Execution
      Copy

    


    


    


    SECOND
      SUPPLEMENTAL INDENTURE

    


    KH
      FUNDING COMPANY, a Maryland corporation,

    as
      obligor 

    


    


    Series
      3 Senior Secured Investment Debt Securities

    


    $220,000,000.00

    


    and

    


    Series
      4 Subordinated Unsecured Investment Debt Securities

    


    $30,000,000.00

    


    WELLS
      FARGO BANK, National Association, a National Banking
      Association,

    as
      trustee

    


    


    Dated
      as of August 11, 2006

    


    


    Supplementing
      the Indenture

    Dated
      as of August 2, 2004

    as
      supplemented and amended by a 

    First
      Supplemental Indenture 

    Dated
      as of July 1, 2005

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
 

    TABLE
      OF
      CONTENTS

     

    


    
      	
              ARTICLE
                I. DEFINITIONS AND INCORPORATION BY REFERENCE

            	
              1

            
	 	
              Section
                1.5

            	
              Recitals;
                Duties of Trustee

            	
              2

            
	 	
              Section
                1.6

            	
              Relationship
                to Original Indenture and Additional Supplemental
                Indentures

            	
              2

            
	 	 
	
              ARTICLE
                II. THE SECURITIES

            	
              2

            
	 	
              Section
                2.1(B)

            	
              Amount;
                Accounts; Interest; Maturity - Additional Securities

            	
              2

            
	 	 
	
              ARTICLE
                XI. MISCELLANEOUS

            	
              3

            
	 	
              Section
                11.17

            	
              Incorporation
                of Second Supplemental Indenture into Indenture

            	
              3

            


    

     

     

     

     

    
      
        
        

      

      
        -
          i
          -

        
          

        

      

      
        
        

      

    

     

     

    


    CROSS-REFERENCE
      TABLE*

     

    

      
        	 Trust
                Indenture Act	
                Indenture

              
	 Section	Section
	 	 
	
                305(a)(1)
                  

              	
                7.10

              
	
                  (a)(2)
                  

              	
                7.10

              
	
                  (a)(3)
                  

              	
                NA

              
	
                  (a)(4)
                  

              	
                NA

              
	
                  (a)(5)
                  

              	
                NA

              
	
                  (b)


              	
                7.8,
                  7.10

              
	
                  (c)
                  

              	
                NA

              
	
                311(a)
                  

              	
                7.11

              
	
                  (b)
                  

              	
                7.11

              
	
                  (c)
                  

              	
                NA

              
	
                312(a)
                  

              	
                2.5

              
	
                  (b)
                  

              	
                11.3

              
	
                  (c)
                  

              	
                11.3

              
	
                313(a)
                  

              	
                7.6

              
	
                  (b)(1)
                  

              	
                NA

              
	
                  (b)(2)
                  

              	
                7.6

              
	
                  (c)
                  

              	
                7.6,
                  11.2

              
	
                  (d)
                  

              	
                7.6

              
	
                314(a)
                  

              	
                4.3,
                  4.4, 11.2

              
	
                  (b)
                  

              	
                4.4

              
	
                  (c)(1)
                  

              	
                11.4

              
	
                  (c)(2)
                  

              	
                11.4

              
	
                  (c)(3)
                  

              	
                NA

              
	
                  (d)
                  

              	
                NA

              
	
                  (e)
                  

              	
                11.5

              
	
                  (f)
                  

              	
                NA

              
	
                315(a)
                  

              	
                7.1(b)

              
	
                  (b)
                  

              	
                7.5,
                  11.2

              
	
                  (c)
                  

              	
                7.1(a)

              
	
                  (d)
                  

              	
                7.1(c)

              
	
                  (e)
                  

              	
                6.11

              
	
                316(a)(last
                  sentence) 

              	
                2.10

              
	
                  (a)(1)(A)
                  

              	
                6.5

              
	
                  (a)(1)(B)
                  

              	
                6.4

              
	
                  (a)(2)
                  

              	
                NA

              
	
                  (b)
                  

              	
                6.7

              
	
                  (c)
                  

              	
                NA

              
	
                317(a)(1)
                  

              	
                6.8

              
	
                  (a)(2)
                  

              	
                6.9

              
	
                  (b)
                  

              	
                2.4

              
	
                318(a)
                  

              	
                11.1

              


      

    

     

    NA
      means
      not applicable

    *
      This
      Cross Reference Table is not part of the Indenture

    


    


    
      
        
        

      

      
        -
          ii
          -

        
          

        

      

      
        
        

      

    

    


     

    THIS
      SECOND SUPPLEMENTAL INDENTURE dated as of August 11, 2006 (the “Second
      Supplemental Indenture”) between KH Funding Company, a Maryland corporation, as
      issuer (the “Company”), and Wells Fargo Bank, National Association, a national
      banking association, as trustee (the “Trustee”), supplements and amends the
      Indenture dated as of August 2, 2004 (the “Indenture”), as supplemented and
      amended by a First Supplemental Indenture dated as of July 1, 2005 (the “First
      Supplemental Indenture”) (the Indenture, as supplemented and amended by the
      First Supplemental Indenture, is hereafter referred to as the ( “Original
      Indenture”).

