exv4w1



 





EXECUTION




HSBC HOME EQUITY LOAN CORPORATION II,

as Depositor,




HSBC FINANCE CORPORATION,

as Servicer,




HSBC BANK USA, NATIONAL ASSOCIATION,

as Administrator,




and




U.S. BANK NATIONAL ASSOCIATION,

as Trustee




 






POOLING AND SERVICING AGREEMENT




Dated as of October 26, 2006




 






HSBC Home Equity Loan Trust (USA) 2006-3




Closed-End Home Equity Loan Asset-Backed Certificates, Series 2006-3




 









 





TABLE OF CONTENTS




	 	 	 	 	 	 	 
	 	 	 	 	Page
	ARTICLE I

DEFINITIONS

	 
	 	 	 	 	 	 
	Section 1.01.

	 	Definitions
	 	 	2	 
	Section 1.02.

	 	Other Definitional Provisions
	 	 	26	 
	Section 1.03.

	 	Interest Calculations
	 	 	26	 
	 
	 	 	 	 	 	 
	ARTICLE II

CONVEYANCE OF HOME EQUITY LOANS; ORIGINAL ISSUANCE OF CERTIFICATES; TAX TREATMENT

	 
	 	 	 	 	 	 
	Section 2.01.

	 	Acknowledgment; Conveyance of Home Equity Loans; Custody of Mortgage
Files
	 	 	27	 
	Section 2.02.

	 	Acceptance by Trustee; Repurchase of Home Equity Loans; Conveyance of
Eligible Substitute Home Equity Loans
	 	 	31	 
	Section 2.03.

	 	Representations, Warranties and Covenants of the Servicer
	 	 	32	 
	Section 2.04.

	 	Representations and Warranties of the Depositor Regarding this Agreement
and the Home Equity Loans; Repurchases and Substitutions
	 	 	33	 
	Section 2.05.

	 	Execution and Authentication of Certificates
	 	 	39	 
	Section 2.06.

	 	Delivery of Opinion of Counsel in Connection with Substitutions
	 	 	39	 
	Section 2.07.

	 	REMIC Matters
	 	 	40	 
	 
	 	 	 	 	 	 
	ARTICLE III

ADMINISTRATION AND SERVICING OF HOME EQUITY LOANS

	 
	 	 	 	 	 	 
	Section 3.01.

	 	The Servicer
	 	 	40	 
	Section 3.02.

	 	Collection of Certain Home Equity Loan Payments
	 	 	42	 
	Section 3.03.

	 	Withdrawals from the Collection Account
	 	 	44	 
	Section 3.04.

	 	Maintenance of Hazard Insurance; Property Protection Expenses
	 	 	45	 
	Section 3.05.

	 	Assumption and Modification Agreements
	 	 	46	 
	Section 3.06.

	 	Realization Upon Defaulted Home Equity Loans
	 	 	47	 
	Section 3.07.

	 	[Reserved]
	 	 	48	 
	Section 3.08.

	 	Trustee to Cooperate
	 	 	48	 
	Section 3.09.

	 	Servicing Compensation; Payment of Certain Expenses by Servicer
	 	 	49	 
	Section 3.10.

	 	Annual Statement as to Compliance
	 	 	49	 
	Section 3.11.

	 	Access to Certain Documentation and Information Regarding the Home
Equity Loans
	 	 	50	 
	Section 3.12.

	 	Maintenance of Certain Servicing Insurance Policies
	 	 	51	 
	Section 3.13.

	 	Derivative Contracts
	 	 	51	 
	Section 3.14.

	 	Information Required by the Internal Revenue Service Generally and
Reports of Foreclosures and Abandonments of Mortgaged Property
	 	 	52	 
	Section 3.15.

	 	Additional Covenants of HSBC Finance
	 	 	52	 
	Section 3.16.

	 	Servicing Certificate
	 	 	53	 






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TABLE OF CONTENTS

(continued)




	 	 	 	 	 	 	 
	 	 	 	 	Page
	ARTICLE IV

DISTRIBUTIONS AND STATEMENTS TO CERTIFICATEHOLDERS; RIGHTS OF CERTIFICATEHOLDERS

	 
	 	 	 	 	 	 
	Section 4.01.

	 	Distributions
	 	 	56	 
	Section 4.02.

	 	Calculation of the Formula Rate for
Floating Rate Certificates;
Calculation of One-Month LIBOR
	 	 	58	 
	Section 4.03.

	 	Allocation of Realized Losses
	 	 	61	 
	Section 4.04.

	 	Carryover Reserve Fund
	 	 	61	 
	 
	 	 	 	 	 	 
	ARTICLE V

THE CERTIFICATES

	 
	 	 	 	 	 	 
	Section 5.01.

	 	The Certificates
	 	 	63	 
	Section 5.02.

	 	Certificate Register; Registration of Transfer and Exchange of Certificates
	 	 	63	 
	Section 5.03.

	 	Mutilated, Destroyed, Lost or Stolen Certificates
	 	 	67	 
	Section 5.04.

	 	Persons Deemed Owners
	 	 	68	 
	Section 5.05.

	 	Appointment of Paying Agent
	 	 	68	 
	Section 5.06.

	 	Actions of Certificateholders
	 	 	69	 
	 
	 	 	 	 	 	 
	ARTICLE VI

THE SERVICER AND THE DEPOSITOR

	 
	 	 	 	 	 	 
	Section 6.01.

	 	Liability of the Servicer and the Depositor
	 	 	70	 
	Section 6.02.

	 	Merger or Consolidation of, or Assumption of the Obligations of, the
Servicer or the Depositor
	 	 	70	 
	Section 6.03.

	 	Limitation on Liability of the Servicer, the Depositor and Others
	 	 	70	 
	Section 6.04.

	 	Servicer Not to Resign
	 	 	71	 
	Section 6.05.

	 	Delegation of Duties
	 	 	71	 
	Section 6.06.

	 	Tax Matters
	 	 	72	 
	 
	 	 	 	 	 	 
	ARTICLE VII

SERVICER TERMINATION EVENTS

	 
	 	 	 	 	 	 
	Section 7.01.

	 	Servicer Termination Events
	 	 	75	 
	Section 7.02.

	 	Trustee to Act; Appointment of Successor
	 	 	76	 
	Section 7.03.

	 	Notification to Certificateholders
	 	 	78	 
	 
	 	 	 	 	 	 
	ARTICLE VIII

THE TRUSTEE AND THE ADMINISTRATOR

	 
	 	 	 	 	 	 
	Section 8.01.

	 	Duties of Trustee
	 	 	79	 






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TABLE OF CONTENTS

(continued)




	 	 	 	 	 	 	 
	 	 	 	 	Page
	Section 8.02.

	 	Certain Matters Affecting the Trustee
	 	 	80	 
	Section 8.03.

	 	Trustee Not Liable for Certificates or Home Equity Loans
	 	 	81	 
	Section 8.04.

	 	Trustee May Own Certificates
	 	 	82	 
	Section 8.05.

	 	Servicer to Pay Trustee’s Fees and Expenses
	 	 	82	 
	Section 8.06.

	 	Eligibility Requirements for Trustee
	 	 	82	 
	Section 8.07.

	 	Resignation or Removal of Trustee
	 	 	83	 
	Section 8.08.

	 	Successor Trustee
	 	 	83	 
	Section 8.09.

	 	Merger or Consolidation of Trustee
	 	 	84	 
	Section 8.10.

	 	Appointment of Co-Trustee or Separate Trustee
	 	 	84	 
	Section 8.11.

	 	Trustee May Enforce Claims Without Possession of Certificates
	 	 	86	 
	Section 8.12.

	 	Inspection of Mortgage Files
	 	 	86	 
	Section 8.13.

	 	Duties of Administrator
	 	 	86	 
	Section 8.14.

	 	Certain Matters Affecting the Administrator
	 	 	87	 
	Section 8.15.

	 	Administrator May Own Certificates
	 	 	88	 
	Section 8.16.

	 	Servicer to Pay Administrator’s Fees and Expenses
	 	 	88	 
	Section 8.17.

	 	Eligibility Requirements for Administrator
	 	 	88	 
	Section 8.18.

	 	Resignation or Removal of Administrator
	 	 	89	 
	Section 8.19.

	 	Successor Administrator
	 	 	89	 
	Section 8.20.

	 	Merger or Consolidation of Administrator
	 	 	90	 
	 
	 	 	 	 	 	 
	ARTICLE IX

TERMINATION

	 
	 	 	 	 	 	 
	Section 9.01.

	 	Termination
	 	 	91	 
	Section 9.02.

	 	Additional Termination Requirements
	 	 	93	 
	 
	 	 	 	 	 	 
	ARTICLE X

MISCELLANEOUS PROVISIONS

	 
	 	 	 	 	 	 
	Section 10.01.

	 	Amendment
	 	 	94	 
	Section 10.02.

	 	Recordation of Agreement
	 	 	96	 
	Section 10.03.

	 	Limitation on Rights of Certificateholders
	 	 	96	 
	Section 10.04.

	 	Governing Law
	 	 	97	 
	Section 10.05.

	 	Notices
	 	 	97	 
	Section 10.06.

	 	Severability of Provisions
	 	 	97	 
	Section 10.07.

	 	No Partnership
	 	 	97	 
	Section 10.08.

	 	Assignment
	 	 	98	 
	Section 10.09.

	 	Certificates Nonassessable and Fully Paid
	 	 	98	 
	Section 10.10.

	 	Third-Party Beneficiaries
	 	 	98	 
	Section 10.11.

	 	Counterparts
	 	 	98	 
	Section 10.12.

	 	Headings
	 	 	98	 
	Section 10.13.

	 	Limitation on Voting of Preferred Stock
	 	 	98	 
	Section 10.14.

	 	Perfection Representations
	 	 	98	 






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TABLE OF CONTENTS

(continued)




	 	 	 	 	 	 	 
	 	 	 	 	Page
	Section 10.15.

	 	No Petition
	 	 	98	 
	Section 10.16.

	 	Inspection of Mortgage Files
	 	 	98	 
	 
	 	 	 	 	 	 
	ARTICLE XI

EXCHANGE ACT REPORTING

	 
	 	 	 	 	 	 
	Section 11.01.

	 	Regulation AB
	 	 	99	 
	Section 11.02.

	 	Information to Be Provided by the Trustee and the Administrator
	 	 	99	 
	 
	 	 	 	 	 	 
	EXHIBITS

	 
	 	 	 	 	 	 
	Schedule 1

	 	Perfection Representations, Warranties and Covenants	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit A

	 	Form of Class A and Class M Certificate	 	 	 	 
	Exhibit B

	 	Form of Class R Certificate	 	 	 	 
	Exhibit C

	 	Home Equity Loan Schedule	 	 	 	 
	Exhibit D

	 	Form of Transfer Affidavit	 	 	 	 






iv









 






     This Pooling and Servicing Agreement, dated as of October 26, 2006, among HSBC HOME EQUITY
LOAN CORPORATION II, as Depositor, HSBC FINANCE CORPORATION, as Servicer, HSBC BANK USA, NATIONAL
ASSOCIATION, as Administrator, and U.S. BANK NATIONAL ASSOCIATION, as Trustee,



WITNESSETH THAT:




     In consideration of the mutual agreements herein contained, the parties hereto agree as
follows:



PRELIMINARY STATEMENT




          The Depositor is the owner of the Trust Fund that is hereby conveyed to the Trustee in return
for the Certificates. For federal income tax purposes, the Trust Fund (other than the Carryover
Reserve Fund and the Derivative Contract Reserve Fund) will constitute a single REMIC. Each
Certificate, other than the Class R Certificate, will represent ownership of one or more regular
interests in the REMIC for purposes of the REMIC Provisions. The Class R Certificate will
represent ownership of the sole class of residual interest in the REMIC. The REMIC will hold as
assets all property of the Trust Fund (other than the assets held in the Carryover Reserve Fund and
the Derivative Contract Reserve Fund). The latest possible maturity date of all REMIC regular
interests described in this Agreement shall be the Latest Possible Maturity Date.




          The following table sets forth characteristics of the REMIC Certificates, together with the
minimum denominations and integral multiples in excess thereof in which such Classes shall be
issuable:




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Integral
	 	 	Original Class	 	Pass-Through	 	 	 	 	 	Multiples in
	Class	 	Certificate Principal	 	Rate	 	Minimum	 	Excess of
	Designation	 	Balance	 	(per annum)	 	Denomination	 	Minimum
	Class A-1F

	 	$	255,200,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class A-1V

	 	$	281,000,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class A-2F

	 	$	78,500,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class A-2V

	 	$	100,000,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class A-3F

	 	$	66,300,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class A-3V

	 	$	100,000,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class A-4

	 	$	170,620,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class M-1

	 	$	72,090,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class M-2

	 	$	52,300,000	 	 	 	(1	)	 	$	25,000	 	 	$	1,000	 
	Class R (2)

	 	 	(3	)	 	 	(3	)	 	 	N/A	 	 	 	N/A	 








 




			
	(1)	 	With respect to this Class of Certificates and any Interest Accrual Period, the lesser
of (i) the applicable Formula Rate for such Class and Interest Accrual Period and (ii) the Net
Rate Cap for the related Distribution Date.
	 
	(2)	 	The Class R Certificate will represent the sole Class of residual interest in the
REMIC.




 









 









			
	(3)	 	The Class R Certificate has no Certificate Principal Balance or Pass-Through Rate and
is entitled only to amounts as described in Article IV.





ARTICLE I




DEFINITIONS




          Section 1.01. Definitions. Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the meanings specified in this Article.




     Administrator: HSBC Bank USA, National Association, a national banking association,
as Administrator (including its role as Certificate Registrar and Paying Agent) under this
Agreement and the other Transaction Documents to which it is a party, or any successor
administrator appointed in accordance with this Agreement that has accepted such appointment in
accordance with this Agreement.



     Affiliate: With respect to any Person, any other Person controlling, controlled by or
under common control with such Person. For purposes of this definition, “control” means the power
to direct the management and policies of a Person, directly or indirectly, whether through
ownership of voting securities, by contract or otherwise, and “controlling” and “controlled” shall
have meanings correlative to the foregoing.



     Agreement: This Pooling and Servicing Agreement and all amendments hereof and
supplements hereto.



     Applied Realized Loss Amount: With respect to any Distribution Date and each Class of
Class M Certificates, the amount by which the Certificate Principal Balance of such Class was
reduced on such Distribution Date pursuant to Section 4.03.



     Appraised Value: With respect to any Home Equity Loan, the appraised value of the
related Mortgaged Property based upon the appraisal used by the applicable Seller at the time of
origination of such Home Equity Loan (or any mortgage loan made by the Seller on the Mortgaged
Property that the Home Equity Loan replaced); provided that if the Home Equity Loan was
originated simultaneously with or not more than 12 months after another mortgage was placed on the
related Mortgaged Property, the lesser of the Appraised Value at origination of the other mortgage
and the sales price, if any, of the related Mortgaged Property.



     Assignment of Mortgage: With respect to any Mortgage, an assignment, notice of
transfer or equivalent instrument, in recordable form, sufficient under the laws of the
jurisdiction in which the related Mortgaged Property is located to reflect the sale of the Mortgage
to the Trustee, which assignment, notice of transfer or equivalent instrument may be in the form of
one or more blanket assignments covering the Home Equity Loans secured by Mortgaged Properties
located in the same jurisdiction.



     Available Distribution Amount: With respect to any Distribution Date, the sum,
without duplication, of all amounts described in clauses (i) through (iii), inclusive, of Section
3.02(b)



2









 







received by the Servicer with respect to the related Collection Period and deposited in the
Collection Account.



     BIF: The Bank Insurance Fund, as from time to time constituted, created under the
Financial Institutions Reform, Recovery and Enhancement Act of 1989 or, if at any time after the
execution of this instrument the Bank Insurance Fund is not existing and performing duties now
assigned to it, the body performing such duties on such date.



     Book-Entry Certificate: Any Offered Certificate registered in the name of the
Depository or its nominee, ownership of which is reflected on the books of the Depository or on the
books of a Person maintaining an account with such Depository (directly or as an indirect
participant in accordance with the rules of such Depository).



     Business Day: Any day other than (i) a Saturday or a Sunday or (ii) a day on which
banking institutions or trust companies in the State of New York or Illinois are required or
authorized by law to be closed.



     Carryover Reserve Fund: The custodial account or accounts created and maintained for
the benefit of the Certificateholders pursuant to Section 4.04(a). The Carryover Reserve Fund
shall be an Eligible Account.



     Certificate: A Class A Certificate, Class M Certificate or Class R Certificate.



     Certificate Owner: The Person who is the beneficial owner of an interest in a
Book-Entry Certificate.



     Certificate Principal Balance: With respect to any Class of Offered Certificates as
of any date of determination, the Original Class Certificate Principal Balance thereof reduced by
all amounts previously distributed to the holders of such Class and allocable to principal and, in
the case of any Class M Certificates, reduced by any Applied Realized Loss Amounts allocated to
such Class of Certificates pursuant to Section 4.03. With respect to any Offered Certificate as of
any date of determination, the product of (i) the Certificate Principal Balance of the Class of
Offered Certificate to which such Offered Certificate belongs, times (ii) a fraction, the numerator
of which is the initial Certificate Principal Balance of such Offered Certificate as stated on the
face thereof, and the denominator of which is equal to the Original Class Certificate Principal
Balance of such Class of Offered Certificates. The Class R Certificate has no Certificate
Principal Balance.



     Certificate Register and Certificate Registrar: The register maintained and the
registrar appointed pursuant to Section 5.02.



     Certificateholder or Holder: The Person in whose name a Certificate is
registered in the Certificate Register, except that, solely for the purpose of giving any consent,
direction, waiver or request pursuant to this Agreement, (i) any Certificate registered in the name
of the Depositor (unless to the knowledge of a Responsible Officer of the Trustee the Depositor is
acting as trustee or nominee for a Person who is not an Affiliate of the Depositor and who makes
the voting decision with respect to such Certificate) or the Servicer or any Person known to a
Responsible Officer of the Trustee to be an Affiliate of either the Depositor or the Servicer and



3









 







(ii) any Certificate for which the Depositor (unless to the knowledge of a Responsible Officer of
the Trustee (A) the Depositor is acting as trustee or nominee for a Person who is not an Affiliate
of the Depositor and who makes the voting decision with respect to such Certificate or (B) the
Depositor is the owner of all the Certificates) or the Servicer or any Person known to a
Responsible Officer of the Trustee to be an Affiliate (other than an Affiliate that has purchased
any Certificate on the Closing Date) of either the Depositor or the Servicer is the Certificate
Owner shall be deemed not to be outstanding and the Percentage Interest evidenced thereby shall not
be taken into account in determining whether the requisite amount of Percentage Interests necessary
to effect any such consent, direction, waiver or request has been obtained.



     Charge Off Amount: With respect to any Charged Off Home Equity Loan and Collection
Period, an amount equal to the amount of the Principal Balance that the Servicer has charged off on
its servicing records during such Collection Period.



     Charged Off Home Equity Loan: A defaulted Home Equity Loan that is not a Liquidated
Home Equity Loan and as to which (i) collection procedures are ongoing and (ii) the Servicer has
charged off all or a portion of the related Principal Balance.



     Class: Any of the Class A Certificates, Class M Certificates or Class R Certificate.



     Class A Certificate: A Class A-1 Certificate, Class A-2 Certificate, Class A-3
Certificate or Class A-4 Certificate.



     Class A Certificateholder: A Holder of a Class A Certificate.



     Class A-1 Certificate: A Class A-1F Certificate or Class A-1V Certificate.



     Class A-1 Certificateholder: A Holder of a Class A-1 Certificate.



     Class A-1F Certificate: Any Certificate designated as a Class A-1F Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class A-1V Certificate: Any Certificate designated as a Class A-1V Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class A-2 Certificate: A Class A-2F Certificate or Class A-2V Certificate.



     Class A-2 Certificateholder: A Holder of a Class A-2 Certificate.



     Class A-2F Certificate: Any Certificate designated as a Class A-2F Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class A-2V Certificate: Any Certificate designated as a Class A-2V Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class A-3 Certificate: A Class A-3F Certificate or Class A-3V Certificate.



     Class A-3 Certificateholder: A Holder of a Class A-3 Certificate.



4









 





     Class A-3F Certificate: Any Certificate designated as a Class A-3F Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class A-3V Certificate: Any Certificate designated as a Class A-3V Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class A-4 Certificate: Any Certificate designated as a Class A-4 Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class A Principal Distribution Amount: With respect to any Distribution Date, the
excess of (A) the aggregate Certificate Principal Balance of the Class A Certificates immediately
prior to such Distribution Date over (B) the lesser of (1) the product of (x) 48.80% and (y) the
Pool Balance as of the last day of the related Collection Period and (2) the excess, if any, of the
Pool Balance as of the last day of the related Collection Period over 1.00% of the Cut-Off Date
Pool Balance.



     Class M Certificate: A Class M-1 Certificate or Class M-2 Certificate.



     Class M Certificateholder: A Holder of a Class M Certificate.



     Class M-1 Certificate: Any Certificate designated as a Class M-1 Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class M-1 Certificateholder: A Holder of a Class M-1 Certificate.



     Class M-1 Principal Distribution Amount: With respect to any Distribution Date, the
excess, if any, of (i) the sum of (A) the aggregate Certificate Principal Balance of the Class A
Certificates (after taking into account the distribution of the Class A Principal Distribution
Amount on such Distribution Date) and (B) the Certificate Principal Balance of the Class M-1
Certificates immediately prior to such Distribution Date over (ii) the lesser of (A) the product of
(1) 59.00% and (2) the Pool Balance as of the last day of the related Collection Period and (B) the
excess, if any, of the Pool Balance as of the last day of the related Collection Period over 1.00%
of the Cut-Off Date Pool Balance.



     Class M-2 Certificate: Any Certificate designated as a Class M-2 Certificate on the
face thereof, substantially in the form of Exhibit A hereto.



     Class M-2 Certificateholder: A Holder of a Class M-2 Certificate.



     Class M-2 Principal Distribution Amount: With respect to any Distribution Date, the
excess, if any, of (i) the sum of (A) the aggregate Certificate Principal Balance of the Class A
Certificates (after taking into account the distribution of the Class A Principal Distribution
Amount on such Distribution Date), (B) the aggregate Certificate Principal Balance of the Class M-1
Certificates (after taking into account the distribution of the Class M-1 Principal Distribution
Amount on such Distribution Date), and (C) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (ii) the lesser of (A) the product of
(1) 66.40% and (2) the Pool Balance as of the last day of the related Collection Period



5









 







and (B) the
excess, if any, of the Pool Balance as of the last day of the related Collection Period over 1.00%
of the Cut-Off Date Pool Balance.



     Class R Certificate: Any Certificate designated as a Class R Certificate on the face
thereof, in the form of Exhibit B hereto.



     Class R Certificateholder: A Holder of a Class R Certificate.



     Closing Date: October 26, 2006.



     Code: The Internal Revenue Code of 1986, as amended from time to time, and any
Treasury regulations promulgated thereunder.



     Collection Account: The custodial account or accounts created and maintained for the
benefit of the Certificateholders pursuant to Section 3.02(b). The Collection Account shall be an
Eligible Account.



     Collection Period: With respect to any Distribution Date and Home Equity Loan, the
calendar month immediately preceding the month in which such Distribution Date occurs, except that
with respect to the initial Distribution Date, the Collection Period is the period beginning on the
day immediately following the Cut-Off Date and ending on November 30, 2006.



     Combined Exposure: As defined in Section 3.04.



     Combined Loan-to-Value Ratio or CLTV: With respect to each Home Equity Loan, a ratio,
expressed as a percentage, the numerator of which is the sum of (a) the original Principal Balance
of the Home Equity Loan and (b) the aggregate unpaid principal balance, at the time of origination
of the Home Equity Loan, of all other mortgage loans, if any, secured by liens senior to that Home
Equity Loan on the related Mortgaged Property, and the denominator of which is the Appraised Value
of the Mortgaged Property.



     Compensating Interest: With respect to any Collection Period, an amount equal to the
lesser of (i) the Prepayment Interest Shortfall for such Collection Period and (ii) the Servicing
Fee for the related Collection Period without regard to any reduction due to Compensating Interest.



     Corporate Trust Office: With respect to the Trustee, the designated office of the
Trustee at which at any particular time its corporate trust business shall be administered, which
office on the Closing Date is located at the address therefor set forth in Section 10.05; and with
respect to the Administrator, the principal office of the Administrator at which at any particular
time its corporate trust business shall be administered, which office on the Closing Date is
located at the address thereabove set forth in Section 10.05.



     Cumulative Loss Percentage: With respect to any Distribution Date on or after the
Stepdown Date, the fraction (expressed as a percentage) obtained by dividing (i) the Cumulative
Realized Losses through the end of the related Collection Period, by (ii) the Cut-Off Date Pool
Balance.



6









 





     Cumulative Loss Percentage Trigger: With respect to any Distribution Date on or after
the Stepdown Date, means (i) for the December 2009 Distribution Date through the November 2010
Distribution Date, 6.10%; (ii) for the December 2010 Distribution Date through the November 2011
Distribution Date, 10.40%; (iii) for the December 2011 Distribution Date through the November 2012
Distribution Date, 13.80%; (iv) for the December 2012 Distribution Date through the November 2013
Distribution Date, 16.35%; and (v) for the December 2013 Distribution Date and each Distribution
Date thereafter, 17.15%.



     Cumulative Realized Losses: With respect to the Home Equity Loans and any Collection
Period, an amount equal to the excess, if any, of (a) the sum of the aggregate Realized Losses on
the Home Equity Loans from the Cut-Off Date through the last day of such Collection Period over (b)
the sum of any Recovered Charge Off Amounts on the Home Equity Loans from the Cut-Off Date through
the last day of such Collection Period.



     Current Interest: With respect to the initial Distribution Date and each Class of
Offered Certificates an amount equal to interest accrued during the two Interest Accrual Periods
for the first Distribution Date on the Certificate Principal Balance of such Class of Offered
Certificates immediately prior to such Distribution Date at the Pass-Through Rates for such Class
and Interest Accrual Periods. With respect to each subsequent Distribution Date and each Class of
Offered Certificates, an amount equal to interest accrued during the related Interest Accrual
Period on the Certificate Principal Balance of such Class of Offered Certificates immediately prior
to such Distribution Date at the Pass-Through Rate for such Class and Interest Accrual Period.



     Cut-Off Date: With respect to each Home Equity Loan, the close of business on October
11, 2006.



     Cut-Off Date Pool Balance: The aggregate of the Cut-Off Date Principal Balances of
the Home Equity Loans.



     Cut-Off Date Principal Balance: With respect to any Home Equity Loan, the unpaid
principal balance thereof as of the Cut-Off Date or, with respect to any Eligible Substitute Home
Equity Loan, as of the date of substitution of such Eligible Substitute Home Equity Loan.



     Defective Home Equity Loan: A Home Equity Loan subject to repurchase or substitution
pursuant to Section 2.02 or 2.04.



     Definitive Certificates: As defined in Section 5.02(f).



     Deposit Account Control Agreement: The Deposit Account Control Agreement dated as of
October 26, 2006 among the Trustee and the Administrator.



     Deposit Date: With respect to any Distribution Date, the Business Day immediately
preceding such Distribution Date.



     Deposit Event: The lowering of the Servicer’s short-term debt rating below “P-1” by
Moody’s, “A-1” by Standard & Poor’s or “F1” by Fitch or any time in which HSBC Finance shall cease
to be the Servicer.




7









 





     Depositor: HSBC Home Equity Loan Corporation II, a Delaware corporation, and its
successors in interest.



     Depository: The initial Depository shall be The Depository Trust Company, the nominee
of which is Cede & Co., as the registered Holder of each Class of Book-Entry Certificates. The
Depository shall at all times be a “clearing corporation” as defined in Section 8-102(a)(5) of the
UCC of the State of New York.



     Depository Participant: A broker, dealer, bank or other financial institution or
other Person for whom from time to time the Depository effects book-entry transfers and pledges of
securities deposited with the Depository.



     Derivative Contract: Any ISDA Master Agreement, together with the related Schedule
and Confirmation, entered into by the Administrator, on behalf of the Trust for the benefit of the
Holder of the Class R Certificate, and a Derivative Counterparty in accordance with Section 3.13.



     Derivative Contract Reserve Fund: As defined in Section 3.13.



     Derivative Counterparty: Any counterparty to a Derivative Contract as provided in
Section 3.13 which counterparty shall not be an Affiliate of the Servicer.



     Determination Date: With respect to any Distribution Date, the second Business Day
prior to such Distribution Date.



     Distribution Date: The 20th day of each month (or if such 20th day is not a Business
Day, then the next succeeding Business Day), commencing December 20, 2006.



     EDGAR: The SEC’s Electronic Data Gathering, Analysis and Retrieval System.



     Electronic Ledger: The electronic master record of home equity loans (including the
Home Equity Loans) maintained by the Servicer.



     Eligible Account: An account that is either (i) maintained with a depository
institution whose short-term debt obligations at the time of any deposit therein are rated in the
highest short-term debt rating category by the Rating Agencies, (ii) an account or accounts
maintained with a depository institution with a long-term unsecured debt rating by each Rating
Agency that is at least investment grade, provided that the deposits in such account or accounts
are fully insured by either the BIF or the SAIF, (iii) a segregated trust account maintained in the
corporate trust department with the Trustee in its fiduciary capacity or the Administrator in its
capacity as administrator, or (iv) an account otherwise acceptable to each Rating Agency, as
evidenced by a letter to such effect from each such Rating Agency to the Trustee and the
Administrator, without reduction or withdrawal of the then-current ratings of any Class of Offered
Certificates.



     Eligible Substitute Home Equity Loan: A Home Equity Loan substituted by the Depositor
or the Servicer for a Defective Home Equity Loan pursuant to Section 2.02(a) or 2.04, which on the
date of such substitution must



8









 






     (i) have a Principal Balance not substantially greater or less than the Principal
Balance of such Defective Home Equity Loan or such elected substituted Home Equity Loan;




     (ii) have a current Loan Rate of not less than the Loan Rate of the Defective Home
Equity Loan or elected substituted Home Equity Loan and not more than 500 basis points in
excess thereof;




     (iii) have a (A) remaining term to maturity not more than six months earlier or later
than the remaining term to maturity of the Defective Home Equity Loan or elected substituted
Home Equity Loan and (B) maturity date not later than the last day of the Collection Period
immediately preceding the month in which the Final Scheduled Distribution Date occurs;




     (iv) comply with the representations and warranties set forth in Section 2.04(b), to
the extent such representations and warranties do not pertain exclusively to the Home Equity
Loans transferred on the Closing Date;




     (v) have a Combined Loan-to-Value Ratio that is not greater than the Combined
Loan-to-Value Ratio of the Defective Home Equity Loan or elected substituted Home Equity
Loan as of the date of origination of such Defective Home Equity Loan or elected substituted
Home Equity Loan;




     (vi) have a lien position at least equal to the lien position of the Mortgage relating
to the Defective Home Equity Loan or elected substituted Home Equity Loan; and




     (vii) be the obligation of a Mortgagor whose credit profile is substantially similar to
that of the Mortgagor under the Defective Home Equity Loan or elected substituted Home
Equity Loan,


provided, however, that with respect to (i) through (vii) above, a home equity loan may qualify as
an Eligible Substitute Home Equity Loan if each of the Rating Agencies consents to such
substitution.




     ERISA: The Employee Retirement Income Security Act of 1974, as amended.



     ERISA-Restricted Certificate: The Class M and Class R Certificates and any
Certificate with a rating which falls below the lowest applicable permitted rating under the
Underwriter Exemption.



     Exchange Act: The Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.



     Exchange Act Filing Obligation: The obligations of the Servicer (x) under Section
3.10, (y) under Section 6.02 and Section 6.04 with respect to notice and information to be provided
to the Depositor or (z) under Article XI.



9









 





     Extra Principal Distribution Amount: With respect to any Distribution Date, the
lesser of (x) the Monthly Excess Cashflow for such Distribution Date and (y) the Interim
Overcollateralization Deficiency for such Distribution Date.



     Fannie Mae: Fannie Mae, formerly known as The Federal National Mortgage Association,
or any successor thereto.



     FDIC: The Federal Deposit Insurance Corporation or any successor thereto.



     Final Scheduled Distribution Date: With respect to the Offered Certificates, the
Distribution Date occurring in March 2036.



     Fitch: Fitch, Inc., or its successor in interest.



     Fixed Rate Certificates: The Class A-1F, Class A-2F and Class A-3F Certificates.



     Floating Rate Certificates: The Class A-1V, Class A-2V, Class A-3V, Class A-4, Class
M-1 and Class M-2 Certificates.



     Foreclosure Profit: With respect to any Liquidated Home Equity Loan, the amount, if
any, by which Net Liquidation Proceeds exceeds the sum of (i) the Principal Balance thereof
immediately prior to the final recovery of its Liquidation Proceeds, (ii) accrued and unpaid
interest (including imputed interest on REO) at the applicable Loan Rate from the date interest was
last paid through the date of receipt of the final Liquidation Proceeds and (iii) the sum of all
related Charge Off Amounts.



     Form 8-K: A current report pursuant to Section 13 or 15(d) of the Exchange Act.



     Formula Rate: With respect to each Class of Floating Rate Certificates and any
Interest Accrual Period, a per annum rate equal to the sum of One-Month LIBOR for such Interest
Accrual Period and (b) the applicable Pass-Through Margin for such Class and Interest Accrual
Period.



     With respect to each Class of Fixed Rate Certificates and any Interest Accrual Period, a per
annum rate equal specified for such class and Interest Accrual Period in the following table:



	 	 	 	 	 	 	 	 	 
	Class	 	Formula Rate (1)	 	Formula Rate (2)
	A-1F
	 	 	5.98	%	 	 	6.48	%
	A-2F
	 	 	5.66	%	 	 	6.16	%
	A-3F
	 	 	5.63	%	 	 	6.13	%








 




			
	 	 	(1) For each Interest Accrual Period relating to a
Distribution Date occurring on or prior to the Optional
Termination Date.
	 
	 	 	(2) For each Interest Accrual Period relating to a
Distribution Date occurring after the Optional Termination Date.




10









 










     Freddie Mac: Freddie Mac, formerly known as The Federal Home Loan Mortgage
Corporation, or any successor thereto.



     Home Equity Loan: Such of the home equity loans (together with the related Mortgage
Notes and Mortgages) transferred and assigned to the Trustee pursuant to Section 2.01 and pursuant
to the Transfer Agreement together with the Related Documents, as from time to time are held as a
part of the Trust, the home equity loans originally so held being identified in the Home Equity
Loan Schedule delivered on the Closing Date. As applicable, the term Home Equity Loan shall be
deemed to refer to the Mortgaged Property that has been converted to ownership by the Servicer
prior to the final recovery of related Liquidation Proceeds.



     Home Equity Loan Purchase Agreement: The home equity loan purchase agreement dated as
of October 26, 2006, between the Depositor and the Sellers pursuant to which the Sellers convey to
the Depositor all of their right, title and interest in and to the unpaid Principal Balances of the
Home Equity Loans, including all interest and principal payments in respect thereof received on or
after the Cut-Off Date, and certain other rights with respect to the collateral supporting the Home
Equity Loans.



     Home Equity Loan Schedule: With respect to any date, the schedule of Home Equity
Loans, including any Eligible Substitute Home Equity Loans, included in the Trust on such date.
The initial Home Equity Loan Schedule is the schedule delivered by the Depositor to the Trustee on
the Closing Date and delivered as Exhibit C hereto, which schedule may be in the form of a computer
file or an electronic or magnetic tape and sets forth as to each Home Equity Loan (i) the account
number, (ii) the Cut-Off Date Principal Balance, (iii) the Loan Rate, (iv) the lien position of the
related Mortgage and (v) the CLTV. The Home Equity Loan Schedule shall be amended from time to time
to reflect the removal of Home Equity Loans and the addition of any Eligible Substitute Home Equity
Loans to the Trust, and when so amended shall include the information set forth above with respect
to each Eligible Substitute Home Equity Loan as of its related date of substitution.



