Interim Loan & Security Agreement

INTERIM LOAN AND SECURITY AGREEMENT


INTERIM LOAN AND SECURITY AGREEMENT, dated as of November 22, 1996 (as amended, supplemented or otherwise modified from time to time, this "Agreement"), between (i) PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation (the "Lender"), and (ii) AAMES CAPITAL CORPORATION, a California corporation (the "Borrower") and a subsidiary of Aames Financial Corporation, a Delaware corporation (the "Guarantor").


RECITALS


WHEREAS, Prudential Securities Incorporated has agreed to act from time to time as lead manager or co-manager or placement agent of one or more public or private offerings of residential loan pass-through certificates (the "Certificates") to be issued by one or more trusts to be sponsored by the Borrower; and


WHEREAS, the Lender has agreed, subject to the terms and conditions contained herein, to provide interim funding from time to time to finance the origination or acquisition of fixed rate first, second or third mortgage lien loans ("Fixed Rate Mortgage Loans") or six-month LIBOR and one year CMT indexed floating rate first or second mortgage lien loans ("Floating Rate Mortgage Loans") (Fixed Mortgage Loans and Floating Rate Mortgage Loans, collectively, "Mortgage Loans"), which Mortgage Loans are identified for inclusion in one of two trusts (each, a "Designated Trust"), which Designated Trust (i) for the period from the date hereof to but excluding December 1, 1996, shall be Aames Mortgage Trust 1996-D, (ii) from December 1, 1996 to but excluding the initial Funding Termination Date, shall be Aames Mortgage Trust 1997-A, and (iii) if the Funding Termination Date is extended in accordance with Section 2(a) hereof, for the period from the date of such extension to but excluding the Funding Termination Date so specified (such initial period and each such subsequent period, a "Funding Period"), shall be the trust specified in the Notice of Extension of Agreement delivered in accordance with Section 2(a) hereof, and which Mortgage Loans are to be pledged to secure the Advances to be made by the Lender hereunder, with the proceeds of the related Certificates to be used to repay such Advances;


NOW, THEREFORE, the parties to this Agreement hereby agree as follows (an index of certain capitalized, defined terms appears in Section 22 of this Agreement):


Section 1. The Advances. Subject to the terms of this Agreement, the Lender agrees to lend to the Borrower from time to time an aggregate principal amount outstanding, not to exceed at any one time outstanding an amount (the "Maximum Funding Amount") equal to (i) for the period from the date hereof to and including the initial Funding Termination


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Date, $125,000,000, and (ii) if the Funding Termination Date is extended in accordance with Section 2(a) hereof, for each subsequent Funding Period the amount specified in the Notice of Extension of Agreement delivered in accordance with Section 2(a) hereof in respect of such Funding Period, to be made in one or more advances (each an "Advance" and, collectively, "Advances"). Each Advance shall be made on a date other than a Saturday, Sunday or other day on which banks in New York, New York are authorized or required by law to be closed or on which the New York Stock Exchange is closed (any such date, a "Business Day") that is prior to the Funding Termination Date (as defined below; each such date on which an Advance is made, a "Funding Date"); provided that:


(a) the representations and warranties of the Borrower in Section
5 hereof and Schedule 1 hereto shall be true and correct on and as of
such Funding Date as if made on and as of such date;


(b) no Default or Event of Default shall have occurred and be
continuing or would exist after the making of any Advance on such
Funding Date;


(c) if requested by the Lender, the Lender shall have conducted a
due diligence review of the mortgage files relating to the Mortgage
Loans, the results of which shall have been satisfactory to the Lender;


(d) the Lender shall have received (i) a timely Notice of
Borrowing as provided in Section 2(b) hereof, (ii) a Certification from
the Custodian as provided in Section 2(b) hereof to the effect that the
Custodian has reviewed the Mortgage Loan Documents relating to the
Mortgage Loans being pledged in connection with the Advance being made
on such Funding Date in the manner required by the Custodial Agreement
and has found no material deficiencies in such Mortgage Loan Documents
as so reviewed, and (iii) in connection with the first Advance, (A) a
legal opinion from counsel to the Borrower and the Guarantor, in the
form of Exhibit C attached hereto, (B) the Secured Note (as defined
below), (C) the Custodial Agreement, and (D) a Guarantee, dated as of
the date hereof, made by the Guarantor in favor of the Lender,
substantially in the form of Exhibit F hereto (as amended, supplemented
or otherwise modified from time to time, the "Guarantee") in each case
duly executed by the parties thereto;


