Exhibit 10.1

 

FEDERAL HOME LOAN BANK OF CHICAGO

ADVANCES, COLLATERAL PLEDGE, AND SECURITY AGREEMENT

[Insurance Companies]

[Nonstandard-RLI Insurance Company / Mt. Hawley Insurance Company]

 

THIS AGREEMENT, dated as of September 22, 2014 between the FEDERAL HOME LOAN
BANK OF CHICAGO, with its principal office located at 200 East Randolph Drive,
Chicago, Illinois 60601 (“Bank”) and [RLI Insurance Company / Mt. Hawley
Insurance Company], an insurance company (“Member”) organized under the laws of
Illinois and having its chief executive office at 9025 N. Lindbergh Drive,
Peoria, IL, 61615.

 

WHEREAS, the Member desires from time to time to participate in the Bank’s
credit programs under the terms of this Agreement (as hereinafter defined) and
the Bank is authorized to make advances to the Member, subject to the provisions
of the Credit Policy (as hereinafter defined), the Federal Home Loan Bank Act,
as now and hereafter amended (the “Act”), and the regulations and guidelines of
the Federal Housing Finance Agency (or any successor thereto), as now and
hereafter in effect (collectively, the “Regulations”); and

 

WHEREAS, the Bank requires that advances and other obligations owed by the
Member to the Bank be secured pursuant to this Agreement, and the Member agrees
to provide the collateral security the Bank requests in accordance with this
Agreement and to otherwise comply with the requirements hereof and the Bank’s
Credit Policy.

 

NOW THEREFORE, the Member and Bank agree as follows:

 

ARTICLE I

DEFINITIONS

 

Section 1.01 DEFINITIONS.  As used herein, the following terms shall have the
following meanings:

 

(a)  “Additional Collateral” means items of property other than Eligible
Collateral which are pledged by the Member and accepted by the Bank as
collateral, as it deems necessary, to fully secure and protect the Bank’s
security position on outstanding Advances or to renew an outstanding Advance in
accordance with Section 10(a)(4) of the Act (12 U.S.C. § 1430(a)(4), as amended)
and any Regulations adopted thereunder.

 

(b) “Advance” or “Advances” means any and all loans, overdrafts, or other
extensions of credit, including, without limitation, deposits under funding
agreements, and all Outstanding Commitments, whether now or hereafter granted by
the Bank to, on behalf of, or for the account of, the Member in accordance with
such terms and conditions as are applicable to each such transaction as set
forth in the Credit Policy (but excluding any obligations that the Bank may now
or hereafter have to honor items or transfer orders under a depository or
similar agreement between the Member and the Bank).

 

(c) “Affiliate” means with respect to the Member, any other person or entity
controlling or controlled by or under common control with the Member.  For
purposes of this definition, “control” when used with respect to any specified
person (including the Member) means the power to direct the management and
policies of such person or entity, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise.

 

(d) “Agreement” means this Advances, Collateral Pledge, and Security Agreement,
together with any and all permitted and authorized amendments, modifications, or
restatements hereof as may be duly entered into by the parties hereto and all
documents or other agreements incorporated by reference including, but not
limited to, the Credit Policy.

 

(e) “Application” means a written or electronic submission (or if so specified
in the Credit Policy, may be telephonic to the Bank), in such form and submitted
in such manner as may be specified by the Bank from time to time in the Credit
Policy or by notice to the Member, by which the Member requests an Advance or a
Commitment for an Advance, including, without limitation, in the case of a
deposit under a funding agreement, a placement schedule or similar addendum or
endorsement to the funding agreement.

 

(f) “Capital Stock” means all of the Member’s capital stock issued by the Bank
and all payments which have been or hereafter are made on account of
subscriptions to and all unpaid dividends on such capital stock.

 

(g) [Reserved].

 

Form No. 300-010 (4-09-12)

 

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(h) “Collateral” means: (1) all property, including the proceeds thereof,
heretofore assigned, transferred, or pledged to the Bank by the Member, or in
which the Member has granted the Bank a security interest, to secure Advances
and other Indebtedness and (2) all Eligible Collateral and Additional
Collateral, including the proceeds thereof, which is now or hereafter assigned,
transferred, or pledged to the Bank by the Member, or in which the Member now or
hereafter grants the Bank a security interest, pursuant to Section 3.01 hereof.

 

(i) “Collateral Maintenance Level” means a dollar amount of Qualifying
Collateral having a Collateral Value equal to such percentage as the Bank may
specify from time to time in its Credit Policy of the aggregate dollar amount of
(1) Indebtedness and (2) any other amounts specified by the Bank from time to
time under the Credit Policy.  The Bank may increase or decrease the Collateral
Maintenance Level at any time (A) for all Members, as a result of a change in
the Credit Policy, upon fifteen (15) business days advance written notice to
Member; or (B) for Member, as a result of credit deterioration, upon three
(3) business days advance written notice.

 

(j) “Collateral Value” means an amount equal to such percentage of the market
value or unpaid principal balances of items of Collateral as the Bank may
specify from time to time, in its sole discretion.

 

(k) “Commitment” means any obligation of the Bank to make an Advance or payment
to, on behalf of, or for the account of, the Member, regardless of whether such
obligation is contingent in whole or in part, including, without limitation, on
the Bank’s obligations under letters of credit, firm commitments, guarantees, or
other arrangements intended to facilitate transactions between the Member and
third parties.

 

(l) [Reserved].

 

(m) “Confirmation of Advance” means a writing or transmission in electronic or
other form as may be determined by the Bank from time to time, by which the Bank
agrees to and confirms an Application.  With respect to an open line of credit
Advance, the posting to a Member’s DID Statement or such similar electronic
statement shall be deemed to be receipt of a Confirmation of Advance.

 

(n) “Credit Policy” means, collectively, the Bank’s Member Products & Credit
Policy, its Member Products Guide, its Collateral Guidelines and such other
documents or publications as may from time to time be specified by the Bank as
supplementing the same, as each such document or publication may from time to
time be modified by the Bank in its sole discretion and communicated to the
Member.

 

(o) “Deposit Accounts” means the Member’s DID Account and any and all other
demand, term, time, savings or similar account maintained by the Member with the
Bank.

 

(p) “DID Account” means the Member’s Daily Investment Deposit Account at the
Bank.

 

(q) “Eligible Collateral” means Capital Stock, First Mortgage Collateral,
Securities, Deposit Accounts and Other Real Estate Related Collateral.

 

(r) “Event of Default” means an Event of Default as defined in Section 4.01
hereof.

 

(s) “First Mortgage Collateral” means Mortgage Loans (excluding participation or
other fractional interests therein), the Mortgage Notes evidencing the Mortgage
Loans, the Mortgages securing the Mortgage Loans and all general intangibles and
accounts relating to a Mortgage Loan, ancillary security agreements, policies
and certificates of insurance or guarantees, rent assignments, FHA mortgage
insurance or VA loan guarantee certificates, title insurance policies, evidences
of recordation, applications, underwriting materials, surveys, appraisals,
approvals, permits, notices, opinions of counsel, loan servicing rights, loan
servicing data, all other electronically created, stored and/or written records
or materials relating to the Mortgage Loans, the proceeds of the Mortgage Loans,
and any real property or other property obtained through foreclosure, by
realizing upon or in settlement of the Mortgage Loans and/or the Mortgages.

 

(t) “Indebtedness” means all indebtedness, obligations and liabilities of the
Member to the Bank arising under or pursuant to this Agreement or any other
agreements, now or hereafter outstanding, of the Member to the Bank, including,
without limitation, all Advances, Outstanding Commitments, interest, prepayment
premiums and all other obligations to pay and liabilities of the Member to the
Bank.

 

(u) “Law” means any law (including common law), constitution, statute, treaty,
regulation, rule, ordinance, adjudication, opinion, release, ruling, order,
injunction, writ, decree or award of any Official Body.

 

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(v) “Mortgage Loans” means fully-disbursed whole loans evidenced by Mortgage
Notes which are secured by Mortgages that constitute a first lien on one-to-four
unit dwellings or Multi-Family Properties, and any endorsements or assignments
thereof.

 

(w) “Mortgage Notes” means notes, bonds, or other instruments evidencing
Mortgage Loans or any other loans or indebtedness secured by Mortgages.

 

(x) “Mortgages” means mortgages, deeds of trust and any other security
instruments that create a lien on real property and secure Mortgage Notes.

