EXECUTION COPY




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                       INSURANCE AND INDEMNITY AGREEMENT


                                     among


                      FINANCIAL SECURITY ASSURANCE INC.,


                      NATIONAL AUTO FINANCE 1998-1 TRUST,


                     NATIONAL FINANCIAL AUTO FUNDING TRUST


                                      and


                     NATIONAL AUTO FINANCE COMPANY, INC.,



                         Dated as of January 20, 1998




                      National Auto Finance 1998-1 Trust
                   5.88% Automobile Receivables-Backed Notes
                                  $85,200,000


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11.TXT

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                               TABLE OF CONTENTS

                                                                          Page

                            ARTICLE I.DEFINITIONS

Section 1.01.  Definitions...................................................2

             ARTICLE II.REPRESENTATIONS, WARRANTIES AND COVENANTS

Section 2.01.  Representations and Warranties of the Trust...................3
Section 2.02.  Affirmative Covenants of the Trust............................7
Section 2.03.  Negative Covenants of the Trust..............................14
Section 2.04.  Representations and Warranties of NAFI and the Transferor....17
Section 2.05.  Affirmative Covenants of NAFI and the Transferor.............25
Section 2.06.  Negative Covenants of NAFI and the Transferor................34
Section 2.07.  Representations and Warranties of NAFI and the
               Transferor with respect to the Master Trust and Funding Trust
               II...........................................................38
Section 2.08.  Affirmative Covenants of NAFI and the Transferor
               with respect to the Master Trust and Funding Trust II........39
Section 2.09.  Negative Covenants of NAFI and the Transferor
               with respect to the Master Trust and Funding Trust II........40

            ARTICLE III.THE POLICY; REIMBURSEMENT; INDEMNIFICATION

Section 3.01.  Issuance of the Policy.......................................41
Section 3.02.  Payment of Fees and Premium..................................41
Section 3.03.  Reimbursement Obligation.....................................42
Section 3.04.  Indemnification..............................................44
Section 3.05.  Subrogation..................................................46

                        ARTICLE IV.FURTHER AGREEMENTS

Section 4.01.  Effective Date; Term of Agreement............................46
Section 4.02.  Obligation Absolute..........................................47
Section 4.03.  Assignments; Reinsurance; Third-Party Rights.................48
Section 4.04.  Liability of Financial Security..............................49

                    ARTICLE V.EVENTS OF DEFAULT; REMEDIES

Section 5.01.  Events of Default............................................49
Section 5.02.  Remedies; Waivers............................................53

                           ARTICLE VI.MISCELLANEOUS

Section 6.01.  Amendments, Etc..............................................54
Section 6.02.  Notices......................................................54
Section 6.03.  Payment Procedure............................................56
Section 6.04.  Confidentiality..............................................56
Section 6.05.  Severability.................................................56
Section 6.06.  Governing Law................................................57

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11.TXT

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                                                                          Page

Section 6.07.  Consent to Jurisdiction......................................57
Section 6.08.  Consent of Financial Security................................58
Section 6.09.  Counterparts.................................................58
Section 6.10.  Trial by Jury Waived.........................................58
Section 6.11.  Limited Liability............................................58
Section 6.13.  Entire Agreement.............................................59


Appendix I        Definitions

Appendix II       Conditions Precedent to Issuance of the Policy

Annex I           Form of Financial Guaranty Insurance Policy

Appendix A        Opinions of Counsel


                                    -ii-
11.TXT

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                        INSURANCE AND INDEMNITY AGREEMENT


     INSURANCE  AND  INDEMNITY  AGREEMENT  dated as of January 20, 1998,  by and
among FINANCIAL SECURITY ASSURANCE INC.  ("Financial  Security"),  NATIONAL AUTO
FINANCE 1998-1 TRUST (the "Trust"),  NATIONAL  FINANCIAL AUTO FUNDING TRUST (the
"Transferor")  and  NATIONAL  AUTO FINANCE  COMPANY,  INC.  ("NAFI",  and in its
capacity as Servicer, the "Servicer").


                             INTRODUCTORY STATEMENTS

     A. On the Closing  Date,  (i) the Master  Trust will sell all of its right,
title and interest in and to the Initial  Receivables and certain other property
related  thereto to Funding  Trust II pursuant to the  Assignment  Agreement and
will simultaneously release its liens on such Initial Receivables and such other
property related thereto, (ii) Funding Trust II will simultaneously (A) sell all
of its right,  title and  interest in and to certain of the Initial  Receivables
and such other property  related thereto to the Transferor  pursuant to the Sale
Agreement and (B) convey all of its right,  title and interest in and to certain
of the Initial  Receivables and such other property related thereto to NAFI as a
dividend, and in each case will simultaneously release its liens on such Initial
Receivables and such other property related thereto,  (iii) NAFI will contribute
all of its right,  title and interest in and to the Initial  Receivables and the
other  property  related  thereto  conveyed  to NAFI by  Funding  Trust  II as a
dividend to the Transferor pursuant to the Purchase and Contribution  Agreement,
and (iv) the Transferor  will  simultaneously  sell all of its right,  title and
interest  in and to the  Initial  Receivables  and such other  property  related
thereto to the Trust pursuant to the Sale and Servicing Agreement.

     A. On each  Subsequent  Transfer Date, the Transferor  proposes to purchase
Subsequent  Receivables  and certain other  property  related  thereto from NAFI
pursuant to the Purchase and Contribution  Agreement and to simultaneously  sell
to the Trust all of its  right,  title and  interest  in and to such  Subsequent
Receivables  and such other property  related  thereto  pursuant to the Sale and
Servicing Agreement and the related Subsequent Transfer Agreement.

     A. The Trust will issue the  Securities  pursuant to the  Indenture and the
Certificates  pursuant  to the Trust  Agreement.  The Trust has  requested  that
Financial  Security issue a financial  guaranty  insurance  policy  guaranteeing
certain  distributions  of the  principal  of  and  interest  on the  Securities
(including any such distributions subsequently avoided as a preference under

                                    -1-

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applicable bankruptcy law) upon the terms and subject to the conditions provided
herein.

     A. It is  contemplated  that  NAFI  and/or  Funding  Trust  II  and/or  the
Transferor  and/or any other  Affiliate of NAFI may in the future enter into one
or more  pooling  and  servicing  agreements,  sale  and  servicing  agreements,
indentures,  receivables purchase agreements or other financing documents (each,
a  "Securitization  Agreement")  pursuant to which NAFI,  Funding  Trust II, the
Transferor  and/or such other  Affiliate of NAFI will sell,  pledge or otherwise
transfer  all or a portion of its right,  title and  interest in and to pools of
contracts  and/or other financial  assets or property to a trust or other Person
and in connection  therewith  Financial  Security in its  discretion  may in the
future  issue   additional   policies   with   respect  to  certain   guaranteed
distributions   or  scheduled   payments  with  respect  to  the   corresponding
securities,  certificates,  notes or other  obligations  issued or arising under
such Securitization Agreements.

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

     In  consideration of the premises and of the agreements  herein  contained,
Financial Security, the Trust, the Transferor and NAFI hereby agree as follows:


                                   ARTICLE I.

                                   DEFINITIONS

     Section  1.1.  Definitions.  Capitalized  terms used herein  shall have the
meanings provided in Appendix I hereto unless the context otherwise requires. In
addition, all terms defined in the Sale and Servicing Agreement or in the Spread
Account  Agreement  shall have the same  meanings in this  Insurance  Agreement.
Unless  otherwise  specified,  if a word  or  phrase  defined  in the  Sale  and
Servicing  Agreement  or in the Spread  Account  Agreement  can be applied  with
respect to one or more  Series,  such a word or phrase  shall be used  herein as
applied to Series 1998-1.




                                       -2-

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                                   ARTICLE II.

                    REPRESENTATIONS, WARRANTIES AND COVENANTS

     Section  2.1.  Representations  and  Warranties  of the  Trust.  The  Trust
represents,  warrants and covenants, as of the date hereof, the Date of Issuance
and each  Subsequent  Transfer  Date,  with  respect to itself and  otherwise as
follows:

          (a) Due  Organization  and  Qualification.  The  Trust  is a  Delaware
     statutory  business  trust,  duly  formed,  validly  existing  and in  good
     standing under the laws of the State of Delaware,  with power and authority
     to own its  properties  and to  conduct  its  business.  The  Trust 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,  in each
     jurisdiction  in which the  failure to be so  qualified  or to obtain  such
     approvals would render any Receivable unenforceable in any respect or would
     otherwise have a material adverse effect upon the Transaction.

          (b) Power and Authority.  The Trust has all necessary  trust power and
     authority to conduct its business as currently  conducted  and as described
     in the Offering Document,  to execute,  deliver and perform its obligations
     under the Transaction Documents and to consummate the Transaction.

          (c) Due Authorization.  The execution, delivery and performance of the
     Transaction  Documents  by the  Trust  have  been  duly  authorized  by all
     necessary action on the part of the Trust and do not require any additional
     approvals  or consents  or other  action by or any notice to or filing with
     any Person by or on behalf of the Trust, including, without limitation, any
     governmental entity.

          (d)  Noncontravention.  None  of the  execution  and  delivery  of the
     Transaction  Documents by the Trust,  the  consummation of the transactions
     contemplated thereby or the satisfaction of the terms and conditions of the
     Transaction Documents,

               (i)  conflicts  with or results in any breach or violation of any
          provision  of the  certificate  of  trust of the  Trust  or the  Trust
          Agreement,  or any  law,  rule,  regulation,  order,  writ,  judgment,
          injunction, decree, determination or award currently in effect having

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          applicability  to the  Trust,  or any  of  its  properties,  including
          regulations  issued by an administrative  agency or other governmental
          authority having supervisory powers over the Trust,

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

               (iii)  results in or requires the creation of any Lien upon or in
          respect  of  any of  the  assets  of the  Trust  except  as  otherwise
          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  Receivables,
     the Trust, or any properties or rights of the Trust, pending or threatened,
     which,  in any case,  if  decided  adversely,  could  result in a  Material
     Adverse Change with respect to the Trust or any Receivable.

          (f) Valid and Binding Obligations.  Each of the Transaction  Documents
     to which the Trust is a party  when  executed  and  delivered  by the Owner
     Trustee  on behalf of the  Trust,  will  constitute  the  legal,  valid and
     binding  obligations  of the  Trust,  enforceable  in  accordance  with its
     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  Indenture,  will be entitled to the benefits of the Indenture and will
     constitute legal, valid and binding  obligations of the Trust,  enforceable
     in  accordance  with  their  terms.   The   Certificates,   when  executed,
     authenticated and delivered in accordance with the Trust Agreement, will be
     validly  issued and  outstanding  and entitled to the benefits of the Trust
     Agreement and will evidence the entire beneficial interest in the Trust.

          (g) ERISA.  The Trust does not maintain or contribute  to, or have any
     obligation to maintain or contribute to, any Plan. The Trust is not subject
     to any of the provisions of ERISA.

          (h) Accuracy of Information.  None of the Provided  Documents  contain
     any statement of a material fact with

                                    -4-

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     respect to the Trust or the  Transaction  that was untrue or  misleading in
     any  material  respect  when made.  Since the  furnishing  of the  Provided
     Documents, there has been no change, nor any development or event involving
     a  prospective  change  known to the Trust  that  would  render  any of the
     Provided  Documents untrue or misleading in any material respect.  There is
     no fact known to the Trust  which has a material  possibility  of causing a
     Material Adverse Change with respect to the Trust or the Receivables.

          (i)  Compliance  With  Securities  Laws.  The  offer  and  sale of the
     Securities and the  Certificates  comply in all material  respects with all
     requirements of law, including all applicable registration  requirements of
     securities laws. Without limitation of the foregoing, 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;  provided that no  representation  is made with
     respect to  information  included in an Offering  Document and furnished by
     Financial   Security  in  writing  expressly  for  use  therein  (all  such
     information so furnished  being  referred to herein as "Financial  Security
     Information"),  it  being  understood  that,  in  respect  of the  Offering
     Document,  the Financial Security Information is limited to the information
     included under the caption "THE INSURER",  and such additional  information
     as may be deemed to be included in the  Offering  Document  pursuant to the
     second paragraph under the heading  "Incorporation  Of Certain Documents By
     Reference"  on  page  S-3 of  the  Offering  Document.  None  of the  Trust
     Agreement, the Indenture or the Sale and Servicing Agreement is required to
     be qualified under the Trust Indenture Act.

          (j) Incorporation of Certain  Representations and Warranties.  Each of
     the   representations   and  warranties  of  the  Trust  contained  in  the
     Transaction  Documents is true and correct in all material respects and the
     Trust hereby makes each such representation and warranty made by it to, and
     for the  benefit  of,  Financial  Security as if the same were set forth in
     full herein.

          (k) No Consents. No consent,  license, approval or authorization from,
     or  registration,   filing  or  declaration   with,  any  regulatory  body,
     administrative  agency,  or  other  governmental  instrumentality,  nor any
     consent,  approval, waiver or notification of any creditor, lessor or other
     nongovernmental  Person, is required with respect to, or to be obtained by,
     the Trust in connection with the execution, delivery and performance by the
     Trust of this Insurance

                                    -5-

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     Agreement or any other Transaction  Document to which the Trust is a party,
     except (in each case) such as have been  obtained and are in full force and
     effect.

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

          (m) Special Purpose Entity.

               (i) The capital of the Trust is  adequate  for the  business  and
          undertakings of the Trust.

               (ii) Other than the  transactions  as provided in the Transaction
          Documents,  the Trust is not engaged in any business transactions with
          NAFI,  the  Transferor  or any of  their  respective  Subsidiaries  or
          Affiliates.

               (iii) The  Trust's  funds and  assets  are not,  and will not be,
          commingled with the funds of any other Person.

          (n) Solvency; Fraudulent Conveyance. The Trust is solvent and will not
     be rendered  insolvent by the Transaction  and, after giving effect to such
     Transaction,  the Trust will not be left with an unreasonably  small amount
     of capital with which to engage in its business.  The Trust does not intend
     to incur, or believe that it has incurred,  debts beyond its ability to pay
     such debts as they mature.  The Trust 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 Trust or any of its  assets.  The Trust is not
     pledging  the  Collateral  to the Trust  Collateral  Agent,  or issuing the
     Securities and the Certificates,  as provided in the Transaction Documents,
     with any intent to hinder, delay or defraud any of the Trust's creditors.

          (o) Investment Company Act Compliance. Neither the Trust nor the Owner
     Trust Estate is required to be registered as an "investment  company" under
     the  Investment  Company Act.  The Trust is not subject to the  information
     reporting requirements of the Securities Exchange Act.

          (p)  Collateral.  On the  Date of  Issuance,  and on  each  Subsequent
     Transfer  Date,  the Trust  will be the  owner  of,  and will have good and
     marketable title to, each item of

                                    -6-

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     Other Trust Property conveyed on such date and will own each such item free
     and clear of all Liens and  Restrictions  on  Transferability  (other  than
     Liens  contemplated  under the  Indenture)  or any equity or  participation
     interest  of any other  Person and will have full  right,  power and lawful
     authority to pledge such Other Trust Property.  The Indenture constitutes a
     valid pledge of the Collateral to the Trust Collateral Agent, and the Trust
     Collateral  Agent shall have a valid and perfected first priority  security
     interest in the Collateral, free and clear of all Liens and Restrictions on
     Transferability.

          (q)  Perfection of Liens and Security  Interest.  On the Closing Date,
     the Lien and security  interest in favor of the Trust Collateral Agent with
     respect  to  the  Collateral  will  be  perfected  by the  delivery  of the
     Receivable  Files to the Custodian,  which  Receivable  Files the Custodian
     will hold on behalf of the Trust Collateral  Agent, the filing of financing
     statements  on Form  UCC-1 in each  jurisdiction  where such  recording  or
     filing is necessary for the perfection of such Lien and security  interest,
     and the establishment of the Collection Account,  the Pre-Funding  Account,
     the Pre-Funding  Period Reserve Account,  the Distribution  Account and the
     Note  Distribution  Account  in  accordance  with  the  provisions  of  the
     Transaction  Documents,  and no other  filings in any  jurisdiction  or any
     other  actions  (except as  expressly  provided  herein) are  necessary  to
     perfect the Trust  Collateral  Agent's first  priority Lien on and security
     interest in the Collateral as against any third parties.

          (r) Security Interest in Funds and Investments. Assuming the retention
     of funds in the Trust Accounts and the acquisition of Eligible  Investments
     in  accordance  with the  Transaction  Documents,  such funds and  Eligible
     Investments  will be  subject  to a valid  and  perfected,  first  priority
     security  interest in favor of the Trust  Collateral Agent on behalf of the
     Indenture  Trustee  (on  behalf  of  the  holders  of the  Securities)  and
     Financial  Security.  Assuming the retention of funds in the Spread Account
     and the  acquisition of Eligible  Investments in accordance with the Spread
     Account Agreement, such funds and Eligible Investments will be subject to a
     valid and  perfected,  first  priority  security  interest  in favor of the
     Collateral Agent on behalf of Financial Security.

     Section 2.2.  Affirmative  Covenants of the Trust. The Trust hereby agrees,
that  during  the  Term of  this  Agreement,  unless  Financial  Security  shall
otherwise expressly consent in writing:


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          (a) Compliance  With  Agreements and Applicable  Laws. The Trust shall
     perform each of its obligations  under the Transaction  Documents and shall
     comply  with all  material  requirements  of,  and the  Securities  and the
     Certificates 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. The Trust will
     not cause or permit to become effective any amendment to or modification of
     any of the  Transaction  Documents to which it is a party unless  Financial
     Security  shall  have  previously  approved  in  writing  the  form of such
     amendment or  modification.  The Trust shall not take any action or fail to
     take any action that would  interfere  with the  enforcement  of any rights
     under the Transaction Documents.

          (b) Financial Statements; Accountants' Reports; Other Information. The
     Trust shall keep or cause to be kept in reasonable detail books and records
     of  account  of its  assets  and  business,  which  shall be  furnished  to
     Financial  Security  upon  request.  The Trust shall furnish or cause to be
     furnished  to  Financial  Security  the  following to the extent any of the
     following is prepared by or on behalf of the Trust:

               (i) Annual Financial Statements. As soon as available, and in any
          event within 90 days after the close of each fiscal year of the Trust,
          the audited  balance  sheets of the Trust as of the end of such fiscal
          year and the audited  statements of income,  changes in  shareholders'
          equity  and cash  flows of the  Trust,  all in  reasonable  detail and
          stating  in   comparative   form  the   respective   figures  for  the
          corresponding  date and period in the preceding fiscal year,  prepared
          in  accordance   with  generally   accepted   accounting   principles,
          consistently  applied,  and  accompanied  by  the  certificate  of the
          Trust's  independent  accountants  (who  shall  be,  in each  case,  a
          nationally  recognized  firm  or  otherwise  acceptable  to  Financial
          Security) and by the certificate specified in Section 2.02(c) hereof.

               (ii) Quarterly Financial Statements. As soon as available, and in
          any event  within 45 days  after the close of each of the first  three
          quarters  of each  fiscal  year of the Trust,  the  unaudited  balance
          sheets of the Trust,  as of the end of such quarter and the  unaudited
          statements of income,  changes in shareholders'  equity and cash flows
          of the Trust for the  portion of the fiscal  year then  ended,  all in
          reasonable detail and stating in comparative form the

                                    -8-

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          respective  figures  for the  corresponding  date  and  period  in the
          preceding fiscal year,  prepared in accordance with generally accepted
          accounting   principles,   consistently  applied  (subject  to  normal
          year-end adjustments), and accompanied by the certificate specified in
          Section 2.02(c) hereof.

               (iii)  Accountants'  Reports.  Copies of any reports submitted to
          the  Trust  by its  independent  accountants  in  connection  with any
          examination of the financial statements of the Trust.

               (iv) Other Information.  Promptly upon receipt thereof, copies of
          all  reports,   statements,   certifications,   schedules,   financial
          statements,  notices or other  similar  items  delivered  to or by the
          Trust pursuant to the terms of the Transaction Documents and, promptly
          upon  request,  such other data as Financial  Security may  reasonably
          request.  The books and records of the Trust will be maintained at the
          address  designated  herein for receipt of  notices,  unless the Trust
          shall otherwise advise the parties hereto in writing.

               (v) Documents. The Trust shall provide or cause to be provided to
          Financial Security an executed original copy of each document executed
          in connection  with the  Transaction  within 10 days after the date of
          closing.