     HSBC Finance: HSBC Finance Corporation, a Delaware corporation, and its successors.



     Insurance Proceeds: Proceeds paid by any insurer pursuant to any insurance policy
covering a Home Equity Loan, or by the Servicer pursuant to the last sentence of Section 3.04, net
of any component thereof covering any expenses incurred by or on behalf of the Servicer in
connection with obtaining such Insurance Proceeds and exclusive of any portion thereof that is
applied to the restoration or repair of the related Mortgaged Property, released to the Mortgagor
in accordance with the Servicer’s normal servicing procedures or required to be paid to any holder
of a mortgage senior to such Home Equity Loan.



     Initial Home Equity Loan: Each Home Equity Loan transferred and assigned to the Trust
on the Closing Date.



     Interest Accrual Period: With respect to each Class of Floating Rate Certificates and
(i) each Distribution Date after the initial Distribution Date, the period from and including the
Distribution Date in the month immediately preceding the month in which the Distribution Date
occurs and ending on and including the day immediately preceding the current Distribution Date



11









 




and (ii) the initial Distribution Date, the following two periods: (a) the period beginning
on the Closing Date and ending on November 19, 2006, and (b) the period beginning on November 20,
2006 and ending on the day immediately preceding the initial Distribution Date. With respect to
each Class of Fixed Rate Certificates and (i) each Distribution Date after the initial Distribution
Date, the calendar month preceding such Distribution Date and (ii) the initial Distribution Date,
the following two periods: (a) the period beginning on October 12, 2006 and ending on October 31,
2006, and (b) the calendar month of November 2006.




     Interest Carry Forward Amount: With respect to each Class of Offered Certificates and
any Distribution Date, the sum of (i) an amount equal to the excess, if any, of (A) the sum of the
Current Interest and the Interest Carry Forward Amount for such Class of Certificates as of the
immediately preceding Distribution Date over (B) the amount of the actual distributions with
respect to such amounts made to such Class of Certificates on such immediately preceding
Distribution Date plus (ii) interest on such amount calculated for the related Interest Accrual
Period at the related Pass-Through Rate.



     Interest Collections: With respect to any Distribution Date, the sum, without
duplication, of:




     (i) the portion allocable to interest of all scheduled monthly payments on the Home
Equity Loans received during the related Collection Period;




     (ii) all Net Liquidation Proceeds actually collected by the Servicer during the related
Collection Period (to the extent such Net Liquidation Proceeds relate to interest);




     (iii) the interest portion of the Purchase Price for any Home Equity Loan repurchased
from the Trust pursuant to the terms of this Agreement during the related Collection Period;




     (iv) the interest portion of all Substitution Adjustment Amounts with respect to the
related Collection Period;




     (v) the interest portion of all other unscheduled collections on the Home Equity Loans
received by the Servicer during the related Collection Period, to the extent not previously
distributed; and




     (vi) the interest portion of all Insurance Proceeds on any Home Equity Loan collected
by the Servicer during the related Collection Period.



     Interim Overcollateralization Amount: With respect to any Distribution Date, the
excess, if any, of (i) the Pool Balance as of the last day of the related Collection Period over
(ii) the aggregate Certificate Principal Balance of the Offered Certificates (after giving effect
to the anticipated distribution of Principal Collections on such Distribution Date).



     Interim Overcollateralization Deficiency: With respect to any Distribution Date, the
excess, if any, of (x) the Targeted Overcollateralization Amount for such Distribution Date over
(y) the Interim Overcollateralization Amount for such Distribution Date.



12









 





     Issuing Entity: HSBC Home Equity Loan Trust (USA) 2006-3.



     LIBOR Business Day: Any day on which dealings in United States dollars are transacted
in the London interbank market.



     LIBOR Determination Date: With respect to any Distribution Date, the second LIBOR
Business Day before the first day of the related Interest Accrual Period.



     Latest Possible Maturity Date: The Distribution Date following the third anniversary
of the scheduled maturity date of the Mortgage Loan having the latest scheduled maturity date as of
the Cut-Off Date.



     Lien: Any mortgage, deed of trust, pledge, conveyance, hypothecation, assignment,
participation, deposit arrangement, encumbrance, lien (statutory or other), preference, priority
right or interest or other security agreement or preferential arrangement of any kind or nature
whatsoever, including, without limitation, any conditional sale or other title retention agreement,
any financing lease having substantially the same economic effect as any of the foregoing or the
filing of any financing statement under the UCC (other than any such financing statement filed for
informational purposes only) or comparable law of any jurisdiction to evidence any of the
foregoing.



     Liquidated Home Equity Loan: With respect to any Distribution Date, any Home Equity
Loan in respect of which the Servicer has determined as of the end of the related Collection Period
that all Liquidation Proceeds that it expects to recover on such Home Equity Loan have been
recovered (exclusive of any possibility of a deficiency judgment but including any recoveries of
Charge Off Amounts or accrued or imputed interest including, but not limited to, recoveries related
to walks (i.e., instances where the Mortgagor has voluntarily vacated the Mortgaged Property) or
short sales)).



     Liquidation Expenses: Out-of-pocket expenses (exclusive of overhead) that are
incurred by the Servicer in connection with the liquidation of any Home Equity Loan and not
recovered under any insurance policy, such expenses including, without limitation, reasonable legal
fees and expenses, any unreimbursed amount expended pursuant to Section 3.06 (including, without
limitation, amounts advanced to correct defaults on any mortgage loan that is senior to such Home
Equity Loan and amounts advanced to keep current or pay off a mortgage loan that is senior to such
Home Equity Loan) with respect to the related Home Equity Loan and any related and unreimbursed
expenditures for real estate property taxes, mechanic’s liens, title perfection, property
management or for property restoration, preservation or insurance against loss or damage.



     Liquidation Proceeds: Proceeds (including Insurance Proceeds) received in connection
with the liquidation of any Home Equity Loan, whether through trustee’s sale, foreclosure sale or
otherwise, including, but not limited to, walks (i.e., instances where the Mortgagor has
voluntarily vacated the Mortgaged Property) and short sales.



     Loan Rate: With respect to any Home Equity Loan and day, the per annum rate of
interest applicable under the related Mortgage Note to the calculation of interest for such day on



13









 




the Principal Balance (adjusted as required by the Relief Act and/or any other federal, state
or local legislation or regulation).




     Majority Certificateholder: The Holder or Holders of Offered Certificates evidencing
not less than 51% of the Voting Rights.



     MERS: Mortgage Electronic Registration Systems, Inc., a corporation organized and
existing under the laws of the State of Delaware, or any successor thereto.



     MERS® System: The system of recording transfers of Mortgages electronically
maintained by MERS.



     MIN: The Mortgage Identification Number for Home Equity Loans registered with MERS on
the MERS® System.



     Monthly Excess Cashflow: With respect to any Distribution Date, the excess, if any,
of (i) the Available Distribution Amount for such Distribution Date over (ii) the sum of (A) the
amount of interest distributions on all Classes of Offered Certificates pursuant to clauses (i)
through (iii) of Section 4.01(a) and (B) the Principal Collections for the related Collection
Period.



     Monthly Distribution Statement: The monthly statement to Certificateholders described
in Section 4.02 hereof.



     Moody’s: Moody’s Investors Service, Inc., or its successor in interest.



     Mortgage: The mortgage, deed of trust or other instrument creating a first, second or
third lien on an estate in fee simple interest in real property securing a Home Equity Loan.



     Mortgage File: The mortgage documents (including without limitation the related
Mortgage Note) listed in Section 2.01 pertaining to a particular Home Equity Loan and any
additional documents required to be added to the Mortgage File pursuant to this Agreement, which
documents may be physical documents or, pursuant to the terms of Section 2.01, may be optical
images or other representations thereof.



     Mortgage Note: With respect to a Home Equity Loan, the mortgage note or other
evidence of indebtedness under which the related Mortgagor agrees to pay the indebtedness evidenced
thereby and secured by the related Mortgage.



     Mortgaged Property: The underlying property securing a Home Equity Loan.



     Mortgagor: The obligor or obligors under a Mortgage.



     Net Interest Collections: With respect to any Distribution Date:




	 	(i)	 	Interest Collections received during the related Collection Period; less
	 
	 	(ii)	 	the Servicing Fee for the related Collection Period; plus




14









 






	 	(iii)	 	Recovered Charge Off Amounts actually collected by the Servicer during the
related Collection Period.





     Net Liquidation Proceeds: With respect to any Liquidated Home Equity Loan, the
excess, if any, of (x) Liquidation Proceeds over (y) Liquidation Expenses.



     Net Loan Rate: With respect to any Home Equity Loan, the Loan Rate less the Servicing
Fee Rate.



     Net Rate Cap: With respect to the first Distribution Date, a per annum rate equal to
7.711% and, with respect to each subsequent Distribution Date, a per annum rate equal to the
weighted average of the Net Loan Rates of each Home Equity Loan, in each case outstanding as of the
first day of the related Collection Period, multiplied in the case of the Floating Rate
Certificates only by a fraction, the numerator of which is 30 and the denominator of which is the
number of days in the related Interest Accrual Period.



     Net Rate Carryover Amount: With respect to each Class of Offered Certificates and any
Distribution Date, the sum of (i) the excess, if any, of (A) interest accrued on such Class of
Certificates at the applicable Formula Rate for such Class for the related Interest Accrual Period
over (B) interest accrued on such Class of Certificates at the applicable Pass-Through Rate for the
related Interest Accrual Period, (ii) any Net Rate Carryover Amount for such Class remaining unpaid
from prior Distribution Dates and (iii) interest on the amount in clause (ii) at the applicable
Formula Rate for such Class and such Distribution Date.



     Non-Permitted Transferee: Any Person other than a Permitted Transferee.



     Offered Certificates: The Class A Certificates and the Class M Certificates.



     Officer’s Certificate: A certificate signed by the President, an Executive Vice
President, a Senior Vice President, a Vice President, an Assistant Vice President, the Treasurer,
Assistant Treasurer, Controller or Assistant Controller of the Depositor or the Servicer, as the
case may be.



     One-Month LIBOR: The per annum rate established by the Administrator in accordance
with Section 4.02.



     One Payment Delinquency Percentage: With respect to any Collection Period, a
fraction, expressed as a percentage, the numerator of which is equal to the aggregate of the
Principal Balances of all Home Equity Loans that are one (1) payment contractually delinquent as of
the end of such Collection Period, and the denominator of which is the Pool Balance as of the end
of such Collection Period.



     Opinion of Counsel: A written opinion of counsel reasonably acceptable to the Trustee
or the Administrator, as the case may be, who may be in-house counsel for the Servicer or the
Depositor; provided, however, that with respect to the interpretation or application of the REMIC
Provisions, such counsel must (i) in fact be independent of the Seller, the Depositor and the
Servicer, (ii) not have any direct financial interest in the Seller, the Depositor or the Servicer
or in any affiliate thereof, and (iii) not be connected with the Seller, the Depositor or the
Servicer as



15









 




an officer, employee, promoter, underwriter, trustee, partner, director or person performing
similar functions.




     Optional Termination Date: The Distribution Date immediately following the
Distribution Date on which the aggregate Certificate Principal Balance of the Offered Certificates,
after giving effect to distributions on such Distribution Date, falls below 15 percent of the
aggregate Original Class Certificate Principal Balance of the Offered Certificates.



     Original Class Certificate Principal Balance: With respect to each Class of Offered
Certificates, the amount set forth below:



	 	 	 	 	 
	 	 	Original Class Certificate
	Class	 	Principal Balance
	A-1F
	 	$	255,200,000	 
	A-1V
	 	$	281,000,000	 
	A-2F
	 	$	78,500,000	 
	A-2V
	 	$	100,000,000	 
	A-3F
	 	$	66,300,000	 
	A-3V
	 	$	100,000,000	 
	A-4
	 	$	170,620,000	 
	M-1
	 	$	72,090,000	 
	M-2
	 	$	52,300,000	 






     Overcollateralization Amount: With respect to any Distribution Date, the excess, if
any, of (x) the Pool Balance as of the last day of the related Collection Period over (y) the
aggregate Certificate Principal Balance of the Offered Certificates calculated after taking into
account all distributions in respect of principal on such Distribution Date.



     Overcollateralization Release Amount: With respect to any Distribution Date, the
amount (but not in excess of the Principal Collections received during the related Collection
Period) equal to the excess, if any, of (i) the Interim Overcollateralization Amount for such
Distribution Date over (ii) the Targeted Overcollateralization Amount for such Distribution Date.



     Ownership Interest: With respect to any Certificate, any ownership or security
interest in such Certificate, including any interest in such Certificate as the Holder thereof and
any other interest therein, whether direct or indirect, legal or beneficial, as owner or as
pledgee.



     Pass-Through Margin: With respect to each Class of Floating Rate Certificates and any
Interest Accrual Period, the percentage specified for such Class and Interest Accrual Period in the
following table:



16









 





	 	 	 	 	 	 	 	 	 
	 	 	Pass-Through	 	Pass-Through
	Class	 	Margin (1)	 	Margin (2)
	A-1V
	 	 	0.08	%	 	 	0.16	%
	A-2V
	 	 	0.13	%	 	 	0.26	%
	A-3V
	 	 	0.16	%	 	 	0.32	%
	A-4
	 	 	0.24	%	 	 	0.48	%
	M-1
	 	 	0.26	%	 	 	0.39	%
	M-2
	 	 	0.30	%	 	 	0.45	%








 




			
	 	 	(1) For each Interest Accrual Period relating to a
Distribution Date occurring on or prior to the Optional
Termination Date.
	 
	 	 	(2) For each Interest Accrual Period relating to a
Distribution Date occurring after the Optional Termination
Date.





     Pass-Through Rate: With respect to any Class of Certificates and any Interest Accrual
Period, the lesser of (i) the applicable Formula Rate for such Class and Interest Accrual Period
and (ii) the Net Rate Cap for the related Distribution Date.



     Paying Agent: Any Person appointed as paying agent pursuant to Section 5.05.



     Percentage Interest: For purposes of making distributions among Certificates of the
Class A Certificates or Class M Certificates, the percentage obtained by dividing the principal
denomination, as applicable, of such Certificate by the aggregate of the principal denominations,
as applicable, of all Certificates of such Class. In the case of any Class R Certificate, the
percentage interest set forth on the face of such Certificate.



     Perfection Representations: The representations, warranties and covenants set forth
in Schedule 1 attached hereto.



     Permitted Investments: One or more of the following (excluding any callable
investments purchased at a premium):




     (i) direct obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or instrumentality thereof,
provided that such obligations are backed by the full faith and credit of the United States;




     (ii) repurchase agreements on obligations specified in clause (i) maturing not more
than three months from the date of acquisition thereof, provided that the short-term
unsecured debt obligations of the party agreeing to repurchase such obligations are at the
date of acquisition rated by each Rating Agency in its highest short-term rating category
(which is “F1+” for Fitch, “A-1+” for Standard & Poor’s and “P-1” for Moody’s);




     (iii) certificates of deposit, time deposits and bankers’ acceptances (which, if
Moody’s is a Rating Agency, shall each have an original maturity of not more than 90 days
and, in the case of bankers’ acceptances, shall in no event have an original maturity
of more than 365 days) of any U.S. depository institution or trust company incorporated



17









 






under the laws of the United States or any state thereof and subject to supervision and
examination by federal and/or state banking authorities, provided that the unsecured
short-term debt obligations of such depository institution or trust company at the date of
acquisition thereof have been rated by each of Moody’s, Standard & Poor’s and Fitch in its
highest unsecured short-term debt rating category;




     (iv) commercial paper (having original maturities of not more than 270 days) of any
corporation incorporated under the laws of the United States or any state thereof which on
the date of acquisition has been rated by Fitch, Standard & Poor’s and Moody’s in their
highest short-term rating categories;




     (v) short term investment funds sponsored by any bank, trust company or national
banking association incorporated under the laws of the United States or any state thereof
which on the date of acquisition has been rated by Fitch, Standard & Poor’s and Moody’s in
their respective highest rating category for long-term unsecured debt, or any other
short-term investment fund the funds in which are invested in securities rated in the
highest rating category by Fitch, Standard & Poor’s and Moody’s and which mature on demand
or prior to the next Distribution Date;




     (vi) interests in any money market fund or mutual fund which at the date of acquisition
has a rating of “Aaa” by Moody’s, “AAA” by Fitch, if rated by Fitch, and “AAA” (or “AAAm” or
“AAAm-G” with respect to money market funds) by and Standard & Poor’s or such lower rating
as will not result in the qualification, downgrading or withdrawal of the then current
ratings assigned to the Offered Certificates by each Rating Agency; and




     (vii) other obligations or securities that are indebtedness in registered form for U.S.
federal income tax purposes and that are reasonably acceptable to each Rating Agency as a
Permitted Investment hereunder and will not result in a reduction in the then-current
ratings of any Class of Offered Certificates, as evidenced by a confirmation or letter to
such effect from such Rating Agency;


provided that no instrument described hereunder shall evidence either the right to receive (a) only
interest with respect to the obligations underlying such instrument or (b) both principal and
interest payments derived from obligations underlying such instrument if such interest and
principal payments provide a yield to maturity at par greater than 120% of the yield to maturity at
par of the underlying obligations; and provided, further, that no instrument described hereunder
may be purchased at a price greater than par if such instrument may be prepaid or called at a price
less than its purchase price prior to its stated maturity.




     Permitted Transferee: Any person other than (i) the United States, any State or
political subdivision thereof, or any agency or instrumentality of any of the foregoing, (ii) a
foreign government, International Organization or any agency or instrumentality of either of the
foregoing, (iii) an organization (except certain farmers’ cooperatives described in Section 521 of
the Code) which is exempt from tax imposed by Chapter 1 of the Code (including the tax imposed by
Section 511 of the Code on unrelated business taxable income) on any excess
inclusions (as defined in Section 860E(c)(1) of the Code) with respect to any Residual



18









 




Certificate, (iv) rural electric and telephone cooperatives described in Section 1381(a)(2)(C) of
the Code, (v) an “electing large partnership” as defined in Section 775 of the Code, (vi) a Person
that is not a citizen or resident of the United States, a corporation, partnership, or other entity
created or organized in or under the laws of the United States, any state thereof or the District
of Columbia, or an estate or trust whose income from sources without the United States is
includible in gross income for United States federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States or a trust if a court
within the United States is able to exercise primary supervision over the administration of the
trust and one or more United States Persons have the authority to control all substantial decisions
of the trust unless such Person has furnished the transferor and the Administrator with a duly
completed Internal Revenue Service Form W-8ECI or any applicable successor form, and (vii) any
other Person so designated by the Depositor based upon an Opinion of Counsel that the Transfer of
an Ownership Interest in a Residual Certificate to such Person may cause any REMIC created under
this Agreement to fail to qualify as a REMIC at any time that the Certificates are outstanding.
The terms “United States,” “State” and “International Organization” shall have the meanings set
forth in Section 7701 of the Code or successor provisions. A corporation will not be treated as an
instrumentality of the United States or of any State or political subdivision thereof for these
purposes if all of its activities are subject to tax and, with the exception of Freddie Mac, a
majority of its board of directors is not selected by such government unit.




     Person: Any individual, corporation, partnership, joint venture, association, limited
liability company, joint-stock company, trust, unincorporated organization, government or any
agency or political subdivision thereof, or any other entity.



     Pool Balance: As of any date of determination, the aggregate of the outstanding
Principal Balances of all Home Equity Loans as of such date.



     Preferred Stock: As defined in Section 10.13.



     Prepayment Assumption: The “Prepayment Assumption” as defined in the Prospectus
Supplement.



     Prepayment Interest Shortfall: With respect to any Collection Period and any Home
Equity Loans that were prepaid in full during such Collection Period, an aggregate amount equal to
the excess, if any, of (i) thirty days’ interest on the aggregate Principal Balance of such Home
Equity Loans at their respective Net Loan Rates, over (ii) the aggregate amount of interest
actually remitted by the related Mortgagors in connection with such principal prepayments.



     Principal Balance: With respect to any Home Equity Loan (other than a Liquidated Home
Equity Loan) and date, the related Cut-Off Date Principal Balance, minus the sum of (x) all
collections credited against the principal balance of such Home Equity Loan in accordance with the
terms of the related Mortgage Note and (y) any related Charge Off Amounts credited against the
principal balance of such Home Equity Loan prior to such date. For purposes of this definition, a
Liquidated Home Equity Loan shall be deemed to have a Principal Balance equal to
the Principal Balance of the related Home Equity Loan immediately prior to the final recovery
of related Liquidation Proceeds and a Principal Balance of zero thereafter.



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     Principal Collections: With respect to any Distribution Date, the sum, without
duplication, of:




     (i) the principal portion of all scheduled monthly payments on the Home Equity Loans
received by the Servicer during the related Collection Period;




     (ii) the principal portion of the Purchase Price for any Home Equity Loan repurchased
from the Trust pursuant to the terms of this Agreement during the related Collection Period;




     (iii) the principal portion of all Substitution Adjustment Amounts with respect to the
related Collection Period;




     (iv) all Net Liquidation Proceeds allocable to principal (excluding Foreclosure Profits
and Recovered Charge Off Amounts) actually received by the Servicer during the related
Collection Period;




     (v) the principal portion of all other unscheduled collections on the Home Equity Loans
received by the Servicer during the related Collection Period (including, without
limitation, full and partial prepayments of principal made by the Mortgagors), to the extent
not previously distributed; and




     (vi) the principal portion of all Insurance Proceeds on any Home Equity Loan collected
by the Servicer during the related Collection Period.



     Principal Distribution Amount: With respect to any Distribution Date, (i) the
Principal Collections received on the Home Equity Loans during the related Collection Period plus
(ii) the Extra Principal Distribution Amount for such Distribution Date, if any, minus (iii) for
Distribution Dates occurring on and after the Stepdown Date and with respect to which a Trigger
Event is not in effect, the Overcollateralization Release Amount, if any.



     Prospectus Supplement: The Prospectus Supplement, dated October 20, 2006, relating to
the Offered Certificates.



     Purchase Price: With respect to any Home Equity Loan purchased from the Trust on any
date pursuant to Section 2.02, 2.04 or 3.01, an amount equal to the sum of (i) the Principal
Balance thereof plus any related Charge Off Amount as of the end of the related Collection Period
preceding the date of repurchase, (ii) accrued and unpaid interest as of the end of such Collection
Period and (iii) any costs and damages incurred by the Trust with respect to such Home Equity Loan
in connection with any violation by such Home Equity Loan of any “predatory” or “abusive” lending
laws.



     Rating Agencies: Moody’s, Standard & Poor’s and Fitch. If such agency or a successor
is no longer in existence, “Rating Agency” shall be such nationally recognized statistical credit
rating agency, or other comparable Person, designated by the Depositor, notice of which
designation shall be given to the Trustee and the Administrator. References herein to the
highest short term unsecured rating category of a Rating Agency shall mean “P-1” or better in the
case of Moody’s, “A-1+” or better in the case of Standard & Poor’s and “F1+” in the case of Fitch
and



20









 




in the case of any other Rating Agency shall mean such equivalent ratings. References herein
to the highest long-term rating category of a Rating Agency shall mean “AAA” in the case of Fitch
and Standard & Poor’s and “Aaa” in the case of Moody’s and in the case of any other Rating Agency,
such equivalent rating.




     Realized Loss: With respect to any (i) Charged Off Home Equity Loan and any
Collection Period (other than the Collection Period in which all or a portion of such Charged Off
Home Equity Loan becomes a Liquidated Home Equity Loan), the related Charge Off Amount and (ii)
Liquidated Home Equity Loan, the excess of the related Principal Balance at the end of the related
Collection Period in which such Home Equity Loan became a Liquidated Home Equity Loan over the
related Net Liquidation Proceeds.



     Record Date: With respect to any Distribution Date and the Floating Rate
Certificates, the Business Day immediately preceding such Distribution Date, or if any such Class
of Certificates are no longer Book-Entry Certificates, the last Business Day of the month
immediately preceding the month in which such Distribution Date occurs. With respect to any
Distribution Date and the Fixed Rate Certificates and the Class R Certificate, the last Business
Day of the month immediately preceding the month in which such Distribution Date occurs.



     Recovered Charge Off Amount: With respect to any Home Equity Loan that became a
Liquidated Home Equity Loan during a Collection Period, the amount, if any, by which (i) the
related Net Liquidation Proceeds exceed (ii) its Principal Balance immediately prior to foreclosure
plus unpaid interest thereon, up to an amount equal to the related Charge Off Amounts, to the
extent not previously recovered. With respect to any Charged Off Home Equity Loan and any
Collection Period (other than the Collection Period in which all or a portion of such Charged Off
Home Equity Loan becomes a Liquidated Home Equity Loan), an amount equal to the recovery of any
prior Charge Off Amount, to the extent collected by the Servicer, or deposited by the Servicer or
Depositor pursuant to Section 2.02 or 2.04, during any Collection Period, to the extent not
previously recovered.



     Regulation AB: Subpart 229.1100 — Asset-Backed Securities (Regulation AB), 17 C.F.R.
§§229.1100 — 229.1123, as such may be amended from time to time, and subject to such clarification
and interpretation as have been provided by the SEC in the adopting release (Asset-Backed
Securities, Securities Act Release No. 33-8518, 70 Fed. Reg. 1,506, 1,531 (Jan. 7, 2005)) or by the
staff of the SEC, or as may be provided by the SEC or its staff from time to time.



     Related Documents: As such term is defined in Section 2.01.



     REMIC Provisions: Provisions of the federal income tax law relating to real estate
mortgage investment conduits, which appear at Sections 860A through 860G of the Code, and related
provisions and proposed, temporary and final regulations and published rulings, notices and
announcements promulgated thereunder, as the foregoing may be in effect from time to time, as well
as provisions of applicable state laws.



     Remittance Report: As such term is defined in Section 3.11(b).



     REO: A Mortgaged Property that is acquired by the Trust in a foreclosure or by grant
of deed in lieu of foreclosure.



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     Residual Certificate: The Class R Certificate.



     Responsible Officer: With respect to the Trustee or the Administrator, any officer
assigned to the corporate trust group (or any successor thereto), including any vice president,
assistant vice president, trust officer, assistant secretary or any other officer of the Trustee or
the Administrator, as the case may be, customarily performing functions similar to those performed
by any of the above designated officers, in each case having direct responsibility for the
administration of this Agreement. When used with respect to any Seller or the Servicer, the
President or any Vice President, Assistant Vice President, Treasurer, Assistant Treasurer or any
Secretary or Assistant Secretary.



     SAIF: The Savings Association Insurance Fund, as from time to time constituted,
created under the Financial Institutions Reform, Recovery and Enhancement Act of 1989, or if at any
time after the execution of this instrument the Savings Association Insurance Fund is not existing
and performing duties now assigned to it, the body performing such duties on such date.



     SEC: The U.S. Securities and Exchange Commission.



     Securities Act: The Securities Act of 1933, as amended.



     Sellers: The sellers set forth in Schedule 2 attached hereto.



     Servicer: HSBC Finance, or its successor in interest, or any successor servicer
appointed as herein provided.



     Servicer Termination Events: As defined in Section 7.01.



     Servicing Certificate: A certificate completed by and executed on behalf of the
Servicer in accordance with Section 3.10.



     Servicing Criteria: The “servicing criteria” set forth in Item 1122(d) of Regulation
AB, as the same may be from time to time amended.



     Servicing Fee: The fee payable to the Servicer pursuant to Section 3.09, which with
respect to any Collection Period shall be equal to the excess of (i) 1/12th (or, in the case of the
first Collection Period, a fraction the numerator of which is the number of days from the Cut-Off
Date to the last day of such Collection Period and the denominator of which is 360) of the
Servicing Fee Rate for each Home Equity Loan in the Home Equity Loan Schedule multiplied by the
outstanding Principal Balance of such Home Equity Loan as of the first day of the related
Collection Period, over (ii) the Compensating Interest for such Collection Period.



     Servicing Fee Rate: A rate equal to 0.50% per annum.



     Servicing Officer: Any officer of the Servicer or other individual designated by an
officer of the Servicer involved in, or responsible for, the administration and servicing of the
Home Equity Loans, whose name and specimen signature appear on a list of servicing officers
furnished to the Trustee and the Administrator on the Closing Date by the Servicer, as such list
may be amended from time to time.



22









 





     Settlement Agreement: The consent decrees entered into between Household
International Inc. and participating States (and agencies of such States) in accordance with the
agreement reached between Household International Inc. and a multi-state working group of state
attorneys general and regulatory agencies, which became effective on January 19, 2003 and reflected
in the Specified Filing.



     Specified Filing: The filing by Household International Inc. with the SEC on Form 8-K
dated October 11, 2002.



     Standard & Poor’s: Standard & Poor’s Ratings Services, a division of The McGraw-Hill
Companies, Inc., or its successor in interest.



     Stepdown Date: The earlier of (i) the first Distribution Date following the
Distribution Date on which the aggregate Certificate Principal Balance of the Class A Certificates
has been reduced to zero and (ii) the later of (A) the Distribution Date in December 2009 and (B)
the first Distribution Date on which the aggregate Certificate Principal Balance of the Class A
Certificates (calculated for this purpose after giving effect to any distributions of principal for
such Distribution Date) is less than or equal to 48.80% of the Pool Balance for such Distribution
Date.



     Subsequent Cut-Off Date: With respect to each Eligible Substitute Home Equity Loan,
the close of business on the day designated as the “Subsequent Cut-Off Date” with respect to the
Eligible Substitute Home Equity Loan.



     Subservicer: With respect to each Home Equity Loan, the related Seller that sold such
Home Equity Loan to the Depositor pursuant to the Home Equity Loan Purchase Agreement.



     Substitution Adjustment Amount: With respect to any Defective Home Equity Loan or any
Home Equity Loan for which the Servicer elects to substitute pursuant to Section 2.02 and the date
on which a substitution thereof occurs pursuant to Section 2.02 or 2.04, the sum of:




     (i) the excess, if any, of (a) the Principal Balance of such Defective Home Equity Loan
or such elected Home Equity Loan plus any related Charge Off Amount as of the end of the
related Collection Period preceding the date of substitution (after the application of any
principal payments received on such Defective Home Equity Loan or such elected Home Equity
Loan on or before the date of the substitution of the applicable Eligible Substitute Home
Equity Loan or Loans) over (b) the aggregate Principal Balance of the applicable Eligible
Substitute Home Equity Loan or Loans, plus




     (ii) accrued and unpaid interest to the end of such Collection Period computed on a
daily basis at the Net Loan Rate on the Principal Balance of such Defective Home Equity Loan
or such elected Home Equity Loan outstanding from time to time, plus




     (iii) any costs, expenses and damages incurred by the Trust resulting from any
violation of any “predatory” or “abusive” lending laws” in connection with such Home Equity
Loan.



23









 





     Targeted Overcollateralization Amount: With respect to any Distribution Date, (i)
prior to the Stepdown Date, 16.80% of the Cut-Off Date Pool Balance, (ii) on or after the Stepdown
Date and on which a Trigger Event is not in effect, the greater of (A) 33.60% of the Pool Balance
as of the last day of the related Collection Period and (B) 1.00% of the Cut-Off Date Pool Balance,
or (iii) on or after the Stepdown Date and on which a Trigger Event is in effect, the Targeted
Overcollateralization Amount for the immediately preceding Distribution Date.



     Termination Price: As defined in Section 9.01(a).



     Three Payment Plus Delinquency Percentage: With respect to any Collection Period, a
fraction, expressed as a percentage, the numerator of which is equal to the aggregate of the
Principal Balances of all Home Equity Loans that are three (3) or more payments contractually
delinquent, including those Home Equity Loans in bankruptcy, foreclosure and REO as of the end of
such Collection Period, and the denominator of which is the Pool Balance as of the end of such
Collection Period.



     Transaction Documents: This Agreement, the Home Equity Loan Purchase Agreement, and
any other document or agreement entered into in connection with the Trust, the Certificates or the
Home Equity Loans.



     Transfer: Any direct or indirect transfer, sale, pledge, hypothecation or other form
of assignment of any Ownership Interest in a Certificate.



     Transfer Agreement: The transfer agreement dated as of October 26, 2006 between the
Trustee and each Seller pursuant to which the Sellers will assign to the Trust all of their right,
title and interest in and on the Transferred Assets not otherwise transferred pursuant to the Home
Equity Loan Purchase Agreement.



     Transfer Date: With respect to any Home Equity Loan transferred to or retransferred
from the Trust hereunder, the date on which such transfer or retransfer is made under the terms
hereof, which date shall be (i) in the case of the Home Equity Loans originally listed on the Home
Equity Loan Schedule, the Closing Date, and (ii) in the case of any Eligible Substitute Home Equity
Loan, the date on which such Eligible Substitute Home Equity Loan is conveyed to the Trust under
the terms hereof.



     Transferred Assets: All aspects, rights, title or interests of, in, to or under the
Home Equity Loans that are not otherwise conveyed hereunder pursuant to Section 2.01, including,
without limitation, all agreements, instruments and other documents evidencing or governing the
Mortgagor’s obligations under the Home Equity Loans or otherwise related thereto or establishing or
setting forth the terms and conditions thereof, and any amendments or modifications thereto, and
all property and collateral securing the borrowers obligations thereunder.



     Trigger Event: Will be in effect on any Distribution Date on or after the Stepdown
Date on which either (i) the Two Payment Plus Rolling Average for such Distribution Date equals or
exceeds 11.50%, or (ii) the Cumulative Loss Percentage for such Distribution Date exceeds the
Cumulative Loss Percentage Trigger for such Distribution Date.



24









 





     Trust: The trust created by this Agreement and designated “HSBC Home Equity Loan
Trust (USA) 2006-3,” the corpus of which consists of the Trust Fund.



     Trust Fund: Consists of the Home Equity Loans, such assets as shall from time to time
be identified as deposited in the Collection Account and the Carryover Reserve Fund (in each case
exclusive of net earnings thereon), the Mortgage Notes and other Mortgage File documents for the
Home Equity Loans, any property that secured a Home Equity Loan and that has become REO, the
interest of the Depositor in certain hazard insurance policies maintained by the Mortgagors or the
Servicer in respect of the Home Equity Loans, the Collection Account, the proceeds of each of the
foregoing and one share of Preferred Stock of the Depositor.



     Trustee: U.S. Bank National Association, or any successor Trustee appointed in
accordance with this Agreement that has accepted such appointment in accordance with this
Agreement.



     Two Payment Delinquency Percentage: With respect to any Collection Period, a
fraction, expressed as a percentage, the numerator of which is equal to the aggregate of the
Principal Balances of all Home Equity Loans that are two (2) payments contractually delinquent as
of the end of such Collection Period, and the denominator of which is the Pool Balance as of the
end of such Collection Period.



     Two Payment Plus Delinquency Percentage: With respect to any Collection Period, a
fraction, expressed as a percentage, the numerator of which is equal to the aggregate of the
Principal Balances of all Home Equity Loans that are two (2) or more payments contractually
delinquent, including those Home Equity Loans in bankruptcy, foreclosure and REO as of the end of
such Collection Period, and the denominator of which is the Pool Balance as of the end of such
Collection Period.



     Two Payment Plus Rolling Average: With respect to any Distribution Date, the average
of the Two Payment Plus Delinquency Percentage for each of the three (3) immediately preceding
Collection Periods.