(e) the Borrower shall have delivered to the Custodian all
documents to be delivered with respect to the Mortgage Loans being
pledged on such Funding Date;


(f) after the making of such Advance: (i) the outstanding
principal amount of the aggregate of all Advances will not exceed the
Maximum Funding Amount; (ii) the outstanding principal amount of the
aggregate of all Advances made in respect of Fixed Rate Mortgage Loans
will not exceed the lesser of (A) 102% of the aggregate par amount of
all Fixed Rate Mortgage Loans held as Collateral and (B) 96.0% of the
aggregate market value of all Fixed Rate Mortgage Loans held as
Collateral; and (iii) the outstanding principal amount of the aggregate
of all Advances made in respect of


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Floating Rate Mortgage Loans will not exceed the lesser of (X) 102% of
the aggregate par amount of all Floating Rate Mortgage Loans held as
Collateral and (Y) 97.0% of the aggregate market value of all Floating
Rate Mortgage Loans held as Collateral;


(g) the Lender shall not have determined, in its sole discretion,
that the Designated Trust is not reasonably likely to be established on
substantially the terms agreed upon at the time of the specifying of the
Designated Trust hereunder;


(h) the Mortgage Loans in respect of which such Advance is
proposed to be made shall not include any Specified Mortgage Loans (as
defined in Section 7(h) hereof); and


(i) any general conditions for the making of Advances, specified
in Section 2 below, shall have been satisfied and will continue to be
satisfied if such Advance is made.


Section 2. Terms and Conditions for All Advances.


(a) Each outstanding Advance shall mature on the related Maturity Date (as defined below), and the obligation of the Lender to make any Advances hereunder shall terminate on March 31, 1997 (the "Funding Termination Date"); provided that the Funding Termination Date may be extended from time to time, in the sole and absolute discretion of the Lender, upon (i) the execution and delivery by the parties hereto of a Notice of Extension of Agreement substantially in the form of Exhibit B-1 annexed hereto, (ii) the delivery of an opinion of counsel to the Borrower substantially in the form of Exhibit B-2 annexed hereto and (iii) in connection with an increase of the Maximum Funding Amount to an amount greater than the then maximum principal amount of the Secured Note, the execution and delivery by the parties hereto of an Endorsement to the Secured Note, substantially in the form of Exhibit B-3 hereto.


(b) If the Borrower wishes to receive an Advance, then the Borrower shall give the Lender written notice by no later than 2:00 p.m. (New York City time) two Business Days prior to a Funding Date of the amount of such Advance to be advanced on such Funding Date by delivering a Notice of Borrowing substantially in the form of Exhibit D attached hereto, and the Custodian shall have delivered a Certification no later than 2:00 p.m. (New York City time) one Business Day before such Funding Date.


(c) Each Advance shall bear interest from the related Funding Date to but excluding the Maturity Date at a rate per annum equal to LIBOR plus 0.70% and thereafter as provided in Section 2(f). "LIBOR" shall mean the rate appearing at page 3750 of the Telerate Screen as one-month LIBOR and, if such rate shall not be so quoted, the rate per annum at which deposits in U.S. dollars for a period of one month are offered by Morgan Guaranty Trust Company of New York (or such other prime bank in the London interbank market as the Lender shall designate) to prime banks in the London interbank market at approximately 11:00 a.m. (London Time) on the related Funding Date (for purposes of determining LIBOR, a


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Business Day being a Business Day on which dealings between banks may be carried on in the London interbank market). Interest shall be calculated on the basis of a 360-day year and for the actual number of days elapsed.


(d) Each outstanding Advance shall mature on the related maturity date specified for such Advance as set forth in the related Notice of Borrowing (the "Maturity Date"); provided that the Maturity Date shall, for any Advance, be no later than the earlier of (i) subject to the next succeeding proviso hereto, the applicable Funding Termination Date, and (ii) subject to Sections 2(m) and 2(n), below, the date upon which the Certificates related to the Mortgage Loans funded by such Advance shall be issued by the Designated Trust; provided, further, that the Lender shall have the option, in its sole discretion, to extend the Maturity Date of an Advance from time to time for a period of up to thirty (30) days by delivering to the Borrower notice of such election in the form of Exhibit E attached hereto no later than 5 days preceding the then scheduled Maturity Date of such Advance. If no such notice is delivered by the Lender, such Advance shall automatically become due and payable without any further action by the Lender on its Maturity Date, and in such event the Lender may exercise all rights and remedies available to it as the holder of a first perfected security interest under the Uniform Commercial Code as in effect in the State of New York (the "NY UCC"). The extension of the Maturity Date of any Advance beyond the applicable Funding Termination Date shall not be deemed to be an extension, renewal, or modification of the Lender's commitment to lend to the Borrower under this Agreement at any time after the Funding Termination Date.