               (vi) Tax Documentation.  Not less than ten days prior to the date
          of filing with the IRS of any tax return or amendment thereto,  copies
          of the proposed  form of such return or amendment  and promptly  after
          the  filing  or  sending  thereof,  copies  of  all  tax  returns  and
          amendments thereto,  proxy statements,  financial statements,  reports
          and registration statements which the Trust files, or delivers to, the
          IRS, the Commission, or any other federal, state or foreign government
          agency,  authority or body which supervises the issuance of securities
          by the Trust or any national securities exchange.

          (c)  Compliance  Certificate.  The Trust  shall  deliver to  Financial
     Security  concurrently  with  the  delivery  of  the  financial  statements
     required  pursuant to Section  2.02(b)(i)  hereof and concurrently with the
     delivery  of  the  financial   statements   required  pursuant  to  Section
     2.02(b)(ii)  hereof a certificate signed by an officer of the Trust stating
     that:


                                    -9-

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               (i) a review of the  Trust's  performance  under the  Transaction
          Documents  during  such  period  has been made  under  such  officer's
          supervision;

               (ii) to the  best  of such  individual's  knowledge,  no  Special
          Event,  Default  or Event of  Default  has  occurred,  or if a Special
          Event, Default or Event of Default has occurred, specifying the nature
          thereof  and,  if the  Trust has a right to cure any such  Default  or
          Event of Default  pursuant  to  Section  5.01,  stating in  reasonable
          detail  the  steps,  if any,  being  taken by the  Trust to cure  such
          Default or Event of Default or to  otherwise  comply with the terms of
          the agreement to which such Default or Event of Default relates; and

               (iii) the attached financial reports submitted in accordance with
          Section  2.02(b)(i) or (ii) hereof,  as  applicable,  are complete and
          correct in all  material  respects  and present  fairly the  financial
          condition and results of operations of the Trust,  as of the dates and
          for the periods  indicated,  in  accordance  with  generally  accepted
          accounting  principles  consistently  applied  (subject  as to interim
          statements to normal year end adjustments).

          (d)  Notice of  Material  Events.  The  Trust  shall  promptly  inform
     Financial Security 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)
          against the Trust  pertaining to the Receivables in general,  (B) with
          respect to a material  portion  of the  Receivables  or (C) in which a
          request  has  been  made  for  certification  as a  class  action  (or
          equivalent  relief)  that  would  involve a  material  portion  of the
          Receivables;

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

               (iii) the occurrence of any Default or Special Event; or

               (iv)  any  other  event,   circumstance  or  condition  that  has
          resulted, or the Trust reasonably believes might result, in a Material
          Adverse Change in respect of the Trust or the Receivables.


                                    -10-

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          (e) Access to Records,  Discussions with Officers and Accountants. The
     Trust  shall,  upon the request of  Financial  Security,  permit  Financial
     Security or its  authorized  agents (i) to inspect the books and records of
     the  Trust as they may  relate to the  Securities,  the  Certificates,  the
     Receivables  and the Other Trust  Property,  the  obligations  of the Trust
     under the Transaction  Documents,  the Trust's business and the Transaction
     and (ii) to discuss the  affairs,  finances  and accounts of the Trust with
     any  of  its  personnel  and  representatives,  including  its  independent
     accountants.  Such  inspections and discussions  shall be conducted  during
     normal  business hours and shall not  unreasonably  disrupt the business of
     the Trust.  The books and  records of the Trust will be  maintained  at the
     address of the Trust designated  herein for receipt of notices,  unless the
     Trust shall otherwise advise the parties hereto in writing.

          (f) Further  Assurances.  The Trust will file all necessary  financing
     statements,  assignments  or  other  instruments,  and  any  amendments  or
     continuation statements relating thereto, necessary to be kept and filed in
     such manner and in such  places as may be  required by law to preserve  and
     protect  fully the Lien on and security  interest in, and all rights of the
     Trust  Collateral Agent with respect to the Collateral under the Indenture.
     In addition, the Trust shall, upon the request of Financial Security,  from
     time to time,  execute,  acknowledge and deliver,  or cause to be executed,
     acknowledged  and  delivered,  within ten (10) 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
     Trust  Collateral  Agent in the Collateral  under the  Indenture,  free and
     clear of all Liens and Restrictions on  Transferability  except the Lien in
     favor of the Trust  Collateral  Agent.  In  addition,  the Trust  agrees to
     cooperate  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) Retirement of Securities.  The Trust shall, upon retirement of the
     Securities, furnish to Financial Security a notice of such retirement, and,
     upon  retirement of the  Securities  and the  expiration of the Term of the
     Policy, surrender the Policy to Financial Security for cancellation.

          (h) Third-Party Beneficiary.  The Trust agrees that Financial Security
     shall have all rights of a  third-party  beneficiary  in respect of each of
     the  Transaction   Documents  and  hereby  incorporates  and  restates  its
     representations,

                                    -11-

<PAGE>




     warranties  and covenants as set forth therein for the benefit of Financial
     Security.

          (i) Preservation of Existence. The Trust shall observe in all material
     respects all procedures  required by its certificate of trust and the Trust
     Agreement  and  preserve  and  maintain  its  existence  as a trust and its
     rights,  franchises and privileges in the jurisdiction of its organization,
     and duly qualify and remain in good standing in each jurisdiction where the
     nature of its business requires it to do so.

          (j) Disclosure  Document.  (1) Each Offering  Document  delivered with
     respect to the  Securities  shall  clearly  disclose that the Policy is not
     covered by the  property/casualty  insurance  security  fund  specified  in
     Article  76 of the New York  Insurance  Law.  In  addition,  each  Offering
     Document  delivered with respect to the Securities which includes financial
     statements  of Financial  Security  prepared in accordance  with  generally
     accepted  accounting  principles  shall  include  the  following  statement
     immediately preceding such financial statements:

          The New York State  Insurance  Department  recognizes  only  statutory
          accounting  practices  for  determining  and  reporting  the financial
          condition  and results of  operations  of an  insurance  company,  for
          determining  its solvency  under the New York  Insurance  Law, and for
          determining  whether its financial condition warrants the payment of a
          dividend to its  stockholders.  No  consideration  is given by the New
          York State Insurance  Department to financial  statements  prepared in
          accordance  with generally  accepted  accounting  principles in making
          such determinations.

               (2)  Each  Offering  Document   delivered  with  respect  to  the
          Securities  subsequent  to the Date of  Issuance  shall be in form and
          substance satisfactory to Financial Security in its sole discretion as
          evidenced by Financial  Security's  prior  written  consent to the use
          thereof.

          (k) Special Purpose Entity.

               (i) The Trust shall  conduct its business  solely in its own name
          through  its duly  authorized  officers or agents so as not to mislead
          others as to the identity of the entity with which those  officers are
          concerned, and particularly will avoid the appearance of

                                    -12-

<PAGE>




          conducting  business on behalf of NAFI, the Transferor or any of their
          respective Affiliates or that the assets of the Trust are available to
          pay the creditors of NAFI, the  Transferor or any of their  respective
          Affiliates. Without limiting the generality of the foregoing, all oral
          and written communications,  including,  without limitation,  letters,
          invoices,   purchase   orders,   contracts,    statements   and   loan
          applications, will be made solely in the name of the Trust.

               (ii) The Trust shall  maintain trust records and books of account
          separate from those of NAFI, the Transferor or any of their respective
          Affiliates.  The books and records of the Trust will be separate  from
          those of NAFI, the Transferor and their respective Affiliates and will
          be maintained at the address designated herein for receipt of notices,
          unless the Trust shall otherwise  advise the parties hereto in writing
          with respect to such address.

               (iii) The Trust shall obtain proper authorization from its equity
          owners of all trust action requiring such authorization, and copies of
          each such  authorization  and the minutes or other written  summary of
          each such meeting shall be delivered to Financial  Security within two
          weeks of such authorization or meeting, as the case may be.

               (iv) Although the organizational  expenses of the Trust have been
          paid by the Seller,  operating  expenses and  liabilities of the Trust
          shall be paid from its own funds.

               (v) The annual  financial  statements of the Trust shall disclose
          the effects of the Trust's  transactions  in accordance with generally
          accepted  accounting  principles and shall disclose that the assets of
          the Trust are not available to pay creditors of NAFI,  the  Transferor
          or any of their respective Affiliates.

               (vi) The  resolutions,  agreements  and other  instruments of the
          Trust  underlying  the   transactions   described  in  this  Insurance
          Agreement and the other  Transaction  Documents  shall be continuously
          maintained  by the Trust as official  records of the Trust  separately
          identified  and held apart from the records of NAFI, the Transferor or
          any of their respective Affiliates.


                                    -13-

<PAGE>




               (vii) The Trust shall maintain an arm's-length  relationship with
          NAFI, the Transferor and their respective Affiliates and will not hold
          itself out as being liable for the debts of NAFI,  the  Transferor  or
          any of their respective Affiliates.

               (viii) The Trust shall keep its assets and its liabilities wholly
          separate from those of all other entities,  including, but not limited
          to NAFI, the Transferor and their respective Affiliates.

          (l)  Maintenance  of Licenses.  The Trust shall maintain all licenses,
     permits,  charters and registrations  which are material to the performance
     by the Trust of its business and of its  obligations  under this  Insurance
     Agreement and each other Transaction Document to which the Trust is a party
     or by which the Trust is bound.

          (m) Tax Matters.  The Trust will take all actions  necessary to ensure
     that the Trust is taxable as a partnership for federal and state income tax
     purposes and not as an association (or publicly traded partnership) taxable
     as a corporation.

          (n) Securities  Laws. The Trust shall comply in all material  respects
     with all  applicable  provisions  of state  and  federal  securities  laws,
     including  blue sky laws and the  Securities  Act, the Exchange Act and the
     Investment Company Act and all rules and regulations promulgated thereunder
     for which  non-compliance  would result in a Material  Adverse  Change with
     respect to the Trust.

          (o)  Incorporation  of Covenants.  The Trust shall comply with each of
     the Trust's  covenants  set forth in the  Transaction  Documents and hereby
     incorporates such covenants by reference as if each were set forth herein.

          (p) Notification of Failure to Perform or Observe Certain Covenants or
     Agreements.  The  Trust  shall  promptly  deliver  to the  Transferor,  the
     Servicer or NAFI, as applicable,  a copy of any written notice delivered to
     the Trust pursuant to Section 5.01(d)  concerning any failure to perform or
     observe  any  covenant or  agreement  contained  in any of the  Transaction
     Documents by the Transferor, the Servicer or NAFI, as the case may be.


     Section 2.3. Negative  Covenants of the Trust. The Trust hereby agrees that
during the Term of this  Agreement,  unless  Financial  Security shall otherwise
expressly consent in writing:


                                    -14-

<PAGE>




          (a) Restrictions on Liens. The Trust shall not, except as contemplated
     by the Transaction Documents (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  Receivables  and the Other Trust Property except for the Lien in favor
     of the Trust  Collateral  Agent  under the  Indenture  or (ii) sign or file
     under  the  Uniform  Commercial  Code  of any  jurisdiction  any  financing
     statement which names the Trust as a debtor, or sign any security agreement
     authorizing any secured party thereunder to file such financing  statement,
     with respect to the  Receivables  and the Other Trust  Property,  except in
     each case any such instrument solely securing the rights and preserving the
     Lien of the Trust  Collateral  Agent, for the benefit of the holders of the
     Securities and Financial Security.

          (b) Impairment of Rights. The Trust shall not take any action, or fail
     to take any  action,  if such  action or  failure  to take  action  may (i)
     interfere  with  the  enforcement  of  any  rights  under  the  Transaction
     Documents  that are material to the rights,  benefits or obligations of the
     Indenture  Trustee,  the  Certificateholders,  the holders of Securities or
     Financial Security,  (ii) result in a Material Adverse Change in respect of
     the  Receivables  or (iii)  impair the  ability of the Trust to perform its
     obligations under the Transaction Documents.

          (c) Waiver,  Amendments,  Etc.  The Trust  shall not waive,  modify or
     amend,  or consent to any waiver,  modification or amendment of, any of the
     provisions of any of the Transaction  Documents or its certificate of trust
     or the Trust  Agreement  unless  Financial  Security  shall have  consented
     thereto in writing.

          (d) Successors. The Trust shall not terminate or designate, or consent
     to the  termination or designation of, the Servicer,  the Backup  Servicer,
     the Custodian, the Owner Trustee, the Trust Collateral Agent, the Indenture
     Trustee or the Collateral Agent or any successor  thereto without the prior
     approval of Financial Security.

          (e) Creation of Indebtedness;  Guarantees. The Trust shall not create,
     incur,  assume or suffer to exist any indebtedness  other than indebtedness
     guaranteed or approved in writing by Financial Security.  Without the prior
     written  consent  of  Financial  Security,  the  Trust  shall  not  assume,
     guarantee,  endorse or  otherwise  be or become  directly  or  contingently
     liable for the obligations of any Person by,

                                    -15-

<PAGE>




     among other things,  agreeing to purchase any obligation of another Person,
     agreeing  to advance  funds to such  Person or causing  or  assisting  such
     Person to maintain any amount of capital.

          (f) Subsidiaries. The Trust shall not form, or cause to be formed, any
     Subsidiaries.

          (g) Issuance of Additional  Beneficial Ownership Interests.  The Trust
     shall  not  issue  or  allow  the  issuance  of any  additional  beneficial
     ownership  interests or securities  convertible  into or  exchangeable  for
     beneficial ownership interests in the Trust.

          (h) No Mergers. The Trust shall not consolidate with or merge into any
     Person or transfer all or any material  portion of its assets to any Person
     or  liquidate  or  dissolve  except  as  contemplated  by  the  Transaction
     Documents.

          (i) Other Activities. The Trust shall not:

               (i) sell,  transfer,  exchange or otherwise dispose of any of its
          assets except as permitted under the Transaction Documents; or

               (ii) engage in any business or activity except as contemplated by
          the  Transaction  Documents and as permitted  under its certificate of
          trust.

          (j) Insolvency.  The Trust shall not commence any case,  proceeding or
     other  action (A) under any  existing  or future  law of any  jurisdiction,
     domestic or foreign, relating to the bankruptcy, insolvency, reorganization
     or relief of  debtors,  seeking  to have an order for relief  entered  with
     respect  to  it,  or  seeking  reorganization,   arrangement,   adjustment,
     winding-up,  liquidation,  dissolution,  corporation  or other  relief with
     respect to it or (B) seeking appointment of a receiver,  trustee, custodian
     or other similar  official for it or for all or any substantial part of its
     assets, or make a general assignment for the benefit of its creditors.  The
     Trust  shall not take any  action in  furtherance  of,  or  indicating  the
     consent  to,  approval  of,  or  acquiescence  in any of the acts set forth
     above. The Trust shall not admit in writing its inability to pay its debts.

          (k) ERISA.  The Trust shall not  contribute or incur any obligation to
     contribute  to,  or  incur  any  liability  in  respect  of,  any  Plan  or
     Multiemployer Plan.


                                    -16-

<PAGE>




     Section 2.4.  Representations  and  Warranties of NAFI and the  Transferor.
NAFI  represents,  warrants and  covenants,  as of the date hereof,  the Date of
Issuance and each Subsequent  Transfer Date with respect to itself, with respect
to the  Transferor  and  otherwise as follows,  and the  Transferor  represents,
warrants and  covenants,  as of the date  hereof,  the Date of Issuance and each
Subsequent Transfer Date, with respect to itself and otherwise, as follows:

          (a) Due Organization and  Qualification.  NAFI is a corporation,  duly
     organized,  validly  existing  and in good  standing  under the laws of the
     State of Delaware.  The Transferor is a Delaware  statutory business trust,
     duly formed,  validly  existing and in good standing  under the laws of the
     State of Delaware.  Each of NAFI and the Transferor 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,  in each jurisdiction in which the failure
     to be so qualified or to obtain such approvals  would render any Receivable
     unenforceable  in any respect or would  otherwise  have a material  adverse
     effect upon the Transaction.

          (b)  Power  and  Authority.  Each of NAFI and the  Transferor  has all
     necessary  power  and  authority  to  conduct  its  business  as  currently
     conducted and as described in the Offering  Document,  to execute,  deliver
     and  perform  its  obligations  under  the  Transaction  Documents  and  to
     consummate the Transaction.

          (c) Due Authorization.  The execution, delivery and performance of the
     Transaction  Documents  by each of NAFI and the  Transferor  have been duly
     authorized  by all  necessary  action  and do not  require  any  additional
     approvals  or consents  or other  action by or any notice to or filing with
     any Person.

          (d)  Noncontravention.  None  of the  execution  and  delivery  of the
     Transaction  Documents by the Transferor or NAFI, the  consummation  of the
     transactions  contemplated  thereby  or the  satisfaction  of the terms and
     conditions of the Transaction Documents,

               (i)  conflicts  with or results in any breach or violation of any
          provision of the  certificate of trust and the trust  agreement of the
          Transferor or the certificate of incorporation and by-laws of NAFI, or
          any law, rule, regulation, order, writ, judgment,

                                    -17-

<PAGE>




          injunction,  decree, determination or award currently in effect having
          applicability to the Transferor or NAFI, as the case may be, or any of
          their  respective  properties,  including  regulations  issued  by  an
          administrative   agency  or  other   governmental   authority   having
          supervisory powers over the Transferor or NAFI, as the case may be,

               (ii) constitutes a default by the Transferor or NAFI, as the case
          may be,  under or a breach  of any  provision  of any loan  agreement,
          mortgage,  indenture  or other  agreement or  instrument  to which the
          Transferor  or NAFI,  as the case may be,  or any of their  respective
          Subsidiaries  or Affiliates is a party or by which it or any of its 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 assets of the Transferor or NAFI or any of their
          respective  Subsidiaries or Affiliates  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 Receivables, NAFI, the Transferor or
     any of their  respective  Subsidiaries or Affiliates,  or any properties or
     rights of NAFI, the Transferor or any of their  respective  Subsidiaries or
     Affiliates,   pending  or  threatened,  which,  in  any  case,  if  decided
     adversely,  would result in a Material Adverse Change with respect to NAFI,
     the Transferor or any Receivable.

          (f) Valid and Binding Obligations.  Each of the Transaction  Documents
     to  which  either  NAFI or the  Transferor  is a party  when  executed  and
     delivered by NAFI or by the Transferor, as the case may be, will constitute
     the legal,  valid and binding  obligations  of such Person,  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 Indenture,  will be binding  obligations of the Trust,
     enforceable in accordance with their terms,  validly issued and outstanding
     and   entitled  to  the   benefits  of  the   Indenture,   except  as  such
     enforceability  may be limited by bankruptcy,  insolvency,  reorganization,
     moratorium or other similar laws affecting  creditors' rights generally and
     general equitable

                                    -18-

<PAGE>




     principles. The Certificates, when executed, authenticated and delivered in
     accordance with the Trust Agreement, will be validly issued and outstanding
     and entitled to the benefits of the Trust  Agreement  and will evidence the
     entire beneficial ownership interest in the Trust.

          (g)  Financial  Statements.  The  Financial  Statements of each of the
     Transferor  and NAFI,  copies of which  have been  furnished  to  Financial
     Security, (i) are, as of the dates and for the periods referred to therein,
     complete and correct in all  material  respects,  (ii)  present  fairly the
     financial condition and results of operations of each of the Transferor and
     NAFI as of the  dates and for the  periods  indicated  and (iii)  have been
     prepared  in  accordance  with  generally  accepted  accounting  principles
     consistently  applied,  except  as noted  therein  (subject  as to  interim
     statements  to  normal  year-end  adjustments).  Since the date of the most
     recent Financial  Statements,  there has been no Material Adverse Change in
     such financial  condition or results of operations.  Except as disclosed in
     the Financial Statements, neither the Transferor nor NAFI is subject to any
     contingent  liabilities  or  commitments  that,   individually  or  in  the
     aggregate, have a material possibility of causing a Material Adverse Change
     in respect of the Transferor or NAFI, as the case may be.

          (h) ERISA. Each of the Transferor and NAFI is in compliance with ERISA
     and  has  not  incurred  and  does  not  reasonably  expect  to  incur  any
     liabilities  to the  PBGC  under  ERISA  in  connection  with  any  Plan or
     Multiemployer  Plan or to contribute now or in the future in respect of any
     Plan or Multiemployer Plan.

          (i) Accuracy of Information.  None of the Provided  Documents  contain
     any  statement of a material fact with respect to NAFI,  the  Transferor or
     the Transaction  that was untrue or misleading in any material respect when
     made.  Since the  furnishing of the Provided  Documents,  there has been no
     change,  nor any development or event involving a prospective  change known
     to  NAFI  or to the  Transferor,  that  would  render  any of the  Provided
     Documents  untrue or misleading in any material  respect.  There is no fact
     known to NAFI or to the  Transferor  which has a  material  possibility  of
     causing a Material  Adverse  Change with respect to NAFI, the Transferor or
     the Receivables.