     UCC: The Uniform Commercial Code, as in effect from time to time in any specified
jurisdiction.



     Underwriter Exemption: Prohibited Transaction Exemption 2002-41, 67 Fed. Reg. 54487
(2002), as amended (or any successor thereto), or any substantially similar administrative
exemption granted by the U.S. Department of Labor.



     United States Person: As defined in Section 7701(a)(30) of the Code, (i) a citizen or
resident of the United States, (ii) a domestic partnership, (iii) a domestic corporation, (iv) any
estate (other than a foreign estate, within the meaning of Section 7701(a)(31) of the Code), and
(v) any trust if (A) a court within the United States is able to exercise primary supervision over
the administration of the trust, and (B) one or more United States Persons have the authority to
control all substantial decisions of the trust.



     Unpaid Realized Loss Amount: With respect to any Class of Class M Certificates and
any Distribution Date, the excess, if any, of (i) the sum of all Applied Realized Loss Amounts



25









 




with respect to such Class of Certificates over (ii) the sum of all distributions in reduction of such
Applied Realized Loss Amounts on all previous Distribution Dates. Amounts distributed to a Class
of Class M Certificates in respect of any Unpaid Realized Loss Amount will not be applied to reduce
the Certificate Principal Balance of such Class.




     Voting Rights: 100% of the Voting Rights shall be allocated among the Offered
Certificates (other than the Depositor or any of its Affiliates) in accordance with their
respective Certificate Principal Balances. The Class R Certificate shall have no Voting Rights.



          Section 1.02. Other Definitional Provisions.




     (a) All terms defined in this Agreement shall have the defined meanings when used in any
certificate or other document made or delivered pursuant hereto unless otherwise defined therein.



     (b) As used in this Agreement and in any certificate or other document made or delivered
pursuant hereto or thereto, accounting terms not defined in this Agreement or in any such
certificate or other document, and accounting terms partly defined in this Agreement or in any such
certificate or other document to the extent not defined, shall have the respective meanings given
to them under generally accepted accounting principles. To the extent that the definitions of
accounting terms in this Agreement or in any such certificate or other document are inconsistent
with the meanings of such terms under generally accepted accounting principles, the definitions
contained in this Agreement or in any such certificate or other document shall control.



     (c) The words “hereof”, “herein”, “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular provision of this
Agreement; Article, Section, Schedule and Exhibit references contained in this Agreement are
references to Articles, Sections, Schedules and Exhibits in or to this Agreement unless otherwise
specified; and the terms “including” and “includes” shall mean “including without limitation.”



     (d) The definitions contained in this Agreement are applicable to the singular as well as the
plural forms of such terms and to the masculine as well as to the feminine genders of such terms.



     (e) Any agreement, instrument or statute defined or referred to herein or in any instrument or
certificate delivered in connection herewith means such agreement, instrument or statute as from
time to time amended, modified or supplemented and includes (in the case of agreements or
instruments) references to all attachments thereto and instruments incorporated therein; references
to a Person are also to its permitted successors and assigns.



          Section 1.03. Interest Calculations. All calculations of interest hereunder that are
made in respect of the Principal Balance of a Home Equity Loan shall be made based on the number of
days elapsed between the date that interest was last paid on such Home Equity Loan and the date of
receipt of the related Mortgagor’s most current payment. All calculations of interest on the
Floating Rate Certificates, shall be made on the basis of a 360-day year and the actual number
of days in the related Interest Accrual Period. All calculations of interest on the Fixed Rate
Certificates shall be made on the basis of a 360-day year consisting of twelve 30-day months.




26









 








ARTICLE II




CONVEYANCE OF HOME EQUITY LOANS;

ORIGINAL ISSUANCE OF CERTIFICATES; TAX TREATMENT




          Section 2.01. Acknowledgment; Conveyance of Home Equity Loans; Custody of Mortgage
Files.




     (a) The Depositor, concurrently with the execution and delivery of this Agreement, does hereby
irrevocably transfer, assign, sell, set over and otherwise convey to the Trust for the benefit of
the Certificateholders without recourse (subject to Sections 2.02 and 2.04) (i) all of its right,
title and interest in and to the unpaid principal balance of each Home Equity Loan and each
Eligible Substitute Home Equity Loan, including all Interest Collections and Principal Collections
in respect of any such Home Equity Loan received after the Cut-Off Date with respect to each
Initial Home Equity Loan and after the Subsequent Cut-Off Date with respect to each Eligible
Substitute Home Equity Loan pursuant to the Home Equity Loan Purchase Agreement; (ii) property
which secured such Home Equity Loan and which has been acquired by foreclosure or deed in lieu of
foreclosure; (iii) its interest in any insurance policies in respect of the Home Equity Loans
(including any Insurance Proceeds); (iv) all proceeds of any of the foregoing; and (v) one share of
the Depositor’s Preferred Stock. The parties hereto acknowledge and agree that it is the policy
and intent of the Trust to only acquire Home Equity Loans consistent with the terms set forth in
Section 2.04(b) of this Agreement.



     (b) The Depositor agrees to take, or to cause to be taken, such actions and to execute such
documents (including without limitation the filing of all necessary continuation statements for the
UCC-1 financing statement filed in the State of Delaware (which shall have been filed as promptly
as practicable, but in no event later than 10 days following the effective date of this Agreement),
describing the Home Equity Loans and naming the Depositor as seller and the Trust as buyer, and any
amendments or other filings to the UCC-1 financing statement required to reflect a change in the
applicable UCC or a change of the name or corporate structure of the Depositor) as are necessary to
perfect and protect the Certificateholders’ interests in the Trust created hereunder, including
each Home Equity Loan and the proceeds thereof (other than delivering to the Trustee possession of
the Mortgage Files, which possession will, subject to the terms hereof, be maintained by the
Subservicers on behalf of the Servicer as custodian and bailee for the Trustee). The parties
hereto intend that the transactions set forth herein constitute a sale and not a pledge by the
Depositor to the Trust of all the Depositor’s right, title and interest in and to the Home Equity
Loans and other Trust property as and to the extent described above. In the event the transactions
set forth herein are characterized as a pledge and not a sale, the Depositor hereby grants to the
Trust a security interest in all of the Depositor’s right, title and interest in, to and under the
Home Equity Loans and such other Trust property, to secure all of the Depositor’s obligations
hereunder, and this Agreement shall constitute a security agreement under applicable law. With
respect to the Home Equity Loans sold by each Seller to the Depositor, the Servicer shall cause
such Seller to file as promptly as practicable, but in no event later than ten days following the
effective date of this Agreement, in the appropriate public filing office or offices UCC-1
financing statements and continuation statements describing such Home Equity Loans
and naming such Seller as seller and the Depositor as buyer, to file appropriate continuation
statements thereto, to file amendments thereto in the case of a change in the applicable UCC,



27









 




name change or change in corporate structure and to file appropriate additional UCC-1 financing
statements, if any, if such Seller changes its jurisdiction of incorporation.




     (c) In connection with such transfer and assignment by the Depositor and the Servicer, acting
through the Subservicers, the Trustee and the Servicer hereby acknowledge that the Subservicers are
holding, with respect to the Home Equity Loans transferred on the Closing Date, and will hold, with
respect to each Eligible Substitute Home Equity Loan, on and from the applicable Transfer Date, as
custodian and bailee for the Trustee, the following documents or instruments with respect to each
such Home Equity Loan (the “Related Documents”):




     (i) the original Mortgage Note with all intervening endorsements showing a complete
chain of title from the originator of such Home Equity Loan to the Seller or a copy of such
original Mortgage Note with an accompanying lost note affidavit;




     (ii) the original Mortgage, with evidence of recording thereon, provided that if the
original Mortgage has been delivered for recording to the appropriate public recording
office of the jurisdiction in which the Mortgaged Property is located but has not yet been
returned to the Seller by such recording office, the Seller may hold a copy of such original
Mortgage;




     (iii) originals of any amendments to the Mortgage Note or Mortgage, any modification or
assumption agreements and any previous assignments of such Home Equity Loan; and




     (iv) for each Mortgage Loan registered on the MERS® System, the original assignment
into the name of MERS® including the related MIN of the Mortgage Loan;


provided, however, that as to any Home Equity Loan, if, as evidenced by an Opinion of Counsel
delivered to and in form and substance reasonably satisfactory to the Trustee, (x) an optical image
or other electronic representation of the related documents specified in clauses (i) through (iv)
above are enforceable in the relevant jurisdictions to the same extent as the original of such
document and (y) such optical image or other representation does not impair the ability of an owner
of such Home Equity Loan to transfer its interest in such Home Equity Loan, such optical image or
other representation may be held by the Servicer, acting through the Subservicers, as custodian and
bailee for the Trustee, in lieu of the physical documents specified above.




     (d) Except as hereinafter provided, the Servicer, acting through the Subservicers, shall be
entitled to maintain possession of all of the foregoing documents and instruments, shall not be
required to deliver any of them to the Trustee and shall not be required to record an assignment of
Mortgage in favor of the Trustee with respect to any Home Equity Loan. In the event, however, that
possession of any of such documents or instruments is required by any Person (including the
Trustee) acting as successor servicer pursuant to Section 6.04 or 7.02 in order to carry out the
duties of Servicer hereunder, then such successor shall be entitled to request delivery, at the
expense of the Servicer, of such documents or instruments by the Servicer and to retain such
documents or instruments for servicing purposes; provided that the
Trustee or such servicers shall maintain such documents at such offices as may be required by
any regulatory body having jurisdiction over such Home Equity Loans.




28










 





     (e) The Servicer’s right to maintain possession, directly or through each Subservicer, of
the related Mortgage Files shall continue so long as (i) at least two of Moody’s, Standard & Poor’s
and Fitch assign a long-term senior unsecured debt rating to HSBC Finance of at least “Baa3”, in
the case of Moody’s, “BBB”, in the case of Fitch, and “BBB-”, in the case of Standard & Poor’s, or
such lower rating acceptable and assigned by at least two of Moody’s, Standard & Poor’s and Fitch)
and (y) such Subservicer remains an Affiliate of HSBC Finance. At such time as either of the
conditions specified in the preceding sentence is not satisfied, as promptly as practicable, but in
no event more than 90 days thereafter in the case of clause (i) below, 60 days in the case of
clause (ii) below and 60 days in the case of clause (iii) below, the Servicer shall cause each
Subservicer, at such Subservicer’s expense or, to the extent the Subservicer fails to pay, the
Servicer’s expense, to (i) either (x) record an assignment of Mortgage in favor of the Trust (which
may be a blanket assignment if permitted by applicable law) with respect to each of the Home Equity
Loans being serviced by such Subservicer in the appropriate real property or other records or (y)
deliver to the Trustee the assignment of such Mortgage in favor of the Trust in form for
recordation, together with an Opinion of Counsel addressed to the Trustee to the effect that
recording is not required to protect the Trust’s right, title and interest in and to the related
Home Equity Loan or to perfect a first priority security interest in favor of the Trust in the
related Home Equity Loan, which Opinion of Counsel also shall be reasonably acceptable to each of
the Rating Agencies and the Trustee, and (ii) unless an Opinion of Counsel, reasonably acceptable
to the Trustee and the Rating Agencies (as evidenced in writing), is delivered to the Trustee to
the effect that delivery of the Mortgage Files is not necessary to protect the Trust’s right, title
and interest in and to the related Home Equity Loans or to perfect a first priority security
interest in favor of the Trust that will be prior to all other present and future claims in the
related Home Equity Loans, deliver the related Mortgage Files to the Trustee or a custodian on its
behalf to be held by the Trustee in trust, upon the terms herein set forth, for the use and benefit
of all present and future Certificateholders, and the Trustee or such custodian on its behalf shall
retain possession thereof except to the extent the Servicer or Subservicers require any Mortgage
Files for normal servicing as contemplated by Section 3.08, and (iii) have a Responsible Officer of
the applicable Seller endorse the original Mortgage Note with respect to each of the Home Equity
Loans being serviced by the Subservicer to “Pay to the order of                      without recourse” with
all intervening endorsements showing a complete chain of title from the originator of such Home
Equity Loan to the applicable Seller. In the event that the Subservicers or the Servicer should
fail to prepare, execute and record any assignments of Mortgages required under this Section 2.01
on a timely basis, the Servicer shall cause the Subservicers to appoint the Trustee as their
attorney-in-fact to prepare, execute and record any assignments of Mortgages requested in writing
by the Majority Certificateholder required under this Section 2.01. Such preparation, execution
and recording shall be at the expense of the Subservicers, or to the extent not paid by the
Subservicers, the Servicer; provided that if the Trustee is not reasonably assured of payment of
such expenses from the Subservicer or the Servicer, the Trustee may require reasonable indemnity
against such expense as a condition to taking any such action.



     (f) Within 90 days following delivery, if any, of the Mortgage Files to the Trustee pursuant
to the preceding subsection, the Trustee or a custodian on its behalf shall review each such
Mortgage File to ascertain that all required documents set forth in this Section 2.01 have
been executed and received and that such documents relate to the Home Equity Loans identified
on the Home Equity Loan Schedule, and in so doing the Trustee or such custodian on its behalf



29









 







may
rely on the purported due execution and genuineness of any signature thereon. If within such
90-day period the Trustee or custodian finds any document constituting a part of a Mortgage File
not to have been executed or received or to be unrelated to the Home Equity Loans identified in
said Home Equity Loan Schedule or, if in the course of its review, the Trustee or custodian
determines that such Mortgage File is otherwise defective in any material respect, the Trustee or
custodian shall promptly upon the conclusion of its review notify the Depositor and the Servicer,
and the Depositor and the Servicer shall have a period of 90 days after such notice within which to
correct or cure any such defect; provided, however, that if such defect shall not have been
corrected or cured within such 90-day period due to the failure of the related office of real
property or other records to return any document constituting a part of a Mortgage File, the
Depositor or the Servicer shall so notify the Trustee and the period during which such defect may
be corrected or cured shall be extended for one additional 90-day period.



     (g) The Trustee shall have no responsibility for reviewing any Mortgage File except as
expressly provided in Section 2.01(f). In reviewing any Mortgage File pursuant to this Section
2.01, the Trustee shall have no responsibility for determining whether any document is valid and
binding, whether the text of any assignment or endorsement is in proper or recordable form (except,
if applicable, to determine if the Trust is the assignee or endorsee), whether any document has
been recorded in accordance with the requirements of any applicable jurisdiction, or whether a
blanket assignment is permitted in any applicable jurisdiction, whether any Person executing any
document is authorized to do so or whether any signature thereon is genuine, but shall only be
required to determine whether a document has been executed, that it appears to be what it purports
to be and, where applicable, that it purports to be recorded.



     (h) The Servicer hereby confirms to the Trustee that on or prior to the Closing Date and on or
prior to the applicable Transfer Date with respect to any Eligible Substitute Home Equity Loan, the
portions of the Electronic Ledger relating to such Home Equity Loans have been or will have been
clearly and unambiguously marked, and the appropriate entries have been or will have been made in
its general accounting records, to indicate that such Home Equity Loans have been transferred to
the Trust and constitute part of the Trust in accordance with the terms hereof.



     (i) In connection with the assignment, pursuant to Section 2.01(e)(i), of any Home Equity Loan
registered on the MERS® System, the Servicer shall cause each Subservicer, at such Subservicer’s
expense or, to the extent the Subservicer fails to pay, the Servicer’s expense, at the time
specified in the second sentence of Section 2.01(e)(i), to cause the MERS® System to indicate that
such Home Equity Loans have been assigned to the Trust in accordance with this Agreement by
including (or deleting, in the case of Home Equity Loans which are repurchased in accordance with
this Agreement) in such computer files (a) the code “[IDENTIFY TRUST SPECIFIC CODE]” in the field
“[IDENTIFY THE FIELD NAME FOR TRUST]” which identifies the Trust and (b) the code “[IDENTIFY SERIES
SPECIFIC CODE NUMBER]” in the field “Pool Field” which identifies the series of the Notes issued in
connection with such Home Equity Loans. The Servicer agrees that it will not alter the codes
referenced in this paragraph with respect to any Home Equity Loan during the term of this Agreement
unless and until such Home Equity Loan is repurchased in accordance with the terms of this
Agreement, and there is
filed any financing statement or amendment thereof necessary to comply with the New York UCC
or the UCC of any applicable jurisdiction.



30









 





          Section 2.02. Acceptance by Trustee; Repurchase of Home Equity Loans; Conveyance of
Eligible Substitute Home Equity Loans.




     (a) The Trustee hereby acknowledges receipt on behalf of the Trust of all the right, title and
interest of the Depositor in and to the assets described Section 2.01(a)(i) through (v), and all of
the right, title and interest of the Sellers in and to the Transferred Assets pursuant to the
Transfer Agreement, including but not limited to the transfer and assignment of the Mortgage Notes
and the Mortgages, and declares, subject to Section 2.01(e), that it holds and will hold such
documents and interests and all amounts received by it in trust, upon the terms herein set forth,
for the use and benefit of all present and future Certificateholders. If the time to cure any
defect of which the Trustee has notified the Depositor and the Servicer following the Trustee’s
review of the Home Equity Loan Files pursuant to Section 2.01(f) has expired or if any loss is
suffered by the Trust, on behalf of the Certificateholders, in respect of any Home Equity Loan as a
result of (i) a defect in any document constituting a part of a Mortgage File or (ii) the related
Seller’s retention of such Mortgage File or an assignment of Mortgage not having been recorded, the
Depositor or, to the extent the Depositor fails to perform, the Servicer shall, in the case of a
defect in such document, and the Servicer shall, in the case of a loss resulting from such Seller’s
retention of a Mortgage File or assignment of Mortgage not having been recorded, on the Business
Day next preceding the Distribution Date in the month following the end of the Collection Period in
which the time to cure such defect expired or such loss occurred, either (i) repurchase the related
Home Equity Loan (a “Defective Home Equity Loan”) (including any property acquired in
respect thereof and any insurance policy or insurance proceeds with respect thereto) from the Trust
at a price equal to the Purchase Price which shall be accomplished by deposit by the Depositor or
the Servicer, as applicable, in the Collection Account pursuant to Section 3.02 on such next
preceding Business Day, or (ii) if such next preceding Business Day occurs prior to the second
anniversary of the Closing Date, remove such Defective Home Equity Loan from the Trust and
substitute in its place an Eligible Substitute Home Equity Loan or Loans; provided, however, that
any such substitution pursuant to clause (ii) above shall not be effected prior to the delivery to
the Trustee of the Opinion of Counsel required by Section 2.06.



     (b) [Reserved]



     (c) With respect to any Eligible Substitute Home Equity Loan or Loans, the Servicer shall
cause the related Seller to deliver to the Trustee with respect to such Eligible Substitute Home
Equity Loan or Loans an acknowledgment that the related Seller is holding as custodian for the
Trust such documents and agreements, if any, as are permitted to be held by the related Seller in
accordance with Section 2.01. An assignment of the Mortgage in favor of the Trust with respect to
such Eligible Substitute Home Equity Loan or Loans shall be required to be recorded in the
appropriate real property or other records or delivered to the Trustee with the Opinion of Counsel
referred to in Section 2.01 under the same circumstances that all other assignments of Mortgage are
required to be recorded hereunder. For any Collection Period during which the Depositor or the
Servicer substitutes one or more Eligible Substitute Home Equity Loans, the Servicer shall
determine the Substitution Adjustment Amount. The Depositor or the Servicer, as applicable, shall
deposit the Substitution Adjustment Amount in the
Collection Account no later than the Business Day immediately preceding the Distribution Date
in the month following the end of the Collection Period in which such substitution occurs. The
Servicer shall amend the Home Equity Loan Schedule to reflect the removal of the Defective



31









 







Home
Equity Loan from the terms of this Agreement and the substitution of the Eligible Substitute Home
Equity Loan or Loans. Upon such substitution, the Eligible Substitute Home Equity Loan or Loans
shall be subject to the terms of this Agreement in all respects, and the Depositor shall be deemed
to have made with respect to such Eligible Substitute Home Equity Loan or Loans, as of the date of
substitution, the covenants, representations and warranties set forth in Section 2.04(b). The
Trustee shall upon satisfaction of the conditions in this subsection immediately take any action
requested by the Depositor, if any, to effect the reconveyance of such Defective Home Equity Loan
or such Home Equity Loan for which the Servicer has made a substitution election so removed from
the Trust to the Depositor or the Servicer, as applicable. The procedures applied by the Depositor
or the Servicer in selecting each Eligible Substitute Home Equity Loan shall not be adverse to the
interests of the Certificateholders and shall be comparable to the selection procedures applicable
to the Home Equity Loans originally conveyed hereunder.



     (d) Upon receipt by the Trustee of (i) in the case of a repurchase, a Servicing Certificate to
the effect that the Purchase Price for any such Defective Home Equity Loan or such Home Equity Loan
for which the Servicer has made a substitution election has been so deposited in the Collection
Account or (ii) in the case of a substitution, (A) a Servicing Certificate to the effect that the
Substitution Adjustment Amount, if any, has been so deposited in the Collection Account and (B) an
Officer’s Certificate reciting the transfer and assignment of the Eligible Substitute Home Equity
Loan(s) to the Trust and, if required at such time, that the related Mortgage File(s) for such
Eligible Substitute Home Equity Loan(s) have been delivered to the Trustee and the assignment(s) of
Mortgage have been recorded, the Trustee on behalf of the Trust shall execute and deliver such
instrument of transfer or assignment presented to it by the Servicer, in each case without
recourse, as shall be necessary to vest in the Depositor or the Servicer, as applicable, legal and
beneficial ownership of such Defective Home Equity Loan or such Home Equity Loan for which the
Servicer has made a substitution election (including any property acquired in respect thereof or
proceeds of any insurance policy with respect thereto). It is understood and agreed that the
obligation of the Depositor or the Servicer to repurchase or substitute for (to the extent
permitted herein) any Defective Home Equity Loan shall constitute the sole and exclusive remedy
respecting such defect available to Certificateholders or the Trustee against the Depositor or the
Servicer, and such obligation on the part of the Servicer shall survive any resignation or
termination of the Servicer hereunder.



          Section 2.03. Representations, Warranties and Covenants of the Servicer. The
Servicer represents, warrants and covenants that as of the Closing Date:




     (a) The Servicer is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and has the corporate power to own its assets and to transact the
business in which it is currently engaged. The Servicer is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the character of the
business transacted by it or properties owned or leased by it require such qualification and in
which the failure to so qualify would have a material adverse effect on the business, properties,
assets, or condition (financial or other) of the Servicer;



     (b) The Servicer has the power and authority to make, execute, deliver and perform its
obligations under this Agreement and to perform its obligations with respect to all of the



32









 







transactions contemplated under this Agreement, and has taken all necessary corporate action to
authorize the execution, delivery and performance of its obligations under this Agreement. When
executed and delivered, this Agreement will constitute the legal, valid and binding obligation of
the Servicer enforceable in accordance with its terms, except as enforcement of such terms may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights
generally and by the availability of equitable remedies (whether in a proceeding at law or in
equity);



     (c) The Servicer is not required to obtain the consent of any other Person or any consent,
license, approval or authorization from, or registration or declaration with, any governmental
authority, bureau or agency in connection with the execution, delivery, performance, validity or
enforceability of this Agreement, except for such consents, licenses, approvals or authorizations,
or registrations or declarations, as shall have been obtained or filed, as the case may be;



     (d) The execution and delivery of this Agreement and the performance of the transactions
contemplated hereby by the Servicer will not violate any provision of any existing law or
regulation or any order or decree of any court applicable to the Servicer or any provision of the
Certificate of Incorporation or Bylaws of the Servicer, or constitute a material breach of any
mortgage, indenture, contract or other agreement to which the Servicer is a party or by which the
Servicer may be bound; and



     (e) No litigation or administrative proceeding of or before any court, tribunal or
governmental body is currently pending, or to the knowledge of the Servicer threatened, against the
Servicer or any of its properties or with respect to this Agreement or the Certificates which in
the opinion of the Servicer has a reasonable likelihood of resulting in a material adverse effect
on the transactions contemplated by this Agreement.



     (f) The Servicer is a member of MERS in good standing, and will comply in all material
respects with the rules and procedures of MERS in connection with the servicing of the Home Equity
Loans that are registered with MERS.



     The representations and warranties set forth in this Section 2.03 shall survive the sale and
assignment of the Home Equity Loans to the Trust. Upon discovery of a breach of any
representations and warranties which materially and adversely affects the interests of the
Certificateholders, the Person discovering such breach shall give prompt written notice to the
other parties. Within 60 days (or such longer period as permitted by prior written consent of a
Responsible Officer of the Trustee) of its discovery or its receipt of notice of such breach, the
Servicer shall cure such breach in all material respects.



          Section 2.04. Representations and Warranties of the Depositor Regarding this Agreement
and the Home Equity Loans; Repurchases and Substitutions.




     (a) The Depositor represents and warrants that as of the Closing Date:




     (i) The Depositor is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power to own its
assets and to transact the business in which it is currently engaged. The



33









 







Depositor is duly
qualified to do business as a foreign corporation and is in good standing in each
jurisdiction in which the character of the business transacted by it or properties owned or
leased by it require such qualification and in which the failure to so qualify would have a
material adverse effect on the business, properties, assets or condition (financial or
other) of the Depositor;




     (ii) The Depositor has the power and authority to make, execute, deliver and perform
its obligations under this Agreement and to perform its obligations with respect to all of
the transactions contemplated under this Agreement, and has taken all necessary corporate
action to authorize the execution, delivery and performance of its obligations under this
Agreement. When executed and delivered, this Agreement will constitute the legal, valid and
binding obligation of the Depositor enforceable in accordance with its terms, except as
enforcement of such terms may be limited by bankruptcy, insolvency or similar laws affecting
the enforcement of creditors’ rights generally and by the availability of equitable remedies
(whether in a proceeding at law or in equity);




     (iii) The Depositor is not required to obtain the consent of any other Person or any
consent, license, approval or authorization from, or registration or declaration with, any
governmental authority, bureau or agency in connection with the execution, delivery,
performance, validity or enforceability of this Agreement, except for such consents,
licenses, approvals or authorizations, or registrations or declarations, as shall have been
obtained or filed, as the case may be;




     (iv) The execution and delivery of this Agreement and the performance of the
transactions contemplated hereby by the Depositor will not violate any provision of any
existing law or regulation or any order or decree of any court applicable to the Depositor
or any provision of the Certificate of Incorporation or Bylaws of the Depositor, or
constitute a material breach of any mortgage, indenture, contract or other agreement to
which the Depositor is a party or by which the Depositor may be bound; and




     (v) No litigation or administrative proceeding of or before any court, tribunal or
governmental body is currently pending, or to the knowledge of the Depositor threatened,
against the Depositor or any of its properties or with respect to this Agreement which in
the opinion of the Depositor has a reasonable likelihood of resulting in a material adverse
effect on the transactions contemplated by this Agreement.



     (b) The Depositor represents and warrants with respect to each Home Equity Loan that as of the
Closing Date with respect to the Initial Home Equity Loans and the applicable Transfer Date with
respect to any Eligible Substitute Home Equity Loans (or to the extent expressly stated herein as
of such other time):




     (i) This Agreement and the Transfer Agreement constitute a valid transfer and
assignment to the Trust of all right, title and interest of the Depositor and the Sellers,
respectively, in and to the Home Equity Loans, all monies due or to become due with
respect thereto, all proceeds thereof, such funds as are from time to time deposited in
the Collection Account (excluding any investment earnings thereon) and all other property



34









 







specified in the definition of “Trust” as being part of the corpus of the Trust conveyed to
the Trust by the Depositor;




     (ii) The information set forth in the Home Equity Loan Schedule with respect to such
Home Equity Loan is true and correct in all material respects;




     (iii) Immediately prior to the transfer and assignment by the related Seller to the
Depositor and the Trust pursuant to the Home Equity Loan Purchase Agreement and the Transfer
Agreement, the Home Equity Loan has not been assigned or pledged, and the related Seller has
good and marketable title thereto, and the related Seller is the sole owner and holder of
such Home Equity Loan free and clear of any and all liens, claims, encumbrances,
participation interests, equities, pledges, charges or security interests of any nature, and
has full right and authority, under all governmental and regulatory bodies having
jurisdiction over the ownership of such Home Equity Loan, to transfer and assign the same
pursuant to the Home Equity Loan Purchase Agreement and the Transfer Agreement;




     (iv) Immediately prior to the transfer and assignment by the Depositor to the Trust
pursuant to this Agreement, the Home Equity Loan has not been assigned or pledged, and the
Depositor has good and marketable title thereto, and the Depositor is the sole owner and
holder of such Home Equity Loan free and clear of any and all liens, claims, encumbrances,
participation interests, equities, pledges, charges or security interests of any nature, and
has full right and authority, under all governmental and regulatory bodies having
jurisdiction over the ownership of such Home Equity Loan, to transfer and assign the same
pursuant to this Agreement;




     (v) The related Mortgage is a valid and existing first or second lien (and, if such
Mortgage is a second lien and HSBC Finance or any of its affiliates originated the related
first lien mortgage loan, such Mortgage was not originated by HSBC Finance or any of its
affiliates within 90 days of the related first lien mortgage loan), as set forth on the Home
Equity Loan Schedule with respect to such Home Equity Loan, on the property therein
described, and the related Mortgaged Property is free and clear of all encumbrances and
liens having priority over the first or second lien, as applicable, of such Mortgage except
for liens for (a) real estate taxes and special assessments not yet delinquent; (b) any
first and, if applicable, second mortgage loan secured by such Mortgaged Property and
specified on the Home Equity Loan Schedule; (c) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of recording that
are acceptable to mortgage lending institutions generally; and (d) other matters to which
like properties are commonly subject which do not materially interfere with the benefits of
the security intended to be provided by such Mortgage;




     (vi) To the best knowledge of the Depositor, each Mortgage is not subject to any
offset, defense or counterclaim of any obligor under the Mortgage;




     (vii) To the best knowledge of the Depositor, there is no delinquent recording or other
tax or fee or assessment lien against the related Mortgaged Property;



35









 






     (viii) To the best knowledge of the Depositor, there is no proceeding pending or
threatened for the total or partial condemnation of the related Mortgaged Property, and such
property is free of material damage and is in good repair;




     (ix) There are no mechanics’ or similar liens or claims which have been filed for work,
labor or material affecting the related Mortgaged Property which are, or may be, liens prior
or equal to the lien of the related Mortgage, except (a) liens which are fully insured
against by the title insurance policy referred to in clause (xiii) or (b) liens which do not
materially interfere with the collection of the Home Equity Loan upon foreclosure or
otherwise;




     (x) As of the Cut-Off Date for the Initial Home Equity Loans (or as of the applicable
Transfer Date for any Eligible Substitute Home Equity Loan), no scheduled monthly payment is
more than 30 days delinquent (measured on a contractual basis);




     (xi) The related Mortgage File contains each of the documents and instruments specified
to be included therein (including, if applicable, an appraisal (which may be an appraisal
prepared using a statistical data base));




     (xii) The related Mortgage Note and the related Mortgage at the time they were made
complied in all material respects with applicable local, state and federal laws, including,
without limitation, usury, truth-in-lending, real estate settlement procedures, consumer
credit protection (including, without limitation, the Home Ownership and Equity Protection
Act of 1994 and all other applicable anti-predatory lending laws), equal credit opportunity
or disclosure laws applicable to the Home Equity Loan;




     (xiii) A lender’s title insurance policy or binder was issued within 60 days of the
date of origination of each Home Equity Loan for home equity loans in excess of $50,000, if
secured by a first lien, or $100,000, if secured by a second lien (in excess of $75,000, if
secured by a first lien in Oklahoma or Texas, or $100,000, if secured by a first or second
lien in Iowa), and each such policy is valid and remains in full force and effect, and a
title search or other assurance of title customary in the relevant jurisdiction was obtained
with respect to each Home Equity Loan as to which no title insurance policy or binder was
issued;




     (xiv) The related Mortgaged Property is not a mobile home or a manufactured housing
unit that is not permanently attached to its foundation;




     (xv) As of the Cut-Off Date, the Combined Loan-to-Value Ratio for each Initial Home
Equity Loan was not in excess of 106%;




     (xvi) No selection procedure reasonably believed by the Depositor to be adverse to the
interests of the Certificateholders was utilized in selecting the Home Equity Loan;




     (xvii) The Depositor has not transferred the Home Equity Loans to the Trust with any
intent to hinder, delay or defraud any of its creditors;



36









 






     (xviii) The related Mortgage contains customary and enforceable provisions that render
the rights and remedies of the holder thereof adequate for the realization against the
Mortgaged Property of the benefits of the security interest therein and each Home Equity
Loan is an enforceable obligation of the related Mortgagor;




     (xix) The Depositor has not received a notice of default of any senior mortgage loan
with respect to the related Mortgaged Property that has not been cured by a party other than
the related Seller;




     (xx) The Initial Home Equity Loan does not have an original term to maturity in excess
of 360 months; and the Principal Balance of which, when included in the Pool Balance (in
each case for the Initial Home Equity Loans as of the Cut-Off Date), would not cause the
weighted average remaining term to maturity of the Initial Home Equity Loans on a
contractual basis to be greater than 298 months;




     (xxi) The related Mortgaged Property consists of a single parcel of real property with
a one-to-four unit single family residence erected thereon, or an individual condominium
unit, planned unit development unit or townhouse;




     (xxii) The Principal Balance of which, when included in the Pool Balance (in each case
for the Initial Home Equity Loans as of the Cut-Off Date), would not cause the average
Principal Balance of such Home Equity Loans to be greater than $132,000;




     (xxiii) The Principal Balance of which, when included in the Pool Balance (in each case
for the Initial Home Equity Loans as of the Cut-Off Date), would not cause the weighted
average percentage of the Initial Home Equity Loans secured by first liens to be less than
95%; and would not cause the weighted average percentage of the Initial Home Equity Loans
secured by second liens to be greater than 5%;




     (xxiv) The Initial Home Equity Loans were originated in accordance with HSBC Finance’s
underwriting guidelines and procedures including full and reduced documentation programs;




     (xxv) No Home Equity Loan is a High Cost Loan or Covered Loan as defined in the
Standard & Poor’s LEVELS® Glossary in effect as of the Cut-Off Date and no Home Equity Loan
originated on or after October 1, 2002 through March 6, 2003 is governed by the Georgia
Lending Act;




     (xxvi) No Home Equity Loan originated on or after November 27, 2003 is a High-Cost Home
Loan, as defined by New Jersey predatory and abusive lending law effected on November 27,
2003;




     (xxvii) No Home Equity Loan is a “high cost home,” “high risk home” or “predatory” loan
under any other applicable state, federal or local law (or similarly
classified loan using different terminology under a law imposing additional legal
liability for residential mortgage loans having high interest rates, points and/or fees);



37









 






     (xxviii) With respect to each Mortgage Note, one of the following has been obtained: an
appraisal on Form 1004, an appraisal on Form 2055 with interior inspection, an appraisal on
Form 2055 with exterior inspection, an appraisal on any other form of uniform residential
appraisal report commonly known as a full appraisal or a valuation using an automated
valuation model; and




     (xxix) Each Home Equity Loan is a “qualified mortgage” under Section 860G(a)(3) of the
Code.



