fifth Business Day preceding such Distribution Date. The first such Determination Date will be December 24, 1996. Directly Operate. With respect to any Foreclosed Property, the furnishing or rendering of services to the tenants thereof, the management or operation of such Foreclosed Property, the holding of such Foreclosed Property primarily for sale, the performance of any construction work thereon, or any use of such Foreclosed Property in a trade or business conducted by the Trust, in each case other than through an Independent Contractor; provided, however, that the Trustee (or the Master Servicer on behalf of the Trustee) shall not be considered to Directly Operate a Foreclosed Property solely because the Trustee (or the Master Servicer on behalf of the Trustee) establishes rental terms, chooses tenants, enters into or renews leases, deals with taxes and insurance, or makes decisions as to repairs or capital expenditures with respect to such Foreclosed Property. Distributable Excess Spread. As to any Distribution Date and the Group I Certificates, the lesser of (i) the amount of Excess Spread for such Distribution Date and (ii) the portion of Excess Spread required to be distributed pursuant to 4.05(a)(x) such that the Overcollateralization Amount for such Distribution Date is equal to the Required OC Amount for such Distribution Date. Distribution Account. As to each Certificate Group, the account established and maintained by the Trustee pursuant to Section 4.04 for such Certificate Group. Distribution Date. Except as provided in the next sentence, the twenty-fifth (25th) day of the month or, if such twenty-fifth (25th) day is not a Business Day, the immediately following Business Day. The first such Distribution Date will be December 30, 1996. Due Date. With respect to any Monthly Payment, the date on which such Monthly Payment is required to be paid pursuant to the related Note. Due Period. With respect to any Determination Date or Distribution Date, the calendar month immediately preceding such Determination Date or Distribution Date, as the case may be. Early Termination Notice Date. Any date on which each of the Loan Group I Principal Balance and the Loan Group II Principal Balance are less than 10% of the Initial Loan Group I Principal Balance and the Initial Loan Group II Principal Balance, respectively. Eligible Account. (i) A segregated trust account that is maintained with the corporate trust department of a depository institution acceptable to the Certificate Insurer (so long as a Certificate Insurer Default shall not have occurred and be continuing), or (ii) a segregated direct deposit account maintained with a depository institution or trust company organized under the laws of the United States of America, or any of the States thereof, or the District of Columbia, having a certificate of deposit, short term deposit or commercial paper rating of at least A-1+ by Standard & Poor's and P-1 by Moody's and (so long as a Certificate Insurer Default shall not have occurred and be continuing) acceptable to the Certificate Insurer. 9 15 Eligible Investments. Any one or more of the following types of investments: (a) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and interests in such direct obligations) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. (b) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): 1. U.S. Export-Import Bank (Eximbank) A. Direct obligations or fully guaranteed certificates of beneficial ownership 2. Farmers Home Administration (FmHA) A. Certificates of beneficial ownership 3. Federal Financing Bank 4. FHA Debentures (FHA) 5. General Services Administration A. Participation certificates 6. U.S. Maritime Administration A. Guaranteed Title XI financing 7. HUD A. Project Notes B. Local Authority Bonds C. New Communities Debentures - U.S. government guaranteed debentures D. U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies that are rated by both Rating Agencies in one of the top two long-term rating categories (stripped securities are only permitted if they have been stripped by the agency itself): 1. Federal Home Loan Bank System A. Senior debt obligations 2. FHLMC A. Participation Certificates B. Senior debt obligations 10 16 3. FNMA A. Mortgage-backed securities and senior debt obligations 4. Student Loan Marketing Association A.Senior debt obligations 5. Resolution Funding Corp. obligations 6. Farm Credit System A. Consolidated systemwide bonds and notes (d) Money market funds registered under the Investment Company Act of 1940, as amended, whose shares are registered under the Securities Act, and having a rating by Standard & Poor's of AAAm-G; AAAm; or AAm and a rating by Moody's of Aaa. (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks which have a short term rating by Moody's of P-1. The collateral must be held by a third party and the Certificateholders must have a perfected first security interest in the collateral. (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF. (g) Investment agreements, including guaranteed investment contracts, acceptable to the Certificate Insurer and each Rating Agency. (h) Commercial paper rated "Prime - 1" by Moody's and "A-1" or better by Standard & Poor's. (i) Bonds or notes issued by any state or municipality which are rated by Moody's and Standard & Poor's in one of the two highest rating long term categories assigned by such agencies. (j) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" by Moody's and "A-1" or "A" or better by S&P. (k) Repurchase agreements provide for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trust (buyer/lender), and the transfer of cash from the Trust to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trust in exchange for the securities at a specified date. Repurchase agreements ("repos") must satisfy the following criteria or be approved by the Certificate Insurer. 11 17 1. Repos must be between the Trust and a dealer bank or securities firm A. Primary dealers on the Federal Reserve reporting dealer list which are rated A or better by Standard & Poor's and P-1 by Moody's, or B. Banks rated "A" or above by Standard & Poor's and P-1 by Moody's. 2. The written repo contract trust must include the following: A. Securities which are acceptable for transfer are: (1) Direct U.S. governments, or (2) Federal agencies backed by the full faith and credit of the U.S. government (or FNMA or FHLMC) other than mortgage backed securities. B. The term of the repo may be up to 30 days C. The collateral must be delivered to the Trustee or third party acting as agent for the Trustee before/simultaneous with payment (perfection by possession of certificated securities). D. Valuation of Collateral (1) The securities must be valued weekly, marked-to-market at current market price plus accrued interest. (a) The value of collateral must be equal to 104% of the amount of cash transferred by the Trust to the dealer bank or security firm under the repo plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by municipality, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. 3. Legal opinion which must be delivered to the Trustee: a. Repo meets guidelines under state law for legal investment of public funds. Eligible Servicer. A Person that (i) is servicing a portfolio of Title I mortgage loans, (ii) is legally qualified to service, and is capable of servicing, the Loans and has all licenses required to service Title I mortgage loans, (iii) has demonstrated the ability 12 18 professionally and competently to service a portfolio of FHA insured mortgage loans similar to the Loans with reasonable skill and care, (iv) has a net worth calculated in accordance with generally accepted accounting principles of at least $500,000 and (v) if other than Mego, is acceptable to the Certificate Insurer. Excess Claim Amount. With respect to any Distribution Date, an amount equal to (A) 90% of the excess of (x) claims paid under the Contract of Insurance in respect of the FHA Loans over (y) the Trust Designated Insurance Amount less (B) the amount deposited to the FHA Reserve Fund on previous Distribution Dates. Excess Spread. With respect to any Distribution Date, the positive excess, if any, of (x) the Collected Amount for the Group I Loans with respect to such Distribution Date over (y) the amount required to be distributed pursuant to priorities (i) through (ix) of Section 4.05(a) on such Distribution Date. Exemption. An individual Prohibited Transactions Exemption granted to an underwriter by the Department of Labor which provides relief from certain of the prohibited transaction provisions of ERISA with respect to the purchase, holding, and subsequent resale by an ERISA Plan of certificates in pass-through trusts that meet the conditions and the requirements of such exemption. FASIT. A "financial asset securitization investment trust" within the meaning of Section 860L of the Code. FDIC. The Federal Deposit Insurance Corporation and any successor thereto. FHA. The Federal Housing Administration and any successor thereto. FHA Insurance. Insurance issued by FHA pursuant to Title I of the National Housing Act of 1934, as amended. FHA Insurance Coverage Insufficiency. At the time of a prospective claim for reimbursement under the Contract of Insurance for an FHA Loan pursuant to Section 3.12, the amount by which the sum of all claims previously paid by the FHA in respect of such FHA Loans and the amount expected to be received in respect of such prospective claim for such FHA Loan exceeds the Trust Designated Insurance Amount. FHA Insurance Coverage Reserve Account. The account established by the FHA pursuant to the Contract of Insurance which is adjusted and maintained under Title I (see 24 C.F.R. 201.32(a)). FHA Insurance Payment Amount. With respect to any Distribution Date and with respect to an FHA Loan for which an insurance claim has been made by the Contract of Insurance Holder or the Claims Administrator and paid by the FHA or rejected, in part, by the FHA, an amount equal to the sum of such of the following as are appropriate: (i) the amount, if any, received from the FHA, (ii) with respect to claims rejected in part, the amount, if any, received from Mego or the Master Servicer pursuant to Section 3.12 and (iii) the amount received from the sale of FHA Pending Claims sold pursuant to Section 9.01(d). 13 19 FHA Loans. The Loans designated as FHA Loans on the Loan Schedule. FHA Pending Claims. As defined in Section 9.01(d). FHA Premium Account. The Eligible Accounts established and maintained by the Trustee pursuant to Section 4.06(a). FHA Premium Account Deposit. With respect to any Distribution Date and Loan Group, an amount equal to the greater of (i) 1/12 times .75% times the aggregate Principal Balance of all FHA Loans in such Loan Group other than Invoiced Loans as of the first day of the calendar month preceding the month of such Distribution Date (or the aggregate Principal Balance of such Loans as of the applicable Cut-Off Date with respect to the first Distribution Date) and (ii) the positive excess, if any, of (A) the projected amount of premium and other charges due under the Contract of Insurance for the next succeeding Due Period over (B) the balance in the FHA Premium Account as of the related Determination Date. FHA Reserve Amount. As to each FHA Loan, 10% of the Initial Principal Balance thereof. FHA Reserve Fund. The account which is an Eligible Account denominated as the FHA Reserve Fund to be established by the Trustee pursuant to Section 4.03(d) hereof. File. With respect to any Loan, the related documents listed in Section 2.01(b)(A) and any additional documents required to be added thereto pursuant to this Agreement. Final Date. The later of: (i) two years after the last insurance claim with respect to a Loan filed with the FHA was certified for payment by FHA, or (ii) the final settlement date with respect to any insurance claim for a Loan rejected by the FHA. Final Residual Distribution Amount. With respect to the Distribution Date which coincides with the Termination Date, all amounts, if any, remaining in each Distribution Account and each FHA Premium Account and all other assets, if any, held by the Trust after all payments required to be made pursuant to Section 4.05 have been made or provided for on such Distribution Date. Final Scheduled Distribution Date. The Distribution Date in November 2022. FHLMC. The Federal Home Loan Mortgage Corporation. FNMA. The Federal National Mortgage Association. Foreclosed Loan. As of any date of determination, any Mortgage Loan, other than a Mortgage Loan for which a claim is pending under the Contract of Insurance, that has 14 20 been discharged as a result of (i) the completion of foreclosure or comparable proceedings; (ii) the Trustee's acceptance of the deed or other evidence of title to the related Property in lieu of foreclosure or other comparable proceeding; or (iii) the acquisition by the Trustee of title to the related Property by operation of law. Foreclosed Property. With respect to any Mortgage Loan, any Property acquired by the Trust as a result of: (i) the completion of foreclosure or comparable proceedings with respect to the related Mortgage Loan; (ii) the Trustee's acceptance of the deed or other evidence of title to the related Property in lieu of foreclosure or other proceeding with respect to the related Loan; or (iii) the acquisition by the Trustee of title thereto by operation of law. Foreclosure Advances. As defined in Section 3.08(b). GNMA. The Government National Mortgage Association. Grantor Trust. A trust classified as a grantor trust under subpart E, Part I of subchapter J of the Code. Grantor Trust Pool. The pool of assets consisting of the Group II Loans which shall be classified as a grantor trust under subpart E, Part I of subchapter J of the Code. Grantor Trust Provisions. Those Sections of the Code and Treasury Regulations relating to trusts classified as grantor trusts under subpart E, Part I of subchapter J of the Code. Group I Certificates. Each of the Class IA-1, Class IA-2, Class IA-3, Class IS Certificates and Class R Certificates. Group II Certificates. The Class IIA Certificates and the Class IIS Certificates. Group IA Certificates. The Class IA-1 Certificates, the Class IA-2 Certificates and the Class IA-3 Certificates. Group IIA Certificates. The Class IIA Certificates. Group I Loan. As of any date of determination, each of the FHA Loans that are Mortgage Loans and certain Mortgage Loans that are Non-FHA Loans, in each case identified as a Group I Loan on the Loan Schedule. Group I Reserve Fund. As defined in the Insurance Agreement. Group II Loan. As of any date of determination, each of the FHA Loans that are unsecured and certain Mortgage Loans that are Non-FHA Loans, in each case identified as a Group II Loan on the Loan Schedule. Group II Reserve Fund. As defined in the Insurance Agreement. 15 21 HUD. The United States Department of Housing and Urban Development and any successor thereto. Indemnification Agreement. The Indemnification Agreement dated December 11, 1996, among the Certificate Insurer, the Underwriter and Mego, as the same may be amended from time to time. Independent. When used with respect to any specified Person, such Person (i) is in fact independent of Mego, the Master Servicer, the Depositor or any of their respective affiliates, (ii) does not have any direct financial interest in or any material indirect financial interest in any of Mego, the Master Servicer, the Depositor or any of their respective affiliates and (iii) is not connected with any of Mego, the Master Servicer, the Depositor or any of their respective affiliates, as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions; provided, however, that a Person shall not fail to be Independent of Mego, the Master Servicer, the Depositor or any of their respective affiliates merely because such Person is the beneficial owner of 1% or less of any class of securities issued by Mego, the Master Servicer, the Depositor or any of their respective affiliates, as the case may be. Independent Accountants. A firm of nationally recognized certified public accountants which is Independent. Independent Contractor. Either (i) any Person (other than the Master Servicer) that would be an "independent contractor" with respect to the Trust within the meaning of Section 856(d)(3) of the Code if the Trust were a real estate investment trust except that the ownership tests set forth in that section shall be considered to be met by any Person that owns, directly or indirectly, 35 percent or more of any Class of Certificates), provided that the Trust does not receive or derive any income from such Person and the relationship between such Person and the Trust is at arm's length, all within the meaning of Treasury Regulation section 1.856-4(b)(5) or (ii) any other Person (including the Master Servicer) if the Master Servicer has delivered to the Trustee an Opinion of Counsel to the effect that the taking of any action in respect of any Foreclosed Property by such Person, subject to any conditions therein specified, that is otherwise herein contemplated to be taken by an Independent Contractor will not cause such Foreclosed Property to cease to qualify as "foreclosure property" within the meaning of Section 860G(a)(8) of the Code (determined without regard to the exception applicable for purposes of Section 860D(a) of the Code), or cause any income realized in respect of such Foreclosed Property to fail to qualify as rents from real property within the meaning of Section 856(d) of the Code. Initial Class A Certificate Balance. With respect to the Class IA-1 Certificates: $19,630,000, the Class IA-2 Certificates: $10,790,000, the Class IA-3 Certificates: $9,101,458, and the Class IIA Certificates: $27,199,925. 16 22 Initial Loan Group I Principal Balance. $40,062,299.05. Initial Loan Group II Principal Balance. $27,199,925.48. Initial Principal Balance. With respect to any Loan, the outstanding principal balance thereof at the opening of business on the Cut-Off Date for such Loan, after giving effect to all payments of principal received prior thereto. Insurance Agreement. The Insurance Agreement, dated as of November 1, 1996, as supplemented and amended from time to time among the Certificate Insurer, the Trustee, the Contract of Insurance Holder, the Depositor, the Master Servicer, the Servicer, the Seller and Claims Administrator. Insurance Default Amount. For any Distribution Date, the Class A Guaranteed Principal Distribution Amount or portion thereof, if any, for such Distribution Date in respect of the Group II Certificates not distributed to the holders of the Group IIA Certificates pursuant to Section 4.05(b)(x) on such Distribution Date. Insurance Policies. With respect to any Property, any related title or other insurance policy other than the Contract of Insurance or the Policies. Insurance Proceeds. With respect to any Property, all amounts collected in respect of Insurance Policies and not required to be applied to the restoration of the related Property or paid to the related Obligor. Insurance Record. The record established and maintained by the Master Servicer (in a manner consistent with the Title I provisions set forth in 24 C.F.R. Section 201.32) setting forth the FHA insurance coverage attributable to the FHA Loans hereunder. To the extent consistent with adjustments pursuant to Title I to the FHA Insurance Coverage Reserve Account, the Insurance Record shall be reduced by the amount of claims approved for payment by the FHA with respect to any FHA Loan or Related Series Loan after the date of transfer of the related FHA reserve account to the Contract of Insurance. Insured Payment. As defined in the related Policy. Interest Advance. As defined in Section 3.08(a). Interested Person. As of any date of determination, the Master Servicer, the Depositor, Mego, or any registered Holder of a Class R Certificate on the date of determination, or any of their respective affiliates. Investment Order. With respect to amounts on deposit in an Account, a written order with respect to the Eligible Investments in which the amounts in such Account are to be invested, signed in the name of Mego by a Responsible Officer of Mego. Invoiced Loan. An FHA Loan with respect to which the related Obligor is required to pay the premium on FHA Insurance with respect to such FHA Loan. 17 23 Late Payment Rate. For any Distribution Date, the lesser of (i) the rate of interest, as it is publicly announced by Citibank, N.A., as its prime rate (any change in such prime rate of interest to be effective on the date such change is announced by Citibank, N.A.) plus 2% and (ii) the maximum rate permissible under any applicable law limiting interest rates. The Late Payment Rate shall be computed on the basis of a year of 365 days calculating the actual number of days elapsed. Legal File. With respect to any Loan, the related documents listed in Section 2.01(b)(A)(i)-(v) and any additional documents required to be added thereto pursuant to this Agreement. Loan. Either a Group I Loan or a Group II Loan, as the context requires, or collectively, the Group I Loans and the Group II Loans. Loan Group. Either Loan Group I or Loan Group II as applicable. Loan Group I. The loan group comprised of Group I Loans. Loan Group II. The loan group comprised of Group II Loans. Loan Group I Principal Balance. For any date of determination, the aggregate of the Principal Balances of all Group I Loans as of such date. Loan Group II Principal Balance. For any date of determination, the aggregate of the Principal Balances of all Group II Loans as of such date. Loan Rate. With respect to any Loan, the fixed rate of interest per annum set forth in the related Note (not including any amounts payable as premium for FHA Insurance with respect to Invoiced Loans). Loan Schedule. The schedule of Loans included in the Trust as of the Closing Date, specifying with respect to each such Loan the information set forth on Exhibit B attached hereto. Loss Carryforward Amount. For any Distribution Date, the aggregate of all Insurance Default Amounts calculated on prior Distribution Dates, minus the sum of the amounts distributed to the holders of the Group II Certificates pursuant to Section 4.05(b)(xi) on all prior Distribution Dates. Master Servicer. Norwest Bank Minnesota, N.A., a national banking association, its successors in interest or any successor master servicer appointed as herein provided. Master Servicer Certificate. As defined in Section 4.01(c). Master Servicer Fee. With respect to any Distribution Date and Loan Group, 1/12 times 0.08% times the Aggregate Principal Balance of such Loan Group as of the opening of business on the first day of the month preceding the month of such Distribution 18 24 Date (or, with respect to the first Distribution Date, the Initial Loan Group I Principal Balance or Initial Loan Group II Principal Balance, as applicable). Master Servicer Termination Event. Any event specified in Section 7.01. Master Servicing Officer. Any officer of the Master Servicer responsible for the administration and servicing of the Loans whose name and specimen signature appears on a list of servicing officers furnished to the Trustee by the Master Servicer, as such list may from time to time be amended. Maturity Date. With respect to any Loan and as of any date of determination, the date on which the last payment of principal is due and payable under the related Note. Maximum Rate. With respect to any Distribution Date and the Group IA Certificates, a rate equal to the quotient of (a) the excess of (i) the aggregate of the Monthly Payments of the Group I Loans allocable to interest due during the related Due Period net of the portion thereof allocable to Master Servicer Fees and Servicer Fees on the Group I Loans over (ii) the sum of the amounts required to be distributed for such Distribution Date pursuant to subsections (i), (iv)-(vi) of Section 4.05(a) and (b) one-twelfth of the Aggregate Class A Certificate Balance of the Group I Certificates (prior to giving effect to distributions made on such Distribution Date). Monthly Cut-Off Date. The last day of any calendar month, and with respect to any Distribution Date, the last day of the calendar month immediately preceding such Distribution Date. Monthly Payment. With respect to any Loan and any Due Period, the payment of principal and interest due in such Due Period from the Obligor pursuant to the related Note (as amended or modified, if applicable, pursuant to Section 3.10). The Monthly Payment related to a Determination Date or a Distribution Date shall be the Monthly Payment due in the next preceding Due Period. Moody's. Moody's Investors Service, Inc., or any successor thereto. Mortgage. With respect to any Mortgage Loan, the mortgage, deed of trust or other instrument creating a mortgage lien (and in a title theory state the document conveying title to the Property as security for the related Loan) on the related Property. Mortgage Loan. As of any date of determination, each of the Loans, secured by an interest in a Property, transferred and assigned to the Trustee pursuant to Section 2.01(a). Mortgagee or Obligee. With respect to any Loan as of any date of determination, the holder of the related Note and any related Mortgage as of such date. Mortgagor or Obligor. With respect to any Loan, the obligor(s) on the related Note. 19 25 Net Loan Rate. With respect to each Loan, the related Loan Rate less the rate at which the Servicer Fee is calculated. Net Prepayment Interest Shortfall. As to any Distribution Date and Loan Group, the amount by which aggregate Prepayment Interest Shortfalls for the Loans in such Loan Group during the preceding Due Period exceed the Servicer Fee for such Loan Group for such Distribution Date. Non-FHA Loans. The Loans designated as Non-FHA Loans on the Loan Schedule. Each Non-FHA Loan is a Mortgage Loan. Nonrecoverable Advances. With respect to any Loan, (i) any Interest Advance previously made and not reimbursed in the case of Loan Group I, pursuant to Section 4.05(a)(iii), or in the case of Loan Group II, Section 4.05(b)(iii), or (ii) an Interest Advance proposed to be made in respect of a Loan which, in the good faith business judgment of the Master Servicer, as evidenced by an Officer's Certificate delivered to the Certificate Insurer, Mego and the Trustee no later than the Business Day following such determination, would not be recoverable ultimately from the Payments in respect of that Loan. Note. With respect to any Loan, the note (or notes), retail installment sale contract or other instrument evidencing the indebtedness under such Loan. Notice of Termination. Notice given to the Trustee by the Master Servicer pursuant to Section 9.01(e), or by Mego pursuant to Section 9.01(d). Obligee. See Mortgagee. Obligor. See Mortgagor. OC Floor. The product of 1% times the Initial Loan Group I Principal Balance, which product is equal to $400,622.99. OC Multiple. As to any Distribution Date and the Group I Loans, the highest OC Multiple based upon the data set forth in the Master Servicer's Certificate for such Distribution Date as set forth in the following chart: 20 26
30+ Day 60+ Day Annual Default Delinquency Delinquency % Percentage Percentage (Rolling (3 Month Average) OC (Rolling 3 Month) 3 Month) for Multiple Loan Group I Loan Group I Loan Group I -------- ----------------- ------------------- ----------------- 1.00 0.00% to 7.99% 0.00% to 3.49% 0.00% to 4.99% 1.25 8.00% to 8.99% 3.50% to 4.99% 5.00% to 5.99% 1.50 9.00% to 11.99% 5.00% to 6.99% 6.00% to 6.99% 2.50 **=12.00% **=7.00% **=7.00%
CUMULATIVE DEFAULT PERCENTAGE LOAN GROUP I ------------------------------------------------------------------------ Months* Months 0 Months 012 024 Maturity -------- ----------------- ------------------- ----------------- 2.50 **5.0% **8.0% **12.0%
- ---------- * Month 0 is November, 1996. ** Greater Than OC Reduction Date. shall be the later of (i) the Distribution Date occurring in December 1999 and (ii) the Distribution Date on which the Aggregate Principal Balance of the Group I Loans for such Distribution Date is equal to or less than one-half of the Initial Loan Group I Principal Balance. Officer's Certificate. A certificate signed by (i) any Master Servicing Officer or (ii) the Chairman of the Board, the Vice Chairman of the Board, the President, a Vice President, an Assistant Vice President, the Treasurer, the Secretary or one of the Assistant Treasurers or Assistant Secretaries of the Depositor or Mego, as the case may be, as required by this Agreement. Opinion of Counsel. A written opinion of counsel (who is acceptable to the Certificate Insurer and the Rating Agencies), who may be employed by Mego, the Master Servicer, the Depositor or any of their respective affiliates. Other Fees. With respect to any Distribution Date, (i) amounts in respect of fees and expenses due to any provider of services to the Trust, except the Trustee, the Master Servicer, the Servicer, the Claims Administrator, the Contract of Insurance Holder and also except any Person, the fees of which are required by this Agreement to be paid by the Master Servicer, the Servicer, the Claims Administrator, the Contract of Insurance Holder or the 21 27 Trustee, but including such amounts payable to the successor Master Servicer pursuant to Section 7.03(c); (ii) any taxes assessed against the Trust; (iii) the reasonable transition expenses of a successor Master Servicer incurred in acting as successor Master Servicer; and (iv) expenses of either the Trustee or the Master Servicer incurred pursuant to Section 8.01(e). Outstanding. With respect to any Class of Certificates as of any date of determination, all Certificates of such Class theretofore executed, countersigned and delivered pursuant to this Agreement except: (i) Certificates theretofore cancelled by the Certificate Registrar or delivered to the Certificate Registrar for cancellation; (ii) Certificates or portions thereof for which the amount of the final distribution to be made thereon has been previously deposited with the Trustee in trust for the Holders of such Certificates; (iii) Certificates in exchange for or in lieu of which other Certificates have been executed, countersigned and delivered pursuant to this Agreement; and (iv) Certificates alleged to have been destroyed, lost or stolen for which replacement Certificates have been issued as provided for in Section 5.03; provided, however, that, in determining whether the Holders of the requisite percentage of any Class of Certificates have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Certificates owned by Mego, the Depositor, any Holder of a Class R Certificate or any affiliate of any of the foregoing shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, or waiver, only Certificates which the Trustee knows to be so owned shall be so disregarded; provided further that in the event that 100% of any Class of Senior Certificates are owned by Mego, the Depositor or any affiliate of any of the foregoing, such certificates shall be deemed to be Outstanding; provided, further, that Certificates to which payments are made under the related Policy shall be deemed to be Outstanding and the Certificate Insurer shall be deemed to be the Holder of such Certificate to the extent so paid. Overcollateralization Amount. As of any Distribution Date the amount, if any, by which the sum of the Aggregate Principal Balance of the Group I Loans as of the end of the related Due Period exceeds the Aggregate Class A Certificate Balance of the Group I Certificates after giving effect to distributions of principal to be made on such Distribution Date. Ownership Interest. Any record or beneficial ownership interest in any Class R Certificate. Payment. With respect to any Loan or the related Foreclosed Property and any Determination Date, all amounts received or collected by or on behalf of the Master Servicer during the preceding Due Period in respect of such Loan or Foreclosed Property from whatever source, including without limitation, amounts received or collected from, or representing: 22 28 (i) the related Obligor; (ii) the application to amounts due on such Loan (or, in the case of any Foreclosed Property, to amounts previously due on the related Foreclosed Loan) of any related Insurance Proceeds, any related condemnation awards or settlements or any payments made by any related guarantor or third-party credit-support provider; (iii) FHA Insurance Payment Amounts with respect to such Loan; (iv) the operation or sale of the related Foreclosed Property; (v) the Purchase Price with respect to such Loan; or (vi) amounts deposited into the related Distribution Account pursuant to Section 9.01(d). Percentage Interest. As to any Class A Certificate, the percentage interest obtained by dividing the Denomination of such Certificate by the aggregate of the Initial Class A Certificate Balance of all Certificates of such Class. As to any Class S Certificate or Class R Certificate, the percentage interest set forth on the face of such Certificate. Permitted Transferee. Any Person other than (i) the United States, any state or any political subdivision thereof, any possession of the United States, or any agency or instrumentality of any of the foregoing (other than an instrumentality that is a corporation if all of its activities are subject to tax and a majority of its board of directors is not selected by any such governmental unit), (ii) a foreign government, international organization or any agency or instrumentality of either of the foregoing (other than an instrumentality that is a corporation if all of its activities are subject to tax and a majority of its board of directors is not selected by any such governmental unit), (iii) an organization (except certain farmers' cooperatives described in Code Section 521) exempt from tax imposed by Chapter 1 of the Code (including the tax imposed by Section 511 of the Code on unrelated business taxable income) on any excess inclusions (as defined in Code Section 860E(c)(1)) with respect to any Class R Certificate, (iv) rural electric and telephone cooperatives described in Code Section 1381(a)(2)(c), (v) any other Person so designated by the Trustee based upon an Opinion of Counsel that the holding of an ownership interest in a Class R Certificate by such Person may cause the Trust or any Person having an ownership interest in any Class R Certificate, other than such Person, to incur a liability for any tax imposed under the Code that would not otherwise be imposed but for the transfer of an ownership interest in a Class R Certificate to such Person and (vi) a Person that is not a citizen or resident of the United States, a corporation, partnership, or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or an estate or trust the income of which is subject to United States federal income taxation regardless of its source unless such person provides the Trustee with a duly completed Internal Revenue Service Form 4224. The terms "United States," "state" and "international organization" shall have the meanings set forth in Code Section 7701 or successor provisions. 23 29 Person. Any individual, corporation, limited liability company, partnership, joint venture association, joint-stock company, trust, unincorporated organization or government or any agency or government or any agency or political subdivision thereof. Plan of Complete Liquidation. With respect to the REMIC Pool, a written plan adopted by the Trustee, as attorney-in-fact for the Certificateholders of the Group I Certificates, authorizing and instructing the Trustee to liquidate the REMIC Pool within the meaning of Section 860F(a)(4) of the Code by (i) selling all the Loans and Foreclosed Properties then held by the REMIC Pool on the terms specified therein, and (ii) making a final distribution to Certificateholders of the Group I Certificates of the cash proceeds of such sale and of all other cash then held by the REMIC Pool (less amounts retained to meet any expenses of, and any claims against, the REMIC Pool), all in accordance with the provisions of Section 9.01. With respect to the Grantor Trust Pool, a written plan adopted by the Trustee, as attorney-in-fact for the Certificateholders, authorizing and instructing the Trustee to liquidate the Grantor Trust Pool by (i) selling all the Group II Loans then held by the Grantor Trust Pool on the terms specified therein, and (ii) making a final distribution to Certificateholders of the Group II Certificates of the cash proceeds of such sale and of all other cash then held by the Grantor Trust Pool (less amounts retained to meet any expenses of, and any claims against, the Grantor Trust Pool), all in accordance with the provisions of Section 9.01. Policies. With respect to the Group I Certificates (other than the Class R Certificates), the certificate guaranty insurance policy number 22640 and with respect to the Group II Certificates, the certificate guaranty insurance policy number 22641, each dated as of the Closing Date, as set forth in Exhibit N-1 and N-2, respectively, issued by the Certificate Insurer to the Trustee for the benefit of Senior Certificateholders. Pool Annual Default Percentage (Three Month Average). With respect to any Determination Date, the average of the percentage equivalents of the fractions determined for each of the three immediately preceding Due Periods the numerator of which is the product of (i) the aggregate of the Principal Balances of all Loans that became Credit Support Multiple Defaulted Loans during such Due Period immediately prior to such Loans becoming Credit Support Multiple Defaulted Loans times (ii) 12, and the denominator of which is the Aggregate Principal Balance of the Loans as of the end of such Due Period. Pool 60+ Delinquency Percentage (Rolling Three Month). With respect to any Determination Date, the average of the percentage equivalents of the fractions determined for each of the three immediately preceding Due Periods the numerator of each of which is equal to the aggregate Principal Balance of Loans that are 60+ Day Delinquent Loans as of the end of such Due Period and the denominator of which is the Aggregate Principal Balance of the Loans as of the end of such Due Period. Preference Amount. As defined in the related Policy. Premium. The premium payable to the Certificate Insurer in accordance with Section 3.02 of the Insurance Agreement. 24 30 Prepayment Interest Shortfall. As to any Loan and Principal Prepayment, the amount by which one month's interest at the related Loan Rate (or such lower rate as may be in effect from a Loan because of the application of the Civil Relief Act) minus the rate at which the Servicing Fee is calculated on such Principal Prepayment exceeds the amount of interest paid by the Mortgagor in connection with such Principal Prepayment. Principal Balance. With respect to any Loan, and for any date of determination, the Initial Principal Balance of such Loan reduced by all amounts previously received or collected in respect of principal on such Loan on or subsequent to the Cut-Off Date for such Loan; provided, that with respect to any Defaulted Loan, the Principal Balance shall be zero immediately after the Due Period in which such Loan becomes a Defaulted Loan. Principal Prepayment. Any payment or other receipt of principal in full due on a Loan made by an Obligor which is received in advance of the scheduled Maturity Date of such Loan. Property. With respect to any Mortgage Loan, any fee interest in the residential property subject to the lien of the related Mortgage. Prospectus Supplement. The prospectus supplement, dated December 11, 1996, relating to the Group IA Certificates and Group IIA Certificates. Purchase Agreement. The loan purchase agreement entered into between Mego, as Seller, and the Depositor, as purchaser, dated as of November 1, 1996. Purchased Loan. As of any Monthly Cut-Off Date and Loan Group, any Loan (including any Defaulted Loan) in such Loan Group that became subject to purchase or repurchase pursuant to Section 2.04(b) or Section 3.12, and in each case, as to which the Purchase Price has been deposited in the related Distribution Account by Mego or the Master Servicer, as applicable. Purchase Price. With respect to a Loan, means the Principal Balance of such Loan as of the date of purchase, plus unpaid accrued interest at the related Loan Rate to the last day of the month in which such purchase occurs (without regard to any Interest Advance that may have been made with respect to such Loan). Rating Agency. Each of Moody's and Standard & Poor's, so long as such rating agency maintains ratings on any of the Senior Certificates; and if either Moody's or Standard & Poor's no longer maintains ratings on the Senior Certificates, such other nationally recognized statistical rating organization specified by Mego and (so long as a Certificate Insurer Default shall not have occurred and be continuing) acceptable to the Certificate Insurer. Record Date. With respect to any Distribution Date, the last day of the month (or if such last day is not a Business Day, the Business Day immediately preceding such last day) preceding the month of such Distribution Date. 25 31 Reimbursement Amount. As of any Distribution Date and Certificate Group, the sum of (x) (i) Insured Payments previously received by the Trustee and not previously re-paid to the Certificate Insurer, in the case of the Group I Certificates, pursuant to Section 4.05(a)(ix) or, in the case of the Group II Certificates, pursuant to Section 4.05(b)(ix) hereof plus (ii) interest accrued on such Insured Payment not previously repaid calculated at the Late Payment Rate from the date the Trustee received such Insured Payment and (y) (i) the amount of any Premium in respect of such Certificate Group not paid on the date due and (ii) interest on such amount at the Late Payment Rate. The Certificate Insurer shall notify the Trustee and Depositor of the amount of any Reimbursement Amount. Rejected Claim. With respect to any FHA Loan, a claim for payment made to the FHA under the Contract of Insurance that has been finally rejected after all appeals with FHA have been exhausted for any reason (including a rejection of a previously paid claim and a demand by the FHA of a return of the FHA Insurance Payment Amount for the related FHA Loan) other than a refusal or rejection due to clerical error in computing the claim amount or because the amount of the FHA Insurance Coverage Reserve Account as shown in the Insurance Record is zero. Related Series. Means (i) the Trust, (ii) Mego Mortgage FHA Title I Loan Trust 1996-2, (iii) Mego Mortgage FHA Title I Loan Trust 1996-1, and (iv) each of the subsequent series of trusts, of which the Trustee is the trustee and the Certificate Insurer is the certificate insurer, to which Related Series Loans are sold directly or indirectly by Mego, established pursuant to pooling and servicing agreements. Related Series Loans. Means FHA Title I loans related to a Related Series which: (i) are sold by Mego, directly or indirectly, to a trust and (ii) the Title I insurance coverage attributable to which is made available to cover claims with respect to the FHA Loans and the Related Series Loans in each other Related Series by virtue of terms relating to the administration of the FHA Insurance Coverage Reserve Account substantially similar to the terms hereof. REMIC. A "real estate mortgage investment conduit," as defined in the REMIC Provisions. REMIC Pool. The pool of assets consisting of the Group I Loans for which an election shall be made to be treated as a REMIC under the REMIC Provisions. REMIC Provisions. Provisions of the federal income tax law relating to real estate mortgage investment conduits, which appear at Sections 860A through 860G of Subchapter M of Chapter 1 of the Code, and related provisions, and regulations (either proposed, temporary or final) and related revenue rulings and procedures, as the foregoing may be in effect from time to time. Required OC Amount. With respect to each Distribution Date, the greater of (a) the OC Floor or (b) the product of (i) the OC Multiple for such Distribution Date and (ii)(x) if such Distribution Date is prior to the OC Reduction Date, the product of 3.75% and the Initial Group I Principal Balance, or (y) if such Distribution Date is on or after the OC Reduction Date, the lesser of (A) the product of 3.75% times the Initial Loan Group I Principal Balance and (B) 26 32 the product of 7.50% times the Aggregate Principal Balance of the Group I Loans as of such Distribution Date, or such lower amount as may be established by the Certificate Insurer in its sole discretion after notice to and written approval by the Rating Agencies; provided, however, on any Distribution Date during the occurrence and continuance of a Trigger Event and for three Distribution Dates after the conclusion of a Trigger Event, notwithstanding anything to the contrary contained in this definition, the Required OC Amount shall be equal to the greater of (a) the OC Floor or (b) the product of (i) the OC Multiple for such Distribution Date times (ii) the product of 3.75% times the Initial Group I Principal Balance. Residual Interest. The fractional undivided interest evidenced by a Class R Certificate in all amounts distributable to Holders of Class R Certificates pursuant to Section 4.05(a). Responsible Officer. When used with respect to the Trustee, an officer in its Corporate Trust Office, or any other officer assigned by the Trustee to administer its corporate trust matters, and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. When used with respect to any other Person that is not an individual, the President, any Vice-President or Assistant Vice-President or the Controller of such Person, or any other officer or employee having similar functions. 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. Securities Act. The Securities Act of 1933, as amended. Senior Certificate. Any of the Class IA-1, Class IA-2, Class IA-3, Class IIA, Class IS Certificates or Class IIS Certificates. Servicer. Mego or any other Eligible Servicer with whom the Master Servicer has entered into a Servicing Agreement pursuant to Section 3.02. Servicer Fee. With respect to any Distribution Date and Loan Group, 1/12 times 1.00% times the Aggregate Principal Balance of such Loan Group, as of the opening of business on the first day of the month preceding the month of such Distribution Date (or, with respect to the first Distribution Date, the Initial Loan Group I Principal Balance or Initial Loan Group II Principal Balance, as applicable), reduced by the sum of (a) aggregate Prepayment Interest Shortfall for such Loan Group for the related Due Period and (b) any Additional Trustee Fee in respect of such Loan Group for such Distribution Date. Servicer Review Report. As defined in Section 3.05(d). Servicer Termination Event. With respect to the Servicing Agreement, the events specified in Section 7.02 therein. 27 33 Servicing Agreement. The servicing agreement dated as of November 1, 1996, between Mego, as Servicer, the Master Servicer, the Trustee and the Trust and any other agreement entered into in accordance with Section 3.02. Servicing Record. The records for each Loan Group maintained by the Master Servicer pursuant to Section 3.03. Servicing Standard. The standard set forth in Section 3.01(a). 60+ Day Delinquent Loan. With respect to any Determination Date or related Distribution Date, a Loan, other than a Credit Support Multiple Defaulted Loan, with respect to which any portion of a Monthly Payment is, as of the prior Monthly Cut-Off Date, 61 days or more past due (without giving effect to any grace period) and unpaid by the Obligor. 60+ Delinquency Percentage (Rolling Three Month). With respect to any Determination Date and Loan Group I, the average of the percentage equivalents of the fractions determined for each of the three immediately preceding Due Periods the numerator of each of which is equal to the aggregate Principal Balance of Loans in such Loan Group that are 60+ Day Delinquent Loans as of the end of such Due Period and the denominator of which is the Aggregate Principal Balance of the Loans in such Loan Group as of the end of such Due Period. Standard & Poor's. Standard & Poor's Rating Services, or any successor thereto. Start-up Day. The day designated as such in Section 8.12(a). Substitute Loan. A Loan: (i) having characteristics such that the representations and warranties made pursuant to Section 2.03(b) with respect to the Loans in the related Loan Group are true and correct as of the date of substitution with respect to such Loan; (ii) each Monthly Payment with respect to such Loan shall be greater than or equal to the Monthly Payments due in the same Due Period on the Loan for which such Substitute Loan is being substituted; (iii) the Maturity Date with respect to such Loan shall be no later than the Maturity Date of the Loan for which such Substitute Loan is being substituted; (iv) as of the date of substitution, the Principal Balance of such Loan is less than or equal to (but not more than 1% less than) the Principal Balance of the Loan for which such Substitute Loan is being substituted; (v) the Loan Rate with respect to such Loan is at least equal to the Loan Rate of the Loan for which such Substitute Loan is being substituted and (vi) the FICO score for such Loan must not be less than ten points of the FICO score for such Loan for which such Substitute Loan is being substituted; provided however, in the event more than one Substitute Loan is being substituted for one or more Defective Loans in a Loan Group on any date, in which case (i) the weighted average Loan Rate for such Substitute Loans must equal or exceed the weighted average Loan Rate of the Defective Loans in such Loan Group immediately prior to giving effect to the substitution, in each case weighted on the basis of the outstanding Principal Balance of such loans as of such day, (ii) the sum of the Monthly Payments with respect to such Substitute Loans shall be greater than or equal to the Monthly Payments due in the same Due Period on the Defective Loans for which a substitution is being made, and (iii) as of the date of substitution, the aggregate Principal Balances of such 28 34 Substitute Loans are less than or equal to (but not more than 1% less than) the aggregate Principal Balances of the Defective Loans for which such a substitution is being made. Substitution Adjustment Amount. The meaning assigned to such term in Section 2.04(d). Tax Return. For the Group I Loans, the federal income tax return on Internal Revenue Service Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return, including Schedule Q thereto, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation, or any successor forms, to be filed on behalf of the portion of the Trust consisting of the REMIC Pool due to its classification as a REMIC under the REMIC Provisions, together with any and all other information, reports or returns that may be required to be furnished to the Certificateholders or filed with the Internal Revenue Service or any other governmental taxing authority under any applicable provisions of federal, state or local tax laws. For the Group II Loans, Internal Revenue Service Form 1041, or any successor forms, to be filed on behalf of the Trust due to its classification as a grantor trust under the Grantor Trust Provisions, together with any and all other information, reports or returns that may be required to be furnished to the Certificateholders, including Schedule K-1 (Form 1041), or filed with the Internal Revenue Service or any other governmental taxing authority under any applicable provisions of federal, state or local tax laws. Termination Date. The earlier of (a) the Distribution Date in November 2022 and (b) the Distribution Date next following the Monthly Cut-Off Date coinciding with or next following the date of the liquidation or disposition of the last asset held by the Trust pursuant to Section 3.13, 9.01(d) or 9.01(e). 30+ Day Delinquent Loan. With respect to any Determination Date or related Distribution Date, a Loan, other than a Credit Support Multiple Defaulted Loan, with respect to which any portion of a Monthly Payment is, as of the prior Monthly Cut-Off Date, 31 days or more past due (without giving effect to any grace period) and unpaid by the Obligor. 30+ Delinquency Percentage (Rolling Three Month). With respect to any Determination Date and Loan Group I, the average of the percentage equivalents of the fractions determined for each of the three immediately preceding Due Periods the numerator of which is equal to the aggregate Principal Balance of Loans in such Loan Group that are 30+ Day Delinquent Loans as of the end of such Due Period, and the denominator of which is the Aggregate Principal Balance of the Loans in such Loan Group as of the end of such Due Period. Title Document. The evidence of title to or ownership of the Property required by Title I. (See 24 C.F.R. 201.26(a)(1) and 201.20). Title I. Section 2 of Title I of the National Housing Act of 1934, as amended, and the rules and regulations promulgated thereunder as each may be amended from time to time and any successor statute, rules or regulations thereto. Transaction Documents. This Agreement, the Purchase Agreement, the Servicing Agreement, the Insurance Agreement and the Indemnification Agreement. 29 35 Transfer. Any direct or indirect purchase, transfer, sale, assignment or other form of disposition of any Ownership Interest in a Certificate other than any pledge of such Certificate for security. Transferee. Any Person who is acquiring by Transfer any Ownership Interest in a Certificate. Trigger Event. The occurrence and continuance of any of the following events: (i) Mego shall fail to pay when due any amount payable by it under the Insurance Agreement, such failure results in a drawing under the Policy and the Certificate Insurer has not been reimbursed therefor; (ii) Mego shall fail to pay when due any amount payable by it hereunder, such failure results in a drawing under the Policy and the Certificate Insurer has not been reimbursed therefor; (iii) the Pool Annual Default Percentage (Three Month Average) exceeds 6.5% or the Pool 60+ Delinquency Percentage (Rolling Three Month) exceeds 6.0% or such higher percentage as determined from time to time by the Certificate Insurer; (iv) any representation, warranty or statement of Mego made in the Insurance Agreement or in this Agreement shall prove to be incorrect in any material respect as of the time when the same shall have been made, and the circumstances or condition in respect of which such representation, warranty or statement was incorrect could (A) in the opinion of the Certificate Insurer have a material adverse affect on the interests of the Certificate Insurer and (B) has not been cured within the applicable cure period specified in the Insurance Agreement or this Agreement, as the case may be or otherwise remedied as provided in the applicable agreement; (v) Mego shall dissolve or liquidate, in whole or in part, in any material respect unless the resulting successor entity (a) assumes all obligations of Mego under this Agreement, the Purchase Agreement and the Insurance Agreement and has a net worth at least equal to Mego's at the time of dissolution or liquidation, or (b) is acceptable to the Certificate Insurer; (vi) Mego is the subject of a conservatorship, receivership or other insolvency proceeding; or (vii) The Purchase Agreement or this Agreement ceases to be in full force and effect or any act or omission by Mego results in the Insurance Agreement not being in full force and effect. Trust. The trust established hereby and evidenced by the Home Loan Asset- Backed Certificates, Series 1996-3, designated as the "Mego Mortgage Home Loan Trust 1996-3." 30 36 Trust Designated Insurance Amount. $3,674,309 or such greater amount approved in advance in writing by the Certificate Insurer. Trust Property. The property and proceeds of every kind conveyed pursuant to Section 2.01 hereof or in accordance with Section 2.04(c) hereof, together with the Policies and the Accounts (including all cash and Eligible Investments therein and all proceeds thereof). Trustee. First Trust of New York, National Association, its successors in interest or any successor trustee appointed as herein provided. Trustee Fee. With respect to any Distribution Date and Loan Group, one-twelfth of 0.045% times the Aggregate Principal Balance of such Loan Group as of the opening of business on the first day of the calendar month preceding the calendar month of such Distribution Date (or, with respect to the first Distribution Date, the Initial Loan Group I Principal Balance or the Initial Loan Group II Principal Balance, as applicable). Underwriter. Greenwich Capital Markets, Inc. Voting Rights. The portion of the aggregate voting rights of all the Certificates evidenced by a Class of Certificates. At all times during the term of this Agreement, 98% of all of the Voting Rights shall be allocated among Holders of the Class A Certificates and the Holders of the Class S Certificates shall be entitled to 2% of all of the Voting Rights. Voting Rights allocated to a Class of Certificates shall be allocated among the Certificates of each such Class in accordance with their respective Percentage Interests. Section 1.02. Rules of Interpretation. The terms "hereof," "herein" or "hereunder," unless otherwise modified by more specific reference, shall refer to this Agreement in its entirety. Unless otherwise indicated in context, the terms "Article," "Section," "Exhibit" or "Schedule" shall refer to an Article or Section of, or Exhibit or Schedule to, this Agreement. The definition of a term shall include the singular, the plural, the past, the present, the future, the active and the passive forms of such term. Whenever the Agreement refers to a Certificate Group and "related" Certificates, such reference shall be to all Certificates with the same numeric designation as set forth in the definition of each Certificate Group. Whenever the Agreement refers to a Certificate Group and "related" Loan Group or Account, such reference shall be to the Loan Group or Account with the same numeric designation as set forth in the definition of Loan Group. Section 1.03. Interest Calculations. All calculations of accrued interest on the Loans, the Certificates and accrued fees shall be made on the basis of a 360-day year consisting of twelve 30-day months. 31 37 ARTICLE II Transfer and Assignment of Loans; Issuance of Certificates Section 2.01. Transfer and Assignment of Loans. (a) The Depositor as of the Closing Date does hereby, sell, transfer, assign and otherwise convey to the Trustee for the benefit of the Holders of the Certificates, in accordance with their terms and the terms hereof, and the Certificate Insurer, without recourse other than as expressly provided herein, and, with respect to the FHA Loans, in accordance with the requirements for transfer of an insured loan in Title I and 24 C.F.R. Section 201.32(c), all the right, title and interest of the Depositor in and to (a) as of the applicable Cut-Off Date, the Loans delivered to the Trustee on the Closing Date, including the related Principal Balance and all payments and collections on account thereof received on or after such Cut-Off Date (including amounts due prior to such Cut-Off Date but received thereafter), the rights to FHA Insurance reserves attributable to the FHA Loans as of the applicable Cut-Off Date, the Files, the Insurance Policies and any proceeds from any Insurance Policies, the Mortgages and security interests in Properties which secure the Mortgage Loans and any and all documents or electronic records relating to the Loans, and all proceeds of any of the foregoing, and (b) the Purchase Agreement. It is the intention of the parties hereto that the transfers and assignments contemplated by this Agreement shall constitute a sale of the Loans and the other property specified in Section 2.01(a) from the Depositor to the Trust and such property shall not be property of the Depositor. After the Closing Date, Mego and the Depositor shall each account for the transfer of the Loans in its financial statements as a sale of the Loans. If the assignment and transfer of the Loans and the other property specified in this Section 2.01(a) to the Trustee pursuant to this Agreement or the conveyance of the Loans or any of such other property to the Trustee is held or deemed not to be a sale or is held or deemed to be a pledge of security for a loan, the Depositor intends that the rights and obligations of the parties shall be established pursuant to the terms of the Agreement and that, in such event, (i) the Depositor shall be deemed to have granted and does hereby grant to the Trustee a first priority security interest in the entire right, title and interest of the Depositor in and to the Loans and all other property conveyed to the Trustee pursuant to this Section 2.01(a) and all proceeds thereof, and (ii) this Agreement shall constitute a security agreement under applicable law. Within five days of the Closing Date, the Depositor shall cause to be filed UCC-1 financing statements naming the Trustee as "secured party" and describing the Loans being sold by the Depositor to the Trust with the office of the Secretary of State of the State in which the Depositor is located. (b) In connection with the sale, transfer, assignment and conveyance pursuant to Section 2.01(a), the Depositor hereby delivers to, and deposits with, the Trustee the following documents or instruments with respect to each Loan so sold, transferred, assigned and conveyed (provided that the Credit Files shall be held in the custody of Mego as custodian on behalf of the Trustee). Notwithstanding anything herein to the contrary, the Credit Files are hereby conveyed to the Trustee and are, and shall at all times hereinafter be, held in the custody of Mego, as custodian on behalf of the Trustee: 32 38 (A) With respect to each Loan: (i) The original Note, showing a complete chain of endorsements or assignments from the named payee to the Trust and endorsed without recourse to the order of the Trustee which latter endorsement may be executed with a facsimile signature; (ii) If such Loan is a Mortgage Loan, the original Mortgage with evidence of recording indicated thereon (except that a true copy thereof certified by an appropriate public official may be substituted); provided, however, that if the Mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Agreement solely because of a delay caused by the public recording office where such Mortgage has been delivered for recordation, there shall be delivered to the Trustee a copy of such Mortgage certified as a true copy in an Officer's Certificate, which Officer's Certificate shall certify that such Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Trustee such Mortgage with evidence of recording indicated thereon upon receipt thereof from the public recording official (or a true copy thereof certified by an appropriate public official may be delivered to the Trustee); (iii) If such Loan is a Mortgage Loan, the original assignment of Mortgage to the Trustee, in recordable form. Such assignments may be blanket assignments, to the extent such assignments are effective under applicable law, for Mortgages covering Properties situated within the same county. If the assignment of Mortgage is in blanket form an assignment of Mortgage need not be included in the individual File; (iv) If such Loan is a Mortgage Loan, all original intermediate assignments of the Mortgage, showing a complete chain of assignments from the named mortgagee to the assignor to the Trustee, with evidence of recording thereon (or true copies thereof certified by appropriate public officials may be substituted); provided, however, that if the intermediate assignments of mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Agreement solely because of a delay caused by the public recording office where such assignments of Mortgage have been delivered for recordation, there shall be delivered to the Trustee a copy of each such assignment of Mortgage certified as a true copy in an Officer's Certificate of Mego, which Officer's Certificate shall certify that each such assignment of Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Trustee such assignments of Mortgage with evidence of recording indicated thereon upon its receipt thereof from the public recording official (or true copies thereof certified by an appropriate public official may be delivered to the Trustee); 33 39 (v) An original of each assumption or modification agreement, if any, relating to such Loan; (vi) (A) If such Loan is an FHA Loan, an original or copy of notice signed by the Obligor acknowledging HUD insurance, (B) an original or copy of truth-in-lending disclosure, (C) an original or copy of the credit application, (D) an original or copy of the consumer credit report, (E) an original or copy of verification of employment and income, or verification of self-employment income, (F) if such Loan is an FHA Loan, an original or copy of evidence of the Obligor's interest in the Property, (G) an original or copy of contract of work or written description with cost estimates, (H) if such Loan is an FHA Loan either (a) an original or copy of the completion certificate or an original or copy of notice of non-compliance, if applicable or (b) an original or copy of report of inspection of improvements to the Property or an original or copy of notice of non-compliance, if applicable, (I) to the extent not included in (C), an original or a copy of a written verification that the Mortgagor at the time of origination was not more than 30 days delinquent on any senior mortgage or deed of trust on the Property, (J) (i) if such Loan is an FHA Loan for which an appraisal is required pursuant to the applicable regulations, an original or a copy of an appraisal of the Property as of the time of origination of such FHA Loan or (ii) if such Loan is a Non-FHA Loan and secured by a Mortgage, (a) if the original principal balance is greater than $25,000 but less than $50,000, a copy of the HUD-1 or HUD 1-A Closing Statement indicating the sale price, or an existing Uniform Residential Appraisal Report, or a Drive-by Appraisal documented on Freddie Mac form 704, or a tax assessment, or (b) if the original principal balance exceeds $50,000, a full Uniform Residential Appraisal Report prepared by a national appraisal firm, (K) an original or a copy of a title search as of the time of origination with respect to the Property, and (L) if such Loan is an FHA Loan, any other documents required for the submission of a claim with respect to such FHA Loan to the FHA. With respect to any documents referred to clauses (A)(ii) and (A)(iv) above that are not delivered to the Trustee because of a delay caused by the public recording office such documents shall be delivered to the Trustee in accordance with the terms of such clauses by Mego if such documents are received by it or by the Depositor if such documents are received by it. (c) Mego, at the direction of the Depositor, concurrently with the execution and delivery hereof, has delivered to the Trustee cash in an amount equal to at least an aggregate amount representing for such Loan Group (i) the accrued annual FHA premium due on each FHA Loan to the applicable Cut-Off Date, and (ii) the amount of FHA premium collected in respect of the Invoiced Loans after the applicable Cut-Off Date. The Trustee shall distribute the amount referred to in clause (i) of the previous sentence into the related FHA Premium Account for such Loan Group and shall distribute the amount referred to in clause (ii) of the previous sentence for such Loan Group into the related Distribution Account. (d) Except as provided in Section 8.11 hereof, the Trustee shall take and maintain continuous physical possession of the Files (except with respect to the Credit Files) 34 40 in the State of Minnesota, and in connection therewith, shall act solely as agent for the holders of the Certificates and the Certificate Insurer in accordance with the terms hereof and not as agent for Mego or any other party. (e) In addition to the documents delivered to the Trustee pursuant to Section 2.01(b), on or prior to the Closing Date, the Policies will be delivered to the Trustee for the benefit of the Holders of the Senior Certificates of the related Certificate Group. (f) Within 60 days of the Closing Date, Mego, at its own expense, shall cause the Trustee to record each assignment of Mortgage in favor of the Trustee (which may be a blanket assignment if permitted by applicable law) in the appropriate real property or other records; provided, however, the Trustee need not cause to be recorded any assignment which relates to a Mortgage Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by Mego (at Mego's expense) to the Trustee, the Certificate Insurer and the Rating Agencies, the recordation of such assignment is not necessary to protect the Trustee's interest in the related Mortgage Loan. With respect to any assignment of Mortgage as to which the related recording information is unavailable within 60 days following the Closing Date, such assignment of Mortgage shall be submitted for recording within 30 days after receipt of such information but in no event later than one year after the Closing Date. The Trustee shall be required to retain a copy of each assignment of Mortgage submitted for recording. In the event that any such assignment of Mortgage is lost or returned unrecorded because of a defect therein, Mego shall promptly prepare a substitute assignment of Mortgage or cure such defect, as the case may be, and thereafter the Trustee shall be required to submit each such assignment of Mortgage Loan for recording. Section 2.02. Acceptance by Trustee. (a) The Trustee hereby acknowledges conveyance of the Note, the Mortgage, if applicable, and the other documents included in the Legal File relating to each Loan listed on the Loan Schedule, receipt of such Legal Files (the contents of which are subject to the Trustee's review pursuant to Section 2.02(b)), receipt of each Policy and receipt of the cash delivered to the Trustee pursuant to Section 2.01(c), and declares that it holds and will hold each such Loan, each related Legal File, each Policy, such cash, all proceeds of any of the foregoing and all other rights, titles or interests of the Trustee in any asset included in the Trust Property from time to time, in trust for the use and benefit of all present and future Holders of the Certificates of each Class and the Certificate Insurer. The Trustee hereby agrees to maintain possession of the Notes in the State of Minnesota. (b) The Trustee agrees for the benefit of the Certificate Insurer and the Certificateholders to review each Legal File within 45 Business Days following the Closing Date, to confirm that all the documents and instruments required to be included in each Legal File pursuant to Section 2.01(b) (i)-(v), are so included and have been executed (and that documents which are required to be originals bear original signatures) and that such documents and instruments relate to the Loans identified in the Loan Schedule and are what they purport to be on their face. Promptly upon completion of such review, the Trustee shall prepare and deliver a list of the Legal Files which are incomplete as described in this paragraph and deliver such list to the Certificate Insurer, the Master Servicer, the Depositor and Mego. 35 41 The Trustee agrees to review each Legal File within 60 days of the Closing Date to confirm whether or not the recorded Mortgage or recorded intermediate assignment or assignments, as the case may be, is contained in such File. Promptly upon completion of such review, the Trustee shall prepare and deliver a list of the Files which are incomplete as described in this paragraph and deliver such list to the Certificate Insurer, the Master Servicer, the Depositor and Mego and Mego shall be obligated to cure such incomplete File in accordance with Section 2.04. In performing the review required by this Section 2.02(b), the Trustee may presume the due execution (unless no signature appears thereon) and genuineness of any such document and the genuineness of any signature thereon. The Trustee shall have no responsibility for reviewing any File except as expressly provided in this Section 2.02(b). Without limiting the effect of the preceding sentence, in reviewing any File pursuant to such Subsection, 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 form (except, with respect to each Loan, to determine if the Trustee is the assignee or endorsee and to determine if there is a complete chain of title from the Person who is the initial payee and initial Mortgagee), whether the recordation of any document is in accordance with the requirements of any applicable jurisdiction, whether any person who has executed any document is authorized to do so, whether each assumption or modification agreement, if any, relating to a Loan has been delivered to it, whether a blanket assignment is permitted or effective in any applicable jurisdiction or, with respect to each FHA Loan, whether the requirements for transfer of an insured loan specified in Title I, 24 C.F.R. Section 201.32(c) or elsewhere have been complied with. (c) The Credit File shall be held in the custody of Mego for the benefit of, and as agent for, the Certificateholders and the Trustee as the owner thereof and the Certificate Insurer. It is intended that by Mego's agreement pursuant to this Section 2.02(c) the Trustee shall be deemed to have possession of the Credit File for purposes of Section 9- 305 of the Uniform Commercial Code of the State in which such documents or instruments are located. Mego shall promptly report to the Trustee and the Certificate Insurer any failure by it to hold the Credit File as herein provided and shall promptly take appropriate action to remedy any such failure. In acting as custodian of such documents and instruments, Mego agrees not to assert any legal or beneficial ownership interest in the Loans or such documents or instruments. Mego agrees to indemnify the Certificateholders, the Certificate Insurer and the Trustee for any and all liabilities, obligations, losses, damages, payments, costs, or expenses of any kind whatsoever which may be imposed on, incurred by or asserted against the Certificateholders, the Certificate Insurer or the Trustee as the result of any act or omission by Mego relating to the maintenance and custody of such documents or instruments which have been delivered to Mego; provided, however, that Mego will not be liable for any portion of any such amount resulting from the negligence or misconduct of any Certificateholder, the Certificate Insurer or the Trustee and provided, further, that Mego will not be liable for any portion of any such amount resulting from Mego's compliance with any instructions or directions consistent with this Agreement issued to Mego by the Trustee. The Trustee shall have no duty to monitor or otherwise oversee Mego's performance as custodian hereunder. 36 42 Section 2.03. Representations and Warranties of Mego. (a) Mego hereby represents and warrants to the Depositor, the Master Servicer, the Trustee for the benefit of the Certificateholders and the Certificate Insurer that as of the Closing Date: (i) Mego is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Mego is duly qualified to do business, is in good standing and has obtained all necessary licenses, permits, charters, registrations and approvals (together, "approvals") necessary for the conduct of its business as currently conducted and the performance of its obligations under the Transaction Documents, in each jurisdiction in which the failure to be so qualified or to obtain such approvals would render any Transaction Document unenforceable in any respect or would have a material adverse effect upon the Transaction. (ii) Mego has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Agreement and each other Transaction Document to which it is a party; has duly authorized the execution, delivery and performance of this Agreement and each other Transaction Document to which it is a party; has duly executed and delivered this Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and delivered by the other parties hereto, this Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of Mego enforceable against it in accordance with its terms, except as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity); (iii) Neither the execution and delivery of this Agreement or any of the other Transaction Documents to which Mego is a party, the consummation of the transactions required of it herein or under any other Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any of the other Transaction Documents will conflict with or result in a breach of any of the terms, conditions or provisions of Mego's charter or by-laws or any legal restriction or any material agreement or instrument to which Mego is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which Mego or their respective property is subject; (iv) There is no action, suit, proceeding, investigation or litigation pending against Mego or, to its knowledge, threatened, which, if determined adversely to Mego, would materially adversely affect the sale of the Loans, the issuance of the Certificates, the execution, delivery or enforceability of this Agreement or any other Transaction Document, or which would have a material adverse affect on the financial condition of Mego; (v) No consent, approval, authorization or order of any court or governmental agency or body is required for: (a) the execution, delivery and 37 43 performance by Mego of, or compliance by Mego with, this Agreement, (b) the transfer of all FHA insurance reserves relating to the FHA Loans to the Contract of Insurance Holder, (c) the issuance of the Certificates, (d) the sale of the Loans or (e) the consummation of the transactions required of it by this Agreement, except: (A) such as shall have been obtained before the Closing Date, (B) the transfer of the FHA insurance reserves by the FHA to the Contract of Insurance Holder with respect to the FHA Loans as to which an FHA case number has not been assigned as of the Closing Date, and (C) such as may be required under state securities or "Blue Sky" laws in connection with the sale of the Certificates by the Underwriter; (vi) Mego is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of Mego or its properties or might have consequences that would materially and adversely affect its performance hereunder; (vii) Mego received fair consideration and reasonably equivalent value in exchange for the sale of the Loans to the Depositor; (viii) HUD has approved in writing the transfer to the Contract of Insurance of the FHA Reserve Amount relating to each FHA Loan and all actions have been taken by Mego (other than the filing of the Transfer of Note Report Form 27030 with HUD) and all required consents have been obtained (other than approval upon HUD's receipt of such Transfer of Note Report), in either case, necessary to effect transfer to the Contract of Insurance Holder of the FHA Reserve Amount relating to each FHA Loan (except for FHA Loans with respect to which a case number has not been assigned as of the Closing Date). The FHA Reserve Amounts with respect to the FHA Loans transferred to the Contract of Insurance Holder both prior to and following the transfer of the FHA Loans to the Trustee will be available to satisfy claims with respect to such FHA Loans. The amount in the FHA Insurance Coverage Reserve Account, together with all amounts to be requested for transfer with respect to the FHA Loans, will equal $16,971,823. The amount to be requested for transfer with respect to the FHA Loans is $3,674,309, which is the sum of approximately 10% of the aggregate of the Initial Principal Balances of the FHA Loans; (ix) Mego is a non-supervised lender in good standing with HUD under 24 CFR Section202.5 and is authorized to originate, purchase, hold, service and/or sell loans insured under 24 CFR Part 201 pursuant to a valid contract of insurance, Number 70497-00003; and (x) Mego has transferred the Loans without any intent to hinder, delay or defraud any of its creditors. (b) Mego hereby agrees for the benefit of the Depositor, the Master Servicer and the Trustee for the benefit of the Certificateholders and the Certificate Insurer, that the failure of any of the following representations and warranties to be true and correct as to any Loan (and the related Note and Mortgage, if applicable) as of the Cut-Off Date for such Loan, 38 44 or such later date if so specified in such representation and warranty, gives rise to the remedy specified in Section 2.04: (i) The information pertaining to each Loan set forth in the Loan Schedule was true and correct in all material respects as of the applicable Cut-Off Date; (ii) As of the Closing Date at least 99.49% of the Loans (by aggregate Initial Principal Balance) are not more than 30 days and the remaining 0.51% of the Loans (by aggregate Initial Principal Balance) are not more than 59 days past due (without giving effect to any grace period); Mego has not advanced funds, induced, solicited or knowingly received any advance of funds from a party other than the Obligor, directly or indirectly, for the payment of any amount required by the Loan; (iii) The terms of the Note and any related Mortgage contain the entire agreement of the parties and have not been impaired, waived, altered or modified in any respect, except by written instruments reflected in the related File and recorded, if necessary, to maintain the lien priority of the any related Mortgage; if such Loan is an FHA Loan the substance of each such waiver, alteration and modification has been approved by the FHA to the extent required under Title I; no other instrument of waiver, alteration, expansion or modification has been executed, and no Obligor has been released, in whole or in part, except in connection with an assumption agreement which assumption agreement is part of the related File and the payment terms of which are reflected in the related Loan Schedule and; if such Loan is an FHA Loan, has been approved by the FHA to the extent required under Title I; (iv) The Note and any related Mortgage are not subject to any set-off, claims, counterclaim or defense and will not have such in the future with respect to the goods and services provided under the Note, including the defense of usury or of fraud in the inducement, nor will the operation of any of the terms of the Note and any related Mortgage, or the exercise of any right thereunder, render such Note or Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (v) Any and all requirements of any federal, state or local law applicable to the Loan (including any law applicable to the origination, servicing and collection practices with respect thereto) have been complied with; (vi) No Note or Mortgage has been satisfied, cancelled, rescinded or subordinated, in whole or part; and Mego has not waived the performance by the Obligor of any action, if the Obligor's failure to perform such action would cause the Note or Mortgage Loan to be in default, except as otherwise permitted by clause (iii); and with respect to a Mortgage Loan, the related Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such satisfaction, subordination, release, cancellation or rescission; 39 45 (vii) Each related Mortgage is a valid, subsisting and enforceable lien on the related Property, including the land and all buildings on the Property; (viii) The Note and any related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights in general and by general principles of equity; (ix) To Mego's best knowledge, all parties to the Note and any related Mortgage had legal capacity at the time to enter into the Loan and to execute and deliver the Note and any related Mortgage, and the Note and any related Mortgage have been duly and properly executed by such parties; (x) As of the applicable Cut-Off Date, the proceeds of the Loan have been fully disbursed and there is no requirement for future advances thereunder, and any and all applicable requirements set forth in the Loan documents have been complied with; the Obligor is not entitled to any refund of any amounts paid or due under the Note or any related Mortgage; (xi) Immediately prior to the sale, transfer and assignment to the Depositor, Mego will have good and indefeasible legal title to the Loan, the related Note and any related Mortgage and the full right to transfer such Loan, the related Note and any related Mortgage, and Mego will have been the sole owner thereof, subject to no liens, pledges, charges, mortgages, encumbrances or rights of others, except for such liens as will be released simultaneously with the transfer and assignment of the Loans to the Depositor; and immediately upon the sale, transfer and assignment contemplated by the Purchase Agreement, the Depositor will hold good title to, and be the sole owner of each Loan, the related Note and any related Mortgage, free of all liens, pledges, charges, mortgages, encumbrances or rights of others; (xii) Except for those Loans referred to in Section 2.03(b)(ii) above that are delinquent as of the Closing Date, there is no default, breach, violation or event of acceleration existing under the Loan, the related Note and any related Mortgage and there is no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration and neither Mego nor its predecessors have waived any default, breach, violation or event of acceleration; (xiii) The Note and any related Mortgage contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Property of the benefits of the security provided thereby, including, (A) in the case of any Mortgage designated as a deed of trust, by trustee's sale, and (B) otherwise by judicial foreclosure; (xiv) Each FHA Loan is an FHA Title I property improvement loan (as defined in 24 C.F.R. Section 201.2) underwritten and originated by Mego in 40 46 accordance with FHA requirements for the Title I Loan program as set forth in 24 C.F.R. Parts 201 and 202, and Mego has transmitted a loan report with respect to such FHA Loan to FHA so that such FHA Loan will be included in the Title I program; (xv) The Loan is a fixed rate loan; the Note shall mature within not more than (a) for an FHA Loan, 20 years and 32 days and (b) for a Non-FHA Loan, 25 years, from the date of origination of the Loan; the Note is payable in substantially equal Monthly Payments, with interest payable in arrears, and requires a Monthly Payment which is sufficient to fully amortize the original principal balance over the original term and to pay interest at the related Loan Rate; interest on each Loan is calculated on the basis of a 360 day year consisting of twelve 30-day months, and the Note does not provide for any extension of the original term; (xvi) The related Note is not and has not been secured by any collateral except, in the case of a Mortgage Loan, the lien of the corresponding Mortgage; (xvii) With respect to any Mortgage Loan, if the related Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, or a valid substitution of trustee has been recorded, and no extraordinary fees or expenses are or will become payable to the trustee under the deed of trust, except in connection with default proceedings and a trustee's sale after default by the Mortgagor; (xviii) With respect to any Mortgage Loan, Mego has no knowledge of any circumstances or conditions not reflected in the representations set forth herein, or in the Loan Schedule, or in the related File with respect to the related Mortgage, the related Property or the Obligor which could reasonably be expected to materially and adversely affect the value of the related Property, or the marketability of the Mortgage Loan or to cause the Mortgage Loan to become delinquent or otherwise in default; (xix) Assuming no material change to the applicable law or regulations in effect as of the Closing Date, after the consummation of the transactions contemplated by this Agreement, the Trustee or its designee on behalf of the Trust will have the ability to foreclose or otherwise realize upon a Property, if the Loan is a Mortgage Loan, or to enforce the provisions of the related Loan against the Obligor thereunder, if the foreclosure upon any such Property or enforcement of the provisions of the related Loan against the Obligor are undertaken as set forth in Section 3.12; (xx) With respect to any FHA Loan that is a Mortgage Loan, the improvements to the Property relating to such FHA Loan, have been or shall be completed and inspected by the Servicer within the time period and to the extent required under the applicable Title I regulations, and evidence of such inspection shall have been delivered to the Trustee or, if not, a letter of non-compliance shall be delivered to the Trustee promptly upon the completion of such inspection; (xxi) Each FHA Loan has been originated in compliance with the provisions of 24 C.F.R. Section 201.20, and, if required by Title I, the market value 41 47 of the any related Property has been ascertained in accordance with the procedures established by HUD; (xxii) There exists a File relating to each Loan and such File contains all of the original or certified documentation listed in Section 2.01(b)(A) for such Loan. Each Legal File has been delivered to the Trustee and each Credit File is being held in trust by Mego for the benefit of, and as agent for, the Certificateholders, the Certificate Insurer and the Trustee as the owner thereof. Each document included in the File which is required to be executed by the Obligor has been executed by the Obligor in the appropriate places. With respect to each Mortgage Loan, the related assignment of Mortgage to the Trustee is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Property is located. All blanks on any form required to be completed have been so completed; (xxiii) Each FHA Loan is in respect of a home improvement loan or a retail installment sale contract, and each Property is improved by a residential dwelling and is not a Loan in respect of a manufactured home or mobile home or the land on which a manufactured home or mobile home has been placed; (xxiv) Each FHA Loan was originated by Mego in accordance with the applicable underwriting criteria established by the FHA and HUD; each Non-FHA Loan was originated by Mego in accordance with Mego's "Express 35/Swift 60 Loan Program" or "Debt Consolidation 125 Loan Program" underwriting guidelines, as applicable, attached hereto as Exhibit G; (xxv) Any Property securing an FHA Loan is covered by any insurance required by Title I; if the Property securing any Mortgage Loan is in an area identified by the Federal Emergency Management Agency ("FEMA") as having special flood hazards, unless the community in which the area is situated is participating in the National Flood Insurance Program and the regulations thereunder or less than a year has passed since FEMA notification regarding such hazards, a flood insurance policy is in effect with respect to such Property with a generally acceptable carrier which complies with Section 102(a) of the Flood Disaster Protection Act of 1973; all improvements upon each Property securing a Non-FHA Loan are insured by a generally acceptable insurer against loss by fire hazards of extended coverage and such other hazards as are customary in the area where the Property is located pursuant to insurance policies conforming to the requirements of the Agreement; all such policies contain a standard mortgage clause naming Mego, its successors and assigns, as loss payee. (xxvi) All costs, fees and expenses incurred in originating and closing the Loan and in recording any related Mortgage were paid and the Obligor is not entitled to any refund of any amounts, paid or due to the Obligee pursuant to the Note or any related Mortgage; (xxvii) Except for the related FHA Premium Amount, if applicable, there is no obligation on the part of Mego or any other party other than the Obligor to make payments with respect to the Loan; 42 48 (xxviii) At the time of origination of the Loan, each related prior lien, if any, was not 30 or more days delinquent; (xxix) All parties which have had any interest in the Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Property is located, and (ii) (A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan associations or national banks having principal offices in such state, or (D) not doing business in such state; (xxx) With respect to each Mortgage Loan, the related Mortgage contains an enforceable provision requiring the consent of the Mortgagee to assumption of the related Mortgage Loan upon sale of the Property; (xxxi) With respect to any Mortgage Loan, there is no homestead or other exemption available to the Mortgagor which would materially interfere with the right to sell the related Property at a trustee's sale or the right to foreclose the Mortgage; no relief has been requested or allowed to the Mortgagor under the Civil Relief Act; (xxxii) Subject to Section 2.04(b), each FHA Loan has been submitted to the FHA for insurance pursuant to the FHA Title I loan program and each FHA Loan has been or will be assigned a case number by the FHA for the FHA Title I loan program; (xxxiii) Subject to Section 2.04(b), the FHA Reserve Amount with respect to each FHA Loan, has been or will be transferred to the FHA Insurance Coverage Reserve Account; (xxxiv) The related File for each FHA Loan that is a Mortgage Loan contains a Title Document with respect to such Loan reflecting that title to the related Property is vested at least 50% in the Obligor under such Loan; (xxxv) Each Property (including each residential dwelling improvement thereon) is free of damage which materially and adversely affects the value thereof and, if the related Loan is an FHA Loan, impairs the ability to insure the related Loan under the Title I program; (xxxvi) Each Group I Loan is a "qualified mortgage" under Section 860G(a)(3) of the Code; (xxxvii) Each Loan was originated in compliance with all applicable laws and, to the best of Mego's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith or, if the related loan is an FHA Loan, in the application for any insurance required by Title I in relation to such FHA Loan; 43 49 (xxxviii) Each Loan has been serviced in accordance with all applicable laws and, to the best of Mego's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith; (xxxix) The transfer, assignment and conveyance of the Notes and the Mortgages by Mego to the Depositor were not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (xl) Any Loan originated in the State of Texas, was originated pursuant to either Chapter 3 or Chapter 6 of the Texas Consumer Credit Code; (xli) As of the applicable Cut-Off Date, no Mortgagor is a debtor under proceedings under the Bankruptcy Code, and no such Mortgagor has defaulted in payments on a Loan after the filing of such bankruptcy case, whether under a plan or reorganization or otherwise; (xlii) Mego has not advanced funds, or induced, solicited or knowingly received any advance of loan payments from a party other than, with respect to a Mortgage Loan, the owner of the Property subject to the Mortgage; (xliii) Mego originated the Loans through its network of dealers and correspondents; (xliv) Each Loan conforms, and all such Loans in the aggregate conform, to the description thereof set forth in the Prospectus Supplement; (xlv) With respect to FHA Loans secured by a Mortgage, the representations and warranties of the Mortgagor in each mortgage loan application and in connection with the related FHA Loan are true and correct in all material respects (and it shall be deemed that a breach is material only if a claim for payment made to the FHA under the Contract of Insurance in respect of such FHA Loan is a Rejected Claim as a result of such breach); (xlvi) Each Loan either complies with the Home Ownership and Equity Protection Act of 1994 or is not subject to such act; (xlvii) Mego has caused to be performed or shall cause to be performed within 15 Business Days of the Closing Date any and all acts required to preserve the rights and remedies of the Trustee in any insurance policies applicable to each Loan and, if such Loan is an FHA Loan, required by Title I, including, without limitation, any necessary notifications of insurers, assignments of policies or interests therein, and establishment of coinsured, joint loss payee and mortgagee rights in favor of the Trustee; (xlviii) With respect to any Mortgage Loan, to Mego's best knowledge, there exists no violation of any environmental law (either local, state or federal), rule or regulation in respect of the Property which violation has or could have a material adverse effect on the market value of such Property. Mego has no knowledge of any 44 50 pending action or proceeding directly involving the related Property in which compliance with any environmental law, rule or regulation is in issue; and, to Mego's best knowledge, nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to the use and enjoyment of such Property; and (xlix) Not more than 0.762% of the FHA Loans (by aggregate Initial Principal Balance) and none of the Non-FHA Loans are secured by Mortgages on nonowner occupied Properties. (l) Substantially all of the proceeds of each FHA Loan that is a Mortgage Loan were used to acquire, improve or protect an interest in real property. For purposes of this representation, "interest in real property" shall have the meaning set forth in Treasury Regulation Section1.856-3(c) and Section1.856-3(d). (li) No Loan was selected from among Mego's assets in a manner which would cause them to be adversely selected as to credit risk from the pool of home improvement loans owned by Mego. The parties to the Agreement hereby acknowledge that the Seller is not selling $9,200,000 of Title I Loans with loan rates of 11% per annum or less in its inventory to the Trust. (c) The representations and warranties set forth in Section 2.03 (together with the remedies with respect thereto): (i) shall survive delivery of the related Legal Files to the Trustee and the delivery of and payment for the Certificates and shall be continuing (but shall speak as of their respective dates) as long as any Certificate is Outstanding or this Agreement has not been terminated, and (ii) are made exclusively to the Master Servicer, the Depositor, the Certificate Insurer and the Trustee for the benefit of Certificateholders. No representation or warranty made in this Section 2.03 shall constitute a waiver of any right, claim or defense of the obligee with respect to any Obligor, Note, Mortgage, or Property. Section 2.04. Defective Loans. (a) Upon determination by the Master Servicer, the Certificate Insurer, the Depositor, Mego or the Trustee that: (i) any document constituting a part of any File was not delivered to the Trustee or, with respect to any document constituting the Credit File, to Mego, as custodian for the Trustee, the Certificate Insurer and Certificateholders, by the time required hereby (which in the case of (A) a failure to deliver a recorded mortgage or recorded assignment pursuant to Section 2.01(b)(A)(ii) or (A)(iv) (only under the circumstances in which a delay is caused by the public recording office and an Officer's Certificate is required to be provided thereunder) shall be the 20 month anniversary of the Closing Date, (B) failure to deliver a completion certificate or inspection report pursuant to Section 2.01(b)(A)(vi)(H) shall be the 14 month anniversary of the Closing Date, (C) a failure to deliver each other document constituting a part of any Legal File shall be the Closing Date and (D) a failure to deliver each document (other than those described in clause (B) above) specified in Section 45 51 2.01(b)(A)(vi) shall be 45 Business Days after the Closing Date) to be so delivered or was defective in any material respect when delivered to the Trustee; or (ii) any of the statements made by Mego in Section 2.03 shall prove to have been untrue in a manner that materially and adversely affects the interests of Certificateholders or the Certificate Insurer in the Loan with respect to which such statement is made or in the Loans; the party identifying any of the foregoing shall give prompt written notice to the other parties and the Certificate Insurer. Nothing contained herein shall require the Trustee to undertake any independent investigation or to make any review of any File other than as provided for in Section 2.02. (b) Except with respect to a breach of the representations made by Mego pursuant to Section 2.03(b)(xxxiii) and (xxxiv), in the event of a determination referred to in Section 2.04(a) and a failure within sixty Business Days of discovery or receipt of notice of such failure to effect a cure of the circumstances giving rise to such defect, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding the expiration of such sixty-day period, to repurchase (or substitute for, to the extent permitted by subsection (c) below) the affected Loan. The Certificate Insurer and the Trustee on behalf of the Certificateholders agree that if an FHA Loan is a Defective Loan because a document is not included in the Credit File as of the 60th Business Day after the discovery or receipt of notice thereof, such defect shall be deemed to be cured if the Trustee shall have received during the sixty-day period after such date a written statement addressed to it from the Director of HUD Title I Insurance Division that such document would not be required in connection with a claim for FHA Insurance with respect to such FHA Loan. Except as set forth in Section 5 of the Indemnification Agreement, it is understood and agreed that the obligation of Mego to repurchase or substitute any such Loan pursuant to this Section shall constitute the sole remedy against it with respect to such breach of the foregoing representations or warranties or the existence of the foregoing conditions. For purposes of calculating 90 Business Days from the discovery of a Defective Loan that is an FHA Loan because a document is not included in the Credit File in this Section 2.04(b), a Business Day shall not include any day on which the FHA is officially closed for reasons other than as specified in the definition of Business Day. With respect to representations and warranties made by Mego pursuant to Section 2.03(b) that are made to Mego's best knowledge, if it is discovered by any of the Depositor, Mego, the Trustee or the Certificate Insurer that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Loan, notwithstanding Mego's lack of knowledge, such inaccuracy shall be deemed a breach of the applicable representation and warranty. With respect to a breach of the representations made by Mego pursuant to Section 2.03(b)(xxxiii) or (xxxiv) if the FHA has not assigned a case number under the Contract of Insurance to an FHA Loan to indicate that such FHA Loan is eligible for Title I Insurance coverage under the Contract of Insurance on or before the 120th day after the Closing Date, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding such 120th day, to repurchase such FHA Loan. If the FHA Reserve Amount with respect to an FHA Loan has not been transferred to the FHA Insurance Coverage Reserve Account on or before the 150th day after the Closing Date, Mego shall be obligated, on the Monthly Cut-Off 46 52 Date next succeeding such 150th day, to repurchase such FHA Loan. The Claims Administrator shall give notice in writing to each of the Master Servicer, the Certificate Insurer, the Depositor, Mego and the Trustee of (i) any FHA Loan with respect to which there has not been assigned a case number under the Contract of Insurance on or before the 120th day after the Closing Date and (ii) any FHA Loan that has not been transferred to the FHA Insurance Coverage Reserve Account on or before the 150th day after the Closing Date. For purposes of calculating either 120 or 150 days from the Closing Date in this Section 2.04(b), any day on which the FHA is officially closed for reasons other than such day being a Saturday, Sunday or a day on which banking institutions in Washington, D.C. are authorized or obligated by law, executive order or governmental decree to be closed, shall not be counted in making such calculation. If Mego is required to repurchase any Loan on a Monthly Cut-Off Date that is not a Business Day, such repurchase shall be made on the last Business Day preceding such Monthly Cut-Off Date. Any Loan required to be purchased or repurchased pursuant to this Section 2.04(b) is referred to as a "Defective Loan." (c) Mego shall be obligated to repurchase a Defective Loan for the Purchase Price, payable to the Trustee in cash on the Monthly Cut-Off Date specified in Section 2.04(b) for deposit in the related Distribution Account. Notwithstanding the foregoing, within two years of the Closing Date, Mego may elect in lieu of the purchase or repurchase of a Defective Loan as provided in this Section 2.04, to substitute, as of the Monthly Cut-off Date specified in Section 2.04(b), a Substitute Loan for the Defective Loan in accordance with the provisions of this Section 2.04. (d) Mego shall notify the Servicer, the Trustee and the Certificate Insurer in writing not less than five Business Days before the related Determination Date which is on or before the date on which Mego would otherwise be required to repurchase such Loan pursuant to Section 2.04(b) of its intention to effect a substitution under this Section. On such Determination Date (the "Substitution Date"), Mego shall deliver to the Trustee and the Certificate Insurer (1) a list of the Loans to be substituted for by such Substitute Loans, and attaching as an exhibit a supplemental Loan Schedule (the "Supplemental Loan Schedule") setting forth the same type of information appearing on the Loan Schedule and representing as to the accuracy thereof and (2) an Opinion of Counsel to the effect set forth below. In connection with any substitution pursuant to this Section 2.04, to the extent that the aggregate Principal Balance of any Substitute Loan or Loans is less than the aggregate Principal Balance of the corresponding Loan or Loans as of the Determination Date on which the substitution is being made, Mego shall deposit such difference (a "Substitution Adjustment Amount") to the Distribution Account on such date. (e) Concurrently with the satisfaction of the conditions set forth in this Section 2.04 and the grant of such Substitute Loans to the Trustee pursuant to Section 2.04(c), Exhibit B to this Agreement shall be deemed to be amended to exclude all Loans being replaced by such Substitute Loans and to include the information set forth on the Supplemental Loan Schedule with respect to such Substitute Loans, and all references in this Agreement to Loans shall include such Substitute Loans and be deemed to be made on or after the related Substitution Date, as the case may be, as to such Substitute Loans. 47 53 In connection with any Loan for which Mego elects to substitute a Substitute Loan, Mego shall deliver to the Trustee and the Certificate Insurer an Opinion of Counsel to the effect that such actions will not cause (x) any federal tax to be imposed on the Trust, including without limitation, with respect to a Substitute Loan for Loan Group I, any Federal tax imposed on "prohibited transactions" under Section 860F(a)(1) of the Code or on "contributions after the start-up day" under Section 860G(d)(1) of the Code or (y) solely with respect to substitutions in Loan Group I, any portion of the Trust to fail to qualify as a REMIC at any time that any Certificate is outstanding. In the event that such opinion indicates that such substitution will result in the imposition of a prohibited transaction tax, give rise to net taxable income or be deemed a contribution to the REMIC after the "start-up day", Mego shall not be permitted to substitute for such Loan but shall repurchase such Loan in accordance with this Section 2.04. (f) Notwithstanding the provisions of Section 2.04(b), the Certificate Insurer, in its sole discretion, may extend, by not more than 150 days from the date of the notice described in Section 2.04(b), the sixty-day period available, pursuant to Section 2.04(b), to Mego to cure the circumstances giving rise to a defect with respect to any Loan described in Section 2.04(a). (g) With respect to all Defective Loans or other Loans repurchased by Mego pursuant to this Agreement, upon the deposit of the Purchase Price therefor to the related Distribution Account, the Trustee shall assign to Mego, without recourse, representation or warranty, all the Trustee's right, title and interest in and to such Defective Loans or Loans, which right, title and interest were conveyed to the Trustee pursuant to Section 2.01, including, without limitation, the rights any FHA Insurance reserves attributable to such Loans. The Trustee shall take any actions as shall be reasonably requested by Mego to effect the repurchase of any such Loans. Section 2.05. Representations and Warranties of the Depositor. The Depositor hereby represents and warrants to Mego, the Master Servicer and the Trustee for the benefit of the Certificateholders and the Certificate Insurer, that, as of the Closing Date: (i) The Depositor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted; (ii) The Depositor has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Agreement and each other Transaction Document to which it is a party; has duly authorized the execution, delivery and performance of this Agreement and each other Transaction Document to which it is a party; has duly executed and delivered this Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and delivered by the other parties hereto, this Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of the Depositor enforceable against it in accordance with its terms, 48 54 except as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity); (iii) Immediately prior to the sale, transfer and assignment by the Depositor to the Trustee of each Loan, the Depositor had good and indefeasible title to each Loan and the related Note and any related Mortgage (insofar as such title was conveyed to it by Mego) subject to no prior lien, claim, participation interest, mortgage, security interest, pledge, charge or other encumbrance or other interest of any nature; (iv) As of the Closing Date, the Depositor has transferred all right, title and interest in the Loans to the Trustee; (v) The Depositor has not transferred the Loans to the Trustee with any intent to hinder, delay or defraud any of its creditors; (vi) Neither the execution and delivery of this Agreement or any of the other Transaction Documents to which the Depositor is a party, the consummation of the transactions required of it herein or under any other such Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any of the other Transaction Documents to which the Depositor is a party, will conflict with or result in a breach of any of the terms, conditions or provisions of the Depositor's charter or by-laws or any legal restriction or any material agreement or instrument to which the Depositor is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Depositor is subject; (vii) There is no action, suit, proceeding, investigation or litigation pending against the Depositor or, to its knowledge, threatened, which, if determined adversely to the Depositor, would materially adversely affect the sale of the Loans, the issuance of the Certificates, the execution, delivery or enforceability of this Agreement or any other Transaction Document to which the Depositor is a party, or which would have a material adverse affect on the financial condition of the Depositor; and (viii) The Depositor received fair consideration and reasonably equivalent value in exchange for the sale of the interest in the Loans evidenced by the Certificates. Section 2.06. Execution, Countersignature and Delivery of Certificates. Concurrently with, and in consideration for, the sale, transfer, assignment and conveyance by the Depositor of the Loans listed in the Loan Schedule on the Closing Date, the delivery by the Depositor of the related Files pursuant to Section 2.01(b), the delivery of the cash required by Section 2.01(c) to be deposited in the related Distribution Account and the related FHA Premium Account, the Trustee has executed, authenticated and delivered to or upon the order of the Depositor, the Class IA-1 Certificates, Class IA-2 Certificates, Class 49 55 IA-3 Certificates, Class IIA Certificates, Class IS Certificates, Class IIS Certificates and the Class R Certificates specified in Section 5.01(a). 50 56 ARTICLE III Administration and Servicing of Loans; Claims Administration Section 3.01. Servicing Standard. (a) The Master Servicer is hereby authorized to act as agent for the Trust and in such capacity shall manage, service, administer and make collections on the Loans, and perform the other actions required by the Master Servicer under this Agreement. In performing its obligations hereunder the Master Servicer shall at all times act in good faith in a commercially reasonable manner in accordance with all requirements of the FHA applicable to the servicing of the FHA Loans and otherwise in accordance with applicable law and the Notes and Mortgages. The Master Servicer shall at all times service and administer the FHA Loans in accordance with Title I, and shall have full power and authority, acting alone and/or through the Servicer as provided in Section 3.02, subject only to this Agreement, the respective Loans, and, in the case of the FHA Loans, the specific requirements and prohibitions of Title I, to do any and all things in connection with such servicing and administration which are consistent with the manner in which prudent servicers service FHA Title I home improvement loans and which are consistent with the ordinary practices of prudent mortgage lending institutions, but without regard to: (i) any relationship that the Master Servicer, the Servicer or any affiliate of the Master Servicer or any Servicer may have with the related Obligor: (ii) Mego's obligations to repurchase or substitute for a Defective Loan pursuant to Section 2.04(c) or any FHA Loans pursuant to Section 3.12(b); (iii) the ownership of any Certificate by the Master Servicer or any affiliate of the Master Servicer; (iv) the Master Servicer's obligation to make Interest Advances pursuant to Section 3.08(a), to make Foreclosure Advances pursuant to Section 3.08(b), or repurchase any FHA Loans pursuant to Section 3.12; or (v) the Master Servicer's right to receive compensation for its services hereunder pursuant to Section 4.05. The Master Servicer may take any action hereunder, including exercising any remedy under any Loan, retaining counsel in connection with the performance of any of its obligations hereunder and instigating litigation to enforce any obligation of any Obligor, without the consent or approval of the Trustee or the Certificate Insurer, unless any such consent or approval is expressly required hereunder or under applicable law. (b) The Trustee shall execute and return to the Master Servicer or the Servicer designated in a written instruction from the Master Servicer to the Trustee, within 5 days of the Trustee's receipt any and all documents or instruments necessary to maintain the lien created by any Mortgage on the related Property or any portion thereof, and, within 51 57 5 days of request by the Master Servicer or the Servicer therefor a power of attorney in favor of the Servicer with respect to any modification, waiver, or amendment to any document contained in any File and any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Loans and with respect to the related Properties prepared and delivered to the Trustee by the Master Servicer or any Servicer, all in accordance with the terms of this Agreement. (c) The Trustee shall furnish the Master Servicer within 5 days of request of a Master Servicing Officer therefor any powers of attorney and other documents necessary and appropriate to carry out its servicing and administrative duties hereunder, including any documents or powers of attorney necessary to foreclose any Loan. The forms of any such powers or documents shall be appended to such requests. (d) Nothing in this Agreement shall preclude the Master Servicer, in its individual capacity, from entering into other mortgage loans or other financial transactions with any Obligor or from refinancing any Loan. (e) The Servicer hereby incorporates by reference the representations, warranties and covenants made by it in Section 2.02 of the Servicing Agreement. Section 3.02. Servicing Arrangements. (a) On or prior to the date hereof, the Master Servicer has entered into a Servicing Agreement with respect to all of the Loans, in substantially the form of the Form of the Servicing Agreement attached hereto as Exhibit A with Mego, as Servicer. So long as no Certificate Insurer Default shall have occurred and be continuing, upon the termination of the Servicing Agreement, the Master Servicer may only appoint or consent to the appointment or succession of a successor Servicer under the Servicing Agreement and may only enter into a substitute servicing agreement which is in form and substance as the Servicing Agreement attached hereto as Exhibit A (which, with the consent of the Certificate Insurer, may differ in material respects from the Form of Servicing Agreement attached hereto as Exhibit A) and with a Person acceptable to the Certificate Insurer. So long as no Certificate Insurer Default exists, the Master Servicer shall not consent to any material amendment, modification or waiver of the provisions of a Servicing Agreement without the consent of the Certificate Insurer. (b) No provision of this Agreement or the Servicing Agreement shall be deemed to relieve the Master Servicer of any of its duties and obligations to the Trustee on behalf of Certificateholders and the Certificate Insurer with respect to the servicing and administration of the Loans as provided hereunder; it being understood that the Master Servicer shall be obligated with respect thereto to the same extent and under the same terms and conditions as if it alone were performing all duties and obligations set forth in this Agreement in connection with the collection, servicing and administration of such Loans. (c) Without limitation of the provisions of Section 3.02(b), the Master Servicer shall (i) review the servicing reports prepared by the Servicer in order to ensure the accuracy thereof, (ii) review the reports submitted by the Servicer to confirm that the Servicer is collecting and appropriately accounting for Obligor payments of premium on FHA Insurance 52 58 on Invoiced Loans, (iii) otherwise monitor the performance by the Servicer under the Servicing Agreement and notify the Trustee and the Certificate Insurer of any Servicer Termination Event, and (iv) be obligated to ensure that the Servicer deposits Payments into the related Collection Account. In the event the Servicer fails to make such deposit, the Master Servicer will deposit such amounts as set forth in Section 4.03(a). (d) The Master Servicer agrees that it shall at all times be prepared (and shall take all steps reasonably required by the Certificate Insurer to ensure such preparation), to perform the obligations of the Servicer if the Servicer fails to perform its duties and obligations under the Servicing Agreement. (e) The Servicing Agreement may provide that the Servicer may retain, as additional compensation, prepayment penalties, assumption and processing fees paid by any Obligor and all similar fees customarily associated with the servicing of the Loans, including, but not limited to late charges, paid by any Obligor. (f) At the direction of the Certificate Insurer, so long as no Certificate Insurer Default exists, the Master Servicer shall terminate the Servicer upon the occurrence and continuance of a Servicer Termination Event pursuant to the terms of the Servicing Agreement. (g) Mego, as Servicer, shall provide information to the Master Servicer monthly in a mutually agreeable format in order to enable the Master Servicer to independently reconfirm the loan-by-loan reconciliation of the outstanding Principal Balance of each Loan included in such information. The Master Servicer shall prepare exception reports, if necessary, showing all Principal Balance differences between the information provided by the Servicer and the confirmations prepared by the Master Servicer and shall furnish such reports to the Trustee for distribution to the Certificate Insurer. If requested by the Certificate Insurer, the Servicer shall provide to the Certificate Insurer all information provided to the Master Servicer pursuant to this Section 3.02(g). Section 3.03. Servicing Record. (a) The Master Servicer shall establish and maintain books and records for each Loan Group, (each, a "Servicing Record") in which the Master Servicer shall record by Loan Group: (i) all Payments received or collected by or on behalf of the Master Servicer (through the Servicer or otherwise) or received by the Trustee in respect of each Loan and each Foreclosed Property and (ii) all amounts owing to the Master Servicer in compensation for services rendered by the Master Servicer hereunder or in reimbursement of costs and expenses incurred by the Master Servicer hereunder. In addition, the Master Servicer shall establish and maintain records for the Insurance Record (which shall be part of each Servicing Record) in which the Master Servicer shall record all claims made under the Contract of Insurance, all payments received by or on behalf of the Contract of Insurance Holder from the FHA for each such claim and the amount of insurance coverage available in the Insurance Record. (b) Except as otherwise provided herein, amounts received or collected by or on behalf of the Master Servicer or the Trustee from or on behalf of any Obligor or in 53 59 respect of any Foreclosed Property or from FHA with respect to a claim made under the Contract of Insurance shall be credited to applicable Servicing Record: (i) promptly following direct receipt or direct collection by the Master Servicer; (ii) in the case of a Loan directly serviced by a Servicer, promptly following deposit of the receipt or collection in the related Collection Account; or (iii) in the case of any amount received directly by the Trustee, promptly following the Master Servicer's actual knowledge of receipt by the Trustee pursuant to the notice required by Section 3.12(e) or otherwise; but in any event not later than the Determination Date next following the date of receipt or collection by or on behalf of the Master Servicer (through the Servicer or otherwise) or receipt by the Trustee. Amounts received or collected by the Master Servicer in connection with the purchase or repurchase of any Loan or any Foreclosed Property shall be so recorded on and as of the date of receipt. Each Servicing Record shall separately reflect amounts so received or collected by the Master Servicer in each Due Period. All Obligor Payments received from FHA Loans from or on behalf of an Obligor shall be allocated in accordance with Title I. (c) The Master Servicer shall credit to each Servicing Record relating to each Due Period, on a Loan-by-Loan basis, each of the following Payments collected or received by or on behalf of the Master Servicer (through the Servicer or otherwise) or received by the Trustee in respect of each Loan in the related Loan Group and each Foreclosed Property relating to such Loan Group: (i) all payments on account of principal; (ii) all payments on account of interest; (iii) all proceeds of the purchase or repurchase of any Loan pursuant to Section 2.04(b) or, with respect to FHA Loans, Section 3.12(b) and all Substitution Adjustment Amounts; (iv) all amounts paid by or on behalf of the related Obligor in respect of Foreclosure Advances previously advanced by the Master Servicer or the Servicer; (v) all revenues received or collected in respect of any Foreclosed Property, including all proceeds of the sale of any Foreclosed Property pursuant to Section 3.13; (vi) all proceeds of the sale of the Loans and any Foreclosed Properties pursuant to Section 9.01; (vii) all FHA Insurance Payment Amounts; and 54 60 (viii) all Insurance Proceeds, any condemnation awards or settlements or any payments made by any related guarantor or third-party credit-support provider and any and all other amounts received in respect of Loans and not specified above. (d) Notwithstanding anything to the contrary herein, the Master Servicer shall not be required to credit to the Servicing Record, and neither the Master Servicer nor any Certificateholder shall have any right or interest in any amount due or received with respect to any Loan or any related Foreclosed Property subsequent to the date of repurchase of such Loan or Foreclosed Property from the Trust. (e) The Master Servicer shall separately record in each Servicing Record for each Loan Group the items required to be included in the Master Servicer Certificate for such Loan Group and additionally the following items with respect to such Loan Group to the extent not included therein: (i) on or before each Determination Date, the related unpaid Master Servicer Fee due the Master Servicer on the next Distribution Date; (ii) on or before each Determination Date, all amounts retained by the Servicer in respect of the preceding Due Period in respect of amounts due Independent Contractors hired by the Master Servicer to operate and manage a Foreclosed Property pursuant to Section 3.14(c); (iii) on or before each Determination Date, the amount of unreimbursed Interest Advances in respect of prior Distribution Dates and the amount which the Master Servicer or the Servicer is entitled to be reimbursed therefor in accordance with Section 3.08; (iv) on or before each Determination Date, all amounts due as of the preceding Monthly Cut-Off Date in reimbursement of Foreclosure Advances previously advanced by the Master Servicer or the Servicer (separately identifying the type and amount of each then due); (v) on or before each Determination Date and based on information provided to the Master Servicer by the Trustee, all Other Fees required to be distributed pursuant to Section 4.05(a)(xv) or 4.05(b)(xiv), as applicable on the next succeeding Distribution Date; (vi) promptly following each Distribution Date, the aggregate amount of the Master Servicer Fee and Servicer Fee paid to the Master Servicer or Servicer, respectively, on such Distribution Date pursuant to Section 4.05(a)(ii) or 4.05(b)(ii), as applicable; (vii) promptly following each Distribution Date, the aggregate amount of Interest Advances and Foreclosure Advances reimbursed to the Master Servicer or the Servicer on such Distribution Date; 55 61 (viii) on or before each Determination Date, all unpaid Trustee Fees due the Trustee as of the preceding Monthly Cut-Off Date pursuant to Section 8.05; (ix) on or before each Determination Date, the Principal Balance of Loans that became Defaulted Loans during the prior Due Period; (x) on or before each Determination Date, each Collateral Performance Percentage, (xi) on or before each Determination Date, the amount deposited into each Collection Account representing payments by the related Obligors on Invoiced Loans in respect of premium on FHA Insurance; (xii) on or before each Determination Date, the amount remaining in the FHA Insurance Coverage Reserve Account with respect to all FHA Loans and the Related Series Loans, if any; (xiii) on or before each Determination Date, identification by loan number, Obligor name, address of Property and Principal Balance of such Loan with respect to which the Master Servicer has requested that the Trustee obtain the environmental report required by Section 3.12 in connection with deciding pursuant to Section 3.12 to foreclose on or otherwise acquire title to the related Property; (xiv) on or before each Determination Date, the Principal Balance of each such Loan with respect to which the Master Servicer has determined under the circumstances described in the penultimate sentence of Section 3.12(a) that in good faith in accordance with customary mortgage loan servicing practices that all amounts which it expects to receive with respect to such Loan have been received; and (xv) on or before each Determination Date, any other information with respect to the Loans reasonably required by the Trustee or the Certificate Insurer to determine the amount of required distributions pursuant to Section 4.05(a) or 4.05(b), as applicable, and determinable by the Master Servicer without undue burden from the Servicer or the items otherwise required to be maintained in each Servicing Record. (f) On or before each Distribution Date, the Master Servicer will determine, based on the date of origination of the FHA Loans as set forth in the Loan Schedule, the amount of FHA insurance premium, if any, due on or prior to the next succeeding Distribution Date with respect to each FHA Loan. On or before such Distribution Date, the Master Servicer will compare such amounts with respect to each FHA Loan against amounts invoiced by FHA with respect to the Contract of Insurance as due on or prior to such next succeeding Distribution Date and report all discrepancies to the Trustee. Mego will assist the Trustee with the transfer of FHA Insurance with respect to each FHA Loan to the Contract of Insurance Holder. The Master Servicer is not responsible for the transfer of FHA Insurance or the payment of any premium for FHA Insurance. 56 62 Section 3.04. Annual Statement as to Compliance; Notice of Master Servicer Termination Event. (a) The Master Servicer will deliver to the Trustee, the Depositor and the Certificate Insurer on or before May 31 of each year an Officer's Certificate signed by two Responsible Officers of the Master Servicer stating with respect to the Trust created hereunder, that: (i) a review of the activities of the Master Servicer during the preceding calendar year (or in connection with the first such Officer's Certificate the period from the Closing Date through the end of 1996) and of the Master Servicer's performance under this Agreement with respect to such Trust has been made under the supervision of the signer of such Officer's Certificate; and (ii) to the best of such signer's knowledge, based on such review, the Master Servicer has fulfilled all its obligations under this Agreement throughout such year (or such portion of such year), or there has been a default in the fulfillment of any such obligation, in which case such Officer's Certificate shall specify each such default known to such signer and the nature and status thereof and what action the Master Servicer proposes to take with respect thereto. (b) The Master Servicer shall deliver to the Trustee, the Certificate Insurer and the Depositor, promptly after having obtained knowledge thereof, but in no event later than 2 Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become a Master Servicer Termination Event under Section 7.01. Each of Mego, the Depositor, the Certificate Insurer, the Trustee and the Master Servicer shall deliver to the other of such Persons promptly after having obtained knowledge thereof, but in no event later than 2 Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become a Master Servicer Termination Event under any other clause of Section 7.01. Section 3.05. Annual Independent Accountants' Report; Servicer Review Report. (a) The Master Servicer shall cause a firm of Independent Accountants, who may also render other services to the Master Servicer, to deliver to the Trustee, the Depositor and the Certificate Insurer on or before May 31 (or 150 days after the end of the Master Servicer's fiscal year) of each year, beginning on the first May 31 (or other applicable date) after the date that is six months after the Closing Date, with respect to the twelve months ended the immediately preceding December 31 (or other applicable date) (or such other period as shall have elapsed from the Closing Date to the date of such certificate) a report, conducted in accordance with generally accepted accounting principles (the "Accountant's Report") including: (i) an opinion on the financial position of the Master Servicer at the end of its most recent fiscal year, and the results of operations and changes in financial position of the Master Servicer for such year then ended on the basis of an examination conducted in accordance with generally accepted auditing standards, and (ii) a statement to the effect that, based on an examination of certain specified documents and records relating to the servicing 57 63 of the Master Servicer's mortgage loan portfolio or the affiliate of the Master Servicer principally engaged in the servicing of mortgage loans conducted in compliance with the audit program for mortgages serviced for FNMA, the United States Department of Housing and Urban Development Mortgagee Audit Standards or the Uniform Single Attestation Program for Mortgage Bankers (the "Applicable Accounting Standards") such firm is of the opinion that such servicing has been conducted in compliance with the Applicable Accounting Standards except for such exceptions as such firm shall believe to be immaterial and such other exceptions as shall be set forth in such statement. (b) In addition, the Master Servicer will provide a report of a firm of Independent Accountants which shall state that (1) a review in accordance with agreed upon procedures (determined by the Certificate Insurer) was made of such number of Master Servicer Certificates which the Independent Accountants deem necessary to carry out their review of Master Servicer performance, but in no case less than two and (2) except as disclosed in the Accountant's Report, no exceptions or errors in the Master Servicer Certificates so examined were found. The Accountant's Report shall also indicate that the firm is independent of the Master Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. (c) The Master Servicer shall mail a copy of the Servicer Review Report and any report or statement of the Servicer prepared pursuant to Section 6.04 of the Servicing Agreement to the Trustee. (d) (1) The Master Servicer shall, unless otherwise directed by the Certificate Insurer, cause a firm of Independent Accountants chosen with the consent of the Certificate Insurer to review, annually within 90 days after each anniversary of the Closing Date, in accordance with agreed upon procedures (determined by the Certificate Insurer) the performance of the Servicer under the Servicing Agreement in order to confirm that the records of the Servicer accurately reflect collections, delinquencies and other relevant data with respect to the Loans reported to the Master Servicer for the purpose of preparation of the Servicing Record, and that such data is accurately reported to the Master Servicer for reflection in the Servicing Record. Any exceptions or errors disclosed by such procedures shall be included in a report delivered to the Master Servicer, the Trustee and the Certificate Insurer (the "Servicer Review Report"). (2) If the Certificate Insurer, upon receipt and review of the Servicer Review Report, determines in its sole discretion that the errors or exceptions disclosed by the Servicer Review Report warrant further review of the performance of the Servicer, then the Certificate Insurer may, so long as no Certificate Insurer Default exists, direct the Master Servicer to cause such firm of Independent Accountants to perform such further review with respect to the performance of Servicer as is reasonably requested by the Certificate Insurer. (3) In addition to the foregoing, the Certificate Insurer may at any time and from time to time, so long as no Certificate Insurer Default exists, direct the Master Servicer to cause such firm of Independent Accountants to conduct such additional reviews and prepare such additional reports with respect to the performance of any Servicer as the Certificate Insurer deems reasonably appropriate. 58 64 Section 3.06. Access to Certain Documentation and Information Regarding Loans. The Master Servicer shall provide to representatives of the Trustee or the Certificate Insurer reasonable access to (a) the documentation regarding the Loans and to those employees of the Master Servicer who are responsible for the performance of the Master Servicer's duties hereunder and (b) the books of account, records, reports and other papers of the Master Servicer and to discuss its affairs, finances and accounts with its employees and Independent accountants for the purpose of reviewing or evaluating the financial condition of the Master Servicer. The Master Servicer shall provide such access to any Certificateholder only in such cases where the Master Servicer is required by applicable statutes or regulations (whether applicable to the Master Servicer or to such Certificateholder) to permit such Certificateholder to review such documentation. In each case, such access shall be afforded without charge but only upon reasonable request and during normal business hours. Nothing in this Section shall derogate from the obligation of the Master Servicer to observe any applicable law prohibiting disclosure of information regarding the Obligors, and the failure of the Master Servicer to provide access as provided in this Section as a result of such obligation shall not constitute a breach of this Section. Any Certificateholder, by its acceptance of a Certificate (or by acquisition of its beneficial interest therein), shall be deemed to have agreed to keep confidential and not to use for its own benefit any information obtained by it pursuant to this Section, except as may be required by applicable law or by any applicable regulatory authority. Section 3.07. [Reserved] Section 3.08. Advances. (a) With respect to the Loans (other than Defaulted Loans) in each Loan Group and each Distribution Date, the Master Servicer shall advance from its own funds and deposit into the related Distribution Account or from funds on deposit in the related Collection Account in respect of amounts available for distribution on future Distribution Dates, no later than the related Determination Date, the excess, if any, of (i) the aggregate of the portions of the Monthly Payments due with respect to all Loans of the related Loan Group in the related Due Period allocable to interest (calculated at a rate equal to the Net Loan Rate) over (ii) the aggregate amount deposited into the Distribution Account with respect to all Loans in such Loan Group and such Distribution Date and allocated in accordance with Section 3.03(c) to interest (such amounts, "Interest Advances"). Any funds so applied from funds on deposit in the related Collection Account in respect of amounts available for distribution on future Distribution Dates shall be reimbursed by the Master Servicer on or before any future Distribution Date to the extent that funds on deposit in such Collection Account applied in the order of priority set forth in such Section 4.05(a) or 4.05(b), as applicable, would be less than the amount required to be distributed pursuant to Section 4.05(a) or 4.05(b), as applicable, on such dates as a result of such Interest Advances. Notwithstanding anything herein to the contrary, no Interest Advance shall be required to be made hereunder if the Master Servicer determines that such Interest Advance would, if made, constitute a Nonrecoverable Advance. 59 65 (b) The Master Servicer shall advance from its own funds the following amounts in respect of any Mortgage Loan or Foreclosed Property, as applicable (collectively, "Foreclosure Advances"): (i) all third party costs and expenses (including legal fees and costs and expenses relating to bankruptcy or insolvency proceedings in respect of any Obligor) associated with the institution of foreclosure or other similar proceedings in respect of any Loan pursuant to Section 3.12; (ii) all insurance premiums due and payable in respect of each Foreclosed Property, prior to the date on which the related Insurance Policy would otherwise be terminated; (iii) all real estate taxes and assessments in respect of each Foreclosed Property that have resulted in the imposition of a lien thereon, other than amounts that are due but not yet delinquent; (iv) all costs and expenses necessary to maintain each Foreclosed Property; (v) all fees and expenses payable to any Independent Contractor hired to operate and manage a Foreclosed Property pursuant to Section 3.14(c); and (vi) all fees and expenses of any Independent appraiser or other real estate expert retained by the Trustee pursuant to Section 3.13(a). The Master Servicer shall advance the Foreclosure Advances described in clauses (i) through (v) above if, but only if, it has approved the foreclosure or other similar proceeding in writing and the Master Servicer would make such an advance if it or an affiliate held the affected Mortgage Loan or Foreclosed Property for its own account and, in the Master Servicer's good faith judgment, such amounts will be recoverable from related Payments. In making such assessment with respect to the institution of such proceedings, the Master Servicer shall not advance funds with respect to a Mortgage Loan unless the appraised value of the related Property exceeds the sum of (i) the amounts necessary to satisfy any liens prior to the liens on Mortgages securing such Mortgage Loan and (ii) the reasonably anticipated costs of foreclosure or similar proceedings. Section 3.09. Reimbursement of Interest Advances and Foreclosure Advances. (a) The Master Servicer shall be entitled to be reimbursed pursuant to Section 4.05(a)(iii), in the case of Group I Loans and pursuant to Section 4.05(b)(iii), in the case of Group II Loans, for previously unreimbursed Interest Advances made from its own funds or any such previously unreimbursed Interest Advance by the Servicer with respect to a Loan on Distribution Dates subsequent to the Distribution Date in respect of which such Interest Advance was made from Payments with respect to such Loan. If a Loan shall become a Defaulted Loan and the Master Servicer shall not have been fully reimbursed for any such Interest Advances with respect to such Loan, the Master Servicer shall be entitled to be 60 66 reimbursed for the outstanding amount of such Interest Advances from unrelated Loans in the same Loan Group pursuant to Section 4.05(a)(iii), in the case of Group I Loans and pursuant to Section 4.05(b)(iii), in the case of Group II Loans. No interest shall be due to the Master Servicer in respect of any Interest Advance for any period prior to the reimbursement thereof. (b) The Master Servicer shall be entitled to be reimbursed pursuant to Section 4.05(a)(iii), in the case of Group I Loans and pursuant to Section 4.05(b)(iii), in the case of Group II Loans from related Payments for Foreclosure Advances advanced on or prior to the related Monthly Cut-Off Date but only to the extent the Master Servicer has satisfied the requirements of Section 3.08. No interest shall be due to the Master Servicer in respect of any Foreclosure Advance for any period prior to the reimbursement thereof. (c) The Trustee shall offset against amounts otherwise distributable to the Master Servicer pursuant to Section 4.05(a)(iii), with respect to Group I Loans and pursuant to Section 4.05(b)(iii), with respect to Group II Loans, amounts, if any, which were required to be deposited in any Collection Account pursuant to Section 4.03(a) with respect to the related Due Period but which were not so deposited. Section 3.10. Modifications, Waivers, Amendments and Consents. (a) The Master Servicer shall not agree to any modification, waiver or amendment of any provision of any Loan unless, in the Master Servicer's good faith judgment, such modification, waiver or amendment (i) would minimize the loss that might otherwise be experienced with respect to such Loan, and (ii) in the case of any FHA Loan, complies with the requirements of Title I or is required by Title I and such FHA Loan has experienced a payment default or a payment default is reasonably foreseeable by the Master Servicer. The Master Servicer shall agree to subordinate the position of the security interest in the Property which secures any FHA Loan upon the Master Servicer's receipt of written approval of HUD to such subordination or written certification by the Servicer that such proposed subordination complies with current published HUD requirements and provided such subordination (i) would permit the Obligor to refinance a senior lien to take advantage of a lower interest rate or (ii) would permit the Obligor to extend the term of the senior lien. Notwithstanding the foregoing, at no time shall the aggregate of the Principal Balances of Loans modified, waived or amended without the prior or subsequent approval of the Certificate Insurer exceed 3% of the aggregate of the Initial Loan Group I Principal Balance and the Initial Loan Group II Principal Balance and no modification or amendment of a Loan shall involve the execution by the Obligor of a new Note or, with respect to any Mortgage Loan, of a new Mortgage. At the request of the Master Servicer, the Certificate Insurer, at its discretion, may approve an increase in or waiver of the percentage referred to in the previous sentence, such approval not to be unreasonably withheld. (b) The Master Servicer shall notify the Trustee and the Certificate Insurer of any modification, waiver or amendment of any provision of any Loan and the date thereof, and shall deliver to the Trustee for deposit in the related File, an original counterpart of the agreement relating to such modification, waiver or amendment, promptly following the execution thereof. Such notice shall state that the conditions contained in this Section 3.10 have been satisfied. 61 67 Section 3.11. Due-On-Sale; Due-on-Encumbrance. (a) If any Loan contains a provision, in the nature of a "due-on-sale" clause, which by its terms: (i) provides that such Loan shall (or may at the Obligee's option) become due and payable upon the sale or other transfer of an interest in the related Property; or (ii) provides that such Loan may not be assumed without the consent of the related Obligee in connection with any such sale or other transfer, then, for so long as such Loan is included in the Trust, the Master Servicer, on behalf of the Trustee, shall exercise any right the Trustee may have as the Obligee of record with respect to such Loan (x) to accelerate the payments thereon, or (y) to withhold its consent to any such sale or other transfer, in a manner consistent with the servicing standard set forth in Section 3.01. (b) If any Loan contains a provision, in the nature of a "due-on-encumbrance" clause, which by its terms: (i) provides that such Loan shall (or may at the Obligee's option) become due and payable upon the creation of any lien or other encumbrance on the related Property; or (ii) requires the consent of the related Obligee to the creation of any such lien or other encumbrance on the related Property, then, for so long as such Loan is included in the Trust, the Master Servicer, on behalf of the Trustee, shall exercise any right the Trustee may have as the Obligee of record with respect to such Loan (x) to accelerate the payments thereon, or (y) to withhold its consent to the creation of any such lien or other encumbrance, in a manner consistent with the servicing standard set forth in Section 3.01. (c) Nothing in this Section 3.11 shall constitute a waiver of the Trustee's right to receive notice of any assumption of a Loan, any sale or other transfer of the related Property or the creation of any lien or other encumbrance with respect to such Property. (d) Except as otherwise permitted by Section 3.10, the Master Servicer shall not agree to modify, waive or amend any term of any Loan in connection with the taking of, or the failure to take, any action pursuant to this Section 3.11. Section 3.12. Claim for FHA Insurance and Foreclosure. (a) (x) If any Monthly Payment due under any FHA Loan is not paid when the same becomes due and payable, or if the Obligor fails to perform any other covenant or obligation under such FHA Loan and such failure continues beyond any applicable grace period, the Master Servicer shall take such action (consistent with Title I, including efforts to 62 68 cure the default of such FHA Loan pursuant to 24 C.F.R. Section 201.50) as it shall deem to be in the best interest of the Trust. If the maturity of the related Note has been accelerated pursuant to the requirements under Title I following the Master Servicer's efforts to cure the default of such FHA Loan (and such FHA Loan is not required to be purchased pursuant to Section 2.04(b)), and (i) if an FHA Insurance Coverage Insufficiency does not exist at the time, the Claims Administrator shall initiate, on behalf of the Trust and the Contract of Insurance Holder, a claim under the Contract of Insurance for reimbursement for loss on such FHA Loan pursuant to Title I (see 24 C.F.R. Section 201.54), or (ii) if an FHA Insurance Coverage Insufficiency exists at the time, the Master Servicer shall determine within 90 days in accordance with Section 3.12(c) whether or not to proceed against the Property securing such FHA Loan, if such FHA Loan is a Mortgage Loan or against the Obligor, if such FHA Loan is unsecured, and if thereafter an FHA Insurance Coverage Insufficiency does not exist, the Claims Administrator may submit a claim under the Contract of Insurance with respect to such FHA Loan if it has obtained the prior approval of the Secretary of HUD pursuant to 24 C.F.R. Section 201.51; (y) if any Monthly Payment due under any Non-FHA Loan is not paid when the same is due and payable, or if the Obligor fails to perform any other covenant or obligation under such Non-FHA Loan and such failure continues beyond any applicable grace period, the Master Servicer shall take such action as it shall deem to be in the best interest of the Trust; including but not limited to proceeding against the Property securing such Non-FHA Loan. In the event that in accordance with clauses (a)(x)(ii) and (y) above the Master Servicer determines not to proceed against the Property or Obligor, as applicable, on or before the Determination Date following such determination the Master Servicer shall determine in good faith in accordance with customary servicing practices that all amounts which it expects to receive with respect to such Loan have been received. If the Master Servicer makes such a determination, it shall give notice to such effect pursuant to Section 3.03(e)(xiv). (b) If the Claims Administrator initiates a claim for reimbursement for loss on any FHA Loan under this Section, the Claims Administrator shall comply with applicable provisions of Title I and diligently pursue such claim and, in any event, shall initiate such claim no later than the last day permitted under Title I (see 24 C.F.R. Section 201.54(b)). For purposes of this Agreement, the term "initiate a claim for reimbursement" shall mean the filing of the claim application pursuant to the requirements set forth in 24 C.F.R. Section 201.54, including the filing of all related assignments and documents and materials required for file review. For the purposes of such filing, the Claims Administrator shall request, and the Trustee within 5 calendar days of request shall deliver to the Claims Administrator, the Note and the related Mortgage for such FHA Loan and each other item in the related File necessary to make such claim. Each Certificateholder hereby consents to the assignment of such FHA Loan for the sole purpose of initiating a claim under the Contract of Insurance for reimbursement with respect to such FHA Loan. Pursuant to Section 3.12(i), the Contract of Insurance Holder shall furnish the Claims Administrator a power of attorney to file claims under the Contract of Insurance. The Trustee and Contract of Insurance Holder agree to execute and deliver to the Claims Administrator, within 5 Business Days of receipt from the Claims Administrator, all documents, if any, necessary to initiate and file a claim under the Contract of Insurance for such FHA Loan, which documents shall be prepared by the Claims Administrator. If any claim to the FHA becomes a Rejected Claim, upon receipt of the FHA's rejection notice by the Claims Administrator directly from the FHA or from the Contract of Insurance Holder pursuant to Section 3.12(e) and a determination by the Claims Administrator 63 69 that the rejection was not due to clerical error, then the Claims Administrator shall promptly notify the Contract of Insurance Holder (if such notice has not already been given), the Trustee and the Certificate Insurer of the notice of a Rejected Claim. If the FHA indicates in writing that the claim is a Rejected Claim due to reasons other than a failure to service the related FHA Loan in accordance with Title I, Mego shall repurchase the FHA Loan on or before the Monthly Cut-Off Date next following the date of such notice from the Claims Administrator to repurchase such FHA Loan, either directly from FHA or from the Trustee, for the Purchase Price. If FHA indicates in writing that the claim is a Rejected Claim due to a failure to service such FHA Loan in accordance with Title I, the Claims Administrator shall immediately notify Mego, the Contract of Insurance Holder, the Trustee and the Certificate Insurer of such determination, and the Master Servicer shall on or before the later to occur of (i) the next succeeding Monthly Cut-Off Date and (ii) ten Business Days from the date on which such rejection notice is received by the Claims Administrator, purchase such FHA Loan either directly from FHA or from the Trustee, for the Purchase Price. In the event that the FHA fails to indicate in writing why the claim is a Rejected Claim, the Claims Administrator shall determine why the claim is a Rejected Claim. If the Claims Administrator determines that the claim is a Rejected Claim for reasons other than a servicing failure that occurred after the Closing Date, Mego shall be obligated to repurchase such FHA Loan for the Purchase Price. If the Claims Administrator determines that the claim is a Rejected Claim due to a servicing failure that occurred after the Closing Date, the Master Servicer shall be obligated to repurchase such FHA Loan for the Purchase Price. Notwithstanding any provisions herein to the contrary, neither Mego nor the Master Servicer shall be required to repurchase or purchase, as applicable, any FHA Loan subject to a Rejected Claim as a result of the depletion of the amount of the FHA Insurance Coverage Reserve Account as shown in the Insurance Record. (c) In accordance with the criteria for proceeding against the Property set forth in Section 3.12(a), with respect to an FHA Loan that is a Mortgage Loan that has been accelerated pursuant to the requirements of Title I following the Master Servicer's efforts to cure the default of the FHA Loan, and with respect to Non-FHA Loans in Group I, unless otherwise prohibited by applicable law or court or administrative order, the Master Servicer, on behalf of the Trustee, may, at any time, institute foreclosure proceedings, exercise any power of sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or title to the related Property, by operation of law or otherwise; provided, however, that the Master Servicer shall not acquire any personal property pursuant to this Section 3.12 unless either: (x) such personal property is incident to real property (within the meaning of section 856(e)(1) of the Code) so acquired by the Master Servicer; or (y) the Trustee shall have received an Opinion of Counsel not employed by the Master Servicer, Mego or its affiliates (with a copy to the Certificate Insurer) to the effect that the holding of such personal property by the Trust will not cause the imposition of a tax on the Trust under the REMIC Provisions or cause the REMIC Pool portion of the Trust to fail to qualify as a REMIC at any time that any Certificate is outstanding. 64 70 In accordance with the criteria for proceeding against the Property set forth in Section 3.12(a), with respect to FHA Loans that are Mortgage Loans and with respect to the Non-FHA Loans, the Master Servicer shall institute foreclosure proceedings, repossess, exercise any power of sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or title to any Property, by operation of law or otherwise only in the event that in the Master Servicer's reasonable judgement such action is likely to result in a positive economic benefit to the Trust by creating net liquidation proceeds (after reimbursement of all amounts owed with respect to such Loan to the Master Servicer or the Servicer) and provided that, with respect to any Property, prior to taking title thereto, the Master Servicer has requested that the Trustee obtain, and the Trustee shall have obtained, an environmental review to be performed on such Property by a company with recognized expertise, the scope of which is limited to the review of public records and documents for information regarding whether such Property has on it, under it or is near, hazardous or toxic material or waste. If such review reveals that such Property has on it, under it or is near hazardous or toxic material or waste or reveals any other environmental problem, the Trustee shall provide a copy of the related report to the Master Servicer and the Certificate Insurer and title shall be taken to such Property only after obtaining the written consent of the Certificate Insurer. In connection with any foreclosure proceeding on an FHA Loan, the Master Servicer shall comply with the requirements under Title I, shall follow such practices and procedures in a manner which is consistent with the Master Servicer's procedure for foreclosure with respect to similar FHA Title I loans held in the Master Servicer's portfolio for its own account or, if there are no such loans, FHA Title I loans serviced by the Master Servicer for others. To the extent required by Section 3.08, the Master Servicer shall advance all necessary and proper Foreclosure Advances until final disposition of the Foreclosed Property and shall manage such Foreclosed Property pursuant to Section 3.14. If, in following such foreclosure procedures, title to the Foreclosed Property is acquired, the deed or certificate of sale shall be issued to the Trustee. (d) In the event the Trust acquires any Foreclosed Property relating to a Group I Loan, the Trustee shall elect to treat such Foreclosed Property as "foreclosure property" within the meaning of Section 860G(a)(8) of the Code, in accordance with such rules as are then applicable; and the Master Servicer, pursuant to Section 3.13(b), shall sell such Foreclosed Property in its entirety prior to the date which is two years after its Acquisition Date, unless, in any such case, either (i) the Master Servicer on behalf of the REMIC Pool has applied for and received an extension of such two-year period pursuant to Code Sections 856(e)(3) and 860G(a)(8)(A) in which case the Master Servicer shall sell such Foreclosed Property within the applicable extension period or (ii) the Master Servicer shall have provided and the Trustee shall have received an opinion of counsel not employed by the Master Servicer, the Depositor or either of their affiliates to the effect that the holding of such Foreclosed Property (subject to any conditions set forth in such Opinion) for an additional specified period will not cause such Foreclosed Property to fail to qualify as "foreclosure property" within the meaning of Section 860G(a)(8) of the Code (determined without regard to the exception applicable for purposes of Section 860D(a) of the Code) at any time that any Certificate is Outstanding, in which event such two-year period shall be extended by such additional specified period, subject to any conditions set forth in such Opinion of Counsel. 65 71 (e) With respect to any FHA Loan, each of the Trustee and the Contract of Insurance Holder shall deposit in the Distribution Account for the Loan Group relating to such FHA Loan on the day of receipt all amounts received from the FHA or any other Person with respect to such FHA Loans or any other assets of the Trust and shall transmit by facsimile, or such other method requested by the Master Servicer, Claims Administrator or the Certificate Insurer, to the Master Servicer, Claims Administrator and the Certificate Insurer on each such day the letter of transmittal received from the FHA and any other documents with respect to such receipt. Each of the Trustee and the Contract of Insurance Holder shall also promptly deliver to the Claims Administrator copies of any other correspondence received from the FHA or sent to the FHA by the Trustee or the Contract of Insurance Holder, as the case may be, including, but not limited to, any correspondence regarding the balance of the FHA Insurance Coverage Reserve Account, premiums due and claims rejected. (f) If, prior to the Termination Date, the FHA rejects an insurance claim, in whole or part, under the Contract of Insurance after previously paying such insurance claim and the FHA demands that the Contract of Insurance Holder repurchase such FHA Loan, the Claims Administrator shall pursue such appeals with the FHA as are reasonable. If the FHA continues to demand that the Contract of Insurance Holder repurchase such FHA Loan after the Claims Administrator exhausts such administrative appeals as are reasonable, then notwithstanding that Mego, the Master Servicer or any other person is required to repurchase such FHA Loan under this Agreement, the Claims Administrator shall notify the Contract of Insurance Holder of such fact and the Contract of Insurance Holder in its capacity as Trustee shall repurchase such FHA Loan from funds available in the related Distribution Account. The Claims Administrator shall, to the extent possible, direct the Trustee to make all such repurchases of FHA Loans once a month and to repurchase any and all such FHA Loans from the FHA in that portion of the calendar month after each Distribution Date. If the Trustee withdraws any amounts from the Trust for such purpose between the Determination Date and Distribution Date of any month, the Master Servicer shall prepare the Master Servicer Certificates provided under Section 4.01 for such Distribution Date (or promptly revise the Master Servicer Certificate if already prepared for such Distribution Date) to reflect such withdrawals as if made on such Determination Date and the Trustee shall revise its determination pursuant to Section 4.10 accordingly. To the extent allowed by FHA, Mego may repurchase directly from FHA any FHA Loan for which an insurance claim has been paid and later rejected by FHA. If the FHA indicates in writing in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to other than (i) a failure to service the FHA Loan in accordance with Title I or (ii) the amount in the FHA Insurance Coverage Reserve Account is insufficient to pay such claim, or if the FHA does not indicate in writing the reason for its rejection or refusal, Mego shall be liable to reimburse the Trust for any amounts paid by the Trustee to the FHA in order to repurchase such FHA Loan. Subject to Section 3.12(b), if the FHA indicates in writing, or it is agreed by the Master Servicer, in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to a failure to service such Loan in accordance with Title I, the Master Servicer shall be liable to reimburse the Trust or Mego for any amounts paid by the Trust or Mego, as the case may be, to FHA in order to repurchase FHA Loans for which the FHA has rejected an insurance claim as a result of a failure to service such FHA Loan in accordance with Title I. (g) If, after the Termination Date, the FHA rejects an insurance claim, in whole or part, under the Contract of Insurance after previously paying such insurance claim 66 72 and the FHA demands that the Contract of Insurance Holder repurchase such FHA Loan, the Claims Administrator shall pursue such appeals with the FHA as are reasonable. If the FHA continues to demand that the Contract of Insurance Holder repurchase such FHA Loan after the Claims Administrator exhausts such administrative appeals as are reasonable, then notwithstanding that Mego or any other person is required to repurchase such FHA Loan under this Agreement, the Claims Administrator shall notify the Contract of Insurance Holder of such fact and the Contract of Insurance Holder shall repurchase such FHA Loan from the FHA. If the FHA indicates in writing in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to other than (i) a failure to service the Loan in accordance with Title I or (ii) the amount in the FHA Insurance Coverage Reserve Account is insufficient to pay such claim, or if FHA does not indicate in writing the reason for its rejection or refusal, Mego shall be liable to reimburse the Contract of Insurance Holder for any amounts paid by the Contract of Insurance Holder to the FHA in order to repurchase such FHA Loan. Subject to Section 3.12(b), if the FHA indicates in writing, or it is agreed by the Claims Administrator, in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to a failure to service such FHA Loan in accordance with Title I, the Master Servicer shall be liable to reimburse the Contract of Insurance Holder or Mego for any amounts paid by the Contract of Insurance Holder or Mego to FHA in order to repurchase FHA Loans for which the FHA has rejected an insurance claim as a result of a failure to service such FHA Loan in accordance with Title I. (h) The Claims Administrator shall be entitled to reimbursement of expenses associated with the filing of any FHA Insurance claim from and to the extent that such amounts are reimbursed by HUD. (i) The Trustee shall furnish the Claims Administrator or the Servicer, as applicable, within 5 days of request of the Claims Administrator or the Servicer therefor any powers of attorney and other documents necessary and appropriate to carry out its respective duties hereunder, including any documents or powers of attorney necessary to foreclose or file a claim with respect to any FHA Loan and to file claims with the FHA under the Contract of Insurance. The forms of any such powers or documents shall be appended to such requests. The Contract of Insurance Holder shall furnish the Claims Administrator or the Servicer, as applicable, within 5 days of request of the Claims Administrator or the Servicer therefor any powers of attorney and other documents necessary and appropriate to carry out its administrative duties pursuant to Section 3.12. Section 3.13. Sale of Foreclosed Properties. (a) The Master Servicer may offer to sell to any Person any Foreclosed Property, if and when the Master Servicer determines consistent with the Servicing Standard and that such a sale would be in the best interests of the Trust, but shall, with respect to the Group I Loans, in any event, so offer to sell any Foreclosed Property in accordance with the criteria set forth in Section 3.12 and no later than the time determined by the Master Servicer to be sufficient to result in the sale of such Foreclosed Property on or prior to the date specified in Section 3.12(d). The Master Servicer shall give the Trustee and the Certificate Insurer not less than five days' prior notice of its intention to sell any Foreclosed Property, and shall accept the highest bid received from any Person for any Foreclosed Property in an amount at least equal to the sum of: 67 73 (i) the Principal Balance of the related foreclosed Loan, unreimbursed Foreclosure Advances plus the outstanding amount of any liens superior in priority, if any, to the lien of the foreclosed Loan; and (ii) all unpaid interest accrued thereon at the related Loan Rate through the date of sale. In the absence of any such bid, the Master Servicer shall accept the highest bid received from any Person that is determined to be a fair price for such Foreclosed Property by the Master Servicer, if the highest bidder is a Person other than an Interested Person, or by an Independent appraiser retained by the Master Servicer, if the highest bidder is an Interested Person. In the absence of any bid determined to be fair as aforesaid, the Master Servicer shall offer the affected Foreclosed Property for sale to any Person, other than an Interested Person, in a commercially reasonable manner for a period of not less than 10 or more than 30 days, and shall accept the highest cash bid received therefor in excess of the highest bid previously submitted. If no such bid is received, any Interested Person may resubmit its original bid, and the Master Servicer shall accept the highest outstanding cash bid, regardless of from whom received. No Interested Person shall be obligated to submit a bid to purchase any Foreclosed Property, and notwithstanding anything to the contrary herein, neither the Trustee, in its individual capacity, nor any of its affiliates may bid for or purchase any Foreclosed Property pursuant hereto. (b) In determining whether any bid constitutes a fair price for any Foreclosed Property, the Master Servicer shall take into account, and any appraiser or other expert in real estate matters shall be instructed to take into account, as applicable, among other factors, the financial standing of any tenant of the Foreclosed Property, the physical condition of the Foreclosed Property, the state of the local and national economies and, with respect to the Group I Loans, the Trust's obligation to dispose of any Foreclosed Property within the time period specified in Section 3.12(d). (c) Subject to the provision of Section 3.12, the Master Servicer shall act on behalf of the Trustee in negotiating and taking any other action necessary or appropriate in connection with the sale of any Foreclosed Property, including the collection of all amounts payable in connection therewith. Any sale of a Foreclosed Property shall be without recourse to the Trustee, the Master Servicer or the Trust, and if consummated in accordance with the terms of this Agreement, neither the Master Servicer nor the Trustee shall have any liability to any Certificateholder with respect to the purchase price therefor accepted by the Master Servicer or the Trustee. Section 3.14. Management of Real Estate Owned. (a) If the Trust acquires any Foreclosed Property pursuant to Section 3.12, the Master Servicer shall have full power and authority, subject only to the specific requirements and prohibitions of this Agreement, to do any and all things in connection therewith as are consistent with the manner in which the Master Servicer manages and operates similar property owned by the Master Servicer or any of its affiliates, all on such terms and for such period as the Master Servicer deems to be in the best interests of Certificateholders. 68 74 (b) Notwithstanding the foregoing, with respect to the Group I Loans the Master Servicer will not manage, conserve, protect and operate (or cause to be managed, conserved, protected and operated) each Foreclosed Property for disposition and sale in a manner that causes such Foreclosed Property to fail to qualify as "foreclosure property" within the meaning of the REMIC Provisions (determined without regard to the exception applicable for purposes of Section 860D(a) of the Code) or results in the receipt by the REMIC of any "income from nonpermitted assets" within the meaning of the REMIC Provisions or any "net income from foreclosure property" subject to taxation under the REMIC Provisions. (c) The Master Servicer may contract with any Independent Contractor for the operation and management of any Foreclosed Property, provided that: (i) the terms and conditions of any such contract may not be inconsistent herewith; (ii) any such contract shall require, or shall be administered to require, that the Independent Contractor remit all related Payments to the Master Servicer as soon as practicable, but in no event later than two Business Days following the receipt thereof by such Independent Contractor; (iii) none of the provisions of this Section 3.14(c) relating to any such contract or to actions taken through any such Independent Contractor shall be deemed to relieve the Master Servicer of any of its duties and obligations to the Trustee for the benefit of Certificateholders with respect to the operation and management of any such Foreclosed Property; and (iv) the Master Servicer shall be obligated with respect thereto to the same extent as if it alone were performing all duties and obligations in connection with the operation and management of such Foreclosed Property. The Master Servicer shall be entitled to enter into any agreement with any Independent Contractor performing services for it related to its duties and obligations hereunder for indemnification of the Master Servicer by such Independent Contractor, and nothing in this Agreement shall be deemed to limit or modify such indemnification. The Master Servicer shall be solely liable for all fees owed by it to any such Independent Contractor, but shall be entitled to be reimbursed for all such fees advanced by it pursuant to Section 3.08(b)(v) in the manner provided in Section 3.09(b). Section 3.15. Inspections. The Master Servicer shall inspect or cause to be inspected each Property that secures any Loan at such times and in such manner as are consistent with the servicing standard set forth in Section 3.01. Section 3.16. Maintenance of Insurance. (a) The Master Servicer shall maintain or cause to be maintained with respect to each Property securing an FHA Loan such insurance as is required with respect 69 75 thereto by Title I. The Master Servicer shall cause to be maintained for each Foreclosed Property acquired by the Trust such types and amounts of insurance coverage as the Master Servicer shall deem reasonable. The Master Servicer shall cause to be maintained for each Non-FHA Loan, fire and hazard insurance naming Mego as loss payee thereunder providing extended coverage in an amount which is at least equal to the least of (i) the maximum insurable value of the improvements securing such Non-FHA Loan from time to time, (ii) the combined principal balance owing on such Non-FHA Loan and any mortgage loan senior to such Non-FHA Loan and (iii) the minimum amount required to compensate for damage or loss on a replacement cost basis. In cases in which any Property securing a Non-FHA Loan is located in a federally designated flood area, the hazard insurance to be maintained for the related Loan shall include flood insurance to the extent such flood insurance is available and the Master Servicer has determined such insurance to be necessary in accordance with accepted mortgage loan servicing standards for mortgage loans similar to the Mortgage Loans. All such flood insurance shall be in amounts equal to the least of (A) the maximum insurable value of the improvement securing such Non-FHA Loan, (B) the combined principal balance owing on such Non-FHA Loan and any mortgage loan senior to such Non-FHA Loan and (c) the maximum amount of insurance available to the lender under the National Flood Insurance Act of 1968, as amended. (b) Any amounts collected by the Master Servicer under any Insurance Policies, shall be paid over or applied by the Master Servicer as follows: (i) In the case of amounts received in respect of any Loan: (A) for the restoration or repair of the affected Property, in which event such amounts shall be released to the Obligor in accordance with the terms of the related Note, or to the extent not so used, or (B) in reduction of the Principal Balance of the related Loan, in which event such amounts shall be credited to the related Servicing Record, unless the related instruments require a different application, in which case such amounts shall be applied in the manner provided therein; and (ii) Subject to Section 3.14, in the case of amounts received in respect of any Foreclosed Property, for the restoration or repair of such Foreclosed Property, unless the Master Servicer determines, consistent with the servicing standard set forth in Section 3.01, that such restoration or repair is not in the best economic interest of the Trust, in which event such amounts shall be credited, as of the date of receipt, to the applicable Servicing Record, as a Payment received from the operation of such Foreclosed Property. Section 3.17. Release of Files. (a) If with respect to any Loan: (i) the outstanding Principal Balance of such Loan plus all interest accrued thereon shall have been paid; 70 76 (ii) the Master Servicer, or the Servicer shall have received, in escrow, payment in full of such Loan in a manner customary for such purposes; (iii) such Loan has become a Defective Loan; (iv) such Loan or the related Foreclosed Property has been sold in connection with the termination of the Trust pursuant to Section 9.01; (v) the FHA has paid a claim with respect to such Loan under the Contract of Insurance; or (vi) the related Foreclosed Property has been sold pursuant to Section 3.13. In each such case, the Servicer shall deliver a certificate to the effect that the Servicer has complied with all of its obligations under the Servicing Agreement with respect to such Loan and requesting that the Trustee release to the Servicer the related File, then the Trustee shall, within three Business Days or such shorter period as may be required by applicable law, release, or cause the Custodian to release, the related File to the Servicer and execute and deliver such instruments of transfer or assignment, in each case without recourse, as shall be necessary to vest ownership of such Loan in the Servicer or such other Person as may be specified in such certificate, the forms of any such instrument to be appended to such certificate. (b) From time to time and as appropriate for the servicing or foreclosure of any Loan, the Trustee shall, upon request of the Servicer, release the related File (or any requested portion thereof) to the Servicer. Such receipt shall obligate the Servicer, to return the File (or such portion thereof) to the Trustee when the need therefor by the Servicer, no longer exists unless any of the conditions specified in subsection (a) above, is satisfied prior thereto. The Trustee shall release such receipt to the Servicer (i) upon the Servicer's return of the File (or such portion thereof) to the Trustee or (ii) if any of the conditions specified in subsection (a) has been satisfied, and the Servicer has not yet returned the File (or such portion thereof) to the Trustee, upon receipt of a certificate certifying that any of such condition has been satisfied. Section 3.18. Certain Tax Matters. The Trustee shall maintain records as to investments and other assets of the Trust sufficient to show compliance with the REMIC Provisions and Grantor Trust Provisions, respectively, during each taxable year of the Trust. The Master Servicer shall provide Mego with such information from the Servicing Record as Mego shall request to prepare any Tax Returns, and any other federal, state or local tax or information returns or reports that are required to be so filed, or so provided to Certificateholders, by the Trust. Mego shall maintain such records and make such information available as required by Section 8.12. 71 77 Section 3.19. Filing of Continuation Statements. On or before the fifth anniversary of the filing of any financing statements by Mego and the Depositor, respectively, with respect to the assets conveyed to the Trustee, Mego and the Depositor shall prepare, have executed by the necessary parties and file in the proper jurisdictions all financing and continuation statements necessary to maintain the liens, security interests, and priorities of such liens and security interests that have been granted by Mego and the Depositor, respectively, and Mego and the Depositor shall continue to file on or before each fifth anniversary of the filing of any financing and continuation statements such additional financing and continuation statements until the Trust has terminated pursuant to Section 9.01. Subject to Section 8.03, the Trustee agrees to cooperate with Mego and the Depositor in preparing, executing and filing such statements. The Trustee agrees to notify Mego and the Depositor on the third Distribution Date prior to each such fifth anniversary of the requirement to file such financing and continuation statements. The filing of any such statement with respect to Mego and the Depositor shall not be construed as any indication of an intent of any party contrary to the expressed intent set forth in Section 10.09. If Mego or the Depositor has ceased to do business whenever any such financing and continuation statements must be filed or Mego or the Depositor fails to file any such financing statements or continuation statements at least one month prior to the expiration thereof, the Trustee shall perform the services required under this Section 3.19. Section 3.20. Fidelity Bond. The Master Servicer shall maintain a fidelity bond in such form and amount as is customary for entities acting as custodian of funds and documents in respect of loans on behalf of institutional investors. Section 3.21. Errors and Omissions Insurance. The Master Servicer shall obtain and maintain at all times during the term of this Agreement errors and omissions insurance coverage covering the Master Servicer and its employees issued by a responsible insurance company. The issuer, policy terms and forms and amounts of coverage, including applicable deductibles, shall be reasonably satisfactory to the Certificate Insurer and shall be in such form and amount as is customary for entities acting as master servicers. The Master Servicer agrees to notify the Certificate Insurer in writing within five (5) days of the Master Servicer's receipt of notice of the cancellation or termination of any such errors and omissions insurance coverage. The Master Servicer shall provide to the Certificate Insurer upon request written evidence of such insurance coverage. 72 78 ARTICLE IV Distributions to Certificateholders Section 4.01. General Provisions Relating to Distributions to Certificateholders. (a) Distributions allocable to interest and principal in respect of each Class of the Senior Certificates shall be made, to the extent and in the priority described in Section 4.05, to the Holders of such Class of Certificates based on the respective Percentage Interests of the Certificateholder of such Class, without preference or priority of any kind. Any amounts distributed to Holders of the Senior Certificates on any Distribution Date shall not be subject to any claim or interest of Holders of Class R Certificates. (b) Distributions from the Trust to Holders of Class R Certificates shall be made on each Distribution Date in accordance with Section 4.05(a) solely from amounts available for distribution on deposit in the Distribution Account for the Group I Certificates. Distributions to the Holders of Class R Certificates shall be made pro rata based on the respective Residual Interests, without preference or priority of any kind. Any amount distributed to Holders of the Class R Certificates on any Distribution Date shall not be subject to any claim or interest of Holders of Senior Certificates. (c) On each Determination Date, the Master Servicer shall deliver to the Trustee and the Certificate Insurer, a certificate for each Loan Group containing the items described in Exhibit E-1 and Exhibit E-2 hereto (each, a "Master Servicer Certificate"), prepared as of the related Determination Date and executed by a Master Servicing Officer. The Master Servicer shall revise any Master Servicer Certificate to take into account any payments of which the Master Servicer is notified made by the Trust to FHA after the related Determination Date and before the related Distribution Date as provided in Section 3.12(f). The Trustee may rely on the Master Servicer Certificate with respect to the matters set forth therein. Section 4.02. Distributions to Certificateholders. (a) Distributions will be made by the Trustee to each Certificateholder of record on the preceding Record Date by: (i) check mailed, via first class mail, postage prepaid, to the address of such Holder as it appears on the Certificate Register; or (ii) Fedwire transfer of immediately available funds, if such Certificateholder holds at least a $1,000,000 Denomination, Class S Certificates representing at least a 30% Percentage Interest or Class R Certificates representing at least 25% of the Residual Interests, if notice from such Certificateholder has been received by the Trustee at least five Business Days prior to any Distribution Date (any such notice being applicable to all subsequent Distribution Dates unless and until rescinded in writing) designating a deposit account for receipt of distributions at a bank 73 79 which has Fedwire transfer capabilities, and providing such other information as the Trustee may reasonably require to effect an electronic credit entry to such account. To the extent required by applicable law, the Trustee shall deduct and withhold taxes due on amounts distributed to Certificateholders. (b) Whenever the Trustee, based on a Master Servicer Certificate, expects that the final distribution with respect to a Class of Senior Certificates will be made on the next Distribution Date, the Trustee shall, as soon as practicable, mail to each Holder of such Class of Senior Certificates as of the applicable Record Date a notice to the effect that: (i) the Trustee expects that the final distribution with respect to such Class of Senior Certificates will be made on such Distribution Date, and (ii) no interest shall accrue on such Class of Senior Certificates after such Distribution Date provided that the final distribution occurs on such Distribution Date. Section 4.03. Collection Accounts and FHA Premium Accounts and the FHA Reserve Fund. (a) The Trustee has heretofore established or caused to be established and shall hereafter maintain or cause to be maintained a separate account for each Loan Group denominated a Collection Account, which in each case is and shall continue to be an Eligible Account in the name of the Trustee and shall be designated "First Trust of New York, National Association, as Trustee of the Mego Mortgage Home Loan Trust 1996-3, Collection Account--Group I Loans" and "First Trust of New York, National Association, as Trustee of the Mego Mortgage Home Loan Trust 1996-3, Collection Account--Group II Loans", respectively. The Master Servicer shall cause all Payments relating to a Loan Group to be deposited by the Servicer in the appropriate Collection Account no later than the second Business Day following the date of receipt thereof by the Servicer. The Trustee shall provide to the Master Servicer and the Servicer a monthly statement of all activity in each Collection Account. (b) No later than the second Business Day preceding each Distribution Date, the Trustee shall withdraw amounts from the Collection Account for each Loan Group in respect of Payments with respect to such Distribution Date and deposit such amounts into the Distribution Account for the related Certificate Group and liquidate the Eligible Investments in which such amounts are invested and distribute all net investment earnings to the Servicer. (c) All amounts on deposit in a Distribution Account representing payments by Obligors on Invoiced Loans in respect of premium on FHA Insurance shall be withdrawn by the Trustee from such Distribution Account and deposited in the related FHA Premium Account no later than the second Business Day preceding each Distribution Date. (d) The Trustee has heretofore established or caused to be established and shall hereafter maintain or cause to be maintained a separate account denominated a FHA Reserve Fund, in the name of the Trustee and shall be designated "First Trust of New York, National Association, as Trustee of the Mego Mortgage Trusts, FHA Reserve Fund." The 74 80 Trustee shall deposit all amounts required to be deposited therein pursuant to Section 4.05(a)(xiv) and Section 4.05(b)(xiv). Amounts on deposit therein shall be withdrawn by the Trustee at the direction of the Certificate Insurer and paid or deposited to either a Distribution Account, the distribution account of a Related Series or the Class R Certificateholders. Amounts on deposit in the FHA Reserve Fund shall be invested by the Trustee in Permitted Investments. Section 4.04. Distribution Accounts. (a) The Trustee has heretofore established with itself in its trust capacity at its corporate trust department for the benefit of Certificateholders of each Certificate Group and the Certificate Insurer an account each referred to herein as a "Distribution Account" for the Trust. The Trustee shall at all times maintain the Distribution Accounts as an Eligible Accounts and shall cause such accounts to be designated, in the case of the Group I Certificates, "First Trust of New York, National Association, as Trustee of the Mego Mortgage Home Loan Trust Series 1996-3, Distribution Account--Group I Certificates" and in the case of the Group II Certificates, "First Trust of New York, National Association, as Trustee of the Mego Mortgage Home Loan Trust 1996-3--Group II Certificates." Eligible Investments of amounts on deposit in the Distribution Account shall mature no later than the Business Day immediately preceding the Distribution Date related to the Due Period to which such amounts relate. (b) Except for amounts deposited into the FHA Premium Accounts, any and all moneys or Eligible Investments that are received by the Trustee from any Person with respect to a Loan Group, including pursuant to Sections 2.04(c), 3.12(b), 4.03(b), 4.10(c) or 9.01(d), together with any Eligible Investments in which such moneys are invested or reinvested prior to the termination of the Trust, shall be held by the Trustee in the related Distribution Account, subject to disbursement and withdrawal as herein provided. Section 4.05. Distributions. (a) On each Distribution Date, on the basis of the information set forth in the Master Servicer Certificate for the Group I Loans with respect to the related Determination Date, the Trustee shall distribute from amounts on deposit in the Distribution Account for the Group I Certificates, the following amounts in the following order of priority: (i) from the Collected Amount for the Group I Loans, for deposit in the related FHA Premium Account, the FHA Premium Account Deposit for the Group I Loans for such Distribution Date; (ii) from the Collected Amount for the Group I Loans, concurrently, to (a) the Master Servicer, the Master Servicer Fee for the Group I Loans and (b) the Servicer, the Servicer Fee for the Group I Loans for such Distribution Date; (iii) from the Collected Amount for the Group I Loans, to the Master Servicer or Servicer, any amount in respect of reimbursement of Interest Advances or Foreclosure Advances for the Group I Loans, to which the Master Servicer or any Servicer is entitled pursuant to Section 3.09 with respect to such Distribution Date and 75 81 to the Claims Administrator, amounts in reimbursement of any expenses for the Group I Loans, of filing of any FHA Insurance claim pursuant to Section 3.12(h); (iv) from the Collected Amount for the Group I Loans, to the Trustee, the Trustee Fee and any Additional Trustee Fee for the Group I Loans for such Distribution Date; (v) other than with respect to the Distribution Dates in December 1996, from the Collected Amount for the Group I Loans, to the Certificate Insurer, the Premium in respect of the Group I Certificates for such Distribution Date; (vi) from the Amount Available, to the holders of the Class IS Certificates, an amount equal to the applicable Class Interest Distribution for such Distribution Date; (vii) from the Amount Available, to holders of each Class of Group IA Certificates, an amount equal to the applicable Class Interest Distribution for such Distribution Date; (viii) from the Collected Amount for the Group I Loans, to the holders of the Group IA Certificates, subject to clause (2) following this paragraph, the Class A Principal Distribution for the Group I Certificates (other than the portion constituting Distributable Excess Spread) for such Distribution Date; (ix) from the Collected Amount for the Group I Loans, to the Certificate Insurer, the Reimbursement Amount; (x) from the Collected Amount for the Group I Loans, to the holders of the Group IA Certificates, subject to clause (2) following this paragraph, the Distributable Excess Spread for such Distribution Date; (xi) from the Amount Available, to the holders of the Group IA Certificates, subject to clause (2) following this paragraph, an amount equal to the Class A Guaranteed Principal Distribution Amount for the Group I Certificates, if any, for such Distribution Date; (xii) from the Collected Amount for the Group I Loans, to the Certificate Insurer, any other amounts with respect to the Group I Certificates owing to the Certificate Insurer under the Insurance Agreement; (xiii) from the Collected Amount for the Group I Loans, to any successor Master Servicer, if any, for such Distribution Date payable in accordance with Section 7.03(c) in addition to the Master Servicer Fee paid pursuant to Section 4.05(a)(ii); (xiv) from the Collected Amount for the Group I Loans, to the FHA Reserve Fund, any unpaid Excess Claim Amount; 76 82 (xv) from the Collected Amount for the Group I Loans, to the Person entitled thereto, payments in respect of Other Fees related to the Group I Loans; (xvi) from the Collected Amount for the Group I Loans, to the Group I Reserve Fund, any amount required to be deposited therein pursuant to Section 7.04 of the Insurance Agreement or after the occurrence and during the continuance of a Trigger Event and at the direction of the Certificate Insurer, to the holders of the Group IA Certificates, as principal, pro rata, based on the respective Class A Certificate Balances, until the respective Class A Certificates are reduced to zero.; and (xvii) the balance of any Collected Amount for the Group I Loans, to the Class R Certificateholders; provided, however, that any portion of the Amount Available for the Group I Certificates that constitutes an Insured Payment for any Distribution Date shall be applied only to payment of the amount referred to in clause (vi), clause (vii), and clause (xi) above, and provided further, with respect to any Distribution Date as to which (a) the Required OC Amount has been reduced below the Overcollateralization Amount or (b) a full distribution of the amounts referred to in clause 4.05(a)(viii) above would cause the Overcollateralization Amount to exceed the Required OC Amount, the amounts to be distributed pursuant to clause 4.05(a)(viii) shall be reduced by the amount of such reduction in the case of clause (a) above and the amount of such excess in the case of (b) above. (1) As to each Distribution Date, any shortfall in the amount of interest required to be distributed pursuant to Section 4.05(a)(vii) above, shall be allocated among the Group IA Certificates, in proportion to the amount each such Class would have been entitled to receive in the absence of such shortfall. (2) As to each Distribution Date, distributions pursuant to Section 4.05(a)(viii), (x) and (xi) shall be made to the Class A Certificates as follows: (i) prior to the occurrence and continuance of a Certificate Insurer Default, sequentially, to the holders of the Class IA-1 Certificates, Class IA-2 Certificates and Class IA-3 Certificates, in that order, until their respective Class A Certificate Balances have been reduced to zero; and (ii) upon the occurrence and continuance of a Certificate Insurer Default and upon the first reduction of the Overcollateralization Amount thereafter to zero, concurrently, to the holders of the Group IA Certificates then outstanding, pro rata, based upon their respective Class A Certificate Balances immediately prior to such Distribution Date. (b) On each Distribution Date, on the basis of the information set forth in the Master Servicer Certificate for the Group II Loans with respect to the related Determination Date, the Trustee shall distribute from amounts on deposit in the Distribution Account for the Group II Certificates, the following amounts in the following order of priority: 77 83 (i) from the Collected Amount for the Group II Loans, for deposit in the related FHA Premium Account, the FHA Premium Account Deposit for the Group II Loans for such Distribution Date; (ii) from the Collected Amount for the Group II Loans, concurrently, to (a) the Master Servicer, the Master Servicer Fee for the Group II Loans and (b) the Servicer, the Servicer Fee for the Group II Loans for such Distribution Date; (iii) from the Collected Amount for the Group II Loans, to the Master Servicer or Servicer, any amount in respect of reimbursement of Interest Advances or Foreclosure Advances for the Group II Loans, to which the Master Servicer or any Servicer is entitled pursuant to Section 3.09 with respect to such Distribution Date and to the Claims Administrator, amounts in reimbursement of any expenses for the Group II Loans, of filing of any FHA Insurance claim pursuant to Section 3.12(h); (iv) from the Collected Amount for the Group II Loans, to the Trustee, the Trustee Fee and any Additional Trustee Fee for the Group II Loans for such Distribution Date; (v) other than with respect to the Distribution Dates in December 1996, from the Collected Amount for the Group II Loans, to the Certificate Insurer, the Premium in respect of the Group II Certificates for such Distribution Date; (vi) from the Amount Available, to the Class IIS Certificateholders, an amount equal to the applicable Class Interest Distribution for such Distribution Date; (vii) from the Amount Available, to the holders of the Group IIA Certificates, an amount equal to the applicable Class Interest Distribution for such Distribution Date; (viii) from the Collected Amount for the Group II Loans, to the holders of the Group IIA Certificates, the Class A Principal Distribution for the Group II Certificates for such Distribution Date; (ix) from the Amount Available for the Group II Loans to the holders of the Group IIA Certificates, an amount equal to the Loss Carryforward Amount, if any, for such Distribution Date; (x) from the Collected Amount for the Group II Loans, to the Certificate Insurer, the Reimbursement Amount; (xi) from the Amount Available, to the holders of the Group IIA Certificates, an amount equal to the Class A Guaranteed Principal Distribution Amount for the Group II Certificates, if any, for such Distribution Date; (xii) from the Collected Amount for the Group II Loans, to the Certificate Insurer, any other amounts with respect to the Group II Certificates owing to the Certificate Insurer under the Insurance Agreement; 78 84 (xiii) from the Collected Amount for the Group II Loans, to any successor Master Servicer, if any, for such Distribution Date payable in accordance with Section 7.03(c) in addition to the Master Servicer Fee paid pursuant to Section 4.05(b)(ii); (xiv) from the Collected Amount for the Group II Loans, to the FHA Reserve Fund, any unpaid Excess Claim Amount (giving effect to any amounts to be distributed pursuant to Section 4.05(a)(xiv) on such Distribution Date); (xv) from the Collected Amount for the Group II Loans, to the Person entitled thereto, payments in respect of Other Fees related to the Group II Loans; (xvi) from the Collected Amount for the Group II Loans, to the Group II Reserve Fund, any amount required to be deposited therein pursuant to Section 7.04 of the Insurance Agreement; and (xvii) the balance of any Collected Amount for the Group II Loans, to the Seller. provided, however, that any portion of the Amount Available for the Group II Certificates that constitutes an Insured Payment for any Distribution Date shall be applied only to payment of the amount referred to in clause (vi), clause (vii), and clause (xi) above. (c) If any amount is deposited in either Distribution Account in error, the Master Servicer may notify the Trustee and the Certificate Insurer (such notice to be signed by a Master Servicing Officer) of the amount of such deposit and in connection therewith shall be required to provide such information to the Trustee and the Certificate Insurer as may be necessary in the opinion of the Trustee and the Certificate Insurer to verify the accuracy of such certification. Upon verification of the accuracy of such certification to the satisfaction of the Trustee and the Certificate Insurer, the Trustee shall then promptly withdraw the erroneous deposit and remit the same to the Master Servicer or to such Person as the Master Servicer shall designate. (d) As directed by the Master Servicer (such direction to be signed by a Master Servicing Officer), the Trustee shall withdraw on the Business Day, the amount, designated by the Master Servicer from the applicable Distribution Account of funds to repurchase any FHA Loan from FHA pursuant to Section 3.12(f). If such withdrawal is to be made between a Determination Date and the related Distribution Date, the Master Servicer shall prepare the related Master Servicer Certificate (or promptly revise the Master Servicer Certificate if already prepared) for such Distribution Date to reflect such withdrawal. Section 4.06. FHA Premium Accounts. (a) FHA Premium Account. The Trustee has heretofore established with itself in its trust capacity at its corporate trust department two segregated trust accounts each referred to herein as a "FHA Premium Account" for the benefit of the Trust. The Trustee shall at all times maintain each FHA Premium Account as an Eligible Account and shall cause such accounts to be designated as "First Trust of New York, National Association, as Trustee 79 85 for Mego Mortgage Home Loan Trust 1996-3, FHA Premium Account--Group I Loans" and "First Trust of New York, National Association as Trustee for Mego Mortgage Home Loan Trust 1996-3 FHA Premium Account--Group II Loans". (b) Any and all moneys with respect to a Loan Group transferred to the applicable FHA Premium Account pursuant to Section 4.03(c), Section 4.05(a)(i) or Section 4.05(b)(i) shall be held by the Trustee in the FHA Premium Account subject to disbursement and withdrawal as herein provided. (c) All amounts deposited to an FHA Premium Account shall be invested and reinvested by the Trustee pursuant to Section 4.07(a) in one or more Eligible Investments. (d) Amounts on deposit in an FHA Premium Account shall be withdrawn by the Trustee, in the amounts required, for application as follows: (i) to payment to the FHA of any premiums due on the Contract of Insurance in respect of FHA Loans in the related Loan Group, in such amounts and on such dates as directed by the Master Servicer or Mego; the Trustee shall apply all amounts on deposit in the related FHA Premium Account to payment to the FHA of any premiums due under the Contract of Insurance as invoiced by FHA and, if, in connection with an FHA Loan in the related Loan Group the FHA Insurance with respect to which shall not yet have been transferred to the Contract of Insurance, Mego instructs the Trustee to pay FHA insurance with respect to such Loan to the related contract of insurance holder, the Trustee shall make such payment, and Mego and not the Trustee shall be liable in the event of the failure of such funds to be applied to payment of the premium with respect to such FHA Loan; and (ii) on the Business Day preceding a Distribution Date that is also the Termination Date, the Trustee shall withdraw from each FHA Premium Account and deposit in the related Distribution Account all amounts then on deposit in such FHA Premium Account, whereupon the each FHA Premium Account shall terminate. Section 4.07. General Provisions Regarding the Accounts; Eligible Accounts. (a) All investments of funds in the Accounts shall be made by the Trustee in accordance with an Investment Order previously delivered to the Trustee. Eligible Investments of amounts on deposit in the Accounts, unless payable on demand or as otherwise specified herein, shall mature no later than the second Business Day immediately preceding the Distribution Date related to the Due Period to which such amounts relate. Amounts on deposit in each FHA Premium Account shall be invested in Eligible Investments which are overnight investments for the period from the Business Day immediately preceding the Distribution Date to the date on which the Master Servicer indicates the amount to be withdrawn therefrom pursuant to Section 4.06(d)(i). In the event amounts on deposit in an Account are at any time invested in an Eligible Investment payable on demand, the Trustee shall demand that payment thereon be made on the last day such Eligible Investment may otherwise mature hereunder. 