          (j)  Compliance  With  Securities  Laws.  The  offer  and  sale of the
     Securities and the  Certificates  comply in all material  respects with all
     requirements of law, including all applicable registration  requirements of
     securities laws. Without limitation of the foregoing, the Offering Document

                                    -19-

<PAGE>




     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;  provided that no  representation  is made with
     respect to  information  included in an Offering  Document and furnished by
     Financial   Security  in  writing  expressly  for  use  therein  (all  such
     information so furnished  being  referred to herein as "Financial  Security
     Information"),  it  being  understood  that,  in  respect  of the  Offering
     Document,  the Financial Security Information is limited to the information
     included under the caption "THE INSURER",  and such additional  information
     as may be deemed to be included in the  Offering  Document  pursuant to the
     second paragraph under the heading  "Incorporation  Of Certain Documents By
     Reference" on page S-3 of the Offering Document.  Neither the Trust nor the
     Owner Trust Estate is required to be registered as an "investment  company"
     under  the  Investment  Company  Act.  None  of the  Trust  Agreement,  the
     Indenture or the Sale and  Servicing  Agreement is required to be qualified
     under the Trust Indenture Act.

          (k) Incorporation of Certain  Representations and Warranties.  Each of
     the representations and warranties of NAFI and of the Transferor  contained
     in the Transaction  Documents is true and correct in all material  respects
     and each of NAFI and the Transferor  hereby makes each such  representation
     and warranty made by it to, and for the benefit of,  Financial  Security as
     if the same were set forth in full herein.

          (l) No Consents. No consent,  license, approval or authorization from,
     or  registration,   filing  or  declaration   with,  any  regulatory  body,
     administrative  agency,  or  other  governmental  instrumentality,  nor any
     consent,  approval, waiver or notification of any creditor, lessor or other
     nongovernmental  Person,  is required  in  connection  with the  execution,
     delivery and  performance  by NAFI or by the  Transferor of this  Insurance
     Agreement  or of any other  Transaction  Document to which such Person is a
     party,  except (in each case)  such as have been  obtained  and are in full
     force and effect.

          (m)  Compliance  With  Law,  Etc.  No  practice,  procedure  or policy
     employed or proposed  to be  employed by NAFI or by the  Transferor  in the
     conduct  of their  respective  businesses  violates  any  law,  regulation,
     judgment,  agreement,  order or decree applicable to it which, if enforced,
     would  result in a Material  Adverse  Change with respect to such Person or
     the Receivables.


                                    -20-

<PAGE>




          (n) Special Purpose Entity.

               (i) The capital of the  Transferor  is adequate  for the business
          and undertakings of the Transferor.

               (ii) Other than with  respect  to the  ownership  by NAFI and its
          Affiliates  of  all  of  the  beneficial  ownership  interests  of the
          Transferor  and the  transactions  as provided in (A) the  Transaction
          Documents and (B) the corresponding  applicable agreements relating to
          the issuance by each of National Auto Finance  1995-1 Trust,  National
          Auto Finance  1996-1 Trust and National Auto Finance 1997-1 Trust of a
          Series,  the  Transferor  is not engaged in any business  transactions
          with NAFI or any of its Affiliates.

               (iii) At least one co-trustee of the Transferor shall be a Person
          who is not, and will not be, a director,  officer,  employee or holder
          of any partnership  interests or equity securities or other beneficial
          ownership interests of NAFI or any of its Affiliates.

               (iv) The Transferor's  funds and assets are not, and will not be,
          commingled with the funds of any other Person.

               (v) The trust agreement of the Transferor requires it to maintain
          (A) correct and complete books and records of account, and (B) minutes
          of the meetings  and other  proceedings  of its holders of  beneficial
          ownership interests and trustees (including any co-trustees).

          (o) Solvency;  Fraudulent Conveyance.  Each of NAFI and the Transferor
     is solvent and will not be rendered insolvent by the Transaction and, after
     giving effect to such Transaction,  neither NAFI nor the Transferor will be
     left with an  unreasonably  small amount of capital with which to engage in
     its business. Neither NAFI nor the Transferor intends to incur, or believes
     that it has  incurred,  debts  beyond its ability to pay such debts as they
     mature.  Neither NAFI nor the Transferor is contemplating  the commencement
     of insolvency,  bankruptcy, liquidation or consolidation proceedings or the
     appointment  of a  receiver,  liquidator,  conservator,  trustee or similar
     official in respect of NAFI or the  Transferor,  as the case may be, or any
     of their respective assets.  The amount of consideration  being received by
     the  Transferor  upon the sale of the  Receivables  and related Other Trust
     Property to the Trust constitutes reasonably equivalent value and fair

                                    -21-

<PAGE>




     consideration  for such  Receivables and related Other Trust Property.  The
     amount of consideration being received by the Master Trust upon the sale of
     the Initial  Receivables  and related Other Trust Property to Funding Trust
     II constitutes  reasonably equivalent value and fair consideration for such
     Receivables and related Other Trust Property.  The amount of  consideration
     being received by Funding Trust II upon the sale of the Initial Receivables
     and related Other Trust Property to the Transferor  constitutes  reasonably
     equivalent  value and fair  consideration  for such Receivables and related
     Other Trust Property.  The amount of  consideration  to be received by NAFI
     upon the transfer of the  Subsequent  Receivables  and related  Other Trust
     Property to the Transferor constitutes reasonably equivalent value and fair
     consideration  for such  Subsequent  Receivables  and  related  Other Trust
     Property.  None  of (i) the  Master  Trust,  with  respect  to the  Initial
     Receivables  and related Other Trust Property  transferred by it to Funding
     Trust II, (ii) Funding  Trust II, with  respect to the Initial  Receivables
     and related Other Trust  Property  transferred  by it to the Transferor and
     NAFI,  and (iii)  NAFI,  with  respect to any  Subsequent  Receivables  and
     related  Other  Trust  Property  transferred  by it to the  Transferor,  is
     transferring any of the above-mentioned Receivables and related Other Trust
     Property or  interests  with any intent to hinder,  delay or defraud any of
     their  respective  creditors.   The  Transferor  is  not  transferring  the
     Receivables  and related  Other Trust  Property to the Trust or selling the
     Securities,  as provided in the Transaction  Documents,  with any intent to
     hinder, delay or defraud any of the Transferor's creditors.

          (p) Investment Company Act Compliance. Neither NAFI nor the Transferor
     is  required  to  be  registered  as  an  "investment  company"  under  the
     Investment Company Act.

          (q) Good Title; Valid Transfer;  Absence of Liens;  Security Interest.
     (i)  Immediately  prior to the sale of the Initial  Receivables and related
     Other Trust  Property by the  Transferor to the Trust  pursuant to the Sale
     and Servicing  Agreement on the Closing Date and  immediately  prior to the
     sale of any Subsequent  Receivables and related Other Trust Property by the
     Transferor to the Trust  pursuant to the Sale and  Servicing  Agreement and
     the related Subsequent  Transfer Agreement on any Subsequent Transfer Date,
     the Transferor was the owner of, and had good and marketable title to, such
     property free and clear of all Liens and  Restrictions on  Transferability,
     and had full right,  power and lawful  authority  to assign,  transfer  and
     pledge such  Receivables  and related  Other Trust  Property.  The Sale and
     Servicing  Agreement  constitutes a valid sale,  transfer and assignment of
     the Initial Receivables and related Other Trust Property

                                    -22-

<PAGE>




     to the  Trust,  and the  Sale and  Servicing  Agreement  and  each  related
     Subsequent  Transfer  Agreement  constitute  a  valid  sale,  transfer  and
     assignment of the Subsequent  Receivables  and related Other Trust Property
     to the Trust, in each case enforceable  against creditors of and purchasers
     of the Transferor.  In the event that, in contravention of the intention of
     the  parties,  the  transfer of such  Receivables  and related  Other Trust
     Property by the  Transferor to the Trust is  characterized  as other than a
     sale, such transfer shall be characterized as a secured financing,  and the
     Trust shall have a valid and perfected first priority  security interest in
     the  Receivables  and related  Other Trust  Property  free and clear of all
     Liens and Restrictions on Transferability.

               (ii)  Immediately  prior to the pledge of the  Collateral  by the
          Trust to the Trust  Collateral  Agent pursuant to the  Indenture,  the
          Trust was the  owner of,  and had good and  marketable  title to,  the
          Receivables  and related  Other Trust  Property  free and clear of all
          Liens and Restrictions on  Transferability,  and had full right, trust
          power and  lawful  authority  to  assign,  transfer  and  pledge  such
          property.  The Indenture  constitutes a valid pledge of the Collateral
          to the Trust  Collateral  Agent,  and the Trust Collateral Agent shall
          have a valid and perfected  first  priority  security  interest in the
          Collateral,   free  and  clear  of  all  Liens  and   Restrictions  on
          Transferability.

          (r)  Perfection of Liens and Security  Interest.  On the Closing Date,
     the Lien and security  interest in favor of the Trust Collateral Agent with
     respect  to  the  Collateral  will  be  perfected  by the  delivery  of the
     Receivable  Files to the Custodian,  which  Receivable  Files the Custodian
     will hold on behalf of the Trust Collateral  Agent, the filing of financing
     statements  on Form  UCC-1 in each  jurisdiction  where such  recording  or
     filing is necessary for the perfection of the security interest in favor of
     the  Trustee  and  the  establishment  of  the  Collection   Account,   the
     Distribution Account, the Note Distribution Account, the Pre-Funding Period
     Reserve  Account,  the  Pre-Funding  Account  and the  Lockbox  Account  in
     accordance with the provisions of the Transaction  Documents,  and no other
     filings in any  jurisdiction  or any other  actions  (except  as  expressly
     provided  herein) are necessary to perfect the Trustee  Collateral  Agent's
     first  priority Lien on and security  interest in the Collateral as against
     any third parties.

          (s) Security Interest in Funds and Investments. Assuming the retention
     of funds in the Trust Accounts and the acquisition of Eligible  Investments
     in accordance with the Transaction Documents, such funds and Eligible

                                    -23-

<PAGE>




     Investments  will be  subject  to a valid  and  perfected,  first  priority
     security  interest in favor of the Trust  Collateral Agent on behalf of the
     Indenture  Trustee (on behalf of the holders of the Securities) and Finance
     Security.  Assuming the  retention  of funds in the Spread  Account and the
     acquisition of Eligible  Investments in accordance  with the Spread Account
     Agreement,  such funds and Eligible  Investments will be subject to a valid
     and perfected,  first priority security interest in favor of the Collateral
     Agent on behalf of Financial Security.

          (t)  Taxes.  Each of NAFI  and the  Transferor  have and each of their
     respective  Subsidiaries have filed all Federal and state tax returns which
     are  required  to be filed and paid all taxes,  including  any  assessments
     received by it, to the extent  that such taxes have become due.  Any taxes,
     fees and other  governmental  charges  payable by the Transferor or NAFI in
     connection  with  the  Transaction,  the  execution  and  delivery  of  the
     Transaction   Documents  and  the  issuance  of  the   Securities  and  the
     Certificates have been paid or shall have been paid at or prior to the Date
     of Issuance.

          (u)  Subsequent  Receivables.  With respect to the transfer by NAFI of
     Subsequent  Receivables  and related Other Trust Property on any Subsequent
     Transfer Date, immediately prior to the sale of such Subsequent Receivables
     and related Other Trust Property to the Transferor pursuant to the Purchase
     and Contribution  Agreement and the related Conveyance,  NAFI was the owner
     of, and had good and marketable  title to, such Subsequent  Receivables and
     related Other Trust  Property free and clear of all Liens and  Restrictions
     on  Transferability,  and  had  full  right,  corporate  power  and  lawful
     authority to assign,  transfer and pledge such  Subsequent  Receivables and
     related Other Trust Property.  The Purchase and Contribution  Agreement and
     the related Conveyance  constitute a valid sale, transfer and assignment of
     the related Subsequent Receivables and related Other Trust Property by NAFI
     to the Transferor  enforceable against creditors of and purchasers of NAFI.
     In the event that, in  contravention  of the intention of the parties,  the
     transfer of such Subsequent Receivables and related Other Trust Property by
     NAFI to the Transferor is characterized as other than a sale, such transfer
     shall be  characterized  as a secured  financing,  and the Transferor shall
     have a  valid  and  perfected  first  priority  security  interest  in such
     Subsequent  Receivables  and related Other Trust Property free and clear of
     all Liens and Restrictions on Transferability.

          (v) Registration Statement;  Prospectus. The Transferor has filed with
     the  Commission a  registration  statement on Form S-3 (No.  333-28829) and
     Form S-3MEF (No.

                                    -24-

<PAGE>




     333-44159) filed pursuant to Rule 462(b) of the Securities Act, including a
     preliminary  prospectus and prospectus  supplement for the  registration of
     the Securities under the Securities Act, has filed such amendments thereto,
     and such amended preliminary prospectuses and prospectus supplements as may
     have been  required  to the date  hereof,  and will  file  such  additional
     amendments thereto and such amended prospectuses and prospectus supplements
     as may hereafter be required.  Such registration  statement (as amended, if
     applicable)  and the  prospectus,  together with the prospectus  supplement
     relating to the Securities,  constituting a part thereof (including in each
     case all  documents,  if any,  incorporated  by  reference  therein and the
     information,  if any,  deemed to be part thereof  pursuant to the rules and
     regulations  of the Commission  under the  Securities  Act, as from time to
     time amended or supplemented  pursuant to the Securities Act or otherwise),
     are  hereinafter  referred  to as  the  "Registration  Statement"  and  the
     "Prospectus",  respectively,  except  that  if any  revised  prospectus  or
     prospectus  supplement  shall  be  provided  by the  Transferor  for use in
     connection  with the  offering of the  Securities  which  differs  from the
     Prospectus filed with the Commission  pursuant to Rule 424 of the rules and
     regulations   under  the  Securities  Act  (whether  or  not  such  revised
     prospectus is required to be filed by the Transferor pursuant to such rules
     and  regulations),  the  term  "Prospectus"  shall  refer  to such  revised
     prospectus  and prospectus  supplement  from and after the time it is first
     provided to the Underwriter for such use. The Registration Statement at the
     time it became effective complied,  and at each time that the Prospectus is
     provided to the Underwriter for use in connection with the offering or sale
     of  any  Securities  will  comply,   in  all  material  respects  with  the
     requirements   of  the  Securities  Act  and  the  rules  and   regulations
     thereunder.  The Registration  Statement and the Prospectus at the time the
     Registration Statement became effective did not and on the date hereof does
     not,  contain an untrue  statement  of a  material  fact or omit to state a
     material  fact  required  to be stated  therein  or  necessary  to make the
     statements  therein not  misleading  and the  Prospectus at the time it was
     first provided to the  Underwriter  for use in connection with the offering
     of the  Securities  did not,  and on the date hereof does not,  contain any
     untrue  statement  of a  material  fact or omit to  state a  material  fact
     necessary  to make the  statements  therein  in light of the  circumstances
     under which they were made not misleading.

     Section 2.5. Affirmative Covenants of NAFI and the Transferor.  NAFI hereby
agrees  with  respect to itself  and with  respect  to the  Transferor,  and the
Transferor hereby agrees with

                                    -25-

<PAGE>




respect to itself,  that  during the Term of this  Agreement,  unless  Financial
Security shall otherwise expressly consent in writing:

          (a)  Compliance  With  Agreements  and  Applicable  Laws.  Each of the
     Transferor and NAFI shall perform each of its respective  obligations under
     the Transaction  Documents and shall comply with all material  requirements
     of, and the  Securities and the  Certificates  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.

          (b) Financial  Statements;  Accountants'  Reports;  Other Information.
     Each  of  NAFI  and  the  Transferor  shall  keep  or  cause  to be kept in
     reasonable detail books and records of account of its respective assets and
     business  and,  in the case of NAFI,  shall  clearly  reflect  therein  the
     transfer of Subsequent  Receivables to the Transferor,  and, in the case of
     the  Transferor,   shall  clearly  reflect  therein  the  transfer  of  the
     Receivables  to the  Trust.  NAFI shall  cause the Master  Trust to keep in
     reasonable  detail  books and records of account of its assets and business
     and to clearly reflect  therein the transfer of the Initial  Receivables to
     Funding  Trust II. NAFI shall cause  Funding Trust II to keep in reasonable
     detail  books and  records of account  of its  assets and  business  and to
     clearly  reflect  therein the  transfer of the Initial  Receivables  to the
     Transferor.  Each of NAFI and the  Transferor  shall furnish or cause to be
     furnished to Financial Security:

               (i) Annual Financial Statements. As soon as available, and in any
          event  within 90 days after the close of each  fiscal year of NAFI and
          the Transferor, the audited balance sheets of NAFI and the Transferor,
          as the case may be, as of the end of such  fiscal year and the audited
          statements of income, changes in equity and cash flows of NAFI and the
          Transferor,  as  the  case  may  be,  for  such  fiscal  year,  all in
          reasonable  detail and  stating  in  comparative  form the  respective
          figures for the corresponding  date and period in the preceding fiscal
          year,  prepared  in  accordance  with  generally  accepted  accounting
          principles,  consistently  applied, and accompanied by the certificate
          of NAFI's and the Transferor's  independent accountants (who shall be,
          in each case, a nationally  recognized firm or otherwise acceptable to
          Financial  Security)  and  by the  certificate  specified  in  Section
          2.05(c) hereof.

               (ii) Quarterly Financial Statements. As soon as available, and in
          any event  within 45 days  after the close of each of the first  three
          quarters of each

                                    -26-

<PAGE>




          fiscal  year of NAFI  and the  Transferor,  as the  case  may be,  the
          unaudited  balance sheets of NAFI and the Transferor,  as the case may
          be, as of the end of such  quarter  and the  unaudited  statements  of
          income,  changes in equity and cash flows of NAFI and the  Transferor,
          as the case may be, for the portion of the fiscal year then ended, all
          in reasonable  detail and stating in  comparative  form the respective
          figures for the corresponding  date and period in the preceding fiscal
          year,  prepared  in  accordance  with  generally  accepted  accounting
          principles,   consistently   applied   (subject  to  normal   year-end
          adjustments),  and accompanied by the certificate specified in Section
          2.05(c) hereof if such certificate is required to be provided pursuant
          to such Section.

               (iii)  Accountants'  Reports.  If a Special  Event has  occurred,
          copies of any reports  submitted  to NAFI or the  Transferor  by their
          respective independent  accountants in connection with any examination
          of the financial  statements of NAFI or the Transferor,  promptly upon
          receipt thereof.

               (iv) Other Information.  Promptly upon receipt thereof, copies of
          all reports, statements,  certifications,  schedules, or other similar
          items delivered to or by NAFI or the Transferor  pursuant to the terms
          of the Transaction  Documents and,  promptly upon request,  such other
          data as Financial Security may reasonably request; provided,  however,
          that neither NAFI nor the Transferor  shall be required to deliver any
          such items if provision  by some other party to Financial  Security is
          required  under the  Transaction  Documents  unless  such other  party
          wrongfully fails to deliver such item. NAFI and the Transferor  shall,
          upon the request of Financial  Security,  permit Financial Security or
          its authorized agents (A) to inspect the books and records of NAFI and
          the Transferor as they may relate to the Securities, the Certificates,
          the Receivables and the Other Trust Property,  the obligations of NAFI
          or of the Transferor under the Transaction Documents,  the Transaction
          and, but only  following  the  occurrence of a Special  Event,  NAFI's
          business; (B) to discuss the affairs, finances and accounts of NAFI or
          the Transferor with its respective  Chief Operating  Officer and Chief
          Financial Officer, no more frequently than annually,  unless a Special
          Event has  occurred;  and (C) to discuss  the  affairs,  finances  and
          accounts of NAFI or the Transferor with its  independent  accountants,
          provided  that an officer of NAFI or the  Transferor,  as the case may
          be, shall have

                                      -27-

<PAGE>




          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 NAFI or the Transferor,  as
          the case may be. In addition, NAFI shall promptly (but in no case more
          than 30 days  following  issuance or receipt by a Commonly  Controlled
          Entity)  provide to  Financial  Security 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  NAFI  and the  Transferor  will be  maintained  at the  respective
          addresses designated herein for receipt of notices, unless NAFI or the
          Transferor shall otherwise advise the parties hereto in writing.

               (v) NAFI  shall  provide  or cause to be  provided  to  Financial
          Security  an  executed  original  copy of each  document  executed  in
          connection with the Transaction  within 10 days after the Closing Date
          or the related Subsequent Transfer Date, as applicable.

               (vi) Promptly after the filing or sending thereof,  copies of all
          proxy  statements,  financial  statements,  reports  and  registration
          statements  which NAFI or the  Transferor  files,  or delivers to, the
          IRS, the Commission, or any other Federal, state or foreign government
          agency,  authority or body which supervises the issuance of securities
          by NAFI or the Transferor or any national securities exchange.