 

(y) “Multi-Family Property” means residential real property which includes five
or more dwelling units and as may be further defined in the Credit Policy.

 

(z) “NAIC” means National Association of Insurance Commissioners or any
successor thereof.

 

(aa) “Official Body” means any federal, state, local or other government or
political subdivision or any agency, authority, bureau, central bank,
commission, department or instrumentality of either, or any court, tribunal, in
each case whether foreign or domestic, that regulates Member.

 

(bb) “Other Real Estate Related Collateral” means (i) all other loans, lines of
credit or indebtedness evidenced by Mortgage Notes, excluding First Mortgage
Collateral, but otherwise including without limitation, home equity loans, home
improvement loans, subordinate loans, mortgage warehouse lines of credit, real
estate construction loans, and other real estate related loans, which Mortgage
Notes are secured by Mortgages on commercial property, residential property or
by security interests in personal property related to real estate transactions
or financing, and (A) all Mortgage Notes or other instruments evidencing such
loans, lines of credit or indebtedness, (B) any endorsements and assignments
thereof to the Member, and (C) all ancillary security agreements, policies and
certificates of insurance or guarantees, chattel paper, electronic chattel
paper, evidences of recordation, applications, underwriting materials,
appraisals, notices, opinions of counsel, loan servicing data, and all other
electronically stored and written records or materials relating to the loans
evidenced or secured thereby, (ii) all property relating to the Member’s
management, collection, processing, accounting for, monitoring, or servicing of
loans and accounts, including, without limitation, all checks, instruments,
documents, certificates, agreements, loan accounts, payments, chattel paper,
electronic chattel paper, collections, account statements, computer files,
records, promissory notes, endorsements, assignments, and loan servicing data,
together with the rights, remedies, and powers related thereto, and
(iii) participations in or portions of First Mortgage Collateral and
participations in or portions of other real estate related collateral as set
forth in clause (i) above.

 

(cc) “Outstanding Commitment(s)” means, at any time, the maximum aggregate
amount that the Bank may be obligated to pay or advance under any Commitment.

 

(dd) “Qualifying Collateral” means Collateral other than Capital Stock that:
(1) qualifies as security for Advances under the terms and conditions of the
Credit Policy, the Act, and the Regulations and satisfies the requirements for
Qualifying Collateral that may be established by the Bank and (2) is owned by
the Member free and clear of any liens, encumbrances, or other interests other
than may be approved in writing by the Bank.

 

(ee) “RBC Level” means the level of Risk-Based Capital as determined from time
to time in accordance with the most restrictive, as of the date of
determination, of the following: (1) state insurance law applicable to the
Member; (2) the policies and procedures of the state insurance department having
regulatory authority over the Member, whether or not having the force or effect
of Law; and (3) the policies and procedures of the NAIC, whether or not having
the force or effect of Law. which level, in the case of any of (1), (2) or (3),
requires a response by the Member or the state insurance department having
regulatory authority over the Member. The RBC Levels may include without
limitation, the following levels as currently defined under the policies and
procedures of the NAIC: Company Action Level, Regulatory Action Level,
Authorized Control Level and Mandatory Control Level as said terms are
determined by the NAIC.

 

(ff) “RBC Plan” means each comprehensive financial plan, including all
amendments and modifications thereto, filed by the Member with the state
insurance department having regulatory authority over the Member at such time as
the Member’s RBC Level is at the Company Action Level, as such term is currently
defined under the policies and procedures of the NAIC, or RBC Level of similar
import, which RBC Plan, without limitation, explains the facts contributing to
the Member’s condition and identifies corrective action to be taken by the
Member.

 

(gg) “RBC Report” means the report filed each year by the Member with the state
insurance department having

 

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regulatory authority over the Member, such report to set forth a detailed
calculation of the Member’s RBC Level as of the end of the immediately preceding
calendar year, or in the event no such report is filed, then the report filed
each year with the NAIC by the Member.

 

(hh) “Reinsurance Contract” has the meaning specified in Section 5.01(t).

 

(ii) “Risk-Based Capital” means that calculation, as in effect from time to
time, which shall be the most restrictive, as of each date of determination, of
the calculations utilized by the following: (1) state insurance Law applicable
to the Member (2) the policies and procedures of the state insurance department
having regulatory authority over the Member, whether or not having the force or
effect of Law; or (3) the policies and procedures of the NAIC whether or not
having the force or effect of Law, which calculation, in the case of any of (1),
(2) or (3), determines, among other matters, the sufficiency of capital of the
Member. Without limiting the generality of the foregoing, as of the date hereof
such calculation in accordance with the policies and procedures of the NAIC
takes into account the risk with respect to an insurance company’s assets, the
risk of adverse loss experience with respect to an insurance company’s policy
liabilities, underwriting and credit risks and all other business risks relevant
to such insurance company.

 

(jj) “REMIC” means a “real estate mortgage investment conduit” within the
meaning of Section 860D of the Internal Revenue Code of 1986, as amended, or any
successor provision.

 

(kk) “Securities” means mortgage-backed securities (including participation
certificates) issued by Federal Home Loan Mortgage Corporation or Federal
National Mortgage Association, obligations guaranteed by Government National
Mortgage Association, consolidated obligations of the Federal Home Loan Bank
System and/or obligations issued or guaranteed by the United States or an agency
thereof, privately-issued residential mortgage-backed securities, and other
securities as may be specified from time to time in the Credit Policy.

 

(ll) Reserved.

 

(mm) Reserved.

 

(nn) “Swap Transaction” means any transaction between the Member and Bank that
constitutes a “swap agreement” as that term is defined in United States
Bankruptcy Code (11 U.S.C. §101(53B) or any successor provision), as amended.

 

(oo) “UCC” means the Uniform Commercial Code as in effect in the State of
Illinois or any other state the laws of which are required to be applied in
connection with the perfection or priority of security interests thereunder.

 

ARTICLE II

ADVANCES AGREEMENT

 

Section 2.01 ADVANCE DOCUMENTATION.

 

(a) The Member may from time to time request Advances and Commitments for
Advances or renewal of an outstanding Advance by completing and submitting an
Application to the Bank.  The terms of each Advance or Commitment for an Advance
shall be conclusively evidenced by this Agreement and by either (1) the Member’s
Application when such Application is executed or accepted by the Bank without
any change; (2) in the case of a telephonic Application received, completed, or
modified by the Bank, by a Confirmation of Advance generated by the Bank; or
(3) in the case of an open line of credit Advance, the Member’s DID Account
Statement.  Unless otherwise agreed to by the Bank in writing, each Advance
shall be made by crediting the Member’s DID Account.

 

(b)  The Member shall be estopped from asserting any claim or defense with
respect to the terms applicable to an Advance or a Commitment for an Advance
unless, within two (2) business days of receipt of the Bank’s Confirmation of
Advance, the Member delivers to the Bank a written notice specifying the
disputed term(s) or condition(s) of the Advance or Commitment for an Advance. 
Upon the request of the Bank, the Member shall sign and deliver to the Bank a
promissory note or notes in such form as the Bank may reasonably require
evidencing any Advance.

 

Section 2.02 REPAYMENT OF ADVANCES.

 

(a) The Member agrees to repay the principal amount of each Advance in
accordance with this Agreement and the terms and conditions specified in the
Application, the Confirmation of Advance and any other document evidencing such
Advance which document is executed by both the Member and the Bank, or, in the
case of an open line of credit Advance, on demand.  Interest shall be paid on
each Advance at the times specified by the Bank in the Credit Policy, the
Application, the

 

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Confirmation of Advance and any other documents evidencing such Advance and
shall be charged for each day that an Advance is outstanding at the rate
applicable to each such Advance.

 

(b) The Member shall ensure that, on any day on which any payment is due to the
Bank with respect to an Advance or other Indebtedness, the DID Account has an
available balance in an amount at least equal to the amounts then currently due
and payable to the Bank, and the Member hereby authorizes the Bank to debit the
DID Account for any and all such amounts.  In the event that the available
balance in the DID Account is insufficient to pay such due and payable amounts,
the Bank may, without notice to or request from the Member, apply any other
deposits, credits, or monies of the Member then in the possession or control of
the Bank (exclusive of any such items as are held by the Bank as bailee for a
third party) to the payment of amounts due and payable or, in the sole
discretion of the Bank, the Bank may fund an Advance to the Member in the amount
of the insufficiency, which Advance shall bear interest from the date the same
shall be made until paid at the rate in effect and being charged by the Bank
from time to time on overdrafts on daily investment deposit accounts of its
members.

