DELTA FINANCIAL CORPORATION
                          1000 Woodbury Road, Suite 200
                            Woodbury, New York 11797


February 23, 2001

VIA FACSIMILE

Beneficial holders of the Notes (as defined below)
listed on the signature pages hereof

Ladies and Gentlemen:

      This  letter of intent,  together  with the term sheet (the "Term  Sheet")
attached  hereto  (collectively,  "Letter  of  Intent"),  sets  forth our mutual
intentions  with  respect  to  the  restructuring   (the   "Restructuring")   of
outstanding indebtedness owed by Delta to the holders (the "Holders") of Delta's
9 1/2% Senior Secured Notes due 2004 (the "Notes").

      This  Letter  of Intent  sets  forth  the  basis  for the  negotiation  of
definitive   documentation  between  Delta  and  the  Holders  (the  "Definitive
Restructuring Agreements"). It is understood that this Letter of Intent does not
contain  all of the  material  terms of the  Restructuring  and is not a binding
agreement,  except for the penultimate  paragraph of this Letter of Intent which
shall be binding on the Holders party hereto.

      Subject  to the  foregoing,  this  Letter of Intent  sets forth our mutual
understanding of the basis of the  Restructuring  as currently  contemplated and
the manner in which the  parties  intend to proceed  between the date hereof and
the execution of the Definitive Restructuring Agreements.

      Promptly  following  the  execution  of this Letter of Intent,  Delta will
solicit the  consents of the  holders of a majority in  principal  amount of the
Notes to the amend (a) the Indenture  governing the Notes (the  "Indenture") (i)
to  allow  for  the  release  to  Delta  of  the  1999-3  and  1996-2  Residuals
(collectively, the "Released Residuals") from the Delta Funding Residual Holding
Trusts (the "Trusts"), (ii) to eliminate the Residual Receivable Coverage Ratios
set forth in Section 4.17 of the Indenture;  PROVIDED,  that after giving effect
to the  release  described  in clause (i) above and the  exchange  described  in
clause (iii) below, the Residuals then remaining in the Trusts had a book value,
as of December 31, 2000, of approximately $150 million, of which,  approximately
$75 million were senior  residuals,  (iii) to provide  that all other  Residuals
currently  in the trusts be kept in the  Trusts  until the  consummation  of the
Exchange  Offer  referred to in the Term Sheet  (other than the  exchange of the
1998-2  Residual  currently  owned by Delta outside of the Trusts for the 1996-3
and 1997-1  Residuals  currently  owned by the Trust as  referred to in the Term
Sheet)  and (iv) to  provide  that a  failure  of Delta to obtain  financing  in
accordance  with the terms of the attached Term Sheet,  or commence the Exchange
Offer described in the Term Sheet, will constitute an event of default under the
Indenture, and (b) the Deposit Trust Agreements to eliminate the Collateral Test
prescribed therein;  PROVIDED, that after giving effect to the release described
in clause  (i) above and the  exchange  described  in clause  (iii)  above,  the
Residuals  then  remaining  in the Trusts had a book value,  as of December  31,
2000, of approximately  $150 million,  of which,  approximately $75 million were
senior  residuals,  and to provide for the release and  exchange of Residuals as
described  above.  For  purposes of this Letter of Intent,  the  "Deposit  Trust
Agreements" mean,  collectively,  (a) that certain Deposit Trust Agreement dated
as of December 22, 2000 between DF Special Holdings  Corporation,  as depositor,
and Wilmington  Trust Company,  as owner trustee,  and (b) that certain  Deposit
Trust Agreement dated as of December 22, 2000 between Delta Funding Corporation,
as depositor, and Wilmington Trust Company, as owner trustee.

      Each of the  undersigned  beneficial  holders  hereby  agrees to grant its
consent to the proposed amendments and consents described above,  subject to its
satisfaction with the applicable Definitive  Restructuring  Agreements.  Each of
the  undersigned  beneficial  holders  hereby  represents  and warrants  that it
beneficially owns the aggregate principal amount of Notes set forth opposite its
name below.