          (c)  Compliance  Certificate.  Each of NAFI and the  Transferor  shall
     deliver  to  Financial  Security  concurrently  with  the  delivery  of the
     financial  statements  required  pursuant to Section  2.05(b)(i) hereof and
     concurrently  with  the  delivery  of  the  financial  statements  required
     pursuant to Section  2.05(b)(ii)  hereof, a certificate signed by the Chief
     Financial Officer of each of NAFI and the Transferor stating that:

               (i)  a  review  of  NAFI's   and  the   Transferor's   respective
          performance  under the  Transaction  Documents  during such period has
          been made under such officer's supervision;

               (ii) to the  best  of such  individual's  knowledge,  no  Special
          Event,  Default  or Event of  Default  has  occurred,  or if a Special
          Event, Default or Event of

                                      -28-

<PAGE>




          Default has occurred,  specifying  the nature  thereof and, if NAFI or
          the  Transferor  has a right  to cure  any  such  Default  or Event of
          Default  pursuant to Section 5.01,  stating in  reasonable  detail the
          steps, if any, being taken by NAFI or the Transferor,  as the case may
          be, to cure such  Default or Event of Default or to  otherwise  comply
          with the terms of the  agreement  to which  such  Default  or Event of
          Default relates; and

               (iii) the attached financial reports submitted in accordance with
          Section  2.05(b)(i) or (ii) hereof,  as  applicable,  are complete and
          correct in all  material  respects  and present  fairly the  financial
          condition and results of operations of NAFI or the Transferor,  as the
          case  may  be,  as of the  dates  and for the  periods  indicated,  in
          accordance with generally accepted accounting principles  consistently
          applied   (subject  as  to  interim   statements  to  normal  year-end
          adjustments).

          (d) Notice of Material  Events.  Each of NAFI and the Transferor shall
     promptly  inform  (unless,  in the case of clause (i) only,  prohibited  by
     applicable  law) Financial  Security 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)
          against  NAFI  or the  Transferor  pertaining  to the  Receivables  in
          general,  (B) with respect to a material portion of the Receivables or
          (C) in which a  request  has been  made for  certification  as a class
          action (or equivalent relief) that would involve a material portion of
          the Receivables;

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

               (iii) the occurrence of any Default,  Event of Default or Special
          Event; 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 NAFI or of the Transferor.

          (e) Further  Assurances.  Each of NAFI and the Transferor will file or
     cause to be filed all necessary financing statements,  assignments or other
     instruments, and

                                      -29-

<PAGE>




     any amendments or continuation statements relating thereto, necessary to be
     kept and filed in such  manner and in such places as may be required by law
     to  preserve  and  protect  fully the Lien on and first  priority  security
     interest in, and all rights of the Trust  Collateral  Agent with respect to
     the  Collateral  under the  Indenture.  In  addition,  each of NAFI and the
     Transferor  shall,  upon the request of  Financial  Security,  from time to
     time,   execute,   acknowledge  and  deliver,  or  cause  to  be  executed,
     acknowledged  and  delivered,  within ten (10) 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
     Trust  Collateral Agent with respect to the Collateral under the Indenture,
     free and clear of all Liens and Restrictions on Transferability  except the
     Lien in favor  of the  Trust  Collateral  Agent  under  the  Indenture.  In
     addition,  each of NAFI and the Transferor agrees to cooperate 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.

          (f)  Retirement of Securities.  Each of NAFI and the Transferor  shall
     cause  the  Trust  Collateral  Agent,  upon  retirement  of the  Securities
     pursuant to the Indenture or otherwise,  to furnish to Financial Security a
     notice of such  retirement,  and, upon retirement of the Securities and the
     expiration of the Term of the Policy,  to surrender the Policy to Financial
     Security for cancellation.

          (g) Third-Party  Beneficiary.  Each of NAFI and the Transferor  agrees
     that Financial Security shall have all rights of a third-party  beneficiary
     in respect of each of the Transaction Documents and hereby incorporates and
     restates its representations, warranties and covenants as set forth therein
     for the benefit of Financial Security.

          (h) Preservation of Existence.  Except as provided in Section 2.06(h),
     each  of  NAFI  and  the  Transferor  shall  maintain  its  existence  as a
     corporation  organized  under  the laws of the State of  Delaware  and as a
     statutory  business  trust  organized  the laws of the  State of  Delaware,
     respectively,  and shall at all times continue to be duly  organized  under
     the laws of the  jurisdiction  of its formation and duly qualified and duly
     authorized (as described in Sections 2.04(a), (b) and (c) hereof) and shall
     conduct its business in  accordance  with the terms of its  certificate  of
     incorporation  and by-laws or certificate  of trust and trust  agreement or
     other applicable governing documents, as the case may be.

                                      -30-

<PAGE>





          (i) Disclosure  Document.  (1) Each Offering  Document  delivered with
     respect to the  Securities  shall  clearly  disclose that the Policy is not
     covered by the  property/casualty  insurance  security  fund  specified  in
     Article  76 of the New York  Insurance  Law.  In  addition,  each  Offering
     Document  delivered with respect to the Securities which includes financial
     statements  of Financial  Security  prepared in accordance  with  generally
     accepted  accounting  principles  shall  include  the  following  statement
     immediately preceding such financial statements:

               The New York State Insurance Department recognizes only statutory
               accounting  practices for determining and reporting the financial
               condition and results of operations of an insurance company,  for
               determining  its solvency  under the New York  Insurance Law, and
               for  determining  whether its  financial  condition  warrants the
               payment of a dividend to its  stockholders.  No  consideration is
               given by the New York State  Insurance  Department  to  financial
               statements   prepared  in  accordance  with  generally   accepted
               accounting principles in making such determinations.

               (2)  Each  Offering  Document   delivered  with  respect  to  the
          Securities  subsequent  to the Date of  Issuance  shall be in form and
          substance satisfactory to Financial Security in its sole discretion as
          evidenced by Financial  Security's  prior  written  consent to the use
          thereof.

          (j) Special Purpose Entity.

               (i) The Transferor  shall conduct its business  solely in its own
          name  through  its duly  authorized  officers  or  agents so as not to
          mislead  others as to the  identity  of the entity  with  which  those
          officers are concerned,  and particularly will use its best efforts to
          avoid the  appearance of conducting  business on behalf of NAFI or any
          Affiliate  thereof or that the assets of the  Transferor are available
          to pay  the  creditors  of  NAFI  or any  Affiliate  thereof.  Without
          limiting  the  generality  of the  foregoing,  all  oral  and  written
          communications,  including,  without  limitation,  letters,  invoices,
          purchase orders, Receivables,  statements and loan applications,  will
          be made solely in the name of the Transferor.

               (ii) The Transferor  shall maintain  records and books of account
          separate from those of NAFI and the

                                      -31-

<PAGE>




          Affiliates  thereof.  The Transferor's books and records shall clearly
          reflect the transfer of the  Receivables to the Trust as a sale of the
          Transferor's  interest  in the  Receivables.  The books of account and
          records of the Transferor  will be separate from those of NAFI and its
          Affiliates and will be maintained at the address designated herein for
          receipt of notices,  unless the Transferor  shall otherwise advise the
          parties hereto in writing with respect to such address.

               (iii) The  Transferor  shall obtain proper  authorization  of all
          action requiring  approval of the co-trustees or holders of beneficial
          ownership interests of the Transferor, as the case may be. Meetings of
          the holders of beneficial  ownership interests of the Transferor shall
          be held not less frequently than one time per annum and copies of each
          such  authorization  and the  minutes  of each such  meeting  shall be
          delivered to Financial Security within two weeks of such authorization
          or meeting, as the case may be.

               (iv) Although the organizational  expenses of the Transferor have
          been  paid  by  NAFI,   operating  expenses  and  liabilities  of  the
          Transferor shall be paid from its own funds.

               (v) The  annual  financial  statements  of the  Transferor  shall
          disclose the effects of the  Transferor's  transactions  in accordance
          with generally accepted accounting  principles and shall disclose that
          the assets of the  Transferor  are not  available to pay  creditors of
          NAFI or any Affiliate thereof.

               (vi) The  resolutions,  agreements  and other  instruments of the
          Transferor  underlying  the  transactions  described in this Insurance
          Agreement and the other  Transaction  Documents  shall be continuously
          maintained  by the  Transferor as official  records of the  Transferor
          separately identified and held apart from the records of NAFI and each
          Affiliate thereof.

               (vii) The Transferor shall maintain an arm's-length  relationship
          with NAFI and the  Affiliates  thereof and will not hold itself out as
          being liable for the debts of NAFI or any Affiliate thereof.

               (viii) The Transferor  shall keep its assets and its  liabilities
          wholly separate from those of all other entities,  including,  but not
          limited to NAFI and the Affiliates thereof.

                                      -32-

<PAGE>





          (k)  Maintenance  of  Licenses.  NAFI and the  Transferor  shall  each
     maintain  all  licenses,  permits,  charters  and  registrations  which are
     material to the performance by NAFI or the Transferor,  as the case may be,
     of its  business and of its  respective  obligations  under this  Insurance
     Agreement and each other Transaction Document.

          (l)  Incorporation  of Covenants.  NAFI and the Transferor  shall each
     comply  with  their  respective  covenants  set  forth  in the  Transaction
     Documents and hereby  incorporates  such  covenants by reference as if each
     were set forth herein.

          (m) Release of Liens.  NAFI and the Transferor shall each duly file or
     cause to be duly filed  with  respect to itself and on behalf of the Master
     Trust and Funding Trust II and other  relevant  parties,  no later than the
     Closing Date or the related  Subsequent  Transfer Date, as applicable,  (i)
     the  amendments  to,  and/or  terminations  of, UCC  financing  statements,
     evidencing  the  release by NAFI,  the  Transferor,  the  Master  Trust and
     Funding  Trust  II  and  other  relevant  parties  of any  Liens,  security
     interests  and/or  ownership  interests in the  Receivables and Other Trust
     Property  and  (ii)  the  financing   statements  on  Form  UCC-1  in  each
     jurisdiction where such recording or filing is necessary for the perfection
     of Liens and security  interest of the Trust  Collateral  Agent in favor of
     the Collateral.

          (n) Notification of Failure to Perform or Observe Certain Covenants or
     Agreements.  The  Transferor  shall  promptly  deliver  to the  Trust,  the
     Servicer or NAFI, as applicable,  a copy of any written notice delivered to
     the  Transferor  pursuant  to Section  5.01(d)  concerning  any  failure to
     perform  or observe  any  covenant  or  agreement  contained  in any of the
     Transaction  Documents by the Trust,  the Servicer or NAFI, as the case may
     be.

          (o) Certain Additional Documentation With Respect to Series 1998-1 and
     the Prior Series.

               (i) On or  prior  to  March  31,  1998,  each  of  NAFI  and  the
          Transferor  shall  execute and  deliver  (and  satisfy the  conditions
          precedent thereto set forth therein) and shall cause the other parties
          thereto  other than  Financial  Security to execute  and deliver  (and
          satisfy  the  conditions  precedent  thereto set forth  therein)  such
          documentation  (including  operative  documents,   opinions,   officer
          certificates  and other  ancillary  documents)  with respect to Series
          1998-1  and each of the  prior  Series  as  Financial  Security  shall
          determine is necessary to provide for the cross-

                                      -33-

<PAGE>




          collateralization  of the Series 1998-1 Spread  Account and the spread
          accounts for each of the prior Series with cash flow  priority to such
          cross-collateralization  and a position  senior to any and all lenders
          and security  holders other than holders of  securities  guaranteed by
          Financial Security and providing customary  bankruptcy  remoteness and
          nonconsolidation  protections  for all funds to be held in any  spread
          account  (including  pursuant  to such  cross-collateralization).  The
          substantive terms of such cross-collateralization  provisions and such
          documentation   shall   be   comparable   to   automobile   receivable
          securitizations  in which Financial Security has issued a guaranty and
          in which  the  non-guaranteed  securities  (or  other  interests)  are
          retained by the sponsor of the  securitization.  The substantive terms
          of such  cross-collateralization  provisions  and  such  documentation
          shall be in all other respects  reasonably  satisfactory  to Financial
          Security.

                    (ii) On or  prior to March  31,  1998,  each of NAFI and the
               Transferor  shall execute and deliver (and satisfy the conditions
               precedent  thereto set forth  therein)  and shall cause the other
               parties  thereto  other than  Financial  Security  to execute and
               deliver (and satisfy the conditions  precedent  thereto set forth
               therein)  such  documentation   (including  operative  documents,
               opinions,  officer  certificates  and other ancillary  documents)
               with  respect to Series  1998-1  and each of the prior  Series as
               Financial  Security shall determine is necessary to provide for a
               backup servicing arrangement reasonably satisfactory to Financial
               Security in Series 1998-1 and in each of the prior Series,  which
               documentation   shall  be  in  form  and   substance   reasonably
               satisfactory to Financial Security;  provided, however, that such
               backup  servicing  arrangement  shall  provide for  standby  data
               verification and other standby services  commencing no later than
               June 21, 1998.

     Section 2.6.  Negative  Covenants of NAFI and the  Transferor.  NAFI hereby
agrees  with  respect  to itself  and with  respect  to the  Transferor  and the
Transferor  hereby  agrees  with  respect to itself that during the Term of this
Agreement,  unless  Financial  Security  shall  otherwise  expressly  consent in
writing:

          (a)  Restrictions on Liens.  Neither NAFI nor the Transferor shall (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

                                      -34-

<PAGE>




     existence of any Lien or Restriction on  Transferability on the Receivables
     or the  Other  Trust  Property  except  for the Lien in favor of the  Trust
     Collateral  Agent under the Indenture for the benefit of the holders of the
     Securities and Financial  Security or (ii) with respect to the  Receivables
     or the Other Trust Property, sign or file under the Uniform Commercial Code
     of any jurisdiction any financing  statement which names either NAFI or the
     Transferor  as a debtor,  or sign any security  agreement  authorizing  any
     secured party thereunder to file such financing  statement,  except in each
     case any such instrument solely securing the rights and preserving the Lien
     of the Trust  Collateral  Agent,  for the  benefit  of the  holders  of the
     Securities and Financial Security, under the Indenture.

          (b) Impairment of Rights.  Neither NAFI nor the Transferor  shall take
     any action,  or fail to take any action,  if such action or failure to take
     action may (i)  interfere  with the  enforcement  of any  rights  under the
     Transaction  Documents  that  are  material  to  the  rights,  benefits  or
     obligations of the Trust,  the Trust  Collateral  Agent, the holders of the
     Securities,  the Certificateholders or Financial Security, (ii) result in a
     Material  Adverse  Change in respect of the  Receivables or the Other Trust
     Property  or (iii)  impair  the  ability  of NAFI or of the  Transferor  to
     perform its  obligations  under the  Transaction  Documents,  including any
     consolidation  or  merger  with any  Person or any  transfer  of all or any
     material amount of NAFI's or the Transferor's assets to any other Person if
     such  consolidation,  merger or transfer  would  materially  impair the net
     worth of NAFI or the Transferor or any successor  Person  obligated,  after
     such event,  to perform NAFI's or the  Transferor's  obligations  under the
     Transaction Documents.

          (c) Waiver,  Amendments,  Etc.  Neither NAFI nor the Transferor  shall
     waive, modify or amend, or consent to any waiver, modification or amendment
     of,  any of the  provisions  of any  of the  Transaction  Documents  or the
     Transferor's certificate of trust or trust agreement.

          (d)  Successors.  Neither NAFI nor the Transferor  shall  terminate or
     designate,  or consent to the  termination or designation of, the Servicer,
     the Backup Servicer, the Custodian, the Owner Trustee, the Trust Collateral
     Agent,  the  Indenture  Trustee or the  Collateral  Agent or any  successor
     thereto without the prior written approval of Financial Security.

          (e) Creation of Indebtedness;  Guarantees.  Other than as permitted in
     the Transaction Documents, the Transferor

                                      -35-

<PAGE>




     shall not create,  incur,  assume or suffer to exist any indebtedness other
     than indebtedness  guaranteed or approved in writing by Financial Security.
     Without the prior written  consent of Financial  Security,  the  Transferor
     shall not assume  guarantee,  endorse or otherwise be or become directly or
     contingently  liable for the  obligations  of any Person  by,  among  other
     things,  agreeing to purchase any obligation of another Person, agreeing to
     advance  funds to such  Person  or  causing  or  assisting  such  Person to
     maintain any amount of capital.

          (f)  Subsidiaries.  The  Transferor  shall  not  form,  or cause to be
     formed, any Subsidiaries.

          (g)  Issuance  of  Additional  Beneficial  Ownership  Interests.   The
     Transferor  shall  not  issue  or  allow  the  issuance  of any  additional
     beneficial   ownership   interests  or  securities   convertible   into  or
     exchangeable for beneficial ownership interests in the Transferor.

          (h) No Mergers. (a) The Transferor shall not consolidate with or merge
     into any Person or transfer  all or any  material  portion of its assets to
     any Person or  liquidate or  dissolve;  and (b) NAFI shall not  consolidate
     with or merge into any Person  unless it complies with the  procedures  set
     forth in Section 9.3 of the Sale and  Servicing  Agreement  with respect to
     the merger or consolidation of the Servicer or transfer all or any material
     portion of its assets to any Person or liquidate or dissolve.

          (i) Other Activities. The Transferor shall not:

               (i) sell,  transfer,  exchange or otherwise dispose of any of its
          assets except as permitted under the Transaction Documents; or

               (ii)  engage  in  any   business   or  activity   other  than  as
          contemplated in the  Transaction  Documents and as permitted under its
          certificate of trust and trust agreement.

          (j)  Insolvency.  Neither NAFI nor the Transferor  shall commence with
     respect to the  Transferor  any case,  proceeding or other action (A) under
     any  existing  or future  law of any  jurisdiction,  domestic  or  foreign,
     relating  to  the  bankruptcy,  insolvency,  reorganization  or  relief  of
     debtors, seeking to have an order for relief entered with respect to it, or
     seeking reorganization,  arrangement,  adjustment, winding-up, liquidation,
     dissolution,  corporation or other relief with respect to it or (B) seeking
     appointment of a

                                      -36-

<PAGE>




     receiver, trustee, custodian or other similar official for it or for all or
     any substantial  part of its assets,  or make a general  assignment for the
     benefit of its creditors.  Neither NAFI nor the  Transferor  shall take any
     action in  furtherance  of, or indicating  the consent to,  approval of, or
     acquiescence in any of the acts set forth above.  The Transferor  shall not
     admit in writing its inability to pay its debts.

          (k) ERISA. The Transferor shall not contribute or incur any obligation
     to  contribute  to, or incur  any  liability  in  respect  of,  any Plan or
     Multiemployer Plan.

          (l) Distributions. The Transferor shall not declare or make payment of
     (i) any  distribution  on or in respect of any of its beneficial  ownership
     interests,  or (ii) any  payment on account  of the  purchase,  redemption,
     retirement or acquisition of any option,  warrant or other right to acquire
     its  beneficial  ownership  interests  unless (in each case) at the time of
     such  declaration  or payment (and after giving  effect  thereto) no amount
     payable by the Transferor or the Trust under any Transaction  Document with
     respect to any Series is then due and owing but unpaid.

          (m)  Transfer  of the  Certificates.  The  Transferor  shall not sell,
     transfer, assign, convey or pledge, and shall not permit or allow the sale,
     transfer, assignment, conveyance or pledge of, any Certificates at any time
     subsequent  to the Date of Issuance to any Person that is an  Affiliate  of
     NAFI or the Transferor unless,  prior to such sale,  transfer,  assignment,
     conveyance  or pledge,  the  Transferor  delivers to Financial  Security an
     opinion of counsel  addressed to Financial  Security  and  satisfactory  to
     Financial Security in its sole discretion and substantially similar in form
     and  substance to the opinion of counsel  delivered on the Date of Issuance
     as to non-consolidation of the assets and liabilities of (x) the Transferor
     and NAFI and (y) the Transferor and any such Person that is an Affiliate of
     the Transferor (other than NAFI);  provided,  however,  that the Transferor
     shall not sell, transfer, assign, convey or pledge, and shall not permit or
     allow  the  sale,  transfer,  assignment,  conveyance  or  pledge  of,  any
     Certificate  at any time  subsequent  to the Date of Issuance to any Person
     that is not an Affiliate of either the Transferor or NAFI unless, (i) prior
     to such sale,  transfer,  assignment,  conveyance  or pledge,  such  Person
     delivers to Financial  Security (A) its  agreement in writing to the effect
     that so long as it has any  interest in any  Certificate  such Person shall
     not become an Affiliate of the  Transferor or NAFI and (B) its agreement in
     writing containing a nonpetition covenant with respect to the

                                      -37-

<PAGE>




     Transferor in form and substance  satisfactory to Financial Security in its
     sole discretion,  and (ii) the obligations of the Transferor to such Person
     in connection with such sale,  transfer,  assignment,  conveyance or pledge
     shall be recourse  only to the extent of amounts,  if any,  received by the
     Transferor pursuant to Section 3.03(b) of the Spread Account Agreement.