     (c) It is understood and agreed that the representations and warranties set forth in this
Section 2.04 shall survive the transfer and assignment of the Home Equity Loans to the Trust. Upon
discovery by the Depositor, the Servicer or the Trustee of a breach of any of the representations
and warranties set forth in this Section 2.04, without regard to any limitation set forth in such
representation or warranty concerning the knowledge of the Depositor as to the facts stated
therein, which materially and adversely affects the interests of the Certificateholders in the
related Home Equity Loan, the person discovering such breach shall give prompt written notice to
the other parties and each Rating Agency. Within 60 days of its discovery or its receipt of notice
of such breach, or, with the prior written consent of a Responsible Officer of the Trustee, such
longer period not to exceed 90 days as specified in such consent, the Depositor or, as necessary,
the Servicer shall cure such breach in all material respects. With regard to any such breach of
the representations and warranties set forth in Section 2.04(b), unless, at the expiration of such
60 day or longer period, such breach has been cured in all material respects or otherwise does not
exist or continue to exist, the Depositor or the Servicer shall, not later than the Business Day
next preceding the Distribution Date in the month following the end of the Collection Period in
which any such cure period expired, either (i) repurchase such Defective Home Equity Loan
(including any property acquired in respect thereof and any insurance policy or insurance proceeds
with respect thereto) or (ii) if such next preceding Business Day occurs prior to the second
anniversary of the Closing Date, remove such Home Equity Loan from the Trust and substitute in its
place an Eligible Substitute Home Equity Loan or Loans, in the same manner and subject to the same
conditions as set forth in Section 2.02. Upon making any such repurchase or substitution and
providing the Trustee with a written request and appropriate forms therefor, the Depositor or the
Servicer, as applicable, shall be entitled to receive an instrument of assignment or transfer from
the Trustee to the same extent as set forth in Section 2.02 with respect to the repurchase or
replacement of Home Equity Loans under that Section. Subject to Section 2.04(d), it is understood
and agreed that the obligation of the Depositor or the Servicer to purchase or substitute for any
such Defective Home Equity Loan (or property acquired in respect thereof) shall constitute the sole
and exclusive remedy against the Depositor or the Servicer respecting such breach of the foregoing
representations or warranties available to Certificateholders or the Trustee against the Depositor
or the Servicer, and such obligation on the part of the Servicer shall survive any resignation or
termination of the Servicer hereunder.



     (d) The Depositor and the Servicer, jointly and not severally, agree to indemnify and hold
harmless the Trust against any and all out-of-pocket financial losses, claims, expenses, damages or
liabilities to which the Trust may become subject, insofar as such out-of-pocket
financial losses, claims, expenses, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any representation or warranty made by the Depositor in this Section
2.04 on which the Trust has relied, being, or alleged to be, untrue or incorrect in any material
respect.



38









 







This indemnity will be in addition to any liability which the Depositor or the Servicer
may otherwise have.



     (e) Promptly after receipt by the Trustee of notice of the commencement of any action or
proceeding in any way relating to or arising from this Agreement, the Trustee will notify the
Depositor and the Servicer of the commencement thereof, but the omission so to notify the party
from whom indemnification is sought (the “Indemnifying Party”) will not relieve the
Indemnifying Party from any liability which it may have to the party seeking indemnification (the
“Indemnified Party”) except to the extent that the Indemnifying Party is materially
adversely affected by the lack of notice. In case any such action is brought against the
Indemnified Party, and it notifies the Indemnifying Party of the commencement thereof, the
Indemnifying Party will be entitled to participate in the defense (with the consent of the
Indemnified Party which shall not be unreasonably withheld) of such action at the Indemnifying
Party’s expense.



          Section 2.05. Execution and Authentication of Certificates. The Trustee on behalf of
the Trust shall execute, and the Administrator shall authenticate and deliver on the Closing Date
to or upon the order of the Depositor, in exchange for the Home Equity Loans, concurrently with the
assignment and conveyance to the Trust of the Home Equity Loans, the Class A Certificates and Class
M Certificates in authorized denominations and the Residual Certificate, together evidencing the
ownership of the entire Trust.




          Section 2.06. Delivery of Opinion of Counsel in Connection with Substitutions.




     (a) Notwithstanding any contrary provision of this Agreement, no substitution pursuant to
Section 2.02 or Section 2.04 shall be made more than 90 days after the Closing Date unless the
Depositor or the Servicer, as the case may be, delivers to the Trustee an Opinion of Counsel, which
Opinion of Counsel shall not be at the expense of the Trustee or the Trust Fund, addressed to the
Trustee, to the effect that such substitution will not (i) result in the imposition of the tax on
“prohibited transactions” on the Trust Fund or contributions after the Startup Date, as defined in
Sections 860F(a)(2) and 860G(d) of the Code, respectively, or (ii) cause any REMIC created under
this Agreement to fail to qualify as a REMIC at any time that any Certificates are outstanding.



     (b) Upon discovery by the Depositor, the Servicer, or the Trustee that any Home Equity Loan
does not constitute a “qualified mortgage” within the meaning of Section 860G(a)(3) of the Code,
the party discovering such fact shall promptly (and in any event within five (5) Business Days of
discovery) give written notice thereof to the other parties. In connection therewith, the Trustee
shall require the Depositor or, as necessary, the Servicer, at its option, to either (i)
substitute, if the conditions in Section 2.04(c) with respect to substitutions are satisfied, an
Eligible Substitute Home Equity Loan for the affected Home Equity Loan, or (ii) repurchase the
affected Home Equity Loan within 90 days of such discovery in the same manner as it would a Home
Equity Loan for a breach of representation or warranty made pursuant to Section 2.04. Upon receipt
from the Depositor or the Servicer, as the case may be, of a written request and appropriate forms
therefor, the Trustee shall reconvey to the Depositor or the
Servicer, as the case may be, the Home Equity Loan to be released pursuant to this Section in
the same manner, and on the same terms and conditions, as it would a Home Equity Loan repurchased
for breach of a representation or warranty contained in Section 2.04.



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          Section 2.07. REMIC Matters. The Preliminary Statement sets forth the designations
and “latest possible maturity date” for federal income tax purposes of all interests created
hereby. The “Startup Day” for purposes of the REMIC Provisions shall be the Closing Date. The
REMIC’s fiscal year shall be the calendar year.




ARTICLE III




ADMINISTRATION AND SERVICING OF HOME EQUITY LOANS




          Section 3.01. The Servicer.




     (a) The Servicer shall, or shall cause the Subservicers to, service and administer the Home
Equity Loans in a manner consistent with the terms of this Agreement and the Settlement Agreement
(to the extent that no term or provision of the Settlement Agreement (excluding those terms
identified in the Specified Filing) shall adversely affect in any material respect the interests of
the Certificateholders) and with general industry practice and shall have full power and authority,
acting alone or through the Subservicers, to do any and all things in connection with such
servicing and administration which it may deem necessary or desirable, it being understood,
however, that the Servicer shall at all times remain responsible to the Trustee and the
Certificateholders for the performance of its duties and obligations hereunder in accordance with
the terms hereof. Any amounts received by the related Subservicer in respect of a Home Equity Loan
shall be deemed to have been received by the Servicer whether or not actually received by it. The
Servicer shall represent and protect the interests of the Trust Fund in the same manner as it
protects its own interests in mortgage loans in its own portfolio in any claim, proceeding or
litigation regarding a Mortgage Loan, and shall not make or permit any modification, waiver or
amendment of any Mortgage Loan which would cause any REMIC created under this Agreement to fail to
qualify as a REMIC or result in the imposition of any tax under section 860F(a) or section 860G(d)
of the Code.



     Without limiting the generality of the foregoing, the Servicer shall continue, and is hereby
authorized and empowered by the Trustee on behalf of the Trust, (i) in its own name or in the name
of any Subservicer, when the Servicer or the Subservicer, as the case may be, believes it
appropriate in its best judgment to register any Home Equity Loan on the MERS® System, or cause the
removal from the registration of any Home Equity Loan on the MERS® System, to execute and deliver,
on behalf of the Trust, any and all instruments of assignment and other comparable instruments with
respect to such assignment or re-recording of a Mortgage in the name of MERS, solely as nominee for
the Trust and its successors and assigns, and (ii) to execute and deliver, on behalf of itself, the
Certificateholders and the Trust or any of them, any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge and all other comparable instruments, with
respect to the Home Equity Loans and with respect to the Mortgaged Properties. Upon the written
request of the Servicer, the Depositor and the Trustee
shall furnish the Servicer with any powers of attorney and other documents necessary or
appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder.
The Servicer in such capacity may also consent to the placing of a proposed lien senior to that of



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the Mortgage on the related Mortgaged Property, provided that such proposed lien is not secured by
a note providing for negative amortization and:




     (x) (i) the Mortgage relating to the Home Equity Loan was in a first lien position as
of the Cut-Off Date and was in a first lien position immediately prior to the placement of
the proposed senior lien, and (ii) the ratio of (a) the sum of the Principal Balance of the
Home Equity Loan and the principal balance of the mortgage loan to be secured by the
proposed senior lien to (b) the Appraised Value of the Mortgaged Property at the time the
Home Equity Loan was originated is not greater than (1) with respect to Home Equity Loans
with an original CLTV of 85% or less, 85%, (2) with respect to Home Equity Loans with an
original CLTV in excess of 85% and not greater than 95%, 95% and (3) with respect to Home
Equity Loans with an original CLTV in excess of 95% and not greater than 110%, 110%;




     (y) (i) the Mortgage relating to the Home Equity Loan was in a first or second lien
position at the time the related Home Equity Loan was conveyed to the Trust and, immediately
following the placement of such proposed senior lien, such Mortgage will be in a second or,
if such Mortgage was in a second lien position at the time the related Home Equity Loan was
conveyed to the Trust, a third lien position and (ii) the principal balance of the mortgage
loan to be secured by the proposed senior lien and the rate at which interest accrues
thereon are no greater than those of the related Home Equity Loan as of the date it was
first conveyed to the Trust; or




     (z) the Mortgage relating to the Home Equity Loan was in a second lien position as of
the Cut-Off Date and the proposed senior lien secures a mortgage loan that refinances an
existing first mortgage loan and the outstanding principal amount of such mortgage loan
immediately following such refinancing and the rate at which interest accrues thereon are
not greater than that of such existing first mortgage loan at the date the mortgage loan was
originated.



     (b) If (i) foreclosure proceedings are commenced with respect to any Home Equity Loan with
respect to which the Servicer has consented to the placing of a subsequent senior lien pursuant to
clause (x) in Section 3.01(a), or (ii) any loss is suffered by the Trust in respect of any Home
Equity Loan as a result of (x) a failure to file on or within ten days following the effective date
of this Agreement the UCC-l financing statements referred to in Section 2.01 or (y) a failure to
publish on or prior to the Closing Date such notices reflecting the sale of the Home Equity Loans
as are described in Section 3440.1(h) of the California Civil Code, then the Servicer shall
repurchase or substitute for any adversely affected Home Equity Loan on the Business Day preceding
the next Distribution Date following the end of the Collection Period during which such foreclosure
proceedings were commenced or such losses were suffered. Such repurchase or substitution shall be
accomplished in the same manner and subject to the same conditions as set forth in Section 2.02.
Upon making any such repurchase or substitution and providing the Trustee with a written request
and appropriate forms therefor, the Servicer shall be entitled to
receive an instrument of assignment or transfer from the Trust to the same extent as set forth
in Section 2.02.



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     (c) Upon the request of a Mortgagor or at the Servicer’s own initiative, the Servicer (or the
related Subservicer on behalf of the Servicer) may waive, modify or vary any term of any Home
Equity Loan or consent to the postponement of strict compliance with any such term or in any manner
grant indulgence to any Mortgagor if:




     (i) in the Servicer’s (or such Subservicer’s) good faith determination such waiver,
modification, postponement or indulgence will enhance recovery with respect to such Home
Equity Loan; and




     (ii) the Mortgagor is in default with respect to the Home Equity Loan, or such default
is, in the judgment of the Servicer (or such Subservicer) imminent.



     (d) The relationship of the Servicer (and of any successor to the Servicer as servicer under
this Agreement) to the Trust under this Agreement is intended by the parties to be that of an
independent contractor and not that of a joint venturer, partner or agent.



     (e) In the event that the rights, duties and obligations of the Servicer are terminated
hereunder, any successor to the Servicer in its sole discretion may, to the extent permitted by
applicable law, terminate the existing subservicer arrangements with any Subservicer or assume the
terminated Servicer’s rights under such subservicing arrangements, provided such termination or
assumption will not violate the terms of such arrangements.



     (f) Any expenses incurred in connection with the actions described in Section 3.01(a)(i) shall
be borne by the Servicer in accordance with Section 3.09, with no right of reimbursement; provided
that if, as a result of MERS discontinuing or becoming unable to continue operations in connection
with the MERS System, it becomes necessary to remove any Home Equity Loan from registration on the
MERS System and to arrange for the assignment of the related Mortgages to the Trust, then any
related expenses shall be reimbursable to the Servicer.



          Section 3.02. Collection of Certain Home Equity Loan Payments.




     (a) The Servicer shall make reasonable efforts to collect all payments called for under the
terms and provisions of the Home Equity Loans, and shall, to the extent such procedures shall be
consistent with this Agreement, follow such collection procedures as it follows with respect to
home equity loans in its servicing portfolio comparable to the Home Equity Loans. Consistent with,
and without limiting the generality of, the foregoing, the Servicer may in its discretion (i) waive
any late payment charge or any assumption fees or other fees that may be collected in the ordinary
course of servicing the Home Equity Loans, (ii) arrange with a Mortgagor a schedule for the payment
of delinquent amounts, so long as such arrangement is consistent with the Servicer’s policies with
respect to the home equity loans it owns or services, (iii) sell the Home Equity Loan at its fair
market value to a third party for collection activity or (iv) reset the delinquency status of a
contractually delinquent Home Equity Loan to current in accordance with the Servicer’s customary
account management policies and practices.



     (b) The Servicer shall establish and maintain with the Administrator a separate trust account
(the “Collection Account”) titled “HSBC Bank USA, National Association, as Administrator, on behalf
of U.S. Bank National Association, as Trustee, in trust for the registered



42









 







holders of HSBC Home
Equity Loan Trust (USA) 2006-3, Closed-End Home Equity Loan Asset-Backed Certificates, Series
2006-3”. In the event that a successor Administrator is appointed as provided in Section 8.19, a
new Collection Account shall be promptly established at and maintained by such successor
Administrator, and the title of the new Collection Account shall be “[Successor Administrator], as
Administrator, on behalf of the Trustee, in trust for the registered holders of HSBC Home Equity
Loan Trust (USA) 2006-3, Closed-End Home Equity Loan Asset-Backed Certificates, Series 2006-3”, and
any amounts in the old Collection Account shall be transferred to the new Collection Account. The
Collection Account shall be an Eligible Account. No later than 12:00 noon Chicago time on each
Deposit Date (or, if a Deposit Event has occurred and the Servicer has not provided credit
enhancement acceptable to each of the Rating Agencies, within two (2) Business Days following
receipt thereof by the Subservicers), the Servicer shall deposit or cause to be deposited into the
Collection Account the following payments and collections received or made by it with respect to
the Home Equity Loans (without duplication):




     (i) Net Interest Collections on the Home Equity Loans;




     (ii) Principal Collections on the Home Equity Loans; and




     (iii) amounts required to be paid by the Servicer in connection with the termination of
the Trust pursuant to Section 9.01;


provided, however, that, with respect to any Distribution Date, so long as a Deposit Event has not
occurred, the Servicer shall, if so permitted in writing by the Class R Certificateholder, only be
required to deposit payments and collections on the Home Equity Loans into the Collection Account
up to the aggregate amount equal to the sum of all amounts payable on that Distribution Date
pursuant to Section 4.01(a)(i)-(vii) hereof, and if at any time prior to that Distribution Date the
amount of payments and collections on the Home Equity Loans deposited into the Collection Account
with respect to the related Collection Period exceeds the amount required to be deposited into the
Collection Account in order to make such payments on such Distribution Date, the Servicer shall be
permitted to direct the Administrator in writing to withdraw any excess and pay the excess to the
Servicer.




     The foregoing requirements respecting deposits to the Collection Account are exclusive, it
being understood that, without limiting the generality of the foregoing, fees (including annual
fees) or late charge penalties payable by Mortgagors, prepayment penalties, or amounts received by
the Servicer or a Subservicer for the accounts of Mortgagors for application towards the payment of
taxes, insurance premiums, assessments and similar items for the account of the related
Subservicer, if any, need not be deposited in the Collection Account.



     (c) The Administrator shall hold amounts deposited in the Collection Account on behalf of the
Trustee for the benefit of the Certificateholders. In addition, the Servicer shall notify the
Administrator in writing on each Determination Date of the amount of payments and
collections to be deposited in the Collection Account with respect to the related Distribution
Date.



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     (d) The Servicer may cause the institution maintaining the Collection Account to invest any
funds in the Collection Account in Permitted Investments (including obligations of the Servicer or
of any of its Affiliates, if such obligations otherwise qualify as Permitted Investments), which
shall mature or otherwise be available not later than the Business Day next preceding the
Distribution Date or on the Distribution Date next following the date of such investment as long as
such action does not result in a withdrawal or downgrading of the then current ratings on the
Offered Certificates by the Rating Agencies (except that any investment in an obligation of the
institution with which the Collection Account is maintained may mature on or before 12:00 noon,
Chicago time, on such Distribution Date) and shall not be sold or disposed of prior to its
maturity. In the event the Administrator is at any time maintaining the Collection Account, any
request by the Servicer to invest funds on deposit in the Collection Account shall be in writing,
shall be delivered to the Administrator at or before 10:30 A.M., Chicago time, if such investment
is to be made on such day, and shall certify that the requested investment is a Permitted
Investment that matures at or prior to the time required hereby. In the absence of such investment
instructions, the amounts on deposit in the Collection Account shall remain uninvested. Any such
investment shall be registered in the name of or controlled by the Administrator on behalf of the
Trustee or in the name of its nominee and to the extent such investments are certificated they
shall be maintained in the possession or control of the Administrator on behalf of the Trustee in
the state of the Administrator’s Corporate Trust Office. Except as provided above, all income and
gain realized from any such investment shall be for the benefit of the Servicer and shall be
subject to its withdrawal or order from time to time. The amount of any losses incurred in respect
of the principal amount of any such investments shall be deposited in the Collection Account by the
Servicer out of its own funds immediately as realized.



     (e) The Administrator is hereby authorized to execute purchases and sales of Permitted
Investments as directed by the Servicer through the facilities of its own trading or capital
markets operations. The Administrator shall send to the Servicer statements reflecting the monthly
activity for each such purchase and sale made for the preceding month. Although the Servicer
recognizes that it may obtain a broker confirmation or written monthly statement containing
comparable information at no additional cost, the Servicer hereby agrees that confirmations of
investments are not required to be issued by the Administrator for each month in which a monthly
statement is rendered. No statement need be rendered pursuant to the provision of this subsection
if no activity occurred in the account for such month.



          Section 3.03. Withdrawals from the Collection Account.




     (a) The Administrator shall withdraw or cause to be withdrawn funds from the Collection
Account for the following purposes:




     (i) On each Distribution Date, to make distributions and payments to Certificateholders
pursuant to Section 4.01;




     (ii) From time to time, to make investments in Permitted Investments and to pay to the
Servicer all income and gain earned in respect of Permitted Investments or on funds
deposited in the Collection Account;



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     (iii) To reimburse the Depositor or the Servicer to the extent permitted by Section
6.03;




     (iv) To withdraw any funds deposited in the Collection Account that were not required
to be deposited therein or were deposited therein in error and to pay such funds to the
appropriate Person;




     (v) To pay to the party legally entitled by a final order of a court of competent
jurisdiction in an insolvency proceeding an amount equal to any preference claim made with
respect to amounts paid with respect to the Home Equity Loans; provided that, if any such
amount is later determined not to be a preference by such court of competent jurisdiction
and is returned to the Servicer or any Subservicer, such amount shall be redeposited into
the Collection Account by the Servicer; and




     (vi) to clear and terminate the Collection Account upon the termination of this
Agreement and to pay any amounts remaining therein to the Class R Certificateholder.



     (b) If the Servicer deposits in the Collection Account any amount not required to be deposited
therein or credited thereto or any amount in respect of payments by Mortgagors made by checks
subsequently returned for insufficient funds or other reason for non-payment, it may at any time
withdraw such amount from the Collection Account pursuant to Section 3.03(a)(iv), and any such
amounts shall not be included in Interest Collections and Principal Collections, any provision
herein to the contrary notwithstanding. Any withdrawal or debit permitted by Section 3.03(a) shall
be accomplished by delivering an Officer’s Certificate of the Servicer to the Administrator which
describes the purpose of such withdrawal (including, without limitation, that any such amount was
deposited in the Collection Account in error or, in the case of returned checks, that such amounts
were properly debited, respectively). Upon receipt of any such Officer’s Certificate, the
Administrator shall withdraw such amount for the account of the Servicer. All funds deposited by
the Servicer in the Collection Account shall be held by the Administrator on behalf of the Trustee
in trust for the Certificateholders, until disbursed in accordance with Section 4.01 or withdrawn
or debited in accordance with this Section.



          Section 3.04. Maintenance of Hazard Insurance; Property Protection Expenses. Each
Home Equity Loan requires that the borrower thereunder maintain hazard insurance naming the
Servicer or the related Subservicer as loss payee providing extended coverage in an amount which is
at least equal to the lesser of (i) 100% of the insurable value of the Mortgaged Property or (ii)
the combined principal balance owing on such Home Equity Loan and any mortgage loan senior to such
Home Equity Loan from time to time. The Servicer represents and warrants that it or the applicable
Seller verified the existence of such hazard insurance at the origination of the Home Equity Loan.
The Servicer may cause to be maintained for each Home Equity Loan on which such insurance has
lapsed hazard insurance with terms and limits similar to those described above. Any Insurance
Proceeds received by the Servicer shall be deposited in the Collection Account on the Deposit Date
in accordance with Section 3.02(b), subject to
withdrawal pursuant to Section 3.03. Any cost incurred by the Servicer in maintaining any
such insurance shall not, for the purposes of this Agreement, be added to the Principal Balance of
the Home Equity Loan even if the terms of such Home Equity Loan so permit. The Servicer shall also
maintain on property acquired upon foreclosure, or by grant of deed in lieu of foreclosure,

45









 








hazard
insurance with extended coverage in an amount which is at least equal to the lesser of (i) 100% of
the insurable value of the Mortgaged Property or (ii) the combined unpaid principal balance owing
on such Home Equity Loan and any mortgage loans senior to such Home Equity Loans at the time of
such foreclosure or grant of deed in lieu of foreclosure plus accrued interest thereon. Amounts
collected by the Servicer under any such policies shall be deposited in the Collection Account to
the extent called for by Section 3.02. In cases in which any Mortgaged Property is located in a
federally designated flood area, the hazard insurance to be maintained for the related Home Equity
Loan shall include flood insurance. All such flood insurance shall be in such amounts as are
required under applicable guidelines of Fannie Mae. The Servicer shall be under no obligation to
require that any Mortgagor maintain earthquake or other additional insurance and shall be under no
obligation itself to maintain any such additional insurance on property acquired in respect of a
Home Equity Loan, other than pursuant to such applicable laws and regulations as shall at any time
be in force and as shall require such additional insurance. With respect to Mortgaged Properties
acquired by the Servicer as provided herein, the Servicer may satisfy its obligation set forth in
the sixth sentence of this Section 3.04 by self insuring Mortgaged Properties for which the
aggregate unpaid principal balance of the related Home Equity Loans plus the outstanding balance of
any mortgage loans senior to such Home Equity Loans at the time title was acquired, plus accrued
interest (the “Combined Exposure”), was less than $250,000 (or such other amount as the
Servicer may in good faith determine from time to time) and by causing hazard policies to be
maintained with respect to Mortgaged Properties for which the Combined Exposure equals or exceeds
the self insurance threshold established from time to time by the Servicer by maintaining a blanket
policy consistent with prudent industry standards insuring against hazard losses on the Mortgaged
Properties. Such policy may contain a deductible clause, in which case the Servicer shall, in the
event that there shall not have been maintained on the related Mortgaged Property a policy
complying with the sixth sentence of this Section 3.04, and there shall have been a loss which
would have been covered by such policy, deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of such deductible clause.




          Section 3.05. Assumption and Modification Agreements. In any case in which a
Mortgaged Property has been or is about to be conveyed by the Mortgagor, the Servicer shall
exercise or refrain from exercising its right to accelerate the maturity of such Home Equity Loan
consistent with the then-current practice of the Servicer and without regard to the inclusion of
such Home Equity Loan in the Trust and not in the Servicer’s portfolio. If it elects not to
enforce its right to accelerate or if it is prevented from doing so by applicable law, the Servicer
(so long as such action conforms with the Servicer’s underwriting standards at the time for new
originations) is authorized to take or enter into an assumption and modification agreement from or
with the Person to whom such Mortgaged Property has been or is about to be conveyed, pursuant to
which such Person becomes liable under the Mortgage Note and, to the extent permitted by applicable
law, the Mortgagor remains liable thereon. The Servicer shall notify the Trustee that any
assumption and modification agreement has been completed by delivering to the Trustee an Officer’s
Certificate certifying that such agreement is in compliance with this Section and by forwarding to
the applicable Subservicer on behalf of the Depositor or the Trustee, as
applicable, the original copy of such assumption and modification agreement. Any such
assumption and modification agreement shall, for all purposes, be considered a part of the related
Mortgage File to the same extent as all other documents and instruments constituting a part
thereof. No change in the terms of the related Mortgage Note may be made by the Servicer in

46









 








connection with any such assumption to the extent that such change would not be permitted to be
made in respect of the original Mortgage Note pursuant to Section 3.01 unless the conditions
specified in Section 3.01 are satisfied. Any fee collected by the Servicer for entering into any
such agreement will be retained by the Servicer as additional servicing compensation.




          Section 3.06. Realization Upon Defaulted Home Equity Loans.




     (a) The Servicer (or the Servicer together with the related Seller as called for by the Home
Equity Loan Purchase Agreement) shall foreclose upon or otherwise comparably convert to ownership
Mortgaged Properties securing such of the Home Equity Loans as come into and continue in default
when, in the opinion of the Servicer based upon the practices and procedures referred to in the
following sentence, no satisfactory arrangements can be made for collection of delinquent payments
pursuant to Section 3.02; provided that if the Servicer has actual knowledge or reasonably believes
that any Mortgaged Property is affected by hazardous or toxic wastes or substances and that the
acquisition of such Mortgaged Property would not be commercially reasonable, then the Servicer will
not cause the Trust to acquire title to such Mortgaged Property in a foreclosure or similar
proceeding. Subject to Section 3.06(c), in connection with such foreclosure or other conversion,
the Servicer shall follow such practices (including, in the case of any default on a related senior
mortgage loan, the advancing of funds to correct such default) and procedures as it shall deem
necessary or advisable and as shall be normal and usual in its general mortgage servicing
activities. The foregoing is subject to the proviso that the Servicer shall not be required to
expend its own funds in connection with any foreclosure or towards the correction of any default on
a related senior mortgage loan or restoration of any property unless it shall determine that such
expenditure will increase Net Liquidation Proceeds. The Servicer will be reimbursed out of
Liquidation Proceeds for advances of its own funds to pay Liquidation Expenses before any Net
Liquidation Proceeds are deposited in the Collection Account.



     (b) In the event that title to any Mortgaged Property is acquired in foreclosure or by deed in
lieu of foreclosure, the deed or certificate of sale shall (i) so long as at least two of Moody’s,
Standard & Poor’s and Fitch assign a long-term unsecured debt rating to the Servicer of at least
“Baa3”, in the case of Moody’s, “BBB”, in the case of Fitch, and “BBB-” in the case of Standard &
Poor’s, be issued in the name of the related Subservicer or (ii) if the rating requirements in
clause (i) are not satisfied, be issued to the Trust, or to its nominee on behalf of
Certificateholders.



     (c) Pursuant to its efforts to sell REO, the Servicer shall either itself or through an agent
selected by the Servicer, protect and conserve such REO in the same manner and to such extent as is
customary in the locality where such REO is located and may, incident to its conservation and
protection of the interests of the Certificateholders, rent the same, or any part thereof, as the
Servicer deems to be in the best interest of the Certificateholders for the period prior to the
sale of such REO. The net monthly rental income, if any, from such REO shall be deposited in the
Certificate Account no later than the close of business on each Determination Date. The Servicer
shall perform the tax reporting and withholding required by Sections 1445
and 6050J of the Code with respect to foreclosures and abandonments, the tax reporting
required by Section 6050H of the Code with respect to the receipt of mortgage interest from
individuals and any tax reporting required by Section 6050P of the Code with respect to the
cancellation of



47









 




indebtedness by certain financial entities, by preparing such tax and information
returns as may be required, in the form required, and delivering the same to the Administrator for
filing.




     In the event that the Trust Fund acquires any Mortgaged Property as aforesaid or otherwise in
connection with a default or imminent default on a Home Equity Loan, the Servicer shall dispose of
such Mortgaged Property as soon as practicable in a manner that maximizes the Liquidation Proceeds
thereof, but in no event later than three years after its acquisition by the Trust Fund. In that
event, the Trustee shall have been supplied with an Opinion of Counsel to the effect that the
holding by the Trust Fund of such Mortgaged Property subsequent to a three year period, if
applicable, will not result in the imposition of taxes on “prohibited transactions” of any REMIC
hereunder as defined in Section 860F of the Code or cause any REMIC hereunder to fail to qualify as
a REMIC at any time that any Certificates are outstanding, and that the Trust Fund may continue to
hold such Mortgaged Property (subject to any conditions contained in such Opinion of Counsel) after
the expiration of such three-year period. Notwithstanding any other provision of this Agreement,
no Mortgaged Property acquired by the Trust Fund shall be rented (or allowed to continue to be
rented) or otherwise used for the production of income by or on behalf of the Trust Fund in such a
manner or pursuant to any terms that would (i) cause such Mortgaged Property to fail to qualify as
“foreclosure property” within the meaning of Section 860G(a)(8) of the Code or (ii) subject any
REMIC hereunder to the imposition of any federal, state or local income taxes on the income earned
from such Mortgaged Property under Section 860G(c) of the Code or otherwise, unless the Servicer
has agreed to indemnify and hold harmless the Trust Fund with respect to the imposition of any such
taxes.



     (d) In the event of a default on a Mortgage Loan one or more of whose obligors is not a United
States Person in connection with any foreclosure or acquisition of a deed in lieu of foreclosure
(together, “foreclosure”) in respect of such Mortgage Loan, the Servicer will cause compliance with
the provisions of Treasury Regulation Section 1.1445-2(d)(3) (or any successor thereto) necessary
to assure that no withholding tax obligation arises with respect to the proceeds of such
foreclosure except to the extent, if any, that proceeds of such foreclosure are required to be
remitted to the obligors on such Home Equity Loan.



          Section 3.07. [Reserved].




          Section 3.08. Trustee to Cooperate.




     (a) Upon any payment in full of the Principal Balance of any Home Equity Loan, the Servicer is
authorized to execute, pursuant to the authorization contained in Section 3.01, if the assignments
of Mortgage have been recorded as required hereunder, an instrument of satisfaction regarding the
related Mortgage or written evidence of cancellation thereon and to cause the removal from the
registration on the MERS® System of such Mortgage, which instrument of satisfaction shall be
recorded by the Servicer if required by applicable law and be delivered to the Person entitled
thereto. It is understood and agreed that no expenses incurred in connection with such instrument
of satisfaction or transfer shall be reimbursed from amounts deposited in the Collection Account.
If the Trustee is holding the Mortgage Files, from time to time and as
appropriate for the servicing or foreclosure of any Home Equity Loan, the Trustee shall, upon
request of the Servicer and delivery to the Trustee of a trust receipt signed by a Servicing
Officer, release the related Mortgage File to the Servicer, and the Trustee shall execute such



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documents as shall be necessary to the prosecution of any such proceedings or the taking of other
servicing actions. Such trust receipt shall obligate the Servicer to return the Mortgage File to
the Trustee when the need therefor by the Servicer no longer exists unless the Home Equity Loan
shall be liquidated, in which case, upon receipt of an Officer’s Certificate of the Servicer, the
trust receipt shall be released by the Trustee to the Servicer.




     (b) In order to facilitate the foreclosure of the Mortgage securing any Home Equity Loan that
is in default following recordation of the assignments of Mortgage in accordance with the
provisions hereof, the Trustee shall, if the Servicer so requests in writing and supplies the
Trustee with appropriate forms therefor, assign such Home Equity Loan for the purpose of collection
to the Servicer or to the related Subservicer (any such assignment shall unambiguously indicate
that the assignment is for the purpose of collection only), and, upon such assignment, such
assignee for collection will thereupon bring all required actions in its own name and otherwise
enforce the terms of the Home Equity Loan and deposit or credit the Net Liquidation Proceeds
received with respect thereto in the Collection Account. In the event that all delinquent payments
due under any such Home Equity Loan are paid by the Mortgagor and any other defaults are cured then
the assignee for collection shall promptly reassign such Home Equity Loan to the Trust and return
it to the place where the related Mortgage File was being maintained.



          Section 3.09. Servicing Compensation; Payment of Certain Expenses by Servicer. The
Servicer shall be entitled to receive the Servicing Fee as compensation for its services in
connection with servicing the Home Equity Loans. The Servicing Fee for each Collection Period
shall be paid to the Servicer out of Interest Collections prior to their deposit in the Collection
Account and shall not be the responsibility or liability of the Trust, the Trustee, the
Administrator or the Class A or Class M Certificateholders. Additional servicing compensation in
the form of late payment charges or other receipts not required to be deposited in the Collection
Account shall be retained by the Servicer. The Servicer shall be required to pay all expenses
incurred by it in connection with its activities hereunder (including payment of Trustee fees,
Administrator fees and all other fees and expenses not expressly stated hereunder to be for the
account of the Certificateholders) and shall not be entitled to reimbursement therefor except as
specifically provided herein.




          Section 3.10. Annual Statement as to Compliance.




     (a) The Servicer shall deliver, and, to the extent required by Section 1123 of Regulation AB,
shall cause each Subservicer to deliver, to the Depositor and the Trustee an Officer’s Certificate
satisfying the requirements of Section 1123 of Regulation AB signed by a responsible officer of the
Servicer or such Subservicer, as applicable, for the year ended December 31 (or other applicable
date) of the immediately preceding year, and stating that (i) a review of the activities of the
Servicer or such Subservicer, as applicable, during the preceding 12-month period (or such shorter
or longer, as applicable, period since the Closing Date) and of its performance under this
Agreement has been made under such officer’s supervision, and (ii) to the best of such officer’s
knowledge, based on such review, the Servicer or such Subservicer, as
applicable, has fulfilled in all material respects all of its obligations under this Agreement
throughout such period, or, if there has been a failure to fulfill any such obligation in any



49









 




material respect, specifying each such failure known to such officer and the nature and status
thereof.




     The Officer’s Certificates referred to in this Section 3.10(a) will be delivered on or before
March 15 of each calendar year, beginning March 15, 2007, unless the Depositor is not required to
file periodic reports with respect to the Issuing Entity under the Exchange Act, in which case the
certificates may be delivered on or before March 31 of each calendar year.



     (b) The Servicer shall deliver to the Trustee and a copy to each of the Rating Agencies,
promptly after having obtained knowledge thereof, but in no event later than five Business Days
thereafter, written notice by means of an Officer’s Certificate of any event that, with the giving
of notice or the lapse of time or both, would become a Servicer Termination Event.