      If the  foregoing  accurately  summarizes  our mutual  understanding  with
respect to the  Restructuring,  please  evidence your approval by executing this
Letter of Intent and returning it to the undersigned.


                                    Very truly yours,

                                    DELTA FINANCIAL CORPORATION

                                    By:  /S/ MARC E. MILLER
                                         Name: Marc E. Miller
                                         Title: SVP

Accepted and Agreed to by:

<PAGE>

Dated:   February 23, 2001  PUTNAM INVESTMENT MANAGEMENT INC., on
                                behalf of:

    $    8,890,000          Putnam High Yield Trust
         7,245,000          Putnam High Yield Advantage Fund
            80,000          Putnam High Income Convertible and Bond Fund
         3,020,000          Putnam Variable Trust-Putnam VT High Yield Fund
           760,000          Putnam Master Income Trust
         1,885,000          Putnam Premier Income Trust
         1,380,000          Putnam Master Intermediate Income Trust
         6,905,000          Putnam Diversified Income Trust
            70,000          Putnam Convertible Opportunities and Income Trust
         6,385,000          Putnam Funds Trust - Putnam High Yield Trust II
           310,000          Putnam Managed High Yield Trust
           320,000          Putnam Strategic Income Fund
         1,170,000          Putnam Variable Trust - Putnam VT Diversified Income
                                    Fund

                            By:/S/ JOHN VERANI
                            Name:  John Verani
                            Its:   Senior Vice President

                            One Post Office Square
                            Boston, MA 02109
                            Telephone: (617)292-1000
                            Telecopy:  (617)760-1676


<PAGE>


Dated: February 23, 2001   PUTNAM ADVISORY COMPANY, INC., on behalf of:

           200,000         Ameritech Pension Trust

                           By:/S/ JOHN VERANI
                           Name:  John Verani
                           Its:   Senior Vice President

                           One Post Office Square
                           Boston, MA 02109
                           Telephone: (617)292-1000
                           Telecopy:  (617)760-1676


Dated: February 23, 2001   PUTNAM FIDUCIARY TRUST COMPANY, on behalf of:

    $    1,305,000         Putnam High Yield Managed Trust
           295,000         Putnam High Yield Fixed Income Fund, LLC

                           By:/S/ JOHN VERANI
                           Name:  John Verani
                           Its:   Senior Vice President

                           One Post Office Square
                           Boston, MA 02109
                           Telephone: (617)292-1000
                           Telecopy:  (617)760-1676



<PAGE>


Dated: February 23, 2001   PUTNAM ADVISORY COMPANY, INC., on behalf of:

         3,000,000         Putnam CBO I, Limited
         1,270,000         Putnam CBO II, Limited
         3,000,000         Putnam CBO III, Limited

                           By:/S/ JOHN VERANI
                           Name:  John Verani
                           Its:   Senior Vice President

                           One Post Office Square
                           Boston, MA 02109
                           Telephone: (617)292-1000
                           Telecopy:  (617)760-1676



<PAGE>


Dated: February 23, 2001   PUTNAM INVESTMENT MANAGEMENT, INC., on
                           behalf of:

           190,000         Travelers Series Fund Inc. - Putnam Diversified
                           Income Portfolio

                           By:/S/ JOHN VERANI
                           Name:  John Verani
                           Its:   Senior Vice President

                           One Post Office Square
                           Boston, MA 02109
                           Telephone: (617)292-1000
                           Telecopy:  (617)760-1676



<PAGE>


Dated: February 23, 2001   PUTNAM ADVISORY COMPANY, INC., on behalf of:

           200,000         Abbott Laboratories Annuity Retirement Plan
           180,000         Strategic Global Fund-High Yield Fixed Income
                           (Putnam) Fund

