Insurance And Indemnity Agreement

INSURANCE AND INDEMNITY AGREEMENT


between


FINANCIAL SECURITY ASSURANCE INC.


and


ACCREDITED HOME LENDERS, INC.


Dated as of September 1, 1996


$92,121,000
------------------------------------------------------
Mortgage Loan Asset-Backed Certificates, Series 1996-1


- --------------------------------------------------------------------------------


TABLE OF CONTENTS


Page


INTRODUCTORY STATEMENTS


ARTICLE I DEFINITIONS; LIMITED RECOURSE


Section 1.01. Definitions...................................... 1
Section 1.02. Limited Recourse................................. 1


ARTICLE II REPRESENTATIONS, WARRANTIES AND
COVENANTS


Section 2.01. Representations and Warranties of
the Company............................................... 2
Section 2.02. [Intentionally Omitted........................... 5
Section 2.03. Affirmative Covenants of the
Company................................................... 5
Section 2.04. [Intentionally Omitted........................... 7
Section 2.05. Negative Covenants of the Company................ 7
Section 2.06. [Intentionally Omitted........................... 8


ARTICLE III THE POLICY; REIMBURSEMENT;
INDEMNIFICATION


Section 3.01. Issuance of the Policy........................... 8
Section 3.02. Payment of Fees and Premium...................... 8
Section 3.03. Reimbursement and Additional Payment
Obligation................................................ 9
Section 3.04. Indemnification.................................. 10
Section 3.05. Subrogation...................................... 11


ARTICLE IV FURTHER AGREEMENTS


Section 4.01. Effective Date: Term of Agreement................ 12
Section 4.02. Obligations Absolute............................ 12
Section 4.03. Assignments; Reinsurance;
Third-Party Rights........................................ 13
Section 4.04. Liability of FSA................................ 13
Section 5.01. Events of Default................................ 14
Section 5.02. Remedies: Waivers................................ 15


ARTICLE VI MISCELLANEOUS


Section 6.01. Amendments. Etc.................................. 16
Section 6.02. Notices.......................................... 16
Section 6.03. Payment Procedure................................ 17
Section 6.04. Severability..................................... 17
Section 6.05. Governing Law.................................... 17
Section 6.06. Consent to Jurisdiction.......................... 17
Section 6.07. Consent of FSA................................... 18


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Section 6.08. Counterparts..................................... 18
Section 6.09. Trial by Jury Waived............................. 18
Section 6.10. Limited Liability................................ 18
Section 6.11. Entire Agreement................................. 19


APPENDIX I


DEFINITIONS


Appendix I--Definitions Appendix II--Opinions of Counsel Annex I--Form of Policy Appendix A--Conditions Precedent to Issuance of the Policy


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INSURANCE AND INDEMNITY AGREEMENT


INSURANCE AND INDEMNITY AGREEMENT (this "Agreement"), dated as of September 1, 1996, between FINANCIAL SECURITY ASSURANCE INC. ("FSA") and ACCREDITED HOME LENDERS, INC. (the "Company").


INTRODUCTORY STATEMENTS


Pursuant to a Pooling and Servicing Agreement, dated as of September 1, 1996, made by and between the Company, as sponsor and master servicer, and Bankers Trust Company, as trustee (the "Trustee"), $92,121,000 Accredited Mortgage Loan Trust 1996-1 Mortgage Loan Asset-Backed Certificates, Series 1996-1, Class A-1 and Class A-2 Certificates (collectively, the "Securities"), together with Class B-1, Class B-2 and Class R Certificates, are being issued.


The Company has requested that FSA issue a financial guaranty insurance policy guarantying certain distributions of the principal of and interest on the Securities (including any such distributions subsequently avoided as a preference under applicable bankruptcy law) upon the terms and subject to the conditions provided herein.


