EXECUTION COPY






                        INSURANCE AND INDEMNITY AGREEMENT


                                      among


                       FINANCIAL SECURITY ASSURANCE INC.,


                       NATIONAL AUTO FINANCE 1997-1 TRUST,


                      NATIONAL FINANCIAL AUTO FUNDING TRUST


                                       and


                      NATIONAL AUTO FINANCE COMPANY, INC.,



                            Dated as of July 23, 1997




                       National Auto Finance 1997-1 Trust
                    6.35% Automobile Receivables-Backed Notes
                                   $66,891,200

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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................................16
Section 2.05.  Affirmative Covenants of NAFI and
                   the Transferor...........................................25
Section 2.06.  Negative Covenants of NAFI and
                   the Transferor...........................................33
Section 2.07.  Representations and Warranties of NAFI
                     and the Transferor with respect to the
                   Master Trust and Funding Trust II........................36
Section 2.08.  Affirmative Covenants of NAFI and
                   the Transferor with respect to the
                   Master Trust and Funding Trust II........................37
Section 2.09.  Negative Covenants of NAFI and
                   the Transferor with respect to the
                   Master Trust and Funding Trust II........................38

                                  ARTICLE III.

                  THE POLICY; REIMBURSEMENT; INDEMNIFICATION

Section 3.01.  Issuance of the Policy.......................................39
Section 3.02.  Payment of Fees and Premium..................................39
Section 3.03.  Reimbursement Obligation.....................................40
Section 3.04.  Indemnification..............................................42
Section 3.05.  Subrogation..................................................45

                                   ARTICLE IV.

                               FURTHER AGREEMENTS

Section 4.01.  Effective Date; Term of Agreement............................45
Section 4.02.  Obligation Absolute..........................................45
Section 4.03.  Assignments; Reinsurance; Third-Party
                   Rights...................................................47
Section 4.04.  Liability of Financial Security..............................48


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                                                                           Page
                                   ARTICLE V.

                           EVENTS OF DEFAULT; REMEDIES

Section 5.01.  Events of Default............................................48
Section 5.02.  Remedies; Waivers............................................51

                                   ARTICLE VI.

                                  MISCELLANEOUS

Section 6.01.  Amendments, Etc..............................................52
Section 6.02.  Notices......................................................52
Section 6.03.  Payment Procedure............................................53
Section 6.04.  Confidentiality..............................................54
Section 6.05.  Severability.................................................54
Section 6.06.  Governing Law................................................54
Section 6.07.  Consent to Jurisdiction......................................55
Section 6.08.  Consent of Financial Security................................55
Section 6.09.  Counterparts.................................................56
Section 6.10.  Trial by Jury Waived.........................................56
Section 6.11.  Limited Liability............................................56
Section 6.13.  Entire Agreement.............................................57


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-
<PAGE>

                        INSURANCE AND INDEMNITY AGREEMENT


      INSURANCE AND INDEMNITY AGREEMENT dated as of July 23, 1997, by and among
FINANCIAL SECURITY ASSURANCE INC. ("Financial Security"), NATIONAL AUTO FINANCE
1997-1 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.

      B. 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.

      C. 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

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

      D. 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.

      E. 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

                                   DEFINITIONS

      Section 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 1997-1.


                                     ARTICLE

                   REPRESENTATIONS, WARRANTIES AND COVENANTS

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      Section 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:

                  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.

                  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.

              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.

              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,

                    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 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,

                                    -3-
<PAGE>
                    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

                    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.

              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.

              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.

              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.

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

                                    -4-
<PAGE>
      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.

              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.

             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.

                  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 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.


                                    -5-
<PAGE>
                  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.

                  Special Purpose Entity.

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

                   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.

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

              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.

              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.

              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 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

                                    -6-
<PAGE>
      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.