     (c) The Servicer shall, and, to the extent required by Item 1122 of Regulation AB, shall cause
each Subservicer to:




     (i) deliver to the Trustee a report, for the year ended December 31 of the preceding
calendar year, on its assessment of compliance during the preceding calendar year with the
Servicing Criteria applicable to it, including disclosure of any material instance of
non-compliance identified by the Servicer or such Subservicer, as applicable, that satisfies
the requirements of Rule 13a-18 and 15d-18 under the Exchange Act and Item 1122 of
Regulation AB under the Securities Act; and




     (ii) cause an independent registered public accounting firm that is qualified and
independent within the meaning of Rule 2-01 of Regulation S-X under the Securities Act to
deliver to the Trustee an attestation report that satisfies the requirements of Rule 13a-18
or Rule 15d-18 under the Exchange Act and Item 1122 of Regulation AB, with respect to each
assessment of compliance with Servicing Criteria delivered pursuant to clause (i) above.
Such attestation report will be addressed to the board of directors of the Servicer or such
Subservicer, as applicable, and to the Trustee and the Administrator and will be in
accordance with Rules 1-02(a)(3) and 2-02(g) of Regulation S-X under the Securities Act.
The firm may render other services to the Servicer, such Subservicer or the Seller, but the
firm must indicate in each attestation report that it is qualified and independent within
the meaning of Rule 2-01 of Regulation S-X under the Securities Act.



     The reports referred to in this Section 3.10(c) will be delivered on or before March 15 of
each calendar year, beginning March 15, 2007, unless the Depositor is not required to file periodic
reports with respect to the Issuing Entity under the Exchange Act, in which case the reports may be
delivered on or before March 31 of each calendar year.



     (d) If directed by the Depositor, the Servicer will prepare, execute, file and deliver all
reports, statements, information, certificates or other documentation required to be delivered by
the Depositor with respect to the Issuing Entity pursuant to the Exchange Act and the
Sarbanes-Oxley Act of 2002 and the rules thereunder.



     Section 3.11. Access to Certain Documentation and Information Regarding the Home Equity
Loans.



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     (a) The Servicer and the Subservicers shall provide to the Trustee, the Administrator, Holders
of Offered Certificates that are federally insured savings and loan associations, the Office of
Thrift Supervision, the successor to the Federal Home Loan Bank Board, the FDIC and the supervisory
agents and examiners of the Office of Thrift Supervision access to the documentation regarding the
Home Equity Loans required by applicable regulations of the Office of Thrift Supervision and the
FDIC (acting as operator of the SAIF or the BIF), such access being afforded without charge but
only upon reasonable request and during normal business hours at the offices of the Servicer or the
Subservicers. Nothing in this Section shall derogate from the obligation of the Servicer to
observe any applicable law prohibiting disclosure of information regarding the Mortgagors, and the
failure of the Servicer to provide access as provided in this Section as a result of such
obligation shall not constitute a breach of this Section.



     (b) No later than the Determination Date preceding the related Distribution Date, the Servicer
shall supply to the Administrator and the Paying Agent information (each, a “Remittance
Report”), in such form as the Administrator shall reasonably request as is required in the
Administrator’s reasonable judgment to enable the Paying Agent or the Administrator, as the case
may be, to make the required distributions and to furnish the required reports to
Certificateholders on such Distribution Date.



          Section 3.12. Maintenance of Certain Servicing Insurance Policies. The Servicer
shall during the term of its service as servicer maintain in force (i) a policy or policies of
insurance covering errors and omissions in the performance of its obligations as servicer hereunder
and (ii) a fidelity bond in respect of its officers, employees or agents. Each such policy or
policies and bond shall, together, comply with the requirements from time to time of Fannie Mae for
Persons performing servicing for mortgage loans purchased by such association.




          Section 3.13. Derivative Contracts.




     (a) The Trustee shall, at the written direction of the Servicer, enter into Derivative
Contracts on behalf of the Trust solely for the benefit of the Holder of the Class R Certificate.
Any such Derivative Contract shall constitute a fully prepaid agreement. The Servicer shall
determine, in its sole discretion, whether any Derivative Contract conforms to the requirements of
clauses (b) and (c) of this Section 3.13. Any acquisition of a Derivative Contract shall be
accompanied by (i) an appropriate amendment to this Agreement, including an Opinion of Counsel to
the effect that all such conditions precedent, if any, to such amendment have been complied with,
(ii) either (A) an Opinion of Counsel addressed to the Trustee to the effect that the existence of
the Derivative Contract will not adversely affect the availability of the exemptive relief afforded
under ERISA by the Underwriter Exemption to the holders of the Offered Certificates, as of the date
the Derivative Contract is acquired by the Trustee on behalf of the Trust; or (B) the consent of
each Holder of a Certificate to the acquisition of such Derivative Contract, and (iii) an Opinion
of Counsel to the effect that entering into the Derivative Contract will not adversely affect the
income tax treatment of the Trust or any interest in the Trust. All collections, proceeds and
other amounts in respect of the Derivative Contracts payable by the Derivative Counterparty shall
first be deposited into a reserve fund (“Derivative Contract 
Reserve Fund”) especially created for such collections, proceeds and other amounts,
and thereafter distributed to the Holder of the Class R Certificate on the Distribution Date
following receipt and deposit thereof by the Administrator. The Derivative Contract Reserve Fund
shall be



51









 







created, and funded with no less than $1,000, before the Trustee enters into such
Derivative Contract. In the event any Derivative Contract is entered into, the Trust shall be
deemed to be divided into two separate and discrete sub-trusts. The assets of one such sub-trust
shall consist of all the assets of the Trust other than such Derivative Contract and the assets of
the other sub-trust shall consist solely of the Derivative Contract and the funds held in the
Derivative Contract Reserve Fund.



     (b) Any Derivative Contract that imposes any obligation to make a payment to the Derivative
Counterparty (other than the obligation to pay any prepaid amount) must (i) impose such obligation
solely on the Holder of the Class R Certificate, (ii) be without recourse to the Administrator, the
Trustee or the assets of the Trust, (iii) contain a non-petition covenant provision from the
Derivative Counterparty, (iv) limit payment dates thereunder to Distribution Dates and (v) contain
a provision limiting any cash payments due to the Derivative Counterparty on any day under such
Derivative Contract solely to funds available therefore in the Collection Account available to make
payments to the Holder of the Class R Certificate on such Distribution Date.



     (c) Each Derivative Contract must (i) provide for the direct payment of any amounts by the
Derivative Counterparty thereunder to the Derivate Contract Reserve Fund on or before the related
Deposit Date, (ii) contain an assignment of all of the rights against the Derivative Counterparty
(but none of the obligations to the Derivative Counterparty) under such Derivative Contract to the
Trustee on behalf the Holder of the Class R Certificate and include an express consent by the
Derivative Counterparty to such assignment, and (iii) prohibit the Derivative Counterparty from
“setting-off’ or “netting” any obligations of the Trust and its affiliates against such Derivative
Counterparty’s payment obligations thereunder.



          Section 3.14. Information Required by the Internal Revenue Service Generally and Reports
of Foreclosures and Abandonments of Mortgaged Property. The Servicer shall prepare and
deliver, or cause to be prepared, mailed and filed all federal and state information reports for
the Home Equity Loans when and as required by all applicable state and federal income tax laws
including, to the extent applicable, returns reporting a cancellation of indebtedness as prescribed
by Section 6050P of the Code. In particular, with respect to the requirement under Section 6050J
of the Code, to the effect that a lender shall be required to report foreclosures and abandonments
of any mortgaged property for each year beginning in 2007, the Servicer shall prepare, mail and
file in a timely fashion each year as required by law information statements in accordance with the
reporting requirements imposed by Section 6050J with respect to each instance occurring during the
previous calendar year in which the Servicer or any Subservicer (i) on behalf of the Trustee
acquired an interest in any Mortgaged Property through foreclosure or other comparable conversion
in full or partial satisfaction of a Home Equity Loan or (ii) knew or had reason to know that any
Mortgaged Property has been abandoned. The information statements from the Servicer shall be in
form and substance sufficient to meet the reporting requirements imposed by Section 6050J of the
Code.




          Section 3.15. Additional Covenants of HSBC Finance. HSBC Finance hereby agrees that:





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     (a) it will maintain its books and records to clearly note the separate corporate
existence of the Depositor, each Subservicer and the Servicer;



     (b) the Depositor, the Subservicers and HSBC Finance will share certain overhead expenses,
although the amount the Depositor will be charged for such use will be based on actual use to the
extent practicable and, to the extent such allocation is not practicable, on a basis reasonably
related to use;



     (c) separate financial records will be maintained to reflect the assets and liabilities of the
Depositor, HSBC Finance and each Subservicer, which financial records are and will be subject to
audit by independent public accountants at the reasonable request of the Board of Directors of the
Depositor, HSBC Finance or such Subservicer, as the case may be;



     (d) except as permitted hereunder, there will be no commingling of the assets of the Depositor
with the assets of HSBC Finance or any Subservicer. All demand deposit accounts and other bank
accounts of the Depositor will be maintained separately from those of HSBC Finance and the
Subservicers. Monetary transactions between the Depositor and HSBC Finance or any Subservicer are
and will continue to be properly reflected in their respective financial records;



     (e) HSBC Finance at all times will recognize, and will take all steps within its power to
maintain, the corporate existence of the Depositor and Subservicers as being separate and apart
from its own corporate existence and will not refer to the Depositor or any Subservicer as a
department or division of HSBC Finance; and



     (f) Except as otherwise expressly provided herein, the Depositor and HSBC Finance will not
guaranty or advance the proceeds for payment of any obligations of the Trust.



          Section 3.16. Servicing Certificate. Not later than each Determination Date, the
Servicer shall deliver to the Administrator, the Paying Agent and each Rating Agency a Servicing
Certificate containing the information set forth below with respect to the Home Equity Loans on an
aggregate basis at the end of the preceding Collection Period (in written form or the form of
computer readable media or such other form as may be agreed to by the Administrator and the
Servicer), together with an Officer’s Certificate to the effect that such Servicing Certificate is
true and correct in all material respects, stating the related Collection Period, Distribution
Date, the series number of the Certificates, the date of this Agreement, and:




     (i) the Available Distribution Amount for such Distribution Date, separately stating
the amount of Interest Collections and Principal Collections;




     (ii) the amount of the payments due to Holders of each Class of Offered Certificates
for such Distribution Date, separately stating the portions thereof allocable to interest
and to principal;




     (iii) the amount of any Interest Carry Forward Amount and Net Rate Carryover Amount for
each Class of Offered Certificates to be distributed on such Distribution Date and the
amount of any Interest Carry Forward Amount or Net Rate Carryover Amount for



53









 







each Class of Offered Certificates remaining after giving effect to the distributions
on such Distribution Date;




     (iv) the Principal Distribution Amount for such Distribution Date (and, if applicable,
the portion thereof consisting of the Extra Principal Distribution Amount for such
Distribution Date), separately stating the portion allocable to each Class of Offered
Certificates on such Distribution Date;




     (v) the Certificate Principal Balance of each Class of Offered Certificates, the Pool
Balance as reported in the prior Monthly Distribution Statement or, in the case of the first
Determination Date, the Original Class Certificate Principal Balance for each Class of
Offered Certificates and the Cut-Off Date Pool Balance;




     (vi) the Certificate Principal Balance of each Class of Offered Certificates after
giving effect to the distributions on such Distribution Date;




     (vii) the number and aggregate Principal Balance of any Home Equity Loan purchased or
substituted by the Depositor or the Servicer with respect to the related Collection Period
pursuant to Section 2.02;




     (viii) the number and aggregate Principal Balance of any Home Equity Loan purchased or
substituted by the Depositor or the Servicer with respect to the related Collection Period
pursuant to Section 2.04;




     (ix) the number and aggregate Principal Balance of any Home Equity Loan purchased or
substituted by the Depositor or the Servicer with respect to the related Collection Period
pursuant to Section 3.01;




     (x) the amount of any Substitution Adjustment Amounts for such Distribution Date;




     (xi) the amount, if any, to be distributed to the Holder of the Class R Certificate on
such Distribution Date;




     (xii) the Servicing Fee for such Collection Period (as reduced by the Compensating
Interest for the related Collection Period) and any accrued amounts thereof that remain
unpaid for previous Collection Periods;




     (xiii) the Compensating Interest for the related Collection Period;




     (xiv) the amount of all payments or reimbursements to the Servicer pursuant to Sections
3.03(ii) through (vi);




     (xv) the Overcollateralization Amount, if any, and the Overcollateralization Release
Amount, Targeted Overcollateralization Amount and Monthly Excess Cashflow for such
Distribution Date;



54









 






     (xvi) the Applied Realized Loss Amount and Unpaid Realized Loss Amount for each Class
of Class M Certificates for such Distribution Date;




     (xvii) the number of Home Equity Loans outstanding at the beginning and at the end of
the related Collection Period;




     (xviii) the Pool Balance as of the end of the related Collection Period;




     (xix) the number and aggregate Principal Balances of Home Equity Loans (x) as to which
one, two or three or more scheduled monthly payments, respectively, are contractually
delinquent, and (y) that have become REO, in each case as of the end of such Collection
Period;




     (xx) the Cumulative Realized Losses on the Home Equity Loans as of the end of the
related Collection Period;




     (xxi) the One Payment Delinquency Percentage for the related Collection Period;




     (xxii) the Two Payment Delinquency Percentage for the related Collection Period;




     (xxiii) the Two Payment Plus Delinquency Percentage for the related Collection Period;




     (xxiv) the Two Payment Plus Rolling Average for such Distribution Date;




     (xxv) the Three Payment Plus Delinquency Percentage for the related Collection Period;




     (xxvi) the aggregate Principal Balances of Home Equity Loans that were restructured
(and delinquency reset) during such Collection Period;




     (xxvii) the aggregate Principal Balances of Home Equity Loans that were restructured
(and delinquency reset) during such Collection Period as a percentage of the Pool Balance as
of the end of such Collection Period;




     (xxviii) whether a Servicer Termination Event has occurred since the prior
Determination Date, specifying each Servicer Termination Event if one has occurred;




     (xxix) One-Month LIBOR for the related Interest Accrual Period(s);




     (xxx) the Formula Rate and Pass-Through Rate for each Class of Offered Certificates,
the Net Rate Cap for the Fixed Rate Certificates and the Net Rate Cap for the Floating Rate
Certificates, in each case for such Distribution Date or the related Interest Accrual
Period(s), as the case may be;




     (xxxi) the Cumulative Loss Percentage for the related Collection Period;



55









 






     (xxxii) whether a Trigger Event has occurred or is continuing; and




     (xxxiii) such other information as is required by the Code and regulations thereunder
to be made available to Holders of the Offered Certificates.



     The Administrator and the Paying Agent shall conclusively rely upon the information contained
in a Servicing Certificate for purposes of making distributions pursuant to Section 4.01, shall
have no duty to inquire into such information and shall have no liability in so relying. The
format and content of the Servicing Certificate may be modified by the mutual agreement of the
Servicer and the Administrator or as may be required by the rules and regulations of the SEC. The
Servicer shall give notice of any such change to the Rating Agencies.



ARTICLE
IV




DISTRIBUTIONS AND STATEMENTS TO CERTIFICATEHOLDERS;

RIGHTS OF CERTIFICATEHOLDERS




          Section 4.01. Distributions. (a) On each Distribution Date, the Paying Agent shall
withdraw amounts on deposit in the Collection Account and make distributions thereof as described
below (to the extent of the Available Distribution Amount) to Holders of the Certificates in the
following order of priority (in accordance with the information set forth in the Servicing
Certificate):





     (i) concurrently, to the Holders of each Class of Class A Certificates, the Current
Interest and any Interest Carry Forward Amount each such Class of Certificates and
Distribution Date, pro rata based on each such Class’s respective entitlement;




     (ii) to the Holders of the Class M-1 Certificates, the Current Interest and any
Interest Carry Forward Amount for such Class and Distribution Date;




     (iii) to the Holders of the Class M-2 Certificates, the Current Interest and any
Interest Carry Forward Amount for such Class and Distribution Date;




     (iv) (A) on each Distribution Date prior to the Stepdown Date or on or after the
Stepdown Date and with respect to which a Trigger Event is in effect:




     (1) concurrently, to the Holders of the Class A-1F and Class A-1V Certificates,
pro rata based on each such Class’s Certificate Principal Balance, the Principal
Distribution Amount for such Distribution Date, until the Certificate Principal
Balances of such Classes have been reduced to zero;




     (2) concurrently, to the Holders of the Class A-2F and Class A-2V Certificates,
pro rata based on each such Class’s Certificate Principal Balance, any remaining
Principal Distribution Amount for such Distribution Date, until the Certificate
Principal Balances of such Classes have been reduced to zero;



56









 






     (3) concurrently, to the Holders of the Class A-3F and Class A-3V Certificates,
pro rata based on each such Class’s Certificate Principal Balance, any remaining
Principal Distribution Amount for such Distribution Date, until the Certificate
Principal Balances of such Classes have been reduced to zero;




     (4) to the Class A-4 Certificates, any remaining Principal Distribution Amount
for such Distribution Date, until the Certificate Principal Balance of such Class
has been reduced to zero;




     (5) to the Class M-1 Certificates, any remaining Principal Distribution Amount
for such Distribution Date, until the Certificate Principal Balance of such Class
has been reduced to zero; and




     (6) to the Class M-2 Certificates, any remaining Principal Distribution Amount
for such Distribution Date, until the Certificate Principal Balance of such Class
has been reduced to zero;




     (B) on each Distribution Date on or after the Stepdown Date and as to which a
Trigger Event is not in effect:




     (1) concurrently, to the Holders of the Class A-1F and Class A-1V Certificates,
pro rata based on each such Class’s Certificate Principal Balance, the Class A
Principal Distribution Amount for such Distribution Date, until the Certificate
Principal Balances of such Classes have been reduced to zero;




     (2) concurrently, to the Holders of the Class A-2F Certificates and the Class
A-2V Certificates, pro rata based on each such Class’s Certificate Principal
Balance, any remaining Class A Principal Distribution Amount for such Distribution
Date, until the Certificate Principal Balances of such Classes have been reduced to
zero;




     (3) concurrently, to the Holders of the Class A-3F Certificates and the Class
A-3V Certificates, pro rata based on each such Class’s Certificate Principal
Balance, any remaining Class A Principal Distribution Amount for such Distribution
Date, until the Certificate Principal Balances of such Classes have been reduced to
zero;




     (4) to the Holders of the Class A-4 Certificates, any remaining Class A
Principal Distribution Amount for such Distribution Date, until the Certificate
Principal Balance of such Class has been reduced to zero;




     (5) to the Holders of the Class M-1 Certificates, the Class M-1 Principal
Distribution Amount for such Distribution Date, until the Certificate Principal
Balance of such Class has been reduced to zero; and




     (6) to the Holders of the Class M-2 Certificates, the Class M-2 Principal
Distribution Amount for such Distribution Date, until the Certificate Principal
Balance of such Class has been reduced to zero;



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     (v) to the Holders of the Class M-1 Certificates, the Unpaid Realized Loss Amount, if
any, for such Class and Distribution Date;




     (vi) to the Holders of the Class M-2 Certificates, the Unpaid Realized Loss Amount, if
any, for such Class and Distribution Date;




     (vii) concurrently to the Holders of each Class of Offered Certificates, any Net Rate
Carryover Amount for each such Class and Distribution Date, pro rata based on each such
Class’s respective Net Rate Carryover Amount; and




     (viii) to the Holder of the Class R Certificate, any remaining Available Distribution
Amount.



     (b) Method of Distribution. The Administrator or the Paying Agent shall make
distributions in respect of a Distribution Date to each Certificateholder of record on the related
Record Date (other than as provided in Section 9.01 respecting the final distribution) by wire
transfer, or upon prior written request by a Certificateholder delivered to the Administrator at
least five business days prior to such Record Date, by check or money order mailed to such
Certificateholder at the address appearing in the Certificate Register, or by such other means of
payment as such Certificateholder and the Paying Agent shall agree. The Administrator, acting in
its capacity as Paying Agent, shall make distributions in respect of a Distribution Date to the
Class R Certificateholder of record on the related Record Date by wire transfer or by such other
means of payment as the Class R Certificateholder and the Paying Agent shall agree; provided, that
if such payments are being distributed directly to the Class R Certificateholder by the Servicer in
accordance with Section 4.01(a) above, then such distributions shall be made by wire transfer or by
such other means of payment as the Class R Certificateholder and the Servicer shall agree.



     (c) Distributions on Book-Entry Certificates. Each distribution with respect to a
Book-Entry Certificate shall be paid to the Depository, which shall credit the amount of such
distribution to the accounts of its Depository Participants in accordance with its normal
procedures. Each Depository Participant shall be responsible for disbursing such distribution to
the Certificate Owners that it represents and to each indirect participating brokerage firm (a
“brokerage firm” or “indirect participating firm”) for which it acts as agent. Each brokerage firm
shall be responsible for disbursing funds to the Certificate Owners that it represents. All such
credits and disbursements with respect to a Book-Entry Certificate are to be made by the Depository
and the Depository Participants in accordance with the provisions of the Offered Certificates.
None of the Trustee, the Administrator, the Paying Agent, the Certificate Registrar, the Depositor
or the Servicer shall have any responsibility therefor except as otherwise provided by applicable
law.



          Section 4.02. Calculation of the Formula Rate for Floating Rate Certificates; Calculation
of One-Month LIBOR.




     (a) Calculation of the Formula Rate. On or prior to each LIBOR Determination Date,
the Servicer shall determine the Formula Rate for each Class of Floating Rate Certificates for the



58









 







related Interest Accrual Period based on the determination of One-Month LIBOR made by the
Administrator as set forth in this Section 4.02.



     (b) Calculation of One-Month LIBOR. Until the Certificate Principal Balance of each
Class of Floating Rate Certificates has been reduced to zero, the Administrator shall establish
One-Month LIBOR on each LIBOR Determination Date as follows:




     (i) If on such LIBOR Determination Date a rate for United States dollar deposits for
one month appears on the Dow Jones Telerate System, page 3750, One-Month LIBOR for the next
Interest Accrual Period shall be equal to such rate as of 11:00 A.M., London time;




     (ii) If such rate does not appear on such page (or such other page as may replace that
page on that service, or if such service is no longer offered, such other service for
displaying One-Month LIBOR or comparable rates as may be selected by the Administrator after
consultation with the Servicer), the rate shall be determined as follows:




(x) The Administrator on the LIBOR Determination Date will request the principal
London offices of each of four major reference banks in the London interbank market,
as selected by the Administrator, to provide the Administrator with its offered
quotation for deposits in United States dollars for the upcoming one-month period,
commencing on the second LIBOR Business Day immediately following such LIBOR
Determination Date, to prime banks in the London interbank market at approximately
11:00 a.m. London time on such LIBOR Determination Date and in a principal amount
that is representative for a single transaction in United States dollars in such
market at such time. If at least two such quotations are provided, LIBOR determined
on such LIBOR Determination Date will be the arithmetic mean of such quotations.




(y) If fewer than two quotations are provided, One-Month LIBOR determined on such
LIBOR Determination Date will be the arithmetic mean of the rates quoted at
approximately 11:00 a.m. in New York City on such LIBOR Determination Date by three
major banks in New York City selected by the Administrator for one-month United
States dollar loans to leading European banks, in a principal amount that is
representative for a single transaction in United States dollars in such market at
such time; provided, however, that if the banks so selected by the Administrator are
not quoting as mentioned in this sentence, One-Month LIBOR determined on such LIBOR
Determination Date will continue to be One-Month LIBOR as then currently in effect
on such LIBOR Determination Date.




     (iii) The establishment of One-Month LIBOR on each LIBOR Determination Date by the
Administrator and the Servicer’s calculation of the rate of interest applicable to the
Offered Certificates for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding. The Administrator shall, upon determination of



59









 







One-Month LIBOR for the relevant Interest Accrual Period, inform the Servicer (at the
facsimile number given to the Administrator in writing) of such rates.



     (c) Statements to Certificateholders. (i) On each Distribution Date, the Servicer
shall deliver a copy of the applicable Servicing Certificate delivered to the Administrator and the
Paying Agent pursuant to Section 3.16 to each Certificateholder concurrently with each distribution
to Certificateholders (the “Monthly Distribution Statement”).



     In the case of information furnished pursuant to clauses (ii) and (iii) of Section 3.16, the
amounts shall be expressed, in a separate section of the report, as a dollar amount per Offered
Certificate for each $1,000 original dollar amount as of the Cut-Off Date.



     The Servicer will make the reports referred to in this section (and, at its option, any
additional files containing the same information in an alternative format) available each month to
Certificateholders and other parties to this Agreement via the Servicer’s website, which is
presently located at www.hsbcusa.com/hsbc_finance/abs. Persons that are unable to use the above
website are entitled to have a paper copy mailed to them via first class mail by requesting a paper
copy in a written request addressed to the Servicer at the address listed in Section 10.05. The
Servicer shall have the right to change the way the reports referred to in this section are
distributed in order to make such distribution more convenient and/or more accessible to the above
parties and to the Certificateholders. The Servicer shall provide timely and adequate notification
to the Administrator and the Paying Agent, who shall thereupon provide a copy of such notice to
Certificateholders, regarding any such change.



     (d) The Servicer shall also give access to such statement to each Rating Agency at the time it
gives access to such statement to the Administrator and the Paying Agent.



     (e) Reports and computer tapes furnished by the Servicer pursuant to this Agreement shall be
deemed confidential and of a proprietary nature, and shall not be copied or distributed except to
the extent provided in this Agreement and to the extent required by law or to the Rating Agencies,
the Depositor and to the extent the Servicer instructs the Administrator in writing to furnish
information regarding the Trust or the Home Equity Loans to third-party information providers. No
Person entitled to receive copies of such reports or tapes or lists of Certificateholders shall use
the information therein for the purpose of soliciting the customers of the Seller or for any other
purpose except as set forth in this Agreement.



     (f) On or before February 28 of each year, the Servicer shall prepare or cause to be prepared
and shall forward or give access to the Administrator the information set forth in clauses (i) and
(ii) of Section 3.16 aggregated for such calendar year. Such obligation of the Servicer shall be
deemed to have been satisfied to the extent that substantially comparable information shall be
provided by the Servicer pursuant to any requirements of the Code.



     (g) On or before March 15 of each calendar year, the Servicer shall forward or give access to
the Administrator for mailing to each Person who at any time during the calendar year was a Holder
of a Residual Certificate a statement containing the applicable distribution information provided
pursuant to this Section aggregated for such calendar year or applicable portion thereof during
which such Person was a Holder of a Residual Certificate together with



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any other information relating to the Trust reasonably required in order to enable a Holder of
a Residual Certificate to timely prepare and file its U.S. federal income tax returns and reports.
Such obligation of the Servicer shall be deemed to have been satisfied to the extent that
substantially comparable information shall be provided by the Servicer to the Administrator
pursuant to any requirements of the Code.



          Section 4.03. Allocation of Realized Losses.




     If on any Distribution Date, after giving effect to all distributions to be made on that
Distribution Date, the aggregate Certificate Principal Balance of the Offered Certificates exceeds
the Pool Balance as of the last day of the related Collection Period, that excess shall be applied
sequentially to reduce the Certificate Principal Balances of the Class M-2 and Class M-1
Certificates, in that order, in each case until the Certificate Principal Balance of such Class is
reduced to zero.



          Section 4.04. Carryover Reserve Fund.




     (a) The Servicer shall establish and maintain with the Administrator a separate trust account
(the “Carryover Reserve Fund”) titled “HSBC Bank USA, National Association, as
Administrator, on behalf of U.S. Bank National Association, as Trustee, in trust for the registered
holders of HSBC Home Equity Loan Trust (USA) 2006-3, Closed-End Home Equity Loan Asset-Backed
Certificates, Series 2006-3”. On the Closing Date, the Depositor will cause the sum of $1,000 to
be deposited into the Carryover Reserve Fund. In the event that a successor Administrator is
appointed as provided in Section 8.19, a new Carryover Reserve Fund shall be promptly established
at and maintained by such successor Administrator, and the title of the new Carryover Reserve Fund
shall be “[Successor Administrator], as Administrator, on behalf of the Trustee, in trust for the
registered holders of HSBC Home Equity Loan Trust (USA) 2006-3, Closed-End Home Equity Loan
Asset-Backed Certificates, Series 2006-3”, and any amounts in the old Carryover Reserve Fund shall
be transferred to the new Carryover Reserve Fund. The Carryover Reserve Fund shall be an Eligible
Account.



     (b) The Servicer may cause the institution maintaining the Carryover Reserve Fund to invest
any funds in the Carryover Reserve Fund in Permitted Investments (including obligations of the
Servicer or of any of its Affiliates, if such obligations otherwise qualify as Permitted
Investments), which shall mature or otherwise be available not later than the Business Day next
preceding the Distribution Date or on the Distribution Date next following the date of such
investment as long as such action does not result in a withdrawal or downgrading of the then
current ratings on the Offered Certificates by the Rating Agencies (except that any investment in
an obligation of the institution with which the Carryover Reserve Fund is maintained may mature on
or before 12:00 noon, Chicago time, on such Distribution Date) and shall not be sold or disposed of
prior to its maturity. In the event the Administrator is at any time maintaining the Carryover
Reserve Fund, any request by the Servicer to invest funds on deposit in the Carryover Reserve Fund
shall be in writing, shall be delivered to the Administrator at or before 10:30 A.M., Chicago time,
if such investment is to be made on such day, and shall certify that the requested investment is a
Permitted Investment that matures at or prior to the time required hereby. In the absence of such
investment instructions, the amounts on deposit in the Carryover Reserve Fund shall remain
uninvested. Any such investment shall be registered in the name of or controlled by



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the Administrator on behalf of the Trustee or in the name of its nominee and to the extent
such investments are certificated they shall be maintained in the possession or control of the
Administrator on behalf of the Trustee in the state of the Administrator’s Corporate Trust Office.
Except as provided above, all income and gain realized from any such investment shall be for the
benefit of the Servicer and shall be subject to its withdrawal or order from time to time. The
amount of any losses incurred in respect of the principal amount of any such investments shall be
deposited in the Carryover Reserve Fund by the Servicer out of its own funds immediately as
realized.



     (c) The Administrator shall hold amounts deposited in the Carryover Reserve Fund on behalf of
the Trustee for the benefit of the Certificateholders.



     (d) The Administrator is hereby authorized to execute purchases and sales of Permitted
Investments as directed by the Servicer through the facilities of its own trading or capital
markets operations. The Administrator shall send to the Servicer statements reflecting the monthly
activity for each such purchase and sale made for the preceding month. Although the Servicer
recognizes that it may obtain a broker confirmation or written monthly statement containing
comparable information at no additional cost, the Servicer hereby agrees that confirmations of
investments are not required to be issued by the Administrator for each month in which a monthly
statement is rendered. No statement need be rendered pursuant to the provision of this subsection
if no activity occurred in the account for such month.



     (e) On each Distribution Date, any distributions of Net Rate Carryover Amounts to be made to
any Holder of an Offered Certificate pursuant to Section 4.01 shall first be remitted from the
Collection Account to the Carryover Reserve Fund and then distributed to such Holder.



     (f) Upon the termination of the Trust Fund, any amounts on deposit in the Carryover Reserve
Fund shall be distributed to the Holder of the Class R Certificate.



     (g) For federal income tax purposes, the Carryover Reserve Fund shall be treated as owned by
the Holder of the Class R Certificate.



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ARTICLE V




THE CERTIFICATES




          Section 5.01. The Certificates.




     (a) The Class A-1F Certificates, the Class A-1V Certificates, the Class A-2F Certificates, the
Class A-2V Certificates, the Class A-3F Certificates, the Class A-3V Certificates, the Class A-4
Certificates, the Class M-1 Certificates, the Class M-2 Certificates and the Class R Certificate
shall be substantially in the forms set forth in Exhibits A and B, as applicable, and shall, on
original issue, be executed by the Trustee on behalf of the Trust, and authenticated and delivered
by the Administrator to and upon the written order of the Depositor concurrently with the sale and
assignment to the Trust pursuant to Section 2.01. Each Class of Offered Certificates shall each be
initially evidenced by one or more certificates representing the entire Original Class Certificate
Principal Balance and shall be held in minimum dollar denominations of $25,000 and multiples of
$1,000 in excess thereof.



     (b) The Certificates shall be executed on behalf of the Trust by manual or facsimile signature
of any officer of the Trustee duly authorized to execute such Certificates on behalf of the Trust.
Certificates bearing the manual or facsimile signatures of individuals who were, at the time when
such signatures were affixed, authorized to sign on behalf of the Trustee shall bind the Trustee,
notwithstanding that such individuals or any of them have ceased to be so authorized prior to the
authentication and delivery of such Certificates or did not hold such offices at the date of such
Certificate. No Certificate shall be entitled to any benefit under this Agreement, or be valid for
any purpose, unless such Certificate shall have been manually authenticated by the Administrator
substantially in the form provided for herein, and such authentication upon any Certificate shall
be conclusive evidence, and the only evidence, that such Certificate has been duly authenticated
and delivered hereunder. All Certificates shall be dated the date of their authentication.
Subject to Section 5.02, each Class of Offered Certificates shall be Book-Entry Certificates. The
Class R Certificate shall issued in fully registered certificated form only in a minimum percentage
interest of 100%.



          Section 5.02. Certificate Register; Registration of Transfer and Exchange of
Certificates.




     (a) The Certificate Registrar shall cause to be kept at its corporate trust office (which
shall be the Corporate Trust Office of the Administrator if the Administrator is the Certificate
Registrar) a Certificate Register in which, subject to such reasonable regulations as it may
prescribe, the Certificate Registrar shall provide for the registration of the Certificates and of
transfers and exchanges of the Certificates as herein provided. The Administrator shall initially
serve as Certificate Registrar for the purpose of registering the Certificates and transfers and
exchanges of Certificates as herein provided.



     (b) Upon surrender for registration of transfer of any Certificate at any office or agency of
the Certificate Registrar maintained for such purpose pursuant to the foregoing paragraph, and in
the case of the Residual Certificate, upon satisfaction of the conditions applicable to such
Certificates set forth below, the Trustee shall execute on behalf of the Trust,



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and the Administrator shall authenticate and deliver in the name of the designated transferee
or transferees, one or more new Certificates of a like Class and of the same aggregate Percentage
Interest dated the date of authentication by the Administrator.



     (c) At the option of the Certificateholders, Certificates may be exchanged for other
Certificates, but solely for Certificates of like Class, in authorized denominations and the same
aggregate Percentage Interests, upon surrender of the Certificates to be exchanged at any such
office or agency. Whenever any Certificates are so surrendered for exchange, the Trustee shall
execute on behalf of the Trust, and the Administrator shall authenticate and deliver, the
Certificates of such Class which the Certificateholder making the exchange is entitled to receive.
Every Certificate presented or surrendered for registration of transfer or exchange shall (if so
required by the Trustee, the Administrator or the Certificate Registrar) be duly endorsed by, or be
accompanied by a written instrument of transfer in form satisfactory to the Administrator and the
Certificate Registrar duly executed by, the Holder thereof or such Holder’s attorney duly
authorized in writing.



     (d) Except as provided in Section 5.02(f), the Book-Entry Certificates shall at all times
remain registered in the name of the Depository or its nominee and at all times: (i) transfers of
the Book-Entry Certificates may not be registered by the Administrator except to another
Depository; (ii) the Depository shall maintain book-entry records with respect to the Certificate
Owners and with respect to ownership and registration of transfers of such Certificates; (iii)
ownership and registration of transfers of the Book-Entry Certificates on the books of the
Depository shall be governed by applicable rules established by the Depository; (iv) the Depository
may collect its usual and customary fees, charges and expenses from its Depository Participants;
(v) the Administrator shall deal with the Depository as representative of the Certificate Owners of
the Book-Entry Certificates for purposes of exercising the rights of Holders under this Agreement,
and requests and directions for and votes of such representative shall not be deemed to be
inconsistent if they are made with respect to different Certificate Owners; and (vi) the
Administrator may rely and shall be fully protected in relying upon information furnished by the
Depository with respect to its Depository Participants and furnished by the Depository Participants
with respect to indirect participating firms and Persons shown on the books of such indirect
participating firms as direct or indirect Certificate Owners.