The parties hereto desire to specify the conditions precedent to the issuance of the Policy by FSA, the payment of premium in respect of the Policy, the indemnity and reimbursement to be provided to FSA in respect of amounts paid by FSA under the Policy or otherwise and certain other matters.


In consideration of the premises and of the agreements herein contained, FSA and the Company hereby agree as follows:


ARTICLE I


DEFINITIONS; LIMITED RECOURSE


Section 1.01. Definitions. Capitalized terms used herein shall have the meanings provided in Appendix I hereto or, if not defined in Appendix I shall have the meanings provided in the Pooling and Servicing Agreement.


Section 1.02. Limited Recourse. Notwithstanding any provision of this Agreement to the contrary, the payment obligations of the Company set forth herein (other than those set forth in Sections 3.02 and Section 3.04) shall be non-recourse obligations and shall be payable only from monies available for such payment in accordance with the provisions of the Pooling and Servicing Agreement (except to the extent that any such payment obligation arises from a failure to perform or default of the Company or any affiliate thereof in accordance with the Pooling and Servicing Agreement or any other Transaction Document or by reason of gross negligence, willful misconduct or bad faith on the part of the Company in the performance of its duties and


obligations thereunder or reckless disregard by the Company of its duties and obligations thereunder).


ARTICLE II


REPRESENTATIONS, WARRANTIES AND COVENANTS


Section 2.01. Representations and Warranties of the Company. The Company represents, warrants and covenants, as of the date hereof and as of the Date of Issuance, as follows:


(a) Due Organization and Qualification. The Company is a
corporation, duly organized, validly existing and in good standing under
the laws of the state of California. The Company 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 as
described in the Offering Document and the performance of its obligations
under the Transaction Documents to which it is a party, in each
jurisdiction in which the failure to be so qualified or to obtain such
approvals would, in any respect, have a material adverse effect upon the
Transaction.


(b) Power and Authority. The Company has all necessary corporate
power and authority to conduct its business as currently conducted and as
described in the Offering Document, to execute the Transaction Documents
to which it is a party, to deliver and perform its obligations under such
Transaction Documents and to consummate the Transaction.


(c) Due Authorization. The execution, delivery and performance by
the Company of the Transaction Documents to which it is a party have been
duly authorized by all necessary corporate action on the part of the
Company and do not require any additional approvals or consents or other
action by, or any notice to or filing by the Company (other than filings
contemplated by the Pooling and Servicing Agreement and routine filings by
the Company under the Securities Exchange Act of 1934, as amended) or any
affiliate thereof with, any Person, including, without limitation, any
governmental entity or the Company's stockholders.


(d) Noncontravention. Neither the execution and delivery of the
Transaction Documents to which it is a party by the Company, the
consummation of the transactions contemplated thereby nor the satisfaction
of the terms and conditions of such Transaction Documents,


(i) conflicts with or results in any breach or violation of
any provision of the charter or Bylaws of the Company or any law,
rule,


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regulation, order, writ, judgment, injunction, decree, determination
or award currently in effect having applicability to the Company or
any of its properties, including regulations issued by an
administrative agency or other governmental authority having
supervisory powers over the Company,


(ii) constitutes a default by the Company under or a breach of
any provision of any loan agreement, mortgage, indenture or other
agreement or instrument to which the Company is a party or by which
it or any of its affiliates or their properties is or may be bound
or affected, or


(iii) results in or requires the creation of any Lien upon or
in respect of any of the Company's assets except as otherwise
expressly contemplated by the Transaction Documents.


(e) Legal Proceedings. There is no action, proceeding or
investigation by or before any court, governmental or administrative
agency or arbitrator against or affecting all or any of the Mortgage
Loans, or the Company, or any properties or rights of the Company, pending
or, to the Company's knowledge after reasonable inquiry, threatened,
which, in any case, if decided adversely to the Company, would result in a
Material Adverse Change with respect to the Company or a material portion
of the Mortgage Loans.