    


    WITNESSETH
      THAT:

    


    WHEREAS,
      the Company and the Trustee have heretofore executed and delivered the Original
      Indenture to provide for the issuance of the Company’s debt securities to be
      issued in one or more series;

    


    WHEREAS,
      Section 2.1 of the Original Indenture provides, among other things, that the
      Company may issue, from time to time in accordance with the provisions of the
      Original Indenture, Additional Securities;

    


    WHEREAS,
      the Company desires to provide for the issuance of Additional Securities and
      to
      set forth the terms that will be applicable thereto;

    


    WHEREAS,
      all action on the part of the Company necessary to authorize the issuance of
      the
      Additional Securities under the Original Indenture and this Second Supplemental
      Indenture has been duly taken; and

    


    WHEREAS,
      all acts and things necessary to make the Additional Securities, when executed
      by the Company and authenticated and delivered by the Trustee as provided in
      the
      Original Indenture, the legal, valid and binding obligations of the Company,
      and
      to constitute these presents a valid and binding supplemental indenture
      according to its terms and binding on the Company, have been done and performed,
      and the Company in the exercise of the legal right and power vested in it,
      executes this Second Supplemental Indenture and proposes to create, execute,
      issue and deliver the Additional Securities. 

    


    NOW,
      THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH: 

    


    That,
      in
      order to establish the terms and provisions of, and to authorize the
      authentication and delivery of, the Additional Securities, the Company and
      the
      Trustee agree to supplement the Original Indenture as follows for the benefit
      of
      each other and for the equal and ratable benefit of the Holders of the
      Additional Securities issued pursuant to the Company's registration statement
      on
      Form SB-2 declared effective by the Securities and Exchange Commission on or
      about August 11, 2006:

    


    


    ARTICLE
      I.

    DEFINITIONS
      AND INCORPORATION

    BY
      REFERENCE

    


    Article
      I
      is supplemented by deleting Sections 1.5 and 1.6 and substituting the following
      in their stead:

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
 

    
      Section
        1.5. Recitals; Duties of Trustee. 

      


      The
        recitals contained in this Second Supplemental Indenture are made by the
        Company
        and not by the Trustee; and all of the provisions contained in the Original
        Indenture in respect of the rights, privileges, immunities, powers and duties
        of
        the Trustee shall be applicable in respect hereof as fully and with like
        effect
        as if set forth herein in full.

      


      Section
        1.6. Relationship to Original Indenture and Additional Supplemental
        Indentures.

      


      (a)    The
        Original Indenture and this Second Supplemental Indenture shall be read,
        taken,
        and construed as one and the same instrument. However, in the event of a
        conflict or a difference between the provisions of the Original Indenture
        and
        this Second Supplemental Indenture, the provisions of this Second Supplemental
        Indenture shall control. The provisions hereof shall remain in effect and
        shall
        be deemed a part of the Original Indenture for so long as the Investment
        Debt
        Securities remain outstanding. Except as amended and supplemented hereby,
        the
        provisions of the Original Indenture shall remain in full force and
        effect.

      


      (b)    Additional
        indentures supplemental may be executed and delivered in accordance with
        the
        provisions of the Original Indenture. Nothing herein contained shall be deemed
        to relieve the Company from its obligations under any such indentures
        supplemental for so long as each remains in effect and, except as expressly
        provided in the Original Indenture, no provision of any such indentures
        supplemental shall be deemed to relieve the Company from its respective
        obligations under this Second Supplemental Indenture for so long as it remains
        in effect.

    

     

    


    ARTICLE
      II.

    THE
      SECURITIES

     

    Article
      II is supplemented to amend and restate Section 2.1(A) as follows:

    


    Section
      2.1(A). Amount; Accounts; Interest; Maturity - Additional
      Securities.

    


    The
      aggregate principal amount of Additional Securities that may be authenticated
      and delivered under this Indenture is $150,000,000 (the “Additional
      Securities”). The
      Additional Securities may be subject to notations, legends or endorsements
      required by law, applicable rules and regulations and agreements to which the
      Company is subject or usage. 

     

    The
      Company shall issue the Additional Securities as provided in Section 2.12 of
      the
      Original Indenture. The record of beneficial ownership of the Additional
      Securities shall be maintained and updated by the Company through the
      establishment and maintenance of Accounts. Each Additional Security shall be
      in
      such denominations as may be designated from time to time by the Company but
      in
      no event in an original denomination less than $5,000. This minimum amount
      may
      be increased or decreased from time to time by the Company and the Company,
      in
      its sole discretion, may accept a lesser amount from any Holder. The Investment
      Debt Securities shall be Fixed Term Notes and Demand Notes. The Fixed Term
      Notes
      shall have maturity dates of one year, three years and five years. The Demand
      Notes shall have demand periods of one day or thirty days. 