(e) The Advances are pre-payable at any time without premium or penalty, in whole or in part. Any amounts pre-paid shall be applied to repay the outstanding principal amount of any Advances (together with interest thereon) until paid in full. Amounts repaid may be borrowed in accordance with the terms of this Agreement. If the Borrower intends to prepay an Advance in whole or in substantial part from a source other than the proceeds of Certificates, the Borrower shall give two Business Days' prior notice thereof to the Lender.


(f) If the Advances are not repaid in whole on the date when due, the Advances shall, commencing on such date, bear interest at a rate per annum equal to LIBOR plus 3.0% until repaid.


(g) With respect to each Advance, LIBOR shall be determined initially as of the date of such Advance for the period from such date to but excluding the fifth calendar day of the month following the month in which such Advance was made (such fifth calendar day of a month and each succeeding fifth calendar day of a month, an "Interest Payment Date") and shall thereafter be determined as of each Interest Payment Date for the period from such date to but excluding the following Interest Payment Date.


(h) Interest on each Advance is payable on each Interest Payment Date and on the Maturity Date for such Advance. In the event that an Advance is not repaid in full on the date when due, interest shall be payable thereafter on demand.


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(i) The Advances shall be evidenced collectively by the secured promissory note of the Borrower in the form attached hereto as Exhibit A (the "Secured Note"). The Lender is authorized to record the date and amount of each Advance and the date and amount of each repayment of principal thereof on the schedule annexed to the Secured Note and any such recordation shall be conclusive evidence of the accuracy of the amounts so recorded (absent manifest error); provided that the failure of the Lender to make such recordation (or any error in such recordation) shall not affect the rights and obligations of the Borrower hereunder or under the Secured Note.


(j) Each Advance shall be repaid in full on the related Maturity Date, and the Lender shall release its security interest in and to the Mortgage Loans relating to a Designated Trust when all Advances relating thereto are so repaid.


(k) If an Advance is not repaid in full when due, thereafter all payments and prepayments of the related Mortgage Loans shall be paid to the Lender as promptly as practicable following receipt of such payments but in any event no later than five Business Days following receipt thereof.


(l) If at any time,


(A) the aggregate outstanding principal amount of all
Advances in respect of Fixed Rate Mortgage Loans exceeds the lesser of
(i) 102% of the par amount of the Mortgage Loans held as Collateral for
such Advances, and (ii) 96.0% of the aggregate market value of the Fixed
Rate Mortgage Loans held as Collateral for such Advances, as determined
by the Lender and notified to the Borrower on the third Business Day of
each week (or, in the sole discretion of the Lender following notice to
the Borrower, on any Business Day); or


(B) the aggregate outstanding principal amount of all
Advances in respect of Floating Rate Mortgage Loans exceeds the lesser
of (i) 102% of the par amount of the Mortgage Loans held as Collateral
for such Advances, and (ii) 97.0% of the aggregate market value of the
Floating Rate Mortgage Loans held as Collateral for such Advances, as
determined by the Lender and notified to the Borrower on the third
Business Day of each week (or, in the sole discretion of the Lender
following notice to the Borrower, on any Business Day); or


(C) any monthly installment of any Mortgage Loan is
delinquent for a period of not less than the period from the due date of
such monthly installment to the due date of the immediately succeeding
monthly installment;


the Borrower shall no later than one Business Day after receipt of notice of such excess or after such Mortgage Loan becomes delinquent, (X) prepay the related Advances (together with interest thereon) in part or in whole, (Y) pledge additional Collateral to the Lender, and/or (Z) in the case of clause (C) of this subsection (l) only, pledge one or more replacement Mortgage Loans having an aggregate unpaid principal amount of not less than the principal amount of


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such delinquent Mortgage Loan and otherwise meeting the requirements of this Agreement and the Custodial Agreement, such that after giving effect to such prepayment, pledge or replacement, the unpaid principal amount of the Advances does not exceed the lesser of the amounts set forth in subclauses (A)(i) and (A)(ii) or (B)(i) and (B)(ii), as applicable, of this subsection (l) and the condition described in clause (C) of this subsection (l) shall no longer exist with respect to any Mortgage Loan.