80 86 (b) Any investment of funds in an Account shall be made in the name of the Trustee (in its capacity as such) or in the name of a nominee of the Trustee. The Trustee shall have sole control over each such investment, the income thereon and the proceeds thereof. Any certificate or other instrument evidencing any such investment shall be delivered directly to the Trustee or its agent, together with any document of transfer necessary to transfer title to such investment to the Trustee or its nominee. The Trustee or its agent, as the case may be, shall take and maintain continuous physical possession of any such certificate or other instrument and the proceeds thereof in the State of Minnesota. The Trustee or its agent, as the case may be, shall in the case of Eligible Investments deposited in all Accounts, act in connection therewith solely as agent for the Trust and not as agent for Mego, the Depositor or any other party. Any certificated security, when so delivered in registered form, shall be issued or endorsed to the Trustee, its nominee or in blank. Any uncertificated security shall either (i) be registered in the name of the Trustee or its nominee on the books of the issuer thereof or (ii) be registered in the name of a financial intermediary which is not a clearing corporation, provided that such financial intermediary sends the Trustee written confirmation of such purchase which also confirms that such financial intermediary has by book-entry or otherwise identified such uncertificated securities as belonging to the Trustee or its nominee. The proceeds of an investment at maturity or upon demand shall be remitted by the issuer thereof or its agent directly to the Trustee for deposit in the Account as to which such investment was made and all earnings on investments shall be added to the corpus of the respective Account. (c) The Trustee shall not be in any way liable by reason of any insufficiency in the Accounts, except for losses on investments that are liabilities of the Trustee in its commercial capacity. Mego shall deposit in the Collection Account or the Distribution Account, as the case may be, the amount of any loss incurred in respect of any Eligible Investment held therein which is in excess of the income thereon immediately upon realization of such loss, without any right to reimbursement therefor, from its own funds. (d) Any Investment Order shall be effective upon receipt thereof by the Trustee. Any Investment Order delivered to the Trustee with respect to funds on deposit in an Account shall be revocable only upon written notice delivered by the Depositor to the Trustee. Revocation of any Investment Order pursuant to any such notice shall be effective on the later of (i) the date of receipt thereof by the Trustee, and (ii) the date specified therein. Revocation of an Investment Order shall not affect investments already made pursuant thereto. (e) In the event that any account required to be an Eligible Account hereunder ceases to be an Eligible Account, the Trustee shall within 5 Business Days establish a new account which shall be an Eligible Account and any cash and Eligible Investments in such original account shall be transferred to such Eligible Account. Section 4.08. Statements to Certificateholders. (a) On or before the third Business Day following each Distribution Date, the Trustee shall mail: 81 87 (i) to each Holder of a Senior Certificate (with a copy to the Certificate Insurer and the Rating Agency) at its address shown on the Certificate Register a statement, based on information set forth in the Master Servicer Certificate for such Distribution Date, substantially in the form of Trustee's Statement to Senior Certificateholders of the Group I Certificates and the Group II Certificates attached hereto as Exhibit F-1 and F-2, respectively, together with a copy of such related Master Servicer Certificate; (ii) to each Holder of a Class R Certificate (with a copy to the Certificate Insurer) at its address shown on the Certificate Register a statement, based on information set forth in the Master Servicer Certificate for such Distribution Date substantially in the form of Trustee's Statement to Class R Certificateholders attached hereto as Exhibit F-1. (b) Promptly following preparation by Trustee of any returns or reports described in Section 8.12(b)(i), the Trustee shall: (i) sign such returns or reports as may be required pursuant to the last paragraph of Section 8.12(b); and (ii) mail such returns or reports as may be required by applicable law to each Holder of a Senior Certificate and to each Holder of a Class R Certificate, at their respective addresses shown on the Certificate Register. (c) The Trustee shall provide the Depositor, the Rating Agency and the Certificate Insurer each statement called for by (a)(i) and (ii) above and each report or return called for by (b)(i) and (ii) above at such times as such statements, reports and returns are required to be provided to the recipients thereof in accordance with the terms of such provisions. Section 4.09. [Reserved] Section 4.10. Claims Under the Policies. (a) On the Determination Date preceding each Distribution Date, the Trustee shall determine if a Deficiency Amount exists with respect to each Class of Senior Certificates. If a Deficiency Amount does exist with respect to a Class of Senior Certificates, the Trustee shall promptly, but in no event later than 12:00 noon New York City time on the second Business Day preceding the related Distribution Date, make a claim under the related Policy for such Class in accordance with its terms. (b) On any date on which the Trustee receives written notice from the Holder of a Class of Senior Certificates that a Preference Amount is payable pursuant to the terms of the related Policy, the Trustee shall make a claim for the payment of such Preference Amount and shall deliver the documents required to be delivered under such Policy to the Certificate Insurer with respect thereto in the manner set forth in such Policy. 82 88 (c) The Trustee shall (i) receive as attorney-in-fact of each Holder of a Senior Certificate with respect to which a Deficiency Amount has been determined to exist, any Insured Payment from the Certificate Insurer under the related Policy and deposit such Insured Payment in the Distribution Account of the Certificate Group to which such Deficiency Amount relates on the date of receipt and (ii) immediately disburse such Insured Payments to such Holders of such Class of Senior Certificates as set forth in Sections 4.05(a) and 4.05(b), as applicable. Insured Payments for a Class of Senior Certificates disbursed by the Trustee from the Policy shall not be considered payment by the Trust with respect to such Class of Senior Certificates, nor shall such payments discharge the obligation of the Trust, with respect to such Class of Senior Certificates, and the Certificate Insurer shall become the owner of such unpaid amounts due from the Trust in respect of Insured Payments for such Class and the deemed assignee of such Holders of such Class of Senior Certificates. The Trustee hereby agrees on behalf of each Holder of a Class of Senior Certificates for the benefit of the Certificate Insurer that it recognizes that to the extent the Certificate Insurer makes Insured Payments for such Class, either directly or indirectly (as by paying through the Trustee), to the Holders of such Class of Senior Certificates, the Certificate Insurer will be entitled to receive the related Reimbursement Amount pursuant to Section 4.05(a)(ix), if such Class is a class of Group I Certificates or Section 4.05(b)(ix), if such Class is a class of Group II Certificates. (d) To the extent of any Insured Payment for a Class of Senior Certificates under the related Policy, the Certificate Insurer shall be fully subrogated to the rights of the Holders of such Class of Senior Certificates and the Trustee in respect of such Class of Senior Certificates, the Deficiency Amount or Preference Amount giving rise to such Insured Payment or in any proceedings relating thereto. 83 89 ARTICLE V The Certificates Section 5.01. The Certificates. (a) Each Class A Certificate shall be substantially in the form of Exhibit C-1 hereto, each Class S Certificate shall be substantially in the form of Exhibit C-2 hereto and each Class R Certificate shall be substantially in the form of Exhibit D hereto, in each case with such appropriate insertions and substitutions as are required or permitted hereunder, and shall, on original issue, be executed on behalf of the Trust by manual or facsimile signature of a Responsible Officer of the Trustee having such authority under the Trustee's seal imprinted or otherwise affixed therein and attested on behalf of the Trustee by the manual or facsimile signature of any other Responsible Officer of the Trustee. The maximum and initial Class A Certificate Balance of the Class A Certificates authorized to be issued hereunder shall be equal to the Initial Class A Certificate Balance, and each Class of Senior Certificates shall bear interest at the applicable Certificate Rate. The Class A Certificates shall be issued in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof (except that one Certificate may be issued in an amount that is not an integral multiple of $1,000). The Class S Certificates shall be issued in minimum denominations of a Percentage Interest equal to 10% and integral multiples of a Percentage Interest equal to 10% in excess thereof. One Class of residual Certificates is authorized to be issued hereunder, designated as the "Class R Certificates." The Class R Certificates shall be issued in minimum denominations representing a one twentieth (i.e., 5%) Residual Interest. No Certificate shall be entitled to any benefit under this Agreement, or be valid for any purpose, unless there appears on such Certificate a execution by the Trustee by manual or facsimile signature, and such signature upon any Certificate shall be conclusive evidence, and the only evidence, that such Certificate has been duly executed and delivered hereunder. Each Certificate shall be dated the date of its signature. Certificates of each Class shall be numbered consecutively beginning with 0001 and each number shall be preceded by an "A" for Class A Certificates, an "S" for Class S Certificates and an "R" for Class R Certificates. The Trustee shall cause to be executed and delivered to or upon the order of the Depositor, in exchange for the Loans and the other Trust Property, simultaneously with the sale, assignment and transfer to the Trustee of Loans, Files and the other Trust Property, Certificates duly executed by the Trustee evidencing the entire ownership of the Trust. (b) Any Certificate as to which the Trustee has made the final distribution thereon shall be deemed cancelled and shall no longer be Outstanding for any purpose of this Agreement, whether or not such Certificate is ever returned to the Trustee. Section 5.02. Registration of Transfer and Exchange of Certificates. (a) The Trustee shall keep or cause to be kept at an office or agency in the city where the Corporate Trust Office is located, a Certificate Register for each Class of Certificates in which, subject to such reasonable regulations as it may prescribe, the Trustee shall provide for the registration of Certificates of such Class and of transfers and exchanges of such Certificates as herein provided. The Trustee shall also designate and cause to be kept in the City of New York an office at and through which Certificates may be delivered to and 84 90 received from the Trustee for purposes of transfers and exchanges as herein provided. The Trustee shall initially serve as Certificate Registrar for the purpose of registering Certificates as herein provided. The Trustee may appoint, by a written instrument delivered to the Master Servicer, any other bank or trust company to act as Certificate Registrar under such conditions as the Master Servicer may prescribe. If the Trustee shall at any time not be the Certificate Registrar, the Trustee shall have and maintain the right to inspect the Certificate Register or to obtain a copy thereof at all reasonable times, to afford Certificateholders access thereto for the purposes specified in Section 10.08, and to rely conclusively upon a certificate of the Certificate Registrar as to the information set forth in the Certificate Register. (b) (1) No transfer of a Class S or Class R 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. In the event of any such transfer, (i) unless such transfer is made in reliance upon Rule 144A under the 1933 Act, the Trustee or the Depositor may require a written Opinion of Counsel (which may be in-house counsel) acceptable to and in form and substance reasonably satisfactory to the Trustee and the Depositor 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 Depositor and (ii) the Trustee shall require the transferee to execute an investment letter (in substantially the form attached hereto as Exhibit I or Exhibit J) acceptable to and in form and substance reasonably satisfactory to the Depositor and the Trustee certifying to the Depositor and the Trustee the facts surrounding such transfer, which investment letter shall not be an expense of the Trustee or the Depositor. The Holder of a Class S or Class R Certificate desiring to effect such transfer shall, and does hereby agree to, indemnify the Trustee and the Depositor 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. (2) Except as provided 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) registration of the Book-Entry Certificates may not be transferred 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 transfers of such Book-Entry Certificates; (iii) ownership and transfers of registration of the Book-Entry 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, Depository Participants and indirect participating firms as representatives of the Certificate Owners of the Book-Entry Certificates for purposes of exercising the rights of Holders under this Agreement, and requests and directions for and votes of such representatives 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 85 91 representing such Certificate Owner. Each Depository Participant shall only transfer Book-Entry Certificates of Certificate Owners it represents or of brokerage firms for which it acts as agent in accordance with the Depository's normal procedures. If (x) (i) the Depository or the Depositor advises the Trustee in writing that the Depository is no longer willing or able to properly discharge its responsibilities as Depository, and (ii) the Trustee or the Depositor is unable to locate a qualified successor, (y) the Depositor at its option, with the consent of the Certificate Insurer, advises the Trustee in writing that it elects to terminate the book-entry system through the Depository or (z) after the occurrence of an Event of Master Servicing Termination, the Certificate Insurer or Certificate Owners representing at least 51% of the Voting Rights evidenced by the Class A Certificates, with the consent of the Certificate Insurer, advise the Trustee and the Depository through the Depository Participants in writing that the continuation of a book-entry system through the Depository is no longer in the best interests of the Certificate Owners, the Trustee shall notify all Certificate Owners, through the Depository, of the occurrence of any such event and of the availability of definitive, fully-registered Class A Certificates (the "Definitive Certificates") to Certificate Owners requesting the same. Upon surrender to the Trustee of such Book-Entry Certificates by the Depository, accompanied by the instructions from the Depository for registration, the Trustee shall issue the Definitive Certificates. None of the Seller, the Master Servicer, the Depositor, the Certificate Insurer or the Trustee shall be liable for any delay in delivery of such instruction and each 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 shall recognize the Holders of the Definitive Certificates as Certificateholders hereunder; provided that the Trustee shall not by virtue of its assumption of such obligations become liable to any party for any act or failure to act of the Depository. Neither the Trustee nor the Certificate Registrar shall have any responsibility to monitor or restrict the transfer of beneficial ownership in any Certificate an interest in which is transferable through the facilities of the Depository. (3) No Transfer of a Class IS, Group II Certificate or Class R Certificate shall be made unless the Trustee shall have received either (i) a representation letter from the transferee of such Certificate acceptable to and in form and substance satisfactory to the Trustee, to the effect that such transferee is not an employee benefit plan or arrangement subject to Section 406 of ERISA or a plan subject to Section 4975 of the Code, nor a person acting on behalf of any such plan or arrangement nor using the assets of any such plan or arrangement to effect such Transfer, (ii) if the purchaser is an insurance company, a representation that the purchaser is an insurance company which is purchasing such Certificates with funds contained in an "insurance company general account" (as such term is defined in Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and holding of such Certificates are covered under PTCE 95-60 or (iii) in the case of any Class R Certificate presented for registration in the name of an employee benefit plan subject to ERISA, or a plan or arrangement subject to Section 4975 of the Code (or comparable provisions of any subsequent enactments), or a trustee of any such plan or any other person acting on behalf of any such plan or arrangement or using such plan's or arrangement's assets, an Opinion of Counsel satisfactory to the Trustee, which Opinion of 86 92 Counsel shall not be an expense of either the Trustee or the Trust, addressed to the Trustee, to the effect that the purchase or holding of such Class S or Class R Certificate will not result in the assets of the Trust being deemed to be "plan assets" and subject to the prohibited transaction provisions of ERISA and the Code and will not subject the Trustee to any obligation in addition to those expressly undertaken in this Agreement or to any liability. Notwithstanding the foregoing, the Trustee shall waive the transfer restrictions imposed by this Section 5.02(b)(3) with respect to the Class IS Certificates, if the initial transferee of the Class S Certificates certifies in writing to the Trustee that such transferee has a valid Exemption and all requirements for transfer of the Class S Certificates pursuant to such Exemption are satisfied. (c) Subject to subsection (b) of this Section and subject to Article XI, upon surrender for registration of transfer of a Certificate of any Class at the office or agency of the Trustee maintained for such purpose pursuant to Section 5.02(a), the Trustee shall execute, authenticate and deliver, in the name of the designated transferee or transferees, one or more new Certificates of the same Class in authorized denominations of the same Percentage Interest. (d) At the option of Certificateholders, Certificates of any Class may be exchanged for other Certificates of the same Class and aggregate Percentage Interests, upon surrender of the Certificates to be exchanged at any such office or agency. Whenever any Certificates are so surrendered for exchange, the Trustee shall execute, authenticate and deliver the Certificates which the Certificateholder making the exchange is entitled to receive. Every Certificate presented or surrendered for transfer or exchange shall be duly endorsed by, or be accompanied by a written instrument of transfer in form satisfactory to the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing. (e) No service charge shall be made for any transfer or exchange of Certificates, but the Trustee may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Certificates. (f) All Certificates surrendered for transfer, exchange or payment shall be disposed of by the Certificate Registrar in accordance with its standard procedures. (g) Transfers of Class R Certificates shall be subject to the provisions of Article XI. Section 5.03. Mutilated, Destroyed, Lost or Stolen Certificates. If (a) any mutilated Certificate is surrendered to the Certificate Registrar or the Trustee, or the Certificate Registrar and the Trustee, the Depositor and the Certificate Insurer receive evidence to their satisfaction of the destruction, loss or theft of any Certificate, and (b) there is delivered to the Certificate Registrar, the Certificate Insurer and the Trustee, the Depositor and the Certificate Insurer such security or indemnity as may be required by them to save each of them harmless (which in the case of a Certificateholder that is an institutional investor with a minimum net worth of $250,000,000, will be deemed to be satisfied by a written agreement of indemnity from such Certificateholder, then, in the absence of notice 87 93 to the Certificate Registrar or the Trustee that such Certificate has been acquired by a bona fide purchaser, the Trustee shall execute on behalf of the Trust and the Trustee shall countersign and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of the same Class and Percentage Interest, as such mutilated, destroyed, lost or stolen Certificate, in each case bearing a number not borne by any then Outstanding Certificate of any Class. Upon the issuance of any new Certificate under this Section 5.03, the Trustee 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 Certificate Registrar) connected therewith. Any Certificate issued pursuant to this Section 5.03 shall constitute complete and indefeasible evidence of the same interest in the Trust, and shall be entitled to the same benefits under this Agreement, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time. Section 5.04. Persons Deemed Owners. Prior to due presentation of a Certificate for registration of transfer, the Trustee, the Certificate Insurer, the Certificate Registrar and any agent of the Trustee, the Certificate Insurer or the Certificate Registrar may treat the Person in whose name any Certificate is registered (i) on any Record Date for purposes of making distributions on the following Distribution Date, whether or not any distribution required to be made on such Certificate shall have been made when scheduled, and (ii) on any date for any other purpose, as the owner of such Certificate, and neither the Trustee, the Certificate Insurer, the Certificate Registrar nor any agent of the Trustee, the Certificate Insurer or the Certificate Registrar shall be affected by notice to the contrary, except, with respect to a Class R Certificate, for notice by the Master Servicer pursuant to Section 11.02 that the record holder is not a Permitted Transferee, and in such case the provisions of Section 11.02 shall apply. Section 5.05. Trustee to Make Payments From Trust Only. All distributions to be made by the Trustee in respect of the Certificates or under this Agreement shall be made only from the Trust Property. Each Certificateholder, by its acceptance of a Certificate, agrees that it will look solely to the Trust Property to the extent available for distribution to it as herein provided and that the Trustee is not personally liable to it for any amount distributable in respect of any Certificate or for any other liability in respect of any Certificate. This Section is intended solely to limit the liability of the Trustee and shall have no effect on the obligations of the Depositor, Mego or the Master Servicer under this Agreement. This Section 5.05 does not limit the liability of the Trustee set forth elsewhere in this Agreement for violations of its representations, warranties and covenants contained herein. 88 94 ARTICLE VI The Master Servicer Section 6.01. Liability of the Master Servicer. (a) 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 and the representations made by the Master Servicer. (b) The Master Servicer shall indemnify, defend and hold harmless the Trust, the Trustee, Mego, the Depositor and the Certificate Insurer, their respective officers, directors, agents and employees and the Certificateholders from and against any and all costs, expenses, losses, claims, damages, and liabilities to the extent that such cost, expense, loss, claim, damage or liability arose out of, or was imposed upon the Trustee, the Trust, Mego, the Depositor, the Certificate Insurer or the Certificateholders through the breach of this Agreement by the Master Servicer, the negligence, willful misfeasance, or bad faith of the Master Servicer in the performance of its duties under this Agreement or by reason of reckless disregard of its obligations and duties under this Agreement. Such indemnification shall include, without limitation, reasonable fees and expenses of counsel and expenses of litigation. Section 6.02. Merger or Consolidation of, or Assumption of, the Master Servicer. The Master Servicer shall not merge or consolidate with any other person, convey, transfer or lease substantially all its assets as an entirety to another Person, or permit any other Person to become the successor to the Master Servicer's business unless, after the merger, consolidation, conveyance, transfer, lease or succession, the successor or surviving entity (i) shall be an Eligible Servicer, (ii) shall be capable of fulfilling the duties of the Master Servicer contained in this Agreement and (iii) shall have a long-term debt rating which is BBB and Baa2 by Standard & Poor's and Moody's respectively. Any corporation (i) into which the Master Servicer may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Master Servicer shall be a party, (iii) which acquires by conveyance, transfer or lease substantially all of the assets of the Master Servicer, or (iv) succeeding to the business of the Master Servicer, in any of the foregoing cases shall execute an agreement of assumption to perform every obligation of the Master Servicer under this Agreement and, whether or not such assumption agreement is executed, shall be the successor to the Master Servicer under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement, anything in this Agreement to the contrary notwithstanding; provided, however, that nothing contained herein shall be deemed to release the Master Servicer from any obligation. The Master Servicer shall provide notice of any merger, consolidation or succession pursuant to this Section 6.02 to the Trustee, the Certificate Insurer and each Rating Agency. Notwithstanding the foregoing, as a condition to the consummation of the transactions referred to in clauses (i) through (iv) above, (x) immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 6.06 shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction), (y) the 89 95 Master Servicer shall have delivered to the Trustee and the Certificate Insurer an Officer's Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section 6.02 and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, and (z) the Master Servicer shall have delivered to the Trustee and the Certificate Insurer an Opinion of Counsel, stating, in the opinion of such counsel, either (A) all financing statements and continuation statements and amendments thereto have been executed and filed that are necessary to preserve and protect the interest of the Trustee in the Trust Property and reciting the details of the filings or (B) no such action shall be necessary to preserve and protect such interest. Section 6.03. Limitation on Liability of the Master Servicer and Others. Neither the Master Servicer nor any of its directors, officers, employees or agents shall be under any liability to the Trust or to the Certificateholders for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Master Servicer or any such Person against any breach of warranties, representations or covenants made herein or any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in performing or failing to perform duties hereunder or by reason of reckless disregard of obligations and duties hereunder. The Master Servicer and any of its directors, officers, employees or agents 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. Section 6.04. Master Servicer Not to Resign; Expenses; Assignment. (a) The Master Servicer shall not resign from the obligations and duties hereby imposed on it except (i) with the consent of the Certificate Insurer and the Rating Agencies or (ii) upon determination that by reason of a change in legal requirements the performance of its duties under this Agreement would cause it to be in violation of such legal requirements in a manner which would result in a material adverse effect on the Master Servicer and the Certificate Insurer (so long as an Certificate Insurer Default shall not have occurred and be continuing) does not elect to waive the obligations of the Master Servicer to perform the duties which render it legally unable to act or to delegate those duties to another Person. Any such determination permitting the resignation of the Master Servicer shall be evidenced by an Opinion of Counsel to such effect delivered and acceptable to the Trustee and the Certificate Insurer (unless a Certificate Insurer Default shall have occurred and be continuing). No resignation of the Master Servicer shall become effective until the Trustee or a successor servicer acceptable to the Certificate Insurer shall have assumed the Master Servicer's servicing responsibilities and obligations in accordance with Section 7.02. (b) Notwithstanding anything to the contrary herein, the Master Servicer shall remain liable for all liabilities and obligations incurred by it as Master Servicer hereunder prior to the time that any resignation or assignment referred to in subsection (a) above or termination under Section 7.01 becomes effective, including the obligation to indemnify the Trustee pursuant to Section 8.05(b) hereof in connection with the Trustee's administration of the trusts created by this Agreement prior to such resignation, assignment or termination. 90 96 (c) The Master Servicer agrees to cooperate with any successor Master Servicer in effecting the transfer of the Master Servicer's servicing responsibilities and rights hereunder pursuant to subsection (a), including, without limitation, the transfer to such successor of all relevant records and documents (including any Files in the possession of the Master Servicer and the Servicing Record) and all amounts credited to the Servicing Record or thereafter received with respect to the Loans and not otherwise permitted to be retained by the Master Servicer pursuant to this Agreement. In addition, the Master Servicer, at its sole cost and expense, shall prepare, execute and deliver any and all documents and instruments, deliver to the successor Master Servicer all Files and do or accomplish all other acts necessary or appropriate to effect such termination and transfer of servicing responsibilities, including, without limitation, assisting in obtaining any necessary approval under Title I from the FHA. Section 6.05. Master Servicer May Own Certificates. Each of the Master Servicer and any affiliate of the Master Servicer may in its individual or any other capacity become the owner or pledgee of Certificates with the same rights as it would have if it were not the Master Servicer or an affiliate thereof except as otherwise specifically provided herein. Certificates so owned by or pledged to the Master Servicer or such affiliate shall have an equal and proportionate benefit under the provisions of this Agreement, without preference, priority, or distinction as among all of the Certificates, provided that any Certificates owned by the Master Servicer or any Affiliate thereof, during the time such Certificates are owned by them, shall be without voting rights for any purpose set forth in this Agreement. The Master Servicer shall notify the Trustee and the Certificate Insurer promptly after it or any of its affiliates becomes the owner or pledgee of a Certificate. Section 6.06. Representations and Warranties of the Master Servicer. The Master Servicer hereby represents and warrants to the Depositor, Mego, the Certificate Insurer and the Trustee, for the benefit of the Certificateholders as of the Closing Date: (a) The Master Servicer is a national banking association duly organized and validly existing under the laws of the United States of America, with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted; (b) The Master Servicer has the full power and authority to execute, deliver and perform, and to enter into and consummate all transactions contemplated by this Agreement and each other Transaction Document to which it is a party, has duly authorized the execution, delivery and performance of this Agreement and each other Transaction Document to which it is a party, has duly executed and delivered this Agreement and each other Transaction Document to which it is a party, and this Agreement and each other Transaction Document to which it is a party, when duly authorized, executed and delivered by the other parties thereto, will constitute a legal, valid and binding obligation of the Master Servicer, enforceable against it in accordance with its terms; 91 97 (c) Neither the execution and delivery of this Agreement or any other Transaction Document to which the Master Servicer is a party, the consummation of the transactions required of the Master Servicer herein or therein, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any other Transaction Document to which the Master Servicer is a party will conflict with or result in a breach of any of the terms, conditions or provisions of the Master Servicer's charter or bylaws or any legal restriction or any material agreement or instrument to which the Master Servicer is now a party or by which it is bound, or which would adversely affect the creation or administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Master Servicer or its property is subject; (d) The Master Servicer is not in default, and the execution and delivery of this Agreement and each other Transaction Document to which it is a party and its performance of and compliance with the terms hereof and thereof will not constitute a violation of, any law, any order or decree of any court, or any order, regulation or demand of any federal, state or local governmental or regulatory authority; (e) No action, suit or other proceeding or investigation is pending or, to the Master Servicer's knowledge, threatened before any court or any federal, state or local governmental or regulatory authority (A) asserting the invalidity of this Agreement or any other Transaction Document to which the Master Servicer is a party, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which the Master Servicer is a party, or (C) seeking any determination or ruling that would materially and adversely affect the ability of the Master Servicer to perform its obligations under this Agreement or any other Transaction Document to which the Master Servicer is a party (including any threatened or pending action, suit, proceeding or investigation which might result in the suspension, revocation or modification of the Contract of Insurance); (f) No consent, approval, authorization or order of, registration or filing with or notice to, any court or any federal, state or local government or regulatory authority is required for the execution, delivery and performance by the Master Servicer of this Agreement or any other Transaction Document to which the Master Servicer is a party (other than those that have been obtained or will be obtained prior to the Closing Date); (g) Neither this Agreement nor any other Transaction Document to which the Master Servicer is a party nor any statement, report or other document furnished or to be furnished by the Master Servicer pursuant to this Agreement or any other Transaction Document to which the Master Servicer is a party or in connection with the transactions contemplated hereby and thereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading; (h) The statements contained in the section of the Prospectus Supplement entitled "The Master Servicer" which describe the Master Servicer are true and correct in all material respects, and such section of the Prospectus Supplement does not contain any untrue statement of a material fact with respect to the Master Servicer and does not omit to state 92 98 a material fact necessary to make the statements contained therein with respect to the Master Servicer not misleading; (i) The Master Servicer is solvent, and the Master Servicer will not be rendered insolvent as a result of the performance of its obligations pursuant to this Agreement and any other Transaction Document to which the Master Servicer is a party; (j) The Servicing Agreement conforms to the requirements for a Servicing Agreement contained in this Agreement; (k) Each FHA Loan will be serviced by the Master Servicer and the Servicer in compliance with Title I and all other applicable laws; (l) The Servicer is an Eligible Servicer, and the Master Servicer possesses all state and federal licenses necessary for servicing the Loans in accordance with this Agreement; (m) The Master Servicer has not waived any default, breach, violation or event of acceleration existing under any Note or the related Mortgage; and (n) The Master Servicer has caused and will cause to be performed any and all acts required to be performed by the Master Servicer or Servicer to preserve the rights and remedies of the Trustee in any Insurance Policies applicable to the Loans including, without limitation, in each case, any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Trustee. It is understood and agreed that the representations and warranties set forth in this Section 6.06 shall survive the issuance and delivery of the Certificates and shall be continuing as long as any Certificate shall be outstanding or this Agreement has not been terminated. Section 6.07. General Covenants of the Master Servicer. The Master Servicer covenants and agrees for the benefit of the Depositor, Mego, the Certificate Insurer and the Trustee for the benefit of the Certificateholders that until the Termination Date: (a) The Master Servicer shall comply with, and shall service, or cause to be serviced, each Loan, in accordance with all applicable laws, and, in particular, in accordance with the National Housing Act, as amended and supplemented, all rules and regulations issued thereunder, and all administrative publications published pursuant thereto including, in the case of the FHA Loans, all FHA requirements of FHA Title I loans. (b) The Master Servicer agrees that, so long as it shall continue to serve in the capacity contemplated under the terms of this Agreement, it shall remain in good standing under the laws governing its creation and existence and qualified under the laws of each state in which it is necessary to perform its obligations under this Agreement or in which the nature 93 99 of its business requires such qualification, it shall maintain all licenses, permits and other approvals required by any law or regulations, including, without limitation Title I, as may be necessary to perform its obligations under this Agreement and to retain all rights to service the Loans, and it shall not dissolve or otherwise dispose of all or substantially all of its assets. 94 100 ARTICLE VII Master Servicer Termination Events Section 7.01. Master Servicer Termination Events; Waiver. For purposes of this Agreement, each of the following shall constitute a "Master Servicer Termination Event": (a) (i) failure by the Master Servicer to deposit or cause the Servicer to deposit all Payments in the related Collection Account no later than the second Business Day following receipt thereof by the Master Servicer or Servicer, which failure continues unremedied for two Business Days; (ii) failure by the Master Servicer to make any required Interest Advance pursuant to Section 3.08; (iii) failure of the Master Servicer to pay when due any amount payable by it under the Insurance Agreement, which failure continues unremedied for two Business Days; or (iv) failure of the Master Servicer to pay when due any amount payable by it under this Agreement and such failure results in a drawing under the related Policy; or (b) failure on the part of the Master Servicer duly to observe or perform in any material respect any of its other covenants or agreements contained in this Agreement that continues unremedied for a period of 30 days after the earlier of (x) the date on which the Master Servicer gives notice of such failure to the Trustee or the Certificate Insurer pursuant to Section 3.04(b) and (y) 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 Certificate Insurer, or to the Master Servicer and the Trustee pursuant to a Class Vote; or (c) failure by the Master Servicer to deliver to the Trustee and (so long as a Certificate Insurer Default shall not have occurred and be continuing) the Certificate Insurer the Master Servicer Certificate by the fourth Business Day prior to each Distribution Date, or failure on the part of the Master Servicer to observe its covenants and agreements set forth in Section 6.07(a); or (d) the entry of a decree or order for relief by a court or regulatory authority having jurisdiction in respect of the Master Servicer in an involuntary case under the federal bankruptcy laws, as now or hereafter in effect, or another present or future, federal or state, bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Master Servicer or of any substantial part of their respective properties or ordering the winding up or liquidation of the affairs of the Master Servicer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the commencement of an involuntary case under the federal bankruptcy laws, as now or hereinafter in effect, or another present or future federal or state bankruptcy, insolvency or similar law and such case is not dismissed within 60 days; or (e) the commencement by the Master Servicer of a voluntary case under the federal bankruptcy laws, as now or hereinafter in effect, or any other present or future, federal or state bankruptcy, insolvency or similar law, or the consent by the Master Servicer 95 101 to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Master Servicer or of any substantial part of its property or the making by the Master Servicer of an assignment for the benefit of creditors or the failure by the Master Servicer generally to pay its debts as such debts become due or the taking of corporate action by the Master Servicer in furtherance of any of the foregoing or the admission in writing by the Master Servicer of an inability to pay its debts as they become due; or (f) any representation, warranty or statement of the Master Servicer made in this Agreement or any certificate, report or other writing delivered pursuant hereto shall prove to be incorrect in any material respect as of the time when the same shall have been made, and the incorrectness of such representation, warranty or statement has a material adverse effect on the Trust and, within 30 days of the earlier of (x) the date on which the Master Servicer gives notice of such failure to the Trustee or the Certificate Insurer pursuant to Section 3.04(b) and (y) the date on which written notice thereof shall have been given to the Master Servicer by the Trustee or the Certificate Insurer (or, if a Certificate Insurer Default shall have occurred and be continuing, written notice thereof shall have been given by a Class Vote), the circumstances or condition in respect of which such representation, warranty or statement was incorrect shall not have been eliminated or otherwise cured; or (g) failure on the part of the Master Servicer to deposit into the applicable Distribution Account within 3 Business Days following the related Determination Date any Interest Advance pursuant to Section 3.08; or (h) the Certificate Insurer determines that the performance by the Master Servicer of its servicing duties hereunder with respect to the Loans is not, in the reasonable opinion of the Certificate Insurer after consultation with the Master Servicer, in conformity with acceptable standards after considering the following factors: (A) the terms and conditions of this Agreement, (B) conformity with the Servicing Standards, (C) the Master Servicer's practices as of the Closing Date, provided that such practices are either (i) consistent with industry standards for the servicing of loans similar to the Loans or (ii) the Master Servicer's historical practices and procedures; or (i) the Master Servicer shall dissolve or liquidate, in whole or in part, in any material respects except to the extent that any resulting successor entity is acceptable to the Certificate Insurer; or (j) the long-term debt rating of the Master Servicer shall be reduced below BBB and Baa2 by Standard & Poor's and Moody's, respectively; or (k) the Pool Annual Default Percentage (Three Month Average) exceeds 6.5% or the Pool 60+ Delinquency Percentage (Rolling Three Month) exceeds 6.0%. Section 7.02. Consequences of a Master Servicer Termination Event. If a Master Servicer Termination Event shall occur and be continuing, the Certificate Insurer (or, if a Certificate Insurer Default shall have occurred and be continuing, the Trustee at the direction of the Holders pursuant to a Class Vote), by notice given in 96 102 writing to the Master Servicer (and to the Trustee if given by the Certificate Insurer or the Certificateholders) may terminate all of the rights and obligations of the Master Servicer under this Agreement. On or after the receipt by the Master Servicer of such written notice, and the appointment of and acceptance by a successor Master Servicer, all authority, power, obligations and responsibilities of the Master Servicer under this Agreement, whether with respect to the Certificates or the Trust or otherwise, shall pass to, be vested in and become obligations and responsibilities of the successor Master Servicer; provided, however, that the successor Master Servicer shall have no liability with respect to any obligation which was required to be performed by the prior Master Servicer prior to the date that the successor Master Servicer becomes the Master Servicer or any claim of a third party based on any alleged action or inaction of the prior Master Servicer. The successor Master Servicer is authorized and empowered by this Agreement to execute and deliver, on behalf of the prior 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. The prior Master Servicer agrees to cooperate with the successor Master Servicer in effecting the termination of the responsibilities and rights of the prior Master Servicer under this Agreement, including, without limitation, the transfer to the successor Master Servicer for administration by it of all cash amounts that shall at the time be held by the prior Master Servicer for deposit, or have been deposited by the prior Master Servicer, in the Collection Accounts or thereafter received with respect to the Loans and the delivery to the successor Master Servicer of all Files and a computer tape in readable form containing the Servicing Record and any other information necessary to enable the successor Master Servicer to service the Loans and the other Trust Property. If requested by the Certificate Insurer (unless a Certificate Insurer Default shall have occurred and be continuing), the successor Master Servicer shall direct the Obligors to make all payments under the Loans directly to the successor Master Servicer, or to a lockbox established by the Master Servicer at the direction of the Certificate Insurer (unless a Certificate Insurer Default shall have occurred and be continuing), at the prior Master Servicer's expense. In addition to any other amounts that are then payable to the terminated Master Servicer under this Agreement, the terminated Master Servicer shall then be entitled to receive (to the extent provided by Section 3.08) out of the Collected Amount for the related Loan Group, reimbursements for any outstanding Interest Advances made during the period prior to the notice pursuant to this Section 7.02 which terminates the obligation and rights of the terminated Master Servicer under this Agreement. The Trustee and the successor Master Servicer may set off and deduct any amounts owed by the terminated Master Servicer from any amounts payable to the terminated Master Servicer. The terminated Master Servicer shall grant the Trustee, the successor Master Servicer and the Certificate Insurer reasonable access to the terminated Master Servicer's premises at the terminated Master Servicer's expense. Section 7.03. Appointment of Successor. (a) On or after the time the Master Servicer receives a notice of termination pursuant to Section 7.02 or upon the resignation of the Master Servicer pursuant to Section 6.04, the Trustee shall be the successor in all respects to the Master Servicer in its capacity as master servicer under this Agreement and the transactions set forth or provided for in this Agreement, and shall be subject to all the responsibilities, restrictions, duties, liabilities and termination provisions relating thereto placed on the Master Servicer by the terms and provisions of this Agreement. The Trustee shall take such action, consistent with this 97 103 Agreement, as shall be necessary to effectuate any such succession. If the Trustee or any other successor Master Servicer is acting as Master Servicer hereunder, it shall be subject to termination under Section 7.02 upon the occurrence of a Master Servicer Termination Event applicable to it as Master Servicer. (b) Any successor Master Servicer appointed pursuant to the provisions of the Agreement must be approved by the Certificate Insurer (provided no Certificate Insurer Default is then occurring and continuing) and shall execute, acknowledge and deliver to the Trustee, the Certificate Insurer and its predecessor Master Servicer an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Master Servicer shall become effective. (c) Any successor Master Servicer shall be entitled to such compensation (whether payable out of the Collected Amount or otherwise) as the Master Servicer would have been entitled to under the Agreement if the Master Servicer had not resigned or been terminated hereunder. The Certificate Insurer and a successor Master Servicer may agree on additional compensation to be paid to such successor Master Servicer in accordance with Section 4.05(a)(xiii) and Section 4.05(b)(xiii), as applicable. In addition, any successor Master Servicer shall be entitled, to reasonable transition expenses incurred in acting as successor Master Servicer pursuant to Section 4.05(a)(xiii) and Section 4.05(b)(xiii), as applicable. Section 7.04. Notification to Certificateholders. Upon any termination of the Master Servicer or appointment of a successor to the Master Servicer, the Trustee shall give prompt written notice thereof to Certificateholders at their respective addresses appearing in the Certificate Register. Section 7.05. Waiver of Past Defaults. The Certificate Insurer (or, if a Certificate Insurer Default shall have occurred and be continuing, the Certificateholders pursuant to a Class Vote) may, on behalf of all Holders of Certificates, waive any default by the Master Servicer in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Master Servicer Termination Event arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon. 98 104 ARTICLE VIII Concerning the Trustee Section 8.01. Duties of the Trustee and Contract of Insurance Holder. (a) The Trustee, prior to the occurrence of a Master Servicer Termination Event and after the curing of all Master Servicer Termination Events which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Agreement. In case a Master Servicer Termination Event has occurred and not been cured (the appointment of a successor servicer (including the Trustee) shall for purposes of this Article be deemed such a cure), the Trustee shall exercise such of the rights and powers vested in it by this Agreement, and use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. The Trustee shall not, except as otherwise provided in this Agreement, sell or otherwise transfer any of the Trust Property. (b) The Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports, documents, notices, orders or other instruments furnished to the Trustee that 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; provided, however, that the Trustee, in its capacity as such, shall not be responsible for the accuracy or content of any such resolution, certificate, statement, opinion, report, document, notice, order or other instrument furnished to the Trustee pursuant to this Agreement. The Trustee shall promptly mail each such resolution, certificate, statement, opinion, report, document, notice, order or other instrument to each Certificateholder. (c) 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 bad faith or willful misconduct; provided, however, that: (i) Prior to the occurrence of a Master Servicer Termination Event, and after the curing of all such Master Servicer Termination Events 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, willful misconduct, or negligence on the part of the Trustee or actual knowledge to the contrary of a Responsible Officer of the Trustee assigned to and working in the Trustee's Corporate Trustee Administration Department, 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 that conform 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 or Responsible Officers of the Trustee, 99 105 unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (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 direction given pursuant to a Class Vote, 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, with respect to such Class of Certificates under this Agreement; (iv) The Trustee shall not be personally liable for any failure to ascertain whether a Certificateholder is an affiliate of the Master Servicer or the Depositor for purposes of obtaining Certificateholder consent pursuant to the terms of this Agreement; (v) For all purposes of this Agreement, the Trustee shall not be deemed to have knowledge of any Master Servicer Termination Event unless a Responsible Officer of the Trustee assigned to and working in the Trustee's Corporate Trustee Administration Department shall have actual knowledge thereof or if written notice thereof is received by the Trustee in accordance herewith, and in the absence of such knowledge no provision hereof requiring the taking of any action or the assumption of any duties or responsibility by the Trustee following the occurrence of any Master Servicer Termination Event shall be effective as to the Trustee; and (vi) None of the provisions contained in this Agreement shall in any event require the Trustee to perform, or to be responsible for the manner of performance of, any of the obligations of the Master Servicer or the Servicer under this Agreement or to supervise or monitor the performance of such obligations (other than to determine that any notices, reports or statements required to be delivered to it by the Master Servicer hereunder comply with the provisions of 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 provisions of this Agreement. (d) If the Trustee receives any funds from the FHA or any other Person with respect to the Loans or any other assets of the Trust, the provisions of Section 3.12(e) shall apply. (e) In the event that any conservator or receiver shall be appointed for Mego, the Trustee shall cause the Master Servicer to notify the Obligors of the sale of the Loans to the Trust. Section 8.02. Certain Matters Affecting the Trustee. Except as otherwise provided in Section 8.01: (i) The Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officer's Certificate, certificate of auditors or any 100 106 other certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (ii) The Trustee shall be under no obligation to exercise any of the trusts 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 the Certificate Insurer or any of the Certificateholders, pursuant to the provisions of this Agreement, expend or use its own funds or otherwise incur any financial liability in the performance of any of its duties as Trustee hereunder, or in the exercise of any of its rights or powers as such, unless either (A) payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in taking such action is, in the opinion of the Trustee, reasonably assured to the Trustee by the security afforded to it by the terms of this Agreement, or (B) the Certificate Insurer or such Certificateholders as the case may be shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby (which, in the case of a Certificateholder which is an institutional investor, will be deemed satisfied by a written agreement of indemnity from such Certificateholder); the right of the Trustee to perform any discretionary act enumerated in this Agreement shall not be construed as a duty, and the Trustee shall not be answerable for other than its negligence, bad faith or willful misconduct in the performance of any such act; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of a Master Servicer Termination Event 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 man would exercise or use under the circumstances in the conduct of his own affairs; (iii) 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; (iv) The Trustee may consult with counsel and any Opinion of Counsel or written advice 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 Opinion of Counsel or written advice; (v) Prior to the occurrence of a Master Servicer Termination Event hereunder and after the curing of all such Master Servicer Termination Events 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 document, unless requested in writing to do so by the Certificate Insurer or pursuant to a Class Vote; 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 from the Certificate Insurer or the Certificateholders, as the case 101 107 may be, giving such direction against such expense or liability as a condition to so proceeding (which, in the case of a Certificateholder which is an institutional investor, will be deemed satisfied by a written agreement of indemnity from such Certificateholder), except that, if a Master Servicer Termination Event has occurred and is continuing, the expenses of any such investigation shall be paid by the Master Servicer or, if paid by the Trustee, shall be repaid by the Master Servicer upon demand, and the Trustee shall not have any lien, claim or demand upon the Trust for the payment thereof; (vi) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or through agents or attorneys; and (vii) The Trustee shall not be required to give any bond or surety in respect of the trust created hereby or the powers created hereunder. Section 8.03. Trustee Not Liable for Certificates or Loans. The recitals contained herein and in the Certificates (other than the countersignature of the Trustee on such Certificates) shall not be taken as the statements of the Trustee, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Agreement (other than as to the execution and delivery of this Agreement by the Trustee) or of the Certificates (other than the countersignature of the Trustee on such Certificates) or of any Loan or related document. The Trustee shall not be accountable for the use or application by the Depositor of any of the Certificates or of the proceeds of such Certificates, or for the use or application of any funds paid to the Master Servicer (unless the Trustee is acting as such) in respect of the Loans or deposited in or withdrawn by the Master Servicer from the Collection Accounts, other than funds so withdrawn and thereafter deposited in a Distribution Account. Except as otherwise expressly provided herein, the Trustee shall have no obligation to inspect, insure or pay taxes on any Property, to investigate the state of title with respect to any Property, to ensure the priority or perfection of any Mortgage or security interest or to file or record any assignment, lien, financing statement, continuation statement or security interest in relation to any Loan or Property or to ensure the priority or perfection of any security referred to in this Agreement or to prepare, file or record any assignment, lien, financing statement or continuation statement with respect thereto or to prepare or file any Securities and Exchange Commission filings for the Trust or to record this Agreement. Section 8.04. Trustee May Own Certificates. The Trustee in its individual or any other capacity may become the owner or pledgee of Certificates of any Class with the same rights as it would have if it were not Trustee, except that no determination, vote or request as Holder of such Certificates shall be included in the determination of a Class Vote. The Trustee, in its individual capacity, may deal with either the Depositor, the Certificate Insurer and the Master Servicer, each in their individual capacities, with the same rights it would have if it were not Trustee. 102 108 Section 8.05. Trustee's Fees and Expenses; Indemnification. (a) The Trustee will disburse to itself pursuant to Section 4.05(a)(iv) and Section 4.05(b)(iv), to the extent funds are available therefor, the Trustee Fee 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. (b) Mego shall indemnify the Trustee and its agent for, and hold them harmless against, any loss, liability or expense (including 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 and the fees and expenses of any co-trustee appointed hereunder)) incurred by the Trustee or such agent without negligence, willful misfeasance or bad faith on the part of the Trustee or any such agent and arising out of or in connection with the acceptance or administration of the trusts created hereby, including without limitation the costs and expenses of defending the Trustee or any such agent against any claim or liability incurred by them in connection with the exercise or performance of any of their powers or duties hereunder, including the signing of any document pursuant to this Agreement, and including without limitation any liability incurred by the Trustee arising from the Depositor's bad faith, willful misfeasance or negligence. The obligations set forth in this Section 8.05(b) shall survive the termination of this Agreement. Section 8.06. Eligibility Requirements for Trustee. The Trustee hereunder shall at all times be a corporation or national banking association organized and doing business under the laws of the United States or of any state, authorized under such laws to exercise corporate trust powers, subject to supervision or examination by federal or state authority and either (i) having a combined capital and surplus of at least $50,000,000 or (ii) being the wholly-owned subsidiary of a bank holding company having such a capital and surplus. If such corporation or national banking association publishes reports of condition at least annually, pursuant to law or the requirements of the aforesaid supervising or examining authority, then for the purpose of this Section 8.06 the combined capital and surplus of such corporation or national banking association shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. By executing and delivering this Agreement, the Trustee represents and warrants that it meets such requirements as of the date hereof. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 8.06, the Trustee shall resign immediately in the manner and with the effect specified in Section 8.07. Neither the Master Servicer nor any affiliate thereof shall be eligible to serve as Trustee at any time, except that the Trustee may serve as successor master servicer pursuant to Section 7.02. Section 8.07. Resignation and Removal of the Trustee. (a) The Trustee may resign and be discharged from the trust hereby created by giving not less than 60 days' written notice thereof to the Master Servicer and the Certificate Insurer. Upon receiving such notice of resignation, the Depositor with the prior 103 109 written consent of the Certificate Insurer or, if a Certificate Insurer Default is then occurring and continuing, the Depositor shall promptly appoint a successor trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within sixty 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. (b) If at any time the Trustee shall cease to be eligible in accordance with the provisions of Section 8.06, or if the Trustee has failed to perform any obligation hereunder and such failure materially and adversely affects Certificateholders of any Class or the Certificate Insurer, and, in either such case, the Trustee shall fail to resign after written request therefor by the Depositor, with the consent of the Certificate Insurer, if a Certificate Insurer Default is not then occurring and continuing, or the Certificate Insurer, if a Certificate Insurer Default is not then occurring and continuing or if at any time the Trustee shall become incapable of acting, or shall be adjudged as bankrupt or insolvent, or a receiver or other conservator 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, in any such case the Depositor may with the prior written consent of the Certificate Insurer or at the written request of the Certificate Insurer shall remove the Trustee and appoint a successor trustee acceptable to the Certificate Insurer 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. (c) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 8.07 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 8.08. Section 8.08. Successor Trustee. (a) Any successor trustee appointed as provided in Section 8.07 shall execute, acknowledge and deliver to the Depositor and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and the acceptance of such successor trustee shall become effective, and such successor trustee, without any further act, deed or conveyance, shall become fully vested with all rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Trustee herein. The predecessor trustee shall upon payment of any unpaid Trustee Fees deliver to the successor trustee all Files, related documents, statements and funds held by it hereunder, including, without limitation, the monies held in the Distribution Accounts and the FHA Premium Accounts and the Depositor and the predecessor trustee shall execute and deliver such instruments and do such other things as may reasonably be required more fully and certainly to vest and confirm in the successor trustee all such rights, powers, duties and obligations, provided, however, that the Trust shall remain liable to the predecessor trustee for any unpaid outstanding fees and expenses of such predecessor trustee. 104 110 (b) No successor trustee shall accept appointment as provided in this Section 8.08 unless at the time of such acceptance such successor trustee shall be eligible under the provisions of Section 8.06. In addition, no appointment of a successor trustee shall be effective until such entity holds a contract of insurance that covers the Loans or First Trust of New York, National Association, as Contract of Insurance Holder is appointed co-trustee under this Pooling and Servicing Agreement. (c) Upon acceptance of appointment by a successor trustee as provided in this Section 8.08, the Master Servicer shall mail notice of the succession of such trustee hereunder to all Certificateholders at their respective addresses appearing in the Certificate Register and be entitled to reimbursement of expenses for such mailing from Mego. Section 8.09. Merger or Consolidation of the Trustee. Any corporation or national banking association into which the Trustee may be merged or converted or with which it may be consolidated or any corporation or national banking association resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation or national banking association succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding, provided that such corporation or national banking association shall be eligible under the provisions of Section 8.06. The Trustee or its successor hereunder shall provide the Depositor and the Certificate Insurer with prompt notice of any such transaction. Section 8.10. Appointment of Co-Trustee or Separate Trustee. (a) Notwithstanding any other provisions hereof at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any part of the Trust or property securing the same may at the time be located, the Depositor and the Trustee acting jointly with the prior written consent of the Certificate Insurer shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Trustee to act as co-trustee 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, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section 8.10, such powers, duties, obligations, rights and trusts as the Master Servicer and the Trustee may consider necessary or desirable. If the Master Servicer shall not have joined in such appointment within fifteen days after the receipt by it of a request so to do, or in case a Master Servicer Termination Event shall have occurred and be continuing, the Trustee shall have the power to make such appointment with the prior written consent of the Certificate Insurer. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as a successor trustee under Section 8.06, and no notice to Certificateholders of the appointment of co-trustee(s) or separate trustee(s) shall be required under Section 8.08. (b) In the case of any appointment of a co-trustee or separate trustee pursuant to this Section 8.10, 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, except to the extent that under any 105 111 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. (c) 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 of appointment of any separate trustee or co-trustee shall refer to this Agreement and the conditions of this Article VIII. 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. (d) 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. (e) No trustee hereunder shall be held personally liable by reason of any act or omission of any other trustee hereunder. (f) The Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. Section 8.11. Appointment of Custodians. (a) Any provision of this Agreement notwithstanding, the Trustee may, with the consent of the Master Servicer and the prior written consent of the Certificate Insurer, appoint, as agents for the Trustee, one or more Custodians to hold all or a portion of the Files, and to take such other action with respect thereto as shall be consistent with the terms of this Agreement, by entering into a Custodial Agreement in form and substance satisfactory to the Certificate Insurer, provided that none of the provisions of this Section 8.11 relating to agreements or arrangements between the Trustee and any Custodian or to actions taken through any such Custodian or otherwise shall be deemed to relieve the Trustee of any of its duties and obligations hereunder, and the Trustee shall be obligated with respect thereto to the same extent and under the same terms and conditions as if it alone were performing all such duties and obligations. Any Custodian shall have a combined capital and surplus of at least $10,000,000. The Trustee shall be entitled to enter into any agreement with any Custodian performing services on behalf of the Trustee related to its duties and obligations 106 112 hereunder for indemnification of the Trustee by such Custodian, and nothing contained in this Agreement shall be deemed to limit or modify such indemnification. (b) The Custodian in its individual or any other capacity may become the owner or pledgee of Certificates of any Class with the same rights it would have if it were not Custodian. (c) Subject to the provisions of this Article VIII, the Trustee agrees to comply with the terms of each such Custodial Agreement and to enforce the terms and provisions thereof against the Custodian for the benefit of Certificateholders and the Certificate Insurer. The Trustee shall be solely liable for all fees owed by it to any Custodian performing services on behalf of the Trustee, irrespective of whether the Trustee's compensation pursuant to this Agreement is sufficient to pay such fees. Any Custodial Agreement shall require that the Custodian thereunder maintain continuous custody of each File in the State of Minnesota, unless the Trustee shall obtain an Opinion of Counsel acceptable to the Certificate Insurer from a firm of attorneys licensed to practice law in the State in which custody of the Files will be maintained to the effect that, in the event that the intended transfer and sale to the Trustee by the Depositor of the Loans is deemed to be the grant of a security interest in the Trust rather than a sale, the Trustee will have a perfected first priority security interest in the Notes despite the fact that custody of the Files no longer is maintained in the State of Minnesota. Section 8.12. Certain Tax Matters. (a) The Trustee is hereby authorized and directed by Mego and to elect to treat the REMIC Pool, including the Collection Account, the Distribution Account and the FHA Premium Account for the Group I Loans, as a REMIC in accordance with the REMIC Provisions. In connection with such election, (i) the Class R Certificates are hereby designated as the sole class of "residual interests" in the REMIC Pool, (ii) the Group IA Certificates are hereby designated as classes of "regular interests" in the REMIC Pool, (iii) the latest possible maturity date of the Group I Certificates is the Final Scheduled Distribution Date, and (iv) the Closing Date is hereby designated as the "Start-Up Day" of the REMIC Pool, all within the meaning of the REMIC Provisions. The taxable year of the REMIC Pool shall be the calendar year and the first taxable year shall begin on the Closing Date. The books of the REMIC Pool shall be maintained on an accrual basis for federal income tax purposes. (b) The Trustee as agent for Mego, so long as it shall be a Holder of a Class R Certificate, and otherwise the Residual Holder appointed in accordance with the provisions of the Code, shall, with respect to the REMIC Pool: (i) in a timely manner, prepare, file with the Internal Revenue Service or other appropriate authorities, and cause the Trustee to mail to Group I Certificateholders, as required, any Tax Returns, and any other federal, state or local tax or information returns or reports that are required to be so filed, or provided to Group I Certificateholders, with respect to the REMIC Pool; (ii) in the first Tax Return, elect to treat the REMIC Pool as a REMIC; 107 113 (iii) in the Tax Return for each taxable year of the REMIC Pool, designate as the tax matters person for the REMIC Pool (x) Mego or an affiliate thereof, if Mego or such affiliate, as the case may be, owned a Class R Certificate at any time during such taxable year, or (y) if neither Mego nor an affiliate thereof owned a Class R Certificate at any time during such taxable year, (A) the Holder of a Class R Certificate designated in a notice delivered to the Trustee prior to the date of completion of such Tax Return by Holders of Class R Certificates representing a majority of the Residual Interests, or (B) if no such notice is received, the Person holding, at the end of such taxable year, Class R Certificates representing, in the aggregate, a greater percentage of the Residual Interests than Class R Certificates then held by any other Person; (iv) maintain or instruct the Trustee to maintain records as to investments and other assets of the REMIC Pool sufficient to show compliance with the REMIC Provisions during each taxable year of the REMIC Pool; and (v) take all actions necessary to ensure that the Tax Return and such other returns or reports are signed by a Person that is both authorized to sign such returns or reports hereunder and is an appropriate Person to sign such returns or reports under the law applicable to such returns or reports (including in the case of the Tax Return, the Code, Treasury Regulations, and any official pronouncements of the Internal Revenue Service). The Trustee is hereby authorized under this Agreement to sign on behalf of the REMIC Pool the Tax Return and any such other returns and reports. Each Holder of a Class R Certificate hereby irrevocably appoints and authorizes the Trustee to be its attorney-in-fact for purposes of signing any such returns and reports. The Trustee shall (i) give notice to the Internal Revenue Service on Internal Revenue Service Form 56 that it is acting in a fiduciary capacity on behalf of the REMIC Pool in accordance with Treasury Regulation Section 1.860F-4(c), and (ii) sign such return or report, provided that the Trustee shall be protected in signing such return or report to the extent provided in Section 8.05(b). The Trustee shall cause the REMIC Pool accountants to include in the first federal income tax return the information required by Treasury Regulation Section 1.860D-1(d)(2) and Treasury Regulation Section 1.860F-4(b)(2). (c) The Trustee shall, with respect to the Grantor Trust Pool: (i) in a timely manner, prepare, sign, and file with the Internal Revenue Service or other appropriate authorities, and mail to Certificateholders of the Group II Certificates as required, any Tax Returns, and any other federal, state or local tax or information returns or reports that are required to be so filed, or provided to such Certificateholders, with respect to the Grantor Trust Pool; and (ii) maintain or instruct the Trustee to maintain records as to investments and other assets of the Grantor Trust Pool sufficient to show compliance with the Grantor Trust Provisions during each taxable year of the Grantor Trust Pool. (d) This Agreement shall be construed so as to carry out the intention of the parties that the REMIC Pool be a REMIC and the Grantor Trust Pool be a Grantor Trust at all 108 114 times from the Start-up Day to the Termination Date. Neither the Master Servicer nor the Trustee shall knowingly or intentionally take any action or omit to take any action that would cause the imposition of a tax on the REMIC Pool, Grantor Trust Pool or Trust under any provisions of the Code or cause the REMIC or cause the Grantor Trust Pool to fail to qualify as a Grantor Trust Pool to fail to qualify as a REMIC at any time that any Certificate is outstanding. Without limiting the generality of the foregoing, after the Start-up Day the Trustee shall not accept any contribution of assets to the Trust unless the Trustee shall have received an Opinion of Counsel to the effect that such contribution will not cause the imposition of a tax on the Trust under the Code or cause the REMIC Pool to fail to qualify as a REMIC or cause the Grantor Trust Pool to fail to qualify as a Grantor Trust at any time that any Certificate is outstanding. There is no requirement for any holder of a Residual Interest to contribute any amount to the Trust. (e) The Trustee is hereby authorized and directed to make information available to the Internal Revenue Service and to any Holder or transferor of a Class R Certificate necessary for compliance with Section 860E(e) of the Code. The Master Servicer shall maintain records and information related to the Loans and Monthly Payments sufficient to make any calculations that may be required pursuant to such section and shall provide such information to the Trustee; provided, however, that any calculations necessary to provide such information to any Holder or the Internal Revenue Service shall be performed by the accountants for the REMIC Pool. The provisions of Section 11.02(vi) shall also apply. (f) The Trustee shall apply promptly to the Internal Revenue Service for a Taxpayer Identification Number for the REMIC Pool and, promptly upon receipt thereof, shall forward to the Master Servicer a copy of the "Notice of New Employer Identification Number Assigned." (g) In connection with assisting Mego (or such other Residual Holder as is referred to in Section 8.12(a) above) in the preparation of, and in filing of, any Tax Returns or other returns or reports pursuant to this Section, the Trustee may rely on information provided by Mego and the Master Servicer and Mego or the Master Servicer, as appropriate, shall indemnify and hold harmless the Trustee for any loss, liability or expense incurred in connection with such preparation and filing arising by reason of such person's bad faith, willful misfeasance or negligence in providing or failing to provide such information. The Trustee shall be entitled to reimbursement from Mego for its reasonable out-of-pocket expenses and disbursements except any such expenses or disbursements as may arise from its negligence, willful misfeasance or bad faith and except as provided in the following sentence. (h) With respect to the REMIC Pool, the Trustee shall file IRS Form 8811 within the time prescribed by law and make available on a timely basis all information required to be provided pursuant to Temporary Treasury Regulation Section 1.6049-7T(e) (or any successor provision) to persons entitled to receive information pursuant thereto. Section 8.13. Representations and Warranties of the Trustee. The Trustee represents and warrants to, and agrees with, the parties hereto, the Certificate Insurer and Certificateholders that: 109 115 (a) The Trustee is duly organized as a national banking association under the laws of the United States of America, is validly existing and in good standing in such state and has the corporate power and authority under United States law to conduct its corporate trust business as now conducted. (b) The Trustee has full corporate power and authority under United States law to enter into and perform all transactions contemplated herein and no consent, approval, authorization or order of any federal court or governmental agency or body governing or having jurisdiction with respect to the Trustee's trust powers is required for the Trustee to enter into this Agreement and to perform its obligations hereunder. (c) The Certificates when countersigned by the Trustee shall have been duly and validly countersigned in accordance with this Agreement. (d) The execution, delivery and performance by it of this Agreement (a) do not violate any provision of any law or regulation governing the banking and trust powers of the Trustee or any order, writ, judgment, or decree of any court, arbitrator, or governmental authority applicable to the Trustee or any of its assets, (b) do not violate any provision of its corporate charter or by-laws, (c) do not violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of any lien on any of the Trust Property pursuant to the provisions of any mortgage, indenture, contract, agreement or other undertaking other than this Agreement to which it is a party and (d) have been duly authorized by the Trustee. (e) This Agreement has been duly executed and delivered by the Trustee and constitutes the legal, valid and binding agreement of the Trustee, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies, regardless of whether such enforceability is considered in a proceeding in equity or at law. (f) The Trustee has taken actual possession of the Notes, Mortgages and any other related documents delivered pursuant to Section 2.01(b) in good faith, and without notice or knowledge: (i) of any adverse claims, lien, or encumbrance against any of the same; (ii) that any Note was overdue (except for those Loans referred to in Section 2.03(b)(ii) that are delinquent as of the Closing Date) or had been dishonored or subject to the circumstances described in Section 3.304 of the Uniform Commercial Code as in effect in the State of New York; or, (iii) of any other defense against or claim to the Notes by any other person or entity. For purposes of this subsection (g), the Trustee shall not be deemed to have had notice or knowledge of the foregoing matters unless a Responsible Officer assigned to and working in the Trustee's Corporate Trustee Administration Department shall have actual knowledge thereof or written notice thereof is received by the Trustee in accordance herewith. (g) The Trustee has taken actual possession of the Notes, Mortgages and other items in the Files in the ordinary course of its business. (h) The Trustee is authorized and approved by FHA for participation in the FHA Title I loan program and holds the Contract of Insurance, which is a valid contract of insurance 110 116 from FHA for such purpose; and no contract of insurance held by the Trustee has ever been revoked or terminated by FHA. Section 8.14. Streit Act. Any provisions required to be contained in this Agreement by Section 126 Article 4-A of the New York Real Property law are hereby incorporated, and such provisions shall be in addition to those conferred or imposed by this Agreement; provided, however, that to the extent that such Section 126 shall not apply to this Agreement, said Section 126 shall not have any effect, and if said Section 126 should at any time be repealed or cease to apply to this Agreement, or be construed by judicial decision to be inapplicable, said Section 126 shall cease to have any further effect upon the provisions of this Agreement. In case of a conflict between the provisions of this Agreement and any mandatory provisions of Article 4-A of the New York Real Property law, such mandatory provisions of said Article 4-A shall prevail, provided that if said Article 4-A shall not apply to this Agreement, should at any time be repealed, or cease to apply to this Agreement, or be construed by judicial decision to be inapplicable, such mandatory provision of such Article 4-A shall cease to have any further effect upon the provisions of this Agreement; provided, however, that the Trustee agrees to act in good faith in the exercise of its rights and powers hereunder. Section 8.15. Rights to Direct Trustee. Subject to Section 8.02(ii), the Certificate Insurer (or, if an Certificate Insurer Default shall have occurred and be continuing, the Certificateholders pursuant to a Class Vote) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that subject to Section 8.01, the Trustee shall have the right to decline to follow any such direction if the Trustee being advised by counsel determines that the action so directed may not lawfully be taken, or if the Trustee in good faith shall, by a Responsible Officer, determine that the proceedings so directed would be in violation of this Agreement or any other Transaction Document or would subject it to personal liability against which it has not been provided reasonable indemnity (which, in the case of a Certificateholder which is an institutional investor, will be deemed satisfied by a written agreement of indemnity from such Certificateholder) or (in the case of directions provided by a Class Vote) be unduly prejudicial to the rights of Certificateholders not parties to such direction; and provided further that nothing in this Agreement shall impair the right of the Trustee to take any action deemed proper by the Trustee and which is not inconsistent with such direction by the Certificate Insurer or the Certificateholders. Section 8.16. Reports to the Securities and Exchange Commission. The Trustee 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. Upon the request of the Trustee, each of the Seller, the Servicer, the Depositor and the Master Servicer shall cooperate with the Trustee in the preparation of any such report and shall provide to the Trustee in a timely manner all such 111 117 information or documentation as the Trustee may reasonable request in connection with the performance of its duties and obligations under this Section. 112 118 ARTICLE IX Termination Section 9.01. Termination. (a) The respective obligations and responsibilities of Mego, the Master Servicer, the Depositor and the Trustee created hereby with respect to the Certificates (other than the obligation to make certain payments and to send certain notices to Certificateholders as hereinafter set forth) shall terminate immediately following the occurrence of the last action required to be taken by the Trustee pursuant to this Article IX on the Termination Date; provided, however, that in no event shall the trust created hereby, i.e., the Trust, continue beyond the expiration of twenty-one 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's, living on the Closing Date; and provided, further, that the respective obligations and responsibilities of Mego and the Master Servicer with respect to reimbursing the Trustee for claims of the FHA shall continue until the Final Date pursuant to Section 3.12(g). As soon as practicable after the termination of the Trust, the Trustee shall surrender the Policies to the Certificate Insurer for cancellation. (b) The REMIC Pool and the Grantor Trust Pool shall each be terminated with the consent of the Certificate Insurer, and the assets of the REMIC Pool and the Grantor Trust Pool shall be sold or otherwise disposed of in connection therewith, only pursuant to a Plan of Complete Liquidation adopted by the Trustee at the direction of the Depositor and having the terms set forth in Section 9.01(c). Each Holder of a Certificate hereby irrevocably approves and appoints the Trustee, acting at the direction of the Depositor as its attorney-in-fact for the purposes of the adoption of the Plan of Complete Liquidation. The Trustee, acting at the direction of the Depositor, shall adopt a Plan of Complete Liquidation promptly following the Trustee's receipt of a Notice of Termination. (c) The Plan of Complete Liquidation shall be adopted on the earliest practicable date occurring not more than 90 days prior to the Anticipated Termination Date specified in the Notice of Termination, and shall provide: (i) for the actions contemplated by the provisions hereof pursuant to which the applicable Notice of Termination is given; (ii) With respect to a Plan of Complete Liquidation of the REMIC Pool, that the REMIC Pool shall terminate as a REMIC as required by Section 860F(a)(4) of the Code on a Distribution Date occurring not more than 90 days following the date of adoption of the Plan of Complete Liquidation; and (iii) With respect to a Plan of Complete Liquidation of the REMIC Pool, that all assets of the REMIC Pool required to be sold pursuant to the Plan of Complete Liquidation shall be sold after the date of adoption thereof, such sale to be conducted by the Master Servicer on behalf of the Trustee; 113 119 provided that the Plan of Complete Liquidation may be adopted prior to the ninetieth day prior to the Anticipated Termination Date and, to the extent consistent with the actions contemplated by the provisions hereof pursuant to which the applicable Notice of Termination is given, may provide for actions different from those set forth in clauses (ii) or (iii) if an Opinion of Counsel shall have been previously delivered to the Trustee to the effect that the adoption of a Plan of Complete Liquidation that provides for such alternative actions as are set forth in such Opinion of Counsel will not result in the imposition of a tax on the REMIC Pool or pursuant to the REMIC Provisions cause the REMIC Pool to fail to qualify as a REMIC at any time that any Certificate is Outstanding. The Trustee shall deliver to the Master Servicer and the Certificate Insurer a copy of the Plan of Complete Liquidation promptly following its adoption. (d) Subject to the provisions of the following sentence, Mego or, if such option is not exercised by Mego, the Master Servicer may, at its option (with the prior written consent of the Certificate Insurer if such purchase would result in a claim under the related Policy), upon not less than thirty days' prior notice given to the Trustee at any time on or after the applicable Early Termination Notice Date, purchase on the Monthly Cut-Off Date specified in such notice, all, but not less than all, the Loans, all claims made under the Contract of Insurance with respect to Loans that are pending with FHA ("FHA Pending Claims") and Foreclosed Properties then included in the Trust, at a purchase price, payable in cash, equal to the sum of: (i) the Principal Balance of each Loan included in the Trust as of such Monthly Cut-Off Date; (ii) all unpaid interest accrued on the Principal Balance of each such Loan at the related Net Loan Rate to such Monthly Cut-Off Date; (iii) the aggregate fair market value of the FHA Pending Claims for which a claim has been filed with the FHA included in the Trust on such Monthly CutOff Date, as determined by an Independent appraiser acceptable to the Trustee as of a date not more than thirty days prior to such Monthly Cut-Off Date; (iv) the aggregate fair market value of each Foreclosed Property included in the Trust on such Monthly Cut-Off Date, as determined by an Independent appraiser acceptable to the Trustee as of a date not more than thirty days prior to such Monthly Cut-Off Date; and (v) any unreimbursed amounts due to the Certificate Insurer under this Agreement or the Insurance Agreement. Any amount received from such sale with respect to FHA Pending Claims shall be considered FHA Insurance Payment Amounts. The expense of any Independent appraiser required under this Section 9.01(d) shall be a nonreimbursable expense of Mego. Mego or the Master Servicer shall effect the purchase referred to in this Section 9.01(d) by deposit of the purchase price allocable to each of the Loan Groups into the applicable Distribution Account. The Trustee shall give written notice of the Early Termination Notice Date to the Certificate Insurer promptly upon the occurrence thereof. 114 120 (e) If the Trust has not been previously terminated pursuant to subsection (d) of this Section 9.01, the Master Servicer shall give the Trustee and the Certificate Insurer notice as soon as practicable (at least 45 days before the Distribution Date) of the Distribution Date which is the earlier of (i) the Final Scheduled Distribution Date and (ii) the Distribution Date on which the Master Servicer anticipates the latest of the maturity or other liquidation of the last Loan. (f) Notice of any termination of the Trust pursuant to this Section 9.01 shall be mailed, via first class mail, postage prepaid, by the Trustee to affected Certificateholders at their addresses shown in the Certificate Register as soon as practicable after the Trustee shall have received a Notice of Termination, but in any event, not more than thirty days, and not less than five days, prior to the Anticipated Termination Date except that notice to Holders of Class R Certificates shall be made within two Business Days after the Trustee shall have received a Notice of Termination. The notice mailed by the Trustee to affected Certificateholders shall: (i) specify the Anticipated Termination Date on which the final distribution is anticipated to be made to Holders of Certificates of the Classes specified therein; and (ii) specify the amount of any such final distribution, if known. If the Trust is not terminated on any Anticipated Termination Date for any reason, the Trustee shall promptly mail, via first class mail, postage prepaid, notice thereof to each affected Certificateholder. (g) On the Termination Date, amounts on deposit in each Distribution Account will be withdrawn and applied in the manner set forth in Section 4.05. 115 121 ARTICLE X Miscellaneous Provisions Section 10.01. Amendment. (a) This Agreement may be amended from time to time by the parties hereto as specified in this Section, with the prior written consent of the Certificate Insurer if a Certificate Insurer Default is not then occurring and continuing (unless such amendment materially and adversely affects the interests of the Certificate Insurer), provided that any amendment be accompanied by an Opinion of Counsel to the Trustee and the Certificate Insurer to the effect that such amendment complies with the provisions of this Section. (b) If the purpose of the amendment (as detailed therein) is to correct any mistake, eliminate any inconsistency, cure any ambiguity or deal with any matter not covered (i.e., to give effect to the intent of the parties and, if applicable, to the expectations of the Certificateholders), it shall not be necessary to obtain the consent of any Certificateholder, but the Trustee shall be furnished with a letter from the Rating Agency that the amendment will not result in the downgrading or withdrawal of the rating then assigned to any Certificate. (c) If the purpose of the amendment is to prevent the imposition of any federal or state taxes at any time that any Certificates are outstanding (i.e., technical in nature), it shall not be necessary to obtain the consent of any Certificateholder, but the Trustee shall be furnished with an Opinion of Counsel that such amendment is necessary or helpful to prevent the imposition of such taxes and is not materially adverse to any Certificateholder. (d) If the purpose of the amendment is to add or eliminate or change any provision of the Agreement other than as contemplated in (b) and (c) above, the amendment shall require the consent of Holders of Certificates evidencing 51% of the Percentage Interests of each Class affected thereby; provided, however, that no such amendment shall (i) reduce in any manner the amount of, or delay the timing of, payments received that are required to be distributed on any Certificate without the consent of the related Certificateholder, or (ii) reduce the aforesaid percentage of Certificates the Holders of which are required to consent to any such amendment, without the consent of the Holders of all such Certificates then Outstanding. (e) The Trustee or the Depositor may amend this Agreement to effect a FASIT election for all or a portion of the Trust; provided, that the Trustee and the Certificate Insurer shall be furnished with an Opinion of Counsel to the effect that such election will not adversely affect the Federal or applicable state income tax characterization of any outstanding Certificates or the taxability of the Trust under Federal or applicable state income tax laws. (f) Promptly after the execution of any amendment hereof, the Trustee shall furnish written notification of the substance of such amendment to each Holder of the affected Certificates. 116 122 (g) It shall not be necessary for the consent of Certificateholders under this Section 10.01 to approve the particular form of any proposed amendment, 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 and of any other consents, directions, waivers or other acts of Certificateholders hereunder shall be subject to such reasonable regulations as to the Trustee may prescribe. (h) The Trustee may, but shall not be obligated to, enter into any amendment hereto which affects the Trustee's own rights, duties, liabilities and immunities under this Agreement or otherwise, except to the extent necessary to maintain the qualification of the REMIC Pool as a REMIC and the Grantor Trust Pool as a Grantor Trust. Section 10.02. Recordation of Agreement. (a) To the extent permitted by applicable law, this Agreement or a memorandum hereof (in a form mutually agreed upon by the Master Servicer, the Depositor, Mego, the Certificate Insurer and the Trustee) may be recorded in all appropriate public offices for real property records in all the counties or other comparable jurisdictions in which any or all of the Properties are situated, and in any other appropriate public recording office or elsewhere, such recordation to be effected by the Master Servicer at the expense of the Trust, if the Master Servicer determines that such recordation materially and beneficially affects the interests of the affected Certificateholders. (b) 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 10.03. Rights of Certificateholders. (a) The death, incapacity or bankruptcy of any Certificateholder shall not operate to terminate this Agreement or the Trust, nor entitle such Certificateholder's legal representatives, heirs or successors to claim an accounting or to take any action or 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. (b) No Certificateholder shall have any right to vote (except as expressly provided herein) 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 as to constitute the Certificateholders of any Class or of all Classes from time to time as partners or members of an association; nor, to the extent permitted by applicable law, shall any Certificateholder be under any liability to any third person by reason of any action taken by the parties to this Agreement pursuant to any provision hereof. (c) No Holder of a Certificate of any Class shall have any right by virtue of any provision 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, with the prior written consent of the 117 123 Certificate Insurer, if a Certificate Insurer Default is not then occurring and continuing the Holders shall have made written request pursuant to a Class Vote (wherein such request is only made by each such affected Class of Certificates) 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 (which, in the case of a Certificateholder which is an institutional investor, will be deemed satisfied by a written agreement of indemnity from such Certificateholder), and the Trustee, for sixty 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 of any Class shall have any right in any manner whatever by virtue of any provision of this Agreement to affect, disturb or prejudice the rights of any other Holders of such 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 of such Class. For the protection and enforcement of the provisions of this Section 10.03, each and every Certificateholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Nothing in this Agreement shall be construed as giving the Certificateholders any right to make a claim under the Policy. SECTION 10.04. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF AND THE PROVISIONS OF THE CERTIFICATES, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS. Section 10.05. Notices. (a) All demands, notices, statements and reports hereunder shall be in writing (unless otherwise specified) and shall be deemed to have been duly given, if personally delivered, mailed by registered mail postage prepaid, or delivered by overnight courier or if telecopied (with confirmation by another prior specified method): (i) in the case of the Master Servicer, to: Norwest Bank Minnesota, N.A. 11000 Broken Land Parkway Columbia, Maryland 21044-3562 Attention: Master Servicing Department Mego Mortgage Home Loan Trust 1996-3 or such other address as may hereafter be furnished to the other parties hereto in writing by the Master Servicer; 118 124 (ii) in the case of Depositor to: Financial Asset Securities Corp. 600 Steamboat Road Greenwich, Connecticut 06830 Attention: Charles A. Forbes or such other address as may hereafter be furnished to the other parties hereto in writing by the Depositor; (iii) in the case of Mego Mego Mortgage Corporation 1000 Parkwood Circle Suite 500 Atlanta, Georgia 30339 Attention: Jeff S. Moore, President (iv) in the case of the Trustee, to: First Trust of New York, N.A. First Trust Center 180 East Fifth Street St. Paul, Minnesota 55101 Attention: Structured Finance or such other address as may hereafter be furnished to the other parties hereto in writing by the Trustee; (v) in the case of the FHA, to: Maurice D. Gulledge Chief, Home Improvement Insurance Branch U.S. Department of Housing and Urban Development 451 Seventh Street SW Room 9272 Washington, D.C. 20410-8000 (vi) in the case of Standard & Poor's, to: Standard & Poor's Rating Services 25 Broadway, 15th Floor New York, New York 10004 Attention: Loan Surveillance 119 125 (vii) in the case of Moody's, to: Moody's Investors Service, Inc. 99 Church Street New York, New York 10007 Attention: Home Equity Monitoring Department (viii) in the case of the Certificate Insurer, to: MBIA Insurance Corporation 113 King Street Armonk, NY 10504 Attention: Insured Portfolio Management Structured Finance (IPM-SF) (Mego Home Loan Asset-Backed Certificates, Series 1996-3) Confirmation: (914) 273-4545 Telecopy No.: (914) 765-3164 (b) Any notice required or permitted to be mailed to a Holder of any Class of Certificates (except for any notice required to be given to a Holder of Senior Certificate in connection with a Class Vote) and any information to be mailed by the Trustee to the Certificateholders pursuant to Section 8.01(b) shall be mailed by first class mail, postage prepaid, or delivered by overnight courier, to the address of such Holder appearing in the Certificate Register, with a copy thereof to each Person designated by such Holder in a written notice provided by such Holder to the Trustee. Any notice required or permitted to be given to a Holder of any Senior Certificate in connection with a Class Vote shall specify the consent sought and the circumstances relating thereto and shall state that if the Class Vote does not occur within 30 days after the date of such notice, such Class Vote shall be determined by the Certificate Insurer, which notice shall be delivered by overnight courier to the address of such Holder appearing in the Certificate Register, with a copy thereof to each Person designated by such Holder in a written notice provided by such Holder to the Trustee. Any notice or information so mailed within the time prescribed in this Agreement shall be conclusively presumed to have been duly given, whether or not such notice is received. Section 10.06. 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, illegal or unenforceable, then such covenants, agreements, provisions or terms shall be deemed to be modified to the extent necessary to render them valid, legal and enforceable, and if no such modification shall render them valid, legal and enforceable, then such covenants, agreements, provisions or terms shall be 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 any Class of Certificates or the rights of the Holders thereof. 120 126 Section 10.07. Waiver of Notice. Notwithstanding anything to the contrary contained herein, any Holder of a Class R Certificate shall be entitled to: (i) waive any provision hereof that requires the Trustee to give any notice, or mail any report, statement or request for consent, to such Holder; and (ii) appoint the Master Servicer (with notice to the Trustee) as its attorney-in-fact for the purposes of providing any consent or giving any instruction required to be provided or given by such Holder hereunder. Any such waiver or appointment shall be in writing, shall be effective as of the later of the date specified therein and the date of receipt by the Master Servicer and/or the Trustee, as the case may be, and shall be revocable at any time by such Holder upon receipt of written notice thereof by the Trustee and/or the Master Servicer, as the case may be. Section 10.08. Access to List of Holders. Upon the written applications of Holders of Certificates representing greater than $2,000,000 in aggregate Denomination (hereinafter referred to as "applicants") to the Trustee, which application states that the applicants desire to communicate with other Holders with respect to their rights under this Agreement or under the Certificates, the Trustee shall, within five Business Days after the receipt of such application, afford such applicants access during normal business hours to the most recent Certificate Register. Every Holder agrees with the Trustee that neither the Trustee nor the Certificate Registrar shall be held accountable by reason of disclosure pursuant hereto of any information included in the Certificate Registrar, regardless of the source from which such information was derived. Section 10.09. Third-Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Except as otherwise provided in this Article X, no other Person shall have the right or obligation hereunder. Upon issuance of the Policies, this Agreement shall also inure to the benefit of the Certificate Insurer. Without limiting the generality of the foregoing, all covenants and agreements in this Agreement which expressly confer rights upon the Certificate Insurer shall be for the benefit of and run directly to the Certificate Insurer, and the Certificate Insurer shall be entitled to rely on and enforce such covenants to the same extent as if it were a party to this Agreement. The Certificate Insurer may disclaim any of its rights and powers under this Agreement (but not its duties and obligations under the Policies) upon delivery of a written notice to the Trustee. Section 10.10. The Certificate Insurer. (a) Except as set forth in Section 10.01, any right conferred to the Certificate Insurer shall be suspended and shall run to the benefit of the Certificateholders during any 121 127 period in which an Certificate Insurer Default shall have occurred and be continuing and shall be exercisable by Class Vote. (b) For so long as no Certificate Insurer Default shall have occurred and be continuing, the Trustee shall agree to accept any moneys due hereunder from the Certificate Insurer. Section 10.11. Consent to Jurisdiction. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES THERETO HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND ANY COURT IN THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND TO OR IN CONNECTION WITH ANY OF THE TRANSACTION DOCUMENTS OR THE TRANSACTION OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD OR DETERMINED IN SUCH NEW YORK STATE COURT OR IN SUCH FEDERAL COURT. THE PARTIES HERETO AGREE THAT A FINAL JUDGMENT IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THE TRANSACTION DOCUMENTS OR THE SUBJECT MATTER THEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURTS. Section 10.12. Trial by Jury Waived. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH ANY OF THE TRANSACTION DOCUMENTS OR THE TRANSACTION. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT IT WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THE TRANSACTION DOCUMENTS TO WHICH IT IS A PARTY BY, AMONG OTHER THINGS, THIS WAIVER. Section 10.13. Separate Counterparts. THIS AGREEMENT MAY BE EXECUTED BY THE PARTIES HERETO IN SEPARATE COUNTERPARTS, EACH OF WHICH WHEN SO EXECUTED AND DELIVERED SHALL BE AN ORIGINAL, BUT ALL SUCH COUNTERPARTS SHALL TOGETHER CONSTITUTE BUT ONE AND THE SAME INSTRUMENT. 122 128 ARTICLE XI Class R Certificate Transfer Restrictions Section 11.01. Restrictions on Transfer. Each Person who has or who acquires any Ownership Interest in a Class R Certificate shall be deemed by the acceptance or acquisition of such Ownership Interest to have agreed to be bound by the following provisions and to have irrevocably appointed the Trustee or its designee as its attorney-in-fact to direct under clause (iv) below the delivery of payments to a Person other than such Person and to negotiate the terms of any mandatory sale under clause (v) below and to execute all instruments of transfer and to do all other things necessary in connection with any such sale, and the rights of each Person acquiring any Ownership Interest in a Class R Certificate are expressly subject to the following provisions: (i) Only a Permitted Transferee may hold or acquire any Ownership Interest in a Class R Certificate. Each Person holding or acquiring any Ownership Interest in a Class R Certificate shall promptly notify the Trustee, the Certificate Insurer and the Master Servicer of any change or impending change in its status as a Permitted Transferee. (ii) In connection with any proposed Transfer of any Ownership Interest in a Class R Certificate, the Trustee shall, as a condition to such consent, require delivery to the Trustee of a properly completed, sworn, executed and acknowledged affidavit from the Transferee (the "Transfer Affidavit") in the form attached hereto as Exhibit L and from the transferor (the "Transferor Representation"), in the form attached hereto as Exhibit K. (iii) Notwithstanding the delivery of a Transfer Affidavit by a proposed Transferee under clause (ii) above, if the Responsible Officer or Responsible Officers of the Trustee has or have actual knowledge that the proposed Transferee is not a Permitted Transferee, the Trustee shall not register and, if the Trustee is not the Certificate Registrar, shall direct to the Certificate Registrar not to register a Class R Certificate in the name of the proposed Transferee, no Transfer of an Ownership Interest in the Residual Interest to such proposed Transferee shall be effected and the Trustee, and Certificate Registrar, shall have no liability for failing to effect the proposed registration. (iv) Any attempted or purported Transfer of any Ownership Interest in a Class R Certificate in violation of the provisions of this Section 11.01 shall be absolutely null and void and shall vest no rights in the purported Transferee. If any purported Transferee shall, in violation of the provisions of this Section 11.01, become a Holder of a Class R Certificate, then the prior Holder of such Class R Certificate shall, upon discovery that the registration of Transfer of such Class R Certificate was not in fact permitted by this Section 11.01, notify the Trustee and the Trustee, upon receipt of such notice and upon verification of the facts set forth in such notice or upon discovery by other means that the registration of Transfer of such Class R Certificate was not in fact permitted by this Section 11.01, shall notify the Master Servicer and the Certificate Registrar of such improper Transfer (such notice to be accompanied by 123 129 an Opinion of Counsel to the effect that such Transfer was improper and the retroactive restoration of the rights of the last preceding Permitted Transferee as described in this clause (iv) shall not be invalid, illegal or unenforceable) and, subject to clause (v) below, shall make payments due on such Class R Certificate to the last preceding Holder that is a Permitted Transferee (as described in such written notice) and the last Holder that is a Permitted Transferee shall be restored to all rights as Holder thereof retroactive to the date of registration of Transfer of such Class R Certificate. The Trustee shall be entitled, but shall not be obligated, to recover from any Holder of a Class R Certificate that was in fact not a Permitted Transferee at the time it became a Holder all payments made on such Class R Certificate. Any such payments so recovered by the Trustee shall be paid and delivered by the Trustee to the last preceding Holder that is a Permitted Transferee who was a Holder of such Class R Certificate. (v) If any Person that is not a Permitted Transferee acquires any Ownership Interest in a Class R Certificate in violation of the restrictions in this Section 11.02, and (A) to the extent that the retroactive restoration of the rights of the last preceding Holder that is a Permitted Transferee as described in clause (iv) above shall be invalid, illegal or unenforceable or (B) if the Trustee is unable within a reasonable period to obtain the Opinion of Counsel required by clause (iv) above then the Trustee shall have the right, without notice to the Holder of such Class R Certificate or any other Person having an Ownership Interest therein, to sell such Class R Certificate to a purchaser selected by the Trustee on such terms as the Trustee may choose. The proceeds of such sale, net of commissions, expenses and taxes due, if any, will be remitted to the Holder of such Class R Certificate by the Trustee, except that in the event that the Trustee determines that the Holder of such Class R Certificate may be liable for any amount due under this Section 11.01 or any other provisions of this Agreement, the Trustee may withhold a corresponding amount from such remittance as security for such claim. The terms and conditions of any sale under this clause (v) shall be determined in the sole discretion of the Trustee, and it shall not be liable to any Person having an Ownership Interest in a Class R Certificate as a result of its exercise of such discretion. (vi) The Trustee shall make available, upon receipt of written requests, all information necessary to compute any tax imposed (A) as a result of the Transfer of an Ownership Interest in Class R Certificates to any Person who is not a Permitted Transferee, and (B) as a result of any regulated investment company, real estate investment trust, common trust fund, partnership, trust, estate or organizations described in Code section 1381 that holds an Ownership Interest in a Class R Certificate and having as among its record holders at any time any Person who is not a Permitted Transferee. Reasonable compensation for providing such information may be charged by the Trustee. The information furnished must be sufficient to compute the present value of the anticipated excess inclusions as required by Treasury Department regulations. The information must be furnished to the requesting party or such later time period as allowed by Treasury Department regulations or the Internal Revenue Service. 124 130 (vii) No undivided interest of the Residual Interest may be transferred to any Person unless the entire interest and rights relating to such undivided interest in the Residual Interest under this Agreement are transferred to such Person. (viii) The provisions of this Section 11.01 set forth prior to this clause (viii) may be eliminated upon execution by the Trustee of a certificate stating that the Trustee has received an Opinion of Counsel, in form and substance satisfactory to the Trustee, to the effect that the absence of such provisions will not cause the REMIC Pool to cease to qualify as a REMIC and will not create a risk that (A) the Trust or the REMIC Pool may be subject to an entity-level tax caused by the Transfer of any Ownership Interest in a Class R Certificate to a Person which is not a Permitted Transferee or (B) a Holder of a Senior Certificate or another Person will be subject to a REMIC-related tax caused by the Transfer of any Ownership Interest in a Class R Certificate to a Person which is not a Permitted Transferee. 125 131 ARTICLE XII Concerning the Contract of Insurance Holder Section 12.01. Compliance with Title I and Filing of FHA Claims. (a) The Contract of Insurance Holder shall at all times while any Senior Certificates are outstanding have a valid Contract of Insurance with the FHA covering the FHA Loans. To the extent applicable to the duties of the Contract of Insurance Holder hereunder, the Contract of Insurance Holder shall comply with the requirements of Title I and shall take or refrain from taking such actions as are necessary or appropriate to maintain a valid Contract of Insurance for the Trust with the FHA covering the FHA Loans. (b) If and for so long as the Contract of Insurance covers any loans other than the FHA Loans, and if HUD shall not have earmarked the coverage of the Contract of Insurance with respect to the FHA Loans, the Contract of Insurance Holder covenants and agrees not to submit any claim to FHA with respect to an FHA Loan if the effect of approval of such claim would result in the amount of claims paid by the FHA in respect of the FHA Loans to exceed the Trust Designated Insurance Amount. Notwithstanding the foregoing, the Claims Administrator shall promptly notify the Trustee, the Master Servicer and the Certificate Insurer if the amount of claims submitted to FHA in respect of the FHA Loans under the Contract of Insurance exceeds the Trust Designated Insurance Amount. As of the Closing Date and at all times thereafter until the Termination Date, the Contract of Insurance Holder covenants and agrees that the Contract of Insurance will only apply to the FHA Loans and Related Series Loans, exclusively, or HUD shall have agreed pursuant to 24 C.F.R. Section 201.32(d)(1) to "earmark" the FHA insurance relating to the FHA Loans and Related Series Loans, in a manner satisfactory to the Certificate Insurer, in its sole and absolute discretion. Mego, as Claims Administrator and Servicer, covenants and agrees that it shall not take any action that would result in the Contract of Insurance applying to loans other than the FHA Loans and the Related Series Loans, exclusively, unless HUD shall have agreed pursuant to 24 C.F.R. Section201.32(d)(1) to "earmark" the FHA insurance relating to the Loans and Related Series Loans in a manner satisfactory to the Certificate Insurer, in its sole and absolute discretion. (c) The Trustee hereby appoints Mego Mortgage Corporation as Claims Administrator. Mego Mortgage Corporation, as Claims Administrator, shall perform on behalf of the Contract of Insurance Holder the duties associated with the submission of claims under Title I in connection with the Contract of Insurance, except to the extent that certain documents must be signed by the Contract of Insurance Holder (in which case the Contract of Insurance Holder shall only sign such documents at the direction of the Claims Administrator) and shall not, in its capacity as Claims Administrator, take any action or omit to take any action that would cause the Contract of Insurance Holder to violate this Section 12.01 or otherwise fail to maintain a valid Contract of Insurance or cause any denial by FHA of an insurance claim under Title I. (d) The Contract of Insurance Holder shall not be deemed to have violated this Section 12.01 and shall otherwise incur no liability hereunder if any failure to maintain a valid Contract of Insurance or to comply with the requirements of Title I or any denial by 126 132 FHA of an insurance claim under Title I shall have been caused by any act or omission of the Master Servicer or Claims Administrator in the performance of its duties hereunder. The Contract of Insurance Holder shall be permitted to, or, if directed by the Certificate Insurer, so long as no Certificate Insurer Default exists, shall replace the Claims Administrator for any failure of the Claims Administrator to perform its duties hereunder. Any successor Claims Administrator shall be subject to the prior approval of the Certificate Insurer, provided no Certificate Insurer Default is then occurring. (e) The Contract of Insurance Holder hereby represents and warrants to the Depositor, the Master Servicer, the Seller, the Trustee for the benefit of the Certificateholders and the Certificate Insurer that First Trust of New York, National Association is an investing lender in good standing with HUD having authority to purchase, hold, and sell loans insured under 24 CFR Part 201, pursuant to a valid Contract of Insurance, Number 71400 0000 6. (f) The Seller shall forward to the Trustee a fully executed Transfer of Note Report for each FHA Loan within 20 days of the receipt by the Seller of such FHA Loan's case number under the Contract of Insurance. The Trustee shall execute each Transfer of Note Report, as buying lender, and submit such Transfer of Note Report to HUD within 31 days of the transfer of the FHA Loans to the Trust. Section 12.02. Regarding the Contract of Insurance Holder. (a) The Contract of Insurance Holder shall not resign from the obligations and duties imposed on it by this Agreement as Contract of Insurance Holder except (i) upon a determination that by reason of a change in legal requirements or requirements imposed by the FHA the performance of its duties under this Agreement would cause it to be in violation of such legal requirements or FHA imposed requirements in a manner which would result in a material adverse effect on the Contract of Insurance Holder or cause it to become ineligible to hold the Contract of Insurance and (ii) the Certificate Insurer (so long as a Certificate Insurer Default shall not have occurred and be continuing) or the Certificateholders by Class Vote (if a Certificate Insurer Default shall have occurred and be continuing) does not elect to waive the obligations of the Contract of Insurance Holder to perform the duties which render it legally unable to act or to delegate those duties to another Person or if the circumstances giving rise to such illegality cannot be waived or delegated. Any such determination permitting the resignation of the Contract of Insurance Holder shall be evidenced by an Opinion of Counsel to such effect delivered and acceptable to the Trustee and the Certificate Insurer. Upon receiving such notice of resignation, the Contract of Insurance shall be transferred to a qualified successor with the consent of the Certificate Insurer by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Contract of Insurance Holder and one copy to the successor contract of insurance holder. Notwithstanding the foregoing, the Contract of Insurance Holder may resign, with the prior written consent of the Certificate Insurer (so long as a Certificate Insurer Default shall not have occurred and be continuing) or the Certificateholders by Class Vote (if a Certificate Insurer Default shall have occurred and be continuing), which may be withheld in its sole and absolute discretion, upon transfer of the FHA insurance and related reserves with respect to the FHA Loans and any Related Series Loans to a contract of insurance held by a successor Contract of Insurance Holder provided, however, that any Contract of Insurance held by such successor Contract of Insurance Holder shall satisfy the criteria set forth in Section 12.01(b), 127 133 and, at the time of succession, shall have an FHA insurance coverage reserve account balance not less than that of the FHA Insurance Coverage Reserve Account at the time of succession. (b) If at any time (i) the Contract of Insurance shall be revoked, suspended or otherwise terminated, or (ii) the Contract of Insurance Holder shall become incapable of acting, or shall be adjudged as bankrupt or insolvent, or a receiver of the Contract of Insurance Holder or of its property shall be appointed, or any public officer shall take charge or control of the Contract of Insurance Holder or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case the Certificate Insurer (so long as a Certificate Insurer Default shall not have occurred and be continuing) or the Certificate-holders by Class Vote (if a Certificate Insurer Default shall have occurred and be continuing) may remove the Contract of Insurance Holder and appoint a successor contract of insurance holder by written instrument, in duplicate, one copy of which instrument shall be delivered to the Contract of Insurance Holder so removed and one copy to the successor contract of insurance holder. Upon removal of the Contract of Insurance Holder, the outgoing Contract of Insurance Holder shall take any action required to transfer the benefits of the FHA Insurance Coverage Reserve Account to the successor contract of insurance holder. (c) Any resignation or removal of the Contract of Insurance Holder and appointment of a successor contract of insurance holder pursuant to any of the provisions of this Section 12.02 shall become effective upon acceptance of appointment by the successor contract of insurance holder. (d) On or prior to the Closing Date, the Contract of Insurance Holder shall have instructed FHA to forward all payments in respect of claims under the Contract of Insurance made to the Contract of Insurance Holder to First Trust of New York, National Association, as Trustee. The Contact of Insurance Holder shall provide no further notification with respect to which such payments shall be directed unless directed by First Trust of New York, National Association, as Trustee. 128 134 IN WITNESS WHEREOF, the Depositor, Mego, the Master Servicer, the Claims Administrator, the Trustee and the Contract of Insurance Holder have caused their names to be signed to this Pooling and Servicing Agreement by their respective officers thereunto duly authorized as of the date first written above. MEGO MORTGAGE CORPORATION, as Seller, Servicer and Claims Administrator By:__________________________________________ Name: Title: FINANCIAL ASSET SECURITIES CORP., as Depositor By:__________________________________________ Name: Title: NORWEST BANK MINNESOTA, N.A., as Master Servicer By:__________________________________________ Name: Title: FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Trustee and Contract of Insurance Holder By:__________________________________________ Name: Title: 135 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the __th day of December, 1996 before me, a notary public in and for said State, personally appeared James L. Belter, known to me to be the Executive Vice President of MEGO MORTGAGE CORPORATION, one of the parties that executed the within instrument, and also known to me to be the person who executed it on behalf of said party, and acknowledged to me that such party executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ------------------------------ Notary Public [Notarial Seal] STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the ___th day of December, 1996 before me, a notary public in and for said State, personally appeared Kari Skilbred, known to me to be the Vice President of FINANCIAL ASSET SECURITIES CORP., one of the parties that executed the within instrument, and also known to me to be the person who executed it on behalf of said party, and acknowledged to me that such party executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ------------------------------ Notary Public [Notarial Seal] 136 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the ___th day of December, 1996 before me, a notary public in and for said State, personally appeared Michael L. Mayer, known to me to be the Vice President of NORWEST BANK MINNESOTA, N.A., one of the parties that executed the within instrument, and also known to me to be the person who executed it on behalf of said party, and acknowledged to me that such party executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ------------------------------ Notary Public [Notarial Seal] STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the ___th day of December, 1996 before me, a notary public in and for said State, personally appeared Lynn Steiner, known to me to be the Vice President of FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, one of the parties that executed the within instrument, and also known to me to be the person who executed it on behalf of said party, and acknowledged to me that such party executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. ------------------------------ Notary Public [Notarial Seal] EX-10.119 8 HOME LOAN PURCHASE AGREEMENT 1 EXHIBIT 10.119 EXECUTION COPY ================================================================================ FINANCIAL ASSET SECURITIES CORP., as Purchaser, and MEGO MORTGAGE CORPORATION, as Seller, HOME LOAN PURCHASE AGREEMENT ================================================================================ Dated as of February 1, 1997 2 Table of Contents
Page ---- ARTICLE I. DEFINITIONS Section 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II. SALE OF HOME LOANS; PAYMENT OF PURCHASE PRICE Section 2.1 Sale of Home Loans . . . . . . . . . . . . . . . . . . . . 2 Section 2.2 [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.3 Obligations of Seller Upon Sale . . . . . . . . . . . . . . 2 Section 2.4 Payment of Purchase Price for the Home Loans . . . . . . . 5 ARTICLE III. REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH Section 3.1 Seller Representations and Warranties . . . . . . . . . . . 5 ARTICLE IV. SELLER'S COVENANTS Section 4.1 Covenants of the Seller . . . . . . . . . . . . . . . . . . 7 ARTICLE V. INDEMNIFICATION BY THE SELLER Section 5.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . 7 Section 5.2 Limitation on Liability of the Seller . . . . . . . . . . . 8 ARTICLE VI. TERMINATION Section 6.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE VII. MISCELLANEOUS PROVISIONS Section 7.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 7.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.4 Severability of Provisions . . . . . . . . . . . . . . . . 11 Section 7.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 11 Section 7.6 Further Agreements . . . . . . . . . . . . . . . . . . . . 11 Section 7.7 Intention of the Parties . . . . . . . . . . . . . . . . . 12
i 3 Section 7.8 Successors and Assigns; Assignment of Purchase Agreement . . . . . . . . . . . . . . . . . . . . 12 Section 7.9 Survival . . . . . . . . . . . . . . . . . . . . . . . . . 12 Section 7.10 Third-Party Beneficiaries . . . . . . . . . . . . . . . . . 12
EXHIBITS AND SCHEDULES Schedule I Schedule of Home Loans ii 4 HOME LOAN PURCHASE AGREEMENT (the "Purchase Agreement"), dated as of February 1, 1997, between Mego Mortgage Corporation ("Mego" or the "Seller") and FINANCIAL ASSET SECURITIES CORP., ("FASCO" and together with any assignee of FASCO, the "Purchaser"). W I T N E S S E T H WHEREAS, the Seller is the owner of a pool of (i) fixed-rate home improvement and home equity loans and debt consolidation loans and retail installment sale contracts (the "Mortgage Loans") secured by first and junior mortgages, deeds of trust and security deeds on certain residential and investment properties (the "Properties") and (ii) fixed-rate home improvement loans and retail installment sale contracts unsecured by an interest in real property (the "Unsecured Loans" and together with the Mortgage Loans, the "Home Loans") as listed on Schedule I hereto referred to below and the Related Documents thereto (as defined below); WHEREAS, certain of the Home Loans will be partially insured under the FHA Title I program (the "FHA Loans") and the remaining Home Loans are home improvement or debt consolidation or home equity loans that have been originated by the Seller and are not insured under the FHA Title I program; WHEREAS, the parties hereto desire that the Seller sell all its right, title and interest in and to the Home Loans and the Related Documents to the Purchaser pursuant to the terms of this Purchase Agreement; and WHEREAS, pursuant to the terms of a Sale and Servicing Agreement, dated as of February 1, 1997 (the "Sale and Servicing Agreement"), among Mego Mortgage Home Loan Owner Trust 1997-1, as issuer (the "Trust"), FASCO, as depositor (the "Depositor"), Mego, as Seller, servicer (the "Servicer") and claims administrator (the "Claims Administrator"), Norwest Bank Minnesota, N.A., as master servicer (the "Master Servicer"), and First Trust of New York, National Association, as Indenture Trustee (the "Indenture Trustee"), co-owner trustee (the "Co-Owner Trustee") and contract of insurance holder (the "Contract of Insurance Holder"), the Purchaser will sell, transfer, assign and otherwise convey to the Trust all its right, title and interest in and to the Home Loans and this Purchase Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.1 Definitions. Capitalized terms used but not defined herein have the meanings assigned thereto in the Sale and Servicing Agreement. Registration Statement. The Purchaser's registration statement on Form S-3 (No. 333-10273), in the form in which it became effective under the Securities Act of 1933, as amended, on August 20, 1996 including any documents incorporated by reference therein. 1 5 Base Prospectus. The prospectus, dated March 7, 1997 attached to the Prospectus Supplement relating to the Notes. ARTICLE II. SALE OF HOME LOANS; PAYMENT OF PURCHASE PRICE Section 2.1 Sale of Home Loans. The Seller, concurrently with the execution and delivery of this Purchase Agreement, does hereby sell, assign, set over, and otherwise convey to the Purchaser, without recourse other than as expressly provided herein and in the Sale and Servicing Agreement, and with respect to the FHA Loans, in accordance with the requirements for transfer of an insured loan under Title I and 24 CFR Section 201.32(c), all of its right, title and interest in, to and under the following, whether now existing or hereafter acquired and wherever located: (i) as of the Cut-Off Date, the Home Loans delivered to the Indenture Trustee on the Closing Date, including the related Principal Balance and all payments and collections on account thereof received on or with respect to such Home Loans after the Cut-Off Date (including amounts due prior to the Cut-Off Date but received thereafter), (ii) the rights to the FHA Insurance reserves attributable to the FHA Loans as of the Cut-Off Date under Title I, (iii) the Home Loan Files, (iv) any Insurance Policies and related Insurance Proceeds, (v) the Mortgages and security interests in Mortgaged Properties which secure the Mortgage Loans, (vi) any and all documents or electronic records relating to the Home Loans, (vii) all proceeds of any of the foregoing. Section 2.2 [Reserved]. Section 2.3 Obligations of Seller Upon Sale. In connection with any transfer pursuant to Section 2.1 hereof, the Seller further agrees, at its own expense, on or prior to the Closing Date (a) to indicate in its books and records that the Home Loans have been sold to the Purchaser pursuant to this Purchase Agreement and (b) to deliver to the Purchaser a computer file containing a true and complete list of all Home Loans specifying for each Home Loan, as of the Cut-Off Date, (i) its account number and (ii) its Principal Balance. Such file, which forms a part of Exhibit A to the Sale and Servicing Agreement, shall also be marked as Schedule I to this Purchase Agreement and is hereby incorporated into and made a part of this Purchase Agreement. The Seller agrees to prepare, execute and file UCC-1 financing statements with the County Clerk of Cobb (which shall have been filed on or before the Closing Date with respect to the Home Loans describing the Home Loans and naming the Seller as debtor and, the Purchaser as secured party (and indicating that such loans have been assigned to the Trust) all necessary continuation statements and any amendments to the UCC-1 financing statements required to reflect a change in the name or corporate structure of the Seller or the filing of any additional UCC-1 financing statements due to the change in the principal office of the Seller, as are necessary to perfect the sale of the Seller's interest in each Home Loan and the proceeds thereof. In connection with any conveyance by the Seller, the Seller shall on behalf of the Purchaser deliver to, and deposit with the Custodian, on behalf of the Indenture Trustee, as assignee of the Purchaser, on or before the Closing Date the following documents or 2 6 instruments with respect to each Home Loan (the "Related Documents"); provided, that the documents or instruments listed in clause (f) below may be held in the custody of the Seller on behalf of the Indenture Trustee. With respect to each Home Loan: (a) The original Debt Instrument, showing a complete chain of endorsements or assignments from the named payee to the Trust and endorsed as follows: "Pay to the order of First Trust of New York, National Association, as Indenture Trustee and Co-Owner Trustee for Mego Mortgage Home Loan Owner Trust 1997-1 without recourse"; (b) If such Home Loan is a Mortgage Loan, the original Mortgage with evidence of recording indicated thereon (except that a true copy thereof certified by an appropriate public official may be substituted); provided, however, that if the Mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Purchase Agreement solely because of a delay caused by the public recording office where such Mortgage has been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of such Mortgage certified as a true copy in an Officer's Certificate which shall certify that such Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such Mortgage with evidence of recording indicated thereon upon receipt thereof from the public recording official (or a true copy thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (c) If such Home Loan is a Mortgage Loan, an original Assignment of the Mortgage, in recordable form. Such assignment may be a blanket assignment, to the extent that blanket assignments are effective under applicable law, for Mortgages covering Properties situated in the same county. If the assignment of Mortgage is in blanket form, an assignment of Mortgage need not be included in the individual Home Loan File; (d) If such Home Loan is a Mortgage Loan, all original intermediate assignments of the Mortgage, showing a complete chain of assignments from the named mortgagee to the assignor to the Indenture Trustee, with evidence of recording thereon (or true copies thereof certified by appropriate public officials may be substituted); provided, however, that if the intermediate assignments of mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Purchase Agreement solely because of a delay caused by the public recording office where such Assignments of Mortgage have been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of each such assignment of Mortgage certified as a true copy in an Officer's Certificate which shall certify that each such assignment of Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such assignments of Mortgage with evidence of recording indicated thereon upon its receipt thereof from the public recording official (or true copies thereof certified by an appropriate public official may be delivered to the Indenture Trustee); 3 7 (e) An original of each assumption or modification agreement, if any, relating to such Home Loan; and (f) (i) If such Home Loan is an FHA Loan, an original or copy of a notice signed by the Obligor acknowledging HUD insurance, (ii) an original or copy of truth-in-lending disclosure, (iii) an original or copy of the credit application, (iv) an original or copy of the consumer credit report, (v) an original or copy of verification of employment and income, or verification of self-employment income, (vi) if such Home Loan is an FHA Loan and a Mortgage Loan, an original or copy of evidence of the Obligor's interest in the Property, (vii) an original or copy of contract of work or written description with cost estimates, (viii)(A) if such Home Loan is an FHA Loan either (1) an original or copy of the completion certificate or an original or copy of notice of non-compliance, if applicable or (2) an original or copy of report of inspection of improvements to the Property or an original or copy of notice of non-compliance, if applicable, or (B) if such Home Loan is a Mortgage Loan and a home improvement loan, an original or copy of report of inspection of improvements to the Property, (ix) if such Home Loan is a Mortgage Loan, to the extent not included in (iii), an original or a copy of a written verification that the Obligor at the time of origination was not more than 30 days delinquent on any senior mortgage or deed of trust on the Property, (x) (A) if such Home Loan is an FHA Loan for which an appraisal is required pursuant to the applicable regulations, an original or a copy of an appraisal of the Property as of the time of origination of such FHA Loan or (B) if such Home Loan is a Non-FHA Loan and secured by a Mortgage (1) if the original principal balance is greater than $25,000 but less than $50,000, a copy of the HUD-1A Closing Statement indicating the sale price, or an existing Uniform Residential Appraisal Report, or a Drive-By Appraisal documented on Freddie Mac form 704, or a tax assessment, or (2) if the original principal balance exceeds $50,000, a full Uniform Residential Appraisal Report prepared by a national appraisal firm, (xi) an original or a copy of a title search as of the time of origination with respect to the Property, and (xii) if such Home Loan is an FHA Loan, any other documents required for the submission of a claim with respect to such FHA Loan to the FHA. With respect to any documents referred to clauses (b) and (d) above that are not delivered to the Custodian on behalf of the Indenture Trustee because of a delay caused by the public recording office, such documents shall be delivered to the Custodian on behalf of the Indenture Trustee in accordance with the terms of such clauses by the Seller if such documents are received by it or by the Purchaser if such documents are received by it. The Seller further hereby confirms to the Purchaser that, as of the Closing Date it has caused the portions of the Seller's electronic ledger relating to the Home Loans to be clearly and unambiguously marked to indicate that the Home Loans have been sold to the Purchaser. The Purchaser hereby acknowledges its acceptance of all right, title and interest to the Home Loans and other property, now existing and hereafter created, conveyed to it pursuant to Section 2.1 hereof. 4 8 The parties hereto intend that each of the transactions set forth herein be a sale by the Seller to the Purchaser of all the Seller's right, title and interest in and to the Home Loans and other property described above. In the event the transactions set forth herein are deemed not to be a sale, the Seller hereby grants to the Purchaser a security interest in all of the Seller's right, title and interest in, to and under the Home Loans and other property described above, whether now existing or hereafter created, to secure all of the Seller's obligations hereunder; and this Purchase Agreement shall constitute a security agreement under applicable law. Section 2.4 Payment of Purchase Price for the Home Loans. (a) In consideration of the sale of the Home Loans from the Seller to the Purchaser on the Closing Date, the Purchaser agrees to pay to the Seller on the Closing Date by transfer of immediately available funds, an amount equal to $86,092,410.64 (before deducting expenses payable by the Seller to the Purchaser) (the "Purchase Price"). (b) Within 60 days of the Closing Date, the Seller, at its own expense, shall cause the Indenture Trustee to record each Assignment of Mortgage in favor of the Indenture Trustee (which may be a blanket assignment if permitted by applicable law) in the appropriate real property or other records; provided, however, the Indenture Trustee need not record any assignment which relates to a Home Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by the Seller (at the Seller's expense) to the Indenture Trustee and the Securities Insurer, the recordation of such Assignment is not necessary to protect the Indenture Trustee's, the Securities Insurer's and the Securityholders' interest in the related Home Loan. With respect to any Assignment of Mortgage as to which the related recording information is unavailable within 60 days following the Closing Date, such Assignment of Mortgage shall be submitted for recording within 30 days after receipt of such information but in no event later than one year after the Closing Date. The Indenture Trustee shall be required to retain a copy of each Assignment of Mortgage submitted for recording. In the event that any such Assignment of Mortgage is lost or returned unrecorded because of a defect therein, the Seller shall promptly prepare a substitute Assignment of Mortgage or cure such defect, as the case may be, and thereafter the Trustee shall be required to submit each such Assignment of Mortgage for recording. ARTICLE III. REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH Section 3.1 Seller Representations and Warranties. (a) The Seller represents and warrants to the Purchaser as of the Cut-Off Date and the Closing Date that: (i) The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted; (ii) The Seller has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Purchase Agreement and each other Transaction Document to which it is a party; has 5 9 duly authorized the execution, delivery and performance of this Purchase Agreement and each other Transaction Document to which it is a party; has duly executed and delivered this Purchase Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and delivered by the other parties hereto, this Purchase Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies, regardless of whether such enforceability is considered in a proceeding in equity or at law; (iii) Neither the execution and delivery of this Purchase Agreement or any of the other Transaction Documents to which the Seller is a party, the consummation of the transactions required of it herein or under any other Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Purchase Agreement or any of the other Transaction Documents will conflict with or result in a breach of any of the terms, conditions or provisions of the Seller's charter or by-laws or any legal restriction or any material agreement or instrument to which the Seller is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject; (iv) There is no action, suit, proceeding, investigation or litigation pending against the Seller or, to its knowledge, threatened, which, if determined adversely to the Seller, would materially adversely affect the sale of the Home Loans, the execution, delivery or enforceability of this Purchase Agreement or any other Transaction Document, or which would have a material adverse affect on the financial condition of the Seller; (v) No consent, approval, authorization or order of any court or governmental agency or body is required for: (a) the execution, delivery and performance by the Seller of, or compliance by the Seller with, this Purchase Agreement, (b) the sale of the Home Loans or (c) the consummation of the transactions required of it by this Purchase Agreement; (vi) The Seller is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Seller or its properties or might have consequences that would materially and adversely affect its performance hereunder; (vii) The Seller received fair consideration and reasonably equivalent value in exchange for the sale of the Home Loans to the Purchaser; 6 10 (viii) The Seller is a non-supervised lender in good standing under 24 CFR Section 202.5 and is authorized to originate, purchase, hold, service and/or sell loans insured under 24 CFR part 201; and (ix) The Seller has transferred the Home Loans without any intent to hinder, delay or defraud any of its creditors. (b) The Seller further represents and warrants to the Purchaser that with respect to the Home Loans as of the Closing Date each of the representations and warranties contained in Section 3.03(b) of the Sale and Servicing Agreement are true and correct. It is understood and agreed that the representations and warranties set forth in this Section 3.1(b) shall survive delivery of the respective Home Loan Files to the Indenture Trustee on behalf of the Purchaser. In the event that (a) any of the representations and warranties of the Seller in Section 3.03(b) of the Sale and Servicing Agreement are determined to be untrue in a manner that materially and adversely affects the interests of the Securityholders or the Securities Insurer in any Home Loan with respect to which such representation or warranty is made and (b) the Seller shall fail to cure such breach within the time period specified in Section 3.05 of the Sale and Servicing Agreement, the Seller shall be obligated to repurchase or substitute the affected Home Loan(s) in accordance with the provisions of Section 3.05 of the Sale and Servicing Agreement. With respect to representations and warranties made by Mego pursuant to this Section 3.1(b) that are made to the Seller's best knowledge, if it is discovered by any of the Depositor, the Seller, the Trustee or the Certificate Insurer that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Home Loan, notwithstanding the Seller's lack of knowledge, such inaccuracy shall be deemed a breach of the applicable representation and warranty. ARTICLE IV. SELLER'S COVENANTS Section 4.1 Covenants of the Seller. The Seller hereby covenants that except for the transfer hereunder, the 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 Home Loan, or any interest therein; and the Seller will defend the right, title and interest of the Trust, as assignee of the Purchaser, in, to and under the Home Loans, against all claims of third parties claiming through or under the Seller. ARTICLE V. INDEMNIFICATION BY THE SELLER Section 5.1 Indemnification. The Seller agrees to indemnify and hold harmless the Purchaser from and against any loss, liability, expense, damage, claim or injury (other than those resulting solely from defaults on the Home Loans) arising out of or based on 7 11 this Agreement including, without limitation, in connection with the origination or prior servicing of the Home Loans by reason of any acts, omissions, or alleged acts or omissions arising out of activities of the Seller, originator or prior servicer, including reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim; provided that the Seller shall not indemnify the Purchaser if such loss, liability, expense, damage or injury is due to the Purchaser's willful misfeasance, bad faith or negligence or by reason of the Purchaser's reckless disregard of its obligations hereunder. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof. Section 5.2 Limitation on Liability of the Seller. None of the directors or trustees or officers or employees or agents of the Seller shall be under any liability to the Purchaser, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consideration for, the execution of this Purchase Agreement; provided, however, that this provision shall not protect any such Person against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder. Except as expressly provided herein and in the Sale and Servicing Agreement, the Seller shall not be under any liability to the Trust, the Trustee or the Securityholders. The Seller and any director or officer or employee or agent of 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. Section 5.3 Indemnification (a) The Seller agrees to indemnify and hold harmless the Purchaser, the directors of the Purchaser and each person, if any, who controls the Purchaser within the meaning of Section 15 of the Securities Act of 1933 (the "Act") or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), from and against any and all losses, claims, damages, liabilities or judgments (including without limiting the foregoing the reasonable legal and other expenses incurred in connection with any action, suit or proceeding or any claim asserted) arising out of (i) any untrue statement or alleged untrue statement of a material fact contained under any of the captions "Mego Mortgage Corporation," "The Title I Loan Program and the Contract of Insurance" and "The Pool" in the Prospectus Supplement or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading or (ii) any information concerning the Seller, the Home Loans or the Seller's operations based on any untrue statement or alleged untrue statement of a fact contained in any information provided by the Seller to the Purchaser, or any material omission from the information purported to be provided thereby, and disseminated to any Rating Agency, the Securities Insurer, Deloitte & Touche or prospective investors (directly or indirectly through available information systems) in connection with the issuance, marketing or offering of the Notes. This indemnity agreement will be in addition to any liability which the Seller may otherwise have pursuant to this Agreement. (b) The Purchaser agrees to indemnify and hold harmless the Seller and each person, if any, who controls the Seller within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities caused by (A) any untrue statement or alleged untrue statement of a material fact contained in (i) the Prospectus Supplement under the caption "Description of the Securities," "Description of the Transfer and Servicing Agreements," and "Prepayment and Yield 8 12 Considerations" (ii) the Base Prospectus or (iii) the Registration Statement (other than the information with respect to the Seller contained in the Prospectus Supplement) or (B) any omission or alleged omission to state a material fact, in the case of the Registration Statement (other than the information with respect to the Seller contained in the Prospectus Supplement), required to be stated therein or necessary to make the statements therein not misleading, and in the case of the section of the Prospectus Supplement specified in clause (A) (i) of this sentence and the Base Prospectus, necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.] This indemnity agreement will be in addition to any liability which the Purchaser may have pursuant to Agreement. (c) In case any action or proceeding (including any governmental or regulatory investigation or proceeding) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (hereinafter called the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (hereinafter called the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate and shall pay the fees and disbursements of such counsel related to such proceeding. In any such action or proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (1) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (2) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for any indemnified party and each person, if any, who controls such indemnified party within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, and it is also understood that expenses shall be reimbursed as they are incurred. In the case of any such separate firm for any indemnified party and any director, officer and control person of the indemnified party, such firm shall be designated in writing by such indemnified party. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in this Section 5.3 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, 9 13 claims, damages, liabilities and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnified party on the one hand and the indemnifying party on the other from the sale of the Home Loans or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, 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 the indemnified party on the one hand and the indemnifying party on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. For purposes of the foregoing, the benefit received by the Seller from the sale of the Home Loans shall be deemed to equal the amount of the gross proceeds received by the Seller from such sale, and the benefit received by the Purchaser for such sale shall be deemed to equal the Formula Amount (as defined below). The relative fault of the Purchaser on the one hand and the Seller on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Purchaser or by the Seller and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Seller and the Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 5.3(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.3(d), in no event shall the Purchaser be required to contribute any amount in excess of $753,844. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. ARTICLE VI. TERMINATION Section 6.1 Termination. The respective obligations and responsibilities of the Seller and the Purchaser created hereby shall terminate, except for the Seller's and Purchaser's indemnity obligations as provided herein, upon the termination of the Trust as provided in Article XI of the Sale and Servicing Agreement. ARTICLE VII. MISCELLANEOUS PROVISIONS Section 7.1 Amendment. This Purchase Agreement may be amended from time to time by the Seller and the Purchaser, with the consent of the Securities Insurer, by written agreement signed by the Seller and the Purchaser. 10 14 Section 7.2 Governing Law. This Purchase Agreement shall be governed by and construed in accordance with the laws of the State of New York and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 7.3 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, postage prepaid, addressed as follows: (a) if to the Seller: Mego Mortgage Corporation 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339 Attention: Jeff S. Moore, President or, such other address as may hereafter be furnished to the Purchaser in writing by the Seller. (b) if to FASCO Financial Asset Securities Corp. 600 Steamboat Road Greenwich, Connecticut 06830 Attention: General Counsel or such other address as may hereafter be furnished to the Seller in writing by the Purchaser. Section 7.4 Severability of Provisions. If any one or more of the covenants, agreements, provisions of terms of this Purchase Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Purchase Agreement and shall in no way affect the validity of enforceability of the other provisions of this Purchase Agreement. Section 7.5 Counterparts. This Purchase Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original and such counterparts, together, shall constitute one and the same agreement. Section 7.6 Further Agreements. The Purchaser and the Seller each agree to execute and deliver to the other such amendments to documents and such additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Purchase Agreement or in connection with the offering of securities representing interests in the Home Loans. Without limiting the generality of the foregoing, as a further inducement for the Purchaser to purchase the Home Loans from the Seller, the Seller will cooperate with the 11 15 Purchaser in connection with the sale of any of the securities representing interests in the Home Loans. In that connection, the Seller will provide to the Purchaser any and all information and appropriate verification of information, whether through letters of its auditors and counsel or otherwise, as the Purchaser shall reasonably request and will provide to the Purchaser such additional representations and warranties, covenants, opinions of counsel, letters from auditors, and certificates of public officials or officers of the Seller as are reasonably required in connection with such transactions and the offering of securities rated "Aaa" and "AAA" by Moody's Investors Service, Inc. and Standard & Poor's Rating Services, respectively. Section 7.7 Intention of the Parties. It is the intention of the parties that the Purchaser is purchasing, and the Seller is selling, the Home Loans rather than pledging the Home Loans to secure a loan by the Purchaser to the Seller. Accordingly, the parties hereto each intend to treat the transaction for federal income tax purposes and all other purposes as a sale by the Seller, and a purchase by the Purchaser, of the Home Loans. The Purchaser will have the right to review the Home Loans and the related Home Loan Files to determine the characteristics of the Home Loans which will affect the federal income tax consequences of owning the Home Loans and the Seller will cooperate with all reasonable requests made by the Purchaser in the course of such review. Section 7.8 Successors and Assigns; Assignment of Purchase Agreement. The Agreement shall bind and inure to the benefit of and be enforceable by the Seller, the Purchaser and the Trustee. The obligations of the Seller under this Purchase Agreement cannot be assigned or delegated to a third party without the consent of the Purchaser, which consent shall be at the Purchaser's sole discretion, except that the Purchaser acknowledges and agrees that the Seller may assign its obligations hereunder to any Person into which the Seller is merged or any corporation resulting from any merger, conversion or consolidation to which the Seller is a party or any Person succeeding to the business of the Seller. The parties hereto acknowledge that FASCO is acquiring the Home Loans for the purpose of contributing them to the Trust that will issue (i) the Certificates representing undivided interests in such Home Loans and (ii) the Notes which will be secured by such Home Loans. As an inducement to FASCO to purchase the Home Loans, the Seller acknowledges and consents to the assignment by FASCO to the Trust of all of FASCO's rights against the Seller pursuant to this Purchase Agreement and to the enforcement or exercise of any right or remedy against the Seller pursuant to this Purchase Agreement by the Owner Trustee and Co-Owner Trustee under the Sale and Servicing Agreement. Such enforcement of a right or remedy by the Owner Trustee and Co-Owner Trustee shall have the same force and effect as if the right or remedy had been enforced or exercised by FASCO directly. Section 7.9 Survival. The representations and warranties set forth in Article III and the provisions of Article V shall survive the purchase of the Home Loans hereunder. Section 7.10 Third-Party Beneficiaries. This Purchase Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Except as otherwise provided in this Section 7.10 no other Person shall have the right or obligation hereunder. Upon issuance of the Policy (as defined in the Sale and Servicing Agreement), this Purchase Agreement shall also inure to the benefit of the Securities Insurer. Without limiting the generality of the foregoing, all covenants and agreements in this 12 16 Purchase Agreement which expressly confer rights upon the Securities Insurer shall be for the benefit of and run directly to the Securities Insurer, and the Securities Insurer shall be entitled to rely on and enforce such covenants to the same extent as if it were a party to this Purchase Agreement. The Securities Insurer may disclaim any of its rights and powers under this Purchase Agreement (but not its duties and obligations under the Policy) upon delivery of a written notice to the Indenture Trustee. 13 17 IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Home Loan Purchase Agreement to be duly executed on their behalf by their respective officers thereunto duly authorized as of the day and year first above written. FINANCIAL ASSET SECURITIES CORP., as Purchaser By: ------------------------------------------------ Name: John Anderson Title: Senior Vice President MEGO MORTGAGE CORPORATION, as Seller By: ------------------------------------------------ Name: James L. Belter Title: Executive Vice President 18 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 10th day of March, 1997 before me, a Notary Public in and for said State, personally appeared John Anderson known to me to be a Senior Vice President of FINANCIAL ASSET SECURITIES CORP., the corporation that executed the within instrument, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. __________________________________ Notary Public 19 STATE OF ) ) ss.: COUNTY OF ) On the 10th day of March, 1997 before me, a Notary Public in and for said State, personally appeared James L. Belter, known to me to be the Executive Vice President of MEGO MORTGAGE CORPORATION, the company that executed the within instrument, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. __________________________________ Notary Public 20 SCHEDULE I Loan Schedule See Exhibit A to Sale and Servicing Agreement EX-10.120 9 SALE AND SERVICING AGREEMENT 1 EXHIBIT 10.120 Execution Copy ================================================================================ SALE AND SERVICING AGREEMENT Dated as of February 1, 1997 among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 (Issuer) FINANCIAL ASSET SECURITIES CORP. (Depositor) MEGO MORTGAGE CORPORATION (Seller, Servicer and Claims Administrator) NORWEST BANK MINNESOTA, N.A. (Master Servicer) and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION (Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder) MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 HOME LOAN ASSET-BACKED SECURITIES SERIES 1997-1 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS Section 1.01 Definitions.................................................... 1 Section 1.02 Other Definitional Provisions................................. 31 Section 1.03 Interest Calculations......................................... 32 ARTICLE II. CONVEYANCE OF THE HOME LOANS Section 2.01 Conveyance of the Home Loans.................................. 33 Section 2.02 Reserved...................................................... 33 Section 2.03 Ownership and Possession of Home Loan Files................... 33 Section 2.04 Books and Records............................................. 34 Section 2.05 Delivery of Home Loan Documents............................... 34 Section 2.06 Acceptance by Indenture Trustee of the Home Loans; Certain Substitutions;Initial Certification by Custodian.............. 37 ARTICLE III. REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Depositor Section 3.02 Representations, Warranties and Covenants of the Master Servicer...................................................... 40 Section 3.03 Representations and Warranties of Mego........................ 43 Section 3.04 [Reserved].................................................... 54 Section 3.05 Purchase and Substitution..................................... 54 ARTICLE IV. ADMINISTRATION AND SERVICING OF HOME LOANS; CLAIMS ADMINISTRATION Section 4.01 Servicing Standard............................................ 58 Section 4.02 Servicing Arrangements........................................ 59 Section 4.03 Servicing Record.............................................. 60 Section 4.04 Annual Statement as to Compliance; Notice of Event of Default. 64 Section 4.05 Annual Independent Accountants' Report; Servicer Review Report 65 Section 4.06 Access to Certain Documentation and Information Regarding Home Loans.................................................... 66 Section 4.07 [Reserved].................................................... 67 Section 4.08 Advances...................................................... 67 Section 4.09 Reimbursement of Interest Advances and Foreclosure Advances... 68 Section 4.10. Modifications, Waivers, Amendments and Consents............... 69
-i- 3 Section 4.11. Due-On-Sale; Due-on-Encumbrance............................... 69 Section 4.12. Claim for FHA Insurance and Foreclosure....................... 70 Section 4.13. Sale of Foreclosed Properties................................. 75 Section 4.14. Management of Real Estate Owned............................... 76 Section 4.15. Inspections................................................... 77 Section 4.16. Maintenance of Insurance...................................... 77 Section 4.17. Release of Files.............................................. 79 Section 4.18. Filing of Continuation Statements............................. 80 Section 4.19. Fidelity Bond................................................. 80 Section 4.20. Errors and Omissions Insurance................................ 80 ARTICLE V. ESTABLISHMENT OF TRUST ACCOUNTS Section 5.01 Collection Account and Note Distribution Account.............. 81 Section 5.02 Claims Under Guaranty Policy.................................. 85 Section 5.03 Certificate Distribution Account.............................. 87 Section 5.04 Trust Accounts; Trust Account Property........................ 89 ARTICLE VI. STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS Section 6.01 Master Servicing Certificate.................................. 92 Section 6.02 Statement to Securityholders.................................. 92 ARTICLE VII. CONCERNING THE CONTRACT OF INSURANCE HOLDER Section 7.01 Compliance with Title I and Filing of FHA Claims.............. 93 Section 7.02. Contract of Insurance Holder.................................. 94 ARTICLE VIII. [Reserved] ARTICLE IX. THE MASTER SERVICER Section 9.01 Indemnification; Third Party Claims........................... 97 Section 9.02 Merger or Consolidation of the Master Servicer................ 97 Section 9.03 Limitation on Liability of the Master Servicer and Others..... 98 Section 9.04 Master Servicer Not to Resign; Assignment..................... 98 Section 9.05 Relationship of Master Servicer to Issuer and the Indenture Trustee....................................................... 99 Section 9.06 Master Servicer May Own Notes................................. 99
-ii- 4 ARTICLE X. DEFAULT Section 10.01 Events of Default............................................ 100 Section 10.02 Consequences of an Event of Default.......................... 102 Section 10.03 Appointment of Successor..................................... 103 Section 10.04 Notification to Certificateholders........................... 103 Section 10.05 Waiver of Past Defaults...................................... 103 ARTICLE XI. TERMINATION Section 11.01 Termination.................................................. 105 Section 11.02 Notice of Termination........................................ 106 ARTICLE XII. MISCELLANEOUS PROVISIONS Section 12.01 Acts of Securityholders...................................... 107 Section 12.02 Amendment.................................................... 107 Section 12.03 Recordation of Agreement..................................... 108 Section 12.04 Duration of Agreement........................................ 108 Section 12.05 Governing Law................................................ 108 Section 12.06 Notices...................................................... 108 Section 12.07 Severability of Provisions................................... 109 Section 12.08 No Partnership............................................... 109 Section 12.09 Counterparts................................................. 109 Section 12.10 Successors and Assigns....................................... 110 Section 12.11 Headings..................................................... 110 Section 12.12 Actions of Securityholders................................... 110 Section 12.13 Reports to Rating Agencies................................... 110 Section 12.14 Grant of Securityholder Rights to Securities Insurer......... 111 Section 12.15 Third Party Beneficiary...................................... 112 Section 12.16 Holders of the Residual Interest Instruments................. 112 Section 12.17 Inconsistencies Among Transaction Documents.................. 112
EXHIBITS EXHIBIT A Home Loan Schedule EXHIBIT B Form of Master Servicer Certificate EXHIBIT C Form of Monthly Statement to Securityholders EXHIBIT D Underwriting Guidelines EXHIBIT E Form of Servicing Agreement
-iii- 5 This Sale and Servicing Agreement is entered into effective as of February 1, 1997, among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1, a Delaware business trust (the "Issuer" or the "Trust"), FINANCIAL ASSET SECURITIES CORP., a Delaware corporation, as Depositor (the "Depositor"), MEGO MORTGAGE CORPORATION, a Delaware corporation ("Mego"), as Seller (in such capacity, the "Seller"), Servicer (in such capacity, the "Servicer") and Claims Administrator (in such capacity, the "Claims Administrator"), NORWEST BANK MINNESOTA, N.A., as Master Servicer (the "Master Servicer"), and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, a national banking association, as Indenture Trustee on behalf of the Noteholders (in such capacity, the "Indenture Trustee"), as Co-Owner Trustee on behalf of the Certificateholders (in such capacity, the "Co-Owner Trustee") and as Contract of Insurance Holder (in such capacity, the "Contract of Insurance Holder"). PRELIMINARY STATEMENT WHEREAS, the Issuer desires to purchase a pool of Home Loans which were originated or purchased by the Seller and sold to the Depositor in the ordinary course of business of the Seller; WHEREAS, the Depositor is willing to purchase from the Seller and sell such Home Loans to the Issuer; and WHEREAS, the Master Servicer is willing to service such Home Loans in accordance with the terms of this Agreement; NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto hereby 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. Agreement: This Sale and Servicing Agreement and all amendments hereof and supplements hereto. Amount Available. With respect to any Distribution Date and the related Determination Date, an amount equal to the sum of (i) the Collected Amount in respect of such Distribution Date, plus (ii) Insured Payments, if any, received by the Indenture Trustee with respect to such Distribution Date. 1 6 Annual Default Percentage (Three Month Average). With respect to any Determination Date, the average of the percentage equivalents of the fractions for each of the three immediately preceding Due Periods, the numerator of which is the product of (i) the aggregate of the Principal Balances of all Home Loans that became Credit Support Multiple Defaulted Loans during the Due Period immediately prior to such Home Loans becoming Credit Support Multiple Defaulted Loans times (ii) 12, and the denominator of which is the Pool Principal Balance of the Home Loans as of the end of such Due Period. Assignment of Mortgage: With respect to each Home Loan secured by a Mortgage, an assignment, notice of transfer or equivalent instrument sufficient under the laws of the jurisdiction wherein the related Property is located to reflect of record the sale of the related Home Loan to the Trust as follows: "First Trust of New York, National Association, as Indenture Trustee and Co-Owner Trustee for the Mego Mortgage Home Loan Owner Trust 1997-1". Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in New York City or in the city in which the Securities Insurer or the Corporate Trust Office of the Indenture Trustee is located or the city in which the Master Servicer's or Servicer's servicing operations are located and are authorized or obligated by law or executive order to be closed. Certificate(s): Any one of the Class S Certificates or the Residual Interest Instruments, or both. Certificate Distribution Account: The account established and maintained pursuant to Section 5.03. Certificateholder: A holder of any Certificate. Certificate Register: The register established pursuant to Section 3.4 of the Trust Agreement. Civil Relief Act Interest Shortfall: With respect to any Distribution Date, for any Home Loan as to which there has been a reduction in the amount of interest collectible thereon for the most recently ended Due Period as a result of the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act"), the amount by which (i) interest collectible on such Home Loan during such Due Period is less than (ii) one month's interest on the Principal Balance of such Home Loan at the Home Loan Interest Rate for such Home Loan before giving effect to the application of the Civil Relief Act. Class: With respect to the Notes, all Notes bearing the same class designation, and with respect to the Certificates, the Certificates with the same class designation. Class A-1 Final Scheduled Distribution Date: March 25, 2023. 2 7 Class A-2 Final Scheduled Distribution Date: March 25, 2023. Class A-3 Final Scheduled Distribution Date: March 25, 2023. Class A-4 Final Scheduled Distribution Date: March 25, 2023. Class A-1 Note: Any Class A-1 Note in the form attached to the Indenture as Exhibit A-1. Class A-2 Note: Any Class A-2 Note in the form attached to the Indenture as Exhibit A-2. Class A-3 Note: Any Class A-3 Note in the form attached to the Indenture as Exhibit A-3. Class A-4 Note: Any Class A-4 Note in the form attached to the Indenture as Exhibit A-4. Class Principal Balance: With respect to each Class of Notes and as of any date of determination, the Original Class Principal Balance of each such Class reduced by all amounts previously distributed to Noteholders of such Class in reduction of the principal balance of such Class on all previous Distribution Dates pursuant to Section 5.01(c). Class S Certificate: Any Class S Certificate in the form attached to the Trust Agreement as Exhibit A. Class S Certificate Rate: 0.50% per annum. Class S Interest Distribution. With respect to any Distribution Date and the Class S Certificates, the sum of (i) the Class S Monthly Interest Amount and (ii) the Class S Interest Shortfall for such Distribution Date. Class S Interest Shortfall. With respect to the Class S Certificates and any Distribution Date, the excess of the Class S Monthly Interest Amount for the preceding Distribution Date and any outstanding Class S Interest Shortfall on such preceding Distribution Date, over the amount in respect of interest that is actually distributed to the Class S Certificateholders on such preceding Distribution Date plus (b) interest on such excess, to the extent permitted by law, at the Certificate Rate from such preceding Distribution Date through the current Distribution Date. Class S Monthly Interest Amount. With respect to any Distribution Date and the Class S Certificates, 30 days of interest at the Class S Certificate Rate, on the Class S Notional Amount for such Distribution Date, reduced by an amount equal to such Class' pro rata share (based on the amount of interest to which such Class would have otherwise been entitled) of 3 8 the sum of (i) Civil Relief Act Interest Shortfall and (ii) the Net Prepayment Interest Shortfall, if any, in each case for such Distribution Date. Class S Notional Amount. As to any Distribution Date and the Class S Certificates, the Pool Principal Balance of the Home Loans as of the opening of business on the first day of the calendar month preceding the calendar month of such Distribution Date (i.e., if the Distribution Date is June 25, the first day of the calendar month preceding the calendar month of such Distribution Date is May 1), or in the case of the first Distribution Date, the Initial Pool Principal Balance. Closing Date: March 10, 1997. Code: The Internal Revenue Code of 1986, as amended from time to time, and Treasury Regulations promulgated thereunder. Collateral Performance Percentages: The Annual Default Percentage (Three Month Average), the 30+ Delinquency Percentage (Rolling Three Month), the 60+ Day Delinquency (Rolling Three Month) and the Cumulative Default Percentage. Collected Amount. With respect to any Determination Date or the Distribution Date, the sum of the amount on deposit in the Note Distribution Account on such Determination Date plus the amounts required to be deposited into the Note Distribution Account pursuant to Sections 3.05, 5.01(a)(3) and 5.01(b)(1). Collection Account: The account denominated as a Collection Account and maintained or caused to be maintained by the Indenture Trustee pursuant to Section 5.01. Contract of Insurance Holder: First Trust of New York, National Association, its successors in interest, and any successor thereto pursuant to the terms of this Agreement. Contract of Insurance: The contract of insurance under Title I covering the FHA Loans held under the name First Trust of New York, National Association, or any successor thereto, as Contract of Insurance Holder hereunder. Corporate Trust Office: The office of the Indenture Trustee at which any particular time its corporate business shall be principally administered, located on the Closing Date at First Trust of New York, National Association, 180 East 5th Street, St. Paul, Minnesota 55101, Attention: Structured Finance. Co-Owner Trustee: First Trust of New York, National Association, a national banking association, in its capacity as the Co-Owner Trustee under the Trust Agreement acting on behalf of the Securitiesholders, or any successor co-owner trustee under the Trust Agreement. 4 9 Credit Support Multiple Defaulted Loan. A Home Loan with respect to which (a) a claim has been submitted to the FHA in respect of such Loan pursuant to the Contract of Insurance, (b) foreclosure proceedings have been commenced on the related Property, (c) any portion of a Monthly Payment is more than 180 calendar days past due and unpaid by the Obligor; or (d) the Servicer has determined in accordance with customary servicing practices, that the Home Loan is uncollectible. Cumulative Default Percentage. As of any Determination Date, the aggregate of the Principal Balances of all Credit Support Multiple Defaulted Loans (immediately prior to such Home Loans becoming Credit Support Multiple Defaulted Loans) as of the prior Monthly Cut-Off Date since the Closing Date, divided by the aggregate of the Initial Pool Principal Balance. Custodial Agreement: The custodial agreement dated as of February 1, 1997 by and between the Issuer, the Depositor, Mego, as the Seller and the Servicer, the Indenture Trustee, and First Trust of New York, National Association, a national banking association, as the Custodian, and any subsequent custodial agreement, in similar form and substance, providing for the retention of the Indenture Trustee's Home Loan Files by the Custodian on behalf of the Indenture Trustee. Custodian: Any custodian acceptable to the Securities Insurer and appointed by the Indenture Trustee pursuant to the Custodial Agreement, which shall not be affiliated with the Servicer, the Seller, any Servicer, or the Depositor. First Trust National Association shall be the initial Custodian pursuant to the terms of the Custodial Agreement. Cut-Off Date: With respect to any Home Loan, either the opening of business on February 1, 1997 or if such Home Loan is originated on or after February 1, 1997, such Home Loan's date of origination. Debt Instrument: The note or other evidence of indebtedness evidencing the indebtedness of an Obligor under a Home Loan. Defaulted Home Loan: A Home Loan with respect to which: (i) a claim has been paid or finally rejected pursuant to the Contract of Insurance, (ii) the Property has been repossessed and sold, or (iii) any portion of a Monthly Payment is more than 180 calendar days past due (without giving effect to any grace period). Defective Home Loan: A Home Loan required to be repurchased pursuant to Section 3.05 hereof. Deficiency Amount: As to any Distribution Date, an amount equal to the sum of (a) the amount by which the Interest Distribution Amount for such Distribution Date exceeds the amount on deposit in the Note Distribution Account available to be distributed therefor on 5 10 such Distribution Date and (b) the Noteholders' Guaranteed Principal Distribution Amount for such Distribution Date. Delivery: When used with respect to Trust Account Property means: (a) with respect to bankers' acceptances, commercial paper, negotiable certificates of deposit and other obligations that constitute "instruments" within the meaning of Section 9-105(1)(i) of the UCC and are susceptible of physical delivery, transfer thereof to the Indenture Trustee or its nominee or custodian by physical delivery to the Indenture Trustee or its nominee or custodian endorsed to, or registered in the name of, the Indenture Trustee or its nominee or custodian or endorsed in blank, and, with respect to a certificated security (as defined in Section 8-102 of the UCC) transfer thereof (i) by delivery of such certificated security endorsed to, or registered in the name of, the Indenture Trustee or its nominee or custodian or endorsed in blank to a financial intermediary (as defined in Section 8-313 of the UCC) and the making by such financial intermediary of entries on its books and records identifying such certificated securities as belonging to the Indenture Trustee or its nominee or custodian and the sending by such financial intermediary of a confirmation of the purchase of such certificated security by the Indenture Trustee or its nominee or custodian, or (ii) by delivery thereof to a "clearing corporation" (as defined in Section 8-102(3) of the UCC) and the making by such clearing corporation of appropriate entries on its books reducing the appropriate securities account of the transferor and increasing the appropriate securities account of a financial intermediary by the amount of such certificated security, the identification by the clearing corporation of the certificated securities for the sole and exclusive account of the financial intermediary, the maintenance of such certificated securities by such clearing corporation or a "custodian bank" (as defined in Section 8-102(4) of the UCC) or the nominee of either subject to the clearing corporation's exclusive control, the sending of a confirmation by the financial intermediary of the purchase by the Indenture Trustee or its nominee or custodian of such securities and the making by such financial intermediary of entries on its books and records identifying such certificated securities as belonging to the Indenture Trustee or its nominee or custodian (all of the foregoing, "Physical Property"), and, in any event, any such Physical Property in registered form shall be in the name of the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect the complete transfer of ownership of any such Trust Account Property (as defined herein) to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; (b) with respect to any securities issued by the U.S. Treasury, FNMA or FHLMC that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations, the following procedures, all in accordance with applicable law, including applicable federal regulations and Articles 8 and 9 of the UCC: book-entry registration of such Trust Account Property to an appropriate 6 11 book-entry account maintained with a Federal Reserve Bank by a financial intermediary that is also a "depository" pursuant to applicable federal regulations and issuance by such financial intermediary of a deposit advice or other written confirmation of such book-entry registration to the Indenture Trustee or its nominee or custodian of the purchase by the Indenture Trustee or its nominee or custodian of such book-entry securities; the making by such financial intermediary of entries in its books and records identifying such book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations as belonging to the Indenture Trustee or its nominee or custodian and indicating that such custodian holds such Trust Account Property solely as agent for the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect complete transfer of ownership of any such Trust Account Property to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; and (c) with respect to any item of Trust Account Property that is an uncertificated security under Article 8 of the UCC and that is not governed by clause (b) above, registration on the books and records of the issuer thereof in the name of the financial intermediary, the sending of a confirmation by the financial intermediary of the purchase by the Indenture Trustee or its nominee or custodian of such uncertificated security, the making by such financial intermediary of entries on its books and records identifying such uncertificated certificates as belonging to the Indenture Trustee or its nominee or custodian. Depositor: Financial Asset Securities Corp., a Delaware corporation, and any successor thereto. Determination Date: With respect to any Distribution Date, the fifth Business Day preceding such Distribution Date. Distributable Excess Spread: As to any Distribution Date, the lesser of (i) the amount of Excess Spread for such Distribution Date and (ii) the portion of Excess Spread required to be distributed pursuant to Section 5.01(c)(vi) such that the Overcollateralization Amount for such Distribution Date is equal to the Required OC Amount for such Distribution Date. Distribution Date: The 25th day of any month or if such 25th day is not a Business Day, the first Business Day immediately following such day, commencing in March 1997. DTC: The Depository Trust Company. Due Date: With respect to any Monthly Payment, the date on which such Monthly Payment is required to be paid pursuant to the related Debt Instrument. 7 12 Due Period: With respect to any Determination Date or Distribution Date, the calendar month immediately preceding such Determination Date or Distribution Date, as the case may be. Early Termination Notice Date. Any date on which the Pool Principal Balance is less than 10% of the Initial Principal Balance. Eligible Account: At any time, an account which is any of the following: (i) A segregated trust account that is maintained with the corporate trust department of a depository institution acceptable to the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing), or (ii) a segregated direct deposit account maintained with a depository institution or trust company organized under the laws of the United States of America, or any of the States thereof, or the District of Columbia, having a certificate of deposit, short term deposit or commercial paper rating of at least A-1+ by Standard & Poor's and P-1 by Moody's and (so long as a Securities Insurer Default shall not have occurred and be continuing) acceptable to the Securities Insurer. Eligible Servicer: A Person that (i) is servicing a portfolio of Title I mortgage loans, (ii) is legally qualified to service, and is capable of servicing, the FHA Loans and has all licenses required to service Title I mortgage loans, (iii) has demonstrated the ability professionally and competently to service a portfolio of FHA insured mortgage loans similar to the FHA Loans with reasonable skill and care, (iv) has a net worth calculated in accordance with generally accepted accounting principles of at least $500,000 and (v) if other than Mego, is acceptable to the Securities Insurer. Event of Default: As described in Section 10.01 hereof. Excess Claim Amount: With respect to any Distribution Date, an amount equal to (A) 90% of the excess of (x) claims paid under the Contract of Insurance in respect of the FHA Loans over (y) the Trust Designated Insurance Amount less (B) the amount deposited to the FHA Reserve Fund on previous Distribution Dates. Excess Spread. With respect to any Distribution Date, the positive excess, if any, of (x) the Collected Amount with respect to such Distribution Date over (y) the amount required to be distributed pursuant to priorities (i) through (v) of Section 5.01(c) on such Distribution Date. FDIC: The Federal Deposit Insurance Corporation and any successor thereto. FHA. The Federal Housing Administration and any successor thereto. FHA Insurance. Insurance issued by FHA pursuant to Title I of the National Housing Act of 1934, as amended. 8 13 FHA Insurance Coverage Insufficiency. At the time of a prospective claim for reimbursement under the Contract of Insurance for an FHA Loan pursuant to Section 4.12, the amount by which the sum of all claims previously paid by the FHA in respect of all FHA Loans and the amount expected to be received in respect of such prospective claim for such FHA Loan exceeds the Trust Designated Insurance Amount. FHA Insurance Coverage Reserve Account. The account established by the FHA pursuant to the Contract of Insurance which is adjusted and maintained under Title I (see 24 C.F.R. 201.32(a)). FHA Insurance Payment Amount. With respect to any Distribution Date and with respect to an FHA Loan for which an insurance claim has been made by the Contract of Insurance Holder or the Claims Administrator and paid by the FHA or rejected, in part, by the FHA, an amount equal to the sum of such of the following as are appropriate: (i) the amount, if any, received from the FHA, (ii) with respect to claims rejected in part, the amount, if any, received from Mego or the Master Servicer pursuant to Section 4.12 and (iii) the amount received from the sale of FHA Pending Claims sold pursuant to Section 11.01(b). FHA Loans. The Home Loans designated as FHA Loans on the Home Loan Schedule. FHA Pending Claims. As defined in Section 11.01(b). FHA Premium Account. The account which is an Eligible Account established and maintained by the Indenture Trustee pursuant to Section 5.01(a)(4). FHA Premium Account Deposit. With respect to any Distribution Date, an amount equal to the greater of (i) 1/12 times .75% times the aggregate Principal Balance of all FHA Loans other than Invoiced Loans as of the first day of the calendar month preceding the month of such Distribution Date (or the aggregate Principal Balance of such Loans as of the applicable Cut-Off Date with respect to the first Distribution Date) and (ii) the positive excess, if any, of (A) the projected amount of premium and other charges due under the Contract of Insurance for the next succeeding Due Period over (B) the balance in the FHA Premium Account as of the related Determination Date. FHA Reserve Amount. As to each FHA Loan, 10% of the Principal Balance as of the Cut-Off Date of such FHA Loan. FHA Reserve Fund. The account which is an Eligible Account denominated as the FHA Reserve Fund to be established by the Indenture Trustee pursuant to Section 5.01(a)(3) hereof. FHLMC: The Federal Home Loan Mortgage Corporation and any successor thereto. 9 14 FICO Score: The credit evaluation scoring methodology developed by Fair, Isaac and Company. Final Date. The later of: (i) two years after the last insurance claim with respect to an FHA Loan filed with the FHA was certified for payment by FHA, or (ii) the final settlement date with respect to any insurance claim for an FHA Loan rejected by the FHA. Final Scheduled Distribution Date: With respect to the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes and the Class A-4 Notes, March 25, 2023. FNMA: The Federal National Mortgage Association and any successor thereto. Foreclosure Advances: As defined in Section 4.08(b). Foreclosed Loan. As of any date of determination, any Mortgage Loan, other than a Mortgage Loan for which a claim is pending under the Contract of Insurance, that has been discharged as a result of (i) the completion of foreclosure or comparable proceedings; (ii) the Owner Trustee's acceptance of the deed or other evidence of title to the related Property in lieu of foreclosure or other comparable proceeding; or (iii) the acquisition by the Owner Trustee of title to the related Property by operation of law. Foreclosed Property. With respect to any Mortgage Loan, any Property acquired by the Trust as a result of: (i) the completion of foreclosure or comparable proceedings with respect to the related Mortgage Loan; (ii) the Co-Owner Trustee's acceptance of the deed or other evidence of title to the related Property in lieu of foreclosure or other proceeding with respect to the related Loan; or (iii) the acquisition by the Co-Owner Trustee of title thereto by operation of law. Grant: As defined in the Indenture. Guaranty Policy. That certain guaranty insurance policy for the Insured Securities, dated March 10, 1997, and issued by the Securities Insurer to the Indenture Trustee and guaranteeing payment of any Insured Payment. 10 15 HUD: The United States Department of Housing and Urban Development and any successor thereto. Home Loan: An individual Home Loan that is conveyed to the Issuer pursuant to this Agreement on the Closing Date, together with the rights and obligations of a holder thereof and payments thereon and proceeds therefrom received after the Cut-off Date, the Home Loans subject to this Agreement being identified on the Home Loan Schedule annexed hereto as Exhibit A. Home Loan File: The Indenture Trustee's Home Loan File and the Servicer's Home Loan File. Home Loan Interest Rate: The fixed annual rate of interest borne by a Debt Instrument, as shown on the related Home Loan Schedule (not including any amounts payable as premium for FHA Insurance with respect to Invoiced Loans). Home Loan Pool: The pool of Home Loans. Home Loan Purchase Agreement: The home loan purchase agreement between the Seller, as seller, and the Depositor, as purchaser, dated as of February 1, 1997. Home Loan Schedule: The schedule of Home Loans specifying with respect to each Home Loan, the information set forth on Exhibit A attached hereto, as amended or supplemented from time to time. Indemnification Agreement: The Indemnification Agreement, dated as of March 7, 1997, by and among the Securities Insurer, the Seller and Greenwich Capital Markets, Inc., as Underwriter. Indenture: The Indenture, dated as of February 1, 1997, between the Issuer and the Indenture Trustee. Indenture Trustee: First Trust of New York, National Association, a national banking association, as Indenture Trustee under the Indenture and this Agreement acting on behalf of the Noteholders, or any successor indenture trustee under the Indenture and this Agreement. Indenture Trustee Fee: With respect to any Distribution Date, the greater of (A) one-twelfth of 0.0375% times the Pool Principal Balance of the Home Loans as of the opening of business on the first day of the calendar month preceding the calendar month of such Distribution Date (or, with respect to the first Distribution Date, the Initial Pool Principal Balance); and (B) $667. Indenture Trustee's Home Loan File: As defined in Section 2.05. 11 16 Independent. When used with respect to any specified Person, such Person (i) is in fact independent of Mego, the Master Servicer, the Depositor or any of their respective affiliates, (ii) does not have any direct financial interest in or any material indirect financial interest in any of Mego, the Master Servicer, the Depositor or any of their respective affiliates and (iii) is not connected with any of Mego, the Master Servicer, the Depositor or any of their respective affiliates, as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions; provided, however, that a Person shall not fail to be Independent of Mego, the Master Servicer, the Depositor or any of their respective affiliates merely because such Person is the beneficial owner of 1% or less of any class of securities issued by Mego, the Master Servicer, the Depositor or any of their respective affiliates, as the case may be. Independent Accountants. A firm of nationally recognized certified public accountants which is Independent. Initial Pool Principal Balance: $89,696,622, which is the Pool Principal Balance as of the Cut-Off Date. Insurance Agreement: The Insurance Agreement, dated as of February 1, 1997, between the Securities Insurer, Mego, as the Seller, Servicer and Claims Administrator, Mego Mortgage Home Loan Acceptance Corporation, as affiliated holder, the Depositor, the Issuer, the Master Servicer, the Indenture Trustee, as Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder and Greenwich Capital Financial Products, Inc. Insurance Policies. With respect to any Property, any related insurance policy other than the Contract of Insurance or the Guaranty Policy. Insurance Proceeds. With respect to any Property, all amounts collected in respect of Insurance Policies and not required to be applied to the restoration of the related Property or paid to the related Obligor. Insurance Record. The record established and maintained by the Claims Administrator (in a manner consistent with the Title I provisions set forth in 24 C.F.R. Section 201.32) setting forth the FHA insurance coverage attributable to the FHA Loans hereunder. To the extent consistent with adjustments pursuant to Title I to the FHA Insurance Coverage Reserve Account, the Insurance Record shall be reduced by the amount of claims approved for payment by the FHA with respect to any FHA Loan or Related Series Loan after the date of transfer of the related FHA reserve account to the Contract of Insurance Holder. Insured Payment: With respect to the Guaranty Policy, the sum of (i) as of any Distribution Date, any Deficiency Amount and (ii) any unpaid Preference Amount. Insured Securities: Each of the Class A-1 Notes, the Class A-2 Notes, the Class A-3, the Class A-4 Notes and the Class S Certificates. 12 17 Interest Advance: As defined in Section 4.08(a). Interest Distribution Amount: On any Distribution Date, the sum of the Noteholders' Interest Distributable Amount for each Class of Notes and the Class S Interest Distribution for such Distribution Date. Invoiced Loan. An FHA Loan with respect to which the related Obligor is required to pay the premium on FHA Insurance with respect to such FHA Loan. Issuer: The Trust. Late Payment Rate. For any Distribution Date, the lesser of (i) the rate of interest, as it is publicly announced by Citibank, N.A., as its prime rate (any change in such prime rate of interest to be effective on the date such change is announced by Citibank, N.A.) plus 2% and (ii) the maximum rate permissible under any applicable law limiting interest rates. The Late Payment Rate shall be computed on the basis of a year of 365 days calculating the actual number of days elapsed. Majority Securityholders: Subject to Section 12.14, (i) until such time as the sum of the Class Principal Balances of all Classes of Notes has been reduced to zero, the holder or holders of in excess of 50% of the Class Principal Balance of all Classes of Notes (accordingly, the holders of the Certificates shall be excluded from any rights or actions of the Majority Securityholders during such period); and (ii) thereafter, the holder or holders of in excess of 50% of the Percentage Interest of the Residual Interest Instruments. Master Servicer. Norwest Bank Minnesota, N.A., a national banking association, its successors in interest or any successor master servicer appointed as herein provided. Master Servicer Certificate: As defined in Section 6.01. Master Servicer Fee. With respect to any Distribution Date, 1/12 times 0.08% times the Pool Principal Balance as of the opening of business on the first day of the month preceding the month of such Distribution Date (or, with respect to the first Distribution Date, the Initial Pool Principal Balance). Master Servicer Termination Event. Any event specified in Section 10.01. Master Servicing Officer. Any officer of the Master Servicer responsible for the administration and servicing of the Home Loans whose name and specimen signature appears on a list of servicing officers furnished to the Indenture Trustee by the Master Servicer, as such list may from time to time be amended. 13 18 Maturity Date. With respect to any Home Loan and as of any date of determination, the date on which the last payment of principal is due and payable under the related Debt Instrument. Monthly Cut-Off Date: The last day of any calendar month, and with respect to any Distribution Date, the last day of the calendar month immediately preceding such Distribution Date. Monthly Payment: With respect to any Home Loan and any Due Period, the payment of principal and interest due in such Due Period from the Obligor pursuant to the related Debt Instrument (as amended or modified, if applicable, pursuant to Section 4.10). The Monthly Payment related to a Determination Date or a Distribution Date shall be the Monthly Payment due for the next preceding Due Period. Moody's: Moody's Investors Service, Inc. or any successor thereto. Mortgage. With respect to any Mortgage Loan, the mortgage, deed of trust or other instrument creating a mortgage lien (and in a title theory state the document conveying title to the Property as security for the related Loan) or other security interest on the related Property. Mortgage Loan. As of any date of determination, each of the Home Loans, secured by an interest in a Property, transferred and assigned to the Indenture Trustee pursuant to Section 2.01(a). Mortgagee or Obligee. With respect to any Home Loan as of any date of determination, the holder of the related Debt Instrument and any related Mortgage as of such date. Mortgagor or Obligor. With respect to any Home Loan, the obligor(s) on the related Debt Instrument. Net Loan Rate. With respect to each Home Loan, the related Home Loan Interest Rate, less the rate at which the Servicer Fee is calculated. Net Prepayment Interest Shortfall: As to any Distribution Date, the amount by which aggregate Prepayment Interest Shortfalls during the preceding Due Period exceed the Servicer Fee for such Distribution Date. Non-FHA Loans: The Home Loans designated as Non-FHA Loans on the Home Loan Schedule. Nonrecoverable Advances. With respect to any Home Loan, (i) any Interest Advance previously made and not reimbursed pursuant to Section 5.01(c)(i)(c), or (ii) an Interest Advance proposed to be made in respect of a Home Loan which, in the good faith business 14 19 judgment of the Master Servicer, as evidenced by an Officer's Certificate delivered to the Securities Insurer, Mego and the Indenture Trustee no later than the Business Day following such determination, would not be recoverable ultimately from the Payments received in subsequent Due Periods in respect of that Home Loan. Note(s): One or more of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes or Class A-4 Notes. Note Distribution Account: The account established and maintained pursuant to Section 5.01(a)(2). Noteholder: A holder of a Note. Noteholders' Distributable Amount: With respect to any Distribution Date and each Class of Notes, the sum of the Noteholders' Principal Distributable Amount and the Noteholders' Interest Distributable Amount. Noteholders' Guaranteed Principal Distribution Amount. With respect to any Distribution Date, the positive excess, if any, of (i) the aggregate Class Principal Balances of the Notes as of such Distribution Date (taking into account the amount of the distributions required to be distributed pursuant to Section 5.01(c)(iii) on such Distribution Date) over (ii) the Pool Principal Balance as of the end of the related Due Period; provided, that on the Final Scheduled Distribution Date for any Class of Notes, the Noteholders' Guaranteed Principal Distribution Amount for such Class of Notes shall equal the amount necessary to reduce the Class Principal Balance thereof to zero (taking into account the amount of the distributions required to be paid on such Class of Notes pursuant to Section 5.01(c)(iii) on such Final Scheduled Distribution Date). Noteholders' Interest Carry-Forward Amount: With respect to any Distribution Date and each Class of Notes, the sum of (i) excess of (A) the applicable Noteholders' Monthly Interest Distributable Amount for the preceding Distribution Date and any outstanding Noteholders' Interest Carry-Forward Amount for such Class on such preceding Distribution Date, over (B) the amount in respect of interest that is actually paid on such Class of Notes on such preceding Distribution Date plus (ii) interest on such excess, to the extent permitted by law, at the applicable Note Interest Rate from such preceding Distribution Date through the current Distribution Date. Noteholders' Interest Distributable Amount: With respect to each Distribution Date and each Class of Notes, the sum of the applicable Noteholders' Monthly Interest Distributable Amount and the applicable Noteholders' Interest Carry-Forward Amount for such Class of Notes, if any, for such Distribution Date. Noteholders' Monthly Interest Distributable Amount: With respect to each Distribution Date and each Class of Notes, the amount of thirty (30) days' accrued interest at 15 20 the respective Interest Rate for such Class of Notes on the Class Principal Balance of such Class immediately preceding such Distribution Date (or, in the case of the first Distribution Date, on the Closing Date) after giving effect to all payments of principal to the Noteholders of such Class on or prior to the immediately preceding Distribution Date, in each case reduced by an amount equal to such Class' pro rata share (based on the amount of interest to which such Class would have otherwise been entitled) of the sum of (i) Civil Relief Act Interest Shortfall and (ii) the Net Prepayment Interest Shortfall, if any, in each case for such Distribution Date. Noteholders' Monthly Principal Distributable Amount: With respect to each Distribution Date, the amount equal to the sum of the following amounts (without duplication) with respect to the immediately preceding Due Period: (i) that portion of all Payments received on Home Loans allocable to principal, including all full and partial principal prepayments (excluding such payments in respect of such Home Loans that became Defaulted Home Loans on or prior to the end of the preceding Due Period), (ii) the Principal Balance as of the end of the immediately preceding Due Period of each Home Loan that became a Defaulted Home Loan for the first time during the such Due Period, (iii) the portion of the Purchase Price allocable to principal of all Defective Loans with respect to such Due Period and the portion of the purchase amount, if any, set forth in 11.01(b) allocable to principal with respect to the Home Loans, (iv) any Substitution Adjustments deposited to the Note Distribution Account pursuant to Section 3.05 on the previous Determination Date, and (v) the amount of Distributable Excess Spread, if any, in respect of such Distribution Date. Noteholders' Principal Distributable Amount: With respect to any Distribution Date, the sum of the Noteholders' Monthly Principal Distributable Amount for such Distribution Date and the Noteholders' Principal Carry-Forward Amount as of the close of the preceding Distribution Date; provided, however, that the Noteholders' Principal Distributable Amount on any Distribution Date shall not exceed the outstanding principal balance of the Notes; and provided, further, that (i) the Noteholders' Principal Distributable Amount on the Class A-1 Final Scheduled Distribution Date shall not be less than the amount that is necessary (after giving effect to other amounts to be deposited in the Note Distribution Account on such Distribution Date and allocable to principal) to reduce the outstanding Class Principal Balance of the Class A-1 Notes to zero; (ii) the Noteholders' Principal Distributable Amount on the Class A-2 Final Scheduled Distribution Date shall not be less than the amount that is necessary (after giving effect to other amounts to be deposited in the Note Distribution Account on such Distribution Date and allocable to principal) to reduce the outstanding Class Principal Balance of the Class A-2 Notes to zero, (iii) the Noteholders' Principal Distributable Amount on the Class A-3 Final Scheduled Distribution Date shall not be less than the amount that is necessary (after giving effect to other amounts to be deposited in the Note Distribution Account on such Distribution Date and allocable to principal) to reduce the outstanding Class Principal Balance of the Class A-3 Notes to zero, and (iv) the Noteholders' Principal Distributable Amount on the Class A-4 Final Scheduled Distribution Date shall not be less than the amount that is necessary (after giving effect to other amounts to be deposited in the 16 21 Note Distribution Account on such Distribution Date and allocable to principal) to reduce the outstanding Class Principal Balance of the Class A-4 Notes to zero. Noteholders' Principal Carry-Forward Amount: As of the close of any Distribution Date, the excess of (A) the Noteholders' Monthly Principal Distributable Amount and any outstanding Noteholders' Principal Carry-Forward Amount from the preceding Distribution Dates, over (B) the amount in respect of principal that is actually paid on the Notes on such preceding Distribution Date. Note Interest Rate: With respect to each Class of Notes, the per annum rate of interest payable to the holders of such Class of Notes. The Note Interest Rate with respect to the Class A-1 Notes is equal to 6.57% per annum; the Note Interest Rate with respect to the Class A-2 Notes is equal to 6.75% per annum; and the Note Interest Rate with respect to the Class A-3 Notes is equal to 6.94% per annum; and the Note Interest Rate with respect to Class A-4 Notes is equal to 7.33% per annum. Note Register: The register established pursuant to Section 2.3 of the Indenture. Obligee: See Mortgagee. Obligor: See Mortgagor. OC Floor: The product of 1% times the Initial Pool Principal Balance, which product is equal to $896,966. 17 22 OC Multiple. As to any Distribution Date, the highest OC Multiple based upon the data set forth in the Master Servicer's Certificate for such Distribution Date as set forth in the following chart:
30+ Day 60+ Day Annual Default OC Delinquency Percentage Delinquency Percentage % Multiple (Rolling 3 Month) (Rolling 3 Month) (3 Month Average) -------- --------------------- ---------------------- ----------------- 1.00 0.00% to 7.99% 0.00% to 3.49% 0.00% to 4.99% 1.25 8.00% to 8.99% 3.50% to 4.99% 5.00% to 5.99% 1.50 9.00% to 11.99% 5.00% to 6.99% 6.00% to 6.99% 2.50 **=12.00% **=7.00% **=7.00%
CUMULATIVE DEFAULT PERCENTAGE ----------------------------------------------------------------------------- Months* Months 0 Months 012 024 Maturity -------- --------------------- ---------------------- ----------------- 2.50 **5.0% **8.0% **12.0%
- ---------- * Month 0 is March, 1997. ** Greater Than OC Reduction Date. shall be the later of (i) the Distribution Date occurring in April 2000 and (ii) the Distribution Date on which the Pool Principal Balance of the Home Loans for such Distribution Date is equal to or less than one-half of the Initial Pool Principal Balance provided, no OC Reduction Date shall occur if there has been an OC Multiple greater than 1.00 on any of the three (3) previous Distribution Dates. Officer's Certificate: A certificate signed by (i) any Master Servicing Officer or (ii) the Chairman of the Board, the Vice Chairman of the Board, the President, a Vice President, an Assistant Vice President, the Treasurer, the Secretary or one of the Assistant Treasurers or Assistant Secretaries of the Depositor or Mego, as the case may be, as required by this Agreement. Opinion of Counsel. A written opinion of counsel (who is acceptable to the Securities Insurer and the Rating Agencies), who may be employed by Mego, the Master Servicer, the Depositor or any of their respective affiliates. 18 23 Original Class Principal Balance: In the case of the Class A-1 Notes, $23,300,000; in the case of the Class A-2 Notes, $25,950,000; in the case of the Class A-3 Notes, $10,300,000; and in the case of the Class A-4 Notes, $26,603,605. Other Fees. With respect to any Distribution Date, (i) amounts in respect of fees and expenses due to any provider of services to the Trust, except the Indenture Trustee, the Master Servicer, the Servicer, the Claims Administrator, the Contract of Insurance Holder and also except any Person, the fees of which are required by this Agreement to be paid by the Master Servicer, the Servicer, the Claims Administrator, the Contract of Insurance Holder or the Trustee, but including such amounts payable to the successor Master Servicer pursuant to Section 10.03(c); (ii) any taxes assessed against the Trust; and (iii) the reasonable transition expenses of a successor Master Servicer incurred in acting as successor Master Servicer. Overcollateralization Amount: As of any Distribution Date the amount, if any, by which the Pool Principal Balance as of the end of the related Due Period exceeds the Class Principal Balances of the Notes after giving effect to payments of principal to be made on such Distribution Date. Ownership Interest: As to any Security, any ownership or security interest in such Security, including any interest in such Security as the holder thereof and any other interest therein, whether direct or indirect, legal or beneficial, as owner or as pledgee. Owner Trustee: Wilmington Trust Company, as owner trustee under the Trust Agreement, and any successor owner trustee under the Trust Agreement. Owner Trustee Fee: The annual fee of $4,000 payable to the Owner Trustee on the Distribution Date occurring in March each year during the term of this Agreement commencing in March 1998; provided that the initial Owner Trustee Fee shall be paid on the Closing Date. Payment: With respect to any Home Loan or the related Foreclosed Property and any Determination Date, all amounts received or collected on account of principal and interest by or on behalf of the Master Servicer during the preceding Due Period in respect of such Home Loan or Foreclosed Property from whatever source, including without limitation, amounts received or collected from, or representing: (i) the related Obligor; (ii) the application to amounts due on such Home Loan (or, in the case of any Foreclosed Property, to amounts previously due on the related Foreclosed Loan) of any related Insurance Proceeds, any related condemnation awards or settlements or any payments made by any related guarantor or third-party credit-support provider; 19 24 (iii) FHA Insurance Payment Amounts with respect to such Home Loan; (iv) the operation or sale of the related Foreclosed Property; (v) the Purchase Price with respect to such Home Loan; or (vi) amounts deposited into the Note Distribution Account pursuant to Section 11.01(b); provided, however, that any amount the Servicer shall be entitled to retain as additional servicer compensation pursuant to Section 6.05(a) of the Servicing Agreement shall be excluded from the calculation of Payment. Percentage Interest: As defined in the Trust Agreement. Permitted Investments: Each of the following: (a) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. (b) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): 1. U.S. Export-Import Bank (Eximbank) A. Direct obligations or fully guaranteed certificates of beneficial ownership 2. Farmers Home Administration (FmHA) A. Certificates of beneficial ownership 3. Federal Financing Bank 4. Federal Housing Administration (FHA) A. Debentures 5. General Services Administration A. Participation certificates 6. U.S. Maritime Administration 20 25 A. Guaranteed Title XI financing 7. U.S. Department of Housing and Urban Development (HUD) A. Project Notes B. Local Authority Bonds C. New Communities Debentures - U.S. government guaranteed debentures D. U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies that are rated by both Rating Agencies in one of the top two long-term rating categories (stripped securities are only permitted if they have been stripped by the agency itself): 1. Federal Home Loan Bank System A. Senior debt obligations 2. Federal Home Loan Mortgage Corporation (FHLMC) A. Participation Certificates B. Senior debt obligations 3. Federal National Mortgage Association (FNMA) A. Mortgage-backed securities and senior debt obligations 4. Student Loan Marketing Association A. Senior debt obligations 5. Resolution Funding Corp. obligations 6. Farm Credit System A. Consolidated systemwide bonds and notes (d) Money market funds registered under the Investment Company Act of 1940, as amended, whose shares are registered under the Securities Act, and having a rating by Standard & Poor's of AAAm-G; AAAm; or AAm and a rating by Moody's of Aaa. (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks which have a short term rating by Moody's of P-1. The collateral must be held by a third party and the Indenture Trustee must have a perfected first security interest in the collateral. 21 26 (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF. (g) Investment agreements, including guaranteed investment contracts, acceptable to the Securities Insurer and each Rating Agency. (h) Commercial paper rated "Prime - 1" by Moody's and "A-1" or better by Standard & Poor's. (i) Bonds or notes issued by any state or municipality which are rated by Moody's and Standard & Poor's in one of the two highest long term rating categories assigned by such agencies. (j) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" by Moody's and "A-1" or "A" or better by S&P. (k) Repurchase agreements providing for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trust (buyer/lender), and the transfer of cash from the Trust to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trust in exchange for the securities at a specified date. Repurchase agreements ("repos") must satisfy the following criteria or be approved by the Securities Insurer. 1. Repos must be between the Trust and a dealer bank or securities firm which are: A. Primary dealers on the Federal Reserve reporting dealer list which are rated A or better by Standard & Poor's and P-1 by Moody's, or B. Banks rated "A" or above by Standard & Poor's and P-1 by Moody's. 2. The written repo contract trust must include the following: A. Securities which are acceptable for transfer are: (1) Direct U.S. governments, or 22 27 (2) Federal agencies backed by the full faith and credit of the U.S. government (or FNMA or FHLMC) other than mortgage backed securities. B. The term of the repo may be up to 30 days C. The collateral must be delivered to the Indenture Trustee or third party acting as agent for the Indenture Trustee before/simultaneous with payment (perfection by possession of certificated securities). D. Valuation of Collateral (1) The securities must be valued weekly, marked-to-market at current market price plus accrued interest. (a) The value of collateral must be equal to 104% of the amount of cash transferred by the Trust to the dealer bank or security firm under the repo plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by the Trust, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. 3. Legal opinion which must be delivered to the Indenture Trustee: a. Repo meets guidelines under state law for legal investment of public funds. Each reference in this definition of "Permitted Investments" to the Rating Agency shall be construed, in the case of each subparagraph above referring to each Rating Agency, as a reference to Standard & Poor's and Moody's. Person: Any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, national banking association, unincorporated organization or government or any agency or political subdivision thereof. Physical Property: As defined in the definition of "Delivery" above. Pool Principal Balance: With respect to any date of determination, the sum of the Principal Balances for all Home Loans. 23 28 Preference Amount: Any amount previously distributed to the holder of an Insured Security that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code, in accordance with a final, non-appealable order of a court having competent jurisdiction. Premium: The premium, payable monthly, that is specified in the Commitment Letter issued by the Securities Insurer with respect to the Notes and the Certificates. Prepayment Interest Shortfall: As to any Home Loan and Principal Prepayment, the amount by which one month's interest at the related Home Loan Interest Rate (or such lower rate as may be in effect from a Home Loan because of the application of the Civil Relief Act) minus the rate at which the Servicing Fee is calculated on such Principal Prepayment exceeds the amount of interest paid by the Mortgagor in connection with such Principal Prepayment. Principal Balance: With respect to any Home Loan, and for any date of determination, the Principal Balance of such Home Loan as of the Cut-Off Date reduced by all amounts previously received or collected in respect of principal on such Home Loan on or subsequent to the Cut-Off Date for such Home Loan; provided, that with respect to any Defaulted Home Loan, the Principal Balance shall be zero immediately after the Due Period in which such Home Loan becomes a Defaulted Home Loan. Principal Prepayment: Any payment or other receipt of principal in full due on a Home Loan made by an Obligor which is received in advance of the scheduled Maturity Date of such Home Loan. Property: The property (real, personal or mixed) encumbered by the Mortgage which secures the Debt Instrument evidencing a secured Home Loan. Prospectus: The Depositor's final Prospectus, dated March 7, 1997, as supplemented by the Prospectus Supplement. Prospectus Supplement: The Prospectus Supplement dated as of March 7, 1997, prepared by the Seller and the Depositor in connection with the issuance and sale of the Securities. Purchase Price: With respect to a Home Loan, means the Principal Balance of such Home Loan as of the date of purchase, plus unpaid accrued interest at the related Home Loan Interest Rate to the last day of the month in which such purchase occurs (without regard to any Interest Advance that may have been made with respect to such Home Loan). Qualified Substitute Home Loan: A Home Loan: (i) having characteristics such that the representations and warranties made pursuant to Section 3.03(b) with respect to the Home Loans are true and correct as of the date of substitution with respect to such Loan; (ii) each Monthly Payment with respect to such Home Loan shall be greater than or equal to the 24 29 Monthly Payments due in the same Due Period on the Loan for which such Qualified Substitute Home Loan is being substituted; (iii) the Maturity Date with respect to such Home Loan shall be no later than the Maturity Date of the Loan for which such Qualified Substitute Home Loan is being substituted; (iv) as of the date of substitution, the Principal Balance of such Home Loan is less than or equal to (but not more than 1% less than) the Principal Balance of the Home Loan for which such Qualified Substitute Home Loan is being substituted; (v) the Home Loan Interest Rate with respect to such Home Loan is at least equal to the Home Loan Interest Rate of the Home Loan for which such Qualified Substitute Home Loan is being substituted and (vi) the FICO score for such Home Loan must not be less than ten points of the FICO score for such Home Loan for which such Qualified Substitute Home Loan is being substituted; provided however, in the event more than one Qualified Substitute Home Loan is being substituted for one or more Defective Home Loans on any date, in which case (i) the weighted average Home Loan Interest Rate for such Qualified Substitute Home Loans must equal or exceed the weighted average Home Loan Interest Rate of the Defective Home Loans immediately prior to giving effect to the substitution, in each case weighted on the basis of the outstanding Principal Balance of such loans as of such day, (ii) the sum of the Monthly Payments with respect to such Qualified Substitute Home Loans shall be greater than or equal to the Monthly Payments due in the same Due Period on the Defective Home Loans for which a substitution is being made, and (iii) as of the date of substitution, the aggregate Principal Balances of such Qualified Substitute Home Loans are less than or equal to (but not more than 1% less than) the aggregate Principal Balances of the Defective Home Loans for which such a substitution is being made. Rating Agency or Rating Agencies: Either or both of (i) Standard & Poor's, or (ii) Moody's, provided that when the terms Rating Agency or Rating Agencies are used in reference to the Insured Securities, such terms shall mean one or both of Standard & Poor's or Moody's. If no such organization or successor is any longer in existence, "Rating Agency" shall be a nationally recognized statistical rating organization or other comparable person designated by the Issuer and approved by the Securities Insurer, notice of which designation shall have been given to the Indenture Trustee, the Securities Insurer, the Issuer and the Master Servicer. Ratings: The ratings initially assigned to the Notes and the Certificates by the Rating Agencies, as evidenced by letters from the Rating Agencies. Record Date: With respect to each Distribution Date, the close of business on the last Business Day of the month immediately preceding the month in which such Distribution Date occurs. Rejected Claim. With respect to any FHA Loan, a claim for payment made to the FHA under the Contract of Insurance that has been finally rejected after all appeals with FHA have been exhausted for any reason (including a rejection of a previously paid claim and a demand by the FHA of a return of the FHA Insurance Payment Amount for the related FHA Loan) other than a refusal or rejection due to clerical error in computing the claim amount or 25 30 because the amount of the FHA Insurance Coverage Reserve Account as shown in the Insurance Record is zero. Related Series. Means (i) the Trust, (ii) Mego Mortgage Home Loan Trust 1996-3, (iii) Mego Mortgage FHA Title I Loan Trust 1996-2, (iv) Mego Mortgage FHA Title I Loan Trust 1996-1, and (v) each of the subsequent series of trusts, of which the Indenture Trustee is the trustee and the Securities Insurer is the certificate insurer, to which Related Series Loans are sold directly or indirectly by Mego, established pursuant to pooling and servicing agreements. Related Series Loans. Means FHA Title I loans included in the Related Series which: (i) are sold by Mego, directly or indirectly, to a trust and (ii) the Title I insurance coverage attributable to which is made available to cover claims with respect to the FHA Loans and the Related Series Loans in each other Related Series by virtue of terms relating to the administration of the FHA Insurance Coverage Reserve Account substantially similar to the terms hereof. Required OC Amount: With respect to each Distribution Date, the greater of (a) the OC Floor or (b) the product of (i) the OC Multiple for such Distribution Date and (ii)(x) if such Distribution Date is prior to the OC Reduction Date, the product of 7.90% and the Initial Pool Principal Balance, or (y) if such Distribution Date is on or after the OC Reduction Date, the lesser of (A) the product of 7.90% times the Initial Pool Principal Balance and (B) the product of 15.80% times the Pool Principal Balance of the Home Loans as of such Distribution Date, or such lower amount as may be established by the Securities Insurer in its sole discretion after notice to and written approval by the Rating Agencies. Residual Interest Instruments: The Certificates representing the interest which represents the right to the amount remaining, if any, after all prior distributions have been made under this Agreement, the Indenture and the Trust Agreement on each Distribution Date and certain other rights to receive amounts hereunder and under the Trust Agreement. Responsible Officer: When used with respect to the Indenture Trustee, any officer within the Corporate Trust Office of the Indenture Trustee, including any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer of the Indenture Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. When used with respect to the Issuer, any officer in the Corporate Trust Administration Department of the Owner Trustee with direct responsibility for the administration of the Trust Agreement and this Agreement on behalf of the Issuer. When used with respect to the Depositor, the Seller, the Master Servicer, or the Custodian, the President or any Vice President, Assistant Vice President, or any Secretary or Assistant Secretary. 26 31 SAIF. The Savings Association Insurance Fund, as from time to time constituted, created under the Financial Institutions Reform, Recovery and Enforcement 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. Securities: The Notes and/or the Certificates, as applicable. Securities Act. The Securities Act of 1933, as amended. Securities Insurer: MBIA Insurance Corporation, as issuer of the Guaranty Policy, and its successors and assigns. Securities Insurer Commitment: As defined in Section 3.04(a) hereof. Securities Insurer Default: The existence and continuance of any of the following: (a) the Securities Insurer fails to make a payment required under the Guaranty Policy in accordance with its terms; or (b) (i) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Securities Insurer in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, rehabilitation, reorganization or other similar law or (B) a decree or order adjudging the Securities Insurer a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, rehabilitation, arrangement, adjustment or composition of or in respect of the Securities Insurer under any applicable United States federal or state law, or appointing a custodian, receiver, liquidator, rehabilitator, assignee, trustee, sequestrator or other similar official of the Securities Insurer or of any substantial part of its property, or ordering the winding-up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (ii) the commencement by the Securities Insurer of a voluntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the Securities Insurer to the entry of a decree or order for relief in respect of the Securities Insurer in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Securities Insurer, or the filing by the Securities Insurer of a petition or answer or consent seeking reorganization or relief under any applicable United States federal or state law, or the consent by the Securities Insurer to the filing of 27 32 such petition or to the appointment of or the taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Securities Insurer or of any substantial part of its property, or the making by the Securities Insurer of an assignment for the benefit of its creditors, or the failure by the Securities Insurer to pay debts generally as they become due, or the admission by the Securities Insurer in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Securities Insurer in furtherance of any such action. Securities Insurer Reimbursement Amount: As of any Distribution Date, the sum of (x) (i) Insured Payments previously received by the Indenture Trustee and not previously repaid to the Securities Insurer pursuant to Section 5.03(c) hereof plus (ii) interest accrued on such Insured Payment not previously repaid calculated at the Late Payment Rate from the date the Indenture Trustee received such Insured Payment and (y) (i) the amount of any Premium not paid on the date due and (ii) interest on such amount at the Late Payment Rate. The Securities Insurer shall notify the Indenture Trustee and the Owner Trustee of the amount of any Securities Insurer Reimbursement Amount. Securityholder: A holder of a Note or Certificate, as applicable; provided that the exercise of any rights by such holder shall be subject to Section 12.14. Seller: Mego, in its capacity as the transferor hereunder. Series or Series 1997-1: Mego Mortgage Home Loan Asset Backed Securities, Series 1997-1. Servicer: Mego, in its capacity as the servicer hereunder, or any other Eligible Servicer with whom the Master Servicer has entered into a Servicing Agreement pursuant to Section 4.02. Servicer Fee. With respect to any Distribution Date, 1/12 times 1.00% times the Pool Principal Balance, as of the opening of business on the first day of the month preceding the month of such Distribution Date (or, with respect to the first Distribution Date, the Initial Pool Principal Balance), reduced by the aggregate Prepayment Interest Shortfall for the related Due Period. Servicer Review Report. As defined in Section 4.05(d). Servicer Termination Event. With respect to the Servicing Agreement, the events specified in Section 7.02 therein. Servicer's Home Loan Files: As defined in Section 2.05(b). 28 33 Servicing Agreement: The servicing agreement dated as of February 1, 1997 between Mego, as Servicer, the Master Servicer, the Indenture Trustee and the Trust and any other agreement entered into in accordance with Section 4.02. Standard & Poor's: Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., or any successor thereto. Servicing Record. The records for each Home Loan maintained by the Master Servicer pursuant to Section 4.03. Servicing Standard. The standard set forth in Section 4.01(a). 60+ Day Delinquent Loan. With respect to any Determination Date or related Distribution Date, a Home Loan, other than a Credit Support Multiple Defaulted Loan, with respect to which any portion of a Monthly Payment is, as of the prior Monthly Cut-Off Date, 61 days or more past due (without giving effect to any grace period) and unpaid by the Obligor. 60+ Delinquency Percentage (Rolling Three Month). With respect to any Determination Date, the average of the percentage equivalents of the fractions determined for each of the three immediately preceding Due Periods the numerator of each of which is equal to the aggregate Principal Balance of Home Loans that are 60+ Day Delinquent Loans as of the end of such Due Period and the denominator of which is the Pool Principal Balance as of the end of such Due Period. Substitution Adjustment Amount: The meaning assigned to such term in Section 3.05. Substitution Date: As defined in Section 3.05. Termination Date: The earlier of (a) the Distribution Date in March 2023 and (b) the Distribution Date next following the Monthly Cut-Off Date coinciding with or next following the date of the liquidation or disposition of the last asset held by the Trust pursuant to Sections 4.13 or 11.01. 30+ Day Delinquent Loan. With respect to any Determination Date or related Distribution Date, a Home Loan, other than a Credit Support Multiple Defaulted Loan, with respect to which any portion of a Monthly Payment is, as of the prior Monthly Cut-Off Date, 31 days or more past due (without giving effect to any grace period) and unpaid by the Obligor. 30+ Delinquency Percentage (Rolling Three Month). With respect to any Determination Date, the average of the percentage equivalents of the fractions determined for each of the three immediately preceding Due Periods the numerator of which is equal to the aggregate Principal Balance of Home Loans that are 30+ Day Delinquent Loans as of the end 29 34 of such Due Period, and the denominator of which is the Pool Principal Balance of the Home Loans as of the end of such Due Period. Title Document. The evidence of title to or ownership of the Property required by Title I. (See 24 C.F.R. 201.26(a)(1) and 201.20). Title I. Section 2 of Title I of the National Housing Act of 1934, as amended, and the rules and regulations promulgated thereunder as each may be amended from time to time and any successor statute, rules or regulations thereto. Transaction Documents. This Agreement, the Home Loan Purchase Agreement, the Trust Agreement, the Servicing Agreement, the Custodial Agreement, the Indenture, the Administration Agreement, the Insurance Agreement and the Indemnification Agreement. Trust: The Issuer. Trust Account Property: The Trust Accounts, all amounts and investments held from time to time in any Trust Account and all proceeds of the foregoing. Trust Accounts: The Note Distribution Account, the Certificate Distribution Account, the Collection Account and the FHA Premium Account. Trust Agreement: The Trust Agreement dated as of February 1, 1997, among the Depositor, the Co-Owner Trustee, the Owner Trustee and Mego Mortgage Corporation. Trust Designated Insurance Amount: $2,194,698 or such greater amount approved in advance in writing by the Securities Insurer. Trust Estate: The assets subject to this Agreement, the Trust Agreement and the Indenture and assigned to the Indenture Trustee, which assets consist of: (i) such Home Loans as from time to time are subject to this Agreement, including Qualified Substitute Home Loans added to the Trust from time to time, together with the Servicer's Home Loan Files and the Indenture Trustee's Home Loan Files relating thereto and all proceeds thereof, (ii) the Mortgages and security interests in Properties, (iii) all payments received on or with respect to the Home Loans after the applicable Cut-Off Date, (iv) the rights to FHA Insurance reserves attributable to the FHA Loans as of the Cut-Off Date, (v) such assets as from time to time are identified as Foreclosed Property, (vi) such assets and funds as are from time to time deposited in the Collection Account, the Note Distribution Account, the Certificate Distribution Account and the FHA Reserve Account, including amounts on deposit in such accounts which are invested in Permitted Investments, (vii) the Issuer's rights under the Insurance Policies and any Insurance Proceeds, and (viii) all right, title and interest of the Depositor in and to the obligations of the Seller under the Home Loan Purchase Agreement in which the Depositor acquired the Home Loans from the Seller. 30 35 Section 1.02 Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Indenture and the Trust Agreement. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof," "herein," "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; Article, Section, Schedule and Exhibit references contained in this Agreement are references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. Section 1.03 Interest Calculations. All calculations of accrued interest on the Home Loans, the Notes, the Certificates and accrued fees shall be made on the basis of a 360-day year consisting of twelve 30-day months. 31 36 ARTICLE II. CONVEYANCE OF THE HOME LOANS Section 2.01 Conveyance of the Home Loans. (a) As of the Closing Date, in consideration of the Issuer's delivery of the Notes and Certificates to the Depositor or its designee, upon the order of the Depositor, the Depositor, as of the Closing Date and concurrently with the execution and delivery hereof, does hereby sell, transfer, assign, set over and otherwise convey to the Issuer, without recourse, but subject to the other terms and provisions of this Agreement, all of the right, title and interest of the Depositor in and to the Trust Estate. The foregoing sale, transfer, assignment, set over and conveyance does not and is not intended to result in a creation or an assumption by the Issuer of any obligation of the Depositor, the Seller or any other person in connection with the Trust Estate or under any agreement or instrument relating thereto except as specifically set forth herein. (b) As of the Closing Date, the Issuer acknowledges the conveyance to it of the Trust Estate, including from the Depositor all right, title and interest of the Depositor in and to the Trust Estate, receipt of which is hereby acknowledged by the Issuer, and the acceptance of which is made in good faith and without notice or knowledge of any adverse claims or liens. Concurrently with such delivery and in exchange therefor, the Issuer has pledged to the Indenture Trustee the Trust Estate and the Indenture Trustee, pursuant to the written instructions of the Issuer, has executed and caused to be authenticated and delivered the Notes to the Depositor or its designee, upon the order of the Issuer. In addition, concurrently with such delivery and in exchange therefor, the Owner Trustee, pursuant to the instructions of the Depositor, has executed (not in its individual capacity, but solely as Owner Trustee on behalf of the Issuer) and caused to be authenticated and delivered the Certificates to the Depositor or its designee, upon the order of the Depositor. Section 2.02 Reserved. Section 2.03 Ownership and Possession of Home Loan Files. Upon the issuance of the Securities, with respect to the Home Loans, the ownership of each Debt Instrument, the related Mortgage and the contents of the related Servicer's Home Loan File and the Indenture Trustee's Home Loan File shall be vested in the Owner Trustee and the Co-Owner Trustee and pledged to the Indenture Trustee for the benefit of the Noteholders and the Securities Insurer, although possession of the Servicer's Home Loan Files (other than items required to be maintained in the Indenture Trustee's Home Loan Files) on behalf of and for the benefit of the Securityholders and the Securities Insurer shall remain with Mego, and the Custodian shall take possession of the Indenture Trustee's Home Loan Files as contemplated in Section 2.06. 32 37 Section 2.04 Books and Records. The sale of each Home Loan shall be reflected on the Depositor's or the Seller's, as the case may be, balance sheets and other financial statements as a sale of assets by the Depositor or the Seller, as the case may be, under generally accepted accounting principles ("GAAP"). The Master Servicer shall maintain, or cause to be maintained pursuant to Section 4.03, a complete set of books and records for each Home Loan which shall be clearly marked to reflect the ownership of each Home Loan by the Owner Trustee and the Co-Owner Trustee and the pledge to the Indenture Trustee for the benefit of the Securityholders and the Securities Insurer. It is the intention of the parties hereto that the transfers and assignments contemplated by this Agreement shall constitute a sale of the Home Loans and the other property specified in Section 2.01(a) from the Depositor to the Trust and such property shall not be property of the Depositor. If the assignment and transfer of the Home Loans and the other property specified in this Section 2.01(a) to the Owner Trustee and Co-Owner Trustee pursuant to this Agreement or the conveyance of the Home Loans or any of such other property to the Owner Trustee and Co-Owner Trustee is held or deemed not to be a sale or is held or deemed to be a pledge of security for a loan, the Depositor intends that the rights and obligations of the parties shall be established pursuant to the terms of the Agreement and that, in such event, (i) the Depositor shall be deemed to have granted and does hereby grant to the Owner Trustee and Co-Owner Trustee a first priority security interest in the entire right, title and interest of the Depositor in and to the Home Loans and all other property conveyed to the Owner Trustee and Co-Owner Trustee pursuant to Section 2.01 and all proceeds thereof, and (ii) this Agreement shall constitute a security agreement under applicable law. Within five days of the Closing Date, the Depositor shall cause to be filed UCC-1 financing statements naming the Owner Trustee and Co-Owner Trustee as "secured parties" and describing the Home Loans being sold by the Depositor to the Trust with the office of the Secretary of State of the State in which the Depositor is located. Section 2.05 Delivery of Home Loan Documents. (a) With respect to each Home Loan, on the Closing Date the Seller and the Depositor have delivered or caused to be delivered to the Custodian as the designated agent of the Indenture Trustee each of the following documents (collectively, the "Indenture Trustee's Home Loan Files"): (i) The original Debt Instrument, showing a complete chain of endorsements or assignments from the named payee to the Trust and endorsed as follows: "Pay to the order of First Trust of New York, National Association, as Indenture Trustee and Co-Owner Trustee for Mego Mortgage Home Loan Owner Trust 1997-1, without recourse"; 33 38 (ii) If such Home Loan is a Mortgage Loan, the original Mortgage with evidence of recording indicated thereon (except that a true copy thereof certified by an appropriate public official may be substituted); provided, however, that if the Mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Agreement solely because of a delay caused by the public recording office where such Mortgage has been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of such Mortgage certified as a true copy in an Officer's Certificate which shall certify that such Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such Mortgage with evidence of recording indicated thereon upon receipt thereof from the public recording official (or a true copy thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (iii) If such Home Loan is a Mortgage Loan, the original Assignment of Mortgage, in recordable form. Such assignments may be blanket assignments, to the extent such assignments are effective under applicable law, for Mortgages covering Mortgaged Properties situated within the same county. If the Assignment of Mortgage is in blanket form an assignment of Mortgage need not be included in the individual Home Loan File; (iv) If such Home Loan is a Mortgage Loan, all original intermediate assignments of the Mortgage, showing a complete chain of assignments from the named mortgagee to the assignor to the Indenture Trustee, with evidence of recording thereon (or true copies thereof certified by appropriate public officials may be substituted); provided, however, that if the intermediate assignments of mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Agreement solely because of a delay caused by the public recording office where such assignments of Mortgage have been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of each such assignment of Mortgage certified as a true copy in an Officer's Certificate of Mego, which shall certify that each such assignment of Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such assignments of Mortgage with evidence of recording indicated thereon upon its receipt thereof from the public recording official (or true copies thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (v) An original of each assumption or modification agreement, if any, relating to such Home Loan. (b) With respect to each Home Loan, on the Closing Date, the Seller and the Depositor have delivered or caused to be delivered to Mego, as the designated agent of the Indenture Trustee each of the following documents (collectively, the "Servicer's Home Loan 34 39 Files"): (A) If such Home Loan is an FHA Loan, an original or copy of notice signed by the Obligor acknowledging HUD insurance, (B) an original or copy of truth-in-lending disclosure, (C) an original or copy of the credit application, (D) an original or copy of the consumer credit report, (E) an original or copy of verification of employment and income, or verification of self-employment income, (F) if such Home Loan is an FHA Loan, an original or copy of evidence of the Obligor's interest in the Property, (G) an original or copy of contract of work or written description with cost estimates, (H)(i) if such Home Loan is an FHA Loan either (a) an original or copy of the completion certificate or an original or copy of notice of non-compliance, if applicable or (b) an original or copy of report of inspection of improvements to the Property or an original or copy of notice of non-compliance, if applicable, or (ii) if such Home Loan is a Non-FHA Loan in respect of a home improvement, an original or copy of report of inspection of improvements to the Property, (I) to the extent not included in (C), an original or a copy of a written verification that the Mortgagor at the time of origination was not more than 30 days delinquent on any senior mortgage or deed of trust on the Property, (J) (i) if such Home Loan is an FHA Loan for which an appraisal is required pursuant to the applicable regulations, an original or a copy of an appraisal of the Property as of the time of origination of such FHA Loan or (ii) if such Home Loan is a Non-FHA Loan and secured by a Mortgage, (a) if the original principal balance is greater than $25,000 but less than $50,000, a copy of the HUD-1 or HUD 1-A Closing Statement indicating the sale price, or an existing Uniform Residential Appraisal Report, or a Drive-by Appraisal documented on Freddie Mac form 704, or a tax assessment, or (b) if the original principal balance exceeds $50,000, a full Uniform Residential Appraisal Report prepared by a national appraisal firm, (K) an original or a copy of a title search as of the time of origination with respect to the Property, and (L) if such Home Loan is an FHA Loan, any other documents required for the submission of a claim with respect to such FHA Loan to the FHA. (c) Mego, at the direction of the Depositor, concurrently with the execution and delivery hereof, has delivered to the Indenture Trustee cash in an amount equal to (i) the accrued annual FHA premium due on each FHA Loan to the applicable Cut-Off Date, and (ii) the amount of FHA premium collected in respect of the Invoiced Loans after the applicable Cut-Off Date. The Indenture Trustee shall distribute the amount referred to in clause (i) of the previous sentence into the FHA Premium Account and shall distribute the amount referred to in clause (ii) of the previous sentence into the Note Distribution Account. (d) The Indenture Trustee shall cause the Custodian to take and maintain continuous physical possession of the Indenture Trustee's Home Loan Files in the State of Minnesota, and in connection therewith, shall act solely as agent for the holders of the Securities and the Securities Insurer in accordance with the terms hereof and not as agent for Mego or any other party. (e) In addition to the documents delivered to the Indenture Trustee pursuant to Section 2.01, on or prior to the Closing Date, the Guaranty Policy will be delivered to the 35 40 Indenture Trustee for the benefit of the Holders of the Securities (other than the holders of the Residual Interest Instruments). (f) Within 60 days of the Closing Date, Mego, at its own expense, shall cause the Indenture Trustee to record each Assignment of Mortgage (which may be a blanket assignment if permitted by applicable law) in the appropriate real property or other records; provided, however, the Indenture Trustee need not cause to be recorded any such Assignment of Mortgage which relates to a Mortgage Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by Mego (at Mego's expense) to the Indenture Trustee, the Securities Insurer and the Rating Agencies, the recordation of such Assignment of Mortgage is not necessary to protect the Indenture Trustee's interest in the related Mortgage Loan. With respect to any Assignment of Mortgage as to which the related recording information is unavailable within 60 days following the Closing Date, such Assignment of Mortgage shall be submitted for recording within 30 days after receipt of such information but in no event later than one year after the Closing Date. The Indenture Trustee shall be required to retain a copy of each Assignment of Mortgage submitted for recording. In the event that any such Assignment of Mortgage is lost or returned unrecorded because of a defect therein, Mego shall promptly prepare a substitute Assignment of Mortgage or cure such defect, as the case may be, and thereafter the Indenture Trustee shall be required to submit each such Assignment of Mortgage Loan for recording. Section 2.06 Acceptance by Indenture Trustee of the Home Loans; Certain Substitutions; Initial Certification by Custodian. (a) The Indenture Trustee agrees to cause the Custodian to execute and deliver on the Closing Date an acknowledgment of receipt of the Indenture Trustee's Home Loan File for each Home Loan. The Indenture Trustee declares that it will cause the Custodian to hold such documents and any amendments, replacements or supplements thereto, as well as any other assets included in the Trust Estate and delivered to the Custodian in trust, upon and subject to the conditions set forth herein for the benefit of the Securityholders and the Securities Insurer in good faith and without notice of any adverse claims or liens. The Indenture Trustee agrees, for the benefit of the Securityholders and the Securities Insurer, to cause the Custodian to review each Indenture Trustee's Home Loan File within 45 days after the Closing Date (or, with respect to any Qualified Substitute Home Loan, within 45 days after the conveyance of the related Home Loan to the Trust) and to cause the Custodian to deliver to the Seller, the Depositor, the Indenture Trustee, the Issuer, the Securities Insurer and the Master Servicer a certification to the effect that, as to each Home Loan listed in the Home Loan Schedule (other than any Home Loan paid in full or any Home Loan specifically identified in such certification as not covered by such certification), (i) all documents required to be delivered to the Indenture Trustee pursuant to this Agreement are in its possession or in the possession of the Custodian on its behalf (other than as expressly permitted in Section 2.05), (ii) all documents delivered by the Depositor and the Seller to the Custodian pursuant to Section 2.05 have been reviewed by the Custodian and have not been mutilated or damaged and appear regular on their face (handwritten additions, changes or corrections shall not 36 41 constitute irregularities if initialed by the Obligor) and relate to such Home Loan, (iii) based on the examination of the Custodian on behalf of the Indenture Trustee, and only as to the foregoing documents, the information set forth on the Home Loan Schedule accurately reflects the information set forth in the Indenture Trustee's Home Loan File and (iv) each Debt Instrument has been endorsed as provided in Section 2.05. Neither the Issuer nor the Custodian shall be under any duty or obligation (i) to inspect, review or examine any such documents, instruments, certificates or other papers to determine that they are genuine, enforceable, or appropriate for the represented purpose or that they are other than what they purport to be on their face or (ii) to determine whether any Indenture Trustee's Home Loan File should include any of the documents specified in Section 2.05(a)(v). (b) The Servicer's Home Loan File shall be held in the custody of Mego for the benefit of, and as agent for, the Securityholders and the Indenture Trustee as the owner thereof and the Securities Insurer. It is intended that by Mego's agreement pursuant to this Section 2.06(b) the Indenture Trustee shall be deemed to have possession of the Servicer's Home Loan Files for purposes of Section 9-305 of the Uniform Commercial Code of the State in which such documents or instruments are located. Mego shall promptly report to the Indenture Trustee and the Securities Insurer any failure by it to hold the Servicer's Home Loan File as herein provided and shall promptly take appropriate action to remedy any such failure. In acting as custodian of such documents and instruments, Mego agrees not to assert any legal or beneficial ownership interest in the Home Loans or such documents or instruments. Mego agrees to indemnify the Securityholders, the Securities Insurer and the Indenture Trustee for any and all liabilities, obligations, losses, damages, payments, costs, or expenses of any kind whatsoever which may be imposed on, incurred by or asserted against the Securityholders, the Securities Insurer or the Indenture Trustee as the result of any act or omission by Mego relating to the maintenance and custody of such documents or instruments which have been delivered to Mego; provided, however, that Mego will not be liable for any portion of any such amount resulting from the negligence or misconduct of any Securityholder, the Securities Insurer or the Indenture Trustee and provided, further, that Mego will not be liable for any portion of any such amount resulting from Mego's compliance with any instructions or directions consistent with this Agreement issued to Mego by the Indenture Trustee. The Indenture Trustee shall have no duty to monitor or otherwise oversee Mego's performance as custodian hereunder. (c) Upon determination by the Master Servicer, the Securities Insurer, the Depositor, Mego or the Indenture Trustee that any document constituting a part of any Home Loan File was not delivered to the Indenture Trustee or, with respect to any document constituting the Servicer's Home Loan File, to Mego, as custodian for the Indenture Trustee, the Securities Insurer and Securityholders, by the time required hereby (which in the case of (A) a failure to deliver a recorded mortgage or recorded assignment pursuant to Section 2.05(a)(ii) or (a)(iv) (only under the circumstances in which a delay is caused by the public recording office and an Officer's Certificate is required to be provided thereunder) shall be the 20 month anniversary of the Closing Date, (B) failure to deliver a completion certificate or inspection report pursuant to Section 2.05(b)(H)(i) shall be the 14 month anniversary of the 37 42 Closing Date (C) a failure to deliver an inspection report pursuant to Section 2.05(b)(H)(ii) shall be the 12 month anniversary of the Closing Date, (D) a failure to deliver each other document constituting a part of any Indenture Trustee's Home Loan File shall be the Closing Date and (E) a failure to deliver each document (other than those described in clause (B) above) specified in Section 2.05(b) shall be 45 Business Days after the Closing Date) to be so delivered or was defective in any material respect when delivered to the Indenture Trustee, the party identifying any of the foregoing shall give prompt written notice to the other parties and the Securities Insurer. Nothing contained herein shall require the Indenture Trustee to undertake any independent investigation or to make any review of any Home Loan File other than as provided for in this Section 2.06. Mego, upon receipt of such notice, shall comply with the cure, substitution and repurchase provisions of Section 3.05 hereof. 38 43 ARTICLE III. REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Depositor. The Depositor hereby represents, warrants and covenants with and to the Issuer, and the Indenture Trustee, on behalf of the Securityholders, and the Master Servicer, as of the Closing Date: (a) The Depositor is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has all licenses necessary to carry on its business as now being conducted. The Depositor has the power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Depositor and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action of the Depositor; this Agreement evidences the valid, binding and enforceable obligation of the Depositor; and all requisite action has been taken by the Depositor to make this Agreement valid, binding and enforceable upon the Depositor in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other, similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (b) The consummation of the transactions contemplated by this Agreement will not result in (i) the breach of any terms or provisions of the Articles of Incorporation or Bylaws of the Depositor, (ii) the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other material instrument to which the Depositor, or its property is subject, or (iii) the violation of any law, rule, regulation, order, judgment or decree to which the Depositor or its respective property is subject; (c) The Depositor is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or otherwise) or operations of the Depositor or its properties or might have consequences that would materially and adversely affect its performance hereunder. Section 3.02 Representations, Warranties and Covenants of the Master Servicer. The Master Servicer hereby represents, warrants and covenants with and to the Depositor, the Issuer, Mego, the Indenture Trustee, the Securities Insurer and the Securityholders as of the Closing Date: 39 44 (a) The Master Servicer is a national banking association duly organized and validly existing under the laws of the United States of America, with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted; (b) The Master Servicer has the full power and authority to execute, deliver and perform, and to enter into and consummate all transactions contemplated by this Agreement and each other Transaction Document to which it is a party, has duly authorized the execution, delivery and performance of this Agreement and each other Transaction Document to which it is a party, has duly executed and delivered this Agreement and each other Transaction Document to which it is a party, and this Agreement and each other Transaction Document to which it is a party, when duly authorized, executed and delivered by the other parties thereto, will constitute a legal, valid and binding obligation of the Master Servicer, enforceable against it in accordance with its terms; (c) Neither the execution and delivery of this Agreement or any other Transaction Document to which the Master Servicer is a party, the consummation of the transactions required of the Master Servicer herein or therein, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any other Transaction Document to which the Master Servicer is a party will conflict with or result in a breach of any of the terms, conditions or provisions of the Master Servicer's charter or bylaws or any legal restriction or any material agreement or instrument to which the Master Servicer is now a party or by which it is bound, or which would adversely affect the administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Master Servicer or its property is subject; (d) The Master Servicer is not in default, and the execution and delivery of this Agreement and each other Transaction Document to which it is a party and its performance of and compliance with the terms hereof and thereof will not constitute a violation of, any law, any order or decree of any court, or any order, regulation or demand of any federal, state or local governmental or regulatory authority; (e) No action, suit or other proceeding or investigation is pending or, to the Master Servicer's knowledge, threatened before any court or any federal, state or local governmental or regulatory authority (A) asserting the invalidity of this Agreement or any other Transaction Document to which the Master Servicer is a party, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which the Master Servicer is a party, or (C) seeking any determination or ruling that would materially and adversely affect the ability of the Master Servicer to perform its obligations under this Agreement or any other Transaction Document to which the Master Servicer is a party (including any threatened or pending action, suit, proceeding or investigation which might result in the suspension, revocation or modification of the Contract of Insurance); 40 45 (f) No consent, approval, authorization or order of, registration or filing with or notice to, any court or any federal, state or local government or regulatory authority is required for the execution, delivery and performance by the Master Servicer of this Agreement or any other Transaction Document to which the Master Servicer is a party (other than those that have been obtained or will be obtained prior to the Closing Date); (g) Neither this Agreement nor any other Transaction Document to which the Master Servicer is a party nor any statement, report or other document furnished or to be furnished by the Master Servicer pursuant to this Agreement or any other Transaction Document to which the Master Servicer is a party or in connection with the transactions contemplated hereby and thereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading; (h) The statements contained in the section of the Prospectus Supplement entitled "The Master Servicer" which describe the Master Servicer are true and correct in all material respects, and such section of the Prospectus Supplement does not contain any untrue statement of a material fact with respect to the Master Servicer and does not omit to state a material fact necessary to make the statements contained therein with respect to the Master Servicer not misleading; (i) The Master Servicer is solvent, and the Master Servicer will not be rendered insolvent as a result of the performance of its obligations pursuant to this Agreement and any other Transaction Document to which the Master Servicer is a party; (j) The Servicing Agreement conforms to the requirements for a Servicing Agreement contained in this Agreement; (k) Each FHA Loan will be serviced by the Master Servicer and the Servicer in compliance with Title I and all other applicable laws; (l) The Master Servicer, or an affiliate thereof that has been previously approved by the Securities Insurer, the primary business of which is the servicing of home loans such as the Home Loans, is an Eligible Servicer, and the Master Servicer or such affiliate possesses all state and federal licenses necessary for servicing the Home Loans in accordance with this Agreement; (m) The Master Servicer has not waived any default, breach, violation or event of acceleration existing under any Debt Instrument or the related Mortgage; (n) The Master Servicer will cause to be performed any and all acts required to be performed by the Master Servicer or Servicer to preserve the rights and remedies of the Trust and the Indenture Trustee in any Insurance Policies applicable to the Home Loans or with respect to any FHA Loan, any Insurance Policy required to be maintained pursuant to Title I, 41 46 including, without limitation, in each case, any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Trust and the Indenture Trustee; (o) The Master Servicer shall comply with, and shall service, or cause to be serviced, each Home Loan, in accordance with all applicable laws, and, in particular, in accordance with any applicable provisions of the National Housing Act, as amended and supplemented, all rules and regulations issued thereunder, and all administrative publications published pursuant thereto including, in the case of the FHA Loans, all FHA requirements of FHA Title I loans; and (p) The Master Servicer agrees that, so long as it shall continue to serve in the capacity contemplated under the terms of this Agreement, it shall remain in good standing under the laws governing its creation and existence and qualified under the laws of each state in which it is necessary to perform its obligations under this Agreement or in which the nature of its business requires such qualification, it shall maintain or cause an affiliate previously approved of by the Securities Insurer to maintain all licenses, permits and other approvals required by any law or regulations, including, without limitation Title I, as may be necessary to perform its obligations under this Agreement and to retain all rights to service the Loans, and it shall not dissolve or otherwise dispose of all or substantially all of its assets. It is understood and agreed that the representations and warranties set forth in this Section 3.02 shall survive the issuance and delivery of the Securities and shall be continuing as long as any Security shall be outstanding or this Agreement has not been terminated. Section 3.03 Representations and Warranties of Mego. (a) The Seller hereby represents and warrants to the Depositor, the Issuer, the Indenture Trustee, the Master Servicer, the Securities Insurer and the Securityholders, that as of the Closing Date: (i) Mego is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Mego is duly qualified to do business, is in good standing and has obtained all necessary licenses, permits, charters, registrations and approvals (together, "approvals") necessary for the conduct of its business as currently conducted and the performance of its obligations under the Transaction Documents, in each jurisdiction in which the failure to be so qualified or to obtain such approvals would render any Transaction Document unenforceable in any respect or would have a material adverse effect upon the Transaction; (ii) Mego has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Agreement and each other Transaction Document to which it is a party; has duly authorized the execution, delivery and performance of this Agreement and each other 42 47 Transaction Document to which it is a party; has duly executed and delivered this Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and delivered by the other parties hereto, this Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of Mego enforceable against it in accordance with its terms, except as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity); (iii) Neither the execution and delivery of this Agreement or any of the other Transaction Documents to which Mego is a party, the consummation of the transactions required of it herein or under any other Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any of the other Transaction Documents will conflict with or result in a breach of any of the terms, conditions or provisions of Mego's charter or by-laws or any legal restriction or any material agreement or instrument to which Mego is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which Mego or its respective property is subject; (iv) There is no action, suit, proceeding, investigation or litigation pending against Mego or, to its knowledge, threatened, which, if determined adversely to Mego, would materially adversely affect the sale of the Loans, the issuance of the Certificates, the execution, delivery or enforceability of this Agreement or any other Transaction Document, or which would have a material adverse affect on the financial condition of Mego; (v) No consent, approval, authorization or order of any court or governmental agency or body is required for: (a) the execution, delivery and performance by Mego of, or compliance by Mego with, this Agreement, (b) the transfer of all FHA insurance reserves relating to the FHA Loans to the Contract of Insurance Holder, (c) the issuance of the Certificates, (d) the sale of the Home Loans under the Home Loan Purchase Agreement or (e) the consummation of the transactions required of it by this Agreement, except: (A) such as shall have been obtained before the Closing Date, (B) the transfer of the FHA insurance reserves by the FHA to the Contract of Insurance Holder with respect to the FHA Loans as to which an FHA case number has not been assigned as of the Closing Date, and (C) such as may be required under state securities or "Blue Sky" laws in connection with the sale of the Certificates by the Underwriter; (vi) Mego is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of Mego or its 43 48 properties or might have consequences that would materially and adversely affect its performance hereunder; (vii) Mego received fair consideration and reasonably equivalent value in exchange for the sale of the Home Loans to the Depositor; (viii) HUD has approved in writing the transfer to the Contract of Insurance Holder of the FHA Reserve Amount relating to each FHA Loan and all actions have been taken by Mego (other than the filing of the Transfer of Note Report Form 27030 with HUD) and all required consents have been obtained (other than approval upon HUD's receipt of such Transfer of Note Report), in either case, necessary to effect transfer to the Contract of Insurance Holder of the FHA Reserve Amount relating to each FHA Loan (except for FHA Loans with respect to which a case number has not been assigned as of the Closing Date). The FHA Reserve Amounts with respect to the FHA Loans transferred to the Contract of Insurance Holder both prior to and following the transfer of the FHA Loans to the Co-Owner Trustee and Owner Trustee will be available to satisfy claims with respect to such FHA Loans. The amount in the FHA Insurance Coverage Reserve Account, together with all amounts to be requested for transfer with respect to the FHA Loans, will equal $19,166,521.61. The amount to be requested for transfer with respect to the FHA Loans is $2,194,698, which is the sum of approximately 10% of the aggregate of the Principal Balances of the FHA Loans as of the Cut-Off Date; (ix) Mego is a non-supervised lender in good standing with HUD under 24 CFR Section202.5 and is authorized to originate, purchase, hold, service and/or sell loans insured under 24 CFR Part 201 pursuant to a valid contract of insurance, Number 70497-00003; (x) Mego has transferred the Home Loans without any intent to hinder, delay or defraud any of its creditors; (b) Mego hereby agrees for the benefit of the Depositor, the Issuer, the Indenture Trustee, the Securities Insurer and the Securityholders that the failure of any of the following representations and warranties to be true and correct as to any Home Loan (and the related Debt Instrument and Mortgage, if applicable) as of the Cut-Off Date for such Home Loan, or such later date if so specified in such representation and warranty, gives rise to the remedy specified in Section 3.05; (i) The information pertaining to each Home Loan set forth in the Home Loan Schedule was true and correct in all material respects as of the Cut-Off Date; (ii) As of the Closing Date at least 99.5% of the Home Loans (by aggregate Initial Pool Principal Balance) are between 0 and 30 days past due and not 44 49 more than 0.5% of the Home Loans (by aggregate Initial Principal Balance) are between 31 and 60 days past due (without giving effect to any grace period); Mego has not advanced funds, induced, solicited or knowingly received any advance of funds from a party other than the Obligor, directly or indirectly, for the payment of any amount required by the Home Loan; (iii) The terms of the Debt Instrument and any related Mortgage contain the entire agreement of the parties and have not been impaired, waived, altered or modified in any respect, except by written instruments reflected in the related File and recorded, if necessary, to maintain the lien priority of the any related Mortgage; if such Home Loan is an FHA Loan the substance of each such waiver, alteration and modification has been approved by the FHA to the extent required under Title I; no other instrument of waiver, alteration, expansion or modification has been executed, and no Obligor has been released, in whole or in part, except in connection with an assumption agreement which assumption agreement is part of the related Home Loan File and the payment terms of which are reflected in the related Home Loan Schedule and; if such Home Loan is an FHA Loan, has been approved by the FHA to the extent required under Title I; (iv) The Debt Instrument and any related Mortgage are not subject to any set-off, claims, counterclaim or defense and will not have such in the future with respect to the goods and services provided under the Debt Instrument, including the defense of usury or of fraud in the inducement, nor will the operation of any of the terms of the Debt Instrument and any related Mortgage, or the exercise of any right thereunder, render such Debt Instrument or Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (v) Any and all requirements of any federal, state or local law applicable to the Home Loan (including any law applicable to the origination, servicing and collection practices with respect thereto) have been complied with; (vi) No Debt Instrument or Mortgage has been satisfied, cancelled, rescinded or subordinated, in whole or part; and Mego has not waived the performance by the Obligor of any action, if the Obligor's failure to perform such action would cause the Debt Instrument or Mortgage Loan to be in default, except as otherwise permitted by clause (iii); and with respect to a Mortgage Loan, the related Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such satisfaction, subordination, release, cancellation or rescission; (vii) Each related Mortgage is a valid, subsisting and enforceable lien on the related Property, including the land and all buildings on the Property; 45 50 (viii) The Debt Instrument and any related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights in general and by general principles of equity; (ix) To Mego's best knowledge, all parties to the Debt Instrument and any related Mortgage had legal capacity at the time to enter into the Home Loan and to execute and deliver the Debt Instrument and any related Mortgage, and the Debt Instrument and any related Mortgage have been duly and properly executed by such parties; (x) As of the applicable Cut-Off Date, the proceeds of the Home Loan have been fully disbursed and there is no requirement for future advances thereunder, and any and all applicable requirements set forth in the Home Loan documents have been complied with; the Obligor is not entitled to any refund of any amounts paid or due under the Debt Instrument or any related Mortgage; (xi) Immediately prior to the sale, transfer and assignment to the Depositor, Mego will have good and indefeasible legal title to the Home Loan, the related Debt Instrument and any related Mortgage and the full right to transfer such Home Loan, the related Debt Instrument and any related Mortgage, and Mego will have been the sole owner thereof, subject to no liens, pledges, charges, mortgages, encumbrances or rights of others, except for such liens as will be released simultaneously with the transfer and assignment of the Home Loans to the Depositor (and the Home Loan File will contain no evidence inconsistent with the foregoing); and immediately upon the sale, transfer and assignment contemplated by the Home Loan Purchase Agreement, the Depositor will hold good title to, and be the sole owner of each Home Loan, the related Debt Instrument and any related Mortgage, free of all liens, pledges, charges, mortgages, encumbrances or rights of others; (xii) Except for those Home Loans referred to in Section 3.03(b)(ii) above that are delinquent as of the Closing Date, there is no default, breach, violation or event of acceleration existing under the Home Loan, the related Debt Instrument and any related Mortgage and there is no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration and neither Mego nor its predecessors have waived any default, breach, violation or event of acceleration; (xiii) The Debt Instrument and any related Mortgage contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Property of the benefits of the security provided thereby, including, (A) in the case of any Mortgage designated as a deed of trust, by trustee's sale, and (B) otherwise by judicial foreclosure; 46 51 (xiv) Each FHA Loan is an FHA Title I property improvement loan (as defined in 24 C.F.R. Section 201.2) underwritten and originated by Mego in accordance with FHA requirements for the Title I Loan program as set forth in 24 C.F.R. Parts 201 and 202, and Mego has transmitted a loan report with respect to such FHA Loan to FHA so that such FHA Loan will be included in the Title I program; (xv) Each Home Loan is a fixed rate loan; the Debt Instrument shall mature within not more than (a) for an FHA Loan, 20 years and 32 days and (b) for a Non-FHA Loan, 25 years, from the date of origination of the Home Loan; the Debt Instrument is payable in substantially equal Monthly Payments, with interest payable in arrears, and requires a Monthly Payment which is sufficient to fully amortize the original principal balance over the original term and to pay interest at the related Home Loan Interest Rate; interest on each Home Loan is calculated on the basis of a 360 day year consisting of twelve 30-day months, and the Debt Instrument does not provide for any extension of the original term; (xvi) The related Debt Instrument is not and has not been secured by any collateral except, in the case of a Mortgage Loan, the lien of the corresponding Mortgage; (xvii) With respect to any Mortgage Loan, if the related Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, or a valid substitution of trustee has been recorded, and no extraordinary fees or expenses are or will become payable to the trustee under the deed of trust, except in connection with default proceedings and a trustee's sale after default by the Obligor; (xviii) With respect to any Mortgage Loan, Mego has no knowledge of any circumstances or conditions not reflected in the representations set forth herein, or in the Home Loan Schedule, or in the related Home Loan File with respect to the related Mortgage, the related Property or the Obligor which could reasonably be expected to materially and adversely affect the value of the related Property, or the marketability of the Mortgage Loan or to cause the Mortgage Loan to become delinquent or otherwise in default; (xix) Assuming no material change to the applicable law or regulations in effect as of the Closing Date, after the consummation of the transactions contemplated by this Agreement, the Master Servicer on behalf of the Trust and the Indenture Trustee will have the ability to foreclose or otherwise realize upon a Property, if the Home Loan is a Mortgage Loan, or to enforce the provisions of the related Home Loan against the Obligor thereunder, if the foreclosure upon any such Property or enforcement of the provisions of the related Home Loan against the Obligor are undertaken as set forth in Section 4.12; 47 52 (xx) With respect to any FHA Loan that is a Mortgage Loan, the improvements to the Property relating to such FHA Loan, have been or shall be completed and inspected by the Servicer within the time period and to the extent required under the applicable Title I regulations, and evidence of such inspection shall be placed in the Servicer's Home Loan File or, if not, a letter of non-compliance shall be delivered to HUD (with a copy placed in the Servicer's Home Loan File) promptly upon the completion of such inspection; (xxi) Each FHA Loan has been originated in compliance with the provisions of 24 C.F.R. Section 201.20, and, if required by Title I, the market value of the any related Property has been ascertained in accordance with the procedures established by HUD; (xxii) There exists a Home Loan File relating to each Home Loan and such Home Loan File contains all of the original or certified documentation listed in Section 2.05 for such Home Loan, subject to applicable grace periods set forth in 2.06(c). Each Indenture Trustee's Home Loan File has been delivered to the Custodian and each Servicer's Home Loan File is being held in trust by Mego for the benefit of, and as agent for, the Securityholders, the Securities Insurer and the Indenture Trustee as the owner thereof. Each document included in the Home Loan File which is required to be executed by the Obligor has been executed by the Obligor in the appropriate places. With respect to each Mortgage Loan, the related Assignment of Mortgage to the Indenture Trustee is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Property is located. All blanks on any form required to be completed have been so completed; (xxiii) Each FHA Loan is in respect of a home improvement loan or a retail installment sale contract, and each Property is improved by a residential dwelling and is not a Home Loan in respect of a manufactured home or mobile home or the land on which a manufactured home or mobile home has been placed; (xxiv) Each FHA Loan was originated by Mego in accordance with the applicable underwriting criteria established by the FHA and HUD; each Non-FHA Loan was originated by Mego in accordance with Mego's "Express 35/Swift 60 Loan Program", "Debt Consolidation 125 Loan Program", and "Renovator 125 Loan Program" underwriting guidelines, as applicable, attached hereto as Exhibit D; (xxv) Any Property securing an FHA Loan is covered by any insurance required by Title I; if the Property securing any Mortgage Loan is in an area identified by the Federal Emergency Management Agency ("FEMA") as having special flood hazards, unless the community in which the area is situated is participating in the National Flood Insurance Program and the regulations thereunder or less than a year has passed since FEMA notification regarding such hazards, a flood insurance policy is in effect with respect to such Property with a generally acceptable carrier which 48 53 complies with Section 102(a) of the Flood Disaster Protection Act of 1973; all improvements upon each Property securing a Non-FHA Loan are insured by a generally acceptable insurer against loss by fire hazards of extended coverage and such other hazards as are customary in the area where the Property is located pursuant to insurance policies conforming to the requirements of the Agreement; all such policies contain a standard mortgage clause naming Mego, its successors and assigns, as loss payee; (xxvi) All costs, fees and expenses incurred in originating and closing the Home Loan and in recording any related Mortgage were paid and the Obligor is not entitled to any refund of any amounts, paid or due to the Obligee pursuant to the Debt Instrument or any related Mortgage; (xxvii) Except for the related FHA Premium Amount, if applicable, there is no obligation on the part of Mego or any other party other than the Obligor to make payments with respect to the Home Loan; (xxviii) At the time of origination of the Home Loan, each related prior lien, if any, was not 30 or more days delinquent; (xxix) All parties which have had any interest in the Home Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Property is located, and (ii) (A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan associations or national banks having principal offices in such state, or (D) not doing business in such state; (xxx) With respect to each Mortgage Loan, the related Mortgage contains an enforceable provision requiring the consent of the Mortgagee to assumption of the related Mortgage Loan upon sale of the Property; (xxxi) With respect to any Mortgage Loan, there is no homestead or other exemption available to the Mortgagor which would materially interfere with the right to sell the related Property at a trustee's sale or the right to foreclose the Mortgage; no relief has been requested or allowed to the Mortgagor under the Civil Relief Act; (xxxii) Subject to Section 3.05, each FHA Loan has been submitted to the FHA for insurance pursuant to the FHA Title I loan program and each FHA Loan has been or will be assigned a case number by the FHA for the FHA Title I loan program; 49 54 (xxxiii) Subject to Section 3.05, the FHA Reserve Amount with respect to each FHA Loan, has been or will be transferred to the FHA Insurance Coverage Reserve Account; (xxxiv) The related Home Loan File for each Home Loan that is a Mortgage Loan contains a title document with respect to such Home Loan reflecting that title to the related Property is vested at least 50% in the Obligor under such Home Loan; (xxxv) Each Property (including each residential dwelling improvement thereon) is free of damage which materially and adversely affects the value thereof and, if the related Home Loan is an FHA Loan, impairs the ability to insure the related Home Loan under the Title I program; (xxxvi) Each Home Loan was originated in compliance with all applicable laws and, to the best of Mego's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith or, if the related loan is an FHA Loan, in the application for any insurance required by Title I in relation to such FHA Loan; (xxxvii) Each Home Loan has been serviced in accordance with all applicable laws and, to the best of Mego's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith; (xxxviii) The transfer, assignment and conveyance of the Debt Instruments and the Mortgages by Mego to the Depositor were not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (xxxix) Any Home Loan originated in the State of Texas, was originated pursuant to either Chapter 3 or Chapter 6 of the Texas Consumer Credit Code; (xl) As of the applicable Cut-Off Date, no Obligor is a debtor under proceedings under the Bankruptcy Code, and no such Obligor has defaulted in payments on a Home Loan after the filing of such bankruptcy case, whether under a plan or reorganization or otherwise; (xli) Mego has not advanced funds, or induced, solicited or knowingly received any advance of loan payments from a party other than, with respect to a Mortgage Loan, the owner of the Property subject to the Mortgage; (xlii) Mego originated the Home Loans through its network of dealers and correspondents; 50 55 (xliii) Each Home Loan conforms, and all such Home Loans in the aggregate conform, to the description thereof set forth in the Prospectus Supplement; (xliv) With respect to FHA Loans secured by a Mortgage, the representations and warranties of the Mortgagor in each mortgage loan application and in connection with the related FHA Loan are true and correct in all material respects (and it shall be deemed that a breach is material only if a claim for payment made to the FHA under the Contract of Insurance in respect of such FHA Loan is a Rejected Claim as a result of such breach); (xlv) Each Home Loan either complies with the Home Ownership and Equity Protection Act of 1994 or is not subject to such act; (xlvi) Mego has caused to be performed or shall cause to be performed within 15 Business Days of the Closing Date any and all acts required to preserve the rights and remedies of the Trust and the Indenture Trustee in any insurance policies applicable to each Home Loan or, if such Home Loan is an FHA Loan, only if required by Title I, including, without limitation, any necessary notifications of insurers, assignments of policies or interests therein, and establishment of coinsured, joint loss payee and mortgagee rights in favor of the Indenture Trustee; (xlvii) With respect to any Mortgage Loan, to Mego's best knowledge, there exists no violation of any environmental law (either local, state or federal), rule or regulation in respect of the Property which violation has or could have a material adverse effect on the market value of such Property. Mego has no knowledge of any pending action or proceeding directly involving the related Property in which compliance with any environmental law, rule or regulation is in issue; and, to Mego's best knowledge, nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to the use and enjoyment of such Property; (xlviii) Not more than 0.26% of the FHA Loans (by aggregate Initial Principal Balance) and none of the Non-FHA Loans are secured by Mortgages on nonowner occupied Mortgaged Properties; (xlix) On the Closing Date, 55% or more (by aggregate Principal Balance) of the Home Loans do not constitute "real estate mortgages" for the purpose of Treasury Regulation Section301.7701 under the Code. For this purpose a Home Loan does not constitute a "real estate mortgage" if: (i) The Home Loan is not secured by an interest in real property, or (ii) The Home Loan is not an "obligation principally secured by an interest in real property." For this purpose an "obligation is principally secured by an interest 51 56 in real property" if it satisfies either test set out in paragraph (1) or paragraph (2) below. (1) The 80-percent test. An obligation is principally secured by an interest in real property if the fair market value of the interest in real property securing the obligation (A) was at least equal to 80 percent of the adjusted issue price of the obligation at the time the obligation was originated (or, if later, the time the obligation was significantly modified); or (B) is at least equal to 80 percent of the adjusted issue price of the obligation on the Closing Date. For purposes of this paragraph (1), the fair market value of the real property interest must be first reduced by the amount of any lien on the real property interest that is senior to the obligation being tested, and must be further reduced by a proportionate amount of any lien that is in parity with the obligation being tested, in each case before the percentages set forth in (1)(A) and (1)(B) are determined. The adjusted issue price of an obligation is its issue price plus the amount of accrued original issue discount, if any, as of the date of determination. (2) Alternative test. An obligation is principally secured by an interest in real property if substantially all of the proceeds of the obligation were used to acquire or to improve or protect an interest in real property that, at the origination date, is the only security for the obligation. For purposes of this test, loan guarantees made by the United States or any state (or any political subdivision, agency, or instrumentality of the United States or of any state), or other third party credit enhancement are not viewed as additional security for a loan. An obligation is not considered to be secured by property other than real property solely because the obligor is personally liable on the obligation. For this purpose only, substantially all of the proceeds of the obligations means 66 2/3% or more of the gross proceeds. (l) No Home Loan was selected from Mego's assets in a manner which would cause it to be adversely selected as to credit risk from the pool of home loans owned by Mego; (li) With respect to each Home Loan that is not a first mortgage loan, either (i) no consent for the Home Loan is required by the holder of the related prior lien or (ii) such consent has been obtained and has been delivered to the Indenture Trustee; 52 57 (lii) Each Home Loan is either a retail installment contract for goods or services, home improvement loan for goods or services, debt consolidation loan or a home equity loan. All Home Loans that are not debt consolidation loans are either retail installment sale contracts for goods and services or home improvement loans for goods and services that are either "consumer credit contracts" or "purchase money loans" as such terms are defined in 16 C.F.R. Part 433.1; and (liii) Each Debt Instrument is comprised of an original promissory note and each promissory note constitutes an "instrument" or "chattel paper" for purposes of Article 9 of the UCC. Each Debt Instrument has been delivered to the Custodian. Section 3.04 [Reserved]. Section 3.05 Purchase and Substitution. (a) It is understood and agreed that the representations and warranties set forth in Sections 3.03 shall survive the conveyance of the Home Loans to the Issuer, the Grant of the Home Loans to the Indenture Trustee and the delivery of the Securities to the Securityholders and shall be continuing as long as any Security is outstanding. Upon discovery by the Depositor, the Master Servicer, the Seller, the Custodian, the Issuer, the Indenture Trustee, the Securities Insurer or any Securityholder of a breach of any of such representations and warranties which materially and adversely affects the value of the Home Loans or the interest of the Securityholders or the Securities Insurer, or which materially and adversely affects the interests of the Securityholders or the Securities Insurer in the related Home Loan in the case of a representation and warranty relating to a particular Home Loan (notwithstanding that such representation and warranty was made to the Seller's best knowledge), the party discovering such breach shall give prompt written notice to the others. Except with respect to a breach of the representations made by Mego pursuant to Section 3.03(b)(xxxii) and (xxxiii), in the event of a determination in Section 2.06(c) or a breach of a representation and warranty made pursuant to Section 3.03(b) that materially and adversely affects the interests of the Securityholders or the Security Insurer in the Home Loan with respect to which such representation is made or in the Home Loans and a failure within sixty Business Days of discovery or receipt of notice of such failure to effect a cure of the circumstances giving rise to such defect, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding the expiration of such sixty-day period, to repurchase (or substitute for, to the extent permitted by subsection (b) below) the affected Home Loan. The Securities Insurer and the Indenture Trustee on behalf of the Securityholders agree that if an FHA Loan is a Defective Home Loan because a document is not included in the Servicer's Home Loan File as of the 60th Business Day after the discovery or receipt of notice thereof, such defect shall be deemed to be cured if the Indenture Trustee shall have received during the sixty-day period after such date a written statement addressed to it from the Director of HUD Title I Insurance Division that such document would not be required in connection with a claim for FHA Insurance with respect to such FHA Loan. Except as set forth in Section 5 of the Indemnification Agreement, it is understood and agreed that the obligation of Mego to repurchase or substitute any such Home 53 58 Loan pursuant to this Section shall constitute the sole remedy against it with respect to such breach of the foregoing representations or warranties or the existence of the foregoing conditions. For purposes of calculating Business Days with respect to a Defective Loan that is an FHA Loan because a document is not included in the Servicer's Home Loan File in this Section 3.05(a), a Business Day shall not include any day on which the FHA is officially closed for reasons other than as specified in the definition of Business Day. With respect to representations and warranties made by Mego pursuant to Section 3.03(b) that are made to Mego's best knowledge, if it is discovered by any of the Depositor, Mego, the Indenture Trustee, the Owner Trustee or the Securities Insurer that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Loan, notwithstanding Mego's lack of knowledge, such inaccuracy shall be deemed a breach of the applicable representation and warranty. With respect to a breach of the representations made by Mego pursuant to Section 3.03(b)(xxxii) or (xxxiii) if the FHA has not assigned a case number under the Contract of Insurance to an FHA Loan to indicate that such FHA Loan is eligible for Title I Insurance coverage under the Contract of Insurance on or before the 120th day after the Closing Date, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding such 120th day, to repurchase such FHA Loan. If the FHA Reserve Amount with respect to an FHA Loan has not been transferred to the FHA Insurance Coverage Reserve Account on or before the 150th day after the Closing Date, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding such 150th day, to repurchase such FHA Loan. The Claims Administrator shall give notice in writing to each of the Master Servicer, the Securities Insurer, the Depositor, Mego and the Indenture Trustee, the Owner Trustee of (i) any FHA Loan with respect to which there has not been assigned a case number under the Contract of Insurance on or before the 120th day after the Closing Date and (ii) any FHA Loan that has not been transferred to the FHA Insurance Coverage Reserve Account on or before the 150th day after the Closing Date. For purposes of calculating either 120 or 150 days from the Closing Date in this Section 3.05(a), any day on which the FHA is officially closed for reasons other than such day being a Saturday, Sunday or a day on which banking institutions in Washington, D.C. are authorized or obligated by law, executive order or governmental decree to be closed, shall not be counted in making such calculation. If Mego is required to repurchase any Home Loan on a Monthly Cut-Off Date that is not a Business Day, such repurchase shall be made on the last Business Day preceding such Monthly Cut-Off Date. Any Home Loan required to be purchased or repurchased pursuant to this Section 3.05(a) is referred to as a "Defective Home Loan." (b) Mego shall be obligated to repurchase a Defective Home Loan for the Purchase Price, payable to the Indenture Trustee in cash on the Monthly Cut-Off Date specified in Section 3.05(a) above, for deposit in the Note Distribution Account. Notwithstanding the foregoing, within two years of the Closing Date, Mego may elect in lieu of the purchase or repurchase of a Defective Home Loan as provided in this Section 3.05, to substitute, as of the 54 59 Monthly Cut-off Date specified in Section 3.05(a), a Qualified Substitute Home Loan for the Defective Home Loan in accordance with the provisions of this Section 3.05. (c) Mego shall notify the Master Servicer, the Indenture Trustee and the Securities Insurer in writing not less than five Business Days before the related Determination Date which is on or before the date on which Mego would otherwise be required to repurchase such Loan pursuant to Section 3.05(a) of its intention to effect a substitution under this Section. On such Determination Date (the "Substitution Date"), Mego shall deliver to the Indenture Trustee and the Securities Insurer a list of the Home Loans to be substituted for by such Qualified Substitute Home Loans, and attaching as an exhibit a supplemental Home Loan Schedule (the "Supplemental Loan Schedule") setting forth the same type of information appearing on the Loan Schedule and representing as to the accuracy thereof. In connection with any substitution pursuant to this Section 3.05, to the extent that the aggregate Principal Balance of any Qualified Substitute Home Loan or Home Loans is less than the aggregate Principal Balance of the corresponding Home Loan or Home Loans as of the Determination Date on which the substitution is being made, Mego shall deposit such difference (a "Substitution Adjustment Amount") to the Note Distribution Account on such date. (d) Concurrently with the satisfaction of the conditions set forth in this Section 3.05 and the Grant of such Qualified Substitute Home Loans to the Indenture Trustee pursuant to Section 3.05(b), Exhibit A to this Agreement shall be deemed to be amended to exclude all Home Loans being replaced by such Qualified Substitute Home Loans and to include the information set forth on the Supplemental Loan Schedule with respect to such Qualified Substitute Home Loans, and all references in this Agreement to Home Loans shall include such Qualified Substitute Home Loans and be deemed to be made on or after the related Substitution Date, as the case may be, as to such Qualified Substitute Home Loans. (e) Notwithstanding the provisions of Section 3.05(a), the Securities Insurer, in its sole discretion, may extend, by not more than 150 days from the date of the notice described in Section 3.05(a), the sixty-day period available, pursuant to Section 3.05(a), to Mego to cure the circumstances giving rise to a defect with respect to any Home Loan described in Section 3.05. (f) With respect to all Defective Home Loans or other Home Loans repurchased by Mego pursuant to this Agreement, upon the deposit of the Purchase Price therefor to the Note Distribution Account, the Indenture Trustee shall assign to Mego, without recourse, representation or warranty, all the Indenture Trustee's right, title and interest in and to such Defective Home Loans or Home Loans, which right, title and interest were conveyed to the Indenture Trustee pursuant to Section 2.01, including, without limitation, the rights to any FHA Insurance reserves attributable to such Home Loans. The Indenture Trustee shall take any actions as shall be reasonably requested by Mego to effect the repurchase of any such Home Loans. 55 60 ARTICLE IV. ADMINISTRATION AND SERVICING OF HOME LOANS; CLAIMS ADMINISTRATION Section 4.01 Servicing Standard. (a) The Master Servicer is hereby authorized to act as agent for the Trust and in such capacity shall manage, service, administer and make collections on the Home Loans, and perform the other actions required by the Master Servicer under this Agreement. In performing its obligations hereunder the Master Servicer shall at all times act in good faith in a commercially reasonable manner in accordance with all requirements of the FHA applicable to the servicing of the FHA Loans and otherwise in accordance with applicable law and the Debt Instruments and Mortgages. The Master Servicer shall at all times service and administer the FHA Loans in accordance with Title I, and shall have full power and authority, acting alone and/or through the Servicer as provided in Section 4.02, subject only to this Agreement, the respective Home Loans, and, in the case of the FHA Loans, the specific requirements and prohibitions of Title I, to do any and all things in connection with such servicing and administration which are consistent with the manner in which prudent servicers service FHA Title I home improvement loans and which are consistent with the ordinary practices of prudent mortgage lending institutions, but without regard to: (i) any relationship that the Master Servicer, the Servicer or any affiliate of the Master Servicer or any Servicer may have with the related Obligor: (ii) Mego's obligations to repurchase or substitute for a Defective Home Loan pursuant to Section 3.05(b) or any FHA Loans pursuant to Section 4.12(b); (iii) the ownership of any Securities by the Master Servicer or any affiliate of the Master Servicer; (iv) the Master Servicer's obligation to make Interest Advances pursuant to Section 4.08(a), to make Foreclosure Advances pursuant to Section 4.08(b), or repurchase any FHA Loans pursuant to Section 4.12; or (v) the Master Servicer's right to receive compensation for its services as provided in Section 5.01(c)(i)(b). The Master Servicer may take any action hereunder, including exercising any remedy under any Home Loan, retaining counsel in connection with the performance of any of its obligations hereunder and instigating litigation to enforce any obligation of any Obligor, without the consent or approval of the Indenture Trustee or the Securities Insurer, unless any such consent or approval is expressly required hereunder or under applicable law. 56 61 (b) The Indenture Trustee shall cause the Custodian to execute and return to the Master Servicer or the Servicer designated in a written instruction from the Master Servicer to the Indenture Trustee, within 5 days of the Indenture Trustee's receipt any and all documents or instruments necessary to maintain the lien created by any Mortgage on the related Property or any portion thereof, and, within 5 days of request by the Master Servicer or the Servicer therefor a power of attorney in favor of the Servicer with respect to any modification, waiver, or amendment to any document contained in any Home Loan File and 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 Home Loans and with respect to the related Mortgaged Properties prepared and delivered to the Indenture Trustee by the Master Servicer or any Servicer, all in accordance with the terms of this Agreement. (c) The Indenture Trustee shall cause the Custodian to furnish the Master Servicer or Servicer within 5 days of request of a Master Servicing Officer therefor any powers of attorney and other documents necessary and appropriate to carry out its servicing and administrative duties hereunder, including any documents or powers of attorney necessary to foreclose any Home Loan. The forms of any such powers or documents shall be appended to such requests. (d) The Servicer hereby incorporates by reference the representations, warranties and covenants made by it in Section 2.02 of the Servicing Agreement. Section 4.02 Servicing Arrangements. (a) On or prior to the date hereof, the Master Servicer has entered into a Servicing Agreement with respect to all of the Home Loans, in substantially the form of the Form of the Servicing Agreement attached hereto as Exhibit E with Mego, as Servicer. So long as no Securities Insurer Default shall have occurred and be continuing, upon the termination of the Servicing Agreement, the Master Servicer may only appoint or consent to the appointment or succession of a successor Servicer under the Servicing Agreement and may only enter into a substitute servicing agreement which is in form and substance as the Servicing Agreement attached hereto as Exhibit E (which, with the consent of the Securities Insurer, may differ in material respects from the Form of Servicing Agreement attached hereto as Exhibit E) and with a Person acceptable to the Securities Insurer and the Indenture Trustee. So long as no Securities Insurer Default exists, the Master Servicer shall not consent to any material amendment, modification or waiver of the provisions of a Servicing Agreement without the consent of the Securities Insurer and the Indenture Trustee. (b) No provision of this Agreement or the Servicing Agreement shall be deemed to relieve the Master Servicer of any of its duties and obligations to the Indenture Trustee on behalf of Securityholders and the Securities Insurer with respect to the servicing and administration of the Home Loans as provided hereunder; it being understood that the Master Servicer shall be obligated with respect thereto to the same extent and under the same terms and conditions as if it alone were performing all duties and obligations set forth in this 57 62 Agreement in connection with the collection, servicing and administration of such Home Loans. (c) Without limitation of the provisions of Section 4.02(b), the Master Servicer shall (i) review the servicing reports prepared by the Servicer in order to ensure the accuracy thereof, (ii) review the reports submitted by the Servicer to confirm that the Servicer is collecting and appropriately accounting for Obligor payments of premium on FHA Insurance on Invoiced Loans, (iii) otherwise monitor the performance by the Servicer under the Servicing Agreement and notify the Indenture Trustee and the Securities Insurer of any Servicer Termination Event, and (iv) be obligated to ensure that the Servicer deposits Payments into the Collection Account. In the event the Servicer fails to make such deposit, the Master Servicer will deposit such amounts as set forth in Section 5.01(a)(1). (d) The Master Servicer agrees that it shall at all times be prepared (and shall take all steps reasonably required by the Securities Insurer to ensure such preparation), to perform the obligations of the Servicer if the Servicer fails to perform its duties and obligations under the Servicing Agreement. (e) The Servicing Agreement may provide that the Servicer may retain, as additional compensation, prepayment penalties, assumption and processing fees paid by any Obligor and all similar fees customarily associated with the servicing of the Home Loans, including, but not limited to late charges, paid by any Obligor. (f) At the direction of the Securities Insurer, so long as no Securities Insurer Default exists, the Master Servicer shall terminate the Servicer upon the occurrence and continuance of Servicer Termination Event pursuant to the terms of the Servicing Agreement. (g) Mego, as Servicer, shall provide information to the Master Servicer monthly in a mutually agreeable format in order to enable the Master Servicer to independently reconfirm the loan-by-loan reconciliation of the outstanding Principal Balance of each Home Loan included in such information. The Master Servicer shall prepare exception reports, if necessary, showing all Principal Balance differences between the information provided by the Servicer and the confirmations prepared by the Master Servicer and shall furnish such reports to the Indenture Trustee for distribution to the Securities Insurer. If requested by the Securities Insurer, the Servicer shall provide to the Securities Insurer all information provided to the Master Servicer pursuant to this Section 4.02(g). Section 4.03 Servicing Record. (a) The Master Servicer shall establish and maintain books and records for the Home Loans (the "Servicing Record"), in which the Master Servicer shall record: (i) all Payments received or collected by or on behalf of the Master Servicer (through the Servicer or otherwise) or received by the Indenture Trustee in respect of each Home Loan and each Foreclosed Property and (ii) all amounts owing to the Master Servicer in compensation for 58 63 services rendered by the Master Servicer hereunder or in reimbursement of costs and expenses incurred by the Master Servicer hereunder. In addition, the Master Servicer shall establish and maintain records for the Insurance Record (which shall be part of each Servicing Record) in which the Master Servicer shall record all claims made under the Contract of Insurance, all payments received by or on behalf of the Contract of Insurance Holder from the FHA for each such claim and the amount of insurance coverage available in the Insurance Record. (b) Except as otherwise provided herein, amounts received or collected by or on behalf of the Master Servicer or the Indenture Trustee from or on behalf of any Obligor or in respect of any Foreclosed Property or from FHA with respect to a claim made under the Contract of Insurance shall be credited to the Servicing Record: (i) promptly following direct receipt or direct collection by the Master Servicer; (ii) in the case of a Home Loan directly serviced by a Servicer, promptly following deposit of the receipt or collection in the related Collection Account; or (iii) in the case of any amount received directly by the Indenture Trustee, promptly following the Master Servicer's actual knowledge of receipt by the Indenture Trustee pursuant to the notice required by Section 4.12(d) or otherwise; but in any event not later than the Determination Date next following the date of receipt or collection by or on behalf of the Master Servicer (through the Servicer or otherwise) or receipt by the Indenture Trustee. Amounts received or collected by the Master Servicer in connection with the purchase or repurchase of any Home Loan or any Foreclosed Property shall be so recorded on and as of the date of receipt. The Servicing Record shall separately reflect amounts so received or collected by the Master Servicer in each Due Period. All Payments from Obligors received on FHA Loans from or on behalf of an Obligor shall be allocated in accordance with Title I. (c) The Master Servicer shall credit to the Servicing Record relating to each Due Period, on a Home Loan-by-Home Loan basis, each of the following Payments collected or received by or on behalf of the Master Servicer (through the Servicer or otherwise) or received by the Indenture Trustee in respect of each Home Loan and each Foreclosed Property: (i) all payments on account of principal; (ii) all payments on account of interest; 59 64 (iii) all proceeds of the purchase or repurchase of any Home Loan pursuant to Section 3.05(a) or, with respect to FHA Loans, Section 4.12(b) and all Substitution Adjustment Amounts; (iv) all amounts paid by or on behalf of the related Obligor in respect of Foreclosure Advances previously advanced by the Master Servicer or the Servicer; (v) all revenues received or collected in respect of any Foreclosed Property, including all proceeds of the sale of any Foreclosed Property pursuant to Section 4.13; (vi) all proceeds of the sale of the Home Loans and any Foreclosed Properties pursuant to Section 11.01; (vii) all FHA Insurance Payment Amounts; and (viii) all Insurance Proceeds, any condemnation awards or settlements or any payments made by any related guarantor or third-party credit-support provider and any and all other amounts received in respect of Home Loans and not specified above. (d) Notwithstanding anything to the contrary herein, the Master Servicer shall not be required to credit to the Servicing Record, and neither the Master Servicer nor any Securityholder shall have any right or interest in any amount due or received with respect to any Home Loan or any related Foreclosed Property subsequent to the date of repurchase of such Home Loan or Foreclosed Property from the Trust. (e) The Master Servicer shall separately record in each Servicing Record the items required to be included in the Master Servicer Certificate and additionally the following items to the extent not included therein: (i) on or before each Determination Date, the related unpaid Master Servicer Fee due the Master Servicer on the next Distribution Date; (ii) on or before each Determination Date, all amounts retained by the Servicer in respect of the preceding Due Period in respect of amounts due Independent Contractors hired by the Master Servicer to operate and manage a Foreclosed Property pursuant to Section 4.14(b); (iii) on or before each Determination Date, the amount of unreimbursed Interest Advances in respect of prior Distribution Dates and the amount which the Master Servicer or the Servicer is entitled to be reimbursed therefor in accordance with Section 4.08; 60 65 (iv) on or before each Determination Date, all amounts due as of the preceding Monthly Cut-Off Date in reimbursement of Foreclosure Advances previously advanced by the Master Servicer or the Servicer (separately identifying the type and amount of each then due); (v) on or before each Determination Date and based on information provided to the Master Servicer by the Indenture Trustee, all Other Fees distributed pursuant to Section 5.01(c)(xi), as applicable on the next succeeding Distribution Date; (vi) promptly following each Distribution Date, the aggregate amount of the Master Servicer Fee and Servicer Fee paid to the Master Servicer or Servicer, respectively, on such Distribution Date pursuant to Section 5.01(c)(i)(b) and the aggregate amount of the Indenture Trustee Fee and Owner Trustee Fee paid to the Indenture Trustee and Owner Trustee, respectively, on such Distribution Date pursuant to Section 5.01(c)(i)(d); (vii) promptly following each Distribution Date, the aggregate amount of Interest Advances and Foreclosure Advances reimbursed to the Master Servicer or the Servicer on such Distribution Date; (viii) on or before each Determination Date, the Principal Balance of Home Loans that became Defaulted Home Loans during the prior Due Period; (ix) on or before each Determination Date, each Collateral Performance Percentage, (x) on or before each Determination Date, the amount deposited into each Collection Account representing payments by the related Obligors on Invoiced Loans in respect of premium on FHA Insurance; (xi) on or before each Determination Date, the amount remaining in the FHA Insurance Coverage Reserve Account with respect to all FHA Loans and the Related Series Loans, if any; (xii) on or before each Determination Date, identification by loan number, Obligor name, address of Property and Principal Balance of such Home Loan with respect to which the Master Servicer has requested that the Indenture Trustee obtain the environmental report required by Section 4.12 in connection with deciding pursuant to Section 4.12 to foreclose on or otherwise acquire title to the related Property; (xiii) on or before each Determination Date, the Principal Balance of each such Home Loan with respect to which the Master Servicer has determined under the circumstances described in the penultimate sentence of Section 4.12(a) that in good 61 66 faith in accordance with customary mortgage loan servicing practices that all amounts which it expects to receive with respect to such Home Loan have been received; and (xiv) on or before each Determination Date, any other information with respect to the Home Loans reasonably required by the Indenture Trustee or the Securities Insurer to determine the amount required to be distributed pursuant to Section 5.01(c) and determinable by the Master Servicer without undue burden from the Servicer or the items otherwise required to be maintained in each Servicing Record. (f) On or before each Distribution Date, the Master Servicer will determine, based on the date of origination of the FHA Loans as set forth in the Home Loan Schedule, the amount of FHA insurance premium, if any, due on or prior to the next succeeding Distribution Date with respect to each FHA Loan. On or before such Distribution Date, the Master Servicer will compare such amounts with respect to each FHA Loan against amounts invoiced by FHA with respect to the Contract of Insurance as due on or prior to such next succeeding Distribution Date and report all discrepancies to the Indenture Trustee. Mego will assist the Indenture Trustee with the transfer of FHA Insurance with respect to each FHA Loan to the Contract of Insurance Holder. The Master Servicer is not responsible for the transfer of FHA Insurance or the payment of any premium for FHA Insurance. Section 4.04 Annual Statement as to Compliance; Notice of Event of Default. (a) The Master Servicer will deliver to the Indenture Trustee, the Depositor and the Securities Insurer on or before May 31 of each year, beginning in 1998 an Officer's Certificate signed by two Responsible Officers of the Master Servicer stating with respect to the Trust, that: (i) a review of the activities of the Master Servicer during the preceding calendar year (or in connection with the first such Officer's Certificate the period from the Closing Date through the end of 1997) and of the Master Servicer's performance under this Agreement with respect to such Trust has been made under the supervision of the signer of such Officer's Certificate; and (ii) to the best of such signer's knowledge, based on such review, the Master Servicer has fulfilled all its obligations under this Agreement throughout such year (or such portion of such year), or there has been a default in the fulfillment of any such obligation, in which case such Officer's Certificate shall specify each such default known to such signer and the nature and status thereof and what action the Master Servicer proposes to take with respect thereto. (b) The Master Servicer shall deliver to the Indenture Trustee, the Securities Insurer and the Depositor, promptly after having obtained knowledge thereof, but in no event later than 2 Business Days thereafter, written notice in an Officer's Certificate of any event 62 67 which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 10.01. Each of Mego, the Depositor, the Securities Insurer, the Indenture Trustee, the Owner Trustee and the Master Servicer shall deliver to the other of such Persons promptly after having obtained knowledge thereof, but in no event later than 2 Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 10.01. Section 4.05 Annual Independent Accountants' Report; Servicer Review Report. (a) The Master Servicer shall cause a firm of Independent Accountants, who may also render other services to the Master Servicer, to deliver to the Indenture Trustee, Owner Trustee, the Depositor and the Securities Insurer on or before May 31 (or 150 days after the end of the Master Servicer's fiscal year) of each year, beginning on the first May 31 (or other applicable date) after the date that is six months after the Closing Date, with respect to the twelve months ended the immediately preceding December 31 (or other applicable date) (or such other period as shall have elapsed from the Closing Date to the date of such certificate) a report, conducted in accordance with generally accepted accounting principles (the "Accountant's Report") including: (i) an opinion on the financial position of the Master Servicer at the end of its most recent fiscal year, and the results of operations and changes in financial position of the Master Servicer for such year then ended on the basis of an examination conducted in accordance with generally accepted auditing standards, and (ii) a statement to the effect that, based on an examination of certain specified documents and records relating to the servicing of the Master Servicer's mortgage loan portfolio or the affiliate of the Master Servicer principally engaged in the servicing of mortgage loans conducted in compliance with the audit program for mortgages serviced for FNMA, the United States Department of Housing and Urban Development Mortgagee Audit Standards or the Uniform Single Attestation Program for Mortgage Bankers (the "Applicable Accounting Standards") such firm is of the opinion that such servicing has been conducted in compliance with the Applicable Accounting Standards except for such exceptions as such firm shall believe to be immaterial and such other exceptions as shall be set forth in such statement. (b) In addition, the Master Servicer will provide a report of a firm of Independent Accountants which shall state that (1) a review in accordance with agreed upon procedures (determined by the Securities Insurer) was made of such number of Master Servicer Certificates which the Independent Accountants deem necessary to carry out their review of Master Servicer performance, but in no case less than two and (2) except as disclosed in the Accountant's Report, no exceptions or errors in the Master Servicer Certificates so examined were found. The Accountant's Report shall also indicate that the firm is independent of the Master Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. (c) The Master Servicer shall mail a copy of the Servicer Review Report and any report or statement of the Servicer prepared pursuant to Section 6.04 of the Servicing Agreement to the Indenture Trustee. 63 68 (d) (1) The Master Servicer shall, unless otherwise directed by the Securities Insurer, cause a firm of Independent Accountants chosen with the consent of the Securities Insurer to review, annually within 90 days after each anniversary of the Closing Date, in accordance with agreed upon procedures (determined by the Securities Insurer) the performance of the Servicer under the Servicing Agreement in order to confirm that the records of the Servicer accurately reflect collections, delinquencies and other relevant data with respect to the Loans reported to the Master Servicer for the purpose of preparation of the Servicing Record, and that such data is accurately reported to the Master Servicer for reflection in the Servicing Record. Any exceptions or errors disclosed by such procedures shall be included in a report delivered to the Master Servicer, the Indenture Trustee, Owner Trustee and the Securities Insurer (the "Servicer Review Report"). (2) If the Securities Insurer, upon receipt and review of the Servicer Review Report, determines in its sole discretion that the errors or exceptions disclosed by the Servicer Review Report warrant further review of the performance of the Servicer, then the Securities Insurer may, so long as no Securities Insurer Default exists, direct the Master Servicer to cause such firm of Independent Accountants to perform such further review with respect to the performance of Servicer as is reasonably requested by the Securities Insurer. (3) In addition to the foregoing, the Securities Insurer may at any time and from time to time, so long as no Securities Insurer Default exists, direct the Master Servicer to cause such firm of Independent Accountants to conduct such additional reviews and prepare such additional reports with respect to the performance of any Servicer as the Securities Insurer deems reasonably appropriate. Section 4.06 Access to Certain Documentation and Information Regarding Home Loans. The Master Servicer shall provide to representatives of the Indenture Trustee or the Securities Insurer reasonable access to (a) the documentation regarding the Home Loans and to those employees of the Master Servicer who are responsible for the performance of the Master Servicer's duties hereunder and (b) the books of account, records, reports and other papers of the Master Servicer and to discuss its affairs, finances and accounts with its employees and Independent accountants for the purpose of reviewing or evaluating the financial condition of the Master Servicer. The Master Servicer shall provide such access to any Securityholder only in such cases where the Master Servicer is required by applicable statutes or regulations (whether applicable to the Master Servicer or to such Securityholder) to permit such Securityholder to review such documentation. In each case, such access shall be afforded without charge but only upon reasonable request and during normal business hours. Nothing in this Section shall derogate from the obligation of the Master Servicer to observe any applicable law prohibiting disclosure of information regarding the Obligors, and the failure of the Master Servicer to provide access as provided in this Section as a result of such obligation shall not constitute a breach of this Section. Any Securityholder, by its acceptance of a Security (or by acquisition of its beneficial interest therein), shall be deemed to have 64 69 agreed to keep confidential and not to use for its own benefit any information obtained by it pursuant to this Section, except as may be required by applicable law or by any applicable regulatory authority. Section 4.07 [Reserved] Section 4.08 Advances. (a) With respect to the Home Loans (other than Defaulted Home Loans) and each Distribution Date, the Master Servicer shall advance from its own funds and deposit into the Note Distribution Account or from funds on deposit in the related Collection Account in respect of amounts available for distribution on future Distribution Dates, no later than the related Determination Date, the excess, if any, of (i) the aggregate of the portions of the Monthly Payments due with respect to all Home Loans in the related Due Period allocable to interest (calculated at a rate equal to the Net Loan Rate) less any Civil Relief Act Interest Shortfalls over (ii) the aggregate amount deposited into the Note Distribution Account with respect to all Home Loans and such Distribution Date and allocated in accordance with Section 4.03(c) to interest (such amounts, "Interest Advances"). Any funds so applied from funds on deposit in the Collection Account in respect of amounts available for distribution on future Distribution Dates shall be reimbursed by the Master Servicer on or before any future Distribution Date to the extent that funds on deposit in the Note Distribution Account applied in the order of priority set forth in such Section 5.01(c) would be less than the amount required to be distributed pursuant to Section 5.01(c) on such dates as a result of such Interest Advances. Notwithstanding anything herein to the contrary, no Interest Advance shall be required to be made hereunder if the Master Servicer determines that such Interest Advance would, if made, constitute a Nonrecoverable Advance. (b) The Master Servicer shall advance from its own funds the following amounts in respect of any Mortgage Loan or Foreclosed Property, as applicable (collectively, "Foreclosure Advances"): (i) all third party costs and expenses (including legal fees and costs and expenses relating to bankruptcy or insolvency proceedings in respect of any Obligor) associated with the institution of foreclosure or other similar proceedings in respect of any Home Loan pursuant to Section 4.12; (ii) all insurance premiums due and payable in respect of each Foreclosed Property, prior to the date on which the related Insurance Policy would otherwise be terminated; 65 70 (iii) all real estate taxes and assessments in respect of each Foreclosed Property that have resulted in the imposition of a lien thereon, other than amounts that are due but not yet delinquent; (iv) all costs and expenses necessary to maintain each Foreclosed Property; (v) all fees and expenses payable to any Independent Contractor hired to operate and manage a Foreclosed Property pursuant to Section 4.14(b); and (vi) all fees and expenses of any Independent appraiser or other real estate expert retained by the Indenture Trustee pursuant to Section 4.13(a). The Master Servicer shall advance the Foreclosure Advances described in clauses (i) through (v) above if, but only if, it has approved the foreclosure or other similar proceeding in writing and the Master Servicer would make such an advance if it or an affiliate held the affected Mortgage Loan or Foreclosed Property for its own account and, in the Master Servicer's good faith judgment, such advance would not constitute a nonrecoverable advance. In making such assessment with respect to the institution of such proceedings, the Master Servicer shall not advance funds with respect to a Mortgage Loan unless the appraised value of the related Property exceeds the sum of (i) the amounts necessary to satisfy any liens prior to the liens on Mortgages securing such Mortgage Loan and (ii) the reasonably anticipated costs of foreclosure or similar proceedings. Section 4.09 Reimbursement of Interest Advances and Foreclosure Advances. (a) The Master Servicer shall be entitled to be reimbursed pursuant to Section 5.01(c) for previously unreimbursed Interest Advances made from its own funds or any such previously unreimbursed Interest Advance by the Servicer with respect to a Home Loan on Distribution Dates subsequent to the Distribution Date in respect of which such Interest Advance was made from Payments with respect to such Home Loan. If a Home Loan shall become a Defaulted Home Loan and the Master Servicer shall not have been fully reimbursed for any such Interest Advances with respect to such Home Loan, the Master Servicer shall be entitled to be reimbursed for the outstanding amount of such Interest Advances from unrelated Home Loans pursuant to Section 5.01(c). No interest shall be due to the Master Servicer in respect of any Interest Advance for any period prior to the reimbursement thereof. (b) The Master Servicer shall be entitled to be reimbursed pursuant to Section 5.01(c) from related Payments for Foreclosure Advances advanced on or prior to the related Monthly Cut-Off Date but only to the extent the Master Servicer has satisfied the requirements of Section 4.08. No interest shall be due to the Master Servicer in respect of any Foreclosure Advance for any period prior to the reimbursement thereof. 66 71 (c) The Indenture Trustee shall offset against amounts otherwise distributable to the Master Servicer pursuant to Section 5.01(c), amounts, if any, which were required to be deposited in any Collection Account pursuant to Section 5.01(c) with respect to the related Due Period but which were not so deposited. Section 4.10. Modifications, Waivers, Amendments and Consents. (a) The Master Servicer shall not agree to any modification, waiver or amendment of any provision of any Home Loan unless, in the Master Servicer's good faith judgment, such modification, waiver or amendment (i) would minimize the loss that might otherwise be experienced with respect to such Home Loan, and (ii) in the case of any FHA Loan, complies with the requirements of Title I or is required by Title I and such FHA Loan has experienced a payment default or a payment default is reasonably foreseeable by the Master Servicer. The Master Servicer shall agree to subordinate the position of the security interest in the Property which secures any FHA Loan upon the Master Servicer's receipt of written approval of HUD to such subordination or written certification by the Servicer that such proposed subordination complies with current published HUD requirements and provided such subordination (i) would permit the Obligor to refinance a senior lien to take advantage of a lower interest rate or (ii) would permit the Obligor to extend the term of the senior lien. Notwithstanding the foregoing, at no time shall the aggregate of the Principal Balances of Home Loans modified, waived or amended without the prior or subsequent approval of the Securities Insurer exceed 3% of the aggregate of the Initial Pool Principal Balance and no modification or amendment of a Home Loan shall involve the execution by the Obligor of a new Debt Instrument or, with respect to any Mortgage Loan, of a new Mortgage. At the request of the Master Servicer, the Securities Insurer, at its discretion, may approve an increase in or waiver of the percentage referred to in the previous sentence, such approval not to be unreasonably withheld. (b) The Master Servicer shall notify the Indenture Trustee and the Securities Insurer of any modification, waiver or amendment of any provision of any Home Loan and the date thereof, and shall deliver to the Indenture Trustee for deposit in the related Home Loan File, an original counterpart of the agreement relating to such modification, waiver or amendment, promptly following the execution thereof. Such notice shall state that the conditions contained in this Section 4.10 have been satisfied. Section 4.11. Due-On-Sale; Due-on-Encumbrance. (a) If any Home Loan contains a provision, in the nature of a "due-on-sale" clause, which by its terms: (i) provides that such Home Loan shall (or may at the Obligee's option) become due and payable upon the sale or other transfer of an interest in the related Property; or 67 72 (ii) provides that such Home Loan may not be assumed without the consent of the related Obligee in connection with any such sale or other transfer, then, for so long as such Home Loan is included in the Trust, the Master Servicer, on behalf of the Indenture Trustee, shall exercise any right the Trust or the Indenture Trustee may have as the Obligee of record with respect to such Home Loan (x) to accelerate the payments thereon, or (y) to withhold its consent to any such sale or other transfer, in a manner consistent with the servicing standard set forth in Section 4.01. (b) If any Home Loan contains a provision, in the nature of a "due-on-encumbrance" clause, which by its terms: (i) provides that such Home Loan shall (or may at the Obligee's option) become due and payable upon the creation of any lien or other encumbrance on the related Property; or (ii) requires the consent of the related Obligee to the creation of any such lien or other encumbrance on the related Property, then, for so long as such Home Loan is included in the Trust, the Master Servicer, on behalf of the Trust or the Indenture Trustee, shall exercise any right the Indenture Trustee may have as the Obligee of record with respect to such Home Loan (x) to accelerate the payments thereon, or (y) to withhold its consent to the creation of any such lien or other encumbrance, in a manner consistent with the servicing standard set forth in Section 4.01. (c) Nothing in this Section 4.11 shall constitute a waiver of the Indenture Trustee's right to receive notice of any assumption of a Home Loan, any sale or other transfer of the related Property or the creation of any lien or other encumbrance with respect to such Property. (d) Except as otherwise permitted by Section 4.10, the Master Servicer shall not agree to modify, waive or amend any term of any Home Loan in connection with the taking of, or the failure to take, any action pursuant to this Section 4.11. Section 4.12. Claim for FHA Insurance and Foreclosure. (a) (x) If any Monthly Payment due under any FHA Loan is not paid when the same becomes due and payable, or if the Obligor fails to perform any other covenant or obligation under such FHA Loan and such failure continues beyond any applicable grace period, the Master Servicer shall take such action (consistent with Title I, including efforts to cure the default of such FHA Loan pursuant to 24 C.F.R. Section 201.50) as it shall deem to be in the best interest of the Trust. If the maturity of the related Note has been accelerated pursuant to the requirements under Title I following the Master Servicer's efforts to cure the default of such FHA Loan (and such FHA Loan is not required to be purchased pursuant to Section 68 73 2.04(b)), and (i) if an FHA Insurance Coverage Insufficiency does not exist at the time, the Claims Administrator shall initiate, on behalf of the Trust and the Contract of Insurance Holder, a claim under the Contract of Insurance for reimbursement for loss on such FHA Loan pursuant to Title I (see 24 C.F.R. Section 201.54), or (ii) if an FHA Insurance Coverage Insufficiency exists at the time, the Master Servicer shall determine within 90 days in accordance with Section 4.12(c) whether or not to proceed against the Property securing such FHA Loan, if such FHA Loan is a Mortgage Loan or against the Obligor, if such FHA Loan is unsecured, and if thereafter an FHA Insurance Coverage Insufficiency does not exist, the Claims Administrator may submit a claim under the Contract of Insurance with respect to such FHA Loan if it has obtained the prior approval of the Secretary of HUD pursuant to 24 C.F.R. Section 201.51; or (y) if any Monthly Payment due under any Non-FHA Loan is not paid when the same is due and payable, or if the Obligor fails to perform any other covenant or obligation under such Non-FHA Loan and such failure continues beyond any applicable grace period, the Master Servicer shall take such action as it shall deem to be in the best interest of the Trust; including but not limited to proceeding against the Property securing such Non-FHA Loan. In the event that in accordance with clauses (a)(x)(ii) and (y) above the Master Servicer determines not to proceed against the Property or Obligor, as applicable, on or before the Determination Date following such determination the Master Servicer shall determine in good faith in accordance with customary servicing practices that all amounts which it expects to receive with respect to such Loan have been received. If the Master Servicer makes such a determination, it shall give notice to such effect pursuant to Section 4.03(e)(xiv). (b) If the Claims Administrator initiates a claim for reimbursement for loss on any FHA Loan under this Section, the Claims Administrator shall comply with applicable provisions of Title I and diligently pursue such claim and, in any event, shall initiate such claim no later than the last day permitted under Title I (see 24 C.F.R. Section 201.54(b)). For purposes of this Agreement, the term "initiate a claim for reimbursement" shall mean the filing of the claim application pursuant to the requirements set forth in 24 C.F.R. Section 201.54, including the filing of all related assignments and documents and materials required for file review. For the purposes of such filing, the Claims Administrator shall request, and the Co-Owner Trustee within 5 calendar days of request shall deliver to the Claims Administrator, the Note and the related Mortgage for such FHA Loan and each other item in the related File necessary to make such claim. Each Securityholder hereby consents to the assignment of such FHA Loan for the sole purpose of initiating a claim under the Contract of Insurance for reimbursement with respect to such FHA Loan. Pursuant to Section 4.12(i), the Contract of Insurance Holder shall furnish the Claims Administrator a power of attorney to file claims under the Contract of Insurance. The Co-Owner Trustee and Contract of Insurance Holder agree to execute and deliver to the Claims Administrator, within 5 Business Days of receipt from the Claims Administrator, all documents, if any, necessary to initiate and file a claim under the Contract of Insurance for such FHA Loan, which documents shall be prepared by the Claims Administrator. If any claim to the FHA becomes a Rejected Claim, upon receipt of the FHA's rejection notice by the Claims Administrator directly from the FHA or 69 74 from the Contract of Insurance Holder pursuant to Section 4.12(e) and a determination by the Claims Administrator that the rejection was not due to clerical error, then the Claims Administrator shall promptly notify the Contract of Insurance Holder (if such notice has not already been given), the Indenture Trustee and the Securities Insurer of the notice of a Rejected Claim. If the FHA indicates in writing that the claim is a Rejected Claim due to reasons other than a failure to service the related FHA Loan in accordance with Title I after the Closing Date, Mego shall repurchase the FHA Loan on or before the Monthly Cut-Off Date next following the date of such notice from the Claims Administrator to repurchase such FHA Loan, either directly from FHA or from the Trust, for the Purchase Price. If FHA indicates in writing that the claim is a Rejected Claim due to a failure to service such FHA Loan in accordance with Title I after the Closing Date, the Claims Administrator shall immediately notify Mego, the Master Servicer, the Contract of Insurance Holder, the Trust, the Indenture Trustee and the Securities Insurer of such determination, and the Master Servicer shall on or before the later to occur of (i) the next succeeding Monthly Cut-Off Date and (ii) ten Business Days from the date on which such rejection notice is received by the Claims Administrator, purchase such FHA Loan either directly from FHA or from the Trust, for the Purchase Price. In the event that the FHA fails to indicate in writing why the claim is a Rejected Claim, the Claims Administrator shall determine why the claim is a Rejected Claim. If the Claims Administrator determines that the claim is a Rejected Claim for reasons other than a servicing failure that occurred after the Closing Date, Mego shall be obligated to repurchase such FHA Loan for the Purchase Price. If the Claims Administrator determines that the claim is a Rejected Claim due to a servicing failure that occurred after the Closing Date, the Master Servicer shall be obligated to repurchase such FHA Loan for the Purchase Price. Notwithstanding any provisions herein to the contrary, neither Mego nor the Master Servicer shall be required to repurchase or purchase, as applicable, any FHA Loan subject to a Rejected Claim as a result of the depletion of the amount of the FHA Insurance Coverage Reserve Account as shown in the Insurance Record. (c) In accordance with the criteria for proceeding against the Property set forth in Section 4.12(a), with respect to an FHA Loan that is a Mortgage Loan that has been accelerated pursuant to the requirements of Title I following the Master Servicer's efforts to cure the default of the FHA Loan, and with respect to a Non-FHA Loan that is a Mortgage Loan, unless otherwise prohibited by applicable law or court or administrative order, the Master Servicer, on behalf of the Trust and the Indenture Trustee, may, at any time, institute foreclosure proceedings, exercise any power of sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or title to the related Property, by operation of law or otherwise. In accordance with the criteria for proceeding against the Property set forth in Section 4.12(a), with respect to FHA Loans that are Mortgage Loans and with respect to the Non-FHA Loans, the Master Servicer shall institute foreclosure proceedings, repossess, exercise any power of sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or 70 75 otherwise acquire possession of or title to any Property, by operation of law or otherwise only in the event that in the Master Servicer's reasonable judgement such action is likely to result in a positive economic benefit to the Trust by creating net liquidation proceeds (after reimbursement of all amounts owed with respect to such Home Loan to the Master Servicer or the Servicer) and provided that, with respect to any Property, prior to taking title thereto, the Master Servicer has requested that the Indenture Trustee obtain, and the Indenture Trustee shall have obtained, an environmental review to be performed on such Property by a company with recognized expertise, the scope of which is limited to the review of public records and documents for information regarding whether such Property has on it, under it or is near, hazardous or toxic material or waste. If such review reveals that such Property has on it, under it or is near hazardous or toxic material or waste or reveals any other environmental problem, the Indenture Trustee shall provide a copy of the related report to the Master Servicer and the Securities Insurer and title shall be taken to such Property only after obtaining the written consent of the Securities Insurer. In connection with any foreclosure proceeding on an FHA Loan, the Master Servicer shall comply with the requirements under Title I, shall follow such practices and procedures in a manner which is consistent with the Master Servicer's procedure for foreclosure with respect to similar FHA Title I loans held in the Master Servicer's portfolio for its own account or, if there are no such loans, FHA Title I loans serviced by the Master Servicer for others. To the extent required by Section 4.08, the Master Servicer shall advance all necessary and proper Foreclosure Advances until final disposition of the Foreclosed Property and shall manage such Foreclosed Property pursuant to Section 4.14. If, in following such foreclosure procedures, title to the Foreclosed Property is acquired, the deed or certificate of sale shall be issued to the Co-Owner Trustee and the Indenture Trustee. (d) With respect to any FHA Loan, each of the Co-Owner Trustee, Owner Trustee, Indenture Trustee and the Contract of Insurance Holder shall deposit in the Note Distribution Account on the day of receipt all amounts received from the FHA or any other Person with respect to such FHA Loans or any other assets of the Trust and shall transmit by facsimile, or such other method requested by the Master Servicer, Claims Administrator or the Securities Insurer, to the Master Servicer, Claims Administrator and the Securities Insurer on each such day the letter of transmittal received from the FHA and any other documents with respect to such receipt. Each of the Co-Owner Trustee, Owner Trustee, Indenture Trustee and the Contract of Insurance Holder shall also promptly deliver to the Claims Administrator copies of any other correspondence received from the FHA or sent to the FHA by the Co-Owner Trustee, Owner Trustee, Indenture Trustee or the Contract of Insurance Holder, as the case may be, including, but not limited to, any correspondence regarding the balance of the FHA Insurance Coverage Reserve Account, premiums due and claims rejected. (e) If, prior to the Termination Date, the FHA rejects an insurance claim, in whole or part, under the Contract of Insurance after previously paying such insurance claim and the FHA demands that the Contract of Insurance Holder repurchase such FHA Loan, the Claims Administrator shall pursue such appeals with the FHA as are reasonable. If the FHA 71 76 continues to demand that the Contract of Insurance Holder repurchase such FHA Loan after the Claims Administrator exhausts such administrative appeals as are reasonable, then notwithstanding that Mego, the Master Servicer or any other person is required to repurchase such FHA Loan under this Agreement, the Claims Administrator shall notify the Contract of Insurance Holder of such fact and the Contract of Insurance Holder in its capacity as Co-Owner Trustee and the Indenture Trustee shall repurchase such FHA Loan from funds available in the Note Distribution Account. The Claims Administrator shall, to the extent possible, direct the Indenture Trustee to make all such repurchases of FHA Loans once a month and to repurchase any and all such FHA Loans from the FHA in that portion of the calendar month after each Distribution Date. If the Indenture Trustee withdraws any amounts from the Trust for such purpose between the Determination Date and Distribution Date of any month, the Master Servicer shall prepare the Master Servicer Certificate provided under Section 6.01 for such Distribution Date (or promptly revise the Master Servicer Certificate if already prepared for such Distribution Date) to reflect such withdrawals as if made on such Determination Date and the Trustee shall revise its determination pursuant to Section 6.01 accordingly. To the extent allowed by FHA, Mego may repurchase directly from FHA any FHA Loan for which an insurance claim has been paid and later rejected by FHA. If the FHA indicates in writing in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to other than (i) a failure to service the FHA Loan in accordance with Title I after the Closing Date or (ii) the amount in the FHA Insurance Coverage Reserve Account is insufficient to pay such claim, or if the FHA does not indicate in writing the reason for its rejection or refusal, Mego shall be liable to reimburse the Trust for any amounts paid by the Indenture Trustee to the FHA in order to repurchase such FHA Loan. Subject to Section 4.12(b), if the FHA indicates in writing, or it is agreed by the Master Servicer, in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to a failure to service such Loan in accordance with Title I after the Closing Date, the Master Servicer shall be liable to reimburse the Trust or Mego for any amounts paid by the Trust or Mego, as the case may be, to FHA in order to repurchase FHA Loans for which the FHA has rejected an insurance claim as a result of a failure to service such FHA Loan in accordance with Title I. (f) If, after the Termination Date, the FHA rejects an insurance claim, in whole or part, under the Contract of Insurance after previously paying such insurance claim and the FHA demands that the Contract of Insurance Holder repurchase such FHA Loan, the Claims Administrator shall pursue such appeals with the FHA as are reasonable. If the FHA continues to demand that the Contract of Insurance Holder repurchase such FHA Loan after the Claims Administrator exhausts such administrative appeals as are reasonable, then notwithstanding that Mego or any other person is required to repurchase such FHA Loan under this Agreement, the Claims Administrator shall notify the Contract of Insurance Holder of such fact and the Contract of Insurance Holder shall repurchase such FHA Loan from the FHA. If the FHA indicates in writing in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to other than (i) a failure to service the FHA Loan in accordance with Title I after the Closing Date or (ii) the amount in the FHA Insurance Coverage Reserve Account is insufficient to pay such claim, or if FHA does not indicate in 72 77 writing the reason for its rejection or refusal, Mego shall be liable to reimburse the Contract of Insurance Holder for any amounts paid by the Contract of Insurance Holder to the FHA in order to repurchase such FHA Loan. Subject to Section 4.12(b), if the FHA indicates in writing, or it is agreed by the Master Servicer, in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to a failure to service such FHA Loan in accordance with Title I after the Closing Date, the Master Servicer shall be liable to reimburse the Contract of Insurance Holder or Mego for any amounts paid by the Contract of Insurance Holder or Mego to FHA in order to repurchase FHA Loans for which the FHA has rejected an insurance claim as a result of a failure to service such FHA Loan in accordance with Title I. (g) The Claims Administrator shall be entitled to reimbursement of expenses associated with the filing of any FHA Insurance claim from and to the extent that such amounts are reimbursed by HUD. (h) The Indenture Trustee shall furnish the Claims Administrator or the Servicer, as applicable, within 5 days of request of the Claims Administrator or the Servicer therefor any powers of attorney and other documents necessary and appropriate to carry out its respective duties hereunder, including any documents or powers of attorney necessary to foreclose or file a claim with respect to any FHA Loan and to file claims with the FHA under the Contract of Insurance. The forms of any such powers or documents shall be appended to such requests. The Contract of Insurance Holder shall furnish the Claims Administrator or the Servicer, as applicable, within 5 days of request of the Claims Administrator or the Servicer therefor any powers of attorney and other documents necessary and appropriate to carry out its administrative duties pursuant to Section 4.12. Section 4.13. Sale of Foreclosed Properties. (a) The Master Servicer may offer to sell to any Person any Foreclosed Property, if and when the Master Servicer determines consistent with the Servicing Standard and that such a sale would be in the best interests of the Trust, but shall, with respect to the FHA Loans, in any event, so offer to sell any Foreclosed Property in accordance with the criteria set forth in Section 4.12 and no later than the time determined by the Master Servicer to be sufficient to result in the sale of such Foreclosed Property on or prior to the date specified in Section 4.12(d). The Master Servicer shall give the Indenture Trustee and the Securities Insurer not less than five days' prior notice of its intention to sell any Foreclosed Property, and shall accept the highest bid received from any Person for any Foreclosed Property in an amount at least equal to the sum of: (i) the Principal Balance of the related foreclosed Home Loan, unreimbursed Foreclosure Advances plus the outstanding amount of any liens superior in priority, if any, to the lien of the foreclosed Home Loan; and 73 78 (ii) all unpaid interest accrued thereon at the related Home Loan Interest Rate through the date of sale. In the absence of any such bid, the Master Servicer shall accept the highest bid received from any Person that is determined to be a fair price for such Foreclosed Property by the Master Servicer, if the highest bidder is a Person other than an Interested Person, or by an Independent appraiser retained by the Master Servicer, if the highest bidder is an Interested Person. In the absence of any bid determined to be fair as aforesaid, the Master Servicer shall offer the affected Foreclosed Property for sale to any Person, other than an Interested Person, in a commercially reasonable manner for a period of not less than 10 or more than 30 days, and shall accept the highest cash bid received therefor in excess of the highest bid previously submitted. If no such bid is received, any Interested Person may resubmit its original bid, and the Master Servicer shall accept the highest outstanding cash bid, regardless of from whom received. No Interested Person shall be obligated to submit a bid to purchase any Foreclosed Property, and notwithstanding anything to the contrary herein, neither the Indenture Trustee, in its individual capacity, nor any of its affiliates may bid for or purchase any Foreclosed Property pursuant hereto. (b) In determining whether any bid constitutes a fair price for any Foreclosed Property or to effectuate the payment of a claim under the Contract of Insurance, the Master Servicer shall take into account, and any appraiser or other expert in real estate matters shall be instructed to take into account, as applicable, among other factors, the financial standing of any tenant of the Foreclosed Property, the physical condition of the Foreclosed Property, the state of the local and national economies and, with respect to the FHA Loans which are Mortgage Loans, the Trust's obligation to dispose of any Foreclosed Property within the time period specified in Section 4.12(d). (c) Subject to the provision of Section 4.12, the Master Servicer shall act on behalf of the Indenture Trustee in negotiating and taking any other action necessary or appropriate in connection with the sale of any Foreclosed Property, including the collection of all amounts payable in connection therewith. Any sale of a Foreclosed Property shall be without recourse to the Indenture Trustee, the Master Servicer or the Trust, and if consummated in accordance with the terms of this Agreement, neither the Master Servicer nor the Indenture Trustee shall have any liability to any Securityholder with respect to the purchase price therefor accepted by the Master Servicer or the Indenture Trustee. Section 4.14. Management of Real Estate Owned. (a) If the Trust acquires any Foreclosed Property pursuant to Section 4.12, the Master Servicer shall have full power and authority, subject only to the specific requirements and prohibitions of this Agreement, to do any and all things in connection therewith as are consistent with the manner in which the Master Servicer manages and operates similar property owned by the Master Servicer or any of its affiliates, all on such terms and for such period as the Master Servicer deems to be in the best interests of Securityholders. 74 79 (b) The Master Servicer may contract with any Independent Contractor for the operation and management of any Foreclosed Property, provided that: (i) the terms and conditions of any such contract may not be inconsistent herewith; (ii) any such contract shall require, or shall be administered to require, that the Independent Contractor remit all related Payments to the Master Servicer as soon as practicable, but in no event later than two Business Days following the receipt thereof by such Independent Contractor; (iii) none of the provisions of this Section 4.14(b) relating to any such contract or to actions taken through any such Independent Contractor shall be deemed to relieve the Master Servicer of any of its duties and obligations to the Indenture Trustee for the benefit of Securityholders with respect to the operation and management of any such Foreclosed Property; and (iv) the Master Servicer shall be obligated with respect thereto to the same extent as if it alone were performing all duties and obligations in connection with the operation and management of such Foreclosed Property. The Master Servicer shall be entitled to enter into any agreement with any Independent Contractor performing services for it related to its duties and obligations hereunder for indemnification of the Master Servicer by such Independent Contractor, and nothing in this Agreement shall be deemed to limit or modify such indemnification. The Master Servicer shall be solely liable for all fees owed by it to any such Independent Contractor, but shall be entitled to be reimbursed for all such fees advanced by it pursuant to Section 4.08(b)(v) in the manner provided in Section 4.09(b). Section 4.15. Inspections. The Master Servicer shall inspect or cause to be inspected each Property that secures any Home Loan at such times and in such manner as are consistent with the servicing standard set forth in Section 4.01. Section 4.16. Maintenance of Insurance. (a) The Master Servicer shall maintain or cause to be maintained with respect to each Property securing an FHA Loan such insurance as is required with respect thereto by Title I. The Master Servicer shall cause to be maintained for each Foreclosed Property acquired by the Trust such types and amounts of insurance coverage as the Master Servicer shall deem reasonable. The Master Servicer shall cause to be maintained for each Non-FHA Loan, fire and hazard insurance naming Mego as loss payee thereunder providing extended coverage in an amount which is at least equal to the least of (i) the maximum insurable value 75 80 of the improvements securing such Non-FHA Loan from time to time, (ii) the combined principal balance owing on such Non-FHA Loan and any mortgage loan senior to such Non-FHA Loan and (iii) the minimum amount required to compensate for damage or loss on a replacement cost basis. In cases in which any Property securing a Non-FHA Loan is located in a federally designated flood area, the hazard insurance to be maintained for the related Loan shall include flood insurance to the extent such flood insurance is available and the Master Servicer has determined such insurance to be necessary in accordance with accepted mortgage loan servicing standards for mortgage loans similar to the Mortgage Loans. All such flood insurance shall be in amounts equal to the least of (A) the maximum insurable value of the improvement securing such Non-FHA Loan, (B) the combined principal balance owing on such Non-FHA Loan and any mortgage loan senior to such Non-FHA Loan and (c) the maximum amount of insurance available to the lender under the National Flood Insurance Act of 1968, as amended. (b) Any amounts collected by the Master Servicer under any Insurance Policies, shall be paid over or applied by the Master Servicer as follows: (i) In the case of amounts received in respect of any Home Loan: (A) for the restoration or repair of the affected Property, in which event such amounts shall be released to the Obligor in accordance with the terms of the related Debt Instrument or to the extent not so used, or (B) in reduction of the Principal Balance of the related Home Loan, in which event such amounts shall be credited to the related Servicing Record, unless the related instruments require a different application, in which case such amounts shall be applied in the manner provided therein; and (ii) Subject to Section 4.14, in the case of amounts received in respect of any Foreclosed Property, for the restoration or repair of such Foreclosed Property, unless the Master Servicer determines, consistent with the servicing standard set forth in Section 4.01, that such restoration or repair is not in the best economic interest of the Trust, in which event such amounts shall be credited, as of the date of receipt, to the applicable Servicing Record, as a Payment received from the operation of such Foreclosed Property. Section 4.17. Release of Files. (a) If with respect to any Home Loan: (i) the outstanding Principal Balance of such Home Loan plus all interest accrued thereon shall have been paid; 76 81 (ii) the Master Servicer, or the Servicer shall have received, in escrow, payment in full of such Home Loan in a manner customary for such purposes; (iii) such Home Loan has become a Defective Loan and has been repurchased or a Qualified Substitute Home Loan has been conveyed to the Trust pursuant to Section 3.05; (iv) such Home Loan or the related Foreclosed Property has been sold in connection with the termination of the Trust pursuant to Section 11.01; (v) the FHA has paid a claim with respect to such Home Loan that is an FHA Loan under the Contract of Insurance; or (vi) the related Foreclosed Property has been sold pursuant to Section 4.13. In each such case, the Servicer shall deliver a certificate to the effect that the Servicer has complied with all of its obligations under the Servicing Agreement with respect to such Home Loan and requesting that the Indenture Trustee release to the Servicer the related Home Loan File, then the Indenture Trustee shall, within three Business Days or such shorter period as may be required by applicable law, release, or cause the Custodian to release (unless such Home Loan File has previously been released), the related Home Loan File to the Servicer and execute and deliver such instruments of transfer or assignment, in each case without recourse, as shall be necessary to vest ownership of such Home Loan in the Servicer or such other Person as may be specified in such certificate, the forms of any such instrument to be appended to such certificate. (b) From time to time and as appropriate for the servicing or foreclosure of any Home Loan or to effectuate the payment of a claim under the Contract of Insurance, the Indenture Trustee shall, upon request of the Servicer, release the related File (or any requested portion thereof) to the Servicer. Such receipt shall obligate the Servicer, to return the File (or such portion thereof) to the Indenture Trustee when the need therefor by the Servicer, no longer exists unless any of the conditions specified in subsection (a) above, is satisfied prior thereto. The Indenture Trustee shall release such receipt to the Servicer (i) upon the Servicer's return of the Servicer's Home Loan File (or such portion thereof) to the Indenture Trustee or (ii) if any of the conditions specified in subsection (a) has been satisfied, and the Servicer has not yet returned the Servicer's Home Loan File (or such portion thereof) to the Indenture Trustee, upon receipt of a certificate certifying that any of such condition has been satisfied. Section 4.18. Filing of Continuation Statements. On or before the fifth anniversary of the filing of any financing statements by Mego and the Depositor, respectively, with respect to the assets conveyed to the Trust, Mego and 77 82 the Depositor shall prepare, have executed by the necessary parties and file in the proper jurisdictions all financing and continuation statements necessary to maintain the liens, security interests, and priorities of such liens and security interests that have been granted by Mego and the Depositor, respectively, and Mego and the Depositor shall continue to file on or before each fifth anniversary of the filing of any financing and continuation statements such additional financing and continuation statements until the Trust has terminated pursuant to Section 9.1 of the Trust Agreement. The Indenture Trustee agrees to cooperate with Mego and the Depositor in preparing, executing and filing such statements. The Indenture Trustee agrees to notify Mego and the Depositor on the third Distribution Date prior to each such fifth anniversary of the requirement to file such financing and continuation statements. The filing of any such statement with respect to Mego and the Depositor shall not be construed as any indication of an intent of any party contrary to the expressed intent set forth in Section 2.04 hereof. If Mego or the Depositor has ceased to do business whenever any such financing and continuation statements must be filed or Mego or the Depositor fails to file any such financing statements or continuation statements at least one month prior to the expiration thereof, the Indenture Trustee shall perform the services required under this Section 4.18. Section 4.19. Fidelity Bond. The Master Servicer shall maintain a fidelity bond in such form and amount as is customary for entities acting as custodian of funds and documents in respect of loans on behalf of institutional investors. Section 4.20. Errors and Omissions Insurance. The Master Servicer shall obtain and maintain at all times during the term of this Agreement errors and omissions insurance coverage covering the Master Servicer and its employees issued by a responsible insurance company. The issuer, policy terms and forms and amounts of coverage, including applicable deductibles, shall be reasonably satisfactory to the Securities Insurer and shall be in such form and amount as is customary for entities acting as master servicers. The Master Servicer agrees to notify the Securities Insurer in writing within five (5) days of the Master Servicer's receipt of notice of the cancellation or termination of any such errors and omissions insurance coverage. The Master Servicer shall provide to the Securities Insurer upon request written evidence of such insurance coverage. 78 83 ARTICLE V. ESTABLISHMENT OF TRUST ACCOUNTS Section 5.01 Collection Account and Note Distribution Account. (a) (1) Establishment of Collection Account. The Indenture Trustee has heretofore established or caused to be established and shall hereafter maintain or cause to be maintained a separate account denominated a Collection Account, which in each case is and shall continue to be an Eligible Account in the name of the Indenture Trustee and shall be designated "First Trust of New York, National Association, as Indenture Trustee in trust for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-1, Collection Account." The Master Servicer shall cause all Payments to be deposited by the Servicer in the Collection Account no later than the second Business Day following the date of receipt thereof by the Servicer. The Indenture Trustee shall provide to the Master Servicer and the Servicer a monthly statement of all activity in the Collection Account. Funds in the Collection Account shall be invested in accordance with Section 5.04. (2) Establishment of Note Distribution Account. The Indenture Trustee has heretofore established with itself in its trust capacity at its corporate trust department for the benefit of Securityholders and the Securities Insurer an account referred to herein as a Note Distribution Account. The Indenture Trustee shall at all times maintain the Note Distribution Account as an Eligible Account and shall cause such account to be designated "First Trust of New York, National Association, as Indenture Trustee in trust for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-1 Note Distribution Account." (3) FHA Reserve Fund. The Indenture Trustee has heretofore established or caused to be established and shall hereafter maintain or cause to be maintained a separate account denominated a FHA Reserve Fund, in the name of the Indenture Trustee and shall be designated "First Trust of New York, National Association, as Indenture Trustee of the Mego Mortgage Trusts, FHA Reserve Fund." The Indenture Trustee shall deposit all amounts required to be deposited therein pursuant to Section 5.01(c)(x). Amounts on deposit therein shall be withdrawn by the Indenture Trustee at the direction of the Securities Insurer and paid or deposited to either the Note Distribution Account, the distribution account of a Related Series or the holders of the Residual Interest Instrument. Amounts on deposit in the FHA Reserve Fund shall be invested in accordance with Section 5.04. (4) FHA Premium Account. The Indenture Trustee has heretofore established with itself in its trust capacity at its corporate trust department a segregated trust account referred to herein as the "FHA Premium Account" for the benefit of the Securityholders and the Securities Insurer. The Indenture Trustee shall at all times maintain the FHA Premium Account as an Eligible Account and shall cause such accounts to be designated as "First Trust of New York, National Association, as Indenture Trustee for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-1". No later than the second Business Day preceding 79 84 each Distribution Date, all amounts on deposit in the Note Distribution Account and Collection Account representing payments by Obligors on Invoiced Loans in respect of premium on FHA Insurance shall be withdrawn by the Indenture Trustee and deposited to the FHA Premium Account. Any and all moneys transferred to the FHA Premium Account pursuant to this Section 5.01(a)(4) shall be held by the Indenture Trustee in the FHA Premium Account subject to disbursement and withdrawal as herein provided. Amounts deposited to an FHA Premium Account shall be invested in accordance with Section 5.04. Amounts on deposit in an FHA Premium Account shall be withdrawn by the Indenture Trustee, in the amounts required, for application as follows: (i) to payment to the FHA of any premiums due on the Contract of Insurance in respect of FHA Loans, in such amounts and on such dates as directed by the Master Servicer or Mego; the Indenture Trustee shall apply all amounts on deposit in the related FHA Premium Account to payment to the FHA of any premiums due under the Contract of Insurance as invoiced by FHA and, if, in connection with an FHA Loan, the FHA Insurance with respect to which shall not yet have been transferred to the Contract of Insurance, Mego instructs the Indenture Trustee to pay FHA insurance with respect to such FHA Loan to the related contract of insurance holder, the Indenture Trustee shall make such payment, and Mego and not the Indenture Trustee shall be liable in the event of the failure of such funds to be applied to payment of the premium with respect to such FHA Loan; and (ii) on the Business Day preceding a Distribution Date that is also the Termination Date, the Indenture Trustee shall withdraw from each FHA Premium Account and deposit in the Note Distribution Account all amounts then on deposit in the FHA Premium Account, whereupon the FHA Premium Account shall terminate. (b) Withdrawals from Collection Account. No later than the second Business Day preceding each Distribution Date, the Indenture Trustee shall withdraw amounts from the Collection Account representing the Payments with respect to such Distribution Date and deposit such amounts into the Note Distribution Account and liquidate the Eligible Investments in which such amounts are invested and distribute all net investment earnings to the Servicer. (c) Withdrawals from Note Distribution Account. On each Distribution Date, the Indenture Trustee shall liquidate the Eligible Investments in which amounts on deposit in the Note Distribution Account are invested and distribute all net investment earnings to Mego and, to the extent funds are available in the Note Distribution Account, the Indenture Trustee (based on the information contained in the Master Servicer Certificate for such Distribution Date) shall make the following withdrawals from the Note Distribution Account by 10:00 a.m. (New York City time) on such Distribution Date, in the following order of priority: (i) to distribute on such Distribution Date the following amounts pursuant to the Indenture, from the Collected Amount, in the following order: 80 85 (a) for deposit in the FHA Premium Account, the FHA Premium Account Deposit for such Distribution Date; (b) concurrently, to (x) the Master Servicer, the Master Servicer Fee, (y) the Servicer, the Servicer Fee, and (z) to the Indenture Trustee, the Indenture Trustee Fee, in each case for such Distribution Date. (c) to the Master Servicer or Servicer, any amount in respect of reimbursement of Interest Advances or Foreclosure Advances, to which the Master Servicer or any Servicer is entitled pursuant to Section 4.09 with respect to such Distribution Date and to the Claims Administrator, amounts in reimbursement of any expenses, of filing of any FHA Insurance claim pursuant to Section 4.12(g); (d) to the Owner Trustee, the Owner Trustee Fee, for such Distribution Date; (e) beginning with the April 1997 Distribution Date, to the Securities Insurer, the Premium for such Distribution Date; (ii) to the holders of each Class of Notes, from the Amount Available remaining after the application of clause (i), an amount equal to the applicable Noteholders' Interest Distributable Amount for such Distribution Date; (iii) to the holders of each Class of Notes, subject to Section 5.01(e) below, from the Collected Amount remaining after the application of clauses (i) through (ii) above, the Noteholders' Principal Distributable Amount (other than the portion constituting Distributable Excess Spread) for such Distribution Date; provided, however, with respect to any Distribution Date as to which (a) the Required OC Amount has been reduced below the Overcollateralization Amount or (b) a full distribution pursuant to this Section 5.01(c)(iii) would cause the Overcollateralization Amount to exceed the Required OC Amount, the amounts to be distributed pursuant to this Section 5.01(c)(iii) shall be reduced by the amount of such reduction in the case of clause (a) above and the amount of such excess in the case of (b) above. (iv) deposit into the Certificate Distribution Account, for distribution pursuant to Section 5.03(b) on such Distribution Date, from the Amount Available remaining after the application of clauses (i) through (iii) above, the Class S Interest Distribution for such Distribution Date; (v) to the Securities Insurer, from the Collected Amount after application of clauses (i) through (iv) above, the Securities Insurer Reimbursement Amount; 81 86 (vi) to the holders of each Class of Notes, subject to Section 5.01(e) below, from the Collected Amount after application of clauses (i) through (v) above, the Distributable Excess Spread for such Distribution Date; (vii) to the holders of each Class of Notes, subject to Section 5.01(e) below, from the Amount Available after application of clauses (i) through (vi) above, the Noteholders' Guaranteed Principal Distribution Amount, if any, for such Distribution Date; (viii) to the Securities Insurer, from the Collected Amount after application of clauses (i) through (vii) above, any other amounts owing to the Securities Insurer under the Insurance Agreement; (ix) to any successor Master Servicer, if any, for such Distribution Date, from the Collected Amount after application of clauses (i) through (viii), amounts payable in accordance with Section 10.03(c) in addition to the Master Servicer Fee; (x) to the FHA Reserve Fund, from the Collected Amount after application of clauses (i) through (ix), any unpaid Excess Claim Amount; (xi) to the Person entitled thereto, payments in respect of Other Fees, from the Collected Amount after application of clauses (i) through (x); and (xii) deposit into the Certificate Distribution Account, for distribution pursuant to Section 5.03(b) on such Distribution Date to the holders of the Residual Interest Instrument, any remaining Collected Amount after application of clauses (i) through (xi) above. (d) Additional Withdrawals from Collection Account. On the third Business Day prior to each Distribution Date, the Indenture Trustee, at the direction of the Master Servicer shall also make the following withdrawals from the Collection Account, in no particular order of priority: (i) to withdraw any amount not required to be deposited in the Collection Account or deposited therein in error; and (ii) to clear and terminate the Collection Account in connection with the termination of this Agreement. (e) As to each Distribution Date, any shortfall in the amount of interest required to be distributed pursuant to Section 5.01(c)(ii) above, shall be allocated among each Class of Notes, in proportion to the amount each such Class would have been entitled to receive in the 82 87 absence of such shortfall. As to each Distribution Date, distributions pursuant to Section 5.01(c)(iii), (v) and (vi) shall be made to the Class of Notes as follows: (i) prior to the occurrence and continuance of a Securities Insurer Default, sequentially, to the holders of the Class A-1 Notes, Class A-2 Notes, Class A- 3 Notes and Class A-4 Notes, in that order, until their respective Class Principal Balances have been reduced to zero; and (ii) upon the occurrence and continuance of a Securities Insurer Default and upon the first reduction of the Overcollateralization Amount thereafter to zero, concurrently, to the holders of each Class of Notes then outstanding, pro rata, based upon their respective Class Principal Balances immediately prior to such Distribution Date. (f) All distributions made on each Class of Notes on each Distribution Date will be made on a pro rata basis among the Noteholders of such Class of record on the preceding Record Date based on the Percentage Interest represented by their respective Notes, and except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such Noteholder, if such Noteholder shall own of record Notes representing at least a $1,000,000 Denomination and shall have so notified the Indenture Trustee, and otherwise by check mailed, via first class mail, postage prepaid, to the address of such Noteholder appearing in the Note Register. Notwithstanding anything to the contrary contained herein, for purposes of the March 1997 Distribution Date, the holder of record of all the Notes shall be Greenwich Capital Markets, Inc. The final distribution on each Note will be made in like manner, but only upon presentment and surrender of such Note at the location specified in the notice to Noteholders of such final distribution. Whenever the Indenture Trustee, based on a Master Servicer Certificate, expects that the final distribution with respect to a Class of Securities will be made on the next Distribution Date, the Indenture Trustee shall, as soon as practicable, mail to each Holder of such Class of Securities as of the applicable Record Date a notice to the effect that: (i) the Indenture Trustee expects that the final distribution with respect to such Class of Securities will be made on such Distribution Date, and (ii) no interest shall accrue on such Class of Securities after such Distribution Date provided that the final distribution occurs on such Distribution Date. Section 5.02 Claims Under Guaranty Policy. (a) The Insured Securities will be insured by the Guaranty Policy pursuant to the terms set forth therein, notwithstanding any provisions to the contrary contained in the Indenture or this Agreement. All amounts received under the Guaranty Policy shall be used 83 88 solely for the payment to Securityholders of principal and interest on the Notes and interest on the Certificates. (b) (i) On the Determination Date preceding each Distribution Date, the Indenture Trustee shall determine if a Deficiency Amount exists with respect to each Class of Insured Securities. If a Deficiency Amount does exist with respect to a Class of Insured Securities, the Indenture Trustee shall promptly, but in no event later than 12:00 noon New York City time on the second Business Day preceding the related Distribution Date, make a claim under the Guaranty Policy for such Class in accordance with its terms. (b) (ii) On any date on which the Indenture Trustee receives written notice from the Holder of a Class of Insured Securities that a Preference Amount is payable pursuant to the terms of the Guaranty Policy, the Indenture Trustee shall make a claim for the payment of such Preference Amount and shall deliver the documents required to be delivered under the Guaranty Policy to the Securities Insurer with respect thereto in the manner set forth in the Guaranty Policy. (c) The Securities Insurer is entitled to the benefit of the following provisions in the event that an Insured Payment has been made. Notwithstanding any other provision hereof: (i) The Indenture Trustee (i) shall receive as attorney-in-fact of each Securityholder with respect to which a Deficiency Amount has been determined to exist any Insured Payment from the Securities Insurer and (ii) shall immediately apply all moneys constituting an Insured Payment to the payment to Securityholders of principal and interest on the Notes and Certificates, as applicable, by depositing such amounts in the Note Distribution Account for Insured Payments payable on the related Class of Notes or in the Certificate Distribution Account for Insured Payments payable on the Certificates. All amounts received under the Guaranty Policy shall be used solely for the payment to Securityholders of principal and interest on Notes and the Certificates, as applicable. The Securities Insurer's obligations under the Guaranty Policy with respect to a particular Insured Payment shall be discharged to the extent funds equal to the applicable Insured Payment are received by the Indenture Trustee, whether or not such funds are properly applied by the Indenture Trustee, the Owner Trustee or Co-Owner Trustee. The parties hereto recognize that the making of an Insured Payment does not relieve any of the parties hereto of any obligation hereunder or under any of the Transaction Documents. (ii) The parties hereto recognize that, to the extent that the Securities Insurer makes payments, directly or indirectly, on account of principal of or interest on the Insured Securities, as applicable, the Securities Insurer shall be subrogated to the rights of the Securityholders to receive distributions of principal and interest in accordance with the terms hereof. 84 89 (iii) To the extent the Securities Insurer is owed any Securities Insurer Reimbursement Amount (including without limitation any unreimbursed Insured Payments made under the Guaranty Policy plus interest accrued thereon as provided in the Insurance Agreement), the Securities Insurer shall be entitled to distributions pursuant to Section 5.01(c), and the Indenture Trustee shall otherwise treat the Securities Insurer as the owner of such rights to distributions of any Reimbursement Amount. (iv) The Securities Insurer shall have the right to institute any suit, action or proceeding at law or in equity under the same terms as a Securityholder may institute any action. (d) The Indenture Trustee, as the holder of the Guaranty Policy providing for the guaranty of the Insured Securities, hereby agrees that with respect to the Certificates, the Indenture Trustee shall make claims under the Guaranty Policy at the direction or upon the request of the Owner Trustee or Co-Owner Trustee to receive Insured Payments distributable to the Class S Certificateholders as part of the Class S Interest Distribution under this Agreement. Section 5.03 Certificate Distribution Account. (a) Establishment. No later than the Closing Date, the Indenture Trustee, for the benefit of the Securityholders and the Securities Insurer, will establish and maintain with Indenture Trustee for the benefit of the Owner Trustee on behalf of the Certificateholders and the Securities Insurer one or more separate Eligible Accounts, which while the Indenture Trustee holds such Trust Account shall be entitled "CERTIFICATE DISTRIBUTION ACCOUNT, FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS CO-OWNER TRUSTEE, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-1". Funds in the Certificate Distribution Account shall be invested in accordance with Section 5.04. (b) Distributions. On each Distribution Date, the Indenture Trustee shall withdraw from the Note Distribution Account all amounts required to be deposited in the Certificate Distribution Account with respect to the preceding Due Period pursuant to Section 5.01(c) and will remit such amount to the Owner Trustee or the Co-Owner Trustee for deposit into the Certificate Distribution Account. On each Distribution Date, the Owner Trustee or the Co-Owner Trustee shall distribute all amounts on deposit in the Certificate Distribution Account to the extent of amounts due and unpaid on the Certificates and to the other parties specified below in the amounts and in the following order of priority: (i) to the Certificateholders, the Class S Interest Distribution; provided, that if there are not sufficient funds in the Certificate Distribution Account to pay the entire amount of accrued and unpaid interest then due on the Certificates, the amount in the Certificate Distribution Account shall be applied to the payment of 85 90 such interest on the Certificates pro rata on the basis of the total such interest due on the Certificates; and (ii) to the holders of the Residual Interest Instruments, from any remaining amounts in the Certificate Distribution Account after the distributions pursuant to item (i) above, any remaining amounts. (c) All distributions made on the Certificates on each Distribution Date will be made on a pro rata basis among the Certificateholders of record on the preceding Record Date based on the Percentage Interest represented by their respective Certificates, and except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such Certificateholder, if such Certificateholder shall own of record Certificates representing at least a 30% Percentage Interest and shall have so notified the Owner Trustee and Co-Owner Trustee, and otherwise by check mailed, via first class mail, postage prepaid, to the address of such Certificateholder appearing in the Certificate Register. Notwithstanding anything to the contrary contained herein, for purposes of the March 1997 Distribution Date, the Certificateholder of record shall be Greenwich Capital Markets, Inc. The final distribution on each Certificate will be made in like manner, but only upon presentment and surrender of such Certificate at the location specified in the notice to Certificateholders of such final distribution. (d) All distributions made on the Residual Interest Instruments on each Distribution Date will be made on a pro rata basis among the Residual Interest Instruments holders of record on the next preceding Record Date based on the Percentage Interest represented by their respective Residual Interest Instruments, and except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such Residual Interest Instruments holder, if such Residual Interest Instruments Holder shall own of record Residual Interest Instruments representing at least a 30% Percentage Interest and shall have so notified the Owner Trustee or Co-Owner Trustee, and otherwise by check mailed, via first class mail, postage prepaid, to the address of such Residual Interest Instruments Holder appearing in the Certificate Register. The final distribution on each Residual Interest Instruments will be made in like manner, but only upon presentment and surrender of such Residual Interest Instruments at the location specified in the notice to holders of the Residual Interest Instruments of such final distribution. 86 91 Section 5.04 Trust Accounts; Trust Account Property. (a) Control of Trust Accounts. Each of the Trust Accounts established hereunder has been pledged by the Issuer to the Indenture Trustee under the Indenture and shall be subject to the lien of the Indenture. In addition to the provisions hereunder, each of the Trust Accounts shall also be established and maintained pursuant to the Indenture. Amounts distributed from each Trust Account in accordance with the Indenture and this Agreement shall be released from the lien of the Indenture upon such distribution thereunder or hereunder. The Indenture Trustee shall possess all right, title and interest in all funds on deposit from time to time in the Trust Accounts (other than the Certificate Distribution Account) and in all proceeds thereof and all such funds, investments, proceeds shall be part of the Trust Account Property and the Trust Estate. If, at any time, any Trust Account ceases to be an Eligible Account, the Indenture Trustee (or the Master Servicer on its behalf) shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) (i) establish a new Trust Account as an Eligible Account, (ii) terminate the ineligible Trust Account, and (iii) transfer any cash and investments from such ineligible Trust Account to such new Trust Account. With respect to the Trust Accounts (other than the Certificate Distribution Account), the Indenture Trustee agrees, by its acceptance hereof, that each such Trust Account shall be subject to the sole and exclusive custody and control of the Indenture Trustee for the benefit of the Securityholders, the Securities Insurer and the Issuer, as the case may be, and the Indenture Trustee shall have sole signature and withdrawal authority with respect thereto. In addition to this Agreement and the Indenture, the Certificate Distribution Account established hereunder also shall be subject to and established and maintained in accordance with the Trust Agreement. Subject to rights of the Indenture Trustee hereunder and under the Indenture, the Owner Trustee and the Co-Owner Trustee shall possess all right, title and interest for the benefit of the Securityholders and the Securities Insurer in all funds on deposit from time to time in the Certificate Distribution Account and in all proceeds thereof (including all income thereon) and all such funds, investments, proceeds and income shall be part of the Trust Account Property and the Trust Estate. Subject to the rights of the Indenture Trustee, the Owner Trustee and Co-Owner Trustee agree, by its acceptance hereof, that such Certificate Distribution Account shall be subject to the sole and exclusive custody and control of the Owner Trustee or Co-Owner Trustee for the benefit of the Issuer and the parties entitled to distributions therefrom, including without limitation, the Certificateholders and Securities Insurer, and the Owner Trustee and the Co-Owner Trustee shall have sole signature and withdrawal authority with respect to the Certificate Distribution Account. Notwithstanding the preceding, the distribution of amounts from the Certificate Distribution Account in accordance with Section 5.03(b) also shall be made for the benefit of the Indenture Trustee (including without limitation as the named insured under the Guaranty Policy on behalf of all Securityholders, and with respect to its duties under the Indenture and this Agreement relating to the Trust Estate), and the Indenture Trustee (in its capacity as Indenture Trustee) shall have the right, but not the obligation to take custody and control of 87 92 the Certificate Distribution Account and to cause the distribution of amounts therefrom in the event that the Owner Trustee or Co-Owner Trustee fails to distribute such amounts in accordance with Section 5.03(b). The Master Servicer shall have the power, revocable by the Indenture Trustee or by the Owner Trustee or Co-Owner Trustee with the consent of the Indenture Trustee, to instruct the Indenture Trustee, Co-Owner Trustee or Owner Trustee to make withdrawals and payments from the Trust Accounts for the purpose of permitting the Master Servicer to carry out its respective duties hereunder or permitting the Indenture Trustee or Owner Trustee to carry out its duties herein or under the Indenture or the Trust Agreement, as applicable. (b) (1) Investment of Funds. The funds held in any Trust Account may only be invested (to the extent practicable and consistent with any requirements of the Code) in Permitted Investments, as directed by a Responsible Officer of Mego in writing. In any case, funds in any Trust Account must be available for withdrawal without penalty, and any Permitted Investments and the funds held in any Trust Account, other than the Note Distribution Account, must mature or otherwise be available for withdrawal, not later than three (3) Business Days immediately preceding the Distribution Date next following the date of such investment and shall not be sold or disposed of prior to its maturity subject to Section 5.04(b)(2) below. Amounts deposited to the Note Distribution Account pursuant to Section 5.01(b) prior to each Distribution Date shall be invested in Eligible Investments which are overnight investments from the date of deposit to the Business Day preceding each Distribution Date. All interest and any other investment earnings on amounts or investments held in any Trust Account shall be deposited into such Trust Account immediately upon receipt by the Indenture Trustee, or in the case of the Certificate Distribution Account, the Owner Trustee or Co-Owner Trustee, as applicable. All Permitted Investments in which funds in any Trust Account (other than the Certificate Distribution Account) are invested must be held by or registered in the name of "FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS INDENTURE TRUSTEE, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-1". While the Co-Owner Trustee holds the Certificate Distribution Account, all Permitted Investments in which funds in the Certificate Distribution Account are invested shall be held by or registered in the name of "FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS CO-OWNER TRUSTEE, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-1". (b) (2) Insufficiency and Losses in Trust Accounts. If any amounts are needed for disbursement from any Trust Account held by or on behalf of the Indenture Trustee and sufficient uninvested funds are not available to make such disbursement, the Indenture Trustee, or Owner Trustee or Co-Owner Trustee in the case of the Certificate Distribution Account, shall cause to be sold or otherwise converted to cash a sufficient amount of the investments in such Trust Account. The Indenture Trustee, or Owner Trustee or Co-Owner Trustee in the case of the Certificate Distribution Account, shall not be liable for any investment loss or other charge resulting therefrom, unless such loss or charge is caused by 88 93 the failure of the Indenture Trustee or Owner Trustee or Co-Owner Trustee, respectively, to perform in accordance with this Section 5.04. If any losses are realized in connection with any investment in any Trust Account pursuant to this Agreement and the Indenture, then Mego shall deposit the amount of such losses (to the extent not offset by income from other investments in such Trust Account) in such Trust Account immediately upon the realization of such loss. All interest and any other investment earnings on amounts held in any Trust Account shall be taxed to the Issuer and for federal and state income tax purposes the Issuer shall be deemed to be the owner of each Trust Account. (c) Subject to Section 6.1 of the Indenture, the Indenture Trustee shall not in any way be held liable by reason of any insufficiency in any Trust Account held by the Indenture Trustee resulting from any investment loss on any Permitted Investment included therein (except to the extent that the Indenture Trustee is the obligor and has defaulted thereon). (d) With respect to the Trust Account Property, the Indenture Trustee acknowledges and agrees that: (1) any Trust Account Property that is held in deposit accounts shall be held solely in the Eligible Accounts; and each such Eligible Account shall be subject to the exclusive custody and control of the Indenture Trustee, and the Indenture Trustee shall have sole signature authority with respect thereto; (2) any Trust Account Property that constitutes Physical Property shall be delivered to the Indenture Trustee in accordance with paragraph (a) of the definition of "Delivery" and shall be held, pending maturity or disposition, solely by the Indenture Trustee or a financial intermediary (as such term is defined in Section 8-313(4) of the UCC) acting solely for the Indenture Trustee; (3) any Trust Account Property that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations shall be delivered in accordance with paragraph (b) of the definition of "Delivery" and shall be maintained by the Indenture Trustee, pending maturity or disposition, through continued book-entry registration of such Trust Account Property as described in such paragraph; and (4) any Trust Account Property that is an "uncertificated security" under Article VIII of the UCC and that is not governed by clause (3) above shall be delivered to the Indenture Trustee in accordance with paragraph (c) of the definition of "Delivery" and shall be maintained by the Indenture Trustee, pending maturity or disposition, through continued registration of the Indenture Trustee's (or its nominee's) ownership of such security. 