                           By:/S/ JOHN VERANI
                           Name:  John Verani
                           Its:   Senior Vice President

                           One Post Office Square
                           Boston, MA 02109
                           Telephone: (617)292-1000
                           Telecopy:  (617)760-1676



<PAGE>


Dated: February 23, 2001   PUTNAM INVESTMENT MANAGEMENT, INC., on
                           behalf of:
           131,000         Putnam Variable Trust-Putnam VT Global Asset
                           Allocation Fund
           767,000         Putnam Asset Allocation Funds - Growth Portfolio
           192,000         Putnam Asset Allocation Funds - Conservative
                           Portfolio

                           By:/S/ JOHN VERANI
                           Name:  John Verani
                           Its:   Senior Vice President

                           One Post Office Square
                           Boston, MA 02109
                           Telephone: (617)292-1000
                           Telecopy:  (617)760-1676


<PAGE>


Dated: February 23, 2001   PUTNAM ADVISORY COMPANY, INC., on behalf of:

           300,000         Northrop Grumman Corporation
           190,000         Putnam World Trust II-Putnam High Yield Bond Fund
                           (Dublin)

                           By:/S/ JOHN VERANI
                           Name:  John Verani
                           Its:   Senior Vice President

                           One Post Office Square
                           Boston, MA 02109
                           Telephone: (617)292-1000
                           Telecopy:  (617)760-1676



<PAGE>


Dated: February 23, 2001   PUTNAM INVESTMENT MANAGEMENT, INC., on
                           behalf of:

            75,000         Lincoln National Global Asset Allocation fund, Inc.

                           By:/S/ JOHN VERANI
                           Name:  John Verani
                           Its:   Senior Vice President

                           One Post Office Square
                           Boston, MA 02109
                           Telephone: (617)292-1000
                           Telecopy:  (617)760-1676


<PAGE>


Dated: February 23, 2001   PRUDENTIAL INVESTMENT CORPORATION, as
                           Investment Advisor for:

    $    7,320,000         Prudential High Yield Fund, Inc.
           435,000         Prumerica WorldWide Investors Portfolio:  U.S. High
                           Yield Fund
           160,000         The High Yield Income Fund, Inc.
           560,000         The U.S. High Yield Fund, SICAV
         1,075,000         The Prudential Series Fund, Inc., High Yield Bond
                           Portfolio

                           By: /S/ GEORGE EDWARDS
                           Name:   George Edwards
                           Its:    Vice President

                           Two Gateway Center
                           Newark, NJ  07102
                           Telephone: (973) 802-8877
                           Telecopy: (973) 367-8555


<PAGE>


FIDELITY SUMMER STREET TRUST:
Fidelity Capital & Income Fund



By:/S/ROBERT DWIGHT                     $13,527,000
   Robert Dwight
   Treasurer




VARIABLE INSURANCE PRODUCTS FUND:
High Income Portfolio



By:/S/ ROBERT DWIGHT                     $1,350,000
   Robert Dwight
   Treasurer




FIDELITY ADVISOR SERIES II:
Fidelity Advisor High Income Fund



By:/S/ ROBERT DWIGHT                       $255,000
   Robert Dwight
   Treasurer




CYPRESS TREE INVESTMENT PARTNERS I, LTD.