                  Perfection of Liens and Security Interest. On the Closing
      Date, the Lien and security interest in favor of (i) 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, the Note Distribution 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 Trust Collateral
      Agent's first priority Lien on and security interest in the Collateral as
      against any third parties.

                  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 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:

              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

                                    -7-
<PAGE>
      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.

             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:

                    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.

                    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 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

                                    -8-
<PAGE>
            year-end adjustments), and accompanied by the certificate specified
            in Section 2.02(c) hereof.

                       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.

                    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.

                   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.

                   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.

              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:

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

                    to the best of such individual's knowledge,
            no Special Event, Default or Event of Default has

                                    -9-
<PAGE>
            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

                   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).

              Notice of Material Events.  The Trust shall
      promptly inform Financial Security in writing of the
      occurrence of any of the following:

                    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;

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

                    the occurrence of any Default or Special
            Event; or

                    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.

                  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

                                    -10-
<PAGE>
      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.

              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.

              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.

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

              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

                                    -11-
<PAGE>
      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.

              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.

              Special Purpose Entity.

                    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
            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,

                                    -12-
<PAGE>
            purchase orders, contracts, statements and loan applications, will
            be made solely in the name of the Trust.

                    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.

                    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.

                    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.

                    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.

                    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.

                    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.

                    The Trust shall keep its assets and its
            liabilities wholly separate from those of all other

                                    -13-
<PAGE>
            entities, including, but not limited to NAFI, the
            Transferor and their respective Affiliates.

              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.

              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) or
      taxable as a corporation.

              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.

              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.

      Section 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:

                  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.

                                    -14-
<PAGE>
              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.

              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.

                  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.

              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, 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.

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

              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.

              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.


                                    -15-
<PAGE>
              Other Activities.  The Trust shall not:

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

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

              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.

                  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.

      Section 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:

                  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

                                    -16-
<PAGE>
      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.

                  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.

              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.

              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,

                    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, 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,

                    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

                    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

                                    -17-
<PAGE>
            Subsidiaries or Affiliates except as otherwise expressly
            contemplated by the Transaction Documents.

              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.

              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 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.

              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

                                    -18-
<PAGE>
      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.

              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.

              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.

              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.
      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

                                    -19-
<PAGE>
      the Sale and Servicing Agreement is required to be qualified
      under the Trust Indenture Act.

             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.

                  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.

                  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.

                  Special Purpose Entity.

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

                    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 and
            National Auto Finance 1996-1 Trust of a Series, the Transferor is
            not engaged in any business transactions with NAFI or any of its
            Affiliates.

                    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

                                    -20-
<PAGE>
            partnership interests or equity securities or other beneficial
            ownership interests of NAFI or any of its Affiliates.

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

                    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).

                  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 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

                                    -21-
<PAGE>
      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.

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

              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 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

                                    -22-
<PAGE>
      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.

                  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.

                  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 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.

              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

                                    -23-
<PAGE>
      the Securities and the Certificates have been paid or shall have been paid
      at or prior to the Date of Issuance.

              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.

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

                                    -24-
<PAGE>
      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 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 respect to itself, that during the Term of this
Agreement, unless Financial Security shall otherwise expressly consent in
writing:

              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.

              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

                                    -25-
<PAGE>
      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:

                    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.

                    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 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.

                    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

                                    -26-
<PAGE>
            financial statements of NAFI or the Transferor,
            promptly upon receipt thereof.

                    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
            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.


                                    -27-
<PAGE>
                    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 date of
            closing.

                    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.

              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:

                    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;

                    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 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

                    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).


                                    -28-
<PAGE>

              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:

                    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;

                    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;

                    the occurrence of any Default, Event of
            Default or Special Event; or

                    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.

              Further Assurances. Each of NAFI and the Transferor will file or
      cause to be filed 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
      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

                                    -29-
<PAGE>
      Moody's in connection with any review of the Transaction which may be
      undertaken by S&P and Moody's after the date hereof.

              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.