(f) Valid and Binding Obligations. The Transaction Documents to
which Company is a party, when executed and delivered by the Company, will
constitute the legal, valid and binding obligations of the Company
enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general equitable principles. The Securities, when executed, authenticated
and delivered in accordance with the Pooling and Servicing Agreement, will
be validly issued and outstanding and entitled to the benefits of the
Pooling and Servicing Agreement and, together with the Class B and Class R
Certificates, will evidence the entire beneficial ownership interest in
the Trust Estate.


(g) ERISA. No Accumulated Funding Deficiency, whether or not waived,
has occurred with respect to any Plan. No Plan has been terminated, and no
Commonly Controlled Entity has withdrawn from any Multiemployer Plan which
could result in any liability under ERISA of a Commonly Controlled Entity.
No Reportable Event or other event or condition has occurred which could
result in the termination of any Plan by the PBGC. No Plan has an
Underfunding greater than $100,000. The aggregate amount of Underfunding
for all Underfunded Plans does not exceed $100,000. The liability to which
the Commonly Controlled Entities would become subject under ERISA if they
were to withdraw completely from all Multiemployer Plans as of the most
recent


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valuation date is not in excess of $100,000. The Multiemployer Plans are
neither in Reorganization (as defined in Section 4241 of ERISA) nor
Insolvent (as defined in Section 4245 of ERISA). The Company is in
compliance in all material respects with ERISA and has not incurred and
does not reasonably expect to incur any liabilities to the PBGC (other
than premiums due to the PBGC) in connection with any Plan or
Multiemployer Plan.


(h) Accuracy of Information. None of the Related Documents contains
any statement of a material fact with respect to the Company or the
Transaction that was untrue or misleading in any material respect when
made. Since the furnishing of the Related Documents, including any
revisions thereto, there has been no change, nor any development or event
involving a prospective change known to the Company, that would render any
of the Related Documents untrue or misleading in any material respect.
There is no fact known to the Company which has a material possibility of
causing a Material Adverse Change with respect to the Company or a
material portion of the Mortgage Loans.


(i) Transaction Documents. Each of the representations and
warranties of the Company contained in the Transaction Documents is true
and correct in all material respects and the Company hereby makes each
such representation and warranty to, and for the benefit of, FSA as if the
same were set forth in full herein.


(j) Compliance With Law. Etc. No practice, procedure or policy
employed or proposed to be employed by the Company in the conduct of its
business violates any law, regulation, judgment, agreement, order or
decree applicable to the Company which, if enforced, would result in a
Material Adverse Change with respect to the Company.


(k) Compliance With Securities Laws. The offer and sale of the
Securities comply in all material respects with all requirements of law,
including all registration requirements of applicable securities laws.
Without limitation of the foregoing, and except with respect to
information provided in writing by FSA to the Underwriter and the Company
(such information being limited to the information included under the
caption "The Certificate Insurer" and the financial statements
incorporated by reference in the Offering Document), the Offering Document
does not contain any untrue statement of a material fact and does not omit
to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under
which they were made, not misleading. The Trust Estate is not required to
be registered as an "investment company" under the Investment Company Act.
The Pooling and Servicing Agreement is not required to be qualified under
the Trust Indenture Act.


(l) Taxes. Any taxes, fees and other governmental charges due and
payable by the Company in connection with the Transaction, the execution
and


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delivery of the Transaction Documents and the issuance of the Securities
have been paid or shall have been paid at or prior to the Date of
Issuance.


(m) Good Title: Absence of Liens: Security Interest. The Company is
the owner of, and has good and marketable title to, the Mortgage Loans
free and clear of all Liens and Restrictions on Transferability other than
such Liens or Restrictions on Transferability as will be satisfied or
removed concurrently with the transfer of the Mortgage Loans to the Trust
Estate, and has full right, corporate power and lawful authority to
assign, transfer and pledge the Mortgage Loans. In the event that, in
contravention of the intention of the parties, the transfer of the
Mortgage Loans by the Company to the Trust Estate is characterized as
other than a sale, such transfer shall be characterized as a secured
financing, and the Trustee shall, for the benefit of the Owners and FSA,
have a valid and perfected first priority security interest in the
Mortgage Loans free and clear of all Liens and Restrictions on
Transferability.