 

(c) The Member shall pay to the Bank, immediately and without demand, interest
on any past due amount owing on any outstanding Advance (other than an Advance
made pursuant to Section 2.02(b)) or other Indebtedness at the interest rate set
forth in the Credit Policy.

 

(d) All payments with respect to Advances shall be applied first to any fees or
charges applicable thereto and to interest due thereon, in such order as the
Bank may determine, and then to any principal amount thereof.

 

Section 2.03 ADVANCES RELATED TO THIRD PARTY COMMITMENTS.

 

(a)         (1) If an Event of Default has occurred and is continuing, the Bank
may at its option, and without notice to or request from the Member, or

 

(2) If the Bank reasonably and in good faith, determines that a material adverse
change of the Member’s financial condition has occurred or the Bank believes,
reasonably and in good faith, that the prospect of payment or performance of any
material obligations or any material performance under this Agreement is
materially impaired, the Bank may at its option, and upon reasonable prior
written notice to the Member,

 

make an Advance by crediting a special account of the Member with the Bank in an
amount equal to the aggregate amount of any and all Outstanding Commitments that
the Bank has issued on the Member’s behalf to or for the benefit of parties
other than the Member.  The Bank shall have a first priority security interest
in any such special account, and amounts credited to such special account may
not be withdrawn by the Member for so long as there shall be Outstanding
Commitments.  Amounts credited to such special account shall be utilized by the
Bank for the purpose of satisfying the Bank’s obligations under such third party
Commitments.  When all such obligations have expired or have been satisfied, the
Bank shall disburse the balance, if any, in such special account first to the
satisfaction of any amounts then due and owing by the Member to the Bank and
then to the Member or its successors in interest.  Advances made pursuant to
this Section 2.03 shall be payable on demand and shall bear interest from the
date made until paid at the rate in effect and being charged by the Bank from
time to time on overdrafts on daily investment deposit accounts of its members.

 

(b) The Bank shall not be obligated to honor an Outstanding Commitment to the
Member (excluding any Outstanding Commitments issued on behalf of the Member for
the benefit of third parties) if the Member’s access to advances is restricted
pursuant to § 1266.4 of the Federal Housing Finance Agency Regulations (or any
successor to such provision), an Event of Default has occurred under this
Agreement or if after giving effect to the related Advance, the Member would not
be in compliance with its Collateral Maintenance Level.  The Member releases the
Bank from any and all liability in connection with such action by the Bank.

 

Section 2.04 AMORTIZATION OF ADVANCES.

 

(a) If the Bank reasonably and in good faith determines, in its sole discretion,
that the creditworthiness of the Member does not meet the minimum requirements
of the Bank, the Bank may, or

 

(b) If the Bank reasonably and in good faith believes that the prospect of
payment or performance of any obligations or any performance under this
Agreement is materially impaired, the Bank may at its option, and upon
reasonable prior written notice to the Member,

 

require amortization by means of monthly payments of principal on all or part of
the Member’s Advances.  The Member agrees to begin making such monthly
amortization payments upon receipt of written notice from the Bank, in such
amounts

 

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as the Bank shall specify in writing.  The Member shall make such payments while
any amount remains unpaid on the subject Advances or until notified otherwise by
the Bank. No monthly payment shall exceed ten percent (10%) of the original
principal balance of the Advance being amortized.  Unless otherwise specified by
the Bank in writing to the Member, such monthly amortization payments shall not
extend the maturity date or other scheduled payment dates applicable to the
Advance being amortized.  Amortization payments required pursuant to this
Section 2.04 shall be in addition to all other required payments of principal
and interest with respect to Advances.

 

Section 2.05 DISCRETION OF THE BANK TO GRANT OR DENY ADVANCES.  Nothing
contained herein, in the Credit Policy, or in any other documents describing or
setting forth the Bank’s credit program and credit policies shall be construed
as an agreement or Commitment on the part of the Bank to grant Advances or
extend Commitments for Advances hereunder or to enter into any other
transaction, the right and power of the Bank, in its discretion to either grant
or deny any Application or other request for an Advance or Commitment for an
Advance in its sole discretion being expressly reserved.  The determination by
the Bank of the Collateral Value of a Member’s Qualifying Collateral shall not
constitute a determination by the Bank that the Member may obtain Advances or
Commitments for Advances up to the maximum amount that could be supported by
such Qualifying Collateral based on the Collateral Maintenance Level.

 

Section 2.06 ELECTRONIC TRANSACTIONS.  The parties agree that the transactions
encompassed under this Agreement may be conducted electronically through
whatever means the Bank may provide from time to time.  An Application submitted
electronically must be transmitted in accordance with the procedures established
by the Bank and communicated to the Member.  The Bank may rely upon and enforce
an Application submitted electronically to the same extent as if such
Application were written and signed on paper and in ink.

 

Section 2.07 INTEREST RATE LIMITATION.  Notwithstanding anything herein to the
contrary, if at any time the interest rate applicable to any Indebtedness,
together with all fees and other charges that are treated as interest on such
Indebtedness under applicable law, shall exceed the maximum lawful rate (the
“maximum rate”) that may be contracted for, charged, taken, received or reserved
by the Bank in accordance with applicable law, the rate of interest payable in
respect of such Indebtedness, together with all of the charges payable in
respect thereof, shall be limited to such maximum rate.

 

ARTICLE III

SECURITY AGREEMENT

 

Section 3.01 CREATION OF SECURITY INTEREST.

 

(a) As security for all Indebtedness and Outstanding Commitments, the Member
hereby assigns, transfers, and pledges to the Bank, and grants to the Bank a
first and prior security interest in:

 

(i) all of the following as may be now owned or existing or hereafter owned by
the Member:

 

(A) Capital Stock;

(B) Deposit Accounts;

 

(ii) such First Mortgage Collateral, Other Real Estate Related Collateral,
Securities and Additional Collateral that are delivered pursuant to Section 3.04
hereof; and

 

(iii) all payment intangibles related to, and all cash and non-cash proceeds of
the foregoing.

 

Without limitation of the foregoing and for the avoidance of doubt, all property
heretofore assigned, transferred, or pledged by the Member to the Bank or as to
which the Member has granted a security interest to the Bank, as collateral for
Advances or Commitments or other Indebtedness prior to the date hereof is
Collateral hereunder.

 

(b) The Member shall make, execute, acknowledge, record, and deliver to the Bank
such financing statements, notices, assignments, listings, powers, and other
documents with respect to the Collateral and the Bank’s security interest
therein and in such form as the Bank may reasonably require. To the extent
permitted by applicable law, the Member hereby irrevocably authorizes the Bank
to file, in the name of the Member or otherwise and without the signature or
other separate authorization or authentication of the Member appearing thereon,
such UCC financing statements (including, without limitation, continuations and
amendments) and in such jurisdictions as the Bank may deem necessary or
appropriate to perfect or maintain the perfection of the security interest of
the Bank with respect to any Collateral. The Member agrees that a photocopy,
electronic or other reproduction of this Agreement or of a financing statement
is sufficient as a financing statement. The Member shall pay the cost of, or
incidental to, any recording or filing of any financing statements (including,
without limitation, continuations and amendments) or other assignment documents
concerning the Collateral.

 

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Section 3.02 COLLATERAL MAINTENANCE LEVEL REQUIREMENT.

 

(a) The Member shall at all times maintain as Collateral an amount of Qualifying
Collateral that has a Collateral Value that is at least equal to the then
current required Collateral Maintenance Level.  The Member shall not assign,
pledge, transfer, create any security interest in, sell, or otherwise dispose of
any Collateral without the prior written consent of the Bank except as may be
specified in the Credit Policy.

 

(b) Any Collateral that has not been delivered in accordance with Section 3.04
hereof shall be held by the Member in trust for the benefit of, and subject to
the direction and control of, the Bank and will be physically safeguarded by the
Member with at least the same degree of care as the Member uses in physically
safeguarding its other property.  Without limitation of the foregoing, the
Member shall take all action necessary or desirable to protect and preserve the
Collateral and the Bank’s interest therein, including without limitation the
maintaining of insurance on property securing First Mortgage Collateral or Other
Real Estate Related Collateral (any and all policies and certificates of
insurance or guaranty relating to such Mortgages are herein called “insurance”),
the collection of payments under all Mortgages and under all insurance, and
otherwise assuring that all Mortgages are serviced in accordance with the
standards of a reasonable and prudent servicer in the mortgage industry.