(m) On the date which is the earlier of (i) the date Certificates shall be issued by Aames Mortgage Trust 1996-D, and (ii) December 31, 1996, the Borrower shall prepay the Advances made prior to the cut-off date for Aames Mortgage Trust 1996-D ("Pre-Cut-Off Date Advances") such that after giving effect to such prepayment, the aggregate outstanding principal amount of Pre-Cut-Off Date Advances does not exceed the lesser of (i) $25,000,000 and (ii) 20% of the aggregate principal amount of all Pre-Cut-Off Date Advances which were outstanding on such cut-off date.


(n) Notwithstanding anything to the contrary in this Agreement, on the date that the Certificates shall be issued by Aames Mortgage Trust 1997-A, the Borrower shall prepay all Advances in respect of Mortgage Loans which were pledged to the Lender hereunder prior to the cut-off date for Aames Mortgage Trust 1996-D, and were not included in either Aames Mortgage Trust 1997-A or Aames Mortgage Trust 1996-D.


(o) Notwithstanding anything to the contrary in this Agreement, (i) if the Lender is unable, after good faith effort, to obtain a source of funds for the proposed Advance on substantially the same economic terms as are available to the Lender as of the date of this Agreement, and as a result the cost to the Lender of making such Advance is increased by an amount which the Lender deems material, the Lender shall not be obligated to make such Advance unless the Borrower agrees to pay the Lender any additional amounts necessary to compensate the Lender for such increased cost, as notified by the Lender to the Borrower, and (ii) the Lender shall have no obligation to make any Advance hereunder if there shall have occurred any material adverse change in (A) the financial condition of the Lender, (B) the financial markets generally or (C) the secondary market for Mortgage Loans. The Lender shall promptly notify the Borrower of any such determination by the Lender of any of the foregoing.


(p) If any payment hereunder becomes due and payable, or any action hereunder is required to be taken, on a day other than a Business Day, the date for such payment or action shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall accrue at the then applicable rate during such extension.


Section 3. Purpose of Advances. Each Advance shall be used to finance or refinance Mortgage Loans originated by the Borrower or to acquire Mortgage Loans from affiliates of the Borrower or unaffiliated third parties, in each case in arm's-length transactions.


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Section 4. Mortgage Files and Custodian; Secured Obligations. (a) In connection with each Advance, the Borrower shall deliver, or heretofore has delivered, to Bankers Trust Company of California, N.A., as custodian (the "Custodian") on behalf of the Lender, the documents and instruments listed in Section 2 of that certain Custodial Agreement, dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Custodial Agreement"), among the Borrower, the Lender, and the Custodian, and the Borrower shall further cause to be delivered to the Custodian the documents and instruments described in the last sentence of Section 2 of the Custodial Agreement as and to the extent required to be delivered to the Custodian pursuant thereto. All such Mortgage Loans, all such documents and instruments evidencing and relating to the Mortgage Loans (collectively, the "Mortgage Loan Documents"), together with all computer records and tapes relating thereto, and any proceeds thereof, are hereinafter referred to as the "Collateral". Pursuant to the Custodial Agreement, the Custodian shall hold the Mortgage Loan Documents on behalf of the Lender pursuant to terms of the Custodial Agreement and shall deliver to the Lender a Certification (as defined in the Custodial Agreement) to the effect that it has reviewed such Mortgage Loan Documents in the manner required by the Custodial Agreement and identifying any deficiencies in such Mortgage Loan Documents as so reviewed.


(b) The Borrower hereby pledges and grants a security interest in all of its respective right, title and interest in and to the Collateral, now owned or hereafter acquired, to the Lender to secure the repayment of principal of and interest on all Advances and all other amounts owing to the Lender hereunder (collectively, the "Secured Obligations"). The Borrower agrees to mark its computer records and tapes to evidence the security interests granted to the Lender hereunder.


Section 5. Representations and Warranties. (a) The Borrower represents and warrants to the Lender that:


(i) It has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of
California.