     

    Each
      Additional Security shall bear interest from and commencing on its Interest
      Accrual Date at such rate of interest as the Company shall determine from time
      to time; provided, however, that (i) the Series 3 Senior Secured Security One
      Year Fixed Term Notes, Three Year Fixed Term Notes and Five Year Fixed Term
      Notes shall pay interest at an annual interest rate fixed at the time of
      issuance with the initial interest rates being 7.25%, 7.60% and 7.85%
      respectively, (ii) the Series 3 Senior Secured Security One Day Demand Notes
      and
      the Thirty Day Demand Notes shall pay interest at a variable annual interest
      rate with the initial rates being 6.00% and 6.25% respectively, and (iii) the
      Series 4 Subordinated Unsecured Security One Year Fixed Term Notes, Three Year
      Fixed Term Notes and Five Year Fixed Term Notes shall pay interest at an annual
      interest rate fixed at the time of issuance with the initial interest rates
      being 8.00%, 8.25% and 8.75% respectively. The Company may change the interest
      rates from time to time by filing a supplement to the Company's prospectus.
      

     

     

    
      
        
        

      

      
        -
          2 -

        
          

        

      

      
        
        

      

    

     

     

    Interest
      on an Investment Debt Security will compound daily and will have interest paid,
      at the election of the Holder, either (i) monthly, quarterly, semi-annually
      or
      annually, or (ii) accrued and credited as principal to the Holder's Account.
      To
      the extent any applicable interest payment date is not a Business Day, then
      interest shall be paid instead on the next succeeding Business Day. All interest
      payments on the Investment Debt Securities shall be approved prior to payment
      by
      the Company's Treasurer. 

    


    The
      Company will give each Holder of a Fixed Term Note (existing as of the
      applicable Maturity Record Date) a written notice at least seven days prior
      to
      the Maturity Date of the Fixed Term Note held by such Holder reminding such
      Holder of the pending maturity of the Fixed Term Note and noticing the Holder
      of
      the Company's intention to repay, or if the Company does not intend to repay
      the
      Fixed Term Note, reminding the Holder that they must choose to either (i) redeem
      the Fixed Term Note, (ii) extend the Fixed Term Note, or (iii) transition the
      Fixed Term Note into a new Account. If the Company gives notice to a Holder
      of
      the Company's intention to repay a Fixed Term Note at maturity, no interest
      will
      accrue after the Maturity Date for such Fixed Term Note if payment is timely
      made. Otherwise, if a Holder requests repayment within seven days after the
      Maturity Date, the Company will pay interest on the Fixed Term Note during
      the
      period after the Fixed Term Note's Maturity Date and prior to redemption at
      the
      rate being paid on such Fixed Term Note immediately prior to its
      maturity.

    


    The
      terms
      and provisions contained in the Investment Debt Securities shall constitute,
      and
      are hereby expressly made a part of, this Second Supplemental Indenture and,
      to
      the extent applicable, the Company and the Trustee, by their execution and
      delivery of this Second Supplemental Indenture, and the Holders by accepting
      the
      Investment Debt Securities, expressly agree to such terms and provisions and
      to
      be bound thereby. In case of a conflict, the provisions of this Second
      Supplemental Indenture shall control. 

    


    ARTICLE
      XI

    MISCELLANEOUS

    


    Article
      XI is supplemented to add new Section 11.17 as follows:

    


    Section
      11.17. Incorporation of Second Supplemental Indenture into Indenture.


    


    This
      Second Supplemental Indenture is executed by the Company and the Trustee
      pursuant to the provisions of Section 2.1 of the Original Indenture, and the
      terms and conditions hereof shall be deemed to be a part thereof for all
      purposes upon the effectiveness of this Second Supplemental Indenture. The
      Original Indenture, as amended and supplemented by the First Supplemental
      Indenture and the Second Supplemental Indenture, is in all respects hereby
      adopted, ratified and confirmed.

    


    [Remainder
      of Page Intentionally Left Blank]

    
 

    
      
        
        

      

      
        -
          3 -

        
          

        

      

      
        
        

      

    

     

    


    SIGNATURES

    


    


    IN
      WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
      Indenture to be duly executed as of the day and year first written
      above.

    
 

    
      	 	 	 	 
	 ATTEST:	 	 	 KH
              FUNDING
              COMPANY
	 	 	 	 
	/s/ James
              E.
              Parker	 	 	/s/ Robert
              L.
              Harris
	
              

            	 	 	
              
Robert
              L. Harris
President
	 	 	 	 


    

     

    

      
        	 	 	 	 
	 ATTEST	 	 	WELLS
                FARGO BANK,
                NATIONAL ASSOCIATION
	 	 	 	as Trustee
	 	 	 	 
	/s/ Nedine
                A.
                Pelesi	 	 	Robert
                L.
                Reynolds
	
                

              	 	 	
                
Robert
                L. Reynolds
Vice President
	 	 	 	 


      

       

      


        [SIGNATURE
          PAGE TO SECOND SUPPLEMENTAL INDENTURE]