 

(c) If the Member becomes aware or has reason to believe that the Collateral
Value of the Member’s Qualifying Collateral has fallen below the Collateral
Maintenance Level (such belief being based on information, including but not
limited to, updated appraisals, revised model valuations and information
obtained in connection with Member’s evaluation of its loan loss reserves), or
that a contingency exists which with the lapse of time would result in the
Member failing to meet the Collateral Maintenance Level, the Member shall
immediately notify the Bank. If any Collateral that was Qualifying Collateral
delivered pursuant to Section 3.04 hereof ceases to be Qualifying Collateral,
the Member shall promptly notify the Bank in writing of that fact and, if so
requested by the Bank, the reason that the Collateral has ceased to be
Qualifying Collateral.  In such case, the Member shall promptly specify, or
deliver, as the case may be, other Qualifying Collateral sufficient to maintain
its Collateral Maintenance Level.

 

Section 3.03 RESERVED.

 

Section 3.04 DELIVERY OF COLLATERAL.

 

(a) The Member shall deliver to the Bank, or to a custodian designated or
approved by the Bank, Qualifying Collateral having a Collateral Value at least
equal to the Collateral Maintenance Level at all times.  Any Collateral that is
delivered under this subsection as a part of the Qualifying Collateral must
conform to the requirements set forth in the Credit Policy for such Collateral.

 

(b) The Member agrees to pay the Bank such reasonable fees and charges as may be
assessed by the Bank to cover the overhead and other costs of the Bank relating
to the receipt, holding, redelivery, and reassignment of Collateral, and to
reimburse the Bank upon request for all recording fees and other reasonable
expenses, disbursements, and advances incurred or made by the Bank in connection
therewith, including reasonable compensation and the expenses and disbursements
of any custodian that may be appointed by the Bank hereunder, and the agents and
legal counsel of the Bank and such custodians.

 

Section 3.05 RELEASE OF COLLATERAL.  Upon receipt of the Bank of writings or
electronic submissions in the form specified by the Bank in the Credit Policy
constituting (a) a request from the Member for release of Collateral; (b) a
detailed listing of the Collateral to be released; and (c) a certificate of a
responsible officer of the Member certifying as to the Qualifying Collateral
remaining after such withdrawal, and upon the Bank’s determination that the
Collateral Value of the remaining Qualifying Collateral is not less than the
current required Collateral Maintenance Level, the Bank shall or shall cause the
custodian to promptly redeliver, release, or reassign to the Member, as
applicable, at the Member’s expense, the Collateral specified in the Member’s
listing of the Collateral to be released.  Notwithstanding anything to the
contrary in this Section 3.05, (i) while an Event of Default shall have occurred
and be continuing; or (ii) at any time that the Bank reasonably believes in good
faith that the prospect of payment or performance of any obligations or any
performance under this Agreement by the Member is materially impaired, or
(iii) the Member would fail to satisfy its Collateral Maintenance Level, the
Member may not obtain any such release of collateral.

 

Section 3.06 BANK’S RESPONSIBILITIES AS TO COLLATERAL.  The duty of the Bank as
to the Collateral shall be solely to use reasonable care in the custody and
preservation of the Collateral in its possession, which shall not include
(i) any steps necessary to preserve rights against parties with a prior position
or (ii) the duty to send notices, perform services, or take any action in
connection with the collection or management of the Collateral.  The Bank shall
not have any

 

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responsibility or liability for the form, sufficiency, correctness, genuineness,
or legal effect of any instrument or document constituting a part of the
Collateral, or any signature thereon or the description or misdescription, or
value of property represented, or purported to be represented, by any such
document or instrument.  The Member agrees that any and all Collateral may be
removed by the Bank from the state or location where situated, and may be
subsequently dealt with by the Bank as provided in this Agreement.

 

Section 3.07 BANK’S RIGHTS AS TO COLLATERAL; POWER OF ATTORNEY.

 

(a) At any time, at the expense of the Member, the Bank may in its reasonable
and good faith discretion, after the occurrence and during the continuation of
an Event of Default, in its own name or in the name of its nominee or of the
Member, take any and all reasonable and good faith actions that are pertinent to
the protection of the Bank’s interest hereunder and, if such actions are subject
to the laws of a state, are lawful under the laws of the State of Illinois
including, but not limited to the following:

 

(1) Terminate any consent given hereunder;

 

(2) Notify obligors on any Collateral to make payments thereon directly to the
Bank or the Bank’s nominee or servicer;

 

(3) Endorse any Collateral on behalf of the Member;

 

(4) Enter into any extension, compromise, settlement, release, renewal,
exchange, or other agreement relating to or affecting any Collateral;

 

(5) Take any action the Member is required to take or which is otherwise
reasonably necessary to (A) file a financing statement or otherwise perfect a
security interest in any or all of the Collateral or (B) obtain, preserve,
protect, enforce, or collect the Collateral;

 

(6) Take control of any funds or other proceeds generated by the Collateral and
use the same to reduce Indebtedness as it becomes due (or hold the same as
Additional Collateral); and

 

(7) Cause the Collateral to be transferred to its name or the name of its
nominee.

 

(b)  In connection with entering into this Agreement, the Member has executed a
power of attorney substantially in the form of Exhibit A hereto.  In exercising
its rights under the power of attorney, the Bank is limited by the provisions of
Section 3.07(a) and may only take reasonable actions that are pertinent to the
protection of the Bank’s interest under this Agreement.  Further, the Bank shall
only exercise its rights under such power of attorney if it reasonably believes
in good faith that the prospect of payment or performance of any obligations or
any performance under this Agreement by the Member is materially impaired or an
Event of Default under this Agreement shall have occurred and shall be
continuing.

 

Section 3.08 SUBORDINATION OF OTHER LOANS TO COLLATERAL.  The Member hereby
agrees that all Mortgage Notes which are part of the Collateral (other than home
equity loans and lines of credit) (“pledged notes”) shall have priority in right
and remedy over any other loans, advances, obligations or indebtedness, whenever
made, and, however evidenced (“Subordinated Debt”), which are also secured by
the Mortgages securing the pledged notes and/or by liens on the same properties
encumbered by the Mortgages securing the pledged notes.  The pledged notes shall
be satisfied out of the property (or proceeds thereof) encumbered by such
Mortgages before recourse to such property may be obtained for the repayment of
any Subordinated Debt.  To this end, the Member hereby subordinates (i) the
Subordinated Debt to the pledged notes and (ii) the lien of any mortgages or
security instruments that secure the Subordinated Debt to the lien of the
Mortgages and security agreements that secure the pledged notes.  The Member
further agrees to retain possession of all notes or other instruments evidencing
any Subordinated Debt and not to pledge, assign, or transfer the same, or any
interest therein, except insofar as such Subordinated Debt may be pledged to the
Bank as part of the Collateral.

 

Section 3.09 PROCEEDS OF COLLATERAL.  The Member, as the Bank’s agent, shall
collect all payments when due on all Collateral.  Upon receipt of written
notice, the Member shall hold such collections and other proceeds of Collateral
separate from its other monies in one or more designated cash collateral
accounts maintained at the Bank and apply them to the reduction of Indebtedness
as it becomes due; otherwise, the Bank consents to the Member’s use and
disposition of all such collections, except as may otherwise be provided under a
control agreement executed by the parties.

 

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Section 3.10 COLLATERAL AUDITS; REPORTS AND ACCESS.

 

(a) All Collateral and the satisfaction of the Collateral Maintenance Level
shall be subject to audit and verification by or on behalf of the Bank.  Such
audits and verifications may occur upon reasonable notice during the Member’s
normal business hours or at such other times as the Bank may reasonably
request.  The Member shall provide to the Bank such reports relating to the
Collateral as may be called for pursuant to the Credit Policy or as the Bank may
otherwise reasonably require.  The Member shall provide the Bank reasonable
access to the Member’s books and records relating to such Collateral and shall
make adequate working facilities available to the representatives or agents of
the Bank for purposes of such audits and verification.  Reasonable fees and
charges may be assessed to the Member by the Bank to cover the Bank’s costs
relating to such audit and verification.