     Section 2.7. Representations and Warranties of NAFI and the Transferor with
respect to the Master  Trust and Funding  Trust II. Each of the  Transferor  and
NAFI represents,  warrants and covenants,  as of the date hereof, as of the Date
of Issuance and as of each  Subsequent  Transfer  Date,  with respect to itself,
with  respect  to the  Master  Trust,  with  respect  to  Funding  Trust  II and
otherwise, as follows:

          (a) Good Title; Valid Transfer;  Absence of Liens;  Security Interest.
     Immediately prior to the sale of the Initial  Receivables and related Other
     Trust Property to Funding Trust II pursuant to the Assignment  Agreement on
     the  Closing  Date,  the  Master  Trust was the owner of,  and had good and
     marketable  title  to,  such  property  free  and  clear of all  Liens  and
     Restrictions  on  Transferability,  and had full  right,  power and  lawful
     authority to assign, transfer and pledge such Receivables and related Other
     Trust Property.  Immediately  prior to the sale of the Initial  Receivables
     and related  Other Trust  Property to the  Transferor  pursuant to the Sale
     Agreement on the Closing  Date,  Funding Trust II was the owner of, and had
     good and marketable title to, such property free and clear of all Liens and
     Restrictions  on  Transferability,  and had full  right,  power and  lawful
     authority to assign, transfer and pledge such Receivables and related Other
     Trust Property. The Assignment Agreement constitutes a valid sale, transfer
     and assignment of the Initial  Receivables and related Other Trust Property
     to Funding Trust II, enforceable against creditors of and purchasers of the
     Master Trust.  The Sale  Agreement  constitutes a valid sale,  transfer and
     assignment of the Initial  Receivables and the related Other Trust Property
     to the  Transferor,  enforceable  against  creditors of and  purchasers  of
     Funding Trust II. In the event that, in  contravention  of the intention of
     the parties,  (i) the transfer of the Initial Receivables and related Other
     Trust Property by the Master Trust to Funding Trust II or (ii) the transfer
     of the  Initial  Receivables  and related  Other Trust  Property by Funding
     Trust II to the  Transferor  is  characterized  as other than a sale,  such
     transfer shall be characterized as a secured  financing,  and Funding Trust
     II or the Transferor, as applicable, shall have a valid and perfected first
     priority  security  interest in such  Receivables  and related  Other Trust
     Property free and clear

                                      -38-

<PAGE>




     of all Liens and Restrictions on  Transferability  other than as imposed by
     the Transaction Documents.

          (b) Compliance With Agreements and Applicable Laws. Each of the Master
     Trust and Funding Trust II has performed each of its obligations  under the
     Assignment  Agreement  and  the  Sale  Agreement,  respectively,  and is in
     compliance  with all material  requirements  of any law, rule or regulation
     applicable to it, or that are required in connection  with its  performance
     under the Assignment Agreement and the Sale Agreement,  respectively.  Each
     of the Master  Trust and  Funding  Trust II has not taken any  action  that
     would  interfere  with the  enforcement  of any rights under the Assignment
     Agreement and the Sale Agreement, respectively.

     Section 2.8. Affirmative  Covenants of NAFI and the Transferor with respect
to the Master Trust and Funding Trust II. Each of NAFI and the Transferor hereby
agrees with respect to itself, with respect to the Master Trust, with respect to
Funding Trust II and otherwise,  that during the Term of this Agreement,  unless
Financial Security shall otherwise expressly consent in writing:

          (a) Notice of Material  Events.  Each of NAFI and the Transferor shall
     promptly inform  Financial  Security 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)
          against the Master Trust or Funding  Trust II, as the case may be, (B)
          with respect to any of the Receivables transferred by the Master Trust
          to Funding Trust II or Funding Trust II to the  Transferor,  or (C) in
          which a request has been made for  certification as a class action (or
          equivalent   relief)  that  would  involve  any  of  the   Receivables
          transferred  by the Master Trust to Funding  Trust II or Funding Trust
          II to the Transferor; or

               (ii) any other event, circumstance or condition that has resulted
          in a material  adverse  change in the  ability of the Master  Trust or
          Funding  Trust II to  perform  its  obligations  under the  Assignment
          Agreement or the Sale Agreement, respectively.

          (b) Further Assurances.  Each of NAFI and the Transferor will file, or
     cause to be filed,  all necessary  termination  statements,  assignments or
     other instruments,  and any amendments or continuation  statements relating
     thereto,  necessary  to be kept and filed in such manner and in such places
     as may be required by law to release the Lien

                                      -39-

<PAGE>




     and  security   interest  of  (i)  the  Master  Trust  in  any  Receivables
     transferred  by the Master Trust to Funding  Trust II or (ii) Funding Trust
     II in any Receivables transferred by Funding Trust II to the Transferor. In
     addition,  each of NAFI and the Transferor  shall, upon the written request
     of Financial Security, from time to time, execute, acknowledge and deliver,
     or cause to be executed,  acknowledged and delivered,  within ten (10) days
     of such request,  such further  instruments and take such further action as
     may be  reasonably  commercially  necessary  to protect the interest of the
     Transferor in the  Receivables  transferred  by the Master Trust to Funding
     Trust II and by Funding Trust II to the  Transferor,  free and clear of all
     Liens and Restrictions on Transferability  created by or for the benefit of
     the Master Trust or Funding Trust II, as the case may be.

          (c)  Third-Party  Beneficiary.  The  Transferor  and NAFI  agree  that
     Financial  Security  shall have all rights of a third-party  beneficiary in
     respect of the Assignment Agreement and the Sale Agreement and each of NAFI
     and the  Transferor  hereby  restates the  representations,  warranties and
     covenants of the Master Trust and Funding Trust II as set forth therein for
     the benefit of Financial Security.

     Section 2.9. Negative  Covenants of NAFI and the Transferor with respect to
the Master Trust and Funding  Trust II. Each of NAFI and the  Transferor  hereby
agrees with respect to itself, with respect to the Master Trust, with respect to
Funding Trust II and otherwise  that during the Term of this  Agreement,  unless
Financial Security shall otherwise expressly consent in writing:

          (a)  Restrictions  on Liens.  Neither  NAFI nor the  Transferor  shall
     permit the  execution  or filing under the Uniform  Commercial  Code of any
     jurisdiction  any  financing  statement  naming the Master Trust or Funding
     Trust  II  as  a  debtor,  or  the  execution  of  any  security  agreement
     authorizing any secured party thereunder to file such financing  statement,
     with respect to the Receivables  transferred by the Master Trust to Funding
     Trust II and by Funding Trust II to the Transferor, except in each case any
     such  instrument  solely securing the rights and preserving the Lien of the
     Trustee,  for the benefit of the holders of the  Securities  and  Financial
     Security.

          (b) Waiver,  Amendments,  Etc.  Neither NAFI nor the Transferor  shall
     waive, modify or amend, or consent to any waiver, modification or amendment
     of, any of the provisions of the certificate of trust or trust agreement of
     Funding Trust II  (including  not  permitting  any Affiliate of NAFI or the
     Transferor to take any such action).

                                      -40-

<PAGE>






                                  ARTICLE III.

                   THE POLICY; REIMBURSEMENT; INDEMNIFICATION

     Section 3.1. Issuance of the Policy. Financial Security agrees to issue the
Policy subject to satisfaction of the conditions precedent set forth in Appendix
II hereto.

     Section 3.2. Payment of Fees and Premium.

          (a) Inducement Letter Fees and Expenses. On the Date of Issuance, NAFI
     and the Transferor  agree to pay or cause to be paid the amounts  specified
     with respect to fees,  expenses and  disbursements in the Inducement Letter
     unless otherwise agreed between NAFI and Financial Security.

          (b) Legal Fees. On the Date of Issuance, NAFI shall pay or cause to be
     paid  legal  fees and  disbursements  incurred  by  Financial  Security  in
     connection with the issuance of the Policy.

          (c) Rating  Agency  Fees.  The initial  fees of S&P and  Moody's  with
     respect to the Securities and the transactions contemplated hereby shall be
     paid by the  Transferor  in full on the  Date  of  Issuance,  or  otherwise
     provided for to the  satisfaction of Financial  Security.  All periodic and
     subsequent  fees of S&P or Moody's with respect to, and directly  allocable
     to, the Securities shall be for the account of, and shall be billed to, the
     Transferor. The fees for any other rating agency shall be paid by the party
     requesting  such other  agency's  rating,  unless  such  other  agency is a
     substitute for S&P or Moody's in the event that S&P or Moody's is no longer
     rating the Securities, in which case the cost for such agency shall be paid
     by the Transferor.

          (d) Auditors' Fees. The Transferor  shall pay on demand any additional
     fees of Financial  Security's  auditors  payable in respect of any Offering
     Document  that are incurred  after the Date of Issuance.  It is  understood
     that Financial  Security's  auditors shall not incur any additional fees in
     respect of future Offering  Documents  except at the request of or with the
     consent of the Transferor.

          (e) Premium. In consideration of the issuance by Financial Security of
     the Policy,  Financial Security shall be entitled to receive the Premium as
     and when due in accordance  with the terms of the Premium Letter (i) in the
     case of Premium due on or before the Date of  Issuance,  directly  from the
     Transferor and (ii) in the case of Premium

                                      -41-

<PAGE>




     due after the Date of  Issuance,  first,  from  monies  available  for such
     payment in accordance with Section 5.7 of the Sale and Servicing  Agreement
     and second, to the extent that such monies are insufficient, from NAFI. The
     Premium paid hereunder or under the Sale and Servicing  Agreement  shall be
     nonrefundable  without  regard  to  whether  Financial  Security  makes any
     payment  under  the  Policy  or any  other  circumstances  relating  to the
     Securities or provision  being made for payment of the Securities  prior to
     maturity.  Although the Premium is fully earned by Financial Security as of
     the Closing Date, the Premium shall be payable in periodic  installments as
     provided  in  the  Premium  Letter.  Anything  herein  or  in  any  of  the
     Transaction Documents  notwithstanding,  upon the occurrence of an Event of
     Default,  the entire  outstanding  balance of further  installments  of the
     Premium shall be immediately due and payable. All payments of Premium shall
     be made by wire  transfer  to an  account  designated  from time to time by
     Financial Security by written notice to the Transferor and NAFI.

     Section 3.3. Reimbursement Obligation. Notwithstanding any of the following
provisions of this Section 3.03 to the  contrary,  the payment  obligations  set
forth in Sections 3.03(a), (b) (other than in respect of amounts due from NAFI),
(c) (other  than in respect of  amounts  due from NAFI and other  amounts  that,
after due notice  and any  required  passage of time,  would not be payable as a
"Scheduled  Payment"  under  the  Policy),  and  (d)(v)  shall  be  non-recourse
obligations  with respect to NAFI,  the  Transferor  or any  Affiliate of either
(other than the Trust) and shall be payable only from monies  available for such
payment in  accordance  with  Section  5.7 of the Sale and  Servicing  Agreement
(except to the extent that any such payment  obligation arises from a failure to
perform or default of NAFI, the Transferor or any of their respective Affiliates
under any Transaction Document or by reason of negligence, willful misconduct or
bad  faith on the  part of  NAFI,  the  Transferor  or any of  their  respective
Affiliates  in the  performance  of its duties  and  obligations  thereunder  or
reckless disregard by NAFI, the Transferor or any of their respective Affiliates
of its duties and  obligations  thereunder).  NAFI, the Transferor and the Trust
agree to pay to Financial Security the following amounts as and when incurred:

          (a) a sum equal to the total of all amounts paid by Financial Security
     under the Policy;

          (b) interest on any and all amounts  described in this Section 3.03 or
     Section  3.02(e)  from the date due to Financial  Security  pursuant to the
     provisions  hereof  until  payment  thereof in full,  payable to  Financial
     Security at the Late Payment Rate per annum;


                                      -42-

<PAGE>




          (c) any payments made by Financial  Security on behalf of, or advanced
     to, NAFI, in its capacity as Servicer,  the Trust,  the Owner Trustee,  the
     Trust  Collateral  Agent,  the Collateral  Agent or the Indenture  Trustee,
     including, without limitation, any amounts payable by NAFI, in its capacity
     as Servicer,  the Trust, the Owner Trustee, the Trust Collateral Agent, the
     Collateral Agent or the Indenture Trustee pursuant to the Securities or any
     other Transaction  Documents;  and any payments made by Financial  Security
     as,  or in lieu  of,  any  servicing,  management,  trustee,  custodial  or
     administrative  fees payable,  in the sole discretion of Financial Security
     to third parties in connection with the Transaction; and

          (d) any and all out-of-pocket  charges, fees, costs and expenses which
     Financial Security may reasonably pay or incur, including,  but not limited
     to, attorneys' and accountants'  fees and expenses,  in connection with (i)
     in the event of payments  under the Policy,  any  accounts  established  to
     facilitate  payments under the Policy, to the extent Financial Security has
     not been  immediately  reimbursed  on the date  that any  amount is paid by
     Financial  Security  under the  Policy,  or other  administrative  expenses
     relating  to such  payments  under  the  Policy,  (ii) the  administration,
     enforcement, defense or preservation of any rights in respect of any of the
     Transaction Documents, including defending,  monitoring or participating in
     any  litigation  or  proceeding  (including  any  insolvency  or bankruptcy
     proceeding  in  respect of any  Transaction  participant  or any  Affiliate
     thereof) relating to any of the Transaction Documents,  any party to any of
     the Transaction Documents or the Transaction,  (iii) any amendment,  waiver
     or other  action with respect to, or related to, any  Transaction  Document
     whether or not executed or completed, (iv) any review or investigation made
     by Financial Security in those  circumstances where its approval or consent
     is  sought  under any of the  Transaction  Documents,  (v) the  foreclosure
     against,   sale  or  other  disposition  of  any  collateral  securing  any
     obligations  under any of the  Transaction  Documents  or  otherwise in the
     discretion of Financial  Security,  or pursuit of any other  remedies under
     any of the Transaction Documents, to the extent such costs and expenses are
     not  recovered  from  such  foreclosure,  sale or other  disposition,  (vi)
     preparation  of  bound  volumes  of the  Transaction  Documents  (vii)  the
     transfer of  Subsequent  Receivables  to the Trust and related  Other Trust
     Property  and (viii)  any  Federal,  state or local tax  (other  than taxes
     payable in  respect of the gross  income of  Financial  Security)  or other
     governmental charge imposed in connection with the issuance of the Policy.


                                      -43-

<PAGE>




     Section 3.4. Indemnification.

          (a) Indemnification by NAFI and the Transferor. In addition to any and
     all rights of  reimbursement,  indemnification,  subrogation  and any other
     rights  pursuant  hereto  or under law or in  equity,  each of NAFI and the
     Transferor, jointly and severally, agrees to pay, and to protect, indemnify
     and  save  harmless,  Financial  Security  and  its  officers,   directors,
     shareholders,  employees,  agents and each  Person,  if any,  who  controls
     Financial  Security  within  the  meaning  of  either  Section  15  of  the
     Securities  Act or  Section  20 of the  Securities  Exchange  Act  from and
     against  any and all claims,  losses,  liabilities  (including  penalties),
     actions, suits, judgments,  demands, damages, costs or expenses (including,
     without  limitation,  fees  and  expenses  of  attorneys,  consultants  and
     auditors and reasonable costs of  investigations) of any nature arising out
     of  or  relating  to  the  transactions  contemplated  by  the  Transaction
     Documents by reason of:

               (i)  any  statement,  omission  or  action  (other  than of or by
          Financial Security) in connection with the offering,  issuance,  sale,
          remarketing or delivery of the Securities or the Certificates;

               (ii) the negligence, bad faith, willful misconduct,  misfeasance,
          malfeasance or theft committed by any director,  officer,  employee or
          agent of the Trust, the Transferor or NAFI, as the case may be;

               (iii) the breach by the Trust,  the  Transferor  or NAFI,  as the
          case may be, of any representation,  warranty or covenant under any of
          the Transaction Documents or the occurrence,  in respect of the Trust,
          the  Transferor  or  NAFI,  as  the  case  may  be,  under  any of the
          Transaction  Documents  of any "event of default" or any event  which,
          with  the  giving  of  notice  or the  lapse  of time or  both,  would
          constitute any "event of default";

               (iv) the  violation by the Trust,  the  Transferor or NAFI of any
          federal,  state or foreign law, rule or  regulation,  or any judgment,
          order or decree applicable to it; or

               (v)  any  untrue  statement  or  alleged  untrue  statement  of a
          material fact contained in the Registration  Statement or any Offering
          Document or in any amendment or supplement  thereto or any omission or
          alleged  omission  to state  therein a material  fact  required  to be
          stated therein or necessary to make the

                                      -44-

<PAGE>




          statements therein not misleading, except insofar as such claims arise
          out of or are based  upon any  untrue  statement  or  omission  in the
          Financial Security Information, it being understood that in respect of
          the Offering Document,  the Financial Security  Information is limited
          to  information  included  under the caption  "THE  INSURER",  or such
          additional information as may be deemed to be included in the Offering
          Document   pursuant  to  the  second   paragraph   under  the  heading
          "Incorporation  of Certain  Documents by Reference" on page S-3 of the
          Offering Document.

          (b)  Conduct of Actions or  Proceedings.  If any action or  proceeding
     (including  any  governmental  investigation)  shall be brought or asserted
     against Financial Security, any officer, director, shareholder, employee or
     agent of Financial  Security or any Person  controlling  Financial Security
     (individually,  an "Indemnified Party" and, collectively,  the "Indemnified
     Parties") in respect of which  indemnity may be sought from the  Transferor
     and NAFI (the  "Indemnifying  Party")  hereunder,  Financial Security shall
     promptly notify the  Indemnifying  Party in writing,  and the  Indemnifying
     Party shall assume the defense thereof, including the employment of counsel
     satisfactory  to  Financial  Security and the payment of all  expenses.  An
     Indemnified  Party shall have the right to employ  separate  counsel in any
     such action and to participate in the defense thereof at the expense of the
     Indemnified Party;  provided,  however,  that the fees and expenses of such
     separate counsel shall be at the expense of the  Indemnifying  Party if (i)
     the Indemnifying  Party has agreed to pay such fees and expenses,  (ii) the
     Indemnifying  Party  shall have failed to assume the defense of such action
     or proceeding and employ counsel  satisfactory to Financial Security in any
     such action or  proceeding or (iii) the named parties to any such action or
     proceeding  (including any impleaded  parties) include both the Indemnified
     Party and the Indemnifying Party, and the Indemnified Party shall have been
     advised  by  counsel  that  (A)  there  may be one or more  legal  defenses
     available to it which are different  from or additional to those  available
     to the Indemnifying  Party and (B) the  representation  of the Indemnifying
     Party and the Indemnified  Party by the same counsel would be inappropriate
     or contrary to prudent  practice (in which case, if the  Indemnified  Party
     notifies  the  Indemnifying  Party in  writing  that it  elects  to  employ
     separate counsel at the expense of the Indemnifying Party, the Indemnifying
     Party  shall not have the right to assume  the  defense  of such  action or
     proceeding  on  behalf  of such  Indemnified  Party,  it being  understood,
     however,  that the Indemnifying Party shall not, in connection with any one
     such action or proceeding or separate but substantially

                                      -45-

<PAGE>




     similar or related actions or proceedings in the same jurisdiction  arising
     out of the same general  allegations  or  circumstances,  be liable for the
     reasonable fees and expenses of more than one separate firm of attorneys at
     any time for the  Indemnified  Parties,  which firm shall be  designated in
     writing by Financial Security).  The Indemnifying Party shall not be liable
     for any  settlement of any such action or proceeding  effected  without its
     written consent to the extent that any such settlement shall be prejudicial
     to the Indemnifying  Party but, if settled with its written consent,  or if
     there  be a  final  judgment  for  the  plaintiff  in any  such  action  or
     proceeding with respect to which the Indemnifying Party shall have received
     notice in  accordance  with this  subsection  (b), the  Indemnifying  Party
     agrees to indemnify  and hold the  Indemnified  Parties  harmless  from and
     against any loss or liability by reason of such settlement or judgment.