(ii) It is duly licensed as a licensee or is otherwise
qualified in each state in which its ownership of property or the
conduct of its business requires such licensure or qualification and
where failure to be so licensed or qualified would have a material
adverse effect on the business of the Borrower, on the Collateral, on
the ability of the Borrower to pay or perform the Secured Obligations or
on the rights and remedies of the Lender hereunder or under the Secured
Note, the Custodial Agreement or the Guarantee, and the Borrower is in
compliance in all material respects with each such state's applicable
statutes, laws, rules and regulations. It has the requisite corporate
power and authority and legal right to own and grant a lien on all of
its right, title and interest in and to the Collateral, and to execute
and deliver, engage in the transactions contemplated by, and perform and
observe the terms and conditions of, this Agreement, the Secured Note
and the Custodial Agreement.


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(iii) It is solvent and is not in default under any
mortgage, borrowing agreement or other instrument or agreement
pertaining to indebtedness for borrowed money, and the execution,
delivery and performance by it of this Agreement, the Secured Note and
the Custodial Agreement do not conflict with any term or provision of
its articles of incorporation or by-laws or any law, rule, regulation,
order, judgment, writ, injunction or decree applicable to any of them of
any court, regulatory body, administrative agency or governmental body
having jurisdiction over it and will not result in any violation of any
such mortgage, instrument or agreement.


(iv) All financial statements or certificates of the
Borrower or any of its officers furnished to the Lender are true and
complete and do not omit to disclose any material liabilities or other
facts relevant to the Borrower's condition. All such financial
statements have been prepared in accordance with GAAP. No financial
statement or other financial information as of a date later than
September 30, 1996, has been furnished by the Borrower to any lender
that has not been furnished to the Lender.


(v) No consent, approval, authorization or order of,
registration or filing with, or notice to any governmental authority or
court is required under applicable law in connection with the execution,
delivery and performance by the Borrower of this Agreement, the Secured
Note or the Custodial Agreement, where the failure to obtain any of the
foregoing would materially adversely affect the business, operations,
property or financial condition of the Borrower taken as a whole, the
ability of the Borrower to perform its obligations under this Agreement,
the Secured Note or the Custodial Agreement or the validity or
enforceability of this Agreement, the Secured Note or the Custodial
Agreement, except as have been obtained and are in full force and
effect.


(vi) There is no action, proceeding or investigation
pending or, to the best of its knowledge, threatened against it before
any court, administrative agency or other tribunal (A) asserting the
invalidity of this Agreement, the Custodial Agreement or the Secured
Note, (B) seeking to prevent the consummation of any of the transactions
contemplated by this Agreement, the Custodial Agreement or the Secured
Note, or (C) which might materially and adversely affect the validity of
the Mortgage Loans or the performance by it of its obligations under, or
the validity or enforceability of, this Agreement, the Secured Note or
the Custodial Agreement.


(vii) There has been no material adverse change in the
business, operations, financial condition, properties or prospects of
the Borrower since September 30, 1996.


(viii) This Agreement, the Secured Note and the Custodial
Agreement have each been duly authorized, executed and delivered by the
Borrower, all requisite corporate action having been taken, and each is
legal, valid and binding and enforceable against the Borrower in
accordance with its terms.


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(ix) Upon receipt by the Custodian of the Mortgage Loan
Documents with respect to any Mortgage Loan and for so long as the
Custodian maintains actual physical possession of such Mortgage Loan
Documents, the Custodian shall have, for the benefit of the Lender, a
fully-perfected first priority security interest in the Collateral with
respect to such Mortgage Loan; provided however until such time as
assignments of mortgage with respect to the Mortgage Loans are recorded
in the appropriate office in the name of the Custodian (1) the Custodian
may not independently be able to enforce a mortgage against the related
mortgaged property or the related mortgagor, (2) the Borrower could
record an assignment of such mortgage in the name of a third party or
record a discharge and satisfaction of such mortgage with the result
that, in the former case such third party could acquire the rights
represented by such mortgage and, in the latter case, the lien of such
mortgage could be discharged, with the result that such mortgage note
would no longer be secured by the related property and (3) any notice
which may be given to the record holder of a mortgage, including,
without limitation, notices regarding the non-payment of real estate
taxes, would instead be given to the Borrower.


(b) With respect to every Mortgage Loan delivered or to be delivered to the Custodian, the Borrower makes the representations and warranties set forth in Schedule 1 hereof.


Section 6. Rights of Lender; Limitations on Lender's Obligations. (a) Anything herein to the contrary notwithstanding, the Borrower shall remain liable under each of the Mortgage Loan Documents to which it is a part ...