 

(b) Notwithstanding anything to the contrary, the Member shall be solely
responsible for the accuracy and adequacy of all information and data in each
audit or status report (or other writing specifying and describing any
Collateral) submitted to the Bank, regardless of the form in which submitted. 
To enable the Bank to regenerate any files or data previously furnished to the
Bank with respect to any Collateral or any information contained in any audit or
status report, the Member shall at all times maintain complete and accurate
records and materials supporting or relating to any audit or status report and
shall make the same available, on request, to the Bank.  The parties hereto
agree that the maintenance and retention of such supporting records and
materials shall be the sole responsibility of the Member and that the Bank shall
not be liable for any loss of such data.

 

(c) The Bank shall have no duty to make any independent examination of or
calculation with respect to the information submitted in an audit or status
report (or in any written schedule that may be submitted by the Member) and,
without limiting the generality of the foregoing, the Bank makes no
representation or warranty as to the validity, accuracy, or completeness of any
information contained in any written records of the Bank concerning, or of any
response to, such audit or status report.

 

Section 3.11 MEMBER’S REPRESENTATIONS AND WARRANTIES CONCERNING COLLATERAL.  The
Member represents and warrants to the Bank, as of the date hereof and the date
of each Advance hereunder, as follows:

 

(a) The Member owns and has marketable title to the Collateral and has the right
and authority to grant a security interest in the Collateral and to subject all
of the Collateral to this Agreement;

 

(b) The information given in any status report, schedule, or other documents
required hereunder and any other information given from time to time by the
Member as to each item of Collateral is true, accurate, and complete in all
material respects;

 

(c) All the Collateral meets the standards and requirements with respect thereto
from time to time established by the Act, the Regulations, and the Bank;

 

(d) The lien of the First Mortgage Collateral and Other Real Estate Related
Collateral on the real property securing the same is a first lien except with
respect to (1) home equity loans or lines of credit and (2) subordinate loans
which are not reported by the Member as Qualifying Collateral;

 

(e) The Member has not conveyed or otherwise created, and there does not
otherwise exist, any participation interest or other direct, indirect, legal, or
beneficial interest in any Qualifying Collateral on the part of anyone other
than the Bank and the Member;

 

(f) To the best of Member’s knowledge, all Mortgage documents, securities and
other instruments and documents constituting a part of the Collateral constitute
valid and binding obligations of their respective issuers and obligors
enforceable against such issuers and obligors in accordance with their
respective terms, subject to the effect of bankruptcy, insolvency and other
similar laws affecting the rights of creditors generally and to general
principles of equity;

 

(g) Except as may be approved in writing by the Bank, to the best of Member’s
knowledge, no account debtor or other obligor owing any obligation to the Member
with respect to any item of Qualifying Collateral has any defenses, offsetting
claims, or other rights affecting the right of the Member or the Bank to enforce
any Mortgage or Mortgage Note relating thereto, and no defaults (or conditions
that, with the passage of time or the giving of notice or both, would constitute
a default) exist under any such Mortgage or Mortgage Note;

 

(h) To the best of Member’s knowledge, no part of any real property or interest
in real property that is securing

 

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Mortgages included in Qualifying Collateral contains or is subject to the
effects of toxic or hazardous materials or other hazardous substances (including
those defined in the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended, 42 U.S.C. 9601, et seq.; the Hazardous
Materials Transportation Act, 49 U.S.C. 1801 et seq.; the Resource Conservation
and Recovery Act, 42 U.S.C. 6901 et seq.; and in the regulations adopted and
publications promulgated pursuant to said laws) the presence of which could
subject the Bank or its successors and assigns to any liability under applicable
state or Federal law or local ordinance either at any time that such property is
pledged to the Bank or upon the enforcement by the Bank of its security interest
therein. The Member hereby agrees to indemnify and hold the Bank harmless
against all costs, claims, expenses, damages, and liabilities resulting in any
way from the presence or effects of any such toxic or hazardous substances or
materials in, on, or under any real property or interest in real property that
is subject to or included in the Collateral.

 

(i)  Reserved.

 

(j)  The exact legal name of the Member, the type and jurisdiction of
organization of the Member, and the location of the Member’s chief executive
office, each as stated in the first paragraph of this Agreement is true,
accurate, and complete.  The Member will provide prior written notice to the
Bank, as soon as reasonably practicable, of any change to its name, its type and
jurisdiction of organization, or the location of its chief executive office.

 

ARTICLE IV

DEFAULT; REMEDIES

 

Section 4.01 EVENTS OF DEFAULT; ACCELERATION.  Upon the occurrence of and during
the continuation of any of the following events or conditions of default (“Event
of Default”), the Bank may at its option and in its discretion, by a notice to
the Member, declare all or any part(s) of the Indebtedness and accrued interest
thereon, including any prepayment fees or charges which are payable in
connection with the payment prior to the originally scheduled maturity of any
Advance, to be immediately due and payable without presentment, demand, protest,
or any further notice:

 

(a) Failure of the Member to pay when due any principal of any Advance or
failure of the Member to pay within three (3) business days when due any
interest on any Advance;

 

(b) Material breach or failure of the Member to comply with the requirements of
the Credit Policy or perform any covenant, promise, or obligation or to satisfy
any condition or liability contained herein, in any Application, Confirmation of
Advance or in any other agreement to which the Member and the Bank are parties,
provided Member shall have fifteen (15) days to cure any such material breach or
default that is not related to any collateral requirement as set forth in the
Credit Policy or the documents identified in this subsection (b);

 

(c) In the Bank’s good faith and reasonable determination, evidence coming to
the attention of the Bank that any material representation, statement, or
warranty made or furnished in any manner to the Bank by or on behalf of the
Member in connection with any Advance, any specification or description of
Qualifying Collateral or any report or certification concerning the status,
principal balance or Collateral Value of any item of Collateral was false in any
material respect when made or furnished;

 

(d) Failure of the Member to maintain adequate Qualifying Collateral free of any
encumbrances or claims as required herein;

 

(e) The issuance of any material tax, levy, seizure, attachment, garnishment,
levy of execution, or other process with respect to the Collateral;

 

(f) Any suspension of payment by the Member or an Affiliate to any material
creditor of material sums due, unless such amount is being disputed in good
faith by the Member, or the occurrence of any event which results (or which with
the giving of notice or passage of time, or both, will result) in another
creditor having the right to accelerate the maturity of any material
indebtedness of the Member under any security agreement, indenture, loan
agreement, instrument, or comparable agreement or the early termination or
close-out of any Swap Transaction or other derivatives contract;

 

(g) The Member or any Affiliate of the Member:

 

(1) becomes insolvent or is unable to pay its debts or fails or admits in
writing its inability generally to pay its debts as they become due;

 

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(2) makes a general assignment, arrangement or composition with or for the
benefit of its creditors;

 

(3)(A)              institutes or has instituted against it, by a regulator,
supervisor or any similar official with primary insolvency, rehabilitative or
regulatory jurisdiction over it, a proceeding seeking a judgment of insolvency
or bankruptcy or any other relief under any bankruptcy or insolvency law or
other similar law affecting creditors’ rights, or a petition is presented for
its winding-up or liquidation by it or such regulator, supervisor or similar
official, or

 

(B)         has such a proceeding instituted against it by a person or entity
not described in clause (3)(A) herein and such proceeding either results in a
judgment of insolvency or bankruptcy or the entry of an order for relief or the
making of an order for its winding-up or liquidation or is not appealed,
dismissed, discharged, stayed or restrained within 45 days;

 

(4) has a resolution passed for its winding-up, official management or
liquidation (other than pursuant to a consolidation, amalgamation or merger);

 

(5) seeks or becomes subject to the appointment of an administrator, provisional
liquidator, conservator, receiver, trustee, custodian or other similar official
for it or for all or substantially all its assets;

 

(6) has a secured party take possession of all or substantially all its assets
or has a distress, execution, attachment, sequestration or other legal process
levied, enforced or sued on or against all or substantially all its assets; or

 

(7) takes any action in furtherance of, or indicating its consent to, approval
of, or acquiescence in, any of the foregoing acts;

 

(h) Sale by the Member of all or a material part of the Member’s assets or the
taking of any other action by the Member to liquidate or dissolve;

 