          (c)  Contribution.  To provide for just and equitable  contribution if
     the indemnification  provided by the Indemnifying Party is determined to be
     unavailable  for any  Indemnified  Party (other than due to  application of
     this  Section),  the  Indemnifying  Party  shall  contribute  to the losses
     incurred by the Indemnified Party on the basis of the relative fault of the
     Indemnifying  Party,  on the one hand, and the  Indemnified  Party,  on the
     other hand.

     Section  3.5.  Subrogation.   Subject  only  to  the  priority  of  payment
provisions  of  the  Sale  and  Servicing  Agreement,  each  of the  Trust,  the
Transferor  and NAFI  acknowledges  that,  to the extent of any payment  made by
Financial  Security  pursuant to the Policy,  Financial  Security is to be fully
subrogated to the extent of such payment and any additional  interest due on any
late payment,  to the rights of the holders of the Securities to any moneys paid
or payable  in respect of the  Securities  under the  Transaction  Documents  or
otherwise. Each of the Trust, the Transferor and NAFI agrees to such subrogation
and, further, agrees to execute such instruments and to take such actions as, in
the sole  judgment  of  Financial  Security,  are  necessary  to  evidence  such
subrogation  and to perfect  the rights of  Financial  Security  to receive  any
moneys  paid or  payable  in respect  of the  Securities  under the  Transaction
Documents or otherwise.


                                   ARTICLE IV.

                               FURTHER AGREEMENTS

     Section 4.1.  Effective Date; Term of Agreement.  This Insurance  Agreement
shall take effect on the Date of Issuance  and shall  remain in effect until the
later of (a) such time as

                                      -46-

<PAGE>




Financial  Security  is no longer  subject  to a claim  under the Policy and the
Policy shall have been  surrendered to Financial  Security for  cancellation and
(b) all amounts payable to Financial  Security and the holders of the Securities
under the Transaction Documents and under the Securities have been paid in full;
provided,  however,  that the provisions of Sections 3.02,  3.03,  3.04 and 4.02
hereof shall survive any termination of this Insurance Agreement.

     Section 4.2. Obligation Absolute. (a) The payment obligations of the Trust,
the Transferor and NAFI hereunder shall be absolute and unconditional, and shall
be  paid  strictly  in  accordance  with  this  Insurance  Agreement  under  all
circumstances irrespective of the following:

               (i) any lack of validity or  enforceability  of, or any amendment
          or other  modifications  of, or waiver  with  respect  to,  any of the
          Transaction Documents, the Securities or the Policy;

               (ii) any exchange or release of any other obligations hereunder;

               (iii) the  existence of any claim,  setoff,  defense,  reduction,
          abatement or other right which the Trust,  the  Transferor or NAFI may
          have at any time against Financial Security or any other Person;

               (iv) any document presented in connection with the Policy proving
          to be forged,  fraudulent,  invalid or  insufficient  in any  respect,
          including any failure to strictly comply with the terms of the Policy,
          or any statement therein being untrue or inaccurate in any respect;

               (v) any failure of the  Transferor  to receive the proceeds  from
          the sale of the Securities;

               (vi) any  breach  by the  Trust,  the  Transferor  or NAFI of any
          representation,   warranty  or  covenant   contained  in  any  of  the
          Transaction Documents;

               (vii) any other circumstances,  other than payment in full, which
          might otherwise constitute a defense available to, or discharge of the
          Trust, the Transferor or NAFI in respect of any Transaction Document.

          (b) Each of the Trust,  the Transferor and NAFI and any and all others
     who are now or may become liable for all or part of the  obligations of any
     of them under this Insurance  Agreement agree to be bound by this Insurance
     Agreement  and (i) to the extent  permitted by law,  waive and renounce any
     and all

                                      -47-

<PAGE>




     redemption  and  exemption  rights  and the  benefit of all  valuation  and
     appraisement  privileges against the indebtedness,  if any, and obligations
     evidenced  by any  Transaction  Document  or by any  extension  or  renewal
     thereof;  (ii)  waive  presentment  and  demand  for  payment,  notices  of
     nonpayment  and of  dishonor,  protest of  dishonor  and notice of protest;
     (iii) waive all notices in  connection  with the  delivery  and  acceptance
     hereof and all other notices in connection with the performance, default or
     enforcement of any payment  hereunder except as required by the Transaction
     Documents; (iv) waive all rights of abatement, diminution,  postponement or
     deduction,  or to any defense other than payment, or to any right of setoff
     or  recoupment  arising  out of any  breach  under  any of the  Transaction
     Documents,  by any party thereto or any beneficiary  thereof, or out of any
     obligation  at any time owing to the Trust,  the  Transferor  or NAFI;  (v)
     agree that any consent,  waiver or forbearance hereunder with respect to an
     event shall operate only for such event and not for any  subsequent  event;
     (vi)  consent  to any and all  extensions  of time that may be  granted  by
     Financial   Security  with  respect  to  any  payment  hereunder  or  other
     provisions  hereof and to the release of any security at any time given for
     any payment hereunder,  or any part thereof,  with or without substitution,
     and to the release of any Person or entity liable for any such payment; and
     (vii)  consent  to the  addition  of any and all other  makers,  endorsers,
     guarantors  and  other  obligors  for  any  payment  hereunder,  and to the
     acceptance  of any and all other  security for any payment  hereunder,  and
     agree that the addition of any such  obligors or security  shall not affect
     the liability of the parties hereto for any payment hereunder.

          (c) Nothing herein shall be construed as prohibiting  the Trust,  NAFI
     or the Transferor  from pursuing any rights or remedies it may have against
     any Person other than Financial Security in a separate legal proceeding.

     Section  4.3.  Assignments;   Reinsurance;  Third-Party  Rights.  (a)  This
Insurance  Agreement shall be a continuing  obligation of the parties hereto and
shall be binding  upon and inure to the benefit of the parties  hereto and their
respective  successors and permitted assigns.  None of the Trust, the Transferor
nor NAFI may assign its rights under this Insurance  Agreement,  or delegate any
of its  duties  hereunder,  without  the  prior  written  consent  of  Financial
Security.  Any assignment made in violation of this Insurance Agreement shall be
null and void.

          (b) Financial Security shall have the right to give  participations in
     its rights under this  Insurance  Agreement and to enter into  contracts of
     reinsurance  with respect to the Policy upon such terms and  conditions  as
     Financial Security may in its discretion determine; provided, however, that
     no such participation or reinsurance agreement or arrangement shall

                                      -48-

<PAGE>




     relieve Financial Security of any of its obligations hereunder or under the
     Policy.

          (c) In  addition,  Financial  Security  shall be entitled to assign or
     pledge to any bank or other  lender  providing  liquidity  or  credit  with
     respect to the  Transaction  or the  obligations  of Financial  Security in
     connection therewith any rights of Financial Security under the Transaction
     Documents,  or with  respect  to any  real or  personal  property  or other
     interests pledged to Financial Security, or in which Financial Security has
     a security interest, in connection with the Transaction.

          (d)  Except as  provided  herein  with  respect  to  participants  and
     reinsurers,  nothing in this  Insurance  Agreement  shall confer any right,
     remedy  or  claim,  express  or  implied,   upon  any  Person,   including,
     particularly,  any holder of the Securities or Certificateholder other than
     Financial Security,  against the Trust, the Transferor or NAFI, and all the
     terms,  covenants,  conditions,  promises and agreements  contained  herein
     shall be for the sole and exclusive benefit of the parties hereto and their
     successors and permitted  assigns.  None of the Trust Collateral Agent, the
     Indenture Trustee,  the Owner Trustee,  any holder of the Securities or any
     Certificateholder shall have any right to payment from any premiums paid or
     payable  hereunder or from any other amounts paid by NAFI or the Transferor
     pursuant to Section 3.02, 3.03 or 3.04 hereof.

     Section 4.4.  Liability of Financial  Security.  Neither Financial Security
nor any of its officers,  directors or employees  shall be liable or responsible
for: (a) the use which may be made of the Policy by the Trust  Collateral  Agent
or for any  acts or  omissions  of the  Trust  Collateral  Agent  in  connection
therewith or (b) the validity, sufficiency, accuracy or genuineness of documents
delivered to Financial  Security (or its Fiscal  Agent) in  connection  with any
claim under the Policy, or of any signatures thereon,  even if such documents or
signatures  should  in  fact  prove  to be  in  any  or  all  respects  invalid,
insufficient,  fraudulent  or  forged  (unless  Financial  Security  had  actual
knowledge  thereof).  In  furtherance  and not in limitation  of the  foregoing,
Financial  Security (or its Fiscal  Agent) may accept  documents  that appear on
their face to be in order, without responsibility for further investigation.


                                   ARTICLE V.

                           EVENTS OF DEFAULT; REMEDIES

     Section 5.1.  Events of Default.  The  occurrence  of any of the  following
events shall constitute an Event of Default hereunder:

                                      -49-

<PAGE>





          (a) any demand for payment shall be made under the Policy;

          (b) any  representation or warranty made by the Trust, the Transferor,
     the  Servicer  or NAFI under any of the  Transaction  Documents,  or in any
     certificate or report  furnished  under any of the  Transaction  Documents,
     shall prove to be untrue or incorrect in any  material  respect;  provided,
     however,  that if the Trust,  the  Transferor,  the  Servicer  or NAFI,  as
     applicable,  effectively  cures any such  defect in any  representation  or
     warranty under any Transaction Document, or certificate or report furnished
     under any  Transaction  Document,  within the time period  specified in the
     relevant  Transaction  Document  as the cure period  therefor,  such defect
     shall not in and of itself constitute an Event of Default hereunder;

          (c) (i) the Trust, the Transferor,  the Servicer or NAFI shall fail to
     pay when due any amount payable by the Trust, the Transferor,  the Servicer
     or NAFI under any of the  Transaction  Documents,  unless such  amounts are
     paid in full within any  applicable  cure period  explicitly  provided  for
     under the relevant  Transaction  Document;  (ii) the Trust, the Transferor,
     the  Servicer  or NAFI  shall  have  asserted  that any of the  Transaction
     Documents  to which it is a party is not valid and  binding on the  parties
     thereto;  or (iii) any  court,  governmental  authority  or  agency  having
     jurisdiction over any of the parties to any of the Transaction Documents or
     any property thereof shall find or rule that any material  provision of any
     of the  Transaction  Documents  is not valid  and  binding  on the  parties
     thereto;

          (d) the Trust,  the  Transferor,  the Servicer,  or NAFI shall fail to
     perform or observe any other covenant or agreement  contained in any of the
     Transaction  Documents (except for the obligations  described under Section
     2.05(o),  clause (c) above and clause  (n)  below) and such  failure  shall
     continue for a period of 30 days after  written  notice given to either the
     Trust or the Transferor;

          (e) the Trust,  NAFI, the Servicer or the Transferor shall fail to pay
     its debts  generally  as they  come  due,  or shall  admit in  writing  its
     inability to pay its debts  generally,  or shall make a general  assignment
     for the benefit of creditors,  or shall institute any proceeding seeking to
     adjudicate it insolvent or seeking a  liquidation,  or shall take advantage
     of any insolvency act, or shall commence a case or other proceeding  naming
     it as debtor  under the  United  States  Bankruptcy  Code or  similar  law,
     domestic  or  foreign,  or a case or other  proceeding  shall be  commenced
     against any of the Trust, NAFI, the Servicer or

                                      -50-

<PAGE>




     the  Transferor  under the United  States  Bankruptcy  Code or similar law,
     domestic or foreign,  or any proceeding shall be instituted  against any of
     the Trust, NAFI, the Servicer or the Transferor seeking  liquidation of its
     assets and such Person shall fail to take  appropriate  action resulting in
     the  withdrawal  or  dismissal of such  proceeding  within 30 days or there
     shall  be  appointed  or  any of  the  Trust,  NAFI,  the  Servicer  or the
     Transferor  shall  consent  to,  or  acquiesce  in,  the  appointment  of a
     receiver, liquidator,  conservator,  trustee or similar official in respect
     of such Person or the whole or any  substantial  part of its  properties or
     assets or such Person shall take any corporate action in furtherance of any
     of the foregoing;

          (f) as of any  Reporting  Date (i)  ocurring  before the January  1999
     Distribution  Date, the Average  Delinquency Ratio shall have been equal to
     or  greater  than  11.50%  or  (ii)   occurring   after  the  January  1999
     Distribution  Date, (x) if the Cumulative  Loss Rate as of the January 1999
     Distribution Date is equal to or greater than 4.0%, the Average Delinquency
     Ratio  shall  have  been  equal to or  greater  than  11.50%  or (y) if the
     Cumulative Loss Rate as of the January 1999  Distribution Date is less than
     4.0%,  the  Average  Delinquency  Ratio shall have been equal to or greater
     than 11.10%;

          (g) as of any  Reporting  Date (i)  occurring  before the January 1999
     Distribution  Date,  the Average  Default  Rate is equal to or greater than
     25.50%,  (ii) occurring after the January 1999 Distribution Date but before
     the January 2000  Distribution  Date and (x) if the Cumulative Loss Rate as
     of the January 1999 Distribution Date is equal to or greater than 4.0%, the
     Average  Default  Rate is equal to or  greater  than  25.50%  or (y) if the
     Cumulative Loss Rate as of the January 1999  Distribution Date is less than
     4.0%, the Average Default Rate is equal to or greater than 25.10% and (iii)
     occurring  subsequent to the January 2000  Distribution Date and (x) if the
     Cumulative Loss Rate as of the January 1999  Distribution  Date is equal to
     or greater than 4.0%, the Average  Default Rate is equal to or greater than
     17.50%  or  (y)  if  the  Cumulative  Loss  Rate  as of  the  January  1999
     Distribution  Date is less than 4.0%, the Average  Default Rate is equal to
     or greater than 17.10%;

          (h) as of any  Reporting  Date (i)  occurring  before the January 1999
     Distribution  Date,  the Average Net Loss Rate is equal to or greater  than
     12.20%,  (ii) occurring after the January 1999 Distribution Date but before
     the January 2000  Distribution  Date and (x) if the Cumulative Loss Rate as
     of the January 1999 Distribution Date is equal to or greater than 4.0%, the
     Average Net Loss Rate is equal to or greater

                                      -51-

<PAGE>




     than  12.20%  or (y) if the  Cumulative  Loss Rate as of the  January  1999
     Distribution  Date is less than 4.0%, the Average Net Loss Rate is equal to
     or greater than 11.30% and (iii)  occurring  subsequent to the January 2000
     Distribution  Date and (x) if the  Cumulative  Loss Rate as of the  January
     1999  Distribution  Date is equal to or greater than 4.0%,  the Average Net
     Loss Rate is equal to or greater than 9.20% or (y) if the  Cumulative  Loss
     Rate as of the  January  1999  Distribution  Date is less  than  4.0%,  the
     Average Net Loss Rate is equal to or greater than 8.30%.

          (i) the Trust becomes  taxable as an association  (or publicly  traded
     partnership)  taxable as a  corporation  for  Federal  or state  income tax
     purposes;

          (j) the occurrence of a Servicer  Termination Event under the Sale and
     Servicing Agreement;

          (k) the  occurrence  of an "Event of Default"  under and as defined in
     any  Insurance  and  Indemnity  Agreement  or similar  agreement  among (x)
     Financial  Security  and (y) NAFI  and/or the  Transferor  and/or any other
     Affiliate of NAFI, entered into with respect to another Series.

          (l) any default in the  observance or  performance  of any covenant or
     agreement of the Trust made in the  Indenture  (other than a default in the
     payment of the  interest  or  principal  of any  Security  when due) or any
     representation  or  warranty of the Trust made in the  Indenture  or in any
     certificate or other writing  delivered  pursuant  thereto or in connection
     therewith  proving to have been incorrect in any material respect as of the
     time when the same shall have been made, and such default shall continue or
     not be cured,  or the  circumstance  or  condition in respect of which such
     misrepresentation  or warranty was incorrect shall not have been eliminated
     or  otherwise  cured,  for a period of 30 days after  there shall have been
     given,  by  registered  or  certified  mail,  to the  Trust,  NAFI  and the
     Indenture Trustee by Financial  Security,  a written notice specifying such
     default or  incorrect  representation  or warranty  and  requiring it to be
     remedied;

          (m) [reserved];

          (n) the failure to file in the  appropriate  jurisdictions  any of the
     financing  statements  described in Section 2.01(q),  2.04(r) or 2.05(m) by
     the Date of Issuance or if a filing service is used, the failure to deliver
     any of the financing  statements  described in Section 2.01(q),  2.04(r) or
     2.05(m) by the Date of Issuance to such filing

                                      -52-

<PAGE>




     service for prompt filing in the appropriate jurisdictions; and

          (o) the Notes not being  treated  as debt for  federal  or  applicable
     state  income  tax  purposes  and such  characterization  having a material
     adverse  effect on the  Trust,  the  holders  of the  Notes,  or  Financial
     Security.

     Section 5.2.  Remedies;  Waivers.  (a) Upon the  occurrence  of an Event of
Default,  Financial  Security  may  exercise  any one or more of the  rights and
remedies set forth below:

               (i) declare  the Premium  Supplement  to be  immediately  due and
          payable,  and the same shall thereupon be immediately due and payable,
          whether or not  Financial  Security  shall have  declared an "Event of
          Default" or shall have  exercised,  or be entitled  to  exercise,  any
          other rights or remedies hereunder;

               (ii)  exercise  any  rights  and  remedies  available  under  the
          Transaction  Documents  in its own  capacity or in its capacity as the
          Controlling Party under the Transaction Documents,  including, without
          limitation,  its right to  accelerate  the  Securities or to terminate
          NAFI as Servicer and to appoint a substitute servicer; or

               (iii)  take  whatever  action  at law  or in  equity  may  appear
          necessary or desirable in its judgment to enforce  performance  of any
          obligation of the Trust,  the Transferor or NAFI under the Transaction
          Documents.

          (b) Unless otherwise  expressly  provided,  no remedy herein conferred
     upon or reserved is intended to be exclusive of any other available remedy,
     but each  remedy  shall be  cumulative  and shall be in  addition  to other
     remedies  given under the  Transaction  Documents  or existing at law or in
     equity.  No delay or failure to exercise any right or power  accruing under
     any  Transaction  Document  upon the  occurrence of any Event of Default or
     otherwise  shall impair any such right or power or shall be construed to be
     a waiver  thereof,  but any such right and power may be exercised from time
     to time and as  often  as may be  deemed  expedient.  In  order to  entitle
     Financial Security to exercise any remedy reserved to Financial Security in
     this Article, it shall not be necessary to give any notice, other than such
     notice as may be expressly required in this Article.

          (c) If any  proceeding  has been  commenced  to  enforce  any right or
     remedy  under  this  Insurance  Agreement  and  such  proceeding  has  been
     discontinued or abandoned for any reason, or has been determined  adversely
     to  Financial  Security,  then and in every  such case the  parties  hereto
     shall, subject to any

                                      -53-

<PAGE>




     determination  in such proceeding,  be restored to their respective  former
     positions hereunder, and, thereafter,  all rights and remedies of Financial
     Security shall continue as though no such proceeding had been instituted.

          (d) Financial  Security  shall have the right,  to be exercised in its
     complete discretion, to waive any covenant,  Default or Event of Default by
     a writing  setting  forth the terms,  conditions  and extent of such waiver
     signed by Financial Security and delivered to the Trust, the Transferor and
     NAFI.  Any such  waiver may only be effected  in writing  duly  executed by
     Financial  Security,  and no other  course of conduct  shall  constitute  a
     waiver of any provision hereof.  Unless such writing expressly  provides to
     the contrary, any waiver so granted shall extend only to the specific event
     or occurrence so waived and not to any other similar event or occurrence.


                                   ARTICLE VI.

                                  MISCELLANEOUS

          Section 6.1. Amendments, Etc. This Insurance Agreement may be amended,
     modified or terminated  only by written  instrument or written  instruments
     signed by the parties  hereto.  No act or course of dealing shall be deemed
     to constitute an amendment, modification or termination hereof.

          Section 6.2. Notices. All demands, notices and other communications to
     be given hereunder  shall be in writing  (except as otherwise  specifically
     provided  herein)  and  shall be mailed by  registered  mail or  personally
     delivered or telecopied to the recipient as follows:

      (a)   To Financial Security:        Financial Security Assurance Inc.
                                          350 Park Avenue
                                          New York, NY 10022
                                          Attention: Surveillance Department
                                          Re:  National Auto Finance 1998-1
                                          Trust, 5.88% Automobile Receivables
                                          Backed Notes
                                          Confirmation: (212) 826-0100
                                          Telecopy Nos.: (212) 339-3518,
                                          (212) 339-3529

               (in each case in which notice or other communication to Financial
               Security refers to an Event of Default,  a claim on the Policy or
               with respect to which  failure on the part of Financial  Security
               to respond shall be deemed to

                                      -54-

<PAGE>




               constitute  consent or acceptance,  then a copy of such notice or
               other communication  should also be sent to the attention of each
               of the General Counsel and the Head-Financial  Guaranty Group and
               shall be marked to indicate "URGENT MATERIAL ENCLOSED.")