89 94 ARTICLE VI. STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS Section 6.01 Master Servicing Certificate. On each Determination Date, the Master Servicer shall deliver to the Indenture Trustee, the Owner Trustee, Co-Owner Trustee and the Securities Insurer, a certificate containing the items described in Exhibit B hereto (each, a "Master Servicer Certificate"), prepared as of the related Determination Date and executed by a Master Servicing Officer. No later than the Business Day following each Determination Date, the Master Servicer shall deliver to the Indenture Trustee and the Securities Insurer, in a format consistent with other electronic loan level reporting supplied by the Master Servicer in connection with similar transactions, "loan level" information with respect to the Home Loans as of the related Determination Date, to the extent that such information has been provided to the Master Servicer by the Servicer. The Master Servicer shall revise any Master Servicer Certificate to take into account any payments of which the Master Servicer is notified made by the Indenture Trustee to FHA after the related Determination Date and before the related Distribution Date as provided in Section 4.12(e). The Indenture Trustee may rely on the Master Servicer Certificate with respect to the matters set forth therein. Section 6.02 Statement to Securityholders. On or before the third Business Day following each Distribution Date, the Indenture Trustee shall mail: to each Holder of a Security (with a copy to the Securities Insurer and the Rating Agency) at its address shown on the Certificate Register or Note Register, as applicable, a statement, based on information set forth in the Master Servicer Certificate for such Distribution Date, substantially in the form of Statement to Securityholders attached hereto as Exhibit C, respectively, together with a copy of such related Master Servicer Certificate; 90 95 ARTICLE VII. CONCERNING THE CONTRACT OF INSURANCE HOLDER Section 7.01 Compliance with Title I and Filing of FHA Claims. (a) The Contract of Insurance Holder shall at all times while any Securities are outstanding have a valid Contract of Insurance with the FHA covering the FHA Loans. To the extent applicable to the duties of the Contract of Insurance Holder hereunder, the Contract of Insurance Holder shall comply with the requirements of Title I and shall take or refrain from taking such actions as are necessary or appropriate to maintain a valid Contract of Insurance for the Trust with the FHA covering the FHA Loans. (b) If and for so long as the Contract of Insurance covers any loans other than the FHA Loans, and if HUD shall not have earmarked the coverage of the Contract of Insurance with respect to the FHA Loans, the Contract of Insurance Holder covenants and agrees not to submit any claim to FHA with respect to an FHA Loan if the effect of approval of such claim would result in the amount of claims paid by the FHA in respect of the FHA Loans to exceed the Trust Designated Insurance Amount. Notwithstanding the foregoing, the Claims Administrator shall promptly notify the Owner Trustee, the Indenture Trustee, the Master Servicer and the Securities Insurer if the amount of claims submitted to FHA in respect of the FHA Loans under the Contract of Insurance exceeds the Trust Designated Insurance Amount. As of the Closing Date and at all times thereafter until the Termination Date, the Contract of Insurance Holder covenants and agrees that the Contract of Insurance will only apply to the FHA Loans and Related Series Loans, exclusively, or HUD shall have agreed pursuant to 24 C.F.R. Section 201.32(d)(1) to "earmark" the FHA insurance relating to the FHA Loans and Related Series Loans, in a manner satisfactory to the Securities Insurer, in its sole and absolute discretion. Mego, as Claims Administrator and Servicer, covenants and agrees that it shall not take any action that would result in the Contract of Insurance applying to loans other than the FHA Loans and the Related Series Loans, exclusively, unless HUD shall have agreed pursuant to 24 C.F.R. Section201.32(d)(1) to "earmark" the FHA insurance relating to the FHA Loans and Related Series Loans in a manner satisfactory to the Securities Insurer, in its sole and absolute discretion. (c) The Owner Trustee and Co-Owner Trustee hereby appoint Mego Mortgage Corporation as Claims Administrator and the Indenture Trustee hereby consents to such appointment. Mego Mortgage Corporation, as Claims Administrator, shall perform on behalf of the Contract of Insurance Holder the duties associated with the submission of claims under Title I in connection with the Contract of Insurance, except to the extent that certain documents must be signed by the Contract of Insurance Holder (in which case the Contract of Insurance Holder shall only sign such documents at the direction of the Claims Administrator) and shall not, in its capacity as Claims Administrator, take any action or omit to take any action that would cause the Contract of Insurance Holder to violate this Section 7.01 or 91 96 otherwise fail to maintain a valid Contract of Insurance or cause any denial by FHA of an insurance claim under Title I. (d) The Contract of Insurance Holder shall not be deemed to have violated this Section 7.01 and shall otherwise incur no liability hereunder if any failure to maintain a valid Contract of Insurance or to comply with the requirements of Title I or any denial by FHA of an insurance claim under Title I shall have been caused by any act or omission of the Master Servicer or Claims Administrator in the performance of its duties hereunder. The Contract of Insurance Holder shall be permitted to, or, if directed by the Securities Insurer, so long as no Securities Insurer Default exists, shall replace the Claims Administrator for any failure of the Claims Administrator to perform its duties hereunder. Any successor Claims Administrator shall be subject to the prior approval of the Securities Insurer, provided no Securities Insurer Default is then occurring. (e) The Contract of Insurance Holder hereby represents and warrants to the Depositor, the Master Servicer, the Seller, the Owner Trustee, the Indenture Trustee for the benefit of the Securityholders and the Securities Insurer that First Trust of New York, National Association is an investing lender in good standing with HUD having authority to purchase, hold, and sell loans insured under 24 CFR Part 201, pursuant to a valid Contract of Insurance, Number 71400 0000 6. (f) The Seller shall forward to the Indenture Trustee a fully executed Transfer of Note Report for each FHA Loan within 20 days of the receipt by the Seller of such FHA Loan's case number under the Contract of Insurance. The Trustee shall execute each Transfer of Note Report, as buying lender, and submit such Transfer of Note Report to HUD within 31 days of the transfer of the FHA Loans to the Trust. Section 7.02. Contract of Insurance Holder. (a) The Contract of Insurance Holder shall not resign from the obligations and duties imposed on it by this Agreement as Contract of Insurance Holder except (i) upon a determination that by reason of a change in legal requirements or requirements imposed by the FHA the performance of its duties under this Agreement would cause it to be in violation of such legal requirements or FHA imposed requirements in a manner which would result in a material adverse effect on the Contract of Insurance Holder or cause it to become ineligible to hold the Contract of Insurance and (ii) the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing) or the Majority Securityholders (if a Securities Insurer Default shall have occurred and be continuing) does not elect to waive the obligations of the Contract of Insurance Holder to perform the duties which render it legally unable to act or to delegate those duties to another Person or if the circumstances giving rise to such illegality cannot be waived or delegated. Any such determination permitting the resignation of the Contract of Insurance Holder shall be evidenced by an Opinion of Counsel to such effect delivered and acceptable to the Indenture Trustee and the Securities Insurer. Upon receiving such notice of resignation, the Contract of Insurance shall be transferred to a 92 97 qualified successor with the consent of the Securities Insurer by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Contract of Insurance Holder and one copy to the successor Contract of Insurance Holder. Notwithstanding the foregoing, the Contract of Insurance Holder may resign, with the prior written consent of the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing) or the Majority Securityholders (if a Securities Insurer Default shall have occurred and be continuing), which may be withheld in its sole and absolute discretion, upon transfer of the FHA insurance and related reserves with respect to the FHA Loans and any Related Series Loans to a contract of insurance held by a successor Contract of Insurance Holder provided, however, that any Contract of Insurance held by such successor Contract of Insurance Holder shall satisfy the criteria set forth in Section 7.01(b), and, at the time of succession, shall have an FHA insurance coverage reserve account balance not less than that of the FHA Insurance Coverage Reserve Account at the time of succession. (b) If at any time (i) the Contract of Insurance shall be revoked, suspended or otherwise terminated, or (ii) the Contract of Insurance Holder shall become incapable of acting, or shall be adjudged as bankrupt or insolvent, or a receiver of the Contract of Insurance Holder or of its property shall be appointed, or any public officer shall take charge or control of the Contract of Insurance Holder or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing) or the Majority Securityholders (if a Securities Insurer Default shall have occurred and be continuing) may remove the Contract of Insurance Holder and appoint a successor contract of insurance holder by written instrument, in duplicate, one copy of which instrument shall be delivered to the Contract of Insurance Holder so removed and one copy to the successor contract of insurance holder. Upon removal of the Contract of Insurance Holder, the outgoing Contract of Insurance Holder shall take any action required to transfer the benefits of the FHA Insurance Coverage Reserve Account to the successor contract of insurance holder. (c) Any resignation or removal of the Contract of Insurance Holder and appointment of a successor contract of insurance holder pursuant to any of the provisions of this Section 7.02 shall become effective upon acceptance of appointment by the successor contract of insurance holder. (d) On or prior to the Closing Date, the Contract of Insurance Holder shall have instructed FHA to forward all payments in respect of claims under the Contract of Insurance made to the Contract of Insurance Holder to First Trust of New York, National Association, as Indenture Trustee and Co-Owner Trustee. The Contact of Insurance Holder shall provide no further notification with respect to which such payments shall be directed unless directed by First Trust of New York, National Association, as Indenture Trustee. 93 98 ARTICLE VIII. [Reserved] 94 99 ARTICLE IX. THE MASTER SERVICER Section 9.01 Indemnification; Third Party Claims. (a) 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 and the representations made by the Master Servicer. (b) The Master Servicer shall indemnify, defend and hold harmless the Trust, the Indenture Trustee, Owner Trustee, the Co-Owner Trustee Mego, the Depositor and the Securities Insurer, their respective officers, directors, agents and employees and the Securityholders from and against any and all costs, expenses, losses, claims, damages, and liabilities to the extent that such cost, expense, loss, claim, damage or liability arose out of, or was imposed upon the Trust, Indenture Trustee, the Owner Trustee, the Co-Owner Trustee, Mego, the Depositor, the Securities Insurer or the Securityholders through the breach of this Agreement by the Master Servicer, the negligence, willful misfeasance, or bad faith of the Master Servicer in the performance of its duties under this Agreement or by reason of reckless disregard of its obligations and duties under this Agreement. Such indemnification shall include, without limitation, reasonable fees and expenses of counsel and expenses of litigation. Section 9.02 Merger or Consolidation of the Master Servicer. The Master Servicer shall not merge or consolidate with any other person, convey, transfer or lease substantially all its assets as an entirety to another Person, or permit any other Person to become the successor to the Master Servicer's business unless, after the merger, consolidation, conveyance, transfer, lease or succession, the successor or surviving entity (i) shall be an Eligible Servicer, (ii) shall be capable of fulfilling the duties of the Master Servicer contained in this Agreement and (iii) shall have a long-term debt rating which is BBB and Baa2 by Standard & Poor's and Moody's respectively. Any corporation (i) into which the Master Servicer may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Master Servicer shall be a party, (iii) which acquires by conveyance, transfer or lease substantially all of the assets of the Master Servicer, or (iv) succeeding to the business of the Master Servicer, in any of the foregoing cases shall execute an agreement of assumption to perform every obligation of the Master Servicer under this Agreement and, whether or not such assumption agreement is executed, shall be the successor to the Master Servicer under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement, anything in this Agreement to the contrary notwithstanding; provided, however, that nothing contained herein shall be deemed to release the Master Servicer from any obligation. The Master Servicer shall provide notice of any merger, consolidation or succession pursuant to this Section 9.02 to the Owner Trustee, the Indenture Trustee, the Securities Insurer and each Rating Agency. 95 100 Notwithstanding the foregoing, as a condition to the consummation of the transactions referred to in clauses (i) through (iv) above, (x) immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 3.02 shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction), and (y) the Master Servicer shall have delivered to the Owner Trustee, the Indenture Trustee and the Securities Insurer an Officer's Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section 9.02 and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with. Section 9.03 Limitation on Liability of the Master Servicer and Others. Neither the Master Servicer nor any of its directors, officers, employees or agents shall be under any liability to the Trust or to the Securityholders for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Master Servicer or any such Person against any breach of warranties, representations or covenants made herein or any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in performing or failing to perform duties hereunder or by reason of reckless disregard of obligations and duties hereunder. The Master Servicer and any of its directors, officers, employees or agents 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. Section 9.04 Master Servicer Not to Resign; Assignment. (a) The Master Servicer shall not resign from the obligations and duties hereby imposed on it except (i) with the consent of the Securities Insurer and the Rating Agencies or (ii) upon determination that by reason of a change in legal requirements the performance of its duties under this Agreement would cause it to be in violation of such legal requirements in a manner which would result in a material adverse effect on the Master Servicer and the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing) does not elect to waive the obligations of the Master Servicer to perform the duties which render it legally unable to act or to delegate those duties to another Person. Any such determination permitting the resignation of the Master Servicer shall be evidenced by an Opinion of Counsel to such effect delivered and acceptable to the Indenture Trustee and the Securities Insurer (unless a Securities Insurer Default shall have occurred and be continuing). No resignation of the Master Servicer shall become effective until the Indenture Trustee or a successor servicer acceptable to the Securities Insurer shall have assumed the Master Servicer's servicing responsibilities and obligations in accordance with Section 10.02. (b) Notwithstanding anything to the contrary herein, the Master Servicer shall remain liable for all liabilities and obligations incurred by it as Master Servicer hereunder prior to the time that any resignation or assignment referred to in subsection (a) above or 96 101 termination under Section 10.01 becomes effective, including the obligation to indemnify the Indenture Trustee pursuant to Section 9.01(b) hereof. (c) The Master Servicer agrees to cooperate with any successor Master Servicer in effecting the transfer of the Master Servicer's servicing responsibilities and rights hereunder pursuant to subsection (a), including, without limitation, the transfer to such successor of all relevant records and documents (including any Home Loan Files in the possession of the Master Servicer and the Servicing Record) and all amounts credited to the Servicing Record or thereafter received with respect to the Loans and not otherwise permitted to be retained by the Master Servicer pursuant to this Agreement. In addition, the Master Servicer, at its sole cost and expense, shall prepare, execute and deliver any and all documents and instruments to the successor Master Servicer including all Home Loan Files in its possession and do or accomplish all other acts necessary or appropriate to effect such termination and transfer of servicing responsibilities, including, without limitation, assisting in obtaining any necessary approval under Title I from the FHA. Section 9.05 Relationship of Master Servicer to Issuer and the Indenture Trustee. The relationship of the Master Servicer (and of any successor to the Master Servicer as servicer under this Agreement) to the Issuer and the Indenture Trustee under this Agreement is intended by the parties hereto to be that of an independent contractor and not of a joint venturer, agent or partner of the Issuer or the Indenture Trustee. Section 9.06 Master Servicer May Own Notes. Each of the Master Servicer and any affiliate of the Master Servicer may in its individual or any other capacity become the owner or pledgee of Notes with the same rights as it would have if it were not the Master Servicer or an affiliate thereof except as otherwise specifically provided herein. Notes so owned by or pledged to the Master Servicer or such affiliate shall have an equal and proportionate benefit under the provisions of this Agreement, without preference, priority, or distinction as among all of the Notes, provided that any Notes owned by the Master Servicer or any affiliate thereof, during the time such Notes are owned by them, shall be without voting rights for any purpose set forth in this Agreement. The Master Servicer shall notify the Indenture Trustee and the Securities Insurer promptly after it or any of its affiliates becomes the owner or pledgee of a Note. 97 102 ARTICLE X. DEFAULT Section 10.01 Events of Default. For purposes of this Agreement, each of the following shall constitute an "Event of Default." (a) (i) failure by the Master Servicer to deposit or cause the Servicer to deposit all Payments in the related Collection Account no later than the second Business Day following receipt thereof by the Master Servicer or Servicer, which failure continues unremedied for two Business Days; (ii) failure of the Master Servicer to pay when due any amount payable by it under the Insurance Agreement, which failure continues unremedied for two Business Days; or (iii) failure of the Master Servicer to pay when due any amount payable by it under this Agreement and such failure results in a drawing under the Guaranty Policy; or (b) failure on the part of the Master Servicer duly to observe or perform in any material respect any of its other covenants or agreements contained in this Agreement that continues unremedied for a period of 30 days after the earlier of (x) the date on which the Master Servicer gives notice of such failure to the Indenture Trustee or the Securities Insurer pursuant to Section 4.04(b) and (y) 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 Indenture Trustee or the Securities Insurer, or to the Master Servicer and the Indenture Trustee pursuant to the direction of the Majority Securityholders; or (c) failure by the Master Servicer to deliver to the Indenture Trustee and (so long as a Securities Insurer Default shall not have occurred and be continuing) the Securities Insurer the Master Servicer Certificate by the fourth Business Day prior to each Distribution Date, or failure on the part of the Master Servicer to observe its covenants and agreements set forth in Section 3.02(o); or (d) the entry of a decree or order for relief by a court or regulatory authority having jurisdiction in respect of the Master Servicer in an involuntary case under the federal bankruptcy laws, as now or hereafter in effect, or another present or future, federal or state, bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Master Servicer or of any substantial part of its properties or ordering the winding up or liquidation of the affairs of the Master Servicer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the commencement of an involuntary case under the federal bankruptcy laws, as now or hereinafter in effect, or another present or future federal or state bankruptcy, insolvency or similar law and such case is not dismissed within 60 days; or 98 103 (e) the commencement by the Master Servicer of a voluntary case under the federal bankruptcy laws, as now or hereinafter in effect, or any other present or future, federal or state bankruptcy, insolvency or similar law, or the consent by the Master Servicer to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Master Servicer or of any substantial part of its property or the making by the Master Servicer of an assignment for the benefit of creditors or the failure by the Master Servicer generally to pay its debts as such debts become due or the taking of corporate action by the Master Servicer in furtherance of any of the foregoing or the admission in writing by the Master Servicer of an inability to pay its debts as they become due; or (f) any representation, warranty or statement of the Master Servicer made in this Agreement or any certificate, report or other writing delivered pursuant hereto shall prove to be incorrect in any material respect as of the time when the same shall have been made, and the incorrectness of such representation, warranty or statement has a material adverse effect on the Trust and, within 30 days of the earlier of (x) the date on which the Master Servicer gives notice of such failure to the Indenture Trustee or the Securities Insurer pursuant to Section 4.04(b) and (y) the date on which written notice thereof shall have been given to the Master Servicer by the Indenture Trustee or the Securities Insurer (or, if a Securities Insurer Default shall have occurred and be continuing, written notice thereof shall have been given by the Majority Securityholders), the circumstances or condition in respect of which such representation, warranty or statement was incorrect shall not have been eliminated or otherwise cured; or (g) failure on the part of the Master Servicer to deposit into the Note Distribution Account within 3 Business Days following the related Determination Date any Interest Advance pursuant to Section 4.08; or (h) the Securities Insurer determines that the performance by the Master Servicer of its servicing duties hereunder with respect to the Home Loans is not, in the reasonable opinion of the Securities Insurer after consultation with the Master Servicer, in conformity with acceptable standards after considering the following factors: (A) the terms and conditions of this Agreement, (B) conformity with the Servicing Standards, (C) the Master Servicer's practices as of the Closing Date, provided that such practices are either (i) consistent with industry standards for the servicing of loans similar to the Home Loans or (ii) the Master Servicer's historical practices and procedures; or (i) the Master Servicer shall dissolve or liquidate, in whole or in part, in any material respects except to the extent that any resulting successor entity is acceptable to the Securities Insurer; or (j) the long-term debt rating of the Master Servicer shall be reduced below BBB and Baa2 by Standard & Poor's and Moody's, respectively; or 99 104 (k) the Annual Default Percentage (Three Month Average) exceeds 6.5% or the 60+ Delinquency Percentage (Rolling Three Month) exceeds 6.0%. Section 10.02 Consequences of an Event of Default. If an Event of Default shall occur and be continuing, the Securities Insurer (or, if a Securities Insurer Default shall have occurred and be continuing, the Indenture Trustee at the direction of the Majority Securityholders), by notice given in writing to the Master Servicer (and to the Indenture Trustee if given by the Securities Insurer or the Securityholders) may terminate all of the rights and obligations of the Master Servicer under this Agreement. On or after the receipt by the Master Servicer of such written notice, and the appointment of and acceptance by a successor Master Servicer, all authority, power, obligations and responsibilities of the Master Servicer under this Agreement, whether with respect to the Securities or the Trust or otherwise, shall pass to, be vested in and become obligations and responsibilities of the successor Master Servicer; provided, however, that the successor Master Servicer shall have no liability with respect to any obligation which was required to be performed by the prior Master Servicer prior to the date that the successor Master Servicer becomes the Master Servicer or any claim of a third party based on any alleged action or inaction of the prior Master Servicer. The successor Master Servicer is authorized and empowered by this Agreement to execute and deliver, on behalf of the prior 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. The prior Master Servicer agrees to cooperate with the successor Master Servicer in effecting the termination of the responsibilities and rights of the prior Master Servicer under this Agreement, including, without limitation, the transfer to the successor Master Servicer for administration by it of all cash amounts that shall at the time be held by the prior Master Servicer for deposit, or have been deposited by the prior Master Servicer, in the Collection Account or thereafter received with respect to the Home Loans and the delivery to the successor Master Servicer of all Home Loan Files in the Master Servicer's possession and a computer tape in readable form containing the Servicing Record and any other information necessary to enable the successor Master Servicer to service the Home Loans. If requested by the Securities Insurer (unless a Securities Insurer Default shall have occurred and be continuing), the successor Master Servicer shall direct the Obligors to make all payments under the Home Loans directly to the successor Master Servicer, or to a lockbox established by the Master Servicer at the direction of the Securities Insurer (unless a Securities Insurer Default shall have occurred and be continuing), at the prior Master Servicer's expense. In addition to any other amounts that are then payable to the terminated Master Servicer under this Agreement, the terminated Master Servicer shall then be entitled to receive (to the extent provided by Section 4.08) out of the Collected Amount, reimbursements for any outstanding Interest Advances made during the period prior to the notice pursuant to this Section 10.02 which terminates the obligation and rights of the terminated Master Servicer under this Agreement. The Indenture Trustee and the successor Master Servicer may set off and deduct any amounts owed by the terminated Master Servicer from any amounts payable to the terminated Master Servicer. The terminated Master Servicer shall grant the Indenture 100 105 Trustee, the successor Master Servicer and the Securities Insurer reasonable access to the terminated Master Servicer's premises at the terminated Master Servicer's expense. Section 10.03 Appointment of Successor. (a) On or after the time the Master Servicer receives a notice of termination pursuant to Section 10.02 or upon the resignation of the Master Servicer pursuant to Section 9.04, the Indenture Trustee shall be the successor in all respects to the Master Servicer in its capacity as master servicer under this Agreement and the transactions set forth or provided for in this Agreement, and shall be subject to all the responsibilities, restrictions, duties, liabilities and termination provisions relating thereto placed on the Master Servicer by the terms and provisions of this Agreement. The Indenture Trustee shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. If the Indenture Trustee or any other successor Master Servicer is acting as Master Servicer hereunder, it shall be subject to termination under Section 10.02 upon the occurrence of an Event of Default applicable to it as Master Servicer. (b) Any successor Master Servicer appointed pursuant to the provisions of this Agreement must be approved by the Securities Insurer (provided no Securities Insurer Default is then occurring and continuing) and shall execute, acknowledge and deliver to the Indenture Trustee, the Securities Insurer and its predecessor Master Servicer an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Master Servicer shall become effective. (c) Any successor Master Servicer shall be entitled to such compensation (whether payable out of the Collected Amount or otherwise) as the Master Servicer would have been entitled to under the Agreement if the Master Servicer had not resigned or been terminated hereunder. The Securities Insurer and a successor Master Servicer may agree on additional compensation to be paid to such successor Master Servicer in accordance with Section 5.01(c)(ix). In addition, any successor Master Servicer shall be entitled, to reasonable transition expenses incurred in acting as successor Master Servicer pursuant to Section 5.01(c)(ix). Section 10.04 Notification to Certificateholders. Upon any termination of the Master Servicer or appointment of a successor to the Master Servicer, the Indenture Trustee shall give prompt written notice thereof to Securityholders at their respective addresses appearing in the Note Register and Certificate Register. Section 10.05 Waiver of Past Defaults. The Securities Insurer (or, if a Securities Insurer Default shall have occurred and be continuing, the Majority Securityholders) may, on behalf of all Securityholders, waive any 101 106 default by the Master Servicer in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon. 102 107 ARTICLE XI. TERMINATION Section 11.01 Termination. (a) This Agreement shall terminate upon notice to the Indenture Trustee of either: (a) the later of (i) the satisfaction and discharge of the Indenture pursuant to Section 4.1 of the Indenture or (ii) the disposition of all funds with respect to the last Home Loan and the remittance of all funds due hereunder and the payment of all amounts due and payable to the Indenture Trustee, the Owner Trustee, the Co-Owner Trustee, the Issuer, the Master Servicer, the Servicer, the Custodian and the Securities Insurer; or (b) the mutual consent of the Master Servicer, the Depositor, the Seller, the Securities Insurer and all Securityholders in writing. (b) Subject to the provisions of the following sentence, Mego or, if such option is not exercised by Mego, the Master Servicer may, at its option (with the prior written consent of the Securities Insurer if such purchase would result in a claim under the Guaranty Policy), upon not less than thirty days' prior notice given to the Indenture Trustee at any time on or after the applicable Early Termination Notice Date, purchase on the Termination Date specified in such notice, all, but not less than all, the Home Loans, all claims made under the Contract of Insurance with respect to Home Loans that are pending with FHA ("FHA Pending Claims") and Foreclosed Properties then included in the Trust, at a purchase price, payable in cash, equal to the sum of: (i) the Principal Balance of each Home Loan included in the Trust as of such Monthly Cut-Off Date; (ii) all unpaid interest accrued on the Principal Balance of each such Loan at the related Net Loan Rate to such Monthly Cut-Off Date; (iii) the aggregate fair market value of the FHA Pending Claims for which a claim has been filed with the FHA included in the Trust on such Monthly Cut-Off Date, as determined by an Independent appraiser acceptable to the Indenture Trustee as of a date not more than thirty days prior to such Monthly Cut-Off Date; (iv) the aggregate fair market value of each Foreclosed Property included in the Trust on such Monthly Cut-Off Date, as determined by an Independent appraiser acceptable to the Trustee as of a date not more than thirty days prior to such Monthly Cut-Off Date; and (v) any unreimbursed amounts due to the Securities Insurer under this Agreement or the Insurance Agreement. 103 108 Any amount received from such sale with respect to FHA Pending Claims shall be considered FHA Insurance Payment Amounts. The expense of any Independent appraiser required under this Section 11.01(b) shall be a nonreimbursable expense of Mego. Mego or the Master Servicer shall effect the purchase referred to in this Section 11.01(b) by deposit of the purchase price into the Collection Account. The Indenture Trustee shall give written notice of the Early Termination Notice Date to the Securities Insurer promptly upon the occurrence thereof. Section 11.02 Notice of Termination. Notice of termination of this Agreement or of early redemption and termination of the Securities shall be sent (i) by the Indenture Trustee to the Noteholders and the Securities Insurer in accordance with Section 2.6(b) of the Indenture and (ii) by the Owner Trustee or Co-Owner Trustee to the Certificateholders and the Securities Insurer in accordance with Section 9.1(d) of the Trust Agreement. 104 109 ARTICLE XII. MISCELLANEOUS PROVISIONS Section 12.01 Acts of Securityholders. Except as otherwise specifically provided herein, whenever Securityholder action, consent or approval is required under this Agreement, such action, consent or approval shall be deemed to have been taken or given on behalf of, and shall be binding upon, all Securityholders if the Majority Securityholders agree to take such action or give such consent or approval. Section 12.02 Amendment. (a) This Agreement may be amended from time to time by the Depositor, the Master Servicer, the Seller and the Issuer by written agreement with notice thereof to the Securityholders, without the consent of any of the Securityholders, but with the consent of the Securities Insurer, to cure any error or ambiguity, to correct or supplement any provisions hereof which may be defective or inconsistent with any other provisions hereof or to add any other provisions with respect to matters or questions arising under this Agreement; provided, however, that such action will not adversely affect in any material respect the interests of the Securityholders. An amendment described above shall be deemed not to adversely affect in any material respect the interests of the Securityholders if either (i) an opinion of counsel is obtained to such effect, or (ii) the party requesting the amendment obtains a letter from each of the Rating Agencies confirming that the amendment, if made, would not result in the downgrading or withdrawal of the rating then assigned by the respective Rating Agency to any Class of Securities then outstanding. Notwithstanding the preceding, the Securities Insurer shall have the right to modify the definitions relating to the calculation of the Required O/C Amount without the requirement of an amendment to this Agreement. (b) This Agreement may also be amended from time to time by the Depositor, the Master Servicer, the Seller and the Issuer by written agreement, with the prior written consent of the Indenture Trustee, the Majority Securityholders and the Securities Insurer, 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 Securityholders; provided, however, that no such amendment shall (i) reduce in any manner the amount of, or delay the timing of, collections of payments on Home Loans or distributions which are required to be made on any Security, without the consent of the holders of 100% of each Class of Notes or the Certificates affected thereby and the Securities Insurer, (ii) adversely affect in any material respect the interests of the holders of any Class of Notes or Certificates or the Securities Insurer in any manner other than as described in (i), without the consent of the holders of 100% of such Class of Notes or the Certificates or the Securities Insurer, respectively, or (iii) reduce the percentage of any Class of Notes or the Certificates, 105 110 the holders of which are required to consent to any such amendment, without the consent of the holders of 100% of such Class of Notes or the Certificates and the Securities Insurer. (c) It shall not be necessary for the consent of Securityholders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Issuer 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 Issuer may, but shall not be obligated to, enter into any such amendment which affects the Issuer's own rights, duties or immunities under this Agreement. Section 12.03 Recordation of Agreement. To the extent permitted by applicable law, this Agreement, or a memorandum thereof if permitted under applicable law, is subject to recordation in all appropriate public offices for real property records in all of 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 at the Securityholders' expense on direction of the Majority Securityholders or the Securities Insurer, but only when accompanied by an opinion of counsel to the effect that such recordation materially and beneficially affects the interests of the Securityholders or is necessary for the administration or servicing of the Home Loans. Section 12.04 Duration of Agreement. This Agreement shall continue in existence and effect until terminated as herein provided. Section 12.05 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 12.06 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 overnight mail, certified mail or registered mail, postage prepaid, to: (i) in the case of the Depositor, FINANCIAL ASSET SECURITIES CORP., 600 Steamboat Road, Greenwich, Connecticut 106 111 06830 Attention: John Anderson, or such other addresses as may hereafter be furnished to the Securityholders and the other parties hereto in writing by the Depositor, (ii) in the case of the Issuer, Mego Mortgage Home Loan Owner Trust 1997-1, c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Emmett R. Harmon, or such other address as may hereafter be furnished to the Securityholders and the other parties hereto, (iii) in the case of the Seller, Servicer and Claims Administrator, MEGO MORTGAGE CORPORATION, 1000 Parkwood Circle, Atlanta, Georgia 30339, Attention: Jeff Moore, President, or such other address as may hereafter be furnished to the Securityholders and the other parties hereto, (iv) in the case of the Securities Insurer, 113 King Street, Armonk, New York 10504, Attention: IPM-SF, (v) in the case of the Indenture Trustee or Co-Owner Trustee, FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, 180 East Fifth Street, St. Paul, Minnesota 55101, Attention: Structured Finance: Mego 1997-1, (vi) in the case of the Master Servicer, 11000 Broken Land Parkway, Columbia, Maryland 21044-3562, Attention: Master Servicing Department, Mego Mortgage Home Loan Owner Trust 1997-1; and (vii) in the case of the Securityholders, as set forth in the applicable Note Register and Certificate Register. Any such notices shall be deemed to be effective with respect to any party hereto upon the receipt of such notice by such party, except that notices to the Securityholders shall be effective upon mailing or personal delivery. Section 12.07 Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other covenants, agreements, provisions or terms of this Agreement. Section 12.08 No Partnership. Nothing herein contained shall be deemed or construed to create any partnership or joint venture between the parties hereto and the services of the Master Servicer shall be rendered as an independent contractor. Section 12.09 Counterparts. This Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same Agreement. Section 12.10 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Master Servicer, the Seller, the Depositor, the Issuer, the Indenture Trustee, and the Securityholders and their respective successors and permitted assigns. 107 112 Section 12.11 Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. Section 12.12 Actions of Securityholders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by Securityholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders in person or by agent 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 Depositor, the Master Servicer or the Issuer. 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 Depositor, the Master Servicer and the Issuer if made in the manner provided in this Section. (b) The fact and date of the execution by any Securityholder of any such instrument or writing may be proved in any reasonable manner which the Depositor, the Master Servicer or the Issuer deems sufficient. (c) Any request, demand, authorization, direction, notice, consent, waiver or other act by a Securityholder shall bind every holder of every Security 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 Depositor, the Master Servicer, the Issuer or the Securities Insurer in reliance thereon, whether or not notation of such action is made upon such Security. (d) The Depositor, the Master Servicer or the Issuer may require additional proof of any matter referred to in this Section 12.12 as it shall deem necessary. Section 12.13 Reports to Rating Agencies. (a) The Indenture Trustee shall provide to each Rating Agency copies of statements, reports and notices, to the extent received or prepared by the Master Servicer hereunder, as follows: (i) copies of amendments to this Agreement; (ii) notice of any substitution or repurchase of any Home Loans; (iii) notice of any termination, replacement, succession, merger or consolidation of either the Master Servicer, any Custodian or the Issuer; (iv) notice of final payment on the Notes and the Certificates; 108 113 (v) notice of any Event of Default; (vi) copies of the annual independent auditor's report delivered pursuant to Section 4.05, and copies of any compliance reports delivered by the Master Servicer hereunder including Section 4.04; and (vii) copies of any Master Servicer's Certificate pursuant to Section 6.02(b); and (b) With respect to the requirement of the Indenture Trustee to provide statements, reports and notices to the Rating Agencies such statements, reports and notices shall be delivered to the Rating Agencies at the following addresses: (i) if to Standard & Poor's, 26 Broadway, 15th Floor, New York, New York 10004-1064, Attention: Asset-Backed Monitoring Department; or (ii) if to Moody's, 99 Church Street, Corporate Department - 4th Floor, New York, New York 10007, Attention: Residential Mortgage Monitoring Department. Section 12.14 Grant of Securityholder Rights to Securities Insurer. In consideration for the guarantee of the Securities by the Securities Insurer pursuant to the Guaranty Policy, the Securityholders hereby grant to the Securities Insurer the right to act as the holder of 100% of the outstanding Insured Securities for the purpose of exercising the rights of the holders of the Insured Securities under this Agreement without the consent of any Securityholders, including the voting rights of such holders, but excluding those rights requiring the consent of all such holders under Section 12.02(b), and any rights of such holders to distributions under Section 8.2 of the Indenture with respect to the Notes and Section 5.03 hereof with respect to the Certificates; provided that the preceding grant of rights to the Securities Insurer by the Securityholders shall be subject to Section 12.16. The rights of the Securities Insurer to direct certain actions and consent to certain actions of the Majority Securityholders hereunder will terminate at such time as the Class Principal Balances of all Classes of Notes and the Certificate Principal Balance of the Certificates have been reduced to zero and the Securities Insurer has been reimbursed for all Insured Payments and any other amounts owed under the Guaranty Policy and Insurance Agreement and the Securities Insurer has no further obligation under the Guaranty Policy. Section 12.15 Third Party Beneficiary. The parties hereto acknowledge that the Securities Insurer is an express third party beneficiary hereof entitled to enforce any rights reserved to it hereunder as if it were actually a party hereto. 109 114 Section 12.16 Holders of the Residual Interest Instruments. (a) Any sums to be distributed or otherwise paid hereunder or under the Trust Agreement to the holders of the Residual Interest Instruments shall be paid to such holders pro rata based on their percentage holdings in the Residual Interest Instruments; (b) Where any act or event hereunder is expressed to be subject to the consent or approval of the holders of the Residual Interest Instruments, such consent or approval shall be capable of being given by the holder or holders of not less than 51% of the Percentage Interests of the Residual Interest Instruments in aggregate. Section 12.17 Inconsistencies Among Transaction Documents. In the event certain provisions of a Transaction Document conflict with the provisions of this Sale and Servicing Agreement, the parties hereto agree that the provisions of this Sale and Servicing Agreement shall be controlling. 110 115 IN WITNESS WHEREOF, the following have caused their names to be signed by their respective officers thereunto duly authorized, as of the day and year first above written, to this SALE AND SERVICING AGREEMENT . MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1, By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By: _______________________________________________ Name: Title: FINANCIAL ASSET SECURITIES CORP., as Depositor By: _______________________________________________ Name: Title: MEGO MORTGAGE CORPORATION, as Seller, Servicer and Claims Administrator By: _______________________________________________ Name: Title: FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder By: _______________________________________________ Name: Title: 111 116 NORWEST BANK MINNESOTA, N.A. as Master Servicer By: _______________________________________________ Name: Title: 112 117 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared _______________, known to me to be a person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said WILMINGTON TRUST COMPANY, NOT IN ITS INDIVIDUAL CAPACITY BUT IN ITS CAPACITY AS OWNER TRUSTEE of MEGO MORTGAGE HOME LOAN OWNER TRUST 1997- 1, as Issuer, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF WILMINGTON TRUST COMPANY, this the ____ day of March, 1997. ----------------------------------------- Notary Public, State of ________ THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared _______________________, known to me to be a person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said FINANCIAL ASSET SECURITIES CORP., as the Depositor, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF FINANCIAL ASSET SECURITIES CORP., this the ____ day of March, 1997. ----------------------------------------- Notary Public, State of ________ 113 118 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared _______________________, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said MEGO MORTGAGE CORPORATION, as the Seller, Servicer and Claims Administrator, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF MEGO MORTGAGE CORPORATION, this the ____ day of March, 1997. ----------------------------------------- Notary Public, State of ________ THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared ____________________, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, a national banking association, as the Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder, and that she executed the same as the act of such entity for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, this the ____ day of March, 1997. ----------------------------------------- Notary Public, State of ________ 114 119 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared ____________________, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said NORWEST BANK MINNESOTA, N.A., as the Master Servicer, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF NORWEST BANK MINNESOTA, N.A., this the ____ day of March, 1997. ----------------------------------------- Notary Public, State of ________ 115 EX-10.121 10 TRUST AGREEMENT 1 EXHIBIT 10.121 EXECUTION COPY TRUST AGREEMENT among FINANCIAL ASSET SECURITIES CORP., as Depositor, MEGO MORTGAGE CORPORATION, as the Company, WILMINGTON TRUST COMPANY, as Owner Trustee and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Co-Owner Trustee Dated as of February 1, 1997 MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 Home Loan Asset Backed Securities, Series 1997-1 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS Section 1.1 Capitalized Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 Section 1.2 Other Definitional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-5 ARTICLE II ORGANIZATION Section 2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 Section 2.2 Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 Section 2.3 Purposes and Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 Section 2.4 Appointment of Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2 Section 2.5 Initial Capital Contribution of Owner Trust Estate . . . . . . . . . . . . . . . . . . II-2 Section 2.6 Declaration of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2 Section 2.7 Title to Trust Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-2 Section 2.8 Situs of Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3 Section 2.9 Representations and Warranties of the Depositor and the Company; Covenant of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-3 Section 2.10 Federal Income Tax Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-5 ARTICLE III TRUST CERTIFICATES AND TRANSFER OF INTERESTS Section 3.1 Initial Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 Section 3.2 The Trust Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 Section 3.3 Execution, Authentication and Delivery of Trust Certificates . . . . . . . . . . . . . III-1 Section 3.4 Registration of Transfer and Exchange of Trust Certificates . . . . . . . . . . . . . III-1 Section 3.5 Mutilated, Destroyed, Lost or Stolen Trust Certificates . . . . . . . . . . . . . . . . III-2 Section 3.6 Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-3 Section 3.7 Access to List of Owners' Names and Addresses . . . . . . . . . . . . . . . . . . . . . III-3 Section 3.8 Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-3 Section 3.9 Appointment of Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-3 Section 3.10 Restrictions on Transfer of Trust Certificate . . . . . . . . . . . . . . . . . . . . . III-4
-i- 3 ARTICLE IV ACTIONS BY OWNER TRUSTEE Section 4.1 Prior Notice to Owners with Respect to Certain Matters . . . . . . . . . . . . . . . . IV-1 Section 4.2 Action by Owners with Respect to Certain Matters . . . . . . . . . . . . . . . . . . . IV-3 Section 4.3 Action by Owners with Respect to Bankruptcy . . . . . . . . . . . . . . . . . . . . . . IV-3 Section 4.4 Restrictions on Owners' Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-3 Section 4.5 Majority Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-3 ARTICLE V APPLICATION OF TRUST FUNDS; CERTAIN DUTIES Section 5.1 Establishment of Trust Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1 Section 5.2 Application Of Trust Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1 Section 5.3 Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-2 Section 5.4 Segregation of Moneys; No Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . V-2 Section 5.5 Accounting and Reports to the Certificateholder, Owners, the Internal Revenue Service and Others . . . . . . . . . . . . . . . . . . . . . . . . . . V-2 Section 5.6 Signature on Returns; Tax Matters Partner . . . . . . . . . . . . . . . . . . . . . . . . V-3 ARTICLE VI AUTHORITY AND DUTIES OF OWNER TRUSTEE Section 6.1 General Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1 Section 6.2 General Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1 Section 6.3 Action upon Instruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1 Section 6.4 No Duties Except as Specified in this Agreement, the Transaction Documents or in Instructions . . . . . . . . . . . . . . . . . . . . . . VI-2 Section 6.5 No Action Except Under Specified Documents or Instructions . . . . . . . . . . . . . . VI-3 Section 6.6 Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-3 ARTICLE VII CONCERNING THE OWNER TRUSTEE Section 7.1 Acceptance of Trusts and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-1 Section 7.2 Furnishing of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-2 Section 7.3 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-2 Section 7.4 Reliance; Advice of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-3 Section 7.5 Not Acting in Individual Capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . VII-4 Section 7.6 Owner Trustee Not Liable for Trust Certificates or Home Loans . . . . . . . . . . . . . VII-4 Section 7.7 Owner Trustee May Own Trust Certificates and Notes . . . . . . . . . . . . . . . . . . VII-4 Section 7.8 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-5
-ii- 4 Section 7.9 Rights of Co-Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII-5 ARTICLE VIII COMPENSATION OF OWNER TRUSTEE Section 8.1 Owner Trustee's Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 Section 8.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 Section 8.3 Payments to the Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII-1 ARTICLE IX TERMINATION OF TRUST AGREEMENT Section 9.1 Termination of Trust Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . IX-1 ARTICLE X SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES Section 10.1 Eligibility Requirements for Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . X-1 Section 10.2 Resignation or Removal of Owner Trustee or Co-Owner Trustee . . . . . . . . . . . . . . . X-1 Section 10.3 Successor Owner Trustee or Co-Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . X-2 Section 10.4 Merger or Consolidation of Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . X-3 Section 10.5 Appointment of Co-Owner Trustee or Separate Owner Trustee . . . . . . . . . . . . . . . . X-3 ARTICLE XI MISCELLANEOUS Section 11.1 Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-1 Section 11.2 No Legal Title to Owner Trust Estate in Owners . . . . . . . . . . . . . . . . . . . . XI-2 Section 11.3 Limitations on Rights of Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2 Section 11.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-2 Section 11.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 Section 11.6 Separate Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 Section 11.7 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 Section 11.8 No Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 Section 11.9 Covenants of Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 Section 11.10 No Recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-3 Section 11.11 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-4 Section 11.12 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-4 Section 11.13 Certificate and Residual Interest Instrument Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-4 Section 11.14 Grant of Certificateholder and Residual Interest Holder Rights to Securities Insurer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-4
-iii- 5 Section 11.15 Third-Party Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI-5 EXHIBIT A Form of Certificate EXHIBIT B Form of Residual Interest Instrument EXHIBIT C Form of Certificate of Trust
-iv- 6 TRUST AGREEMENT, dated as of February 1, 1997, among FINANCIAL ASSET SECURITIES CORP., a Delaware corporation, as Depositor (the "Depositor"), MEGO MORTGAGE CORPORATION, a Delaware corporation (the "Company"), WILMINGTON TRUST COMPANY, a Delaware banking corporation, as Owner Trustee (the "Owner Trustee") and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Co-Owner Trustee (the "Co-Owner Trustee"). ARTICLE I DEFINITIONS Section 1.1 Capitalized Terms. For all purposes of this Agreement, the following terms shall have the meanings set forth below: "Agreement" shall mean this Trust Agreement, as the same may be amended and supplemented from time to time. "Administration Agreement" shall mean the Administration Agreement, dated as of February 1, 1997 among the Issuer, the Company, and First Trust of New York, National Association, as Administrator. "Administrator" shall mean First Trust of New York, National Association, or any successor in interest thereto, in its capacity as Administrator under the Administration Agreement. "Benefit Plan" shall have the meaning assigned to such term in Section 11.12. "Business Trust Statute" shall mean Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as the same may be amended from time to time. "Certificate" shall mean any Class S Certificate; a form of which is attached hereto as Exhibit A. "Certificate Distribution Account" shall have the meaning assigned to such term in the Sale and Servicing Agreement. "Certificate of Trust" shall mean the Certificate of Trust in the form of Exhibit C to be filed for the Trust pursuant to Section 3810(a) of the Business Trust Statute. "Certificate Owner" shall mean, with respect to a Book-Entry Certificate, the Person who is the beneficial owner of such Book-Entry Certificate, as reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing I-1 7 Agency (directly as a Clearing Agency Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). "Certificate Register" and "Certificate Registrar" shall mean the register mentioned in, and the registrar appointed pursuant to, Section 3.4. "Certificateholder" or "Holder" shall mean a Person in whose name a Certificate is registered. "Class Notional Amount" shall have the same meaning as set forth in the Sale and Servicing Agreement with respect to "Class S Notional Amount". "Code" shall mean the Internal Revenue Code of 1986, as amended, and Treasury Regulations promulgated thereunder. "Co-Owner Trustee" shall mean First Trust of New York, National Association. "Company" shall mean Mego Mortgage Corporation, a Delaware corporation. "Corporate Trust Office" shall mean, with respect to the Owner Trustee, the principal corporate trust office of the Owner Trustee located at Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001, Attention: Corporate Trust Administration; or at such other address in the State of Delaware as the Owner Trustee may designate by notice to the Owners and the Company, or the principal corporate trust office of any successor Owner Trustee (the address (which shall be in the State of Delaware) of which the successor owner trustee will notify the Owners and the Company). "Definitive Certificates" means a certificated form of security that represents a Certificate or a Residual Interest Instrument. "ERISA" shall have the meaning assigned thereto in Section 11.12. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Expenses" shall have the meaning assigned to such term in Section 8.2. "Indenture" shall mean the Indenture, dated as of February 1, 1997, by and between the Issuer and the Indenture Trustee. "Indenture Trustee" means First Trust of New York, National Association, as Indenture Trustee under the Indenture. "Insurance Agreement" shall mean the Insurance Agreement, dated as of February 1, 1997, among the Issuer, the Depositor, the Affiliated Holder, Greenwich Capital Financial I-2 8 Products, Inc., the Company as Seller, Servicer and Claims Administrator, the Master Servicer, the Indenture Trustee as Indenture Trustee, Co- Owner Trustee and Contract of Insurance Holder and the Securities Insurer. "Issuer" shall mean Mego Mortgage Home Loan Owner Trust 1997-1, the Delaware business trust created pursuant to this Agreement. "Non-permitted Foreign Holder" shall have the meaning set forth in Section 3.10. "Non-U.S. Person" shall mean an individual, corporation, partnership or other person other than a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, an estate that is subject to U.S. federal income tax regardless of the source of its income, or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States trustees have authority to control all substantial decisions of the trust.. "Owner" shall mean each Holder of a Certificate and each holder of a Residual Interest Instrument, as applicable. "Owner Trust Estate" shall mean the contribution of $1 referred to in Section 2.5 and the Trust Estate (as defined in the Indenture). "Owner Trustee" shall mean Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as owner trustee under this Agreement, and any successor owner trustee hereunder. "Paying Agent" shall mean the Co-Owner Trustee or any successor in interest thereto or any other paying agent or co-paying agent appointed pursuant to Section 3.9 and authorized by the Issuer to make payments to and distributions from the Certificate Distribution Account, including payment of principal of or interest on the Certificates on behalf of the Issuer. "Percentage Interest" shall mean with respect to any Certificate, the portion of the Certificates as a whole evidenced by such single Certificate, expressed as a percentage rounded to five decimal places, equivalent to a fraction, the numerator of which is the denomination represented by such single Certificate and the denominator of which is the original Class Notional Amount. With respect to each Residual Interest Instrument, the percentage portion of all of the Residual Interest evidenced thereby as stated on the face of such Residual Interest Instrument. "Prospective Owner" shall have the meaning set forth in Section 3.10(a). "Rating Agency Condition" means, with respect to any action to which a Rating Agency Condition applies, that each Rating Agency shall have been given 10 days (or such I-3 9 shorter period as is acceptable to each Rating Agency) prior notice thereof and that each of the Rating Agencies shall have notified the Seller, the Servicer, the Securities Insurer, the Owner Trustee, Co-Owner Trustee, and the Issuer in writing that such action will not result in a reduction or withdrawal of the then current rating of the Notes and Certificates. "Record Date" shall mean as to each Distribution Date the last Business Day of the month immediately preceding the month in which such Distribution Date occurs. "Residual Interest" shall mean the right to receive distributions of Excess Spread, if any, and certain other funds, if any, on each Distribution Date, pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement. "Residual Interest Instrument" shall mean an instrument substantially in the form attached as Exhibit B hereto and evidencing the Residual Interest. "Residual Interestholder" shall mean any Holder of a Percentage Interest of the Residual Interest Instruments. "Sale and Servicing Agreement" shall mean the Sale and Servicing Agreement dated as of the date hereof, among the Trust as Issuer, the Depositor, the Indenture Trustee as Indenture Trustee, Contract of Insurance Holder and Co-Owner Trustee, Norwest Bank Minnesota, N.A., as Master Servicer, and the Company, as Seller, Servicer and Claims Administrator. "Secretary of State" shall mean the Secretary of State of the State of Delaware. "Securities Insurer" shall mean MBIA Insurance Corporation. "Securities Insurer Default" shall mean the failure of the Securities Insurer to make payments under the Guaranty Policy, if such failure has not been remedied with ten (10) days of notice thereof, or the entry of an order or decree with respect to the Securities Insurer in any insolvency or bankruptcy proceedings which remain unstayed or undischarged for 90 days. "Transaction Documents" shall have the meaning set forth in the Sale and Servicing Agreement. "Treasury Regulations" shall mean regulations, including proposed or temporary regulations, promulgated under the Code. References herein to specific provisions of proposed or temporary regulations shall include analogous provisions of final Treasury Regulations or other successor Treasury Regulations. "Trust" shall mean the trust established by this Agreement. I-4 10 "Trust Certificates" shall mean the Certificates and the Residual Interest Instruments, collectively. "Underwriter" shall mean Greenwich Capital Markets, Inc. Section 1.2 Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Sale and Servicing Agreement or, if not defined therein, in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof", "herein", "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; Section and Exhibit references contained in this Agreement are references to Sections and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. I-5 11 ARTICLE II ORGANIZATION Section 2.1 Name. The Trust created hereby shall be known as "Mego Mortgage Home Loan Owner Trust 1997-1", in which name the Owner Trustee may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. Section 2.2 Office. The office of the Trust shall be in care of the Owner Trustee at the Corporate Trust Office or at such other address in Delaware as the Owner Trustee may designate by written notice to the Owners, the Securities Insurer, and the Company. Section 2.3 Purposes and Powers. (a) The purpose of the Trust is to engage in the following activities: (i) to issue the Notes pursuant to the Indenture and the Certificates pursuant to this Agreement and to sell such Notes and such Certificates; (ii) with the proceeds of the sale of the Notes and the Certificates, to fund start-up and transactional expenses of the Trust and to pay the balance to the Depositor and the Company, as their interests may appear pursuant to the Sale and Servicing Agreement; (iii) to assign, grant, transfer, pledge, mortgage and convey the Trust Estate pursuant to the Indenture and to hold, manage and distribute to the Owners pursuant to the terms of the Sale and Servicing Agreement any portion of the Trust Estate released from the lien of, and remitted to the Trust pursuant to, the Indenture; (iv) to enter into and perform its obligations under the Transaction Documents to which it is to be a party; (v) to engage in those activities, including entering into agreements, that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith; (vi) subject to compliance with the Transaction Documents, to engage in such other activities as may be required in connection with conservation of the Owner Trust Estate and the making of distributions to the Owners and the Noteholders; and (vii) to issue the Residual Interest Instruments pursuant to this Agreement. II-1 12 The Trust is hereby authorized to engage in the foregoing activities. The Trust shall not engage in any activity other than in connection with the foregoing or other than as required or authorized by the terms of this Agreement or the Transaction Documents. Section 2.4 Appointment of Owner Trustee. The Depositor hereby appoints the Owner Trustee as trustee of the Trust effective as of the date hereof, to have all the rights, powers and duties set forth herein. Section 2.5 Initial Capital Contribution of Owner Trust Estate. The Depositor hereby sells, assigns, transfers, conveys and sets over to the Owner Trustee, as of the date hereof, the sum of $1. The Owner Trustee hereby acknowledges receipt in trust from the Depositor, as of the date hereof, of the foregoing contribution, which shall constitute the initial Owner Trust Estate and shall be deposited in the Certificate Distribution Account. The Company shall pay organizational expenses of the Trust as they may arise or shall, upon the request of the Owner Trustee, promptly reimburse the Owner Trustee for any such expenses paid by the Owner Trustee. Section 2.6 Declaration of Trust. The Owner Trustee hereby declares that it will hold the Owner Trust Estate in trust upon and subject to the conditions set forth herein for the use and benefit of the Owners, subject to the obligations of the Trust under the Transaction Documents. It is the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Statute and that this Agreement constitute the governing instrument of such business trust. It is the intention of the parties hereto that, solely for income and franchise tax purposes, the Trust shall be treated as a partnership, with the assets of the partnership being the Home Loans and other assets held by the Trust, the partners of the partnership being the holders of the Trust Certificates and the Notes being non-recourse debt of the partnership. The parties agree that, unless otherwise required by appropriate tax authorities, the Trust will file or cause to be filed annual or other necessary returns, reports and other forms consistent with the characterization of the Trust as a partnership for such tax purposes. Effective as of the date hereof, the Owner Trustee shall have all rights, powers and duties set forth herein and in the Business Trust Statute with respect to accomplishing the purposes of the Trust. Section 2.7 Title to Trust Property. (a) Subject to the Indenture, legal title to all the Owner Trust Estate shall be vested at all times in the Trust as a separate legal entity except where applicable law in any jurisdiction requires title to any part of the Owner Trust Estate to be vested in a trustee or trustees, in which case title shall be deemed to be vested in the Owner Trustee, the Co-Owner Trustee and/or a separate trustee, as the case may be. II-2 13 (b) The Owners shall not have legal title to any part of the Owner Trust Estate. No transfer by operation of law or otherwise of any interest of the Owners shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of any part of the Owner Trust Estate. Section 2.8 Situs of Trust. The Trust will be located and administered in the state of Delaware. All bank accounts maintained by the Owner Trustee on behalf of the Trust shall be located in the State of Delaware or the State of New York, except with respect to the Co- Owner Trustee. The Trust shall not have any employees; provided, however, that nothing herein shall restrict or prohibit the Owner Trustee from having employees within or without the State of Delaware. Payments will be received by the Trust only in Delaware or New York, and payments will be made by the Trust only from Delaware or New York, except with respect to the Co-Owner Trustee. The only office of the Trust will be at the Corporate Trust Office in Delaware. Section 2.9 Representations and Warranties of the Depositor and the Company; Covenant of the Company. (a) The Depositor hereby represents and warrants to the Owner Trustee, the Co-Owner Trustee and the Securities Insurer that: (i) The Depositor is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has all licenses necessary to carry on its business as now being conducted. The Depositor has the power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Depositor and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action of the Depositor; this Agreement evidences the valid, binding and enforceable obligation of the Depositor; and all requisite action has been taken by the Depositor to make this Agreement valid, binding and enforceable upon the Depositor in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other, similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity.; (ii) The consummation of the transactions contemplated by this Agreement will not result in (i) the breach of any terms or provisions of the Articles of Incorporation or Bylaws of the Depositor, (ii) the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other material instrument to which the Depositor, or its property is subject, or (iii) the violation of any law, rule, regulation, order, judgment or decree to which the Depositor or its respective property is subject; II-3 14 (iii) The Depositor is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or otherwise) or operations of the Depositor or its properties or might have consequences that would materially and adversely affect its performance hereunder. (b) The Company hereby represents and warrants to the Owner Trustee, the Co-Owner Trustee and the Securities Insurer that: (i) The Company is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted. (ii) The Company is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications. (iii) The Company has the power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement has been duly authorized by the Company by all necessary corporate action. (iv) The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the articles of incorporation or by-laws of the Company, or any indenture, agreement or other instrument to which the Company is a party or by which it is bound; nor result in the creation or imposition of any lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than pursuant to the Transaction Documents); nor violate any law or, to the best of the Company's knowledge, any order, rule or regulation applicable to the Company of any court or of any Federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Company or its properties. (v) There are no proceedings or investigations pending or, to the Company's best knowledge, threatened, before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Company or its properties: (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (iii) seeking any determination or ruling that might materially and II-4 15 adversely affect the performance by the Company of its obligations under, or the validity or enforceability of, this Agreement. (c) The Company covenants with the Owner Trustee, the Co-Owner Trustee and the Securities Insurer that during the continuance of this Agreement it will comply in all respects with the provisions of its Certificate of Incorporation in effect from time to time. Section 2.10 Federal Income Tax Allocations. Net income of the Trust for any month, as determined for Federal income tax purposes (and each item of income, gain, loss and deduction entering into the computation thereof), shall be allocated to the holders of the Residual Interest Instruments, on a pro rata basis. II-5 16 ARTICLE III TRUST CERTIFICATES AND TRANSFER OF INTERESTS Section 3.1 Initial Ownership. Upon the formation of the Trust by the contribution by the Depositor pursuant to Section 2.5 and until the issuance of the Trust Certificates, the Depositor shall be the sole Owner of the Trust. Section 3.2 The Trust Certificates. The Certificates (other than the Residual Interest) shall be issued in minimum denominations of $100,000 notional amount and in integral multiples of $1,000 in excess thereof. The Residual Interest Instruments shall not be issued with a principal or notional amount. The Trust Certificates shall be executed on behalf of the Trust by manual or facsimile signature of a Trust Officer of the Owner Trustee or the Administrator. Trust Certificates bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be valid and binding obligations of the Trust, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the authentication and delivery of such Trust Certificates or did not hold such offices at the date of authentication and delivery of such Trust Certificates. A transferee of a Trust Certificate shall become an Owner, and shall be entitled to the rights and subject to the obligations of an Owner hereunder and under the Sale and Servicing Agreement, upon such transferee's acceptance of a Trust Certificate duly registered in such transferee's name pursuant to Section 3.4. Section 3.3 Execution, Authentication and Delivery of Trust Certificates. Concurrently with the sale of the Home Loans to the Trust pursuant to the Sale and Servicing Agreement, the Owner Trustee shall cause the Certificates, in an aggregate notional amount equal to the initial Class Notional Amount of the Certificates, and the Residual Interest Instruments representing 100% of the Percentage Interests of the Residual Interest to be executed on behalf of the Trust, authenticated and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president or any vice president, without further corporate action by the Depositor, in authorized denominations. No Trust Certificate shall entitle its holder to any benefit under this Agreement, or shall be valid for any purpose, unless there shall appear on such Trust Certificate a certificate of authentication substantially in the form set forth in Exhibits A and B, executed by the Owner Trustee or the Administrator, as the Owner Trustee's authenticating agent, by manual or facsimile signature; such authentication shall constitute conclusive evidence that such Trust Certificate shall have been duly authenticated and delivered hereunder. All Trust Certificates shall be dated the date of their authentication. Section 3.4 Registration of Transfer and Exchange of Trust Certificates. The Certificate Registrar shall keep or cause to be kept, at the office or agency maintained pursuant to Section 3.8, a Certificate Register in which, subject to such reasonable regulations III-1 17 as it may prescribe, the Owner Trustee shall provide for the registration of Trust Certificates and of transfers and exchanges of Trust Certificates as herein provided. The Administrator shall be the initial Certificate Registrar. Upon surrender for registration of transfer of any Trust Certificate at the office or agency maintained pursuant to Section 3.8, the Owner Trustee shall execute, authenticate and deliver (or shall cause the Administrator as its authenticating agent to authenticate and deliver), in the name of the designated transferee or transferees, one or more new Trust Certificates in authorized denominations of a like aggregate amount dated the date of authentication by the Owner Trustee or any authenticating agent. At the option of an Owner, Trust Certificates may be exchanged for other Trust Certificates of authorized denominations of a like aggregate amount upon surrender of the Trust Certificates to be exchanged at the office or agency maintained pursuant to Section 3.8. Every Trust Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Owner Trustee and the Certificate Registrar duly executed by the Owner or his attorney duly authorized in writing. In addition, each Residual Interest Instrument presented or surrendered for registration of transfer and exchange must be accompanied by a letter from the Prospective Owner certifying as to the representations set forth in Sections 3.10(a) and (b). Each Trust Certificate surrendered for registration of transfer or exchange shall be canceled and disposed of by the Owner Trustee in accordance with its customary practice. No service charge shall be made for any registration of transfer or exchange of Trust Certificates, but the Owner Trustee or 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 Trust Certificates. The preceding provisions of this Section notwithstanding, the Owner Trustee shall not make and the Certificate Registrar shall not register transfer or exchanges of Trust Certificates for a period of 15 days preceding the due date for any payment with respect to the Trust Certificates. Section 3.5 Mutilated, Destroyed, Lost or Stolen Trust Certificates. If (a) any mutilated Trust Certificate shall be surrendered to the Certificate Registrar, or if the Certificate Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Certificate and (b) there shall be delivered to the Certificate Registrar and the Owner Trustee such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Certificate shall have been acquired by a bona fide purchaser, the Owner Trustee on behalf of the Trust shall execute and the Owner Trustee, or the Administrator as the Owner Trustee's authenticating agent, shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Certificate, a new Trust Certificate of like tenor and denomination. In connection with the issuance of any new Trust Certificate under this Section, the Owner Trustee or the Certificate III-2 18 Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Certificate issued pursuant to this Section shall constitute conclusive evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Trust Certificate shall be found at any time. Section 3.6 Persons Deemed Owners. Prior to due presentation of a Trust Certificate for registration of transfer, the Owner Trustee or the Certificate Registrar may treat the Person in whose name any Trust Certificate shall be registered in the Certificate Register as the owner of such Trust Certificate for the purpose of receiving distributions pursuant to Section 5.2 and for all other purposes whatsoever, and neither the Owner Trustee nor the Certificate Registrar shall be bound by any notice to the contrary. Section 3.7 Access to List of Owners' Names and Addresses. The Certificate Registrar shall furnish or cause to be furnished to the Master Servicer, the Servicer, the Depositor and the Indenture Trustee within 15 days after receipt by the Owner Trustee of a request therefor from the Master Servicer, the Servicer, the Depositor or the Indenture Trustee in writing, a list, in such form as the Master Servicer, the Servicer, the Depositor or the Indenture Trustee may reasonably require, of the names and addresses of the Owners as of the most recent Record Date. If three or more Certificateholders or one or more Holders of Certificates together evidencing not less than a 25% Percentage Interest in the Certificates apply in writing to the Owner Trustee, and such application states that the applicants desire to communicate with other Certificateholders with respect to their rights under this Agreement or under the Certificates and such application is accompanied by a copy of the communication that such applicants propose to transmit, then the Owner Trustee shall, within five Business Days after the receipt of such application, afford such applicants access during normal business hours to the current list of Certificateholders. Each Owner, by receiving and holding a Trust Certificate, shall be deemed to have agreed not to hold any of the Depositor, the Company, the Certificate Registrar or the Owner Trustee accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. Section 3.8 Maintenance of Office or Agency. The Owner Trustee shall maintain an office or offices or agency or agencies where Trust Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Owner Trustee in respect of the Trust Certificates and the Transaction Documents may be served. The Owner Trustee initially designates the Administrator's office in St. Paul, Minnesota as its principal corporate trust office for such purposes. The Owner Trustee shall give prompt written notice to the Company and to the Certificateholders of any change in the location of the Certificate Register or any such office or agency. Section 3.9 Appointment of Paying Agent. The Owner Trustee hereby appoints the Co-Owner Trustee as Paying Agent under this Agreement. The Paying Agent shall make distributions to Certificateholders and Residual Interestholders from the Certificate III-3 19 Distribution Account pursuant to Section 5.2 hereof and Section 5.01 of the Sale and Servicing Agreement and shall report the amounts of such distributions to the Owner Trustee. The Paying Agent shall have the revocable power to withdraw funds from the Certificate Distribution Account for the purpose of making the distributions referred to above. In the event that the Co-Owner Trustee shall no longer be the Paying Agent hereunder, the Owner Trustee shall appoint a successor to act as Paying Agent (which shall be a bank or trust company) acceptable to the Securities Insurer. The Owner Trustee shall cause such successor Paying Agent or any additional Paying Agent appointed by the Owner Trustee to execute and deliver to the Owner Trustee an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Owner Trustee that as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Owners in trust for the benefit of the Certificateholders and Residual Interestholders entitled thereto until such sums shall be paid to such Owners. The Paying Agent shall return all unclaimed funds to the Owner Trustee, and upon removal of a Paying Agent, such Paying Agent shall also return all funds in its possession to the Owner Trustee. The provisions of Sections 7.1, 7.3, 7.4 and 8.1 shall apply to the Co- Owner Trustee also in its role as Paying Agent, for so long as the Co-Owner Trustee shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. Notwithstanding anything herein to the contrary, the Co-Owner Trustee and the Paying Agent shall be the same entity as the Indenture Trustee under the Indenture and the Sale and Servicing Agreement, unless a Securities Insurer Default has occurred and is continuing. In such event, the Co-Owner Trustee and the Paying Agent shall resign and the Owner Trustee shall assume the duties and obligations of the Co-Owner Trustee and the Paying Agent hereunder and under the Sale and Servicing Agreement; provided, however, that the Indenture Trustee shall continue to perform its duties as Contract of Insurance Holder under the Sale and Servicing Agreement. In addition, in such event, the Indenture Trustee shall agree to continue to make claims under the Guaranty Policy on behalf of the Owner Trustee for the benefit of the Certificateholders pursuant to the Sale and Servicing Agreement. Section 3.10 Restrictions on Transfer of Trust Certificates. (a) Neither any Certificate nor any Residual Interest Instrument may be acquired, by or for the account of (i) an employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended, or (iii) any entity, including an insurance company separate account or general account, whose underlying assets include plan assets by reason of a plan's investment in the entity (each, a "Benefit Plan"). By accepting and holding a Trust Certificate, the Owner thereof shall be deemed to have represented and warranted that it is not a Benefit Plan. (b) Each prospective purchaser and any subsequent transferee of a Trust Certificate (each, a "Prospective Owner"), other than the Company or a wholly-owned III-4 20 subsidiary of the Company, shall represent and warrant, in writing, to the Owner Trustee and the Certificate Registrar and any of their respective successors that: (i) Such Person is (A) a "qualified institutional buyer" as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and is aware that the seller of such Trust Certificate may be relying on the exemption from the registration requirements of the Securities Act provided by Rule 144A and is acquiring such Trust Certificate for its own account or for the account of one or more qualified institutional buyers for whom it is authorized to act, or (B) a Person involved in the organization or operation of the Trust or an affiliate of such Person within the meaning of Rule 3a-7 of the Investment Company Act of 1940, as amended (including, but not limited to, the Seller or the Company). (ii) Such Person understands that such Trust Certificate has not been and will not be registered under the Securities Act and may be offered, sold, pledged or otherwise transferred only to a person whom the seller reasonably believes is (A) a qualified institutional buyer or (B) a Person involved in the organization or operation of the Trust or an affiliate of such Person, in a transaction meeting the requirements of Rule 144A under the Securities Act and in accordance with any applicable securities laws of any state of the United States. (iii) Such Person understands that each Trust Certificate bears a legend to the following effect: "[THE RESIDUAL INTEREST IN THE TRUST REPRESENTED BY THIS RESIDUAL INTEREST INSTRUMENT] [THIS CERTIFICATE] HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THIS [RESIDUAL INTEREST] [CERTIFICATE] MAY BE DIRECTLY OR INDIRECTLY OFFERED OR SOLD OR OTHERWISE DISPOSED OF (INCLUDING PLEDGED) BY THE HOLDER HEREOF ONLY TO (I) A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE ACT, IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT PURSUANT TO RULE 144A OR [(II) A PERSON INVOLVED IN THE ORGANIZATION OR OPERATION OF THE TRUST OR AN AFFILIATE OF SUCH A PERSON WITHIN THE MEANING OF RULE 3a-7 OF THE III-5 21 INVESTMENT COMPANY ACT OF 1940], AS AMENDED (INCLUDING, BUT NOT LIMITED TO, MEGO MORTGAGE CORPORATION) IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. NO PERSON IS OBLIGATED TO REGISTER THIS RESIDUAL INTEREST INSTRUMENT UNDER THE ACT OR ANY STATE SECURITIES LAWS." (iv) Such Person shall comply with the provisions of Section 3.10(b), as applicable, relating to the ERISA restrictions with respect to the acceptance or acquisition of such Residual Interest Instrument. (c) Each Prospective Owner, other than the Company, shall either: (i) represent and warrant, in writing, to the Owner Trustee and the Certificate Registrar and any of their respective successors that the Prospective Owner is not (A) an "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or (B) a "plan" within the meaning of Section 4975(e)(1) of the Code (any such plan or employee benefit plan, a "Plan") or (C) any entity, including an insurance company separate account or general account, whose underlying assets include plan assets by reason of a plan's investment in the entity and is not directly or indirectly purchasing such Trust Certificate on behalf of, as investment manager of, as named fiduciary of, as trustee of, or with assets of a Plan; or (ii) furnish to the Owner Trustee and the Certificate Registrar and any of their respective successors an opinion of counsel acceptable to such persons that (A) the proposed issuance or transfer of such Trust Certificate to such Prospective Owner will not cause any assets of the Trust to be deemed assets of a Plan, or (B) the proposed issuance or transfer of such Trust Certificate will not cause the Owner Trustee or the Certificate Registrar or any of their respective successors to be a fiduciary of a Plan within the meaning of Section 3(21) of ERISA and will not give rise to a transaction described in Section 406 of ERISA or Section 4975(c)(1) of the Code for which a statutory or administrative exemption is unavailable. (d) By its acceptance of a Residual Interest Instrument, each Prospective Owner agrees and acknowledges that no legal or beneficial interest in all or any portion of the Residual Interest Instruments may be transferred directly or indirectly to an individual, corporation, partnership or other person unless such transferee is not a Non-U.S. Person (any III-6 22 such person being referred to herein as a "Non-permitted Foreign Holder"), and any such purported transfer shall be void and have no effect. (e) Neither The Owner Trustee nor the Administrator shall execute, or countersign and deliver, any Trust Certificate in connection with any transfer thereof unless the transferor shall have provided to the Owner Trustee or the Administrator a certificate, substantially in the form attached as Exhibit D to this Agreement, signed by the transferee or a Non-permitted Foreign Holder, which certificate shall contain the consent of the transferee to any amendments of this Agreement as may be required to effectuate further the foregoing restrictions on transfer of any Trust Certificate to Non-permitted Foreign Holders, and an agreement by the transferee that it will not transfer any Trust Certificate without providing to Certificate Registrar on behalf of the Owner Trustee a certificate substantially in the form attached as Exhibit D to this Agreement. (f) Each Trust Certificate shall bear an additional legend referring to the foregoing restrictions contained in paragraphs (c) and (d) above. (g) The Prospective Owner of a Residual Interest Instrument shall obtain an opinion of counsel to the effect that, as a matter of Federal income tax law, such Prospective Owner is permitted to accept the transfer of a Residual Interest Instrument. (h) The Residual Interest Instrument may not be transferred without an Opinion of Counsel to the effect that such transfer would not jeopardize the tax treatment of the Trust, would not subject the Trust to an entity-level tax, and would not jeopardize the status of the Notes as debt for all purposes. (i) The Trust Certificates shall not be listed for trading on an established securities market, nor be readily tradeable on a secondary market, nor be transferable through the substantial equivalent of a secondary market, nor shall the Issuer be permitted to have more than 100 partners, for income tax purposes, all within the meaning of Code Section 7704, and its attendant regulations, as applicable. If requested, in the discretion of the Owner Trustee, transfer of a Trust Certificate shall be made only if accompanied by an opinion of counsel satisfactory to the Owner Trustee or the Co-Owner Trustee, which opinion of counsel shall not be an expense of the Issuer, the Owner Trustee, the Servicer or the Seller, to the effect such transfer will not cause the Issuer to be a publicly traded partnership taxable as a corporation and will not cause the termination of the Issuer under the federal income tax rules applicable to partnerships. III-7 23 ARTICLE IV ACTIONS BY OWNER TRUSTEE Section 4.1 Prior Notice to Owners with Respect to Certain Matters. With respect to the following matters, the Owner Trustee shall not take action, and the Owners shall not direct the Owner Trustee to take any action, unless at least 30 days before the taking of such action, the Owner Trustee shall have notified the Owners and the Securities Insurer in writing of the proposed action and the Owners and/or the Securities Insurer shall not have notified the Owner Trustee in writing prior to the 30th day after such notice is given that such Owners and/or the Securities Insurer have withheld consent or the Owners have provided alternative direction (any direction by the Owners shall require the prior consent of the Securities Insurer): (a) the initiation of any claim or lawsuit by the Trust (except claims or lawsuits brought in connection with the collection of the Home Loans) and the compromise of any action, claim or lawsuit brought by or against the Trust (except with respect to the aforementioned claims or lawsuits for collection of the Home Loans); (b) the election by the Trust to file an amendment to the Certificate of Trust (unless such amendment is required to be filed under the Business Trust Statute); (c) the amendment or other change to this Agreement or any Transaction Document in circumstances where the consent of any Noteholder or the Securities Insurer is required; (d) the amendment or other change to this Agreement or any Transaction Document in circumstances where the consent of any Noteholder or the Securities Insurer is not required and such amendment materially adversely affects the interest of the Owners; (e) the appointment pursuant to the Indenture of a successor Note Registrar, Paying Agent or Indenture Trustee or pursuant to this Agreement of a successor Certificate Registrar, or the consent to the assignment by the Note Registrar, Paying Agent or Indenture Trustee or Certificate Registrar of its obligations under the Indenture or this Agreement, as applicable. (f) the consent to the calling or waiver of any default of any Transaction Document; (g) the consent to the assignment by the Indenture Trustee, the Master Servicer or Servicer of their respective obligations under any Transaction Document; (h) except as provided in Article IX hereof, dissolve, terminate or liquidate the Trust in whole or in part; III-1 24 (i) merge or consolidate the Trust with or into any other entity, or convey or transfer all or substantially all of the Trust's assets to any other entity; (j) cause the Trust to incur, assume or guaranty any indebtedness other than the Notes, as set forth in this Agreement; (k) do any act that conflicts with any other Transaction Document; (l) do any act which would make it impossible to carry on the ordinary business of the Trust; (m) confess a judgment against the Trust; (n) possess Trust assets, or assign the Trust's right to property, for other than a Trust purpose; (o) cause the Trust to lend any funds to any entity; or (p) change the Trust's purpose and powers from those set forth in this Trust Agreement. In addition the Trust shall not commingle its assets with those of any other entity. The Trust shall maintain its financial and accounting books and records separate from those of any other entity. Except as expressly set forth herein, the Trust shall pay its indebtedness, operating expenses from its own funds, and the Trust shall not pay the indebtedness, operating expenses and liabilities of any other entity. The Trust shall maintain appropriate minutes or other records of all appropriate actions and shall maintain its office separate from the offices of the Company, the Depositor, and any of their respective affiliates. This Agreement is and shall be the only agreement among the parties hereto with respect to the creation, operation and termination of the Trust. For accounting purposes, the Trust shall be treated as an entity separate and distinct from any Owner. The pricing and other material terms of all transactions and agreements to which the Trust is a party shall be intrinsically fair to all parties thereto. The Owner Trustee shall not have the power, except upon the direction of the Majority Securityholders with the consent of the Securities Insurer, and to the extent otherwise consistent with the Transaction Documents, to (i) remove or replace the Master Servicer, the Servicer or the Indenture Trustee, (ii) institute proceedings to have the Trust declared or adjudicated a bankrupt or insolvent, (iii) consent to the institution of bankruptcy or insolvency proceedings against the Trust, (iv) file a petition or consent to a petition seeking reorganization or relief on behalf of the Trust under any applicable federal or state law relating to bankruptcy, (v) consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or any similar official) of the Trust or a substantial portion of the property of the Trust, (vi) make any assignment for the benefit of the Trust's creditors, IV-2 25 (vii) cause the Trust to admit in writing its inability to pay its debts generally as they become due, or (viii) take any action, or cause the Trust to take any action, in furtherance of any of the foregoing (any of the above, a "Bankruptcy Action"). So long as the Indenture and the Insurance Agreement remain in effect and no Securities Insurer Default exists, no Certificateholder or Residual Interestholder shall have the power to take, and shall not take, any Bankruptcy Action with respect to the Trust or direct the Owner Trustee to take any Bankruptcy Action with respect to the Trust. Section 4.2 Action by Owners with Respect to Certain Matters. The Owner Trustee shall not have the power, except upon the direction of the Owners and the consent of the Securities Insurer, to (a) remove the Administrator pursuant to the Administration Agreement, (b) appoint a successor Administrator pursuant to the Administration Agreement, (c) remove the Master Servicer pursuant to the Sale and Servicing Agreement, (d) remove the Servicer pursuant to the Servicing Agreement, or (e) sell the Home Loans after the termination of the Indenture. The Owner Trustee shall take the actions referred to in the preceding sentence only upon written instructions signed by the Owners and only after obtaining the consent of the Securities Insurer. Section 4.3 Action by Owners with Respect to Bankruptcy. The Owner Trustee shall not have the power to commence a voluntary proceeding in bankruptcy relating to the Trust without the consent and approval of the Securities Insurer, the unanimous prior approval of all Owners and the Securities Insurer and the delivery to the Owner Trustee by each such Owner of a certificate certifying that such Owner reasonably believes that the Trust is insolvent. Section 4.4 Restrictions on Owners' Power. The Owners shall not direct the Owner Trustee to take or refrain from taking any action if such action or inaction would be contrary to any obligation of the Trust or the Owner Trustee under this Agreement or any of the Transaction Documents or would be contrary to Section 2.3 nor shall the Owner Trustee be obligated to follow any such direction, if given. Section 4.5 Majority Control. Except as expressly provided herein, any action that may be taken by the Owners under this Agreement may be taken by (i) the Holders of Certificates evidencing more than a 50% Percentage Interest in the Certificates and (ii) the Majority Residual Interestholders. Except as expressly provided herein, any written notice of the Owners delivered pursuant to this Agreement shall be effective if signed by Holders of Certificates evidencing (i) more than a 50% Percentage Interest in the Certificates and (ii) the Majority Residual Interestholders at the time of the delivery of such notice. IV-3 26 ARTICLE V APPLICATION OF TRUST FUNDS; CERTAIN DUTIES Section 5.1 Establishment of Trust Account. The Owner Trustee shall cause the Indenture Trustee, to establish and maintain with First Trust of New York, National Association for the benefit of the Owner Trustee or Co-Owner Trustee one or more Eligible Accounts which while the Co-Owner Trustee holds such Trust Account shall be entitled "CERTIFICATE DISTRIBUTION ACCOUNT, FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS CO-OWNER TRUSTEE, IN TRUST FOR THE MEGO MORTGAGE HOME LOAN ASSET BACKED SECURITIES, SERIES 1997-1". Funds shall be deposited in the Certificate Distribution Account as required by the Sale and Servicing Agreement. All of the right, title and interest of the Co-Owner Trustee or Owner Trustee in all funds on deposit from time to time in the Certificate Distribution Account and in all proceeds thereof shall be held for the benefit of the Owners, the Securities Insurer and such other persons entitled to distributions therefrom. Except as otherwise expressly provided herein or in the Sale and Servicing Agreement, the Certificate Distribution Account shall be under the sole dominion and control of the Owner Trustee or Co-Owner Trustee for the benefit of the Owners, the Securities Insurer and the Servicer. In addition to the foregoing, the Certificate Distribution Account is a Trust Account under the Sale and Servicing Agreement and constitutes part of the Trust Estate pledged by the Trust to the Indenture Trustee under the Indenture. The Certificate Distribution Account shall be subject to and established and maintained in accordance with the applicable provisions of the Sale and Servicing Agreement and the Indenture, including, without limitation, the provisions of Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement regarding distributions from the Certificate Distribution Account. The Company agrees to direct and shall have the sole authority to direct the Owner Trustee or Co-Owner Trustee, or their successor in interest, as to the Permitted Investments in which the funds on deposit in the Trust Accounts (as such term is defined in the Sale and Servicing Agreement) may be invested. Section 5.2 Application Of Trust Funds. (a) On each Distribution Date, the Owner Trustee or Co-Owner Trustee shall direct the Paying Agent to make the distributions and payments set forth in Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement from amounts on deposit in the Note Distribution Account and the Certificate Distribution Account, respectively. (b) On or before the third Business Day following each Distribution Date, the Owner Trustee shall cause the Paying Agent to send to each Owner the Statement to V-1 27 Securityholders prepared pursuant to Section 6.02 of the Sale and Servicing Agreement with respect to such Distribution Date. (c) In the event that any withholding tax is imposed on the Trust's payment (or allocations of income) to an Owner, such tax shall reduce the amount otherwise distributable to the Owner in accordance with this Section. The Owner Trustee is hereby authorized and directed to retain from amounts otherwise distributable to the Owners sufficient funds for the payment of any tax that is legally owed by the Trust (but such authorization shall not prevent the Owner Trustee from contesting any such tax in appropriate proceedings, and withholding payment of such tax, if permitted by law, pending the outcome of such proceedings). The amount of any withholding tax imposed with respect to an Owner shall be treated as cash distributed to such Owner at the time it is withheld by the Trust and remitted to the appropriate taxing authority. If there is a possibility that withholding tax is payable with respect to a distribution (such as a distribution to a non-U.S. Owner), the Owner Trustee may in its sole discretion withhold such amounts in accordance with this paragraph (c). In the event that an Owner wishes to apply for a refund of any such withholding tax, the Owner Trustee shall reasonably cooperate with such owner in making such claim so long as such Owner agrees to reimburse the Owner Trustee for any out-of-pocket expenses incurred. Section 5.3 Method of Payment. Distributions required to be made to Owners on any Distribution Date shall be made to each Owner of record on the preceding Record Date in the manner set forth in Section 5.03 of the Sale and Servicing Agreement. Section 5.4 Segregation of Moneys; No Interest. Subject to Sections 4.1 and 5.2, moneys received by the Owner Trustee hereunder and deposited into the Certificate Distribution Account will be segregated except to the extent required otherwise by law or the Sale and Servicing Agreement and shall be invested in Permitted Investments at the direction of the Company. The Owner Trustee shall not be liable for payment of any interest in respect of such moneys. Section 5.5 Accounting and Reports to the Certificateholder, Owners, the Internal Revenue Service and Others. The Owner Trustee shall (a) maintain (or cause to be maintained) the books of the Trust on a calendar year basis on the accrual method of accounting, and such books shall be maintained separate from those of any other entity and reflect the separate interest of the Trust, (b) deliver to each Owner, as may be required by the Code and applicable Treasury Regulations, such information as may be required to enable each Owner to prepare its federal and state income tax returns, (c) file such tax return relating to the Trust (including a partnership information return, IRS Form 1065), and make such elections as may from time to time be required or appropriate under any applicable state or Federal statute or rule or regulation thereunder so as to maintain the Trust's characterization as a partnership for Federal income tax purposes, (d) cause such tax returns to be signed in the manner required by law and (e) collect or cause to be collected any withholding tax as described in and in accordance with Section 5.2(c) with respect to income or distributions to Owners. The Owner Trustee shall elect under Section 1278 of the Code to include in income V-2 28 currently any market discount that accrues with respect to the Home Loans. The Owner Trustee shall not make the election provided under Section 754 of the Code. Section 5.6 Signature on Returns. The Owner Trustee shall sign on behalf of the Trust the tax returns of the Trust, unless applicable law requires an Owner to sign such documents, in which case such documents shall be signed by the Company. V-3 29 ARTICLE VI AUTHORITY AND DUTIES OF OWNER TRUSTEE Section 6.1 General Authority. The Owner Trustee is authorized and directed to execute and deliver or cause to be executed and delivered the Notes, the Trust Certificates and the Transaction Documents to which the Trust is to be a party and each certificate or other document attached as an exhibit to or contemplated by the Transaction Documents to which the Trust is to be a party and any amendment or other agreement or instrument described in Article III, in each case, in such form as the Company shall approve, as evidenced conclusively by the Owner Trustee's execution thereof, and, on behalf of the Trust, to direct the Indenture Trustee to authenticate and deliver Classes of Notes in the following aggregate principal amounts: Class A-1 Notes, $23,300,000; Class A-2 Notes, $25,950,000; Class A-3 Notes, $10,300,000; and Class A-4 Notes, $26,603,605. The Administrator on behalf of the Owner Trustee shall authenticate and deliver the Certificates and the Residual Interest Instruments. In addition to the foregoing, the Owner Trustee is authorized, but shall not be obligated, to take all actions required of the Trust, pursuant to the Transaction Documents. Section 6.2 General Duties. It shall be the duty of the Owner Trustee: (a) to discharge (or cause to be discharged) all of its responsibilities pursuant to the terms of this Agreement and the Transaction Documents to which the Trust is a party and to administer the Trust in the interest of the Owners, subject to the Transaction Documents and in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the Owner Trustee shall be deemed to have discharged its duties and responsibilities hereunder and under the Transaction Documents to the extent the Administrator or the Co-Owner Trustee has agreed in the Administration Agreement or this Agreement, respectively, to perform any act or to discharge any duty of the Owner Trustee or the Trust hereunder or under any Transaction Document, and the Owner Trustee shall not be held liable for the default or failure of the Administrator or the Co-Owner Trustee to carry out its obligations under the Administration Agreement or this Agreement, respectively; and (b) to obtain and preserve, the Issuer's qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of the Indenture, the Notes, the Trust Estate and each other instrument and agreement included in the Trust Estate. Section 6.3 Action upon Instruction. (a) Subject to Article IV and in accordance with the terms of the Transaction Documents, the Owners may by written instruction direct the Owner Trustee in the management of the Trust but only to the extent consistent with the limited purpose of the Trust. Such direction may be exercised at any-time by written instruction of the Owners pursuant to Article IV. VI-1 30 (b) The Owner Trustee shall not be required to take any action hereunder or under any Transaction Document if the Owner Trustee shall have reasonably determined, or shall have been advised by counsel, that such action is likely to result in liability on the part of the Owner Trustee or is contrary to the terms hereof or of any Transaction Document or is otherwise contrary to law. (c) Whenever the Owner Trustee is unable to decide between alternative courses of action permitted or required by the terms of this Agreement or under any Transaction Document, the Owner Trustee shall promptly give notice (in such form as shall be appropriate under the circumstances) to the Owners and the Securities Insurer requesting instruction from the Owners as to the course of action to be adopted, and to the extent the Owner Trustee acts in good faith in accordance with any written instruction of the Owners received, the Owner Trustee shall not be liable on account of such action to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action, not inconsistent with this Agreement or the Transaction Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. (d) In the event that the Owner Trustee is unsure as to the application of any provision of this Agreement or any Transaction Document or any such provision is ambiguous as to its application, or is, or appears to be, in conflict with any other applicable provision, or in the event that this Agreement permits any determination by the Owner Trustee or is silent or is incomplete as to the course of action that the Owner Trustee is required to take with respect to a particular set of facts, the Owner Trustee may give notice (in such form as shall be appropriate under the circumstances) to the Owners requesting instruction and, to the extent that the Owner Trustee acts or refrains from acting in good faith in accordance with any such instruction received, the Owner Trustee shall not be liable, on account of such action or inaction, to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action, not inconsistent with this Agreement or the Transaction Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. Section 6.4 No Duties Except as Specified in this Agreement, the Transaction Documents or in Instructions. The Owner Trustee shall not have any duty or obligation to manage, make any payment with respect to, register, record, sell, dispose of, or otherwise deal with the Owner Trust Estate, or to otherwise take or refrain from taking any action under, or in connection with, any document contemplated hereby to which the Owner Trustee is a party, except as expressly provided by the terms of this Agreement, any Transaction Document or in any document or written instruction received by the Owner Trustee pursuant to Section 6.3; VI-2 31 and no implied duties or obligations shall be read into this Agreement or any Transaction Document against the Owner Trustee. The Owner 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 or to prepare or file any Securities and Exchange Commission filing for the Trust or to record this Agreement or any Transaction Document. The Owner Trustee nevertheless agrees that it will, at its own cost and expense, promptly take all action as may be necessary to discharge any liens on any part of the Owner Trust Estate that result from actions by, or claims against, the Owner Trustee that are not related to the ownership or the administration of the Owner Trust Estate. Section 6.5 No Action Except Under Specified Documents or Instructions. The Owner Trustee shall not manage, control, use, sell, dispose of or otherwise deal with any part of the Owner Trust Estate except (i) in accordance with the powers granted to and the authority conferred upon the Owner Trustee pursuant to this Agreement, (ii) in accordance with the Transaction Documents and (iii) in accordance with any document or instruction delivered to the Owner Trustee pursuant to Section 6.3. Section 6.6 Restrictions. The Owner Trustee shall not take any action (a) that is inconsistent with the purposes of the Trust set forth in Section 2.3 or (b) that, to the actual knowledge of the Owner Trustee, would result in the Trust's becoming taxable as a corporation for Federal income tax purposes. The Owners shall not direct the Owner Trustee to take action that would violate the provisions of this Section. VI-3 32 ARTICLE VII CONCERNING THE OWNER TRUSTEE Section 7.1 Acceptance of Trusts and Duties. The Owner Trustee accepts the trusts hereby created and agrees to perform its duties hereunder with respect to such trusts but only upon the terms of this Agreement and the Transaction Documents. The Owner Trustee also agrees to disburse all moneys actually received by it constituting part of the Owner Trust Estate upon the terms of the Transaction Documents and this Agreement. The Owner Trustee shall not be answerable or accountable hereunder or under any Transaction Document under any circumstances, except (i) for its own willful misconduct or gross negligence or (ii) in the case of the inaccuracy of any representation or warranty contained in Section 7.3 expressly made by the Owner Trustee. In particular, but not by way of limitation (and subject to the exceptions set forth in the preceding sentence): (a) the Owner Trustee shall not be liable for any error of judgment made by a responsible officer of the Owner Trustee; (b) the Owner Trustee shall not be liable with respect to any action taken or omitted to be taken by it in accordance with the instructions of the Administrator or the Owners; (c) no provision of this Agreement or any Transaction Document shall require the Owner Trustee to expend or risk funds or otherwise incur any financial liability in the performance of any of its rights or powers hereunder or under any Transaction Document if the Owner Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; (d) under no circumstances shall the Owner Trustee be liable for indebtedness evidenced by or arising under any of the Transaction Documents, including the principal of and interest on the Notes; (e) the Owner Trustee shall not be responsible for or in respect of the validity or sufficiency of this Agreement or for the due execution hereof by the Depositor or the Company or for the form, character, genuineness, sufficiency, value or validity of any of the Owner Trust Estate or for or in respect of the validity or sufficiency of the Transaction Documents, other than the certificate of authentication on the Trust Certificates, and the Owner Trustee shall in no event assume or incur any liability, duty, or obligation to any Noteholder or to any Owner, other than as expressly provided for herein and in the Transaction Documents; (f) the Owner Trustee shall not be liable for the default or misconduct of the Administrator, the Seller, the Company, the Indenture Trustee, the Master Servicer or the Servicer under any of the Transaction Documents or otherwise and the Owner Trustee shall VII-1 33 have no obligation or liability to perform the obligations of the Trust under this Agreement or the Transaction Documents that are required to be performed by the Administrator under the Administration Agreement, the Indenture Trustee under the Indenture, the Master Servicer under the Sale and Servicing Agreement, or the Servicer under the Servicing Agreement; and (g) the Owner 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 under this Agreement or otherwise or in relation to this Agreement or any Transaction Document, at the request, order or direction of any of the Owners, unless such Owners have offered to the Owner Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities that may be incurred by the Owner Trustee therein or thereby. The right of the Owner Trustee to perform any discretionary act enumerated in this Agreement or in any Transaction Document shall not be construed as a duty, and the Owner Trustee shall not be answerable for other than its gross negligence or willful misconduct in the performance of any such act provided, that the Owner Trustee shall be liable for its negligence or willful misconduct in the event that it assumes the duties and obligations of the Co-Owner Trustee under the Sale and Servicing Agreement pursuant to Section 10.5 hereof. Section 7.2 Furnishing of Documents. The Owner Trustee shall furnish (a) to the Owners promptly upon receipt of a written request therefor, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Owner Trustee under the Transaction Documents and (b) to Noteholders promptly upon written request therefor, copies of the Sale and Servicing Agreement, the Administration Agreement and the Trust Agreement. Section 7.3 Representations and Warranties. (a) The Owner Trustee hereby represents and warrants to the Depositor and the Company, for the benefit of the Owners, that: (i) It is a banking corporation duly organized and validly existing in good standing under the laws of the State of Delaware. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (ii) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement, and this Agreement will be executed and delivered by one of its officers who is duly authorized to execute and deliver this Agreement on its behalf. (iii) Neither the execution nor the delivery by it of this Agreement nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the terms or provisions hereof will contravene any Federal or Delaware law, governmental rule or regulation governing the banking or trust powers of the VII-2 34 Owner Trustee or any judgment or order binding on it, or constitute any default under its charter documents or by-laws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. (b) The Co-Owner Trustee hereby represents and warrants to the Depositor and the Company and the Securities Insurer, for the benefit of the Owners, that: (i) It is a national banking association duly organized and validly existing in good standing under the laws of the United States. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (ii) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement, and this Agreement will be executed and delivered by one of its officers who is duly authorized to execute and deliver this Agreement on its behalf. (iii) Neither the execution nor the delivery by it of this Agreement nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the terms or provisions hereof will contravene any Federal or Minnesota law, governmental rule or regulation governing the banking or trust powers of the Co-Owner Trustee or any judgment or order binding on it, or constitute any default under its charter documents or by-laws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. Section 7.4 Reliance; Advice of Counsel. (a) The Owner Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond, or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. The Owner Trustee may accept a certified copy of a resolution of the board of directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the method of the determination of which is not specifically prescribed herein, the Owner Trustee may for all purposes hereof rely on a certificate, signed by the president or any vice president or by the treasurer or other authorized officers of the relevant party, as to such fact or matter and such certificate shall constitute full protection to the Owner Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. (b) In the exercise or administration of the trusts hereunder and in the performance of its duties and obligations under this Agreement or the Transaction Documents, the Owner Trustee (i) may act directly or through its agents or attorneys pursuant to agreements entered into with any of them, and the Owner Trustee shall not be liable for the VII-3 35 conduct or misconduct of such agents or attorneys if such agents or attorneys shall have been selected by the Owner Trustee with reasonable care, and (ii) may consult with counsel, accountants and other skilled persons to be selected with reasonable care and employed by it. The Owner Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the written opinion or advice of any such counsel, accountants or other such persons and not contrary to this Agreement or any Transaction Document. Section 7.5 Not Acting in Individual Capacity. Except as provided in this Article VII, in accepting the trusts hereby created Wilmington Trust Company acts solely as Owner Trustee hereunder and not in its individual capacity and all Persons having any claim against the Owner Trustee by reason of the transactions contemplated by this Agreement or any Transaction Document shall look only to the Owner Trust Estate for payment or satisfaction thereof. Section 7.6 Owner Trustee Not Liable for Trust Certificates or Home Loans. The recitals contained herein and in the Trust Certificates (other than the signature and countersignature of the Owner Trustee on the Trust Certificates) shall be taken as the statements of the Depositor and the Company, and the Owner Trustee assumes no responsibility for the correctness thereof. The Owner Trustee makes no representations as to the validity or sufficiency of this Agreement, of any Transaction Document or of the Trust Certificates (other than the signature and countersignature of the Owner Trustee on the Trust Certificates and as specified in Section 7.3) or the Notes, or of any Home Loans or related documents. The Owner Trustee shall at no time have any responsibility or liability for or with respect to the legality, validity and enforceability of any Home Loan, or the perfection and priority of any security interest created by any Home Loan or the maintenance of any such perfection and priority, or for or with respect to the sufficiency of the Owner Trust Estate or its ability to generate the payments to be distributed to Owners under this Agreement or the Noteholders under the Indenture, including, without limitation: the existence, condition and ownership of any Property; the existence and enforceability of any insurance thereon; the existence and contents of any Home Loan on any computer or other record thereof; the validity of the assignment of any Home Loan to the Trust or of any intervening assignment; the completeness of any Home Loan; the performance or enforcement of any Home Loan; the compliance by the Depositor, the Company, the Master Servicer or the Servicer with any warranty or representation made under any Transaction Document or in any related document or the accuracy of any such warranty or representation or any action of the Administrator, the Indenture Trustee, the Master Servicer or the Servicer or any subservicer taken in the name of the Owner Trustee. Section 7.7 Owner Trustee May Own Trust Certificates and Notes. The Owner Trustee in its individual or any other capacity may become the owner or pledgee of Trust Certificates or Notes and may deal with the Depositor, the Company, the Administrator, the Indenture Trustee and the Servicer in banking transactions with the same rights as it would have if it were not Owner Trustee. VII-4 36 Section 7.8 Licenses. The Owner Trustee shall cause the Trust to use its best efforts to obtain and maintain the effectiveness of any licenses required in connection with this Agreement and the Transaction Documents and the transactions contemplated hereby and thereby until such time as the Trust shall terminate in accordance with the terms hereof. Section 7.9 Rights of Co-Owner Trustee. The Co-Owner Trustee shall be entitled to all the rights and benefits conferred upon the Owner Trustee in Article VII of this Agreement. VII-5 37 ARTICLE VIII COMPENSATION OF OWNER TRUSTEE Section 8.1 Owner Trustee's Fees and Expenses. The Owner Trustee shall receive as compensation for its services hereunder such fees as have been separately agreed upon before the date hereof between the Company and the Owner Trustee, and the Owner Trustee shall be entitled to be reimbursed by the Company for its other reasonable expenses hereunder, including the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as the Owner Trustee may employ in connection with the exercise and performance of its rights and its duties hereunder. Section 8.2 Indemnification. The Company shall be liable as primary obligor, and the Servicer as secondary obligor pursuant to the Administration Agreement, for, and shall indemnify the Owner Trustee, the Co-Owner Trustee and their successors, assigns, agents and servants (collectively, the "Indemnified Parties") from and against, any and all liabilities, obligations, losses, damages, taxes, claims, actions and suits, and any and all reasonable costs, expenses and disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever (collectively, "Expenses") which may at any time be imposed on, incurred by, or asserted against the Owner Trustee or any Indemnified Party in any way relating to or arising out of this Agreement, the Transaction Documents, the Owner Trust Estate, the administration of the Owner Trust Estate or the action or inaction of the Owner Trustee or the Co-Owner Trustee hereunder, except only that the Company shall not be liable for or required to indemnify an Indemnified Party from and against Expenses arising or resulting from any of the matters described in the third sentence of Section 7.1 hereof. The indemnities contained in this Section shall survive the resignation or termination of the Owner Trustee or the termination of this Agreement. In any event of any claim, action or proceeding for which indemnity will be sought pursuant to this Section, the Owner Trustee's or Co-Owner Trustee's choice of legal counsel shall be subject to the approval of the Company, which approval shall not be unreasonably withheld. Section 8.3 Payments to the Owner Trustee. Any amounts paid to the Owner Trustee pursuant to this Article VIII shall be deemed not to be a part of the Owner Trust Estate immediately after such payment. VIII-1 38 ARTICLE IX TERMINATION OF TRUST AGREEMENT Section 9.1 Termination of Trust Agreement. (a) This Agreement (other than Article VIII) and the Trust shall terminate and be of no further force or effect on the earlier of (i) the satisfaction and discharge of the Indenture pursuant to Section 4.01 of the Indenture and the termination of the Sale and Servicing Agreement and (ii) 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's) alive on the date hereof. The bankruptcy, liquidation, dissolution, death or incapacity of any Owner shall not (x) operate to terminate this Agreement or the Trust, nor (y) entitle such Owner's legal representatives or heirs to claim an accounting or to take any action or proceeding in any court for a partition or winding up of all or any part of the Trust or Owner Trust Estate nor (z) otherwise affect the rights, obligations and liabilities of the parties hereto. (b) The Certificates shall be subject to an early redemption or termination at the option of the Company, the Master Servicer or the Securities Insurer in the manner and subject to the provisions of Section 11.01 of the Sale and Servicing Agreement. (c) Except as provided in Sections 9.1(a) and (b) above, none of the Depositor, the Company, the Securities Insurer nor any Owner shall be entitled to revoke or terminate the Trust. (d) Notice of any termination of the Trust, specifying the Distribution Date upon which the Certificateholders shall surrender their Certificates to the Paying Agent for payment of the final distributions and cancellation, shall be given by the Owner Trustee to the Certificateholders, the Securities Insurer and the Rating Agencies mailed within five Business Days of receipt by the Owner Trustee of notice of such termination pursuant to Section 9.1(a) or (b) above, which notice given by the Owner Trustee shall state (i) the Distribution Date upon or with respect to which final payment of the Certificates shall be made upon presentation and surrender of the Certificates at the office of the Paying Agent therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Distribution Date is not applicable, payments being made only upon presentation and surrender of the Trust Certificates at the office of the Paying Agent therein specified. The Owner Trustee shall give such notice to the Certificate Registrar (if other than the Owner Trustee) and the Paying Agent at the time such notice is given to Certificateholders. Upon presentation and surrender of the Certificates, the Paying Agent shall cause to be distributed to Certificateholders amounts distributable on such Distribution Date pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement. IX-1 39 In the event that all of the Certificateholders shall not surrender their Trust Certificates for cancellation within six months after the date specified in the above mentioned written notice, the Co-Owner Trustee shall give a second written notice to the remaining Certificateholders to surrender their Trust Certificates for cancellation and receive the final distribution with respect thereto. If within one year after the second notice all the Trust Certificates shall not have been surrendered for cancellation, the Co-Owner Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Certificateholders concerning surrender of their Trust Certificates, and the cost thereof shall be paid out of the funds and other assets that shall remain subject to this Agreement. Any funds remaining in the Trust after exhaustion of such remedies shall be distributed by the Co-Owner Trustee to the Residual Interestholders on a pro rata basis. (e) Upon the winding up of the Trust and its termination, the Owner Trustee shall cause the Certificate of Trust to be canceled by filing a certificate of cancellation with the Secretary of State in accordance with the provisions of Section 3820 of the Business Trust Statute. IX-2 40 ARTICLE X SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES Section 10.1 Eligibility Requirements for Owner Trustee. The Owner Trustee shall at all times be a corporation satisfying the provisions of Section 3807(a) of the Business Trust Statute; authorized to exercise corporate powers; having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by Federal or state authorities; and having (or having a parent which has) a long-term rating of at least "A-1" by Standard & Poor's and "Baa3" by Moody's and being acceptable to the Securities Insurer. If such corporation shall publish reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purpose of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Owner Trustee shall cease to be eligible in accordance with the provisions of this Section, the Owner Trustee shall resign immediately in the manner and with the effect specified in Section 10.2. Section 10.2 Resignation or Removal of Owner Trustee or Co-Owner Trustee. The Owner Trustee or Co-Owner Trustee may at any time resign and be discharged from the trusts hereby created by giving written notice thereof to the Administrator, the Indenture Trustee, the Securities Insurer and the Company. Upon receiving such notice of resignation, the Administrator shall promptly appoint a successor Owner Trustee or Co-Owner Trustee (acceptable to the Securities Insurer) by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Owner Trustee and one copy to the successor Owner Trustee or Co-Owner Trustee. If no successor Owner Trustee or Co- Owner Trustee shall have been so appointed and have accepted appointment within 30 days after the giving of such notice of resignation, the resigning Owner Trustee or Co-Owner Trustee or the Securities Insurer may petition any court of competent jurisdiction for the appointment of a successor Owner Trustee or Co-Owner Trustee. If at any time the Owner Trustee or Co-Owner Trustee shall cease to be eligible in accordance with the provisions of Section 10.1 and shall fail to resign after written request therefor by the Administrator, or if at any time the Owner Trustee or Co-Owner Trustee shall be legally unable to act, or shall be adjudged bankrupt or insolvent, or a receiver of the Owner Trustee or Co-Owner Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Owner Trustee or Co-Owner Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Securities Insurer, or the Administrator with the consent of the Securities Insurer, may remove the Owner Trustee or Co-Owner Trustee. If the Administrator or the Securities Insurer shall remove the Owner Trustee or Co-Owner Trustee under the authority of the immediately preceding sentence, the Securities Insurer, or the Administrator with the consent of the Securities Insurer, shall promptly appoint a successor Owner Trustee or Co-Owner Trustee by written instrument in duplicate, one copy of which instrument shall be delivered to the X-1 41 outgoing Owner Trustee or Co-Owner Trustee so removed and one copy to the successor Owner Trustee or Co-Owner Trustee and payment of all fees owed to the outgoing Owner Trustee or Co-Owner Trustee. Any resignation or removal of the Owner Trustee or Co-Owner Trustee and appointment of a successor Owner Trustee or Co-Owner Trustee pursuant to any of the provisions of this Section shall not become effective until (i) acceptance of appointment by the successor Owner Trustee or Co-Owner Trustee pursuant to Section 10.3 written approval by the Securities Insurer and payment of all fees and expenses owed to the outgoing Owner Trustee or Co-Owner Trustee. The Administrator shall provide notice of such resignation or removal of the Owner Trustee or Co- Owner Trustee to each of the Rating Agencies and the Securities Insurer. Section 10.3 Successor Owner Trustee or Co-Owner Trustee. Any successor Owner Trustee or Co-Owner Trustee appointed pursuant to Section 10.2 shall execute, acknowledge and deliver to the Administrator, the Securities Insurer and to its predecessor Owner Trustee or Co- Owner Trustee an instrument accepting such appointment under this Agreement, and thereupon the resignation or removal of the predecessor Owner Trustee or Co-Owner Trustee shall become effective and such successor Owner Trustee or Co-Owner Trustee (if acceptable to the Securities Insurer), without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties, and obligations of its predecessor under this Agreement, with like effect as if originally named as Owner Trustee or Co-Owner Trustee. The predecessor Owner Trustee or Co-Owner Trustee shall upon payment of its fees and expenses deliver to the successor Owner Trustee or Co-Owner Trustee all documents and statements and monies held by it under this Agreement; and the Administrator and the predecessor Owner Trustee or Co-Owner 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 Owner Trustee or Co-Owner Trustee all such rights, powers, duties, and obligations. No successor Owner Trustee or Co-Owner Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Owner Trustee or Co-Owner Trustee shall be eligible pursuant to Section 10.1. Upon acceptance of appointment by a successor Owner Trustee or Co-Owner Trustee pursuant to this Section, the Administrator shall mail notice of the successor of such Owner Trustee or Co-Owner Trustee to all Owners, the Indenture Trustee, the Noteholders, the Securities Insurer and the Rating Agencies. If the Administrator fails to mail such notice within 10 days after acceptance of appointment by the successor Owner Trustee or Co-Owner Trustee, the successor Owner Trustee or Co-Owner Trustee shall cause such notice to be mailed at the expense of the Administrator. X-2 42 Section 10.4 Merger or Consolidation of Owner Trustee. Any corporation into which the Owner 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 Owner Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Owner Trustee, shall be the successor of the Owner Trustee hereunder, provided such corporation shall be eligible pursuant to Section 10.1, without the execution or filing of any instrument or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding; provided further that the Owner Trustee shall mail notice of such merger or consolidation to the Rating Agencies. Section 10.5 Appointment of Co-Owner Trustee or Separate Owner 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 Owner Trust Estate or any Mortgaged Property may at the time be located, and for the purpose of performing certain duties and obligations of the Owner Trustee with respect to the Trust and the Certificates under the Sale and Servicing Agreement, the Administrator and the Owner Trustee acting jointly shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Owner Trustee and acceptable to the Securities Insurer to act as co-owner trustee, jointly with the Owner Trustee, or separate owner trustee or separate owner trustees, of all or any part of the Owner Trust Estate, and to vest in such Person, in such capacity, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Administrator, the Securities Insurer and the Owner Trustee may consider necessary or desirable. If the Administrator shall not have joined in such appointment within 25 days after the receipt by it of a request so to do, the Owner Trustee (with the consent of the Securities Insurer) shall have the power to make such appointment. No Co-Owner Trustee or separate Owner Trustee under this Section 10.5 shall be required to meet the terms of eligibility as a successor trustee pursuant to Section 10.1 and no notice of the appointment of any co-owner trustee or separate Owner Trustee shall be required pursuant to Section 10.3. The Owner Trustee hereby appoints the Indenture Trustee as Co-Owner Trustee for the purpose of (i) establishing and maintaining the Certificate Distribution Account and making the distributions therefrom to the Persons entitled thereto pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement and (ii) holding the Contract of Insurance on behalf of the Trust, facilitating claims under the Contract of Insurance and for purposes of holding record ownership of each FHA Loan. The Owner Trustee and the Co-Owner Trustee each agree that upon the occurrence and continuation of a Securities Insurer Default, the Co-Owner Trustee shall resign and the Owner Trustee shall assume the duties and obligations of the Co-Owner Trustee under the Sale and Servicing Agreement (other than its duties as Contract of Insurance Holder thereunder) and this Agreement, including without limitation, the obligations of the Co-Owner Trustee as Paying Agent pursuant to Section 3.9 hereof. Each separate owner trustee and co-owner trustee shall, to the extent permitted by law, be appointed and act subject to the following provision and conditions: X-3 43 (i) all rights, powers, duties and obligations conferred or imposed upon the Owner Trustee shall be conferred upon and exercised or performed by the Owner Trustee and such separate owner trustee or co-owner trustee jointly (it being understood that such separate owner trustee or co-owner trustee is not authorized to act separately without the Owner Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed, the Owner 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 owner trustee or co-owner trustee but solely at the direction of the Owner Trustee; provided that Co-Owner Trustee, in performing its duties and obligations under the Sale and Servicing Agreement, may act separately in its capacity as Co-Owner Trustee without the Owner Trustee joining in such Acts. (ii) no owner trustee under this Agreement shall be personally liable by reason of any act or omission of any other owner trustee under this Agreement; and (iii) the Administrator and the Owner Trustee acting jointly may at any time accept the resignation of or remove any separate owner trustee or co-owner trustee. Any notice, request or other writing given to the Owner Trustee shall be deemed to have been given to the separate owner trustees and co-owner trustees, as if given to each of them. Every instrument appointing any separate owner trustee or co-owner trustee, other than this Agreement, shall refer to this Agreement and to the conditions of this Article. Each separate owner trustee and co-owner trustee, upon its acceptance of appointment, shall be vested with the estates specified in its instrument of appointment, either jointly with the Owner 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 Owner Trustee. Each such instrument shall be filed with the Owner Trustee and a copy thereof given to the Administrator. Any separate owner trustee or co-owner trustee may at any time appoint the Owner Trustee as 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 owner trustee or co-owner 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 Owner Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. X-4 44 The Co-Owner Trustee, in its capacity as Co-Owner Trustee, shall not have any rights, duties or obligations except as expressly provided in this Agreement and the Sale and Servicing Agreement. X-5 45 ARTICLE XI MISCELLANEOUS Section 11.1 Supplements and Amendments. This Agreement may be amended by the Depositor, the Company and the Owner Trustee, with the prior consent of the Securities Insurer, and with prior written notice to the Rating Agencies and the Securities Insurer, but without the consent of any of the Noteholders or the Owners or the Indenture Trustee, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders or the Owners provided, however, that such action shall not adversely affect in any material respect the interests of any Noteholder or Owner or the rights of the Securities Insurer. An amendment described above shall be deemed not to adversely affect in any material respect the interests of any Noteholder or Owner if (i) an opinion of counsel is obtained to such effect, and (ii) the party requesting the amendment satisfies the Rating Agency Condition with respect to such amendment. This Agreement may also be amended from time to time by the Depositor, the Company and the Owner Trustee, with the prior written consent of the Rating Agencies and with the prior written consent of the Indenture Trustee, the Securities Insurer, the Holders (as defined in the Indenture) of Notes evidencing more than 50% of the Percentage Interests in the Notes, the Holders of Certificates evidencing more than 50% of the Percentage Interests in the Certificates and the Majority Residual Interestholders, 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 Noteholders or the Owners; provided, however, that no such amendment shall (a) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on the Home Loans or distributions that shall be required to be made for the benefit of the Noteholders or the Certificateholders or the Securities Insurer (b) reduce the aforesaid percentage of the Outstanding Amount of the Notes and the Class Notional Balance of the Certificates or the Percentage Interests required to consent to any such amendment, in either case of clause (a) or (b) without the consent of the holders of all the outstanding Notes and Certificates and the Securities Insurer, and in the case of clause (b) without the consent of the holders of all the outstanding Residual Interest Instruments. Promptly after the execution of any such amendment or consent, the Owner Trustee shall furnish written notification of the substance of such amendment or consent to each Certificateholder, the Indenture Trustee, the Securities Insurer and each of the Rating Agencies. It shall not be necessary for the consent of Owners, the Noteholders or the Indenture Trustee pursuant to this Section 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 XI-1 46 manner of obtaining such consents (and any other consents of Owners provided for in this Agreement or in any other Transaction Document) and of evidencing the authorization of the execution thereof by Certificateholders shall be subject to such reasonable requirements as the Owner Trustee may prescribe. Promptly after the execution of any amendment to the Certificate of Trust, the Owner Trustee shall cause the filing of such amendment with the Secretary of State. Prior to the execution of any amendment to this Agreement or the Certificate of Trust, the Owner 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 Owner Trustee may, but shall not be obligated to, enter into any such amendment which affects the Owner Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 11.2 No Legal Title to Owner Trust Estate in Owners. The Owners shall not have legal title to any part of the Owner Trust Estate. The Owners shall be entitled to receive distributions with respect to their undivided ownership interest therein only in accordance with Articles V and IX. No transfer, by operation of law or otherwise, of any right, title, or interest of the Owners to and in their ownership interest in the Owner Trust Estate shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of legal title to any part of the Owner Trust Estate. Section 11.3 Limitations on Rights of Others. The provisions of this Agreement are solely for the benefit of the Owner Trustee, the Co-Owner Trustee, the Depositor, the Company, the Owners, the Administrator, the Securities Insurer and, to the extent expressly provided herein, the Indenture Trustee and the Noteholders, and nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Owner Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 11.4 Notices. (a) Unless otherwise expressly specified or permitted by the terms hereof, all notices shall be in writing and shall be deemed given upon receipt by the intended recipient or three Business Days after mailing if mailed by certified mail, postage prepaid (except that notice to the Owner Trustee shall be deemed given only upon actual receipt by the Owner Trustee), at the following addresses: (i) if to the Owner Trustee, its Corporate Trust Office; (ii) if to the Depositor, Financial Asset Securities Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: John Anderson, Senior Vice President; (iii) if to the Company, Mego Mortgage Corporation, 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339, Attention: Jeff S. Moore, President; (iv) if to the Securities Insurer, MBIA Insurance Corporation, 113 King Street, Armonk, New York 10504, Attention: IPM-SF, telephone: 914-765-3810, confirmation: 914-765-3781; (v) if to the Co- Owner Trustee, First Trust of New York, National Association, 180 East Fifth Street, St. Paul, Minnesota 55101, Attention: Structured Finance/Mego Mortgage 1997-1 Corporate Trust XI-2 47 Department; or, as to each such party, at such other address as shall be designated by such party in a written notice to each other party. (b) Any notice required or permitted to be given to an Owner shall be given by first-class mail, postage prepaid, at the address of such Owner 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 Owner receives such notice. Section 11.5 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 11.6 Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 11.7 Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Depositor, the Company, the Securities Insurer, the Owner Trustee, the Co-Owner Trustee and its successors and each owner and its successors and permitted assigns, all as herein provided. Any request, notice, direction, consent, waiver or other instrument or action by an Owner shall bind the successors and assigns of such Owner. Section 11.8 No Petition. The Owner Trustee, by entering into this Agreement, each Owner, by accepting a Trust Certificate, and the Indenture Trustee and each Noteholder by accepting the benefits of this Agreement, hereby covenant and agree that they will not at any time institute against the Company, any wholly-owned subsidiary of the Company, the Depositor or the Trust, or join in any institution against the Company, any wholly-owned subsidiary of the Company, or the Trust of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States Federal or state bankruptcy or law in connection with any obligations relating to the Trust Certificates, the Notes, this Agreement or any of the Transaction Documents. Section 11.9 Covenants of Company. The Company shall not institute at any time any Bankruptcy proceeding against the Trust or any wholly-owned subsidiary of the Company, under any United States Federal or state bankruptcy or similar law in connection with any obligations relating to the Trust Certificates, the Notes, the Trust Agreement or any of the Transaction Documents. Section 11.10 No Recourse. Each Owner by accepting a Trust Certificate acknowledges that such Owner's Trust Certificate represents a beneficial interest in the Trust XI-3 48 only and does not represent an interest in or an obligation of the Seller, the Servicer, the Company, the Depositor, the Administrator, the Owner Trustee, the Co-Owner Trustee or any Affiliate thereof and no recourse may be had against such parties or their assets, except as may be expressly set forth or contemplated in this Agreement, the Trust Certificates or the Transaction Documents. Section 11.11 Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 11.12 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, 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 11.13 Section 11.13 [Reserved]. Section 11.14 Grant of Certificateholder and Residual Interest Holder Rights to Securities Insurer. (a) In consideration for the guarantee of the Certificates by the Securities Insurer pursuant to the Guaranty Policy, the Certificateholders hereby grant to the Securities Insurer the right to act as the Holder of 100% of the outstanding Certificates for the purpose of exercising the rights of the Certificateholders under this Agreement without the consent of the Certificateholders, including the voting rights of such holders hereunder, but excluding those rights requiring the consent of all such Holders under Section 11.1 and any rights of such Holders to distributions under Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement; provided that the preceding grant of rights to the Securities Insurer by the Certificateholders shall be subject to Section 11.16. (b) In consideration for the issuance of the Residual Interest Instruments and for the guarantee of the Certificates by the Securities Insurer pursuant to the Guaranty Policy, the holders of the Residual Interest Instruments hereby grant to the Securities Insurer the right to act as the holder of 100% of the Residual Interest Instruments for the purpose of exercising the rights of the holders of the Residual Interest under this Agreement, including the voting rights of such holders hereunder, but excluding those rights requiring the consent of all such holders under Section 11.1 and any rights of such holders to Distributions under Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement; provided that the preceding grant of rights to the Securities Insurer by the holders of the Residual Interest shall be subject to Section 11.15. (c) The rights of the Securities Insurer to direct certain actions and consent to certain actions of the Certificateholders hereunder will terminate at such time as the XI-4 49 Notional Balance of the Certificates has been reduced to zero and the Securities Insurer has been reimbursed for all Guaranteed Payments and any other amounts owed under the Guaranty Policy and the Insurance Agreement and the Securities Insurer has no further obligation under the Guaranty Policy. Section 11.15 Third-Party Beneficiary. The parties hereto acknowledge that the Securities Insurer is an express third party beneficiary hereof entitled to enforce any rights reserved to it hereunder as if it were actually a party hereto. Section 11.16 Suspension and Termination of Securities Insurer's Rights. (a) During the continuation of a Securities Insurer Default, rights granted or reserved to the Securities Insurer hereunder shall vest instead in the Owners; provided that the Securities Insurer shall be entitled to any distributions in reimbursement of the Securities Insurer Reimbursement Amount, and the Securities Insurer shall retain those rights under Section 11.1 to consent to any amendment of this Agreement. At such time as either (i) the Class Notional Amount has been reduced to zero or (ii) the Guaranty Policy has been terminated and in either case of (i) or (ii) the Securities Insurer has been reimbursed for all Guaranteed Payments and any other amounts owed under the Guaranty Policy and the Insurance Agreement (and the Securities Insurer no longer has any obligation under the Guaranty Policy, except for breach thereof by the Securities Insurer), then the rights and benefits granted or reserved to the Securities Insurer hereunder (including the rights to direct certain actions and receive certain notices) shall terminate and the Owner shall be entitled to the exercise of such rights and to receive such benefits of the Securities Insurer following such termination to the extent that such rights and benefits are applicable to the Owners. Section 11.17 Inconsistencies with Sale and Servicing Agreement. In the event certain provisions of this Agreement conflict with the provisions of the Sale and Servicing Agreement, the parties hereto agree that the provisions of the Sale and Servicing Agreement shall be controlling. XI-5 50 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed by their respective officers hereunto duly authorized, as of the day and year first above written. FINANCIAL ASSET SECURITIES CORP., Depositor By: -------------------------------------- Name: Title: MEGO MORTGAGE CORPORATION By: -------------------------------------- Name: Title: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By: -------------------------------------- Name: Title: FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, not in its individual capacity but solely as Co-Owner Trustee and Paying Agent By: -------------------------------------- Name: Title: 51 THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF FINANCIAL ASSET SECURITIES CORP., MEGO MORTGAGE CORPORATION OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT TO THE EXTENT DESCRIBED BELOW. MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 ____% HOME LOAN ASSET BACKED CERTIFICATE evidencing a [fractional undivided interest] in the Trust, as defined below, the property of which includes a pool of Home Loans sold to the Trust by Financial Asset Securities Corp. NUMBER:______ FRACTIONAL UNDIVIDED INTEREST: __________/_________th CUSIP NO. ______ ___ (See Reverse Pages for certain definitions) THIS CERTIFIES THAT___________ is the registered owner of a _________/__________th nonassessable, fully-paid, fractional undivided interest in MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 (the "Trust") formed by Financial Asset Securities Corp., a Delaware corporation (the "Seller"). The Trust was created pursuant to a Trust Agreement dated as of February 1, 1997 (as amended and supplemented from time to time, the "Trust Agreement"), among the Seller, Financial Asset Securities Corp., a Delaware corporation (the "Company"), Wilmington Trust Company, as owner trustee (the "Owner Trustee") and First Trust of New York National Association, as Co-Owner Trustee (the "Co-Owner Trustee"), a summary of certain of the pertinent provisions of which is set forth below. To the extent not otherwise defined herein, the capitalized terms used herein have the meanings assigned to them in the Trust Agreement or the Sale and Servicing Agreement dated as of February 1, 1997 (as amended and supplemented from time to time, the "Sale and Servicing Agreement"), among the Trust, the Seller, Mego Mortgage Corporation, as servicer (the "Servicer") and the Co-Owner Trustee, as applicable. This Certificate is one of the duly authorized Certificates designated as "Mego Mortgage Home Loan Asset Backed Certificates, Series 1997-1" (herein called the "Certificates") issued under the Trust Agreement. Also issued under an Indenture dated as of February 1, 1997, between the Trust and First Trust of New York, National Association, as Indenture Trustee, are the _____ classes of Notes designated as "Mego Mortgage Asset Backed Notes, Series 1997-1, Class A-1, Class A-2, Class A-3 and Class A-4 (collectively, the "Notes"). This Certificate is issued under and is subject to the terms, provisions and conditions of the Trust Agreement to which Trust Agreement the holder of this Certificate by virtue of the acceptance hereof assents and by which such holder is bound. Payments of interest on this Certificate shall be made by First Trust of New York, 52 National Association, in its capacity as Co-Owner Trustee under the Sale and Servicing Agreement. The property of the Trust includes a pool of Initial Home Loans and Subsequent Home Loans (collectively, the "Home Loans"), all monies due thereunder on or after the respective Cut-off Dates thereof, certain bank accounts and the proceeds thereof, proceeds from claims on certain insurance policies and certain other rights under the Trust Agreement and the Sale and Servicing Agreement and all proceeds of the foregoing. The rights of the holders of the Certificates are subordinated to the rights of the holders of the Notes, as set forth in the Sale and Servicing Agreement and the Indenture. Under the Trust Agreement, there will be distributed on the 25th day of each month or, if such 25th day is not a Business Day, the next Business Day, (each, a "Distribution Date"), commencing in March, 1997, to the person in whose name this Certificate is registered at the close of business on the last Business Day of the month immediately preceding the month in which each Distribution Date occurs (the "Record Date") such Certificateholder's fractional undivided interest in the Certificateholder Distributable Amount to Certificateholders on such Distribution Date pursuant to Section 5.01 of the Sale and Servicing Agreement. The holder of this Certificate acknowledges and agrees that its rights to receive distributions in respect of this Certificate are subordinated to the rights of the Noteholders as described in the Sale and Servicing Agreement and the Indenture. It is the intent of the Seller, the Company, the Servicer and the Certificateholders that, for purposes of Federal, state and local income and single business tax and any other income taxes, the Trust will be treated as a partnership and the Certificateholders (including the Company) will be treated as partners in that partnership. The Company and the other Certificateholders by acceptance of a Certificate, agree to treat, and to take no action inconsistent with the treatment of, the Certificates for such tax purposes as partnership interests in the Trust. Each Certificateholder or Certificate Owner, by its acceptance of a Certificate or, in the case of a Certificate Owner, a beneficial interest in a Certificate, covenants and agrees that such Certificateholder or Certificate Owner, as the case may be, will not at any time institute against the Company, or join in any institution against the Company of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States Federal or state bankruptcy or similar law in connection with any obligations relating to the Certificates, the Notes, the Trust Agreement or any of the Transaction Documents. Distributions on this Certificate will be made as provided in the Trust Agreement, and the Indenture by the Indenture Trustee by wire transfer or check mailed to the Certificateholder of record in the Certificate Register without the presentation or surrender of this Certificate or the making of any notation hereon, except that 53 with respect to Certificates registered on the Record Date in the name of the nominee of the Clearing Agency (initially, such nominee to be Cede & Co.), payments will be made by wire transfer in immediately available funds to the account designated by such nominee. Except as otherwise provided in the Trust Agreement and notwithstanding the above, the final distribution on this Certificate will be made after due notice by the Co-Owner Trustee of the pendency of such distribution and only upon presentation and surrender of this Certificate at the office or agency maintained for the purpose by the Co-Owner Trustee in the Borough of Manhattan, The City of New York. Reference is hereby made to the further provisions of this Certificate set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. [Remainder of page intentionally left blank] 54 Unless the certificate of authentication hereon shall have been executed by an authorized officer of the Owner Trustee, by manual or facsimile signature, this Certificate shall not entitle the holder hereof to any benefit under the Trust Agreement or the Sale and Servicing Agreement or be valid for any purpose. THIS TRUST CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, 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. IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in its individual capacity, has caused this Certificate to be duly executed. MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By: ---------------------------------- Authorized Signatory DATED:_________________ 55 CERTIFICATE OF AUTHENTICATION This is one of the Certificates referred to in the within-mentioned Trust Agreement. FIRST TRUST ON NEW YORK, NATIONAL ASSOCIATION, as Authenticating Agent By:_____________________________ Authorized Signatory 56 (REVERSE OF TRUST CERTIFICATE) The Certificates do not represent an obligation of, or an interest in, the Seller, the Servicer, the Company, the Depositor, the Owner Trustee, the Co-Owner Trustee or any affiliates of any of them and no recourse may be had against such parties or their assets, except as may be expressly set forth or contemplated herein or in the Trust Agreement or the Transaction Documents. In addition, this Certificate is not guaranteed by any governmental agency or instrumentality and is limited in right of payment to certain collections and recoveries respecting the Home Loans (and certain other amounts), all as more specifically set forth herein, in the Sale and Servicing Agreement and in the Indenture. A copy of each of the Sale and Servicing Agreement, the Indenture and the Trust Agreement may be examined during normal business hours at the principal office of the Seller, and at such other places, if any, designated by the Seller, by any Certificateholder upon written request. MBIA Insurance Corporation, as the Securities Insurer, has issued a Guaranty Policy in the name of the Indenture Trustee for the benefit of the Certificateholders, which policy guarantees payments on each Distribution Date to the Indenture Trustee for the benefit of the Certificateholders of the related Certificateholders' Interest Distributable Amount then payable on the Certificates. Unless a Securities Insurer Default shall be continuing, the Securities Insurer shall be deemed to be the Holder of 100% of the outstanding Certificates for the purpose of exercising the rights, including voting rights, of the Certificateholders under the Trust Agreement and the Sale and Servicing Agreement. In addition, on each Distribution Date, after the Certificateholders have been paid all amounts to which they are entitled, the Securities Insurer will be entitled to be reimbursed for any unreimbursed Guaranteed Payments and any other amounts owed under the Guaranty Policy. The Trust Agreement permits, with certain exceptions therein provided, the amendment thereof and the modification of the rights and obligations of the Seller and the Company and the rights of the Certificateholders under the Trust Agreement at any time by the Seller, the Company and the Owner Trustee with the consent of the holders of the Notes and the Certificates each voting as a class evidencing not less than a majority of the outstanding Notes and the Class Notional Balance of the Certificates. Any such consent by the holder of this Certificate shall be conclusive and binding on such holder and on all future holders of this Certificate and of any Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent is made upon this Certificate. The Trust Agreement also permits the amendment thereof, in certain limited circumstances, without the consent of the holders of any of the Certificates. As provided in the Trust Agreement and subject to certain limitations therein set forth, the transfer of this Certificate is registerable in the Certificate Register upon surrender of this Certificate for registration of transfer at the offices or agencies of the Certificate Registrar maintained by the Co-Owner Trustee in the Borough of Manhattan, The City of New York, accompanied by a written instrument of transfer in form satisfactory to the Co-Owner Trustee and the Certificate Registrar duly executed by the holder hereof or such holder's attorney duly 57 authorized in writing, and thereupon one or more new Certificates of authorized denominations evidencing the same aggregate interest in the Trust will be issued to the designated transferee. The initial Certificate Registrar appointed under the Trust Agreement is the Co-Owner Trustee. The Certificates are issuable only as registered Certificates without coupons in denominations of $100,000 and in integral multiples of $1,000 in excess thereof. As provided in the Trust Agreement and subject to certain limitations therein set forth, Certificates are exchangeable for new Certificates of authorized denominations evidencing the same aggregate denomination, as requested by the holder surrendering the same. No service charge will be made for any such registration of transfer or exchange, but the Co-Owner Trustee or the Certificate Registrar may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The Owner Trustee, the Co-Owner Trustee, the Certificate Registrar and any agent of the Owner Trustee, the Co-Owner Trustee or the Certificate Registrar may treat the person in whose name this Certificate is registered as the owner hereof for all purposes and none of the Owner Trustee, the Co-Owner Trustee, the Certificate Registrar or any such agent shall be affected by any notice to the contrary. The obligations and responsibilities created by the Trust Agreement and the Trust created thereby and the Sale and Servicing Agreement shall terminate eighteen months after the payment to Certificateholders of all amounts required to be paid to them pursuant to the Trust Agreement and the Sale and Servicing Agreement and the disposition of all property held as part of the Trust. The Majority Residual Interestholders may at their option purchase the corpus of the Trust at a price specified in the Sale and Servicing Agreement, and such purchase of the Home Loans and other property of the Trust will effect early retirement of the Certificates; however, such right of purchase is exercisable only on a Distribution Date on which the Pool Principal Balance is less than or equal to 10% of the Original Pool Principal Balance of the Home Loans. The Certificates may not be acquired by (a) an employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to the provisions of Title I of ERISA, (b) a plan described in Section 4975(e)(1) of the Code or (c) any entity, including an insurance company separate account, whose underlying assets include plan assets by reason of a plan's investment in the entity (each, a "Benefit Plan"). By accepting and holding this Certificate, the Holder hereof shall be deemed to have represented and warranted that it is not a Benefit Plan. 58 ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ (Please print or type name and address, including postal zip code, of assignee) ________________________________________________________________________________ the within Certificate, and all rights thereunder, hereby irrevocably constituting and appointing ________________________________________________________________________________ Attorney to transfer said Certificate on the books of the Certificate Registrar, with full power of substitution in the premises. Dated:____________________ _____________________________________*/ Signature Guaranteed: _____________________________________*/ __________________________ */ NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Certificate in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. 59 EXHIBIT A-2 TO THE TRUST AGREEMENT [FORM OF CERTIFICATE ISSUED TO THE COMPANY] 60 EXHIBIT B TO THE TRUST AGREEMENT (FORM OF RESIDUAL INTEREST INSTRUMENT] THE RESIDUAL INTEREST IN THE TRUST REPRESENTED BY THIS RESIDUAL INTEREST INSTRUMENT HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THIS RESIDUAL INTEREST MAY BE DIRECTLY OR INDIRECTLY OFFERED OR SOLD OR OTHERWISE DISPOSED OF (INCLUDING PLEDGED) BY THE HOLDER HEREOF ONLY TO (I) A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE ACT, IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT PURSUANT TO RULE 144A OR (II) A PERSON INVOLVED IN THE ORGANIZATION OR OPERATION OF THE TRUST OR AN AFFILIATE OF SUCH A PERSON WITHIN THE MEANING OF RULE 3A-7 OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (INCLUDING, BUT NOT LIMITED TO, MEGO MORTGAGE CORPORATION) IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. NO PERSON IS OBLIGATED TO REGISTER THIS RESIDUAL INTEREST UNDER THE ACT OR ANY STATE SECURITIES LAWS. NO TRANSFER OF THIS RESIDUAL INTEREST INSTRUMENT OR ANY BENEFICIAL INTEREST THEREIN SHALL BE MADE TO ANY PERSON UNLESS THE OWNER TRUSTEE HAS RECEIVED A CERTIFICATE FROM THE TRANSFEREE TO THE EFFECT THAT SUCH TRANSFEREE (I) IS NOT A PERSON WHICH IS AN EMPLOYEE BENEFIT PLAN, TRUST OR ACCOUNT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA") OR SECTION 4975 OF THE CODE OR A GOVERNMENTAL PLAN, DEFINED IN SECTION 3(32) OF ERISA SUBJECT TO ANY FEDERAL, STATE OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE FOREGOING PROVISIONS OF ERISA OR THE CODE (ANY SUCH PERSON BEING A "PLAN") AND (II) IS NOT AN ENTITY, INCLUDING AN INSURANCE COMPANY SEPARATE ACCOUNT OR GENERAL ACCOUNT, WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF A PLAN'S INVESTMENT IN THE ENTITY. [THIS AGREEMENT IS NONTRANSFERABLE. NOTWITHSTANDING ANYTHING HEREIN OR IN THE TRUST AGREEMENT TO THE CONTRARY, ANY ATTEMPTED TRANSFER OF THIS RESIDUAL INTEREST INSTRUMENT SHALL BE NULL AND VOID FOR ALL PURPOSES.] 61 MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 RESIDUAL INTEREST CERTIFICATE No. _____ THIS CERTIFIES THAT __________________________________ (the "Owner") is the registered owner of a _____% residual interest in MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 (the "Trust") existing under the laws of the State of Delaware and created pursuant to the Trust Agreement dated as of February 1, 1997 (the "Trust Agreement") between FINANCIAL ASSET SECURITIES CORP., as Depositor, MEGO MORTGAGE CORPORATION, as the Company, WILMINGTON TRUST COMPANY, not in its individual capacity but solely in its fiduciary capacity as owner trustee under the Trust Agreement (the "Owner Trustee") and First Trust of New York, National Association, as Co-Owner Trustee (the "Co-Owner Trustee"). Initially capitalized terms used but not defined herein have the meanings assigned to them in the Trust Agreement. The Owner Trustee, on behalf of the Issuer and not in its individual capacity, has executed this Residual Interest Instrument by one of its duly authorized signatories as set forth below. This Residual Interest Instrument is one of the Residual Interest Instruments referred to in the Trust Agreement and is issued under and is subject to the terms, provisions and conditions of the Trust Agreement to which the holder of this Residual Interest Instrument by virtue of the acceptance hereof agrees and by which the holder hereof is bound. Reference is hereby made to the Trust Agreement and the Sale and Servicing Agreement for the rights of the holder of this Residual Interest Instrument, as well as for the terms and conditions of the Trust created by the Trust Agreement. The holder, by its acceptance hereof, agrees not to transfer this Residual Interest Instrument [except in accordance with terms and provisions of the Agreement]. 62 THIS RESIDUAL INTEREST INSTRUMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, 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. IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in its individual capacity, has caused this Residual Interest Instrument to be duly executed. MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By:___________________________ Authorized Signatory DATED: February __, 1997 CERTIFICATE OF AUTHENTICATION This is one of the Residual Interest referred to in the within-mentioned Agreement. FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Authenticating Agent By:_____________________________ Authorized Signatory 63 ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ________________________________________________________________________________ (Please print or type name and address, including postal zip code, of assignee) ________________________________________________________________________________ the within Instrument, and all rights thereunder, hereby irrevocably constituting and appointing ________________________________________________________________________________ Attorney to transfer said Instrument on the books of the Certificate Registrar, with full power of substitution in the premises. Dated:____________________ ________________________________________*/ Signature Guaranteed: ________________________________________*/ __________________________ */ NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Certificate in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. 64 EXHIBIT C TO THE TRUST AGREEMENT CERTIFICATE OF TRUST OF MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 THIS Certificate of Trust of MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1 (the "Trust"), dated as of February 1, 1997, is being duly executed and filed by Wilmington Trust Company, a Delaware banking corporation, as trustee, to form a business trust under the Delaware Business Trust Act (12 Del. Code, Section 3801 et seq.). 1. Name. The name of the business trust formed hereby is MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-1. 2. Delaware Trustee. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company of Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890. Attention:___________. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, has executed this Certificate of Trust as of the date first above written. Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under a Trust Agreement dated as of February 1, 1997. By:_________________________________ Name: Title: EX-10.122 11 HOME LOAN PURCHASE AGREEMENT 1 EXHIBIT 10.122 EXECUTION COPY - -------------------------------------------------------------------------------- FINANCIAL ASSET SECURITIES CORP., as Purchaser, and MEGO MORTGAGE CORPORATION, as Seller, HOME LOAN PURCHASE AGREEMENT - -------------------------------------------------------------------------------- Dated as of May 1, 1997 2 Table of Contents
Page ---- ARTICLE I. DEFINITIONS Section 1.1 Definitions.............................................. 1 ARTICLE II. SALE OF HOME LOANS; PAYMENT OF PURCHASE PRICE Section 2.1 Sale of Home Loans....................................... 2 Section 2.2 [Reserved]............................................... 2 Section 2.3 Obligations of Seller Upon Sale.......................... 2 Section 2.4 Payment of Purchase Price for the Home Loans............. 5 ARTICLE III. REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH Section 3.1 Seller Representations and Warranties.................... 5 ARTICLE IV. SELLER'S COVENANTS Section 4.1 Covenants of the Seller.................................. 7 ARTICLE V. INDEMNIFICATION BY THE SELLER Section 5.1 Indemnification.......................................... 7 Section 5.2 Limitation on Liability of the Seller.............. 8 ARTICLE VI. TERMINATION Section 6.1 Termination.............................................. 10 ARTICLE VII. MISCELLANEOUS PROVISIONS Section 7.1 Amendment................................................ 10 Section 7.2 Governing Law............................................ 11 Section 7.3 Notices.................................................. 11 Section 7.4 Severability of Provisions............................... 11 Section 7.5 Counterparts............................................. 11 Section 7.6 Further Agreements....................................... 11 Section 7.7 Intention of the Parties................................. 12
i 3 Section 7.8 Successors and Assigns; Assignment of Purchase Agreement. 12 Section 7.9 Survival................................................. 12 Section 7.10 Third-Party Beneficiaries................................ 12
EXHIBITS AND SCHEDULES Schedule I Schedule of Home Loans ii 4 HOME LOAN PURCHASE AGREEMENT (the "Purchase Agreement"), dated as of May 1, 1997, between Mego Mortgage Corporation ("Mego" or the "Seller") and FINANCIAL ASSET SECURITIES CORP., ("FASCO" and together with any assignee of FASCO, the "Purchaser"). W I T N E S S E T H WHEREAS, the Seller is the owner of a pool of (i) fixed-rate home improvement and debt consolidation loans and retail installment sale contracts (the "Mortgage Loans") secured by first and junior mortgages, deeds of trust and security deeds on certain residential and investment properties (the "Properties") and (ii) fixed-rate home improvement loans and retail installment sale contracts unsecured by an interest in real property (the "Unsecured Loans" and together with the Mortgage Loans, the "Home Loans") as listed on Schedule I attached hereto and the Related Documents thereto (as defined below); WHEREAS, certain of the Home Loans will be partially insured under the FHA Title I program (the "FHA Loans") and the remaining Home Loans are home improvement or debt consolidation or retail installment contracts that have been originated by the Seller and are not insured under the FHA Title I program; WHEREAS, the parties hereto desire that the Seller sell all its right, title and interest in and to the Home Loans and the Related Documents to the Purchaser pursuant to the terms of this Purchase Agreement; and WHEREAS, pursuant to the terms of a Sale and Servicing Agreement, dated as of May 1, 1997 (the "Sale and Servicing Agreement"), among Mego Mortgage Home Loan Owner Trust 1997-2, as issuer (the "Trust"), FASCO, as depositor (the "Depositor"), Mego, as Seller, servicer (the "Servicer") and claims administrator (the "Claims Administrator"), Norwest Bank Minnesota, N.A., as master servicer (the "Master Servicer"), and First Trust of New York, National Association, as Indenture Trustee (the "Indenture Trustee"), co-owner trustee (the "Co-Owner Trustee") and contract of insurance holder (the "Contract of Insurance Holder"), the Purchaser will sell, transfer, assign and otherwise convey to the Trust all its right, title and interest in and to the Home Loans and this Purchase Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.1 Definitions. Capitalized terms used but not defined herein have the meanings assigned thereto in the Sale and Servicing Agreement. Registration Statement. The Purchaser's registration statement on Form S-3 (No. 333-21071), in the form in which it became effective under the Securities Act of 1933, as amended, on March 25, 1997 including any documents incorporated by reference therein. 1 5 Base Prospectus. The prospectus, dated May 21, 1997 attached to the Prospectus Supplement relating to the Notes. ARTICLE II. SALE OF HOME LOANS; PAYMENT OF PURCHASE PRICE Section 2.1 Sale of Home Loans. The Seller, concurrently with the execution and delivery of this Purchase Agreement, does hereby sell, assign, set over, and otherwise convey to the Purchaser, without recourse other than as expressly provided herein and in the Sale and Servicing Agreement, and with respect to the FHA Loans, in accordance with the requirements for transfer of an insured loan under Title I and 24 CFR Section 201.32(c), all of its right, title and interest in, to and under the following, whether now existing or hereafter acquired and wherever located: (i) as of the Cut-Off Date, the Home Loans delivered to the Indenture Trustee on the Closing Date, including the related Principal Balance and all payments of principal in respect of Home Loans received on or after the Cut-Off Date and payments of interest in respect of Home Loans due on or after the Cut-Off Date, (ii) the rights to the FHA Insurance reserves attributable to the FHA Loans as of the Cut-Off Date under Title I, (iii) the Home Loan Files, (iv) any Insurance Policies and related Insurance Proceeds, (v) the Mortgages and security interests in Mortgaged Properties which secure the Mortgage Loans, (vi) any and all documents or electronic records relating to the Home Loans, (vii) all proceeds of any of the foregoing. Section 2.2 [Reserved]. Section 2.3 Obligations of Seller Upon Sale. In connection with any transfer pursuant to Section 2.1 hereof, the Seller further agrees, at its own expense, on or prior to the Closing Date (a) to indicate in its books and records that the Home Loans have been sold to the Purchaser pursuant to this Purchase Agreement and (b) to deliver to the Purchaser a computer file containing a true and complete list of all Home Loans specifying for each Home Loan, as of the Cut-Off Date, (i) its account number and (ii) its Principal Balance. Such file, which forms a part of Exhibit A to the Sale and Servicing Agreement, shall also be marked as Schedule I to this Purchase Agreement and is hereby incorporated into and made a part of this Purchase Agreement. The Seller agrees to prepare, execute and file UCC-1 financing statements with the County Clerk of Cobb (which shall have been filed on or before the Closing Date with respect to the Home Loans describing the Home Loans and naming the Seller as debtor and, the Purchaser as secured party (and indicating that such loans have been assigned to the Trust) all necessary continuation statements and any amendments to the UCC-1 financing statements required to reflect a change in the name or corporate structure of the Seller or the filing of any additional UCC-1 financing statements due to the change in the principal office of the Seller, as are necessary to perfect the sale of the Seller's interest in each Home Loan and the proceeds thereof. In connection with any conveyance by the Seller, the Seller shall on behalf of the Purchaser deliver to, and deposit with the Custodian, on behalf of the Indenture Trustee, as assignee of the Purchaser, on or before the Closing Date the following documents or 2 6 instruments with respect to each Home Loan (the "Related Documents"); provided, that the documents or instruments listed in clause (f) below may be held in the custody of the Seller on behalf of the Indenture Trustee. With respect to each Home Loan: (a) The original Debt Instrument, showing a complete chain of endorsements or assignments from the named payee to the Trust and endorsed as follows: "Pay to the order of First Trust of New York, National Association, as Indenture Trustee and Co-Owner Trustee for Mego Mortgage Home Loan Owner Trust 1997-2 without recourse"; (b) If such Home Loan is a Mortgage Loan, the original Mortgage with evidence of recording indicated thereon (except that a true copy thereof certified by an appropriate public official may be substituted); provided, however, that if the Mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Purchase Agreement solely because of a delay caused by the public recording office where such Mortgage has been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of such Mortgage certified as a true copy in an Officer's Certificate which shall certify that such Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such Mortgage with evidence of recording indicated thereon upon receipt thereof from the public recording official (or a true copy thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (c) If such Home Loan is a Mortgage Loan, an original Assignment of the Mortgage, in recordable form. Such assignment may be a blanket assignment, to the extent that blanket assignments are effective under applicable law, for Mortgages covering Properties situated in the same county. If the assignment of Mortgage is in blanket form, an assignment of Mortgage need not be included in the individual Home Loan File; (d) If such Home Loan is a Mortgage Loan, all original intermediate assignments of the Mortgage, showing a complete chain of assignments from the named mortgagee to the assignor to the Indenture Trustee, with evidence of recording thereon (or true copies thereof certified by appropriate public officials may be substituted); provided, however, that if the intervening assignments of mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Purchase Agreement solely because of a delay caused by the public recording office where such Assignments of Mortgage have been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of each such assignment of Mortgage certified as a true copy in an Officer's Certificate which shall certify that each such assignment of Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such assignments of Mortgage with evidence of recording indicated thereon upon its receipt thereof from the public recording official (or true copies thereof certified by an appropriate public official may be delivered to the Indenture Trustee); 3 7 (e) An original of each assumption or modification agreement, if any, relating to such Home Loan; and (f) (i) If such Home Loan is an FHA Loan, an original or copy of a notice signed by the Obligor acknowledging HUD insurance, (ii) an original or copy of truth-in-lending disclosure, (iii) an original or copy of the credit application, (iv) an original or copy of the consumer credit report, (v) an original or copy of verification of employment and income, or verification of self-employment income, (vi) if such Home Loan is an FHA Loan and a Mortgage Loan, an original or copy of evidence of the Obligor's interest in the Property, (vii) an original or copy of contract of work or written description with cost estimates, (viii)(A) if such Home Loan is an FHA Loan either (1) an original or copy of the completion certificate or an original or copy of notice of non-compliance, if applicable or (2) an original or copy of report of inspection of improvements to the Property or an original or copy of notice of non-compliance, if applicable, or (B) if such Home Loan is a Mortgage Loan and a home improvement loan, an original or copy of report of inspection of improvements to the Property, (ix) if such Home Loan is a Mortgage Loan, to the extent not included in (iii), an original or a copy of a written verification that the Obligor at the time of origination was not more than 30 days delinquent on any senior mortgage or deed of trust on the Property, (x) (A) if such Home Loan is an FHA Loan for which an appraisal is required pursuant to the applicable regulations, an original or a copy of an appraisal of the Property as of the time of origination of such FHA Loan or (B) if such Home Loan is a Non-FHA Loan and secured by a Mortgage (1) if the original principal balance is between $35,001 and $40,000, (A) evidence that the borrower has a FICO Score of at least 640, a debt to income ratio no greater than 45%, and disposable income of at least $1,500, or (B) (I) a copy of the HUD-1 Closing Statement indicating the sale price, or (II) an Uniform Residential Appraisal Report, or (III) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (IV) a tax assessment, or (V) a broker's price opinion; (2) if the original principal balance is between $40,001 and $50,000, (A) a copy of the HUD-1 Closing Statement indicating the sale price, or (B) an Uniform Residential Appraisal, or (C) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (D) a tax assessment, or (E) a broker's price opinion, or (3) if the original principal balance exceeds $50,000, a full Uniform Residential Appraisal Report prepared by a national appraisal firm, (xi) an original or a copy of a title search as of the time of origination with respect to the Property, and (xii) if such Home Loan is an FHA Loan, any other documents required for the submission of a claim with respect to such FHA Loan to the FHA. With respect to any documents referred to clauses (b) and (d) above that are not delivered to the Custodian on behalf of the Indenture Trustee because of a delay caused by the public recording office, such documents shall be delivered to the Custodian on behalf of the Indenture Trustee in accordance with the terms of such clauses by the Seller if such documents are received by it or by the Purchaser if such documents are received by it. The Seller further hereby confirms to the Purchaser that, as of the Closing Date it has caused the portions of the Seller's electronic ledger relating to the Home Loans to be clearly and unambiguously marked to indicate that the Home Loans have been sold to the Purchaser. 4 8 The Purchaser hereby acknowledges its acceptance of all right, title and interest to the Home Loans and other property, now existing and hereafter created, conveyed to it pursuant to Section 2.1 hereof. The parties hereto intend that each of the transactions set forth herein be a sale by the Seller to the Purchaser of all the Seller's right, title and interest in and to the Home Loans and other property described above. In the event the transactions set forth herein are deemed not to be a sale, the Seller hereby grants to the Purchaser a security interest in all of the Seller's right, title and interest in, to and under the Home Loans and other property described above, whether now existing or hereafter created, to secure all of the Seller's obligations hereunder; and this Purchase Agreement shall constitute a security agreement under applicable law. Section 2.4 Payment of Purchase Price for the Home Loans. (a) In consideration of the sale of the Home Loans from the Seller to the Purchaser on the Closing Date, the Purchaser agrees to pay to the Seller on the Closing Date by transfer of immediately available funds, an amount equal to $58,305,617.43 (plus accrued interest) (before deducting expenses payable by the Seller to the Purchaser) (the "Purchase Price"). (b) Within 60 days of the Closing Date, the Seller, at its own expense, shall cause the Indenture Trustee to record each Assignment of Mortgage in favor of the Indenture Trustee (which may be a blanket assignment if permitted by applicable law) in the appropriate real property or other records; provided, however, the Indenture Trustee need not record any assignment which relates to a Home Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by the Seller (at the Seller's expense) to the Indenture Trustee and the Securities Insurer, the recordation of such Assignment is not necessary to protect the Indenture Trustee's, the Securities Insurer's and the Securityholders' interest in the related Home Loan. With respect to any Assignment of Mortgage as to which the related recording information is unavailable within 60 days following the Closing Date, such Assignment of Mortgage shall be submitted for recording within 30 days after receipt of such information but in no event later than one year after the Closing Date. The Indenture Trustee shall be required to retain a copy of each Assignment of Mortgage submitted for recording. In the event that any such Assignment of Mortgage is lost or returned unrecorded because of a defect therein, the Seller shall promptly prepare a substitute Assignment of Mortgage or cure such defect, as the case may be, and thereafter the Trustee shall be required to submit each such Assignment of Mortgage for recording. ARTICLE III. REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH Section 3.1 Seller Representations and Warranties. (a) The Seller represents and warrants to the Purchaser as of the Cut-Off Date and the Closing Date that: (i) The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted; 5 9 (ii) The Seller has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Purchase Agreement and each other Transaction Document to which it is a party; has duly authorized the execution, delivery and performance of this Purchase Agreement and each other Transaction Document to which it is a party; has duly executed and delivered this Purchase Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and delivered by the other parties hereto, this Purchase Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies, regardless of whether such enforceability is considered in a proceeding in equity or at law; (iii) Neither the execution and delivery of this Purchase Agreement or any of the other Transaction Documents to which the Seller is a party, the consummation of the transactions required of it herein or under any other Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Purchase Agreement or any of the other Transaction Documents will conflict with or result in a breach of any of the terms, conditions or provisions of the Seller's charter or by-laws or any legal restriction or any material agreement or instrument to which the Seller is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject; (iv) There is no action, suit, proceeding, investigation or litigation pending against the Seller or, to its knowledge, threatened, which, if determined adversely to the Seller, would materially adversely affect the sale of the Home Loans, the execution, delivery or enforceability of this Purchase Agreement or any other Transaction Document, or which would have a material adverse affect on the financial condition of the Seller; (v) No consent, approval, authorization or order of any court or governmental agency or body is required for: (a) the execution, delivery and performance by the Seller of, or compliance by the Seller with, this Purchase Agreement, (b) the sale of the Home Loans or (c) the consummation of the transactions required of it by this Purchase Agreement; (vi) The Seller is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Seller or its properties or might have consequences that would materially and adversely affect its performance hereunder; 6 10 (vii) The Seller received fair consideration and reasonably equivalent value in exchange for the sale of the Home Loans to the Purchaser; (viii) The Seller is a non-supervised lender in good standing under 24 CFR Section 202.5 and is authorized to originate, purchase, hold, service and/or sell loans insured under 24 CFR part 201; and (ix) The Seller has transferred the Home Loans without any intent to hinder, delay or defraud any of its creditors. (b) The Seller further represents and warrants to the Purchaser that with respect to the Home Loans as of the Closing Date each of the representations and warranties contained in Section 3.03(b) of the Sale and Servicing Agreement are true and correct. It is understood and agreed that the representations and warranties set forth in this Section 3.1(b) shall survive delivery of the respective Home Loan Files to the Indenture Trustee on behalf of the Purchaser. In the event that (a) any of the representations and warranties of the Seller in Section 3.03(b) of the Sale and Servicing Agreement are determined to be untrue in a manner that materially and adversely affects the interests of the Securityholders or the Securities Insurer in any Home Loan with respect to which such representation or warranty is made and (b) the Seller shall fail to cure such breach within the time period specified in Section 3.05 of the Sale and Servicing Agreement, the Seller shall be obligated to repurchase or substitute the affected Home Loan(s) in accordance with the provisions of Section 3.05 of the Sale and Servicing Agreement. With respect to representations and warranties made by Mego pursuant to this Section 3.1(b) that are made to the Seller's best knowledge, if it is discovered by any of the Depositor, the Seller, the Indenture Trustee, the Owner Trustee or the Securities Insurer that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Home Loan, notwithstanding the Seller's lack of knowledge, such inaccuracy shall be deemed a breach of the applicable representation and warranty. ARTICLE IV. SELLER'S COVENANTS Section 4.1 Covenants of the Seller. The Seller hereby covenants that except for the transfer hereunder, the 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 Home Loan, or any interest therein; and the Seller will defend the right, title and interest of the Trust, as assignee of the Purchaser, in, to and under the Home Loans, against all claims of third parties claiming through or under the Seller. ARTICLE V. INDEMNIFICATION BY THE SELLER 7 11 Section 5.1 Indemnification. The Seller agrees to indemnify and hold harmless the Purchaser from and against any loss, liability, expense, damage, claim or injury (other than those resulting solely from defaults on the Home Loans) arising out of or based on this Agreement including, without limitation, in connection with the origination or prior servicing of the Home Loans by reason of any acts, omissions, or alleged acts or omissions arising out of activities of the Seller, originator or prior servicer, including reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim; provided that the Seller shall not indemnify the Purchaser if such loss, liability, expense, damage or injury is due to the Purchaser's willful misfeasance, bad faith or negligence or by reason of the Purchaser's reckless disregard of its obligations hereunder. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof. Section 5.2 Limitation on Liability of the Seller. None of the directors or trustees or officers or employees or agents of the Seller shall be under any liability to the Purchaser, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consideration for, the execution of this Purchase Agreement; provided, however, that this provision shall not protect any such Person against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder. Except as expressly provided herein and in the Sale and Servicing Agreement, the Seller shall not be under any liability to the Trust, the Trustee or the Securityholders. The Seller and any director or officer or employee or agent of 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. Section 5.3 Indemnification (a) The Seller agrees to indemnify and hold harmless the Purchaser, the directors of the Purchaser and each person, if any, who controls the Purchaser within the meaning of Section 15 of the Securities Act of 1933 (the "Act") or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), from and against any and all losses, claims, damages, liabilities or judgments (including without limiting the foregoing the reasonable legal and other expenses incurred in connection with any action, suit or proceeding or any claim asserted) arising out of (i) any untrue statement or alleged untrue statement of a material fact contained under any of the captions "Mego Mortgage Corporation", "The Title I Loan Program and the Contract of Insurance" and "The Pool" in the Prospectus Supplement or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading or (ii) any information concerning the Seller, the Home Loans or the Seller's operations based on any untrue statement or alleged untrue statement of a fact contained in any information provided by the Seller to the Purchaser, or any material omission from the information purported to be provided thereby, and disseminated to any Rating Agency, the Securities Insurer, Deloitte & Touche or prospective investors (directly or indirectly through available information systems) in connection with the issuance, marketing or offering of the Notes. This indemnity agreement will be in addition to any liability which the Seller may otherwise have pursuant to this Agreement. (b) The Purchaser agrees to indemnify and hold harmless the Seller and each person, if any, who controls the Seller within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities 8 12 caused by (A) any untrue statement or alleged untrue statement of a material fact contained in (i) the Prospectus Supplement under the caption "Description of the Securities", "Description of the Transfer and Servicing Agreements", and "Prepayment and Yield Considerations"; (ii) the Base Prospectus; or (iii) the Registration Statement (other than the information with respect to the Seller contained in the Prospectus Supplement) or (B) any omission or alleged omission to state a material fact, in the case of the Registration Statement (other than the information with respect to the Seller contained in the Prospectus Supplement), required to be stated therein or necessary to make the statements therein not misleading, and in the case of the section of the Prospectus Supplement specified in clause (A) (i) of this sentence and the Base Prospectus, necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. This indemnity agreement will be in addition to any liability which the Purchaser may have pursuant to Agreement. (c) In case any action or proceeding (including any governmental or regulatory investigation or proceeding) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (hereinafter called the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (hereinafter called the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate and shall pay the fees and disbursements of such counsel related to such proceeding. In any such action or proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (1) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (2) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for any indemnified party and each person, if any, who controls such indemnified party within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, and it is also understood that expenses shall be reimbursed as they are incurred. In the case of any such separate firm for any indemnified party and any director, officer and control person of the indemnified party, such firm shall be designated in writing by such indemnified party. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 9 13 (d) If the indemnification provided for in this Section 5.3 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnified party on the one hand and the indemnifying party on the other from the sale of the Home Loans or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, 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 the indemnified party on the one hand and the indemnifying party on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. For purposes of the foregoing, the benefit received by the Seller from the sale of the Home Loans shall be deemed to equal the amount of the gross proceeds received by the Seller from such sale, and the benefit received by the Purchaser for such sale shall be deemed to equal the amount specified in the paragraph below. The relative fault of the Purchaser on the one hand and the Seller on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Purchaser or by the Seller and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Seller and the Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 5.3(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.3(d), in no event shall the Purchaser be required to contribute any amount in excess of $480,279.87. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. ARTICLE VI. TERMINATION Section 6.1 Termination. The respective obligations and responsibilities of the Seller and the Purchaser created hereby shall terminate, except for the Seller's and Purchaser's indemnity obligations as provided herein, upon the termination of the Trust as provided in Article XI of the Sale and Servicing Agreement. ARTICLE VII. MISCELLANEOUS PROVISIONS 10 14 Section 7.1 Amendment. This Purchase Agreement may be amended from time to time by the Seller and the Purchaser, with the consent of the Securities Insurer, by written agreement signed by the Seller and the Purchaser. Section 7.2 Governing Law. This Purchase Agreement shall be governed by and construed in accordance with the laws of the State of New York and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 7.3 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, postage prepaid, addressed as follows: (a) if to the Seller: Mego Mortgage Corporation 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339 Attention: Jeff S. Moore, President or, such other address as may hereafter be furnished to the Purchaser in writing by the Seller. (b) if to FASCO Financial Asset Securities Corp. 600 Steamboat Road Greenwich, Connecticut 06830 Attention: General Counsel or such other address as may hereafter be furnished to the Seller in writing by the Purchaser. Section 7.4 Severability of Provisions. If any one or more of the covenants, agreements, provisions of terms of this Purchase Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Purchase Agreement and shall in no way affect the validity of enforceability of the other provisions of this Purchase Agreement. Section 7.5 Counterparts. This Purchase Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original and such counterparts, together, shall constitute one and the same agreement. Section 7.6 Further Agreements. The Purchaser and the Seller each agree to execute and deliver to the other such amendments to documents and such additional documents, instruments or agreements as may be necessary or appropriate to effectuate the 11 15 purposes of this Purchase Agreement or in connection with the offering of securities representing interests in the Home Loans. Without limiting the generality of the foregoing, as a further inducement for the Purchaser to purchase the Home Loans from the Seller, the Seller will cooperate with the Purchaser in connection with the sale of any of the securities representing interests in the Home Loans. In that connection, the Seller will provide to the Purchaser any and all information and appropriate verification of information, whether through letters of its auditors and counsel or otherwise, as the Purchaser shall reasonably request and will provide to the Purchaser such additional representations and warranties, covenants, opinions of counsel, letters from auditors, and certificates of public officials or officers of the Seller as are reasonably required in connection with such transactions and the offering of securities rated "Aaa" and "AAA" by Moody's Investors Service, Inc. and Standard & Poor's Rating Services, respectively. Section 7.7 Intention of the Parties. It is the intention of the parties that the Purchaser is purchasing, and the Seller is selling, the Home Loans rather than pledging the Home Loans to secure a loan by the Purchaser to the Seller. Accordingly, the parties hereto each intend to treat the transaction for federal income tax purposes and all other purposes as a sale by the Seller, and a purchase by the Purchaser, of the Home Loans. The Purchaser will have the right to review the Home Loans and the related Home Loan Files to determine the characteristics of the Home Loans which will affect the federal income tax consequences of owning the Home Loans and the Seller will cooperate with all reasonable requests made by the Purchaser in the course of such review. Section 7.8 Successors and Assigns; Assignment of Purchase Agreement. The Agreement shall bind and inure to the benefit of and be enforceable by the Seller, the Purchaser and the Trustee. The obligations of the Seller under this Purchase Agreement cannot be assigned or delegated to a third party without the consent of the Purchaser, which consent shall be at the Purchaser's sole discretion, except that the Purchaser acknowledges and agrees that the Seller may assign its obligations hereunder to any Person into which the Seller is merged or any corporation resulting from any merger, conversion or consolidation to which the Seller is a party or any Person succeeding to the business of the Seller. The parties hereto acknowledge that FASCO is acquiring the Home Loans for the purpose of contributing them to the Trust that will issue (i) the Residual Certificates representing undivided interests in such Home Loans and (ii) the Notes which will be secured by such Home Loans. As an inducement to FASCO to purchase the Home Loans, the Seller acknowledges and consents to the assignment by FASCO to the Trust of all of FASCO's rights against the Seller pursuant to this Purchase Agreement and to the enforcement or exercise of any right or remedy against the Seller pursuant to this Purchase Agreement by the Owner Trustee and Co-Owner Trustee under the Sale and Servicing Agreement. Such enforcement of a right or remedy by the Owner Trustee and Co-Owner Trustee shall have the same force and effect as if the right or remedy had been enforced or exercised by FASCO directly. Section 7.9 Survival. The representations and warranties set forth in Article III and the provisions of Article V shall survive the purchase of the Home Loans hereunder. 12 16 Section 7.10 Third-Party Beneficiaries. This Purchase Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Except as otherwise provided in this Section 7.10 no other Person shall have the right or obligation hereunder. Upon issuance of the Guaranty Policy (as defined in the Sale and Servicing Agreement), this Purchase Agreement shall also inure to the benefit of the Securities Insurer. Without limiting the generality of the foregoing, all covenants and agreements in this Purchase Agreement which expressly confer rights upon the Securities Insurer shall be for the benefit of and run directly to the Securities Insurer, and the Securities Insurer shall be entitled to rely on and enforce such covenants to the same extent as if it were a party to this Purchase Agreement. The Securities Insurer may disclaim any of its rights and powers under this Purchase Agreement (but not its duties and obligations under the Guaranty Policy) upon delivery of a written notice to the Indenture Trustee. 13 17 IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Home Loan Purchase Agreement to be duly executed on their behalf by their respective officers thereunto duly authorized as of the day and year first above written. FINANCIAL ASSET SECURITIES CORP., as Purchaser By:__________________________________________ Name: Peter McMullin Title: Vice President MEGO MORTGAGE CORPORATION, as Seller By:__________________________________________ Name: James L. Belter Title: Executive Vice President 18 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 22nd day of May 1997 before me, a Notary Public in and for said State, personally appeared Peter McMullin known to me to be a Vice President of FINANCIAL ASSET SECURITIES CORP., the corporation that executed the within instrument, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. --------------------------------------------- Notary Public 19 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 22nd day of May 1997 before me, a Notary Public in and for said State, personally appeared James L. Belter, known to me to be the Executive Vice President of MEGO MORTGAGE CORPORATION, the company that executed the within instrument, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. --------------------------------------------- Notary Public 20 SCHEDULE I Loan Schedule See Exhibit A to Sale and Servicing Agreement EX-10.123 12 SALE AND SERVICING AGREEMENT 1 EXHIBIT 10.123 EXECUTION COPY ================================================================================ SALE AND SERVICING AGREEMENT Dated as of May 1, 1997 among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2 (Issuer) FINANCIAL ASSET SECURITIES CORP. (Depositor) MEGO MORTGAGE CORPORATION (Seller, Servicer and Claims Administrator) NORWEST BANK MINNESOTA, N.A. (Master Servicer) and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION (Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder) MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2 HOME LOAN ASSET-BACKED NOTES, SERIES 1997-2 HOME LOAN ASSET-BACKED RESIDUAL CERTIFICATES, SERIES 1997-2 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS Section 1.01 Definitions.................................................... 1 Section 1.02 Other Definitional Provisions.................................. 28 Section 1.03 Interest Calculations.......................................... 29 ARTICLE II. CONVEYANCE OF THE HOME LOANS Section 2.01 Conveyance of the Home Loans................................... 30 Section 2.02 Reserved....................................................... 30 Section 2.03 Ownership and Possession of Home Loan Files.................... 30 Section 2.04 Books and Records.............................................. 31 Section 2.05 Delivery of Home Loan Documents................................ 31 Section 2.06 Acceptance by Indenture Trustee of the Home Loans; Certain Substitutions; Initial Certification by Custodian.............. 34 ARTICLE III. REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Depositor Section 3.02 Representations, Warranties and Covenants of the Master Servicer....................................................... 37 Section 3.03 Representations and Warranties of Mego......................... 40 Section 3.04 [Reserved]..................................................... 51 Section 3.05 Purchase and Substitution...................................... 51 ARTICLE IV. ADMINISTRATION AND SERVICING OF HOME LOANS; CLAIMS ADMINISTRATION Section 4.01 Servicing Standard............................................. 55 Section 4.02 Servicing Arrangements......................................... 56 Section 4.03 Servicing Record............................................... 57 Section 4.04 Annual Statement as to Compliance; Notice of Event of Default.. 61 Section 4.05 Annual Independent Accountants' Report; Servicer Review Report......................................................... 61 Section 4.06 Access to Certain Documentation and Information Regarding Home Loans..................................................... 63 Section 4.07 [Reserved]..................................................... 63 Section 4.08 Advances....................................................... 63 Section 4.09 Reimbursement of Interest Advances and Foreclosure Advances.... 65 Section 4.10. Modifications, Waivers, Amendments and Consents................ 65 Section 4.11. Due-On-Sale; Due-on-Encumbrance................................ 66