(i) Termination for any reason of the Member’s membership in the Bank, or the
Member’s ceasing to be a type of entity that is eligible under the Act to become
a member of the Bank, in each case, at such time as the Member has any
outstanding Indebtedness due to the Bank;

 

(j) Merger, consolidation, or other combination of the Member with an entity
which is not a member of the Bank if the nonmember entity is the surviving
entity;

 

(k) The Bank reasonably and in good faith determines that a material adverse
change has occurred in the financial condition of the Member or an Affiliate
from that disclosed at the time of the making of any Advance or from the
condition of the Member or an Affiliate as theretofore most recently disclosed
to the Bank which could either (1) affect the ability of the Member to perform
its obligations under this Agreement or (2) impair the prospect of repayment of
any portion of the Indebtedness;

 

(l) Any Official Body takes any action with respect to the Member or an
Affiliate which (i) is in anticipation of a takeover or assumption of control of
the Member or an Affiliate by any Official Body; (ii) is a takeover or
assumption of control of the Member or Affiliate by any Official Body; or
(iii) results in the supervision of the Member’s or an Affiliate’s operations
pursuant to an order of any court or Official Body; provided, however,
supervision of the Member’s or an Affiliate’s operations by an Official Body
shall encompass significant orders covering a material portion of such Member’s
or Affiliate’s operations and shall not include immaterial regulatory actions or
memoranda of understanding, written agreements and orders that relate to
compliance matters such as reporting and commercial or consumer lending issues;

 

(m)  Reserved.

 

(n)  With respect to the Member’s RBC Level, the occurrence of a Regulatory
Action Level event, an Authorized Control Level event, or a Mandatory Control
Level event (as such events are currently defined in the policies and procedures
of the NAIC), or an event of similar import occurs in accordance with any of
(i) state insurance Law applicable to the Member, or (ii) the policies and
procedures of the state insurance department or a federal regulatory body having
regulator authority over the Member, whether or not having the force and effect
of Law.

 

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Section 4.02 REMEDIES.

 

(a) Upon the occurrence of any Event of Default, the Bank shall have all of the
rights and remedies provided by applicable law which shall include, but not be
limited to, all of the remedies of a secured party under the UCC.

 

(b) Without limiting or affecting other rights of the Bank pertaining to the
Collateral contained herein, the Bank, at its option and in its reasonable and
good faith discretion, may take or cause its agent to take immediate possession
or control of any of the Collateral or any part thereof wherever the same may be
found by suit or otherwise.  The Bank may sell, assign, and deliver the
Collateral or any part thereof at public or private sale (at the sole option of
the Bank), without recourse for such price as the Bank deems appropriate without
any liability for any loss due to a decrease in the market value of the
Collateral during the period held.  The Bank shall have the right to purchase
all or part of the Collateral at such sale free of any right of redemption on
the part of the Member which right is expressly waived and released to the
fullest extent permitted by law.  If the Collateral includes insurance or
securities which will be redeemed by the issuer upon surrender, or any deposits
or other accounts in the possession or control of the Bank, the Bank may realize
upon such Collateral without notice to the Member.

 

(c) The Member waives any demand, advertisement, or notice of the time or place
of intended disposition of any of the Collateral except to the extent required
by applicable law.  Any such notification shall be deemed reasonably and
properly given if given as provided by applicable law or in accordance with
Section 5.05 hereof at least 10 days before any such disposition.  The Member
agrees that the Bank may exercise its rights of setoff upon the occurrence of an
Event of Default in the same manner as if the Advances and other Indebtedness
were unsecured.

 

(d) Notwithstanding any other provision hereof, upon the occurrence of any Event
of Default at any time when all or part of the obligations of the Member to the
Bank hereunder shall be the subject of any guarantee by a third party for the
Bank’s benefit and there shall be other outstanding obligations of the Member to
the Bank that are not so guaranteed but that are secured by the Collateral, then
any sums realized by the Bank from the Collateral, or from any other collateral
pledged or furnished to the Bank by the Member under any other agreement, shall
be applied first to the satisfaction of such other nonguaranteed obligations and
then to the Member’s guaranteed obligations hereunder.

 

(e) The Member agrees to pay all the reasonable costs and expenses of the Bank
in the collection of the Indebtedness and enforcement and preservation of the
Bank’s rights and remedies in case of default, including, without limitation,
reasonable attorneys’ fees.  Any sums owed to the Bank under this
Section 4.02(e) may be collected by the Bank, at its option, by debiting the
Member’s DID Account with the Bank.

 

Section 4.03 PAYMENT OF PREPAYMENT CHARGES.  Any prepayment fees or charges
applicable to an Advance shall be calculated in accordance with the formula set
forth in the Bank’s Credit Policy and shall be payable at the time of any
voluntary or involuntary payment of all or part of the principal of such Advance
prior to the originally scheduled maturity thereof, including without limitation
payments that are made as part of a liquidation of the Member or that become due
as a result of an acceleration pursuant to Section 4.01 hereof, whether such
payment is made by the Member, by a conservator, receiver, liquidator,
Affiliates or trustee of or for the Member, or by any successor to or any
assignee of the Member.

 

Section 4.04 CERTAIN PROVISIONS AS TO SALE OF COLLATERAL.  In view of the
possibility that Federal and state securities laws and Federal and state laws
applicable to the Member may impose certain restrictions on the method by which
a sale of the Collateral may be effected, the Bank and the Member agree that any
sale of the Collateral as a result of an Event of Default shall be deemed
“commercially reasonable” irrespective of whether the notice or manner of such
sale contains provisions, or imposes, or is subject to, conditions or
restrictions deemed appropriate to comply with the Securities Act of 1933 or any
other applicable Federal or state securities law or any state or Federal law
applicable to the Member.  It is further agreed that from time to time the Bank
may attempt to sell the Collateral by means of private placement.  In so doing,
the Bank may restrict the bidders and prospective purchasers to those who will
represent and agree that they are purchasing for investment only and not for
distribution or otherwise impose restrictions deemed appropriate by the Bank for
the purpose of complying with the requirements of applicable securities laws. 
The Bank may solicit offers to buy such Collateral, for cash or otherwise, from
a limited number of investors deemed by the Bank to be responsible parties who
might be interested in purchasing such Collateral.  If the Bank solicits offers
from not less than three such investors, then the acceptance by the Bank of the
highest offer obtained therefrom (whether or not three offers are obtained)
shall be deemed to be a commercially reasonable method of disposing of the
Collateral.

 

Section 4.05 APPLICATION OF PAYMENTS.  Upon the occurrence of any Event of
Default, the Bank shall apply any payment by or recovery from the Member, or any
sum realized from Collateral which shall be received by the Bank (a) to

 

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payment of all costs of collection and enforcement; (b) to payment of the
Indebtedness in such manner as the Bank shall choose; and (c) to offset any
amounts to be paid or advanced under Outstanding Commitments.  The Bank shall,
unless otherwise required by applicable law, remit any surplus to the Member.

 

ARTICLE V

MISCELLANEOUS

 

Section 5.01 GENERAL REPRESENTATIONS AND WARRANTIES BY THE MEMBER; COVENANTS. 
The Member hereby represents, warrants, and covenants that, as of the date
hereof and the date of each Advance hereunder:

 

(a) The Member is not, and neither the execution of nor the performance of any
of the transactions or obligations of the Member under this Agreement shall,
with the passage of time, the giving of notice or otherwise, cause the Member to
be: (1) in violation of its charter or articles of incorporation, bylaws, the
Act or the Regulations, any other law or administrative regulation, including,
but not limited to, any applicable anti-predatory lending law or regulation, any
court decree, or any order of an Official Body; provided however, Member’s
representation that it is not in violation of any law or regulation refers to
violations that could have a material impact to the financial condition of the
Member and does not include immaterial violations that may be raised as part of
an examination such as reporting and commercial or consumer lending compliance
matters; or (2) in default under or in breach of any indenture, contract, or
other instrument or agreement to which the Member is a party or by which it or
any of its property is bound which would have a material adverse effect on
Member;

 

(b) The Member has full corporate power and authority and has received all
corporate and governmental authorizations and approvals (including without
limitation those required under the Act and the Regulations) as may be required
to enter into and perform its obligations under this Agreement, to borrow each
Advance, and to obtain each Commitment for an Advance;

 

(c) The information given by the Member in any document provided, or in any oral
statement made, in connection with an Application, request for an Advance,
Commitment for an Advance, a pledge, specification, or delivery of Collateral,
is true, accurate, and complete in all material respects;