      (b)   To the Transferor:            National Financial Auto Funding
                                            Trust
                                          c/o Chase Manhattan Bank Delaware
                                          1201 Market Street
                                          Wilmington, Delaware  19801

                                          Attention:  Corporate Trust
                                            Administration
                                          Telecopy No:  (302) 984-4903
                                          Confirmation: (302) 428-3375

            with a copy to:               Chase Manhattan Bank Delaware
                                          c/o The Chase Manhattan Bank, N.A.
                                          4 Chase Metrotech Center
                                          Brooklyn, New York  11242

                                          Attention:  Corporate Trust
                                            Administration
                                          Telecopy No:  (718) 242-3529
                                          Confirmation: (718) 242-7283

      (c)   To NAFI:                      National Auto Finance Company, Inc.
                                          One Park Place (Suite 200)
                                          621 N.W. 53rd Street
                                          Boca Raton, Florida  33487

                                          Attention:  President
                                          Telecopy No:  (800) 787-6232
                                          Confirmation: (407) 997-2747

      (d)   To the Trust:                 National Auto Finance 1998-1 Trust
                                          c/o Wilmington Trust Company
                                          Rodney Square North
                                          1100 North Market Street
                                          Wilmington, DE  19890

                                          Attention:  Corporate Trust
                                            Administration
                                          Telecopy No: (302) 651-8882
                                          Confirmation: (302) 651-1000


                                      -55-

<PAGE>




     A party may specify an  additional  or  different  address or  addresses by
writing  mailed or delivered to the other party as  aforesaid.  All such notices
and other communications shall be effective upon receipt.

     Section 6.3.  Payment  Procedure.  In the event of any payment by Financial
Security for which it is entitled to be  reimbursed or  indemnified  as provided
above,  each of the Trust,  the Transferor and NAFI agrees to accept the voucher
or other  evidence of payment as prima facie  evidence of the propriety  thereof
and the  liability  therefor to Financial  Security.  All payments to be made to
Financial  Security  under this Insurance  Agreement  shall be made to Financial
Security  in lawful  currency  of the United  States of  America in  immediately
available funds to the account number provided in the Premium Letter before 1:00
p.m.  (New York,  New York time) on the date when due or as  Financial  Security
shall otherwise  direct by written notice to the Trust, the Transferor and NAFI.
In the  event  that  the  date  of any  payment  to  Financial  Security  or the
expiration of any time period  hereunder occurs on a day which is not a Business
Day,  then such payment or  expiration  of time period shall be made or occur on
the next  succeeding  Business  Day with the same  force  and  effect as if such
payment  was made or time  period  expired on the  scheduled  date of payment or
expiration date.  Payments to be made to Financial Security under this Insurance
Agreement  shall bear interest at the Late Payment Rate from the date due to the
date paid.

     Section  6.4.  Confidentiality.   Any  information  obtained  by  Financial
Security  pursuant to this  Insurance  Agreement  shall be held in confidence by
Financial  Security  unless (i) such  information  has become  available  to the
public other than as a result of a disclosure by or through Financial  Security,
(ii) such information was available to Financial  Security on a  nonconfidential
basis prior to its disclosure to Financial Security  hereunder,  (iii) Financial
Security shall be required in connection with any legal or regulatory proceeding
to  disclose  such  information,   or  (iv)  Financial  Security,  in  its  sole
discretion,  deems it  necessary  to  disclose  such  information  to the Rating
Agencies;  provided, that, in any such instance, Financial Security will use its
best efforts to notify the Trust,  the  Transferor  or NAFI of its  intention to
make any such disclosure prior to making any such disclosure and, in the case of
disclosure  to a Rating  Agency,  Financial  Security  shall  notify such Rating
Agency that such  information is  confidential  and should be treated as such by
such Rating Agency.

     Section  6.5.  Severability.  In the  event  that  any  provision  of  this
Insurance  Agreement  shall be held  invalid  or  unenforceable  by any court of
competent  jurisdiction,  the parties  hereto agree that such holding  shall not
invalidate or render

                                      -56-

<PAGE>




unenforceable any other provision hereof.  The parties hereto further agree that
the holding by any court of competent  jurisdiction  that any remedy  pursued by
any party hereto is unavailable or unenforceable shall not affect in any way the
ability of such party to pursue any other remedy available to it.

     Section 6.6.  Governing Law. THIS INSURANCE  AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

     Section  6.7.  Consent  to  Jurisdiction.  (a) THE  PARTIES  HERETO  HEREBY
IRREVOCABLY  SUBMIT TO THE  JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF NEW YORK AND ANY COURT IN THE STATE OF NEW YORK LOCATED
IN THE CITY AND COUNTY OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN
ANY ACTION,  SUIT OR PROCEEDING  BROUGHT AGAINST IT AND TO OR IN CONNECTION WITH
ANY OF THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS  CONTEMPLATED THEREUNDER OR
FOR  RECOGNITION OR  ENFORCEMENT OF ANY JUDGMENT,  AND THE PARTIES HERETO HEREBY
IRREVOCABLY  AND  UNCONDITIONALLY  AGREE  THAT ALL CLAIMS IN RESPECT OF ANY SUCH
ACTION OR PROCEEDING MAY BE HEARD OR DETERMINED IN SUCH NEW YORK STATE COURT OR,
TO THE EXTENT  PERMITTED BY LAW, IN SUCH FEDERAL COURT. THE PARTIES HERETO AGREE
THAT A FINAL JUDGMENT IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE
AND MAY BE ENFORCED  IN OTHER  JURISDICTIONS  BY SUIT ON THE  JUDGMENT OR IN ANY
OTHER MANNER  PROVIDED BY LAW. TO THE EXTENT  PERMITTED BY  APPLICABLE  LAW, THE
PARTIES  HERETO  HEREBY  WAIVE AND AGREE  NOT TO ASSERT BY WAY OF  MOTION,  AS A
DEFENSE OR OTHERWISE IN ANY SUCH SUIT,  ACTION OR PROCEEDING,  ANY CLAIM THAT IT
IS NOT PERSONALLY  SUBJECT TO THE  JURISDICTION  OF SUCH COURTS,  THAT THE SUIT,
ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT  FORUM, THAT THE VENUE OF THE
SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THE TRANSACTION  DOCUMENTS OR THE
SUBJECT MATTER THEREOF MAY NOT BE LITIGATED IN OR BY SUCH COURTS.

     (b) To the extent permitted by applicable law, the parties hereto shall not
seek and hereby  waive the right to any review of the judgment of any such court
by any court of any other  nation or  jurisdiction  which may be called  upon to
grant an enforcement of such judgment.

     (c) Each of the Trust, the Transferor and NAFI hereby irrevocably  appoints
and designates CT Corporation System, whose address is 1633 Broadway,  New York,
New York 10019, as its true and lawful  attorney and duly  authorized  agent for
acceptance of service of legal  process.  Each of the Trust,  the Transferor and
NAFI agrees that  service of such  process  upon such  Person  shall  constitute
personal service of such process upon it.

     (d) Nothing  contained in this  Insurance  Agreement  shall limit or affect
Financial Security's right to serve process in

                                      -57-

<PAGE>




any other manner permitted by law or to start legal proceedings  relating to any
of the Transaction  Documents  against the Trust,  the Transferor or NAFI or its
respective property in the courts of any jurisdiction.

     Section 6.8.  Consent of Financial  Security.  In the event that  Financial
Security's  consent is  required  under any of the  Transaction  Documents,  the
determination  whether  to  grant  or  withhold  such  consent  shall be made by
Financial  Security in its sole discretion  without any implied duty towards any
other Person, except as otherwise expressly provided therein.

     Section 6.9.  Counterparts.  This  Insurance  Agreement  may be executed in
counterparts by the parties hereto,  and all such counterparts  shall constitute
one and the same instrument.

     Section 6.10. Trial by Jury Waived. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT  PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION  ARISING  DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION  WITH
ANY OF THE  TRANSACTION  DOCUMENTS  OR  ANY  OF  THE  TRANSACTIONS  CONTEMPLATED
THEREUNDER.  EACH PARTY HERETO (A) CERTIFIES  THAT NO  REPRESENTATIVE,  AGENT OR
ATTORNEY OF ANY PARTY HERETO HAS  REPRESENTED,  EXPRESSLY OR OTHERWISE,  THAT IT
WOULD NOT, IN THE EVENT OF LITIGATION,  SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B)  ACKNOWLEDGES  THAT IT HAS  BEEN  INDUCED  TO  ENTER  INTO  THE  TRANSACTION
DOCUMENTS TO WHICH IT IS A PARTY BY, AMONG OTHER THINGS, THIS WAIVER.

     Section 6.11. Limited Liability. No recourse under any Transaction Document
shall be had against,  and no personal  liability  shall attach to, any officer,
employee,  director,  Affiliate or shareholder of any party hereto,  as such, by
the  enforcement of any assessment or by any legal or equitable  proceeding,  by
virtue  of any  statute  or  otherwise  in  respect  of  any of the  Transaction
Documents,  the  Securities  or  the  Policy,  it  being  expressly  agreed  and
understood that each  Transaction  Document is solely a corporate  obligation of
each party hereto, and that any and all personal liability, either at common law
or in equity,  or by statute or constitution,  of every such officer,  employee,
director,  Affiliate  or  shareholder  for  breaches by any party  hereto of any
obligations  under any  Transaction  Document  is hereby  expressly  waived as a
condition  of and in  consideration  for  the  execution  and  delivery  of this
Insurance Agreement.

     Section 6.12.  Servicing Transfer;  Termination of Sub-Servicer.  Financial
Security  hereby  acknowledges  that  (i) it has  been  present  at one or  more
meetings with NAFI at which the establishment by NAFI of a servicing center, the
transfer to NAFI of  servicing  functions  previously  performed by OFSA and the
termination of OFSA as Sub-Servicer were discussed, (ii) NAFI has

                                      -58-

<PAGE>




assumed certain servicing functions previously performed by OFSA pursuant to the
Amended  and  Restated  Servicing  Agreement,  dated as of December 5, 1994 (the
"Servicing Agreement"), between OFSA (as assignee of World Omni Financial Corp.)
and NAFI (as successor to National Auto Finance  Company  L.P.),  and (iii) NAFI
has taken  significant  steps and entered into certain  material  commitments in
furtherance of the  establishment  of the servicing center and the assumption by
NAFI of all  servicing  functions  previously  or  currently  performed  by OFSA
pursuant to the Servicing Agreement.  NAFI hereby covenants to provide Financial
Security with prior  notification of the occurrence of any event or events that,
individually  or the  aggregate,  constitute  a material  transfer of  servicing
functions from OFSA to NAFI. In addition, NAFI shall, prior to the effectiveness
of the  termination  of OFSA as  Sub-Servicer,  obtain  the  written  consent of
Financial Security to such termination,  which consent shall not be unreasonably
withheld.

     Section 6.13.  Entire  Agreement.  This  Insurance  Agreement,  the Premium
Letter,  the  Inducement  Letter and the  Policy set forth the entire  agreement
between  the  parties  with  respect to the  subject  matter  thereof,  and this
Insurance Agreement  supersedes and replaces any agreement or understanding that
may have existed between the parties prior to the date hereof in respect of such
subject matter.


                                      -59-

<PAGE>




     IN WITNESS  WHEREOF,  the parties  hereto have duly  executed and delivered
this Insurance Agreement, all as of the day and year first above written.

                                       FINANCIAL SECURITY ASSURANCE INC.


                                       By:
                                          Name:
                                          Title:


                                       NATIONAL AUTO FINANCE 1998-1
                                        TRUST


                                       By:
                                          Name:
                                          Title:                    of
                                         Wilmington Trust Company, not
                                         in its individual capacity, but
                                         solely in its capacity as owner
                                         trustee for National Auto
                                         Finance 1998-1 Trust


                                       NATIONAL FINANCIAL AUTO FUNDING
                                         TRUST


                                       By:
                                          Name:
                                          Title:                       of
                                         Chase Manhattan Bank Delaware,
                                         not in its individual capacity, but
                                         solely in its capacity as trustee for
                                         National Financial Auto Funding Trust


                                       NATIONAL AUTO FINANCE COMPANY, INC.


                                       By:
                                          Name:
                                          Title:




<PAGE>




                                   APPENDIX I

                                   DEFINITIONS


     "Accumulated Funding Deficiency" has the meaning provided in Section 412 of
the Code and Section 302 of ERISA, whether or not waived.

     "Affiliate"  means,  as to any Person,  any other Person that,  directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person  within the meaning of control  under  Section 15 of the  Securities
Act.

     "Assignment Agreement" means the Assignment Agreement, dated as of December
15,  1997,  between the Master  Trust and  Funding  Trust II, as the same may be
amended,  amended and restated,  supplemented or otherwise modified from time to
time in accordance with the terms thereof.

     "Business  Day" means any day other than (a) a Saturday  or Sunday or (b) a
day on which banking institutions in the City of New York, Wilmington, Delaware,
Chicago,  Illinois or the State of Florida are authorized or obligated by law or
executive order to be closed.

     "Certificate"  means a  Certificate  of  Trust  (as  defined  in the  Trust
Agreement).

     "Code"  means the  Internal  Revenue  Code of 1986,  including,  unless the
context otherwise  requires,  the rules and regulations  thereunder,  as amended
from time to time.

     "Collateral" has the meaning specified in the Indenture.

     "Commission" means the Securities and Exchange Commission.

     "Commonly  Controlled  Entity"  means,  with  respect  to  the  Trust,  the
Transferor  or NAFI,  as the  case  may be,  and  each  entity,  whether  or not
incorporated,  which  is  affiliated  with the  Trust,  the  Transferor  or NAFI
pursuant to Section 414(b), (c), (m) or (o) of the Code.

     "Conveyance"  has the meaning  specified on the  Purchase and  Contribution
Agreement.

     "Custodian  Agreement" means the Custodial  Agreement,  dated as of January
20,  1998,  between  NAFI  and Omni  Financial  Services  of  America,  Inc.  as
custodian, as the same may be amended,

                                   Appendix I
                                        1

<PAGE>




amended and restated,  supplemented  or otherwise  modified from time to time in
accordance with the terms thereof.

     "Date of  Issuance"  means  the date on  which  the  Policy  is  issued  as
specified therein.

     "Default" means any event which results, or which with the giving of notice
or the lapse of time or both would result, in an Event of Default.

     "ERISA"  means  the  Employee  Retirement  Income  Security  Act  of  1974,
including,  unless the context  otherwise  requires,  the rules and  regulations
thereunder, as amended from time to time.

     "Event of Default" means any event of default  specified in Section 5.01 of
this Insurance Agreement.

     "Expiration  Date"  means  the  final  date of the Term of the  Policy,  as
specified in the Policy.

     "Financial  Security" means Financial  Security  Assurance Inc., a New York
stock insurance company, its successors and assigns.

     "Financial  Security  Information"  has the  meaning  provided  in Sections
2.01(i) and 2.04(j) of this Insurance Agreement.

     "Financial  Statements"  means with respect to NAFI and the Transferor,  as
the case may be, the balance sheet as of December 31, 1996 and the statements of
income,  retained earnings and cash flows for the 12-month period then ended and
the  notes  thereto  and the  balance  sheet as of  September  30,  1997 and the
statement of income,  retained earnings and cash flows for the three months then
ended and the notes thereto.

     "Fiscal Agent" means the Fiscal Agent, if any,  designated  pursuant to the
terms of the Policy.

     "Funding  Trust II"  means  National  Financial  Auto  Funding  Trust II, a
business trust formed by NAFI under the laws of the State of Delaware.

     "Indemnification Agreement" means the Indemnification Agreement dated as of
January 20, 1998, among Financial Security,  the Transferor and the Underwriter,
as the same may be amended,  amended and  restated,  supplemented  or  otherwise
modified from time to time in accordance with the terms thereof.

     "Indenture"  means the  Indenture,  dated as of December 15, 1997,  between
National Auto Finance 1998-1 Trust and Harris Trust

                                   Appendix I
                                        2

<PAGE>




and Savings Bank, as Indenture  Trustee and Trust Collateral  Agent, as the same
may be amended,  amended and restated,  supplemented or otherwise  modified from
time to time in accordance with the terms thereof.

     "Indenture  Trustee"  means  Harris  Trust and  Savings  Bank,  an Illinois
banking corporation, as indenture trustee under the Indenture, and any successor
thereto as indenture trustee under the Indenture.

     "Inducement Letter" means that letter dated November 21, 1995, from NAFI to
Financial Security.

     "Insurance Agreement" means this Insurance and Indemnity Agreement dated as
of January 20, 1998,  among Financial  Security,  the Trust,  the Transferor and
NAFI,  as the  same  may be  amended,  amended  and  restated,  supplemented  or
otherwise modified from time to time in accordance with the terms hereof.

     "Insurance  Agreement  Indenture  Cross  Default" means an Event of Default
specified  in  clauses  (a),  (e),  (i),  (l)  and (o) of  Section  5.01 of this
Insurance Agreement.

     "Investment  Company  Act"  means  the  Investment  Company  Act  of  1940,
including,  unless the context  otherwise  requires,  the rules and  regulations
thereunder, as amended from time to time.

     "IRS" means the Internal Revenue Service.

     "Late  Payment  Rate"  means the  lesser of (a) the  greater of (i) the per
annum rate of interest,  publicly announced from time to time by Chase Manhattan
Bank at its  principal  office  in the City of New  York,  as its  prime or base
lending  rate (any change in such rate of interest to be  effective  on the date
such change is  announced  by Chase  Manhattan  Bank) plus 3%, and (ii) the then
applicable  highest rate of interest on the  Securities and (b) the maximum rate
permissible  under applicable usury or similar laws limiting interest rates. The
Late  Payment  Rate shall be computed on the basis of the actual  number of days
elapsed over 360 days.

     "Lien"  means,  as  applied  to the  property  or assets  (or the income or
profits therefrom) of any Person, in each case whether the same is consensual or
nonconsensual  or  arises  by  contract,  operation  of law,  legal  process  or
otherwise:   (a)  any  mortgage,  lien,  pledge,   attachment,   charge,  lease,
conditional sale or other title retention agreement,  or other security interest
or encumbrance  of any kind or (b) any  arrangement,  express or implied,  under
which  such  property  or  assets  are  transferred,  sequestered  or  otherwise
identified for the purpose of subjecting

                                   Appendix I
                                        3

<PAGE>




or making available the same for the payment of debt or performance of any other
obligation  in priority to the payment of the  general,  unsecured  creditors of
such Person.

     "Master Trust" means National  Financial Auto  Receivables  Master Trust, a
trust formed by the Transferor under the laws of the State of New York.

     "Material  Adverse Change" means,  (a) in respect of any Person, a material
adverse change in (i) the business,  financial condition,  results of operations
or properties of such Person or any of its  Subsidiaries or Affiliates,  or (ii)
the  ability  of  such  Person  to  perform  its  obligations  under  any of the
Transaction  Documents to which it is a party, (b) in respect of any Receivable,
a material  adverse change in (i) the value or marketability of such Receivable,
or (ii) the  probability  that amounts now or  hereafter  due in respect of such
Receivable  will be  collected on a timely basis or (c) the ability of Financial
Security or the Trust to realize the benefits of the security afforded under the
Transaction Documents.

     "Moody's" means Moody's Investors  Service,  Inc., a Delaware  corporation,
and any  successor  thereto,  and, if such  corporation  shall for any reason no
longer perform the functions of a securities  rating agency,  "Moody's" shall be
deemed to refer to any other nationally  recognized  rating agency designated by
Financial Security.

     "Multiemployer  Plan"  means a  multiemployer  plan  (within the meaning of
Section  4001(a)(3) of ERISA) in respect of which a Commonly  Controlled  Entity
makes contributions or has liability.

     "NAFI" means National Auto Finance Company, Inc., a Delaware corporation.

     "National Auto Finance 1995-1 Trust" means the National Auto Finance 1995-1
Trust.

     "National Auto Finance 1996-1 Trust" means the National Auto Finance 1996-1
Trust.

     "National Auto Finance 1997-1 Trust" means the National Auto Finance 1997-1
Trust

     "Notice  of  Claim"  means a Notice of Claim  and  Certificate  in the form
attached as Exhibit A to Endorsement No. 1 to the Policy.


                                   Appendix I
                                        4

<PAGE>




     "Offering Document" means the Prospectus and any other offering document of
the Transferor or an Affiliate  thereof in respect of the Securities  that makes
reference to the Policy.

     "OFSA"  means  Omni  Financial   Services  of  America,   Inc.,  a  Florida
corporation.