              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.

             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.

              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

                                    -30-
<PAGE>
                  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.

              Special Purpose Entity.

                    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.

                    The Transferor shall maintain records and books of account
            separate from those of NAFI and the 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.

                    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

                                    -31-
<PAGE>
            shall be delivered to Financial Security within two weeks of such
            authorization or meeting, as the case may be.

                    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.

                    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.

                    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.

                    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.

                    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.

              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.

             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.

             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
      Business

                                    -32-
<PAGE>
      Day immediately following 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.

      Section 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:

                  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 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.

              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

                                    -33-
<PAGE>
      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.

              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.

                  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.

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

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

              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.

              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

                                    -34-
<PAGE>
      material portion of its assets to any Person or liquidate or
      dissolve.

              Other Activities.  The Transferor shall not:

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

                    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.

              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 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.

                  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.

              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.

              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

                                    -35-
<PAGE>
      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
      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 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:

              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

                                    -36-
<PAGE>
      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 of all Liens and Restrictions on
      Transferability other than as imposed by the Transaction Documents.

              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 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:

                  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:


                                    -37-
<PAGE>
                    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

                    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.

              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 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.

              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   Negative Covenants of NAFI and the Transferor
with respect to the Master Trust and Funding Trust II.  Each of

                                    -38-
<PAGE>
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:

                  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.

              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).


                                     ARTICLE

                  THE POLICY; REIMBURSEMENT; INDEMNIFICATION

      Section 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   Payment of Fees and Premium.

                  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.

              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.

                  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

                                    -39-
<PAGE>
      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.

                  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.

                  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 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 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

                                    -40-
<PAGE>
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 sum equal to the total of all amounts paid by
      Financial Security under the Policy;

              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;

              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

              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,

                                    -41-
<PAGE>
      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.

      Section   Indemnification.

              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:

                    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;


                                    -42-
<PAGE>
                    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;

                    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";

                    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

                    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 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.

              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

                                    -43-
<PAGE>
      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 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.

              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

                                    -44-
<PAGE>
      relative fault of the Indemnifying Party, on the one hand,
      and the Indemnified Party, on the other hand.

      Section 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

                               FURTHER AGREEMENTS

      Section 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 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 Obligation Absolute. 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:

              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;

              any exchange or release of any other obligations
      hereunder;


                                    -45-
<PAGE>
              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;

              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;

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

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

              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.

        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 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

                                    -46-
<PAGE>
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.

        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   Assignments; Reinsurance; Third-Party Rights.
  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.

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

        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.

        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

                                    -47-
<PAGE>
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 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

                           EVENTS OF DEFAULT; REMEDIES

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

              any demand for payment shall be made under the
      Policy;

              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;

              (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

                                    -48-
<PAGE>
      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;

              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 clause
      (c) above and clauses (m) and (n) below and such failure shall continue
      for a period of 30 days after written notice given to the Trust, the
      Transferor, the Servicer or NAFI, as the case may be;

               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 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;

                  the Average Delinquency Ratio as of any Reporting
      Date shall have been equal to or greater than 11.0%;

              the Average Default Rate as of any Reporting Date (i) occurring
      prior to the July 1999 Distribution Date, is equal to or greater than
      25.0% and (ii) occurring subsequent

                                    -49-
<PAGE>
      to the July 1999 Distribution Date, is equal to or greater
      than 17.0%;

              the Average Net Loss Rate as of any Reporting Date (i) occurring
      on or prior to the July 1999 Distribution Date, is equal to or greater
      than 11.0% and (ii) occurring subsequent to the July 1999 Distribution
      Date, is equal to or greater than 8.0%;

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

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

              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.

              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;

              the failure of NAFI and the Transferor to comply
      with Section 2.05(m) of this Insurance Agreement; and

             the failure to file in the appropriate jurisdictions any of the
      financing statements described in Section 2.01(q) or 2.04(r) by the Date
      of Issuance or Section 2.05(m) within the time frame set forth therein for
      any such filing.