By:/S/ ROBERT LAWRENCE                   $2,000,000
   Robert Lawrence


<PAGE>

                   SUMMARY OF MATERIAL TERMS AND CONDITIONS
                   FOR NOTEHOLDER RESTRUCTURING TRANSACTION

1.     RESTRUCTURING OF NOTES

         Except as provided in the next bullet  points,  all residuals  owned by
         the two Residual  Holding Trusts  (and/or the Owner Trust  Certificates
         for  such  Residual   Holding  Trusts)  to  be  contributed  to  a  new
         Liquidating   Trust  formed  in  connection  with  the  Exchange  Offer
         (contingent  upon  at  least  90-95%  of  Noteholders  agreeing  to the
         Exchange Offer and exchanging  their Notes for a commensurate  interest
         in the Liquidating  Trust). The Liquidating Trust will be owned 100% by
         Noteholders  who agree to Exchange  Offer,  but will provide that Delta
         Funding  Corporation  is to receive (a) a management  fee of 15% of the
         cashflows generated by the residuals owned by the Liquidating Trust for
         services rendered by it for each of the first three years following the
         consummation of the Exchange  Offer,  and 10% per year  thereafter,  in
         return for its oversight  and absorbing  certain costs and fees for the
         Liquidating Trust (e.g.  calculating  agent and custodial fees),  which
         rights and obligations  shall be  non-assignable  and non-delegable and
         shall terminate on a change of control,  cessation of operations or the
         liquidation  of  Delta;  provided,  however,  that  the  assignment  or
         delegation  of  such  rights  and  obligations  in  connection  with  a
         transaction  (including,  without  limitation,  a change of  control of
         Delta) that does not result in management  services  being  provided by
         individuals  other the  members  of the Miller  family (or  individuals
         working under the direct supervision of the Miller Family) shall not be
         deemed  breach of this  clause  (a) and shall not affect the rights and
         obligations  of the  parties  hereto  and (b) all cash  flows  from the
         residuals  through and including the June 2001  distributions.  Subsidy
         payments  associated with New York State Banking Department  settlement
         will be netted  from the  Liquidating  Trust so long as the  Company is
         providing  management  services to the Liquidating  Trust, as set forth
         above.  The residuals to be contributed to the trust have a book value,
         as of 12/31/00  (unaudited),  of approximately $152 million,  of which,
         approximately $75 million are senior residuals.

       * Delta will exchange  the 1998-2  residual  (owned  outside the Residual
         Holding  Trusts)  for the  1996-3 and 1997-1  residuals  (which  have a
         similar  aggregate  book  value and are owned by the  Residual  Holding
         Trusts).

       * The 1999-3  and  1996-2  residuals  (collectively  referred  to  as the
         "Released  Residuals")  will be removed from the Residual Holding Trust
         and pledged to Greenwich  as  collateral  for residual  financing of no
         more  than  $6.5  million  on  these  Released  Residuals  (as  part of
         Greenwich's   residual   financing   described   below,   and   to   be
         cross-collateralized,  together  with the other  residuals  pledged  to
         Greenwich,  with all of Delta's indebtedness to Greenwich).  Subject to
         Greenwich's lien and right of offset against all outstanding financing,
         Noteholders will receive a subordinate lien on the Released  Residuals,
         which lien shall  automatically  extinguish upon the transfer of actual
         servicing from Delta to Ocwen (or another third party acceptable to the
         Noteholders party to the Letter of Intent (the "Informal Committee") or
         upon  Greenwich's  purchase of the residual  (with  respect to only the
         1996-2  residual).  If Delta files a bankruptcy  proceeding and has not
         yet  transferred  servicing,  the Released  Residuals to be used by the
         estate to pay for costs of  expenses  of the estate to  facilitate  the
         transfer of servicing, as agreed to by the Informal Committee, provided
         that all of Delta's  indebtedness  to  Greenwich  has been fully repaid
         (which  is  necessary  to  extinguish  Greenwich's  senior  lien on the
         Released Residuals).

2.     NOTEHOLDERS ADDITIONAL CONSIDERATION

       * Net proceeds from transfer of servicing to  Ocwen (inclusive of (a) all
         amounts  received  from,  or paid  over  to,  Ocwen  including  without
         limitation  for Servicing and  Delinquency  Advances,  reconciling  all
         accounts, etc., (b) all amounts paid over to third parties for consents
         and/or  to  effectuate  the  servicing   transfer,   including  without
         limitation  to  the  bond   insurers,   trustees,   ratings   agencies,
         custodians,   etc.,   and  (c)   collapsing   servicing   and   advance
         transactions,  and all costs and fees paid in connection  therewith) to
         be split 80/20 between the Liquidating Trust and Delta.