-i- 3 Section 4.12. Collection Procedures; Claim for FHA Insurance and Foreclosure Procedures..................................................... 67 Section 4.13. Sale of Foreclosed Properties.................................. 72 Section 4.14. Management of Real Estate Owned................................ 73 Section 4.15. Inspections.................................................... 74 Section 4.16. Maintenance of Insurance....................................... 74 Section 4.17. Release of Files............................................... 75 Section 4.18. Filing of Continuation Statements.............................. 76 Section 4.19. Fidelity Bond.................................................. 76 Section 4.20. Errors and Omissions Insurance................................. 76 ARTICLE V. ESTABLISHMENT OF TRUST ACCOUNTS Section 5.01 Collection Account and Note Distribution Account............... 78 Section 5.02 Claims Under Guaranty Policy................................... 82 Section 5.03 Certificate Distribution Account............................... 83 Section 5.04 Trust Accounts; Trust Account Property......................... 84 ARTICLE VI. STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS Section 6.01 Master Servicing Certificate................................... 88 Section 6.02 Statement to Securityholders................................... 88 ARTICLE VII. CONCERNING THE CONTRACT OF INSURANCE HOLDER Section 7.01 Compliance with Title I and Filing of FHA Claims............... 89 Section 7.02. Contract of Insurance Holder................................... 90 ARTICLE VIII. [Reserved] ARTICLE IX. THE MASTER SERVICER Section 9.01 Indemnification; Third Party Claims............................ 93 Section 9.02 Merger or Consolidation of the Master Servicer................. 93 Section 9.03 Limitation on Liability of the Master Servicer and Others...... 94 Section 9.04 Master Servicer Not to Resign; Assignment...................... 94 Section 9.05 Relationship of Master Servicer to Issuer and the Indenture Trustee........................................................ 95 Section 9.06 Master Servicer May Own Notes.................................. 95
-ii- 4 ARTICLE X. DEFAULT Section 10.01 Events of Default............................................. 96 Section 10.02 Consequences of an Event of Default........................... 98 Section 10.03 Appointment of Successor...................................... 98 Section 10.04 Notification to Certificateholders............................ 99 Section 10.05 Waiver of Past Defaults....................................... 99 ARTICLE XI. TERMINATION Section 11.01 Termination.................................................. 100 Section 11.02 Notice of Termination........................................ 101 ARTICLE XII. MISCELLANEOUS PROVISIONS Section 12.01 Acts of Securityholders...................................... 102 Section 12.02 Amendment.................................................... 102 Section 12.03 Recordation of Agreement..................................... 103 Section 12.04 Duration of Agreement........................................ 103 Section 12.05 Governing Law................................................ 103 Section 12.06 Notices...................................................... 103 Section 12.07 Severability of Provisions................................... 104 Section 12.08 No Partnership............................................... 104 Section 12.09 Counterparts................................................. 104 Section 12.10 Successors and Assigns....................................... 104 Section 12.11 Headings..................................................... 105 Section 12.12 Actions of Securityholders................................... 105 Section 12.13 Reports to Rating Agencies................................... 105 Section 12.14 Grant of Securityholder Rights to Securities Insurer......... 106 Section 12.15 Third Party Beneficiary...................................... 106 Section 12.16 Holders of the Residual Certificates......................... 106 Section 12.17 Inconsistencies Among Transaction Documents.................. 107
EXHIBITS EXHIBIT A Home Loan Schedule EXHIBIT B Form of Master Servicer Certificate EXHIBIT C Form of Monthly Statement to Securityholders EXHIBIT D Underwriting Guidelines EXHIBIT E Form of Servicing Agreement
-iii- 5 This Sale and Servicing Agreement is entered into effective as of May 1, 1997, among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2, a Delaware business trust (the "Issuer" or the "Trust"), FINANCIAL ASSET SECURITIES CORP., a Delaware corporation, as Depositor (the "Depositor"), MEGO MORTGAGE CORPORATION, a Delaware corporation ("Mego"), as Seller (in such capacity, the "Seller"), Servicer (in such capacity, the "Servicer") and Claims Administrator (in such capacity, the "Claims Administrator"), NORWEST BANK MINNESOTA, N.A., as Master Servicer (the "Master Servicer"), and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, a national banking association, as Indenture Trustee on behalf of the Noteholders (in such capacity, the "Indenture Trustee"), as Co-Owner Trustee on behalf of the Certificateholders (in such capacity, the "Co-Owner Trustee") and as Contract of Insurance Holder (in such capacity, the "Contract of Insurance Holder"). PRELIMINARY STATEMENT WHEREAS, the Issuer desires to purchase a pool of Home Loans which were originated or purchased by the Seller and sold to the Depositor in the ordinary course of business of the Seller; WHEREAS, the Depositor is willing to purchase from the Seller and sell such Home Loans to the Issuer; and WHEREAS, the Master Servicer is willing to service such Home Loans in accordance with the terms of this Agreement; NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto hereby 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. Agreement: This Sale and Servicing Agreement and all amendments hereof and supplements hereto. Amount Available: With respect to any Distribution Date and the related Determination Date, an amount equal to the sum of (i) the Collected Amount in respect of such Distribution Date, plus (ii) Insured Payments relating to clause (i) of the definition thereof, if any, received by the Indenture Trustee with respect to such Distribution Date. Annual Default Percentage (Three Month Average): With respect to any Determination Date or related Distribution Date, the average of the percentage equivalents of the fractions for 1 6 each of the three immediately preceding Due Periods, the numerator of which is the product of (i) the aggregate of the Principal Balances of all Home Loans that became Credit Support Multiple Defaulted Loans during the Due Period immediately prior to such Home Loans becoming Credit Support Multiple Defaulted Loans and (ii) 12, and the denominator of which is the Pool Principal Balance as of the end of such Due Period. Assignment of Mortgage: With respect to each Home Loan secured by a Mortgage, an assignment, notice of transfer or equivalent instrument sufficient under the laws of the jurisdiction wherein the related Property is located to reflect of record the sale of the related Home Loan to the Trust as follows: "First Trust of New York, National Association, as Indenture Trustee and Co-Owner Trustee for the Mego Mortgage Home Loan Owner Trust 1997-2". Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in New York City or in the city in which the Securities Insurer or the Corporate Trust Office of the Indenture Trustee is located or the city in which the Master Servicer's or Servicer's servicing operations are located and are authorized or obligated by law or executive order to be closed. Certificate Distribution Account: The account established and maintained pursuant to Section 5.03. Certificateholder: A holder of any Residual Certificate. Certificate Register: The register established pursuant to Section 3.4 of the Trust Agreement. Civil Relief Act Interest Shortfall: With respect to any Distribution Date, for any Home Loan as to which there has been a reduction in the amount of interest collectible thereon on the Due Date during the most recently ended Due Period as a result of the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act"), the amount by which (i) interest collectible on such Home Loan on such Due Date is less than (ii) one month's interest on the Principal Balance of such Home Loan immediately preceding such Due Date at the Home Loan Interest Rate for such Home Loan before giving effect to the application of the Civil Relief Act. Class: With respect to the Notes, all Notes bearing the same class designation, and with respect to the Certificates, the Certificates with the same class designation. Class A-1 Note: Any Class A-1 Note in the form attached to the Indenture as Exhibit A-1. Class A-2 Note: Any Class A-2 Note in the form attached to the Indenture as Exhibit A-2. 2 7 Class A-3 Note: Any Class A-3 Note in the form attached to the Indenture as Exhibit A-3. Class A-4 Note: Any Class A-4 Note in the form attached to the Indenture as Exhibit A-4. Class A-5 Note: Any Class A-5 Note in the form attached to the Indenture as Exhibit A-5. Class Principal Balance: With respect to each Class of Notes and as of any date of determination, the Original Class Principal Balance of each such Class reduced by all amounts previously distributed to Noteholders of such Class in reduction of the principal balance of such Class on all previous Distribution Dates pursuant to Section 5.01(c). Closing Date: May 22, 1997. Code: The Internal Revenue Code of 1986, as amended from time to time, and Treasury Regulations promulgated thereunder. Collateral Performance Percentages: The Annual Default Percentage (Three Month Average), the 30+ Delinquency Percentage (Rolling Three Month), the 60+ Day Delinquency (Rolling Three Month) and the Cumulative Default Percentage. Collected Amount. With respect to any Determination Date or related Distribution Date, the sum of the amount on deposit in the Note Distribution Account on such Determination Date plus the amounts required to be deposited into the Note Distribution Account pursuant to Sections 5.01(a)(3) and 5.01(b). Collection Account: The account denominated as a Collection Account and maintained or caused to be maintained by the Indenture Trustee pursuant to Section 5.01. Contract of Insurance Holder: First Trust of New York, National Association, its successors in interest, and any successor thereto pursuant to the terms of this Agreement. Contract of Insurance: The contract of insurance under Title I covering the FHA Loans held under the name First Trust of New York, National Association, or any successor thereto, as Contract of Insurance Holder hereunder. Corporate Trust Office: The office of the Indenture Trustee at which any particular time its corporate business shall be principally administered, located on the Closing Date at First Trust of New York, National Association, 180 East 5th Street, St. Paul, Minnesota 55101, Attention: Structured Finance. 3 8 Co-Owner Trustee: First Trust of New York, National Association, a national banking association, in its capacity as the Co-Owner Trustee under the Trust Agreement acting on behalf of the Securityholders, or any successor co-owner trustee under the Trust Agreement. Credit Support Multiple Defaulted Loan: A Home Loan with respect to which (a) a claim has been submitted to the FHA in respect of such Loan pursuant to the Contract of Insurance, (b) foreclosure proceedings have been commenced on the related Property, (c) any portion of a Monthly Payment is more than 180 calendar days past due and unpaid by the Obligor; or (d) the Servicer has determined in accordance with customary servicing practices, that the Home Loan is uncollectible. Cumulative Default Percentage: As of any Determination Date, the aggregate of the Principal Balances of all Credit Support Multiple Defaulted Loans (such Principal Balances to be calculated immediately prior to such Home Loans becoming Credit Support Multiple Defaulted Loans) as of the related Monthly Cut-Off Date since the Closing Date, divided by the Initial Pool Principal Balance. Custodial Agreement: The custodial agreement dated as of May 1, 1997 by and between the Issuer, the Depositor, Mego, as the Seller and Servicer, the Indenture Trustee, and First Trust National Association, as Custodian, and any subsequent custodial agreement, in similar form and substance, providing for the retention of the Indenture Trustee's Home Loan Files by the Custodian on behalf of the Indenture Trustee. Custodian: Any custodian acceptable to the Securities Insurer and appointed by the Indenture Trustee pursuant to the Custodial Agreement, which shall not be affiliated with the Servicer, the Seller, any Servicer, or the Depositor. First Trust National Association shall be the initial Custodian pursuant to the terms of the Custodial Agreement. Cut-Off Date: With respect to any Home Loan, either the opening of business on May 1, 1997 or if such Home Loan is originated on or after May 1, 1997, such Home Loan's date of origination. Debt Instrument: The note or other evidence of indebtedness evidencing the indebtedness of an Obligor under a Home Loan. Defaulted Home Loan: A Home Loan with respect to which: (i) a claim has been paid or finally rejected pursuant to the Contract of Insurance, (ii) the Property has been repossessed and sold, or (iii) any portion of a Monthly Payment is more than 180 calendar days past due (without giving effect to any grace period). Defective Home Loan: A Home Loan required to be repurchased pursuant to Section 3.05 hereof. 4 9 Deficiency Amount: As to any Determination Date and the related Distribution Date, an amount equal to the sum of (a) the amount by which the sum of the Noteholders' Interest Distributable Amount for each Class of Notes for such related Distribution Date exceeds the amount on deposit in the Note Distribution Account available to be distributed therefor on such Distribution Date (without taking into account any Insured Payments to be made relating to such Distribution Date) and (b) the Noteholders' Guaranteed Principal Distribution Amount for such Distribution Date. Delivery: When used with respect to Trust Account Property means: (a) with respect to bankers' acceptances, commercial paper, negotiable certificates of deposit and other obligations that constitute "instruments" within the meaning of Section 9-105(1)(i) of the UCC and are susceptible of physical delivery, transfer thereof to the Indenture Trustee or its nominee or custodian by physical delivery to the Indenture Trustee or its nominee or custodian endorsed to, or registered in the name of, the Indenture Trustee or its nominee or custodian or endorsed in blank, and, with respect to a certificated security (as defined in Section 8-102 of the UCC) transfer thereof (i) by delivery of such certificated security endorsed to, or registered in the name of, the Indenture Trustee or its nominee or custodian or endorsed in blank to a financial intermediary (as defined in Section 8-313 of the UCC) and the making by such financial intermediary of entries on its books and records identifying such certificated securities as belonging to the Indenture Trustee or its nominee or custodian and the sending by such financial intermediary of a confirmation of the purchase of such certificated security by the Indenture Trustee or its nominee or custodian, or (ii) by delivery thereof to a "clearing corporation" (as defined in Section 8-102(3) of the UCC) and the making by such clearing corporation of appropriate entries on its books reducing the appropriate securities account of the transferor and increasing the appropriate securities account of a financial intermediary by the amount of such certificated security, the identification by the clearing corporation of the certificated securities for the sole and exclusive account of the financial intermediary, the maintenance of such certificated securities by such clearing corporation or a "custodian bank" (as defined in Section 8-102(4) of the UCC) or the nominee of either subject to the clearing corporation's exclusive control, the sending of a confirmation by the financial intermediary of the purchase by the Indenture Trustee or its nominee or custodian of such securities and the making by such financial intermediary of entries on its books and records identifying such certificated securities as belonging to the Indenture Trustee or its nominee or custodian (all of the foregoing, "Physical Property"), and, in any event, any such Physical Property in registered form shall be in the name of the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect the complete transfer of ownership of any such Trust Account Property (as defined herein) to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; 5 10 (b) with respect to any securities issued by the U.S. Treasury, FNMA or FHLMC that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations, the following procedures, all in accordance with applicable law, including applicable federal regulations and Articles 8 and 9 of the UCC: book-entry registration of such Trust Account Property to an appropriate book-entry account maintained with a Federal Reserve Bank by a financial intermediary that is also a "depository" pursuant to applicable federal regulations and issuance by such financial intermediary of a deposit advice or other written confirmation of such book-entry registration to the Indenture Trustee or its nominee or custodian of the purchase by the Indenture Trustee or its nominee or custodian of such book-entry securities; the making by such financial intermediary of entries in its books and records identifying such book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations as belonging to the Indenture Trustee or its nominee or custodian and indicating that such custodian holds such Trust Account Property solely as agent for the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect complete transfer of ownership of any such Trust Account Property to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; and (c) with respect to any item of Trust Account Property that is an uncertificated security under Article 8 of the UCC and that is not governed by clause (b) above, registration on the books and records of the issuer thereof in the name of the financial intermediary, the sending of a confirmation by the financial intermediary of the purchase by the Indenture Trustee or its nominee or custodian of such uncertificated security, the making by such financial intermediary of entries on its books and records identifying such uncertificated certificates as belonging to the Indenture Trustee or its nominee or custodian. Depositor: Financial Asset Securities Corp., a Delaware corporation, and any successor thereto. Determination Date: With respect to any Distribution Date, the fifth Business Day preceding such Distribution Date. Distributable Excess Spread: As to any Distribution Date, the lesser of (i) the amount of Excess Spread for such Distribution Date and (ii) the portion of Excess Spread required to be distributed pursuant to Section 5.01(c)(iv) such that the Overcollateralization Amount for such Distribution Date is equal to the Required OC Amount for such Distribution Date. Distribution Date: The 25th day of any month or if such 25th day is not a Business Day, the first Business Day immediately following such day, commencing in June 1997. DTC: The Depository Trust Company. 6 11 Due Date: With respect to any Monthly Payment, the date on which such Monthly Payment is required to be paid pursuant to the related Debt Instrument. Due Period: With respect to any Determination Date or Distribution Date, the calendar month immediately preceding such Determination Date or Distribution Date, as the case may be. Early Termination Notice Date: Any date on which the Pool Principal Balance is less than 10% of the Initial Principal Balance. Eligible Account: At any time, an account which is any of the following: (i) A segregated trust account that is maintained with the corporate trust department of a depository institution acceptable to the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing), or (ii) a segregated direct deposit account maintained with a depository institution or trust company organized under the laws of the United States of America, or any of the States thereof, or the District of Columbia, having a certificate of deposit, short term deposit or commercial paper rating of at least A-1+ by Standard & Poor's and P-1 by Moody's and (so long as a Securities Insurer Default shall not have occurred and be continuing) acceptable to the Securities Insurer. Eligible Servicer: A Person that (i) is servicing a portfolio of mortgage loans, (ii) is legally qualified to service, and is capable of servicing, the Home Loans and has all licenses required to service mortgage loans (including Title I mortgage loans), (iii) has demonstrated the ability professionally and competently to service a portfolio of mortgage loans similar to the Home Loans (including the FHA Loans) with reasonable skill and care, (iv) has a net worth calculated in accordance with generally accepted accounting principles of at least $500,000 and (v) if other than Mego, Norwest Bank Minnesota, N.A. or Preferred Equities Corporation, is acceptable to the Securities Insurer. Event of Default: As described in Section 10.01 hereof. Excess Claim Amount: With respect to any Distribution Date, an amount equal to (A) 90% of the excess of (x) claims paid under the Contract of Insurance in respect of the FHA Loans over (y) the Trust Designated Insurance Amount less (B) the amount deposited to the FHA Reserve Fund on previous Distribution Dates. Excess Spread. With respect to any Distribution Date, the positive excess, if any, of (x) the Collected Amount with respect to such Distribution Date over (y) the amount required to be distributed pursuant to priorities (i) through (iii) of Section 5.01(c) on such Distribution Date. FDIC: The Federal Deposit Insurance Corporation and any successor thereto. FHA: The Federal Housing Administration and any successor thereto. 7 12 FHA Insurance: Insurance issued by FHA pursuant to Title I of the National Housing Act of 1934, as amended. FHA Insurance Coverage Insufficiency: At the time of a prospective claim for reimbursement under the Contract of Insurance for an FHA Loan pursuant to Section 4.12, the amount by which the sum of all claims previously paid by the FHA in respect of all FHA Loans and the amount expected to be received in respect of such prospective claim for such FHA Loan exceeds the Trust Designated Insurance Amount. FHA Insurance Coverage Reserve Account: The account established by the FHA pursuant to the Contract of Insurance which is adjusted and maintained under Title I (see 24 C.F.R. 201.32(a)). FHA Insurance Payment Amount: With respect to any Distribution Date and with respect to an FHA Loan for which an insurance claim has been made by the Contract of Insurance Holder or the Claims Administrator and paid by the FHA or rejected, by the FHA, an amount equal to the sum of such of the following as are appropriate: (i) the amount, if any, received from the FHA, (ii) with respect to claims rejected, the amount, if any, received from Mego or the Master Servicer pursuant to Section 4.12 and (iii) the amount received from the sale of FHA Pending Claims sold pursuant to Section 11.01(b). FHA Loans: The Home Loans designated as FHA Loans on the Home Loan Schedule. FHA Pending Claims: As defined in Section 11.01(b). FHA Premium Account: The account which is an Eligible Account established and maintained by the Indenture Trustee pursuant to Section 5.01(a)(4). FHA Premium Account Deposit: With respect to any Distribution Date, an amount equal to the greater of (i) 1/12 times .75% times the aggregate Principal Balance of all FHA Loans other than Invoiced Loans as of the first day of the calendar month preceding the month of such Distribution Date (or the aggregate Principal Balance of such Loans as of the applicable Cut-Off Date with respect to the first Distribution Date) and (ii) the positive excess, if any, of (A) the projected amount of premium and other charges due under the Contract of Insurance for the next succeeding Due Period over (B) the balance in the FHA Premium Account as of the related Distribution Date. FHA Reserve Amount: As to each FHA Loan, 10% of the Principal Balance as of the Cut-Off Date of such FHA Loan. FHA Reserve Fund: The account which is an Eligible Account denominated as the FHA Reserve Fund to be established by the Indenture Trustee pursuant to Section 5.01(a)(3) hereof. FHLMC: The Federal Home Loan Mortgage Corporation and any successor thereto. 8 13 FICO Score: The credit evaluation scoring methodology developed by Fair, Isaac and Company. Final Maturity Date: With respect to the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, the Class A-4 Notes and the Class A-5 Notes, May 25, 2023. FNMA: The Federal National Mortgage Association and any successor thereto. Foreclosure Advances: As defined in Section 4.08(b). Foreclosed Loan. As of any date of determination, any Mortgage Loan, other than a Mortgage Loan for which a claim is pending under the Contract of Insurance, that has been discharged as a result of (i) the completion of foreclosure or comparable proceedings; (ii) the Owner Trustee's acceptance of the deed or other evidence of title to the related Property in lieu of foreclosure or other comparable proceeding; or (iii) the acquisition by the Owner Trustee of title to the related Property by operation of law. Foreclosed Property. With respect to any Mortgage Loan, any Property acquired by the Trust as a result of: (i) the completion of foreclosure or comparable proceedings with respect to the related Mortgage Loan; (ii) the Co-Owner Trustee's acceptance of the deed or other evidence of title to the related Property in lieu of foreclosure or other proceeding with respect to the related Loan; or (iii) the acquisition by the Co-Owner Trustee of title thereto by operation of law. Grant: As defined in the Indenture. Guaranty Policy: That certain guaranty insurance policy for the Insured Securities, dated May 22, 1997, and issued by the Securities Insurer to the Indenture Trustee and guaranteeing payment of any Insured Payment. HUD: The United States Department of Housing and Urban Development and any successor thereto. Home Loan: An individual Home Loan that is conveyed to the Issuer pursuant to this Agreement on the Closing Date, together with the rights and obligations of a holder thereof and payments of principal in respect of such Home Loan received on or after the Cut-Off Date and payments of interest in respect of such Home Loan due on or after the Cut-Off Date, the Home 9 14 Loans subject to this Agreement being identified on the Home Loan Schedule as amended from time to time and annexed hereto as Exhibit A. Home Loan File: The Indenture Trustee's Home Loan File and the Servicer's Home Loan File. Home Loan Interest Rate: The fixed annual rate of interest borne by a Debt Instrument, as shown on the related Home Loan Schedule (not including any amounts payable as premium for FHA Insurance with respect to Invoiced Loans). Home Loan Pool: The pool of Home Loans. Home Loan Purchase Agreement: The home loan purchase agreement between the Seller, as seller, and the Depositor, as purchaser, dated as of May 1, 1997. Home Loan Schedule: The schedule of Home Loans specifying with respect to each Home Loan, the information set forth on Exhibit A attached hereto, as amended or supplemented from time to time. Indemnification Agreement: The Indemnification Agreement, dated as of May 21, 1997, by and among the Securities Insurer, the Seller and Greenwich Capital Markets, Inc., as Underwriter. Indenture: The Indenture, dated as of May 1, 1997, between the Issuer and the Indenture Trustee. Indenture Trustee: First Trust of New York, National Association, a national banking association, as Indenture Trustee under the Indenture and this Agreement acting on behalf of the Noteholders, or any successor indenture trustee under the Indenture and this Agreement. Indenture Trustee Fee: With respect to any Distribution Date, the greater of (A) one-twelfth of .0045% times the Pool Principal Balance of the Home Loans as of the opening of business on the first day of the calendar month preceding the calendar month of such Distribution Date (or, with respect to the first Distribution Date, the Initial Pool Principal Balance); and (B) $667. Indenture Trustee's Home Loan File: As defined in Section 2.05. Independent: When used with respect to any specified Person, such Person (i) is in fact independent of Mego, the Master Servicer, the Depositor or any of their respective affiliates, (ii) does not have any direct financial interest in or any material indirect financial interest in any of Mego, the Master Servicer, the Depositor or any of their respective affiliates and (iii) is not connected with any of Mego, the Master Servicer, the Depositor or any of their respective affiliates, as an officer, employee, promoter, underwriter, trustee, partner, director or Person 10 15 performing similar functions; provided, however, that a Person shall not fail to be Independent of Mego, the Master Servicer, the Depositor or any of their respective affiliates merely because such Person is the beneficial owner of 1% or less of any class of securities issued by Mego, the Master Servicer, the Depositor or any of their respective affiliates, as the case may be. Independent Accountants: A firm of nationally recognized certified public accountants which is Independent. Initial Pool Principal Balance: $63,459,083.77, which is the Pool Principal Balance as of the opening of business on the Cut-Off Date. Insurance Agreement: The Insurance Agreement, dated as of May 1, 1997, between the Securities Insurer, Mego, as the Seller, Servicer and Claims Administrator, Mego Mortgage Home Loan Acceptance Corporation, as affiliated holder, the Depositor, the Issuer, the Master Servicer, the Indenture Trustee, as Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder and Greenwich Capital Financial Products, Inc. Insurance Policies: With respect to any Property, any related insurance policy other than the Contract of Insurance or the Guaranty Policy. Insurance Proceeds: With respect to any Property, all amounts collected in respect of Insurance Policies and not required to be applied to the restoration of the related Property or paid to the related Obligor. Insurance Record: The record established and maintained by the Claims Administrator (in a manner consistent with the Title I provisions set forth in 24 C.F.R. Section 201.32) setting forth the FHA insurance coverage attributable to the FHA Loans hereunder and for Related Series Loans. To the extent consistent with adjustments pursuant to Title I to the FHA Insurance Coverage Reserve Account, the Insurance Record shall be reduced by the amount of claims approved for payment by the FHA with respect to any FHA Loan or Related Series Loan after the date of transfer of the related FHA reserve account to the Contract of Insurance Holder. Insured Payment: With respect to the Guaranty Policy, the sum of (i) as of any Distribution Date, any Deficiency Amount and (ii) any unpaid Preference Amount. Insured Securities: Each of the Class A-1 Notes, the Class A-2 Notes, the Class A-3, the Class A-4 Notes and the Class A-5 Notes. Interest Advance: As defined in Section 4.08(a). Invoiced Loan: An FHA Loan with respect to which the related Obligor is required to pay the premium on FHA Insurance with respect to such FHA Loan. Issuer: The Trust. 11 16 Late Payment Rate: For any Distribution Date, the lesser of (i) the rate of interest, as it is publicly announced by Citibank, N.A., as its prime rate (any change in such prime rate of interest to be effective on the date such change is announced by Citibank, N.A.) plus 2% and (ii) the maximum rate permissible under any applicable law limiting interest rates. The Late Payment Rate shall be computed on the basis of a year of 365 days calculating the actual number of days elapsed. Majority Securityholders: Subject to Section 12.14, (i) until such time as the sum of the Class Principal Balances of all Classes of Notes has been reduced to zero, the holder or holders of in excess of 50% of the Class Principal Balance of all Classes of Notes (accordingly, the holders of the Residual Certificates shall be excluded from any rights or actions of the Majority Securityholders during such period); and (ii) thereafter, the holder or holders of in excess of 50% of the Percentage Interest of the Residual Certificates. Master Servicer: Norwest Bank Minnesota, N.A., a national banking association, its successors in interest or any successor master servicer appointed as herein provided. Master Servicer Certificate: As defined in Section 6.01. Master Servicer Fee: With respect to any Distribution Date, 1/12 times 0.08% times the Pool Principal Balance as of the opening of business on the first day of the month preceding the month of such Distribution Date (or, with respect to the first Distribution Date, the Initial Pool Principal Balance). Master Servicer Termination Event: Any event specified in Section 10.01. Master Servicing Officer: Any officer of the Master Servicer responsible for the administration and servicing of the Home Loans whose name and specimen signature appears on a list of servicing officers furnished to the Indenture Trustee by the Master Servicer, as such list may from time to time be amended. Maturity Date: With respect to any Home Loan and as of any date of determination, the date on which the last payment of principal is due and payable under the related Debt Instrument. Monthly Cut-Off Date: The last day of any calendar month, and with respect to any Distribution Date or related Determination Date, the last day of the calendar month immediately preceding such Distribution Date or related Determination Date. Monthly Payment: With respect to any Home Loan and any Due Period, the payment of principal and interest due in such Due Period from the Obligor pursuant to the related Debt Instrument (as amended or modified, if applicable, pursuant to Section 4.10). The Monthly Payment related to a Determination Date or a Distribution Date shall be the Monthly Payment due for the preceding Due Period. 12 17 Moody's: Moody's Investors Service, Inc. or any successor thereto. Mortgage: With respect to any Mortgage Loan, the mortgage, deed of trust or other instrument creating a mortgage lien (and in a title theory state the document conveying title to the Property as security for the related Loan) or other security interest on the related Property. Mortgage Loan: As of any date of determination, each of the Home Loans, secured by an interest in a Property, transferred and assigned to the Indenture Trustee pursuant to Section 2.01(a). Mortgagee or Obligee: With respect to any Home Loan as of any date of determination, the holder of the related Debt Instrument and any related Mortgage as of such date. Mortgagor or Obligor: With respect to any Home Loan, the obligor(s) on the related Debt Instrument. Net Loan Rate: With respect to each Home Loan, the related Home Loan Interest Rate, less the rate at which the Servicer Fee is calculated. Net Prepayment Interest Shortfall: As to any Distribution Date, the amount by which aggregate Prepayment Interest Shortfalls during the preceding Due Period exceed the Servicer Fee for such Distribution Date (before reduction of the Servicer Fee in respect of such Prepayment Interest Shortfalls). Non-FHA Loans: The Home Loans designated as Non-FHA Loans on the Home Loan Schedule. Nonrecoverable Advances: With respect to any Home Loan, (i) any Interest Advance previously made and not reimbursed pursuant to Section 5.01(c)(i)(c), or (ii) an Interest Advance proposed to be made in respect of a Home Loan which, in either case, in the good faith business judgment of the Master Servicer, as evidenced by an Officer's Certificate delivered to the Securities Insurer, Mego and the Indenture Trustee no later than the Business Day following such determination, would not be recoverable ultimately from the Payments received in subsequent Due Periods in respect of that Home Loan. Note(s): One or more of the Class A-1 Notes, the Class A-2 Notes, the Class A-3 Notes, Class A-4 Notes or Class A-5 Notes. Note Distribution Account: The account established and maintained pursuant to Section 5.01(a)(2). Noteholder: A holder of a Note. 13 18 Noteholders' Guaranteed Principal Distribution Amount: With respect to any Distribution Date, the positive excess, if any, of (i) the aggregate Class Principal Balances of the Notes as of such Distribution Date (taking into account the amount of the distributions required to be distributed pursuant to Sections 5.01(c)(iii) and (iv) on such Distribution Date) over (ii) the Pool Principal Balance as of the end of the related Due Period; provided, that on the Final Maturity Date for any Class of Notes, the Noteholders' Guaranteed Principal Distribution Amount for such Class of Notes shall equal the amount necessary to reduce the Class Principal Balance thereof to zero (taking into account the amount of the distributions required to be paid on such Class of Notes pursuant to Sections 5.01(c)(iii) and (iv) on such Final Maturity Date). Noteholders' Interest Carry-Forward Amount: With respect to any Distribution Date and each Class of Notes, the sum of (i) excess of (A) the applicable Noteholders' Monthly Interest Distributable Amount for the preceding Distribution Date and any outstanding Noteholders' Interest Carry-Forward Amount for such Class on such preceding Distribution Date, over (B) the amount in respect of interest that is actually paid on such Class of Notes on such preceding Distribution Date plus (ii) interest on such excess, to the extent permitted by law, at the applicable Note Interest Rate from such preceding Distribution Date through the current Distribution Date. Noteholders' Interest Distributable Amount: With respect to each Distribution Date and each Class of Notes, the sum of the applicable Noteholders' Monthly Interest Distributable Amount and the applicable Noteholders' Interest Carry-Forward Amount for such Class of Notes, if any, for such Distribution Date. Noteholders' Monthly Interest Distributable Amount: With respect to each Distribution Date and each Class of Notes, the amount of thirty (30) days' accrued interest at the respective Interest Rate for such Class of Notes on the Class Principal Balance of such Class immediately preceding such Distribution Date (or, in the case of the first Distribution Date, on the Closing Date), in each case reduced by an amount equal to such Class' pro rata share (based on the amount of interest to which such Class would have otherwise been entitled) of the sum of (i) the aggregate of Civil Relief Act Interest Shortfalls and (ii) the Net Prepayment Interest Shortfall, if any, in each case for such Distribution Date. Noteholders' Monthly Principal Distributable Amount: With respect to each Distribution Date, the amount equal to the sum of the following amounts (without duplication) with respect to the immediately preceding Due Period: that portion of all Payments received on Home Loans allocable to principal for such Distribution Date, including all full and partial principal prepayments (including (i) such payments in respect of such Home Loans that became Defaulted Home Loans on or prior to the end of the preceding Due Period, (ii) the portion of the Purchase Price allocable to principal of all Defective Loans or Defaulted Loans and the portion of the Termination Price, if any, set forth in Section 11.01(b) allocable to principal with respect to the Home Loans, and (iii) any Substitution Adjustments deposited to the Note Distribution Account pursuant to Section 3.05 on the previous Determination Date); provided, however, that the Noteholders' Monthly Principal Distributable Amount on any Distribution Date shall not exceed 14 19 the outstanding principal balance of the Notes; and provided, further, that the Noteholders' Monthly Principal Distributable Amount on the Final Maturity Date shall not be less than the amount that is necessary (after giving effect to other amounts to be deposited in the Note Distribution Account on such Distribution Date and allocable to principal) to reduce the outstanding aggregate Class Principal Balances of the Notes to zero. Note Interest Rate: With respect to each Class of Notes, the per annum rate of interest payable to the holders of such Class of Notes. The Note Interest Rate with respect to the Class A-1 Notes is equal to 6.87% per annum; the Note Interest Rate with respect to the Class A-2 Notes is equal to 6.88% per annum; the Note Interest Rate with respect to the Class A-3 Notes is equal to 7.00% per annum; the Note Interest Rate with respect to the Class A-4 Notes is equal to 7.17% per annum; and the Note Interest Rate with respect to the Class A-5 Notes is equal to 7.63% per annum. Note Register: The register established pursuant to Section 2.3 of the Indenture. Obligee: See Mortgagee. Obligor: See Mortgagor. OC Floor: The product of 1% times the Initial Pool Principal Balance, which product is equal to $634,590.84. 15 20 OC Multiple. As to any Distribution Date and related Determination Date, the highest OC Multiple based upon the data set forth in the Master Servicer's Certificate for such Distribution Date as set forth in the following chart:
30+ Day 60+ Day Annual Default OC Delinquency Percentage Delinquency Percentage % Multiple (Rolling 3 Month) (Rolling 3 Month) (3 Month Average) -------- ---------------------- ---------------------- ----------------- 1.00 0.00% to 7.99% 0.00% to 3.49% 0.00% to 4.99% 1.25 8.00% to 8.99% 3.50% to 4.99% 5.00% to 5.99% 1.50 9.00% to 11.99% 5.00% to 6.99% 6.00% to 6.99% 2.50 **=12.00% **=7.00% **=7.00%
CUMULATIVE DEFAULT PERCENTAGE ----------------------------------------------------------------------------- Months* Months 0 Months 012 024 Maturity -------- ---------------------- ---------------------- ----------------- 2.50 **5.0% **8.0% **12.0%
- ---------- * Month 0 is May, 1997. ** Greater Than OC Reduction Date. shall be the later of (i) the Distribution Date occurring in May 2000 and (ii) the Distribution Date on which the Pool Principal Balance of the Home Loans as of the end of the previous Due Period is equal to or less than one-half of the Initial Pool Principal Balance, provided no OC Reduction Date shall occur if there has been an OC Multiple greater than 1.00 on any of the three (3) previous Distribution Dates. Officer's Certificate: A certificate signed by (i) any Master Servicing Officer or (ii) the Chairman of the Board, the Vice Chairman of the Board, the President, a Vice President, an Assistant Vice President, the Treasurer, the Secretary or one of the Assistant Treasurers or Assistant Secretaries of the Depositor or Mego, as the case may be, as required by this Agreement. Opinion of Counsel. A written opinion of counsel (who is acceptable to the Securities Insurer and the Rating Agencies), who may be employed by Mego, the Master Servicer, the Depositor or any of their respective affiliates. 16 21 Original Class Principal Balance: In the case of the Class A-1 Notes, $15,950,000; in the case of the Class A-2 Notes, $8,100,000; in the case of the Class A-3 Notes, $6,750,000; in the case of the Class A-4 Notes, $13,600,000 and in the case of the Class A-5 Notes, $14,394,841. Other Fees. With respect to any Distribution Date, (i) amounts in respect of fees and expenses due to any provider of services to the Trust, except the Indenture Trustee, the Master Servicer, the Servicer, the Claims Administrator, the Contract of Insurance Holder and also except any Person, the fees of which are required by this Agreement to be paid by the Master Servicer, the Servicer, the Claims Administrator, the Contract of Insurance Holder or the Indenture Trustee; (ii) any taxes assessed against the Trust; and (iii) the reasonable transition expenses of a successor Master Servicer incurred in acting as successor Master Servicer. Overcollateralization Amount: As of any Distribution Date the amount, if any, by which the Pool Principal Balance as of the end of the related Due Period exceeds the Class Principal Balances of the Notes after giving effect to payments of principal to be made on such Distribution Date. Ownership Interest: As to any Security, any ownership or security interest in such Security, including any interest in such Security as the holder thereof and any other interest therein, whether direct or indirect, legal or beneficial, as owner or as pledgee. Owner Trustee: Wilmington Trust Company, as owner trustee under the Trust Agreement, and any successor owner trustee under the Trust Agreement. Owner Trustee Fee: $4,000. Owner Trustee Fee Reserve: With respect to any Distribution Date, $333.33. Payment: With respect to any Home Loan or the related Foreclosed Property and any Distribution Date or related Determination Date, all amounts received or collected on account of principal and interest by or on behalf of the Master Servicer during the preceding Due Period (or with respect to the interest component of any Monthly Payment due during such Due Period, received or collected by or on behalf of the Master Servicer during the period commencing on the first day of the preceding Due Period and ending prior to such Determination Date) in respect of such Home Loan or Foreclosed Property from whatever source, including without limitation, amounts received or collected from, or representing: (i) the related Obligor; (ii) the application to amounts due on such Home Loan (or, in the case of any Foreclosed Property, to amounts previously due on the related Foreclosed Loan) of any related Insurance Proceeds, any related condemnation awards or settlements or any payments made by any related guarantor or third-party credit-support provider; 17 22 (iii) FHA Insurance Payment Amounts with respect to such Home Loan; (iv) the operation or sale of the related Foreclosed Property; (v) the Purchase Price with respect to such Home Loan or Substitution Adjustment Amounts with respect thereto; or (vi) the Termination Price pursuant to Section 11.01(b); provided, however, that any amount the Servicer shall be entitled to retain as additional servicer compensation pursuant to Section 6.05(a) of the Servicing Agreement shall be excluded from the calculation of Payment. Percentage Interest: As defined in the Trust Agreement. Permitted Investments: Each of the following: (a) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. (b) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): 1. U.S. Export-Import Bank (Eximbank) A. Direct obligations or fully guaranteed certificates of beneficial ownership 2. Farmers Home Administration (FmHA) A. Certificates of beneficial ownership 3. Federal Financing Bank 4. Federal Housing Administration (FHA) A. Debentures 5. General Services Administration A. Participation certificates 6. U.S. Maritime Administration A. Guaranteed Title XI financing 18 23 7. U.S. Department of Housing and Urban Development (HUD) A. Project Notes B. Local Authority Bonds C. New Communities Debentures - U.S. government guaranteed debentures D. U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies that are rated by both Rating Agencies in one of the top two long-term rating categories (stripped securities are only permitted if they have been stripped by the agency itself): 1. Federal Home Loan Bank System A. Senior debt obligations 2. Federal Home Loan Mortgage Corporation (FHLMC) A. Participation Certificates B. Senior debt obligations 3. Federal National Mortgage Association (FNMA) A. Mortgage-backed securities and senior debt obligations 4. Student Loan Marketing Association A. Senior debt obligations 5. Resolution Funding Corp. obligations 6. Farm Credit System A. Consolidated systemwide bonds and notes (d) Money market funds registered under the Investment Company Act of 1940, as amended, whose shares are registered under the Securities Act, and having a rating by Standard & Poor's of AAAm-G; AAAm; or AAm and a rating by Moody's of Aaa. (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks which have a short term rating by Moody's of P-1. The collateral must be held by a third party and the Indenture Trustee must have a perfected first security interest in the collateral. (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF. 19 24 (g) Investment agreements, including guaranteed investment contracts, acceptable to the Securities Insurer and each Rating Agency. (h) Commercial paper rated "Prime - 1" by Moody's and "A-1" or better by Standard & Poor's. (i) Bonds or notes issued by any state or municipality which are rated by Moody's and Standard & Poor's in one of the two highest long term rating categories assigned by such agencies. (j) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" by Moody's and "A-1" or "A" or better by S&P. (k) Repurchase agreements providing for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trust (buyer/lender), and the transfer of cash from the Trust to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trust in exchange for the securities at a specified date. Repurchase agreements ("repos") must satisfy the following criteria or be approved by the Securities Insurer. 1. Repos must be between the Trust and a dealer bank or securities firm which are: A. Primary dealers on the Federal Reserve reporting dealer list which are rated A or better by Standard & Poor's and P-1 by Moody's, or B. Banks rated "A" or above by Standard & Poor's and P-1 by Moody's. 2. The written repo contract trust must include the following: A. Securities which are acceptable for transfer are: (1) Direct U.S. governments, or (2) Federal agencies backed by the full faith and credit of the U.S. government (or FNMA or FHLMC) other than mortgage backed securities. B. The term of the repo may be up to 30 days 20 25 C. The collateral must be delivered to the Indenture Trustee (if the Indenture Trustee is not supplying the collateral) or third party acting as agent for the Indenture Trustee (if the Indenture Trustee is supplying the collateral) before/simultaneous with payment (perfection by possession of certificated securities). D. Valuation of Collateral (1) The securities must be valued weekly, marked-to-market at current market price plus accrued interest. (a) The value of collateral must be equal to 104% of the amount of cash transferred by the Trust to the dealer bank or security firm under the repo plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by the Trust, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. 3. Legal opinion which must be delivered to the Indenture Trustee: a. Repo meets guidelines under state law for legal investment of public funds. Each reference in this definition of "Permitted Investments" to the Rating Agency shall be construed, in the case of each subparagraph above referring to each Rating Agency, as a reference to Standard & Poor's and Moody's. Person: Any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, national banking association, unincorporated organization or government or any agency or political subdivision thereof. Physical Property: As defined in the definition of "Delivery" above. Pool Principal Balance: With respect to any date of determination, the sum of the Principal Balances for all Home Loans as of such date. Preference Amount: Any amount previously distributed to the holder of an Insured Security that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code, in accordance with a final, non-appealable order of a court having competent jurisdiction. 21 26 Premium: The premium, payable monthly, that is specified in the commitment letter between Mego Mortgage Corporation and the Securities Insurer dated as of May 22, 1997 relating to the Guaranty Policy issued by the Securities Insurer with respect to the Notes. Prepayment Interest Shortfall: As to any Home Loan and Principal Prepayment, the amount by which one month's interest at the related Home Loan Interest Rate (or such lower rate as may be in effect from a Home Loan because of the application of the Civil Relief Act) minus the rate at which the Servicing Fee is calculated on such Principal Prepayment exceeds the amount of interest paid by the Mortgagor in connection with such Principal Prepayment. Principal Balance: With respect to any Home Loan, and for any date of determination, the Principal Balance of such Home Loan as of the Cut-Off Date reduced by all amounts previously received or collected in respect of principal on such Home Loan on or subsequent to the Cut-Off Date for such Home Loan; provided, that with respect to any Defaulted Home Loan, the Principal Balance shall be zero as of the end of the Due Period in which such Home Loan becomes a Defaulted Home Loan. Principal Prepayment: Any payment or other receipt of principal in full due on a Home Loan made by an Obligor which is received in advance of the scheduled Maturity Date of such Home Loan. Property: The property (real, personal or mixed) encumbered by the Mortgage which secures the Debt Instrument evidencing a secured Home Loan. Prospectus: The Depositor's final Prospectus, dated May 21, 1997, as supplemented by the Prospectus Supplement. Prospectus Supplement: The Prospectus Supplement dated as of May 21, 1997, prepared by the Seller and the Depositor in connection with the issuance and sale of the Securities. Purchase Price: With respect to a Home Loan, means the Principal Balance of such Home Loan as of the date of purchase, plus unpaid accrued interest at the related Home Loan Interest Rate to the last day of the month in which such purchase occurs (without regard to any Interest Advance that may have been made with respect to such Home Loan). Qualified Substitute Home Loan: A Home Loan: (i) having characteristics such that the representations and warranties made pursuant to Section 3.03(b) with respect to the Home Loans are true and correct as of the date of substitution with respect to such Home Loan; (ii) each Monthly Payment with respect to such Home Loan shall be greater than or equal to the Monthly Payments due in the same Due Period on the Home Loan for which such Qualified Substitute Home Loan is replacing; (iii) the Maturity Date with respect to such Home Loan shall be no later than the Maturity Date of the Home Loan for which such Qualified Substitute Home Loan is replacing; (iv) as of the date of substitution, the Principal Balance of such Home Loan is less than or equal to (but not more than 1% less than) the Principal Balance of the Home Loan for which 22 27 such Qualified Substitute Home Loan is replacing; (v) the Home Loan Interest Rate with respect to such Home Loan is at least equal to the Home Loan Interest Rate of the Home Loan for which such Qualified Substitute Home Loan is replacing and (vi) the FICO score for such Home Loan must not be more than ten points lower than the FICO score for such Home Loan for which such Qualified Substitute Home Loan is replacing; provided however, in the event more than one Qualified Substitute Home Loan is replacing one or more Defective Home Loans on any date, in which case (i) the weighted average Home Loan Interest Rate for such Qualified Substitute Home Loans must equal or exceed the weighted average Home Loan Interest Rate of the Defective Home Loans immediately prior to giving effect to the substitution, in each case weighted on the basis of the outstanding Principal Balance of such loans as of such day, (ii) the sum of the Monthly Payments with respect to such Qualified Substitute Home Loans shall be greater than or equal to the Monthly Payments due in the same Due Period on the Defective Home Loans being replaced, and (iii) as of the date of substitution, the aggregate Principal Balances of such Qualified Substitute Home Loans are less than or equal to (but not more than 1% less than) the aggregate Principal Balances of the Defective Home Loans being replaced. Rating Agency or Rating Agencies: Either or both of (i) Standard & Poor's, or (ii) Moody's, provided that when the terms Rating Agency or Rating Agencies are used in reference to the Insured Securities, such terms shall mean one or both of Standard & Poor's or Moody's. If no such organization or successor is any longer in existence, "Rating Agency" shall be a nationally recognized statistical rating organization or other comparable person designated by the Issuer and approved by the Securities Insurer, notice of which designation shall have been given to the Indenture Trustee, the Securities Insurer, the Issuer and the Master Servicer. Ratings: The ratings initially assigned to the Notes and the Certificates by the Rating Agencies, as evidenced by letters from the Rating Agencies. Record Date: With respect to each Distribution Date, the close of business on the last Business Day of the month immediately preceding the month in which such Distribution Date occurs. Rejected Claim. With respect to any FHA Loan, a claim for payment made to the FHA under the Contract of Insurance that has been finally rejected after all appeals with FHA have been exhausted for any reason (including a rejection of a previously paid claim and a demand by the FHA of a return of the FHA Insurance Payment Amount for the related FHA Loan) other than a refusal or rejection due to clerical error in computing the claim amount or because the amount of the FHA Insurance Coverage Reserve Account as shown in the Insurance Record is zero. Related Series. Means (i) the Trust, (ii) Mego Mortgage Home Loan Owner Trust 1997-1, (iii) Mego Mortgage Home Loan Trust 1996-3, (iv) Mego Mortgage FHA Title I Loan Trust 1996-2, (v) Mego Mortgage FHA Title I Loan Trust 1996-1, and (vi) each of the subsequent series of trusts, of which the Indenture Trustee is either the trustee or indenture trustee and the Securities Insurer is the insurer of related notes or certificates, to which Related Series Loans are 23 28 sold directly or indirectly by Mego, pursuant to pooling and servicing agreements or sale and servicing agreements. Related Series Loans. Means FHA Title I loans included in the Related Series which: (i) are sold by Mego, directly or indirectly, to a trust and (ii) the Title I insurance coverage attributable to which is made available to cover claims with respect to the FHA Loans and the Related Series Loans in each other Related Series by virtue of terms relating to the administration of the FHA Insurance Coverage Reserve Account substantially similar to the terms hereof. Required OC Amount: With respect to each Distribution Date, the greater of (a) the OC Floor or (b) the product of (i) the OC Multiple for such Distribution Date and (ii)(x) if such Distribution Date is prior to the OC Reduction Date, the product of 13.10% and the Initial Pool Principal Balance, or (y) if such Distribution Date is on or after the OC Reduction Date, the lesser of (A) the product of 13.10% times the Initial Pool Principal Balance and (B) the product of 26.20% times the Pool Principal Balance of the Home Loans as of the end of the related Due Period, or such lower amount as may be established by the Securities Insurer in its sole discretion after notice to and written approval by the Rating Agencies. Residual Certificates: The Certificates representing the interest which represents the right to the amount remaining, if any, after all prior distributions have been made under this Agreement, the Indenture and the Trust Agreement on each Distribution Date and certain other rights to receive amounts hereunder and under the Trust Agreement. Responsible Officer: When used with respect to the Indenture Trustee, any officer within the Corporate Trust Office of the Indenture Trustee, including any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer of the Indenture Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. When used with respect to the Issuer, any officer in the Corporate Trust Administration Department of the Owner Trustee with direct responsibility for the administration of the Trust Agreement and this Agreement on behalf of the Issuer. When used with respect to the Depositor, the Seller, the Master Servicer, or the Custodian, the President or any Vice President, Assistant Vice President, or any Secretary or Assistant Secretary. SAIF: The Savings Association Insurance Fund, as from time to time constituted, created under the Financial Institutions Reform, Recovery and Enforcement 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. Securities: The Notes and/or the Certificates, as applicable. Securities Act: The Securities Act of 1933, as amended. 24 29 Securities Insurer: MBIA Insurance Corporation, as issuer of the Guaranty Policy, and its successors and assigns. Securities Insurer Default: The existence and continuance of any of the following: (a) the Securities Insurer fails to make a payment required under the Guaranty Policy in accordance with its terms; or (b) (i) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Securities Insurer in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, rehabilitation, reorganization or other similar law or (B) a decree or order adjudging the Securities Insurer a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, rehabilitation, arrangement, adjustment or composition of or in respect of the Securities Insurer under any applicable United States federal or state law, or appointing a custodian, receiver, liquidator, rehabilitator, assignee, trustee, sequestrator or other similar official of the Securities Insurer or of any substantial part of its property, or ordering the winding-up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (ii) the commencement by the Securities Insurer of a voluntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the Securities Insurer to the entry of a decree or order for relief in respect of the Securities Insurer in an involuntary case or proceeding under any applicable United States federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against the Securities Insurer, or the filing by the Securities Insurer of a petition or answer or consent seeking reorganization or relief under any applicable United States federal or state law, or the consent by the Securities Insurer to the filing of such petition or to the appointment of or the taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Securities Insurer or of any substantial part of its property, or the making by the Securities Insurer of an assignment for the benefit of its creditors, or the failure by the Securities Insurer to pay debts generally as they become due, or the admission by the Securities Insurer in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Securities Insurer in furtherance of any such action. Securities Insurer Reimbursement Amount: As of any Distribution Date, the sum of (i) Insured Payments previously received by the Indenture Trustee and not previously re-paid to the Securities Insurer pursuant to Section 5.01(c)(vi) hereof plus (ii) interest accrued on such Insured Payment not previously repaid calculated at the Late Payment Rate from the date the Indenture 25 30 Trustee received such Insured Payment. The Securities Insurer shall notify the Indenture Trustee and the Owner Trustee of the amount of any Securities Insurer Reimbursement Amount. Securityholder: A holder of a Note or Certificate, as applicable; provided that the exercise of any rights by such holder shall be subject to Section 12.14. Seller: Mego, in its capacity as the seller hereunder. Series or Series 1997-2: Mego Mortgage Home Loan Asset Backed Securities, Series 1997-2. Servicer: Mego, in its capacity as the servicer hereunder, or any other Eligible Servicer with whom the Master Servicer has entered into a Servicing Agreement pursuant to Section 4.02. Servicer Fee. With respect to any Distribution Date, 1/12 times 1.00% times the Pool Principal Balance, as of the opening of business on the first day of the month preceding the month of such Distribution Date (or, with respect to the first Distribution Date, the Initial Pool Principal Balance), reduced (but not below zero) by the aggregate Prepayment Interest Shortfall for the related Due Period. Servicer Review Report. As defined in Section 4.05(d). Servicer Termination Event. With respect to the Servicing Agreement, the events specified in Section 7.02 therein. Servicer's Home Loan Files: As defined in Section 2.05(b). Servicing Agreement: The servicing agreement dated as of May 1, 1997 between Mego, as Servicer, the Master Servicer, the Indenture Trustee and the Trust and any other agreement entered into in accordance with Section 4.02. Standard & Poor's: Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or any successor thereto. Servicing Record. The records for each Home Loan maintained by the Master Servicer pursuant to Section 4.03. Servicing Standard. The standard set forth in Section 4.01(a). 60+ Day Delinquent Loan. With respect to any Determination Date or related Distribution Date, a Home Loan, other than a Credit Support Multiple Defaulted Loan, with respect to which any portion of a Monthly Payment is, as of the related Monthly Cut-Off Date, 61 days or more past due (without giving effect to any grace period) and unpaid by the Obligor. 26 31 60+ Delinquency Percentage (Rolling Three Month). With respect to any Determination Date or related Distribution Date, the average of the percentage equivalents of the fractions determined for each of the three immediately preceding Due Periods the numerator of each of which is equal to the aggregate Principal Balance of Home Loans that are 60+ Day Delinquent Loans as of the end of such Due Period and the denominator of which is the Pool Principal Balance as of the end of such Due Period. Substitution Adjustment Amount: The meaning assigned to such term in Section 3.05. Substitution Date: As defined in Section 3.05. Termination Date: The earlier of (a) the Distribution Date in May 2023 and (b) the Distribution Date next following the Monthly Cut-Off Date coinciding with or next following the date of the liquidation or disposition of the last asset held by the Trust pursuant to Sections 4.13 or 11.01. Termination Price: As defined in Section 11.01(b). 30+ Day Delinquent Loan. With respect to any Determination Date or related Distribution Date, a Home Loan, other than a Credit Support Multiple Defaulted Loan, with respect to which any portion of a Monthly Payment is, as of the related Monthly Cut-Off Date, 31 days or more past due (without giving effect to any grace period) and unpaid by the Obligor. 30+ Delinquency Percentage (Rolling Three Month). With respect to any Determination Date or related Distribution Date, the average of the percentage equivalents of the fractions determined for each of the three immediately preceding Due Periods the numerator of which is equal to the aggregate Principal Balance of Home Loans that are 30+ Day Delinquent Loans as of the end of such Due Period, and the denominator of which is the Pool Principal Balance of the Home Loans as of the end of such Due Period. Title Document. The evidence of title to or ownership of the Property required by Title I. (See 24 C.F.R. 201.26(a)(1) and 201.20). Title I. Section 2 of Title I of the National Housing Act of 1934, as amended, and the rules and regulations promulgated thereunder as each may be amended from time to time and any successor statute, rules or regulations thereto. Transaction Documents. This Agreement, the Home Loan Purchase Agreement, the Trust Agreement, the Servicing Agreement, the Custodial Agreement, the Indenture, the Administration Agreement, the Insurance Agreement and the Indemnification Agreement. Trust: The Issuer. 27 32 Trust Account Property: The Trust Accounts, all amounts and investments held from time to time in any Trust Account and all proceeds of the foregoing. Trust Accounts: The Note Distribution Account, the Certificate Distribution Account, the Collection Account and the FHA Premium Account. Trust Agreement: The Trust Agreement dated as of May 1, 1997, among the Depositor, the Co-Owner Trustee, the Owner Trustee and Mego Mortgage Corporation. Trust Designated Insurance Amount: $273,578 or such greater amount approved in advance in writing by the Securities Insurer. Trust Estate: The assets subject to this Agreement, the Trust Agreement and the Indenture and assigned to the Indenture Trustee, which assets consist of: (i) such Home Loans as from time to time are subject to this Agreement, including Qualified Substitute Home Loans added to the Trust from time to time, together with the Servicer's Home Loan Files and the Indenture Trustee's Home Loan Files relating thereto and all proceeds thereof, (ii) the Mortgages and security interests in Properties, (iii) all payments of principal in respect of Home Loans received on or after the Cut-Off Date and payments of interest in respect of Home Loans due on or after the Cut-Off Date, (iv) the rights to FHA Insurance reserves attributable to the FHA Loans as of the Cut-Off Date, (v) such assets as from time to time are identified as Foreclosed Property, (vi) such assets and funds as are from time to time deposited in the Collection Account, the Note Distribution Account, the Certificate Distribution Account and the FHA Reserve Account, including amounts on deposit in such accounts which are invested in Permitted Investments, (vii) the Issuer's rights under the Insurance Policies and any Insurance Proceeds, and (viii) all right, title and interest of the Depositor in and to the obligations of the Seller under the Home Loan Purchase Agreement in which the Depositor acquired the Home Loans from the Seller. Section 1.02 Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Indenture and the Trust Agreement. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, 28 33 the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof," "herein," "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; Article, Section, Schedule and Exhibit references contained in this Agreement are references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. Section 1.03 Interest Calculations. Except as otherwise set forth herein, all calculations of accrued interest on the Home Loans, the Notes, the Certificates and accrued fees shall be made on the basis of a 360-day year consisting of twelve 30-day months. 29 34 ARTICLE II. CONVEYANCE OF THE HOME LOANS Section 2.01 Conveyance of the Home Loans. (a) As of the Closing Date, in consideration of the Issuer's delivery of the Notes and Certificates to the Depositor or its designee, upon the order of the Depositor, the Depositor, as of the Closing Date and concurrently with the execution and delivery hereof, does hereby sell, transfer, assign, set over and otherwise convey to the Issuer, without recourse, but subject to the other terms and provisions of this Agreement, all of the right, title and interest of the Depositor in and to the Trust Estate. The foregoing sale, transfer, assignment, set over and conveyance does not and is not intended to result in a creation or an assumption by the Issuer of any obligation of the Depositor, the Seller or any other person in connection with the Trust Estate or under any agreement or instrument relating thereto except as specifically set forth herein. (b) As of the Closing Date, the Issuer acknowledges the conveyance to it of the Trust Estate, including from the Depositor all right, title and interest of the Depositor in and to the Trust Estate, receipt of which is hereby acknowledged by the Issuer, and the acceptance of which is made in good faith and without notice or knowledge of any adverse claims or liens. Concurrently with such delivery and in exchange therefor, the Issuer has pledged to the Indenture Trustee the Trust Estate and the Indenture Trustee, pursuant to the written instructions of the Issuer, has executed and caused to be authenticated and delivered the Notes to the Depositor or its designee, upon the order of the Issuer. In addition, concurrently with such delivery and in exchange therefor, the Owner Trustee, pursuant to the instructions of the Depositor, has executed (not in its individual capacity, but solely as Owner Trustee on behalf of the Issuer) and caused to be authenticated and delivered the Certificates to the Depositor or its designee, upon the order of the Depositor. Section 2.02 Reserved. Section 2.03 Ownership and Possession of Home Loan Files. Upon the issuance of the Securities, with respect to the Home Loans, the ownership of each Debt Instrument, the related Mortgage and the contents of the related Servicer's Home Loan File and the Indenture Trustee's Home Loan File shall be vested in the Owner Trustee and the Co-Owner Trustee and pledged to the Indenture Trustee for the benefit of the Noteholders and the Securities Insurer, although possession of the Servicer's Home Loan Files (other than items required to be maintained in the Indenture Trustee's Home Loan Files) on behalf of and for the benefit of the Securityholders and the Securities Insurer shall remain with Mego, and the Custodian shall take possession of the Indenture Trustee's Home Loan Files as contemplated in Section 2.06. 30 35 Section 2.04 Books and Records. The sale of each Home Loan shall be reflected on the Depositor's or the Seller's, as the case may be, balance sheets and other financial statements as a sale of assets by the Depositor or the Seller, as the case may be, under generally accepted accounting principles ("GAAP"). The Master Servicer shall maintain, or cause to be maintained pursuant to Section 4.03, a complete set of books and records for each Home Loan which shall be clearly marked to reflect the ownership of each Home Loan by the Owner Trustee and the Co-Owner Trustee and the pledge to the Indenture Trustee for the benefit of the Securityholders and the Securities Insurer. It is the intention of the parties hereto that the transfers and assignments contemplated by this Agreement shall constitute a sale of the Home Loans and the other property specified in Section 2.01(a) from the Depositor to the Trust and such property shall not be property of the Depositor. If the assignment and transfer of the Home Loans and the other property specified in this Section 2.01(a) to the Owner Trustee and Co-Owner Trustee pursuant to this Agreement or the conveyance of the Home Loans or any of such other property to the Owner Trustee and Co-Owner Trustee is held or deemed not to be a sale or is held or deemed to be a pledge of security for a loan, the Depositor intends that the rights and obligations of the parties shall be established pursuant to the terms of the Agreement and that, in such event, (i) the Depositor shall be deemed to have granted and does hereby grant to the Owner Trustee and Co-Owner Trustee a first priority security interest in the entire right, title and interest of the Depositor in and to the Home Loans and all other property conveyed to the Owner Trustee and Co-Owner Trustee pursuant to Section 2.01 and all proceeds thereof, and (ii) this Agreement shall constitute a security agreement under applicable law. Within five days of the Closing Date, the Depositor shall cause to be filed UCC-1 financing statements naming the Owner Trustee and Co-Owner Trustee as "secured parties" and describing the Home Loans being sold by the Depositor to the Trust with the office of the Secretary of State of the State in which the Depositor is located. Section 2.05 Delivery of Home Loan Documents. (a) With respect to each Home Loan, on the Closing Date the Seller, at the direction of the Depositor, shall have delivered or caused to be delivered to the Custodian as the designated agent of the Indenture Trustee each of the following documents (collectively, the "Indenture Trustee's Home Loan Files"): (i) The original Debt Instrument, showing a complete chain of endorsements or assignments from the named payee to the Trust and endorsed as follows: "Pay to the order of First Trust of New York, National Association, as Indenture Trustee and Co-Owner Trustee for Mego Mortgage Home Loan Owner Trust 1997-2, without recourse"; (ii) If such Home Loan is a Mortgage Loan, the original Mortgage with evidence of recording indicated thereon (except that a true copy thereof certified by an appropriate public official may be substituted); provided, however, that if the Mortgage 31 36 with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Agreement solely because of a delay caused by the public recording office where such Mortgage has been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of such Mortgage certified as a true copy in an Officer's Certificate which shall certify that such Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such Mortgage with evidence of recording indicated thereon upon receipt thereof from the public recording official (or a true copy thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (iii) If such Home Loan is a Mortgage Loan, the original Assignment of Mortgage, in recordable form. Such assignments may be blanket assignments, to the extent such assignments are effective under applicable law, for Mortgages covering Mortgaged Properties situated within the same county. If the Assignment of Mortgage is in blanket form an assignment of Mortgage need not be included in the individual Home Loan File; (iv) If such Home Loan is a Mortgage Loan, all original intervening assignments of the Mortgage, showing a complete chain of assignments from the named mortgagee to the assignor to the Indenture Trustee, with evidence of recording thereon (or true copies thereof certified by appropriate public officials may be substituted); provided, however, that if the intermediate assignments of mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Agreement solely because of a delay caused by the public recording office where such assignments of Mortgage have been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of each such assignment of Mortgage certified as a true copy in an Officer's Certificate of Mego, which shall certify that each such assignment of Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such assignments of Mortgage with evidence of recording indicated thereon upon its receipt thereof from the public recording official (or true copies thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (v) An original of each assumption or modification agreement, if any, relating to such Home Loan. (b) With respect to each Home Loan, on the Closing Date, the Seller, at the direction of the Depositor, shall have delivered or caused to be delivered to Mego, as the designated agent of the Indenture Trustee each of the following documents (collectively, the "Servicer's Home Loan Files"): (A) If such Home Loan is an FHA Loan, an original or copy of notice signed by the Obligor acknowledging HUD insurance, (B) an original or copy of truth-in-lending disclosure, (C) an original or copy of the credit application, (D) an original or copy of the consumer credit report, (E) an original or copy of verification of employment and income, or verification of self-employment income, (F) if such Home Loan is an FHA Loan, an original or copy of evidence 32 37 of the Obligor's interest in the Property, (G) an original or copy of contract of work or written description with cost estimates, (H)(i) if such Home Loan is an FHA Loan either (a) an original or copy of the completion certificate or an original or copy of notice of non-compliance, if applicable or (b) an original or copy of report of inspection of improvements to the Property or an original or copy of notice of non-compliance, if applicable, or (ii) if such Home Loan is a Non-FHA Loan in respect of a home improvement, an original or copy of report of inspection of improvements to the Property, (I) to the extent not included in (C), an original or a copy of a written verification that the Mortgagor at the time of origination was not more than 30 days delinquent on any senior mortgage or deed of trust on the Property, (J) (i) if such Home Loan is an FHA Loan for which an appraisal is required pursuant to the applicable regulations, an original or a copy of an appraisal of the Property as of the time of origination of such FHA Loan or (ii) if such Home Loan is a Non-FHA Loan and secured by a Mortgage, (a) if the original principal balance is between $35,001 and $40,000, (1) evidence that the borrower has a FICO Score of at least 640, a debt to income ratio no greater than 45%, and disposable income of at least $1,500, or (2) (I) a copy of the HUD-1 Closing Statement indicating the sale price, or (II) an Uniform Residential Appraisal Report, or (III) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (IV) a tax assessment, or (V) a broker's price opinion; (b) if the original principal balance is between $40,001 and $50,000, (1) a copy of the HUD-1 Closing Statement indicating the sale price, or (2) an Uniform Residential Appraisal Report, or (3) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (4) a tax assessment, or (5) a broker's price opinion; or (c) if the original principal balance exceeds $50,000, a full Uniform Residential Appraisal Report prepared by a national appraisal firm, (K) an original or a copy of a title search as of the time of origination with respect to the Property, and (L) if such Home Loan is an FHA Loan, any other documents required for the submission of a claim with respect to such FHA Loan to the FHA. (c) Mego, at the direction of the Depositor, concurrently with the execution and delivery hereof, has delivered to the Indenture Trustee cash in an amount equal to (i) the accrued annual FHA premium due on each FHA Loan to the applicable Cut-Off Date, and (ii) the amount of FHA premium collected in respect of the Invoiced Loans after the applicable Cut-Off Date. The Indenture Trustee shall deposit the amount referred to in clause (ii) of the previous sentence into the FHA Premium Account and shall deposit the amount referred to in clause (i) of the previous sentence into the Note Distribution Account. (d) The Indenture Trustee shall cause the Custodian to take and maintain continuous physical possession of the Indenture Trustee's Home Loan Files in the State of Minnesota, and in connection therewith, shall act solely as agent for the holders of the Securities and the Securities Insurer in accordance with the terms hereof and not as agent for Mego or any other party. (e) In addition to the documents delivered to the Indenture Trustee pursuant to Section 2.01, on or prior to the Closing Date, the Guaranty Policy will be delivered to the Indenture Trustee for the benefit of the Holders of the Securities (other than the Residual Certificateholders). 33 38 (f) Within 60 days of the Closing Date, Mego, at its own expense, shall cause the Indenture Trustee to record each Assignment of Mortgage (which may be a blanket assignment if permitted by applicable law) in the appropriate real property or other records; provided, however, the Indenture Trustee need not cause to be recorded any such Assignment of Mortgage which relates to a Mortgage Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by Mego (at Mego's expense) to the Indenture Trustee, the Securities Insurer and the Rating Agencies, the recordation of such Assignment of Mortgage is not necessary to protect the Indenture Trustee's interest in the related Mortgage Loan; provided further, however, notwithstanding the delivery of any Opinion of Counsel, each Assignment of Mortgage shall be recorded (at Mego's expense) upon the earliest to occur of (i) direction by the Securities Insurer, (ii) the occurrence of an event of default under the Transaction Documents, or (iii) any bankruptcy, insolvency or foreclosure with respect to the related Mortgagor. With respect to any Assignment of Mortgage as to which the related recording information is unavailable within 60 days following the Closing Date, such Assignment of Mortgage shall be submitted for recording within 30 days after receipt of such information but in no event later than one year after the Closing Date. The Indenture Trustee shall be required to retain a copy of each Assignment of Mortgage submitted for recording. In the event that any such Assignment of Mortgage is lost or returned unrecorded because of a defect therein, Mego shall promptly prepare a substitute Assignment of Mortgage or cure such defect, as the case may be, and thereafter the Indenture Trustee shall be required to submit each such Assignment of Mortgage Loan for recording. Section 2.06 Acceptance by Indenture Trustee of the Home Loans; Certain Substitutions; Initial Certification by Custodian. (a) The Indenture Trustee agrees to cause the Custodian to execute and deliver on the Closing Date an acknowledgment of receipt of the Indenture Trustee's Home Loan File for each Home Loan. The Indenture Trustee declares that it will cause the Custodian to hold such documents and any amendments, replacements or supplements thereto, as well as any other assets included in the Trust Estate and delivered to the Custodian in trust, upon and subject to the conditions set forth herein for the benefit of the Securityholders and the Securities Insurer in good faith and without notice of any adverse claims or liens. The Indenture Trustee agrees, for the benefit of the Securityholders and the Securities Insurer, to cause the Custodian to review each Indenture Trustee's Home Loan File within 45 days after the Closing Date (or, with respect to any Qualified Substitute Home Loan, within 45 days after the conveyance of the related Home Loan to the Trust) and to cause the Custodian to deliver to the Seller, the Depositor, the Indenture Trustee, the Issuer, the Securities Insurer and the Master Servicer a certification to the effect that, as to each Home Loan listed in the Home Loan Schedule (other than any Home Loan paid in full or any Home Loan specifically identified in such certification as not covered by such certification), (i) all documents required to be delivered to the Indenture Trustee pursuant to this Agreement are in its possession or in the possession of the Custodian on its behalf (other than as expressly permitted in Section 2.05), (ii) all documents delivered by the Depositor and the Seller to the Custodian pursuant to Section 2.05 have been reviewed by the Custodian and have not been mutilated or damaged and appear regular on their face (handwritten additions, changes 34 39 or corrections shall not constitute irregularities if initialed by the Obligor) and relate to such Home Loan, (iii) based on the examination of the Custodian on behalf of the Indenture Trustee, and only as to the foregoing documents, the information set forth on the Home Loan Schedule accurately reflects the information set forth in the Indenture Trustee's Home Loan File and (iv) each Debt Instrument has been endorsed as provided in Section 2.05. Neither the Issuer nor the Custodian shall be under any duty or obligation (i) to inspect, review or examine any such documents, instruments, certificates or other papers to determine that they are genuine, enforceable, or appropriate for the represented purpose or that they are other than what they purport to be on their face or (ii) to determine whether any Indenture Trustee's Home Loan File should include any of the documents specified in Section 2.05(a)(v). (b) The Servicer's Home Loan File shall be held in the custody of Mego for the benefit of, and as agent for, the Securityholders and the Indenture Trustee as the owner thereof and the Securities Insurer. It is intended that by Mego's agreement pursuant to this Section 2.06(b) the Indenture Trustee shall be deemed to have possession of the Servicer's Home Loan Files for purposes of Section 9-305 of the Uniform Commercial Code of the State in which such documents or instruments are located. Mego shall promptly report to the Indenture Trustee and the Securities Insurer any failure by it to hold the Servicer's Home Loan File as herein provided and shall promptly take appropriate action to remedy any such failure. In acting as custodian of such documents and instruments, Mego agrees not to assert any legal or beneficial ownership interest in the Home Loans or such documents or instruments. Mego agrees to indemnify the Securityholders, the Securities Insurer and the Indenture Trustee for any and all liabilities, obligations, losses, damages, payments, costs, or expenses of any kind whatsoever which may be imposed on, incurred by or asserted against the Securityholders, the Securities Insurer or the Indenture Trustee as the result of any act or omission by Mego relating to the maintenance and custody of such documents or instruments which have been delivered to Mego; provided, however, that Mego will not be liable for any portion of any such amount resulting from the negligence or misconduct of any Securityholder, the Securities Insurer or the Indenture Trustee and provided, further, that Mego will not be liable for any portion of any such amount resulting from Mego's compliance with any instructions or directions consistent with this Agreement issued to Mego by the Indenture Trustee. The Indenture Trustee shall have no duty to monitor or otherwise oversee Mego's performance as custodian hereunder. (c) Upon determination by the Master Servicer, the Securities Insurer, the Depositor, Mego or the Indenture Trustee that any document constituting a part of any Home Loan File was not delivered to the Indenture Trustee or, with respect to any document constituting the Servicer's Home Loan File, to Mego, as custodian for the Indenture Trustee, the Securities Insurer and Securityholders, by the time required hereby (which in the case of (A) a failure to deliver a recorded mortgage or recorded assignment pursuant to Section 2.05(a)(ii) or (a)(iv) (only under the circumstances in which a delay is caused by the public recording office and an Officer's Certificate is required to be provided thereunder) shall be the 20 month anniversary of the Closing Date, (B) failure to deliver a completion certificate or inspection report pursuant to Section 2.05(b)(H)(i) shall be the 14 month anniversary of the Closing Date (C) a failure to deliver an inspection report pursuant to Section 2.05(b)(H)(ii) shall be the 12 month anniversary 35 40 of the Closing Date, (D) a failure to deliver each other document constituting a part of any Indenture Trustee's Home Loan File shall be the Closing Date and (E) a failure to deliver each document (other than those described in clause (B) above) specified in Section 2.05(b) shall be 45 Business Days after the Closing Date) to be so delivered or was defective in any material respect when delivered to the Indenture Trustee, the party identifying any of the foregoing shall give prompt written notice to the other parties and the Securities Insurer. Nothing contained herein shall require the Indenture Trustee to undertake any independent investigation or to make any review of any Home Loan File other than as provided for in this Section 2.06. Mego, upon receipt of such notice, shall comply with the cure, substitution and repurchase provisions of Section 3.05 hereof. 36 41 ARTICLE III. REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Depositor. The Depositor hereby represents, warrants and covenants with and to the Issuer, and the Indenture Trustee, on behalf of the Securityholders, and the Master Servicer, as of the Closing Date: (a) The Depositor is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has all licenses necessary to carry on its business as now being conducted. The Depositor has the power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Depositor and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action of the Depositor; this Agreement evidences the valid, binding and enforceable obligation of the Depositor; and all requisite action has been taken by the Depositor to make this Agreement valid, binding and enforceable upon the Depositor in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other, similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (b) The consummation of the transactions contemplated by this Agreement will not result in (i) the breach of any terms or provisions of the Articles of Incorporation or Bylaws of the Depositor, (ii) the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other material instrument to which the Depositor, or its property is subject, or (iii) the violation of any law, rule, regulation, order, judgment or decree to which the Depositor or its respective property is subject; (c) The Depositor is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or otherwise) or operations of the Depositor or its properties or might have consequences that would materially and adversely affect its performance hereunder. Section 3.02 Representations, Warranties and Covenants of the Mater Servicer. The Master Servicer hereby represents, warrants and covenants with and to the Depositor, the Issuer, Mego, the Indenture Trustee, the Securities Insurer and the Securityholders as of the Closing Date: 37 42 (a) The Master Servicer is a national banking association duly organized and validly existing under the laws of the United States of America, with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted; (b) The Master Servicer has the full power and authority to execute, deliver and perform, and to enter into and consummate all transactions contemplated by this Agreement and each other Transaction Document to which it is a party, has duly authorized the execution, delivery and performance of this Agreement and each other Transaction Document to which it is a party, has duly executed and delivered this Agreement and each other Transaction Document to which it is a party, and this Agreement and each other Transaction Document to which it is a party, when duly authorized, executed and delivered by the other parties thereto, will constitute a legal, valid and binding obligation of the Master Servicer, enforceable against it in accordance with its terms; (c) Neither the execution and delivery of this Agreement or any other Transaction Document to which the Master Servicer is a party, the consummation of the transactions required of the Master Servicer herein or therein, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any other Transaction Document to which the Master Servicer is a party will conflict with or result in a breach of any of the terms, conditions or provisions of the Master Servicer's charter or bylaws or any legal restriction or any material agreement or instrument to which the Master Servicer is now a party or by which it is bound, or which would adversely affect the administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Master Servicer or its property is subject; (d) The Master Servicer is not in default, and the execution and delivery of this Agreement and each other Transaction Document to which it is a party and its performance of and compliance with the terms hereof and thereof will not constitute a violation of, any law, any order or decree of any court, or any order, regulation or demand of any federal, state or local governmental or regulatory authority; (e) No action, suit or other proceeding or investigation is pending or, to the Master Servicer's knowledge, threatened before any court or any federal, state or local governmental or regulatory authority (A) asserting the invalidity of this Agreement or any other Transaction Document to which the Master Servicer is a party, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which the Master Servicer is a party, or (C) seeking any determination or ruling that would materially and adversely affect the ability of the Master Servicer to perform its obligations under this Agreement or any other Transaction Document to which the Master Servicer is a party (including any threatened or pending action, suit, proceeding or investigation which might result in the suspension, revocation or modification of the Contract of Insurance); 38 43 (f) No consent, approval, authorization or order of, registration or filing with or notice to, any court or any federal, state or local government or regulatory authority is required for the execution, delivery and performance by the Master Servicer of this Agreement or any other Transaction Document to which the Master Servicer is a party (other than those that have been obtained or will be obtained prior to the Closing Date); (g) Neither this Agreement nor any other Transaction Document to which the Master Servicer is a party nor any statement, report or other document furnished or to be furnished by the Master Servicer pursuant to this Agreement or any other Transaction Document to which the Master Servicer is a party or in connection with the transactions contemplated hereby and thereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading; (h) The statements contained in the section of the Prospectus Supplement entitled "The Master Servicer" which describe the Master Servicer are true and correct in all material respects, and such section of the Prospectus Supplement does not contain any untrue statement of a material fact with respect to the Master Servicer and does not omit to state a material fact necessary to make the statements contained therein with respect to the Master Servicer not misleading; (i) The Master Servicer is solvent, and the Master Servicer will not be rendered insolvent as a result of the performance of its obligations pursuant to this Agreement and any other Transaction Document to which the Master Servicer is a party; (j) The Servicing Agreement conforms to the requirements for a Servicing Agreement contained in this Agreement; (k) Each FHA Loan will be serviced by the Master Servicer and the Servicer in compliance with Title I and all other applicable laws; (l) The Master Servicer, or an affiliate thereof that has been previously approved by the Securities Insurer, the primary business of which is the servicing of home loans such as the Home Loans, is an Eligible Servicer, and the Master Servicer or such affiliate possesses all state and federal licenses necessary for servicing the Home Loans in accordance with this Agreement; (m) The Master Servicer has not waived any default, breach, violation or event of acceleration existing under any Debt Instrument or the related Mortgage; (n) The Master Servicer will cause to be performed any and all acts required to be performed by the Master Servicer or Servicer to preserve the rights and remedies of the Trust and the Indenture Trustee in any Insurance Policies applicable to the Home Loans or with respect to any FHA Loan, any Insurance Policy required to be maintained pursuant to Title I, including, without limitation, in each case, any necessary notifications of insurers, assignments of policies 39 44 or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Trust and the Indenture Trustee; (o) The Master Servicer shall comply with, and shall service, or cause to be serviced, each Home Loan, in accordance with all applicable laws, and, in particular, in accordance with any applicable provisions of the National Housing Act, as amended and supplemented, all rules and regulations issued thereunder, and all administrative publications published pursuant thereto including, in the case of the FHA Loans, all FHA requirements of FHA Title I loans; and (p) The Master Servicer agrees that, so long as it shall continue to serve in the capacity contemplated under the terms of this Agreement, it shall remain in good standing under the laws governing its creation and existence and qualified under the laws of each state in which it is necessary to perform its obligations under this Agreement or in which the nature of its business requires such qualification, it shall maintain or cause an affiliate previously approved of by the Securities Insurer to maintain all licenses, permits and other approvals required by any law or regulations, including, without limitation Title I, as may be necessary to perform its obligations under this Agreement and to retain all rights to service the Loans, and it shall not dissolve or otherwise dispose of all or substantially all of its assets. It is understood and agreed that the representations and warranties set forth in this Section 3.02 shall survive the issuance and delivery of the Securities and shall be continuing as long as any Security shall be outstanding or this Agreement has not been terminated. Section 3.03 Representations and Warranties of Mego. (a) The Seller hereby represents and warrants to the Depositor, the Issuer, the Indenture Trustee, the Master Servicer, the Securities Insurer and the Securityholders, that as of the Closing Date: (i) Mego is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Mego is duly qualified to do business, is in good standing and has obtained all necessary licenses, permits, charters, registrations and approvals (together, "approvals") necessary for the conduct of its business as currently conducted and the performance of its obligations under the Transaction Documents, in each jurisdiction in which the failure to be so qualified or to obtain such approvals would render any Transaction Document unenforceable in any respect or would have a material adverse effect upon the Transaction; (ii) Mego has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Agreement and each other Transaction Document to which it is a party; has duly authorized the execution, delivery and performance of this Agreement and each other Transaction Document to which it is a party; has duly executed and delivered this Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and 40 45 delivered by the other parties hereto, this Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of Mego enforceable against it in accordance with its terms, except as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity); (iii) Neither the execution and delivery of this Agreement or any of the other Transaction Documents to which Mego is a party, the consummation of the transactions required of it herein or under any other Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any of the other Transaction Documents will conflict with or result in a breach of any of the terms, conditions or provisions of Mego's charter or by-laws or any legal restriction or any material agreement or instrument to which Mego is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which Mego or its respective property is subject; (iv) There is no action, suit, proceeding, investigation or litigation pending against Mego or, to its knowledge, threatened, which, if determined adversely to Mego, would materially adversely affect the sale of the Loans, the issuance of the Certificates, the execution, delivery or enforceability of this Agreement or any other Transaction Document, or which would have a material adverse affect on the financial condition of Mego; (v) No consent, approval, authorization or order of any court or governmental agency or body is required for: (a) the execution, delivery and performance by Mego of, or compliance by Mego with, this Agreement, (b) the transfer of all FHA insurance reserves relating to the FHA Loans to the Contract of Insurance Holder, (c) the issuance of the Certificates, (d) the sale of the Home Loans under the Home Loan Purchase Agreement or (e) the consummation of the transactions required of it by this Agreement, except: (A) such as shall have been obtained before the Closing Date, (B) the transfer of the FHA insurance reserves by the FHA to the Contract of Insurance Holder with respect to the FHA Loans as to which an FHA case number has not been assigned as of the Closing Date, and (C) such as may be required under state securities or "Blue Sky" laws in connection with the sale of the Notes by the Underwriter; (vi) Mego is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of Mego or its properties or might have consequences that would materially and adversely affect its performance hereunder; 41 46 (vii) Mego received fair consideration and reasonably equivalent value in exchange for the sale of the Home Loans to the Depositor; (viii) HUD has approved in writing the transfer to the Contract of Insurance Holder of the FHA Reserve Amount relating to each FHA Loan and all actions have been taken by Mego (other than the filing of the Transfer of Note Report Form 27030 with HUD) and all required consents have been obtained (other than approval upon HUD's receipt of such Transfer of Note Report), in either case, necessary to effect transfer to the Contract of Insurance Holder of the FHA Reserve Amount relating to each FHA Loan (except for FHA Loans with respect to which a case number has not been assigned as of the Closing Date). The FHA Reserve Amounts with respect to the FHA Loans transferred to the Contract of Insurance Holder both prior to and following the transfer of the FHA Loans to the Co-Owner Trustee and Owner Trustee will be available to satisfy claims with respect to such FHA Loans. As of the Cut-off Date, the amount in the FHA Insurance Coverage Reserve Account, together with all amounts to be requested for transfer with respect to the FHA Loans, will equal $19,440,100 less approximately $4,252,273 representing claims paid, filed or pending filing as of the Cutoff Date against the Contract of Insurance. The amount to be requested for transfer with respect to the FHA Loans is $273,578, which is the sum of approximately 10% of the aggregate of the Principal Balances of the FHA Loans as of the Cut-Off Date; (ix) Mego is a non-supervised lender in good standing with HUD under 24 CFR Section202.5 and is authorized to originate, purchase, hold, service and/or sell loans insured under 24 CFR Part 201 pursuant to a valid contract of insurance, Number 70497-00003; (x) Mego has transferred the Home Loans without any intent to hinder, delay or defraud any of its creditors; (b) Mego hereby agrees for the benefit of the Depositor, the Issuer, the Indenture Trustee, the Securities Insurer and the Securityholders that the failure of any of the following representations and warranties to be true and correct as to any Home Loan (and the related Debt Instrument and Mortgage, if applicable) as of the Cut-Off Date for such Home Loan, or such later date if so specified in such representation and warranty, gives rise to the remedy specified in Section 3.05; (i) The information pertaining to each Home Loan set forth in the Home Loan Schedule was true and correct in all material respects as of the Cut-Off Date; (ii) As of the Closing Date at least 99.44% of the Home Loans (by aggregate Initial Pool Principal Balance) are between 0 and 30 days past due and not more than 0.56% of the Home Loans (by aggregate Initial Principal Balance) are between 31 and 60 days past due (without giving effect to any grace period); Mego has not advanced funds, induced, solicited or knowingly received any advance of funds from a 42 47 party other than the Obligor, directly or indirectly, for the payment of any amount required by the Home Loan; (iii) The terms of the Debt Instrument and any related Mortgage contain the entire agreement of the parties and have not been impaired, waived, altered or modified in any respect, except by written instruments reflected in the related File and recorded, if necessary, to maintain the lien priority of the any related Mortgage; if such Home Loan is an FHA Loan the substance of each such waiver, alteration and modification has been approved by the FHA to the extent required under Title I; no other instrument of waiver, alteration, expansion or modification has been executed, and no Obligor has been released, in whole or in part, except in connection with an assumption agreement which assumption agreement is part of the related Home Loan File and the payment terms of which are reflected in the related Home Loan Schedule and; if such Home Loan is an FHA Loan, has been approved by the FHA to the extent required under Title I; (iv) The Debt Instrument and any related Mortgage are not subject to any set-off, claims, counterclaim or defense and will not have such in the future with respect to the goods and services provided under the Debt Instrument, including the defense of usury or of fraud in the inducement, nor will the operation of any of the terms of the Debt Instrument and any related Mortgage, or the exercise of any right thereunder, render such Debt Instrument or Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (v) Any and all requirements of any federal, state or local law applicable to the Home Loan (including any law applicable to the origination, servicing and collection practices with respect thereto) have been complied with; (vi) No Debt Instrument or Mortgage has been satisfied, cancelled, rescinded or subordinated, in whole or part; and Mego has not waived the performance by the Obligor of any action, if the Obligor's failure to perform such action would cause the Debt Instrument or Mortgage Loan to be in default, except as otherwise permitted by clause (iii); and with respect to a Mortgage Loan, the related Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such satisfaction, subordination, release, cancellation or rescission; (vii) Each related Mortgage is a valid, subsisting and enforceable lien on the related Property, including the land and all buildings on the Property; (viii) The Debt Instrument and any related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance 43 48 with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights in general and by general principles of equity; (ix) To Mego's best knowledge, all parties to the Debt Instrument and any related Mortgage had legal capacity at the time to enter into the Home Loan and to execute and deliver the Debt Instrument and any related Mortgage, and the Debt Instrument and any related Mortgage have been duly and properly executed by such parties; (x) As of the applicable Cut-Off Date, the proceeds of the Home Loan have been fully disbursed and there is no requirement for future advances thereunder, and any and all applicable requirements set forth in the Home Loan documents have been complied with; the Obligor is not entitled to any refund of any amounts paid or due under the Debt Instrument or any related Mortgage; (xi) Immediately prior to the sale, transfer and assignment to the Depositor, Mego will have good and indefeasible legal title to the Home Loan, the related Debt Instrument and any related Mortgage and the full right to transfer such Home Loan, the related Debt Instrument and any related Mortgage, and Mego will have been the sole owner thereof, subject to no liens, pledges, charges, mortgages, encumbrances or rights of others, except for such liens as will be released simultaneously with the transfer and assignment of the Home Loans to the Depositor (and the Home Loan File will contain no evidence inconsistent with the foregoing); and immediately upon the sale, transfer and assignment contemplated by the Home Loan Purchase Agreement, the Depositor will hold good title to, and be the sole owner of each Home Loan, the related Debt Instrument and any related Mortgage, free of all liens, pledges, charges, mortgages, encumbrances or rights of others; (xii) Except for those Home Loans referred to in Section 3.03(b)(ii) above that are delinquent as of the Closing Date, there is no default, breach, violation or event of acceleration existing under the Home Loan, the related Debt Instrument and any related Mortgage and there is no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration and neither Mego nor its predecessors have waived any default, breach, violation or event of acceleration; (xiii) The Debt Instrument and any related Mortgage contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Property of the benefits of the security provided thereby, including, (A) in the case of any Mortgage designated as a deed of trust, by trustee's sale, and (B) otherwise by judicial foreclosure; 44 49 (xiv) Each FHA Loan is an FHA Title I property improvement loan (as defined in 24 C.F.R. Section 201.2) underwritten and originated by Mego in accordance with FHA requirements for the Title I Loan program as set forth in 24 C.F.R. Parts 201 and 202, and Mego has transmitted a loan report with respect to such FHA Loan to FHA so that such FHA Loan will be included in the Title I program; (xv) Each Home Loan is a fixed rate loan; the Debt Instrument shall mature within not more than (a) for an FHA Loan, 20 years and 32 days and (b) for a Non-FHA Loan, 25 years, from the date of origination of the Home Loan; the Debt Instrument is payable in substantially equal Monthly Payments, with interest payable in arrears, and requires a Monthly Payment which is sufficient to fully amortize the original principal balance over the original term and to pay interest at the related Home Loan Interest Rate; interest on each Home Loan is calculated on the basis of a 360 day year consisting of twelve 30-day months, and the Debt Instrument does not provide for any extension of the original term; (xvi) The related Debt Instrument is not and has not been secured by any collateral except, in the case of a Mortgage Loan, the lien of the corresponding Mortgage; (xvii) With respect to any Mortgage Loan, if the related Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, or a valid substitution of trustee has been recorded, and no extraordinary fees or expenses are or will become payable to the trustee under the deed of trust, except in connection with default proceedings and a trustee's sale after default by the Obligor; (xviii) With respect to any Mortgage Loan, Mego has no knowledge of any circumstances or conditions not reflected in the representations set forth herein, or in the Home Loan Schedule, or in the related Home Loan File with respect to the related Mortgage, the related Property or the Obligor which could reasonably be expected to materially and adversely affect the value of the related Property, or the marketability of the Mortgage Loan or to cause the Mortgage Loan to become delinquent or otherwise in default; (xix) Assuming no material change to the applicable law or regulations in effect as of the Closing Date, after the consummation of the transactions contemplated by this Agreement, the Master Servicer on behalf of the Trust and the Indenture Trustee will have the ability to foreclose or otherwise realize upon a Property, if the Home Loan is a Mortgage Loan, or to enforce the provisions of the related Home Loan against the Obligor thereunder, if the foreclosure upon any such Property or enforcement of the provisions of the related Home Loan against the Obligor are undertaken as set forth in Section 4.12; 45 50 (xx) With respect to any FHA Loan that is a Mortgage Loan, the improvements to the Property relating to such FHA Loan, have been or shall be completed and inspected by the Servicer within the time period and to the extent required under the applicable Title I regulations, and evidence of such inspection shall be placed in the Servicer's Home Loan File or, if not, a letter of non-compliance shall be delivered to HUD (with a copy placed in the Servicer's Home Loan File) promptly upon the completion of such inspection; (xxi) Each FHA Loan has been originated in compliance with the provisions of 24 C.F.R. Section 201.20, and, if required by Title I, the market value of the any related Property has been ascertained in accordance with the procedures established by HUD; (xxii) There exists a Home Loan File relating to each Home Loan and such Home Loan File contains all of the original or certified documentation listed in Section 2.05 for such Home Loan, subject to applicable grace periods set forth in Section 2.06(c). Each Indenture Trustee's Home Loan File has been delivered to the Custodian and each Servicer's Home Loan File is being held in trust by Mego for the benefit of, and as agent for, the Securityholders, the Securities Insurer and the Indenture Trustee as the owner thereof. Each document included in the Home Loan File which is required to be executed by the Obligor has been executed by the Obligor in the appropriate places. With respect to each Mortgage Loan, the related Assignment of Mortgage to the Indenture Trustee is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Property is located. All blanks on any form required to be completed have been so completed; (xxiii) Each FHA Loan is in respect of a home improvement loan or a retail installment sale contract, and each Property is improved by a residential dwelling and is not a Home Loan in respect of a manufactured home or mobile home or the land on which a manufactured home or mobile home has been placed; (xxiv) Each FHA Loan was originated by Mego in accordance with the applicable underwriting criteria established by the FHA and HUD; each Non-FHA Loan was originated by Mego in accordance with Mego's "Express 35/Swift 60 Loan Program", "Debt Consolidation 125 Loan Program", and "Renovator 125 Loan Program" underwriting guidelines, as applicable, attached hereto as Exhibit D; (xxv) Any Property securing an FHA Loan is covered by any insurance required by Title I; if the Property securing any Mortgage Loan is in an area identified by the Federal Emergency Management Agency ("FEMA") as having special flood hazards, unless the community in which the area is situated is participating in the National Flood Insurance Program and the regulations thereunder or less than a year has passed since FEMA notification regarding such hazards, a flood insurance policy is in effect with respect to such Property with a generally acceptable carrier which complies with Section 46 51 102(a) of the Flood Disaster Protection Act of 1973; all improvements upon each Property securing a Non-FHA Loan are insured by a generally acceptable insurer against loss by fire hazards of extended coverage and such other hazards as are customary in the area where the Property is located pursuant to insurance policies conforming to the requirements of the Agreement; all such policies contain a standard mortgage clause naming Mego, its successors and assigns, as loss payee; (xxvi) All costs, fees and expenses incurred in originating and closing the Home Loan and in recording any related Mortgage were paid and the Obligor is not entitled to any refund of any amounts, paid or due to the Obligee pursuant to the Debt Instrument or any related Mortgage; (xxvii) Except for the related FHA Premium Amount, if applicable, there is no obligation on the part of Mego or any other party other than the Obligor to make payments with respect to the Home Loan; (xxviii) At the time of origination of the Home Loan, each related prior lien, if any, was not 30 or more days delinquent; (xxix) All parties which have had any interest in the Home Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Property is located, and (ii) (A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan associations or national banks having principal offices in such state, or (D) not doing business in such state; (xxx) With respect to each Mortgage Loan, the related Mortgage contains an enforceable provision requiring the consent of the Mortgagee to assumption of the related Mortgage Loan upon sale of the Property; (xxxi) With respect to any Mortgage Loan, there is no homestead or other exemption available to the Mortgagor which would materially interfere with the right to sell the related Property at a trustee's sale or the right to foreclose the Mortgage; no relief has been requested or allowed to the Mortgagor under the Civil Relief Act; (xxxii) Subject to Section 3.05, each FHA Loan has been submitted to the FHA for insurance pursuant to the FHA Title I loan program and each FHA Loan has been or will be assigned a case number by the FHA for the FHA Title I loan program; (xxxiii) Subject to Section 3.05, the FHA Reserve Amount with respect to each FHA Loan, has been or will be transferred to the FHA Insurance Coverage Reserve Account; 47 52 (xxxiv) The related Home Loan File for each Home Loan that is a Mortgage Loan contains a title document with respect to such Home Loan reflecting that title to the related Property is vested at least 50% in the Obligor under such Home Loan; (xxxv) Each Property (including each residential dwelling improvement thereon) is free of damage which materially and adversely affects the value thereof and, if the related Home Loan is an FHA Loan, impairs the ability to insure the related Home Loan under the Title I program; (xxxvi) Each Home Loan was originated in compliance with all applicable laws and, to the best of Mego's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith or, if the related loan is an FHA Loan, in the application for any insurance required by Title I in relation to such FHA Loan; (xxxvii) Each Home Loan has been serviced in accordance with all applicable laws and, to the best of Mego's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith; (xxxviii) The transfer, assignment and conveyance of the Debt Instruments and the Mortgages by Mego to the Depositor were not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (xxxix) Any Home Loan originated in the State of Texas, was originated pursuant to either Chapter 3 or Chapter 6 of the Texas Consumer Credit Code; (xl) As of the applicable Cut-Off Date, no Obligor is a debtor under proceedings under the Bankruptcy Code, and no such Obligor has defaulted in payments on a Home Loan after the filing of such bankruptcy case, whether under a plan or reorganization or otherwise; (xli) Mego has not advanced funds, or induced, solicited or knowingly received any advance of loan payments from a party other than, with respect to a Mortgage Loan, the owner of the Property subject to the Mortgage; (xlii) Mego originated the Home Loans through its network of dealers and correspondents; (xliii) Each Home Loan conforms, and all such Home Loans in the aggregate conform, to the description thereof set forth in the Prospectus Supplement; (xliv) With respect to FHA Loans secured by a Mortgage, the representations and warranties of the Mortgagor in each mortgage loan application and in connection with the related FHA Loan are true and correct in all material respects (and it shall be deemed that a breach is material only if a claim for payment made to the FHA 48 53 under the Contract of Insurance in respect of such FHA Loan is a Rejected Claim as a result of such breach); (xlv) Each Home Loan either complies with the Home Ownership and Equity Protection Act of 1994 or is not subject to such act; (xlvi) Mego has caused to be performed or shall cause to be performed within 15 Business Days of the Closing Date any and all acts required to preserve the rights and remedies of the Trust and the Indenture Trustee in any insurance policies applicable to each Home Loan or, if such Home Loan is an FHA Loan, only if required by Title I, including, without limitation, any necessary notifications of insurers, assignments of policies or interests therein, and establishment of coinsured, joint loss payee and mortgagee rights in favor of the Indenture Trustee; (xlvii) With respect to any Mortgage Loan, to Mego's best knowledge, there exists no violation of any environmental law (either local, state or federal), rule or regulation in respect of the Property which violation has or could have a material adverse effect on the market value of such Property. Mego has no knowledge of any pending action or proceeding directly involving the related Property in which compliance with any environmental law, rule or regulation is in issue; and, to Mego's best knowledge, nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to the use and enjoyment of such Property; (xlviii) Not more than 0.089% of the FHA Loans (by aggregate Initial Principal Balance) and none of the Non-FHA Loans are secured by Mortgages on nonowner occupied Mortgaged Properties; (xlix) On the Closing Date, 55% or more (by aggregate Principal Balance) of the Home Loans do not constitute "real estate mortgages" for the purpose of Treasury Regulation Section301.7701 under the Code. For this purpose a Home Loan does not constitute a "real estate mortgage" if: (i) The Home Loan is not secured by an interest in real property, or (ii) The Home Loan is not an "obligation principally secured by an interest in real property." For this purpose an "obligation is principally secured by an interest in real property" if it satisfies either test set out in paragraph (1) or paragraph (2) below. (1) The 80-percent test. An obligation is principally secured by an interest in real property if the fair market value of the interest in real property securing the obligation 49 54 (A) was at least equal to 80 percent of the adjusted issue price of the obligation at the time the obligation was originated (or, if later, the time the obligation was significantly modified); or (B) is at least equal to 80 percent of the adjusted issue price of the obligation on the Closing Date. For purposes of this paragraph (1), the fair market value of the real property interest must be first reduced by the amount of any lien on the real property interest that is senior to the obligation being tested, and must be further reduced by a proportionate amount of any lien that is in parity with the obligation being tested, in each case before the percentages set forth in (1)(A) and (1)(B) are determined. The adjusted issue price of an obligation is its issue price plus the amount of accrued original issue discount, if any, as of the date of determination. (2) Alternative test. An obligation is principally secured by an interest in real property if substantially all of the proceeds of the obligation were used to acquire or to improve or protect an interest in real property that, at the origination date, is the only security for the obligation. For purposes of this test, loan guarantees made by the United States or any state (or any political subdivision, agency, or instrumentality of the United States or of any state), or other third party credit enhancement are not viewed as additional security for a loan. An obligation is not considered to be secured by property other than real property solely because the obligor is personally liable on the obligation. For this purpose only, substantially all of the proceeds of the obligations means 66 2/3% or more of the gross proceeds. (l) No Home Loan was selected from Mego's assets in a manner which would cause it to be adversely selected as to credit risk from the pool of home loans owned by Mego. The parties to this Agreement hereby acknowledge that Mego is not selling approximately $18,000,000 of secured Title I loans within its inventory to the Trust; (li) With respect to each Home Loan that is not a first mortgage loan, either (i) no consent for the Home Loan is required by the holder of the related prior lien or (ii) such consent has been obtained and has been delivered to the Indenture Trustee; (lii) Each Home Loan is either a retail installment contract for goods or services, home improvement loan for goods or services, debt consolidation loan or a home equity loan. All Home Loans that are not debt consolidation loans are either retail installment sale contracts for goods and services or home improvement loans for goods 50 55 and services that are either "consumer credit contracts" or "purchase money loans" as such terms are defined in 16 C.F.R. Part 433.1; and (liii) Each Debt Instrument is comprised of an original promissory note and each promissory note constitutes an "instrument" or "chattel paper" for purposes of Article 9 of the UCC. Each Debt Instrument has been delivered to the Custodian. Section 3.04 [Reserved]. Section 3.05 Purchase and Substitution. (a) It is understood and agreed that the representations and warranties set forth in Sections 3.03 shall survive the conveyance of the Home Loans to the Issuer, the Grant of the Home Loans to the Indenture Trustee and the delivery of the Securities to the Securityholders and shall be continuing as long as any Security is outstanding. Upon discovery by the Depositor, the Master Servicer, the Seller, the Custodian, the Issuer, the Indenture Trustee, the Securities Insurer or any Securityholder of a breach of any of such representations and warranties which materially and adversely affects the value of the Home Loans or the interest of the Securityholders or the Securities Insurer, or which materially and adversely affects the interests of the Securityholders or the Securities Insurer in the related Home Loan in the case of a representation and warranty relating to a particular Home Loan (notwithstanding that such representation and warranty was made to the Seller's best knowledge), the party discovering such breach shall give prompt written notice to the others. Except with respect to a breach of the representations made by Mego pursuant to Section 3.03(b)(xxxii) and (xxxiii), in the event of a determination in Section 2.06(c) or a breach of a representation and warranty made pursuant to Section 3.03(b) that materially and adversely affects the interests of the Securityholders or the Security Insurer in the Home Loan with respect to which such representation is made or in the Home Loans and a failure within sixty Business Days of discovery or receipt of notice of such failure to effect a cure of the circumstances giving rise to such defect, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding the expiration of such sixty-day period, to repurchase (or substitute for, to the extent permitted by subsection (b) below) the affected Home Loan. The Securities Insurer and the Indenture Trustee on behalf of the Securityholders agree that if an FHA Loan is a Defective Home Loan because a document is not included in the Servicer's Home Loan File as of the 60th Business Day after the discovery or receipt of notice thereof, such defect shall be deemed to be cured if the Indenture Trustee shall have received during the sixty-day period after such date a written statement addressed to it from the Director of HUD Title I Insurance Division that such document would not be required in connection with a claim for FHA Insurance with respect to such FHA Loan. Except as set forth in Section 5 of the Indemnification Agreement, it is understood and agreed that the obligation of Mego to repurchase or substitute any such Home Loan pursuant to this Section shall constitute the sole remedy against it with respect to such breach of the foregoing representations or warranties or the existence of the foregoing conditions. For purposes of calculating Business Days with respect to a Defective Home Loan that is an FHA Loan because a document is not included in the Servicer's Home Loan File in this Section 3.05(a), a Business Day shall not include any day on which the FHA is officially closed for 51 56 reasons other than as specified in the definition of Business Day. With respect to representations and warranties made by Mego pursuant to Section 3.03(b) that are made to Mego's best knowledge, if it is discovered by any of the Depositor, Mego, the Indenture Trustee, the Owner Trustee or the Securities Insurer that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Home Loan, notwithstanding Mego's lack of knowledge, such inaccuracy shall be deemed a breach of the applicable representation and warranty. With respect to a breach of the representations made by Mego pursuant to Section 3.03(b)(xxxii) or (xxxiii) if the FHA has not assigned a case number under the Contract of Insurance to an FHA Loan to indicate that such FHA Loan is eligible for Title I Insurance coverage under the Contract of Insurance on or before the 120th day after the Closing Date, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding such 120th day, to repurchase such FHA Loan. If the FHA Reserve Amount with respect to an FHA Loan has not been transferred to the FHA Insurance Coverage Reserve Account on or before the 150th day after the Closing Date, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding such 150th day, to repurchase such FHA Loan. The Claims Administrator shall give notice in writing to each of the Master Servicer, the Securities Insurer, the Depositor, Mego and the Indenture Trustee, the Owner Trustee of (i) any FHA Loan with respect to which there has not been assigned a case number under the Contract of Insurance on or before the 120th day after the Closing Date and (ii) any FHA Loan that has not been transferred to the FHA Insurance Coverage Reserve Account on or before the 150th day after the Closing Date. For purposes of calculating either 120 or 150 days from the Closing Date in this Section 3.05(a), any day on which the FHA is officially closed for reasons other than such day being a Saturday, Sunday or a day on which banking institutions in Washington, D.C. are authorized or obligated by law, executive order or governmental decree to be closed, shall not be counted in making such calculation. If Mego is required to repurchase any Home Loan on a Monthly Cut-Off Date that is not a Business Day, such repurchase shall be made on the last Business Day preceding such Monthly Cut-Off Date. Any Home Loan required to be purchased or repurchased pursuant to this Section 3.05(a) is referred to as a "Defective Home Loan". (b) Mego shall be obligated to repurchase a Defective Home Loan for the Purchase Price, payable to the Indenture Trustee in cash on the Monthly Cut-Off Date specified in Section 3.05(a) above, for deposit in the Note Distribution Account. Notwithstanding the foregoing, Mego may elect in lieu of the purchase or repurchase of a Defective Home Loan as provided in this Section 3.05, to substitute, as of the Monthly Cut-off Date specified in Section 3.05(a), a Qualified Substitute Home Loan for the Defective Home Loan in accordance with the provisions of this Section 3.05. (c) Mego shall notify the Master Servicer, the Indenture Trustee and the Securities Insurer in writing not less than five Business Days before the related Determination Date which is on or before the date on which Mego would otherwise be required to repurchase such Home 52 57 Loan pursuant to Section 3.05(a) of its intention to effect a substitution under this Section. On such Determination Date (the "Substitution Date"), Mego shall deliver to the Indenture Trustee and the Securities Insurer a list of the Home Loans to be substituted for by such Qualified Substitute Home Loans, and attaching as an exhibit a supplemental Home Loan Schedule (the "Supplemental Loan Schedule") setting forth the same type of information appearing on the Home Loan Schedule and representing as to the accuracy thereof. In connection with any substitution pursuant to this Section 3.05, to the extent that the aggregate Principal Balance of any Qualified Substitute Home Loan or Home Loans is less than the aggregate Principal Balance of the corresponding Home Loan or Home Loans as of the end of the Due Period prior to the Determination Date on which the substitution is being made, Mego shall deposit such difference (a "Substitution Adjustment Amount") to the Note Distribution Account on such date. (d) Concurrently with the satisfaction of the conditions set forth in this Section 3.05 and the Grant of such Qualified Substitute Home Loans to the Indenture Trustee pursuant to Section 3.05(b), Exhibit A to this Agreement shall be deemed to be amended to exclude all Home Loans being replaced by such Qualified Substitute Home Loans and to include the information set forth on the Supplemental Loan Schedule with respect to such Qualified Substitute Home Loans, and all references in this Agreement to Home Loans shall include such Qualified Substitute Home Loans and be deemed to be made on or after the related Substitution Date, as the case may be, as to such Qualified Substitute Home Loans. (e) Notwithstanding the provisions of Section 3.05(a), the Securities Insurer, in its sole discretion, may extend, by not more than 150 days from the date of the notice described in Section 3.05(a), the sixty-day period available, pursuant to Section 3.05(a), to Mego to cure the circumstances giving rise to a defect with respect to any Home Loan described in Section 3.05. (f) With respect to all Defective Home Loans or other Home Loans repurchased by Mego pursuant to this Agreement, upon the deposit of the Purchase Price therefor to the Note Distribution Account, the Indenture Trustee shall assign to Mego, without recourse, representation or warranty, all the Indenture Trustee's right, title and interest in and to such Defective Home Loans or Home Loans, which right, title and interest were conveyed to the Indenture Trustee pursuant to Section 2.01, including, without limitation, the rights to any FHA Insurance reserves attributable to such Home Loans. The Indenture Trustee shall take any actions as shall be reasonably requested by Mego to effect the repurchase of any such Home Loans. (g) The Servicer may, at its option, purchase from the Trust any Defaulted Home Loan or substitute a Qualified Substitute Home Loan for any Defaulted Home Loan, provided, however, that the aggregate of Principal Balances of Defaulted Loans purchased or replaced pursuant to this Section 3.05(g) shall not exceed 10% of the Initial Pool Principal Balance. If the Servicer elects to purchase a Defaulted Loan, the Servicer shall deposit the Purchase Price in the Note Distribution Account on the Monthly Cut-Off Date following the date on which such election is made. Any substitution of a Defaulted Home Loan for a Qualified Substitute Home Loan by the Servicer shall be performed in accordance with the substitution provisions set forth in Section 3.05(c) and Section 3.05(d). 53 58 ARTICLE IV. ADMINISTRATION AND SERVICING OF HOME LOANS; CLAIMS ADMINISTRATION Section 4.01 Servicing Standard. (a) The Master Servicer is hereby authorized to act as agent for the Trust and in such capacity shall manage, service, administer and make collections on the Home Loans, and perform the other actions required by the Master Servicer under this Agreement. In performing its obligations hereunder the Master Servicer shall at all times act in good faith in a commercially reasonable manner in accordance with all requirements of the FHA applicable to the servicing of the FHA Loans and otherwise in accordance with applicable law and the Debt Instruments and Mortgages. The Master Servicer shall at all times service and administer the FHA Loans in accordance with Title I, and shall have full power and authority, acting alone and/or through the Servicer as provided in Section 4.02, subject only to this Agreement, the respective Home Loans, and, in the case of the FHA Loans, the specific requirements and prohibitions of Title I, to do any and all things in connection with such servicing and administration which are consistent with the ordinary practices of prudent mortgage lending institutions and, in the case of the FHA Loans, prudent FHA Title I home improvement loan servicers, but without regard to: (i) any relationship that the Master Servicer, the Servicer or any affiliate of the Master Servicer or any Servicer may have with the related Obligor: (ii) Mego's obligations to repurchase or substitute for a Defective Home Loan pursuant to Section 3.05(b) or any FHA Loans pursuant to Section 4.12(b); (iii) the ownership of any Securities by the Master Servicer or any affiliate of the Master Servicer; (iv) the Master Servicer's obligation to make Interest Advances pursuant to Section 4.08(a), to make Foreclosure Advances pursuant to Section 4.08(b), or repurchase any FHA Loans pursuant to Section 4.12; or (v) the Master Servicer's right to receive compensation for its services as provided in Section 5.01(c)(i)(b). The Master Servicer may take any action hereunder, including exercising any remedy under any Home Loan, retaining counsel in connection with the performance of any of its obligations hereunder and instigating litigation to enforce any obligation of any Obligor, without the consent or approval of the Indenture Trustee or the Securities Insurer, unless any such consent or approval is expressly required hereunder or under applicable law. 54 59 (b) The Indenture Trustee shall cause the Custodian to execute and return to the Master Servicer or the Servicer designated in a written instruction from the Master Servicer to the Indenture Trustee, within 5 days of the Indenture Trustee's receipt any and all documents or instruments necessary to maintain the lien created by any Mortgage on the related Property or any portion thereof, and, within 5 days of request by the Master Servicer or the Servicer therefor a power of attorney in favor of the Servicer with respect to any modification, waiver, or amendment to any document contained in any Home Loan File and 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 Home Loans and with respect to the related Mortgaged Properties prepared and delivered to the Indenture Trustee by the Master Servicer or any Servicer, all in accordance with the terms of this Agreement. (c) The Indenture Trustee shall cause the Custodian to furnish the Master Servicer or Servicer within 5 days of request of a Master Servicing Officer therefor any powers of attorney and other documents necessary and appropriate to carry out its servicing and administrative duties hereunder, including any documents or powers of attorney necessary to foreclose any Home Loan. The forms of any such powers or documents shall be appended to such requests. (d) The Servicer hereby incorporates by reference the representations, warranties and covenants made by it in Section 2.02 of the Servicing Agreement. Section 4.02 Servicing Arrangements. (a) On or prior to the date hereof, the Master Servicer has entered into a Servicing Agreement with respect to all of the Home Loans, in substantially the form of the Form of the Servicing Agreement attached hereto as Exhibit E with Mego, as Servicer. So long as no Securities Insurer Default shall have occurred and be continuing, upon the termination of the Servicing Agreement, the Master Servicer may only appoint or consent to the appointment or succession of a successor Servicer under the Servicing Agreement and may only enter into a substitute servicing agreement which is in form and substance as the Servicing Agreement attached hereto as Exhibit E (which, with the consent of the Securities Insurer, may differ in material respects from the Form of Servicing Agreement attached hereto as Exhibit E) and with a Person acceptable to the Securities Insurer and the Indenture Trustee. So long as no Securities Insurer Default exists, the Master Servicer shall not consent to any material amendment, modification or waiver of the provisions of a Servicing Agreement without the consent of the Securities Insurer and the Indenture Trustee. (b) No provision of this Agreement or the Servicing Agreement shall be deemed to relieve the Master Servicer of any of its duties and obligations to the Indenture Trustee on behalf of Securityholders and the Securities Insurer with respect to the servicing and administration of the Home Loans as provided hereunder; it being understood that the Master Servicer shall be obligated with respect thereto to the same extent and under the same terms and conditions as if it alone were performing all duties and obligations set forth in this Agreement in connection with the collection, servicing and administration of such Home Loans. 55 60 (c) Without limitation of the provisions of Section 4.02(b), the Master Servicer shall (i) review the servicing reports prepared by the Servicer in order to ensure the accuracy thereof, (ii) review the reports submitted by the Servicer to confirm that the Servicer is collecting and appropriately accounting for Obligor payments of premium on FHA Insurance on Invoiced Loans, (iii) otherwise monitor the performance by the Servicer under the Servicing Agreement and notify the Indenture Trustee and the Securities Insurer of any Servicer Termination Event, and (iv) be obligated to ensure that the Servicer deposits Payments into the Collection Account. In the event the Servicer fails to make such deposit, the Master Servicer will deposit such amounts as set forth in Section 5.01(a)(1). (d) The Master Servicer agrees that it shall at all times be prepared (and shall take all steps reasonably required by the Securities Insurer to ensure such preparation), to perform the obligations of the Servicer if the Servicer fails to perform its duties and obligations under the Servicing Agreement. (e) The Servicing Agreement may provide that the Servicer may retain, as additional compensation, prepayment penalties, assumption and processing fees paid by any Obligor and all similar fees customarily associated with the servicing of the Home Loans, including, but not limited to late charges, paid by any Obligor. (f) At the direction of the Securities Insurer, so long as no Securities Insurer Default exists, the Master Servicer shall terminate the Servicer upon the occurrence and continuance of Servicer Termination Event pursuant to the terms of the Servicing Agreement. (g) Mego, as Servicer, shall provide information to the Master Servicer monthly in a mutually agreeable format in order to enable the Master Servicer to independently reconfirm the loan-by-loan reconciliation of the outstanding Principal Balance of each Home Loan included in such information. The Master Servicer shall prepare exception reports, if necessary, showing all Principal Balance differences between the information provided by the Servicer and the confirmations prepared by the Master Servicer and shall furnish such reports to the Indenture Trustee for distribution to the Securities Insurer. If requested by the Securities Insurer, the Servicer shall provide to the Securities Insurer all information provided to the Master Servicer pursuant to this Section 4.02(g). Section 4.03 Servicing Record. (a) The Master Servicer shall establish and maintain books and records for the Home Loans (the "Servicing Record"), in which the Master Servicer shall record: (i) all Payments received or collected by or on behalf of the Master Servicer (through the Servicer or otherwise) or received by the Indenture Trustee in respect of each Home Loan and each Foreclosed Property and (ii) all amounts owing to the Master Servicer in compensation for services rendered by the Master Servicer hereunder or in reimbursement of costs and expenses incurred by the Master Servicer hereunder. In addition, the Master Servicer shall establish and maintain records for the Insurance Record (which shall be part of each Servicing Record) in which the Master Servicer 56 61 shall record all claims made under the Contract of Insurance, all payments received by or on behalf of the Contract of Insurance Holder from the FHA for each such claim and the amount of insurance coverage available in the Insurance Record. (b) Except as otherwise provided herein, amounts received or collected by or on behalf of the Master Servicer or the Indenture Trustee from or on behalf of any Obligor or in respect of any Foreclosed Property or from FHA with respect to a claim made under the Contract of Insurance shall be credited to the Servicing Record: (i) promptly following direct receipt or direct collection by the Master Servicer; (ii) in the case of a Home Loan directly serviced by a Servicer, promptly following deposit of the receipt or collection in the related Collection Account; or (iii) in the case of any amount received directly by the Indenture Trustee, promptly following the Master Servicer's actual knowledge of receipt by the Indenture Trustee pursuant to the notice required by Section 4.12(d) or otherwise; but in any event not later than the Determination Date next following the date of receipt or collection by or on behalf of the Master Servicer (through the Servicer or otherwise) or receipt by the Indenture Trustee. Amounts received or collected by the Master Servicer in connection with the purchase or repurchase of any Home Loan or any Foreclosed Property shall be so recorded on and as of the date of receipt. The Servicing Record shall separately reflect amounts so received or collected by the Master Servicer in each Due Period. All Payments from Obligors received on FHA Loans from or on behalf of an Obligor shall be allocated in accordance with Title I. (c) The Master Servicer shall credit to the Servicing Record relating to each Determination Date, on a Home Loan-by-Home Loan basis, each of the following Payments collected or received by or on behalf of the Master Servicer (through the Servicer or otherwise) or received by the Indenture Trustee in respect of each Home Loan and each Foreclosed Property: (i) all payments on account of principal; (ii) all payments on account of interest; (iii) all proceeds of the purchase or repurchase of any Home Loan pursuant to Section 3.05(a) or, with respect to FHA Loans, Section 4.12(b) and all Substitution Adjustment Amounts; (iv) all amounts paid by or on behalf of the related Obligor in respect of Foreclosure Advances previously advanced by the Master Servicer or the Servicer; 57 62 (v) all revenues received or collected in respect of any Foreclosed Property, including all proceeds of the sale of any Foreclosed Property pursuant to Section 4.13; (vi) all proceeds of the sale of the Home Loans and any Foreclosed Properties pursuant to Section 11.01; (vii) all FHA Insurance Payment Amounts; and (viii) all Insurance Proceeds, any condemnation awards or settlements or any payments made by any related guarantor or third-party credit-support provider and any and all other amounts received in respect of Home Loans and not specified above. (d) Notwithstanding anything to the contrary herein, the Master Servicer shall not be required to credit to the Servicing Record, and neither the Master Servicer nor any Securityholder shall have any right or interest in any amount due or received with respect to any Home Loan or any related Foreclosed Property subsequent to the date of repurchase of such Home Loan or Foreclosed Property from the Trust. (e) The Master Servicer shall separately record in each Servicing Record the items required to be included in the Master Servicer Certificate and additionally the following items to the extent not included therein: (i) on or before each Determination Date, the related unpaid Master Servicer Fee due the Master Servicer on the next Distribution Date; (ii) on or before each Determination Date, all amounts retained by the Servicer in respect of the preceding Due Period in respect of amounts due Independent Contractors hired by the Master Servicer to operate and manage a Foreclosed Property pursuant to Section 4.14(b); (iii) on or before each Determination Date, the amount of unreimbursed Interest Advances in respect of prior Distribution Dates and the amount which the Master Servicer or the Servicer is entitled to be reimbursed therefor in accordance with Section 4.08; (iv) on or before each Determination Date, all amounts due as of the preceding Monthly Cut-Off Date in reimbursement of Foreclosure Advances previously advanced by the Master Servicer or the Servicer (separately identifying the type and amount of each then due); (v) on or before each Determination Date and based on information provided to the Master Servicer by the Indenture Trustee, all Other Fees distributable pursuant to Section 5.01(c)(x), as applicable on the next succeeding Distribution Date; 58 63 (vi) promptly following each Distribution Date, the aggregate amount of the Master Servicer Fee, Servicer Fee and the Indenture Trustee Fee paid to the Master Servicer, Servicer and Indenture Trustee respectively, on such Distribution Date pursuant to Section 5.01(c)(i)(b) and the aggregate amount of the Owner Trustee Fee Reserve paid to the Servicer, on such Distribution Date pursuant to Section 5.01(c)(i)(d); (vii) promptly following each Distribution Date, the aggregate amount of Interest Advances and Foreclosure Advances reimbursed to the Master Servicer or the Servicer on such Distribution Date; (viii) on or before each Determination Date, the Principal Balance of Home Loans that became Defaulted Home Loans during the prior Due Period; (ix) on or before each Determination Date, each Collateral Performance Percentage, (x) on or before each Determination Date, the amount deposited into each Collection Account representing payments by the related Obligors on Invoiced Loans in respect of premium on FHA Insurance; (xi) on or before each Determination Date, the amount remaining in the FHA Insurance Coverage Reserve Account with respect to all FHA Loans and the Related Series Loans, if any; (xii) on or before each Determination Date, identification by loan number, Obligor name, address of Property and Principal Balance of such Home Loan with respect to which the Master Servicer has requested that the Indenture Trustee obtain the environmental report required by Section 4.12 in connection with deciding pursuant to Section 4.12 to foreclose on or otherwise acquire title to the related Property; (xiii) on or before each Determination Date, the Principal Balance of each such Home Loan with respect to which the Master Servicer has determined under the circumstances described in the penultimate sentence of Section 4.12(a) in good faith in accordance with customary mortgage loan servicing practices that all amounts which it expects to receive with respect to such Home Loan have been received; and (xiv) on or before each Determination Date, any other information with respect to the Home Loans reasonably required by the Indenture Trustee or the Securities Insurer to determine the amount required to be distributed pursuant to Section 5.01(c) and determinable by the Master Servicer without undue burden from the Servicer or the items otherwise required to be maintained in each Servicing Record. (f) On or before each Distribution Date, the Master Servicer will determine, based on the date of origination of the FHA Loans as set forth in the Home Loan Schedule, the amount 59 64 of FHA insurance premium, if any, due on or prior to the next succeeding Distribution Date with respect to each FHA Loan. On or before such Distribution Date, the Master Servicer will compare such amounts with respect to each FHA Loan against amounts invoiced by FHA with respect to the Contract of Insurance as due on or prior to such next succeeding Distribution Date and report all discrepancies to the Indenture Trustee. Mego will assist the Indenture Trustee with the transfer of FHA Insurance with respect to each FHA Loan to the Contract of Insurance Holder. The Master Servicer is not responsible for the transfer of FHA Insurance or the payment of any premium for FHA Insurance. Section 4.04 Annual Statement as to Compliance; Notice of Event of Default. (a) The Master Servicer will deliver to the Indenture Trustee, the Depositor and the Securities Insurer on or before May 31 of each year, beginning in 1998 an Officer's Certificate signed by two Responsible Officers of the Master Servicer stating with respect to the Trust, that: (i) a review of the activities of the Master Servicer during the preceding calendar year (or in connection with the first such Officer's Certificate the period from the Closing Date through the end of 1997) and of the Master Servicer's performance under this Agreement with respect to such Trust has been made under the supervision of the signer of such Officer's Certificate; and (ii) to the best of such signer's knowledge, based on such review, the Master Servicer has fulfilled all its obligations under this Agreement throughout such year (or such portion of such year), or there has been a default in the fulfillment of any such obligation, in which case such Officer's Certificate shall specify each such default known to such signer and the nature and status thereof and what action the Master Servicer proposes to take with respect thereto. (b) The Master Servicer shall deliver to the Indenture Trustee, the Securities Insurer and the Depositor, promptly after having obtained knowledge thereof, but in no event later than 2 Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 10.01. Each of Mego, the Depositor, the Securities Insurer, the Indenture Trustee, the Owner Trustee and the Master Servicer shall deliver to the other of such Persons promptly after having obtained knowledge thereof, but in no event later than 2 Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 10.01. Section 4.05 Annual Independent Accountants' Report; Servicer Review Report. (a) The Master Servicer shall cause a firm of Independent Accountants, who may also render other services to the Master Servicer, to deliver to the Indenture Trustee, Owner Trustee, the Depositor and the Securities Insurer on or before May 31 (or 150 days after the end of the Master Servicer's fiscal year) of each year, beginning on the first May 31 (or other applicable 60 65 date) after the date that is six months after the Closing Date, with respect to the twelve months ended the immediately preceding December 31 (or other applicable date) (or such other period as shall have elapsed from the Closing Date to the date of such certificate) a report, conducted in accordance with generally accepted accounting principles (the "Accountant's Report") including: (i) an opinion on the financial position of the Master Servicer at the end of its most recent fiscal year, and the results of operations and changes in financial position of the Master Servicer for such year then ended on the basis of an examination conducted in accordance with generally accepted auditing standards, and (ii) a statement to the effect that, based on an examination of certain specified documents and records relating to the servicing of the Master Servicer's mortgage loan portfolio or the affiliate of the Master Servicer principally engaged in the servicing of mortgage loans conducted in compliance with the audit program for mortgages serviced for FNMA, the United States Department of Housing and Urban Development Mortgagee Audit Standards or the Uniform Single Attestation Program for Mortgage Bankers (the "Applicable Accounting Standards") such firm is of the opinion that such servicing has been conducted in compliance with the Applicable Accounting Standards except for such exceptions as such firm shall believe to be immaterial and such other exceptions as shall be set forth in such statement. (b) In addition, the Master Servicer will provide a report of a firm of Independent Accountants which shall state that (1) a review in accordance with agreed upon procedures (determined by the Securities Insurer) was made of such number of Master Servicer Certificates which the Independent Accountants deem necessary to carry out their review of Master Servicer performance, but in no case less than two and (2) except as disclosed in the Accountant's Report, no exceptions or errors in the Master Servicer Certificates so examined were found. The Accountant's Report shall also indicate that the firm is independent of the Master Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. (c) The Master Servicer shall mail a copy of the Servicer Review Report and any report or statement of the Servicer prepared pursuant to Section 6.04 of the Servicing Agreement to the Indenture Trustee. (d) (1) The Master Servicer shall, unless otherwise directed by the Securities Insurer, cause a firm of Independent Accountants chosen with the consent of the Securities Insurer to review, annually within 90 days after each anniversary of the Closing Date, in accordance with agreed upon procedures (determined by the Securities Insurer) the performance of the Servicer under the Servicing Agreement in order to confirm that the records of the Servicer accurately reflect collections, delinquencies and other relevant data with respect to the Loans reported to the Master Servicer for the purpose of preparation of the Servicing Record, and that such data is accurately reported to the Master Servicer for reflection in the Servicing Record. Any exceptions or errors disclosed by such procedures shall be included in a report delivered to the Master Servicer, the Indenture Trustee, Owner Trustee, the Securities Insurer and the Depositor (the "Servicer Review Report"). 61 66 (2) If the Securities Insurer, upon receipt and review of the Servicer Review Report, determines in its sole discretion that the errors or exceptions disclosed by the Servicer Review Report warrant further review of the performance of the Servicer, then the Securities Insurer may, so long as no Securities Insurer Default exists, direct the Master Servicer to cause such firm of Independent Accountants to perform such further review with respect to the performance of Servicer as is reasonably requested by the Securities Insurer. (3) In addition to the foregoing, the Securities Insurer may at any time and from time to time, so long as no Securities Insurer Default exists, direct the Master Servicer to cause such firm of Independent Accountants to conduct such additional reviews and prepare such additional reports with respect to the performance of any Servicer as the Securities Insurer deems reasonably appropriate. Section 4.06 Access to Certain Documentation and Information Regarding Home Loans. The Master Servicer shall provide to representatives of the Indenture Trustee or the Securities Insurer reasonable access to (a) the documentation regarding the Home Loans and to those employees of the Master Servicer who are responsible for the performance of the Master Servicer's duties hereunder and (b) the books of account, records, reports and other papers of the Master Servicer and to discuss its affairs, finances and accounts with its employees and Independent accountants for the purpose of reviewing or evaluating the financial condition of the Master Servicer. The Master Servicer shall provide such access to any Securityholder only in such cases where the Master Servicer is required by applicable statutes or regulations (whether applicable to the Master Servicer or to such Securityholder) to permit such Securityholder to review such documentation. In each case, such access shall be afforded without charge but only upon reasonable request and during normal business hours. Nothing in this Section shall derogate from the obligation of the Master Servicer to observe any applicable law prohibiting disclosure of information regarding the Obligors, and the failure of the Master Servicer to provide access as provided in this Section as a result of such obligation shall not constitute a breach of this Section. Any Securityholder, by its acceptance of a Security (or by acquisition of its beneficial interest therein), shall be deemed to have agreed to keep confidential and not to use for its own benefit any information obtained by it pursuant to this Section, except as may be required by applicable law or by any applicable regulatory authority. Section 4.07 [Reserved] Section 4.08 Advances. (a) With respect to the Home Loans (other than Defaulted Home Loans) and each Distribution Date, the Master Servicer shall advance from its own funds and deposit into the Note Distribution Account or from funds on deposit in the related Collection Account in respect of amounts available for distribution on future Distribution Dates, no later than the related Determination Date, the excess, if any, of (i) the aggregate of the portions of the Monthly Payments due with respect to all Home Loans in the related Due Period allocable to interest 62 67 (calculated at a rate equal to the Net Loan Rate) less any Civil Relief Act Interest Shortfalls over (ii) the aggregate amount to be deposited into the Note Distribution Account with respect to all Home Loans and such Distribution Date and allocated in accordance with Section 4.03(c) to interest (such amounts, "Interest Advances"). Any funds so applied from funds on deposit in the Collection Account in respect of amounts available for distribution on future Distribution Dates shall be reimbursed by the Master Servicer on or before any future Distribution Date to the extent that funds on deposit in the Note Distribution Account applied in the order of priority set forth in such Section 5.01(c) would be less than the amount required to be distributed pursuant to Section 5.01(c) on such dates as a result of such Interest Advances. Notwithstanding anything herein to the contrary, no Interest Advance shall be required to be made hereunder if the Master Servicer determines that such Interest Advance would, if made, constitute a Nonrecoverable Advance. (b) The Master Servicer shall advance from its own funds the following amounts in respect of any Mortgage Loan or Foreclosed Property, as applicable (collectively, "Foreclosure Advances"): (i) all third party costs and expenses (including legal fees and costs and expenses relating to bankruptcy or insolvency proceedings in respect of any Obligor) associated with the institution of foreclosure or other similar proceedings in respect of any Home Loan pursuant to Section 4.12; (ii) all insurance premiums due and payable in respect of each Foreclosed Property, prior to the date on which the related Insurance Policy would otherwise be terminated; (iii) all real estate taxes and assessments in respect of each Foreclosed Property that have resulted in the imposition of a lien thereon, other than amounts that are due but not yet delinquent; (iv) all costs and expenses necessary to maintain each Foreclosed Property; (v) all fees and expenses payable to any Independent Contractor hired to operate and manage a Foreclosed Property pursuant to Section 4.14(b); and (vi) all fees and expenses of any Independent appraiser or other real estate expert retained by the Indenture Trustee pursuant to Section 4.13(a). The Master Servicer shall advance the Foreclosure Advances described in clauses (i) through (v) above if, but only if, it has approved the foreclosure or other similar proceeding in writing and the Master Servicer would make such an advance if it or an affiliate held the affected Mortgage Loan or Foreclosed Property for its own account and, in the Master Servicer's good faith 63 68 judgment, such advance would not constitute a nonrecoverable advance. In making such assessment with respect to the institution of such proceedings, the Master Servicer shall not advance funds with respect to a Mortgage Loan unless the appraised value of the related Property exceeds the sum of (i) the amounts necessary to satisfy any liens prior to the liens on Mortgages securing such Mortgage Loan and (ii) the reasonably anticipated costs of foreclosure or similar proceedings. Section 4.09 Reimbursement of Interest Advances and Foreclosure Advances. (a) The Master Servicer shall be entitled to be reimbursed pursuant to Section 5.01(c) for previously unreimbursed Interest Advances made from its own funds or any such previously unreimbursed Interest Advance by the Servicer with respect to a Home Loan on Distribution Dates subsequent to the Distribution Date in respect of which such Interest Advance was made from Payments with respect to such Home Loan. If an Interest Advance shall become a Nonrecoverable Advance or if a Home Loan shall become a Defaulted Home Loan and the Master Servicer or Servicer shall not have been fully reimbursed for any such Interest Advances with respect to such Home Loan, the Master Servicer or Servicer, as applicable, shall be entitled to be reimbursed for the outstanding amount of such Interest Advances from unrelated Home Loans pursuant to Section 5.01(c)(i)(c). No interest shall be due to the Master Servicer in respect of any Interest Advance for any period prior to the reimbursement thereof. (b) The Master Servicer shall be entitled to be reimbursed pursuant to Section 5.01(c)(i)(c) from related Payments for Foreclosure Advances advanced on or prior to the related Monthly Cut-Off Date but only to the extent the Master Servicer has satisfied the requirements of Section 4.08. No interest shall be due to the Master Servicer in respect of any Foreclosure Advance for any period prior to the reimbursement thereof. (c) The Indenture Trustee shall offset against amounts otherwise distributable to the Master Servicer pursuant to Section 5.01(c), amounts, if any, which were required to be deposited in any Collection Account pursuant to Section 5.01(c) with respect to the related Due Period but which were not so deposited. Section 4.10. Modifications, Waivers, Amendments and Consents. (a) The Master Servicer shall not agree to any modification, waiver or amendment of any provision of any Home Loan unless, in the Master Servicer's good faith judgment, (i) such modification, waiver or amendment (a) would minimize the loss that might otherwise be experienced with respect to such Home Loan, and (b) in the case of any FHA Loan, complies with the requirements of Title I or is required by Title I and (ii) such Home Loan has experienced a payment default or a payment default is reasonably foreseeable by the Master Servicer. The Master Servicer may agree to subordinate the position of the security interest in the Property which secures any Mortgage Loan, provided such subordination (i) would permit the Obligor to refinance a senior lien to take advantage of a lower interest rate or (ii) would permit the Obligor to extend the term of the senior lien and, with respect to any FHA Loan, the Master 64 69 Servicer receives prior written approval of HUD to such subordination or written certification by the Servicer that such proposed subordination complies with current published HUD requirements. Notwithstanding the foregoing, at no time shall the aggregate of the Principal Balances of Home Loans modified, waived or amended without the prior or subsequent approval of the Securities Insurer exceed 3% of the aggregate of the Initial Pool Principal Balance and no modification or amendment of a Home Loan shall involve the execution by the Obligor of a new Debt Instrument or, with respect to any Mortgage Loan, of a new Mortgage. At the request of the Master Servicer, the Securities Insurer, at its discretion, may approve an increase in or waiver of the percentage referred to in the previous sentence, such approval not to be unreasonably withheld. (b) The Master Servicer shall notify the Indenture Trustee and the Securities Insurer of any modification, waiver or amendment of any provision of any Home Loan and the date thereof, and shall deliver to the Indenture Trustee for deposit in the related Home Loan File, an original counterpart of the agreement relating to such modification, waiver or amendment, promptly following the execution thereof. Such notice shall state that the conditions contained in this Section 4.10 have been satisfied. Section 4.11. Due-On-Sale; Due-on-Encumbrance. (a) If any Home Loan contains a provision, in the nature of a "due-on-sale" clause, which by its terms: (i) provides that such Home Loan shall (or may at the Obligee's option) become due and payable upon the sale or other transfer of an interest in the related Property; or (ii) provides that such Home Loan may not be assumed without the consent of the related Obligee in connection with any such sale or other transfer, then, for so long as such Home Loan is included in the Trust, the Master Servicer, on behalf of the Indenture Trustee, shall exercise any right the Trust or the Indenture Trustee may have as the Obligee of record with respect to such Home Loan (x) to accelerate the payments thereon, or (y) to withhold its consent to any such sale or other transfer, in a manner consistent with the servicing standard set forth in Section 4.01. (b) If any Home Loan contains a provision, in the nature of a "due-on-encumbrance" clause, which by its terms: (i) provides that such Home Loan shall (or may at the Obligee's option) become due and payable upon the creation of any lien or other encumbrance on the related Property; or (ii) requires the consent of the related Obligee to the creation of any such lien or other encumbrance on the related Property, 65 70 then, for so long as such Home Loan is included in the Trust, the Master Servicer, on behalf of the Trust or the Indenture Trustee, shall exercise any right the Indenture Trustee may have as the Obligee of record with respect to such Home Loan (x) to accelerate the payments thereon, or (y) to withhold its consent to the creation of any such lien or other encumbrance, in a manner consistent with the servicing standard set forth in Section 4.01. (c) Nothing in this Section 4.11 shall constitute a waiver of the Indenture Trustee's right to receive notice of any assumption of a Home Loan, any sale or other transfer of the related Property or the creation of any lien or other encumbrance with respect to such Property. (d) Except as otherwise permitted by Section 4.10, the Master Servicer shall not agree to modify, waive or amend any term of any Home Loan in connection with the taking of, or the failure to take, any action pursuant to this Section 4.11. Section 4.12. Collection Procedures; Claim for FHA Insurance and Foreclosure Procedures. (a) (x) If any Monthly Payment due under any FHA Loan is not paid when the same becomes due and payable, or if the Obligor fails to perform any other covenant or obligation under such FHA Loan and such failure continues beyond any applicable grace period, the Master Servicer shall take such action (consistent with Title I, including efforts to cure the default of such FHA Loan pursuant to 24 C.F.R. Section 201.50) as it shall deem to be in the best interest of the Trust. If the maturity of the related Debt Instrument has been accelerated pursuant to the requirements under Title I following the Master Servicer's efforts to cure the default of such FHA Loan (and such FHA Loan is not required to be purchased pursuant to Section 4.12(b)), and (i) if an FHA Insurance Coverage Insufficiency does not exist at the time, the Claims Administrator shall initiate, on behalf of the Trust and the Contract of Insurance Holder, a claim under the Contract of Insurance for reimbursement for loss on such FHA Loan pursuant to Title I (see 24 C.F.R. Section 201.54), or (ii) if an FHA Insurance Coverage Insufficiency exists at the time, the Master Servicer shall determine within 90 days in accordance with Section 4.12(c) whether or not to proceed against the Property securing such FHA Loan, if such FHA Loan is a Mortgage Loan or against the Obligor, if such FHA Loan is unsecured, and if thereafter an FHA Insurance Coverage Insufficiency does not exist, the Claims Administrator may submit a claim under the Contract of Insurance with respect to such FHA Loan if it has obtained the prior approval of the Secretary of HUD pursuant to 24 C.F.R. Section 201.51; or (y) if any Monthly Payment due under any Non-FHA Loan is not paid when the same is due and payable, or if the Obligor fails to perform any other covenant or obligation under such Non-FHA Loan and such failure continues beyond any applicable grace period, the Master Servicer shall take such action as it shall deem to be in the best interest of the Trust; including but not limited to proceeding against the Property securing such Non-FHA Loan. In the event that in accordance with clauses (a)(x)(ii) or (y) above, as applicable, the Master Servicer determines not to proceed against the Property or Obligor, as applicable, on or before the Determination Date following such determination the Master Servicer shall determine 66 71 in good faith in accordance with customary servicing practices that all amounts which it expects to receive with respect to such Loan have been received. If the Master Servicer makes such a determination, it shall give notice to such effect pursuant to Section 4.03(e)(xiii). (b) If the Claims Administrator initiates a claim for reimbursement for loss on any FHA Loan under this Section, the Claims Administrator shall comply with applicable provisions of Title I and diligently pursue such claim and, in any event, shall initiate such claim no later than the last day permitted under Title I (see 24 C.F.R. Section 201.54(b)). For purposes of this Agreement, the term "initiate a claim for reimbursement" shall mean the filing of the claim application pursuant to the requirements set forth in 24 C.F.R. Section 201.54, including the filing of all related assignments and documents and materials required for file review. For the purposes of such filing, the Claims Administrator shall request, and the Co-Owner Trustee within 5 calendar days of request shall deliver to the Claims Administrator, the Debt Instrument and the related Mortgage for such FHA Loan and each other item in the related Home Loan File necessary to make such claim. Each Securityholder hereby consents to the assignment of such FHA Loan for the sole purpose of initiating a claim under the Contract of Insurance for reimbursement with respect to such FHA Loan. Pursuant to Section 4.12(h), the Contract of Insurance Holder shall furnish the Claims Administrator a power of attorney to file claims under the Contract of Insurance. The Co-Owner Trustee and Contract of Insurance Holder agree to execute and deliver to the Claims Administrator, within 5 Business Days of receipt from the Claims Administrator, all documents, if any, necessary to initiate and file a claim under the Contract of Insurance for such FHA Loan, which documents shall be prepared by the Claims Administrator. If any claim to the FHA becomes a Rejected Claim, upon receipt of the FHA's rejection notice by the Claims Administrator directly from the FHA or from the Contract of Insurance Holder pursuant to Section 4.12(e) and a determination by the Claims Administrator that the rejection was not due to clerical error, then the Claims Administrator shall promptly notify the Contract of Insurance Holder (if such notice has not already been given), the Indenture Trustee and the Securities Insurer of the notice of a Rejected Claim. If the FHA indicates in writing that the claim is a Rejected Claim due to reasons other than a failure to service the related FHA Loan in accordance with Title I after the Closing Date, Mego shall repurchase the FHA Loan on or before the Monthly Cut-Off Date next following the date of such notice from the Claims Administrator to repurchase such FHA Loan, either directly from FHA or from the Trust, for the Purchase Price. If FHA indicates in writing that the claim is a Rejected Claim due to a failure to service such FHA Loan in accordance with Title I after the Closing Date, the Claims Administrator shall immediately notify Mego, the Master Servicer, the Contract of Insurance Holder, the Trust, the Indenture Trustee and the Securities Insurer of such determination, and the Master Servicer shall on or before the later to occur of (i) the next succeeding Monthly Cut-Off Date and (ii) ten Business Days from the date on which such rejection notice is received by the Claims Administrator, purchase such FHA Loan either directly from FHA or from the Trust, for the Purchase Price. In the event that the FHA fails to indicate in writing why the claim is a Rejected Claim, the Claims Administrator shall determine why the claim is a Rejected Claim. If the Claims Administrator determines that the claim is a Rejected Claim for reasons other than a servicing failure that occurred after the Closing Date, Mego shall 67 72 be obligated to repurchase such FHA Loan for the Purchase Price. If the Claims Administrator determines that the claim is a Rejected Claim due to a servicing failure that occurred after the Closing Date, the Master Servicer shall be obligated to repurchase such FHA Loan for the Purchase Price. Notwithstanding any provisions herein to the contrary, neither Mego nor the Master Servicer shall be required to repurchase or purchase, as applicable, any FHA Loan subject to a Rejected Claim as a result of the depletion of the amount of the FHA Insurance Coverage Reserve Account as shown in the Insurance Record. (c) In accordance with the criteria for proceeding against the Property set forth in Section 4.12(a), with respect to an FHA Loan that is a Mortgage Loan that has been accelerated pursuant to the requirements of Title I following the Master Servicer's efforts to cure the default of the FHA Loan, and with respect to a Non-FHA Loan that is a Mortgage Loan, unless otherwise prohibited by applicable law or court or administrative order, the Master Servicer, on behalf of the Trust and the Indenture Trustee, may, at any time, institute foreclosure proceedings, exercise any power of sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or title to the related Property, by operation of law or otherwise. In accordance with the criteria for proceeding against the Property set forth in Section 4.12(a), with respect to FHA Loans that are Mortgage Loans and with respect to the Non-FHA Loans, the Master Servicer shall be permitted to institute foreclosure proceedings, repossess, exercise any power of sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or title to any Property, by operation of law or otherwise only in the event that in the Master Servicer's reasonable judgement such action is likely to result in a positive economic benefit to the Trust by creating net liquidation proceeds (after reimbursement of all amounts owed with respect to such Home Loan to the Master Servicer or the Servicer) and provided that, with respect to any Property, prior to taking title thereto, the Master Servicer has requested that the Indenture Trustee obtain, and the Indenture Trustee shall have obtained, an environmental review to be performed on such Property by a company with recognized expertise, the scope of which is limited to the review of public records and documents for information regarding whether such Property has on it, under it or is near, hazardous or toxic material or waste. If such review reveals that such Property has on it, under it or is near hazardous or toxic material or waste or reveals any other environmental problem, the Indenture Trustee shall provide a copy of the related report to the Master Servicer and the Securities Insurer and title shall be taken to such Property only after obtaining the written consent of the Securities Insurer. In connection with any foreclosure proceeding on a Mortgage Loan, the Master Servicer shall comply with the requirements under Title I, if such Mortgage Loan is an FHA Loan, and shall follow such practices and procedures in a manner which is consistent with the Master Servicer's procedure for foreclosure with respect to similar loans held in the Master Servicer's portfolio for its own account or, if there are no such loans, such loans serviced by the Master Servicer for others, giving due consideration to accepted servicing practices of prudent lending institutions. To the extent required by Section 4.08, the Master Servicer shall advance all necessary and proper Foreclosure Advances until final disposition of the Foreclosed Property and 68 73 shall manage such Foreclosed Property pursuant to Section 4.14. If, in following such foreclosure procedures, title to the Foreclosed Property is acquired, the deed or certificate of sale shall be issued to the Co-Owner Trustee and the Indenture Trustee. (d) With respect to any FHA Loan, each of the Co-Owner Trustee, Owner Trustee, Indenture Trustee and the Contract of Insurance Holder shall deposit in the Note Distribution Account on the day of receipt all amounts received from the FHA or any other Person with respect to such FHA Loans or any other assets of the Trust and shall transmit by facsimile, or such other method requested by the Master Servicer, Claims Administrator or the Securities Insurer, to the Master Servicer, Claims Administrator and the Securities Insurer on each such day the letter of transmittal received from the FHA and any other documents with respect to such receipt. Each of the Co-Owner Trustee, Owner Trustee, Indenture Trustee and the Contract of Insurance Holder shall also promptly deliver to the Claims Administrator copies of any other correspondence received from the FHA or sent to the FHA by the Co-Owner Trustee, Owner Trustee, Indenture Trustee or the Contract of Insurance Holder, as the case may be, including, but not limited to, any correspondence regarding the balance of the FHA Insurance Coverage Reserve Account, premiums due and claims rejected. (e) If, prior to the Termination Date, the FHA rejects an insurance claim, in whole or part, under the Contract of Insurance after previously paying such insurance claim and the FHA demands that the Contract of Insurance Holder repurchase such FHA Loan, the Claims Administrator shall pursue such appeals with the FHA as are reasonable. If the FHA continues to demand that the Contract of Insurance Holder repurchase such FHA Loan after the Claims Administrator exhausts such administrative appeals as are reasonable, then notwithstanding that Mego, the Master Servicer or any other person is required to repurchase such FHA Loan under this Agreement, the Claims Administrator shall notify the Contract of Insurance Holder of such fact and the Contract of Insurance Holder in its capacity as Co-Owner Trustee and the Indenture Trustee shall repurchase such FHA Loan from funds available in the Note Distribution Account. The Claims Administrator shall, to the extent possible, direct the Indenture Trustee to make all such repurchases of FHA Loans once a month and to repurchase any and all such FHA Loans from the FHA in that portion of the calendar month after each Distribution Date. If the Indenture Trustee withdraws any amounts from the Trust for such purpose between the Determination Date and Distribution Date of any month, the Master Servicer shall prepare the Master Servicer Certificate provided under Section 6.01 for such Distribution Date (or promptly revise the Master Servicer Certificate if already prepared for such Distribution Date) to reflect such withdrawals as if made on such Determination Date and the Indenture Trustee shall revise its determination pursuant to Section 6.01 accordingly. To the extent allowed by FHA, Mego may repurchase directly from FHA any FHA Loan for which an insurance claim has been paid and later rejected by FHA. If the FHA indicates in writing in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to other than (i) a failure to service the FHA Loan in accordance with Title I after the Closing Date or (ii) the amount in the FHA Insurance Coverage Reserve Account is insufficient to pay such claim, or if the FHA does not indicate in writing the reason for its rejection or refusal, Mego shall be liable to reimburse the Trust for any amounts paid by the Indenture Trustee to the FHA in order to repurchase such FHA Loan. Subject to 69 74 Section 4.12(b), if the FHA indicates in writing, or it is agreed by the Master Servicer, in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to a failure to service such FHA Loan in accordance with Title I after the Closing Date, the Master Servicer shall be liable to reimburse the Trust or Mego for any amounts paid by the Trust or Mego, as the case may be, to FHA in order to repurchase FHA Loans for which the FHA has rejected an insurance claim as a result of a failure to service such FHA Loan in accordance with Title I. (f) If, after the Termination Date, the FHA rejects an insurance claim, in whole or part, under the Contract of Insurance after previously paying such insurance claim and the FHA demands that the Contract of Insurance Holder repurchase such FHA Loan, the Claims Administrator shall pursue such appeals with the FHA as are reasonable. If the FHA continues to demand that the Contract of Insurance Holder repurchase such FHA Loan after the Claims Administrator exhausts such administrative appeals as are reasonable, then notwithstanding that Mego or any other person is required to repurchase such FHA Loan under this Agreement, the Claims Administrator shall notify the Contract of Insurance Holder of such fact and the Contract of Insurance Holder shall repurchase such FHA Loan from the FHA. If the FHA indicates in writing in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to other than (i) a failure to service the FHA Loan in accordance with Title I after the Closing Date or (ii) the amount in the FHA Insurance Coverage Reserve Account is insufficient to pay such claim, or if FHA does not indicate in writing the reason for its rejection or refusal, Mego shall be liable to reimburse the Contract of Insurance Holder for any amounts paid by the Contract of Insurance Holder to the FHA in order to repurchase such FHA Loan. Subject to Section 4.12(b), if the FHA indicates in writing, or it is agreed by the Master Servicer, in connection with its rejection or refusal to pay a claim that such rejection or refusal is due to a failure to service such FHA Loan in accordance with Title I after the Closing Date, the Master Servicer shall be liable to reimburse the Contract of Insurance Holder or Mego for any amounts paid by the Contract of Insurance Holder or Mego to FHA in order to repurchase FHA Loans for which the FHA has rejected an insurance claim as a result of a failure to service such FHA Loan in accordance with Title I. (g) The Claims Administrator shall be entitled to reimbursement of expenses associated with the filing of any FHA Insurance claim from and to the extent that such amounts are reimbursed by HUD. (h) The Indenture Trustee shall furnish the Claims Administrator or the Servicer, as applicable, within 5 days of request of the Claims Administrator or the Servicer therefor any powers of attorney and other documents necessary and appropriate to carry out its respective duties hereunder, including any documents or powers of attorney necessary to foreclose or file a claim with respect to any FHA Loan and to file claims with the FHA under the Contract of Insurance. The forms of any such powers or documents shall be appended to such requests. The Contract of Insurance Holder shall furnish the Claims Administrator or the Servicer, as applicable, within 5 days of request of the Claims Administrator or the Servicer therefor any powers of 70 75 attorney and other documents necessary and appropriate to carry out its administrative duties pursuant to Section 4.12. Section 4.13. Sale of Foreclosed Properties. (a) The Master Servicer may offer to sell to any Person any Foreclosed Property, if and when the Master Servicer determines consistent with the Servicing Standard and that such a sale would be in the best interests of the Trust, but shall, with respect to the FHA Loans, in any event, so offer to sell any Foreclosed Property in accordance with the criteria set forth in Section 4.12. The Master Servicer shall give the Indenture Trustee and the Securities Insurer not less than five days' prior notice of its intention to sell any Foreclosed Property, and shall accept the highest bid received from any Person for any Foreclosed Property in an amount at least equal to the sum of: (i) the Principal Balance of the related foreclosed Home Loan, unreimbursed Foreclosure Advances plus the outstanding amount of any liens superior in priority, if any, to the lien of the foreclosed Home Loan; and (ii) all unpaid interest accrued thereon at the related Home Loan Interest Rate through the date of sale. In the absence of any such bid, the Master Servicer shall accept the highest bid received from any Person that is determined to be a fair price for such Foreclosed Property by the Master Servicer, if the highest bidder is a Person that is Independent, or by an Independent appraiser retained by the Master Servicer, if the highest bidder is a Person that is not Independent. In the absence of any bid determined to be fair as aforesaid, the Master Servicer shall offer the affected Foreclosed Property for sale to any Person, other than an Interested Person, in a commercially reasonable manner for a period of not less than 10 or more than 30 days, and shall accept the highest cash bid received therefor in excess of the highest bid previously submitted. If no such bid is received, any Interested Person may resubmit its original bid, and the Master Servicer shall accept the highest outstanding cash bid, regardless of from whom received. No Interested Person shall be obligated to submit a bid to purchase any Foreclosed Property, and notwithstanding anything to the contrary herein, neither the Indenture Trustee, in its individual capacity, nor any of its affiliates may bid for or purchase any Foreclosed Property pursuant hereto. (b) In determining whether any bid constitutes a fair price for any Foreclosed Property or to effectuate the payment of a claim under the Contract of Insurance, the Master Servicer shall take into account, and any appraiser or other expert in real estate matters shall be instructed to take into account, as applicable, among other factors, the financial standing of any tenant of the Foreclosed Property, the physical condition of the Foreclosed Property, and the state of the local and national economies. (c) Subject to the provision of Section 4.12, the Master Servicer shall act on behalf of the Indenture Trustee in negotiating and taking any other action necessary or appropriate in 71 76 connection with the sale of any Foreclosed Property, including the collection of all amounts payable in connection therewith. Any sale of a Foreclosed Property shall be without recourse to the Indenture Trustee, the Master Servicer or the Trust, and if consummated in accordance with the terms of this Agreement, neither the Master Servicer nor the Indenture Trustee shall have any liability to any Securityholder with respect to the purchase price therefor accepted by the Master Servicer or the Indenture Trustee. Section 4.14. Management of Real Estate Owned. (a) If the Trust acquires any Foreclosed Property pursuant to Section 4.12, the Master Servicer shall have full power and authority, subject only to the specific requirements and prohibitions of this Agreement, to do any and all things in connection therewith as are consistent with the manner in which the Master Servicer manages and operates similar property owned by the Master Servicer or any of its affiliates, all on such terms and for such period as the Master Servicer deems to be in the best interests of Securityholders. (b) The Master Servicer may contract with any Independent Contractor for the operation and management of any Foreclosed Property, provided that: (i) the terms and conditions of any such contract may not be inconsistent herewith; (ii) any such contract shall require, or shall be administered to require, that the Independent Contractor remit all related Payments to the Master Servicer as soon as practicable, but in no event later than two Business Days following the receipt thereof by such Independent Contractor; (iii) none of the provisions of this Section 4.14(b) relating to any such contract or to actions taken through any such Independent Contractor shall be deemed to relieve the Master Servicer of any of its duties and obligations to the Indenture Trustee for the benefit of Securityholders with respect to the operation and management of any such Foreclosed Property; and (iv) the Master Servicer shall be obligated with respect thereto to the same extent as if it alone were performing all duties and obligations in connection with the operation and management of such Foreclosed Property. The Master Servicer shall be entitled to enter into any agreement with any Independent Contractor performing services for it related to its duties and obligations hereunder for indemnification of the Master Servicer by such Independent Contractor, and nothing in this Agreement shall be deemed to limit or modify such indemnification. The Master Servicer shall be solely liable for all fees owed by it to any such Independent Contractor, but shall be entitled to be reimbursed for all such fees advanced by it pursuant to Section 4.08(b)(v) in the manner provided in Section 4.09(b). 