 

(d) The Member, unless otherwise exempted, is in compliance with any Regulations
pertaining to community investment or service adopted pursuant to
Section 10(g) of the Act (12 U.S.C. 1430(g), as amended);

 

(e) All long-term Advances shall be utilized solely for the purpose of providing
funds for residential housing finance. “Long-term” is defined as greater than
five years in term or as defined by the Federal Housing Finance Agency;

 

(f)  The Member shall notify the Bank immediately if it becomes aware of a
material adverse event affecting the Member or its business or operations,
including an event, which with a lapse of time, could cause the Collateral Value
of Qualifying Collateral to fall below the Collateral Maintenance Level;

 

(g)  The Member consents to the recording of telephone conversations in
connection with this Agreement and any Advances and any other products and
services that the Member may receive from time to time from the Bank;

 

(h)  The Member’s board of directors approved the execution of this Agreement
and such approval is recorded in its official minutes and this Agreement has
been, continuously, from the time of its execution, an official record of the
Member;

 

(i)  The Member shall deliver to the Bank, simultaneously with the Member’s
delivery thereof to the appropriate federal or state Official Body, a copy of
each Form 10-K, 10-Q or other filing with the Securities and Exchange
Commission, if any, with respect to Member and a copy of all financial
statements, including without limitation all actuarial certifications required
in accordance with applicable Law to be filed with any Official Body, such
financial statements to be prepared in accordance with all of the requirements
of applicable Law (without limitation, as to format, accounting methods and
otherwise) and whether or not adopted by applicable Law the requirements of the
NAIC (and in the event of any conflicting provisions, including a reconciliation
of any difference between the requirements of applicable Law and the NAIC
requirements) or, in the event that there are no such requirements of applicable
Law, then to be prepared in accordance with statutory accounting principles and,
if available, in accordance with generally accepted accounting principles;

 

(j)  If prepared by the Member, the Member shall provide to the Bank, as soon as
available and in any event within forty-five (45) calendar days after the end of
each fiscal quarter in each fiscal year, a detailed calculation of Member’s
estimated Risk-Based Capital and consolidated and consolidating financial
statements of the Member, consisting of a balance

 

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sheet as of the end of such fiscal quarter and related statements of income,
stockholders’ equity and cash flows for the fiscal quarter then ended and the
fiscal year through that date, all in reasonable detail and certified (subject
to normal year-end audit adjustments) by the Chief Executive Officer, President
or Chief Financial Officer of the Member as having been prepared in accordance
with statutory accounting principles in a form required by applicable law and
regulations of the applicable insurance regulatory authority, consistently
applied, and setting forth in comparative form the respective financial
statements for the corresponding date and period in the previous fiscal year;

 

(k)  If prepared by the Member, the Member shall provide to the Bank, as soon as
available in any event within ninety (90) days after the end of each fiscal year
of the Member, consolidated and consolidating financial statements of the
Member, which are provided to the applicable insurance regulatory authority,
consisting of a balance sheet as of the end of such fiscal year, and related
statements of income, stockholders’ equity and cash flows for the fiscal year
then ended, all in reasonable detail and setting forth in comparative form the
financial statements as of the end of and for the preceding fiscal year, and
certified by independent certified public accountants reasonably satisfactory to
the Bank. The certificate or report of accountants shall be free of
qualifications (other than any consistency qualification that may result from a
change in the method used to prepare the financial statements as to which such
accountants concur) and shall not indicate the occurrence or existence of any
event, condition or contingency which would materially impair the prospect of
payment or performance of any covenant, agreement or duty of the Member under
this Agreement or the related documents evidencing or in connection with the
Indebtedness, together with a letter of such accountants substantially to the
effect that based upon their ordinary and customary examination of the affairs
of the Member, performed in connection with the preparation of such consolidated
financial statements, and in accordance with generally accepted auditing
standards, they are not aware of the existence of any condition or event which
constitutes an Event of Default or event which with the giving of notice or the
passing of time or both would constitute an Event of Default, or, if they are
aware of such condition or event, stating the nature thereof;

 

(l)  Concurrently with the financial statements of the Member furnished to the
Bank pursuant to Sections 5.01(i), (j) and (k) hereof, a certificate of the
Member signed by the Chief Executive Officer, President or Chief Financial
Officer of the Member, to the effect that, (i) the representations and
warranties of the Member contained in this Agreement and the related documents
evidencing or in connection with the Indebtedness are true in all material
respects on and as of the date of such certificate with the same effect as
though such representations and warranties had been made on and as of such date
and the Member has performed and complied in all material respects with all
covenants and conditions hereof, and (ii) no Event of Default or event which
with the passing of time or the giving of notice or both would become an Event
of Default exists and is continuing on the date of such certificate;

 

(m)  The Member shall automatically deliver to the Bank, without any request
therefore by the Bank, a copy of each RBC Report of the Member and, if any, each
RBC Plan of the Member upon preparation of the same by the Member;

 

(n)  The Member shall deliver to the Bank within five (5) days of the occurrence
thereof, a copy of any amendment to the Member’s by-laws, articles or
certificate of incorporation or other charter documents;

 

(o)  The Member shall deliver to the Bank as soon as reasonably practicable such
other information as the Bank’s Credit Policy may from time to time require the
Member to deliver to the Bank or as the Bank may otherwise from time to time
reasonably request;

 

(p)  The Member shall provide written notice to the Bank upon the occurrence of
an Event of Default;

 

(q)  Upon request from the Bank, the Member shall deliver to the Bank, in form
and substance satisfactory to the Bank, an opinion of legal counsel of the
Member, such legal counsel to be satisfactory to the Bank and such opinion to be
as to those matters which the Bank may request, in its sole discretion,
including without limitation: (i) confirming the power and authority of the
Member to enter into this Agreement and the other related loan documents with
respect to the Indebtedness and to consummate the transactions contemplated
hereby and thereby; (ii) confirming the due authorization of this Agreement and
the other documents in connection with the Indebtedness to consummate the
transactions contemplated thereby; (iii) confirming there is no material
litigation pending against the Member or describing same that materially
adversely affect the Member’s ability to perform its obligations under this
Agreement (or describing same); (iv) confirming that there are no regulatory
orders which have been issued by any Official Body that would prohibit the
Member from entering into this Agreement and the other related loan documents in
respect of the Indebtedness and consummating the transitions contemplated hereby
and thereby; and (v) confirming the valid and enforceable first priority
security interest of the Bank in the Collateral;

 

(r)  The Member shall at all times comply with all applicable Law, including,
without limitation, all Laws relating to: (i) the purchase or holding by the
Member of those investments permitted by Law; (ii) transactions with affiliates;
(iii) payment of dividends; and (iv) contributions to the Member’s surplus
except, in each case, where the failure to comply could not reasonably be
expected to have a material adverse impact on the Collateral and/or the Bank’s
rights under this Agreement;

 

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(s)  The Member shall notify the Bank of any change in law generally applicable
to insurance companies the result of which may have a material adverse impact
upon the Member; and

 

(t)  Reserved.

 

(u) The Member shall not amend its by-laws, articles or certificate of
incorporation or other charter documents in such a way that materially adversely
impacts the Bank.

 

Section 5.02  CHANGES TO CREDIT POLICY.  The Bank reserves the right to amend,
supplement, restate or otherwise modify the Credit Policy, including but not
limited to, changes in underwriting criteria, collateral eligibility, reporting
requirements, and collateral margins (each, a “Policy Modification”) at any
time, in its sole discretion, without the consent of the Member, and the Member
(i) acknowledges and agrees that each such Policy Modification shall apply to
all Advances and other Indebtedness (whether outstanding on the date of such
Policy Modification or incurred after the date thereof) and (ii) agrees to be
bound by each and every Policy Modification occurring on, prior to, or after the
date of this Agreement.  Each Policy Modification shall become effective
immediately upon adoption by the Bank; provided, however, no Event of Default
shall occur as a result of any Policy Modification until 45 days after the
effective date of such Policy Modification.  The Bank shall provide notice of
any Policy Modification in writing, which may include by electronic mail, to the
Member no later than 30 days after the effective date of such Policy
Modification; provided, however, such notice shall be deemed effective when
given by the Bank.  Notwithstanding the provisions of this Section, the Bank
shall not amend, supplement, restate or otherwise modify the terms and
conditions of any Advance specified in an Application or Confirmation of Advance
without the consent of the Member.