     (e) All transfers by Certificate Owners of Book-Entry Certificates shall be made in accordance
with the procedures established by the Depository Participant or brokerage firm representing such
Certificate Owners. Each Depository Participant shall only transfer ownership interests
represented by Book-Entry Certificates of Certificate Owners that it represents or of brokerage
firms for which it acts as agent in accordance with the Depository’s normal procedures. The parties
hereto are hereby authorized to execute a letter of representations with the Depository or take
such other action as may be necessary or desirable to register a Book-Entry Certificate to the
Depository. In the event of any conflict between the terms of any such Letter of Representation
and this Agreement the terms of this Agreement shall control.



     (f) If (i) (x) the Depository or the Depositor advises the Trustee and the Administrator in
writing that the Depository is no longer willing or able to discharge properly its responsibilities
as Depository and (y) the Administrator or the Depositor is unable to locate a qualified successor,
(ii) the Depositor, at its sole option, with the consent of the Trustee and the



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Administrator, elects to terminate the book-entry system through the Depository or (iii) after
the occurrence of a Servicer Termination Event, the Majority Certificateholder advises the Trustee,
the Administrator and Depository through the Depository Participants in writing that the
continuation of a book-entry system through the Depository to the exclusion of definitive, fully
registered certificates (the “Definitive Certificates”) to Certificate Owners is no longer
in the best interests of the Certificate Owners, upon surrender to the Certificate Registrar of the
Classes of Offered Certificates by the Depository, accompanied by registration instructions from
the Depository for registration, the Trustee shall, at the Servicer’s expense, execute on behalf of
the Trust, and the Administrator shall, upon written order of the Depositor, authenticate, the
Definitive Certificates. None of the Depositor, the Servicer, the Administrator or the Trustee
shall be liable for any delay in delivery of such instructions and may conclusively rely on, and
shall be protected in relying on, such instructions. Upon the issuance of Definitive Certificates,
all references herein to obligations imposed upon or to be performed by the Depository shall be
deemed to be imposed upon and performed by the Administrator, to the extent applicable with respect
to such Definitive Certificates, and the Trustee, the Administrator, the Certificate Registrar, the
Servicer and the Depositor shall recognize the Holders of the Definitive Certificates as
Certificateholders hereunder.



     (g) No service charge shall be made for any Transfer or exchange of Certificates of any Class,
but the Administrator may require payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any Transfer or exchange of Certificates.



     (h) All Certificates surrendered for Transfer and exchange shall be cancelled and subsequently
disposed of by the Certificate Registrar.



     (i) Except with respect to the transfer of the Class R Certificates to the Depositor or an
Affiliate of the Depositor, no transfer of an ERISA-Restricted Certificate shall be made unless the
Administrator shall have received either (i) a representation from the transferee of such
Certificate acceptable to and in form and substance satisfactory to the Administrator (in the event
such Certificate is a Residual Certificate, such requirement is satisfied only by the
Administrator’s receipt of a representation letter from the transferee substantially in the form of
Exhibit D), to the effect that such transferee is not an employee benefit plan or arrangement
subject to Section 406 of ERISA or Section 4975 of the Code or a Person acting on behalf of any
such plan or arrangement or using the assets of any such plan or arrangement (determined under 29
C.F.R. §2510.3-101 or under other authority under ERISA) to effect such transfer, or (ii) in the
case of an ERISA-Restricted Certificate (other than a Residual Certificate), a representation that
the purchaser is an insurance company that is purchasing such Certificates with funds contained in
an “insurance company general account” (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption (“PTCE”) 95-60) and that the purchase and holding of such
Certificates are covered under Sections I and III of PTCE 95-60 or (iii) in the case of any such
ERISA-Restricted Certificate (other than a Residual Certificate) presented for registration in the
name of an employee benefit plan subject to Title I of ERISA, a plan or arrangement subject to
Section 4975 of the Code (or comparable provisions of any subsequent enactments), or a trustee of
any such plan or any other person acting on behalf of any such plan or arrangement or using such
plan’s or arrangement’s assets, an Opinion of Counsel satisfactory to the Administrator (which
Opinion of Counsel shall not be an expense of the Depositor, the Trustee,



65









 







the Servicer, the Administrator, the Certificate Registrar or the Trust Fund), addressed to
the Administrator, to the effect that the purchase and holding of such ERISA-Restricted Certificate
shall not constitute or result in a non-exempt prohibited transaction within the meaning of ERISA
or Section 4975 of the Code and shall not subject the Trustee, the Administrator, the Certificate
Registrar or the Servicer to any obligation in addition to those expressly undertaken in this
Agreement or to any liability. For purposes of the preceding sentence, with respect to an
ERISA-Restricted Certificate, in the event the representation letter referred to in clause (i) or
(ii) of the preceding sentence is not furnished, representation in clause (i) shall be deemed to
have been made to the Administrator by the transferee’s (including an initial acquirer’s)
acceptance of the ERISA-Restricted Certificates. Notwithstanding anything else to the contrary
herein, (a) any purported transfer of an ERISA-Restricted Certificate (other than a Residual
Certificate) to or on behalf of an employee benefit plan subject to ERISA or the Code without the
delivery to the Administrator of an Opinion of Counsel satisfactory to the Administrator as
described above shall be void and of no effect and (b) any purported transfer of a Residual
Certificate to a transferee that does not make the representation in clause (i) above shall be void
and of no effect.



          The Class R Certificate may not be sold to any employee benefit plan subject to Title I of
ERISA or any plan subject to Section 4975 of the Code or any Person investing on behalf or with
plan assets of such plan.




          To the extent permitted under applicable law (including, but not limited to, ERISA), the
Administrator shall be under no liability to any Person for any registration of transfer of any
ERISA-Restricted Certificate that is in fact not permitted by this Section 5.02(i) or for making
any distributions due on such Certificate to the Holder thereof or taking any other action with
respect to such Holder under the provisions of this Agreement so long as, in the case of a
Definitive Certificate, the transfer was registered by the Administrator in accordance with the
foregoing requirements.




     (j) Each Person who has or who acquires any Ownership Interest in a Residual Certificate shall
be deemed by the acceptance or acquisition of such Ownership Interest to have agreed to be bound by
the following provisions, and the rights of each Person acquiring any Ownership Interest in a
Residual Certificate are expressly subject to the following provisions:




     (i) Each Person holding or acquiring any Ownership Interest in a Residual Certificate
shall be a Permitted Transferee and shall promptly notify the Administrator of any change or
impending change in its status as a Permitted Transferee.




     (ii) Except in connection with any registration in the name of, or transfer of a
Residual Certificate to, an affiliate of the Depositor (either directly or through a
nominee) in connection with the initial issuance of the Certificates, no Ownership Interest
in a Residual Certificate may be registered on the Closing Date or thereafter transferred,
and the Administrator shall not register the Transfer of any Residual Certificate unless the
Administrator shall have been furnished with an affidavit (a “Transfer Affidavit”)
of the initial owner or the proposed transferee in the form attached hereto as Exhibit D.




     (iii) Each Person holding or acquiring any Ownership Interest in a Residual Certificate
shall agree (A) to obtain a Transfer Affidavit from any other Person to whom



66









 







such Person attempts to Transfer its Ownership Interest in a Residual Certificate, (B)
to obtain a Transfer Affidavit from any Person for whom such Person is acting as nominee,
trustee or agent in connection with any Transfer of a Residual Certificate and (C) not to
Transfer its Ownership Interest in a Residual Certificate or to cause the Transfer of an
Ownership Interest in a Residual Certificate to any other Person if it has actual knowledge
that such Person is not a Permitted Transferee.




     (iv) Any attempted or purported Transfer of any Ownership Interest in a Residual
Certificate in violation of the provisions of this Section 5.02(i) shall be absolutely null
and void and shall vest no rights in the purported Transferee. If any purported transferee
shall become a Holder of a Residual Certificate in violation of the provisions of this
Section 5.02(i), then the last preceding Permitted Transferee shall be restored to all
rights as Holder thereof retroactive to the date of registration of Transfer of such
Residual Certificate. The Administrator shall be under no liability to any Person for any
registration of Transfer of a Residual Certificate that is in fact not in compliance with
this Section 5.02(i) or for making any payments due on such Certificate to the Holder
thereof or taking any other action with respect to such Holder under the provisions of this
Agreement so long as the Transfer was registered after receipt of the related Transfer
Affidavit. The Administrator shall be entitled but not obligated to recover from any Holder
of a Residual Certificate that was in fact not a Permitted Transferee at the time it became
a Holder or, at such subsequent time as it became other than a Permitted Transferee, all
payments made on such Residual Certificate at and after either such time. Any such payments
so recovered by the Administrator shall be paid and delivered by the Administrator to the
last preceding Permitted Transferee of such Certificate.




     (v) The Depositor shall use its best efforts to make available, upon receipt of written
request from the Administrator, all information necessary to compute any tax imposed under
Section 860E(e) of the Code as a result of a Transfer of an Ownership Interest in a Residual
Certificate to any Holder who is not a Permitted Transferee.



     The restrictions on Transfers of a Residual Certificate set forth in this Section 5.02(j)
shall cease to apply (and the applicable portions of the legend on a Residual Certificate may be
deleted) with respect to Transfers occurring after delivery to the Administrator of an Opinion of
Counsel, which Opinion of Counsel shall not be an expense of the Trust Fund, the Trustee, the
Servicer or the Administrator, to the effect that the elimination of such restrictions will not
cause any REMIC hereunder to fail to qualify as a REMIC at any time that the Certificates are
outstanding or result in the imposition of any tax on the Trust Fund, a Certificateholder or
another Person. Each Person holding or acquiring any Ownership Interest in a Residual Certificate
hereby consents to any amendment of this Agreement which, based on an Opinion of Counsel furnished
to the Administrator and the Trustee, is reasonably necessary (x) to ensure that the record
ownership of, or any beneficial interest in, a Residual Certificate is not transferred, directly or
indirectly, to a Person that is not a Permitted Transferee and (y) to provide for a means to compel
the Transfer of a Residual Certificate which is held by a Person that is not a Permitted Transferee
to a Holder that is a Permitted Transferee.



          Section 5.03. Mutilated, Destroyed, Lost or Stolen Certificates. If (i) any mutilated
Certificate is surrendered to the Certificate Registrar or the Certificate Registrar




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receives evidence to its satisfaction of the destruction, loss or theft of any Certificate,
and (ii) there is delivered to the Trustee, the Administrator, the Servicer and the Certificate
Registrar such security or indemnity as may be required by them to save each of them harmless,
then, in the absence of notice to the Trustee, the Administrator or the Certificate Registrar that
such Certificate has been acquired by a bona fide purchaser, the Trustee shall execute on behalf of
the Trust, and the Administrator shall authenticate and deliver, in exchange for or in lieu of any
such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like Class, tenor and
Percentage Interest. Upon the issuance of any new Certificate under this Section, the Trustee, the
Administrator or the Certificate Registrar may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and any other expenses
(including the fees and expenses of the Trustee, the Administrator and the Certificate Registrar)
connected therewith. Any duplicate Certificate issued pursuant to this Section shall constitute
complete and indefeasible evidence of ownership in the Trust, as if originally issued, whether or
not the lost, stolen or destroyed Certificate shall be found at any time.




          Section 5.04. Persons Deemed Owners. Prior to due presentation of a Certificate for
registration of transfer, the Servicer, the Depositor, the Trustee, the Administrator, the
Certificate Registrar and any agent of the Servicer, the Depositor, the Trustee, the Administrator
or the Certificate Registrar may treat the Person in whose name any Certificate is registered as
the owner of such Certificate for the purpose of receiving distributions pursuant to Section 4.01
and for all other purposes whatsoever, and none of the Servicer, the Depositor, the Trustee, the
Certificate Registrar or any agent of any of them shall be affected by notice to the contrary.




          Section 5.05. Appointment of Paying Agent.




     (a) The Paying Agent shall make distributions to Certificateholders from the Collection
Account pursuant to Section 4.01 and shall report the amounts of such distributions to the
Administrator. The duties of the Paying Agent may include the obligation (i) to withdraw funds
from the Collection Account pursuant to Section 3.03 for the purpose of making the distributions
referred to above and (ii) to distribute statements and provide information to Certificateholders
as required hereunder. The Paying Agent hereunder shall at all times be a corporation duly
incorporated and validly existing under the laws of the United States of America or any state
thereof, authorized under such laws to exercise corporate trust powers and subject to supervision
or examination by federal or state authorities. The Paying Agent shall initially be the
Administrator. The Administrator may appoint a successor to act as Paying Agent, which appointment
shall be reasonably satisfactory to the Depositor.



     (b) The Administrator shall cause the Paying Agent (if other than the Administrator) to
execute and deliver to the Administrator an instrument in which such Paying Agent shall agree with
the Administrator that such Paying Agent shall hold all sums, if any, held by it for payment to the
Certificateholders in trust for the benefit of the Certificateholders entitled thereto until such
sums shall be paid to such Certificateholders and shall agree that it shall comply with all
requirements of the Code regarding the withholding of payments in respect of federal income taxes
due from Certificate Owners and otherwise comply with the provisions of this Agreement applicable
to it.



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          Section 5.06. Actions of Certificateholders.




     (a) Any request, demand, authorization, direction, notice, consent, waiver or other action
provided by this Agreement to be given or taken by Certificateholders may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by such
Certificateholders in person or by their agents duly appointed in writing; and except as herein
otherwise expressly provided, such action shall become effective when such instrument or
instruments are delivered to the Trustee and, when required, to the Administrator, the Depositor or
the Servicer. Proof of execution of any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Agreement and conclusive in favor of the Trustee, the
Administrator, the Depositor and the Servicer, if made in the manner provided in this Section.



     (b) The fact and date of the execution by any Certificateholder of any such instrument or
writing may be proved in any reasonable manner which the Trustee or the Administrator, as the case
may be, deems sufficient.



     (c) Any request, demand, authorization, direction, notice, consent, waiver or other act by a
Certificateholder shall bind every Holder of every Certificate issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof, in respect of anything done, or
omitted to be done, by the Trustee, the Depositor or the Servicer in reliance therein, whether or
not notation of such action is made upon such Certificate.



     (d) The Trustee and the Administrator, as the case may be, may require such additional proof
of any matter referred to in this Section 5.06 as it shall deem necessary.




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ARTICLE VI




THE SERVICER AND THE DEPOSITOR




          Section 6.01. Liability of the Servicer and the Depositor. The Servicer shall be
liable in accordance herewith only to the extent of the obligations specifically imposed upon and
undertaken by the Servicer herein. The Depositor shall be liable in accordance herewith only to
the extent of the obligations specifically imposed upon and undertaken by the Depositor herein.




          Section 6.02. Merger or Consolidation of, or Assumption of the Obligations of, the
Servicer or the Depositor. Any corporation into which the Servicer or Depositor may be merged
or consolidated, or any corporation resulting from any merger or consolidation to which the
Servicer or the Depositor shall be a party, or any corporation succeeding to the business of the
Servicer or the Depositor, shall be the successor of the Servicer or the Depositor, as the case may
be, hereunder, without the execution or filing of any paper or any further act on the part of any
of the parties hereto, and, solely with respect to the Servicer, so long as such entity is
investment grade rated, anything herein to the contrary notwithstanding. The Servicer shall, at
least 15 calendar days prior to the effective date of any such merger, consolidation or succession,
provide written notice thereof to the Depositor, in form and substance reasonably satisfactory to
the Depositor, containing all information reasonably requested by the Depositor in order for the
Depositor to comply with its reporting obligation under Item 6.02 of Form 8-K.




          Section 6.03. Limitation on Liability of the Servicer, the Depositor and Others.
None of the Servicer, the Depositor, or any director, officer, employee or agent of the Servicer or
the Depositor shall be under any liability to the Trust or the Certificateholders for any action
taken or for refraining from the taking of any action by the Servicer or the Depositor, as
applicable, in good faith pursuant to this Agreement, or for errors in judgment; provided, however,
that this provision shall not protect the Servicer, the Depositor or any such person against any
liability which would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of obligations and
duties hereunder, and that this provision shall not be construed to entitle the Servicer to
indemnity in the event that amounts advanced by the Servicer to retire any senior Lien exceed Net
Liquidation Proceeds realized with respect to the related Home Equity Loan. The Servicer, the
Depositor and any director, officer, employee or agent of the Servicer or the Depositor may rely in
good faith on any document of any kind prima facie properly executed and submitted by any Person
respecting any matters arising hereunder. The Servicer, the Depositor and any director, officer,
employee or agent of the Servicer or the Depositor shall be indemnified by the Trust and held
harmless against any loss, liability or expense incurred in connection with any legal action
relating to this Agreement or the Certificates, other than any loss, liability or expense related
to any specific Home Equity Loan or Home Equity Loans (except as any such loss, liability or
expense shall be otherwise reimbursable pursuant to this Agreement) and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence in the performance
of duties hereunder or by reason of reckless disregard of obligations and duties hereunder.
Neither the Servicer nor the Depositor shall be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its respective duties under this Agreement, and
which in its opinion may involve it in any expense or liability; provided, however, that the
Servicer or the Depositor may, in its sole discretion, undertake any such action




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which it may deem necessary or desirable in respect of this Agreement and the rights and
duties of the parties hereto and the interests of the Certificateholders hereunder. In such event,
the reasonable legal expenses and costs of such action and any liability resulting therefrom and
any claims by the Servicer or the Depositor hereunder for indemnification shall be expenses, costs
and liabilities of the Trust, and the Servicer or the Depositor, as the case may be, shall be
entitled to be reimbursed therefor and indemnified pursuant to the terms hereof from amounts
deposited in the Collection Account as provided by Section 3.03. The Servicer’s and the
Depositor’s right to indemnity or reimbursement pursuant to this Section shall survive any
resignation or termination of the Servicer pursuant to Section 6.04 or 8.01 with respect to any
losses, expenses, costs or liabilities arising prior to such resignation or termination (or arising
from events that occurred prior to such resignation or termination). The Servicer shall have no
claim (whether by subrogation or otherwise) or other action against any Certificateholder for any
amounts paid by the Servicer pursuant to any provision of this Agreement.




          Section 6.04. Servicer Not to Resign. Subject to the provisions of Section 6.02, the
Servicer shall not resign from the obligations and duties hereby imposed on it except (i) upon
determination that the performance of its obligations or duties hereunder are no longer permissible
under applicable law or are in material conflict by reason of applicable law with any other
activities carried on by it or its subsidiaries or Affiliates, the other activities of the Servicer
so causing such a conflict being of a type and nature carried on by the Servicer or its
subsidiaries or Affiliates at the date of this Agreement or (ii) upon satisfaction of the following
conditions: (a) the Servicer has proposed a successor servicer to the Trustee in writing and such
proposed successor servicer is reasonably acceptable to the Trustee; (b) each Rating Agency shall
have confirmed to the Trustee that the appointment of such proposed successor servicer as Servicer
hereunder will not result in the reduction or withdrawal of the then-current ratings of the Offered
Certificates; and (c) such proposed successor servicer has agreed in writing to assume the
obligations of Servicer hereunder and the Servicer has delivered to the Trustee an Opinion of
Counsel to the effect that all conditions precedent to the resignation of the Servicer and the
appointment of and acceptance by the proposed successor servicer have been satisfied; provided,
however, that in the case of clause (i) above no such resignation by the Servicer shall become
effective until the Trustee shall have assumed the Servicer’s responsibilities and obligations
hereunder or the Trustee shall have designated a successor servicer in accordance with Section
7.02; and, provided further that as a condition precedent to the effectiveness of any such
resignation of the Servicer, the Servicer shall, at least 15 calendar days prior to the effective
date of such resignation, provide written notice thereof to the Depositor, in form and substance
reasonably satisfactory to the Depositor, containing all information reasonably requested by the
Depositor in order for the Depositor to comply with its reporting obligations under Item 6.02 of
Form 8-K.




          Any such resignation shall not relieve the Servicer of responsibility for any of the
obligations specified in Sections 7.01 and 7.02 as obligations that survive the resignation or
termination of the Servicer. Any such determination permitting the resignation of the Servicer
pursuant to clause (i) of the preceding paragraph shall be evidenced by an Opinion of Counsel to
such effect delivered to the Trustee.




          Section 6.05. Delegation of Duties. The Servicer initially appoints each
Subservicer to subservice the related Home Equity Loans in accordance with the standards set

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forth in Section 3.01. In the ordinary course of business, the Servicer at any time may
delegate any of its duties hereunder to any Person, including any of its Affiliates, who agrees to
conduct such duties in accordance with standards comparable to those with which the Servicer
complies pursuant to Section 3.01. Such delegation shall not relieve the Servicer of its
liabilities and responsibilities with respect to such duties and shall not constitute a resignation
within the meaning of Section 6.04. The Servicer shall provide each Rating Agency, the
Administrator and the Trustee with written notice prior to the delegation of any of its duties to
any Person other than any of the Servicer’s Affiliates or their respective successors and assigns.




          Section 6.06. Tax Matters.




     It is intended that the assets with respect to which any REMIC election is to be made, as set
forth in the Preliminary Statement, shall constitute, and that the conduct of matters relating to
such assets shall be such as to qualify such assets as, a “real estate mortgage investment conduit”
as defined in and in accordance with the REMIC Provisions. In furtherance of such intention, the
Servicer covenants and agrees that it shall act as agent on behalf of any such REMIC and that in
such capacity it shall:



          (i) prepare and file, or cause to be prepared and filed, in a timely manner, a U.S.
Real Estate Mortgage Investment Conduit Income Tax Return (Form 1066 or any successor form
adopted by the Internal Revenue Service) and prepare and file or cause to be prepared and
filed with the Internal Revenue Service and applicable state or local tax authorities income
tax or information returns for each taxable year with respect to any such REMIC, containing
such information and at the times and in the manner as may be required by the Code or state
or local tax laws, regulations, or rules, and furnish or cause to be furnished to
Certificateholders the schedules, statements or information at such times and in such manner
as may be required thereby;




          (ii) within 30 days after the Closing Date, furnish or cause to be furnished to the
Internal Revenue Service, on Forms 8811 or as otherwise may be required by the Code, the
name, title, address, and telephone number of the person that the holders of the
Certificates may contact for tax information relating thereto, together with such additional
information as may be required by such Form, and update such information at the time or
times in the manner required by the Code;




          (iii) make or cause to be made elections that such assets be treated as a REMIC on the
federal tax return for its first taxable year (and, if necessary, under applicable state
law);




          (iv) prepare and forward, or cause to be prepared and forwarded, to the
Certificateholders and to the Internal Revenue Service and, if necessary, state tax
authorities, all information returns and reports as and when required to be provided to them
in accordance with the REMIC Provisions, including without limitation, the calculation of
any original issue discount using the Prepayment Assumption;




          (v) provide information necessary for the computation of tax imposed on the transfer of
a Residual Certificate to a Person that is not a Permitted Transferee, or an




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agent (including a broker, nominee or other middleman) of a Non-Permitted Transferee,
or a pass-through entity in which a Non-Permitted Transferee is the record holder of an
interest (the reasonable cost of computing and furnishing such information may be charged to
the Person liable for such tax);




          (vi) to the extent that they are under its control conduct matters relating to such
assets at all times that any Certificates are outstanding so as to maintain the status as a
REMIC under the REMIC Provisions;




          (vii) not knowingly or intentionally take any action or omit to take any action that
would cause the termination of the tax status of any REMIC;




          (viii) cause the Administrator to pay, at the direction of the Servicer, from the
sources specified in the last paragraph of this Section 6.06, the amount of any federal or
state tax, including prohibited transaction taxes as described below, imposed on any such
REMIC prior to its termination when and as the same shall be due and payable (but such
obligation shall not prevent the Servicer or any other appropriate Person from contesting
any such tax in appropriate proceedings and shall not prevent the Servicer from withholding
payment of such tax, if permitted by law, pending the outcome of such proceedings);




          (ix) ensure that federal, state or local income tax or information returns shall be
signed by the Trustee or such other person as may be required to sign such returns by the
Code or state or local laws, regulations or rules;




          (x) maintain records relating to any such REMIC, including but not limited to the
income, expenses, assets and liabilities thereof and the fair market value and adjusted
basis of the assets determined at such intervals as may be required by the Code, as may be
necessary to prepare the foregoing returns, schedules, statements or information; and




          (xi) as and when necessary and appropriate, represent any such REMIC in any
administrative or judicial proceedings relating to an examination or audit by any
governmental taxing authority, request an administrative adjustment as to any taxable year
of any such REMIC, enter into settlement agreements with any governmental taxing agency,
extend any statute of limitations relating to any tax item of any such REMIC, and otherwise
act on behalf of any such REMIC in relation to any tax matter or controversy involving it.




     In order to enable the Servicer to perform its duties as set forth in this Agreement, the
Depositor shall provide, or cause to be provided, to the Servicer within ten (10) days after the
Closing Date all information or data that the Servicer requests in writing and determines to be
relevant for tax purposes to the valuations and offering prices of the Certificates, including,
without limitation, the price, yield, prepayment assumption and projected cash flows of the
Certificates and the Home Equity Loans. Thereafter, the Depositor shall provide to the Servicer
promptly upon written request therefor, any such additional information or data that the Servicer
may, from time to time, reasonably request in order to enable the Servicer to perform its duties as
set forth in this Agreement. The Servicer hereby indemnifies the Administrator for any losses,



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liabilities, damages, claims or expenses of the Administrator arising from any errors or
miscalculations of the Administrator that result from any failure of the Depositor to provide, or
to cause to be provided, accurate information or data to the Administrator on a timely basis.




     In the event that any tax is imposed on “prohibited transactions” of any REMIC hereunder as
defined in Section 860F(a)(2) of the Code, on the “net income from foreclosure property” of such
REMIC as defined in Section 860G(c) of the Code, on any contribution to any REMIC hereunder after
the Startup Day pursuant to Section 860G(d) of the Code, or any other tax is imposed, including,
without limitation, any minimum tax imposed upon any REMIC hereunder pursuant to Sections 23153 and
24874 of the California Revenue and Taxation Code, if not paid as otherwise provided for herein,
such tax shall be paid by (i) the Administrator, if any such other tax arises out of or results
from a breach by the Administrator of any of its obligations under this Agreement, (ii) the
Servicer, in the case of any such minimum tax, or if such tax arises out of or results from a
breach by the Servicer or the Depositor of any of their obligations under this Agreement or (iii)
in all other cases, or in the event that the Administrator, the Servicer or the Depositor fails to
honor its obligations under the preceding clause (i) or (ii), any such tax will be paid with
amounts otherwise to be distributed to the Certificateholders.



     For federal income tax purposes, the Carryover Reserve Fund shall not be an asset of any REMIC
created hereunder, but will be an outside reserve fund (within the meaning of Treasury Regulation
Section 1.860G-2(h)) that is treated as owned by the Holder of the Class R Certificate and the
rights of the holders of the REMIC regular interests to receive any payments of Net Rate Carryover
shall be treated as both (i) rights with respect to a notional principal contract written by the
Holder of the Class R Certificate and (ii) contractual rights coupled with REMIC regular interests
within the meaning of Treasury Regulation Section 1.860G-2(i). Any payments of Net Rate Carryover
Amount shall be treated as first distributed with respect to the Class R Certificate and then as
paid into the Carryover Reserve Fund for payment to the holders of the REMIC regular interests.



     In addition, for federal income tax purposes, the Derivative Contract Reserve Fund shall not
be an asset of any REMIC created hereunder, but will be an outside reserve fund (within the meaning
of Treasury Regulation Section 1.860G-2(h)) that is treated as owned by the Holder of the Class R
Certificate.



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ARTICLE VII




SERVICER TERMINATION EVENTS




          Section 7.01. Servicer Termination Events. If any one of the following events
(“Servicer Termination Events”) shall occur and be continuing:




     (a) Any failure by the Servicer to deposit in the Collection Account any deposit required to
be made under the terms of this Agreement which continues unremedied for a period of five (5)
Business Days after the date upon which written notice of such failure shall have been given to the
Servicer by the Administrator, the Trustee or the Depositor, or to the Servicer, the Administrator,
the Depositor and the Trustee by the Majority Certificateholder; or



     (b) Any failure on the part of the Servicer duly to observe or perform in any material respect
any other covenants or agreements of the Servicer set forth in the Certificates or in this
Agreement, which failure (A) materially and adversely affects the interests of Certificateholders
and (B) continues unremedied for a period of sixty (60) days after the date on which written notice
of such failure, requiring the same to be remedied, shall have been given to the Servicer by the
Administrator, the Trustee or the Depositor, or to the Servicer, the Administrator, the Depositor
and the Trustee by the Majority Certificateholder; provided, however, that such 60-day cure period
shall not apply to any failure to comply with the requirements set forth in Section 3.10, Section
6.02 (with respect to notice to the Depositor) or Section 6.04 (with respect to notice to the
Depositor), and the grace period for any such failure shall not exceed the lesser of 10 calendar
days or such period in which the applicable report under the Exchange Act can be filed (without
taking into account any extensions);



     (c) The entry against the Servicer of a decree or order by a court or agency or supervisory
authority having jurisdiction in the premises for the appointment of a trustee, conservator,
receiver or liquidator in any insolvency, conservatorship, receivership, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for the winding up or liquidation
of its affairs, and the continuance of any such decree or order unstayed and in effect for a period
of 60 consecutive days; or



     (d) The consent by the Servicer to the appointment of a trustee, conservator, receiver or
liquidator in any insolvency, conservatorship, receivership, readjustment of debt, marshalling of
assets and liabilities or similar proceedings of or relating to the Servicer or of or relating to
substantially all of its property; or the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any applicable insolvency
or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily
suspend payment of its obligations;


then, and in each and every case, so long as a Servicer Termination Event shall not have been
remedied by the Servicer, either the Trustee or the Depositor may, and at the direction of the
Majority Certificateholder, the Trustee shall, by notice then given in writing to the Servicer, the
Depositor, the Administrator and the Trustee, as applicable, terminate all of the rights and
obligations of the Servicer as servicer under this Agreement; provided, however, that in the event
of a Servicer Termination Event related to a failure to comply with an Exchange Act Filing


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Obligation, the Servicer may only be terminated at the direction of the Depositor; and provided,
further, that the responsibilities and duties of the initial Servicer with respect to the purchase
of Home Equity Loans pursuant to Sections 2.02, 2.04(c) and 3.01 shall not terminate. Any such
notice to the Servicer shall also be given to each Rating Agency. On or after the receipt by the
Servicer of such written notice, all authority and power of, and all benefits accruing to, the
Servicer under this Agreement, whether with respect to the Certificates or the Home Equity Loans or
otherwise, shall pass to and be vested in the Trustee or, if a successor Servicer has been
appointed under Section 7.02, such successor Servicer pursuant to and under this Section 7.01; and,
without limitation, the Trustee is hereby authorized and empowered to execute and deliver, on
behalf of the Servicer, as attorney-in-fact or otherwise, any and all documents and other
instruments, and to do or accomplish all other acts or things necessary or appropriate to effect
the purposes of such notice of termination, whether to complete the transfer and endorsement of
each Home Equity Loan and related documents, or otherwise. The Servicer agrees to cooperate with
the Trustee and the successor Servicer in effecting the termination of the responsibilities and
rights of the Servicer hereunder, including, without limitation, the transfer to the successor
Servicer or the Trustee, as the case may be, for the administration by it of all cash amounts that
shall at the time be held by the terminated Servicer and to be deposited by it in the Collection
Account, or that have been deposited by the terminated Servicer in the Collection Account or
thereafter received by the terminated Servicer with respect to the Home Equity Loans, and the
recordation of Assignments of Mortgages to the Trust if MERS is not the mortgagee of a Home Equity
Loan or otherwise in accordance with Section 7.02(c).




     Notwithstanding the foregoing, a delay in or failure of performance under Section 7.01(a) for
a period of five (5) Business Days or under Section 7.01(b) for a period of sixty (60) days, shall
not constitute a Servicer Termination Event if such delay or failure could not be prevented by the
exercise of reasonable diligence by the Servicer and such delay or failure was caused by an act of
God, acts of declared or undeclared war, public disorder, terrorism, rebellion or sabotage,
epidemics, landslides, lightning, fire, hurricanes, earthquakes, floods or similar causes. The
preceding sentence shall not relieve the Servicer from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of this Agreement, and the Servicer
shall provide the Trustee, the Administrator, the Depositor, the Certificateholders with an
Officer’s Certificate giving prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations. The Servicer shall immediately notify
the Trustee, the Administrator and each Rating Agency in writing of any Servicer Termination
Events.



          Section 7.02. Trustee to Act; Appointment of Successor.




     (a) On and after the time the Servicer resigns pursuant to Section 6.04(i) or receives a
notice of termination pursuant to Section 7.01, the Trustee shall be the successor in all respects
to the Servicer in its capacity as servicer under this Agreement and the transactions set forth or
provided for herein and shall be subject to all the responsibilities, duties and liabilities
relating thereto placed on the Servicer by the terms and provisions hereof; provided, however, that
the responsibilities and duties of HSBC Finance as Servicer with respect to the purchase of the
Home Equity Loans pursuant to Sections 2.02, 2.04(c) and 3.01 and the indemnification obligation
pursuant to Section 2.04(d) shall not terminate. As compensation therefor, the Trustee shall be
entitled to such compensation as the Servicer would have been entitled to hereunder if



76









 







no such notice of termination had been given. Notwithstanding the above, (i) if the Trustee
is unwilling to act as successor Servicer, or (ii) if the Trustee is legally unable so to act, the
Trustee may (in the situation described in clause (i)) or shall (in the situation described in
clause (ii)) appoint, or petition a court of competent jurisdiction to appoint, any housing and
home finance institution or other mortgage loan or home equity loan servicer having all licenses
and permits required in order to perform its obligations hereunder and a net worth of not less than
$50,000,000 as the successor to the Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer hereunder; provided that the appointment of
any such successor Servicer will not result in the qualification, reduction or withdrawal of the
then-current ratings assigned to any class of the Offered Certificates by the Rating Agencies, as
evidenced by a writing to such effect delivered to the Trustee and the Administrator and any
successor servicer appointed hereunder shall be reasonably acceptable to the Depositor. Pending
appointment of a successor to the Servicer hereunder, unless the Trustee is prohibited by law from
so acting, the Trustee shall act in such capacity as hereinabove provided. In connection with such
appointment and assumption, the successor shall be entitled to receive compensation out of payments
on Home Equity Loans in an amount equal to the compensation which the Servicer would otherwise have
received pursuant to Section 3.09 (or such lesser compensation as the Trustee and such successor
shall agree). The Trustee and such successor shall take such action, consistent with this
Agreement, as shall be necessary to effectuate any such succession. All costs incurred in
transferring the servicing to a successor servicer shall be paid by the Servicer.



     (b) Any successor, including the Trustee, to the Servicer as servicer shall during the term of
its service as servicer (i) continue to service and administer the Home Equity Loans for the
benefit of Certificateholders and (ii) maintain in force a policy or policies of insurance covering
errors and omissions in the performance of its obligations as Servicer hereunder and a fidelity
bond in respect of its officers, employees and agents to the same extent as the Servicer is so
required pursuant to Section 3.12. The appointment of a successor Servicer shall not affect any
liability of the predecessor Servicer which may have arisen under this Agreement prior to its
termination as Servicer (including, without limitation, any deductible under an insurance policy
pursuant to Section 3.04), nor shall any successor Servicer be liable for any acts or omissions of
the predecessor Servicer or for any breach by such Servicer or the Depositor of any of their
representations or warranties contained herein or in any related document or agreement.