72 77 Section 4.15. Inspections. The Master Servicer shall inspect or cause to be inspected each Property that secures any Home Loan at such times and in such manner as are consistent with the servicing standard set forth in Section 4.01. Section 4.16. Maintenance of Insurance. (a) The Master Servicer shall maintain or cause to be maintained with respect to each Property securing an FHA Loan such insurance as is required with respect thereto by Title I. The Master Servicer shall cause to be maintained for each Foreclosed Property acquired by the Trust such types and amounts of insurance coverage as the Master Servicer shall deem reasonable. The Master Servicer shall cause to be maintained for each Non-FHA Loan, fire and hazard insurance naming Mego as loss payee thereunder providing extended coverage in an amount which is at least equal to the least of (i) the maximum insurable value of the improvements securing such Non-FHA Loan from time to time, (ii) the combined principal balance owing on such Non-FHA Loan and any mortgage loan senior to such Non-FHA Loan and (iii) the minimum amount required to compensate for damage or loss on a replacement cost basis. In cases in which any Property securing a Non-FHA Loan is located in a federally designated flood area, the hazard insurance to be maintained for the related Non-FHA Loan shall include flood insurance to the extent such flood insurance is available and the Master Servicer has determined such insurance to be necessary in accordance with accepted mortgage loan servicing standards for mortgage loans similar to the Mortgage Loans. All such flood insurance shall be in amounts equal to the least of (A) the maximum insurable value of the improvement securing such Non-FHA Loan, (B) the combined principal balance owing on such Non-FHA Loan and any mortgage loan senior to such Non-FHA Loan and (c) the maximum amount of insurance available to the lender under the National Flood Insurance Act of 1968, as amended. (b) Any amounts collected by the Master Servicer under any Insurance Policies, shall be paid over or applied by the Master Servicer as follows: (i) In the case of amounts received in respect of any Home Loan: (A) for the restoration or repair of the affected Property, in which event such amounts shall be released to the Obligor in accordance with the terms of the related Debt Instrument or to the extent not so used, or (B) in reduction of the Principal Balance of the related Home Loan, in which event such amounts shall be credited to the related Servicing Record, unless the related instruments require a different application, in which case such amounts shall be applied in the manner provided therein; and 73 78 (ii) Subject to Section 4.14, in the case of amounts received in respect of any Foreclosed Property, for the restoration or repair of such Foreclosed Property, unless the Master Servicer determines, consistent with the servicing standard set forth in Section 4.01, that such restoration or repair is not in the best economic interest of the Trust, in which event such amounts shall be credited, as of the date of receipt, to the applicable Servicing Record, as a Payment received from the operation of such Foreclosed Property. Section 4.17. Release of Files. (a) If with respect to any Home Loan: (i) the outstanding Principal Balance of such Home Loan plus all interest accrued thereon shall have been paid; (ii) the Master Servicer, or the Servicer shall have received, in escrow, payment in full of such Home Loan in a manner customary for such purposes; (iii) such Home Loan has become a Defective Loan and has been repurchased or a Qualified Substitute Home Loan has been conveyed to the Trust pursuant to Section 3.05; (iv) such Home Loan or the related Foreclosed Property has been sold in connection with the termination of the Trust pursuant to Section 11.01; (v) the FHA has paid a claim with respect to such Home Loan that is an FHA Loan under the Contract of Insurance; or (vi) the related Foreclosed Property has been sold pursuant to Section 4.13. In each such case, the Servicer shall deliver a certificate to the effect that the Servicer has complied with all of its obligations under the Servicing Agreement with respect to such Home Loan and requesting that the Indenture Trustee release to the Servicer the related Home Loan File, then the Indenture Trustee shall, within three Business Days or such shorter period as may be required by applicable law, release, or cause the Custodian to release (unless such Home Loan File has previously been released), the related Home Loan File to the Servicer and execute and deliver such instruments of transfer or assignment, in each case without recourse, as shall be necessary to vest ownership of such Home Loan in the Servicer or such other Person as may be specified in such certificate, the forms of any such instrument to be appended to such certificate. (b) From time to time and as appropriate for the servicing or foreclosure of any Home Loan or to effectuate the payment of a claim under the Contract of Insurance, the Indenture Trustee shall, upon request of the Servicer, release the related Home Loan File (or any requested 74 79 portion thereof) to the Servicer. Such receipt shall obligate the Servicer, to return the Home Loan File (or such portion thereof) to the Indenture Trustee when the need therefor by the Servicer, no longer exists unless any of the conditions specified in subsection (a) above, is satisfied prior thereto. The Indenture Trustee shall release such receipt to the Servicer (i) upon the Servicer's return of such Home Loan File (or such portion thereof) to the Indenture Trustee or (ii) if any of the conditions specified in subsection (a) has been satisfied, and the Servicer has not yet returned such Home Loan File (or such portion thereof) to the Indenture Trustee, upon receipt of a certificate certifying that any of such condition has been satisfied. Section 4.18. Filing of Continuation Statements. On or before the fifth anniversary of the filing of any financing statements by Mego and the Depositor, respectively, with respect to the assets conveyed to the Trust, Mego and the Depositor shall prepare, have executed by the necessary parties and file in the proper jurisdictions all financing and continuation statements necessary to maintain the liens, security interests, and priorities of such liens and security interests that have been granted by Mego and the Depositor, respectively, and Mego and the Depositor shall continue to file on or before each fifth anniversary of the filing of any financing and continuation statements such additional financing and continuation statements until the Trust has terminated pursuant to Section 9.1 of the Trust Agreement. The Indenture Trustee agrees to cooperate with Mego and the Depositor in preparing, executing and filing such statements. The Indenture Trustee agrees to notify Mego and the Depositor on the third Distribution Date prior to each such fifth anniversary of the requirement to file such financing and continuation statements. The filing of any such statement with respect to Mego and the Depositor shall not be construed as any indication of an intent of any party contrary to the expressed intent set forth in Section 2.04 hereof. If Mego or the Depositor has ceased to do business whenever any such financing and continuation statements must be filed or Mego or the Depositor fails to file any such financing statements or continuation statements at least one month prior to the expiration thereof, the Indenture Trustee shall perform the services required under this Section 4.18. Section 4.19. Fidelity Bond. The Master Servicer shall maintain a fidelity bond in such form and amount as is customary for entities acting as custodian of funds and documents in respect of loans on behalf of institutional investors. Section 4.20. Errors and Omissions Insurance. The Master Servicer shall obtain and maintain at all times during the term of this Agreement errors and omissions insurance coverage covering the Master Servicer and its employees issued by a responsible insurance company. The issuer, policy terms and forms and amounts of coverage, including applicable deductibles, shall be reasonably satisfactory to the Securities Insurer and shall be in such form and amount as is customary for entities acting as master servicers. The Master Servicer agrees to notify the Securities Insurer in writing within 75 80 five (5) days of the Master Servicer's receipt of notice of the cancellation or termination of any such errors and omissions insurance coverage. The Master Servicer shall provide to the Securities Insurer upon request written evidence of such insurance coverage. 76 81 ARTICLE V. ESTABLISHMENT OF TRUST ACCOUNTS Section 5.01 Collection Account and Note Distribution Account. (a) (1) Establishment of Collection Account. The Indenture Trustee has heretofore established or caused to be established and shall hereafter maintain or cause to be maintained a separate account denominated a Collection Account, which in each case is and shall continue to be an Eligible Account in the name of the Indenture Trustee and shall be designated "First Trust of New York, National Association, as Indenture Trustee in trust for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-2, Collection Account." The Master Servicer shall cause all Payments received by the Servicer to be deposited to the Collection Account no later than the second Business Day following the date of receipt thereof by the Servicer. The Master Servicer shall cause the Servicer to deposit to the Collection Account all amounts representing payments by Obligors on Invoiced Loans in respect of premium on FHA Insurance no later than the second Business Day following receipt thereof by the Servicer. The Indenture Trustee shall provide to the Master Servicer and the Servicer a monthly statement of all activity in the Collection Account. Funds in the Collection Account shall be invested in accordance with Section 5.04. (2) Establishment of Note Distribution Account. The Indenture Trustee has heretofore established with itself in its trust capacity at its corporate trust department for the benefit of Securityholders and the Securities Insurer an account referred to herein as a Note Distribution Account. The Indenture Trustee shall at all times maintain the Note Distribution Account as an Eligible Account and shall cause such account to be designated "First Trust of New York, National Association, as Indenture Trustee in trust for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-2 Note Distribution Account." (3) FHA Reserve Fund. The Indenture Trustee has heretofore established or caused to be established and shall hereafter maintain or cause to be maintained a separate account denominated a FHA Reserve Fund, in the name of the Indenture Trustee and shall be designated "First Trust of New York, National Association, as Indenture Trustee of the Mego Mortgage Trusts, FHA Reserve Fund." The Indenture Trustee shall deposit all amounts required to be deposited therein pursuant to Section 5.01(c)(ix). Amounts on deposit therein shall be withdrawn by the Indenture Trustee at the direction of the Securities Insurer and paid or deposited to either the Note Distribution Account, the distribution account of a Related Series or the holders of the Residual Certificates. Amounts on deposit in the FHA Reserve Fund shall be invested in accordance with Section 5.04. (4) FHA Premium Account. The Indenture Trustee has heretofore established with itself in its trust capacity at its corporate trust department a segregated trust account referred to herein as the "FHA Premium Account" for the benefit of the Securityholders and the Securities Insurer. The Indenture Trustee shall at all times maintain the FHA Premium Account as an Eligible Account and shall cause such accounts to be designated as "First Trust of New York, National 77 82 Association, as Indenture Trustee for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-2, FHA Premium Account". No later than the second Business Day preceding each Distribution Date, all amounts on deposit in the Collection Account representing payments by Obligors on Invoiced Loans in respect of premium on FHA Insurance shall be withdrawn by the Indenture Trustee and deposited to the FHA Premium Account. Any and all moneys transferred to the FHA Premium Account pursuant to this Section 5.01(a)(4) and Section 5.01(c)(i)(a) shall be held by the Indenture Trustee in the FHA Premium Account subject to disbursement and withdrawal as herein provided. Amounts deposited to the FHA Premium Account shall be invested in accordance with Section 5.04. Amounts on deposit in the FHA Premium Account shall be withdrawn by the Indenture Trustee, in the amounts required, for application as follows: (i) to payment to the FHA of any premiums due on the Contract of Insurance in respect of FHA Loans, in such amounts and on such dates as directed by the Master Servicer or Mego; the Indenture Trustee shall apply all amounts on deposit in the related FHA Premium Account to payment to the FHA of any premiums due under the Contract of Insurance as invoiced by FHA and, if, in connection with an FHA Loan, the FHA Insurance with respect to which shall not yet have been transferred to the Contract of Insurance, Mego instructs the Indenture Trustee to pay FHA insurance with respect to such FHA Loan to the related contract of insurance holder, the Indenture Trustee shall make such payment, and Mego and not the Indenture Trustee shall be liable in the event of the failure of such funds to be applied to payment of the premium with respect to such FHA Loan; and (ii) on the Business Day preceding a Distribution Date that is also the Termination Date, the Indenture Trustee shall withdraw from the FHA Premium Account and deposit in the Note Distribution Account all amounts then on deposit in the FHA Premium Account, whereupon the FHA Premium Account shall terminate. (b) Withdrawals from Collection Account. No later than the second Business Day preceding each Distribution Date, the Indenture Trustee shall withdraw amounts from the Collection Account representing the Payments with respect to the related Determination Date on deposit therein and deposit such amounts into the Note Distribution Account and liquidate the Permitted Investments in which such amounts are invested and distribute all net investment earnings to the Servicer. (c) Withdrawals from Note Distribution Account. On each Distribution Date, the Indenture Trustee shall liquidate the Permitted Investments in which amounts on deposit in the Note Distribution Account are invested and distribute all net investment earnings to the Servicer and, to the extent funds are available in the Note Distribution Account, the Indenture Trustee (based on the information contained in the Master Servicer Certificate for such Distribution Date) shall make the following withdrawals from the Note Distribution Account by 10:00 a.m. (New York City time) on such Distribution Date, in the following order of priority: 78 83 (i) to distribute on such Distribution Date the following amounts pursuant to the Indenture, from the Collected Amount, in the following order: (a) for deposit in the FHA Premium Account, the FHA Premium Account Deposit for such Distribution Date; (b) concurrently, to (x) the Master Servicer, the Master Servicer Fee, (y) the Servicer, the Servicer Fee, and (z) to the Indenture Trustee, the Indenture Trustee Fee, in each case for such Distribution Date; (c) to the Master Servicer or Servicer, any amount in respect of reimbursement of Interest Advances or Foreclosure Advances, to which the Master Servicer or any Servicer is entitled pursuant to Section 4.09 with respect to such Distribution Date and to the Claims Administrator, amounts in reimbursement of any expenses, of filing of any FHA Insurance claim pursuant to Section 4.12(g); (d) to the Servicer, the Owner Trustee Fee Reserve, for such Distribution Date; (e) to the Securities Insurer, the sum of (a) the Premium for such Distribution Date for so long as no default in payment under the Guaranty Policy has occurred and is continuing and (b) any due and unpaid Premium for a previous Distribution Date required to be paid pursuant to Section 5.01(c)(i)(e) plus interest on such amount at the Late Payment Rate; (ii) to the holders of each Class of Notes, from the Amount Available remaining after the application of clause (i), an amount equal to the applicable Noteholders' Interest Distributable Amount for such Distribution Date; (iii) to the holders of each Class of Notes, subject to Section 5.01(e) below, from the Collected Amount remaining after the application of clauses (i) through (ii) above, the Noteholders' Monthly Principal Distributable Amount for such Distribution Date; provided, however, with respect to any Distribution Date as to which a full distribution pursuant to this Section 5.01(c)(iii) would cause the Overcollateralization Amount to exceed the Required OC Amount, the amounts to be distributed pursuant to this Section 5.01(c)(iii) shall be reduced by the amount of such excess; (iv) to the holders of each Class of Notes, subject to Section 5.01(e) below, from the Collected Amount after application of clauses (i) through (iii) above, the Distributable Excess Spread for such Distribution Date; (v) to the holders of each Class of Notes, subject to Section 5.01(e) below, from the Amount Available after application of clauses (i) through (iv) above, the 79 84 Noteholders' Guaranteed Principal Distribution Amount, if any, for such Distribution Date; (vi) to the Securities Insurer, from the Amount Available after application of clauses (i) through (v) above, the Securities Insurer Reimbursement Amount; (vii) to the Securities Insurer, from the Collected Amount after application of clauses (i) through (vi) above, any other amounts owing to the Securities Insurer under the Insurance Agreement; (viii) to any successor Master Servicer, if any, for such Distribution Date, from the Collected Amount after application of clauses (i) through (vii), amounts payable in accordance with Section 10.03(c) in addition to the Master Servicer Fee; (ix) to the FHA Reserve Fund, from the Collected Amount after application of clauses (i) through (viii), any unpaid Excess Claim Amount; (x) to the Person entitled thereto, payments in respect of Other Fees, from the Collected Amount after application of clauses (i) through (ix); and (xi) for deposit into the Certificate Distribution Account, for distribution pursuant to Section 5.03(b) on such Distribution Date to the holders of the Residual Certificates, any remaining Collected Amount after application of clauses (i) through (x) above. (d) Additional Withdrawals from Collection Account. On the third Business Day prior to each Distribution Date, the Indenture Trustee, at the direction of the Master Servicer shall also make the following withdrawals from the Collection Account, in no particular order of priority: (i) to withdraw any amount not required to be deposited in the Collection Account or deposited therein in error; and (ii) to clear and terminate the Collection Account in connection with the termination of this Agreement. (e) As to each Distribution Date, any shortfall in the amount of interest required to be distributed pursuant to Section 5.01(c)(ii) above, shall be allocated among each Class of Notes, in proportion to the amount each such Class would have been entitled to receive in the absence of such shortfall. As to each Distribution Date, distributions pursuant to Section 5.01(c)(iii), (iv) and (v) shall be made to the Class of Notes as follows: (i) prior to the occurrence and continuance of a Securities Insurer Default, sequentially, to the holders of the Class A-1 Notes, Class A-2 Notes, Class A-3 80 85 Notes, Class A-4 Notes and Class A-5 Notes in that order, until their respective Class Principal Balances have been reduced to zero; and (ii) upon the occurrence and continuance of a Securities Insurer Default and upon the first reduction of the Overcollateralization Amount thereafter to zero after such Securities Insurer Default, concurrently, to the holders of each Class of Notes then outstanding, pro rata, based upon their respective Class Principal Balances immediately prior to such Distribution Date. (f) All distributions made on each Class of Notes on each Distribution Date will be made on a pro rata basis among the Noteholders of such Class of record on the preceding Record Date based on the Percentage Interest represented by their respective Notes, and except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such Noteholder, if such Noteholder shall own of record Notes representing at least a $1,000,000 Denomination and shall have so notified the Indenture Trustee, and otherwise by check mailed, via first class mail, postage prepaid, to the address of such Noteholder appearing in the Note Register. The final distribution on each Note will be made in like manner, but only upon presentment and surrender of such Note at the location specified in the notice to Noteholders of such final distribution. Whenever the Indenture Trustee, based on a Master Servicer Certificate, expects that the final distribution with respect to a Class of Securities will be made on the next Distribution Date, the Indenture Trustee shall, as soon as practicable, mail to each Holder of such Class of Securities as of the applicable Record Date a notice to the effect that: (i) the Indenture Trustee expects that the final distribution with respect to such Class of Securities will be made on such Distribution Date, and (ii) no interest shall accrue on such Class of Securities after such Distribution Date provided that the final distribution occurs on such Distribution Date. Section 5.02 Claims Under Guaranty Policy. (a) The Insured Securities will be insured by the Guaranty Policy pursuant to the terms set forth therein, notwithstanding any provisions to the contrary contained in the Indenture or this Agreement. All amounts received under the Guaranty Policy shall be used solely for the payment to Securityholders of principal and interest on the Notes. (i) On the Determination Date preceding each Distribution Date, the Indenture Trustee shall determine if a Deficiency Amount exists with respect to each Class of Insured Securities. If a Deficiency Amount does exist with respect to a Class of Insured Securities, the Indenture Trustee shall promptly, but in no event later than 12:00 noon New York City time on the second Business Day preceding the related Distribution Date, make a claim under the Guaranty Policy for such Class in accordance with its terms. 81 86 (ii) On any date on which the Indenture Trustee receives written notice from the Holder of a Class of Insured Securities that a Preference Amount is payable pursuant to the terms of the Guaranty Policy, the Indenture Trustee shall make a claim for the payment of such Preference Amount and shall deliver the documents required to be delivered under the Guaranty Policy to the Securities Insurer with respect thereto in the manner set forth in the Guaranty Policy. (b) The Securities Insurer is entitled to the benefit of the following provisions in the event that an Insured Payment has been made. Notwithstanding any other provision hereof: (i) The Indenture Trustee (i) shall receive as attorney-in-fact of each Securityholder with respect to which a Deficiency Amount has been determined to exist any Insured Payment from the Securities Insurer and (ii) shall immediately apply all moneys constituting an Insured Payment to the payment to Securityholders of principal and interest on the Notes, by depositing such amounts in the Note Distribution Account for Insured Payments payable on the related Class of Notes, on the immediately succeeding Distribution Date. All amounts received under the Guaranty Policy shall be used solely for the payment to Securityholders of principal and interest on Notes. The Securities Insurer's obligations under the Guaranty Policy with respect to a particular Insured Payment shall be discharged to the extent funds equal to the applicable Insured Payment are received by the Indenture Trustee, whether or not such funds are properly applied by the Indenture Trustee. The parties hereto recognize that the making of an Insured Payment does not relieve any of the parties hereto of any obligation hereunder or under any of the Transaction Documents. (ii) The parties hereto recognize that, to the extent that the Securities Insurer makes payments, directly or indirectly, on account of principal of or interest on the Insured Securities, as applicable, the Securities Insurer shall be subrogated to the rights of the Securityholders to receive distributions of principal and interest in accordance with the terms hereof. (iii) With respect to any Distribution Date, to the extent the Securities Insurer is owed any Securities Insurer Reimbursement Amount (including without limitation any unreimbursed Insured Payments made under the Guaranty Policy plus interest accrued thereon as provided in the Insurance Agreement), the Securities Insurer shall be entitled to distributions pursuant to Sections 5.01(c)(vi) and (vii), and the Indenture Trustee shall otherwise treat the Securities Insurer as the owner of such rights to distributions of any Securities Insurer Reimbursement Amount. (iv) The Securities Insurer shall have the right to institute any suit, action or proceeding at law or in equity under the same terms as a Securityholder may institute any action. Section 5.03 Certificate Distribution Account. 82 87 (a) Establishment. No later than the Closing Date, the Indenture Trustee, for the benefit of the Securityholders and the Securities Insurer, will establish and maintain with Indenture Trustee for the benefit of the Owner Trustee on behalf of the Certificateholders and the Securities Insurer one or more separate Eligible Accounts, which while the Indenture Trustee holds such Trust Account shall be entitled "Certificate Distribution Account, First Trust of New York, National Association, as Co-Owner Trustee, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-2". Funds in the Certificate Distribution Account shall be invested in accordance with Section 5.04. (b) Distributions. On each Distribution Date, the Indenture Trustee shall withdraw from the Note Distribution Account all amounts required to be deposited in the Certificate Distribution Account with respect to the preceding Due Period pursuant to Section 5.01(c)(xi) and will remit such amount to the Owner Trustee or the Co-Owner Trustee for deposit into the Certificate Distribution Account. On each Distribution Date, the Owner Trustee or the Co-Owner Trustee shall distribute all amounts on deposit in the Certificate Distribution Account to the Residual Certificateholders. (c) All distributions made on the Residual Certificates on each Distribution Date will be made on a pro rata basis among the Residual Certificateholders of record on the next preceding Record Date based on the Percentage Interest represented by their respective Residual Certificates, and except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such Residual Certificateholder, if such Residual Certificateholder shall own of record Residual Certificates representing at least a 30% Percentage Interest and shall have so notified the Owner Trustee or Co-Owner Trustee, and otherwise by check mailed, via first class mail, postage prepaid, to the address of such Residual Certificateholder appearing in the Certificate Register. The final distribution on each Residual Certificate will be made in like manner, but only upon presentment and surrender of such Residual Certificate at the location specified in the notice to holders of the Residual Certificates of such final distribution. Section 5.04 Trust Accounts; Trust Account Property. (a) Control of Trust Accounts. Each of the Trust Accounts established hereunder has been pledged by the Issuer to the Indenture Trustee under the Indenture and shall be subject to the lien of the Indenture. In addition to the provisions hereunder, each of the Trust Accounts shall also be established and maintained pursuant to the Indenture. Amounts distributed from each Trust Account in accordance with the Indenture and this Agreement shall be released from the lien of the Indenture upon such distribution thereunder or hereunder. The Indenture Trustee shall possess all right, title and interest in all funds on deposit from time to time in the Trust Accounts (other than the Certificate Distribution Account) and in all proceeds thereof and all such funds, investments, proceeds shall be part of the Trust Account Property and the Trust Estate. If, at any time, any Trust Account ceases to be an Eligible Account, the Indenture Trustee (or the Master Servicer on its behalf) shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) (i) establish a new Trust 83 88 Account as an Eligible Account, (ii) terminate the ineligible Trust Account, and (iii) transfer any cash and investments from such ineligible Trust Account to such new Trust Account. With respect to the Trust Accounts (other than the Certificate Distribution Account), the Indenture Trustee agrees, by its acceptance hereof, that each such Trust Account shall be subject to the sole and exclusive custody and control of the Indenture Trustee for the benefit of the Securityholders, the Securities Insurer and the Issuer, as the case may be, and the Indenture Trustee shall have sole signature and withdrawal authority with respect thereto. In addition to this Agreement and the Indenture, the Certificate Distribution Account established hereunder also shall be subject to and established and maintained in accordance with the Trust Agreement. Subject to rights of the Indenture Trustee hereunder and under the Indenture, the Owner Trustee and the Co-Owner Trustee shall possess all right, title and interest for the benefit of the Securityholders and the Securities Insurer in all funds on deposit from time to time in the Certificate Distribution Account and in all proceeds thereof (including all income thereon) and all such funds, investments, proceeds and income shall be part of the Trust Account Property and the Trust Estate. Subject to the rights of the Indenture Trustee, the Owner Trustee and Co-Owner Trustee agree, by its acceptance hereof, that such Certificate Distribution Account shall be subject to the sole and exclusive custody and control of the Owner Trustee or Co-Owner Trustee for the benefit of the Issuer and the parties entitled to distributions therefrom, including without limitation, the Certificateholders and Securities Insurer, and the Owner Trustee and the Co-Owner Trustee shall have sole signature and withdrawal authority with respect to the Certificate Distribution Account. Notwithstanding the preceding, the distribution of amounts from the Certificate Distribution Account in accordance with Section 5.03(b) also shall be made for the benefit of the Indenture Trustee (including without limitation as the named insured under the Guaranty Policy on behalf of all Securityholders, and with respect to its duties under the Indenture and this Agreement relating to the Trust Estate), and the Indenture Trustee (in its capacity as Indenture Trustee) shall have the right, but not the obligation to take custody and control of the Certificate Distribution Account and to cause the distribution of amounts therefrom in the event that the Owner Trustee or Co-Owner Trustee fails to distribute such amounts in accordance with Section 5.03(b). The Master Servicer shall have the power, revocable by the Indenture Trustee or by the Owner Trustee or Co-Owner Trustee with the consent of the Indenture Trustee, to instruct the Indenture Trustee, Co-Owner Trustee or Owner Trustee to make withdrawals and payments from the Trust Accounts for the purpose of permitting the Master Servicer to carry out its respective duties hereunder or permitting the Indenture Trustee or Owner Trustee to carry out its duties herein or under the Indenture or the Trust Agreement, as applicable. (b) (1) Investment of Funds. The funds held in any Trust Account may only be invested (to the extent practicable and consistent with any requirements of the Code) in Permitted Investments, as directed by a Responsible Officer of Mego in writing. In any case, funds in any Trust Account must be available for withdrawal without penalty, and any Permitted Investments and the funds held in any Trust Account, other than the Note Distribution Account, must mature 84 89 or otherwise be available for withdrawal, not later than three (3) Business Days immediately preceding the Distribution Date next following the date of such investment and shall not be sold or disposed of prior to its maturity subject to Section 5.04(b)(2) below. Amounts deposited to the Note Distribution Account pursuant to Section 5.01(b) prior to each Distribution Date (other than proceeds under the Guaranty Policy) shall be invested in Permitted Investments which are overnight investments from the date of deposit to the Business Day preceding each Distribution Date. All interest and any other investment earnings on amounts or investments held in any Trust Account shall be deposited into such Trust Account immediately upon receipt by the Indenture Trustee, or in the case of the Certificate Distribution Account, the Owner Trustee or Co-Owner Trustee, as applicable. All Permitted Investments in which funds in any Trust Account (other than the Certificate Distribution Account) are invested must be held by or registered in the name of "First Trust of New York, National Association, as Indenture Trustee, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-2". While the Co-Owner Trustee holds the Certificate Distribution Account, all Permitted Investments in which funds in the Certificate Distribution Account are invested shall be held by or registered in the name of "First Trust of New York, National Association, as Co-Owner Trustee, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-2". (2) Insufficiency and Losses in Trust Accounts. If any amounts are needed for disbursement from any Trust Account and sufficient uninvested funds are not available to make such disbursement, the Indenture Trustee, or Owner Trustee or Co-Owner Trustee in the case of the Certificate Distribution Account, shall cause to be sold or otherwise converted to cash a sufficient amount of the investments in such Trust Account. The Indenture Trustee, or Owner Trustee or Co-Owner Trustee in the case of the Certificate Distribution Account, shall not be liable for any investment loss or other charge resulting therefrom, unless such loss or charge is caused by the failure of the Indenture Trustee or Owner Trustee or Co-Owner Trustee, respectively, to perform in accordance with this Section 5.04. If any losses are realized in connection with any investment in any Trust Account pursuant to this Agreement and the Indenture, then Mego shall deposit the amount of such losses (to the extent not offset by income from other investments in such Trust Account) in such Trust Account immediately upon the realization of such loss. All interest and any other investment earnings on amounts held in any Trust Account shall be taxed to the Seller. (c) Subject to Section 6.1 of the Indenture, the Indenture Trustee shall not in any way be held liable by reason of any insufficiency in any Trust Account held by the Indenture Trustee resulting from any investment loss on any Permitted Investment included therein (except to the extent that the Indenture Trustee is the obligor and has defaulted thereon). (d) With respect to the Trust Account Property, the Indenture Trustee acknowledges and agrees that: (1) any Trust Account Property that is held in deposit accounts shall be held solely in the Eligible Accounts; and each such Eligible Account shall be subject to the 85 90 exclusive custody and control of the Indenture Trustee, and the Indenture Trustee shall have sole signature authority with respect thereto; (2) any Trust Account Property that constitutes Physical Property shall be delivered to the Indenture Trustee in accordance with paragraph (a) of the definition of "Delivery" and shall be held, pending maturity or disposition, solely by the Indenture Trustee or a financial intermediary (as such term is defined in Section 8-313(4) of the UCC) acting solely for the Indenture Trustee; (3) any Trust Account Property that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations shall be delivered in accordance with paragraph (b) of the definition of "Delivery" and shall be maintained by the Indenture Trustee, pending maturity or disposition, through continued book-entry registration of such Trust Account Property as described in such paragraph; and (4) any Trust Account Property that is an "uncertificated security" under Article VIII of the UCC and that is not governed by clause (3) above shall be delivered to the Indenture Trustee in accordance with paragraph (c) of the definition of "Delivery" and shall be maintained by the Indenture Trustee, pending maturity or disposition, through continued registration of the Indenture Trustee's (or its nominee's) ownership of such security. Section 5.05 Servicer to Pay Owner Trustee Fee. On the Distribution Date occuring in May each year during the term of this Agreement, commencing in May 1998, the Servicer shall pay to the Owner Trustee, the Owner Trustee Fee. 86 91 ARTICLE VI. STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS Section 6.01 Master Servicing Certificate. On each Determination Date, the Master Servicer shall deliver to the Indenture Trustee, the Owner Trustee, Co-Owner Trustee and the Securities Insurer, a certificate containing the items described in Exhibit B hereto (each, a "Master Servicer Certificate"), prepared as of the related Determination Date and executed by a Master Servicing Officer. No later than the Business Day following each Determination Date, the Master Servicer shall deliver to the Indenture Trustee and the Securities Insurer, in a format consistent with other electronic loan level reporting supplied by the Master Servicer in connection with similar transactions, "loan level" information with respect to the Home Loans as of the related Determination Date, to the extent that such information has been provided to the Master Servicer by the Servicer. The Master Servicer shall revise any Master Servicer Certificate to take into account any payments of which the Master Servicer is notified made by the Indenture Trustee to FHA after the related Determination Date and before the related Distribution Date as provided in Section 4.12(e). The Indenture Trustee may rely on the Master Servicer Certificate with respect to the matters set forth therein. Section 6.02 Statement to Securityholders. On or before the third Business Day following each Distribution Date, the Indenture Trustee shall mail: to each Holder of a Security (with a copy to the Securities Insurer, the Depositor and the Rating Agency) at its address shown on the Certificate Register or Note Register, as applicable, a statement, based on information set forth in the Master Servicer Certificate for such Distribution Date, substantially in the form of Statement to Securityholders attached hereto as Exhibit C, respectively, together with a copy of such related Master Servicer Certificate. 87 92 ARTICLE VII. CONCERNING THE CONTRACT OF INSURANCE HOLDER Section 7.01 Compliance with Title I and Filing of FHA Claims. (a) The Contract of Insurance Holder shall at all times while any Securities are outstanding have a valid Contract of Insurance with the FHA covering the FHA Loans. To the extent applicable to the duties of the Contract of Insurance Holder hereunder, the Contract of Insurance Holder shall comply with the requirements of Title I and shall take or refrain from taking such actions as are necessary or appropriate to maintain a valid Contract of Insurance for the Trust with the FHA covering the FHA Loans. (b) If and for so long as the Contract of Insurance covers any loans other than the FHA Loans, and if HUD shall not have earmarked the coverage of the Contract of Insurance with respect to the FHA Loans, the Contract of Insurance Holder covenants and agrees not to submit any claim to FHA with respect to an FHA Loan if the effect of approval of such claim would result in the amount of claims paid by the FHA in respect of the FHA Loans to exceed the Trust Designated Insurance Amount. Notwithstanding the foregoing, the Claims Administrator shall promptly notify the Owner Trustee, the Indenture Trustee, the Master Servicer and the Securities Insurer if the amount of claims submitted to FHA in respect of the FHA Loans under the Contract of Insurance exceeds the Trust Designated Insurance Amount. As of the Closing Date and at all times thereafter until the Termination Date, the Contract of Insurance Holder covenants and agrees that the Contract of Insurance will only apply to the FHA Loans and Related Series Loans, exclusively, or HUD shall have agreed pursuant to 24 C.F.R. Section 201.32(d)(1) to "earmark" the FHA insurance relating to the FHA Loans and Related Series Loans, in a manner satisfactory to the Securities Insurer, in its sole and absolute discretion. Mego, as Claims Administrator and Servicer, covenants and agrees that it shall not take any action that would result in the Contract of Insurance applying to loans other than the FHA Loans and the Related Series Loans, exclusively, unless HUD shall have agreed pursuant to 24 C.F.R. Section201.32(d)(1) to "earmark" the FHA insurance relating to the FHA Loans and Related Series Loans in a manner satisfactory to the Securities Insurer, in its sole and absolute discretion. (c) The Owner Trustee and Co-Owner Trustee hereby appoint Mego Mortgage Corporation as Claims Administrator and the Indenture Trustee hereby consents to such appointment. Mego Mortgage Corporation, as Claims Administrator, shall perform on behalf of the Contract of Insurance Holder the duties associated with the submission of claims under Title I in connection with the Contract of Insurance, except to the extent that certain documents must be signed by the Contract of Insurance Holder (in which case the Contract of Insurance Holder shall only sign such documents at the direction of the Claims Administrator) and shall not, in its capacity as Claims Administrator, take any action or omit to take any action that would cause the Contract of Insurance Holder to violate this Section 7.01 or otherwise fail to maintain a valid Contract of Insurance or cause any denial by FHA of an insurance claim under Title I. 88 93 (d) The Contract of Insurance Holder shall not be deemed to have violated this Section 7.01 and shall otherwise incur no liability hereunder if any failure to maintain a valid Contract of Insurance or to comply with the requirements of Title I or any denial by FHA of an insurance claim under Title I shall have been caused by any act or omission of the Master Servicer or Claims Administrator in the performance of its duties hereunder. The Contract of Insurance Holder shall be permitted to, or, if directed by the Securities Insurer, so long as no Securities Insurer Default exists, shall replace the Claims Administrator for any failure of the Claims Administrator to perform its duties hereunder. Any successor Claims Administrator shall be subject to the prior approval of the Securities Insurer, provided no Securities Insurer Default is then occurring. (e) The Contract of Insurance Holder hereby represents and warrants to the Depositor, the Master Servicer, the Seller, the Owner Trustee, the Indenture Trustee for the benefit of the Securityholders and the Securities Insurer that First Trust of New York, National Association is an investing lender in good standing with HUD having authority to purchase, hold, and sell loans insured under 24 CFR Part 201, pursuant to a valid Contract of Insurance, Number 71400 0000 6. (f) The Seller shall forward to the Indenture Trustee a fully executed Transfer of Note Report for each FHA Loan within 20 days of the receipt by the Seller of such FHA Loan's case number under the Contract of Insurance. The Trustee shall execute each Transfer of Note Report, as buying lender, and submit such Transfer of Note Report to HUD within 31 days of the transfer of the FHA Loans to the Trust. Section 7.02. Contract of Insurance Holder. (a) The Contract of Insurance Holder shall not resign from the obligations and duties imposed on it by this Agreement as Contract of Insurance Holder except (i) upon a determination that by reason of a change in legal requirements or requirements imposed by the FHA the performance of its duties under this Agreement would cause it to be in violation of such legal requirements or FHA imposed requirements in a manner which would result in a material adverse effect on the Contract of Insurance Holder or cause it to become ineligible to hold the Contract of Insurance and (ii) the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing) or the Majority Securityholders (if a Securities Insurer Default shall have occurred and be continuing) does not elect to waive the obligations of the Contract of Insurance Holder to perform the duties which render it legally unable to act or to delegate those duties to another Person or if the circumstances giving rise to such illegality cannot be waived or delegated. Any such determination permitting the resignation of the Contract of Insurance Holder shall be evidenced by an Opinion of Counsel to such effect delivered and acceptable to the Indenture Trustee and the Securities Insurer. Upon receiving such notice of resignation, the Contract of Insurance shall be transferred to a qualified successor with the consent of the Securities Insurer by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Contract of Insurance Holder and one copy to the successor Contract of Insurance Holder. Notwithstanding the foregoing, the Contract of Insurance Holder may 89 94 resign, with the prior written consent of the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing) or the Majority Securityholders (if a Securities Insurer Default shall have occurred and be continuing), which may be withheld in its sole and absolute discretion, upon transfer of the FHA insurance and related reserves with respect to the FHA Loans and any Related Series Loans to a contract of insurance held by a successor Contract of Insurance Holder provided, however, that any Contract of Insurance held by such successor Contract of Insurance Holder shall satisfy the criteria set forth in Section 7.01(b), and, at the time of succession, shall have an FHA insurance coverage reserve account balance not less than that of the FHA Insurance Coverage Reserve Account at the time of succession. (b) If at any time (i) the Contract of Insurance shall be revoked, suspended or otherwise terminated, or (ii) the Contract of Insurance Holder shall become incapable of acting, or shall be adjudged as bankrupt or insolvent, or a receiver of the Contract of Insurance Holder or of its property shall be appointed, or any public officer shall take charge or control of the Contract of Insurance Holder or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing) or the Majority Securityholders (if a Securities Insurer Default shall have occurred and be continuing) may remove the Contract of Insurance Holder and appoint a successor contract of insurance holder by written instrument, in duplicate, one copy of which instrument shall be delivered to the Contract of Insurance Holder so removed and one copy to the successor contract of insurance holder. Upon removal of the Contract of Insurance Holder, the outgoing Contract of Insurance Holder shall take any action required to transfer the benefits of the FHA Insurance Coverage Reserve Account to the successor contract of insurance holder. (c) Any resignation or removal of the Contract of Insurance Holder and appointment of a successor contract of insurance holder pursuant to any of the provisions of this Section 7.02 shall become effective upon acceptance of appointment by the successor contract of insurance holder. (d) On or prior to the Closing Date, the Contract of Insurance Holder shall have instructed FHA to forward all payments in respect of claims under the Contract of Insurance made to the Contract of Insurance Holder to First Trust of New York, National Association, as Indenture Trustee and Co-Owner Trustee. The Contact of Insurance Holder shall provide no further notification with respect to which such payments shall be directed unless directed by First Trust of New York, National Association, as Indenture Trustee. 90 95 ARTICLE VIII. [Reserved] 91 96 ARTICLE IX. THE MASTER SERVICER Section 9.01 Indemnification; Third Party Claims. (a) 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 and the representations made by the Master Servicer. (b) The Master Servicer shall indemnify, defend and hold harmless the Trust, the Indenture Trustee, Owner Trustee, the Co-Owner Trustee, Mego, the Depositor and the Securities Insurer, their respective officers, directors, agents and employees and the Securityholders from and against any and all costs, expenses, losses, claims, damages, and liabilities to the extent that such cost, expense, loss, claim, damage or liability arose out of, or was imposed upon the Trust, Indenture Trustee, the Owner Trustee, the Co-Owner Trustee, Mego, the Depositor, the Securities Insurer or the Securityholders through the breach of this Agreement by the Master Servicer, the negligence, willful misfeasance, or bad faith of the Master Servicer in the performance of its duties under this Agreement or by reason of reckless disregard of its obligations and duties under this Agreement. Such indemnification shall include, without limitation, reasonable fees and expenses of counsel and expenses of litigation. Section 9.02 Merger or Consolidation of the Master Servicer. The Master Servicer shall not merge or consolidate with any other person, convey, transfer or lease substantially all its assets as an entirety to another Person, or permit any other Person to become the successor to the Master Servicer's business unless, after the merger, consolidation, conveyance, transfer, lease or succession, the successor or surviving entity (i) shall be an Eligible Servicer, (ii) shall be capable of fulfilling the duties of the Master Servicer contained in this Agreement and (iii) shall have a long-term debt rating which is BBB and Baa2 by Standard & Poor's and Moody's respectively. Any corporation (i) into which the Master Servicer may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Master Servicer shall be a party, (iii) which acquires by conveyance, transfer or lease substantially all of the assets of the Master Servicer, or (iv) succeeding to the business of the Master Servicer, in any of the foregoing cases shall execute an agreement of assumption to perform every obligation of the Master Servicer under this Agreement and, whether or not such assumption agreement is executed, shall be the successor to the Master Servicer under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement, anything in this Agreement to the contrary notwithstanding; provided, however, that nothing contained herein shall be deemed to release the Master Servicer from any obligation. The Master Servicer shall provide notice of any merger, consolidation or succession pursuant to this Section 9.02 to the Owner Trustee, the Indenture Trustee, the Securities Insurer and each Rating Agency. Notwithstanding the foregoing, as a condition to the consummation of the 92 97 transactions referred to in clauses (i) through (iv) above, (x) immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 3.02 shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction), and (y) the Master Servicer shall have delivered to the Owner Trustee, the Indenture Trustee and the Securities Insurer an Officer's Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section 9.02 and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with. Section 9.03 Limitation on Liability of the Master Servicer and Others. Neither the Master Servicer nor any of its directors, officers, employees or agents shall be under any liability to the Trust or to the Securityholders for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Master Servicer or any such Person against any breach of warranties, representations or covenants made herein or any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in performing or failing to perform duties hereunder or by reason of reckless disregard of obligations and duties hereunder. The Master Servicer and any of its directors, officers, employees or agents 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. Section 9.04 Master Servicer Not to Resign; Assignment. (a) The Master Servicer shall not resign from the obligations and duties hereby imposed on it except (i) with the consent of the Securities Insurer and the Rating Agencies or (ii) upon determination that by reason of a change in legal requirements the performance of its duties under this Agreement would cause it to be in violation of such legal requirements in a manner which would result in a material adverse effect on the Master Servicer and the Securities Insurer (so long as a Securities Insurer Default shall not have occurred and be continuing) does not elect to waive the obligations of the Master Servicer to perform the duties which render it legally unable to act or to delegate those duties to another Person. Any such determination permitting the resignation of the Master Servicer by reason of a change in such legal requirements shall be evidenced by an Opinion of Counsel to such effect delivered and acceptable to the Indenture Trustee and the Securities Insurer (unless a Securities Insurer Default shall have occurred and be continuing). No resignation of the Master Servicer shall become effective until the Indenture Trustee or a successor master servicer acceptable to the Securities Insurer shall have assumed the Master Servicer's servicing responsibilities and obligations in accordance with Section 10.02. (b) Notwithstanding anything to the contrary herein, the Master Servicer shall remain liable for all liabilities and obligations incurred by it as Master Servicer hereunder prior to the time that any resignation or assignment referred to in subsection (a) above or termination under Section 10.01 becomes effective, including the obligation to indemnify the Indenture Trustee pursuant to Section 9.01(b) hereof. 93 98 (c) The Master Servicer agrees to cooperate with any successor Master Servicer in effecting the transfer of the Master Servicer's servicing responsibilities and rights hereunder pursuant to subsection (a), including, without limitation, the transfer to such successor of all relevant records and documents (including any Home Loan Files in the possession of the Master Servicer and the Servicing Record) and all amounts credited to the Servicing Record or thereafter received with respect to the Home Loans and not otherwise permitted to be retained by the Master Servicer pursuant to this Agreement. In addition, the Master Servicer, at its sole cost and expense, shall prepare, execute and deliver any and all documents and instruments to the successor Master Servicer including all Home Loan Files in its possession and do or accomplish all other acts necessary or appropriate to effect such termination and transfer of servicing responsibilities, including, without limitation, assisting in obtaining any necessary approval under Title I from the FHA. Section 9.05 Relationship of Master Servicer to Issuer and the Indenture Trustee. The relationship of the Master Servicer (and of any successor to the Master Servicer as servicer under this Agreement) to the Issuer and the Indenture Trustee under this Agreement is intended by the parties hereto to be that of an independent contractor and not of a joint venturer, agent or partner of the Issuer or the Indenture Trustee. Section 9.06 Master Servicer May Own Notes. Each of the Master Servicer and any affiliate of the Master Servicer may in its individual or any other capacity become the owner or pledgee of Notes with the same rights as it would have if it were not the Master Servicer or an affiliate thereof except as otherwise specifically provided herein. Notes so owned by or pledged to the Master Servicer or such affiliate shall have an equal and proportionate benefit under the provisions of this Agreement, without preference, priority, or distinction as among all of the Notes, provided that any Notes owned by the Master Servicer or any affiliate thereof, during the time such Notes are owned by them, shall be without voting rights for any purpose set forth in this Agreement. The Master Servicer shall notify the Indenture Trustee and the Securities Insurer promptly after it or any of its affiliates becomes the owner or pledgee of a Note. 94 99 ARTICLE X. DEFAULT Section 10.01 Events of Default. For purposes of this Agreement, each of the following shall constitute an "Event of Default." (a) (i) failure by the Master Servicer to deposit or cause the Servicer to deposit all Payments in the Collection Account no later than the second Business Day following receipt thereof by the Master Servicer or Servicer, which failure continues unremedied for two Business Days; (ii) failure of the Master Servicer to pay when due any amount payable by it under the Insurance Agreement, which failure continues unremedied for two Business Days; or (iii) failure of the Master Servicer to pay when due any amount payable by it under this Agreement and such failure results in a drawing under the Guaranty Policy; or (b) failure on the part of the Master Servicer duly to observe or perform in any material respect any of its other covenants or agreements contained in this Agreement that continues unremedied for a period of 30 days after the earlier of (x) the date on which the Master Servicer gives notice of such failure to the Indenture Trustee or the Securities Insurer pursuant to Section 4.04(b) and (y) 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 Indenture Trustee or the Securities Insurer, or to the Master Servicer and the Indenture Trustee pursuant to the direction of the Majority Securityholders; or (c) failure by the Master Servicer to deliver to the Indenture Trustee and (so long as a Securities Insurer Default shall not have occurred and be continuing) the Securities Insurer the Master Servicer Certificate by the fourth Business Day prior to each Distribution Date, or failure on the part of the Master Servicer to observe its covenants and agreements set forth in Section 3.02(o); or (d) the entry of a decree or order for relief by a court or regulatory authority having jurisdiction in respect of the Master Servicer in an involuntary case under the federal bankruptcy laws, as now or hereafter in effect, or another present or future, federal or state, bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Master Servicer or of any substantial part of its properties or ordering the winding up or liquidation of the affairs of the Master Servicer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the commencement of an involuntary case under the federal bankruptcy laws, as now or hereinafter in effect, or another present or future federal or state bankruptcy, insolvency or similar law and such case is not dismissed within 60 days; or 95 100 (e) the commencement by the Master Servicer of a voluntary case under the federal bankruptcy laws, as now or hereinafter in effect, or any other present or future, federal or state bankruptcy, insolvency or similar law, or the consent by the Master Servicer to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Master Servicer or of any substantial part of its property or the making by the Master Servicer of an assignment for the benefit of creditors or the failure by the Master Servicer generally to pay its debts as such debts become due or the taking of corporate action by the Master Servicer in furtherance of any of the foregoing or the admission in writing by the Master Servicer of an inability to pay its debts as they become due; or (f) any representation, warranty or statement of the Master Servicer made in this Agreement or any certificate, report or other writing delivered pursuant hereto shall prove to be incorrect in any material respect as of the time when the same shall have been made, and the incorrectness of such representation, warranty or statement has a material adverse effect on the Trust and, within 30 days of the earlier of (x) the date on which the Master Servicer gives notice of such failure to the Indenture Trustee or the Securities Insurer pursuant to Section 4.04(b) and (y) the date on which written notice thereof shall have been given to the Master Servicer by the Indenture Trustee or the Securities Insurer (or, if a Securities Insurer Default shall have occurred and be continuing, written notice thereof shall have been given by the Majority Securityholders), the circumstances or condition in respect of which such representation, warranty or statement was incorrect shall not have been eliminated or otherwise cured; or (g) failure on the part of the Master Servicer to deposit into the Note Distribution Account within 3 Business Days following the related Determination Date any Interest Advance pursuant to Section 4.08; or (h) the Securities Insurer determines that the performance by the Master Servicer of its servicing duties hereunder with respect to the Home Loans is not, in the reasonable opinion of the Securities Insurer after consultation with the Master Servicer, in conformity with acceptable standards after considering the following factors: (A) the terms and conditions of this Agreement, (B) conformity with the Servicing Standards, (C) the Master Servicer's practices as of the Closing Date, provided that such practices are either (i) consistent with industry standards for the servicing of loans similar to the Home Loans or (ii) the Master Servicer's historical practices and procedures; or (i) the Master Servicer shall dissolve or liquidate, in whole or in part, in any material respects except to the extent that any resulting successor entity is acceptable to the Securities Insurer; or (j) the long-term debt rating of the Master Servicer shall be reduced below BBB and Baa2 by Standard & Poor's and Moody's, respectively; or (k) the Annual Default Percentage (Three Month Average) exceeds 6.5% or the 60+ Delinquency Percentage (Rolling Three Month) exceeds 6.0%. 96 101 Section 10.02 Consequences of an Event of Default. If an Event of Default shall occur and be continuing, the Securities Insurer (or, if a Securities Insurer Default shall have occurred and be continuing, the Indenture Trustee at the direction of the Majority Securityholders), by notice given in writing to the Master Servicer (and to the Indenture Trustee if given by the Securities Insurer or the Securityholders) may terminate all of the rights and obligations of the Master Servicer under this Agreement. On or after the receipt by the Master Servicer of such written notice, and the appointment of and acceptance by a successor Master Servicer, all authority, power, obligations and responsibilities of the Master Servicer under this Agreement, whether with respect to the Securities or the Trust or otherwise, shall pass to, be vested in and become obligations and responsibilities of the successor Master Servicer; provided, however, that the successor Master Servicer shall have no liability with respect to any obligation which was required to be performed by the prior Master Servicer prior to the date that the successor Master Servicer becomes the Master Servicer or any claim of a third party based on any alleged action or inaction of the prior Master Servicer. The successor Master Servicer is authorized and empowered by this Agreement to execute and deliver, on behalf of the prior 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. The prior Master Servicer agrees to cooperate with the successor Master Servicer in effecting the termination of the responsibilities and rights of the prior Master Servicer under this Agreement, including, without limitation, the transfer to the successor Master Servicer for administration by it of all cash amounts that shall at the time be held by the prior Master Servicer for deposit, or have been deposited by the prior Master Servicer, in the Collection Account or thereafter received with respect to the Home Loans and the delivery to the successor Master Servicer of all Home Loan Files in the Master Servicer's possession and a computer tape in readable form containing the Servicing Record and any other information necessary to enable the successor Master Servicer to service the Home Loans. If requested by the Securities Insurer (unless a Securities Insurer Default shall have occurred and be continuing), the successor Master Servicer shall direct the Obligors to make all payments under the Home Loans directly to the successor Master Servicer, or to a lockbox established by the Master Servicer at the direction of the Securities Insurer (unless a Securities Insurer Default shall have occurred and be continuing), at the prior Master Servicer's expense. In addition to any other amounts that are then payable to the terminated Master Servicer under this Agreement, the terminated Master Servicer shall then be entitled to receive (to the extent provided by Section 4.09) out of the Collected Amount, reimbursements for any outstanding Interest Advances made during the period prior to the notice pursuant to this Section 10.02 which terminates the obligation and rights of the terminated Master Servicer under this Agreement. The Indenture Trustee and the successor Master Servicer may set off and deduct any amounts owed by the terminated Master Servicer from any amounts payable to the terminated Master Servicer. The terminated Master Servicer shall grant the Indenture Trustee, the successor Master Servicer and the Securities Insurer reasonable access to the terminated Master Servicer's premises at the terminated Master Servicer's expense. Section 10.03 Appointment of Successor. 97 102 (a) On or after the time the Master Servicer receives a notice of termination pursuant to Section 10.02 or upon the resignation of the Master Servicer pursuant to Section 9.04, the Indenture Trustee shall be the successor in all respects to the Master Servicer in its capacity as master servicer under this Agreement and the transactions set forth or provided for in this Agreement, and shall be subject to all the responsibilities, restrictions, duties, liabilities and termination provisions relating thereto placed on the Master Servicer by the terms and provisions of this Agreement. The Indenture Trustee shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. If the Indenture Trustee or any other successor Master Servicer is acting as Master Servicer hereunder, it shall be subject to termination under Section 10.02 upon the occurrence of an Event of Default applicable to it as Master Servicer. (b) Any successor Master Servicer appointed pursuant to the provisions of this Agreement must be approved by the Securities Insurer (provided no Securities Insurer Default is then occurring and continuing) and shall execute, acknowledge and deliver to the Indenture Trustee, the Securities Insurer and its predecessor Master Servicer an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Master Servicer shall become effective. (c) Any successor Master Servicer shall be entitled to such compensation (whether payable out of the Collected Amount or otherwise) as the Master Servicer would have been entitled to under the Agreement if the Master Servicer had not resigned or been terminated hereunder. The Securities Insurer and a successor Master Servicer may agree on additional compensation to be paid to such successor Master Servicer in accordance with Section 5.01(c)(viii). In addition, any successor Master Servicer shall be entitled, to reasonable transition expenses incurred in acting as successor Master Servicer pursuant to Section 5.01(c)(viii). Section 10.04 Notification to Certificateholders. Upon any termination of the Master Servicer or appointment of a successor to the Master Servicer, the Indenture Trustee shall give prompt written notice thereof to Securityholders at their respective addresses appearing in the Note Register and Certificate Register. Section 10.05 Waiver of Past Defaults. The Securities Insurer (or, if a Securities Insurer Default shall have occurred and be continuing, the Majority Securityholders) may, on behalf of all Securityholders, waive any default by the Master Servicer in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon. 98 103 ARTICLE XI. TERMINATION Section 11.01 Termination. (a) This Agreement shall terminate upon notice to the Indenture Trustee of either: (a) the later of (i) the satisfaction and discharge of the Indenture pursuant to Section 4.1 of the Indenture or (ii) the disposition of all funds with respect to the last Home Loan and the remittance of all funds due hereunder and the payment of all amounts due and payable to the Indenture Trustee, the Owner Trustee, the Co-Owner Trustee, the Issuer, the Master Servicer, the Servicer, the Custodian and the Securities Insurer; or (b) the mutual consent of the Master Servicer, the Depositor, the Seller, the Securities Insurer and all Securityholders in writing. (b) Subject to the provisions of the following sentence, Mego or, if such option is not exercised by Mego, the Master Servicer may, at its option (with the prior written consent of the Securities Insurer if such purchase would result in a claim under the Guaranty Policy), upon not less than thirty days' prior notice given to the Indenture Trustee at any time on or after the applicable Early Termination Notice Date, purchase on the Termination Date specified in such notice, all, but not less than all, the Home Loans, all claims made under the Contract of Insurance with respect to Home Loans that are pending with FHA ("FHA Pending Claims") and Foreclosed Properties then included in the Trust, at a purchase price (the "Termination Price"), payable in cash, equal to the sum of: (i) the Principal Balance of each Home Loan included in the Trust as of such Monthly Cut-Off Date; (ii) all unpaid interest accrued on the Principal Balance of each such Loan at the related Home Loan Interest Rate to such Monthly Cut-Off Date; (iii) the aggregate fair market value of the FHA Pending Claims for which a claim has been filed with the FHA included in the Trust on such Monthly CutOff Date, as determined by an Independent appraiser acceptable to the Indenture Trustee as of a date not more than thirty days prior to such Monthly Cut-Off Date; (iv) the aggregate fair market value of each Foreclosed Property included in the Trust on such Monthly Cut-Off Date, as determined by an Independent appraiser acceptable to the Trustee as of a date not more than thirty days prior to such Monthly Cut-Off Date; and (v) any unreimbursed amounts due to the Securities Insurer under this Agreement or the Insurance Agreement (including any amounts that may be paid by the Securities Insurer under the Securities Insurance Policy in connection with the final distribution on the Notes). 99 104 Any amount received from such sale with respect to FHA Pending Claims shall be considered FHA Insurance Payment Amounts. The expense of any Independent appraiser required under this Section 11.01(b) shall be a nonreimbursable expense of Mego. Mego or the Master Servicer shall effect the purchase referred to in this Section 11.01(b) by deposit of the Termination Price into the Note Distribution Account. The Indenture Trustee shall give written notice of the Early Termination Notice Date to the Securities Insurer promptly upon the occurrence thereof. Section 11.02 Notice of Termination. Notice of termination of this Agreement or of early redemption and termination of the Securities shall be sent (i) by the Indenture Trustee to the Noteholders and the Securities Insurer in accordance with Section 2.6(b) of the Indenture and (ii) by the Owner Trustee or Co-Owner Trustee to the Certificateholders and the Securities Insurer in accordance with Section 9.1(d) of the Trust Agreement. 100 105 ARTICLE XII. MISCELLANEOUS PROVISIONS Section 12.01 Acts of Securityholders. Except as otherwise specifically provided herein, whenever Securityholder action, consent or approval is required under this Agreement, such action, consent or approval shall be deemed to have been taken or given on behalf of, and shall be binding upon, all Securityholders if the Majority Securityholders agree to take such action or give such consent or approval. Section 12.02 Amendment. (a) This Agreement may be amended from time to time by the Depositor, the Master Servicer, the Seller and the Issuer by written agreement with notice thereof to the Securityholders, without the consent of any of the Securityholders, but with the consent of the Securities Insurer, to cure any error or ambiguity, to correct or supplement any provisions hereof which may be defective or inconsistent with any other provisions hereof or to add any other provisions with respect to matters or questions arising under this Agreement; provided, however, that such action will not adversely affect in any material respect the interests of the Securityholders. An amendment described above shall be deemed not to adversely affect in any material respect the interests of the Securityholders if either (i) an opinion of counsel is obtained to such effect, or (ii) the party requesting the amendment obtains a letter from each of the Rating Agencies confirming that the amendment, if made, would not result in the downgrading or withdrawal of the rating then assigned by the respective Rating Agency to any Class of Securities then outstanding. Notwithstanding the preceding, the Securities Insurer shall have the right to reduce the Required O/C Amount without the requirement of an amendment to this Agreement, provided, however, no such reduction shall be made if such reduction shall adversely affect the tax characterization of the Notes as debt under federal and applicable state tax law. (b) This Agreement may also be amended from time to time by the Depositor, the Master Servicer, the Seller and the Issuer by written agreement, with the prior written consent of the Indenture Trustee, the Majority Securityholders and the Securities Insurer, 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 Securityholders; provided, however, that no such amendment shall (i) reduce in any manner the amount of, or delay the timing of, collections of payments on Home Loans or distributions which are required to be made on any Security, without the consent of the holders of 100% of each Class of Notes or the Certificates affected thereby and the Securities Insurer, (ii) adversely affect in any material respect the interests of the holders of any Class of Notes or Certificates or the Securities Insurer in any manner other than as described in (i), without the consent of the holders of 100% of such Class of Notes or the Certificates or the Securities Insurer, respectively, or (iii) reduce the percentage of any Class of Notes or the Certificates, the holders of which are required to consent 101 106 to any such amendment, without the consent of the holders of 100% of such Class of Notes or the Certificates and the Securities Insurer. (c) It shall not be necessary for the consent of Securityholders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Issuer 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 Issuer may, but shall not be obligated to, enter into any such amendment which affects the Issuer's own rights, duties or immunities under this Agreement. Section 12.03 Recordation of Agreement. To the extent permitted by applicable law, this Agreement, or a memorandum thereof if permitted under applicable law, is subject to recordation in all appropriate public offices for real property records in all of 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 at the Securityholders' expense on direction of the Majority Securityholders or the Securities Insurer, but only when accompanied by an opinion of counsel to the effect that such recordation materially and beneficially affects the interests of the Securityholders or is necessary for the administration or servicing of the Home Loans. Section 12.04 Duration of Agreement. This Agreement shall continue in existence and effect until terminated as herein provided. Section 12.05 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 12.06 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 overnight mail, certified mail or registered mail, postage prepaid, to: (i) in the case of the Depositor, FINANCIAL ASSET SECURITIES CORP., 600 Steamboat Road, Greenwich, Connecticut 06830 Attention: Peter McMullin, or such other addresses as may hereafter be furnished to the Securityholders and 102 107 the other parties hereto in writing by the Depositor, (ii) in the case of the Issuer, Mego Mortgage Home Loan Owner Trust 1997-2, c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Emmett R. Harmon, or such other address as may hereafter be furnished to the Securityholders and the other parties hereto, (iii) in the case of the Seller, Servicer and Claims Administrator, MEGO MORTGAGE CORPORATION, 1000 Parkwood Circle, Atlanta, Georgia 30339, Attention: Jeff Moore, President, or such other address as may hereafter be furnished to the Securityholders and the other parties hereto, (iv) in the case of the Securities Insurer, 113 King Street, Armonk, New York 10504, Attention: IPM-SF, (v) in the case of the Indenture Trustee or Co-Owner Trustee, FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, 180 East Fifth Street, St. Paul, Minnesota 55101, Attention: Structured Finance: Mego 1997-2, (vi) in the case of the Master Servicer, 11000 Broken Land Parkway, Columbia, Maryland 21044-3562, Attention: Master Servicing Department, Mego Mortgage Home Loan Owner Trust 1997-2; and (vii) in the case of the Securityholders, as set forth in the applicable Note Register and Certificate Register. Any such notices shall be deemed to be effective with respect to any party hereto upon the receipt of such notice by such party, except that notices to the Securityholders shall be effective upon mailing or personal delivery. Section 12.07 Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other covenants, agreements, provisions or terms of this Agreement. Section 12.08 No Partnership. Nothing herein contained shall be deemed or construed to create any partnership or joint venture between the parties hereto and the services of the Master Servicer shall be rendered as an independent contractor. Section 12.09 Counterparts. This Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same Agreement. Section 12.10 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Master Servicer, the Seller, the Depositor, the Issuer, the Indenture Trustee, and the Securityholders and their respective successors and permitted assigns. 103 108 Section 12.11 Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. Section 12.12 Actions of Securityholders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by Securityholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders in person or by agent 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 Depositor, the Master Servicer or the Issuer. 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 Depositor, the Master Servicer and the Issuer if made in the manner provided in this Section. (b) The fact and date of the execution by any Securityholder of any such instrument or writing may be proved in any reasonable manner which the Depositor, the Master Servicer or the Issuer deems sufficient. (c) Any request, demand, authorization, direction, notice, consent, waiver or other act by a Securityholder shall bind every holder of every Security 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 Depositor, the Master Servicer, the Issuer or the Securities Insurer in reliance thereon, whether or not notation of such action is made upon such Security. (d) The Depositor, the Master Servicer or the Issuer may require additional proof of any matter referred to in this Section 12.12 as it shall deem necessary. Section 12.13 Reports to Rating Agencies. (a) The Indenture Trustee shall provide to each Rating Agency copies of statements, reports and notices, to the extent received or prepared by the Master Servicer hereunder, as follows: (i) copies of amendments to this Agreement; (ii) notice of any substitution or repurchase of any Home Loans; (iii) notice of any termination, replacement, succession, merger or consolidation of either the Master Servicer, any Custodian or the Issuer; (iv) notice of final payment on the Notes and the Residual Certificates; 104 109 (v) notice of any Event of Default; (vi) copies of the annual independent auditor's report delivered pursuant to Section 4.05, and copies of any compliance reports delivered by the Master Servicer hereunder including Section 4.04; and (vii) copies of any Master Servicer's Certificate pursuant to Section 6.02(b); and (b) With respect to the requirement of the Indenture Trustee to provide statements, reports and notices to the Rating Agencies such statements, reports and notices shall be delivered to the Rating Agencies at the following addresses: (i) if to Standard & Poor's, 26 Broadway, 15th Floor, New York, New York 10004-1064, Attention: Asset-Backed Monitoring Department; or (ii) if to Moody's, 99 Church Street, Corporate Department - 4th Floor, New York, New York 10007, Attention: Residential Mortgage Monitoring Department. Section 12.14 Grant of Securityholder Rights to Securities Insurer. In consideration for the guarantee of the Securities by the Securities Insurer pursuant to the Guaranty Policy, the Securityholders hereby grant to the Securities Insurer the right to act as the holder of 100% of the outstanding Insured Securities for the purpose of exercising the rights of the holders of the Insured Securities under this Agreement without the consent of any Securityholders, including the voting rights of such holders, but excluding those rights requiring the consent of all such holders under Section 12.02(b), and any rights of such holders to distributions under Section 8.2 of the Indenture with respect to the Notes. The rights of the Securities Insurer to direct certain actions and consent to certain actions of the Majority Securityholders hereunder will terminate at such time as the Class Principal Balances of all Classes of Notes have been reduced to zero and the Securities Insurer has been reimbursed for all Insured Payments and any other amounts owed under the Guaranty Policy and Insurance Agreement and the Securities Insurer has no further obligation under the Guaranty Policy. Section 12.15 Third Party Beneficiary. The parties hereto acknowledge that the Securities Insurer is an express third party beneficiary hereof entitled to enforce any rights reserved to it hereunder as if it were actually a party hereto. Section 12.16 Holders of the Residual Certificates. (a) Any sums to be distributed or otherwise paid hereunder or under the Trust Agreement to the holders of the Residual Certificates shall be paid to such holders pro rata based on their percentage holdings in the Residual Certificates; 105 110 (b) Where any act or event hereunder is expressed to be subject to the consent or approval of the holders of the Residual Certificates, such consent or approval shall be capable of being given by the holder or holders of not less than 51% of the Percentage Interests of the Residual Certificates in aggregate. Section 12.17 Inconsistencies Among Transaction Documents. In the event certain provisions of a Transaction Document conflict with the provisions of this Sale and Servicing Agreement, the parties hereto agree that the provisions of this Sale and Servicing Agreement shall be controlling. 106 111 IN WITNESS WHEREOF, the following have caused their names to be signed by their respective officers thereunto duly authorized, as of the day and year first above written, to this SALE AND SERVICING AGREEMENT . MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2, By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By:________________________________________________ Name: Emmett R. Harmon Title: Vice President FINANCIAL ASSET SECURITIES CORP., as Depositor By:________________________________________________ Name: Peter McMullin Title: Vice President MEGO MORTGAGE CORPORATION, as Seller, Servicer and Claims Administrator By:________________________________________________ Name: James L. Belter Title: Executive Vice President FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder By:________________________________________________ Name: Lynn Steiner Title: Assistant Vice President 107 112 NORWEST BANK MINNESOTA, N.A. as Master Servicer By:________________________________________________ Name: Michael Mayer Title: Vice President 108 113 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared Emmett R. Harmon, known to me to be a person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said WILMINGTON TRUST COMPANY, NOT IN ITS INDIVIDUAL CAPACITY BUT IN ITS CAPACITY AS OWNER TRUSTEE of MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2, as Issuer, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF WILMINGTON TRUST COMPANY, this the 22nd day of May, 1997. --------------------------------------------------- Notary Public, State of ________ THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared Peter McMullin, known to me to be a person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said FINANCIAL ASSET SECURITIES CORP., as the Depositor, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF FINANCIAL ASSET SECURITIES CORP., this the 22nd day of May, 1997. --------------------------------------------------- Notary Public, State of ________ 109 114 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared James L. Belter, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said MEGO MORTGAGE CORPORATION, as the Seller, Servicer and Claims Administrator, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF MEGO MORTGAGE CORPORATION, this the 22nd day of May, 1997. --------------------------------------------------- Notary Public, State of ________ THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared Lynn Steiner, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, a national banking association, as the Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder, and that she executed the same as the act of such entity for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, this the 22nd day of May, 1997. --------------------------------------------------- Notary Public, State of ________ 110 115 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared Michael Mayer, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said NORWEST BANK MINNESOTA, N.A., as the Master Servicer, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF NORWEST BANK MINNESOTA, N.A., this the 22nd day of May, 1997. --------------------------------------------------- Notary Public, State of ________ 111 EX-10.124 13 TRUST AGREEMENT 1 EXHIBIT 10.124 EXECUTION COPY ================================================================================ TRUST AGREEMENT among FINANCIAL ASSET SECURITIES CORP., as Depositor, MEGO MORTGAGE CORPORATION, as the Company, WILMINGTON TRUST COMPANY, as Owner Trustee and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Co-Owner Trustee Dated as of May 1, 1997 MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2 Home Loan Asset Backed Securities, Series 1997-2 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS Section 1.1 Capitalized Terms.............................................I-1 Section 1.2 Other Definitional Provisions.................................I-4 ARTICLE II ORGANIZATION Section 2.1 Name.........................................................II-1 Section 2.2 Office.......................................................II-1 Section 2.3 Purposes and Powers..........................................II-1 Section 2.4 Appointment of Owner Trustee.................................II-2 Section 2.5 Initial Capital Contribution of Owner Trust Estate...........II-2 Section 2.6 Declaration of Trust.........................................II-2 Section 2.7 Title to Trust Property......................................II-2 Section 2.8 Situs of Trust...............................................II-3 Section 2.9 Representations and Warranties of the Depositor and the Company; Covenant of the Company.............................II-3 Section 2.10 Federal Income Tax Allocations...............................II-5 ARTICLE III RESIDUAL CERTIFICATES AND TRANSFER OF INTERESTS Section 3.1 Initial Ownership...........................................III-1 Section 3.2 The Residual Certificates...................................III-1 Section 3.3 Execution, Authentication and Delivery of Residual Certificates................................................III-1 Section 3.4 Registration of Transfer and Exchange of Residual Certificates................................................III-1 Section 3.5 Mutilated, Destroyed, Lost or Stolen Residual Certificates..III-2 Section 3.6 Persons Deemed Owners.......................................III-3 Section 3.7 Access to List of Owners' Names and Addresses...............III-3 Section 3.8 Maintenance of Office or Agency.............................III-3 Section 3.9 Appointment of Paying Agent.................................III-3
-i- 3 Section 3.10 Restrictions on Transfer of Residual Certificates...........III-4 ARTICLE IV ACTIONS BY OWNER TRUSTEE Section 4.1 Prior Notice to Owners with Respect to Certain Matters.......IV-1 Section 4.2 Action by Owners with Respect to Certain Matters.............IV-3 Section 4.3 Action by Owners with Respect to Bankruptcy..................IV-3 Section 4.4 Restrictions on Owners' Power................................IV-3 Section 4.5 Majority Control.............................................IV-3 ARTICLE V APPLICATION OF TRUST FUNDS; CERTAIN DUTIES Section 5.1 Establishment of Trust Account................................V-1 Section 5.2 Application Of Trust Funds....................................V-1 Section 5.3 Method of Payment.............................................V-2 Section 5.4 Segregation of Moneys; No Interest............................V-2 Section 5.5 Accounting and Reports to the Residual Certificateholders, Owners, the Internal Revenue Service and Others........................................................V-2 Section 5.6 Signature on Returns..........................................V-3 ARTICLE VI AUTHORITY AND DUTIES OF OWNER TRUSTEE Section 6.1 General Authority............................................VI-1 Section 6.2 General Duties...............................................VI-1 Section 6.3 Action upon Instruction......................................VI-1 Section 6.4 No Duties Except as Specified in this Agreement, the Transaction Documents or in Instructions.....................VI-2 Section 6.5 No Action Except Under Specified Documents or Instructions.................................................VI-3 Section 6.6 Restrictions.................................................VI-3 ARTICLE VII CONCERNING THE OWNER TRUSTEE Section 7.1 Acceptance of Trusts and Duties.............................VII-1 Section 7.2 Furnishing of Documents.....................................VII-2
-ii- 4 Section 7.3 Representations and Warranties..............................VII-2 Section 7.4 Reliance; Advice of Counsel.................................VII-3 Section 7.5 Not Acting in Individual Capacity..........................VII-4 Section 7.6 Owner Trustee Not Liable for Residual Certificates or Home Loans..................................................VII-4 Section 7.7 Owner Trustee May Own Residual Certificates and Notes.......VII-4 Section 7.8 Licenses....................................................VII-5 Section 7.9 Rights of Co-Owner Trustee..................................VII-5 ARTICLE VIII COMPENSATION OF OWNER TRUSTEE Section 8.1 Owner Trustee's Fees and Expenses..........................VIII-1 Section 8.2 Indemnification............................................VIII-1 Section 8.3 Payments to the Owner Trustee..............................VIII-1 ARTICLE IX TERMINATION OF TRUST AGREEMENT Section 9.1 Termination of Trust Agreement...............................IX-1 ARTICLE X SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES Section 10.1 Eligibility Requirements for Owner Trustee....................X-1 Section 10.2 Resignation or Removal of Owner Trustee or Co-Owner Trustee.......................................................X-1 Section 10.3 Successor Owner Trustee or Co-Owner Trustee...................X-2 Section 10.4 Merger or Consolidation of Owner Trustee......................X-3 Section 10.5 Appointment of Co-Owner Trustee or Separate Owner Trustee.......................................................X-3 ARTICLE XI MISCELLANEOUS Section 11.1 Supplements and Amendments...................................XI-1 Section 11.2 No Legal Title to Owner Trust Estate in Owners...............XI-2 Section 11.3 Limitations on Rights of Others..............................XI-2 Section 11.4 Notices......................................................XI-2 Section 11.5 Severability.................................................XI-3
-iii- 5 Section 11.6 Separate Counterparts........................................XI-3 Section 11.7 Successors and Assigns.......................................XI-3 Section 11.8 No Petition..................................................XI-3 Section 11.9 Covenants of Company.........................................XI-3 Section 11.10 No Recourse..................................................XI-3 Section 11.11 Headings.....................................................XI-4 Section 11.12 GOVERNING LAW................................................XI-4 Section 11.13 Third-Party Beneficiary......................................XI-4 Section 11.14 Inconsistencies with Sale and Servicing Agreement............XI-4
EXHIBIT A Form of Residual Certificate EXHIBIT B Certificate of Trust
-iv- 6 TRUST AGREEMENT, dated as of May 1, 1997, among FINANCIAL ASSET SECURITIES CORP., a Delaware corporation, as Depositor (the "Depositor"), MEGO MORTGAGE CORPORATION, a Delaware corporation (the "Company"), WILMINGTON TRUST COMPANY, a Delaware banking corporation, as Owner Trustee (the "Owner Trustee") and FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Co-Owner Trustee (the "Co-Owner Trustee"). ARTICLE I DEFINITIONS Section 1.1 Capitalized Terms. For all purposes of this Agreement, the following terms shall have the meanings set forth below: "Agreement" shall mean this Trust Agreement, as the same may be amended and supplemented from time to time. "Administration Agreement" shall mean the Administration Agreement, dated as of May 1, 1997 among the Issuer, the Company, and First Trust of New York, National Association, as Administrator. "Administrator" shall mean First Trust of New York, National Association, or any successor in interest thereto, in its capacity as Administrator under the Administration Agreement. "Benefit Plan" shall have the meaning assigned to such term in Section 3.10. "Business Trust Statute" shall mean Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as the same may be amended from time to time. "Residual Certificate" shall mean any Residual Certificate; a form of which is attached hereto as Exhibit A. "Certificate Distribution Account" shall have the meaning assigned to such term in the Sale and Servicing Agreement. "Certificate of Trust" shall mean the Certificate of Trust in the form of Exhibit C to be filed for the Trust pursuant to Section 3810(a) of the Business Trust Statute. "Certificate Register" and "Certificate Registrar" shall mean the register mentioned in, and the registrar appointed pursuant to, Section 3.4. I-1 7 "Residual Certificateholder" or "Holder" shall mean a Person in whose name a Residual Certificate is registered. "Code" shall mean the Internal Revenue Code of 1986, as amended, and Treasury Regulations promulgated thereunder. "Co-Owner Trustee" shall mean First Trust of New York, National Association. "Company" shall mean Mego Mortgage Corporation, a Delaware corporation. "Corporate Trust Office" shall mean, with respect to the Owner Trustee, the principal corporate trust office of the Owner Trustee located at Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001, Attention: Corporate Trust Administration; or at such other address in the State of Delaware as the Owner Trustee may designate by notice to the Owners and the Company, or the principal corporate trust office of any successor Owner Trustee (the address (which shall be in the State of Delaware) of which the successor owner trustee will notify the Owners and the Company). "ERISA" shall have the meaning assigned thereto in Section 3.10. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Expenses" shall have the meaning assigned to such term in Section 8.2. "Indenture" shall mean the Indenture, dated as of May 1, 1997, by and between the Issuer and the Indenture Trustee. "Indenture Trustee" means First Trust of New York, National Association, as Indenture Trustee under the Indenture. "Insurance Agreement" shall mean the Insurance Agreement, dated as of May 1, 1997, among the Issuer, the Depositor, the Affiliated Holder, Greenwich Capital Financial Products, Inc., the Company, as Seller, Servicer and Claims Administrator, the Master Servicer, the Indenture Trustee as Indenture Trustee, Co-Owner Trustee and Contract of Insurance Holder and the Securities Insurer. "Issuer" shall mean Mego Mortgage Home Loan Owner Trust 1997-2, the Delaware business trust created pursuant to this Agreement. "Non-permitted Foreign Holder" shall have the meaning set forth in Section 3.10. "Non-U.S. Person" shall mean an individual, corporation, partnership or other person other than a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision I-2 8 thereof, an estate that is subject to U.S. federal income tax regardless of the source of its income, or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States trustees have authority to control all substantial decisions of the trust.. "Owner" shall mean each Holder of a Residual Certificate. "Owner Trust Estate" shall mean the contribution of $1 referred to in Section 2.5 and the Trust Estate (as defined in the Indenture). "Owner Trustee" shall mean Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as owner trustee under this Agreement, and any successor owner trustee hereunder. "Paying Agent" shall mean the Co-Owner Trustee or any successor in interest thereto or any other paying agent or co-paying agent appointed pursuant to Section 3.9 and authorized by the Issuer to make payments to and distributions from the Certificate Distribution Account, including payments on the Residual Certificates on behalf of the Issuer. "Percentage Interest" shall mean with respect to each Residual Certificate, the percentage portion of all of the Residual Interest evidenced thereby as stated on the face of such Residual Certificate. "Prospective Owner" shall have the meaning set forth in Section 3.10(a). "Rating Agency Condition" means, with respect to any action to which a Rating Agency Condition applies, that each Rating Agency shall have been given 10 days (or such shorter period as is acceptable to each Rating Agency) prior notice thereof and that each of the Rating Agencies shall have notified the Seller, the Servicer, the Securities Insurer, the Owner Trustee, Co-Owner Trustee, and the Issuer in writing that such action will not result in a reduction or withdrawal of the then current rating of the Notes. "Record Date" shall mean as to each Distribution Date the last Business Day of the month immediately preceding the month in which such Distribution Date occurs. "Residual Interest" shall mean the right to receive distributions of Distributable Excess Spread, if any, and certain other funds, if any, on each Distribution Date, pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement. "Sale and Servicing Agreement" shall mean the Sale and Servicing Agreement dated as of the date hereof, among the Trust as Issuer, the Depositor, the Indenture Trustee as Indenture Trustee, Contract of Insurance Holder and Co-Owner Trustee, Norwest Bank Minnesota, N.A., as Master Servicer, and the Company, as Seller, Servicer and Claims Administrator. I-3 9 "Secretary of State" shall mean the Secretary of State of the State of Delaware. "Securities Insurer" shall mean MBIA Insurance Corporation. "Securities Insurer Default" shall mean the failure of the Securities Insurer to make payments under the Guaranty Policy, if such failure has not been remedied with ten (10) days of notice thereof, or the entry of an order or decree with respect to the Securities Insurer in any insolvency or bankruptcy proceedings which remain unstayed or undischarged for 90 days. "Transaction Documents" shall have the meaning set forth in the Sale and Servicing Agreement. "Treasury Regulations" shall mean regulations, including proposed or temporary regulations, promulgated under the Code. References herein to specific provisions of proposed or temporary regulations shall include analogous provisions of final Treasury Regulations or other successor Treasury Regulations. "Trust" shall mean the trust established by this Agreement. "Underwriter" shall mean Greenwich Capital Markets, Inc. Section 1.2 Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Sale and Servicing Agreement or, if not defined therein, in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof", "herein", "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; Section and Exhibit references contained in this I-4 10 Agreement are references to Sections and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. I-5 11 ARTICLE II ORGANIZATION Section 2.1 Name. The Trust created hereby shall be known as "Mego Mortgage Home Loan Owner Trust 1997-2", in which name the Owner Trustee may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. Section 2.2 Office. The office of the Trust shall be in care of the Owner Trustee at the Corporate Trust Office or at such other address in Delaware as the Owner Trustee may designate by written notice to the Owners, the Securities Insurer, and the Company. Section 2.3 Purposes and Powers. (a) The purpose of the Trust is to engage in the following activities: (i) to issue the Notes pursuant to the Indenture and the Residual Certificates pursuant to this Agreement and to sell such Notes and such Residual Certificates; (ii) with the proceeds of the sale of the Notes and the Residual Certificates, to fund start-up and transactional expenses of the Trust and to pay the balance to the Depositor and the Company, as their interests may appear pursuant to the Sale and Servicing Agreement; (iii) to assign, grant, transfer, pledge, mortgage and convey the Trust Estate pursuant to the Indenture and to hold, manage and distribute to the Owners pursuant to the terms of the Sale and Servicing Agreement any portion of the Trust Estate released from the lien of, and remitted to the Trust pursuant to, the Indenture; (iv) to enter into and perform its obligations under the Transaction Documents to which it is to be a party; (v) to engage in those activities, including entering into agreements, that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith; and (vi) subject to compliance with the Transaction Documents, to engage in such other activities as may be required in connection with conservation of the Owner Trust Estate and the making of distributions to the Owners and the Noteholders; II-1 12 The Trust is hereby authorized to engage in the foregoing activities. The Trust shall not engage in any activity other than in connection with the foregoing or other than as required or authorized by the terms of this Agreement or the Transaction Documents. Section 2.4 Appointment of Owner Trustee. The Depositor hereby appoints the Owner Trustee as trustee of the Trust effective as of the date hereof, to have all the rights, powers and duties set forth herein. Section 2.5 Initial Capital Contribution of Owner Trust Estate. The Depositor hereby sells, assigns, transfers, conveys and sets over to the Owner Trustee, as of the date hereof, the sum of $1. The Owner Trustee hereby acknowledges receipt in trust from the Depositor, as of the date hereof, of the foregoing contribution, which shall constitute the initial Owner Trust Estate and shall be deposited in the Certificate Distribution Account. The Company shall pay organizational expenses of the Trust as they may arise or shall, upon the request of the Owner Trustee, promptly reimburse the Owner Trustee for any such expenses paid by the Owner Trustee. Section 2.6 Declaration of Trust. The Owner Trustee hereby declares that it will hold the Owner Trust Estate in trust upon and subject to the conditions set forth herein for the use and benefit of the Owners, subject to the obligations of the Trust under the Transaction Documents. It is the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Statute and that this Agreement constitute the governing instrument of such business trust. It is the intention of the parties hereto that, solely for income and franchise tax purposes, the Trust shall be treated as a partnership, with the assets of the partnership being the Home Loans and other assets held by the Trust, the partners of the partnership being the holders of the Residual Certificates and the Notes being non-recourse debt of the partnership. The parties agree that, unless otherwise required by appropriate tax authorities, the Trust will file or cause to be filed annual or other necessary returns, reports and other forms consistent with the characterization of the Trust as a partnership for such tax purposes. Effective as of the date hereof, the Owner Trustee shall have all rights, powers and duties set forth herein and in the Business Trust Statute with respect to accomplishing the purposes of the Trust. Section 2.7 Title to Trust Property. (a) Subject to the Indenture, legal title to all the Owner Trust Estate shall be vested at all times in the Trust as a separate legal entity except where applicable law in any jurisdiction requires title to any part of the Owner Trust Estate to be vested in a trustee or trustees, in which case title shall be deemed to be vested in the Owner Trustee, the Co-Owner Trustee and/or a separate trustee, as the case may be. II-2 13 (b) The Owners shall not have legal title to any part of the Owner Trust Estate. No transfer by operation of law or otherwise of any interest of the Owners shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of any part of the Owner Trust Estate. Section 2.8 Situs of Trust. The Trust will be located and administered in the state of Delaware. All bank accounts maintained by the Owner Trustee on behalf of the Trust shall be located in the State of Delaware or the State of New York, except with respect to the Co-Owner Trustee. The Trust shall not have any employees; provided, however, that nothing herein shall restrict or prohibit the Owner Trustee from having employees within or without the State of Delaware. Payments will be received by the Trust only in Delaware or New York, and payments will be made by the Trust only from Delaware or New York, except with respect to the Co-Owner Trustee. The only office of the Trust will be at the Corporate Trust Office in Delaware. Section 2.9 Representations and Warranties of the Depositor and the Company; Covenant of the Company. (a) The Depositor hereby represents and warrants to the Owner Trustee, the Co-Owner Trustee and the Securities Insurer that: (i) The Depositor is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has all licenses necessary to carry on its business as now being conducted. The Depositor has the power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Depositor and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action of the Depositor; this Agreement evidences the valid, binding and enforceable obligation of the Depositor; and all requisite action has been taken by the Depositor to make this Agreement valid, binding and enforceable upon the Depositor in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other, similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity.; (ii) The consummation of the transactions contemplated by this Agreement will not result in (i) the breach of any terms or provisions of the Articles of Incorporation or Bylaws of the Depositor, (ii) the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other material instrument to which the Depositor, or its property is subject, or (iii) the violation of any law, rule, regulation, order, judgment or decree to which the Depositor or its respective property is subject; II-3 14 (iii) The Depositor is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or otherwise) or operations of the Depositor or its properties or might have consequences that would materially and adversely affect its performance hereunder. (b) The Company hereby represents and warrants to the Owner Trustee, the Co-Owner Trustee and the Securities Insurer that: (i) The Company is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted. (ii) The Company is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications. (iii) The Company has the power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement has been duly authorized by the Company by all necessary corporate action. (iv) The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the articles of incorporation or by-laws of the Company, or any indenture, agreement or other instrument to which the Company is a party or by which it is bound; nor result in the creation or imposition of any lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than pursuant to the Transaction Documents); nor violate any law or, to the best of the Company's knowledge, any order, rule or regulation applicable to the Company of any court or of any Federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Company or its properties. (v) There are no proceedings or investigations pending or, to the Company's best knowledge, threatened, before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Company or its properties: (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (iii) seeking any determination or ruling that might materially and II-4 15 adversely affect the performance by the Company of its obligations under, or the validity or enforceability of, this Agreement. (c) The Company covenants with the Owner Trustee, the Co-Owner Trustee and the Securities Insurer that during the continuance of this Agreement it will comply in all respects with the provisions of its Certificate of Incorporation in effect from time to time. Section 2.10 Federal Income Tax Allocations. Net income of the Trust for any month, as determined for Federal income tax purposes (and each item of income, gain, loss and deduction entering into the computation thereof), shall be allocated to the holders of the Residual Certificates, on a pro rata basis. II-5 16 ARTICLE III RESIDUAL CERTIFICATES AND TRANSFER OF INTERESTS Section 3.1 Initial Ownership. Upon the formation of the Trust by the contribution by the Depositor pursuant to Section 2.5 and until the issuance of the Residual Certificates, the Depositor shall be the sole Owner of the Trust. Section 3.2 The Residual Certificates. The Residual Certificates shall not be issued with a principal or notional amount. The Residual Certificates shall be executed on behalf of the Trust by manual or facsimile signature of a Trust Officer of the Owner Trustee or the Co-Owner Trustee. Residual Certificates bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be valid and binding obligations of the Trust, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the authentication and delivery of such Residual Certificates or did not hold such offices at the date of authentication and delivery of such Residual Certificates. A transferee of a Residual Certificate shall become an Owner, and shall be entitled to the rights and subject to the obligations of an Owner hereunder and under the Sale and Servicing Agreement, upon such transferee's acceptance of a Residual Certificate duly registered in such transferee's name pursuant to Section 3.4. Section 3.3 Execution, Authentication and Delivery of Residual Certificates. Concurrently with the sale of the Home Loans to the Trust pursuant to the Sale and Servicing Agreement, the Owner Trustee or the Co-Owner Trustee shall cause the Residual Certificates representing 100% of the Percentage Interests of the Residual Interest to be executed on behalf of the Trust, authenticated and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president or any vice president, without further corporate action by the Depositor, in authorized denominations. No Residual Certificate shall entitle its holder to any benefit under this Agreement, or shall be valid for any purpose, unless there shall appear on such Residual Certificate a certificate of authentication substantially in the form set forth in Exhibit A, executed by the Owner Trustee or the Administrator, as the Owner Trustee's authenticating agent, by manual or facsimile signature; such authentication shall constitute conclusive evidence that such Residual Certificate shall have been duly authenticated and delivered hereunder. All Residual Certificates shall be dated the date of their authentication. Section 3.4 Registration of Transfer and Exchange of Residual Certificates. The Certificate Registrar shall keep or cause to be kept, at the office or agency maintained pursuant to Section 3.8, a Certificate Register in which, subject to such reasonable regulations as it may prescribe, the Owner Trustee shall provide for the registration of Residual Certificates and of transfers and exchanges of Residual Certificates as herein provided. The Administrator shall be the initial Certificate Registrar. III-1 17 Upon surrender for registration of transfer of any Residual Certificate at the office or agency maintained pursuant to Section 3.8, the Owner Trustee or Co-Owner Trustee shall execute, authenticate and deliver (or shall cause the Administrator as its authenticating agent to authenticate and deliver), in the name of the designated transferee or transferees, one or more new Residual Certificates in authorized denominations of a like aggregate amount dated the date of authentication by the Owner Trustee or any authenticating agent. At the option of an Owner, Residual Certificates may be exchanged for other Residual Certificates of authorized denominations of a like aggregate amount upon surrender of the Residual Certificates to be exchanged at the office or agency maintained pursuant to Section 3.8. Every Residual Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Owner Trustee and the Certificate Registrar duly executed by the Owner or his attorney duly authorized in writing. In addition, each Residual Certificate presented or surrendered for registration of transfer and exchange must be accompanied by a letter from the Prospective Owner certifying as to the representations set forth in Sections 3.10(a) and (b). Each Residual Certificate surrendered for registration of transfer or exchange shall be canceled and disposed of by the Owner Trustee in accordance with its customary practice. No service charge shall be made for any registration of transfer or exchange of Residual Certificates, but the Owner Trustee or 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 Residual Certificates. The preceding provisions of this Section notwithstanding, the Owner Trustee shall not make and the Certificate Registrar shall not register transfer or exchanges of Residual Certificates for a period of 15 days preceding the due date for any payment with respect to the Residual Certificates. Section 3.5 Mutilated, Destroyed, Lost or Stolen Residual Certificates. If (a) any mutilated Residual Certificate shall be surrendered to the Certificate Registrar, or if the Certificate Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Residual Certificate and (b) there shall be delivered to the Certificate Registrar and the Owner Trustee such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Residual Certificate shall have been acquired by a bona fide purchaser, the Owner Trustee on behalf of the Trust shall execute and the Owner Trustee, or the Administrator as the Owner Trustee's authenticating agent, shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Residual Certificate, a new Residual Certificate of like tenor and denomination. In connection with the issuance of any new Residual Certificate under this Section, the Owner 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 connection therewith. Any duplicate Residual Certificate issued pursuant to this Section shall constitute conclusive III-2 18 evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Residual Certificate shall be found at any time. Section 3.6 Persons Deemed Owners. Prior to due presentation of a Residual Certificate for registration of transfer, the Owner Trustee or the Certificate Registrar may treat the Person in whose name any Residual Certificate shall be registered in the Certificate Register as the owner of such Residual Certificate for the purpose of receiving distributions pursuant to Section 5.2 and for all other purposes whatsoever, and neither the Owner Trustee nor the Certificate Registrar shall be bound by any notice to the contrary. Section 3.7 Access to List of Owners' Names and Addresses. The Certificate Registrar shall furnish or cause to be furnished to the Master Servicer, the Servicer, the Depositor, the Securities Insurer and the Indenture Trustee within 15 days after receipt by the Owner Trustee of a request therefor from the Master Servicer, the Servicer, the Depositor, the Securities Insurer or the Indenture Trustee in writing, a list, in such form as the Master Servicer, the Servicer, the Depositor or the Indenture Trustee may reasonably require, of the names and addresses of the Owners as of the most recent Record Date. If three or more Residual Certificateholders or one or more Holders of Residual Certificates together evidencing not less than a 25% Percentage Interest in the Residual Certificates apply in writing to the Owner Trustee, and such application states that the applicants desire to communicate with other Residual Certificateholders with respect to their rights under this Agreement or under the Residual Certificates and such application is accompanied by a copy of the communication that such applicants propose to transmit, then the Owner Trustee shall, within five Business Days after the receipt of such application, afford such applicants access during normal business hours to the current list of Residual Certificateholders. Each Owner, by receiving and holding a Residual Certificate, shall be deemed to have agreed not to hold any of the Depositor, the Company, the Certificate Registrar or the Owner Trustee accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. Section 3.8 Maintenance of Office or Agency. The Owner Trustee shall maintain an office or offices or agency or agencies where Residual Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Owner Trustee in respect of the Residual Certificates and the Transaction Documents may be served. The Owner Trustee initially designates the Administrator's office in St. Paul, Minnesota as its principal corporate trust office for such purposes. The Owner Trustee shall give prompt written notice to the Company and to the Residual Certificateholders of any change in the location of the Certificate Register or any such office or agency. Section 3.9 Appointment of Paying Agent. The Owner Trustee hereby appoints the Co-Owner Trustee as Paying Agent under this Agreement. The Paying Agent shall make distributions to Residual Certificateholders from the Certificate Distribution Account pursuant to Section 5.2 hereof and Section 5.01 of the Sale and Servicing Agreement and shall report the amounts of such distributions to the Owner Trustee. The Paying Agent shall have the III-3 19 revocable power to withdraw funds from the Certificate Distribution Account for the purpose of making the distributions referred to above. In the event that the Co-Owner Trustee shall no longer be the Paying Agent hereunder, the Owner Trustee shall appoint a successor to act as Paying Agent (which shall be a bank or trust company) acceptable to the Securities Insurer. The Owner Trustee shall cause such successor Paying Agent or any additional Paying Agent appointed by the Owner Trustee to execute and deliver to the Owner Trustee an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Owner Trustee that as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Owners in trust for the benefit of the Residual Certificateholders entitled thereto until such sums shall be paid to such Owners. The Paying Agent shall return all unclaimed funds to the Owner Trustee, and upon removal of a Paying Agent, such Paying Agent shall also return all funds in its possession to the Owner Trustee. The provisions of Sections 7.1, 7.3, 7.4 and 8.1 shall apply to the Co-Owner Trustee also in its role as Paying Agent, for so long as the Co-Owner Trustee shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. Notwithstanding anything herein to the contrary, the Co-Owner Trustee and the Paying Agent shall be the same entity as the Indenture Trustee under the Indenture and the Sale and Servicing Agreement, unless a Securities Insurer Default has occurred and is continuing. In such event, the Co-Owner Trustee and the Paying Agent shall resign and the Owner Trustee shall assume the duties and obligations of the Co-Owner Trustee and the Paying Agent hereunder and under the Sale and Servicing Agreement; provided, however, that the Indenture Trustee shall continue to perform its duties as Contract of Insurance Holder under the Sale and Servicing Agreement. In addition, in such event, the Indenture Trustee shall agree to continue to make claims under the Guaranty Policy on behalf of the Owner Trustee for the benefit of the Residual Certificateholders pursuant to the Sale and Servicing Agreement. Section 3.10 Restrictions on Transfer of Residual Certificates. (a) No Residual Certificate may be acquired, by or for the account of (i) an employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended, or (iii) any entity, including an insurance company separate account or general account, whose underlying assets include plan assets by reason of a plan's investment in the entity (each, a "Benefit Plan"). By accepting and holding a Residual Certificate, the Owner thereof shall be deemed to have represented and warranted that it is not a Benefit Plan. (b) Each prospective purchaser and any subsequent transferee of a Residual Certificate (each, a "Prospective Owner"), other than the Company or a wholly-owned subsidiary of the Company, shall represent and warrant, in writing, to the Owner Trustee and the Certificate Registrar and any of their respective successors that: III-4 20 (i) Such Person is (A) a "qualified institutional buyer" as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and is aware that the seller of such Residual Certificate may be relying on the exemption from the registration requirements of the Securities Act provided by Rule 144A and is acquiring such Residual Certificate for its own account or for the account of one or more qualified institutional buyers for whom it is authorized to act, or (B) a Person involved in the organization or operation of the Trust or an affiliate of such Person within the meaning of Rule 3a-7 of the Investment Company Act of 1940, as amended (including, but not limited to, the Seller or the Company). (ii) Such Person understands that such Residual Certificate has not been and will not be registered under the Securities Act and may be offered, sold, pledged or otherwise transferred only to a person whom the seller reasonably believes is (A) a qualified institutional buyer or (B) a Person involved in the organization or operation of the Trust or an affiliate of such Person, in a transaction meeting the requirements of Rule 144A under the Securities Act and in accordance with any applicable securities laws of any state of the United States. (iii) Such Person understands that each Residual Certificate bears a legend to the following effect: THIS RESIDUAL CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THIS RESIDUAL CERTIFICATE MAY BE DIRECTLY OR INDIRECTLY OFFERED OR SOLD OR OTHERWISE DISPOSED OF (INCLUDING PLEDGED) BY THE HOLDER HEREOF ONLY TO (I) A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE ACT, IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT PURSUANT TO RULE 144A OR [(II) A PERSON INVOLVED IN THE ORGANIZATION OR OPERATION OF THE TRUST OR AN AFFILIATE OF SUCH A PERSON WITHIN THE MEANING OF RULE 3a-7 OF THE INVESTMENT COMPANY ACT OF 1940], AS AMENDED (INCLUDING, BUT NOT LIMITED TO, MEGO MORTGAGE CORPORATION) IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE III-5 21 REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. NO PERSON IS OBLIGATED TO REGISTER THIS RESIDUAL CERTIFICATE UNDER THE ACT OR ANY STATE SECURITIES LAWS." (iv) Such Person shall comply with the provisions of Section 3.10(b), as applicable, relating to the ERISA restrictions with respect to the acceptance or acquisition of such Residual Certificate. (c) Each Prospective Owner, other than the Company, shall either: (i) represent and warrant, in writing, to the Owner Trustee and the Certificate Registrar and any of their respective successors that the Prospective Owner is not (A) an "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or (B) a "plan" within the meaning of Section 4975(e)(1) of the Code (any such plan or employee benefit plan, a "Plan") or (C) any entity, including an insurance company separate account or general account, whose underlying assets include plan assets by reason of a plan's investment in the entity and is not directly or indirectly purchasing such Residual Certificate on behalf of, as investment manager of, as named fiduciary of, as trustee of, or with assets of a Plan; or (ii) furnish to the Owner Trustee and the Certificate Registrar and any of their respective successors an opinion of counsel acceptable to such persons that (A) the proposed issuance or transfer of such Residual Certificate to such Prospective Owner will not cause any assets of the Trust to be deemed assets of a Plan, or (B) the proposed issuance or transfer of such Residual Certificate will not cause the Owner Trustee or the Certificate Registrar or any of their respective successors to be a fiduciary of a Plan within the meaning of Section 3(21) of ERISA and will not give rise to a transaction described in Section 406 of ERISA or Section 4975(c)(1) of the Code for which a statutory or administrative exemption is unavailable. (d) By its acceptance of a Residual Certificate, each Prospective Owner agrees and acknowledges that no legal or beneficial interest in all or any portion of the Residual Certificates may be transferred directly or indirectly to an individual, corporation, partnership or other person unless such transferee is not a Non-U.S. Person (any such person being referred to herein as a "Non-permitted Foreign Holder"), and any such purported transfer shall be void and have no effect. (e) Neither The Owner Trustee nor the Administrator shall execute, or countersign and deliver, any Residual Certificate in connection with any transfer thereof unless the transferor shall have provided to the Owner Trustee or the Administrator a certificate, III-6 22 substantially in the form attached as Exhibit D to this Agreement, signed by the transferee or a Non-permitted Foreign Holder, which certificate shall contain the consent of the transferee to any amendments of this Agreement as may be required to effectuate further the foregoing restrictions on transfer of any Residual Certificate to Non-permitted Foreign Holders, and an agreement by the transferee that it will not transfer any Residual Certificate without providing to Certificate Registrar on behalf of the Owner Trustee a certificate substantially in the form attached as Exhibit D to this Agreement. (f) Each Residual Certificate shall bear an additional legend referring to the foregoing restrictions contained in paragraphs (c) and (d) above. (g) The Prospective Owner of a Residual Certificate shall obtain an opinion of counsel to the effect that, as a matter of Federal income tax law, such Prospective Owner is permitted to accept the transfer of a Residual Certificate. (h) No Residual Certificate may not be transferred without an Opinion of Counsel to the effect that such transfer would not jeopardize the tax treatment of the Trust, would not subject the Trust to an entity-level tax, and would not jeopardize the status of the Notes as debt for all purposes. (i) The Residual Certificates shall not be listed for trading on an established securities market, nor be readily tradeable on a secondary market, nor be transferable through the substantial equivalent of a secondary market, nor shall the Issuer be permitted to have more than 100 partners, for income tax purposes, all within the meaning of Code Section 7704, and its attendant regulations, as applicable. If requested, in the discretion of the Owner Trustee, transfer of a Residual Certificate shall be made only if accompanied by an opinion of counsel satisfactory to the Owner Trustee or the Co-Owner Trustee, which opinion of counsel shall not be an expense of the Issuer, the Owner Trustee, the Servicer or the Seller, to the effect such transfer will not cause the Issuer to be a publicly traded partnership taxable as a corporation and will not cause the termination of the Issuer under the federal income tax rules applicable to partnerships. III-7 23 ARTICLE IV ACTIONS BY OWNER TRUSTEE Section 4.1 Prior Notice to Owners with Respect to Certain Matters. With respect to the following matters, the Owner Trustee shall not take action, and the Owners shall not direct the Owner Trustee to take any action, unless at least 30 days before the taking of such action, the Owner Trustee shall have notified the Owners and the Securities Insurer in writing of the proposed action and the Owners and/or the Securities Insurer shall not have notified the Owner Trustee in writing prior to the 30th day after such notice is given that such Owners and/or the Securities Insurer have withheld consent or the Owners have provided alternative direction (any direction by the Owners shall require the prior consent of the Securities Insurer): (a) the initiation of any claim or lawsuit by the Trust (except claims or lawsuits brought in connection with the collection of the Home Loans) and the compromise of any action, claim or lawsuit brought by or against the Trust (except with respect to the aforementioned claims or lawsuits for collection of the Home Loans); (b) the election by the Trust to file an amendment to the Certificate of Trust (unless such amendment is required to be filed under the Business Trust Statute); (c) the amendment or other change to this Agreement or any Transaction Document in circumstances where the consent of any Noteholder or the Securities Insurer is required; (d) the amendment or other change to this Agreement or any Transaction Document in circumstances where the consent of any Noteholder or the Securities Insurer is not required and such amendment materially adversely affects the interest of the Owners; (e) the appointment pursuant to the Indenture of a successor Note Registrar, Paying Agent or Indenture Trustee or pursuant to this Agreement of a successor Certificate Registrar, or the consent to the assignment by the Note Registrar, Paying Agent or Indenture Trustee or Certificate Registrar of its obligations under the Indenture or this Agreement, as applicable. (f) the consent to the calling or waiver of any default of any Transaction Document; (g) the consent to the assignment by the Indenture Trustee, the Master Servicer or Servicer of their respective obligations under any Transaction Document; (h) except as provided in Article IX hereof, dissolve, terminate or liquidate the Trust in whole or in part; IV-1 24 (i) merge or consolidate the Trust with or into any other entity, or convey or transfer all or substantially all of the Trust's assets to any other entity; (j) cause the Trust to incur, assume or guaranty any indebtedness other than the Notes, as set forth in this Agreement; (k) do any act that conflicts with any other Transaction Document; (l) do any act which would make it impossible to carry on the ordinary business of the Trust; (m) confess a judgment against the Trust; (n) possess Trust assets, or assign the Trust's right to property, for other than a Trust purpose; (o) cause the Trust to lend any funds to any entity; or (p) change the Trust's purpose and powers from those set forth in this Trust Agreement. In addition the Trust shall not commingle its assets with those of any other entity. The Trust shall maintain its financial and accounting books and records separate from those of any other entity. Except as expressly set forth herein, the Trust shall pay its indebtedness, operating expenses from its own funds, and the Trust shall not pay the indebtedness, operating expenses and liabilities of any other entity. The Trust shall maintain appropriate minutes or other records of all appropriate actions and shall maintain its office separate from the offices of the Company, the Depositor, and any of their respective affiliates. This Agreement is and shall be the only agreement among the parties hereto with respect to the creation, operation and termination of the Trust. For accounting purposes, the Trust shall be treated as an entity separate and distinct from any Owner. The pricing and other material terms of all transactions and agreements to which the Trust is a party shall be intrinsically fair to all parties thereto. The Owner Trustee shall not have the power, except upon the direction of the Majority Securityholders with the consent of the Securities Insurer, and to the extent otherwise consistent with the Transaction Documents, to (i) remove or replace the Master Servicer, the Servicer or the Indenture Trustee, (ii) institute proceedings to have the Trust declared or adjudicated a bankrupt or insolvent, (iii) consent to the institution of bankruptcy or insolvency proceedings against the Trust, (iv) file a petition or consent to a petition seeking reorganization or relief on behalf of the Trust under any applicable federal or state law relating to bankruptcy, (v) consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or any similar official) of the Trust or a substantial portion of the property of the Trust, (vi) make any assignment for the benefit of the Trust's creditors, (vii) cause the Trust to admit in writing its inability to pay its debts generally as they become IV-2 25 due, or (viii) take any action, or cause the Trust to take any action, in furtherance of any of the foregoing (any of the above, a "Bankruptcy Action"). So long as the Indenture and the Insurance Agreement remain in effect and no Securities Insurer Default exists, no Residual Certificateholder shall have the power to take, and shall not take, any Bankruptcy Action with respect to the Trust or direct the Owner Trustee to take any Bankruptcy Action with respect to the Trust. Section 4.2 Action by Owners with Respect to Certain Matters. The Owner Trustee shall not have the power, except upon the direction of the Owners and the consent of the Securities Insurer, to (a) remove the Administrator pursuant to the Administration Agreement, (b) appoint a successor Administrator pursuant to the Administration Agreement, (c) remove the Master Servicer pursuant to the Sale and Servicing Agreement, (d) remove the Servicer pursuant to the Servicing Agreement, or (e) sell the Home Loans after the termination of the Indenture. The Owner Trustee shall take the actions referred to in the preceding sentence only upon written instructions signed by the Owners and only after obtaining the consent of the Securities Insurer. Section 4.3 Action by Owners with Respect to Bankruptcy. The Owner Trustee shall not have the power to commence a voluntary proceeding in bankruptcy relating to the Trust without the consent and approval of the Securities Insurer, the unanimous prior approval of all Owners and the Securities Insurer and the delivery to the Owner Trustee by each such Owner of a certificate certifying that such Owner reasonably believes that the Trust is insolvent. Section 4.4 Restrictions on Owners' Power. The Owners shall not direct the Owner Trustee to take or refrain from taking any action if such action or inaction would be contrary to any obligation of the Trust or the Owner Trustee under this Agreement or any of the Transaction Documents or would be contrary to Section 2.3 nor shall the Owner Trustee be obligated to follow any such direction, if given. Section 4.5 Majority Control. Except as expressly provided herein, any action that may be taken by the Owners under this Agreement may be taken by the Holders of more than a 50% Percentage Interest in the Residual Certificates. Except as expressly provided herein, any written notice of the Owners delivered pursuant to this Agreement shall be effective if signed by Holders of Residual Certificates evidencing more than a 50% Percentage Interest in the Residual Certificates at the time of the delivery of such notice. IV-3 26 ARTICLE V APPLICATION OF TRUST FUNDS; CERTAIN DUTIES Section 5.1 Establishment of Trust Account. The Owner Trustee shall cause the Indenture Trustee, to establish and maintain with First Trust of New York, National Association for the benefit of the Owner Trustee or Co-Owner Trustee one or more Eligible Accounts which while the Co-Owner Trustee holds such Trust Account shall be entitled "CERTIFICATE DISTRIBUTION ACCOUNT, FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, AS CO-OWNER TRUSTEE, IN TRUST FOR THE MEGO MORTGAGE HOME LOAN ASSET BACKED SECURITIES, SERIES 1997-2". Funds shall be deposited in the Certificate Distribution Account as required by the Sale and Servicing Agreement. All of the right, title and interest of the Co-Owner Trustee or Owner Trustee in all funds on deposit from time to time in the Certificate Distribution Account and in all proceeds thereof shall be held for the benefit of the Owners, the Securities Insurer and such other persons entitled to distributions therefrom. Except as otherwise expressly provided herein or in the Sale and Servicing Agreement, the Certificate Distribution Account shall be under the sole dominion and control of the Owner Trustee or Co-Owner Trustee for the benefit of the Owners, the Securities Insurer and the Servicer. In addition to the foregoing, the Certificate Distribution Account is a Trust Account under the Sale and Servicing Agreement and constitutes part of the Trust Estate pledged by the Trust to the Indenture Trustee under the Indenture. The Certificate Distribution Account shall be subject to and established and maintained in accordance with the applicable provisions of the Sale and Servicing Agreement and the Indenture, including, without limitation, the provisions of Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement regarding distributions from the Certificate Distribution Account. The Company agrees to direct and shall have the sole authority to direct the Owner Trustee or Co-Owner Trustee, or their successor in interest, as to the Permitted Investments in which the funds on deposit in the Trust Accounts (as such term is defined in the Sale and Servicing Agreement) may be invested. Section 5.2 Application Of Trust Funds. (a) On each Distribution Date, the Owner Trustee or Co-Owner Trustee shall direct the Paying Agent to make the distributions and payments set forth in Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement from amounts on deposit in the Note Distribution Account and the Certificate Distribution Account, respectively. (b) On or before the third Business Day following each Distribution Date, the Owner Trustee shall cause the Paying Agent to send to each Owner the Statement to V-1 27 Securityholders prepared pursuant to Section 6.02 of the Sale and Servicing Agreement with respect to such Distribution Date. (c) In the event that any withholding tax is imposed on the Trust's payment (or allocations of income) to an Owner, such tax shall reduce the amount otherwise distributable to the Owner in accordance with this Section. The Owner Trustee is hereby authorized and directed to retain from amounts otherwise distributable to the Owners sufficient funds for the payment of any tax that is legally owed by the Trust (but such authorization shall not prevent the Owner Trustee from contesting any such tax in appropriate proceedings, and withholding payment of such tax, if permitted by law, pending the outcome of such proceedings). The amount of any withholding tax imposed with respect to an Owner shall be treated as cash distributed to such Owner at the time it is withheld by the Trust and remitted to the appropriate taxing authority. If there is a possibility that withholding tax is payable with respect to a distribution (such as a distribution to a non-U.S. Owner), the Owner Trustee may in its sole discretion withhold such amounts in accordance with this paragraph (c). In the event that an Owner wishes to apply for a refund of any such withholding tax, the Owner Trustee shall reasonably cooperate with such owner in making such claim so long as such Owner agrees to reimburse the Owner Trustee for any out-of-pocket expenses incurred. Section 5.3 Method of Payment. Distributions required to be made to Owners on any Distribution Date shall be made to each Owner of record on the preceding Record Date in the manner set forth in Section 5.03 of the Sale and Servicing Agreement. Section 5.4 Segregation of Moneys; No Interest. Subject to Sections 4.1 and 5.2, moneys received by the Owner Trustee hereunder and deposited into the Certificate Distribution Account will be segregated except to the extent required otherwise by law or the Sale and Servicing Agreement and shall be invested in Permitted Investments at the direction of the Company. The Owner Trustee shall not be liable for payment of any interest in respect of such moneys. Section 5.5 Accounting and Reports to the Residual Certificateholders, Owners, the Internal Revenue Service and Others. The Owner Trustee shall (a) maintain (or cause to be maintained) the books of the Trust on a calendar year basis on the accrual method of accounting, and such books shall be maintained separate from those of any other entity and reflect the separate interest of the Trust, (b) deliver to each Owner, as may be required by the Code and applicable Treasury Regulations, such information as may be required to enable each Owner to prepare its federal and state income tax returns, (c) file such tax return relating to the Trust (including a partnership information return, IRS Form 1065), and make such elections as may from time to time be required or appropriate under any applicable state or Federal statute or rule or regulation thereunder so as to maintain the Trust's characterization as a partnership for Federal income tax purposes, (d) cause such tax returns to be signed in the manner required by law and (e) collect or cause to be collected any withholding tax as described in and in accordance with Section 5.2(c) with respect to income or distributions to Owners. The Owner Trustee shall elect under Section 1278 of the Code to include in income V-2 28 currently any market discount that accrues with respect to the Home Loans. The Owner Trustee shall not make the election provided under Section 754 of the Code. Section 5.6 Signature on Returns. The Owner Trustee shall sign on behalf of the Trust the tax returns of the Trust, unless applicable law requires an Owner to sign such documents, in which case such documents shall be signed by the Company. V-3 29 ARTICLE VI AUTHORITY AND DUTIES OF OWNER TRUSTEE Section 6.1 General Authority. The Owner Trustee is authorized and directed to execute and deliver or cause to be executed and delivered the Notes, the Residual Certificates and the Transaction Documents to which the Trust is to be a party and each certificate or other document attached as an exhibit to or contemplated by the Transaction Documents to which the Trust is to be a party and any amendment or other agreement or instrument described in Article III, in each case, in such form as the Company shall approve, as evidenced conclusively by the Owner Trustee's execution thereof, and, on behalf of the Trust, to direct the Indenture Trustee to authenticate and deliver Classes of Notes in the following aggregate principal amounts: Class A-1 Notes, $15,950,000; Class A-2 Notes, $8,100,000; Class A-3 Notes, $6,750,000; Class A-4 Notes, $13,600,000; and Class A-5 Notes, $14,394,841. The Administrator on behalf of the Owner Trustee shall authenticate and deliver the Residual Certificates. In addition to the foregoing, the Owner Trustee is authorized, but shall not be obligated, to take all actions required of the Trust, pursuant to the Transaction Documents. Section 6.2 General Duties. It shall be the duty of the Owner Trustee: (a) to discharge (or cause to be discharged) all of its responsibilities pursuant to the terms of this Agreement and the Transaction Documents to which the Trust is a party and to administer the Trust in the interest of the Owners, subject to the Transaction Documents and in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the Owner Trustee shall be deemed to have discharged its duties and responsibilities hereunder and under the Transaction Documents to the extent the Administrator or the Co-Owner Trustee has agreed in the Administration Agreement or this Agreement, respectively, to perform any act or to discharge any duty of the Owner Trustee or the Trust hereunder or under any Transaction Document, and the Owner Trustee shall not be held liable for the default or failure of the Administrator or the Co-Owner Trustee to carry out its obligations under the Administration Agreement or this Agreement, respectively; and (b) to obtain and preserve, the Issuer's qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of the Indenture, the Notes, the Trust Estate and each other instrument and agreement included in the Trust Estate. Section 6.3 Action upon Instruction. (a) Subject to Article IV and in accordance with the terms of the Transaction Documents, the Owners may by written instruction direct the Owner Trustee in the management of the Trust but only to the extent consistent with the limited purpose of the VI-1 30 Trust. Such direction may be exercised at any-time by written instruction of the Owners pursuant to Article IV. (b) The Owner Trustee shall not be required to take any action hereunder or under any Transaction Document if the Owner Trustee shall have reasonably determined, or shall have been advised by counsel, that such action is likely to result in liability on the part of the Owner Trustee or is contrary to the terms hereof or of any Transaction Document or is otherwise contrary to law. (c) Whenever the Owner Trustee is unable to decide between alternative courses of action permitted or required by the terms of this Agreement or under any Transaction Document, the Owner Trustee shall promptly give notice (in such form as shall be appropriate under the circumstances) to the Owners and the Securities Insurer requesting instruction from the Owners as to the course of action to be adopted, and to the extent the Owner Trustee acts in good faith in accordance with any written instruction of the Owners received, the Owner Trustee shall not be liable on account of such action to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action, not inconsistent with this Agreement or the Transaction Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. (d) In the event that the Owner Trustee is unsure as to the application of any provision of this Agreement or any Transaction Document or any such provision is ambiguous as to its application, or is, or appears to be, in conflict with any other applicable provision, or in the event that this Agreement permits any determination by the Owner Trustee or is silent or is incomplete as to the course of action that the Owner Trustee is required to take with respect to a particular set of facts, the Owner Trustee may give notice (in such form as shall be appropriate under the circumstances) to the Owners requesting instruction and, to the extent that the Owner Trustee acts or refrains from acting in good faith in accordance with any such instruction received, the Owner Trustee shall not be liable, on account of such action or inaction, to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action, not inconsistent with this Agreement or the Transaction Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. Section 6.4 No Duties Except as Specified in this Agreement, the Transaction Documents or in Instructions. The Owner Trustee shall not have any duty or obligation to manage, make any payment with respect to, register, record, sell, dispose of, or otherwise deal with the Owner Trust Estate, or to otherwise take or refrain from taking any action under, or VI-2 31 in connection with, any document contemplated hereby to which the Owner Trustee is a party, except as expressly provided by the terms of this Agreement, any Transaction Document or in any document or written instruction received by the Owner Trustee pursuant to Section 6.3; and no implied duties or obligations shall be read into this Agreement or any Transaction Document against the Owner Trustee. The Owner 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 or to prepare or file any Securities and Exchange Commission filing for the Trust or to record this Agreement or any Transaction Document. The Owner Trustee nevertheless agrees that it will, at its own cost and expense, promptly take all action as may be necessary to discharge any liens on any part of the Owner Trust Estate that result from actions by, or claims against, the Owner Trustee that are not related to the ownership or the administration of the Owner Trust Estate. Section 6.5 No Action Except Under Specified Documents or Instructions. The Owner Trustee shall not manage, control, use, sell, dispose of or otherwise deal with any part of the Owner Trust Estate except (i) in accordance with the powers granted to and the authority conferred upon the Owner Trustee pursuant to this Agreement, (ii) in accordance with the Transaction Documents and (iii) in accordance with any document or instruction delivered to the Owner Trustee pursuant to Section 6.3. Section 6.6 Restrictions. The Owner Trustee shall not take any action (a) that is inconsistent with the purposes of the Trust set forth in Section 2.3 or (b) that, to the actual knowledge of the Owner Trustee, would result in the Trust's becoming taxable as a corporation for Federal income tax purposes. The Owners shall not direct the Owner Trustee to take action that would violate the provisions of this Section. VI-3 32 ARTICLE VII CONCERNING THE OWNER TRUSTEE Section 7.1 Acceptance of Trusts and Duties. The Owner Trustee accepts the trusts hereby created and agrees to perform its duties hereunder with respect to such trusts but only upon the terms of this Agreement and the Transaction Documents. The Owner Trustee also agrees to disburse all moneys actually received by it constituting part of the Owner Trust Estate upon the terms of the Transaction Documents and this Agreement. The Owner Trustee shall not be answerable or accountable hereunder or under any Transaction Document under any circumstances, except (i) for its own willful misconduct or gross negligence or (ii) in the case of the inaccuracy of any representation or warranty contained in Section 7.3 expressly made by the Owner Trustee. In particular, but not by way of limitation (and subject to the exceptions set forth in the preceding sentence): (a) the Owner Trustee shall not be liable for any error of judgment made by a responsible officer of the Owner Trustee; (b) the Owner Trustee shall not be liable with respect to any action taken or omitted to be taken by it in accordance with the instructions of the Administrator or the Owners; (c) no provision of this Agreement or any Transaction Document shall require the Owner Trustee to expend or risk funds or otherwise incur any financial liability in the performance of any of its rights or powers hereunder or under any Transaction Document if the Owner Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; (d) under no circumstances shall the Owner Trustee be liable for indebtedness evidenced by or arising under any of the Transaction Documents, including the principal of and interest on the Notes; (e) the Owner Trustee shall not be responsible for or in respect of the validity or sufficiency of this Agreement or for the due execution hereof by the Depositor or the Company or for the form, character, genuineness, sufficiency, value or validity of any of the Owner Trust Estate or for or in respect of the validity or sufficiency of the Transaction Documents, other than the certificate of authentication on the Residual Certificates, and the Owner Trustee shall in no event assume or incur any liability, duty, or obligation to any Noteholder or to any Owner, other than as expressly provided for herein and in the Transaction Documents; (f) the Owner Trustee shall not be liable for the default or misconduct of the Administrator, the Seller, the Company, the Indenture Trustee, the Master Servicer or the Servicer under any of the Transaction Documents or otherwise and the Owner Trustee shall VII-1 33 have no obligation or liability to perform the obligations of the Trust under this Agreement or the Transaction Documents that are required to be performed by the Administrator under the Administration Agreement, the Indenture Trustee under the Indenture, the Master Servicer under the Sale and Servicing Agreement, or the Servicer under the Servicing Agreement; and (g) the Owner 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 under this Agreement or otherwise or in relation to this Agreement or any Transaction Document, at the request, order or direction of any of the Owners, unless such Owners have offered to the Owner Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities that may be incurred by the Owner Trustee therein or thereby. The right of the Owner Trustee to perform any discretionary act enumerated in this Agreement or in any Transaction Document shall not be construed as a duty, and the Owner Trustee shall not be answerable for other than its gross negligence or willful misconduct in the performance of any such act provided, that the Owner Trustee shall be liable for its negligence or willful misconduct in the event that it assumes the duties and obligations of the Co-Owner Trustee under the Sale and Servicing Agreement pursuant to Section 10.5 hereof. Section 7.2 Furnishing of Documents. The Owner Trustee shall furnish (a) to the Owners promptly upon receipt of a written request therefor, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Owner Trustee under the Transaction Documents and (b) to Noteholders promptly upon written request therefor, copies of the Sale and Servicing Agreement, the Administration Agreement and the Trust Agreement. Section 7.3 Representations and Warranties. (a) The Owner Trustee hereby represents and warrants to the Depositor and the Company, for the benefit of the Owners, that: (i) It is a banking corporation duly organized and validly existing in good standing under the laws of the State of Delaware. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (ii) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement, and this Agreement will be executed and delivered by one of its officers who is duly authorized to execute and deliver this Agreement on its behalf. (iii) Neither the execution nor the delivery by it of this Agreement nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the terms or provisions hereof will contravene any Federal or Delaware law, governmental rule or regulation governing the banking or trust powers of the VII-2 34 Owner Trustee or any judgment or order binding on it, or constitute any default under its charter documents or by-laws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. (b) The Co-Owner Trustee hereby represents and warrants to the Depositor and the Company and the Securities Insurer, for the benefit of the Owners, that: (i) It is a national banking association duly organized and validly existing in good standing under the laws of the United States. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (ii) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement, and this Agreement will be executed and delivered by one of its officers who is duly authorized to execute and deliver this Agreement on its behalf. (iii) Neither the execution nor the delivery by it of this Agreement nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the terms or provisions hereof will contravene any Federal or Minnesota law, governmental rule or regulation governing the banking or trust powers of the Co-Owner Trustee or any judgment or order binding on it, or constitute any default under its charter documents or by-laws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. Section 7.4 Reliance; Advice of Counsel. (a) The Owner Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond, or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. The Owner Trustee may accept a certified copy of a resolution of the board of directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the method of the determination of which is not specifically prescribed herein, the Owner Trustee may for all purposes hereof rely on a certificate, signed by the president or any vice president or by the treasurer or other authorized officers of the relevant party, as to such fact or matter and such certificate shall constitute full protection to the Owner Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. (b) In the exercise or administration of the trusts hereunder and in the performance of its duties and obligations under this Agreement or the Transaction Documents, the Owner Trustee (i) may act directly or through its agents or attorneys pursuant to agreements entered into with any of them, and the Owner Trustee shall not be liable for the VII-3 35 conduct or misconduct of such agents or attorneys if such agents or attorneys shall have been selected by the Owner Trustee with reasonable care, and (ii) may consult with counsel, accountants and other skilled persons to be selected with reasonable care and employed by it. The Owner Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the written opinion or advice of any such counsel, accountants or other such persons and not contrary to this Agreement or any Transaction Document. Section 7.5 Not Acting in Individual Capacity. Except as provided in this Article VII, in accepting the trusts hereby created Wilmington Trust Company acts solely as Owner Trustee hereunder and not in its individual capacity and all Persons having any claim against the Owner Trustee by reason of the transactions contemplated by this Agreement or any Transaction Document shall look only to the Owner Trust Estate for payment or satisfaction thereof. Section 7.6 Owner Trustee Not Liable for Residual Certificates or Home Loans. The recitals contained herein and in the Residual Certificates (other than the signature and countersignature of the Owner Trustee on the Residual Certificates) shall be taken as the statements of the Depositor and the Company, and the Owner Trustee assumes no responsibility for the correctness thereof. The Owner Trustee makes no representations as to the validity or sufficiency of this Agreement, of any Transaction Document or of the Residual Certificates (other than the signature and countersignature of the Owner Trustee on the Residual Certificates and as specified in Section 7.3) or the Notes, or of any Home Loans or related documents. The Owner Trustee shall at no time have any responsibility or liability for or with respect to the legality, validity and enforceability of any Home Loan, or the perfection and priority of any security interest created by any Home Loan or the maintenance of any such perfection and priority, or for or with respect to the sufficiency of the Owner Trust Estate or its ability to generate the payments to be distributed to Owners under this Agreement or the Noteholders under the Indenture, including, without limitation: the existence, condition and ownership of any Property; the existence and enforceability of any insurance thereon; the existence and contents of any Home Loan on any computer or other record thereof; the validity of the assignment of any Home Loan to the Trust or of any intervening assignment; the completeness of any Home Loan; the performance or enforcement of any Home Loan; the compliance by the Depositor, the Company, the Master Servicer or the Servicer with any warranty or representation made under any Transaction Document or in any related document or the accuracy of any such warranty or representation or any action of the Administrator, the Indenture Trustee, the Master Servicer or the Servicer or any subservicer taken in the name of the Owner Trustee. Section 7.7 Owner Trustee May Own Residual Certificates and Notes. The Owner Trustee in its individual or any other capacity may become the owner or pledgee of Residual Certificates or Notes and may deal with the Depositor, the Company, the Administrator, the Indenture Trustee and the Servicer in banking transactions with the same rights as it would have if it were not Owner Trustee. VII-4 36 Section 7.8 Licenses. The Owner Trustee shall cause the Trust to use its best efforts to obtain and maintain the effectiveness of any licenses required in connection with this Agreement and the Transaction Documents and the transactions contemplated hereby and thereby until such time as the Trust shall terminate in accordance with the terms hereof. Section 7.9 Rights of Co-Owner Trustee. The Co-Owner Trustee shall be entitled to all the rights and benefits conferred upon the Owner Trustee in Article VII of this Agreement. VII-5 37 ARTICLE VIII COMPENSATION OF OWNER TRUSTEE Section 8.1 Owner Trustee's Fees and Expenses. The Owner Trustee shall receive as compensation for its services hereunder such fees as have been separately agreed upon before the date hereof between the Company and the Owner Trustee, and the Owner Trustee shall be entitled to be reimbursed by the Company for its other reasonable expenses hereunder, including the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as the Owner Trustee may employ in connection with the exercise and performance of its rights and its duties hereunder. Section 8.2 Indemnification. The Company shall be liable as primary obligor, and the Servicer as secondary obligor pursuant to the Administration Agreement, for, and shall indemnify the Owner Trustee, the Co-Owner Trustee and their successors, assigns, agents and servants (collectively, the "Indemnified Parties") from and against, any and all liabilities, obligations, losses, damages, taxes, claims, actions and suits, and any and all reasonable costs, expenses and disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever (collectively, "Expenses") which may at any time be imposed on, incurred by, or asserted against the Owner Trustee or any Indemnified Party in any way relating to or arising out of this Agreement, the Transaction Documents, the Owner Trust Estate, the administration of the Owner Trust Estate or the action or inaction of the Owner Trustee or the Co-Owner Trustee hereunder, except only that the Company shall not be liable for or required to indemnify an Indemnified Party from and against Expenses arising or resulting from any of the matters described in the third sentence of Section 7.1 hereof. The indemnities contained in this Section shall survive the resignation or termination of the Owner Trustee or the termination of this Agreement. In any event of any claim, action or proceeding for which indemnity will be sought pursuant to this Section, the Owner Trustee's or Co-Owner Trustee's choice of legal counsel shall be subject to the approval of the Company, which approval shall not be unreasonably withheld. Section 8.3 Payments to the Owner Trustee. Any amounts paid to the Owner Trustee pursuant to this Article VIII shall be deemed not to be a part of the Owner Trust Estate immediately after such payment. VIII-1 38 ARTICLE IX TERMINATION OF TRUST AGREEMENT Section 9.1 Termination of Trust Agreement. (a) This Agreement (other than Article VIII) and the Trust shall terminate and be of no further force or effect on the earlier of (i) the satisfaction and discharge of the Indenture pursuant to Section 4.01 of the Indenture and the termination of the Sale and Servicing Agreement and (ii) 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's) alive on the date hereof. The bankruptcy, liquidation, dissolution, death or incapacity of any Owner shall not (x) operate to terminate this Agreement or the Trust, nor (y) entitle such Owner's legal representatives or heirs to claim an accounting or to take any action or proceeding in any court for a partition or winding up of all or any part of the Trust or Owner Trust Estate nor (z) otherwise affect the rights, obligations and liabilities of the parties hereto. (b) The Residual Certificates shall be subject to an early redemption or termination at the option of the Company, the Master Servicer or the Securities Insurer in the manner and subject to the provisions of Section 11.01 of the Sale and Servicing Agreement. (c) Except as provided in Sections 9.1(a) and (b) above, none of the Depositor, the Company, the Securities Insurer nor any Owner shall be entitled to revoke or terminate the Trust. (d) Notice of any termination of the Trust, specifying the Distribution Date upon which the Residual Certificateholders shall surrender their Residual Certificates to the Paying Agent for payment of the final distributions and cancellation, shall be given by the Owner Trustee to the Certificateholders, the Securities Insurer and the Rating Agencies mailed within five Business Days of receipt by the Owner Trustee of notice of such termination pursuant to Section 9.1(a) or (b) above, which notice given by the Owner Trustee shall state (i) the Distribution Date upon or with respect to which final payment of the Residual Certificates shall be made upon presentation and surrender of the Residual Certificates at the office of the Paying Agent therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Distribution Date is not applicable, payments being made only upon presentation and surrender of the Residual Certificates at the office of the Paying Agent therein specified. The Owner Trustee shall give such notice to the Certificate Registrar (if other than the Owner Trustee) and the Paying Agent at the time such notice is given to Residual Certificateholders. Upon presentation and surrender of the Residual Certificates, the Paying Agent shall cause to be distributed to Residual Certificateholders amounts distributable on such Distribution Date pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement. IX-1 39 In the event that all of the Residual Certificateholders shall not surrender their Residual Certificates for cancellation within six months after the date specified in the above mentioned written notice, the Co-Owner Trustee shall give a second written notice to the remaining Certificateholders to surrender their Residual Certificates for cancellation and receive the final distribution with respect thereto. If within one year after the second notice all the Residual Certificates shall not have been surrendered for cancellation, the Co-Owner Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Residual Certificateholders concerning surrender of their Residual Certificates, and the cost thereof shall be paid out of the funds and other assets that shall remain subject to this Agreement. Any funds remaining in the Trust after exhaustion of such remedies shall be distributed by the Co-Owner Trustee to the Residual Certificateholders on a pro rata basis. (e) Upon the winding up of the Trust and its termination, the Owner Trustee shall cause the Certificate of Trust to be canceled by filing a certificate of cancellation with the Secretary of State in accordance with the provisions of Section 3820 of the Business Trust Statute. IX-2 40 ARTICLE X SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES Section 10.1 Eligibility Requirements for Owner Trustee. The Owner Trustee shall at all times be a corporation satisfying the provisions of Section 3807(a) of the Business Trust Statute; authorized to exercise corporate powers; having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by Federal or state authorities; and having (or having a parent which has) a long-term rating of at least "A-1" by Standard & Poor's and "Baa3" by Moody's and being acceptable to the Securities Insurer. If such corporation shall publish reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purpose of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Owner Trustee shall cease to be eligible in accordance with the provisions of this Section, the Owner Trustee shall resign immediately in the manner and with the effect specified in Section 10.2. Section 10.2 Resignation or Removal of Owner Trustee or Co-Owner Trustee. The Owner Trustee or Co-Owner Trustee may at any time resign and be discharged from the trusts hereby created by giving written notice thereof to the Administrator, the Indenture Trustee, the Securities Insurer and the Company. Upon receiving such notice of resignation, the Administrator shall promptly appoint a successor Owner Trustee or Co-Owner Trustee (acceptable to the Securities Insurer) by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Owner Trustee and one copy to the successor Owner Trustee or Co-Owner Trustee. If no successor Owner Trustee or Co-Owner Trustee shall have been so appointed and have accepted appointment within 30 days after the giving of such notice of resignation, the resigning Owner Trustee or Co-Owner Trustee or the Securities Insurer may petition any court of competent jurisdiction for the appointment of a successor Owner Trustee or Co-Owner Trustee. If at any time the Owner Trustee or Co-Owner Trustee shall cease to be eligible in accordance with the provisions of Section 10.1 and shall fail to resign after written request therefor by the Administrator, or if at any time the Owner Trustee or Co-Owner Trustee shall be legally unable to act, or shall be adjudged bankrupt or insolvent, or a receiver of the Owner Trustee or Co-Owner Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Owner Trustee or Co-Owner Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Securities Insurer, or the Administrator with the consent of the Securities Insurer, may remove the Owner Trustee or Co-Owner Trustee. If the Administrator or the Securities Insurer shall remove the Owner Trustee or Co-Owner Trustee under the authority of the immediately preceding sentence, the Securities Insurer, or the Administrator with the consent of the Securities Insurer, shall promptly appoint a successor Owner Trustee or Co-Owner Trustee by written instrument in duplicate, one copy of which instrument shall be delivered to the X-1 41 outgoing Owner Trustee or Co-Owner Trustee so removed and one copy to the successor Owner Trustee or Co-Owner Trustee and payment of all fees owed to the outgoing Owner Trustee or Co-Owner Trustee. Any resignation or removal of the Owner Trustee or Co-Owner Trustee and appointment of a successor Owner Trustee or Co-Owner Trustee pursuant to any of the provisions of this Section shall not become effective until (i) acceptance of appointment by the successor Owner Trustee or Co-Owner Trustee pursuant to Section 10.3 written approval by the Securities Insurer and payment of all fees and expenses owed to the outgoing Owner Trustee or Co-Owner Trustee. The Administrator shall provide notice of such resignation or removal of the Owner Trustee or Co-Owner Trustee to each of the Rating Agencies and the Securities Insurer. Section 10.3 Successor Owner Trustee or Co-Owner Trustee. Any successor Owner Trustee or Co-Owner Trustee appointed pursuant to Section 10.2 shall execute, acknowledge and deliver to the Administrator, the Securities Insurer and to its predecessor Owner Trustee or Co-Owner Trustee an instrument accepting such appointment under this Agreement, and thereupon the resignation or removal of the predecessor Owner Trustee or Co-Owner Trustee shall become effective and such successor Owner Trustee or Co-Owner Trustee (if acceptable to the Securities Insurer), without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties, and obligations of its predecessor under this Agreement, with like effect as if originally named as Owner Trustee or Co-Owner Trustee. The predecessor Owner Trustee or Co-Owner Trustee shall upon payment of its fees and expenses deliver to the successor Owner Trustee or Co-Owner Trustee all documents and statements and monies held by it under this Agreement; and the Administrator and the predecessor Owner Trustee or Co-Owner 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 Owner Trustee or Co-Owner Trustee all such rights, powers, duties, and obligations. No successor Owner Trustee or Co-Owner Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Owner Trustee or Co-Owner Trustee shall be eligible pursuant to Section 10.1. Upon acceptance of appointment by a successor Owner Trustee or Co-Owner Trustee pursuant to this Section, the Administrator shall mail notice of the successor of such Owner Trustee or Co-Owner Trustee to all Owners, the Indenture Trustee, the Noteholders, the Securities Insurer and the Rating Agencies. If the Administrator fails to mail such notice within 10 days after acceptance of appointment by the successor Owner Trustee or Co-Owner Trustee, the successor Owner Trustee or Co-Owner Trustee shall cause such notice to be mailed at the expense of the Administrator. X-2 42 Section 10.4 Merger or Consolidation of Owner Trustee. Any corporation into which the Owner Trustee or the Co-Owner Trustee may be merged or converted or with which either may be consolidated or any corporation resulting from any merger, conversion or consolidation to which the Owner Trustee or the Co-Owner Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Owner Trustee or the Co-Owner Trustee, shall be the successor of the Owner Trustee or the Co-Owner Trustee, as the case may be, hereunder, provided such corporation shall be eligible pursuant to Section 10.1, without the execution or filing of any instrument or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding; provided further that the Owner Trustee or the Co-Owner Trustee, as the case may be, shall mail notice of such merger or consolidation to the Rating Agencies. Section 10.5 Appointment of Co-Owner Trustee or Separate Owner 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 Owner Trust Estate or any Mortgaged Property may at the time be located, and for the purpose of performing certain duties and obligations of the Owner Trustee with respect to the Trust and the Residual Certificates under the Sale and Servicing Agreement, the Administrator and the Owner Trustee acting jointly shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Owner Trustee and acceptable to the Securities Insurer to act as co-owner trustee, jointly with the Owner Trustee, or separate owner trustee or separate owner trustees, of all or any part of the Owner Trust Estate, and to vest in such Person, in such capacity, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Administrator, the Securities Insurer and the Owner Trustee may consider necessary or desirable. If the Administrator shall not have joined in such appointment within 25 days after the receipt by it of a request so to do, the Owner Trustee (with the consent of the Securities Insurer) shall have the power to make such appointment. No Co-Owner Trustee or separate Owner Trustee under this Section 10.5 shall be required to meet the terms of eligibility as a successor trustee pursuant to Section 10.1 and no notice of the appointment of any co-owner trustee or separate Owner Trustee shall be required pursuant to Section 10.3. The Owner Trustee hereby appoints the Indenture Trustee as Co-Owner Trustee for the purpose of (i) establishing and maintaining the Certificate Distribution Account and making the distributions therefrom to the Persons entitled thereto pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement and (ii) holding the Contract of Insurance on behalf of the Trust, facilitating claims under the Contract of Insurance and for purposes of holding record ownership of each FHA Loan. The Owner Trustee and the Co-Owner Trustee each agree that upon the occurrence and continuation of a Securities Insurer Default, the Co-Owner Trustee shall resign and the Owner Trustee shall assume the duties and obligations of the Co-Owner Trustee under the Sale and Servicing Agreement (other than its duties as Contract of Insurance Holder thereunder) and this Agreement, including without limitation, the obligations of the Co-Owner Trustee as Paying Agent pursuant to Section 3.9 hereof. X-3 43 Each separate owner trustee and co-owner trustee shall, to the extent permitted by law, be appointed and act subject to the following provision and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Owner Trustee shall be conferred upon and exercised or performed by the Owner Trustee and such separate owner trustee or co-owner trustee jointly (it being understood that such separate owner trustee or co-owner trustee is not authorized to act separately without the Owner Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed, the Owner 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 owner trustee or co-owner trustee but solely at the direction of the Owner Trustee; provided that Co-Owner Trustee, in performing its duties and obligations under the Sale and Servicing Agreement, may act separately in its capacity as Co-Owner Trustee without the Owner Trustee joining in such Acts. (ii) no owner trustee under this Agreement shall be personally liable by reason of any act or omission of any other owner trustee under this Agreement; and (iii) the Administrator and the Owner Trustee acting jointly may at any time accept the resignation of or remove any separate owner trustee or co-owner trustee. Any notice, request or other writing given to the Owner Trustee shall be deemed to have been given to the separate owner trustees and co-owner trustees, as if given to each of them. Every instrument appointing any separate owner trustee or co-owner trustee, other than this Agreement, shall refer to this Agreement and to the conditions of this Article. Each separate owner trustee and co-owner trustee, upon its acceptance of appointment, shall be vested with the estates specified in its instrument of appointment, either jointly with the Owner 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 Owner Trustee. Each such instrument shall be filed with the Owner Trustee and a copy thereof given to the Administrator. Any separate owner trustee or co-owner trustee may at any time appoint the Owner Trustee as 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 owner trustee or co-owner 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 Owner Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. X-4 44 The Co-Owner Trustee, in its capacity as Co-Owner Trustee, shall not have any rights, duties or obligations except as expressly provided in this Agreement and the Sale and Servicing Agreement. X-5 45 ARTICLE XI MISCELLANEOUS Section 11.1 Supplements and Amendments. This Agreement may be amended by the Depositor, the Company and the Owner Trustee, with the prior consent of the Securities Insurer, and with prior written notice to the Rating Agencies and the Securities Insurer, but without the consent of any of the Noteholders or the Owners or the Indenture Trustee, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders or the Owners provided, however, that such action shall not adversely affect in any material respect the interests of any Noteholder or Owner or the rights of the Securities Insurer. An amendment described above shall be deemed not to adversely affect in any material respect the interests of any Noteholder or Owner if (i) an opinion of counsel is obtained to such effect, and (ii) the party requesting the amendment satisfies the Rating Agency Condition with respect to such amendment. This Agreement may also be amended from time to time by the Depositor, the Company and the Owner Trustee, with the prior written consent of the Rating Agencies and with the prior written consent of the Indenture Trustee, the Securities Insurer, the Holders (as defined in the Indenture) of Notes evidencing more than 50% of the Percentage Interests in the Notes, the Holders of Residual Certificates evidencing more than 50% of the Percentage Interests in the Residual Certificates, 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 Noteholders or the Owners; provided, however, that no such amendment shall (a) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on the Home Loans or distributions that shall be required to be made for the benefit of the Noteholders or the Residual Certificateholders or the Securities Insurer (b) reduce the aforesaid percentage of the Outstanding Amount of the Notes or the Percentage Interests required to consent to any such amendment, in either case of clause (a) or (b) without the consent of the holders of all the outstanding Notes and Residual Certificates and the Securities Insurer, and in the case of clause (b) without the consent of the holders of all the outstanding Residual Certificates. Promptly after the execution of any such amendment or consent, the Owner Trustee shall furnish written notification of the substance of such amendment or consent to each Residual Certificateholder, the Indenture Trustee, the Securities Insurer and each of the Rating Agencies. It shall not be necessary for the consent of Owners, the Noteholders or the Indenture Trustee pursuant to this Section 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 any other consents of Owners provided for in this XI-1 46 Agreement or in any other Transaction Document) and of evidencing the authorization of the execution thereof by Residual Certificateholders shall be subject to such reasonable requirements as the Owner Trustee may prescribe. Promptly after the execution of any amendment to the Certificate of Trust, the Owner Trustee shall cause the filing of such amendment with the Secretary of State. Prior to the execution of any amendment to this Agreement or the Certificate of Trust, the Owner 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 Owner Trustee may, but shall not be obligated to, enter into any such amendment which affects the Owner Trustee's own rights, duties or immunities under this Agreement or otherwise. Section 11.2 No Legal Title to Owner Trust Estate in Owners. The Owners shall not have legal title to any part of the Owner Trust Estate. The Owners shall be entitled to receive distributions with respect to their undivided ownership interest therein only in accordance with Articles V and IX. No transfer, by operation of law or otherwise, of any right, title, or interest of the Owners to and in their ownership interest in the Owner Trust Estate shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of legal title to any part of the Owner Trust Estate. Section 11.3 Limitations on Rights of Others. The provisions of this Agreement are solely for the benefit of the Owner Trustee, the Co-Owner Trustee, the Depositor, the Company, the Owners, the Administrator, the Securities Insurer and, to the extent expressly provided herein, the Indenture Trustee and the Noteholders, and nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Owner Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 11.4 Notices. (a) Unless otherwise expressly specified or permitted by the terms hereof, all notices shall be in writing and shall be deemed given upon receipt by the intended recipient or three Business Days after mailing if mailed by certified mail, postage prepaid (except that notice to the Owner Trustee shall be deemed given only upon actual receipt by the Owner Trustee), at the following addresses: (i) if to the Owner Trustee, its Corporate Trust Office; (ii) if to the Depositor, Financial Asset Securities Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Peter McMullin, Vice President; (iii) if to the Company, Mego Mortgage Corporation, 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339, Attention: Jeff S. Moore, President; (iv) if to the Securities Insurer, MBIA Insurance Corporation, 113 King Street, Armonk, New York 10504, Attention: IPM-SF, telephone: 914-765-3810, confirmation: 914-765-3781; (v) if to the Co-Owner Trustee, First Trust of New York, National Association, 180 East Fifth Street, St. Paul, Minnesota 55101, Attention: Structured Finance/Mego Mortgage 1997-2 Corporate Trust Department; XI-2 47 or, as to each such party, at such other address as shall be designated by such party in a written notice to each other party. (b) Any notice required or permitted to be given to an Owner shall be given by first-class mail, postage prepaid, at the address of such Owner 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 Owner receives such notice. Section 11.5 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 11.6 Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 11.7 Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Depositor, the Company, the Securities Insurer, the Owner Trustee, the Co-Owner Trustee and its successors and each owner and its successors and permitted assigns, all as herein provided. Any request, notice, direction, consent, waiver or other instrument or action by an Owner shall bind the successors and assigns of such Owner. Section 11.8 No Petition. The Owner Trustee, by entering into this Agreement, each Owner, by accepting a Residual Certificate, and the Indenture Trustee and each Noteholder by accepting the benefits of this Agreement, hereby covenant and agree that they will not at any time institute against the Company, any wholly-owned subsidiary of the Company, the Depositor or the Trust, or join in any institution against the Company, any wholly-owned subsidiary of the Company, or the Trust of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States Federal or state bankruptcy or law in connection with any obligations relating to the Residual Certificates, the Notes, this Agreement or any of the Transaction Documents. Section 11.9 Covenants of Company. The Company shall not institute at any time any Bankruptcy proceeding against the Trust or any wholly-owned subsidiary of the Company, under any United States Federal or state bankruptcy or similar law in connection with any obligations relating to the Residual Certificates, the Notes, the Trust Agreement or any of the Transaction Documents. Section 11.10 No Recourse. Each Owner by accepting a Residual Certificate acknowledges that such Owner's Trust Certificate represents a beneficial interest in the Trust XI-3 48 only and does not represent an interest in or an obligation of the Seller, the Servicer, the Company, the Depositor, the Administrator, the Owner Trustee, the Co-Owner Trustee or any Affiliate thereof and no recourse may be had against such parties or their assets, except as may be expressly set forth or contemplated in this Agreement, the Residual Certificates or the Transaction Documents. Section 11.11 Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 11.12 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, 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 11.13 Third-Party Beneficiary. The parties hereto acknowledge that the Securities Insurer is an express third party beneficiary hereof entitled to enforce any rights reserved to it hereunder as if it were actually a party hereto. Section 11.14 Inconsistencies with Sale and Servicing Agreement. In the event certain provisions of this Agreement conflict with the provisions of the Sale and Servicing Agreement, the parties hereto agree that the provisions of the Sale and Servicing Agreement shall be controlling. XI-4 49 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed by their respective officers hereunto duly authorized, as of the day and year first above written. FINANCIAL ASSET SECURITIES CORP., Depositor By:___________________________________ Name: Title: MEGO MORTGAGE CORPORATION By:___________________________________ Name: Title: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By:___________________________________ Name: Title: FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, not in its individual capacity but solely as Co-Owner Trustee and Paying Agent By:___________________________________ Name: Title: 50 EXHIBIT A TO THE TRUST AGREEMENT (FORM OF RESIDUAL CERTIFICATE] THE RESIDUAL CERTIFICATE IN THE TRUST REPRESENTED BY THIS RESIDUAL CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THIS RESIDUAL INTEREST MAY BE DIRECTLY OR INDIRECTLY OFFERED OR SOLD OR OTHERWISE DISPOSED OF (INCLUDING PLEDGED) BY THE HOLDER HEREOF ONLY TO (I) A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE ACT, IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT PURSUANT TO RULE 144A OR (II) A PERSON INVOLVED IN THE ORGANIZATION OR OPERATION OF THE TRUST OR AN AFFILIATE OF SUCH A PERSON WITHIN THE MEANING OF RULE 3A-7 OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (INCLUDING, BUT NOT LIMITED TO, MEGO MORTGAGE CORPORATION) IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. NO PERSON IS OBLIGATED TO REGISTER THIS RESIDUAL INTEREST UNDER THE ACT OR ANY STATE SECURITIES LAWS. NO TRANSFER OF THIS RESIDUAL OR ANY BENEFICIAL INTEREST THEREIN SHALL BE MADE TO ANY PERSON UNLESS THE OWNER TRUSTEE HAS RECEIVED A CERTIFICATE FROM THE TRANSFEREE TO THE EFFECT THAT SUCH TRANSFEREE (I) IS NOT A PERSON WHICH IS AN EMPLOYEE BENEFIT PLAN, TRUST OR ACCOUNT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA") OR SECTION 4975 OF THE CODE OR A GOVERNMENTAL PLAN, DEFINED IN SECTION 3(32) OF ERISA SUBJECT TO ANY FEDERAL, STATE OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE FOREGOING PROVISIONS OF ERISA OR THE CODE (ANY SUCH PERSON BEING A "PLAN") AND (II) IS NOT AN ENTITY, INCLUDING AN INSURANCE COMPANY SEPARATE ACCOUNT OR GENERAL ACCOUNT, WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF A PLAN'S INVESTMENT IN THE ENTITY. [THIS AGREEMENT IS NONTRANSFERABLE. NOTWITHSTANDING ANYTHING HEREIN OR IN THE TRUST AGREEMENT TO THE CONTRARY, ANY ATTEMPTED TRANSFER OF THIS RESIDUAL CERTIFICATE SHALL BE NULL AND VOID FOR ALL PURPOSES.] A-1 51 MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2 RESIDUAL CERTIFICATE No. _____ THIS CERTIFIES THAT __________________________________ (the "Owner") is the registered owner of a _____% residual interest in MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2 (the "Trust") existing under the laws of the State of Delaware and created pursuant to the Trust Agreement dated as of May 1, 1997 (the "Trust Agreement") between FINANCIAL ASSET SECURITIES CORP., as Depositor, MEGO MORTGAGE CORPORATION, as the Company, WILMINGTON TRUST COMPANY, not in its individual capacity but solely in its fiduciary capacity as owner trustee under the Trust Agreement (the "Owner Trustee") and First Trust of New York, National Association, as Co-Owner Trustee (the "Co-Owner Trustee"). Initially capitalized terms used but not defined herein have the meanings assigned to them in the Trust Agreement. The Owner Trustee, on behalf of the Issuer and not in its individual capacity, has executed this Residual Certificate by one of its duly authorized signatories as set forth below. This Residual Certificate is one of the Residual Certificates referred to in the Trust Agreement and is issued under and is subject to the terms, provisions and conditions of the Trust Agreement to which the holder of this Residual Certificate by virtue of the acceptance hereof agrees and by which the holder hereof is bound. Reference is hereby made to the Trust Agreement and the Sale and Servicing Agreement for the rights of the holder of this Residual Certificate, as well as for the terms and conditions of the Trust created by the Trust Agreement. The holder, by its acceptance hereof, agrees not to transfer this Residual Certificate [except in accordance with terms and provisions of the Agreement]. A-2 52 THIS RESIDUAL CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, 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. IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in its individual capacity, has caused this Residual Certificate to be duly executed. MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2 By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By:______________________________________________ Authorized Signatory DATED: May __, 1997 CERTIFICATE OF AUTHENTICATION This is one of the Residual Certificates referred to in the within-mentioned Agreement. FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Authenticating Agent By:______________________________________________ Authorized Signatory A-3 53 ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- (Please print or type name and address, including postal zip code, of assignee) - -------------------------------------------------------------------------------- the within Instrument, and all rights thereunder, hereby irrevocably constituting and appointing - -------------------------------------------------------------------- Attorney to transfer said Instrument on the books of the Certificate Registrar, with full power of substitution in the premises. Dated:___________ */ ----------------------------------- Signature Guaranteed: */ ----------------------------------- - ---------- */ NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Certificate in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. A-4 54 EXHIBIT B TO THE TRUST AGREEMENT CERTIFICATE OF TRUST OF MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2 THIS Certificate of Trust of MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2 (the "Trust"), dated as of May 1, 1997, is being duly executed and filed by Wilmington Trust Company, a Delaware banking corporation, as trustee, to form a business trust under the Delaware Business Trust Act (12 Del. Code, Section 3801 et seq.). 1. Name. The name of the business trust formed hereby is MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-2. 2. Delaware Trustee. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company of Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890. Attention:___________. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, has executed this Certificate of Trust as of the date first above written. Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under a Trust Agreement dated as of May 1, 1997. By:_____________________________________ Name: Title: B-1 EX-10.125 14 HOME LOAN PURCHASE AGREEMENT 1 EXHIBIT 10.125 EXECUTION COPY ================================================================================ FINANCIAL ASSET SECURITIES CORP., as Purchaser, and MEGO MORTGAGE CORPORATION, as Seller, HOME LOAN PURCHASE AGREEMENT ================================================================================ Dated as of June 14, 1997 2 Table of Contents ARTICLE I. DEFINITIONS