(n) Solvency; Fraudulent Conveyance. The Company is solvent and will
not be rendered insolvent by the transactions contemplated by the
Transaction Documents and, after giving effect to such transactions, the
Company will not be left with an unreasonably small amount of capital with
which to engage in its business. The Company does not intend to incur, or
believe that it has incurred, debts beyond its ability to pay such debts
as they mature. The Company does not contemplate the commencement of
insolvency, bankruptcy, liquidation or consolidation proceedings or the
appointment of a receiver, liquidator, conservator, trustee or similar
official in respect of the Company or any of its assets. The amount of
consideration being received by the Company upon the sale of the
Securities to the Underwriter constitutes reasonably equivalent value and
fair consideration for the interest in the Mortgage Loans evidenced by the
Securities. The Company is not selling the Securities to the Underwriter,
as provided in the Transaction Documents, with any intent to hinder, delay
or defraud any of the Company's creditors.


Section 2.02. [Intentionally Omitted].


Section 2.03. Affirmative Covenants of the Company. The Company hereby agrees that during the Term of the Agreement, unless FSA shall otherwise expressly consent in writing:


(a) Compliance With Agreements and Applicable Laws. The Company
shall perform each of its obligations under the Transaction Documents and
shall comply with all material requirements of, and the Securities shall
be offered and sold in accordance with, any law, rule or regulation
applicable to it or thereto, or that are required in connection with its
performance under any of the Transaction Documents.


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(b) Corporate Existence. The Company shall maintain its corporate
existence and shall at all times continue to be duly organized under the
laws of the state of its incorporation and duly qualified and duly
authorized (as described in Sections 2.01(a), (b) and (c) hereof) and
shall conduct its business in accordance with the terms of its articles of
incorporation and bylaws.


(c) Financial Statements; Accountants' Reports; Other Information.
The Company shall keep or cause to be kept in reasonable detail books and
records of account of the Company's assets and business, and shall clearly
reflect therein the transfer of the Mortgage Loans to the Trust and the
sale of the Securities to the Underwriter as a sale of the Company's
interest in the Mortgage Loans evidenced by the Securities. The Company
shall furnish or caused to be furnished to FSA:


(i) Promptly upon receipt thereof, copies of all reports,
statements, certifications, schedules, or other similar items
delivered to or by the Company pursuant to the terms of the
Transaction Documents and, promptly upon request, such other data as
FSA may reasonably request; provided, however, that the Company
shall not be required to deliver any such items if provision by some
other party to FSA is required under the Related Documents unless
such other party wrongfully fails to deliver such item. The Company
shall, upon the request of FSA, permit FSA or its authorized agents
(A) to inspect the books and records of the Company as they may
relate to the Securities, the Mortgage Loans, the obligations of the
Company under the Transaction Documents, the Transaction and, but
only following the occurrence of a Trigger Event, the Company's
business; (B) to discuss the affairs, finances and accounts of the
Company with the Chief Operating Officer and the Chief Financial
Officer of the Company, no more frequently than annually unless a
Trigger Event has occurred; and (C) upon the occurrence of a Trigger
Event, to discuss the affairs, finances and accounts of the Company
with the Company's independent accountants, provided that an officer
of the Company shall have the right to be present during such
discussions. Such inspections and discussions shall be conducted
during normal business hours and shall not unreasonably disrupt the
business of the Company. In addition, the Company shall promptly
(but in no case more than 30 days following issuance or receipt by
the Commonly Controlled Entity) provide to FSA a copy of all
correspondence between a Commonly Controlled Entity and the PBGC,
IRS, Department of Labor or the administrators of a Multiemployer
Plan relating to any Reportable Event or the underfunded status,
termination or possible termination of a Plan or a Multiemployer
Plan. The books and records of the Company will be maintained at the
address of the Company designated herein for receipt of notices,
unless the Company shall otherwise advise the parties hereto in
writing.


