Indemnification Agreement

INDEMNIFICATION AGREEMENT


among


FINANCIAL SECURITY ASSURANCE INC.,


ACCREDITED HOME LENDERS, INC.,


and


LEHMAN BROTHERS INC.


Dated as of September 23, 1996


$14,073,000 Class A-1 Certificates
$78,048,000 Class A-2 Certificates


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TABLE OF CONTENTS


Page
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SECTION 1. Definitions ................................................. 1
SECTION 2. Representations, Warranties and
Agreements of Financial Security ............................ 3
SECTION 3. Representations, Warranties and
Agreements of the Underwriter................................ 6
SECTION 4. Indemnification ............................................. 7
SECTION 5. Indemnification Procedures................................... 8
SECTION 6. Contribution ................................................ 9
SECTION 7. Miscellaneous................................................ 10
EXHIBIT A Opinion of General Counsel


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INDEMNIFICATION AGREEMENT


INDEMNIFICATION AGREEMENT, dated as of September 23, 1996, among FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"), ACCREDITED HOME LENDERS, INC. (the "Issuer"), and LEHMAN BROTHERS INC. (the "Underwriter"):


Section 1. Definitions. For purposes of this Agreement, the following terms shall have the meanings provided below. Capitalized terms used but not otherwise defined herein shall have the meaning ascribed thereto in the Pooling and Servicing Agreement.


"Agreement" means this Indemnification Agreement, as amended from time to time.


"Federal Securities Laws" means the Securities Act, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the Public Utility Holding Company Act of 1935, each as amended from time to time, and the rules regulations in effect from time to time under such Acts.


"Financial Security Agreements" means this Agreement and the Insurance Agreement.


"Financial Security Financial Information" has the meaning provided in Section 2(f).


"Financial Security Information" has the meaning provided in Section 2(g) hereof.


"Financial Security Party" means any of Financial Security, its parent, subsidiaries and affiliates, and any shareholder, director, officer, employee, agent or "controlling person" (as such term is used in the Securities Act) of any of the foregoing.


"Indemnified Party" means any party entitled to any indemnification pursuant to Section 4 hereof.


"Indemnifying Party" means any party required to provide indemnification pursuant to Section 4 hereof.


"Insurance Agreement" means the Insurance and Indemnity Agreement, dated as of September 1, 1996, by and between Financial Security and the Issuer.


"Issuer Party" means any of the Issuer, its parent, subsidiaries and affiliates and any shareholder, director, officer, employee, agent or "controlling person" (as such term is used in the Securities Act) of any of the foregoing.


"Losses" means (a) any actual out-of-pocket damages incurred by the party entitled to indemnification or contribution hereunder, (b) any actual out-of-pocket costs or actual expenses incurred by such party, including reasonable fees or expenses of its counsel and other expenses incurred in connection with investigating or defending any claim, action or other proceeding which entitle such party to be indemnified hereunder (subject to the limitations set forth in Section 5 hereof), to the extent not paid, satisfied or reimbursed from funds provided by any other Person other than an affiliate of such party (provided that the foregoing shall not create or imply any obligation to pursue recourse against any such other Person), plus (c) interest on the amount paid by the party entitled to indemnification or contribution from the date of such payment to the date of payment by the party who is obligated to indemnify or contribute hereunder at the statutory rate applicable to judgments for breach of contract.


"Offering Circular" means the Prospectus Supplement relating to the Securities dated September 23, 1996.


"Offering Document" means the Offering Circular (including the Financial Security Financial Information incorporated by reference therein) and any other material or documents delivered by the Underwriter to any Person in connection with the offer or sale of the Securities.


"Person" means any individual, partnership, joint venture, corporation, trust, unincorporated organization or other organization or entity (whether governmental or private).


"Pooling and Servicing Agreement" means the Pooling and Servicing Agreement, dated as of September 1, 1996, between the Issuer, as sponsor and master servicer, and Bankers Trust Company, as trustee.


"Policy" means the financial guaranty insurance policy delivered by Financial Security with respect to the Securities.


"Securities" means the Class A-1 Certificates and Class A-2 Certificates issued by the Issuer pursuant to the Pooling and Servicing Agreement.


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"Securities Act" means the Securities Act of 1933, as amended from time to time.


"Underwriter Information" has the meaning provided in Section 3(b) hereof.


"Underwriter" means Lehman Brothers Inc.


"Underwriter Party" means, the Underwriter, its parent, subsidiaries and affiliates and any shareholder, director, officer, employee, agent or "controlling person" (as such item is used in the Securities Act) of any of the foregoing.


"Underwriting Agreement" means the Underwriting Agreement dated September 23, 1996, between the Issuer and the Underwriter.


Section 2. Representations, Warranties and Agreements of Financial Security. Financial Security represents, warrants and agrees as follows:


(a) Organization, Etc. Financial Security is a stock insurance company duly organized, validly existing and authorized to transact financial guaranty insurance business under the laws of the State of New York.


(b) Authorization, Etc. The Policy and the Financial Security Agreements have been duly authorized, executed and delivered by Financial Security.


(c) Validity, Etc. The Policy and the Financial Security Agreements constitute valid and binding obligations of Financial Security, enforceable against Financial Security in accordance with their terms, subject, as to the enforcement of remedies, to bankruptcy, insolvency, reorganization, rehabilitation, moratorium and other similar laws affecting the enforceability of creditors' rights generally applicable in the event of the bankruptcy or insolvency of Financial Security and to the application of general principles of equity and subject, in the case of this Agreement, to principles of public policy limiting the right to enforce the indemnification provisions contained herein.


(d) Exemption From Registration. The Policy is exempt from registration under the Securities Act.


(e) No Conflicts. Neither the execution or delivery by Financial Security of the Policy or the Financial Security Agreements, nor the performance by Financial Security of its obligations thereunder, will conflict with any provision of the certificate of incorporation or the


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bylaws of Financial Security nor result in a breach of, or constitute a default under, any material agreement or other instrument to which Financial Security is a party or by which any of its property is bound nor violate any judgment, order or decree applicable to Financial Security of any governmental or regulatory body, administrative agency, court or arbitrator having jurisdiction over Financial Security (except that, in the published opinion of the Securities and Exchange Commission, the indemnification provisions of this Agreement, insofar as they relate to indemnification for liabilities arising under the Securities Act, are against public policy as expressed in the Securities Act and are therefore unenforceable).


(f) Financial Information. The consolidated balance sheets of Financial Security as of December 31, 1995 and December 31, 1994 and the related consolidated statements of income, changes in shareholder's equity and cash flows for the fiscal years then ended and the interim consolidated balance sheet of Financial Security as of June 30, 1996, and the related statements of income, changes in shareholder's equity and cash flows for the interim period then ended, furnished by Financial Security for use, or incorporated by reference, in the Offering Circular (collectively, the "Financial Security Financial Information"), fairly present in all material respects the financial condition of Financial Security as of such dates and for such periods in accordance with generally accepted accounting principles consistently applied (subject as to interim statements to normal year-end adjustments) and since the date of the most current interim consolidated balance sheet referred to above there has been no change in the financial condition of Financial Security which would materially and adversely affect its ability to perform its obligations under the Policy.


(g) Financial Se ...