Page ---- Section 1.1 Definitions................................................................................... 1 ARTICLE II. SALE OF HOME LOANS; PAYMENT OF PURCHASE PRICE Section 2.1 Sale of Home Loans............................................................................ 2 Section 2.2 [Reserved].................................................................................... 2 Section 2.3 Obligations of Seller Upon Sale............................................................... 2 Section 2.4 Payment of Purchase Price for the Home Loans.................................................. 4 ARTICLE III. REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH Section 3.1 Seller Representations and Warranties......................................................... 5 ARTICLE IV. SELLER'S COVENANTS Section 4.1 Covenants of the Seller....................................................................... 7 ARTICLE V. INDEMNIFICATION BY THE SELLER Section 5.1 Indemnification............................................................................... 7 Section 5.2 Limitation on Liability of the Seller......................................................... 7 ARTICLE VI. TERMINATION Section 6.1 Termination................................................................................... 10 ARTICLE VII. MISCELLANEOUS PROVISIONS Section 7.1 Amendment..................................................................................... 10 Section 7.2 Governing Law................................................................................. 10 Section 7.3 Notices....................................................................................... 10 Section 7.4 Severability of Provisions.................................................................... 11 Section 7.5 Counterparts.................................................................................. 11 Section 7.6 Further Agreements............................................................................ 11
i 3 Section 7.7 Intention of the Parties...................................................................... 11 Section 7.8 Successors and Assigns; Assignment of Purchase Agreement...................................... 12 Section 7.9 Survival...................................................................................... 12 Section 7.10 Third-Party Beneficiaries..................................................................... 12 EXHIBITS AND SCHEDULES Schedule I Schedule of Home Loans
ii 4 HOME LOAN PURCHASE AGREEMENT (the "Purchase Agreement"), dated as of June 14, 1997, between Mego Mortgage Corporation ("Mego" or the "Seller") and FINANCIAL ASSET SECURITIES CORP., ("FASCO" and together with any assignee of FASCO, the "Purchaser"). W I T N E S S E T H WHEREAS, the Seller is the owner of a pool of fixed-rate home improvement and debt consolidation loans and retail installment sale contracts (the "Home Loans") secured by first and junior mortgages, deeds of trust and security deeds on certain residential and investment properties (the "Properties") as listed on Schedule I attached hereto and the Related Documents thereto (as defined below); WHEREAS, the parties hereto desire that the Seller sell all its right, title and interest in and to the Home Loans and the Related Documents to the Purchaser pursuant to the terms of this Purchase Agreement; and WHEREAS, pursuant to the terms of a Sale and Servicing Agreement, dated as of June 14, 1997 (the "Sale and Servicing Agreement"), among Mego Mortgage Home Loan Owner Trust 1997-3, as issuer (the "Trust"), FASCO, as depositor (the "Depositor"), Mego, as Seller and servicer (the "Servicer"), Norwest Bank Minnesota, N.A., as master servicer (the "Master Servicer"), and First Bank National Association, as indenture trustee (the "Indenture Trustee") and co-owner trustee (the "Co-Owner Trustee"), the Purchaser will sell, transfer, assign and otherwise convey to the Trust all its right, title and interest in and to the Home Loans and this Purchase Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.1 Definitions. Capitalized terms used but not defined herein have the meanings assigned thereto in the Sale and Servicing Agreement. Registration Statement. The Purchaser's registration statement on Form S-3 (No. 333-29381), in the form in which it became effective under the Securities Act of 1933, as amended, on June 20, 1997 including any documents incorporated by reference therein. Base Prospectus. The prospectus, dated June 20, 1997 attached to the Prospectus Supplement relating to the Notes. 1 5 ARTICLE II. SALE OF HOME LOANS; PAYMENT OF PURCHASE PRICE Section 2.1 Sale of Home Loans. The Seller, concurrently with the execution and delivery of this Purchase Agreement, does hereby sell, assign, set over, and otherwise convey to the Purchaser, without recourse other than as expressly provided herein and in the Sale and Servicing Agreement, all of its right, title and interest in, to and under the following, whether now existing or hereafter acquired and wherever located: (i) as of the Cut-Off Date, the Home Loans delivered to the Indenture Trustee on the Closing Date, including the related Principal Balance and all payments of principal in respect of Home Loans received on or after the Cut-Off Date and payments of interest in respect of Home Loans due on or after the CutOff Date, (ii) the Home Loan Files, (iii) any Insurance Policies and related Insurance Proceeds, (iv) the Mortgages and security interests in Mortgaged Properties which secure the Home Loans, (v) any and all documents or electronic records relating to the Home Loans, (vi) all proceeds of any of the foregoing. Section 2.2 [Reserved]. Section 2.3 Obligations of Seller Upon Sale. In connection with any transfer pursuant to Section 2.1 hereof, the Seller further agrees, at its own expense, on or prior to the Closing Date (a) to indicate in its books and records that the Home Loans have been sold to the Purchaser pursuant to this Purchase Agreement and (b) to deliver to the Purchaser a computer file containing a true and complete list of all Home Loans specifying for each Home Loan, as of the Cut-Off Date, (i) its account number and (ii) its Principal Balance. Such file, which forms a part of Exhibit A to the Sale and Servicing Agreement, shall also be marked as Schedule I to this Purchase Agreement and is hereby incorporated into and made a part of this Purchase Agreement. The Seller agrees to prepare, execute and file UCC-1 financing statements with the County Clerk of Cobb (which shall have been filed on or before the Closing Date with respect to the Home Loans describing the Home Loans and naming the Seller as debtor and, the Purchaser as secured party (and indicating that such loans have been assigned to the Trust) all necessary continuation statements and any amendments to the UCC-1 financing statements required to reflect a change in the name or corporate structure of the Seller or the filing of any additional UCC-1 financing statements due to the change in the principal office of the Seller, as are necessary to perfect the sale of the Seller's interest in each Home Loan and the proceeds thereof. In connection with any conveyance by the Seller, the Seller shall on behalf of the Purchaser deliver to, and deposit with the Indenture Trustee, as assignee of the Purchaser, on or before the Closing Date the following documents or instruments with respect to each Home Loan (the "Related Documents"); provided, that the documents or instruments listed in clause (f) below may be held in the custody of the Seller on behalf of the Indenture Trustee. With respect to each Home Loan: 2 6 (a) The original Debt Instrument, showing a complete chain of endorsements or assignments from the named payee to the Trust and endorsed as follows: "Pay to the order of First Bank National Association, as Indenture Trustee and Co-Owner Trustee for Mego Mortgage Home Loan Owner Trust 1997-3 without recourse"; (b) If such Home Loan is a Mortgage Loan, the original Mortgage with evidence of recording indicated thereon (except that a true copy thereof certified by an appropriate public official may be substituted); provided, however, that if the Mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Purchase Agreement solely because of a delay caused by the public recording office where such Mortgage has been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of such Mortgage certified as a true copy in an Officer's Certificate which shall certify that such Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such Mortgage with evidence of recording indicated thereon upon receipt thereof from the public recording official (or a true copy thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (c) If such Home Loan is a Mortgage Loan, an original Assignment of the Mortgage, in recordable form. Such assignment may be a blanket assignment, to the extent that blanket assignments are effective under applicable law, for Mortgages covering Properties situated in the same county. If the assignment of Mortgage is in blanket form, an assignment of Mortgage need not be included in the individual Home Loan File; (d) If such Home Loan is a Mortgage Loan, all original intermediate assignments of the Mortgage, showing a complete chain of assignments from the named mortgagee to the assignor to the Indenture Trustee, with evidence of recording thereon (or true copies thereof certified by appropriate public officials may be substituted); provided, however, that if the intervening assignments of mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Purchase Agreement solely because of a delay caused by the public recording office where such Assignments of Mortgage have been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of each such assignment of Mortgage certified as a true copy in an Officer's Certificate which shall certify that each such assignment of Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such assignments of Mortgage with evidence of recording indicated thereon upon its receipt thereof from the public recording official (or true copies thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (e) An original of each assumption or modification agreement, if any, relating to such Home Loan; and (f) (i) an original or copy of the truth-in-lending disclosure, (ii) an original or copy of the credit application, (iii) an original or copy of the consumer credit report, (iv) an original or copy of verification of employment and income, or verification of self- 3 7 employment income, (v) an original or copy of the contract of work or written description with cost estimates, if applicable, (vi) an original or copy of the report of inspection of improvements to the Property, if applicable, (vii) to the extent not included in (ii), an original or a copy of a written verification, or an underwriter's notation of obtaining a verbal verification that the Obligor at the time of origination was not more than 30 days delinquent on any senior mortgage or deed of trust on the Property, (viii) (1) if the original principal balance is between $35,001 and $40,000, (A) evidence that the borrower has a FICO Score of at least 640, a debt to income ratio no greater than 45%, and disposable income of at least $1,500 per month, or (B) (I) a copy of the HUD-1 Closing Statement indicating the sale price, or (II) an Uniform Residential Appraisal Report, or (III) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (IV) a tax assessment, or (V) a broker's price opinion; (2) if the original principal balance is between $40,001 and $50,000, (A) a copy of the HUD-1 Closing Statement indicating the sale price, or (B) an Uniform Residential Appraisal, or (C) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (D) a tax assessment, or (E) a broker's price opinion, or (3) if the original principal balance exceeds $50,000, a full Uniform Residential Appraisal Report prepared by a national appraisal firm, and (ix) an original or a copy of a title search as of the time of origination with respect to the Property. With respect to any documents referred to clauses (b) and (d) above that are not delivered to the Indenture Trustee because of a delay caused by the public recording office, such documents shall be delivered to the Indenture Trustee in accordance with the terms of such clauses by the Seller if such documents are received by it or by the Purchaser if such documents are received by it. The Seller further hereby confirms to the Purchaser that, as of the Closing Date it has caused the portions of the Seller's electronic ledger relating to the Home Loans to be clearly and unambiguously marked to indicate that the Home Loans have been sold to the Purchaser. The Purchaser hereby acknowledges its acceptance of all right, title and interest to the Home Loans and other property, now existing and hereafter created, conveyed to it pursuant to Section 2.1 hereof. The parties hereto intend that each of the transactions set forth herein be a sale by the Seller to the Purchaser of all the Seller's right, title and interest in and to the Home Loans and other property described above. In the event the transactions set forth herein are deemed not to be a sale, the Seller hereby grants to the Purchaser a security interest in all of the Seller's right, title and interest in, to and under the Home Loans and other property described above, whether now existing or hereafter created, to secure all of the Seller's obligations hereunder; and this Purchase Agreement shall constitute a security agreement under applicable law. Section 2.4 Payment of Purchase Price for the Home Loans. (a) In consideration of the sale of the Home Loans from the Seller to the Purchaser on the Closing Date, the Purchaser agrees to pay to the Seller on the Closing Date by transfer of immediately 4 8 available funds, an amount equal to $103,620,516.02 (which includes accrued interest) (before deducting expenses payable by the Seller to the Purchaser) (the "Purchase Price"). (b) Within 60 days of the Closing Date, the Seller, at its own expense, shall cause the Indenture Trustee to record each Assignment of Mortgage in favor of the Indenture Trustee (which may be a blanket assignment if permitted by applicable law) in the appropriate real property or other records; provided, however, the Indenture Trustee need not record any assignment which relates to a Home Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by the Seller (at the Seller's expense) to the Indenture Trustee, the recordation of such Assignment is not necessary to protect the Indenture Trustee's and the Securityholders' interest in the related Home Loan. With respect to any Assignment of Mortgage as to which the related recording information is unavailable within 60 days following the Closing Date, such Assignment of Mortgage shall be submitted for recording within 30 days after receipt of such information but in no event later than one year after the Closing Date. The Indenture Trustee shall be required to retain a copy of each Assignment of Mortgage submitted for recording. In the event that any such Assignment of Mortgage is lost or returned unrecorded because of a defect therein, the Seller shall promptly prepare a substitute Assignment of Mortgage or cure such defect, as the case may be, and thereafter the Trustee shall be required to submit each such Assignment of Mortgage for recording. ARTICLE III. REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH Section 3.1 Seller Representations and Warranties. (a) The Seller represents and warrants to the Purchaser as of the Cut-Off Date and the Closing Date that: (i) The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own its properties and conduct its business as such properties are presently owned and such business is presently conducted; (ii) The Seller has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Purchase Agreement and each other Transaction Document to which it is a party; has duly authorized the execution, delivery and performance of this Purchase Agreement and each other Transaction Document to which it is a party; has duly executed and delivered this Purchase Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and delivered by the other parties hereto, this Purchase Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies, regardless of whether such enforceability is considered in a proceeding in equity or at law; 5 9 (iii) Neither the execution and delivery of this Purchase Agreement or any of the other Transaction Documents to which the Seller is a party, the consummation of the transactions required of it herein or under any other Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Purchase Agreement or any of the other Transaction Documents will conflict with or result in a breach of any of the terms, conditions or provisions of the Seller's charter or by-laws or any legal restriction or any material agreement or instrument to which the Seller is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject; (iv) There is no action, suit, proceeding, investigation or litigation pending against the Seller or, to its knowledge, threatened, which, if determined adversely to the Seller, would materially adversely affect the sale of the Home Loans, the execution, delivery or enforceability of this Purchase Agreement or any other Transaction Document, or which would have a material adverse affect on the financial condition of the Seller; (v) No consent, approval, authorization or order of any court or governmental agency or body is required for: (a) the execution, delivery and performance by the Seller of, or compliance by the Seller with, this Purchase Agreement, (b) the sale of the Home Loans or (c) the consummation of the transactions required of it by this Purchase Agreement; (vi) The Seller is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of the Seller or its properties or might have consequences that would materially and adversely affect its performance hereunder; (vii) The Seller received fair consideration and reasonably equivalent value in exchange for the sale of the Home Loans to the Purchaser; and (viii) The Seller has transferred the Home Loans without any intent to hinder, delay or defraud any of its creditors. (b) The Seller further represents and warrants to the Purchaser that with respect to the Home Loans as of the Closing Date each of the representations and warranties contained in Section 3.03(b) of the Sale and Servicing Agreement are true and correct. It is understood and agreed that the representations and warranties set forth in this Section 3.1(b) shall survive delivery of the respective Home Loan Files to the Indenture Trustee on behalf of the Purchaser. In the event that (a) any of the representations and warranties of the Seller in Section 3.03(b) of the Sale and Servicing Agreement are determined 6 10 to be untrue in a manner that materially and adversely affects the interests of the Securityholders in any Home Loan with respect to which such representation or warranty is made and (b) the Seller shall fail to cure such breach within the time period specified in Section 3.05 of the Sale and Servicing Agreement, the Seller shall be obligated to repurchase or substitute the affected Home Loan(s) in accordance with the provisions of Section 3.05 of the Sale and Servicing Agreement. With respect to representations and warranties made by Mego pursuant to this Section 3.1(b) that are made to the Seller's best knowledge, if it is discovered by any of the Depositor, the Seller, the Indenture Trustee or the Owner Trustee that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Home Loan, notwithstanding the Seller's lack of knowledge, such inaccuracy shall be deemed a breach of the applicable representation and warranty. ARTICLE IV. SELLER'S COVENANTS Section 4.1 Covenants of the Seller. The Seller hereby covenants that except for the transfer hereunder, the 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 Home Loan, or any interest therein; and the Seller will defend the right, title and interest of the Trust, as assignee of the Purchaser, in, to and under the Home Loans, against all claims of third parties claiming through or under the Seller. ARTICLE V. INDEMNIFICATION BY THE SELLER Section 5.1 Indemnification. The Seller agrees to indemnify and hold harmless the Purchaser from and against any loss, liability, expense, damage, claim or injury (other than those resulting solely from defaults on the Home Loans) arising out of or based on this Agreement including, without limitation, in connection with the origination or prior servicing of the Home Loans by reason of any acts, omissions, or alleged acts or omissions arising out of activities of the Seller, originator or prior servicer, including reasonable attorneys' fees and other costs or expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim; provided that the Seller shall not indemnify the Purchaser if such loss, liability, expense, damage or injury is due to the Purchaser's willful misfeasance, bad faith or negligence or by reason of the Purchaser's reckless disregard of its obligations hereunder. The provisions of this indemnity shall run directly to and be enforceable by an injured party subject to the limitations hereof. Section 5.2 Limitation on Liability of the Seller. None of the directors or trustees or officers or employees or agents of the Seller shall be under any liability to the Purchaser, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consideration for, the execution of this Purchase Agreement; provided, however, that this provision shall not protect any such Person against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence 7 11 in the performance of duties hereunder. Except as expressly provided herein and in the Sale and Servicing Agreement, the Seller shall not be under any liability to the Trust, the Owner Trustee, the Co-Owner Trustee or the Securityholders. The Seller and any director or officer or employee or agent of 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. Section 5.3 Indemnification (a) The Seller agrees to indemnify and hold harmless the Purchaser, the directors of the Purchaser and each person, if any, who controls the Purchaser within the meaning of Section 15 of the Securities Act of 1933 (the "Act") or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), from and against any and all losses, claims, damages, liabilities or judgments (including without limiting the foregoing the reasonable legal and other expenses incurred in connection with any action, suit or proceeding or any claim asserted) arising out of (i) any untrue statement or alleged untrue statement of a material fact contained under any of the captions "Mego Mortgage Corporation", and "The Pool" in the Prospectus Supplement or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading or (ii) any information concerning the Seller, the Home Loans or the Seller's operations based on any untrue statement or alleged untrue statement of a fact contained in any information provided by the Seller to the Purchaser, or any material omission from the information purported to be provided thereby, and disseminated to any Rating Agency, Deloitte & Touche or prospective investors (directly or indirectly through available information systems) in connection with the issuance, marketing or offering of the Notes and Certificates. This indemnity agreement will be in addition to any liability which the Seller may otherwise have pursuant to this Purchase Agreement. (b) The Purchaser agrees to indemnify and hold harmless the Seller and each person, if any, who controls the Seller within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities caused by (A) any untrue statement or alleged untrue statement of a material fact contained in (i) the Prospectus Supplement under the caption "Description of the Securities", "Description of the Transfer and Servicing Agreements", and "Prepayment and Yield Considerations"; (ii) the Base Prospectus; or (iii) the Registration Statement (other than the information with respect to the Seller contained in the Prospectus Supplement) or (B) any omission or alleged omission to state a material fact, in the case of the Registration Statement (other than the information with respect to the Seller contained in the Prospectus Supplement), required to be stated therein or necessary to make the statements therein not misleading, and in the case of the section of the Prospectus Supplement specified in clause (A) (i) of this sentence and the Base Prospectus, necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. This indemnity agreement will be in addition to any liability which the Purchaser may have pursuant to this Purchase Agreement. (c) In case any action or proceeding (including any governmental or regulatory investigation or proceeding) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such person (hereinafter called the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (hereinafter called the "indemnifying party") in writing and the 8 12 indemnifying party, upon request of the indemnified party, shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate and shall pay the fees and disbursements of such counsel related to such proceeding. In any such action or proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (1) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (2) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for any indemnified party and each person, if any, who controls such indemnified party within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, and it is also understood that expenses shall be reimbursed as they are incurred. In the case of any such separate firm for any indemnified party and any director, officer and control person of the indemnified party, such firm shall be designated in writing by such indemnified party. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in this Section 5.3 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnified party on the one hand and the indemnifying party on the other from the sale of the Home Loans or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, 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 the indemnified party on the one hand and the indemnifying party on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. For purposes of the foregoing, the benefit received by the Seller from the sale of the Home Loans shall be deemed to equal the amount of the gross proceeds received by the Seller from such sale, and the benefit received by the Purchaser for such sale shall be deemed to equal the amount specified in the paragraph below. The relative fault of the Purchaser on the one hand and the Seller on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Purchaser or by the Seller and the parties' relative intent, 9 13 knowledge, access to information and opportunity to correct or prevent such statement or omission. The Seller and the Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 5.3(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.3(d), in no event shall the Purchaser be required to contribute any amount in excess of $961,697.37. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. ARTICLE VI. TERMINATION Section 6.1 Termination. The respective obligations and responsibilities of the Seller and the Purchaser created hereby shall terminate, except for the Seller's and Purchaser's indemnity obligations as provided herein, upon the termination of the Trust as provided in Article XI of the Sale and Servicing Agreement. ARTICLE VII. MISCELLANEOUS PROVISIONS Section 7.1 Amendment. This Purchase Agreement may be amended from time to time by the Seller and the Purchaser, by written agreement signed by the Seller and the Purchaser. Section 7.2 Governing Law. This Purchase Agreement shall be governed by and construed in accordance with the laws of the State of New York and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. Section 7.3 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, postage prepaid, addressed as follows: (a) if to the Seller: Mego Mortgage Corporation 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339 Attention: Jeff S. Moore, President 10 14 or, such other address as may hereafter be furnished to the Purchaser in writing by the Seller. (b) if to FASCO Financial Asset Securities Corp. 600 Steamboat Road Greenwich, Connecticut 06830 Attention: General Counsel or such other address as may hereafter be furnished to the Seller in writing by the Purchaser. Section 7.4 Severability of Provisions. If any one or more of the covenants, agreements, provisions of terms of this Purchase Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Purchase Agreement and shall in no way affect the validity of enforceability of the other provisions of this Purchase Agreement. Section 7.5 Counterparts. This Purchase Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original and such counterparts, together, shall constitute one and the same agreement. Section 7.6 Further Agreements. The Purchaser and the Seller each agree to execute and deliver to the other such amendments to documents and such additional documents, instruments or agreements as may be necessary or appropriate to effectuate the purposes of this Purchase Agreement or in connection with the offering of securities representing interests in the Home Loans. Without limiting the generality of the foregoing, as a further inducement for the Purchaser to purchase the Home Loans from the Seller, the Seller will cooperate with the Purchaser in connection with the sale of any of the securities representing interests in the Home Loans. In that connection, the Seller will provide to the Purchaser any and all information and appropriate verification of information, whether through letters of its auditors and counsel or otherwise, as the Purchaser shall reasonably request and will provide to the Purchaser such additional representations and warranties, covenants, opinions of counsel, letters from auditors, and certificates of public officials or officers of the Seller as are reasonably required in connection with such transactions and the offering of investment grade securities rated by Duff & Phelps Credit Ratings Co., Fitch Investors Services L.P. and Standard & Poor's Rating Services. Section 7.7 Intention of the Parties. It is the intention of the parties that the Purchaser is purchasing, and the Seller is selling, the Home Loans rather than pledging the Home Loans to secure a loan by the Purchaser to the Seller. Accordingly, the parties hereto each intend to treat the transaction for federal income tax purposes and all other purposes as a sale by the Seller, and a purchase by the Purchaser, of the Home Loans. The Purchaser will have the right to review the Home Loans and the related Home Loan Files to determine the 11 15 characteristics of the Home Loans which will affect the federal income tax consequences of owning the Home Loans and the Seller will cooperate with all reasonable requests made by the Purchaser in the course of such review. Section 7.8 Successors and Assigns; Assignment of Purchase Agreement. The Agreement shall bind and inure to the benefit of and be enforceable by the Seller, the Purchaser and the Trustee. The obligations of the Seller under this Purchase Agreement cannot be assigned or delegated to a third party without the consent of the Purchaser, which consent shall be at the Purchaser's sole discretion, except that the Purchaser acknowledges and agrees that the Seller may assign its obligations hereunder to any Person into which the Seller is merged or any corporation resulting from any merger, conversion or consolidation to which the Seller is a party or any Person succeeding to the business of the Seller. The parties hereto acknowledge that FASCO is acquiring the Home Loans for the purpose of contributing them to the Trust that will issue (i) the Residual Instruments and the Certificates representing undivided interests in such Home Loans and (ii) the Notes which will be secured by such Home Loans. As an inducement to FASCO to purchase the Home Loans, the Seller acknowledges and consents to the assignment by FASCO to the Trust of all of FASCO's rights against the Seller pursuant to this Purchase Agreement and to the enforcement or exercise of any right or remedy against the Seller pursuant to this Purchase Agreement by the Owner Trustee and Co-Owner Trustee under the Sale and Servicing Agreement. Such enforcement of a right or remedy by the Owner Trustee and Co-Owner Trustee shall have the same force and effect as if the right or remedy had been enforced or exercised by FASCO directly. Section 7.9 Survival. The representations and warranties set forth in Article III and the provisions of Article V shall survive the purchase of the Home Loans hereunder. Section 7.10 Third-Party Beneficiaries. This Purchase Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Except as otherwise provided in this Section 7.10 no other Person shall have the right or obligation hereunder. 12 16 IN WITNESS WHEREOF, the Seller and the Purchaser have caused this Home Loan Purchase Agreement to be duly executed on their behalf by their respective officers thereunto duly authorized as of the day and year first above written. FINANCIAL ASSET SECURITIES CORP., as Purchaser By: ------------------------------------- Name: Craig A. Braun Title: Vice President MEGO MORTGAGE CORPORATION, as Seller By: ------------------------------------- Name: James L. Belter Title: Executive Vice President 17 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 27th day of June 1997 before me, a Notary Public in and for said State, personally appeared Craig A. Braun known to me to be a Vice President of FINANCIAL ASSET SECURITIES CORP., the corporation that executed the within instrument, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. Notary Public ------------------------------------- 18 STATE OF ) ) ss.: COUNTY OF ) On the 27th day of June 1997 before me, a Notary Public in and for said State, personally appeared James L. Belter, known to me to be the Executive Vice President of MEGO MORTGAGE CORPORATION, the company that executed the within instrument, and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in this certificate first above written. Notary Public ------------------------------------- 19 SCHEDULE I Loan Schedule See Exhibit A to Sale and Servicing Agreement EX-10.126 15 SALE AND SERVICING AGREEMENT 1 EXHIBIT 10.126 EXECUTION COPY ================================================================================ SALE AND SERVICING AGREEMENT Dated as of June 14, 1997 among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 (Issuer) FINANCIAL ASSET SECURITIES CORP. (Depositor) MEGO MORTGAGE CORPORATION (Seller and Servicer) NORWEST BANK MINNESOTA, N.A. (Master Servicer) and FIRST BANK NATIONAL ASSOCIATION (Indenture Trustee and Co-Owner Trustee) MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 HOME LOAN ASSET-BACKED NOTES, SERIES 1997-3 HOME LOAN ASSET-BACKED CERTIFICATES, SERIES 1997-3 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS Section 1.01 Definitions................................................... 1 Section 1.02 Other Definitional Provisions................................. 26 Section 1.03 Interest Calculations......................................... 26 ARTICLE II. CONVEYANCE OF THE HOME LOANS Section 2.01 Conveyance of the Home Loans.................................. 27 Section 2.02 Reserved...................................................... 27 Section 2.03 Ownership and Possession of Home Loan Files................... 27 Section 2.04 Books and Records............................................. 28 Section 2.05 Delivery of Home Loan Documents............................... 28 Section 2.06 Acceptance by Indenture Trustee of the Home Loans; Certain Substitutions; Initial Certification.......................... 31 ARTICLE III. REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Depositor................33 Section 3.02 Representations, Warranties and Covenants of the Master Servicer...................................................... 33 Section 3.03 Representations and Warranties of Mego........................ 36 Section 3.04 [Reserved].................................................... 44 Section 3.05 Purchase and Substitution..................................... 44 ARTICLE IV. ADMINISTRATION AND SERVICING OF HOME LOANS Section 4.01 Servicing Standard............................................ 47 Section 4.02 Servicing Arrangements........................................ 48 Section 4.03 Servicing Record.............................................. 49 Section 4.04 Annual Statement as to Compliance; Notice of Event of Default. 52 Section 4.05 Annual Independent Accountants' Report; Servicer Review Report........................................................ 52 Section 4.06 Access to Certain Documentation and Information Regarding Home Loans.................................................... 53 Section 4.07 [Reserved].................................................... 54 Section 4.08 Advances...................................................... 54 Section 4.09 Reimbursement of Interest Advances and Foreclosure Advances... 55 Section 4.10 Modifications, Waivers, Amendments and Consents............... 56 Section 4.11 Due-On-Sale; Due-on-Encumbrance............................... 56 Section 4.12 Collection Procedures; Foreclosure Procedures................. 57 Section 4.13 Sale of Foreclosed Properties................................. 58
-i- 3 Section 4.14. Management of Real Estate Owned............................... 59 Section 4.15. Inspections................................................... 60 Section 4.16. Maintenance of Insurance...................................... 60 Section 4.17. Release of Files.............................................. 61 Section 4.18. Filing of Continuation Statements............................. 62 Section 4.19. Fidelity Bond................................................. 63 Section 4.20. Errors and Omissions Insurance................................ 63 ARTICLE V. ESTABLISHMENT OF TRUST ACCOUNTS Section 5.01 Collection Account and Note Distribution Account.............. 64 Section 5.02 [Reserved].................................................... 68 Section 5.03 Certificate Distribution Account.............................. 68 Section 5.04 Trust Accounts; Trust Account Property........................ 69 Section 5.05 Servicer to Pay Owner Trustee Fee............................. 72 ARTICLE VI. STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS Section 6.01 Master Servicing Certificate.................................. 73 Section 6.02 Statement to Securityholders.................................. 73 ARTICLE VII. [Reserved] ARTICLE VIII. [Reserved] ARTICLE IX. THE MASTER SERVICER Section 9.01 Indemnification; Third Party Claims........................... 76 Section 9.02 Merger or Consolidation of the Master Servicer................ 76 Section 9.03 Limitation on Liability of the Master Servicer and Others..... 77 Section 9.04 Master Servicer Not to Resign; Assignment..................... 77 Section 9.05 Relationship of Master Servicer to Issuer and the Indenture Trustee....................................................... 78 Section 9.06 Master Servicer May Own Notes................................. 78
-ii- 4 ARTICLE X. DEFAULT Section 10.01 Events of Default............................................. 79 Section 10.02 Consequences of an Event of Default........................... 80 Section 10.03 Appointment of Successor...................................... 81 Section 10.04 Notification to Certificateholders............................ 81 Section 10.05 Waiver of Past Defaults....................................... 82 ARTICLE XI. TERMINATION Section 11.01 Termination................................................... 83 Section 11.02 Notice of Termination......................................... 83 ARTICLE XII. MISCELLANEOUS PROVISIONS Section 12.01 Acts of Securityholders....................................... 84 Section 12.02 Amendment..................................................... 84 Section 12.03 Recordation of Agreement...................................... 85 Section 12.04 Duration of Agreement......................................... 85 Section 12.05 Governing Law................................................. 85 Section 12.06 Notices....................................................... 85 Section 12.07 Severability of Provisions.....................................86 Section 12.08 No Partnership.................................................86 Section 12.09 Counterparts...................................................86 Section 12.10 Successors and Assigns.........................................86 Section 12.11 Headings.......................................................86 Section 12.12 Actions of Securityholders.....................................87 Section 12.13 Reports to Rating Agencies.....................................87 Section 12.14 Inconsistencies Among Transaction Documents....................88 EXHIBITS EXHIBIT A Home Loan Schedule EXHIBIT B Form of Master Servicer Certificate EXHIBIT C Form of Monthly Statement to Securityholders EXHIBIT D Underwriting Guidelines EXHIBIT E Form of Servicing Agreement
-iii- 5 This Sale and Servicing Agreement is entered into effective as of June 14, 1997, among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3, a Delaware business trust (the "Issuer" or the "Trust"), FINANCIAL ASSET SECURITIES CORP., a Delaware corporation, as Depositor (the "Depositor"), MEGO MORTGAGE CORPORATION, a Delaware corporation ("Mego"), as Seller (in such capacity, the "Seller") and Servicer (in such capacity, the "Servicer"), NORWEST BANK MINNESOTA, N.A., as Master Servicer (the "Master Servicer"), and FIRST BANK NATIONAL ASSOCIATION, a national banking association, as Indenture Trustee on behalf of the Noteholders (in such capacity, the "Indenture Trustee") and as Co-Owner Trustee on behalf of the Securityholders (in such capacity, the "Co-Owner Trustee"). PRELIMINARY STATEMENT WHEREAS, the Issuer desires to purchase a pool of Home Loans which were originated or purchased by the Seller and sold to the Depositor in the ordinary course of business of the Seller; WHEREAS, the Depositor is willing to purchase from the Seller and sell such Home Loans to the Issuer; and WHEREAS, the Master Servicer is willing to service such Home Loans in accordance with the terms of this Agreement; NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto hereby 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. Accrual Period: With respect to the first Distribution Date and the Class A-1 Notes, the period commencing on the Closing Date and ending on the day immediately preceding such Distribution Date (28 days). With respect to any subsequent Distribution Date and the Class A-1 Notes, the period commencing on the immediately preceding Distribution Date and ending on the day immediately preceding such subsequent Distribution Date. With respect to the first Distribution Date and the Classes of Securities other than the Class A-1 Notes, the period commencing on the Cut-Off Date and ending on the last day of the month of the Cut-Off Date (17 days). With respect to any Classes of Securities other than the Class A-1 Notes for a given Distribution Date, the calendar month preceding the month of such Distribution Date based on a 360-day year consisting of twelve 30-day months. 1 6 Aggregate Note Principal Balance: With respect to any Distribution Date, the aggregate of the Class Principal Balances of the Notes. Agreement: This Sale and Servicing Agreement and all amendments hereof and supplements hereto. Allocable Loss Amount: With respect to each Distribution Date, the excess, if any, of (a) the aggregate of the Class Principal Balances of all Classes of Securities (after giving effect to all distributions on such Distribution Date) over (b) the Pool Principal Balance as of the end of the preceding Due Period. Allocable Loss Amount Priority: With respect to any Distribution Date, sequentially, to the Certificates, the Class M-2 Notes and the Class M-1 Notes, in that order, until the respective Class Principal Balances thereof are reduced to zero. Assignment of Mortgage: With respect to each Home Loan secured by a Mortgage, an assignment, notice of transfer or equivalent instrument sufficient under the laws of the jurisdiction wherein the related Property is located to reflect of record the sale of the related Home Loan to the Trust as follows: "First Bank National Association, as Indenture Trustee and Co-Owner Trustee for the Mego Mortgage Home Loan Owner Trust 1997-3". Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a day on which banking institutions in New York City or in the city in which the Corporate Trust Office of the Indenture Trustee is located or the city in which the Master Servicer's or Servicer's servicing operations are located and are authorized or obligated by law or executive order to be closed. Certificate Distribution Account: The account established and maintained pursuant to Section 5.03. Certificate: Any Certificate issued pursuant to the Trust Agreement. Certificateholder: A holder of any Certificate. Certificateholders' Interest Carry-Forward Amount: With respect to any Distribution Date and the Certificates, the sum of (i) the excess of (A) the Certificateholders' Monthly Interest Distributable Amount for the preceding Distribution Date and any outstanding Certificateholders' Interest Carry-Forward Amount on such preceding Distribution Date, over (B) the amount of interest that is actually distributed to the Certificateholders on such preceding Distribution Date plus (ii) interest on such excess, to the extent permitted by law, at the applicable Certificate Pass-Through Rate from such proceeding Distribution Date through the current Distribution Date. Certificateholders' Interest Distributable Amount: With respect to any Distribution Date and the Certificates, the sum of the Certificateholders' Monthly Interest Distributable Amount and the Certificateholders' Interest Carry-Forward Amount for such Distribution Date; provided 2 7 however, that on the Distribution Date, if any, on which the Class Principal Balance of the Certificates is reduced to zero through application of an Allocable Loss Amount, the Certificateholders' Interest Distributable Amount shall be reduced by an amount equal to the portion, if any, of the Allocable Loss Amount that would be allocable to the Classes of Mezzanine Notes without giving effect to this proviso. Certificateholders' Monthly Interest Distributable Amount: With respect to any Distribution Date and the Certificates, interest accrued during the related Accrual Period at the Certificate Pass-Through Rate on the Class Principal Balance of the Certificates immediately preceding such Distribution Date (or, in the case of the first Distribution Date, on the Closing Date). Certificate Optimal Principal Balance: With respect to any Distribution Date prior to the Stepdown Date, zero; and with respect to any other Distribution Date, the Pool Principal Balance as of the preceding Determination Date minus the sum of (i) the aggregate Class Principal Balance of the Notes (after taking into account any distributions made on such Distribution Date in reduction of the Class Principal Balances of the Notes prior to such determination) and (ii) the Overcollateralization Target Amount for such Distribution Date; provided however, that the Certificate Optimal Principal Balance amount shall never be less than zero or greater than the Original Class Principal Balance of the Certificates. Certificate Pass-Through Rate: The per annum rate of 8.01%; provided, however, with respect to any Distribution Date after the first Distribution Date on which either the Mego or the Master Servicer may exercise its option to purchase the Home Loans pursuant to Section 11.01(b), the Certificate Pass-Through Rate shall be 8.51%. Certificate Register: The register established pursuant to Section 3.4 of the Trust Agreement. Class: With respect to the Notes, all Notes bearing the same class designation, and with respect to the Certificates, the Certificates shall be deemed to be one class. Class A-1 Note: Any Class A-1 Note in the form attached to the Indenture as Exhibit A-1. Class A-2 Note: Any Class A-2 Note in the form attached to the Indenture as Exhibit A-2. Class A-3 Note: Any Class A-3 Note in the form attached to the Indenture as Exhibit A-3. Class A-4 Note: Any Class A-4 Note in the form attached to the Indenture as Exhibit A-4. 3 8 Class M-1 Optimal Principal Balance: With respect to any Distribution Date prior to the Stepdown Date, zero; and with respect to any other Distribution Date, the Pool Principal Balance as of the preceding Determination Date minus the sum of (i) the aggregate Class Principal Balance of the Senior Notes (after taking into account distributions made on such Distribution Date in reduction of the Class Principal Balances of the Classes of Senior Notes prior to such determination) and (ii) the greater of (x) the sum of (1) 25.50% of the Pool Principal Balance as of the preceding Determination Date and (2) the Overcollateralization Target Amount for such Distribution Date (calculated without giving effect to the proviso in the definition thereof) or (y) 0.50% of the Original Pool Principal Balance; provided however, that the Class M-1 Optimal Principal Balance shall never be less than zero or greater than the Original Class Principal Balance of the Class M-1 Notes. Class M-2 Optimal Principal Balance: With respect to any Distribution Date prior to the Stepdown Date, zero; with respect to any other Distribution Date, the Pool Principal Balance as of the preceding Determination Date minus the sum of (i) the aggregate Class Principal Balance of the Senior Notes (after taking into account any distributions made on such Distribution Date in reduction of the Class Principal Balances of the Classes of Senior Notes prior to such determination) plus the Class Principal Balance of the Class M-1 Notes (after taking into account any distributions made on such Distribution Date in reduction of the Class Principal Balance of the Class M-1 Notes prior to such determination) and (ii) the greater of (x) the sum of (1) 11.00% of the Pool Principal Balance as of the preceding Determination Date and (2) the Overcollateralization Target Amount for such Distribution Date (without giving effect to the proviso in the definition thereof) or (y) 0.50% of the Original Pool Principal Balance; provided, however, that the Class M-2 Optimal Principal Balance shall never be less than zero or greater than the Original Class Principal Balance of the Class M-2 Notes. Class M-1 Note: Any Class M-1 Note in the form attached to the Indenture as Exhibit A. Class M-2 Note: Any Class M-2 Note in the form attached to the Indenture as Exhibit A. Class Principal Balance: With respect to each Class and as of any date of determination, the Original Class Principal Balance of such Class reduced by the sum of (i) all amounts previously distributed in respect of principal of such Class on all previous Distribution Dates and (ii) with respect to the Class M-1, Class M-2 Notes and the Certificates, all Allocable Loss Amounts applied in reduction of principal of such Class on all previous Distribution Dates. Closing Date: June 27, 1997. Code: The Internal Revenue Code of 1986, as amended from time to time, and Treasury Regulations promulgated thereunder. 4 9 Collected Amount: With respect to any Determination Date or related Distribution Date, the sum of the amount on deposit in the Note Distribution Account on such Determination Date plus the amounts required to be deposited into the Note Distribution Account pursuant to Section 5.01(b). Collection Account: The account denominated as a Collection Account and maintained or caused to be maintained by the Indenture Trustee pursuant to Section 5.01. Corporate Trust Office: The office of the Indenture Trustee at which any particular time its corporate business shall be principally administered, located on the Closing Date at First Bank National Association, 180 East 5th Street, St. Paul, Minnesota 55101, Attention: Structured Finance. Co-Owner Trustee: First Bank National Association, a national banking association, in its capacity as the Co-Owner Trustee under the Trust Agreement acting on behalf of the Securityholders, or any successor co-owner trustee under the Trust Agreement. Cumulative Net Losses: With respect to any Distribution Date, the aggregate amount of Net Loan Losses calculated for such Distribution Date and each prior Distribution Date, reduced by any recoveries in respect of principal on a Defaulted Home Loan received after the Due Period in which such Home Loan became a Defaulted Home Loan. Cut-Off Date: With respect to any Home Loan, the opening of business on June 14, 1997. Debt Instrument: The note or other evidence of indebtedness evidencing the indebtedness of an Obligor under a Home Loan. Defaulted Home Loan: A Home Loan with respect to which: (i) the Property has been acquired through foreclosure or similar proceedings and sold, (ii) any portion of a Monthly Payment is more than 180 calendar days past due (without giving effect to any grace period), or (iii) the Servicer has determined in accordance with customary servicing practices, that the Home Loan is uncollectible. Defective Home Loan: A Home Loan required to be repurchased pursuant to Section 3.05 hereof. Delivery: When used with respect to Trust Account Property means: (a) with respect to bankers' acceptances, commercial paper, negotiable certificates of deposit and other obligations that constitute "instruments" within the meaning of Section 9-105(1)(i) of the UCC and are susceptible of physical delivery, transfer thereof to the Indenture Trustee or its nominee or custodian by physical delivery to the Indenture Trustee or its nominee or custodian endorsed to, or registered in the name of, the Indenture Trustee or its nominee or custodian or endorsed in blank, and, with 5 10 respect to a certificated security (as defined in Section 8-102 of the UCC) transfer thereof (i) by delivery of such certificated security endorsed to, or registered in the name of, the Indenture Trustee or its nominee or custodian or endorsed in blank to a financial intermediary (as defined in Section 8-313 of the UCC) and the making by such financial intermediary of entries on its books and records identifying such certificated securities as belonging to the Indenture Trustee or its nominee or custodian and the sending by such financial intermediary of a confirmation of the purchase of such certificated security by the Indenture Trustee or its nominee or custodian, or (ii) by delivery thereof to a "clearing corporation" (as defined in Section 8-102(3) of the UCC) and the making by such clearing corporation of appropriate entries on its books reducing the appropriate securities account of the transferor and increasing the appropriate securities account of a financial intermediary by the amount of such certificated security, the identification by the clearing corporation of the certificated securities for the sole and exclusive account of the financial intermediary, the maintenance of such certificated securities by such clearing corporation or a "custodian bank" (as defined in Section 8-102(4) of the UCC) or the nominee of either subject to the clearing corporation's exclusive control, the sending of a confirmation by the financial intermediary of the purchase by the Indenture Trustee or its nominee or custodian of such securities and the making by such financial intermediary of entries on its books and records identifying such certificated securities as belonging to the Indenture Trustee or its nominee or custodian (all of the foregoing, "Physical Property"), and, in any event, any such Physical Property in registered form shall be in the name of the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect the complete transfer of ownership of any such Trust Account Property (as defined herein) to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; (b) with respect to any securities issued by the U.S. Treasury, FNMA or FHLMC that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations, the following procedures, all in accordance with applicable law, including applicable federal regulations and Articles 8 and 9 of the UCC: book-entry registration of such Trust Account Property to an appropriate book-entry account maintained with a Federal Reserve Bank by a financial intermediary that is also a "depository" pursuant to applicable federal regulations and issuance by such financial intermediary of a deposit advice or other written confirmation of such book-entry registration to the Indenture Trustee or its nominee or custodian of the purchase by the Indenture Trustee or its nominee or custodian of such book-entry securities; the making by such financial intermediary of entries in its books and records identifying such book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations as belonging to the Indenture Trustee or its nominee or custodian and indicating that such custodian holds such Trust Account Property solely as agent for the Indenture Trustee or its nominee or custodian; and such additional or alternative procedures as may hereafter become appropriate to effect complete transfer of ownership 6 11 of any such Trust Account Property to the Indenture Trustee or its nominee or custodian, consistent with changes in applicable law or regulations or the interpretation thereof; and (c) with respect to any item of Trust Account Property that is an uncertificated security under Article 8 of the UCC and that is not governed by clause (b) above, registration on the books and records of the issuer thereof in the name of the financial intermediary, the sending of a confirmation by the financial intermediary of the purchase by the Indenture Trustee or its nominee or custodian of such uncertificated security, the making by such financial intermediary of entries on its books and records identifying such uncertificated certificates as belonging to the Indenture Trustee or its nominee or custodian. Depositor: Financial Asset Securities Corp., a Delaware corporation, and any successor thereto. Determination Date: With respect to any Distribution Date, the fifth Business Day preceding such Distribution Date. Distribution Date: The 25th day of any month or if such 25th day is not a Business Day, the first Business Day immediately following such day, commencing in July 1997. DTC: The Depository Trust Company. Due Date: With respect to any Monthly Payment, the date on which such Monthly Payment is required to be paid pursuant to the related Debt Instrument. Due Period: With respect to any Determination Date or Distribution Date, the calendar month immediately preceding such Determination Date or Distribution Date, as the case may be; provided, however, that with respect to the July 1997 Distribution Date, Due Period shall mean the period from June 14, 1997 to June 30, 1997. DCR: Duff & Phelps Credit Rating Co. Early Termination Notice Date: Any date on which the Pool Principal Balance is less than 10% of the Initial Principal Balance. Eligible Account: At any time, an account which is any of the following: (i) A segregated trust account that is maintained with the corporate trust department of a depository institution (A) the long-term debt obligations of which are at such time rated by each Rating Agency in one of their two highest long-term rating categories, or (B) short-term debt obligations of which are then rated by each Rating Agency in their highest short-term rating category or (C) a segregated trust account department of a federal or state chartered depository institution or trust company having capital and surplus of not less than $100,000,000 acting in its fiduciary capacity; (ii) a segregated direct deposit account maintained with a depository institution or trust company 7 12 organized under the laws of the United States of America, or any of the States thereof, or the District of Columbia, having a certificate of deposit, short term deposit or commercial paper rating of at least A-1+ by Standard & Poor's and P-1 by Moody's or (iii) an account that will not cause any Rating Agency to downgrade or withdraw its then current rating(s) assigned to the Notes as evidenced in writing by such Rating Agency. Eligible Servicer: Either a Person that (a) (i) is servicing a portfolio of mortgage loans, (ii) is legally qualified to service, and is capable of servicing, the Home Loans and has all licenses required to service mortgage loans, (iii) has demonstrated the ability professionally and competently to service a portfolio of mortgage loans similar to the Home Loans with reasonable skill and care, (iv) has a net worth calculated in accordance with generally accepted accounting principles of at least $500,000 and (v) has been approved in writing by the Rating Agencies or (b) Mego Mortgage Corporation, Preferred Equities Corporation or Norwest Bank Minnesota, N.A. Event of Default: As described in Section 10.01 hereof. Excess Spread. With respect to any Distribution Date, the positive excess, if any, of (x) the Collected Amount with respect to such Distribution Date over (y) the amount distributed pursuant to clauses (i) and (ii) of Section 5.01(c) on such Distribution Date. FDIC: The Federal Deposit Insurance Corporation and any successor thereto. FHLMC: The Federal Home Loan Mortgage Corporation and any successor thereto. FICO Score: The credit evaluation scoring methodology developed by Fair, Isaac and Company. Final Maturity Date: With respect to the following Classes of Securities: Class A-1 Notes: August 25, 2023 Class A-2 Notes: August 25, 2023 Class A-3 Notes: August 25, 2023 Class A-4 Notes: August 25, 2023 Class M-1 Notes: August 25, 2023 Class M-2 Notes: August 25, 2023 Certificates: August 25, 2023 Fitch: Fitch Investors Service, L.P. FNMA: The Federal National Mortgage Association and any successor thereto. Foreclosure Advances: As defined in Section 4.08(b). 8 13 Foreclosed Loan. As of any date of determination, any Mortgage Loan that has been discharged as a result of (i) the completion of foreclosure or comparable proceedings; (ii) the Owner Trustee's acceptance of the deed or other evidence of title to the related Property in lieu of foreclosure or other comparable proceeding; or (iii) the acquisition by the Owner Trustee of title to the related Property by operation of law. Foreclosed Property. With respect to any Mortgage Loan, any Property acquired by the Trust as a result of: (i) the completion of foreclosure or comparable proceedings with respect to the related Mortgage Loan; (ii) the Co-Owner Trustee's acceptance of the deed or other evidence of title to the related Property in lieu of foreclosure or other proceeding with respect to the related Loan; or (iii) the acquisition by the Co-Owner Trustee of title thereto by operation of law. Grant: As defined in the Indenture. HUD: The United States Department of Housing and Urban Development and any successor thereto. Home Loan: An individual home loan that is conveyed to the Issuer pursuant to this Agreement on the Closing Date, together with the rights and obligations of a holder thereof and payments of principal in respect of such Home Loan received on or after the Cut-Off Date and payments of interest in respect of such Home Loan due on or after the Cut-Off Date, the Home Loans subject to this Agreement being identified on the Home Loan Schedule as amended from time to time and annexed hereto as Exhibit A. Home Loan File: The Indenture Trustee's Home Loan File and the Servicer's Home Loan File. Home Loan Interest Rate: The fixed annual rate of interest borne by a Debt Instrument, as shown on the related Home Loan Schedule. Home Loan Pool: The pool of Home Loans. Home Loan Purchase Agreement: The home loan purchase agreement between the Seller, as seller, and the Depositor, as purchaser, dated as of June 14, 1997. 9 14 Home Loan Schedule: The schedule of Home Loans specifying with respect to each Home Loan, the information set forth on Exhibit A attached hereto, as amended or supplemented from time to time. Indenture: The Indenture, dated as of June 14, 1997, between the Issuer and the Indenture Trustee. Indenture Trustee: First Bank National Association, a national banking association, as Indenture Trustee under the Indenture and this Agreement acting on behalf of the Noteholders, or any successor indenture trustee under the Indenture and this Agreement. Indenture Trustee Fee: With respect to any Distribution Date, the greater of (A) one-twelfth of 0.0275% times the Pool Principal Balance of the Home Loans as of the opening of business on the first day of the calendar month preceding the calendar month of such Distribution Date (or, with respect to the first Distribution Date, the Original Pool Principal Balance); and (B) $666.67. Indenture Trustee's Home Loan File: As defined in Section 2.05. Independent: When used with respect to any specified Person, such Person (i) is in fact independent of Mego, the Master Servicer, the Depositor or any of their respective affiliates, (ii) does not have any direct financial interest in or any material indirect financial interest in any of Mego, the Master Servicer, the Depositor or any of their respective affiliates and (iii) is not connected with any of Mego, the Master Servicer, the Depositor or any of their respective affiliates, as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions; provided, however, that a Person shall not fail to be Independent of Mego, the Master Servicer, the Depositor or any of their respective affiliates merely because such Person is the beneficial owner of 1% or less of any class of securities issued by Mego, the Master Servicer, the Depositor or any of their respective affiliates, as the case may be. Independent Accountants: A firm of nationally recognized certified public accountants which is Independent. Independent Contractor: As defined in Section 4.14(b). Insurance Policies: With respect to any Property, any related insurance policy. Insurance Proceeds: With respect to any Property, all amounts collected in respect of Insurance Policies and not required to be applied to the restoration of the related Property or paid to the related Obligor. Interest Advance: As defined in Section 4.08(a). 10 15 Interest Determination Date: With respect to any Accrual Period, the second London Business Day preceding the commencement of such Accrual Period. Issuer: The Trust. London Business Day: Any day on which banks in the City of London or New York City are open and conducting transactions in United States dollars. Loss Reimbursement Entitlement: With respect to any Distribution Date and the Class M-1 Notes, Class M-2 Notes or the Certificates, the amount of Allocable Loss Amounts applied to the reduction of the Class Principal Balance of such Class pursuant to Section 5.02 and not reimbursed pursuant to Section 5.01 or 5.03 hereof as of such Distribution Date, plus (in the case of the Class M-1 Notes and Class M-2 Notes) interest accrued on the unreimbursed portion thereof at the applicable Note Interest Rate through the end of the Due Period immediately preceding such Distribution Date; however, no interest shall accrue on any amount of any such accrued and unpaid interest. Majority Securityholders: (i) Until such time as the sum of the Aggregate Note Principal Balance has been reduced to zero, the holder or holders of in excess of 50% of the Class Principal Balance of all Classes of Notes (as a result of which the holders of the Certificates and the Residual Instruments shall be excluded from any rights or actions of the Majority Securityholders during such period); (ii) thereafter and until such time as the Class Principal Balance of the Certificate has been reduced to zero, the holder or holders of in excess of 50% of the Class Principal Balance of the Certificates (as a result of which the holders of the Residual Instruments shall be excluded from any rights or actions of the Majority Securityholders during such period); and (iii) thereafter, the holder or holders of in excess of 50% of the Percentage Interest of the Residual Instruments. Master Servicer: Norwest Bank Minnesota, N.A., a national banking association, its successors in interest or any successor master servicer appointed as herein provided. Master Servicer Certificate: As defined in Section 6.01. Master Servicer Fee: With respect to any Distribution Date, 1/12 times 0.08% times the Pool Principal Balance as of the opening of business on the first day of the month preceding the month of such Distribution Date (or, with respect to the first Distribution Date, the Original Pool Principal Balance). Master Servicer Termination Event: Any event specified in Section 10.01. Master Servicing Officer: Any officer of the Master Servicer responsible for the administration and servicing of the Home Loans whose name and specimen signature appears on a list of servicing officers furnished to the Indenture Trustee by the Master Servicer, as such list may from time to time be amended. 11 16 Maturity Date: With respect to any Home Loan and as of any date of determination, the date on which the last payment of principal is due and payable under the related Debt Instrument. Mezzanine Notes: The Class M-1 Notes and the Class M-2 Notes. Monthly Cut-Off Date: The last day of any calendar month, and with respect to any Distribution Date or related Determination Date, the last day of the calendar month immediately preceding such Distribution Date or related Determination Date. Monthly Payment: With respect to any Home Loan and any Due Period, the payment of principal and interest due in such Due Period from the Obligor pursuant to the related Debt Instrument (as amended or modified, if applicable, pursuant to Section 4.10). The Monthly Payment related to a Determination Date or a Distribution Date shall be the Monthly Payment due for the preceding Due Period. Moody's: Moody's Investors Service, Inc., or any successor thereto. Mortgage: With respect to any Mortgage Loan, the mortgage, deed of trust or other instrument creating a mortgage lien (and in a title theory state the document conveying title to the Property as security for the related Loan) or other security interest on the related Property. Mortgage Loan: As of any date of determination, each of the Home Loans, secured by an interest in a Property, transferred and assigned to the Indenture Trustee pursuant to Section 2.01(a). Mortgagee or Obligee: With respect to any Home Loan as of any date of determination, the holder of the related Debt Instrument and any related Mortgage as of such date. Mortgagor or Obligor: With respect to any Home Loan, the obligor(s) on the related Debt Instrument. Net Delinquency Calculation Amount: With respect to any Distribution Date, beginning with the sixth Distribution Date, the excess, if any, of (x) the product of (a) the product of 2.5 times the 61+ Delinquency Percentage (Rolling Six-Month) times (b) the Pool Principal Balance as of the preceding Due Period over (y) the aggregate of the amounts of Excess Spread for the three preceding Distribution Dates. Net Loan Losses: With respect to any Distribution Date and the Home Loans that become Defaulted Home Loans during the immediately preceding Due Period, the aggregate Principal Balance of such Defaulted Home Loans as of the last day of such Due Period, after giving effect to any recoveries attributable to principal from whatever source received during such Due Period with respect to such Defaulted Home Loans, including without limitation any Insurance Proceeds. 12 17 Net Loan Rate: With respect to each Home Loan, the related Home Loan Interest Rate, less the rate at which the Servicer Fee is calculated. Nonrecoverable Advances: With respect to any Home Loan, (i) any Interest Advance previously made and not reimbursed pursuant to Section 5.01(c)(i)(b), or (ii) an Interest Advance proposed to be made in respect of a Home Loan which, in either case, in the good faith business judgment of the Master Servicer, as evidenced by an Officer's Certificate delivered to Mego and the Indenture Trustee no later than the Business Day following such determination, would not be recoverable ultimately from the Payments received in subsequent Due Periods in respect of that Home Loan. Note(s): One or more of the Senior Notes, the Class M-1 Notes and the Class M-2 Notes. Note Distribution Account: The account established and maintained pursuant to Section 5.01(a)(2). Noteholder: A holder of a Note. Noteholders' Interest Carry-Forward Amount: With respect to any Distribution Date and each Class of Notes, the sum of (i) the excess of (A) the applicable Noteholders' Monthly Interest Distributable Amount for the preceding Distribution Date and any outstanding Noteholders' Interest Carry-Forward Amount for such Class on such preceding Distribution Date, over (B) the amount in respect of interest that is actually paid on such Class of Notes on such preceding Distribution Date plus (ii) interest on such excess, to the extent permitted by law, at the applicable Note Interest Rate from such preceding Distribution Date through the current Distribution Date. Noteholders' Interest Distributable Amount: With respect to each Distribution Date and each Class of Notes, the sum of the applicable Noteholders' Monthly Interest Distributable Amount and the applicable Noteholders' Interest Carry-Forward Amount for such Class of Notes, if any, for such Distribution Date. Noteholders' Monthly Interest Distributable Amount: With respect to each Distribution Date and Class of Notes, interest accrued during the related Accrual Period at the respective Note Interest Rate for such Class of Notes on the Class Principal Balance of such Class immediately preceding such Distribution Date (or, in the case of the first Distribution Date, on the Closing Date). Note Interest Rate: With respect to each Class of Notes, the per annum rate of interest payable to the holders of such Class of Notes. The Note Interest Rate with respect to the Class A-1 Notes is the lesser of (a) the sum of (i) One-Month LIBOR and (ii) 0.14% or (b) 12.00%; the Note Interest Rate with respect to the Class A-2 Notes is equal to 6.81% per annum; the Note Interest Rate with respect to the Class A-3 Notes is equal to 7.05% per annum; the Note Interest Rate with respect to the Class A-4 Notes is equal to 7.39% per annum; the Note Interest Rate 13 18 with respect to the Class M-1 Notes is equal to 7.50% per annum; and the Note Interest Rate with respect to the Class M-2 Notes is equal to 7.67% per annum; provided, however, with respect to the Class A-4, Class M-1 and Class M-2 Notes with respect to any Distribution Date after the first Distribution Date on which either Mego or the Master Servicer may exercise its option to purchase the Home Loans pursuant to Section 11.01(b), the Note Interest Rate shall be 7.89%, 8.00% and 8.17% per annum, respectively. Note Register: The register established pursuant to Section 2.3 of the Indenture. Obligee: See Mortgagee. Obligor: See Mortgagor. Officer's Certificate: A certificate signed by (i) any Master Servicing Officer or (ii) the Chairman of the Board, the Vice Chairman of the Board, the President, a Vice President, an Assistant Vice President, the Treasurer, the Secretary or one of the Assistant Treasurers or Assistant Secretaries of the Depositor or Mego, as the case may be, as required by this Agreement. One-Month LIBOR: With respect to any Accrual Period and the Class A-1 Notes, the rate determined by the Indenture Trustee on the related Interest Determination Date on the basis of the offered rates of the Reference Banks for one-month United States dollar deposits, as such rates appear on the Telerate Screen 3750, as of 11:00 a.m. (London time) on such Interest Determination Date. On each Interest Determination Date, One-Month LIBOR for the related Accrual Period will be established by the Indenture Trustee as follows: (i) If on such Interest Determination Date two or more Reference Banks provide such offered quotations, One-Month LIBOR for the related Accrual Period shall be the arithmetic mean of such offered quotations (rounded upwards if necessary to the nearest whole multiple of 0.0625%. (ii) If on such Interest Determination Date fewer than two Reference Banks provide such offered quotations, One-Month LIBOR for the related Accrual Period shall be the higher of (i) One-Month LIBOR as determined on the previous Interest Determination Date and (ii) the Reserve Interest Rate. Opinion of Counsel. A written opinion of counsel (who is acceptable to the Rating Agencies), who may be employed by Mego, the Master Servicer, the Depositor or any of their respective affiliates. Original Class Principal Balance: In the case of the Class A-1 Notes, $33,400,000; in the case of the Class A-2 Notes, $25,700,000; in the case of the Class A-3 Notes, $6,500,000; in the case of the Class A-4 Notes, $9,451,000; in the case of the Class M-1 Notes, $16,213,000; in the case of the Class M-2 Notes, $7,584,000 and in the case of the Certificates, $5,753,639. 14 19 Original Pool Principal Balance: $104,601,639.24 which is the Pool Principal Balance, as of the Cut-Off Date. Other Fees: With respect to any Distribution Date, (i) amounts in respect of fees and expenses due to any provider of services to the Trust, except the Indenture Trustee, the Master Servicer, the Servicer and also except any Person, the fees of which are required by this Agreement to be paid by the Master Servicer, the Servicer, or the Indenture Trustee; (ii) any taxes assessed against the Trust; and (iii) the reasonable transition expenses of a successor Master Servicer incurred in acting as successor Master Servicer. Overcollateralization Amount: With respect to any Distribution Date, the amount equal to the excess of (A) the Pool Principal Balance as of the last day of the related Due Period over (B) the aggregate of the Class Principal Balances of the Securities (after giving effect to all distributions on the Classes of Securities on such Distribution Date). Overcollateralization Deficiency Amount: With respect to any Distribution Date, the excess, if any, of the Overcollateralization Target Amount over the Overcollateralization Amount (such Overcollateralization Amount to be calculated after giving effect to all prior distributions on the Classes of Securities on such Distribution Date pursuant to Section 5.01(c)(i) and (ii) hereof). Overcollateralization Target Amount: (A) With respect to any Distribution Date occurring prior to the Stepdown Date, an amount equal to the greater of (x) 8% of the Original Pool Principal Balance or (y) the Net Delinquency Calculation Amount; (B) with respect to any other Distribution Date, an amount equal to the greater of (x) 16% of the Pool Principal Balance as of the end of the related Due Period or (y) the Net Delinquency Calculation Amount; provided, however, that the Overcollateralization Target Amount shall in no event be less than 0.50% of the Original Pool Principal Balance. Ownership Interest: As to any Security, any ownership or security interest in such Security, including any interest in such Security as the holder thereof and any other interest therein, whether direct or indirect, legal or beneficial, as owner or as pledgee. Owner Trustee: Wilmington Trust Company, as owner trustee under the Trust Agreement, and any successor owner trustee under the Trust Agreement. Owner Trustee Fee: $4,000. Owner Trustee Fee Reserve: With respect to any Distribution Date, $333.33. Payment: With respect to any Home Loan or the related Foreclosed Property and any Distribution Date or related Determination Date, all amounts received or collected on account of principal and interest by or on behalf of the Master Servicer during the preceding Due Period (or with respect to the interest component of any Monthly Payment due during such Due Period, 15 20 received or collected by or on behalf of the Master Servicer during the period commencing on the first day of the preceding Due Period and ending prior to such Determination Date) in respect of such Home Loan or Foreclosed Property from whatever source, including without limitation, amounts received or collected from, or representing: (i) the related Obligor; (ii) the application to amounts due on such Home Loan (or, in the case of any Foreclosed Property, to amounts previously due on the related Foreclosed Loan) of any related Insurance Proceeds (to the extent provided in Section 4.16(b)), any related condemnation awards or settlements or any payments made by any related guarantor or third-party credit-support provider; (iii) the operation or sale of the related Foreclosed Property; (iv) the Purchase Price with respect to such Home Loan or Substitution Adjustment Amounts with respect thereto; or (v) the Termination Price pursuant to Section 11.01(b); provided, however, that any amount the Servicer shall be entitled to retain as additional servicer compensation pursuant to Section 6.05(a) of the Servicing Agreement shall be excluded from the calculation of Payment. Percentage Interest: As defined in the Trust Agreement. Permitted Investments: Each of the following: (a) Direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury, and CATS and TIGRS) or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. (b) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies and provided such obligations are backed by the full faith and credit of the United States of America (stripped securities are only permitted if they have been stripped by the agency itself): 1. U.S. Export-Import Bank (Eximbank) A. Direct obligations or fully guaranteed certificates of beneficial ownership 2. Farmers Home Administration (FmHA) A. Certificates of beneficial ownership 16 21 3. Federal Financing Bank 4. Federal Housing Administration (FHA) A. Debentures 5. General Services Administration A. Participation certificates 6. U.S. Maritime Administration A. Guaranteed Title XI financing 7. U.S. Department of Housing and Urban Development (HUD) A. Project Notes B. Local Authority Bonds C. New Communities Debentures - U.S. government guaranteed debentures D. U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds (c) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies that are rated by both Rating Agencies in either the highest long-term rating categories or in one of the top two highest short-term rating categories (stripped securities are only permitted if they have been stripped by the agency itself): 1. Federal Home Loan Bank System A. Senior debt obligations 2. Federal Home Loan Mortgage Corporation (FHLMC) A. Participation Certificates B. Senior debt obligations 3. Federal National Mortgage Association (FNMA) A. Mortgage-backed securities and senior debt obligations 4. Student Loan Marketing Association A. Senior debt obligations 5. Resolution Funding Corp. obligations 6. Farm Credit System A. Consolidated systemwide bonds and notes 17 22 (d) Money market funds registered under the Investment Company Act of 1940, as amended, whose shares are registered under the Securities Act, and having a rating by Standard & Poor's of AAAm-G; AAAm; or AAm and a rating by Moody's of Aaa. (e) Certificates of deposit secured at all times by collateral described in (a) and/or (b) above. Such certificates must be issued by commercial banks, savings and loan associations or mutual savings banks which have a short term rating by Moody's of P-1 or higher and by Standard & Poor's of A-1 or higher. The collateral must be held by a third party and the Indenture Trustee must have a perfected first security interest in the collateral. (f) Certificates of deposit, savings accounts, deposit accounts or money market deposits which are fully insured by FDIC, including BIF and SAIF. (g) Investment agreements, including guaranteed investment contracts, acceptable to each Rating Agency. (h) Commercial paper rated "Prime - 1" by Moody's and "A-1" or better by Standard & Poor's. (i) Bonds or notes issued by any state or municipality which are rated by Moody's and Standard & Poor's in the highest long term rating categories or one of the two highest short-term rating categories assigned by such agencies. (j) Federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of "Prime - 1" by Moody's and "A-1" or "A" or better by Standard & Poor's. (k) Repurchase agreements providing for the transfer of securities from a dealer bank or securities firm (seller/borrower) to the Trust (buyer/lender), and the transfer of cash from the Trust to the dealer bank or securities firm with an agreement that the dealer bank or securities firm will repay the cash plus a yield to the Trust in exchange for the securities at a specified date. Repurchase agreements ("repos") must satisfy the following criteria. 1. Repos must be between the Trust and a dealer bank or securities firm which are: A. Primary dealers on the Federal Reserve reporting dealer list which are rated A or better by Standard & Poor's and P-1 by Moody's, or B. Banks rated "A" or above by Standard & Poor's and P-1 by Moody's. 18 23 2. The written repo contract trust must include the following: A. Securities which are acceptable for transfer are: (1) Direct U.S. governments, or (2) Federal agencies backed by the full faith and credit of the U.S. government (or FNMA or FHLMC) other than mortgage backed securities. B. The term of the repo may be up to 30 days C. The collateral must be delivered to the Indenture Trustee (if the Indenture Trustee is not supplying the collateral) or third party acting as agent for the Indenture Trustee (if the Indenture Trustee is supplying the collateral) before/simultaneous with payment (perfection by possession of certificated securities). D. Valuation of Collateral (1) The securities must be valued weekly, marked-to-market at current market price plus accrued interest. (a) The value of collateral must be equal to 104% of the amount of cash transferred by the Trust to the dealer bank or security firm under the repo plus accrued interest. If the value of securities held as collateral slips below 104% of the value of the cash transferred by the Trust, then additional cash and/or acceptable securities must be transferred. If, however, the securities used as collateral are FNMA or FHLMC, then the value of collateral must equal 105%. 3. Legal opinion which must be delivered to the Indenture Trustee: a. Repo meets guidelines under state law for legal investment of public funds. Each reference in this definition of "Permitted Investments" to the Rating Agency shall be construed, in the case of each subparagraph above referring to each Rating Agency, as a reference to Standard & Poor's and Moody's. 19 24 Person: Any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, national banking association, unincorporated organization or government or any agency or political subdivision thereof. Physical Property: As defined in the definition of "Delivery" above. Pool Principal Balance: With respect to any date of determination, the sum of the Principal Balances for all Home Loans as of the end of the preceding Due Period. Principal Balance: With respect to any Home Loan, and for any date of determination, the Principal Balance of such Home Loan as of the Cut-Off Date minus all principal reductions credited against the Principal Balance of such Home Loan on or subsequent to the Cut-Off Date for such Home Loan; provided, that with respect to any Defaulted Home Loan, the Principal Balance shall be zero as of the end of the Due Period in which such Home Loan becomes a Defaulted Home Loan. Property: The property (real, personal or mixed) encumbered by the Mortgage which secures the Debt Instrument evidencing a secured Home Loan. Prospectus: The Depositor's final Prospectus, dated June 20, 1997, as supplemented by the Prospectus Supplement. Prospectus Supplement: The Prospectus Supplement dated as of June 27, 1997, prepared by the Seller and the Depositor in connection with the issuance and sale of the Securities. Purchase Price: With respect to a Home Loan, means the Principal Balance of such Home Loan as of the date of purchase, plus unpaid accrued interest at the related Home Loan Interest Rate to the last day of the month in which such purchase occurs (without regard to any Interest Advance that may have been made with respect to such Home Loan). Qualified Substitute Home Loan: A Home Loan: (i) having characteristics such that the representations and warranties made pursuant to Section 3.03(b) with respect to the Home Loans are true and correct as of the date of substitution with respect to such Home Loan; (ii) each Monthly Payment with respect to such Home Loan shall be greater than or equal to the Monthly Payments due in the same Due Period on the Home Loan for which such Qualified Substitute Home Loan is replacing; (iii) the Maturity Date with respect to such Home Loan shall be no later than the Maturity Date of the Home Loan for which such Qualified Substitute Home Loan is replacing; (iv) as of the date of substitution, the Principal Balance of such Home Loan is less than or equal to (but not more than 1% less than) the Principal Balance of the Home Loan for which such Qualified Substitute Home Loan is replacing; (v) the Home Loan Interest Rate with respect to such Home Loan is at least equal to the Home Loan Interest Rate of the Home Loan for which such Qualified Substitute Home Loan is replacing and (vi) with respect to which the FICO score is equal to or greater than the FICO score for such Home Loan for which such Qualified Substitute Home Loan is replacing; provided however, in the event more than one Qualified 20 25 Substitute Home Loan is replacing one or more Defective Home Loans on any date, in which case (i) the weighted average Home Loan Interest Rate for such Qualified Substitute Home Loans must equal or exceed the weighted average Home Loan Interest Rate of the Defective Home Loans immediately prior to giving effect to the substitution, in each case weighted on the basis of the outstanding Principal Balance of such loans as of such day, (ii) the sum of the Monthly Payments with respect to such Qualified Substitute Home Loans shall be greater than or equal to the Monthly Payments due in the same Due Period on the Defective Home Loans being replaced, and (iii) as of the date of substitution, the aggregate Principal Balances of such Qualified Substitute Home Loans are less than or equal to (but not more than 1% less than) the aggregate Principal Balances of the Defective Home Loans being replaced. Rating Agency or Rating Agencies: Any of (i) Standard & Poor's, (ii) Fitch, or (iii) DCR or, if no such organization or successor is any longer in existence, "Rating Agency" shall be a nationally recognized statistical rating organization or other comparable person designated by the Issuer, notice of which designation shall have been given to the Indenture Trustee and the Master Servicer. Ratings: The ratings initially assigned to the Notes and the Certificates by the Rating Agencies, as evidenced by letters from the Rating Agencies. Record Date: With respect to each Distribution Date, other than the first Distribution Date, the close of business on the last Business Day of the month immediately preceding the month in which such Distribution Date occurs and, with respect to the first Distribution Date, July 3, 1997. Reference Banks: Bankers Trust Company, Barclay's Bank Plc, The Bank of Tokyo and National Westminster Bank Plc; provided that if any of the foregoing banks are not suitable to serve as a Reference Bank, then any leading banks selected by the Indenture Trustee which are engaged in transactions in Eurodollar deposits in the international Eurocurrency market (i) with an established place of business in London, England, (ii) not controlling, under the control of or under common control with the Depositor or any affiliate thereof, (iii) whose quotations appear on the Telerate Screen 3750 on the relevant Interest Determination Date and (iv) which have been designated as such by the Indenture Trustee. Regular Distribution Amount: With respect to any Distribution Date, the lesser of (a) the Collected Amount less the amounts required to be distributed pursuant to Section 5.01(c)(i) on such Distribution Date or (b) the sum of (i) the Noteholders' Interest Distributable Amount, (ii) the Certificateholders' Interest Distributable Amount and (iii) the Regular Principal Distribution Amount, in each case for such Distribution Date. Regular Principal Distribution Amount: With respect to each Distribution Date, an amount equal to the lesser of: 21 26 (A) the aggregate of the Class Principal Balances of the Classes of Securities immediately prior to such Distribution Date; or (B) The sum of the following amounts (without duplication) with respect to the immediately preceding Due Period: that portion of all Payments received on Home Loans allocable to principal for such Distribution Date, including all full and partial principal prepayments (including (i) such payments in respect of such Home Loans that became Defaulted Home Loans on or prior to the end of the preceding Due Period, (ii) the portion of the Purchase Price allocable to principal of all Defective Loans or Defaulted Loans and the portion of the Termination Price, if any, set forth in Section 11.01(b) allocable to principal with respect to the Home Loans, and (iii) any Substitution Adjustment Amounts deposited to the Note Distribution Account pursuant to Section 3.05 on the previous Determination Date). Reserve Interest Rate: With respect to any Interest Determination Date, the rate per annum that the Indenture Trustee determines to be either (i) the arithmetic mean (rounded upwards if necessary to the nearest whole multiple of 0.0625%) of the one-month United States dollar lending rates which New York City banks selected by the Indenture Trustee are quoting on the relevant Interest Determination Date to the principal London offices of leading banks in the London interbank market or (ii) in the event that the Indenture Trustee can determine no such arithmetic mean, the lowest one-month United States dollar lending rate which New York City banks selected by the Indenture Trustee are quoting on such Interest Determination Date to leading European banks. Residual Instruments: The instruments evidencing the right to the amount remaining, if any, after all prior distributions have been made under this Agreement, the Indenture and the Trust Agreement on each Distribution Date and certain other rights to receive amounts hereunder and under the Trust Agreement. Responsible Officer: When used with respect to the Indenture Trustee, any officer within the Corporate Trust Office of the Indenture Trustee, including any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer of the Indenture Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular matter, any other officer to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. When used with respect to the Issuer, any officer in the Corporate Trust Administration Department of the Owner Trustee with direct responsibility for the administration of the Trust Agreement and this Agreement on behalf of the Issuer. When used with respect to the Depositor, the Seller or the Master Servicer, the President or any Vice President, Assistant Vice President, or any Secretary or Assistant Secretary. SAIF: The Savings Association Insurance Fund, as from time to time constituted, created under the Financial Institutions Reform, Recovery and Enforcement 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. 22 27 Securities: The Notes and/or the Certificates, as applicable. Securities Act: The Securities Act of 1933, as amended. Securityholder: A holder of a Note or Certificate, as applicable. Seller: Mego, in its capacity as the seller hereunder. Senior Notes: The Class A-1, Class A-2, Class A-3 and Class A-4 Notes. Senior Optimal Principal Balance: With respect to any Distribution Date prior to the Stepdown Date, zero; with respect to any other Distribution Date, an amount equal to the Pool Principal Balance as of the preceding Determination Date minus the greater of (a) the sum of (1) 56.50% of the Pool Principal Balance as of the preceding Determination Date and (2) the Overcollateralization Target Amount for such Distribution Date (without giving effect to the proviso in the definition thereof) or (b) 0.50% of the Original Pool Principal Balance; provided however, that the Senior Optimal Principal Balance shall never be less than zero or greater than the Aggregate Note Principal Balance as of the Closing Date. Series or Series 1997-3: Mego Mortgage Home Loan Asset Backed Securities, Series 1997-3. Servicer: Mego, in its capacity as the servicer hereunder, or any other Eligible Servicer with whom the Master Servicer has entered into a Servicing Agreement pursuant to Section 4.02. Servicer Fee: With respect to any Distribution Date, 1/12 times 1.00% times the Pool Principal Balance, as of the opening of business on the first day of the month preceding the month of such Distribution Date (or, with respect to the first Distribution Date, the Original Pool Principal Balance). Servicer Review Report: As defined in Section 4.05(d). Servicer Termination Event: With respect to the Servicing Agreement, the events specified in Section 7.02 therein. Servicer's Home Loan Files: As defined in Section 2.05(b). Servicing Agreement: The servicing agreement dated as of June 14, 1997 between Mego, as Servicer, the Master Servicer, the Indenture Trustee and the Trust and any other agreement entered into in accordance with Section 4.02. Standard & Poor's: Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or any successor thereto. 23 28 Stepdown Date: The first Distribution Date occurring after June 2000 as to which all of the following conditions exist: (1) the Pool Principal Balance has been reduced to an amount less than or equal to 50% of the Original Pool Principal Balance; (2) the Net Delinquency Calculation Amount is less than 8% of the Original Pool Principal Balance; and (3) the aggregate Class Principal Balance of the Senior Notes (after giving effect to distributions of principal on such Distribution Date) will be able to be reduced on such Distribution Date (such determination to be made by the Indenture Trustee prior to making actual distributions on such Distribution Date) to an amount equal to or less than the excess of (i) the Pool Principal Balance as of the preceding Determination Date over (ii) the greater of (1) the sum of (x) 56.50% of the Pool Principal Balance as of the preceding Determination Date and (y) the Overcollateralization Target Amount for such Distribution Date (such Overcollateralization Target Amount calculated without giving effect to the proviso in the definition thereof and calculated pursuant only to clause (B) in the definition thereof) or (2) 0.50% of the Original Pool Principal Balance. Servicing Record. The records for each Home Loan maintained by the Master Servicer pursuant to Section 4.03. Servicing Standard. The standard set forth in Section 4.01(a). 61+ Day Delinquent Loan. With respect to any Determination Date or related Distribution Date, a Home Loan, other than a Defaulted Home Loan, with respect to which any portion of a Monthly Payment is, as of the related Monthly Cut-Off Date, 61 days or more past due (without giving effect to any grace period and including Home Loans in foreclosure and Foreclosed Property that are not otherwise Defaulted Home Loans) and unpaid by the Obligor. 61+ Delinquency Percentage (Rolling Six Month). With respect to any Determination Date or related Distribution Date, the average of the percentage equivalents of the fractions determined for each of the six immediately preceding Due Periods the numerator of each of which is equal to the aggregate Principal Balance of Home Loans that are 61+ Day Delinquent Loans as of the end of such Due Period and the denominator of which is the Pool Principal Balance as of the end of such Due Period. Substitution Adjustment Amount: The meaning assigned to such term in Section 3.05. Substitution Date: As defined in Section 3.05. Termination Date: The earlier of (a) the Distribution Date in August 2023 and (b) the Distribution Date next following the Monthly Cut-Off Date coinciding with or next following the 24 29 date of the liquidation or disposition of the last asset held by the Trust pursuant to Sections 4.13 or 11.01. Termination Price: As defined in Section 11.01(b). Total Expected Loan Loss Percentage: With respect to any Distribution Date, the percentage equivalent of the fraction, the numerator of which is equal to the sum of (a) Cumulative Net Losses for such Distribution Date, (b) 25% of the aggregate Principal Balance of Home Loans which are between 31 and 60 days past due (without giving effect to any grace period) as of the last day of the preceding Due Period, (c) 50% of the aggregate Principal Balance of Home Loans which are between 61 and 90 days past due (without giving effect to any grace period) as of the last day of the preceding Due Period, (d) the aggregate Principal Balance of the Home Loans which are more than 90 days past due (without giving effect to any grace period) as of the last day of the preceding Due Period and the denominator of which is the Original Pool Principal Balance. Transaction Documents. This Agreement, the Home Loan Purchase Agreement, the Trust Agreement, the Servicing Agreement, the Indenture and the Administration Agreement. Trust: The Issuer. Trust Account Property: The Trust Accounts, all amounts and investments held from time to time in any Trust Account and all proceeds of the foregoing. Trust Accounts: The Note Distribution Account, the Certificate Distribution Account and the Collection Account. Trust Agreement: The Trust Agreement dated as of June 14, 1997, among the Depositor, the Co-Owner Trustee, the Owner Trustee and Mego Mortgage Corporation. Trust Estate: The assets subject to this Agreement, the Trust Agreement and the Indenture and assigned to the Indenture Trustee, which assets consist of: (i) such Home Loans as from time to time are subject to this Agreement, including Qualified Substitute Home Loans added to the Trust from time to time, together with the Servicer's Home Loan Files and the Indenture Trustee's Home Loan Files relating thereto and all proceeds thereof, (ii) the Mortgages and security interests in Properties, (iii) all payments of principal in respect of Home Loans received on or after the Cut-Off Date and payments of interest in respect of Home Loans due on or after the Cut-Off Date, (iv) such assets as from time to time are identified as Foreclosed Property, (v) such assets and funds as are from time to time deposited in the Collection Account, the Note Distribution Account and the Certificate Distribution Account, including amounts on deposit in such accounts which are invested in Permitted Investments, (vi) the Issuer's rights under the Insurance Policies and any Insurance Proceeds, and (vii) all right, title and interest of the Depositor in and to the obligations of the Seller under the Home Loan Purchase Agreement in which the Depositor acquired the Home Loans from the Seller. 25 30 Section 1.02 Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Indenture and the Trust Agreement. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof," "herein," "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; Article, Section, Schedule and Exhibit references contained in this Agreement are references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation." (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. Section 1.03 Interest Calculations. Except as otherwise set forth herein, all calculations of accrued interest on the Home Loans, the Notes (except the Class A-1 Notes), the Certificates and accrued fees shall be made on the basis of a 360-day year consisting of twelve 30-day months. 26 31 ARTICLE II. CONVEYANCE OF THE HOME LOANS Section 2.01 Conveyance of the Home Loans. (a) As of the Closing Date, in consideration of the Issuer's delivery of the Notes, Certificates and Residual Instruments to the Depositor or its designee, upon the order of the Depositor, the Depositor, as of the Closing Date and concurrently with the execution and delivery hereof, does hereby sell, transfer, assign, set over and otherwise convey to the Issuer, without recourse, but subject to the other terms and provisions of this Agreement, all of the right, title and interest of the Depositor in and to the Trust Estate. The foregoing sale, transfer, assignment, set over and conveyance does not and is not intended to result in a creation or an assumption by the Issuer of any obligation of the Depositor, the Seller or any other person in connection with the Trust Estate or under any agreement or instrument relating thereto except as specifically set forth herein. (b) As of the Closing Date, the Issuer acknowledges the conveyance to it of the Trust Estate, including from the Depositor all right, title and interest of the Depositor in and to the Trust Estate, receipt of which is hereby acknowledged by the Issuer, and the acceptance of which is made in good faith and without notice or knowledge of any adverse claims or liens. Concurrently with such delivery and in exchange therefor, the Issuer has pledged to the Indenture Trustee the Trust Estate, and the Indenture Trustee, pursuant to the written instructions of the Issuer, has executed and caused to be authenticated and delivered the Notes to the Depositor or its designee, upon the order of the Issuer. In addition, concurrently with such delivery and in exchange therefor, the Owner Trustee, pursuant to the instructions of the Depositor, has executed (not in its individual capacity, but solely as Owner Trustee on behalf of the Issuer) and caused to be authenticated and delivered the Certificates and Residual Instruments to the Depositor or its designee, upon the order of the Depositor. Section 2.02 Reserved. Section 2.03 Ownership and Possession of Home Loan Files. Upon the issuance of the Securities, with respect to the Home Loans, the ownership of each Debt Instrument, the related Mortgage and the contents of the related Servicer's Home Loan File and the Indenture Trustee's Home Loan File shall be vested in the Owner Trustee and the Co-Owner Trustee and pledged to the Indenture Trustee for the benefit of the Noteholders, although possession of the Servicer's Home Loan Files (other than items required to be maintained in the Indenture Trustee's Home Loan Files) on behalf of and for the benefit of the Securityholders shall remain with Mego, and the Indenture Trustee shall take possession of the Indenture Trustee's Home Loan Files as contemplated in Section 2.06. 27 32 Section 2.04 Books and Records. The sale of each Home Loan shall be reflected on the Depositor's or the Seller's, as the case may be, balance sheets and other financial statements as a sale of assets by the Depositor or the Seller, as the case may be, under generally accepted accounting principles ("GAAP"). The Master Servicer shall maintain, or cause to be maintained pursuant to Section 4.03, a complete set of books and records for each Home Loan which shall be clearly marked to reflect the ownership of each Home Loan by the Owner Trustee and the Co-Owner Trustee and the pledge to the Indenture Trustee for the benefit of the Securityholders. It is the intention of the parties hereto that the transfers and assignments contemplated by this Agreement shall constitute a sale of the Home Loans and the other property specified in Section 2.01(a) from the Depositor to the Trust and such property shall not be property of the Depositor. If the assignment and transfer of the Home Loans and the other property specified in this Section 2.01(a) to the Owner Trustee and Co-Owner Trustee pursuant to this Agreement or the conveyance of the Home Loans or any of such other property to the Owner Trustee and Co-Owner Trustee is held or deemed not to be a sale or is held or deemed to be a pledge of security for a loan, the Depositor intends that the rights and obligations of the parties shall be established pursuant to the terms of the Agreement and that, in such event, (i) the Depositor shall be deemed to have granted and does hereby grant to the Owner Trustee and Co-Owner Trustee a first priority security interest in the entire right, title and interest of the Depositor in and to the Home Loans and all other property conveyed to the Owner Trustee and Co-Owner Trustee pursuant to Section 2.01 and all proceeds thereof, and (ii) this Agreement shall constitute a security agreement under applicable law. Within five days of the Closing Date, the Depositor shall cause to be filed UCC-1 financing statements naming the Owner Trustee and Co-Owner Trustee as "secured parties" and describing the Home Loans being sold by the Depositor to the Trust with the office of the Secretary of State of the State in which the Depositor is located. Section 2.05 Delivery of Home Loan Documents. (a) With respect to each Home Loan, on the Closing Date the Seller, at the direction of the Depositor, shall have delivered or caused to be delivered to the Indenture Trustee each of the following documents (collectively, the "Indenture Trustee's Home Loan Files"): (i) The original Debt Instrument, showing a complete chain of endorsements or assignments from the named payee to the Trust and endorsed as follows: "Pay to the order of First Bank National Association, as Indenture Trustee and Co-Owner Trustee for Mego Mortgage Home Loan Owner Trust 1997-3, without recourse"; (ii) If such Home Loan is a Mortgage Loan, the original Mortgage with evidence of recording indicated thereon (except that a true copy thereof certified by an appropriate public official may be substituted); provided, however, that if the Mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Agreement solely because of a delay caused by the public recording 28 33 office where such Mortgage has been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of such Mortgage certified as a true copy in an Officer's Certificate which shall certify that such Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such Mortgage with evidence of recording indicated thereon upon receipt thereof from the public recording official (or a true copy thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (iii) If such Home Loan is a Mortgage Loan, the original Assignment of Mortgage, in recordable form. Such assignments may be blanket assignments, to the extent such assignments are effective under applicable law, for Mortgages covering Mortgaged Properties situated within the same county. If the Assignment of Mortgage is in blanket form an assignment of Mortgage need not be included in the individual Home Loan File; (iv) If such Home Loan is a Mortgage Loan, all original intervening assignments of the Mortgage, showing a complete chain of assignments from the named mortgagee to the assignor to the Indenture Trustee, with evidence of recording thereon (or true copies thereof certified by appropriate public officials may be substituted); provided, however, that if the intermediate assignments of mortgage with evidence of recording thereon cannot be delivered concurrently with the execution and delivery of this Agreement solely because of a delay caused by the public recording office where such assignments of Mortgage have been delivered for recordation, there shall be delivered to the Indenture Trustee a copy of each such assignment of Mortgage certified as a true copy in an Officer's Certificate of Mego, which shall certify that each such assignment of Mortgage has been delivered to the appropriate public recording office for recordation, and there shall be promptly delivered to the Indenture Trustee such assignments of Mortgage with evidence of recording indicated thereon upon its receipt thereof from the public recording official (or true copies thereof certified by an appropriate public official may be delivered to the Indenture Trustee); (v) An original of each assumption or modification agreement, if any, relating to such Home Loan. (b) With respect to each Home Loan, on the Closing Date, the Seller, at the direction of the Depositor, shall have delivered or caused to be delivered to Mego, as the designated agent of the Indenture Trustee each of the following documents (collectively, the "Servicer's Home Loan Files"): (A) an original or copy of truth-in-lending disclosure, (B) an original or copy of the credit application, (C) an original or copy of the consumer credit report, (D) an original or copy of verification of employment and income, or verification of self-employment income, (E) an original or copy of contract of work or written description with cost estimates, if applicable, (F) an original or copy of report of inspection of improvements to the Property, if applicable, (G) to the extent not included in (B), an original or a copy of a written verification, or an underwriter's notation of obtaining a verbal verification from the holder of any senior 29 34 mortgage or deed of trust that such Mortgagor at the time of origination was not more than 30 days delinquent on any senior mortgage or deed of trust on the Property, (H) (a) if the original principal balance is between $35,001 and $40,000, (1) evidence that the borrower has a FICO Score of at least 640, a debt to income ratio no greater than 45%, and disposable income of at least $1,500 per month, or (2) (I) a copy of the HUD-1 Closing Statement indicating the sale price, or (II) an Uniform Residential Appraisal Report, or (III) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (IV) a tax assessment, or (V) a broker's price opinion; (b) if the original principal balance is between $40,001 and $50,000, (1) a copy of the HUD-1 Closing Statement indicating the sale price, or (2) an Uniform Residential Appraisal Report, or (3) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form 2055, or (4) a tax assessment, or (5) a broker's price opinion; or (c) if the original principal balance exceeds $50,000, a full Uniform Residential Appraisal Report prepared by a national appraisal firm, and (I) an original or a copy of a title search as of the time of origination with respect to the Property. (c) [Reserved] (d) The Indenture Trustee shall take and maintain continuous physical possession of the Indenture Trustee's Home Loan Files in the State of Minnesota, and in connection therewith, shall act solely as agent for the holders of the Securities in accordance with the terms hereof and not as agent for Mego or any other party. (e) Within 60 days of the Closing Date, Mego, at its own expense, shall cause the Indenture Trustee to record each Assignment of Mortgage (which may be a blanket assignment if permitted by applicable law) in the appropriate real property or other records; provided, however, the Indenture Trustee need not cause to be recorded any such Assignment of Mortgage which relates to a Mortgage Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of Counsel delivered by Mego (at Mego's expense) to the Indenture Trustee, and the Rating Agencies, the recordation of such Assignment of Mortgage is not necessary to protect the Indenture Trustee's interest in the related Mortgage Loan against the claims of any subsequent transferee or any creditor of the Depositor or the Seller. With respect to any Assignment of Mortgage as to which the related recording information is unavailable within 60 days following the Closing Date, such Assignment of Mortgage shall be submitted for recording within 30 days after receipt of such information but in no event later than one year after the Closing Date. The Indenture Trustee shall be required to retain a copy of each Assignment of Mortgage submitted for recording. In the event that any such Assignment of Mortgage is lost or returned unrecorded because of a defect therein, Mego shall promptly prepare a substitute Assignment of Mortgage or cure such defect, as the case may be, and thereafter the Indenture Trustee shall be required to submit each such Assignment of Mortgage Loan for recording. 30 35 Section 2.06 Acceptance by Indenture Trustee of the Home Loans; Certain Substitutions; Initial Certification. (a) The Indenture Trustee agrees to execute and deliver on the Closing Date an acknowledgment of receipt of the Indenture Trustee's Home Loan File for each Home Loan. The Indenture Trustee declares that it will hold such documents and any amendments, replacements or supplements thereto, as well as any other assets included in the Trust Estate, upon and subject to the conditions set forth herein for the benefit of the Securityholders in good faith and without notice of any adverse claims or liens. The Indenture Trustee agrees, for the benefit of the Securityholders to review each Indenture Trustee's Home Loan File within 45 days after the Closing Date (or, with respect to any Qualified Substitute Home Loan, within 45 days after the conveyance of the related Home Loan to the Trust) and to deliver to the Seller, the Depositor, the Indenture Trustee, the Issuer and the Master Servicer a certification to the effect that, as to each Home Loan listed in the Home Loan Schedule (other than any Home Loan paid in full or any Home Loan specifically identified in such certification as not covered by such certification), (i) all documents required to be delivered to the Indenture Trustee pursuant to this Agreement are in its possession (other than as expressly permitted in Section 2.05), (ii) all documents delivered by the Depositor and the Seller to the Indenture Trustee pursuant to Section 2.05 have been reviewed by the Indenture Trustee and have not been mutilated or damaged and appear regular on their face (handwritten additions, changes or corrections shall not constitute irregularities if initialed by the Obligor) and relate to such Home Loan, (iii) based on the examination of the Indenture Trustee, and only as to the foregoing documents, the information set forth on the Home Loan Schedule accurately reflects the information set forth in the Indenture Trustee's Home Loan File and (iv) each Debt Instrument has been endorsed as provided in Section 2.05. Neither the Issuer nor the Indenture Trustee shall be under any duty or obligation (i) to inspect, review or examine any such documents, instruments, certificates or other papers to determine that they are genuine, enforceable, or appropriate for the represented purpose or that they are other than what they purport to be on their face or (ii) to determine whether any Indenture Trustee's Home Loan File should include any of the documents specified in Section 2.05(a)(v). (b) The Servicer's Home Loan File shall be held in the custody of Mego for the benefit of, and as agent for, the Securityholders, the Indenture Trustee and the Issuer, as the owner thereof. It is intended that by Mego's agreement pursuant to this Section 2.06(b) the Indenture Trustee shall be deemed to have possession of the Servicer's Home Loan Files for purposes of Section 9-305 of the Uniform Commercial Code of the State in which such documents or instruments are located. Mego shall promptly report to the Indenture Trustee any failure by it to hold the Servicer's Home Loan File as herein provided and shall promptly take appropriate action to remedy any such failure. In acting as custodian of such documents and instruments, Mego agrees not to assert any legal or beneficial ownership interest in the Home Loans or such documents or instruments. Mego agrees to indemnify the Securityholders and the Indenture Trustee for any and all liabilities, obligations, losses, damages, payments, costs, or expenses of any kind whatsoever which may be imposed on, incurred by or asserted against the Securityholders or the Indenture Trustee as the result of any act or omission by Mego relating 31 36 to the maintenance and custody of such documents or instruments which have been delivered to Mego; provided, however, that Mego will not be liable for any portion of any such amount resulting from the negligence or misconduct of any Securityholder or the Indenture Trustee and provided, further, that Mego will not be liable for any portion of any such amount resulting from Mego's compliance with any instructions or directions consistent with this Agreement issued to Mego by the Indenture Trustee. The Indenture Trustee shall have no duty to monitor or otherwise oversee Mego's performance as custodian hereunder. (c) Upon determination by the Master Servicer, the Depositor, Mego or the Indenture Trustee that any document constituting a part of any Home Loan File was not delivered to the Indenture Trustee or, with respect to any document constituting the Servicer's Home Loan File, to Mego, as custodian for the Indenture Trustee and the Issuer, by the time required hereby (which in the case of (A) a failure to deliver a recorded mortgage or recorded assignment pursuant to Section 2.05(a)(ii) or (a)(iv) (only under the circumstances in which a delay is caused by the public recording office and an Officer's Certificate is required to be provided thereunder) shall be the 20 month anniversary of the Closing Date, (B) a failure to deliver an inspection report pursuant to Section 2.05(b)(F) shall be the 12 month anniversary of the Closing Date, (C) a failure to deliver each other document constituting a part of any Indenture Trustee's Home Loan File shall be the Closing Date and (D) a failure to deliver each document (other than those described in clause (B) above) specified in Section 2.05(b) shall be 45 Business Days after the Closing Date) to be so delivered or was defective in any material respect when delivered to the Indenture Trustee, the party identifying any of the foregoing shall give prompt written notice to the other parties. Nothing contained herein shall require the Indenture Trustee to undertake any independent investigation or to make any review of any Home Loan File other than as provided for in this Section 2.06. Mego, upon receipt of such notice, shall comply with the cure, substitution and repurchase provisions of Section 3.05 hereof. 32 37 ARTICLE III. REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Depositor. The Depositor hereby represents, warrants and covenants with and to the Issuer, and the Indenture Trustee, on behalf of the Securityholders, and the Master Servicer, as of the Closing Date: (a) The Depositor is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has all licenses necessary to carry on its business as now being conducted. The Depositor has the power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Depositor and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action of the Depositor; this Agreement evidences the valid, binding and enforceable obligation of the Depositor; and all requisite action has been taken by the Depositor to make this Agreement valid, binding and enforceable upon the Depositor in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other, similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity; (b) The consummation of the transactions contemplated by this Agreement will not result in (i) the breach of any terms or provisions of the Articles of Incorporation or Bylaws of the Depositor, (ii) the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other material instrument to which the Depositor, or its property is subject, or (iii) the violation of any law, rule, regulation, order, judgment or decree to which the Depositor or its respective property is subject; (c) The Depositor is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or otherwise) or operations of the Depositor or its properties or might have consequences that would materially and adversely affect its performance hereunder. Section 3.02 Representations, Warranties and Covenants of the Master Servicer. The Master Servicer hereby represents, warrants and covenants with and to the Depositor, the Issuer, Mego, the Indenture Trustee and the Securityholders as of the Closing Date: (a) The Master Servicer is a national banking association duly organized and validly existing under the laws of the United States of America, with full power and authority to own 33 38 its properties and conduct its business as such properties are presently owned and such business is presently conducted; (b) The Master Servicer has the full power and authority to execute, deliver and perform, and to enter into and consummate all transactions contemplated by this Agreement and each other Transaction Document to which it is a party, has duly authorized the execution, delivery and performance of this Agreement and each other Transaction Document to which it is a party, has duly executed and delivered this Agreement and each other Transaction Document to which it is a party, and this Agreement and each other Transaction Document to which it is a party, when duly authorized, executed and delivered by the other parties thereto, will constitute a legal, valid and binding obligation of the Master Servicer, enforceable against it in accordance with its terms; (c) Neither the execution and delivery of this Agreement or any other Transaction Document to which the Master Servicer is a party, the consummation of the transactions required of the Master Servicer herein or therein, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any other Transaction Document to which the Master Servicer is a party will conflict with or result in a breach of any of the terms, conditions or provisions of the Master Servicer's charter or bylaws or any legal restriction or any material agreement or instrument to which the Master Servicer is now a party or by which it is bound, or which would adversely affect the administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Master Servicer or its property is subject; (d) The Master Servicer is not in default, and the execution and delivery of this Agreement and each other Transaction Document to which it is a party and its performance of and compliance with the terms hereof and thereof will not constitute a violation of, any law, any order or decree of any court, or any order, regulation or demand of any federal, state or local governmental or regulatory authority; (e) No action, suit or other proceeding or investigation is pending or, to the Master Servicer's knowledge, threatened before any court or any federal, state or local governmental or regulatory authority (A) asserting the invalidity of this Agreement or any other Transaction Document to which the Master Servicer is a party, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Transaction Document to which the Master Servicer is a party, or (C) seeking any determination or ruling that would materially and adversely affect the ability of the Master Servicer to perform its obligations under this Agreement or any other Transaction Document to which the Master Servicer is a party; (f) No consent, approval, authorization or order of, registration or filing with or notice to, any court or any federal, state or local government or regulatory authority is required for the execution, delivery and performance by the Master Servicer of this Agreement or any other 34 39 Transaction Document to which the Master Servicer is a party (other than those that have been obtained or will be obtained prior to the Closing Date); (g) Neither this Agreement nor any other Transaction Document to which the Master Servicer is a party nor any statement, report or other document furnished or to be furnished by the Master Servicer pursuant to this Agreement or any other Transaction Document to which the Master Servicer is a party or in connection with the transactions contemplated hereby and thereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading; (h) The statements contained in the section of the Prospectus Supplement entitled "The Master Servicer" which describe the Master Servicer are true and correct in all material respects, and such section of the Prospectus Supplement does not contain any untrue statement of a material fact with respect to the Master Servicer and does not omit to state a material fact necessary to make the statements contained therein with respect to the Master Servicer not misleading; (i) The Master Servicer is solvent, and the Master Servicer will not be rendered insolvent as a result of the performance of its obligations pursuant to this Agreement and any other Transaction Document to which the Master Servicer is a party; (j) The Servicing Agreement conforms to the requirements for a Servicing Agreement contained in this Agreement; (k) The Master Servicer, or an affiliate thereof, the primary business of which is the servicing of home loans such as the Home Loans, is an Eligible Servicer, and the Master Servicer or such affiliate possesses all state and federal licenses necessary for servicing the Home Loans in accordance with this Agreement; (l) The Master Servicer has not waived any default, breach, violation or event of acceleration existing under any Debt Instrument or the related Mortgage; (m) The Master Servicer will cause to be performed any and all acts required to be performed by the Master Servicer or Servicer to preserve the rights and remedies of the Trust and the Indenture Trustee in any Insurance Policies applicable to the Home Loans, including, without limitation, any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Trust and the Indenture Trustee; (n) The Master Servicer shall comply with, and shall service, or cause to be serviced, each Home Loan, in accordance with all applicable laws, all rules and regulations issued thereunder, and all administrative publications published pursuant thereto; and 35 40 (o) The Master Servicer agrees that, so long as it shall continue to serve in the capacity contemplated under the terms of this Agreement, it shall remain in good standing under the laws governing its creation and existence and qualified under the laws of each state in which it is necessary to perform its obligations under this Agreement or in which the nature of its business requires such qualification, it shall maintain or cause an affiliate to maintain all licenses, permits and other approvals required by any law or regulations, as may be necessary to perform its obligations under this Agreement and to retain all rights to service the Loans, and it shall not dissolve or otherwise dispose of all or substantially all of its assets. It is understood and agreed that the representations and warranties set forth in this Section 3.02 shall survive the issuance and delivery of the Securities and shall be continuing as long as any Security shall be outstanding or this Agreement has not been terminated. Section 3.03 Representations and Warranties of Mego. (a) The Seller hereby represents and warrants to the Depositor, the Issuer, the Indenture Trustee, the Master Servicer and the Securityholders, that as of the Closing Date: (i) Mego is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Mego is duly qualified to do business, is in good standing and has obtained all necessary licenses, permits, charters, registrations and approvals (together, "approvals") necessary for the conduct of its business as currently conducted and the performance of its obligations under the Transaction Documents, in each jurisdiction in which the failure to be so qualified or to obtain such approvals would render any Transaction Document unenforceable in any respect or would have a material adverse effect upon the Transaction; (ii) Mego has full power and authority to execute, deliver and perform, and to enter into and consummate all transactions required of it by this Agreement and each other Transaction Document to which it is a party; has duly authorized the execution, delivery and performance of this Agreement and each other Transaction Document to which it is a party; has duly executed and delivered this Agreement and each other Transaction Document to which it is a party; when duly authorized, executed and delivered by the other parties hereto, this Agreement and each other Transaction Document to which it is a party will constitute a legal, valid and binding obligation of Mego enforceable against it in accordance with its terms, except as such enforceability may be limited by general principles of equity (whether considered in a proceeding at law or in equity); (iii) Neither the execution and delivery of this Agreement or any of the other Transaction Documents to which Mego is a party, the consummation of the transactions required of it herein or under any other Transaction Document, nor the fulfillment of or compliance with the terms and conditions of this Agreement or any of the other Transaction Documents will conflict with or result in a breach of any of the 36 41 terms, conditions or provisions of Mego's charter or by-laws or any legal restriction or any material agreement or instrument to which Mego is now a party or by which it is bound, or which would adversely affect the creation and administration of the Trust as contemplated hereby, or constitute a material default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which Mego or its respective property is subject; (iv) There is no action, suit, proceeding, investigation or litigation pending against Mego or, to its knowledge, threatened, which, if determined adversely to Mego, would materially adversely affect the sale of the Loans, the issuance of the Securities and Residual Instruments, the execution, delivery or enforceability of this Agreement or any other Transaction Document, or which would have a material adverse affect on the financial condition of Mego; (v) No consent, approval, authorization or order of any court or governmental agency or body is required for: (a) the execution, delivery and performance by Mego of, or compliance by Mego with, this Agreement, (b) the issuance of the Securities and Residual Instruments, (c) the sale of the Home Loans under the Home Loan Purchase Agreement or (d) the consummation of the transactions required of it by this Agreement, except: (A) such as shall have been obtained before the Closing Date, and (B) such as may be required under state securities or "Blue Sky" laws in connection with the sale of the Securities by the Underwriter; (vi) Mego is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or other) or operations of Mego or its properties or might have consequences that would materially and adversely affect its performance hereunder; (vii) Mego received fair consideration and reasonably equivalent value in exchange for the sale of the Home Loans to the Depositor; (viii) Mego has transferred the Home Loans without any intent to hinder, delay or defraud any of its creditors; (b) Mego hereby agrees for the benefit of the Depositor, the Issuer, the Indenture Trustee and the Securityholders that the failure of any of the following representations and warranties to be true and correct as to any Home Loan as of the Cut-Off Date for such Home Loan, or such later date if so specified in such representation and warranty, gives rise to the remedy specified in Section 3.05; (i) The information pertaining to each Home Loan set forth in the Home Loan Schedule was true and correct in all material respects as of the applicable Cut-Off Date; 37 42 (ii) As of the Cut-off Date, Home Loans representing 99.4% of the Original Pool Principal Balance are between 0 and 29 days past due and nineteen of the Home Loans representing 0.60% of the Original Pool Principal Balance are at least 30 days but no more than 59 days past due (without giving effect to any grace period); Mego has not advanced funds, induced, solicited or knowingly received any advance of funds from a party other than the Obligor, directly or indirectly, for the payment of any amount required by the Home Loan; (iii) The terms of the Debt Instrument and the related Mortgage contain the entire agreement of the parties and have not been impaired, waived, altered or modified in any respect, except by written instruments reflected in the related File and recorded, if necessary, to maintain the lien priority of the related Mortgage; and no other instrument of waiver, alteration, expansion or modification has been executed, and no Obligor has been released, in whole or in part, except in connection with an assumption agreement which assumption agreement is part of the related Home Loan File and the payment terms of which are reflected in the related Home Loan Schedule; (iv) The Debt Instrument and the related Mortgage are not subject to any set-off, claims, counterclaim or defense and will not have such in the future with respect to the goods and services provided under the Debt Instrument, including the defense of usury or of fraud in the inducement, nor will the operation of any of the terms of the Debt Instrument and the related Mortgage, or the exercise of any right thereunder, render such Debt Instrument or Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (v) Any and all requirements of any federal, state or local law applicable to the Home Loan (including any law applicable to the origination, servicing and collection practices with respect thereto) have been complied with; (vi) No Debt Instrument or Mortgage has been satisfied, cancelled, rescinded or subordinated, in whole or part; and Mego has not waived the performance by the Obligor of any action, if the Obligor's failure to perform such action would cause the Debt Instrument or Mortgage Loan to be in default, except as otherwise permitted by clause (iii); and the related Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such satisfaction, subordination, release, cancellation or rescission; (vii) Each Mortgage is a valid, subsisting and enforceable lien on the related Property, including the land and all buildings on the Property; (viii) The Debt Instrument and the related Mortgage are genuine and each is the legal, valid and binding obligation of the maker thereof, enforceable in accordance 38 43 with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights in general and by general principles of equity; (ix) To Mego's best knowledge, all parties to the Debt Instrument and the related Mortgage had legal capacity at the time to enter into the Home Loan and to execute and deliver the Debt Instrument and the related Mortgage, and the Debt Instrument and the related Mortgage have been duly and properly executed by such parties; (x) As of the applicable Cut-Off Date, the proceeds of the Home Loan have been fully disbursed and there is no requirement for future advances thereunder, and any and all applicable requirements set forth in the Home Loan documents have been complied with; the Obligor is not entitled to any refund of any amounts paid or due under the Debt Instrument or the related Mortgage; (xi) Immediately prior to the sale, transfer and assignment to the Depositor, Mego will have good and indefeasible legal title to the Home Loan, the related Debt Instrument and the related Mortgage and the full right to transfer such Home Loan, the related Debt Instrument and the related Mortgage, and Mego will have been the sole owner thereof, subject to no liens, pledges, charges, mortgages, encumbrances or rights of others, except for such liens as will be released simultaneously with the transfer and assignment of the Home Loans to the Depositor (and the Home Loan File will contain no evidence inconsistent with the foregoing); and immediately upon the sale, transfer and assignment contemplated by the Home Loan Purchase Agreement, the Depositor will hold good title to, and be the sole owner of each Home Loan, the related Debt Instrument and the related Mortgage, free of all liens, pledges, charges, mortgages, encumbrances or rights of others; (xii) Except for those Home Loans referred to in Section 3.03(b)(ii) above that are delinquent as of the Closing Date, there is no default, breach, violation or event of acceleration existing under the Home Loan, the related Debt Instrument and the related Mortgage and there is no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration and neither Mego nor its predecessors have waived any default, breach, violation or event of acceleration; (xiii) The Debt Instrument and the related Mortgage contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Property of the benefits of the security provided thereby, including, (A) in the case of any Mortgage designated as a deed of trust, by trustee's sale, and (B) otherwise by judicial foreclosure; 39 44 (xiv) Each Home Loan is a fixed rate loan; the Debt Instrument shall mature within not more than 25 years, from the date of origination of the Home Loan; the Debt Instrument is payable in substantially equal Monthly Payments, with interest payable in arrears, and requires a Monthly Payment which is sufficient to fully amortize the original principal balance over the original term and to pay interest at the related Home Loan Interest Rate; interest on each Home Loan is calculated on the basis of a 360 day year consisting of twelve 30-day months, and the Debt Instrument does not provide for any extension of the original term; (xv) The related Debt Instrument is not and has not been secured by any collateral except the lien of the corresponding Mortgage; (xvi) With respect to any Mortgage Loan, if the related Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, or a valid substitution of trustee has been recorded, and no extraordinary fees or expenses are or will become payable to the trustee under the deed of trust, except in connection with default proceedings and a trustee's sale after default by the Obligor; (xvii) Mego has no knowledge of any circumstances or conditions not reflected in the representations set forth herein, or in the Home Loan Schedule, or in the related Home Loan File with respect to the related Mortgage, the related Property or the Obligor which could reasonably be expected to materially and adversely affect the value of the related Property, or the marketability of the Mortgage Loan or to cause the Mortgage Loan to become delinquent or otherwise in default; (xviii) Assuming no material change to the applicable law or regulations in effect as of the Closing Date, after the consummation of the transactions contemplated by this Agreement, the Master Servicer on behalf of the Trust and the Indenture Trustee will have the ability to foreclose or otherwise realize upon a Property, if the Home Loan is a Mortgage Loan, or to enforce the provisions of the related Home Loan against the Obligor thereunder, if the foreclosure upon any such Property or enforcement of the provisions of the related Home Loan against the Obligor are undertaken as set forth in Section 4.12; (xix) There exists a Home Loan File relating to each Home Loan and such Home Loan File contains all of the original or certified documentation listed in Section 2.05 for such Home Loan, subject to applicable grace periods set forth in Section 2.06(c). Each Indenture Trustee's Home Loan File has been delivered to the Indenture Trustee and each Servicer's Home Loan File is being held in trust by Mego for the benefit of, and as agent for, the Indenture Trustee, the Securityholders and the Owner Trustee as the owner thereof. Each document included in the Home Loan File which is required to be executed by the Obligor has been executed by the Obligor in the appropriate places. With respect to each Mortgage Loan, the related Assignment of Mortgage to the Indenture 40 45 Trustee is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Property is located. All blanks on any form required to be completed have been so completed; (xx) Each Property is improved by a residential dwelling and is not a Home Loan in respect of a manufactured home or mobile home or the land on which a manufactured home or mobile home has been placed; (xxi) Each Mortgage Loan was originated by Mego in accordance with Mego's "Express 35/Swift 60 Loan Program", "Debt Consolidation 125 Loan Program", "Renovator 125 Loan Program" and "Zero Equity Loan Program" underwriting guidelines, as applicable, attached hereto as Exhibit D; (xxii) If the Property securing any Mortgage Loan is in an area identified by the Federal Emergency Management Agency ("FEMA") as having special flood hazards, unless the community in which the area is situated is participating in the National Flood Insurance Program and the regulations thereunder or less than a year has passed since FEMA notification regarding such hazards, a flood insurance policy is in effect with respect to such Property with a generally acceptable carrier which complies with Section 102(a) of the Flood Disaster Protection Act of 1973; all improvements upon each Property are insured by a generally acceptable insurer against loss by fire hazards of extended coverage and such other hazards as are customary in the area where the Property is located pursuant to insurance policies conforming to the requirements of the Agreement; all such policies contain a standard mortgage clause naming Mego, its successors and assigns, as loss payee; (xxiii) All costs, fees and expenses incurred in originating and closing the Home Loan and in recording the related Mortgage were paid and the Obligor is not entitled to any refund of any amounts, paid or due to the Obligee pursuant to the Debt Instrument or any related Mortgage; (xxiv) There is no obligation on the part of Mego or any other party other than the Obligor to make payments with respect to the Home Loan; (xxv) At the time of origination of the Home Loan, each related prior lien, if any, was not 30 or more days delinquent; (xxvi) With respect to each Mortgage Loan, the related Mortgage contains an enforceable provision requiring the consent of the Mortgagee to assumption of the related Mortgage Loan upon sale of the Property; (xxvii) With respect to any Mortgage Loan, there is no homestead or other exemption available to the Mortgagor which would materially interfere with the right to 41 46 sell the related Property at a trustee's sale or the right to foreclose the Mortgage; no relief has been requested or allowed to the Mortgagor under the Civil Relief Act; (xxviii) The related Home Loan File for each Home Loan contains a title document with respect to such Home Loan reflecting that title to the related Property is vested at least 50% in the Obligor under such Home Loan; (xxix) Each Property (including each residential dwelling improvement thereon) is free of damage which materially and adversely affects the value thereof; (xxx) Each Home Loan was originated in compliance with all applicable laws and, to the best of Mego's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith; (xxxi) Each Home Loan has been serviced in accordance with all applicable laws and, to the best of Mego's knowledge, no fraud or misrepresentation was committed by any Person in connection therewith; (xxxii) The transfer, assignment and conveyance of the Debt Instruments and the Mortgages by Mego to the Depositor were not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction; (xxxiii) Any Home Loan originated in the State of Texas, was originated pursuant to either Chapter 3 or Chapter 6 of the Texas Consumer Credit Code; (xxxiv) As of the applicable Cut-Off Date, no Obligor is a debtor under proceedings under the Bankruptcy Code, and no such Obligor has defaulted in payments on a Home Loan after the filing of such bankruptcy case, whether under a plan or reorganization or otherwise; (xxxv) Mego has not advanced funds, or induced, solicited or knowingly received any advance of loan payments from a party other than, with respect to a Mortgage Loan, the owner of the Property subject to the Mortgage; (xxxvi) Mego originated the Home Loans through its network of dealers and correspondents; (xxxvii) Each Home Loan conforms, and all such Home Loans in the aggregate conform, to the description thereof set forth in the Prospectus Supplement; (xxxviii) Each Home Loan either complies with the Home Ownership and Equity Protection Act of 1994 or is not subject to such act; 42 47 (xxxix) Mego has caused to be performed or shall cause to be performed within 15 Business Days of the Closing Date any and all acts required to preserve the rights and remedies of the Trust and the Indenture Trustee in any insurance policies applicable to each Home Loan, including, without limitation, any necessary notifications of insurers, assignments of policies or interests therein, and establishment of coinsured, joint loss payee and mortgagee rights in favor of the Indenture Trustee; (xl) To Mego's best knowledge, there exists no violation of any environmental law (either local, state or federal), rule or regulation in respect of the Property which violation has or could have a material adverse effect on the market value of such Property. Mego has no knowledge of any pending action or proceeding directly involving the related Property in which compliance with any environmental law, rule or regulation is in issue; and, to Mego's best knowledge, nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to the use and enjoyment of such Property; (xli) None of the Mortgage Loans is secured by Mortgages on non-owner occupied Mortgaged Properties; (xlii) On the Closing Date, 55% or more (by aggregate Principal Balance) of the Home Loans do not constitute "real estate mortgages" for the purpose of Treasury Regulation Section301.7701 under the Code. For this purpose a Home Loan does not constitute a "real estate mortgage" if: (i) The Home Loan is not secured by an interest in real property, or (ii) The Home Loan is not an "obligation principally secured by an interest in real property." For this purpose an "obligation is principally secured by an interest in real property" if it satisfies either test set out in paragraph (1) or paragraph (2) below. (1) The 80-percent test. An obligation is principally secured by an interest in real property if the fair market value of the interest in real property securing the obligation (A) was at least equal to 80 percent of the adjusted issue price of the obligation at the time the obligation was originated (or, if later, the time the obligation was significantly modified); or (B) is at least equal to 80 percent of the adjusted issue price of the obligation on the Closing Date. For purposes of this paragraph (1), the fair market value of the real property interest must be first reduced by the amount of any lien on the real property interest that is senior to the obligation being tested, and must 43 48 be further reduced by a proportionate amount of any lien that is in parity with the obligation being tested, in each case before the percentages set forth in (1)(A) and (1)(B) are determined. The adjusted issue price of an obligation is its issue price plus the amount of accrued original issue discount, if any, as of the date of determination. (2) Alternative test. An obligation is principally secured by an interest in real property if substantially all of the proceeds of the obligation were used to acquire or to improve or protect an interest in real property that, at the origination date, is the only security for the obligation. For purposes of this test, loan guarantees made by the United States or any state (or any political subdivision, agency, or instrumentality of the United States or of any state), or other third party credit enhancement are not viewed as additional security for a loan. An obligation is not considered to be secured by property other than real property solely because the obligor is personally liable on the obligation. For this purpose only, substantially all of the proceeds of the obligations means 662/3% or more of the gross proceeds. (xliii) With respect to each Home Loan that is not a first mortgage loan, either (i) no consent for the Home Loan is required by the holder of the related prior lien or (ii) such consent has been obtained and has been delivered to the Indenture Trustee; (xliv) No Home Loan was selected from Mego's assets in a manner which would cause it to be adversely selected as to credit risk from the pool of home loans owned by Mego. Section 3.04 [Reserved]. Section 3.05 Purchase and Substitution. (a) It is understood and agreed that the representations and warranties set forth in Sections 3.03 shall survive the conveyance of the Home Loans to the Issuer, the Grant of the Home Loans to the Indenture Trustee and the delivery of the Securities to the Securityholders and shall be continuing as long as any Security is outstanding. Upon discovery by the Depositor, the Master Servicer, the Seller, the Owner Trustee, the Indenture Trustee or any Securityholder of a breach of any of such representations and warranties made pursuant to Section 3.03(b), the party discovering such breach shall give prompt written notice to the others. In the event of a determination in Section 2.06(c) or a breach of a representation and warranty made pursuant to Section 3.03(b) that materially and adversely affects the value of the Home Loans or the interest of the Securityholders, or which materially and adversely affects the interests of the Securityholders in the related Home Loan in the case of a representation and warranty relating to a particular Home Loan (notwithstanding that such representation and warranty was made to 44 49 the Seller's best knowledge), and a failure within sixty Business Days of discovery or receipt of notice of such failure to effect a cure of the circumstances giving rise to such defect, Mego shall be obligated, on the Monthly Cut-Off Date next succeeding the expiration of such sixty-day period, to repurchase (or substitute for, to the extent permitted by subsection (b) below) the affected Home Loan. It is understood and agreed that the obligation of Mego to repurchase or substitute any such Home Loan pursuant to this Section shall constitute the sole remedy against it with respect to such breach of the foregoing representations or warranties or the existence of the foregoing conditions. With respect to representations and warranties made by Mego pursuant to Section 3.03(b) that are made to Mego's best knowledge, if it is discovered by any of the Depositor, the Master Servicer, the Seller, Mego, the Indenture Trustee, the Owner Trustee, or any Securityholder that the substance of such representation and warranty is inaccurate and such inaccuracy materially and adversely affects the value of the related Home Loan, notwithstanding Mego's lack of knowledge, such inaccuracy shall be deemed a breach of the applicable representation and warranty. If Mego is required to repurchase any Home Loan on a Monthly Cut-Off Date that is not a Business Day, such repurchase shall be made on the last Business Day preceding such Monthly Cut-Off Date. Any Home Loan required to be purchased or repurchased pursuant to this Section 3.05(a) is referred to as a "Defective Home Loan". (b) Mego shall be obligated to repurchase a Defective Home Loan for the Purchase Price, payable to the Indenture Trustee in cash on the Monthly Cut-Off Date specified in Section 3.05(a) above, for deposit in the Note Distribution Account. Notwithstanding the foregoing, Mego may elect in lieu of the repurchase of a Defective Home Loan as provided in this Section 3.05, to substitute, as of the Monthly Cut-off Date specified in Section 3.05(a), a Qualified Substitute Home Loan for the Defective Home Loan in accordance with the provisions of this Section 3.05. (c) Mego shall notify the Master Servicer, and the Indenture Trustee in writing not less than five Business Days before the related Determination Date which is on or before the date on which Mego would otherwise be required to repurchase such Home Loan pursuant to Section 3.05(a) of its intention to effect a substitution under this Section. On such Determination Date (the "Substitution Date"), Mego shall deliver to the Indenture Trustee a list of the Home Loans to be substituted for by such Qualified Substitute Home Loans, and attaching as an exhibit a supplemental Home Loan Schedule (the "Supplemental Loan Schedule") setting forth the same type of information appearing on the Home Loan Schedule and representing as to the accuracy thereof. In connection with any substitution pursuant to this Section 3.05, to the extent that the aggregate Principal Balance of any Qualified Substitute Home Loan or Home Loans is less than the aggregate Principal Balance of the corresponding Home Loan or Home Loans as of the end of the Due Period prior to the Determination Date on which the substitution is being made, Mego shall deposit such difference (a "Substitution Adjustment Amount") to the Note Distribution Account on such date. 45 50 (d) Concurrently with the satisfaction of the conditions set forth in this Section 3.05 and the Grant of such Qualified Substitute Home Loans to the Indenture Trustee pursuant to the Indenture, Exhibit A to this Agreement shall be deemed to be amended to exclude all Home Loans being replaced by such Qualified Substitute Home Loans and to include the information set forth on the Supplemental Loan Schedule with respect to such Qualified Substitute Home Loans, and all references in this Agreement to Home Loans shall include such Qualified Substitute Home Loans and be deemed to be made on or after the related Substitution Date, as the case may be, as to such Qualified Substitute Home Loans. (e) With respect to all Defective Home Loans or other Home Loans repurchased by Mego pursuant to this Agreement, upon the deposit of the Purchase Price therefor to the Note Distribution Account, the Indenture Trustee shall assign to Mego, without recourse, representation or warranty, all the Indenture Trustee's right, title and interest in and to such Defective Home Loans or Home Loans, which right, title and interest were conveyed to the Indenture Trustee pursuant to Section 2.01. The Indenture Trustee shall take any actions as shall be reasonably requested by Mego to effect the repurchase of any such Home Loans. (f) The Servicer may, at its option, purchase from the Trust any Defaulted Home Loan or substitute a Qualified Substitute Home Loan for any Defaulted Home Loan, provided, however, that the aggregate of Principal Balances of Defaulted Home Loans purchased or replaced pursuant to this Section 3.05(f) shall not exceed 10% of the Original Pool Principal Balance. If the Servicer elects to purchase a Defaulted Home Loan, the Servicer shall deposit the Purchase Price in the Note Distribution Account on the Monthly Cut-Off Date following the date on which such election is made. Any substitution of a Defaulted Home Loan for a Qualified Substitute Home Loan by the Servicer shall be performed in accordance with the substitution provisions set forth in Section 3.05(c) and Section 3.05(d). 46 51 ARTICLE IV. ADMINISTRATION AND SERVICING OF HOME LOANS Section 4.01 Servicing Standard. (a) The Master Servicer is hereby authorized to act as agent for the Trust and in such capacity shall manage, service, administer and make collections on the Home Loans, and perform the other actions required by the Master Servicer under this Agreement. In performing its obligations hereunder the Master Servicer shall at all times act in good faith in a commercially reasonable manner and in accordance with applicable law and the Debt Instruments and Mortgages. The Master Servicer shall have full power and authority, acting alone and/or through the Servicer as provided in Section 4.02, subject only to this Agreement and the respective Home Loans, to do any and all things in connection with such servicing and administration which are consistent with the ordinary practices of prudent mortgage lending institutions, but without regard to: (i) any relationship that the Master Servicer, the Servicer or any affiliate of the Master Servicer or any Servicer may have with the related Obligor: (ii) Mego's obligations to repurchase or substitute for a Defective Home Loan pursuant to Section 3.05; (iii) the ownership of any Securities by the Master Servicer or any affiliate of the Master Servicer; (iv) the Master Servicer's obligation to make Interest Advances pursuant to Section 4.08(a) or to make Foreclosure Advances pursuant to Section 4.08(b); or (v) the Master Servicer's right to receive compensation for its services as provided in Section 5.01(c)(i)(a). The Master Servicer may take any action hereunder, including exercising any remedy under any Home Loan, retaining counsel in connection with the performance of any of its obligations hereunder and instigating litigation to enforce any obligation of any Obligor, without the consent or approval of the Indenture Trustee, unless any such consent or approval is expressly required hereunder or under applicable law. (b) The Indenture Trustee shall execute and return to the Master Servicer or the Servicer designated in a written instruction from the Master Servicer to the Indenture Trustee, within 5 days of the Indenture Trustee's receipt any and all documents or instruments necessary to maintain the lien created by any Mortgage on the related Property or any portion thereof, and, within 5 days of request by the Master Servicer or the Servicer therefor a power of attorney in 47 52 favor of the Master Servicer or Servicer with respect to any modification, waiver, or amendment to any document contained in any Home Loan File and 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 Home Loans and with respect to the related Mortgaged Properties prepared and delivered to the Indenture Trustee by the Master Servicer or any Servicer, all in accordance with the terms of this Agreement. (c) The Indenture Trustee shall furnish the Master Servicer or Servicer within 5 days of request of a Master Servicing Officer therefor any powers of attorney and other documents necessary and appropriate to carry out its servicing and administrative duties hereunder, including any documents or powers of attorney necessary to foreclose any Home Loan. The forms of any such powers or documents shall be appended to such requests. Section 4.02 Servicing Arrangements. (a) On or prior to the date hereof, the Master Servicer has entered into a Servicing Agreement with respect to all of the Home Loans, in substantially the form of the Form of the Servicing Agreement attached hereto as Exhibit E with Mego, as Servicer. Upon the termination of the Servicing Agreement, the Master Servicer may only appoint or consent to the appointment or succession of a successor Servicer under the Servicing Agreement and may only enter into a substitute servicing agreement which is in form and substance as the Servicing Agreement attached hereto as Exhibit E and with a Person acceptable to the Indenture Trustee. The Master Servicer shall not consent to any material amendment, modification or waiver of the provisions of a Servicing Agreement without the consent of the Indenture Trustee. (b) No provision of this Agreement or the Servicing Agreement shall be deemed to relieve the Master Servicer of any of its duties and obligations to the Indenture Trustee on behalf of Securityholders with respect to the servicing and administration of the Home Loans as provided hereunder; it being understood that the Master Servicer shall be obligated with respect thereto to the same extent and under the same terms and conditions as if it alone were performing all duties and obligations set forth in this Agreement in connection with the collection, servicing and administration of such Home Loans. (c) Without limitation of the provisions of Section 4.02(b), the Master Servicer shall (i) review the servicing reports prepared by the Servicer in order to ensure the accuracy thereof, (ii) otherwise monitor the performance by the Servicer under the Servicing Agreement and notify the Indenture Trustee of any Servicer Termination Event, and (iii) be obligated to ensure that the Servicer deposits Payments into the Collection Account. In the event the Servicer fails to make such deposit, the Master Servicer will deposit such amounts as set forth in Section 5.01(a)(1). (d) The Master Servicer agrees that it shall at all times be prepared to perform the obligations of the Servicer if the Servicer fails to perform its duties and obligations under the Servicing Agreement. 48 53 (e) The Servicing Agreement may provide that the Servicer may retain, as additional compensation, prepayment penalties, assumption and processing fees paid by any Obligor and all similar fees customarily associated with the servicing of the Home Loans, including, but not limited to late charges, paid by any Obligor. (f) Mego, as Servicer, shall provide information to the Master Servicer monthly in a mutually agreeable format in order to enable the Master Servicer to independently reconfirm the loan-by-loan reconciliation of the outstanding Principal Balance of each Home Loan included in such information. The Master Servicer shall prepare exception reports, if necessary, showing all Principal Balance differences between the information provided by the Servicer and the confirmations prepared by the Master Servicer and shall furnish such reports to the Indenture Trustee. Section 4.03 Servicing Record. (a) The Master Servicer shall establish and maintain books and records for the Home Loans (the "Servicing Record"), in which the Master Servicer shall record: (i) all Payments received or collected by or on behalf of the Master Servicer (through the Servicer or otherwise) or received by the Indenture Trustee in respect of each Home Loan and each Foreclosed Property and (ii) all amounts owing to the Master Servicer in compensation for services rendered by the Master Servicer hereunder or in reimbursement of costs and expenses incurred by the Master Servicer hereunder. (b) Except as otherwise provided herein, amounts received or collected by or on behalf of the Master Servicer or the Indenture Trustee from or on behalf of any Obligor or in respect of any Foreclosed Property shall be credited to the Servicing Record: (i) promptly following direct receipt or direct collection by the Master Servicer; (ii) in the case of a Home Loan directly serviced by a Servicer, promptly following deposit of the receipt or collection in the related Collection Account; or (iii) in the case of any amount received directly by the Indenture Trustee, promptly following the Master Servicer's actual knowledge of receipt by the Indenture Trustee; but in any event not later than the Determination Date next following the date of receipt or collection by or on behalf of the Master Servicer (through the Servicer or otherwise) or receipt by the Indenture Trustee. Amounts received or collected by the Master Servicer in connection with the purchase or repurchase of any Home Loan or any Foreclosed Property shall be so recorded on and as of the date of receipt. The Servicing Record shall separately reflect amounts so received or collected by the Master Servicer in each Due Period. 49 54 (c) The Master Servicer shall credit to the Servicing Record relating to each Determination Date, on a Home Loan-by-Home Loan basis, each of the following Payments collected or received by or on behalf of the Master Servicer (through the Servicer or otherwise) or received by the Indenture Trustee in respect of each Home Loan and each Foreclosed Property: (i) all payments on account of principal; (ii) all payments on account of interest; (iii) all proceeds of the purchase or repurchase of any Home Loan pursuant to Section 3.05 and all Substitution Adjustment Amounts; (iv) all amounts paid by or on behalf of the related Obligor in respect of Foreclosure Advances previously advanced by the Master Servicer or the Servicer; (v) all revenues received or collected in respect of any Foreclosed Property, including all proceeds of the sale of any Foreclosed Property pursuant to Section 4.13; (vi) all proceeds of the sale of the Home Loans and any Foreclosed Properties pursuant to Section 11.01; and (vii) all Insurance Proceeds, any condemnation awards or settlements or any payments made by any related guarantor or third-party credit-support provider and any and all other amounts received in respect of Home Loans and not specified above. (d) Notwithstanding anything to the contrary herein, the Master Servicer shall not be required to credit to the Servicing Record, and neither the Master Servicer nor any Securityholder shall have any right or interest in any amount due or received with respect to any Home Loan or any related Foreclosed Property subsequent to the date of purchase of such Home Loan or Foreclosed Property from the Trust. (e) The Master Servicer shall separately record in the Servicing Record the items required to be included in the Master Servicer Certificate and additionally the following items to the extent not included therein: (i) on or before each Determination Date, the related unpaid Master Servicer Fee due the Master Servicer on the next Distribution Date; (ii) on or before each Determination Date, all amounts retained by the Servicer in respect of the preceding Due Period in respect of amounts due Independent Contractors hired by the Master Servicer to operate and manage a Foreclosed Property pursuant to Section 4.14(b); 50 55 (iii) on or before each Determination Date, the amount of unreimbursed Interest Advances in respect of prior Distribution Dates and the amount which the Master Servicer or the Servicer is entitled to be reimbursed therefor in accordance with Section 4.08; (iv) on or before each Determination Date, all amounts due as of the preceding Monthly Cut-Off Date in reimbursement of Foreclosure Advances previously advanced by the Master Servicer or the Servicer (separately identifying the type and amount of each then due); (v) on or before each Determination Date and based on information provided to the Master Servicer by the Indenture Trustee, all Other Fees distributable pursuant to Section 5.01(c)(iii)(d) on the next succeeding Distribution Date; (vi) promptly following each Distribution Date, the aggregate amount of the Master Servicer Fee, Servicer Fee and the Indenture Trustee Fee paid to the Master Servicer, Servicer and Indenture Trustee respectively, on such Distribution Date pursuant to Section 5.01(c)(i)(a) and the aggregate amount of the Owner Trustee Fee Reserve paid to the Servicer, on such Distribution Date pursuant to Section 5.01(c)(i)(c); (vii) promptly following each Distribution Date, the aggregate amount of Interest Advances and Foreclosure Advances reimbursed to the Master Servicer or the Servicer on such Distribution Date; (viii) on or before each Determination Date, the Principal Balance of Home Loans that became Defaulted Home Loans during the prior Due Period; (ix) on or before each Determination Date, identification by loan number, Obligor name, address of Property and Principal Balance of such Home Loan with respect to which the Master Servicer has requested that the Indenture Trustee obtain the environmental report required by Section 4.12 in connection with deciding pursuant to Section 4.12 to foreclose on or otherwise acquire title to the related Property; (x) on or before each Determination Date, the Principal Balance of each such Home Loan with respect to which the Master Servicer has determined under the circumstances described in Section 4.12(a) in good faith in accordance with customary mortgage loan servicing practices that all amounts which it expects to receive with respect to such Home Loan have been received; and (xi) on or before each Determination Date, any other information with respect to the Home Loans reasonably required by the Indenture Trustee to determine the amount required to be distributed pursuant to Section 5.01(c) and determinable by the Master Servicer without undue burden from the Servicer or the items otherwise required to be maintained in each Servicing Record. 51 56 Section 4.04 Annual Statement as to Compliance; Notice of Event of Default. (a) The Master Servicer will deliver to the Indenture Trustee and the Depositor on or before May 31 of each year, beginning in 1998 an Officer's Certificate signed by two Responsible Officers of the Master Servicer stating with respect to the Trust, that: (i) a review of the activities of the Master Servicer during the preceding calendar year (or in connection with the first such Officer's Certificate the period from the Closing Date through the end of 1997) and of the Master Servicer's performance under this Agreement with respect to such Trust has been made under the supervision of the signer of such Officer's Certificate; and (ii) to the best of such signer's knowledge, based on such review, the Master Servicer has fulfilled all its obligations under this Agreement throughout such year (or such portion of such year), or there has been a default in the fulfillment of any such obligation, in which case such Officer's Certificate shall specify each such default known to such signer and the nature and status thereof and what action the Master Servicer proposes to take with respect thereto. (b) The Master Servicer shall deliver to the Indenture Trustee and the Depositor, promptly after having obtained knowledge thereof, but in no event later than 2 Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 10.01. Each of Mego, the Depositor, the Indenture Trustee, the Owner Trustee and the Master Servicer shall deliver to the other of such Persons promptly after having obtained knowledge thereof, but in no event later than 2 Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become an Event of Default under Section 10.01. Section 4.05 Annual Independent Accountants' Report; Servicer Review Report. (a) The Master Servicer shall cause a firm of Independent Accountants, who may also render other services to the Master Servicer, to deliver to the Indenture Trustee, Owner Trustee and the Depositor on or before May 31 (or 150 days after the end of the Master Servicer's fiscal year) of each year, beginning on the first May 31 (or other applicable date) after the date that is six months after the Closing Date, with respect to the twelve months ended the immediately preceding December 31 (or other applicable date) (or such other period as shall have elapsed from the Closing Date to the date of such certificate) a report, conducted in accordance with generally accepted accounting principles (the "Accountant's Report") including: (i) an opinion on the financial position of the Master Servicer at the end of its most recent fiscal year, and the results of operations and changes in financial position of the Master Servicer for such year then ended on the basis of an examination conducted in accordance with generally accepted auditing standards, and (ii) a statement to the effect that, based on an examination of certain specified documents and records relating to the servicing of the Master Servicer's mortgage loan portfolio 52 57 or the affiliate of the Master Servicer principally engaged in the servicing of mortgage loans conducted in compliance with the audit program for mortgages serviced for FNMA, the United States Department of Housing and Urban Development Mortgagee Audit Standards or the Uniform Single Attestation Program for Mortgage Bankers (the "Applicable Accounting Standards") such firm is of the opinion that such servicing has been conducted in compliance with the Applicable Accounting Standards except for such exceptions as such firm shall believe to be immaterial and such other exceptions as shall be set forth in such statement. (b) In addition, the Master Servicer will provide a report of a firm of Independent Accountants which shall state that (1) a review in accordance with agreed upon procedures was made of such number of Master Servicer Certificates which the Independent Accountants deem necessary to carry out their review of Master Servicer performance, but in no case less than two and (2) except as disclosed in the Accountant's Report, no exceptions or errors in the Master Servicer Certificates so examined were found. The Accountant's Report shall also indicate that the firm is independent of the Master Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. (c) The Master Servicer shall mail a copy of the Servicer Review Report and any report or statement of the Servicer prepared pursuant to Section 6.04 of the Servicing Agreement to the Indenture Trustee. (d) (1) The Master Servicer shall cause a firm of Independent Accountants to review, annually within 90 days after each anniversary of the Closing Date, in accordance with agreed upon procedures the performance of the Servicer under the Servicing Agreement in order to confirm that the records of the Servicer accurately reflect collections, delinquencies and other relevant data with respect to the Home Loans reported to the Master Servicer for the purpose of preparation of the Servicing Record, and that such data is accurately reported to the Master Servicer for reflection in the Servicing Record. Any exceptions or errors disclosed by such procedures shall be included in a report delivered to the Master Servicer, the Indenture Trustee, Owner Trustee and the Depositor (the "Servicer Review Report"). Section 4.06 Access to Certain Documentation and Information Regarding Home Loans. The Master Servicer shall provide to representatives of the Indenture Trustee reasonable access to (a) the documentation regarding the Home Loans and to those employees of the Master Servicer who are responsible for the performance of the Master Servicer's duties hereunder and (b) the books of account, records, reports and other papers of the Master Servicer and to discuss its affairs, finances and accounts with its employees and Independent accountants for the purpose of reviewing or evaluating the financial condition of the Master Servicer. The Master Servicer shall provide such access to any Securityholder only in such cases where the Master Servicer is required by applicable statutes or regulations (whether applicable to the Master Servicer or to such Securityholder) to permit such Securityholder to review such documentation. In each case, such access shall be afforded without charge but only upon reasonable request and during normal business hours. Nothing in this Section shall derogate from the obligation of the Master Servicer 53 58 to observe any applicable law prohibiting disclosure of information regarding the Obligors, and the failure of the Master Servicer to provide access as provided in this Section as a result of such obligation shall not constitute a breach of this Section. Any Securityholder, by its acceptance of a Security (or by acquisition of its beneficial interest therein), shall be deemed to have agreed to keep confidential and not to use for its own benefit any information obtained by it pursuant to this Section, except as may be required by applicable law or by any applicable regulatory authority. Section 4.07 [Reserved] Section 4.08 Advances. (a) With respect to the Home Loans (other than Defaulted Home Loans) and each Distribution Date, the Master Servicer shall advance from its own funds and deposit into the Note Distribution Account or from funds on deposit in the related Collection Account in respect of amounts available for distribution on future Distribution Dates, no later than the related Determination Date, the excess, if any, of (i) the aggregate of the portions of the Monthly Payments due with respect to all Home Loans in the related Due Period allocable to interest (calculated at a rate equal to the Net Loan Rate) over (ii) the aggregate amount to be deposited into the Note Distribution Account with respect to all Home Loans and such Distribution Date and allocated in accordance with Section 4.03(c) to interest (such amounts, "Interest Advances"). Any funds so applied from funds on deposit in the Collection Account in respect of amounts available for distribution on future Distribution Dates shall be reimbursed by the Master Servicer on or before any future Distribution Date to the extent that funds on deposit in the Note Distribution Account applied in the order of priority set forth in such Section 5.01(c) would be less than the amount required to be distributed pursuant to Section 5.01(c) on such dates as a result of such Interest Advances. Notwithstanding anything herein to the contrary, no Interest Advance shall be required to be made hereunder (i) if the Master Servicer determines that such Interest Advance would, if made, constitute a Nonrecoverable Advance or (ii) with respect to shortfalls in interest resulting from application of the Soldiers' and Sailors' Relief Act or from full or partial prepayments of any Loan. (b) The Master Servicer shall advance from its own funds the following amounts in respect of any Mortgage Loan or Foreclosed Property, as applicable (collectively, "Foreclosure Advances"): (i) all third party costs and expenses (including legal fees and costs and expenses relating to bankruptcy or insolvency proceedings in respect of any Obligor) associated with the institution of foreclosure or other similar proceedings in respect of any Home Loan pursuant to Section 4.12; 54 59 (ii) all insurance premiums due and payable in respect of each Foreclosed Property, prior to the date on which the related Insurance Policy would otherwise be terminated; (iii) all real estate taxes and assessments in respect of each Foreclosed Property that have resulted in the imposition of a lien thereon, other than amounts that are due but not yet delinquent; (iv) all costs and expenses necessary to maintain each Foreclosed Property; (v) all fees and expenses payable to any Independent Contractor hired to operate and manage a Foreclosed Property pursuant to Section 4.14(b); and (vi) all fees and expenses of any Independent appraiser or other real estate expert retained by the Indenture Trustee pursuant to Section 4.13(a). The Master Servicer shall advance the Foreclosure Advances described in clauses (i) through (v) above if, but only if, it has approved the foreclosure or other similar proceeding in writing and the Master Servicer would make such an advance if it or an affiliate held the affected Mortgage Loan or Foreclosed Property for its own account and, in the Master Servicer's good faith judgment, such advance would not constitute a nonrecoverable advance. In making such assessment with respect to the institution of such proceedings, the Master Servicer shall not advance funds with respect to a Mortgage Loan unless the appraised value of the related Property exceeds the sum of (i) the amounts necessary to satisfy any liens prior to the liens on Mortgages securing such Mortgage Loan and (ii) the reasonably anticipated costs of foreclosure or similar proceedings. Section 4.09 Reimbursement of Interest Advances and Foreclosure Advances. (a) The Master Servicer shall be entitled to be reimbursed pursuant to Section 5.01(c) for previously unreimbursed Interest Advances made from its own funds or any such previously unreimbursed Interest Advance by the Servicer with respect to a Home Loan on Distribution Dates subsequent to the Distribution Date in respect of which such Interest Advance was made from Payments with respect to such Home Loan. If an Interest Advance shall become a Nonrecoverable Advance or if a Home Loan shall become a Defaulted Home Loan and the Master Servicer or Servicer shall not have been fully reimbursed for any such Interest Advances with respect to such Home Loan, the Master Servicer or Servicer, as applicable, shall be entitled to be reimbursed for the outstanding amount of such Interest Advances from unrelated Home Loans pursuant to Section 5.01(c)(i)(b). No interest shall be due to the Master Servicer in respect of any Interest Advance for any period prior to the reimbursement thereof. (b) The Master Servicer shall be entitled to be reimbursed pursuant to Section 5.01(c)(i)(b) from related Payments for Foreclosure Advances advanced on or prior to the related 55 60 Monthly Cut-Off Date but only to the extent the Master Servicer has satisfied the requirements of Section 4.08. No interest shall be due to the Master Servicer in respect of any Foreclosure Advance for any period prior to the reimbursement thereof. (c) The Indenture Trustee shall offset against amounts otherwise distributable to the Master Servicer pursuant to Section 5.01(c), amounts, if any, which were required to be deposited in any Collection Account pursuant to Section 5.01(c) with respect to the related Due Period but which were not so deposited. Section 4.10. Modifications, Waivers, Amendments and Consents. (a) The Master Servicer shall not agree to any modification, waiver or amendment of any provision of any Home Loan unless, in the Master Servicer's good faith judgment, (i) such modification, waiver or amendment would minimize the loss that might otherwise be experienced with respect to such Home Loan, and (ii) such Home Loan has experienced a payment default or a payment default is reasonably foreseeable by the Master Servicer. The Master Servicer may agree to subordinate the position of the security interest in the Property which secures any Mortgage Loan, provided such subordination (i) would permit the Obligor to refinance a senior lien to take advantage of a lower interest rate or (ii) would permit the Obligor to extend the term of the senior lien. Notwithstanding the foregoing, no modification, waiver or amendment of a Home Loan shall involve the execution by the Obligor of a new Debt Instrument or a new Mortgage. (b) The Master Servicer shall notify the Indenture Trustee of any modification, waiver or amendment of any provision of any Home Loan and the date thereof, and shall deliver to the Indenture Trustee for deposit in the related Home Loan File, an original counterpart of the agreement relating to such modification, waiver or amendment, promptly following the execution thereof. Such notice shall state that the conditions contained in this Section 4.10 have been satisfied. Section 4.11. Due-On-Sale; Due-on-Encumbrance. (a) If any Home Loan contains a provision, in the nature of a "due-on-sale" clause, which by its terms: (i) provides that such Home Loan shall (or may at the Obligee's option) become due and payable upon the sale or other transfer of an interest in the related Property; or (ii) provides that such Home Loan may not be assumed without the consent of the related Obligee in connection with any such sale or other transfer, then, for so long as such Home Loan is included in the Trust, the Master Servicer, on behalf of the Indenture Trustee, shall exercise any right the Trust or the Indenture Trustee may have as the 56 61 Obligee of record with respect to such Home Loan (x) to accelerate the payments thereon, or (y) to withhold its consent to any such sale or other transfer, in a manner consistent with the servicing standard set forth in Section 4.01. (b) If any Home Loan contains a provision, in the nature of a "due-on-encumbrance" clause, which by its terms: (i) provides that such Home Loan shall (or may at the Obligee's option) become due and payable upon the creation of any lien or other encumbrance on the related Property; or (ii) requires the consent of the related Obligee to the creation of any such lien or other encumbrance on the related Property, then, for so long as such Home Loan is included in the Trust, the Master Servicer, on behalf of the Trust or the Indenture Trustee, shall exercise any right the Indenture Trustee may have as the Obligee of record with respect to such Home Loan (x) to accelerate the payments thereon, or (y) to withhold its consent to the creation of any such lien or other encumbrance, in a manner consistent with the servicing standard set forth in Section 4.01. (c) Nothing in this Section 4.11 shall constitute a waiver of the Indenture Trustee's right to receive notice of any assumption of a Home Loan, any sale or other transfer of the related Property or the creation of any lien or other encumbrance with respect to such Property. (d) Except as otherwise permitted by Section 4.10, the Master Servicer shall not agree to modify, waive or amend any term of any Home Loan in connection with the taking of, or the failure to take, any action pursuant to this Section 4.11. Section 4.12. Collection Procedures; Foreclosure Procedures. (a) If any Monthly Payment due under any Home Loan is not paid when the same is due and payable, or if the Obligor fails to perform any other covenant or obligation under such Home Loan and such failure continues beyond any applicable grace period, the Master Servicer shall take such action as it shall deem to be in the best interest of the Trust; including but not limited to proceeding against the Property securing such Home Loan. In the event that the Master Servicer determines not to proceed against the Property, on or before the Determination Date following such determination the Master Servicer shall determine in good faith in accordance with customary servicing practices that all amounts which it expects to receive with respect to such Home Loan have been received. If the Master Servicer makes such a determination, it shall be reflected in the Servicing Record pursuant to Section 4.03(e)(xi). (b) In accordance with the criteria for proceeding against the Property set forth in Section 4.12(a), unless otherwise prohibited by applicable law or court or administrative order, the Master Servicer, on behalf of the Trust and the Indenture Trustee, may, at any time, institute 57 62 foreclosure proceedings, exercise any power of sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or title to the related Property, by operation of law or otherwise. The Master Servicer shall be permitted to institute foreclosure proceedings, repossess, exercise any power of sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or title to any Property, by operation of law or otherwise only in the event that in the Master Servicer's reasonable judgement such action is likely to result in a positive economic benefit to the Trust by creating net liquidation proceeds (after reimbursement of all amounts owed with respect to such Home Loan to the Master Servicer or the Servicer) and provided that, with respect to any Property, prior to taking title thereto, the Master Servicer has requested that the Indenture Trustee obtain, and the Indenture Trustee shall have obtained, an environmental review to be performed on such Property by a company with recognized expertise, the scope of which is limited to the review of public records and documents for information regarding whether such Property has on it, under it or is near, hazardous or toxic material or waste. If such review reveals that such Property has on it, under it or is near hazardous or toxic material or waste or reveals any other environmental problem, the Indenture Trustee shall provide a copy of the related report to the Master Servicer and title shall be taken to such Property only after obtaining the written consent of the Indenture Trustee. In connection with any foreclosure proceeding on a Mortgage Loan, the Master Servicer shall follow such practices and procedures in a manner which is consistent with the Master Servicer's procedure for foreclosure with respect to similar loans held in the Master Servicer's portfolio for its own account or, if there are no such loans, such loans serviced by the Master Servicer for others, giving due consideration to accepted servicing practices of prudent lending institutions. To the extent required by Section 4.08, the Master Servicer shall advance all necessary and proper Foreclosure Advances until final disposition of the Foreclosed Property and shall manage such Foreclosed Property pursuant to Section 4.14. If, in following such foreclosure procedures, title to the Foreclosed Property is acquired, the deed or certificate of sale shall be issued to the Co-Owner Trustee and the Indenture Trustee. Section 4.13. Sale of Foreclosed Properties. (a) The Master Servicer may offer to sell to any Person any Foreclosed Property, if and when the Master Servicer determines consistent with the Servicing Standard and that such a sale would be in the best interests of the Trust. The Master Servicer shall give the Indenture Trustee not less than five days' prior notice of its intention to sell any Foreclosed Property, and shall accept the highest bid received from any Person for any Foreclosed Property in an amount at least equal to the sum of: (i) the Principal Balance of the related foreclosed Home Loan, unreimbursed Foreclosure Advances plus the outstanding amount of any liens superior in priority, if any, to the lien of the foreclosed Home Loan; and 58 63 (ii) all unpaid interest accrued thereon at the related Home Loan Interest Rate through the date of sale. In the absence of any such bid, the Master Servicer shall accept the highest bid received from any Person that is determined to be a fair price for such Foreclosed Property by the Master Servicer, if the highest bidder is a Person that is Independent, or by an Independent appraiser retained by the Master Servicer, if the highest bidder is a Person that is not Independent. In the absence of any bid determined to be fair as aforesaid, the Master Servicer shall offer the affected Foreclosed Property for sale to any Person, other than an Interested Person, in a commercially reasonable manner for a period of not less than 10 or more than 30 days, and shall accept the highest cash bid received therefor in excess of the highest bid previously submitted. If no such bid is received, any Interested Person may resubmit its original bid, and the Master Servicer shall accept the highest outstanding cash bid, regardless of from whom received. No Interested Person shall be obligated to submit a bid to purchase any Foreclosed Property, and notwithstanding anything to the contrary herein, neither the Indenture Trustee, in its individual capacity, nor any of its affiliates may bid for or purchase any Foreclosed Property pursuant hereto. (b) In determining whether any bid constitutes a fair price for any Foreclosed Property the Master Servicer shall take into account, and any appraiser or other expert in real estate matters shall be instructed to take into account, as applicable, among other factors, the financial standing of any tenant of the Foreclosed Property, the physical condition of the Foreclosed Property, and the state of the local and national economies. (c) The Master Servicer shall act on behalf of the Indenture Trustee in negotiating and taking any other action necessary or appropriate in connection with the sale of any Foreclosed Property, including the collection of all amounts payable in connection therewith. Any sale of a Foreclosed Property shall be without recourse to the Indenture Trustee, the Master Servicer or the Trust, and if consummated in accordance with the terms of this Agreement, neither the Master Servicer nor the Indenture Trustee shall have any liability to any Securityholder with respect to the purchase price therefor accepted by the Master Servicer or the Indenture Trustee. Section 4.14. Management of Real Estate Owned. (a) If the Trust acquires any Foreclosed Property pursuant to Section 4.12, the Master Servicer shall have full power and authority, subject only to the specific requirements and prohibitions of this Agreement, to do any and all things in connection therewith as are consistent with the manner in which the Master Servicer manages and operates similar property owned by the Master Servicer or any of its affiliates, all on such terms and for such period as the Master Servicer deems to be in the best interests of Securityholders. (b) The Master Servicer may contract with any Person that is Independent (an "Independent Contractor") for the operation and management of any Foreclosed Property, provided that: 59 64 (i) the terms and conditions of any such contract may not be inconsistent herewith; (ii) any such contract shall require, or shall be administered to require, that the Independent Contractor remit all related Payments to the Master Servicer as soon as practicable, but in no event later than two Business Days following the receipt thereof by such Independent Contractor; (iii) none of the provisions of this Section 4.14(b) relating to any such contract or to actions taken through any such Independent Contractor shall be deemed to relieve the Master Servicer of any of its duties and obligations to the Indenture Trustee for the benefit of Securityholders with respect to the operation and management of any such Foreclosed Property; and (iv) the Master Servicer shall be obligated with respect thereto to the same extent as if it alone were performing all duties and obligations in connection with the operation and management of such Foreclosed Property. The Master Servicer shall be entitled to enter into any agreement with any Independent Contractor performing services for it related to its duties and obligations hereunder for indemnification of the Master Servicer by such Independent Contractor, and nothing in this Agreement shall be deemed to limit or modify such indemnification. The Master Servicer shall be solely liable for all fees owed by it to any such Independent Contractor, but shall be entitled to be reimbursed for all such fees advanced by it pursuant to Section 4.08(b)(v) in the manner provided in Section 4.09(b). Section 4.15. Inspections. The Master Servicer shall inspect or cause to be inspected each Property that secures any Home Loan at such times and in such manner as are consistent with the servicing standard set forth in Section 4.01. Section 4.16. Maintenance of Insurance. (a) The Master Servicer shall cause to be maintained for each Foreclosed Property acquired by the Trust such types and amounts of insurance coverage as the Master Servicer shall deem reasonable. The Master Servicer shall cause to be maintained for each Home Loan, fire and hazard insurance naming Mego as loss payee thereunder providing extended coverage in an amount which is at least equal to the least of (i) the maximum insurable value of the improvements securing such Home Loan from time to time, (ii) the combined principal balance owing on such Home Loan and any mortgage loan senior to such Home Loan and (iii) the minimum amount required to compensate for damage or loss on a replacement cost basis. In cases in which any Property securing a Home Loan is located in a federally designated flood area, the hazard insurance to be maintained for the related Home Loan shall include flood insurance 60 65 to the extent such flood insurance is available and the Master Servicer has determined such insurance to be necessary in accordance with accepted mortgage loan servicing standards for mortgage loans similar to the Mortgage Loans. All such flood insurance shall be in amounts equal to the least of (A) the maximum insurable value of the improvement securing such Home Loan, (B) the combined principal balance owing on such Home Loan and any mortgage loan senior to such Home Loan and (c) the maximum amount of insurance available to the lender under the National Flood Insurance Act of 1968, as amended. (b) Any amounts collected by the Master Servicer under any Insurance Policies, shall be paid over or applied by the Master Servicer as follows: (i) In the case of amounts received in respect of any Home Loan: (A) for the restoration or repair of the affected Property, in which event such amounts shall be released to the Obligor in accordance with the terms of the related Debt Instrument or to the extent not so used, (B) in reduction of the Principal Balance of the related Home Loan, in which event such amounts shall be credited to the Servicing Record, unless the related instruments require a different application, in which case such amounts shall be applied in the manner provided therein; and (ii) Subject to Section 4.14, in the case of amounts received in respect of any Foreclosed Property, for the restoration or repair of such Foreclosed Property, unless the Master Servicer determines, consistent with the servicing standard set forth in Section 4.01, that such restoration or repair is not in the best economic interest of the Trust, in which event such amounts shall be credited, as of the date of receipt, to the applicable Servicing Record, as a Payment received from the operation of such Foreclosed Property. Section 4.17. Release of Files. (a) If with respect to any Home Loan: (i) the outstanding Principal Balance of such Home Loan plus all interest accrued thereon shall have been paid; (ii) the Master Servicer, or the Servicer shall have received, in escrow, payment in full of such Home Loan in a manner customary for such purposes; (iii) such Home Loan has become a Defective Loan and has been repurchased or a Qualified Substitute Home Loan has been conveyed to the Trust pursuant to Section 3.05; 61 66 (iv) such Home Loan or the related Foreclosed Property has been sold in connection with the termination of the Trust pursuant to Section 11.01; or (v) the related Foreclosed Property has been sold pursuant to Section 4.13. In each such case, the Servicer shall deliver a certificate to the effect that the Servicer has complied with all of its obligations under the Servicing Agreement with respect to such Home Loan and requesting that the Indenture Trustee release to the Servicer the related Home Loan File, then the Indenture Trustee shall, within three Business Days or such shorter period as may be required by applicable law, release (unless such Home Loan File has previously been released), the related Home Loan File to the Servicer and execute and deliver such instruments of transfer or assignment, in each case without recourse, as shall be necessary to vest ownership of such Home Loan in the Servicer or such other Person as may be specified in such certificate, the forms of any such instrument to be appended to such certificate. (b) From time to time and as appropriate for the servicing or foreclosure of any Home Loan, the Indenture Trustee shall, upon request of the Servicer, release the related Home Loan File (or any requested portion thereof) to the Servicer. Such receipt shall obligate the Servicer, to return the Home Loan File (or such portion thereof) to the Indenture Trustee when the need therefor by the Servicer, no longer exists unless any of the conditions specified in subsection (a) above, is satisfied prior thereto. The Indenture Trustee shall release such receipt to the Servicer (i) upon the Servicer's return of such Home Loan File (or such portion thereof) to the Indenture Trustee or (ii) if any of the conditions specified in subsection (a) has been satisfied, and the Servicer has not yet returned such Home Loan File (or such portion thereof) to the Indenture Trustee, upon receipt of a certificate certifying that any of such condition has been satisfied. Section 4.18. Filing of Continuation Statements. On or before the fifth anniversary of the filing of any financing statements by Mego and the Depositor, respectively, with respect to the assets conveyed to the Trust, Mego and the Depositor shall prepare, have executed by the necessary parties and file in the proper jurisdictions all financing and continuation statements necessary to maintain the liens, security interests, and priorities of such liens and security interests that have been granted by Mego and the Depositor, respectively, and Mego and the Depositor shall continue to file on or before each fifth anniversary of the filing of any financing and continuation statements such additional financing and continuation statements until the Trust has terminated pursuant to Section 9.1 of the Trust Agreement. The Indenture Trustee agrees to cooperate with Mego and the Depositor in preparing, executing and filing such statements. The Indenture Trustee agrees to notify Mego and the Depositor on the third Distribution Date prior to each such fifth anniversary of the requirement to file such financing and continuation statements. The filing of any such statement with respect to Mego and the Depositor shall not be construed as any indication of an intent of any party contrary to the expressed intent set forth in Section 2.04 hereof. If Mego or the Depositor has ceased to do business whenever any such financing and continuation statements must be filed or 62 67 Mego or the Depositor fails to file any such financing statements or continuation statements at least one month prior to the expiration thereof, the Indenture Trustee shall perform the services required under this Section 4.18. Section 4.19. Fidelity Bond. The Master Servicer shall maintain a fidelity bond in such form and amount as is customary for entities acting as custodian of funds and documents in respect of loans on behalf of institutional investors and shall cause each Servicer to maintain such fidelity bond in an amount that conforms to FNMA levels. Section 4.20. Errors and Omissions Insurance. The Master Servicer shall obtain and maintain at all times during the term of this Agreement errors and omissions insurance coverage covering the Master Servicer and its employees issued by a responsible insurance company and in an amount that conforms to FNMA levels. The issuer, policy terms and forms and amounts of coverage, including applicable deductibles shall be in such form and amount as is customary for entities acting as master servicers. The Master Servicer agrees to notify the Indenture Trustee in writing within five (5) days of the Master Servicer's receipt of notice of the cancellation or termination of any such errors and omissions insurance coverage. The Master Servicer shall cause the Servicer to maintain such errors and omissions insurance coverage as provided herein and in an amount that conforms to FNMA Levels. 