     (c) In connection with the termination or resignation of the Servicer hereunder, either (i)
the successor Servicer, including the Trustee if the Trustee is acting as successor Servicer, shall
represent and warrant that it is a member of MERS in good standing and shall agree to comply in all
material respects with the rules and procedures of MERS in connection with the servicing of the
Home Equity Loans that are registered with MERS, in which case the predecessor Servicer shall
cooperate with the successor Servicer in causing MERS to revise its records to reflect the transfer
of servicing to the successor Servicer as necessary under MERS’ rules and regulations, or (ii) the
predecessor Servicer shall cooperate with the successor Servicer in causing MERS to execute and
deliver an Assignment of Mortgage in recordable form to transfer the Mortgage from MERS to the
Trust and to execute and deliver such other notices, documents and other instruments as may be
necessary or desirable to effect a transfer of such Home Equity Loan or servicing of such Home
Equity Loan on the MERS® System to the successor Servicer. The predecessor Servicer shall file or
cause to be filed any such assignment



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in the appropriate recording office. The predecessor Servicer shall bear any and all fees of
MERS, costs of preparing any Assignments of Mortgage, and fees and costs of filing any assignments
of Mortgage that may be required under this subsection (c). The successor Servicer shall cause
such assignment to be delivered to the Trustee promptly upon receipt of the original with evidence
of recording thereon or a copy certified by the public recording office in which such Assignment of
Mortgage was recorded.



     (d) In the event that the Servicer is terminated pursuant to Section 7.01 hereof, any
successor to the Servicer as servicer under this Agreement, including the Trustee, shall provide to
the Depositor, in written form and substance reasonably satisfactory to the Depositor, all
information reasonably requested by the Depositor in order for the Depositor to comply with its
reporting obligation under Item 6.02 of Form 8-K with respect to a successor servicer.



          Section 7.03. Notification to Certificateholders. Upon any termination or
appointment of a successor to the Servicer pursuant to Section 6.04 or this Article VII, the
Trustee shall give prompt written notice thereof to the Certificateholders at their respective
addresses appearing in the Certificate Register and each Rating Agency.
 


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ARTICLE VIII




THE TRUSTEE AND THE ADMINISTRATOR




          Section 8.01. Duties of Trustee. The Trustee, prior to the occurrence of a Servicer
Termination Events and after the curing of all Servicer Termination Events which may have occurred,
undertakes to perform such duties and only such duties as are specifically set forth in this
Agreement. If a Servicer Termination Event of which a Responsible Officer of the Trustee shall
have actual knowledge has occurred (which has not been cured), the Trustee shall exercise such
rights and powers vested in it by this Agreement, and use the same degree of care and skill in
their exercise, as a prudent person would exercise or use under the circumstances in the conduct of
his own affairs.




     The Trustee, upon receipt of all resolutions, certificates, statements, opinions, reports,
documents, orders or other instruments furnished to the Trustee which are specifically required to
be furnished pursuant to any provision of this Agreement, shall examine them to determine whether
they conform to the requirements of this Agreement.



     No provision of this Agreement shall be construed to relieve the Trustee from liability for
its own negligent action, its own negligent failure to act or its own misconduct; provided,
however, that:



          (i) prior to the occurrence of an Servicer Termination Event of which a Responsible
Officer of the Trustee shall have actual knowledge, and after the curing of all such
Servicer Termination Events which may have occurred, the duties and obligations of the
Trustee shall be determined solely by the express provisions of this Agreement, the Trustee
shall not be liable except for the performance of such duties and obligations as are
specifically set forth in this Agreement, no implied covenants or obligations shall be read
into this Agreement against the Trustee and, in the absence of bad faith on the part of the
Trustee, the Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or opinions furnished
to the Trustee and conforming to the requirements of this Agreement;




          (ii) the Trustee shall not be personally liable for an error of judgment made in good
faith by a Responsible Officer of the Trustee, unless it shall be proved that the Trustee
was negligent in performing its duties in accordance with the terms of this Agreement;




          (iii) the Trustee shall not be personally liable with respect to any action taken,
suffered or omitted to be taken by it in good faith in accordance with the consent or in
accordance with the direction of the Majority Certificateholder relating to the time, method
and place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this Agreement; and




          (iv) the Trustee shall not be charged with knowledge of any failure by the Servicer to
comply with the obligations of the Servicer referred to in clauses (a) and (b)




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of Section 7.01 unless a Responsible Officer of the Trustee obtains actual knowledge of
such failure or the Trustee receives written notice of such failure from the Servicer or the
Majority Certificateholder.




     The Trustee shall not be required to expend or risk its own funds or otherwise incur financial
liability in the performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if there is reasonable ground for believing that the repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to it, and none of the
provisions contained in this Agreement shall in any event require the Trustee to perform, or be
responsible for the manner of performance of, any of the obligations of the Servicer under this
Agreement, except during such time, if any, as the Trustee shall be the successor to, and be vested
with the rights, duties, powers and privileges of, the Servicer in accordance with the terms of
this Agreement.



          Section 8.02. Certain Matters Affecting the Trustee. Except as otherwise provided
in Section 8.01:




     (a) the Trustee may request and rely upon, and shall be protected in acting or refraining from
acting upon, any resolution, Officer’s Certificate, Servicing Certificate, certificate of auditors
or any other certificate, statement, instrument, opinion, report, notice, request, consent, order,
appraisal, bond or other paper or document reasonably believed by it to be genuine and to have been
signed or presented by the proper party or parties;



     (b) the Trustee may consult with counsel and any written advice or Opinion of Counsel shall be
full and complete authorization and protection in respect of any action taken or suffered or
omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel;



     (c) the Trustee shall be under no obligation to exercise any of the rights or powers vested in
it by this Agreement, or to institute, conduct or defend any litigation hereunder or in relation
hereto, at the request, order or direction of any of the Certificateholders, pursuant to the
provisions of this Agreement, unless such Certificateholders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby; nothing contained herein shall, however, relieve the Trustee of the
obligations, upon the occurrence of a Servicer Termination Event of which a Responsible Officer of
the Trustee has actual knowledge (which has not been cured), to exercise such of the rights and
powers vested in it by this Agreement, and to use the same degree of care and skill in their
exercise as a prudent person would exercise or use under the circumstances in the conduct of his
own affairs;



     (d) the Trustee shall not be personally liable for any action taken, suffered or omitted by it
in good faith and believed by it to be authorized or within the discretion or rights or powers
conferred upon it by this Agreement;



     (e) prior to the occurrence of a Servicer Termination Event of which a Responsible Officer of
the Trustee has actual knowledge and after the curing of all Servicer Termination Events which may
have occurred, the Trustee shall not be bound to make any investigation into



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the facts or matters stated in any resolution, certificate, statement, instrument, opinion,
report, notice, request, consent, order, approval, bond or other paper or documents, unless
requested in writing to do so by the Majority Certificateholder; provided, however, that if the
payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be
incurred by it in the making of such investigation is, in the opinion of the Trustee, not
reasonably assured to the Trustee by the security afforded to it by the terms of this Agreement,
the Trustee may require reasonable indemnity against such cost, expense or liability as a condition
to such proceeding. The reasonable expense of every such examination shall be paid by the Servicer
or, if paid by the Trustee, shall be reimbursed by the Servicer upon demand. Nothing in this
clause (e) shall derogate from the obligation of the Servicer to observe any applicable law
prohibiting disclosure of information regarding the Mortgagors; and



     (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties
hereunder either directly or by or through agents or attorneys or a custodian (except that the
Trustee shall not be responsible for selecting the Servicer as custodian and bailee).



          Section 8.03. Trustee Not Liable for Certificates or Home Equity Loans. The
recitals contained herein and in the Certificates shall be taken as the statements of the Servicer,
and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Agreement or of the Certificates (other
than the signature of the Trustee on the Certificates) or of any Home Equity Loan or related
document. The Trustee shall not be accountable for the use or application by the Servicer of any
of the Certificates or of the proceeds of such Certificates, or for the use or application of any
funds paid to the Depositor or the Servicer in respect of the Home Equity Loans or deposited in or
withdrawn from the Collection Account by the Servicer. The Trustee shall at no time have any
responsibility or liability for or with respect to the legality, validity and enforceability of any
Mortgage or any Home Equity Loan, or the perfection and priority of any Mortgage or the maintenance
of any such perfection and priority, or for or with respect to the sufficiency of the Trust or its
ability to generate the payments to be distributed to Certificateholders under this Agreement,
including, without limitation: the existence, condition and ownership of any Mortgaged Property;
the existence and enforceability of any hazard insurance thereon (other than if the Trustee shall
assume the duties of the Servicer pursuant to Section 7.02); the existence and contents of any Home
Equity Loan on any computer or other record thereof (other than if the Trustee shall assume the
duties of the Servicer pursuant to Section 7.02); the validity of the assignment of any Home Equity
Loan to the Trust or of any intervening assignment; the completeness of any Home Equity Loan; the
performance or enforcement of any Home Equity Loan (other than if the Trustee shall assume the
duties of the Servicer pursuant to Section 7.02); the compliance by the Depositor or the Servicer
with any warranty or representation made under this Agreement or in any related document or the
accuracy of any such warranty or representation prior to the Trustee’s receipt of notice or other
discovery of any non-compliance therewith or any breach thereof; any investment of monies by or at
the direction of the Servicer or any loss resulting therefrom, it being understood that the Trustee
shall remain responsible for any Trust property that it may hold in its individual capacity; the
acts or omissions of the Depositor, the Servicer (other than if the Trustee shall assume the duties
of the Servicer pursuant to Section 7.02), any Subservicer (other than if the Trustee shall assume
the duties of the Servicer pursuant to Section 7.02 and shall engage such Subservicer as its
subservicer) or any Mortgagor; any action of the Servicer (other than if the Trustee shall assume
the duties of the

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Servicer pursuant to Section 7.02), or any Subservicer (other than if the Trustee shall assume
the duties of the Servicer pursuant to Section 7.02 and shall engage such Subservicer as its
subservicer) taken in the name of the Trustee; or any action by the Trustee taken at the
instruction of the Servicer in accordance with the terms of this Agreement (other than if the
Trustee shall assume the duties of the Servicer pursuant to Section 7.02); provided, however, that
the foregoing shall not relieve the Trustee of its obligation to perform its duties under this
Agreement. The Trustee shall have no responsibility for filing any financing or continuation
statement in any public office at any time or to otherwise perfect or maintain the perfection of
any security interest or lien granted to it hereunder (unless the Trustee shall have become the
successor Servicer) or to prepare or file any SEC filing for the Trust or to record this Agreement.




          Section 8.04. Trustee May Own Certificates. The Trustee in its individual or any
other capacity may become the owner or pledgee of Certificates and may transact business with the
Depositor, the Servicer and their Affiliates with the same rights as it would have if it were not
Trustee.




          Section 8.05. Servicer to Pay Trustee’s Fees and Expenses. The Servicer covenants
and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to,
reasonable compensation (which shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust) for all services rendered by it in the execution of
the trusts hereby created and in the exercise and performance of any of the powers and duties
hereunder of the Trustee, and the Servicer will pay or reimburse the Trustee upon its request for
all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance
with any of the provisions of this Agreement (including the reasonable compensation and the
expenses and disbursements of its counsel and of all persons not regularly in its employ) except
any such expense, disbursement or advance as may arise from its negligence or bad faith. In
addition, the Servicer and the Depositor, jointly and severally, covenant and agree to indemnify
the Trustee from, and hold it harmless against, any and all losses, liabilities, damages, claims or
expenses other than those resulting from the Trustee’s willful malfeasance, bad faith or gross
negligence or by reason of the Trustee’s reckless disregard of its obligations and duties
hereunder.




          Section 8.06. Eligibility Requirements for Trustee. The Trustee hereunder shall at
all times be a corporation duly incorporated and validly existing under the laws of the United
States of America or any state thereof, authorized under such laws to exercise corporate trust
powers, having a combined capital and surplus of at least $50,000,000 and subject to supervision or
examination by federal or state authority. If such corporation publishes reports of condition at
least annually, pursuant to law or to the requirements of the aforesaid supervising or examining
authority, then for the purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. The principal office of the Trustee (other than the initial
Trustee) shall be in a state with respect to which an Opinion of Counsel has been delivered to such
Trustee at the time such Trustee is appointed Trustee to the effect that the Trust will not be a
taxable entity under the laws of such state. In case at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in
the manner and with the effect specified in Section 8.07.





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          Section 8.07. Resignation or Removal of Trustee. The Trustee may at any time resign
and be discharged from the trusts hereby created by giving written notice thereof to the Depositor,
the Servicer and each Rating Agency. Upon receiving such notice of resignation, the Depositor
shall promptly appoint a successor Trustee by written instrument, in duplicate, one copy of which
instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee;
provided, however, that any such successor Trustee shall be subject to the prior written approval
of the Servicer. If no successor Trustee shall have been so appointed and have accepted
appointment within 30 days after the giving of such notice of resignation, the resigning Trustee
may petition any court of competent jurisdiction for the appointment of a successor Trustee.




     As a condition precedent to the effectiveness of any such resignation, the Trustee shall
provide to the Depositor and the Servicer, at least 30 calendar days prior to the effective date of
such resignation, written notice, in form and substance reasonably satisfactory to the Depositor
and the Servicer, containing all information reasonably requested by the Depositor and the Servicer
in order for the Depositor to comply with its reporting obligation under Item 6.02 of Form 8-K with
respect to the resignation of the Trustee. If the Trustee fails to fulfill its obligations under
this Section 8.07 with respect to notice to the Depositor and the Servicer and such failure
continues for the lesser of 10 calendar days or such period in which the applicable Exchange Act
report can be filed timely (without taking into account any extensions), the Servicer may terminate
the Trustee.



     If at any time the Trustee shall cease to be eligible in accordance with the provisions of
Section 8.06 and shall fail to resign after written request therefor by the Depositor, or if at any
time the Trustee shall be legally unable to act, or shall be adjudged a bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public officer shall take
charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, then the Depositor may remove the Trustee. If the Depositor removes
the Trustee under the authority of the immediately preceding sentence, the Depositor shall promptly
appoint a successor Trustee by written instrument, in duplicate, one copy of which instrument shall
be delivered to the Trustee so removed and one copy to the successor Trustee.



     Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to
any of the provisions of this Section shall not become effective until acceptance of appointment by
the successor Trustee as provided in Section 8.08.



          Section 8.08. Successor Trustee. Any successor Trustee appointed as provided in
Section 8.07 shall execute, acknowledge and deliver to the Depositor, the Administrator and to its
predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the
resignation or removal of the predecessor Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become fully vested with all the
rights, powers, duties and obligations of its predecessor hereunder, with like effect as if
originally named as Trustee. The successor Trustee shall, at least 30 days prior to the effective
date of its acceptance, provide to the Depositor and the Servicer written notice in form and
substance reasonably satisfactory to the Depositor and the Servicer containing all information
reasonably requested by the Depositor and the Servicer in order for the Depositor to comply with




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its reporting obligations under Item 6.02 of Form 8-K with respect to a replacement of the
Trustee. The Depositor, the Servicer and the predecessor Trustee shall execute and deliver
such instruments and do such other things as may reasonably be required for fully and certainly
vesting and confirming in the successor Trustee all such rights, powers, duties and obligations.




     No successor Trustee shall accept appointment as provided in this Section unless at the time
of such acceptance (i) such successor Trustee shall be eligible under the provisions of Section
8.06, and (ii) the unsecured long-term debt of such successor Trustee is rated at least “A3” by
Moody’s. The successor Trustee shall not accept such appointment if the Rating Agencies have sent
written notice to the Depositor that such successor Trustee will result in a withdrawal or a
downgrading of the then current ratings on any Class of the Offered Certificates. The predecessor
Trustee shall notify the Rating Agency of the appointment of any successor Trustee.



     Upon acceptance of appointment by a successor Trustee as provided in this Section, the
Servicer shall mail notice of the succession of such Trustee hereunder to all Holders of
Certificates at their addresses as shown in the Certificate Register and to each Rating Agency. If
the Servicer fails to mail such notice within 30 days after acceptance of appointment by the
successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the
Servicer.



          Section 8.09. Merger or Consolidation of Trustee.




     Any corporation into which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or consolidation to which
the Trustee shall be a party, or any corporation succeeding to all or substantially all of the
business of the Trustee, shall be the successor of the Trustee hereunder, provided that such
corporation shall be eligible under the provisions of Section 8.06, without the execution or filing
of any paper or any further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding.



     The Trustee shall provide to the Depositor and the Servicer, within two Business Days
following the effective date of any such merger or consolidation, written notice, in form and
substance typically issued by the Trustee for such purpose, containing all information reasonably
required in order for the Depositor to comply with its reporting obligation under Form 8-K with
respect to a replacement trustee.



          Section 8.10. Appointment of Co-Trustee or Separate Trustee. Notwithstanding any
other provisions of this Agreement, at any time, for the purpose of meeting any legal requirements
of any jurisdiction in which any part of the Trust or any Mortgaged Property may at the time be
located, the Depositor and the Trustee acting jointly shall have the power and shall execute and
deliver all instruments to appoint one or more Persons approved by them to act as co-trustee or
co-trustees, jointly with the Trustee, or separate trustee or separate trustees, of all or any part
of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the
Certificateholders, such title to the Trust, or any part thereof, and, subject to the other
provisions of this Section, such powers, duties, obligations, rights and trusts as the Servicer and
the Trustee may consider necessary or desirable. Any such co-trustee or separate trustee shall be





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subject to the written approval of the Servicer. If the Servicer shall not have joined in such
appointment within 15 days after the receipt by it of a request so to do, or in the case an
Servicer Termination Events shall have occurred and be continuing, the Trustee alone shall have the
power to make such appointment. No co-trustee or separate trustee hereunder shall be required to
meet the terms of eligibility as a successor Trustee under Section 8.06 and no notice to
Certificateholders of the appointment of any co-trustee or separate trustee shall be required under
Section 8.08.




     Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and
act subject to the following provisions and conditions:




     (i) all rights, powers, duties and obligations conferred or imposed upon the Trustee
shall be conferred or imposed upon and exercised or performed by the Trustee and such
separate trustee or co-trustee jointly (it being understood that such separate trustee or
co-trustee is not authorized to act separately without the Trustee joining in such act),
except to the extent that under any law of any jurisdiction in which any particular act or
acts are to be performed (whether as Trustee hereunder or as successor to the Servicer
hereunder), the Trustee shall be incompetent or unqualified to perform such act or acts, in
which event such rights, powers, duties and obligations (including the holding of title to
the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed
singly by such separate trustee or co-trustee, but solely at the direction of the Trustee;




     (ii) no trustee hereunder shall be held personally liable by reason of any act or
omission of any other trustee hereunder; and




     (iii) the Servicer and the Trustee acting jointly may at any time accept the
resignation of or remove any separate trustee or co-trustee, except that following the
occurrence of a Servicer Termination Event which has not been cured, the Trustee acting
alone may accept the resignation of or remove any separate trustee or co-trustee.



     Any notice, request or other writing given to the Trustee shall be deemed to have been given
to each of the then-separate trustees and co-trustees, as effectively as if given to each of them.
Every instrument appointing any separate trustee or co-trustee shall refer to this Agreement and
the conditions of this Article VIII. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in its instrument of
appointment, either jointly with the Trustee or separately, as may be provided therein, subject to
all the provisions of this Agreement, specifically including every provision of this Agreement
relating to the conduct of, affecting the liability of, or affording protection to, the Trustee.
Every such instrument shall be filed with the Trustee and a copy thereof given to the Depositor and
the Servicer.



     Any separate trustee or co-trustee may, at any time, constitute the Trustee, its agent or
attorney-in-fact, with full power and authority, to the extent not prohibited by law, to do any
lawful act under or in respect of this Agreement on its behalf and in its name. If any separate
trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its
estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to
the extent permitted by law, without the appointment of a new or successor Trustee.



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          Section 8.11. Trustee May Enforce Claims Without Possession of Certificates. All
rights of action and claims under this Agreement or the Certificates may be prosecuted and enforced
by the Trustee without the possession of any of the Certificates or the production thereof in any
proceeding relating thereto. Any such proceeding instituted by the Trustee shall be brought in its
own name or in its capacity as Trustee. Any recovery of judgment shall, after provision for the
payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel, be for the benefit of the Certificateholders.




          Section 8.12. Inspection of Mortgage Files. Following the time that the Mortgage
Files have been delivered to the Trustee upon reasonable prior notice and during regular business
hours, the Trustee shall permit representatives of applicable state regulatory agencies to inspect
the Mortgage Files on the Trustee’s premises or shall provide such documents at such places
required by state regulations, including the offices of the Subservicers. Any loss incurred by the
Trustee in fulfilling such obligations shall be paid by the Servicer.




          Section 8.13. Duties of Administrator. The Administrator undertakes to perform such
duties and only such duties as are specifically set forth in this Agreement. No provision of this
Agreement shall be construed to relieve the Administrator from liability for its own negligent
action, its own negligent failure to act or its own misconduct; provided, however, that:





     (i) the duties and obligations of the Administrator shall be determined solely by the
express provisions of this Agreement, the Administrator shall not be liable except for the
performance of such duties and obligations as are specifically set forth in this Agreement,
no implied covenants or obligations shall be read into this Agreement against the Trustee
and, in the absence of bad faith on the part of the Administrator, the Administrator may
conclusively rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon any certificates or opinions furnished to the Administrator and
conforming to the requirements of this Agreement; and




     (ii) the Administrator shall not be personally liable for an error of judgment made in
good faith by a Responsible Officer of the Administrator, unless it shall be proved that the
Administrator was negligent in performing its duties in accordance with the terms of this
Agreement.



     The Administrator shall have all of the rights and benefits of and limitations on liability
afforded to the Trustee under this Article VIII to the same extent as though the Administrator had
been named in the various provisions of Article VIII, except (i) to the extent otherwise provided
in Sections 8.13, 8.14, 8.15, 8.16, 8.17, 8.19 and 8.20 (for example, Section 8.16 shall apply
instead of Section 8.05) and (ii) with respect to Section 8.03, the Administrator shall be
responsible for the Administrator’s certificate of authentication on the Certificates.



     In acting under this Agreement and the other Transaction Documents to which it is a party and
in connection with the Certificates, the Administrator is acting solely as an agent of the Trustee
on behalf of the Trust and does not assume any obligation or relationship of agency for or with, or
any fiduciary obligation towards, any of the Holders of the Certificates



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     The Administrator shall be obligated to make payments pursuant to the terms of the Transaction
Documents only if, and only to the extent that, sufficient funds are available therefor in the
Collection Account. In no event shall the Administrator, in its capacity as Administrator or
Paying Agent or in its individual capacity, be liable for any such payments.



     In each case that the Administrator (including in its capacity as Paying Agent hereunder) may
be or is required hereunder or under any other Transaction Document to which it is a party to take
any action (an “Action”), including without limitation to make any determination or judgment
(including without limitation the proper reporting and/or withholding for federal income tax
purposes required with respect to any payment made under any Transaction Document for which the
Administrator has a reporting and/or withholding obligation for federal income tax purposes), to
exercise rights or powers or otherwise act hereunder or thereunder, the Administrator may seek
direction from the Servicer. The Administrator shall not be liable with respect to any Action
taken or omitted to be taken by it in good faith in accordance with the direction from the
Servicer. If the Administrator shall request direction from the Servicer with respect to any
Action, the Administrator shall be entitled to refrain from such Action unless and until such
Administrator shall have received written direction from the Servicer, and the Administrator shall
not incur liability to any Person by reason of so refraining.



     The Administrator shall not be responsible for filing any financing or continuation statement
or otherwise taking any action in connection with any security interest or lien granted pursuant to
the Transaction Documents.



     The Administrator shall not be required to expend or risk its own funds or otherwise incur
financial liability in the performance of any of its duties hereunder, or in the exercise of any of
its rights or powers, if there is reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured to it, and none of
the provisions contained in this Agreement shall in any event require the Administrator to perform,
or be responsible for the manner of performance of, any of the obligations of the Servicer under
this Agreement.



          Section 8.14. Certain Matters Affecting the Administrator. Except as otherwise
provided in Section 8.13:





     (i) the Administrator may request and rely upon, and shall be protected in acting or
refraining from acting in reliance upon, any resolution, Opinion of Counsel, Officer’s
Certificate, Servicing Certificate, certificate of auditors or any other certificate,
statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond or
other paper or document reasonably believed by it to be genuine and to have been signed or
presented by the proper party or parties;




     (ii) the Administrator may consult with counsel and any written advice or Opinion of
Counsel shall be full and complete authorization and protection in respect of any action
taken or suffered or omitted by it hereunder in good faith and in accordance with such
advice or Opinion of Counsel; and



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     (iii) the Administrator shall not be personally liable for any action taken, suffered
or omitted by it in good faith and believed by it to be authorized or within the discretion
or rights or powers conferred upon it by this Agreement.



          Section 8.15. Administrator May Own Certificates. The Administrator in its
individual or any other capacity may become the owner or pledgee of Certificates and may transact
business with the Depositor, the Servicer, the Trustee and their Affiliates with the same rights as
it would have if it were not Administrator.




          Section 8.16. Servicer to Pay Administrator’s Fees and Expenses. The Servicer
covenants and agrees to pay to the Administrator from time to time, and the Administrator shall be
entitled to, reasonable compensation (which shall not be limited by any provision of law in regard
to the compensation of a Administrator of an express trust) for all services rendered by it in the
execution of the trusts hereby created and in the exercise and performance of any of the powers and
duties hereunder of the Administrator, and the Servicer will pay or reimburse the Administrator
upon its request for all reasonable expenses, disbursements and advances incurred or made by the
Administrator in accordance with any of the provisions of this Agreement (including the reasonable
compensation and the expenses and disbursements of its counsel and of all persons not regularly in
its employ) except any such expense, disbursement or advance as may arise from its negligence or
bad faith.




     The Administrator (including in its roles as Certificate Registrar and Paying Agent) and any
director, officer, employee or agent of the Administrator shall be indemnified by the Servicer and
held harmless by the Servicer against any loss, liability or expense (including reasonable
attorney’s fees and expenses) arising out of, relating to or in connection with (i) this Agreement,
the Certificates and the other Transaction Documents to which it is a party or in connection with
their respective duties hereunder or any legal action relating thereto, other than any loss,
liability or expense incurred by reason of willful misconduct, negligence or bad faith in the
performance of the Administrator’s duties hereunder or thereunder and (ii) any audit, controversy
or judicial proceeding relating to a governmental taxing authority with respect to this Agreement,
the Certificates and the other Transaction Documents.



     Notwithstanding anything contained in this Agreement or any of the other Transaction Documents
to the contrary, the indemnification provided for in this Section 8.16 shall survive the payment of
the Certificates, the resignation or removal of the Administrator and/or the termination of this
Agreement.



          Section 8.17. Eligibility Requirements for Administrator. The Administrator
hereunder shall at all times be a corporation duly incorporated and validly existing under the laws
of the United States of America or any state thereof, authorized under such laws to exercise
corporate trust powers, having a combined capital and surplus of at least $50,000,000 and subject
to supervision or examination by federal or state authority. If such corporation publishes reports
of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising
or examining authority, then for the purposes of this Section, the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. In case at any time the Administrator shall cease to be




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eligible in accordance with the provisions of this Section, the Administrator shall resign
immediately in the manner and with the effect specified in Section 8.18.




          Section 8.18. Resignation or Removal of Administrator. The Administrator may at any
time resign and be discharged from the trusts hereby created by giving written notice thereof to
the Depositor, the Servicer, the Trustee and each Rating Agency. Upon receiving such notice of
resignation, the Depositor shall promptly appoint a successor Administrator by written instrument,
in duplicate, one copy of which instrument shall be delivered to the resigning Administrator and
one copy to the successor Administrator; provided, however, that any such successor Administrator
shall be subject to the prior written approval of the Servicer. If no successor Administrator
shall have been so appointed and have accepted appointment within 30 days after the giving of such
notice of resignation, the resigning Administrator may petition any court of competent jurisdiction
for the appointment of a successor Administrator.




     As a condition precedent to the effectiveness of any such resignation, the Administrator shall
provide to the Depositor and the Servicer, at least 30 calendar days prior to the effective date of
any such resignation, written notice, in form and substance reasonably satisfactory to the
Depositor and the Servicer, containing all information reasonably requested by the Depositor in
order for the Depositor to comply with its reporting obligation under Item 6.02 of Form 8-K with
respect to the resignation of the Administrator. If the Administrator fails to fulfill its
obligations under this Section 8.18 with respect to notice to the Depositor and the Servicer and
such failure continues for the lesser of 10 calendar days or such period in which the applicable
Exchange Act report can be filed timely (without taking into account any extensions), the Servicer
may terminate the Administrator.



     If at any time the Administrator shall cease to be eligible in accordance with the provisions
of Section 8.17 and shall fail to resign after written request therefor by the Depositor, or if at
any time the Administrator shall be legally unable to act, or shall be adjudged a bankrupt or
insolvent, or a receiver of the Administrator or of its property shall be appointed, or any public
officer shall take charge or control of the Administrator or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation, then the Depositor may remove the
Administrator. If the Depositor removes the Administrator under the authority of the immediately
preceding sentence, the Depositor shall promptly appoint a successor Administrator by written
instrument, in duplicate, one copy of which instrument shall be delivered to the Administrator so
removed and one copy to the successor Administrator.



     Any resignation or removal of the Administrator and appointment of a successor Administrator
pursuant to any of the provisions of this Section shall not become effective until acceptance of
appointment by the successor Administrator as provided in Section 8.19.



          Section 8.19. Successor Administrator. Any successor Administrator appointed as
provided in Section 8.18 shall execute, acknowledge and deliver to the Depositor, the Trustee and
to its predecessor Administrator an instrument accepting such appointment hereunder, and thereupon
the resignation or removal of the predecessor Administrator shall become effective and such
successor Administrator, without any further act, deed or conveyance, shall become fully vested
with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect
as if originally named as Administrator. The successor Administrator shall, at least 30




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days prior to the effective date of its acceptance, provide to the Depositor and the Servicer
written notice in form and substance reasonably satisfactory to the Depositor and the Servicer
containing all information reasonably requested by the Depositor and the Servicer in order for the
Depositor to comply with its reporting obligations under Item 6.02 of Form 8-K with respect to a
replacement of the Administrator. The Depositor, the Servicer, the Trustee and the predecessor
Administrator shall execute and deliver such instruments and do such other things as may reasonably
be required for fully and certainly vesting and confirming in the successor Administrator all such
rights, powers, duties and obligations.




     No successor Administrator shall accept appointment as provided in this Section unless at the
time of such acceptance (i) such successor Administrator shall be eligible under the provisions of
Section 8.17, (ii) the unsecured long-term debt of such successor Administrator is rated at least
“A3” by Moody’s or (iii) the Rating Agencies have confirmed that such successor Administrator will
not result in a withdrawal or a downgrading of the then current ratings on any Class of the Offered
Certificates. The Servicer shall notify the Rating Agency of the appointment of any successor
Administrator.



     Upon acceptance of appointment by a successor Administrator as provided in this Section, the
Servicer shall mail notice of the succession of such Administrator hereunder to the Trustee, all
Holders of Certificates at their addresses as shown in the Certificate Register and to each Rating
Agency. If the Servicer fails to mail such notice within 30 days after acceptance of appointment
by the successor Administrator, the successor Administrator shall cause such notice to be mailed at
the expense of the Servicer.



          Section 8.20. Merger or Consolidation of Administrator.




     Any corporation into which the Administrator may be merged or converted or with which it may
be consolidated, or any corporation resulting from any merger, conversion or consolidation to which
the Administrator shall be a party, or any corporation succeeding to all or substantially all of
the business of the Administrator, shall be the successor of the Administrator hereunder, provided
that such corporation shall be eligible under the provisions of Section 8.17, without the execution
or filing of any paper or any further act on the part of any of the parties hereto, anything herein
to the contrary notwithstanding.



     The Administrator shall provide to the Depositor and the Servicer within two business days
following the effective date of any such merger or consolidation, written notice, in form and
substance typically issued by the Administrator for such purpose, containing all information
reasonably required in order for the Depositor to comply with its reporting obligation under Form
8-K with respect to a replacement administrator.



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ARTICLE IX




TERMINATION




          Section 9.01. Termination.




     (a) The respective obligations and responsibilities of the Depositor, the Servicer, the
Administrator and the Trustee created hereby (other than the obligation of the Administrator to
make certain payments to Certificateholders after the Final Scheduled Distribution Date and the
obligation of the Servicer to send certain notices as hereinafter set forth) shall terminate upon
notice to the Trustee and the Administrator of the earliest of (i) the final payment or other
liquidation of the last Home Equity Loan remaining in the Trust and (ii) the optional purchase by
the Servicer of the Home Equity Loans as described below in this Section 9.01; provided that in no
event shall the Trust created hereby continue beyond the earlier of (i) the expiration of 21 years
from the death of the last survivor of the descendants of Joseph P. Kennedy, the late Ambassador of
the United States to the Court of St. James’s, living on the date hereof and (ii) the Latest
Possible Maturity Date. Upon termination in accordance with clause (i) or (ii) of this Section
9.01, the Trustee shall execute such documents and instruments of transfer, in each case without
recourse, representation or warranty, presented by the Depositor and take such other actions as the
Depositor may reasonably request to effect the retransfer of the Home Equity Loans to the
Depositor.



     (b) The Servicer may, at its option, terminate this Agreement on any Distribution Date
following the first Distribution Date on which the aggregate Certificate Principal Balance of all
Offered Certificates (after giving effect to payments made on such Distribution Date) falls below
15% of the aggregate Original Class Certificate Principal Balance of all Classes of Offered
Certificates by purchasing, on any such Distribution Date, all of the outstanding Home Equity Loans
and REO Properties at a price (the “Termination Price”) equal to the greater of (A) the sum
of (1) the aggregate Principal Balance of the Home Equity Loans as of the last day of the prior
Collection Period, together with accrued and unpaid interest thereon through the end of such
Collection Period at the weighted average of the Net Loan Rates (weighted on the basis of the
Principal Balances thereof as of the last day of the prior Collection Period) and (2) the fair
market value of the REO properties in the Trust (as reflected on the books and records of the
Servicer as of the close of business on the last day of the prior Collection Period) and (B) the
sum of (1) 100% of the aggregate Certificate Principal Balance of the Offered Certificates, (2) one
month’s interest on the Offered Certificates at their respective Pass-Through Rates, (3) any unpaid
Interest Carry Forward Amounts and Net Rate Carryover Amounts allocable to the Offered
Certificates, plus one month’s interest on such Certificate Principal Balance and any unpaid
Interest Carry Forward Amounts, together with interest accrued thereon at the respective
Pass-Through Rates and (4) any unpaid Net Rate Carryover Amounts, together with interest accrued
thereon at the respective Formula Rates.



     (c) Any such purchase shall be accomplished by deposit into the Collection Account on the
Deposit Date before such Distribution Date of the Termination Price.



     (d) Notice of any termination, specifying the Distribution Date (which shall be a date that
would otherwise be a Distribution Date) upon which the Certificateholders may surrender



91









 







their Certificates to the Administrator for payment of the final distribution and
cancellation, shall be given promptly by the Administrator (upon receipt of written directions from
the Servicer, if the Depositor is exercising its right to retransfer the Home Equity Loans) to
Certificateholders by letter mailed not earlier than the [15th] day and not later than the [25th]
day of the month next preceding the month of such final distribution specifying (i) the
Distribution Date upon which final distribution of the Certificates will be made upon presentation
and surrender of the Certificates at the office or agency of the Administrator therein designated,
(ii) the amount of any such final distribution and (iii) that the Record Date otherwise applicable
to such Distribution Date is not applicable, distributions being made only upon presentation and
surrender of the Certificates at the office or agency of the Administrator therein specified. In
the event written directions are delivered by the Servicer to the Administrator as described in the
preceding sentence, the Depositor shall deposit in the Collection Account on or before the
Distribution Date for such final distribution in immediately available funds an amount which, when
added to the funds on deposit in the Collection Account that are payable to the related
Certificateholders, will be equal to the purchase price for the assets of the Trust computed as
above provided.