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(ii) The Company shall provide or cause to be provided to FSA
an executed original copy of each document executed in connection
with the Transaction within 30 days after the date of closing.


(d) Compliance Certificate. The Company shall deliver to FSA within
90 days after the close of each fiscal year of the Company a certificate
signed by an officer of the Company stating that:


(i) a review of the Company's performance under the
Transaction Documents to which it is a party during such period has
been made under such officer's supervision; and


(ii) to the best of such individual's knowledge following
reasonable inquiry, no Trigger Event, Default or Event of Default
has occurred, or if a Trigger Event, Default or Event of Default has
occurred, specifying the nature thereof and, if the Company has a
right to cure any such Default or Event of Default, stating in
reasonable detail the steps, if any, being taken by the Company to
cure such Default or to otherwise comply with the terms of the
agreement to which such Default or Event of Default relates.


(e) Notice of Material Events. The Company shall promptly inform
FSA in writing of the occurrence of any of the following:


(i) the submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation (A)
with respect to a material portion of the Mortgage Loans or (B) in
which a request has been made for certification as a class action
(or equivalent relief) that would involve a material portion of the
Mortgage Loans;


(ii) any change in the location of the Company's principal
office or any change in the location of the Company's books and
records;


(iii) the occurrence of any Trigger Event, Default or Event of
Default; or


(iv) any other event, circumstance or condition that has
resulted, or has a material possibility of resulting, in a Material
Adverse Change in respect of the Company.


(f) Further Assurances. The Company shall, upon the request of FSA,
from time to time, execute, acknowledge and deliver, or cause to be
executed, acknowledged and delivered, within thirty (30) days of such
request, such amendments hereto and such further instruments and take such
further action as may be reasonably necessary to effectuate the intention,
performance and provisions of the Transaction Documents or to protect the
interest of the Trustee,


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for the benefit of the Owners and FSA, in the Mortgage Loans, free and
clear of all Liens and Restrictions on Transferability except the Lien in
favor of the Trustee, for the benefit of the Owners and FSA, and the
Restrictions on Transferability imposed by the Pooling and Servicing
Agreement. In addition, the Company agrees to cooperate in good faith with
S&P and Moody's in connection with any review of the Transaction which may
be undertaken by S&P and Moody's after the date hereof.


(g) Existence. The Company shall maintain its existence and shall at
all times continue to be duly organized under the laws of the state of
California and duly qualified and duly authorized (as described in
Sections 2.01(a), (b) and (c) hereof) and shall conduct its business in
accordance with the terms of its Articles of Incorporation and By-Laws.


(h) Third-Party Beneficiary. The Company agrees that FSA shall have
all rights of a third-party beneficiary in respect of the Pooling and
Servicing Agreement and hereby incorporates and restates its
representations, warranties and covenants as set forth therein for the
benefit of FSA.


Section 2.04. [Intentionally Omitted.]


Section 2.05. Negative Covenants of the Company. The Company hereby agrees that during the Term of the Agreement, unless FSA shall otherwise expressly consent in writing:


(a) Restrictions on Liens. The Company shall not (i) create, incur
or suffer to exist, or agree to create, incur or suffer to exist, or
consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any
Lien or Restriction on Transferability on the Mortgage Loans except for
the Lien in favor of the Trustee, for the benefit of the Owners and FSA,
and the Restrictions on Transferability imposed by the Pooling and
Servicing Agreement or (ii) sign or file under the Uniform Commercial Code
of any jurisdiction any financing statement which names the Company as a
debtor, or sign any security agreement authorizing any secured party
thereunder to file such finan ...