63 68 ARTICLE V. ESTABLISHMENT OF TRUST ACCOUNTS Section 5.01 Collection Account and Note Distribution Account. (a) (1) Establishment of Collection Account. The Indenture Trustee has heretofore established or caused to be established and shall hereafter maintain or cause to be maintained a separate account denominated a Collection Account, which in each case is and shall continue to be an Eligible Account in the name of the Indenture Trustee and shall be designated "First Bank National Association, as Indenture Trustee in trust for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-3, Collection Account." The Master Servicer shall cause all Payments received by the Servicer to be deposited to the Collection Account no later than the second Business Day following the date of receipt thereof by the Servicer. The Indenture Trustee shall provide to the Master Servicer and the Servicer a monthly statement of all activity in the Collection Account. Funds in the Collection Account shall be invested in accordance with Section 5.04. (2) Establishment of Note Distribution Account. The Indenture Trustee has heretofore established with itself in its trust capacity at its corporate trust department for the benefit of Securityholders an account referred to herein as a Note Distribution Account. The Indenture Trustee shall at all times maintain the Note Distribution Account as an Eligible Account and shall cause such account to be designated "First Bank National Association, as Indenture Trustee in trust for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-3 Note Distribution Account." (b) Withdrawals from Collection Account. No later than the second Business Day preceding each Distribution Date, the Indenture Trustee shall withdraw amounts from the Collection Account representing the Payments with respect to the related Determination Date on deposit therein and deposit such amounts into the Note Distribution Account and liquidate the Permitted Investments in which such amounts are invested and distribute all net investment earnings to the Servicer. (c) Withdrawals from Note Distribution Account. On each Distribution Date, the Indenture Trustee shall liquidate the Permitted Investments in which amounts on deposit in the Note Distribution Account are invested and distribute all net investment earnings to the Servicer and, to the extent funds are available in the Note Distribution Account, the Indenture Trustee (based on the information contained in the Master Servicer Certificate for such Distribution Date) shall make the following withdrawals from the Note Distribution Account by 10:00 a.m. (New York City time) on such Distribution Date, in the following order of priority: (i) to distribute on such Distribution Date the following amounts pursuant to the Indenture, from the Collected Amount, in the following order: 64 69 (a) concurrently, to (x) the Master Servicer, the Master Servicer Fee, (y) the Servicer, the Servicer Fee, and (z) to the Indenture Trustee, the Indenture Trustee Fee, in each case for such Distribution Date; (b) to the Master Servicer or Servicer, any amount in respect of reimbursement of Interest Advances or Foreclosure Advances, to which the Master Servicer or any Servicer is entitled pursuant to Section 4.09 with respect to such Distribution Date; (c) to the Servicer, the Owner Trustee Fee Reserve, for such Distribution Date; (ii) to distribute on such Distribution Date the Regular Distribution Amount pursuant to the Indenture, from the Collected Amount remaining after the application of clause (i), in the following order: (a) to the holders of each Class of Senior Notes, an amount equal to the applicable Noteholders' Interest Distributable Amount for such Distribution Date (any shortfall to be allocated, pro rata, based on the amount each such Class would be entitled to receive in the absence of any such shortfall); (b) first, to the holders of Class M-1 Notes and then to the holders of the Class M-2 Notes, in that order, an amount equal to the applicable Noteholders' Interest Distributable Amount for such Distribution Date; (c) to the Certificate Distribution Account for distribution pursuant to Section 5.03(b) to holders of the Certificates, an amount equal to the Certificateholders' Interest Distributable Amount for such Distribution Date; (d) sequentially, to the holders of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes, in that order, until the respective Class Principal Balances thereof are reduced to zero, the amount necessary to reduce the aggregate Class Principal Balance of the Senior Notes to the Senior Optimal Principal Balance for such Distribution Date; (e) first, to the holders of the Class M-1 Notes and then to the holders of the Class M-2 Notes, the amount necessary to reduce the Class Principal Balances thereof to the Class M-1 Optimal Principal Balance and the Class M-2 Optimal Principal Balance, respectively, for such Distribution Date; (f) to the Certificate Distribution Account for distribution pursuant to Section 5.03(b) to holders of the Certificates, the amount necessary to 65 70 reduce the Class Principal Balance thereof to the Certificate Optimal Principal Balance for such Distribution Date; and (g) sequentially, to the Class M-1 Notes, Class M-2 Notes and the Certificates, in that order, until their respective Loss Reimbursement Entitlements have been paid in full (in the case of the Class M-1 and Class M-2 Notes, first to the reimbursement of Allocable Loss Amounts, until completely reimbursed, and then to any accrued interest thereon) (such amounts to be distributed to the holders of the Certificates pursuant to this clause (g) shall be deposited in the Certificate Distribution Account). (iii) On each Distribution Date, the Indenture Trustee shall distribute the Excess Spread, if any, in the following order of priority: (a) in an amount equal to the Overcollateralization Deficiency Amount, if any, as follows: (i) sequentially, to the holders of the Class A-1, Class A-2, Class A-3 and Class A-4 Notes, in that order, until the respective Class Principal Balances thereof are reduced to zero, the amount necessary to reduce the aggregate of their Class Principal Balances to the Senior Optimal Principal Balance for such Distribution Date; (ii) first, to the holders of the Class M-1 Notes and then to the holders of the Class M-2 Notes, as principal, until the respective Class Principal Balances thereof have been reduced to the Class M-1 Optimal Principal Balance and Class M-2 Optimal Principal Balance, respectively, for such Distribution Date; and (iii) to the Certificate Distribution Account for distribution pursuant to Section 5.03(b) to the holders of the Certificates, until the Class Principal Balance thereof has been reduced to the Certificate Optimal Principal Balance for such Distribution Date; and (b) sequentially, to the Class M-1 Notes, the Class M-2 Notes and the Certificates, in that order, until their respective Loss Reimbursement Entitlements, if any, have been paid in full (in the case of the Class M-1 and Class M-2 Notes, first to the reimbursement of Allocable Loss Amounts, until completely reimbursed, and then to any accrued interest thereon) (such amounts to be distributed to the holders of the Certificates pursuant to this clause (g) shall be deposited in the Certificate Distribution Account); and 66 71 (c) to any successor Master Servicer, if any, for such Distribution Date, amounts payable in accordance with Section 10.03(c) in addition to the Master Servicer Fee; (d) to the Person entitled thereof, payments in respect of Other Fees; and (e) for deposit into the Certificate Distribution Account, for distribution pursuant to Section 5.03(b) on such Distribution Date, to the holders of the Residual Instruments, any remaining amount. (d) Additional Withdrawals from Collection Account. On the third Business Day prior to each Distribution Date, the Indenture Trustee, at the direction of the Master Servicer shall also make the following withdrawals from the Collection Account, in no particular order of priority: (i) to withdraw any amount not required to be deposited in the Collection Account or deposited therein in error; and (ii) to clear and terminate the Collection Account in connection with the termination of this Agreement. (e) All distributions made on each Class of Notes on each Distribution Date will be made on a pro rata basis among the Noteholders of such Class of record on the preceding Record Date based on the Percentage Interest represented by their respective Notes, and except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such Noteholder, if such Noteholder shall own of record Notes representing at least a $1,000,000 Denomination and shall have so notified the Indenture Trustee, and otherwise by check mailed, via first class mail, postage prepaid, to the address of such Noteholder appearing in the Note Register. The final distribution on each Note will be made in like manner, but only upon presentment and surrender of such Note at the location specified in the notice to Noteholders of such final distribution. Notwithstanding the reduction of the Class Principal Balance of a Class to zero, the final distribution with respect to each Class shall be made upon the earlier of (a) the reduction of any Loss Reimbursement Entitlement with respect thereto to zero, or (b) the Final Maturity Date for such Class. Whenever the Indenture Trustee, based on a Master Servicer Certificate, expects that the final distribution with respect to a Class of Securities will be made on the next Distribution Date, the Indenture Trustee shall, as soon as practicable, mail to each Holder of such Class of Securities as of the applicable Record Date a notice to the effect that: (i) the Indenture Trustee expects that the final distribution with respect to such Class of Securities will be made on such Distribution Date, and 67 72 (ii) no interest shall accrue on such Class of Securities after such Distribution Date provided that the final distribution occurs on such Distribution Date. Section 5.02 Allocation of Losses. (a) In the event that the Payments received or collected in respect of a Home Loan are less than the related Principal Balance plus accrued interest thereon, or any Obligor makes a partial payment of any Monthly Payment due on a Home Loan, such Payments or partial payment shall be applied to payment of the related Debt Instrument, first to interest accrued at the Home Loan Interest Rate and then to principal. (b) On any Distribution Date, any Allocable Loss Amounts shall be applied to the reduction of the Class Principal Balances of the Certificates, the Class M-2 and Class M-1 Notes in accordance with the Allocable Loss Amount Priority. Section 5.03 Certificate Distribution Account. (a) Establishment. No later than the Closing Date, the Indenture Trustee, will establish and maintain with the Indenture Trustee for the benefit of the Owner Trustee on behalf of the Certificateholders and holders of Residual Instruments one or more separate Eligible Accounts, which while the Indenture Trustee holds such Trust Account shall be entitled "Certificate Distribution Account, First Bank National Association, as Co-Owner Trustee, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-3". Funds in the Certificate Distribution Account shall be invested in accordance with Section 5.04. (b) Distributions. On each Distribution Date, the Indenture Trustee shall withdraw from the Note Distribution Account all amounts required to be deposited in the Certificate Distribution Account with respect to the preceding Due Period pursuant to Section 5.01(c)(ii)(c), (f) and (g) and 5.01(c)(iii)(a)(iii), (b) and (e) and will remit such amount to the Owner Trustee or the Co-Owner Trustee for deposit into the Certificate Distribution Account. On each Distribution Date, the Owner Trustee or the Co-Owner Trustee shall distribute all amounts on deposit in the Certificate Distribution Account to the Certificateholders and the holders of the Residual Instruments, as specified and in accordance with the amounts calculated pursuant to the foregoing sections of Section 5.01. (c) All distributions made on the Certificates on each Distribution Date will be made on a pro rata basis among the Certificateholders of record on the immediately preceding Record Date based on the Percentage Interest represented by their respective Certificates, and except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such Certificateholder, if such Certificateholder shall own of record Certificates representing at least a 30% Percentage Interest and shall have so notified the Owner Trustee or Co-Owner Trustee, and otherwise by check mailed, via first class mail, postage prepaid, to the address of such Certificateholder appearing in the Certificate Register. The final distribution on each Certificate will be made in like manner, but only upon 68 73 presentment and surrender of such Certificate at the location specified in the notice to holders of the Certificates of such final distribution. Notwithstanding the reduction of the Class Principal Balance of a Class to zero, the final distribution with respect to each Class shall be made upon the earlier of (a) the reduction of any Loss Reimbursement Entitlement with respect thereto to zero, and (b) the Final Maturity Date for such Class. (d) All distributions made on the Residual Instruments on each Distribution Date will be made on a pro rata basis among the holders of Residual Instruments of record on the immediately preceding Record Date based on the Percentage Interest represented by such Residual Instruments, and except as otherwise provided in the next succeeding sentence, shall be made by wire transfer of immediately available funds to the account of such holders of Residual Instruments, if such holders of Residual Instruments shall own of record Residual Instruments representing at least a 30% Percentage Interest and shall have so notified the Owner Trustee or Co-Owner Trustee, and otherwise by check mailed, via first class mail, postage prepaid, to the address of such holder of Residual Instruments appearing in the Certificate Register. The final distribution on each Residual Instrument will be made in like manner, but only upon presentment and surrender of such Residual Instrument at the location specified in the notice to holders of the Residual Instruments of such final distribution. Section 5.04 Trust Accounts; Trust Account Property. (a) Control of Trust Accounts. Each of the Trust Accounts established hereunder has been pledged by the Issuer to the Indenture Trustee under the Indenture and shall be subject to the lien of the Indenture. In addition to the provisions hereunder, each of the Trust Accounts shall also be established and maintained pursuant to the Indenture. Amounts distributed from each Trust Account in accordance with the Indenture and this Agreement shall be released from the lien of the Indenture upon such distribution thereunder or hereunder. The Indenture Trustee shall possess all right, title and interest in all funds on deposit from time to time in the Trust Accounts (other than the Certificate Distribution Account) and in all proceeds thereof and all such funds, investments, proceeds shall be part of the Trust Account Property and the Trust Estate. If, at any time, any Trust Account ceases to be an Eligible Account, the Indenture Trustee (or the Master Servicer on its behalf) shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which each Rating Agency may consent) (i) establish a new Trust Account as an Eligible Account, (ii) terminate the ineligible Trust Account, and (iii) transfer any cash and investments from such ineligible Trust Account to such new Trust Account. With respect to the Trust Accounts (other than the Certificate Distribution Account), the Indenture Trustee agrees, by its acceptance hereof, that each such Trust Account shall be subject to the sole and exclusive custody and control of the Indenture Trustee for the benefit of the Securityholders and the Issuer, as the case may be, and the Indenture Trustee shall have sole signature and withdrawal authority with respect thereto. In addition to this Agreement and the Indenture, the Certificate Distribution Account established hereunder also shall be subject to and established and maintained in accordance with 69 74 the Trust Agreement. Subject to rights of the Indenture Trustee hereunder and under the Indenture, the Owner Trustee and the Co-Owner Trustee shall possess all right, title and interest for the benefit of the Securityholders in all funds on deposit from time to time in the Certificate Distribution Account and in all proceeds thereof (including all income thereon) and all such funds, investments, proceeds and income shall be part of the Trust Account Property and the Trust Estate. Subject to the rights of the Indenture Trustee, the Owner Trustee and Co-Owner Trustee agree, by its acceptance hereof, that such Certificate Distribution Account shall be subject to the sole and exclusive custody and control of the Owner Trustee or Co-Owner Trustee for the benefit of the Issuer and the parties entitled to distributions therefrom, including without limitation, the Certificateholders, the holders of Residual Instruments and the Owner Trustee and the Co-Owner Trustee shall have sole signature and withdrawal authority with respect to the Certificate Distribution Account. Notwithstanding the preceding, the distribution of amounts from the Certificate Distribution Account in accordance with Section 5.03(b) also shall be made for the benefit of the Indenture Trustee (with respect to its duties under the Indenture and this Agreement relating to the Trust Estate), and the Indenture Trustee (in its capacity as Indenture Trustee) shall have the right, but not the obligation to take custody and control of the Certificate Distribution Account and to cause the distribution of amounts therefrom in the event that the Owner Trustee or Co-Owner Trustee fails to distribute such amounts in accordance with Section 5.03(b). The Master Servicer shall have the power, revocable by the Indenture Trustee or by the Owner Trustee or Co-Owner Trustee with the consent of the Indenture Trustee, to instruct the Indenture Trustee, Co-Owner Trustee or Owner Trustee to make withdrawals and payments from the Trust Accounts for the purpose of permitting the Master Servicer to carry out its respective duties hereunder or permitting the Indenture Trustee or Owner Trustee to carry out its duties herein or under the Indenture or the Trust Agreement, as applicable. (b) (1) Investment of Funds. The funds held in any Trust Account may only be invested (to the extent practicable and consistent with any requirements of the Code) in Permitted Investments, as directed by a Responsible Officer of Mego in writing. In any case, funds in any Trust Account must be available for withdrawal without penalty, and any Permitted Investments and the funds held in any Trust Account, other than the Note Distribution Account, must mature or otherwise be available for withdrawal, not later than three (3) Business Days immediately preceding the Distribution Date next following the date of such investment and shall not be sold or disposed of prior to its maturity subject to Section 5.04(b)(2) below. Amounts deposited to the Note Distribution Account pursuant to Section 5.01(b) prior to each Distribution Date shall be invested in Permitted Investments which are overnight investments from the date of deposit to the Business Day preceding each Distribution Date. All interest and any other investment earnings on amounts or investments held in any Trust Account shall be deposited into such Trust Account immediately upon receipt by the Indenture Trustee, or in the case of the Certificate Distribution Account, the Owner Trustee or Co-Owner Trustee, as applicable. All Permitted Investments in which funds in any Trust Account (other than the Certificate Distribution Account) are invested must be held by or registered in the name of "First Bank National Association, as Indenture Trustee, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 70 75 1997-3". While the Co-Owner Trustee holds the Certificate Distribution Account, all Permitted Investments in which funds in the Certificate Distribution Account are invested shall be held by or registered in the name of "First Bank National Association, as Co-Owner Trustee, in trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-3". (2) Insufficiency and Losses in Trust Accounts. If any amounts are needed for disbursement from any Trust Account and sufficient uninvested funds are not available to make such disbursement, the Indenture Trustee, or Owner Trustee or Co-Owner Trustee in the case of the Certificate Distribution Account, shall cause to be sold or otherwise converted to cash a sufficient amount of the investments in such Trust Account. The Indenture Trustee, or Owner Trustee or Co-Owner Trustee in the case of the Certificate Distribution Account, shall not be liable for any investment loss or other charge resulting therefrom, unless such loss or charge is caused by the failure of the Indenture Trustee or Owner Trustee or Co-Owner Trustee, respectively, to perform in accordance with this Section 5.04. If any losses are realized in connection with any investment in any Trust Account pursuant to this Agreement and the Indenture, then Mego shall deposit the amount of such losses (to the extent not offset by income from other investments in such Trust Account) in such Trust Account immediately upon the realization of such loss. All interest and any other investment earnings on amounts held in any Trust Account shall be taxed to the holders of the Residual Instruments. (c) Subject to Section 6.1 of the Indenture, the Indenture Trustee shall not in any way be held liable by reason of any insufficiency in any Trust Account held by the Indenture Trustee resulting from any investment loss on any Permitted Investment included therein (except to the extent that the Indenture Trustee is the obligor and has defaulted thereon). (d) With respect to the Trust Account Property, the Indenture Trustee acknowledges and agrees that: (1) any Trust Account Property that is held in deposit accounts shall be held solely in the Eligible Accounts; and each such Eligible Account shall be subject to the exclusive custody and control of the Indenture Trustee, and the Indenture Trustee shall have sole signature authority with respect thereto; (2) any Trust Account Property that constitutes Physical Property shall be delivered to the Indenture Trustee in accordance with paragraph (a) of the definition of "Delivery" and shall be held, pending maturity or disposition, solely by the Indenture Trustee or a financial intermediary (as such term is defined in Section 8-313(4) of the UCC) acting solely for the Indenture Trustee; (3) any Trust Account Property that is a book-entry security held through the Federal Reserve System pursuant to federal book-entry regulations shall be delivered in accordance with paragraph (b) of the definition of "Delivery" and shall be maintained by 71 76 the Indenture Trustee, pending maturity or disposition, through continued book-entry registration of such Trust Account Property as described in such paragraph; and (4) any Trust Account Property that is an "uncertificated security" under Article VIII of the UCC and that is not governed by clause (3) above shall be delivered to the Indenture Trustee in accordance with paragraph (c) of the definition of "Delivery" and shall be maintained by the Indenture Trustee, pending maturity or disposition, through continued registration of the Indenture Trustee's (or its nominee's) ownership of such security. Section 5.05 Servicer to Pay Owner Trustee Fee. On the Distribution Date occurring in July each year during the term of this Agreement, commencing in July 1998, the Servicer shall pay to the Owner Trustee, the Owner Trustee Fee. 72 77 ARTICLE VI. STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS Section 6.01 Master Servicing Certificate. On each Determination Date, the Master Servicer shall deliver to the Indenture Trustee, the Owner Trustee and Co-Owner Trustee, a certificate containing the items described in Exhibit B hereto (each, a "Master Servicer Certificate"), prepared as of the related Determination Date and executed by a Master Servicing Officer. No later than the Business Day following each Determination Date, the Master Servicer shall deliver to the Indenture Trustee, in a format consistent with other electronic loan level reporting supplied by the Master Servicer in connection with similar transactions, "loan level" information with respect to the Home Loans as of the related Determination Date, to the extent that such information has been provided to the Master Servicer by the Servicer. The Indenture Trustee may rely on the Master Servicer Certificate with respect to the matters set forth therein. Section 6.02 Statement to Securityholders. On or before the third Business Day following each Distribution Date, the Indenture Trustee shall mail: to each Holder of a Security (with a copy to the Depositor and the Rating Agency) at its address shown on the Certificate Register or Note Register, as applicable, a statement, based on information set forth in the Master Servicer Certificate for such Distribution Date, substantially in the form of Statement to Securityholders attached hereto as Exhibit C, respectively, together with a copy of such related Master Servicer Certificate. 73 78 ARTICLE VII. [Reserved] 74 79 ARTICLE VIII. [Reserved] 75 80 ARTICLE IX. THE MASTER SERVICER Section 9.01 Indemnification; Third Party Claims. (a) 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 and the representations made by the Master Servicer. (b) The Master Servicer shall indemnify, defend and hold harmless the Trust, the Indenture Trustee, Owner Trustee, the Co-Owner Trustee, Mego and the Depositor, their respective officers, directors, agents and employees and the Securityholders from and against any and all costs, expenses, losses, claims, damages, and liabilities to the extent that such cost, expense, loss, claim, damage or liability arose out of, or was imposed upon the Trust, Indenture Trustee, the Owner Trustee, the Co-Owner Trustee, Mego, the Depositor, or the Securityholders through the breach of this Agreement by the Master Servicer, the negligence, willful misfeasance, or bad faith of the Master Servicer in the performance of its duties under this Agreement or by reason of reckless disregard of its obligations and duties under this Agreement. Such indemnification shall include, without limitation, reasonable fees and expenses of counsel and expenses of litigation. Section 9.02 Merger or Consolidation of the Master Servicer. The Master Servicer shall not merge or consolidate with any other person, convey, transfer or lease substantially all its assets as an entirety to another Person, or permit any other Person to become the successor to the Master Servicer's business unless, after the merger, consolidation, conveyance, transfer, lease or succession, the successor or surviving entity (i) shall be an Eligible Servicer, (ii) shall be capable of fulfilling the duties of the Master Servicer contained in this Agreement and (iii) shall have a long-term debt rating which is BBB and Baa2 by Standard & Poor's and Moody's respectively. Any corporation (i) into which the Master Servicer may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Master Servicer shall be a party, (iii) which acquires by conveyance, transfer or lease substantially all of the assets of the Master Servicer, or (iv) succeeding to the business of the Master Servicer, in any of the foregoing cases shall execute an agreement of assumption to perform every obligation of the Master Servicer under this Agreement and, whether or not such assumption agreement is executed, shall be the successor to the Master Servicer under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement, anything in this Agreement to the contrary notwithstanding; provided, however, that nothing contained herein shall be deemed to release the Master Servicer from any obligation. The Master Servicer shall provide notice of any merger, consolidation or succession pursuant to this Section 9.02 to the Owner Trustee, the Indenture Trustee and each Rating Agency. Notwithstanding the foregoing, as a condition to the consummation of the transactions referred 76 81 to in clauses (i) through (iv) above, (x) immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 3.02 shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction), and (y) the Master Servicer shall have delivered to the Owner Trustee and the Indenture Trustee an Officer's Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section 9.02 and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with. Section 9.03 Limitation on Liability of the Master Servicer and Others. Neither the Master Servicer nor any of its directors, officers, employees or agents shall be under any liability to the Trust or to the Securityholders for any action taken or for refraining from the taking of any action in good faith pursuant to this Agreement, or for errors in judgment; provided, however, that this provision shall not protect the Master Servicer or any such Person against any breach of warranties, representations or covenants made herein or any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or negligence in performing or failing to perform duties hereunder or by reason of reckless disregard of obligations and duties hereunder. The Master Servicer and any of its directors, officers, employees or agents 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. Section 9.04 Master Servicer Not to Resign; Assignment. (a) The Master Servicer shall not resign from the obligations and duties hereby imposed on it except (i) with the consent of the Rating Agencies or (ii) upon determination that by reason of a change in legal requirements the performance of its duties under this Agreement would cause it to be in violation of such legal requirements in a manner which would result in a material adverse effect on the Master Servicer. Any such determination permitting the resignation of the Master Servicer by reason of a change in such legal requirements shall be evidenced by an Opinion of Counsel to such effect delivered and acceptable to the Indenture Trustee. No resignation of the Master Servicer shall become effective until the Indenture Trustee or a successor master servicer shall have assumed the Master Servicer's servicing responsibilities and obligations in accordance with Section 10.02. (b) Notwithstanding anything to the contrary herein, the Master Servicer shall remain liable for all liabilities and obligations incurred by it as Master Servicer hereunder prior to the time that any resignation or assignment referred to in subsection (a) above or termination under Section 10.01 becomes effective, including the obligation to indemnify the Indenture Trustee pursuant to Section 9.01(b) hereof. (c) The Master Servicer agrees to cooperate with any successor Master Servicer in effecting the transfer of the Master Servicer's servicing responsibilities and rights hereunder pursuant to subsection (a), including, without limitation, the transfer to such successor of all 77 82 relevant records and documents (including any Home Loan Files in the possession of the Master Servicer and the Servicing Record) and all amounts credited to the Servicing Record or thereafter received with respect to the Home Loans and not otherwise permitted to be retained by the Master Servicer pursuant to this Agreement. In addition, the Master Servicer, at its sole cost and expense, shall prepare, execute and deliver any and all documents and instruments to the successor Master Servicer including all Home Loan Files in its possession and do or accomplish all other acts necessary or appropriate to effect such termination and transfer of servicing responsibilities. Section 9.05 Relationship of Master Servicer to Issuer and the Indenture Trustee. The relationship of the Master Servicer (and of any successor to the Master Servicer as servicer under this Agreement) to the Issuer and the Indenture Trustee under this Agreement is intended by the parties hereto to be that of an independent contractor and not of a joint venturer, agent or partner of the Issuer or the Indenture Trustee. Section 9.06 Master Servicer May Own Notes. Each of the Master Servicer and any affiliate of the Master Servicer may in its individual or any other capacity become the owner or pledgee of Notes with the same rights as it would have if it were not the Master Servicer or an affiliate thereof except as otherwise specifically provided herein. Notes so owned by or pledged to the Master Servicer or such affiliate shall have an equal and proportionate benefit under the provisions of this Agreement, without preference, priority, or distinction as among all of the Notes, provided that any Notes owned by the Master Servicer or any affiliate thereof, during the time such Notes are owned by them, shall be without voting rights for any purpose set forth in this Agreement. The Master Servicer shall notify the Indenture Trustee promptly after it or any of its affiliates becomes the owner or pledgee of a Note. 78 83 ARTICLE X. DEFAULT Section 10.01 Events of Default. For purposes of this Agreement, each of the following shall constitute an "Event of Default." (a) failure by the Master Servicer to deposit or cause the Servicer to deposit all Payments in the Collection Account no later than the second Business Day following receipt thereof by the Master Servicer or Servicer, which failure continues unremedied for two Business Days; or (b) failure on the part of the Master Servicer duly to observe or perform in any material respect any of its other covenants or agreements contained in this Agreement that continues unremedied for a period of 30 days after the earlier of (x) the date on which the Master Servicer gives notice of such failure to the Indenture Trustee pursuant to Section 4.04(b) and (y) 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 Indenture Trustee, or to the Master Servicer and the Indenture Trustee pursuant to the direction of the Majority Securityholders; or (c) failure by the Master Servicer to deliver to the Indenture Trustee the Master Servicer Certificate by the fourth Business Day prior to each Distribution Date; or (d) the entry of a decree or order for relief by a court or regulatory authority having jurisdiction in respect of the Master Servicer in an involuntary case under the federal bankruptcy laws, as now or hereafter in effect, or another present or future, federal or state, bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Master Servicer or of any substantial part of its properties or ordering the winding up or liquidation of the affairs of the Master Servicer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the commencement of an involuntary case under the federal bankruptcy laws, as now or hereinafter in effect, or another present or future federal or state bankruptcy, insolvency or similar law and such case is not dismissed within 60 days; or (e) the commencement by the Master Servicer of a voluntary case under the federal bankruptcy laws, as now or hereinafter in effect, or any other present or future, federal or state bankruptcy, insolvency or similar law, or the consent by the Master Servicer to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Master Servicer or of any substantial part of its property or the making by the Master Servicer of an assignment for the benefit of creditors or the failure by the Master Servicer generally to pay its debts as such debts become due or the taking of corporate 79 84 action by the Master Servicer in furtherance of any of the foregoing or the admission in writing by the Master Servicer of an inability to pay its debts as they become due; or (f) any representation, warranty or statement of the Master Servicer made in this Agreement or any certificate, report or other writing delivered pursuant hereto shall prove to be incorrect in any material respect as of the time when the same shall have been made, and the incorrectness of such representation, warranty or statement has a material adverse effect on the Trust and, within 30 days of the earlier of (x) the date on which the Master Servicer gives notice of such failure to the Indenture Trustee pursuant to Section 4.04(b) and (y) the date on which written notice thereof shall have been given to the Master Servicer by the Indenture Trustee or the Majority Securityholders, the circumstances or condition in respect of which such representation, warranty or statement was incorrect shall not have been eliminated or otherwise cured; or (g) failure on the part of the Master Servicer to deposit into the Note Distribution Account within 3 Business Days following the related Determination Date any Interest Advance pursuant to Section 4.08; or (h) the Total Expected Loan Loss Percentage exceeds 21% prior to the fifth anniversary of the Cut-Off Date or 31.50% thereafter. Section 10.02 Consequences of an Event of Default. If an Event of Default shall occur and be continuing, the Indenture Trustee at the direction of the Majority Securityholders, by notice given in writing to the Master Servicer may terminate all of the rights and obligations of the Master Servicer under this Agreement. On or after the receipt by the Master Servicer of such written notice, and the appointment of and acceptance by a successor Master Servicer, all authority, power, obligations and responsibilities of the Master Servicer under this Agreement, whether with respect to the Securities or the Trust or otherwise, shall pass to, be vested in and become obligations and responsibilities of the successor Master Servicer; provided, however, that the successor Master Servicer shall have no liability with respect to any obligation which was required to be performed by the prior Master Servicer prior to the date that the successor Master Servicer becomes the Master Servicer or any claim of a third party based on any alleged action or inaction of the prior Master Servicer. The successor Master Servicer is authorized and empowered by this Agreement to execute and deliver, on behalf of the prior 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. The prior Master Servicer agrees to cooperate with the successor Master Servicer in effecting the termination of the responsibilities and rights of the prior Master Servicer under this Agreement, including, without limitation, the transfer to the successor Master Servicer for administration by it of all cash amounts that shall at the time be held by the prior Master Servicer for deposit, or have been deposited by the prior Master Servicer, in the Collection Account or thereafter received with respect to the Home Loans and the delivery to the successor Master Servicer of all Home Loan Files in the Master Servicer's 80 85 possession and a computer tape in readable form containing the Servicing Record and any other information necessary to enable the successor Master Servicer to service the Home Loans. In addition to any other amounts that are then payable to the terminated Master Servicer under this Agreement, the terminated Master Servicer shall then be entitled to receive (to the extent provided by Section 4.09) out of the Collected Amount, reimbursements for any outstanding Interest Advances made during the period prior to the notice pursuant to this Section 10.02 which terminates the obligation and rights of the terminated Master Servicer under this Agreement. The Indenture Trustee and the successor Master Servicer may set off and deduct any amounts owed by the terminated Master Servicer from any amounts payable to the terminated Master Servicer. The terminated Master Servicer shall grant the Indenture Trustee, and the successor Master Servicer reasonable access to the terminated Master Servicer's premises at the terminated Master Servicer's expense. Section 10.03 Appointment of Successor. (a) On or after the time the Master Servicer receives a notice of termination pursuant to Section 10.02 or upon the resignation of the Master Servicer pursuant to Section 9.04, the Indenture Trustee shall be the successor in all respects to the Master Servicer in its capacity as master servicer under this Agreement and the transactions set forth or provided for in this Agreement, and shall be subject to all the responsibilities, restrictions, duties, liabilities and termination provisions relating thereto placed on the Master Servicer by the terms and provisions of this Agreement. The Indenture Trustee shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. If the Indenture Trustee or any other successor Master Servicer is acting as Master Servicer hereunder, it shall be subject to termination under Section 10.02 upon the occurrence of an Event of Default applicable to it as Master Servicer. (b) Any successor Master Servicer appointed pursuant to the provisions of this Agreement shall execute, acknowledge and deliver to the Indenture Trustee and its predecessor Master Servicer an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Master Servicer shall become effective. (c) Any successor Master Servicer shall be entitled to such compensation (whether payable out of the Collected Amount or otherwise) as the Master Servicer would have been entitled to under the Agreement if the Master Servicer had not resigned or been terminated hereunder. In addition, any successor Master Servicer shall be entitled, to reasonable transition expenses incurred in acting as successor Master Servicer pursuant to Section 5.01(c)(iii)(c). Section 10.04 Notification to Certificateholders. Upon any termination of the Master Servicer or appointment of a successor to the Master Servicer, the Indenture Trustee shall give prompt written notice thereof to Securityholders at their respective addresses appearing in the Note Register and Certificate Register. 81 86 Section 10.05 Waiver of Past Defaults. The Majority Securityholders may, on behalf of all Securityholders, waive any default by the Master Servicer in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon. 82 87 ARTICLE XI. TERMINATION Section 11.01 Termination. (a) This Agreement shall terminate upon notice to the Indenture Trustee of either: (a) the later of (i) the satisfaction and discharge of the Indenture pursuant to Section 4.1 of the Indenture or (ii) the disposition of all funds with respect to the last Home Loan and the remittance of all funds due hereunder and the payment of all amounts due and payable to the Indenture Trustee, the Owner Trustee, the Co-Owner Trustee, the Issuer, the Master Servicer and the Servicer; or (b) the mutual consent of the Master Servicer, the Depositor, the Seller and all Securityholders in writing. (b) Subject to the provisions of the following sentence, Mego or, if such option is not exercised by Mego, the Master Servicer may, at its option upon not less than thirty days' prior notice given to the Indenture Trustee at any time on or after the applicable Early Termination Notice Date, purchase on the Termination Date specified in such notice, all, but not less than all, the Home Loans and Foreclosed Properties then included in the Trust, at a purchase price (the "Termination Price"), payable in cash, equal to the sum of: (i) the Principal Balance of each Home Loan included in the Trust as of such Monthly Cut-Off Date; (ii) all unpaid interest accrued on the Principal Balance of each such Loan at the related Home Loan Interest Rate to such Monthly Cut-Off Date; and (iii) the aggregate fair market value of each Foreclosed Property included in the Trust on such Monthly Cut-Off Date, as determined by an Independent appraiser acceptable to the Trustee as of a date not more than thirty days prior to such Monthly Cut-Off Date. The expense of any Independent appraiser required under this Section 11.01(b) shall be a nonreimbursable expense of the party exercising the purchase option pursuant to this Section 11.01(b). Mego or the Master Servicer shall effect the purchase referred to in this Section 11.01(b) by deposit of the Termination Price into the Note Distribution Account. Section 11.02 Notice of Termination. Notice of termination of this Agreement or of early redemption and termination of the Securities shall be sent (i) by the Indenture Trustee to the Noteholders in accordance with Section 2.6(b) of the Indenture and (ii) by the Owner Trustee or Co-Owner Trustee to the Certificateholders and holders of Residual Instruments in accordance with Section 9.1(d) of the Trust Agreement. 83 88 ARTICLE XII. MISCELLANEOUS PROVISIONS Section 12.01 Acts of Securityholders. Except as otherwise specifically provided herein, whenever Securityholder action, consent or approval is required under this Agreement, such action, consent or approval shall be deemed to have been taken or given on behalf of, and shall be binding upon, all Securityholders if the Majority Securityholders agree to take such action or give such consent or approval. Section 12.02 Amendment. (a) This Agreement may be amended from time to time by the Depositor, the Master Servicer, the Seller and the Issuer by written agreement with notice thereof to the Securityholders, without the consent of any of the Securityholders, to cure any error or ambiguity, to correct or supplement any provisions hereof which may be defective or inconsistent with any other provisions hereof or to add any other provisions with respect to matters or questions arising under this Agreement; provided, however, that such action will not adversely affect in any material respect the interests of the Securityholders. An amendment described above shall be deemed not to adversely affect in any material respect the interests of the Securityholders if either (i) an opinion of counsel is obtained to such effect, or (ii) the party requesting the amendment obtains a letter from each of the Rating Agencies confirming that the amendment, if made, would not result in the downgrading or withdrawal of the rating then assigned by the respective Rating Agency to any Class of Securities then outstanding. (b) This Agreement may also be amended from time to time by the Depositor, the Master Servicer, the Seller and the Issuer by written agreement, with the prior written consent of the Indenture Trustee and the Majority Securityholders, 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 Securityholders; provided, however, that no such amendment shall (i) reduce in any manner the amount of, or delay the timing of, collections of payments on Home Loans or distributions which are required to be made on any Security, without the consent of the holders of 100% of each Class of Notes, Certificates or Residual Instruments affected thereby, (ii) adversely affect in any material respect the interests of the holders of any Class of Notes, Certificates or Residual Instruments in any manner other than as described in (i), without the consent of the holders of 100% of such Class of Notes, the Certificates or Residual Instruments, respectively, or (iii) reduce the percentage of any Class of Notes, Certificates or Residual Instruments, the holders of which are required to consent to any such amendment, without the consent of the holders of 100% of such Class of Notes or the Certificates or Residual Instruments. 84 89 (c) It shall not be necessary for the consent of Securityholders under this Section to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. Prior to the execution of any amendment to this Agreement, the Issuer 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 Issuer may, but shall not be obligated to, enter into any such amendment which affects the Issuer's own rights, duties or immunities under this Agreement. Section 12.03 Recordation of Agreement. To the extent permitted by applicable law, this Agreement, or a memorandum thereof if permitted under applicable law, is subject to recordation in all appropriate public offices for real property records in all of 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 at the Securityholders' expense on direction of the Indenture Trustee or the Majority Securityholders, but only when accompanied by an opinion of counsel to the effect that such recordation materially and beneficially affects the interests of the Securityholders or is necessary for the administration or servicing of the Home Loans. Section 12.04 Duration of Agreement. This Agreement shall continue in existence and effect until terminated as herein provided. Section 12.05 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 12.06 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 overnight mail, certified mail or registered mail, postage prepaid, to: (i) in the case of the Depositor, FINANCIAL ASSET SECURITIES CORP., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Peter McMullin, or such other addresses as may hereafter be furnished to the Securityholders and the other parties hereto in writing by the Depositor, (ii) in the case of the Issuer, Mego Mortgage Home Loan Owner Trust 1997-3, c/o Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Emmett R. Harmon, or such other 85 90 address as may hereafter be furnished to the Securityholders and the other parties hereto, (iii) in the case of the Seller and Servicer, MEGO MORTGAGE CORPORATION, 1000 Parkwood Circle, Atlanta, Georgia 30339, Attention: Jeff Moore, President, or such other address as may hereafter be furnished to the Securityholders and the other parties hereto, (iv) in the case of the Indenture Trustee or Co-Owner Trustee, FIRST BANK NATIONAL ASSOCIATION, 180 East Fifth Street, St. Paul, Minnesota 55101, Attention: Structured Finance: Mego 1997-3, (v) in the case of the Master Servicer, 11000 Broken Land Parkway, Columbia, Maryland 21044-3562, Attention: Master Servicing Department, Mego Mortgage Home Loan Owner Trust 1997-3; and (vi) in the case of the Securityholders, as set forth in the applicable Note Register and Certificate Register. Any such notices shall be deemed to be effective with respect to any party hereto upon the receipt of such notice by such party, except that notices to the Securityholders shall be effective upon mailing or personal delivery. Section 12.07 Severability of Provisions. If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be held invalid for any reason whatsoever, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other covenants, agreements, provisions or terms of this Agreement. Section 12.08 No Partnership. Nothing herein contained shall be deemed or construed to create any partnership or joint venture between the parties hereto and the services of the Master Servicer shall be rendered as an independent contractor. Section 12.09 Counterparts. This Agreement may be executed in one or more counterparts and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed to be an original; such counterparts, together, shall constitute one and the same Agreement. Section 12.10 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Master Servicer, the Seller, the Servicer, the Depositor, the Issuer, the Indenture Trustee and the Securityholders and their respective successors and permitted assigns. Section 12.11 Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 86 91 Section 12.12 Actions of Securityholders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by Securityholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders in person or by agent 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 Depositor, the Master Servicer or the Issuer. 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 Depositor, the Master Servicer and the Issuer if made in the manner provided in this Section. (b) The fact and date of the execution by any Securityholder of any such instrument or writing may be proved in any reasonable manner which the Depositor, the Master Servicer or the Issuer deems sufficient. (c) Any request, demand, authorization, direction, notice, consent, waiver or other act by a Securityholder shall bind every holder of every Security 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 Depositor, the Master Servicer or the Issuer in reliance thereon, whether or not notation of such action is made upon such Security. (d) The Depositor, the Master Servicer or the Issuer may require additional proof of any matter referred to in this Section 12.12 as it shall deem necessary. Section 12.13 Reports to Rating Agencies. (a) The Indenture Trustee shall provide to each Rating Agency copies of statements, reports and notices, to the extent received or prepared by the Master Servicer hereunder, as follows: (i) copies of amendments to this Agreement; (ii) notice of any substitution or repurchase of any Home Loans; (iii) notice of any termination, replacement, succession, merger or consolidation of either the Master Servicer or the Issuer; (iv) notice of final payment on the Notes, the Certificates and the Residual Instruments; (v) notice of any Event of Default; 87 92 (vi) copies of the annual independent auditor's report delivered pursuant to Section 4.05, and copies of any compliance reports delivered by the Master Servicer hereunder including Section 4.04; and (vii) copies of any Master Servicer's Certificate pursuant to Section 6.02(b); and (b) With respect to the requirement of the Indenture Trustee to provide statements, reports and notices to the Rating Agencies such statements, reports and notices shall be delivered to the Rating Agencies at the following addresses: (i) if to Standard & Poor's, 26 Broadway, 15th Floor, New York, New York 10004-1064, Attention: Asset-Backed Monitoring Department; (ii) if to DCR, 55 East Monroe Street, 35th Floor, Chicago, Illinois 60603, Attention: MBS Monitoring; or (iii) if to Fitch, One State Street Plaza, New York, New York 10004, Attention: [Glenn Costello]. Section 12.14 Inconsistencies Among Transaction Documents. In the event certain provisions of a Transaction Document conflict with the provisions of this Sale and Servicing Agreement, the parties hereto agree that the provisions of this Sale and Servicing Agreement shall be controlling. 88 93 IN WITNESS WHEREOF, the following have caused their names to be signed by their respective officers thereunto duly authorized, as of the day and year first above written, to this SALE AND SERVICING AGREEMENT. MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3, By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee By: -------------------------------------------- Title: Vice President FINANCIAL ASSET SECURITIES CORP., as Depositor By: -------------------------------------------- Name: Peter McMullin Title: Vice President MEGO MORTGAGE CORPORATION, as Seller and Servicer By: -------------------------------------------- Name: James L. Belter Title: Executive Vice President FIRST BANK NATIONAL ASSOCIATION, as Indenture Trustee and Co-Owner Trustee By: -------------------------------------------- Name: Lynn Steiner Title: Assistant Vice President 89 94 NORWEST BANK MINNESOTA, N.A. as Master Servicer By: -------------------------------------------- Name: Michael Mayer Title: Vice President 90 95 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared Emmett R. Harmon, known to me to be a person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said WILMINGTON TRUST COMPANY, NOT IN ITS INDIVIDUAL CAPACITY BUT IN ITS CAPACITY AS OWNER TRUSTEE of MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3, as Issuer, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF WILMINGTON TRUST COMPANY, this the 27th day of June, 1997. ------------------------------------------------------ Notary Public, State of ________ THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared Peter McMullin, known to me to be a person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said FINANCIAL ASSET SECURITIES CORP., as the Depositor, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF FINANCIAL ASSET SECURITIES CORP., this the 27th day of June, 1997. -------------------------------------------------------- Notary Public, State of ________ 91 96 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared James L. Belter, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said MEGO MORTGAGE CORPORATION, as the Seller and Servicer, and that he executed the same as the act of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF MEGO MORTGAGE CORPORATION, this the 27th day of June, 1997. ----------------------------------------------------- Notary Public, State of ________ THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared Lynn Steiner, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said FIRST BANK NATIONAL ASSOCIATION, a national banking association, as the Indenture Trustee, and Co-Owner Trustee, and that she executed the same as the act of such entity for the purposes and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, this the 27th day of June, 1997. ----------------------------------------------------- Notary Public, State of ________ 92 97 THE STATE OF ________ ) ) COUNTY OF ________ ) BEFORE ME, the undersigned authority, a Notary Public, on this day personally appeared Michael Mayer, known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged to me that the same was the act of the said NORWEST BANK MINNESOTA, N.A., as the Master Servicer, and that he executed the same as the act of such corporation for the purpose and consideration therein expressed, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF NORWEST BANK MINNESOTA, N.A., this the 27th day of June, 1997. ----------------------------------------------------- Notary Public, State of ________ 93 EX-10.127 16 TRUST AGREEMENT 1 EXHIBIT 10.127 EXECUTION COPY ================================================================================ TRUST AGREEMENT among FINANCIAL ASSET SECURITIES CORP., as Depositor, MEGO MORTGAGE CORPORATION, as the Company, WILMINGTON TRUST COMPANY, as Owner Trustee and FIRST BANK NATIONAL ASSOCIATION, as Co-Owner Trustee Dated as of June 14, 1997 MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 Home Loan Asset Backed Notes and Certificates, Series 1997-3 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS Section 1.1 Capitalized Terms.............................................I-1 Section 1.2 Other Definitional Provisions.................................I-5 ARTICLE II ORGANIZATION Section 2.1 Name.........................................................II-1 Section 2.2 Office.......................................................II-1 Section 2.3 Purposes and Powers..........................................II-1 Section 2.4 Appointment of Owner Trustee.................................II-2 Section 2.5 Initial Capital Contribution of Owner Trust Estate...........II-2 Section 2.6 Declaration of Trust.........................................II-2 Section 2.7 Title to Trust Property......................................II-2 Section 2.8 Situs of Trust...............................................II-3 Section 2.9 Representations and Warranties of the Depositor and the Company; Covenant of the Company.........................II-3 Section 2.10 Federal Income Tax Allocations...............................II-5 ARTICLE III TRUST SECURITIES AND TRANSFER OF INTERESTS Section 3.1 Initial Ownership...........................................III-1 Section 3.2 The Trust Securities........................................III-1 Section 3.3 Execution, Authentication and Delivery of Trust Securities............................................III-1 Section 3.4 Registration of Transfer and Exchange of Trust Securities............................................III-1 Section 3.5 Mutilated, Destroyed, Lost or Stolen Trust Securities..................................................III-2 Section 3.6 Persons Deemed Owners.......................................III-3 Section 3.7 Access to List of Owners' Names and Addresses...............III-3 Section 3.8 Maintenance of Office or Agency.............................III-3
-i- 3 Section 3.9 Appointment of Paying Agent.................................III-3 Section 3.10 Book-Entry Certificates.....................................III-4 Section 3.11 Notices to Clearing Agency .................................III-5 Section 3.12 Definitive Certificates ....................................III-5 Section 3.13 Restrictions on Transfer of Certificates....................III-6 ARTICLE IV ACTIONS BY OWNER TRUSTEE Section 4.1 Prior Notice to Owners with Respect to Certain Matters.......IV-1 Section 4.2 Action by Owners with Respect to Certain Matters.............IV-3 Section 4.3 Action by Owners with Respect to Bankruptcy..................IV-3 Section 4.4 Restrictions on Owners' Power................................IV-3 Section 4.5 Majority Control.............................................IV-3 ARTICLE V APPLICATION OF TRUST FUNDS; CERTAIN DUTIES Section 5.1 Establishment of Trust Account................................V-1 Section 5.2 Application Of Trust Funds....................................V-1 Section 5.3 Method of Payment.............................................V-2 Section 5.4 Segregation of Moneys; No Interest............................V-2 Section 5.5 Accounting and Reports to the Certificateholders, Owners, the Internal Revenue Service and Others...............V-2 Section 5.6 Signature on Returns..........................................V-3 ARTICLE VI AUTHORITY AND DUTIES OF OWNER TRUSTEE Section 6.1 General Authority............................................VI-1 Section 6.2 General Duties...............................................VI-1 Section 6.3 Action upon Instruction......................................VI-1 Section 6.4 No Duties Except as Specified in this Agreement, the Transaction Documents or in Instructions.....................VI-2 Section 6.5 No Action Except Under Specified Documents or Instructions.................................................VI-3 Section 6.6 Restrictions.................................................VI-3
-ii- 4 ARTICLE VII CONCERNING THE OWNER TRUSTEE Section 7.1 Acceptance of Trusts and Duties.............................VII-1 Section 7.2 Furnishing of Documents.....................................VII-2 Section 7.3 Representations and Warranties..............................VII-2 Section 7.4 Reliance; Advice of Counsel.................................VII-3 Section 7.5 Not Acting in Individual Capacity..........................VII-4 Section 7.6 Owner Trustee Not Liable for Trust Securities or Home Loans...............................................VII-4 Section 7.7 Owner Trustee May Own Residual Instruments and Notes.......................................................VII-4 Section 7.8 Licenses....................................................VII-5 Section 7.9 Rights of Co-Owner Trustee..................................VII-5 ARTICLE VIII COMPENSATION OF OWNER TRUSTEE Section 8.1 Owner Trustee's Fees and Expenses..........................VIII-1 Section 8.2 Indemnification............................................VIII-1 Section 8.3 Payments to the Owner Trustee..............................VIII-1 ARTICLE IX TERMINATION OF TRUST AGREEMENT Section 9.1 Termination of Trust Agreement...............................IX-1 ARTICLE X SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES Section 10.1 Eligibility Requirements for Owner Trustee....................X-1 Section 10.2 Resignation or Removal of Owner Trustee or Co-Owner Trustee.......................................................X-1 Section 10.3 Successor Owner Trustee or Co-Owner Trustee...................X-2 Section 10.4 Merger or Consolidation of Owner Trustee......................X-2 Section 10.5 Appointment of Co-Owner Trustee or Separate Owner Trustee.......................................................X-3
-iii- 5 ARTICLE XI MISCELLANEOUS Section 11.1 Supplements and Amendments..................................XI-1 Section 11.2 No Legal Title to Owner Trust Estate in Owners..............XI-2 Section 11.3 Limitations on Rights of Others.............................XI-2 Section 11.4 Notices.....................................................XI-2 Section 11.5 Severability................................................XI-3 Section 11.6 Separate Counterparts.......................................XI-3 Section 11.7 Successors and Assigns......................................XI-3 Section 11.8 No Petition.................................................XI-3 Section 11.9 Covenants of Company........................................XI-3 Section 11.10 No Recourse.................................................XI-3 Section 11.11 Headings....................................................XI-4 Section 11.12 GOVERNING LAW...............................................XI-4 Section 11.13 Inconsistencies with Sale and Servicing Agreement...........XI-4
EXHIBIT A Form of Certificate EXHIBIT B Form of Residual Instrument EXHIBIT C Certificate of Trust EXHIBIT D Form of Certificate Depository Agreement EXHIBIT E Form of Transfer Certificate
-iv- 6 TRUST AGREEMENT, dated as of June 14, 1997, among FINANCIAL ASSET SECURITIES CORP., a Delaware corporation, as Depositor (the "Depositor"), MEGO MORTGAGE CORPORATION, a Delaware corporation (the "Company"), WILMINGTON TRUST COMPANY, a Delaware banking corporation, as Owner Trustee (the "Owner Trustee") and FIRST BANK NATIONAL ASSOCIATION, as Co-Owner Trustee (the "Co-Owner Trustee"). ARTICLE I DEFINITIONS Section 1.1 Capitalized Terms. For all purposes of this Agreement, the following terms shall have the meanings set forth below: "Agreement" shall mean this Trust Agreement, as the same may be amended and supplemented from time to time. "Administration Agreement" shall mean the Administration Agreement, dated as of June 14, 1997 among the Issuer, the Company, and First Bank National Association, as Administrator. "Administrator" shall mean First Bank National Association, or any successor in interest thereto, in its capacity as Administrator under the Administration Agreement. "Benefit Plan" shall have the meaning assigned to such term in Section 3.10. "Book-Entry Certificate" shall mean a beneficial interest in the Certificates, ownership and transfers of which shall be made through book entries by a Clearing Agency as described in Section 3.10. "Business Trust Statute" shall mean Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as the same may be amended from time to time. "Certificate" shall mean any Trust Security issued hereby substantially in the form of Exhibit A hereto attached. "Certificate Depository Agreement" shall mean the agreement among the Trust and DTC, dated as of the Closing Date, substantially in the form attached hereto as Exhibit D, relating to the Certificates, as the same may be amended and supplemented from time to time. "Certificate Distribution Account" shall have the meaning assigned to such term in the Sale and Servicing Agreement. I-1 7 "Certificate of Trust" shall mean the Certificate of Trust in the form of Exhibit C to be filed for the Trust pursuant to Section 3810(a) of the Business Trust Statute. "Certificate Register" and "Certificate Registrar" shall mean the register mentioned in, and the registrar appointed pursuant to, Section 3.4. "Certificateholder" shall mean a Person in whose name a Certificate is registered. "Clearing Agency" shall mean an organization registered as a "clearing agency" pursuant to Section 17A of the Exchange Act. "Clearing Agency Participant" shall mean a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Code" shall mean the Internal Revenue Code of 1986, as amended, and Treasury Regulations promulgated thereunder. "Co-Owner Trustee" shall mean First Bank National Association. "Company" shall mean Mego Mortgage Corporation, a Delaware corporation. "Corporate Trust Office" shall mean, with respect to the Owner Trustee, the principal corporate trust office of the Owner Trustee located at Rodney Square North, 1100 North Market Street, Wilmington, DE 19890-0001, Attention: Corporate Trust Administration; or at such other address in the State of Delaware as the Owner Trustee may designate by notice to the Owners and the Company, or the principal corporate trust office of any successor Owner Trustee (the address (which shall be in the State of Delaware) of which the successor owner trustee will notify the Owners and the Company). "Definitive Certificates" shall mean a certificated form of security that represents a Trust Security pursuant to Section 3.12. "DTC" shall mean the Depository Trust Company, as the initial Clearing Agency. "ERISA" shall have the meaning assigned thereto in Section 3.10. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Expenses" shall have the meaning assigned to such term in Section 8.2. "Indenture" shall mean the Indenture, dated as of June 14, 1997, by and between the Issuer and the Indenture Trustee. I-2 8 "Indenture Trustee" means First Bank National Association, as Indenture Trustee under the Indenture. "Initial Certificate Principal Balance" shall mean $5,753,639. "Issuer" shall mean Mego Mortgage Home Loan Owner Trust 1997-3, the Delaware business trust created pursuant to this Agreement. "Non-permitted Foreign Holder" shall have the meaning set forth in Exhibit E hereto. "Non-U.S. Person" shall mean an individual, corporation, partnership or other person other than a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, an estate that is subject to U.S. federal income tax regardless of the source of its income, or a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States trustees have authority to control all substantial decisions of the trust. "Owner" shall mean each beneficial owner of a Trust Security. "Owner Trust Estate" shall mean the contribution of $1 referred to in Section 2.5 and the Trust Estate (as defined in the Indenture). "Owner Trustee" shall mean Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as owner trustee under this Agreement, and any successor owner trustee hereunder. "Paying Agent" shall mean the Co-Owner Trustee or any successor in interest thereto or any other paying agent or co-paying agent appointed pursuant to Section 3.9 and authorized by the Issuer to make payments to and distributions from the Certificate Distribution Account, including payment of principal of or interest on the Certificates on behalf of the Issuer. "Percentage Interest" shall mean with respect to any Certificate, the portion of the Certificates as a whole evidenced by such single Certificate, expressed as a percentage rounded to five decimal places, equivalent to a fraction, the numerator of which is the denomination represented by such single Certificate and the denominator of which is the Original Class Principal Balance of the Certificates. With respect to any Residual Instrument, the percentage portion of all of the Residual Interest evidenced thereby as stated on the face of such Residual Instrument. "Prospective Owner" shall have the meaning set forth in Section 3.10(a). "Rating Agency Condition" shall mean, with respect to any action to which a Rating Agency Condition applies, that each Rating Agency shall have been given 10 days (or such I-3 9 shorter period as is acceptable to each Rating Agency) prior notice thereof and that each of the Rating Agencies shall have notified the Depositor, the Company, the Owner Trustee, and the Co-Owner Trustee in writing that such action will not result in a reduction or withdrawal of the then current rating of the Notes and Certificates. "Record Date" shall mean as to each Distribution Date (other than the initial Distribution Date) the last Business Day of the month immediately preceding the month in which such Distribution Date occurs; and with respect to the initial Distribution Date shall mean July 3, 1997. "Residual Instrument" shall have the meaning assigned to such term in the Sale and Servicing Agreement; a form of Residual Instrument is attached hereto as Exhibit B. "Residual Interest" shall mean the right to receive distributions of and with respect to the initial Distribution Date shall mean July 3, 1997. Excess Spread, if any, and certain other funds, if any, on each Distribution Date, pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement. "Residual Instrument Holder" shall mean a Person in whose name a Residual Instrument is registered. "Sale and Servicing Agreement" shall mean the Sale and Servicing Agreement dated as of the date hereof, among the Trust as Issuer, the Depositor, the Indenture Trustee as Indenture Trustee, and Co-Owner Trustee, as Master Servicer, and the Company, as Seller and Servicer. "Secretary of State" shall mean the Secretary of State of the State of Delaware. "Securityholder" shall mean a holder of any Trust Security. "Transaction Documents" shall have the meaning set forth in the Sale and Servicing Agreement. "Treasury Regulations" shall mean regulations, including proposed or temporary regulations, promulgated under the Code. References herein to specific provisions of proposed or temporary regulations shall include analogous provisions of final Treasury Regulations or other successor Treasury Regulations. "Trust" shall mean the trust established by this Agreement. "Trust Security" shall mean any Certificate or Residual Instrument issued pursuant to the Trust Agreement. "Underwriter" shall mean Greenwich Capital Markets, Inc. I-4 10 Section 1.2 Other Definitional Provisions. (a) Capitalized terms used herein and not otherwise defined herein have the meanings assigned to them in the Sale and Servicing Agreement or, if not defined therein, in the Indenture. (b) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. (c) As used in this Agreement and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such certificate or other document, and accounting terms partly defined in this Agreement or in any such certificate or other document to the extent not defined, shall have the respective meanings given to them under generally accepted accounting principles. To the extent that the definitions of accounting terms in this Agreement or in any such certificate or other document are inconsistent with the meanings of such terms under generally accepted accounting principles, the definitions contained in this Agreement or in any such certificate or other document shall control. (d) The words "hereof", "herein", "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; Section and Exhibit references contained in this Agreement are references to Sections and Exhibits in or to this Agreement unless otherwise specified; and the term "including" shall mean "including without limitation". (e) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such terms. (f) Any agreement, instrument or statute defined or referred to herein or in any instrument or certificate delivered in connection herewith means such agreement, instrument or statute as from time to time amended, modified or supplemented and includes (in the case of agreements or instruments) references to all attachments thereto and instruments incorporated therein; references to a Person are also to its permitted successors and assigns. I-5 11 ARTICLE II ORGANIZATION Section 2.1 Name. The Trust created hereby shall be known as "Mego Mortgage Home Loan Owner Trust 1997-3", in which name the Owner Trustee may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. Section 2.2 Office. The office of the Trust shall be in care of the Owner Trustee at the Corporate Trust Office or at such other address in Delaware as the Owner Trustee may designate by written notice to the Owners and the Company. Section 2.3 Purposes and Powers. (a) The purpose of the Trust is to engage in the following activities: (i) to issue the Notes pursuant to the Indenture and the Trust Securities pursuant to this Agreement and to sell such Notes and Trust Securities; (ii) with the proceeds of the sale of the Notes and the Trust Securities, to fund start-up and transactional expenses of the Trust and to pay the balance to the Depositor and the Company, as their interests may appear pursuant to the Sale and Servicing Agreement; (iii) to assign, grant, transfer, pledge, mortgage and convey the Trust Estate pursuant to the Indenture and to hold, manage and distribute to the Owners pursuant to the terms of the Sale and Servicing Agreement any portion of the Trust Estate released from the lien of, and remitted to the Trust pursuant to, the Indenture; (iv) to enter into and perform its obligations under the Transaction Documents to which it is to be a party; (v) to engage in those activities, including entering into agreements, that are necessary, suitable or convenient to accomplish the foregoing or are incidental thereto or connected therewith; and (vi) subject to compliance with the Transaction Documents, to engage in such other activities as may be required in connection with conservation of the Owner Trust Estate and the making of distributions to the Owners and the Noteholders. The Trust is hereby authorized to engage in the foregoing activities. The Trust shall not engage in any activity other than in connection with the foregoing or other than as required or authorized by the terms of this Agreement or the Transaction Documents. II-1 12 Section 2.4 Appointment of Owner Trustee. The Depositor hereby appoints the Owner Trustee as trustee of the Trust effective as of the date hereof, to have all the rights, powers and duties set forth herein. Section 2.5 Initial Capital Contribution of Owner Trust Estate. The Depositor hereby sells, assigns, transfers, conveys and sets over to the Owner Trustee, as of the date hereof, the sum of $1. The Owner Trustee hereby acknowledges receipt in trust from the Depositor, as of the date hereof, of the foregoing contribution, which shall constitute the initial Owner Trust Estate and shall be deposited in the Certificate Distribution Account. The Company shall pay organizational expenses of the Trust as they may arise or shall, upon the request of the Owner Trustee, promptly reimburse the Owner Trustee for any such expenses paid by the Owner Trustee. Section 2.6 Declaration of Trust. The Owner Trustee hereby declares that it will hold the Owner Trust Estate in trust upon and subject to the conditions set forth herein for the use and benefit of the Owners, subject to the obligations of the Trust under the Transaction Documents. It is the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Statute and that this Agreement constitute the governing instrument of such business trust. It is the intention of the parties hereto that, solely for income and franchise tax purposes, the Trust shall be treated as a partnership, with the assets of the partnership being the Home Loans and other assets held by the Trust, the partners of the partnership being the holders of the Trust Securities and the Notes being non-recourse debt of the partnership. The parties agree that, unless otherwise required by appropriate tax authorities, the Trust will file or cause to be filed annual or other necessary returns, reports and other forms consistent with the characterization of the Trust as a partnership for such tax purposes. Effective as of the date hereof, the Owner Trustee shall have all rights, powers and duties set forth herein and in the Business Trust Statute with respect to accomplishing the purposes of the Trust. Section 2.7 Title to Trust Property. (a) Subject to the Indenture, legal title to all the Owner Trust Estate shall be vested at all times in the Trust as a separate legal entity except where applicable law in any jurisdiction requires title to any part of the Owner Trust Estate to be vested in a trustee or trustees, in which case title shall be deemed to be vested in the Owner Trustee, the Co-Owner Trustee and/or a separate trustee, as the case may be. (b) The Owners shall not have legal title to any part of the Owner Trust Estate. No transfer by operation of law or otherwise of any interest of the Owners shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of any part of the Owner Trust Estate. II-2 13 Section 2.8 Situs of Trust. The Trust will be located and administered in the state of Delaware. All bank accounts maintained by the Owner Trustee on behalf of the Trust shall be located in the State of Delaware or the State of New York, except with respect to the Co-Owner Trustee. The Trust shall not have any employees; provided, however, that nothing herein shall restrict or prohibit the Owner Trustee from having employees within or without the State of Delaware. Payments will be received by the Trust only in Delaware or New York, and payments will be made by the Trust only from Delaware or New York, except with respect to the Co-Owner Trustee. The only office of the Trust will be at the Corporate Trust Office in Delaware. Section 2.9 Representations and Warranties of the Depositor and the Company; Covenant of the Company. (a) The Depositor hereby represents and warrants to the Owner Trustee and the Co-Owner Trustee that: (i) The Depositor is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has all licenses necessary to carry on its business as now being conducted. The Depositor has the power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Depositor and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action of the Depositor; this Agreement evidences the valid, binding and enforceable obligation of the Depositor; and all requisite action has been taken by the Depositor to make this Agreement valid, binding and enforceable upon the Depositor in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium and other, similar laws relating to or affecting creditors' rights generally or the application of equitable principles in any proceeding, whether at law or in equity. (ii) The consummation of the transactions contemplated by this Agreement will not result in (i) the breach of any terms or provisions of the Articles of Incorporation or Bylaws of the Depositor, (ii) the breach of any term or provision of, or conflict with or constitute a default under or result in the acceleration of any obligation under, any material agreement, indenture or loan or credit agreement or other material instrument to which the Depositor, or its property is subject, or (iii) the violation of any law, rule, regulation, order, judgment or decree to which the Depositor or its respective property is subject. (iii) The Depositor is not in default with respect to any order or decree of any court or any order, regulation or demand of any federal, state, municipal or other governmental agency, which default might have consequences that would materially and adversely affect the condition (financial or otherwise) or operations of II-3 14 the Depositor or its properties or might have consequences that would materially and adversely affect its performance hereunder. (b) The Company hereby represents and warrants to the Owner Trustee and the Co-Owner Trustee that: (i) The Company is duly organized and validly existing as a corporation in good standing under the laws of the State of Delaware, with power and authority to own its properties and to conduct its business as such properties are currently owned and such business is presently conducted. (ii) The Company is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease of property or the conduct of its business shall require such qualifications. (iii) The Company has the power and authority to execute and deliver this Agreement and to carry out its terms; and the execution, delivery and performance of this Agreement has been duly authorized by the Company by all necessary corporate action. (iv) The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof do not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the articles of incorporation or by-laws of the Company, or any indenture, agreement or other instrument to which the Company is a party or by which it is bound; nor result in the creation or imposition of any lien upon any of its properties pursuant to the terms of any such indenture, agreement or other instrument (other than pursuant to the Transaction Documents); nor violate any law or, to the best of the Company's knowledge, any order, rule or regulation applicable to the Company of any court or of any Federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Company or its properties. (v) There are no proceedings or investigations pending or, to the Company's best knowledge, threatened, before any court, regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Company or its properties: (i) asserting the invalidity of this Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Company of its obligations under, or the validity or enforceability of, this Agreement. II-4 15 (c) The Company covenants with the Owner Trustee and the Co-Owner Trustee that during the continuance of this Agreement it will comply in all respects with the provisions of its Certificate of Incorporation in effect from time to time. Section 2.10 Federal Income Tax Allocations. Net income of the Trust for any month, as determined for Federal income tax purposes (and each item of income, gain, loss and deduction entering into the computation thereof), shall be allocated to the holders of the Residual Instruments, on a pro rata basis. II-5 16 ARTICLE III TRUST SECURITIES AND TRANSFER OF INTERESTS Section 3.1 Initial Ownership. Upon the formation of the Trust by the contribution by the Depositor pursuant to Section 2.5 and until the issuance of the Trust Securities, the Depositor shall be the sole Owner of the Trust. Section 3.2 The Trust Securities. The Certificates shall be issued in minimum denominations of $100,000 and in integral multiples of $1,000 in excess thereof. The Residual Instruments shall not be issued with a principal or notional amount. The Trust Securities shall be executed on behalf of the Trust by manual or facsimile signature of a Trust Officer of the Owner Trustee or the Co-Owner Trustee. Trust Securities bearing the manual or facsimile signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be valid and binding obligations of the Trust, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the authentication and delivery of such Trust Securities or did not hold such offices at the date of authentication and delivery of such Trust Securities. A transferee of a Trust Security shall become an Owner, and shall be entitled to the rights and subject to the obligations of an Owner hereunder and under the Sale and Servicing Agreement, upon such transferee's acceptance of a Trust Security duly registered in such transferee's name pursuant to Section 3.4. Section 3.3 Execution, Authentication and Delivery of Trust Securities. Concurrently with the sale of the Home Loans to the Trust pursuant to the Sale and Servicing Agreement, the Owner Trustee or the Co-Owner Trustee shall cause the Certificates, in an aggregate principal amount equal to the initial Class Principal Balance of the Certificates, and the Residual Instruments representing 100% of the Percentage Interests of the Residual Interest to be executed on behalf of the Trust, authenticated and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president or any vice president, without further corporate action by the Depositor, in authorized denominations. No Trust Security shall entitle its holder to any benefit under this Agreement, or shall be valid for any purpose, unless there shall appear on such Trust Security a certificate of authentication substantially in the form set forth in Exhibit A and B, executed by the Owner Trustee or the Administrator, as the Owner Trustee's authenticating agent, by manual or facsimile signature; such authentication shall constitute conclusive evidence that such Trust Security shall have been duly authenticated and delivered hereunder. All Trust Securities shall be dated the date of their authentication. Section 3.4 Registration of Transfer and Exchange of Trust Securities. The Certificate Registrar shall keep or cause to be kept, at the office or agency maintained pursuant to Section 3.8, a Certificate Register in which, subject to such reasonable regulations as it may prescribe, the Owner Trustee shall provide for the registration of Trust Securities III-1 17 and of transfers and exchanges of Trust Securities as herein provided. The Administrator shall be the initial Certificate Registrar. Upon surrender for registration of transfer of any Trust Security at the office or agency maintained pursuant to Section 3.8, the Owner Trustee or Co-Owner Trustee shall execute, authenticate and deliver (or shall cause the Administrator as its authenticating agent to authenticate and deliver), in the name of the designated transferee or transferees, one or more new Trust Securities in authorized denominations of a like aggregate amount dated the date of authentication by the Owner Trustee or any authenticating agent. At the option of an Owner, Trust Securities may be exchanged for other Trust Securities of authorized denominations of a like aggregate amount upon surrender of the Trust Securities to be exchanged at the office or agency maintained pursuant to Section 3.8. Every Trust Security presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Owner Trustee and the Certificate Registrar duly executed by the Owner or his attorney duly authorized in writing. In addition, each Trust Security presented or surrendered for registration of transfer and exchange must be accompanied by a letter from the Prospective Owner certifying as to the representations set forth in Sections 3.13(a) and (b), as applicable. Each Trust Security surrendered for registration of transfer or exchange shall be canceled and disposed of by the Owner Trustee in accordance with its customary practice. No service charge shall be made for any registration of transfer or exchange of Trust Securities, but the Owner Trustee or 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 Trust Securities. The preceding provisions of this Section notwithstanding, the Owner Trustee shall not make and the Certificate Registrar shall not register transfer or exchanges of Trust Securities for a period of 15 days preceding the due date for any payment with respect to any of the Trust Securities. Section 3.5 Mutilated, Destroyed, Lost or Stolen Trust Securities. If (a) any mutilated Trust Security shall be surrendered to the Certificate Registrar, or if the Certificate Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Security and (b) there shall be delivered to the Certificate Registrar and the Owner Trustee such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Security shall have been acquired by a bona fide purchaser, the Owner Trustee on behalf of the Trust shall execute and the Owner Trustee, or the Administrator as the Owner Trustee's authenticating agent, shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Security, a new Trust Security of like tenor and denomination. In connection with the issuance of any new Trust Security under this Section, the Owner Trustee or the Certificate Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that III-2 18 may be imposed in connection therewith. Any duplicate Trust Security issued pursuant to this Section shall constitute conclusive evidence of ownership or the related Percentage Interest in the Nos. and Interest, as if originally issued, whether or not the lost, stolen or destroyed Trust Security shall be found at any time. Section 3.6 Persons Deemed Owners. Prior to due presentation of a Trust Security for registration of transfer, the Owner Trustee or the Certificate Registrar may treat the Person in whose name any Trust Security shall be registered in the Certificate Register as the owner of such Trust Security for the purpose of receiving distributions pursuant to Section 5.2 and for all other purposes whatsoever, and neither the Owner Trustee nor the Certificate Registrar shall be bound by any notice to the contrary. Section 3.7 Access to List of Owners' Names and Addresses. The Certificate Registrar shall furnish or cause to be furnished to the Master Servicer, the Servicer, the Depositor and the Indenture Trustee within 15 days after receipt by the Owner Trustee of a request therefor from the Master Servicer, the Servicer, the Depositor, or the Indenture Trustee in writing, a list, in such form as the Master Servicer, the Servicer, the Depositor or the Indenture Trustee may reasonably require, of the names and addresses of the Owners as of the most recent Record Date. If three or more Certificateholders together evidencing not less than a 25% Percentage Interest in the Certificates apply in writing to the Owner Trustee, and such application states that the applicants desire to communicate with other Certificateholders with respect to their rights under this Agreement or under the Certificates and such application is accompanied by a copy of the communication that such applicants propose to transmit, then the Owner Trustee shall, within five Business Days after the receipt of such application, afford such applicants access during normal business hours to the current list of Certificateholders. Each Owner, by receiving and holding a Certificate, shall be deemed to have agreed not to hold any of the Depositor, the Company, the Certificate Registrar or the Owner Trustee accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. Section 3.8 Maintenance of Office or Agency. The Owner Trustee shall maintain an office or offices or agency or agencies where Trust Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Owner Trustee in respect of the Trust Securities and the Transaction Documents may be served. The Owner Trustee initially designates the Administrator's office in St. Paul, Minnesota as its principal corporate trust office for such purposes. The Owner Trustee shall give prompt written notice to the Company and to the Securityholders of any change in the location of the Certificate Register or any such office or agency. Section 3.9 Appointment of Paying Agent. The Owner Trustee hereby appoints the Co-Owner Trustee as Paying Agent under this Agreement. The Paying Agent shall make distributions to Securityholders from the Certificate Distribution Account pursuant to Section 5.2 hereof and Section 5.01 of the Sale and Servicing Agreement and shall report the amounts of such distributions to the Owner Trustee. The Paying Agent shall have the revocable power III-3 19 to withdraw funds from the Certificate Distribution Account for the purpose of making the distributions referred to above. In the event that the Co-Owner Trustee shall no longer be the Paying Agent hereunder, the Owner Trustee shall appoint a successor to act as Paying Agent (which shall be a bank or trust company). The Owner Trustee shall cause such successor Paying Agent or any additional Paying Agent appointed by the Owner Trustee to execute and deliver to the Owner Trustee an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Owner Trustee that as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Owners in trust for the benefit of the Securityholders entitled thereto until such sums shall be paid to such Owners. The Paying Agent shall return all unclaimed funds to the Owner Trustee, and upon removal of a Paying Agent, such Paying Agent shall also return all funds in its possession to the Owner Trustee. The provisions of Sections 7.1, 7.3, 7.4 and 8.1 shall apply to the Co-Owner Trustee also in its role as Paying Agent, for so long as the Co-Owner Trustee shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. Notwithstanding anything herein to the contrary, the Co-Owner Trustee and the Paying Agent shall be the same entity as the Indenture Trustee under the Indenture and the Sale and Servicing Agreement. In such event, the Co-Owner Trustee and the Paying Agent shall resign and the Owner Trustee shall assume the duties and obligations of the Co-Owner Trustee and the Paying Agent hereunder and under the Sale and Servicing Agreement. Section 3.10 Book-Entry Certificates. The Trust Certificates, upon original issuance, will be issued in the form of a typewritten Trust Certificate or Certificates representing Book-Entry Certificates, to be delivered to The Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the Trust; provided, however, that one Definitive Trust Certificate (the Residual Instrument) may be issued to the Company. Such Book-Entry Certificate or Certificates shall initially be registered on the Certificate Register in the name of Cede & Co., the nominee of the initial Clearing Agency, and no Owner of a Book-Entry Certificate will receive a definitive Certificate representing such Owner's interest in such Certificate, except as provided in this Section 3.10 and in Section 3.12. Unless and until Definitive Certificates, fully registered, have been issued to Certificate Owners pursuant to Section 3.12: (i) the provisions of this Section shall be in full force and effect; (ii) the Certificate Registrar and the Owner Trustee shall be entitled to deal with the Clearing Agency for all purposes of this Agreement (including the payment of principal of and interest on the Certificates and the giving of instructions or directions hereunder) as the sole Holder of such Certificates and shall have no obligation to the related Certificate Owners; III-4 20 (iii) to the extent that the provisions of this Section conflict with any other provisions of this Agreement, the provisions of this Section shall control; (iv) the rights of Certificate Owners shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Certificate Owners and the Clearing Agency and/or the Clearing Agency Participants. Pursuant to the Certificate Depository Agreement, unless and until Definitive Certificates are issued pursuant to Section 3.12, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit payments of principal of and interest on the Certificates to such Clearing Agency Participants; and (v) whenever this Agreement requires or permits actions to be taken based upon instructions or directions of Holders of Certificates evidencing a specified percentage of the Class Principal Balance of the Certificates, the Clearing Agency shall be deemed to represent such percentage only to the extent that it has received instructions to such effect from Certificate Owners and/or Clearing Agency Participants owning or representing, respectively, such required percentage of the beneficial interest in the Certificates and has delivered such instructions to the Owner Trustee. Section 3.11 Notices to Clearing Agency. Whenever a notice or other communication to the Certificateholders is required under this Agreement, unless and until Definitive Certificates shall have been issued to Certificate Owners pursuant to Section 3.12, the Owner Trustee shall give all such notices and communications specified herein to be given to Certificateholders to the Clearing Agency, and shall have no obligations to the Certificate Owners. Section 3.12 Definitive Certificates. If (i) the Administrator advises the Owner Trustee in writing that the Clearing Agency is no longer willing or able to properly discharge its responsibilities with respect to the Certificates, and the Administrator is unable to locate a qualified successor, (ii) the Administrator at its option advises the Owner Trustee in writing that it elects to terminate the book-entry system through the Clearing Agency or (iii) after the occurrence of an Event of Default, Certificate Owners representing beneficial interests aggregating at least 50% of the Class Principal Balance of the Certificates advise the Clearing Agency in writing that the continuation of a book-entry system through the Clearing Agency is no longer in the best interest of the Certificate Owners, then the Clearing Agency shall notify all Certificate Owners and the Owner Trustee of the occurrence of any such event and of the availability of the Definitive Certificates to Certificate Owners requesting the same. Upon surrender to the Owner Trustee of the typewritten Certificate or Certificates representing the Book-Entry Certificates by the Clearing Agency, accompanied by registration instructions, the Owner Trustee shall execute and authenticate the Definitive Certificates in accordance with the instructions of the Clearing Agency. Neither the Certificate Registrar nor the Owner 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 III-5 21 Certificates, the Owner Trustee shall recognize the Holders of the Definitive Certificates as Certificateholders. The Definitive Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Owner Trustee, as evidenced by its execution thereof. Section 3.13 Restrictions on Transfer of Trust Securities. (a) No Trust Security may be acquired, by or for the account of (i) an employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) that is subject to the provisions of Title I of ERISA, (ii) a plan described in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended, or (iii) any entity, including an insurance company separate account or general account, whose underlying assets include plan assets by reason of a plan's investment in the entity (each, a "Benefit Plan"). By accepting and holding a Trust Security, the Owner thereof shall be deemed to have represented and warranted that it is not a Benefit Plan. (b) Each prospective purchaser and any subsequent transferee of a Residual Instrument (each, a "Prospective Owner"), other than the Company or a wholly-owned subsidiary of the Company, shall represent and warrant, in writing, to the Owner Trustee and the Certificate Registrar and any of their respective successors that: (i) Such Person is (A) a "qualified institutional buyer" as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and is aware that the seller of such Residual Instrument may be relying on the exemption from the registration requirements of the Securities Act provided by Rule 144A and is acquiring such Residual Instrument for its own account or for the account of one or more qualified institutional buyers for whom it is authorized to act, or (B) a Person involved in the organization or operation of the Trust or an affiliate of such Person within the meaning of Rule 3a-7 of the Investment Company Act of 1940, as amended (including, but not limited to, the Seller or the Company). (ii) Such Person understands that such Residual Instrument has not been and will not be registered under the Securities Act and may be offered, sold, pledged or otherwise transferred only to a person whom the seller reasonably believes is (A) a qualified institutional buyer or (B) a Person involved in the organization or operation of the Trust or an affiliate of such Person, in a transaction meeting the requirements of Rule 144A under the Securities Act and in accordance with any applicable securities laws of any state of the United States. (iii) Such Person understands that each Residual Instrument bears a legend to the following effect: III-6 22 THIS RESIDUAL INSTRUMENT HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THIS RESIDUAL INSTRUMENT MAY BE DIRECTLY OR INDIRECTLY OFFERED OR SOLD OR OTHERWISE DISPOSED OF (INCLUDING PLEDGED) BY THE HOLDER HEREOF ONLY TO (I) A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE ACT, IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT PURSUANT TO RULE 144A OR [(II) A PERSON INVOLVED IN THE ORGANIZATION OR OPERATION OF THE TRUST OR AN AFFILIATE OF SUCH A PERSON WITHIN THE MEANING OF RULE 3a-7 OF THE INVESTMENT COMPANY ACT OF 1940], AS AMENDED (INCLUDING, BUT NOT LIMITED TO, MEGO MORTGAGE CORPORATION) IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. NO PERSON IS OBLIGATED TO REGISTER THIS RESIDUAL INSTRUMENT UNDER THE ACT OR ANY STATE SECURITIES LAWS." (iv) Such Person shall comply with the provisions of Section 3.13(b), as applicable, relating to the ERISA restrictions with respect to the acceptance or acquisition of such Residual Instrument. (c) Each Prospective Owner, other than the Company, shall either: (i) represent and warrant, in writing, to the Owner Trustee and the Certificate Registrar and any of their respective successors that the Prospective Owner is not (A) an "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or (B) a "plan" within the meaning of Section 4975(e)(1) of the Code (any such plan or employee benefit plan, a "Plan") or (C) any entity, including an insurance company separate account or general account, whose underlying assets include plan assets by reason of a plan's investment in the entity and is not directly or indirectly purchasing such Trust Security on behalf of, as investment manager of, as named fiduciary of, as trustee of, or with assets of a Plan; or III-7 23 (ii) furnish to the Owner Trustee and the Certificate Registrar and any of their respective successors an opinion of counsel acceptable to such persons that (A) the proposed issuance or transfer of such Trust Security to such Prospective Owner will not cause any assets of the Trust to be deemed assets of a Plan, or (B) the proposed issuance or transfer of such Trust Security will not cause the Owner Trustee or the Certificate Registrar or any of their respective successors to be a fiduciary of a Plan within the meaning of Section 3(21) of ERISA and will not give rise to a transaction described in Section 406 of ERISA or Section 4975(c)(1) of the Code for which a statutory or administrative exemption is unavailable. (d) By its acceptance of a Residual Instrument, each Prospective Owner agrees and acknowledges that no legal or beneficial interest in all or any portion of the Residual Instruments may be transferred directly or indirectly to an individual, corporation, partnership or other person unless such transferee is not a Non-U.S. Person (any such person being referred to herein as a "Non-permitted Foreign Holder"), and any such purported transfer shall be void and have no effect. (e) Neither The Owner Trustee nor the Administrator shall execute, or countersign and deliver, any Residual Instrument in connection with any transfer thereof unless the transferor shall have provided to the Owner Trustee or the Administrator a certificate, substantially in the form attached as Exhibit E to this Agreement, signed by the transferee or a Non-permitted Foreign Holder, which certificate shall contain the consent of the transferee to any amendments of this Agreement as may be required to effectuate further the foregoing restrictions on transfer of any Residual Instrument to Non-permitted Foreign Holders, and an agreement by the transferee that it will not transfer any Residual Instrument without providing to the Certificate Registrar on behalf of the Owner Trustee a certificate substantially in the form attached as Exhibit E to this Agreement. (f) Each Residual Instrument shall bear an additional legend referring to the foregoing restrictions contained in paragraphs (c) and (d) above. (g) The Prospective Owner of a Residual Instrument shall obtain an opinion of counsel to the effect that, as a matter of Federal income tax law, such Prospective Owner is permitted to accept the transfer of a Residual Instrument. (h) No Residual Instrument may be transferred without an Opinion of Counsel to the effect that such transfer would not jeopardize the tax treatment of the Trust, would not subject the Trust to an entity-level tax, and would not jeopardize the status of the Notes as debt for all purposes. III-8 24 (i) The Residual Instruments shall not be listed for trading on an established securities market, nor be readily tradeable on a secondary market, nor be transferable through the substantial equivalent of a secondary market, nor shall the Issuer be permitted to have more than one hundred 100 partners, for income tax purposes, all within the meaning of Code Section 7704, and its attendant regulations, as applicable. If requested, in the discretion of the Owner Trustee, transfer of a Residual Instrument shall be made only if accompanied by an opinion of counsel satisfactory to the Owner Trustee or the Co-Owner Trustee, which opinion of counsel shall not be an expense of the Issuer, the Owner Trustee, the Servicer or the Seller, to the effect such transfer will not cause the Issuer to be a publicly traded partnership taxable as a corporation and will not cause the termination of the Issuer under the federal income tax rules applicable to partnerships. III-9 25 ARTICLE IV ACTIONS BY OWNER TRUSTEE Section 4.1 Prior Notice to Certificateholders with Respect to Certain Matters. With respect to the following matters, the Owner Trustee shall not take action, and the Certificateholders shall not direct the Owner Trustee to take any action, unless at least 30 days before the taking of such action, the Owner Trustee shall have notified the Certificateholders in writing of the proposed action and the Certificateholders shall not have notified the Owner Trustee in writing prior to the 30th day after such notice is given that such Certificateholders have withheld consent or the Certificateholders have provided alternative direction: (a) the initiation of any claim or lawsuit by the Trust (except claims or lawsuits brought in connection with the collection of the Home Loans) and the compromise of any action, claim or lawsuit brought by or against the Trust (except with respect to the aforementioned claims or lawsuits for collection of the Home Loans); (b) the election by the Trust to file an amendment to the Certificate of Trust (unless such amendment is required to be filed under the Business Trust Statute); (c) the amendment or other change to this Agreement or any Transaction Document in circumstances where the consent of any Noteholder is required; (d) the amendment or other change to this Agreement or any Transaction Document in circumstances where the consent of any Noteholder is not required and such amendment materially adversely affects the interest of the Certificateholders; (e) the appointment pursuant to the Indenture of a successor Note Registrar, Paying Agent or Indenture Trustee or pursuant to this Agreement of a successor Certificate Registrar, or the consent to the assignment by the Note Registrar, Paying Agent or Indenture Trustee or Certificate Registrar of its obligations under the Indenture or this Agreement, as applicable; (f) the consent to the calling or waiver of any default of any Transaction Document; (g) the consent to the assignment by the Indenture Trustee, the Master Servicer or Servicer of their respective obligations under any Transaction Document; (h) except as provided in Article IX hereof, dissolve, terminate or liquidate the Trust in whole or in part; (i) merge or consolidate the Trust with or into any other entity, or convey or transfer all or substantially all of the Trust's assets to any other entity; IV-1 26 (j) cause the Trust to incur, assume or guaranty any indebtedness other than the Notes, as set forth in this Agreement; (k) do any act that conflicts with any other Transaction Document; (l) do any act which would make it impossible to carry on the ordinary business of the Trust; (m) confess a judgment against the Trust; (n) possess Trust assets, or assign the Trust's right to property, for other than a Trust purpose; (o) cause the Trust to lend any funds to any entity; or (p) change the Trust's purpose and powers from those set forth in this Trust Agreement. In addition the Trust shall not commingle its assets with those of any other entity. The Trust shall maintain its financial and accounting books and records separate from those of any other entity. Except as expressly set forth herein, the Trust shall pay its indebtedness, operating expenses from its own funds, and the Trust shall not pay the indebtedness, operating expenses and liabilities of any other entity. The Trust shall maintain appropriate minutes or other records of all appropriate actions and shall maintain its office separate from the offices of the Company, the Depositor, and any of their respective affiliates. This Agreement is and shall be the only agreement among the parties hereto with respect to the creation, operation and termination of the Trust. For accounting purposes, the Trust shall be treated as an entity separate and distinct from any Certificateholder. The pricing and other material terms of all transactions and agreements to which the Trust is a party shall be intrinsically fair to all parties thereto. The Owner Trustee shall not have the power, except upon the direction of the Certificateholders, and to the extent otherwise consistent with the Transaction Documents, to (i) remove or replace the Master Servicer, the Servicer or the Indenture Trustee, (ii) institute proceedings to have the Trust declared or adjudicated a bankrupt or insolvent, (iii) consent to the institution of bankruptcy or insolvency proceedings against the Trust, (iv) file a petition or consent to a petition seeking reorganization or relief on behalf of the Trust under any applicable federal or state law relating to bankruptcy, (v) consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or any similar official) of the Trust or a substantial portion of the property of the Trust, (vi) make any assignment for the benefit of the Trust's creditors, (vii) cause the Trust to admit in writing its inability to pay its debts generally as they become due, or (viii) take any action, or cause the Trust to take any action, in furtherance of any of the foregoing (any of the above, a "Bankruptcy Action"). So long as the Indenture remains in effect, no Certificateholder shall have the power to take, and shall IV-2 27 not take, any Bankruptcy Action with respect to the Trust or the Company or direct the Owner Trustee to take any Bankruptcy Action with respect to the Trust or the Company. Section 4.2 Action by Certificateholders with Respect to Certain Matters. The Owner Trustee shall not have the power, except upon the direction of the Certificateholders, to (a) remove the Administrator pursuant to the Administration Agreement, (b) appoint a successor Administrator pursuant to the Administration Agreement, (c) remove the Master Servicer pursuant to the Sale and Servicing Agreement, (d) remove the Servicer pursuant to the Servicing Agreement, or (e) sell the Home Loans after the termination of the Indenture. The Owner Trustee shall take the actions referred to in the preceding sentence only upon written instructions signed by the Certificateholders. Section 4.3 Action by Certificateholders with Respect to Bankruptcy. The Owner Trustee shall not have the power to commence a voluntary proceeding in bankruptcy relating to the Trust without the unanimous prior approval of all Certificateholders and the delivery to the Owner Trustee by each such Certificateholder of a certificate certifying that such Certificateholder reasonably believes that the Trust is insolvent. Section 4.4 Restrictions on Owners' Power. The Owners shall not direct the Owner Trustee to take or refrain from taking any action if such action or inaction would be contrary to any obligation of the Trust or the Owner Trustee under this Agreement or any of the Transaction Documents or would be contrary to Section 2.3 nor shall the Owner Trustee be obligated to follow any such direction, if given. Section 4.5 Majority Control. Except as expressly provided herein, any action that may be taken by the Certificateholders under this Agreement may be taken by the Holders of Certificates evidencing more than a 50% of the Class Principal Balance of the Certificates. Except as expressly provided herein, any written notice of the Owners delivered pursuant to this Agreement shall be effective if signed by Holders of Certificates evidencing more than 50% of the Class Principal Balance of the Certificates at the time of the delivery of such notice. IV-3 28 ARTICLE V APPLICATION OF TRUST FUNDS; CERTAIN DUTIES Section 5.1 Establishment of Trust Account. The Owner Trustee shall cause the Indenture Trustee, to establish and maintain with First Bank National Association for the benefit of the Owner Trustee or Co-Owner Trustee one or more Eligible Accounts which while the Co-Owner Trustee holds such Trust Account shall be entitled "CERTIFICATE DISTRIBUTION ACCOUNT, FIRST BANK NATIONAL ASSOCIATION, AS INDENTURE TRUSTEE AND CO-OWNER TRUSTEE, IN TRUST FOR THE MEGO MORTGAGE HOME LOAN ASSET BACKED CERTIFICATES, SERIES 1997-3". Funds shall be deposited in the Certificate Distribution Account as required by the Sale and Servicing Agreement. All of the right, title and interest of the Co-Owner Trustee or Owner Trustee in all funds on deposit from time to time in the Certificate Distribution Account and in all proceeds thereof shall be held for the benefit of the Owners and such other persons entitled to distributions therefrom. Except as otherwise expressly provided herein or in the Sale and Servicing Agreement, the Certificate Distribution Account shall be under the sole dominion and control of the Owner Trustee or Co-Owner Trustee for the benefit of the Owners and the Servicer. In addition to the foregoing, the Certificate Distribution Account is a Trust Account under the Sale and Servicing Agreement and constitutes part of the Trust Estate pledged by the Trust to the Indenture Trustee under the Indenture. The Certificate Distribution Account shall be subject to and established and maintained in accordance with the applicable provisions of the Sale and Servicing Agreement and the Indenture, including, without limitation, the provisions of Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement regarding distributions from the Certificate Distribution Account. The Company agrees to direct and shall have the sole authority to direct the Owner Trustee or Co-Owner Trustee, or their successor in interest, as to the Permitted Investments in which the funds on deposit in the Trust Accounts (as such term is defined in the Sale and Servicing Agreement) may be invested. Section 5.2 Application Of Trust Funds. (a) On each Distribution Date, the Owner Trustee or Co-Owner Trustee shall direct the Paying Agent to make the distributions and payments set forth in Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement from amounts on deposit in the Note Distribution Account and the Certificate Distribution Account, respectively. (b) On or before the third Business Day following each Distribution Date, the Owner Trustee shall cause the Paying Agent to send to DTC and each Residual Instrument V-1 29 Holder the statement provided to the Owner Trustee by the Servicer pursuant to Section 6.02 of the Sale and Servicing Agreement with respect to such Distribution Date. (c) In the event that any withholding tax is imposed on the Trust's payment (or allocations of income) to an Owner, such tax shall reduce the amount otherwise distributable to the Owner in accordance with this Section. The Owner Trustee is hereby authorized and directed to retain from amounts otherwise distributable to the Owners sufficient funds for the payment of any tax that is legally owed by the Trust (but such authorization shall not prevent the Owner Trustee from contesting any such tax in appropriate proceedings, and withholding payment of such tax, if permitted by law, pending the outcome of such proceedings). The amount of any withholding tax imposed with respect to an Owner shall be treated as cash distributed to such Owner at the time it is withheld by the Trust and remitted to the appropriate taxing authority. If there is a possibility that withholding tax is payable with respect to a distribution (such as a distribution to a non-U.S. Owner), the Owner Trustee may in its sole discretion withhold such amounts in accordance with this paragraph (c). In the event that an Owner wishes to apply for a refund of any such withholding tax, the Owner Trustee shall reasonably cooperate with such owner in making such claim so long as such Owner agrees to reimburse the Owner Trustee for any out-of-pocket expenses incurred. Section 5.3 Method of Payment. Distributions required to be made to Owners on any Distribution Date shall be made to each Owner of record on the preceding Record Date in the manner set forth in Section 5.03 of the Sale and Servicing Agreement. Section 5.4 Segregation of Moneys; No Interest. Subject to Sections 4.1 and 5.2, moneys received by the Owner Trustee hereunder and deposited into the Certificate Distribution Account will be segregated except to the extent required otherwise by law or the Sale and Servicing Agreement and shall be invested in Permitted Investments at the direction of the Company. The Owner Trustee shall not be liable for payment of any interest in respect of such moneys. Section 5.5 Accounting and Reports to the Residual Instrument Holders, Certificateholders, Owners, the Internal Revenue Service and Others. The Owner Trustee shall (a) maintain (or cause to be maintained) the books of the Trust on a calendar year basis on the accrual method of accounting, and such books shall be maintained separate from those of any other entity and reflect the separate interest of the Trust, (b) deliver to each Owner, as may be required by the Code and applicable Treasury Regulations, such information as may be required to enable each Owner to prepare its federal and state income tax returns, (c) file such tax return relating to the Trust (including a partnership information return, IRS Form 1065), and make such elections as may from time to time be required or appropriate under any applicable state or Federal statute or rule or regulation thereunder so as to maintain the Trust's characterization as a partnership for Federal income tax purposes, (d) cause such tax returns to be signed in the manner required by law and (e) collect or cause to be collected any withholding tax as described in and in accordance with Section 5.2(c) with respect to income or distributions to Owners. The Owner Trustee shall elect under Section 1278 of the Code to V-2 30 include in income currently any market discount that accrues with respect to the Home Loans. The Owner Trustee shall not make the election provided under Section 754 of the Code. Section 5.6 Signature on Returns. The Owner Trustee shall sign on behalf of the Trust the tax returns of the Trust, unless applicable law requires an Owner to sign such documents, in which case such documents shall be signed by the Company. V-3 31 ARTICLE VI AUTHORITY AND DUTIES OF OWNER TRUSTEE Section 6.1 General Authority. The Owner Trustee is authorized and directed to execute and deliver or cause to be executed and delivered the Notes, the Trust Securities and the Transaction Documents to which the Trust is to be a party and each certificate or other document attached as an exhibit to or contemplated by the Transaction Documents to which the Trust is to be a party and any amendment or other agreement or instrument described in Article III, in each case, in such form as the Company shall approve, as evidenced conclusively by the Owner Trustee's execution thereof, and, on behalf of the Trust, to direct the Indenture Trustee to authenticate and deliver Classes of Notes in the following aggregate principal amounts: Class A-1 Notes, $33,400,000; Class A-2 Notes, $25,700,000; Class A-3 Notes, $6,500,000; Class A-4 Notes, $9,451,000; Class M-1 Notes $16,213,000; and Class M- 2 Notes, $7,584,000; The Administrator on behalf of the Owner Trustee shall authenticate and deliver the Certificates. In addition to the foregoing, the Owner Trustee is authorized, but shall not be obligated, to take all actions required of the Trust, pursuant to the Transaction Documents. Section 6.2 General Duties. It shall be the duty of the Owner Trustee: (a) to discharge (or cause to be discharged) all of its responsibilities pursuant to the terms of this Agreement and the Transaction Documents to which the Trust is a party and to administer the Trust in the interest of the Owners, subject to the Transaction Documents and in accordance with the provisions of this Agreement. Notwithstanding the foregoing, the Owner Trustee shall be deemed to have discharged its duties and responsibilities hereunder and under the Transaction Documents to the extent the Administrator or the Co-Owner Trustee has agreed in the Administration Agreement or this Agreement, respectively, to perform any act or to discharge any duty of the Owner Trustee or the Trust hereunder or under any Transaction Document, and the Owner Trustee shall not be held liable for the default or failure of the Administrator or the Co-Owner Trustee to carry out its obligations under the Administration Agreement or this Agreement, respectively; and (b) to obtain and preserve, the Issuer's qualification to do business in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of the Indenture, the Notes, the Trust Estate and each other instrument and agreement included in the Trust Estate. Section 6.3 Action upon Instruction. (a) Subject to Article IV and in accordance with the terms of the Transaction Documents, the Owners may by written instruction direct the Owner Trustee in the management of the Trust but only to the extent consistent with the limited purpose of the VI-1 32 Trust. Such direction may be exercised at any-time by written instruction of the Owners pursuant to Article IV. (b) The Owner Trustee shall not be required to take any action hereunder or under any Transaction Document if the Owner Trustee shall have reasonably determined, or shall have been advised by counsel, that such action is likely to result in liability on the part of the Owner Trustee or is contrary to the terms hereof or of any Transaction Document or is otherwise contrary to law. (c) Whenever the Owner Trustee is unable to decide between alternative courses of action permitted or required by the terms of this Agreement or under any Transaction Document, the Owner Trustee shall promptly give notice (in such form as shall be appropriate under the circumstances) to the Owners requesting instruction from the Owners as to the course of action to be adopted, and to the extent the Owner Trustee acts in good faith in accordance with any written instruction of the Owners received, the Owner Trustee shall not be liable on account of such action to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action, not inconsistent with this Agreement or the Transaction Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. (d) In the event that the Owner Trustee is unsure as to the application of any provision of this Agreement or any Transaction Document or any such provision is ambiguous as to its application, or is, or appears to be, in conflict with any other applicable provision, or in the event that this Agreement permits any determination by the Owner Trustee or is silent or is incomplete as to the course of action that the Owner Trustee is required to take with respect to a particular set of facts, the Owner Trustee may give notice (in such form as shall be appropriate under the circumstances) to the Owners requesting instruction and, to the extent that the Owner Trustee acts or refrains from acting in good faith in accordance with any such instruction received, the Owner Trustee shall not be liable, on account of such action or inaction, to any Person. If the Owner Trustee shall not have received appropriate instruction within 10 days of such notice (or within such shorter period of time as reasonably may be specified in such notice or may be necessary under the circumstances) it may, but shall be under no duty to, take or refrain from taking such action, not inconsistent with this Agreement or the Transaction Documents, as it shall deem to be in the best interests of the Owners, and shall have no liability to any Person for such action or inaction. Section 6.4 No Duties Except as Specified in this Agreement, the Transaction Documents or in Instructions. The Owner Trustee shall not have any duty or obligation to manage, make any payment with respect to, register, record, sell, dispose of, or otherwise deal with the Owner Trust Estate, or to otherwise take or refrain from taking any action under, or VI-2 33 in connection with, any document contemplated hereby to which the Owner Trustee is a party, except as expressly provided by the terms of this Agreement, any Transaction Document or in any document or written instruction received by the Owner Trustee pursuant to Section 6.3; and no implied duties or obligations shall be read into this Agreement or any Transaction Document against the Owner Trustee. The Owner 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 or to prepare or file any Securities and Exchange Commission filing for the Trust or to record this Agreement or any Transaction Document. The Owner Trustee nevertheless agrees that it will, at its own cost and expense, promptly take all action as may be necessary to discharge any liens on any part of the Owner Trust Estate that result from actions by, or claims against, the Owner Trustee that are not related to the ownership or the administration of the Owner Trust Estate. Section 6.5 No Action Except Under Specified Documents or Instructions. The Owner Trustee shall not manage, control, use, sell, dispose of or otherwise deal with any part of the Owner Trust Estate except (i) in accordance with the powers granted to and the authority conferred upon the Owner Trustee pursuant to this Agreement, (ii) in accordance with the Transaction Documents and (iii) in accordance with any document or instruction delivered to the Owner Trustee pursuant to Section 6.3. Section 6.6 Restrictions. The Owner Trustee shall not take any action (a) that is inconsistent with the purposes of the Trust set forth in Section 2.3 or (b) that, to the actual knowledge of the Owner Trustee, would result in the Trust's becoming taxable as a corporation for Federal income tax purposes. The Owners shall not direct the Owner Trustee to take action that would violate the provisions of this Section. VI-3 34 ARTICLE VII CONCERNING THE OWNER TRUSTEE Section 7.1 Acceptance of Trusts and Duties. The Owner Trustee accepts the trusts hereby created and agrees to perform its duties hereunder with respect to such trusts but only upon the terms of this Agreement and the Transaction Documents. The Owner Trustee also agrees to disburse all moneys actually received by it constituting part of the Owner Trust Estate upon the terms of the Transaction Documents and this Agreement. The Owner Trustee shall not be answerable or accountable hereunder or under any Transaction Document under any circumstances, except (i) for its own willful misconduct or gross negligence or (ii) in the case of the inaccuracy of any representation or warranty contained in Section 7.3 expressly made by the Owner Trustee. In particular, but not by way of limitation (and subject to the exceptions set forth in the preceding sentence): (a) the Owner Trustee shall not be liable for any error of judgment made by a responsible officer of the Owner Trustee; (b) the Owner Trustee shall not be liable with respect to any action taken or omitted to be taken by it in accordance with the instructions of the Administrator or the Owners; (c) no provision of this Agreement or any Transaction Document shall require the Owner Trustee to expend or risk funds or otherwise incur any financial liability in the performance of any of its rights or powers hereunder or under any Transaction Document if the Owner Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; (d) under no circumstances shall the Owner Trustee be liable for indebtedness evidenced by or arising under any of the Transaction Documents, including the principal of and interest on the Notes; (e) the Owner Trustee shall not be responsible for or in respect of the validity or sufficiency of this Agreement or for the due execution hereof by the Depositor or the Company or for the form, character, genuineness, sufficiency, value or validity of any of the Owner Trust Estate or for or in respect of the validity or sufficiency of the Transaction Documents, other than the certificate of authentication on the Trust Securities, and the Owner Trustee shall in no event assume or incur any liability, duty, or obligation to any Noteholder or to any Owner, other than as expressly provided for herein and in the Transaction Documents; (f) the Owner Trustee shall not be liable for the default or misconduct of the Administrator, the Seller, the Company, the Indenture Trustee, the Master Servicer or the Servicer under any of the Transaction Documents or otherwise and the Owner Trustee shall VII-1 35 have no obligation or liability to perform the obligations of the Trust under this Agreement or the Transaction Documents that are required to be performed by the Administrator under the Administration Agreement, the Indenture Trustee under the Indenture, the Master Servicer under the Sale and Servicing Agreement, or the Servicer under the Servicing Agreement; and (g) the Owner 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 under this Agreement or otherwise or in relation to this Agreement or any Transaction Document, at the request, order or direction of any of the Owners, unless such Owners have offered to the Owner Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities that may be incurred by the Owner Trustee therein or thereby. The right of the Owner Trustee to perform any discretionary act enumerated in this Agreement or in any Transaction Document shall not be construed as a duty, and the Owner Trustee shall not be answerable for other than its gross negligence or willful misconduct in the performance of any such act provided, that the Owner Trustee shall be liable for its negligence or willful misconduct in the event that it assumes the duties and obligations of the Co-Owner Trustee under the Sale and Servicing Agreement pursuant to Section 10.5 hereof. Section 7.2 Furnishing of Documents. The Owner Trustee shall furnish (a) to the Owners promptly upon receipt of a written request therefor, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Owner Trustee under the Transaction Documents and (b) to Noteholders promptly upon written request therefor, copies of the Sale and Servicing Agreement, the Administration Agreement and the Trust Agreement. Section 7.3 Representations and Warranties. (a) The Owner Trustee hereby represents and warrants to the Depositor and the Company, for the benefit of the Owners, that: (i) It is a banking corporation duly organized and validly existing in good standing under the laws of the State of Delaware. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (ii) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement, and this Agreement will be executed and delivered by one of its officers who is duly authorized to execute and deliver this Agreement on its behalf. (iii) Neither the execution nor the delivery by it of this Agreement nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the terms or provisions hereof will contravene any Federal or Delaware law, governmental rule or regulation governing the banking or trust powers of the VII-2 36 Owner Trustee or any judgment or order binding on it, or constitute any default under its charter documents or by-laws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. (b) The Co-Owner Trustee hereby represents and warrants to the Depositor and the Company that: (i) It is a national banking association duly organized and validly existing in good standing under the laws of the United States. It has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement. (ii) It has taken all corporate action necessary to authorize the execution and delivery by it of this Agreement, and this Agreement will be executed and delivered by one of its officers who is duly authorized to execute and deliver this Agreement on its behalf. (iii) Neither the execution nor the delivery by it of this Agreement nor the consummation by it of the transactions contemplated hereby nor compliance by it with any of the terms or provisions hereof will contravene any Federal or Minnesota law, governmental rule or regulation governing the banking or trust powers of the Co-Owner Trustee or any judgment or order binding on it, or constitute any default under its charter documents or by-laws or any indenture, mortgage, contract, agreement or instrument to which it is a party or by which any of its properties may be bound. Section 7.4 Reliance; Advice of Counsel. (a) The Owner Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond, or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. The Owner Trustee may accept a certified copy of a resolution of the board of directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the method of the determination of which is not specifically prescribed herein, the Owner Trustee may for all purposes hereof rely on a certificate, signed by the president or any vice president or by the treasurer or other authorized officers of the relevant party, as to such fact or matter and such certificate shall constitute full protection to the Owner Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. (b) In the exercise or administration of the trusts hereunder and in the performance of its duties and obligations under this Agreement or the Transaction Documents, the Owner Trustee (i) may act directly or through its agents or attorneys pursuant to agreements entered into with any of them, and the Owner Trustee shall not be liable for the VII-3 37 conduct or misconduct of such agents or attorneys if such agents or attorneys shall have been selected by the Owner Trustee with reasonable care, and (ii) may consult with counsel, accountants and other skilled persons to be selected with reasonable care and employed by it. The Owner Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the written opinion or advice of any such counsel, accountants or other such persons and not contrary to this Agreement or any Transaction Document. Section 7.5 Not Acting in Individual Capacity. Except as provided in this Article VII, in accepting the trusts hereby created Wilmington Trust Company acts solely as Owner Trustee hereunder and not in its individual capacity and all Persons having any claim against the Owner Trustee by reason of the transactions contemplated by this Agreement or any Transaction Document shall look only to the Owner Trust Estate for payment or satisfaction thereof. Section 7.6 Owner Trustee Not Liable for Trust Securities or Home Loans. The recitals contained herein and in the Trust Securities (other than the signature and countersignature of the Owner Trustee on the Trust Securities) shall be taken as the statements of the Depositor and the Company, and the Owner Trustee assumes no responsibility for the correctness thereof. The Owner Trustee makes no representations as to the validity or sufficiency of this Agreement, of any Transaction Document or of the Trust Securities (other than the signature and countersignature of the Owner Trustee on the Trust Securities and as specified in Section 7.3) or the Notes, or of any Home Loans or related documents. The Owner Trustee shall at no time have any responsibility or liability for or with respect to the legality, validity and enforceability of any Home Loan, or the perfection and priority of any security interest created by any Home Loan or the maintenance of any such perfection and priority, or for or with respect to the sufficiency of the Owner Trust Estate or its ability to generate the payments to be distributed to Owners under this Agreement or the Noteholders under the Indenture, including, without limitation: the existence, condition and ownership of any Property; the existence and enforceability of any insurance thereon; the existence and contents of any Home Loan on any computer or other record thereof; the validity of the assignment of any Home Loan to the Trust or of any intervening assignment; the completeness of any Home Loan; the performance or enforcement of any Home Loan; the compliance by the Depositor, the Company, the Master Servicer or the Servicer with any warranty or representation made under any Transaction Document or in any related document or the accuracy of any such warranty or representation or any action of the Administrator, the Indenture Trustee, the Master Servicer or the Servicer or any subservicer taken in the name of the Owner Trustee. Section 7.7 Owner Trustee May Own Trust Securities and Notes. The Owner Trustee in its individual or any other capacity may become the owner or pledgee of Trust Securities or Notes and may deal with the Depositor, the Company, the Administrator, the Indenture Trustee and the Servicer in banking transactions with the same rights as it would have if it were not Owner Trustee. VII-4 38 Section 7.8 Licenses. The Owner Trustee shall cause the Trust to use its best efforts to obtain and maintain the effectiveness of any licenses required in connection with this Agreement and the Transaction Documents and the transactions contemplated hereby and thereby until such time as the Trust shall terminate in accordance with the terms hereof. Section 7.9 Rights of Co-Owner Trustee. The Co-Owner Trustee shall be entitled to all the rights and benefits conferred upon the Owner Trustee in Article VII of this Agreement. VII-5 39 ARTICLE VIII COMPENSATION OF OWNER TRUSTEE Section 8.1 Owner Trustee's Fees and Expenses. The Owner Trustee shall receive as compensation for its services hereunder such fees as have been separately agreed upon before the date hereof between the Company and the Owner Trustee, and the Owner Trustee shall be entitled to be reimbursed by the Company for its other reasonable expenses hereunder, including the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as the Owner Trustee may employ in connection with the exercise and performance of its rights and its duties hereunder. Section 8.2 Indemnification. The Company shall be liable as primary obligor, and the Servicer as secondary obligor pursuant to the Administration Agreement, for, and shall indemnify the Owner Trustee, the Co-Owner Trustee and their successors, assigns, agents and servants (collectively, the "Indemnified Parties") from and against, any and all liabilities, obligations, losses, damages, taxes, claims, actions and suits, and any and all reasonable costs, expenses and disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever (collectively, "Expenses") which may at any time be imposed on, incurred by, or asserted against the Owner Trustee or any Indemnified Party in any way relating to or arising out of this Agreement, the Transaction Documents, the Owner Trust Estate, the administration of the Owner Trust Estate or the action or inaction of the Owner Trustee or the Co-Owner Trustee hereunder, except only that the Company shall not be liable for or required to indemnify an Indemnified Party from and against Expenses arising or resulting from any of the matters described in the third sentence of Section 7.1 hereof. The indemnities contained in this Section shall survive the resignation or termination of the Owner Trustee or the termination of this Agreement. In any event of any claim, action or proceeding for which indemnity will be sought pursuant to this Section, the Owner Trustee's or Co-Owner Trustee's choice of legal counsel shall be subject to the approval of the Company, which approval shall not be unreasonably withheld. Section 8.3 Payments to the Owner Trustee. Any amounts paid to the Owner Trustee pursuant to this Article VIII shall be deemed not to be a part of the Owner Trust Estate immediately after such payment. VIII-1 40 ARTICLE IX TERMINATION OF TRUST AGREEMENT Section 9.1 Termination of Trust Agreement. (a) This Agreement (other than Article VIII) and the Trust shall terminate and be of no further force or effect on the earlier of (i) the satisfaction and discharge of the Indenture pursuant to Section 4.01 of the Indenture and the termination of the Sale and Servicing Agreement and (ii) 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's) alive on the date hereof. The bankruptcy, liquidation, dissolution, death or incapacity of any Owner shall not (x) operate to terminate this Agreement or the Trust, nor (y) entitle such Owner's legal representatives or heirs to claim an accounting or to take any action or proceeding in any court for a partition or winding up of all or any part of the Trust or Owner Trust Estate nor (z) otherwise affect the rights, obligations and liabilities of the parties hereto. (b) The Trust Securities shall be subject to an early redemption or termination at the option of the Company or the Master Servicer in the manner and subject to the provisions of Section 11.02 of the Sale and Servicing Agreement. (c) Except as provided in Sections 9.1(a) and (b) above, none of the Depositor, the Company nor any Owner shall be entitled to revoke or terminate the Trust. (d) Notice of any termination of the Trust, specifying the Distribution Date upon which the Securityholders shall surrender their Trust Securities to the Paying Agent for payment of the final distributions and cancellation, shall be given by the Owner Trustee to the Securityholders and the Rating Agencies mailed within five Business Days of receipt by the Owner Trustee of notice of such termination pursuant to Section 9.1(a) or (b) above, which notice given by the Owner Trustee shall state (i) the Distribution Date upon or with respect to which final payment of the Trust Securities shall be made upon presentation and surrender of the Trust Securities at the office of the Paying Agent therein designated, (ii) the amount of any such final payment and (iii) that the Record Date otherwise applicable to such Distribution Date is not applicable, payments being made only upon presentation and surrender of the Trust Securities at the office of the Paying Agent therein specified. The Owner Trustee shall give such notice to the Certificate Registrar (if other than the Owner Trustee) and the Paying Agent at the time such notice is given to the Securityholders. Upon presentation and surrender of the Trust Securities, the Paying Agent shall cause to be distributed to the Securityholders amounts distributable on such Distribution Date pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement. In the event that all of the Securityholders shall not surrender their Trust Securities for cancellation within six months after the date specified in the above mentioned IX-1 41 written notice, the Co-Owner Trustee shall give a second written notice to the remaining Securityholders to surrender their Trust Securities for cancellation and receive the final distribution with respect thereto. If within one year after the second notice all the Trust Securities shall not have been surrendered for cancellation, the Co-Owner Trustee may take appropriate steps, or may appoint an agent to take appropriate steps, to contact the remaining Securityholders concerning surrender of their Trust Securities, and the cost thereof shall be paid out of the funds and other assets that shall remain subject to this Agreement. Any funds remaining in the Trust after exhaustion of such remedies shall be distributed by the Co-Owner Trustee to the Residual Instrument Holders on a pro rata basis. (e) Upon the winding up of the Trust and its termination, the Owner Trustee shall cause the Certificate of Trust to be canceled by filing a certificate of cancellation with the Secretary of State in accordance with the provisions of Section 3820 of the Business Trust Statute. IX-2 42 ARTICLE X SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES Section 10.1 Eligibility Requirements for Owner Trustee. The Owner Trustee shall at all times be a corporation satisfying the provisions of Section 3807(a) of the Business Trust Statute; authorized to exercise corporate powers; having a combined capital and surplus of at least $50,000,000 and subject to supervision or examination by Federal or state authorities; and having (or having a parent which has) a long-term rating of at least "A" by Standard & Poor's and "A2" by Moody's, "A" by DCR and "A" by Fitch. If such corporation shall publish reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purpose of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Owner Trustee shall cease to be eligible in accordance with the provisions of this Section, the Owner Trustee shall resign immediately in the manner and with the effect specified in Section 10.2. Section 10.2 Resignation or Removal of Owner Trustee or Co-Owner Trustee. The Owner Trustee or Co-Owner Trustee may at any time resign and be discharged from the trusts hereby created by giving written notice thereof to the Administrator, the Indenture Trustee and the Company. Upon receiving such notice of resignation, the Administrator shall promptly appoint a successor Owner Trustee or Co-Owner Trustee by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Owner Trustee or Co-Owner Trustee and one copy to the successor Owner Trustee or Co-Owner Trustee. If no successor Owner Trustee or Co-Owner Trustee shall have been so appointed and have accepted appointment within 30 days after the giving of such notice of resignation, the resigning Owner Trustee or Co-Owner Trustee may petition any court of competent jurisdiction for the appointment of a successor Owner Trustee or Co-Owner Trustee. If at any time the Owner Trustee or Co-Owner Trustee shall cease to be eligible in accordance with the provisions of Section 10.1 and shall fail to resign after written request therefor by the Administrator, or if at any time the Owner Trustee or Co-Owner Trustee shall be legally unable to act, or shall be adjudged bankrupt or insolvent, or a receiver of the Owner Trustee or Co-Owner Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Owner Trustee or Co-Owner Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then the Administrator may remove the Owner Trustee or Co-Owner Trustee. If the Administrator shall remove the Owner Trustee or Co-Owner Trustee under the authority of the immediately preceding sentence, the Administrator shall promptly appoint a successor Owner Trustee or Co-Owner Trustee by written instrument in duplicate, one copy of which instrument shall be delivered to the outgoing Owner Trustee or Co-Owner Trustee so removed and one copy to the successor Owner Trustee or Co-Owner Trustee and payment of all fees owed to the outgoing Owner Trustee or Co-Owner Trustee. X-1 43 Any resignation or removal of the Owner Trustee or Co-Owner Trustee and appointment of a successor Owner Trustee or Co-Owner Trustee pursuant to any of the provisions of this Section shall not become effective until acceptance of appointment by the successor Owner Trustee or Co-Owner Trustee pursuant to Section 10.3 and payment of all fees and expenses owed to the outgoing Owner Trustee or Co-Owner Trustee. The Administrator shall provide notice of such resignation or removal of the Owner Trustee or Co-Owner Trustee to each of the Rating Agencies. Section 10.3 Successor Owner Trustee or Co-Owner Trustee. Any successor Owner Trustee or Co-Owner Trustee appointed pursuant to Section 10.2 shall execute, acknowledge and deliver to the Administrator and to its predecessor Owner Trustee or Co-Owner Trustee an instrument accepting such appointment under this Agreement, and thereupon the resignation or removal of the predecessor Owner Trustee or Co-Owner Trustee shall become effective and such successor Owner Trustee or Co-Owner Trustee, without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties, and obligations of its predecessor under this Agreement, with like effect as if originally named as Owner Trustee or Co-Owner Trustee. The predecessor Owner Trustee or Co-Owner Trustee shall upon payment of its fees and expenses deliver to the successor Owner Trustee or Co-Owner Trustee all documents and statements and monies held by it under this Agreement; and the Administrator and the predecessor Owner Trustee or Co-Owner 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 Owner Trustee or Co-Owner Trustee all such rights, powers, duties, and obligations. No successor Owner Trustee or Co-Owner Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Owner Trustee or Co-Owner Trustee shall be eligible pursuant to Section 10.1. Upon acceptance of appointment by a successor Owner Trustee or Co-Owner Trustee pursuant to this Section, the Administrator shall mail notice of the successor of such Owner Trustee or Co-Owner Trustee to all Owners, the Indenture Trustee, the Noteholders and the Rating Agencies. If the Administrator fails to mail such notice within 10 days after acceptance of appointment by the successor Owner Trustee or Co-Owner Trustee, the successor Owner Trustee or Co-Owner Trustee shall cause such notice to be mailed at the expense of the Administrator. Section 10.4 Merger or Consolidation of Owner Trustee or Co-Owner Trustee. Any corporation into which the Owner Trustee or the Co-Owner Trustee may be merged or converted or with which either may be consolidated or any corporation resulting from any merger, conversion or consolidation to which the Owner Trustee or the Co-Owner Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Owner Trustee or the Co-Owner Trustee, shall be the successor of the Owner Trustee or the Co-Owner Trustee, as the case may be, hereunder, provided such corporation shall be eligible pursuant to Section 10.1, without the execution or filing of any instrument or X-2 44 any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding; provided further that the Owner Trustee or the Co-Owner Trustee, as the case may be, shall mail notice of such merger or consolidation to the Rating Agencies. Section 10.5 Appointment of Co-Owner Trustee or Separate Owner 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 Owner Trust Estate or any Mortgaged Property may at the time be located, and for the purpose of performing certain duties and obligations of the Owner Trustee with respect to the Trust and the Trust Securities under the Sale and Servicing Agreement, the Administrator and the Owner Trustee acting jointly shall have the power and shall execute and deliver all instruments to appoint one or more Persons approved by the Owner Trustee and to act as co-owner trustee, jointly with the Owner Trustee, or separate owner trustee or separate owner trustees, of all or any part of the Owner Trust Estate, and to vest in such Person, in such capacity, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section, such powers, duties, obligations, rights and trusts as the Administrator and the Owner Trustee may consider necessary or desirable. If the Administrator shall not have joined in such appointment within 25 days after the receipt by it of a request so to do, the Owner Trustee shall have the power to make such appointment. No Co-Owner Trustee or separate Owner Trustee under this Section 10.5 shall be required to meet the terms of eligibility as a successor trustee pursuant to Section 10.1 and no notice of the appointment of any co-owner trustee or separate Owner Trustee shall be required pursuant to Section 10.3. The Owner Trustee hereby appoints the Indenture Trustee as Co-Owner Trustee for the purpose of (i) establishing and maintaining the Certificate Distribution Account and making the distributions therefrom to the Persons entitled thereto pursuant to Sections 5.01(c) and 5.03 of the Sale and Servicing Agreement. Each separate owner trustee and co-owner trustee shall, to the extent permitted by law, be appointed and act subject to the following provision and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon the Owner Trustee shall be conferred upon and exercised or performed by the Owner Trustee and such separate owner trustee or co-owner trustee jointly (it being understood that such separate owner trustee or co-owner trustee is not authorized to act separately without the Owner Trustee joining in such act), except to the extent that under any law of any jurisdiction in which any particular act or acts are to be performed, the Owner 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 owner trustee or co-owner trustee but solely at the direction of the Owner Trustee; provided that Co-Owner Trustee, in performing its duties and obligations under the Sale and Servicing Agreement, may act X-3 45 separately in its capacity as Co-Owner Trustee without the Owner Trustee joining in such Acts. (ii) no owner trustee under this Agreement shall be personally liable by reason of any act or omission of any other owner trustee under this Agreement; and (iii) the Administrator and the Owner Trustee acting jointly may at any time accept the resignation of or remove any separate owner trustee or co-owner trustee. Any notice, request or other writing given to the Owner Trustee shall be deemed to have been given to the separate owner trustees and co-owner trustees, as if given to each of them. Every instrument appointing any separate owner trustee or co-owner trustee, other than this Agreement, shall refer to this Agreement and to the conditions of this Article. Each separate owner trustee and co-owner trustee, upon its acceptance of appointment, shall be vested with the estates specified in its instrument of appointment, either jointly with the Owner 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 Owner Trustee. Each such instrument shall be filed with the Owner Trustee and a copy thereof given to the Administrator. Any separate owner trustee or co-owner trustee may at any time appoint the Owner Trustee as 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 owner trustee or co-owner 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 Owner Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. The Co-Owner Trustee, in its capacity as Co-Owner Trustee, shall not have any rights, duties or obligations except as expressly provided in this Agreement and the Sale and Servicing Agreement. X-4 46 ARTICLE XI MISCELLANEOUS Section 11.1 Supplements and Amendments. This Agreement may be amended by the Depositor, the Company and the Owner Trustee with prior written notice to the Rating Agencies, but without the consent of any of the Noteholders or the Owners or the Indenture Trustee, to cure any ambiguity, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the Noteholders or the Owners provided, however, that such action shall not adversely affect in any material respect the interests of any Noteholder or Owner. An amendment described above shall be deemed not to adversely affect in any material respect the interests of any Noteholder or Owner if (i) an opinion of counsel is obtained to such effect, and (ii) the party requesting the amendment satisfies the Rating Agency Condition with respect to such amendment. This Agreement may also be amended from time to time by the Depositor, the Company and the Owner Trustee, with the prior written consent of the Rating Agencies and with the prior written consent of the Indenture Trustee, the Holders (as defined in the Indenture) of Notes evidencing more than 50% of the Percentage Interests in the Notes and the Holders of Certificates evidencing more than 50% of the Percentage Interests in the Certificates, 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 Noteholders or the Owners; provided, however, that no such amendment shall (a) increase or reduce in any manner the amount of, or accelerate or delay the timing of, collections of payments on the Home Loans or distributions that shall be required to be made for the benefit of the Noteholders or the Securityholders or (b) reduce the aforesaid Percentage Interests required to consent to any such amendment, in either case of clause (a) or (b) without the consent of the holders of all the outstanding Notes or Trust Securities, as applicable. Promptly after the execution of any such amendment or consent, the Owner Trustee shall furnish written notification of the substance of such amendment or consent to each Certificateholder, the Indenture Trustee and each of the Rating Agencies. It shall not be necessary for the consent of Owners, the Noteholders or the Indenture Trustee pursuant to this Section 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 any other consents of Owners provided for in this Agreement or in any other Transaction Document) and of evidencing the authorization of the execution thereof by Securityholders shall be subject to such reasonable requirements as the Owner Trustee may prescribe. XI-1 47 Promptly after the execution of any amendment to the Certificate of Trust, the Owner Trustee shall cause the filing of such amendment with the Secretary of State. Prior to the execution of any amendment to this Agreement or the Certificate of Trust, the Owner 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 Owner Trustee may, but shall not be obligated to, enter into any such amendment which affects the Owner Trustee's own rights, duties or immunities under this Agreement or otherwise. Notwithstanding the above, no supplement or amendment to this Agreement shall be made without the consent of any Residual Instrument Holder, if such amendment and/or supplement would modify in any manner the receipt of distributions with respect to such Residual Instrument. Section 11.2 No Legal Title to Owner Trust Estate in Owners. The Owners shall not have legal title to any part of the Owner Trust Estate. The Owners shall be entitled to receive distributions with respect to their undivided ownership interest therein only in accordance with Articles V and IX. No transfer, by operation of law or otherwise, of any right, title, or interest of the Owners to and in their ownership interest in the Owner Trust Estate shall operate to terminate this Agreement or the trusts hereunder or entitle any transferee to an accounting or to the transfer to it of legal title to any part of the Owner Trust Estate. Section 11.3 Limitations on Rights of Others. The provisions of this Agreement are solely for the benefit of the Owner Trustee, the Co-Owner Trustee, the Depositor, the Company, the Owners, the Administrator and, to the extent expressly provided herein, the Indenture Trustee and the Noteholders, and nothing in this Agreement, whether express or implied, shall be construed to give to any other Person any legal or equitable right, remedy or claim in the Owner Trust Estate or under or in respect of this Agreement or any covenants, conditions or provisions contained herein. Section 11.4 Notices. (a) Unless otherwise expressly specified or permitted by the terms hereof, all notices shall be in writing and shall be deemed given upon receipt by the intended recipient or three Business Days after mailing if mailed by certified mail, postage prepaid (except that notice to the Owner Trustee shall be deemed given only upon actual receipt by the Owner Trustee), at the following addresses: (i) if to the Owner Trustee, its Corporate Trust Office; (ii) if to the Depositor, Financial Asset Securities Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Peter McMullin, Vice President; (iii) if to the Company, Mego Mortgage Corporation, 1000 Parkwood Circle, Suite 500 Atlanta, Georgia 30339, Attention: Jeff S. Moore, President; (iv) if to the Co-Owner Trustee, First Bank National Association, 180 East Fifth Street, St. Paul, Minnesota 55101, Attention: Structured Finance/Mego Mortgage 1997-3 Corporate Trust Department; or, as to each such party, at such other address as shall be designated by such party in a written notice to each other party. XI-2 48 (b) Any notice required or permitted to be given to an Owner shall be given by first-class mail, postage prepaid, at the address of such Owner 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 Owner receives such notice. Section 11.5 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 11.6 Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 11.7 Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Depositor, the Company, the Owner Trustee, the Co-Owner Trustee and its successors and each owner and its successors and permitted assigns, all as herein provided. Any request, notice, direction, consent, waiver or other instrument or action by an Owner shall bind the successors and assigns of such Owner. Section 11.8 No Petition. The Owner Trustee, by entering into this Agreement, each Owner, by accepting a Trust Security, and the Indenture Trustee and each Noteholder by accepting the benefits of this Agreement, hereby covenant and agree that they will not at any time institute against the Company, any wholly-owned subsidiary of the Company, the Depositor or the Trust, or join in any institution against the Company, any wholly-owned subsidiary of the Company, or the Trust of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States Federal or state bankruptcy or law in connection with any obligations relating to the Trust Securities, the Notes, this Agreement or any of the Transaction Documents. Section 11.9 Covenants of Company. The Company shall not institute at any time any Bankruptcy proceeding against the Trust or any wholly-owned subsidiary of the Company, under any United States Federal or state bankruptcy or similar law in connection with any obligations relating to the Trust Securities, the Notes, the Trust Agreement or any of the Transaction Documents. Section 11.10 No Recourse. Each Owner by accepting a Trust Security acknowledges that such Owner's Trust Security represents a beneficial interest in the Trust only and does not represent an interest in or an obligation of the Seller, the Servicer, the Company, the Depositor, the Administrator, the Owner Trustee, the Co-Owner Trustee or any Affiliate thereof and no recourse may be had against such parties or their assets, except as may be XI-3 49 expressly set forth or contemplated in this Agreement, the Trust Securities or the Transaction Documents. Section 11.11 Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 11.12 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, 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 11.13 Inconsistencies with Sale and Servicing Agreement. In the event certain provisions of this Agreement conflict with the provisions of the Sale and Servicing Agreement, the parties hereto agree that the provisions of the Sale and Servicing Agreement shall be controlling. XI-4 50 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed by their respective officers hereunto duly authorized, as of the day and year first above written. FINANCIAL ASSET SECURITIES CORP., Depositor By:____________________________________ Name: Title: MEGO MORTGAGE CORPORATION By:____________________________________ Name: Title: WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Owner Trustee By:____________________________________ Name: Title: FIRST BANK NATIONAL ASSOCIATION, not in its individual capacity but solely as Co-Owner Trustee and Paying Agent By:____________________________________ Name: Title: 51 EXHIBIT A [FORM OF CERTIFICATE] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO. HAS AN INTEREST HEREIN. THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF FINANCIAL ASSET SECURITIES CORP., MEGO MORTGAGE CORPORATION OR ANY OF THEIR RESPECTIVE AFFILIATES. MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 ____% HOME LOAN ASSET BACKED CERTIFICATE evidencing a fractional undivided interest in the Trust, as defined below, the property of which includes a pool of Home Loans sold to the Trust by Financial Asset Securities Corp.. Initial Certificate Principal Original Certificate Balance of this Certificate: Principal Balance: $_____________ $_____________ NUMBER:_______ CUSIP NO. _________ (See Reverse Pages for certain definitions) THIS CERTIFIES THAT___________ is the registered owner of the Percentage Interest evidenced by this Certificate (obtained by dividing the initial Certificate Principal Balance of this Certificate by the Original Certificate Principal Balance of the Class of Certificates, both as specified above), in certain distributions with respect to MEGO MORTGAGE Home Loan Owner Trust 1997-3 (the "Trust") formed by Financial Asset Securities Corp., a Delaware corporation (the "Seller"). The Trust was created pursuant to a Trust Agreement dated as of June 14, 1997 (as amended and supplemented from time to time, the "Trust Agreement"), among the Seller, Financial Asset Securities Corp., a Delaware corporation (the "Company"), Wilmington Trust A-1 52 Company, as owner trustee (the "Owner Trustee") and First Bank National Association, as Co-Owner Trustee (the "Co-Owner Trustee"), a summary of certain of the pertinent provisions of which is set forth below. To the extent not otherwise defined herein, the capitalized terms used herein have the meanings assigned to them in the Trust Agreement or the Sale and Servicing Agreement dated as of June 14, 1997 (as amended and supplemented from time to time, the "Sale and Servicing Agreement"), among the Trust, the Seller, Mego Mortgage Corporation, as servicer (the "Servicer") and the Co-Owner Trustee, as applicable. This Certificate is one of the duly authorized Certificates designated as "Mego Mortgage Home Loan Asset Backed Certificates, Series 1997-3", (herein called the "Certificates") issued under the Trust Agreement. Also issued under an Indenture dated as of June 14, 1997, between the Trust and First Bank National Association, as Indenture Trustee, are the six classes of Notes designated as "Mego Mortgage Home Loan Asset Backed Notes, Series 1997-3, Class A-1, Class A-2, Class A-3, Class A-4, Class M-1 and Class M-2 (collectively, the "Notes"). This Certificate is issued under and is subject to the terms, provisions and conditions of the Trust Agreement to which Trust Agreement the holder of this Certificate by virtue of the acceptance hereof assents and by which such holder is bound. Payments of principal and interest on this Certificate shall be made by First Bank National Association, in its capacity as Co-Owner Trustee under the Sale and Servicing Agreement. The property of the Trust includes a pool of Home Loans (the "Home Loans"), all monies due thereunder on or after the Cut-Off Date, certain accounts and the proceeds thereof, and certain other rights under the Trust Agreement and the Sale and Servicing Agreement and all proceeds of the foregoing. The rights of the holders of the Certificates are subordinated to the rights of the holders of the Notes, as set forth in the Sale and Servicing Agreement and the Indenture. Under the Trust Agreement, there will be distributed on the 25th day of each month or, if such 25th day is not a Business Day, the next Business Day, (each, a "Distribution Date"), commencing in July, 1997, to the person in whose name this Certificate is registered at the close of business on the last Business Day of the month immediately preceding the month in which each Distribution Date occurs (the "Record Date") such Securityholders's fractional undivided interest in the amounts distributable to Securityholders on such Distribution Date pursuant to Section 5.01 of the Sale and Servicing Agreement. The holder of this Certificate acknowledges and agrees that its rights to receive distributions in respect of this Certificate are subordinated to the rights of the Noteholders as described in the Sale and Servicing Agreement and the Indenture. It is the intent of the Seller, the Company, the Servicer and the Securityholders that, for purposes of federal, state and local income and single business tax and any other income taxes, the Trust will be treated as a partnership and the Securityholders (including the Company) will be treated as partners in that partnership. The Company and the other Securityholders by acceptance of a Certificate, agree to treat, and to take no action inconsistent with the treatment of, the Certificates for such tax purposes as partnership interests in the Trust. A-2 53 Each Securityholder or Certificate Owner, by its acceptance of a Certificate or, in the case of a Certificate Owner, a beneficial interest in a Certificate, covenants and agrees that such Securityholder or Certificate Owner, as the case may be, will not at any time institute against the Company, or join in any institution against the Company of, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Certificates, the Notes, the Trust Agreement or any of the Transaction Documents. Distributions on this Certificate will be made as provided in the Trust Agreement and the Sale and Servicing Agreement by the Indenture Trustee by wire transfer or check mailed to the Securityholder of record in the Certificate Register without the presentation or surrender of this Certificate or the making of any notation hereon, except that with respect to Certificates registered on the Record Date in the name of the nominee of the Clearing Agency (initially, such nominee to be Cede & Co.), payments will be made by wire transfer in immediately available funds to the account designated by such nominee. Except as otherwise provided in the Trust Agreement and notwithstanding the above, the final distribution on this Certificate will be made after due notice by the Co-Owner Trustee of the pendency of such distribution and only upon presentation and surrender of this Certificate at the office or agency maintained for the purpose by the Co-Owner Trustee in the Borough of Manhattan, The City of New York. Reference is hereby made to the further provisions of this Certificate set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. [Remainder of page intentionally left blank] A-3 54 Unless the certificate of authentication hereon shall have been executed by an authorized officer of the Owner Trustee, by manual or facsimile signature, this Certificate shall not entitle the holder hereof to any benefit under the Trust Agreement or the Sale and Servicing Agreement or be valid for any purpose. THIS TRUST SECURITY SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, 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. IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in its individual capacity, has caused this Certificate to be duly executed. MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By:_________________________________________________ Authorized Signatory DATED: June 27, 1997 CERTIFICATE OF AUTHENTICATION This is one of the Certificates referred to in the within-mentioned Trust Agreement. First Bank National Association, as Administrator and Authenticating Agent By:_________________________________________________ Authorized Signatory A-4 55 (REVERSE OF TRUST SECURITY) The Certificates do not represent an obligation of, or an interest in, the Seller, the Master Servicer, the Servicer, the Company, the Depositor, the Owner Trustee, the Co-Owner Trustee or any affiliates of any of them and no recourse may be had against such parties or their assets, except as may be expressly set forth or contemplated herein or in the Trust Agreement or the Transaction Documents. In addition, this Certificate is not guaranteed by any governmental agency or instrumentality and is limited in right of payment to certain collections and recoveries respecting the Home Loans, all as more specifically set forth herein, in the Sale and Servicing Agreement and in the Indenture. A copy of each of the Sale and Servicing Agreement, the Indenture and the Trust Agreement may be examined during normal business hours at the principal office of the Co-Owner Trustee, and at such other places, if any, designated by the Co-Owner Trustee, by any Securityholder upon written request. The Trust Agreement permits, with certain exceptions therein provided, the amendment thereof and the modification of the rights and obligations of the Seller and the Company and the rights of the Securityholders under the Trust Agreement at any time by the Seller, the Company and the Owner Trustee with the consent of the holders of the Notes and the Certificates each voting as a class evidencing not less than a majority of the outstanding Notes and the Class Principal Balance of the Certificates. Any such consent by the holder of this Certificate shall be conclusive and binding on such holder and on all future holders of this Certificate and of any Certificate issued upon the transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent is made upon this Certificate. The Trust Agreement also permits the amendment thereof, in certain limited circumstances, without the consent of the holders of any of the Certificates. As provided in the Trust Agreement and subject to certain limitations therein set forth, the transfer of this Certificate is registerable in the Certificate Register upon surrender of this Certificate for registration of transfer at the offices or agencies of the Certificate Registrar maintained by the Co-Owner Trustee in St. Paul, Minnesota, accompanied by a written instrument of transfer in form satisfactory to the Co-Owner 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 Certificates of authorized denominations evidencing the same aggregate interest in the Trust will be issued to the designated transferee. The initial Certificate Registrar appointed under the Trust Agreement is the Co-Owner Trustee. The Certificates are issuable only as registered Certificates without coupons in denominations of $100,000 and in integral multiples of $1,000 in excess thereof. As provided in the Trust Agreement and subject to certain limitations therein set forth, Certificates are exchangeable for new Certificates of authorized denominations evidencing the same aggregate denomination, as requested by the holder surrendering the same. No service charge will be made for any such registration of transfer or exchange, but the Co-Owner Trustee or the Certificate Registrar may require payment of a sum sufficient to cover any tax or governmental charge payable in connection therewith. The Owner Trustee, the Co-Owner Trustee, the Certificate Registrar and any agent of the Owner Trustee, the Co-Owner Trustee or the Certificate Registrar may treat the person in whose name this Certificate is registered as the owner hereof for all purposes and none of the Owner Trustee, the Co-Owner Trustee, the Certificate Registrar or any such agent shall be affected by any notice to the contrary. A-5 56 The obligations and responsibilities created by the Trust Agreement and the Trust created thereby and the Sale and Servicing Agreement shall terminate eighteen months after the payment to Securityholders of all amounts required to be paid to them pursuant to the Trust Agreement and the Sale and Servicing Agreement and the disposition of all property held as part of the Trust. The Seller or the Master Servicer may at their option purchase the corpus of the Trust at a price specified in the Sale and Servicing Agreement, and such purchase of the Home Loans and other property of the Trust will effect early retirement of the Certificates; however, such right of purchase is exercisable only on a Distribution Date on which the Pool Principal Balance is less than or equal to 10% of the Original Pool Principal Balance. The Certificates may not be acquired by (a) an employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to the provisions of Title I of ERISA, (b) a plan described in Section 4975(e)(1) of the Code or (c) any entity, including an insurance company separate account or general account, whose underlying assets include plan assets by reason of a plan's investment in the entity (each, a "Benefit Plan"). By accepting and holding this Certificate, the Holder hereof shall be deemed to have represented and warranted that it is not a Benefit Plan. A-6 57 ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- (Please print or type name and address, including postal zip code, of assignee) - -------------------------------------------------------------------------------- the within Certificate, and all rights thereunder, hereby irrevocably constituting and appointing - -------------------------------------------------------------------- Attorney to transfer said Certificate on the books of the Certificate Registrar, with full power of substitution in the premises. Dated:_____________ */ --------------------------------------------- Signature Guaranteed: */ --------------------------------------------- - ---------- */ NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Certificate in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. A-7 58 EXHIBIT B TO THE TRUST AGREEMENT [FORM OF RESIDUAL INSTRUMENT] THE RESIDUAL INTEREST IN THE TRUST REPRESENTED BY THIS RESIDUAL INSTRUMENT HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THIS RESIDUAL INSTRUMENT MAY BE DIRECTLY OR INDIRECTLY OFFERED OR SOLD OR OTHERWISE DISPOSED OF (INCLUDING PLEDGED) BY THE HOLDER HEREOF ONLY TO (I) A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE ACT, IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT PURSUANT TO RULE 144A OR (II) A PERSON INVOLVED IN THE ORGANIZATION OR OPERATION OF THE TRUST OR AN AFFILIATE OF SUCH A PERSON WITHIN THE MEANING OF RULE 3A-7 OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (INCLUDING, BUT NOT LIMITED TO, MEGO MORTGAGE CORPORATION) IN A TRANSACTION THAT IS REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR THAT IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. NO PERSON IS OBLIGATED TO REGISTER THIS RESIDUAL INSTRUMENT UNDER THE ACT OR ANY STATE SECURITIES LAWS. NO TRANSFER OF THIS RESIDUAL INSTRUMENT OR ANY BENEFICIAL INTEREST THEREIN SHALL BE MADE TO ANY PERSON UNLESS THE OWNER TRUSTEE HAS RECEIVED A CERTIFICATE FROM THE TRANSFEREE TO THE EFFECT THAT SUCH TRANSFEREE (I) IS NOT A PERSON WHICH IS AN EMPLOYEE BENEFIT PLAN, TRUST OR ACCOUNT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA") OR SECTION 4975 OF THE CODE OR A GOVERNMENTAL PLAN, DEFINED IN SECTION 3(32) OF ERISA SUBJECT TO ANY FEDERAL, STATE OR LOCAL LAW WHICH IS, TO A MATERIAL EXTENT, SIMILAR TO THE FOREGOING PROVISIONS OF ERISA OR THE CODE (ANY SUCH PERSON BEING A "PLAN") AND (II) IS NOT AN ENTITY, INCLUDING AN INSURANCE COMPANY SEPARATE ACCOUNT OR GENERAL ACCOUNT, WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF A PLAN'S INVESTMENT IN THE ENTITY. [THIS AGREEMENT IS NONTRANSFERABLE. NOTWITHSTANDING ANYTHING HEREIN OR IN THE TRUST AGREEMENT TO THE CONTRARY, ANY ATTEMPTED TRANSFER OF THIS RESIDUAL INSTRUMENT SHALL BE NULL AND VOID FOR ALL PURPOSES.] B-1 59 MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 RESIDUAL INSTRUMENT No. _____ THIS CERTIFIES THAT __________________________________ (the "Owner") is the registered owner of a _____% residual interest in MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 (the "Trust") existing under the laws of the State of Delaware and created pursuant to the Trust Agreement dated as of June 14, 1997 (the "Trust Agreement") between FINANCIAL ASSET SECURITIES CORP., as Depositor, MEGO MORTGAGE CORPORATION, as the Company, WILMINGTON TRUST COMPANY, not in its individual capacity but solely in its fiduciary capacity as owner trustee under the Trust Agreement (the "Owner Trustee") and First Bank National Association, as Co-Owner Trustee (the "Co-Owner Trustee"). Initially capitalized terms used but not defined herein have the meanings assigned to them in the Trust Agreement. The Owner Trustee, on behalf of the Issuer and not in its individual capacity, has executed this Residual Instrument by one of its duly authorized signatories as set forth below. This Residual Instrument is one of the Residual Instruments referred to in the Trust Agreement and is issued under and is subject to the terms, provisions and conditions of the Trust Agreement to which the holder of this Residual Instrument by virtue of the acceptance hereof agrees and by which the holder hereof is bound. Reference is hereby made to the Trust Agreement and the Sale and Servicing Agreement for the rights of the holder of this Residual Instrument, as well as for the terms and conditions of the Trust created by the Trust Agreement. The holder, by its acceptance hereof, agrees not to transfer this Residual Instrument [except in accordance with terms and provisions of the Agreement]. B-2 60 THIS RESIDUAL INSTRUMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, 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. IN WITNESS WHEREOF, the Owner Trustee, on behalf of the Trust and not in its individual capacity, has caused this Residual Instrument to be duly executed. MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 By: Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By:_________________________________________________ Authorized Signatory DATED: June 27, 1997 CERTIFICATE OF AUTHENTICATION This is one of the Certificates referred to in the within-mentioned Trust Agreement. First Bank National Association, as Administrator and Authenticating Agent By:_________________________________________________ Authorized Signatory B-3 61 ASSIGNMENT FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- (Please print or type name and address, including postal zip code, of assignee) - -------------------------------------------------------------------------------- the within Certificate, and all rights thereunder, hereby irrevocably constituting and appointing - -------------------------------------------------------------------- Attorney to transfer said Certificate on the books of the Certificate Registrar, with full power of substitution in the premises. Dated:_____________ */ --------------------------------------------- Signature Guaranteed: */ --------------------------------------------- - ---------- */ NOTICE: The signature to this assignment must correspond with the name as it appears upon the face of the within Certificate in every particular, without alteration, enlargement or any change whatever. Such signature must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank or trust company. B-4 62 EXHIBIT C TO THE TRUST AGREEMENT CERTIFICATE OF TRUST OF MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 THIS Certificate of Trust of MEGO MORTGAGE HOME LOAN OWNER TRUST 1997- 3 (the "Trust"), dated as of June 14, 1997, is being duly executed and filed by Wilmington Trust Company, a Delaware banking corporation, as trustee, to form a business trust under the Delaware Business Trust Act (12 Del. Code, Section 3801 et seq.). 1. Name. The name of the business trust formed hereby is MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3. 2. Delaware Trustee. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company of Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890. Attention:___________. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, has executed this Certificate of Trust as of the date first above written. Wilmington Trust Company, not in its individual capacity but solely as Owner Trustee under a Trust Agreement dated as of June 14, 1997. By______________________________________ Name: Title: B-1 63 EXHIBIT D TO THE TRUST AGREEMENT (Form of Certificate Depository Agreement) B-2 64 EXHIBIT E TRANSFER CERTIFICATE First Bank National Association 180 East Fifth Street St. Paul, Minnesota 55101 Attention: Structured Finance/Mego Mortgage Home Loan Owner Trust 1997-3 Financial Asset Securities Corp. 600 Steamboat Road Greenwich, Connecticut 06830 Re: Trust Agreement, dated as of June 14, 1997, among Mego Mortgage Corporation, Financial Asset Securities Corp., First Bank National Association and Wilmington Trust Company, as Owner Trustee; Mego Mortgage Home Loan Owner Trust 1997-3 Home Loan Asset-Backed Notes and Certificates, Series 1997-3 Ladies and Gentlemen: The undersigned (the "Transferee") has agreed to purchase from__________ ___________ (the "Transferor") the following: [Insert Residual Instrument(s) to be transferred] A. Rule 144A "Qualified Institutional Buyers" should complete this section I. The Transferee is (check one): ____ (i) An insurance company, as defined in Section 2(13) of the Securities Act of 1933, as amended (the "Securities Act"), (ii) an investment company registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"), (iii) a business development company as defined in Section 2(a)(48) of the Securities Act, (iv) a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958, (v) a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, (vi) an employee benefit plan within the E-1 65 meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (vii) a business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940, (viii) an organization described in Section 501(c)(3) of the Internal Revenue Code, corporation (other than a bank as defined in Section 3(a)(2) of the Securities Act or a savings and loan association or other institution referenced in Section 3(a)(2) of the Securities Act or a foreign bank or savings and loan association or equivalent institution), partnership, or Massachusetts or similar business trust; or (ix) an investment advisor registered under the Investment Advisors Act of 1940, which, for each of (i) through (ix), owns and invests on a discretionary basis at least $100 million in securities other than securities of issuers affiliated with the Transferee, securities issued or guaranteed by the United States or a person controlled or supervised by and acting as an instrumentality of the government of the United States pursuant to authority granted by the Congress of the United States, bank deposit notes and certificates of deposit, loan participations, repurchase agreements, securities owned but subject to a repurchase agreement, and currency, interest rate and commodity swaps (collectively, "Excluded Securities"); ____ a dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that in the aggregate owns and invests on a discretionary basis at least $10 million of securities other than Excluded Securities and securities constituting the whole or part of an unsold allotment to, or subscription by, Transferee as a participant in a public offering; ____ an investment company registered under the Investment Company Act that is part of a family of investment companies (as defined in Rule 144A of the Securities and Exchange Commission) which own in the aggregate at least $100 million in securities other than Excluded Securities and securities of issuers that are part of such family of investment companies; ____ an entity, all of the equity owners of which are entities described in this Paragraph A(I); ____ a bank as defined in Section 3(a)(2) of the Securities Act, any savings and loan association or other institution as referenced in Section 3(a)(5)(A) of the Securities Act, or any foreign bank or savings and loan association or equivalent institution that in the aggregate owns and invests on a discretionary basis at least $100 million in securities other than Excluded Securities and has an audited net worth of at least $25 million as demonstrated in its latest annual financial statements, as of a date not more than 16 months preceding the date of transfer of the Residual Instruments E-2 66 to the Transferee in the case of a U.S. Bank or savings and loan association, and not more than 18 months preceding such date in the case of a foreign bank or savings association or equivalent institution. II. The Transferee is acquiring such Residual Instruments solely for its own account, for the account of one or more others, all of which are "Qualified Institutional Buyers" within the meaning of Rule 144A, or in its capacity as a dealer registered pursuant to Section 15 of the Exchange Act acting in a riskless principal transaction on behalf of a "Qualified Institutional Buyer". The Transferee is not acquiring such Residual Instruments with a view to or for the resale, distribution, subdivision or fractionalization thereof which would require registration of the Residual Instruments under the Securities Act. B. "Accredited Investors" should complete this Section I. The Transferee is (check one): ____ a bank within the meaning of Section 3(a)(2) of the Securities Act; ____ a savings and loan association or other institution defined in Section 3(a)(5) of the Securities Act; ____ a broker or dealer registered pursuant to the Exchange Act; ____ an insurance company within the meaning of Section 2(13) of the Securities Act; ____ an investment company registered under the Investment Company Act; ____ an employee benefit plan within the meaning of Title I of ERISA, which has total assets in excess of $5,000,000; ____ another entity which is an "accredited investor" within the meaning of paragraph (fill in) of subsection (a) of Rule 501 of the Securities and Exchange Commission. II. The Transferee is acquiring such Residual Instruments solely for its own account, for investment, and not with a view to or for the resale, distribution, subdivision or fractionalization thereof which would require registration of the Residual Instruments under the Securities Act. C. If the Transferee is unable to complete one of paragraph A(I) or paragraph B(I) above, the Transferee must furnish an opinion in form and substance satisfactory to the Trustee of counsel satisfactory to the Trustee to the effect that such purchase will not violate any applicable federal or state securities laws. E-3 67 [To be completed by any Transferee acquiring an interest in Residual Instruments or the Certificates] D. The Transferee represents that it is not (A) an "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 19974, as amended ("ERISA"), or (B) a "plan" within the meaning of Section 4975(e)(1) of the Code (any such plan or employee benefit plan, a "Plan") or (C) any entity, including an insurance company separate account or general account, whose underlying assets include plan assets by reason of a plan's investment in the entity and is not directly or indirectly purchasing such Trust Security on behalf of, as investment manager of, as named fiduciary of, as trustee of, or with assets of a Plan. [By its acceptance of a Residual Instrument, each Prospective Owner thereof agrees and acknowledges that no legal or beneficial interest in all or any portion of the Residual Instruments may be transferred directly or indirectly to an individual, corporation, partnership or other person unless such transferee is not a Non-U.S. Person (any such person being referred to herein as a "Non-permitted Foreign Holder"), and any such purported transfer shall be void and have no effect.] (iii) the Transferee is an "accredited investor" as defined in Rule 501(a) of Regulation D pursuant to the 1933 Act. Very truly yours, [NAME OF PURCHASER] By:________________________ Title:_____________________ Dated: THE FOREGOING IS ACKNOWLEDGED THIS ____ DAY OF __________, 199_. [NAME OF SELLER] By:________________________ Title:_____________________ E-4 EX-27.1 17 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS AUG-31-1997 SEP-01-1996 MAR-31-1997 16,220 0 74,695 10,288 36,822 0 40,548 15,253 265,054 0 99,027 0 0 187 47,211 265,054 36,105 97,943 4,992 32,071 53,084 12,601 10,493 12,788 1,221 11,567 0 0 0 10,074 0.52 0.52 Excludes 1,493 of income associated with minority interest
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