     (e) Upon presentation and surrender of the Certificates, the Administrator, in accordance with
the written direction of the Servicer, shall cause to be distributed to the Certificateholders on
the Distribution Date for such final distribution, in proportion to their respective Percentage
Interests, an amount equal to (i) as to each Class of the Offered Certificates, the sum of (A) such
Class’ appropriate share of the Principal Distribution Amount, (B) one month’s interest at the
related Pass-Through Rate on such Certificate Principal Balance, (C) any previously unpaid Interest
Carry Forward Amount together with interest thereon at the applicable Pass-Through Rate, and (D)
any previously unpaid Net Rate Carryover Amount together with interest accrued thereon at the
applicable Formula Rate, and (ii) as to the Class R Certificate the amount which remains on deposit
in the Collection Account (other than the amounts retained to meet claims) after application
pursuant to clause (i) above. The distribution on such final Distribution Date shall be in lieu of
the distribution otherwise required to be made on such Distribution Date in respect of each Class
of Certificates.



     (f) In the event that all of the Certificateholders shall not surrender their Certificates for
final payment and cancellation on or before such final Distribution Date, the Administrator shall
promptly following such date cause all funds in the Collection Account not distributed in final
distribution to Certificateholders to be withdrawn therefrom and credited to the remaining
Certificateholders by depositing such funds in a separate escrow account for the benefit of such
Certificateholders and the Servicer (if the Servicer has exercised its right to purchase the Home
Equity Loans) or the Administrator (in any other case), shall give a second written notice to the
remaining Certificateholders to surrender their Certificates for cancellation and receive the final
distribution with respect thereto. If within nine months after the second notice all the
Certificates shall not have been surrendered for cancellation, the Holder of the Class R
Certificate will be entitled to all remaining unclaimed funds and other assets which remain subject
hereto, and the Administrator upon transfer of such funds at the written request of such Holder
shall be discharged of any responsibility for such funds and the Holders of the Offered
Certificates shall look to the Holder of the Residual Certificate for payment.



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          Section 9.02. Additional Termination Requirements.




     (a) In the event the Servicer exercises its purchase option pursuant to Section 9.01(b), the
Trust Fund shall be terminated in accordance with the following additional requirements, unless the
Trustee has been supplied with an Opinion of Counsel, at the expense of the Servicer, to the effect
that the failure of the Trust Fund to comply with the requirements of this Section 9.02 will not
(i) result in the imposition of taxes on “prohibited transactions” of any REMIC described
hereunder, or (ii) cause any REMIC described hereunder to fail to qualify as a REMIC at any time
that any Certificates are outstanding:




     (i) The Servicer shall establish a 90-day liquidation period, notify the Trustee
thereof, and furnish the Trustee with a statement specifying the first day of such period,
such statement to be attached to the Trust Fund’s final Tax Return pursuant to Treasury
Regulation Section 1.860F-1. The Servicer shall prepare a plan of complete liquidation and
shall otherwise satisfy all the requirements of a qualified liquidation under Section 860F
of the Code and any regulations thereunder, as evidenced by an Opinion of Counsel delivered
to the Trustee and the Depositor obtained at the expense of the Servicer;




     (ii) During such 90-day liquidation period, and at or prior to the time of making the
final payment on the Certificates, the Servicer shall acquire for its own account, all of
the assets of the Trust Fund for cash; and




     (iii) At the time of the making of the final payment on the Certificates, the Trustee
shall distribute or credit, or cause the Administrator to distribute or credit, to the
Holder of the Class R Certificate all cash on hand (other than cash retained to meet claims)
related to such Class of Certificates, and the Trust Fund shall terminate at that time.



     (b) By their acceptance of the Certificates, the Holders thereof hereby authorize the Servicer
to specify the 90-day liquidation period for the Trust Fund, which authorization shall be binding
upon all successor Certificateholders. The Trustee shall attach a statement to the final Federal
income tax return for any REMIC described hereunder stating that pursuant to Treasury Regulation
Section 1.860F-1, the first day of the 90-day liquidation period for the REMIC was the date on
which the Servicer acquired for its own account the assets of the Trust Fund.



     (c) The Trustee on behalf of the Trust agrees to adopt and sign such a plan of complete
liquidation upon the written request of the Servicer, and the receipt of the Opinion of Counsel
referred to in Section 9.02(a)(i), and together with the Holder of the Class R Certificate agrees
to take such other action in connection therewith as may be reasonably requested by the Servicer.



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ARTICLE X




MISCELLANEOUS PROVISIONS




          Section 10.01. Amendment. This Agreement may be amended from time to time by the
Servicer, the Depositor, the Administrator and the Trustee by written agreement, in each case
without the consent of any of the Certificateholders, (i) to cure any ambiguity, (ii) to correct or
supplement any provisions herein that may be inconsistent with any other provisions herein or to
correct any error, (iii) to add to the duties of the Depositor, the Administrator, the Trustee or
the Servicer, (iv) to add, amend or modify any other provisions with respect to matters or
questions arising under this Agreement, which shall not be inconsistent with this Agreement, (v) to
add or amend any provisions of this Agreement as required by any Rating Agency or any other
nationally recognized statistical rating agency in order to maintain or improve the rating of any
Class of the Offered Certificates (it being understood that, after obtaining the ratings in effect
on the Closing Date, none of the Trustee, the Administrator , the Depositor nor the Servicer is
obligated to obtain, maintain or improve any such rating), (vi) to comply with any requirement
imposed by changes in accounting policies that do not materially impact the Offered Certificates,
(vii) to comply with any requirements imposed by the Code, (viii) to modify, alter, amend, add to
or rescind any of the terms or provisions contained in this Agreement to comply with any rules or
regulations promulgated by the SEC from time to time; provided, however, that as evidenced by an
Opinion of Counsel (copies of which shall be delivered to the Trustee and the Administrator) (at
the expense of the requesting party), in each case (other than a case arising under clause (vi),
(vii) or (viii)) such action shall not materially and adversely affect the interests of any Class A
or Class M Certificateholder; and provided, further, that the amendment shall not be deemed to
adversely affect in any material respect the interests of the Class A and Class M
Certificateholders and no Opinion of Counsel to that effect shall be required if the Person
requesting the amendment receives a confirmation from each Rating Agency stating that the amendment
would not result in the downgrading or withdrawal of the respective ratings then assigned to any
Class of the Offered Certificates.




     In addition, the Servicer, the Depositor, the Administrator and the Trustee also may at any
time and from time to time amend this Agreement without the consent of the Certificateholders to
modify, eliminate or add to any of its provisions to such extent as shall be necessary or helpful
to (a) maintain the qualification of any REMIC as a REMIC under the Code, (b) avoid or minimize the
risk of the imposition of any tax on any REMIC pursuant to the Code that would be a claim at any
time prior to the final redemption of the Certificates or (c) comply with any other requirements of
the Code, provided that the Trustee and the Administrator have been provided an Opinion of Counsel,
which opinion shall be an expense of the party requesting such opinion but in any case shall not be
an expense of the Trustee, the Administrator or the Trust Fund, to the effect that such action is
necessary or helpful to, as applicable, (x) maintain such qualification, (y) avoid or minimize the
risk of the imposition of such a tax or (z) comply with any such requirements of the Code.



     Notwithstanding any contrary provision of this Agreement, the Trustee and the Administrator
shall not consent to any amendment to this Agreement unless it shall have first received an Opinion
of Counsel, which opinion shall not be an expense of the Trustee, the Administrator or the Trust
Fund, to the effect that such amendment will not cause the imposition



94









 







of any tax on any REMIC or the Certificateholders or cause any REMIC to fail to qualify as a
REMIC at any time that any Certificates are outstanding.



     Each party to this Agreement hereby agrees that it will cooperate with each other party to
effect any amendment to this Agreement pursuant to clause (viii) of the first paragraph of this
Section 10.01 or pursuant to the second paragraph of this Section 10.01.



     This Agreement also may be amended from time to time by the Servicer, the Depositor, the
Administrator and the Trustee, in each case with the consent of the Holders of the Class of the
Offered Certificates that are affected by such amendment, evidencing Percentage Interests
aggregating not less than 51% in Percentage Interests of such Class or in the case of an amendment
which affects all classes, evidencing Percentage Interests aggregating not less than 51% of all
Classes, for the purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment shall (i) reduce in any manner the
amount of, or delay the timing of, collections of payments on Home Equity Loans, (ii) reduce in any
manner the amount of, or delay the timing of, payments on the Certificates which are required to be
made on any Certificate without the consent of the Holder of such Certificate, (iii) impair the
right of any Certificateholder to institute suit for the enforcement of the provisions of the
Agreement, (iv) reduce the aforesaid percentage required to consent to any such amendment, (v)
create a material risk of the Trust incurring taxes imposed under the Code or of the Class A
Certificates or Class M Certificates not being treated as indebtedness under the Code, or (vi)
result in a downgrading of the ratings of any Class of the Offered Certificates without, in each
case, the consent of the Holders of all Classes of Certificates then outstanding or each Class of
Certificates affected thereby.



     Prior to the solicitation of consent of Certificateholders in connection with any such
amendment, the party seeking such amendment shall furnish the Trustee and the Administrator with an
Opinion of Counsel stating whether such amendment would create a material risk of the Trust
incurring taxes imposed under the Code and notice of the conclusion expressed in such Opinion of
Counsel shall be included with any such solicitation. An amendment made with the consent of all
Certificateholders and executed in accordance with this Section shall be permitted or authorized by
this Agreement notwithstanding that such Opinion of Counsel may conclude that such amendment would
create a material risk of the Trust incurring taxes imposed under the Code.



     Prior to the execution of any such amendment made with the consent of Certificateholders, the
Servicer shall furnish written notification of the substance of such amendment to each Rating
Agency. In addition, promptly after the execution of any such amendment made with the consent of
the Certificateholders, the Administrator shall furnish written notification of the substance of
such amendment to each Certificateholder.



     It shall not be necessary for the consent of Certificateholders under this Section 10.01 to
approve the particular form of any proposed amendment or consent, but it shall be sufficient if
such consent shall approve the substance thereof. The manner of obtaining such consents and of
evidencing the authorization of the execution thereof by Certificateholders shall be subject to
such reasonable requirements as the Trustee may prescribe.



95









 





     Prior to the execution of any amendment to this Agreement, each of the Trustee and the
Administrator shall be entitled to receive and rely conclusively upon an Opinion of Counsel stating
that the execution of such amendment is authorized or permitted by this Agreement and all
conditions precedent to the execution of such amendment have been met. The Trustee and the
Administrator may, but shall not be obligated to, enter into any such amendment which affects the
Trustee’s or the Administrator’s, as the case may be, own rights, duties or immunities under this
Agreement.



          Section 10.02. Recordation of Agreement. This Agreement is subject to recordation in
all appropriate public offices for real property records in all the counties or other comparable
jurisdictions in which any or all of the Mortgaged Properties are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be effected by the Servicer
and at its expense on direction by the Trustee (which shall not have any duty to determine whether
such recordation should be made), but only when accompanied by an Opinion of Counsel to the effect
that such recordation materially and beneficially affects the interests of Certificateholders or is
necessary for the administration or servicing of the Home Equity Loans.




     For the purpose of facilitating the recordation of this Agreement as herein provided and for
other purposes, this Agreement may be executed simultaneously in any number of counterparts, each
of which counterparts shall be deemed to be an original, and such counterparts shall constitute but
one and the same instrument.



          Section 10.03. Limitation on Rights of Certificateholders. The death or incapacity
of any Certificateholder shall not operate to terminate this Agreement or the Trust, nor entitle
such Certificateholder’s legal representatives or heirs to claim an accounting or to take any
action or commence any proceeding in any court for a partition or winding up of the Trust, nor
otherwise affect the rights, obligations and liabilities of the parties hereto or any of them.




     No Certificateholder shall have any right to vote (except as provided in Section 10.01) or in
any manner otherwise control the operation and management of the Trust, or the obligations of the
parties hereto, nor shall anything herein set forth, or contained in the terms of the Certificates,
be construed so as to constitute the Certificateholders from time to time as partners or members of
an association; nor shall any Certificateholder be under any liability to any third person by
reason of any action taken by the parties to this Agreement pursuant to any provision hereof.



     No Certificateholder shall have any right by virtue or by availing itself of any provisions of
this Agreement to institute any suit, action or proceeding in equity or at law upon or under or
with respect to this Agreement, unless such Holder previously shall have given to the Trustee a
written notice of default and of the continuance thereof, as hereinbefore provided, and unless also
the Majority Certificateholder shall have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the
Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to
be incurred therein or thereby, and the Trustee, for 60 days after its receipt of such notice,
request and offer of indemnity, shall have neglected or refused to institute any such action, suit
or proceeding; it being understood and intended, and being expressly covenanted by each
Certificateholder with every other Certificateholder and the Trustee, that no one or more Holders



96









 







of Certificates shall have any right in any manner whatever by virtue or by availing itself or
themselves of any provisions of this Agreement to affect, disturb or prejudice the rights of the
Holders of any other of the Certificates, or to obtain or seek to obtain priority over or
preference to any other such Holder, or to enforce any right under this Agreement, except in the
manner herein provided and for the equal, ratable and common benefit of all Certificateholders.
For the protection and enforcement of the provisions of this Section, each and every
Certificateholder and the Trustee shall be entitled to such relief as can be given either at law or
in equity.



          Section 10.04. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS
OF LAWS (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW.)




          Section 10.05. Notices. All demands, notices and communications hereunder shall be
in writing and shall be deemed to have been duly given if personally delivered at or mailed by
overnight mail, certified mail, or registered mail, postage prepaid to (a) in the case of the
Depositor or the Servicer, 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention:
Treasurer, (b) in the case of the Trustee, at the Corporate Trust Office, 209 South LaSalle Street,
3rd Floor, Chicago, Illinois 60604, Attention: Corporate Trust Services, Reference: HSBC Home
Equity Loan Trust 2006-3 (facsimile number (312) 325-8905), (c) in the case of the Administrator,
at the Corporate Trust Office, 452 Fifth Avenue, New York, New York 10018, Attention: CTLA –
Structured Finance, Reference: HSBC Home Equity Loan Trust (USA) 2006-3 (facsimile number (212)
525-1300), (d) in the case of Moody’s, ABS Monitoring Department, 99 Church Street, New York, New
York 10007, (e) in the case of Standard & Poor’s, 55 Water Street, 40th Floor, New York, New York
10041, Attention: Structured Finance Surveillance and (f) in the case of Fitch, One State Street
Plaza, 33rd Floor, New York, New York 10004, Attention: RMBS Surveillance Department, or, as to
each party, at such other address as shall be designated by such party in a written notice to each
other party. Any notice required or permitted to be mailed to a Certificateholder shall be given
by first class mail, postage prepaid, at the address of such Holder as shown in the Certificate
Register. Any notice so mailed within the time prescribed in this Agreement shall be conclusively
presumed to have been duly given, whether or not the Certificateholder receives such notice.




          Section 10.06. Severability of Provisions. If any one or more of the covenants,
agreements, provisions or terms of this Agreement shall be held invalid for any reason whatsoever,
then such covenants, agreements, provisions or terms shall be deemed severable from the remaining
covenants, agreements, provisions or terms of this Agreement and shall in no way affect the
validity or enforceability of the other provisions of this Agreement or of the Certificates or the
rights of the Holders thereof.




          Section 10.07. No Partnership. Nothing herein contained shall be deemed or construed
to create any partnership or joint venture between the parties hereto and the services of the
Servicer shall be rendered as an independent contractor.




97









 








          Section 10.08. Assignment. Notwithstanding anything to the contrary contained
herein, except as provided in Sections 6.02 and 6.04, this Agreement may not be assigned by the
Depositor or the Servicer without the prior written consent of Holders of Certificates of each
Class, voting as a Class, evidencing, as to each such Class, Percentage Interests aggregating not
less than 66-2/3%.




          Section 10.09. Certificates Nonassessable and Fully Paid. The parties agree that the
Certificateholders shall not be personally liable for obligations of the Trust, that the beneficial
ownership interests represented by the Certificates shall be nonassessable for any losses or
expenses of the Trust or for any reason whatsoever, and that the Certificates upon execution by the
Trustee on behalf of the Trust and the authentication and delivery thereof by the Administrator
pursuant to Sections 2.05 and 5.01 are and shall be deemed fully paid.




          Section 10.10. Third-Party Beneficiaries. This Agreement will inure to the benefit
of and be binding upon the parties hereto, the Certificateholders and their respective successors
and permitted assigns. Except as otherwise provided in this Agreement, no other person will have
any right or obligation hereunder.




          Section 10.11. Counterparts. This Agreement may be executed in one or more
counterparts and by different parties hereto in separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall constitute one and
the same instrument.




          Section 10.12. Headings. The headings of the various sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed to be a part of this
Agreement.




          Section 10.13. Limitation on Voting of Preferred Stock. The Trustee shall hold all
of the preferred stock (“Preferred Stock”) of the Depositor in trust, for the benefit of
the Certificateholders and, during the continuance of a Servicer Termination Event, shall vote such
stock only pursuant to the written instructions of the Majority Certificateholder. The Trustee
shall not permit a transfer of any of the Preferred Stock to HSBC Finance or any of its Affiliates.
Concurrently with any transfer of the Home Equity Loans to the Servicer pursuant to Section 9.01,
the Trustee shall transfer to the Depositor for cancellation all shares of Preferred Stock held by
the Trustee.




          Section 10.14. Perfection Representations. The Perfection Representations shall be a
part of this Agreement for all purposes.




          Section 10.15. No Petition. The Trustee, the Administrator and the
Certificateholders agree that they shall not institute against the Depositor, or cooperate with or
encourage others to institute against the Depositor, any bankruptcy, reorganization, arrangement,
insolvency, or liquidation proceedings under United States federal or state bankruptcy laws in
connection with any obligations relating to the Certificates or this Agreement.




          Section 10.16. Inspection of Mortgage Files.




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     Following the time that the Mortgage Files have been delivered to the Trustee upon reasonable
prior notice and during regular business hours, the Trustee shall permit representatives of
applicable state regulatory agencies to inspect the Mortgage Files on the Trustee’s premises or
shall provide such documents at such places required by state regulations, including the offices of
the Subservicers. Any loss incurred by the Trustee in fulfilling such obligations shall be paid by
the Servicer.



ARTICLE XI




EXCHANGE ACT REPORTING




          Section 11.01. Regulation AB.




     The Depositor, the Servicer, the Trustee and the Administrator acknowledge and agree that the
purpose of this Section 11.01 is to facilitate compliance by the Depositor with the provisions of
Regulation AB and related rules and regulations of the SEC. The Depositor shall not exercise its
right to request delivery of information or other performance under these provisions other than in
good faith, or for purposes other than compliance with the Securities Act, the Exchange Act and the
rules and regulations of the SEC under the Securities Act and the Exchange Act. The Servicer, the
Trustee and the Administrator acknowledge that interpretations of the SEC and its staff of the
requirements of Regulation AB may change over time and, accordingly, each agrees to comply with
reasonable requests made by the Depositor or the Servicer in good faith for delivery of readily
available and deliverable information under these provisions on the basis of such interpretations
of Regulation AB. The Servicer, the Trustee and the Administrator shall cooperate fully with the
Depositor and the Issuing Entity to deliver to the Depositor and the Issuing Entity (including the
Servicer and any other assignees or designees) any and all documentation, records and any other
information, in each case solely as is readily available and deliverable, that is reasonably
necessary to permit the Depositor to comply with the provisions of Regulation AB, together with
such disclosures relating to the Servicer, the Subservicer, the Trustee, the Administrator and the
Home Equity Loans, or the servicing of the Home Equity Loans, as are reasonably necessary in order
to effect such compliance.



          Section 11.02. Information to Be Provided by the Trustee and the Administrator.




     For so long as the Depositor is required to report with respect to the Issuing Entity under
the Exchange Act, each of the Trustee and the Administrator shall (i) on or before the fifth
Business Day of each month, provide to the Servicer, in writing, such information regarding the
Trustee or the Administrator, as applicable, as is requested by the Servicer for the purpose of
compliance with Item 1117 of Regulation AB, (ii) on or before March 15 of each calendar year,
beginning March 15, 2007, provide to the Servicer, in writing, some information regarding the
Trustee or the Administrator, as applicable, as is requested by the Servicer for the purpose of
compliance with Item 1119 of Regulation AB; provided, however, that neither the Trustee nor the
Administrator shall be required to provide information required by the foregoing clause (i) or (ii)
in the event that there has been no change to the information previously provided by the Trustee or
the Administrator, as applicable, to the Servicer, and (iii) as promptly as practicable



99









 







following notice to or discovery by a Responsible Officer of the Trustee or the Administrator,
as applicable, of any changes to such information, provide to the Servicer, in writing, such
updated information.



100









 





     IN WITNESS WHEREOF, the Depositor, the Servicer, the Trustee and the Administrator have caused
this Agreement to be duly executed by their respective officers all as of the day and year first
above written.



	 	 	 	 	 
	 	HSBC HOME EQUITY LOAN CORPORATION II,
as Depositor

 	 
	 	By:  	/s/
David
J. Hunter 	 
	 	 	Name:  	David
J. Hunter 	 
	 	 	Title:  	Vice President & Assistant Treasurer 	 
	 
	 	HSBC FINANCE CORPORATION, as Servicer

 	 
	 	By:  	/s/
William H. Kesler 	 
	 	 	Name:  	
William H. Kesler 	 
	 	 	Title:  	Senior Vice President — Treasurer 	 
	 
	 	U.S. BANK NATIONAL ASSOCIATION, as Trustee

 	 
	 	By:  	/s/
Patricia M. Child 	 
	 	 	Name:  	Patricia M. Child 	 
	 	 	Title:  	Vice President 	 
	 
	 	HSBC BANK USA, NATIONAL ASSOCIATION, as Administrator

 	 
	 	By:  	/s/
Fernando Acebedo 	 
	 	 	Name:  	Fernando Acebedo 	 
	 	 	Title:  	Vice President 	 
	 




S-1









 





ACKNOWLEDGED AND AGREED TO

FOR PURPOSES OF ARTICLE III AND SECTION 6.05 HEREOF:



BENEFICIAL ALABAMA INC.

BENEFICIAL CALIFORNIA INC.

BENEFICIAL CONSUMER DISCOUNT COMPANY

BENEFICIAL DELAWARE INC.

BENEFICIAL FLORIDA INC.

BENEFICIAL HAWAII INC.

BENEFICIAL HOMEOWNER SERVICE CORPORATION

BENEFICIAL ILLINOIS INC.

BENEFICIAL INDIANA INC.

BENEFICIAL IOWA INC.

BENEFICIAL KENTUCKY INC.

BENEFICIAL MAINE INC.

BENEFICIAL MASSACHUSETTS INC.

BENEFICIAL MICHIGAN INC.

BENEFICIAL MORTGAGE CO. OF ARIZONA

BENEFICIAL MORTGAGE CO. OF COLORADO

BENEFICIAL MORTGAGE CO. OF CONNECTICUT

BENEFICIAL MORTGAGE CO. OF GEORGIA

BENEFICIAL MORTGAGE CO. OF IDAHO

BENEFICIAL MORTGAGE CO. OF KANSAS, INC.

BENEFICIAL MORTGAGE CO. OF MARYLAND

BENEFICIAL MORTGAGE CO. OF MISSOURI, INC.

BENEFICIAL MORTGAGE CO. OF NEVADA

BENEFICIAL MORTGAGE CO. OF NEW HAMPSHIRE

BENEFICIAL MORTGAGE CO. OF NORTH CAROLINA

BENEFICIAL MORTGAGE CO. OF RHODE ISLAND

BENEFICIAL MORTGAGE CO. OF SOUTH CAROLINA

BENEFICIAL MORTGAGE CO. OF UTAH

BENEFICIAL MORTGAGE CO. OF VIRGINIA

BENEFICIAL MORTGAGE CORPORATION

BENEFICIAL NEBRASKA INC.

BENEFICIAL NEW JERSEY INC.

BENEFICIAL NEW MEXICO INC.




	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	By:	 	/s/ Daniel W. Anderson 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: Daniel W. Anderson	 	 
	 

	 	 	 	Title: Vice President & Treasurer	 	 






S-2









 




BENEFICIAL OHIO INC.

BENEFICIAL OKLAHOMA INC.

BENEFICIAL OREGON INC.

BENEFICIAL SOUTH DAKOTA INC.

BENEFICIAL TENNESSEE INC.

BENEFICIAL TEXAS INC.

BENEFICIAL WASHINGTON INC.

BENEFICIAL WEST VIRGINIA, INC.

BENEFICIAL WISCONSIN INC.

BENEFICIAL WYOMING INC.

HOUSEHOLD FINANCE CONSUMER DISCOUNT COMPANY

HOUSEHOLD FINANCE CORPORATION II

HOUSEHOLD FINANCE CORPORATION III

HOUSEHOLD FINANCE CORPORATION OF ALABAMA

HOUSEHOLD FINANCE CORPORATION OF CALIFORNIA

HOUSEHOLD FINANCE INDUSTRIAL LOAN COMPANY OF IOWA

HOUSEHOLD FINANCE REALTY CORPORATION OF NEVADA

HOUSEHOLD FINANCE REALTY CORPORATION OF NEW YORK

HOUSEHOLD FINANCIAL CENTER INC.

HOUSEHOLD REALTY CORPORATION

MORTGAGE ONE CORPORATION




	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	By:	 	/s/ Daniel W. Anderson 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name: Daniel W. Anderson	 	 
	 

	 	 	 	Title: Vice President &
Treasurer	 	 






S-3









 






	 	 	 	 	 	 
	State of Illinois

	 	}	 	 
	 

	 	}
	 	ss.:
	County of Cook

	 	}	 	 






     On
the 24th day of October, 2006 before me, a notary public in and for the State of Illinois,
personally appeared David J. Hunter, known to me who, being by me duly sworn, did depose and say
that he/she resides at Deer Park, Illinois; that he/she is the Vice President and Assistant
Treasurer of HSBC Home Equity Loan Corporation II, a Delaware corporation, one of the parties that
executed the foregoing instrument; that he/she knows the seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of
Directors of said corporation; and that he/she signed his/her name thereto by like order.



/s/ Lynne C. Zaremba



 



Notary Public




[Seal]




	 	 	 	 	 	 
	State of Illinois

	 	}	 	 
	 

	 	}
	 	ss.:
	County of Cook

	 	}	 	 






     On
the 25th day of October, 2006 before me, a notary public in and for the State of Illinois,
personally appeared William H. Kesler, known to me who, being by me duly sworn, did depose and say
that he/she resides at Barrington, Illinois; that he/she is the Senior Vice President — Treasurer
of HSBC Finance Corporation, a Delaware corporation, one of the parties that executed the foregoing
instrument; that he/she knows the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by order of the Board of Directors of
said corporation; and that he/she signed his/her name thereto by like order.



/s/ Lynne C. Zaremba



 



Notary Public




[Seal]




	 	 	 	 	 	 
	State of Illinois

	 	}	 	 
	 

	 	}
	 	ss.:
	County of Cook

	 	}	 	 






     On the ___day of October, 2006 before me, a notary public in and for the State of Illinois,
personally appeared Patricia M. Child, known to me who, being by me duly sworn, did depose and say
that he/she resides at Chicago, Illinois; that he/she is the Vice President of U.S. Bank National
Association, a national banking association, one of the parties that executed the foregoing
instrument; and that he/she signed his name thereto by order of the Board of Directors of said
association.



/s/ Phyllis C. Cloud



 



Notary Public




[Seal]




	 	 	 	 	 	 
	State of New York

	 	}	 	 
	 

	 	}
	 	ss.:
	County of New York

	 	}	 	 






     On the 26th day of October, 2006 before me, a notary public in and for the State of New York,
personally appeared Fernando Acebedo, known to me who, being by me duly sworn, did depose and say
that he/she resides at Huntington, New York; that he is the Vice President of HSBC Bank USA,
National Association, a national banking association, one of the parties that executed the
foregoing instrument; and that he/she signed his name thereto by order of the Board of Directors of
said association.



/s/ Ecliff C. Jackman



 



Notary Public




[Seal]






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Schedule 1




PERFECTION REPRESENTATIONS, WARRANTIES AND COVENANTS



The Depositor hereby represents, warrants, and covenants to the Trustee as to itself and the
Sellers as follows on the Closing Date and on each Distribution Date thereafter:




General




     1. This Agreement creates a valid and continuing security interest (as defined in the
applicable UCC) in the Home Equity Loans in favor of the Trust, which security interest is prior to
all other Liens, and is enforceable as such as against creditors of and purchasers from the
Depositor.



     2. The Home Equity Loans constitute “general intangibles” or “instruments” within the meaning
of the applicable UCC.



     3. The Collection Account and all subaccounts thereof constitute either a deposit account or a
securities account.



     4. To the extent that payments and collections received or made with respect to the Home
Equity Loans constitute securities entitlements, such payments and collections have been and will
have been credited to the Collection Account. The securities intermediary for the Collection
Account has agreed to treat all assets credited to the Collection Account as “financial assets”
within the meaning of the applicable UCC.



Creation




     5. The Depositor owns and has good and marketable title to the Home Equity Loans free and
clear of any Lien, claim or encumbrance of any Person, excepting only liens for taxes, assessments
or similar governmental charges or levies incurred in the ordinary course of business that are not
yet due and payable or as to which any applicable grace period shall not have expired, or that are
being contested in good faith by proper proceedings and for which adequate reserves have been
established, but only so long as foreclosure with respect to such a lien is not imminent and the
use and value of the property to which the Lien attaches is not impaired during the pendency of
such proceeding.



     6. The Depositor has received all consents and approvals to the sale of the Home Equity Loans
hereunder to the Trust required by the terms of the Home Equity Loans that constitute instruments.



     7. To the extent the Collection Account or subaccounts thereof constitute securities
entitlements, certificated securities or uncertificated securities, the Depositor has received all
consents and approvals required to transfer to the Trust its interest and rights in the Collection
Account hereunder.



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Perfection




     8. The Depositor has caused or will have caused, within ten days after the effective date of
this Agreement, the filing of all appropriate financing statements in the proper filing office in
the appropriate jurisdictions under applicable law in order to perfect the sale of the Home Equity
Loans from the Depositor to the Trust, and the security interest in the Home Equity Loans granted
to the Trust hereunder.



     9. With respect to the Collection Account and all subaccounts that constitute deposit
accounts, either:




(i) the Depositor has delivered to the Trustee a fully-executed agreement pursuant
to which the bank maintaining the deposit accounts has agreed to comply with all
instructions originated by the Trustee directing disposition of the funds in the
Collection Account without further consent by the Depositor; or




(ii) the Depositor has taken all steps necessary to cause the Trustee to become the
account holder of the Collection Account.



     10. With respect to the Collection Account or subaccounts thereof that constitute securities
accounts or securities entitlements, either:




(i) the Depositor has caused or will have caused, within ten days after the
effective date of this Agreement, the filing of all appropriate financing statements
in the proper filing office in the appropriate jurisdictions under applicable law in
order to perfect the security interest granted in the Collection Account to the
Trustee; or




(ii) the Depositor has delivered to the Trustee a fully-executed agreement pursuant
to which the securities intermediary has agreed to comply with all instructions
originated by the Trustee relating to the Collection Account without further consent
by the Depositor; or




(iii) the Depositor has taken all steps necessary to cause the securities
intermediary to identify in its records the Trustee as the person having a security
entitlement against the securities intermediary in the Collection Account.



Priority




     11. Other than the transfer of the Home Equity Loans to the Trust under the Transfer
Agreement, and the security interest granted to the Trustee pursuant to this Agreement, neither the
Depositor nor the Sellers have pledged, assigned, sold, granted a security interest in, or
otherwise conveyed any of the Home Equity Loans. Neither the Depositor nor the Sellers have
authorized the filing of, or are aware of any financing statements against the Depositor or any of
the Sellers that include a description of collateral covering the Home Equity Loans other than any
financing statement relating to the security interest granted to the Trustee hereunder or that has
been terminated.



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     12. The Depositor is not aware of any judgment, ERISA or tax lien filings against either the
Depositor or any of the Sellers.



     13. To the Depositor’s knowledge, none of the instruments that constitute or evidence the Home
Equity Loans has any marks or notations indicating that they have been pledged, assigned or
otherwise conveyed to any Person other than the Trustee.



     14. Neither the Collection Account nor any subaccount thereof is in the name of any person
other than the Depositor or the Trustee as trustee hereunder or in the name of its nominee. The
Depositor has not consented for the securities intermediary of the Collection Account to comply
with entitlement orders of any person other than the Trustee.



     15. Survival of Perfection Representations. Notwithstanding any other provision of
this Agreement or any other transaction document, the Perfection Representations contained in this
Schedule shall be continuing, and remain in full force and effect (notwithstanding any replacement
of the Servicer or termination of the Servicer’s rights to act as such) until such time as all
obligations under this Agreement have been finally and fully paid and performed.



     16. No Waiver. The parties to this Agreement (i) shall not, without obtaining a
confirmation of the then-current rating of the Certificates, waive any of the Perfection
Representations, and (ii) shall provide the Rating Agencies with prompt written notice of any
breach of the Perfection Representations, and shall not, without obtaining a confirmation of the
then-current rating of the Certificates (as determined after any adjustment or withdrawal of the
ratings following notice of such breach) waive a breach of any of the Perfection Representations.



     17. Servicer to Maintain Perfection and Priority. The Servicer covenants that, in
order to evidence the interests of the Depositor and the Trustee under this Agreement, the Servicer
shall take such action, or execute and deliver such instruments (other than effecting a Filing (as
defined below), unless such Filing is effected in accordance with this paragraph) as may be
necessary or advisable (including, without limitation, such actions as are requested by the
Trustee) to maintain and perfect, as a first priority interest, the Trustee’s security interest in
the Home Equity Loans. The Servicer shall, from time to time and within the time limits
established by law, prepare and present to the Trustee for the Trustee to authorize (based in
reliance on the Opinion of Counsel hereinafter provided for) the Servicer to file, all financing
statements, amendments, continuations, initial financing statements in lieu of a continuation
statement, terminations, partial terminations, releases or partial releases, or any other filings
necessary or advisable to continue, maintain and perfect the Trustee’s security interest in the
Home Equity Loans as a first-priority interest (each a “Filing”). The Servicer shall present each
such Filing to the Trustee together with (x) an Opinion of Counsel to the effect that such Filing
is (i) consistent with grant of the security interest to the Trustee pursuant to Section 2.01 of
this Agreement, (ii) satisfies all requirements and conditions to such Filing in this Agreement and
(iii) satisfies the requirements for a Filing of such type under the Uniform Commercial Code in the
applicable jurisdiction (or if the Uniform Commercial Code does not apply, the applicable statute
governing the perfection of security interests), and (y) a form of authorization for the Trustee’s
signature. Upon receipt of such Opinion of Counsel and form of authorization, the Trustee shall
promptly authorize in writing the Servicer to, and the Servicer shall, effect such Filing under the
Uniform Commercial Code without the signature of the Depositor or the Trustee where allowed by



S-3









 







applicable law. Notwithstanding anything else in the transaction documents to the contrary,
the Servicer shall not have any authority to effect a Filing without obtaining written
authorization from the Trustee.




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