                                    -50-
<PAGE>
        Section Remedies; Waivers. Upon the occurrence of an Event of Default,
Financial Security may exercise any one or more of the rights and remedies set
forth below:

              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;

              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

              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.

        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.

        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
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.

        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,

                                    -51-
<PAGE>
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

                                  MISCELLANEOUS

      Section 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 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:

            To Financial Security:        Financial Security Assurance Inc.
                                          350 Park Avenue
                                          New York, NY 10022
                                          Attention: Surveillance Department
                                          Re:  National Auto Finance 1997-1
                                          Trust, 6.35% 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
                                          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.")

                                    -52-
<PAGE>

            To the Transferor:            National Financial Auto Funding
                                            Trust
                                          c/o Chase Manhattan Bank Delaware
                                          802 Delaware Avenue
                                          Wilmington, Delaware  19801

                                          Attention:  Corporate Trust
                                            Administration
                                          Telecopy No:  (302) 575-5467
                                          Confirmation: (302) 575-5099

            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

            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

            To the Trust:                 National Auto Finance 1997-1 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

      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 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

                                    -53-
<PAGE>
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 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 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 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   Governing Law.  THIS INSURANCE AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK.


                                    -54-
<PAGE>
      Section Consent to Jurisdiction. 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.

        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.

        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.

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

                                    -55-
<PAGE>
sole discretion without any implied duty towards any other Person, except as
otherwise expressly provided therein.

      Section   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 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 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 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 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

                                    -56-
<PAGE>
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 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.


                                    -57-
<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 1997-1
                                        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 1997-1 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 June
29, 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 Custodian Agreement, dated
as of June 29, 1997, between NAFI and Omni Financial Services of
America, Inc. as custodian, as the same may be amended, amended

                                   Appendix I
                                        1
<PAGE>
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 March 31, 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 June 29, 1997, 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 June 29, 1997, between
National Auto Finance 1997-1 Trust and Harris Trust and

                                   Appendix I
                                        2
<PAGE>
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 July 23, 1997, 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) and (l) 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>
r 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.

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

      "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.


                                   Appendix I
                                        4
<PAGE>
      "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 July 23, 1997, 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.

      "Premium Supplement" means a non-refundable premium, in addition to the
premium payable in accordance with Section 3.02 of this Insurance Agreement,
payable to Financial Security in monthly installments commencing on the first
Distribution Date

                                   Appendix I
                                        5
<PAGE>
following the Premium Supplement Commencement Date and on each Distribution Date
thereafter in accordance with the terms set forth in the Premium Letter.

      "Premium Supplement Commencement Date" means the date of occurrence of the
Event of Default in respect of which the Premium Supplement shall have been
declared due and payable in accordance with Section 5.02 of this Insurance
Agreement.

      "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 June 29, 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.

      "Sale Agreement" means the Sale Agreement, dated as of June 29, 1997,
between the Transferor and Funding Trust II, as the same may be amended, amended
and restated, supplemented or

                                   Appendix I
                                        6
<PAGE>
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 June 29, 1997, among the Trust, the Transferor, the 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 $66,891,200 of National Auto Finance 1997-1 Trust,
6.35% 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 1997-1" means the Series issued on the date hereof
pursuant to the Indenture.

      "Series of Certificates" or "Series" means Series 1997-1 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 July
23, 1997, 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.

      "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

                                   Appendix I
                                        7
<PAGE>
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 July 23, 1997 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.

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


                                   Appendix I
                                        8
<PAGE>
      "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 July 21, 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 July
17, 1997, 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, 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 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

                                   Appendix II
                                        1
<PAGE>
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 Underwriter's obligation to
purchase the Securities (other than the issuance of the Policy) shall have been
satisfied.


                                   Appendix II
                                        2
<PAGE>
      (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