     "Other  Trust  Property"  means the Trust  Property  and the  property  and
proceeds  conveyed by the Transferor to the Trust pursuant to Section 2.2 of the
Sale and Security Agreement and any Subsequent Transfer Agreement,  in each case
exclusive of the Policy.

     "Owner Trust Estate" has the meaning provided in the Trust Agreement.

     "Owner Trustee" means Wilmington Trust Company,  as owner trustee under the
Trust  Agreement,  and any  successor  thereto as owner  trustee under the Trust
Agreement.

     "PBGC" means the Pension  Benefit  Guaranty  Corporation  or any  successor
agency,  corporation or instrumentality of the United States to which the duties
and powers of the Pension Benefit Guaranty Corporation are transferred.

     "Person" means an individual,  joint stock company,  trust,  unincorporated
association,  joint venture, corporation,  business or owner trust, partnership,
limited liability company,  limited liability  partnership or other organization
or entity (whether governmental or private).

     "Plan" means any pension plan (other than a Multiemployer  Plan) covered by
Title IV of ERISA,  which is  maintained by a Commonly  Controlled  Entity or in
respect of which a Commonly Controlled Entity has liability.

     "Policy"  means the  financial  guaranty  insurance  policy,  including any
endorsements  thereto,   issued  by  Financial  Security  with  respect  to  the
Securities,  substantially  in the form  attached  as Annex I to this  Insurance
Agreement.

     "Premium" means the premium payable in accordance with Section 3.02 of this
Insurance Agreement and the Premium Supplement, if any.

     "Premium  Letter"  means the side  letter  dated  January 20,  1998,  among
Financial  Security,  NAFI,  the Transferor  and the Trust  Collateral  Agent in
respect of the premium payable in consideration of the issuance of the Policy.


                                   Appendix I
                                        5

<PAGE>




     "Premium  Supplement"  means a non-refundable  premium,  in addition to the
premium  payable in accordance  with Section 3.02 of this  Insurance  Agreement,
accruing to Financial Security in monthly installments commencing on the Premium
Supplement  Commencement Date and on each monthly anniversary in accordance with
the terms set forth in the  Premium  Letter and payable  upon and in  accordance
with a declaration under Section 5.02 of this Insurance Agreement.

     "Premium  Supplement  Commencement Date" means the date of occurrence of an
Event of Default whether or not an "Event of Default" shall have been declared.

     "Prospectus"  has the meaning provided in Section 2.04(v) of this Insurance
Agreement.

     "Provided  Documents"  means the  Transaction  Documents and any documents,
agreements,   instruments,   schedules,  certificates,   statements,  cash  flow
schedules, number runs or other writings or data furnished to Financial Security
by or on behalf of the Trust, the Transferor or NAFI with respect to itself, its
Subsidiaries or Affiliates, the Receivables or the Transaction.

     "Purchase and  Contribution  Agreement" means the Purchase and Contribution
Agreement dated as of December 15, 1997, between NAFI and the Transferor, as the
same may be amended,  supplemented  or otherwise  modified  from time to time in
accordance with the terms thereof.

     "Receivables" has the meaning provided in the Sale and Servicing Agreement.

     "Registration  Statement"  has the meaning  provided in Section  2.04(v) of
this Insurance Agreement.

     "Reportable  Event" means any of the events set forth in Section 4043(b) of
ERISA or the regulations thereunder.

     "Restrictions  on  Transferability"  means,  as applied to the  property or
assets (or the income or profits  therefrom) of any Person, in each case whether
the same is consensual or nonconsensual or arises by contract, operation of law,
legal process or otherwise,  any material  condition to, or restriction  on, the
ability of such Person or any transferee therefrom to sell, assign,  transfer or
otherwise  liquidate such property or assets in a commercially  reasonable  time
and  manner or which  would  otherwise  materially  deprive  such  Person or any
transferee therefrom of the benefits of ownership of such property or assets.


                                   Appendix I
                                        6

<PAGE>




     "Sale Agreement"  means the Sale Agreement,  dated as of December 15, 1997,
between the Transferor and Funding Trust II, as the same may be amended, amended
and restated, supplemented or otherwise modified from time to time in accordance
with the terms thereof.

     "Sale and  Servicing  Agreement"  means the Sale and  Servicing  Agreement,
dated as of December 15, 1997,  among the Trust,  the Transferor,  the Servicer,
the Backup Servicer and the Trust Collateral  Agent, as the same may be amended,
amended and restated,  supplemented  or otherwise  modified from time to time in
accordance with the terms thereof.

     "Securities"  means the  $85,200,000 of National Auto Finance 1998-1 Trust,
5.88% Automobile Receivables-Backed Notes issued pursuant to the Indenture.

     "Securities  Act" means the Securities Act of 1933,  including,  unless the
context otherwise  requires,  the rules and regulations  thereunder,  as amended
from time to time.

     "Securities  Exchange  Act"  means  the  Securities  Exchange  Act of 1934,
including,  unless the context  otherwise  requires,  the rules and  regulations
thereunder, as amended from time to time.

     "Securitization  Agreement" has the meaning  provided in paragraph D of the
Introductory Statements to this Insurance Agreement.

     "Series  1998-1" means the Series issued on the date hereof pursuant to the
Indenture.

     "Series of  Certificates" or "Series" means Series 1998-1 or any, or as the
context may require, all, additional series of securities,  certificates,  notes
or other  obligations  issued or  arising as  described  in  paragraph  D of the
Introductory Statements hereto.

     "Servicer Termination Side Letter" means the letter from Financial Security
to the Trust  Collateral  Agent, the Transferor and NAFI dated as of January 20,
1998, with regard to the renewal term of the Servicer.

     "S&P" means Standard & Poor's Ratings Group, division of McGraw Hill, Inc.,
and any  successor  thereto,  and, if such entity shall for any reason no longer
perform the functions of a securities  rating  agency,  "S&P" shall be deemed to
refer to any other nationally  recognized  rating agency designated by Financial
Security.


                                   Appendix I
                                        7

<PAGE>




     "Special  Event" means the occurrence of any one of the  following:  (a) an
Event of Default under this Insurance  Agreement has occurred and is continuing,
(b) a Trigger Event has occurred and is continuing,  (c) any legal proceeding or
binding  arbitration  is instituted  with respect to the  Transaction or (d) any
governmental or administrative investigation, action or proceeding is instituted
that would, if adversely decided, result in a Material Adverse Change in respect
of the Trust, NAFI, the Transferor or the Receivables.

     "Spread Account Agreement" means the Master Spread Account Agreement, dated
as of January 20, 1998 among the Transferor,  the Collateral Agent named therein
and Financial  Security,  as the same may be amended,  supplemented or otherwise
modified from time to time in accordance with the terms thereof.

     "Subsidiary"  means,  with respect to any Person (herein referred to as the
"parent"),  any corporation,  partnership,  association or other business entity
(a) of which securities or other ownership interests  representing more than 50%
of the equity or more than 50% of the ordinary  voting power or more than 50% of
the general  partnership  interests are, at the time any  determination is being
made,  owned,  controlled  or held by the parent or (b) that is, at the time any
determination is being made, otherwise controlled,  by the parent or one or more
subsidiaries of the parent or by the parent and one or more  subsidiaries of the
parent.

     "Term of this Agreement" shall be determined as provided in Section 4.01 of
this Insurance Agreement.

     "Term of the Policy"  has the  meaning  provided in the Policy for the term
"Term of this Policy".

     "Transaction"  means  this  transactions  contemplated  by the  Transaction
Documents, including the transactions described in the Offering Document.

     "Transaction  Documents"  means  the  Securities,  the  Certificates,  this
Insurance  Agreement,  the  Lockbox  Agreement,  the  Custodian  Agreement,  the
Indemnification  Agreement, the Sale and Servicing Agreement, the Indenture, the
Premium Letter, any Sub-Servicing Agreement, the Inducement Letter, the Purchase
and Contribution Agreement,  the Sale Agreement,  the Assignment Agreement,  the
Servicer  Termination  Side Letter,  each Subsequent  Transfer  Agreement,  each
Conveyance,  the  Underwriting  Agreement,  the Spread  Account  Agreement,  the
certificate of trust of the Trust and the Trust Agreement.


                                   Appendix I
                                        8

<PAGE>




     "Transferor"  means National Financial Auto Funding Trust, a business trust
formed by NAFI under the laws of the State of Delaware.

     "Trust" means the trust created under the Trust Agreement.

     "Trust Accounts" means the Collection  Account,  the Distribution  Account,
the Note Distribution  Account, the Pre- Funding Account, the Pre-Funding Period
Reserve Account and the Lockbox Account.

     "Trust Agreement" means the Trust Agreement, dated as of December 15, 1997,
between the Transferor  and the Owner Trustee with respect to the Trust,  as the
same may be amended,  amended and restated,  supplemented or otherwise  modified
from time to time in accordance with the terms thereof.

     "Trust  Collateral  Agent" means Harris Trust and Savings Bank, an Illinois
banking corporation,  as trust collateral agent under the Indenture and as trust
collateral agent under the Sale and Servicing Agreement, as applicable,  and any
successor  thereto  as trust  collateral  agent  under  the  Indenture  or trust
collateral agent the Sale and Servicing Agreement, as the case may be.

     "Trust  Indenture  Act" means the Trust  Indenture Act of 1939,  including,
unless the context otherwise requires, the rules and regulations thereunder,  as
amended from time to time.

     "Underfunded Plan" means any Plan that has an Underfunding.

     "Underfunding"  means, with respect to any Plan, the excess, if any, of (a)
the present value of all benefits under the Plan (based on the assumptions  used
to fund the Plan  pursuant  to  Section  412 of the Code) as of the most  recent
valuation  date over (b) the fair market  value of the assets of such Plan as of
such valuation date.

     "Underwriter" means First Union Capital Markets Corp.

     "Underwriting  Agreement"  means  the  Underwriting  Agreement  dated as of
January 15, 1998, by and among the Transferor and the Underwriter,  with respect
to the offer and sale of the Securities, as the same may be amended, amended and
restated,  supplemented  or otherwise  modified  from time to time in accordance
with the terms thereof.

                                   Appendix I
                                        9

<PAGE>




                                   APPENDIX II
                      TO INSURANCE AND INDEMNITY AGREEMENT

                 CONDITIONS PRECEDENT TO ISSUANCE OF THE POLICY


     (a) Payment of Initial  Premium and  Expenses;  Premium  Letter.  Financial
Security shall have been paid, by or on behalf of NAFI, a nonrefundable  Premium
and shall  have been  reimbursed,  by or on behalf of NAFI,  for other  fees and
expenses  identified in Section 3.02 of this  Insurance  Agreement as payable at
closing and Financial  Security shall have received a fully executed copy of the
Premium Letter.

     (b) Transaction Documents. Financial Security shall have received a copy of
each of the Transaction  Documents (other than any Subsequent Transfer Agreement
to be  delivered to Financial  Security on or following  the related  Subsequent
Transfer Date), in form and substance  satisfactory to Financial Security,  duly
authorized,  executed and delivered by each party thereto.  Without limiting the
foregoing,  the provisions of the Sale and Servicing  Agreement  relating to the
payment  to  Financial  Security  of  the  Premium  due on the  Policy  and  the
reimbursement to Financial Security of amounts paid under the Policy shall be in
form and substance acceptable to Financial Security in its sole discretion.

     (c) Certified  Documents and  Resolutions.  Financial  Security  shall have
received a copy of (i) the certificate of trust and the trust agreement for each
of the Trust,  the  Transferor  and Funding  Trust II, (ii) the  certificate  of
incorporation  and by-laws of NAFI,  (iii) the  consent,  if  necessary,  of the
co-trustees and/or holders of beneficial interests of each of the Transferor and
Funding Trust II, and (iv) the resolutions of the Board of Directors of NAFI, in
each case authorizing the issuance of the Securities and the  Certificates,  and
the execution,  delivery and performance by the Trust,  the Transferor,  Funding
Trust  II  and  NAFI,  as  applicable,  of the  Transaction  Documents  and  the
transactions  contemplated  thereby,  certified  by  a  Secretary  or  Assistant
Secretary of the Trust, the Transferor, Funding Trust II and NAFI, as applicable
(which  certificate  shall  state  that  such  certificate  of trust  and  trust
agreement or certificate of incorporation  and by-laws,  as the case may be, are
in full force and effect without modification on the Date of Issuance).

     (d)  Incumbency  Certificate.  Financial  Security  shall  have  received a
certificate of a Secretary or Assistant Secretary of each of the Transferor, the
Owner  Trustee,  the Trust  Collateral  Agent,  the Indenture  Trustee and NAFI,
respectively, certifying

                                   Appendix II
                                        1

<PAGE>




the name and  signatures of the officers of the  Transferor,  the Owner Trustee,
the Trust Collateral  Agent, the Indenture Trustee and NAFI, as the case may be,
authorized  to  execute  and  deliver  the  Transaction  Documents  and that all
consents necessary to execute and deliver such documents have been obtained.

     (e)  Representations and Warranties;  Certificate.  The representations and
warranties of the Trust,  the Transferor  and NAFI in this  Insurance  Agreement
shall be true and correct as of the Date of Issuance with respect to such Person
as if made on the Date of Issuance and Financial  Security shall have received a
certificate of an appropriate  officer of the Owner Trustee,  the Transferor and
NAFI, as the case may be, to that effect.

     (f) Opinions of Counsel. Financial Security shall have received opinions of
counsel  addressed  to  Financial  Security,  Moody's  and S&P in respect of the
Trust, the Owner Trustee, the Indenture Trustee,  the Transferor,  NAFI, Funding
Trust II, the other parties to the Transaction  Documents and the Transaction in
form and substance  satisfactory to Financial Security,  addressing such matters
as Financial Security may reasonably request,  including without limitation, the
items set  forth in  Appendix  A hereto,  and the  counsel  providing  each such
opinion shall have been  instructed by its client to deliver such opinion to the
addressees thereof.

     (g) Approvals, Etc. Financial Security shall have received true and correct
copies of all  approvals,  licenses and  consents,  if any,  including,  without
limitation,  the  approval  of the  co-trustees  of each of the  Transferor  and
Funding Trust II, the holders of beneficial  ownership  interests in each of the
Transferor and Funding Trust II and the board of directors of NAFI,  required in
connection with the Transaction.

     (h) No Litigation, Etc. No suit, action or other proceeding, investigation,
or injunction or final judgment relating thereto, shall be pending or threatened
before any court or  governmental  agency in which it is sought to  restrain  or
prohibit  or to obtain  damages or other  relief in  connection  with any of the
Transaction Documents or the consummation of the Transaction.

     (i)  Legality.  No  statute,  rule,  regulation  or order  shall  have been
enacted,  entered or deemed  applicable  by any  government or  governmental  or
administrative agency or court which would make the transactions contemplated by
any of the Transaction Documents,  illegal or otherwise prevent the consummation
thereof.

     (j)  Satisfaction  of  Conditions  of  the  Underwriting   Agreement.   All
conditions in the Underwriting Agreement to the

                                   Appendix II
                                        2

<PAGE>




Underwriter's  obligation to purchase the Securities (other than the issuance of
the Policy) shall have been satisfied.

     (k)  Issuance  of  Ratings.   Financial   Security   shall  have   received
confirmation that the risk secured by the Policy constitutes an investment grade
risk by S&P and an  insurable  risk by  Moody's  and that the  Securities,  when
issued, will be rated "AAA" by S&P and "Aaa" by Moody's.

     (l)  Maintenance of Receivable  Files;  Filings and  Recordings.  Financial
Security  shall  have  received  evidence  satisfactory  to  it  that:  (i)  the
Receivable  Files  are  being  maintained  by and  held  in the  custody  of the
Custodian  pursuant  to the  Sale  and  Servicing  Agreement  and the  Custodian
Agreement;  (ii) all  filings  necessary  to perfect  the  interest of the Trust
Collateral Agent in the Collateral have been made; and (iii) all taxes, fees and
other changes payable in connection with such filings shall have been paid.

     (m) No Default. No Default or Event of Default shall have occurred.

     (n)  Absence of Liens.  Financial  Security  shall have  received  evidence
satisfactory to it in its sole discretion that all Liens of Funding Trust II and
the Master Trust and  Restrictions  on  Transferability  relating to the Initial
Receivables  transferred  by the Master Trust to Funding Trust II and by Funding
Trust II to the Transferor have been released or removed on or prior to the Date
of Issuance.

     (o)  Additional  Items.  Financial  Security shall have received such other
documents, instruments, approvals or opinions requested by Financial Security as
may be reasonably necessary to effect the Transaction, including but not limited
to evidence satisfactory to Financial Security that all conditions precedent, if
any, in the Transaction Documents have been satisfied.


                                   Appendix II
                                        3

<PAGE>




                                     ANNEX I
                                       TO
                        INSURANCE AND INDEMNITY AGREEMENT


                   FORM OF FINANCIAL GUARANTY INSURANCE POLICY




<PAGE>




                                   APPENDIX A

                               OPINIONS OF COUNSEL


     There shall be delivered to Financial Security, Moody's and S&P opinions of
counsel  satisfactory  in form  and  substance  to  Financial  Security  and its
counsel, including, without limitation, opinions as follows:

     (i) opinions to the effect that the  Securities and the  Certificates  have
been duly issued,  and the  Transaction  Documents  have been duly  executed and
delivered,   and  each  constitutes  legal,   valid  and  binding   obligations,
enforceable in accordance with its respective terms;

     (ii) opinions as to compliance with applicable  securities laws, including,
but not limited to, opinions to the effect that:

          (A) no filing or registration with or notice to or consent,  approval,
     authorization or order of any court or governmental  authority or agency is
     required for the  consummation  of the  Transaction,  except such as may be
     required  and  have  been  obtained  under  the  Securities  Act and  state
     securities or "blue sky" laws;

          (B) the  Registration  Statement is effective under the Securities Act
     and, to the best of  counsel's  knowledge  and  information,  no stop order
     suspending the effectiveness of the Registration  Statement has been issued
     under the Securities Act or proceedings therefor initiated or threatened by
     the Commission;

          (C) none of the  Transferor,  NAFI,  the Trust or the Trust  Estate is
     required to be registered under the Investment Company Act; and

          (D)  none of the  Indenture,  the  Trust  Agreement  or the  Sale  and
     Servicing  Agreement is required to be qualified  under the Trust Indenture
     Act;

     (iii) an opinion to the effect  that (A) the Trust  Collateral  Agent has a
first priority  perfected  security  interest in the Collateral and the proceeds
thereof  (covering  perfection  by  possession  and by  filing  UCC-1  financing
statements)  under the applicable  Uniform  Commercial Code; (B) the Receivables
and the Other Trust Property would not be included as part of the estate of NAFI
or Funding Trust II in the event of any  receivership or insolvency  proceedings
in respect thereof; (C) the contribution of certain of the Receivables and other
property related thereto

                                   Appendix A
                                        1

<PAGE>



by NAFI to the Transferor  pursuant to the Purchase and  Contribution  Agreement
would be characterized by a court of competent jurisdiction as a contribution of
such  Receivables and such other property related thereto and not as a borrowing
by the  Transferor or a  relationship  of joint  ownership,  partnership,  joint
venture or similar arrangement;  and (D) the transfer of the Receivables and the
Other Trust Property would be characterized by a court of competent jurisdiction
as a sale of such  Receivables and Other Trust Property by NAFI or Funding Trust
II to the Transferor,  as applicable,  and not as a borrowing by NAFI or Funding
Trust II, as applicable,  or a  relationship  of joint  ownership,  partnership,
joint venture or similar arrangement; and (E) the assets and liabilities of each
of the Trust and the Transferor  would not be  substantively  consolidated  with
those of NAFI in the  event of any  receivership  or  insolvency  proceeding  in
respect of NAFI;

     (iv) the Collateral  Agent under the Spread Account  Agreement has a valid,
perfected  first priority  perfected  security  interest in the collateral  held
thereunder for the benefit of secured parties thereunder;

     (v) a title and  perfection  opinion with respect to the Financed  Vehicles
from Florida, Georgia and North Carolina;

     (vi) opinions with respect to United States federal tax law and ERISA;

     (vii) general corporate and  enforceability  opinions with respect to NAFI,
the Master Trust,  Funding Trust II, the Transferor,  the Trust,  the Collateral
Agent, the Owner Trustee, the Trust Collateral Agent and the Indenture Trustee;

     (viii) an opinion to the effect that the forms of  Receivables  used comply
with  the  disclosure  requirements  of the  Federal  Truth-in-Lending  Act  and
Regulations Z and B of the Federal Reserve Board; and

     (ix) such other opinions as Financial Security shall request.

                                   Appendix A
                                        2

<PAGE>