       * Delta's ownership/residual interest in non-performing loan trust to  be
         transferred to Liquidating Trust.

       * Liquidating  Trust to  receive  preferred  stock  in Delta  with a  $15
         million liquidation  preference,  10% dividend (payable  semi-annually,
         with the  first  dividend  due on  January  1,  2002,  and the  first 3
         dividends  payable in kind).  Preferred  stock is convertible  into __%
         [subject  to  KPMG's  advice  as  to  maximum  level  without   risking
         triggering a "change of  ownership"  and  subjecting  the Net Operating
         Losses to  limitation]  of the fully diluted  shares of Delta once five
         dividends in total have not been paid in cash. In addition,  after five
         dividends in total have not been paid in cash,  the  Liquidating  Trust
         shall have the right to appoint two directors to Delta's board.

       * Delta has  option to redeem  the  preferred  stock at  the  liquidation
         preference plus accrued dividends at any time prior to conversion.

3.     MISCELLANEOUS OTHER ITEMS

       * Upon full  performance  by  Delta,  Noteholders  to  exchange  complete
         releases with all parties.

       * Delta and Greenwich  enter into an amendment to the existing  warehouse
         line on February 22, 2001.

       * Greenwich to proceed  with  purchase of whatever  loans they approve in
         their sole  discretion,  Delta will sell  balance in whole loan  market
         and/or securitize.

       * Subject to  Greenwich's  due  diligence  and  acceptance  and  on terms
         reasonably  acceptable  to the  Informal  Committee,  Greenwich  to (a)
         provide initial residual financing of approximately $2.5 million on the
         1996-1,  1997-2 and 1998-2  residuals,  (b)  subsequently  increase the
         residual financing to approximately $10 million on the 1996-1,  1996-2,
         1996-3,  1997-1,  1997-2  and  1999-3  residuals,  and  (c)  thereafter
         purchase the 1996-1,  1996-2,  1996-3,  1997-1 and 1997-2 residuals for
         approximately  $15 million.  To the extent that the net purchase  price
         (after fees and costs) for these five  residuals  exceeds $15  million,
         all such excess amounts shall be paid into the Liquidating  Trust,  and
         the amount of the preferred  stock  liquidation  preference  (described
         above) shall be reduced commensurately.

       * Current   sub-servicing   agreement  provides  for  Ocwen   to  finance
         outstanding  delinquency  and  servicing  advances.  Delta to negotiate
         collapse of  servicing  advance  transaction  prior to execution of the
         exchange offer (in connection with which,  it is anticipated  that fees
         will need to be paid) on terms  reasonably  acceptable  to the Informal
         Committee.

       * Delta agrees to  hire consultants  designated by Informal Committee who
         will  be  consulted  with  in  connection   with  the  negotiation  and
         implementation  of these  transactions,  including the  negotiation and
         consummation of the transfer of servicing.  The  consultants'  scope of
         duties and amount of compensation shall be agreed upon by Delta and the
         Informal Committee.

       * All   documentation   necessary  to   memorialize   the    transactions
         contemplated by this term sheet (E.G.,  amendments to the Indenture and
         Deposit Trust  Agreements,  and the Consent  Solicitation  and Exchange
         Offer) shall be in a form and content  reasonably  satisfactory  to all
         parties.

       * Delta agrees to  pay fees and expenses of professionals to the Informal
         Committee. Delta agrees to pay to Ropes & Gray, counsel to the Informal
         Committee, a retainer of $75,000, to be replenished to $40,000 whenever
         the unused portion is less than $20,000.

       * A breach of any of the foregoing  conditions  shall  result in an event
         of default under the Notes.