 

Section 5.03 ASSIGNMENT.  The Member hereby gives the Bank the full right,
power, and authority to assign or transfer all or any part of the Bank’s right,
title, and interest in and to this Agreement, and to pledge, assign, or
negotiate to any other Federal Home Loan Bank or to any other person or entity,
with or without recourse, all or any part of the Indebtedness or participations
therein; provided however, if the Bank assigns or transfers its interest in this
Agreement or any Indebtedness to a third party other than another Federal Home
Loan Bank or Federal Reserve Bank, the Bank will obtain the prior written
consent of the Member.  In connection therewith, the Bank may assign and deliver
the whole or any part of the Collateral to the transferee, which shall succeed
to all the powers and rights of the Bank in respect thereof, and the Bank shall
thereafter be forever relieved and fully discharged from any liability or
responsibility with respect to the Collateral so assigned or pledged, and all
references herein to the Bank shall be read to refer to the pledgee or
assignee.  The Member may not assign or transfer any of its rights or
obligations hereunder without the express prior written consent of the Bank,
which shall not be unreasonably withheld or delayed.

 

Section 5.04 AMENDMENT; WAIVERS.  No modification, amendment, or waiver of any
provision of this Agreement or consent to any departure therefrom shall be
effective unless in a writing executed by an authorized officer of the party
against whom such change is asserted and shall be effective only in the specific
instance and for the purpose of which given.  The terms of this Agreement may
not be modified or amended unless both parties execute a written agreement.  No
notice to or demand on the Member in any case shall entitle the Member to any
other or further notice or demand in the same, or similar or other
circumstances.  Any forbearance, failure, or delay by the Bank in exercising any
right, power, or remedy hereunder shall not be deemed to be a waiver thereof,
and any single or partial exercise by the Bank of any right, power, or remedy
hereunder shall not preclude the further exercise thereof.  Every right, power,
and remedy of the Bank shall continue in full force and effect until
specifically waived by the Bank in writing and no such waiver shall extend to
any subsequent matter or impair any right consequent thereon except to the
extent expressly so waived.

 

Section 5.05 JURISDICTION; LEGAL FEES.  In any action or proceeding brought by
the Bank or the Member in order to enforce any right or remedy under this
Agreement, the parties hereby consent to, and agree that they will submit to,
the exclusive jurisdiction of the United States District Court for the Northern
District of Illinois or, if such action or proceeding may not be brought in
Federal court, the jurisdiction of the courts of the State of Illinois located
in the City of Chicago.  The Member hereby waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying
of venue in any such action or proceeding in such courts and any defense or
objection based upon any such court being an inconvenient forum for purposes of
any such action or proceeding.  The parties agree that if any action or
proceeding is brought by either party seeking to obtain any legal or equitable
relief against the other party under or arising out of this Agreement or any
transaction contemplated hereby and such relief is not granted by the final
decision, after any and all appeals, of a court of competent jurisdiction, the
losing party will pay all reasonable attorneys’ fees and other costs incurred by
the prevailing party in connection therewith.  Each party agrees to reimburse
the other party for all reasonable costs and expenses (including reasonable fees
and out-of-pocket expenses of outside counsel) incurred by the former party in
connection with the enforcement or preservation of the Bank’s rights under this
Agreement, including, but not limited to, its rights in respect of any
Collateral and the audit or possession thereof.  Any sums owed to the Bank under
this Section 5.05

 

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may be collected by the Bank, at its option, by debiting the Member’s DID
Account with the Bank.

 

Section 5.06 NOTICES.  Any notice, advice, request, consent, or direction given,
made, or withdrawn pursuant to this Agreement shall be given in writing or by an
electronic transmission in such form and provided in accordance with such
security procedures or similar protocols as may be established by the Bank, and
shall be deemed to have been duly given to and received by a party hereto when
it shall have been mailed by first class mail or hand delivered to such party at
its address given above by, or if given by hand or by electronic transmission,
when actually received by such party at its chief executive office, or as
otherwise designated.

 

Section 5.07 SIGNATURES OF MEMBER.  For purposes of this Agreement, documents
and electronic records shall be deemed signed by the Member when a signature or
an electronic signature of the Member or an authorized signatory or an
authorized facsimile thereof appears on or is associated with the document or
electronic record.  The Bank may rely on any signature or facsimile thereof
which reasonably appears to the Bank to be the signature of an authorized
person, including signatures appearing on documents transmitted electronically
to and reproduced mechanically at the Bank.  The secretary or an assistant
secretary of the Member shall from time to time furnish to the Bank, on forms
provided by the Bank, a certified copy of the resolution of the Board of
Directors of the Member authorizing persons to apply on behalf of the Member to
the Bank for Advances and Commitments and otherwise act for and on behalf of the
Member in accordance with this Agreement together with specimen signatures or
specimen electronic signatures of such persons.  Such certifications are
incorporated herein and made a part of this Agreement and shall continue in
effect until expressly revoked in writing by the Member notwithstanding that
subsequent certifications may authorize additional persons to act for and on
behalf of the Member.

 

Section 5.08 APPLICABLE LAW; SEVERABILITY.  In addition to the terms and
conditions specifically set forth herein and in any Application or Confirmation
of an Advance between the Bank and the Member, this Agreement and all Advances
and all Commitments for Advances shall be governed by the statutory and common
law of the United States and, to the extent Federal law incorporates or defers
to state law, the laws (exclusive of the choice of law provisions) of the State
of Illinois.  Notwithstanding the foregoing, the Uniform Commercial Code as in
effect in the State of Illinois shall be deemed applicable to this Agreement and
to any Advance hereunder and shall govern the attachment and perfection of any
security interest granted hereunder to the extent that the Act, Regulations, or
other statutory law of the United States is not applicable.  In the event that
any portion of this Agreement conflicts with applicable law, such conflict shall
not affect other provisions of this Agreement which can be given effect without
the conflicting provision, and to this end the provisions of this Agreement are
declared to be severable.

 

Section 5.09 SUCCESSORS AND ASSIGNS.  This Agreement shall be binding upon and
inure to the benefit of the successors and permitted assigns of the Member and
Bank.

 

Section 5.10 ENTIRE AGREEMENT.  This Agreement embodies the entire agreement and
understanding between the parties hereto relating to the subject matter hereof
and, except as specified in the next sentence, supersedes all prior agreements
between such parties which relate to such subject matter.  To the extent the
Member and the Bank have entered into an Advances, Collateral Pledge and
Security Agreement prior to the date hereof (the “Existing Agreement”): (a) any
Advances and Commitments made by the Bank to the Member under the Existing
Agreement shall continue to be governed by the terms of the Application or
Confirmation of Advance pursuant to which such Advances and Commitments were
made, and otherwise by the terms and conditions of this Agreement and (b) this
Agreement shall not supersede or terminate any assignment or transfer of, pledge
to or grant of a security interest in property made by the Member under the
Existing Agreement to secure Advances or other Indebtedness by the Bank.

 

Section 5.11 CAPTIONS AND HEADINGS.  The captions and headings in this Agreement
are for convenience only and shall not be considered as part of or affect the
construction or interpretation of any provision of this Agreement.

 

Section 5.12 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS.  All
representations, warranties, and covenants by the Member contained in this
Agreement or made in writing in connection herewith, shall be continuing and
shall survive execution and delivery of this Agreement and the incurrence of any
Indebtedness and shall expire upon termination of this Agreement and repayment
of all outstanding Indebtedness.

 

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IN WITNESS WHEREOF, the Member and the Bank have caused this Agreement to be
signed in their names by their duly authorized officers as of the date first
above mentioned.

 

MEMBER

 

 

 

 

[RLI Insurance Company / Mt. Hawley Insurance Company]

 

 

(Typed Name of Member)

 

 

 

 

 

 

 

 

By:

/s/ Thomas L. Brown

 

 

 

 

 

Name:

Thomas L. Brown

 

 

 

 

 

Title:

VP/Chief Financial Officer/Treasurer

 

Member Number:

 

 

 

 

 

 

 

FEDERAL HOME LOAN BANK OF CHICAGO

 

 

 

 

 

 

 

 

By:

/s/ Roger D. Lundstrom

 

 

 

 

 

Title:

EVP — CFO

 

 

 

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