Stop-Loss Settlement Policy

The Authority has had numerous calls and letters from borrowers inquiring about our prepayment policy, and if the Authority would consider refinancing or allowing a paying down of debt without penalty, or with a reduced penalty. The Authority and the Board of Directors review each request and although understanding the borrower's concerns, have maintained current policy.

The Authority would like to reiterate our prepayment policy and provide some insight into why we cannot consider changing it at this time.

In December 2003, the Authority revised its prepayment policy regarding new loans made after January 1, 2004. All new loans made after January 1, 2004, including local improvement loans, are subject to the full cost stop-loss settlement policy. While loans made prior to January 1, 2004 are subject to the original stop-loss settlement policy.

For loans issued prior to January 1, 2004, a borrower may repay a loan in part or in full, or may obtain a reduction of the original loan term, or both, at any time prior to the maturity date of the loan if the borrower pays the lesser of the present value of the interest loss over the remaining term to maturity of the loan (the "stop-loss" settlement), or a penalty determined as follows:

2 months of interest on the amount of the loan prepaid or reduced in term if the unexpired term or the reduction of the term of the original loan is less than 5 years;

3 months of interest on the amount of the loan prepaid or reduced in term if the unexpired term or the reduction of the term of the original loan is 5 years but less than 10 years; and

4 months of interest on the amount of the loan prepaid or reduced in term if the unexpired term of the original loan prepaid or the reduction of the term is 10 years or more.

Each shareholder can make cumulative prepayments, and/or reductions in term, commencing January 1, 1987 under the penalty, of not more than 7½% of its debt owing to the Authority as at December 31 of the prior year-end. Prepayments plus reductions in term in excess of this limit and prepayments made with funds borrowed from any source, shall be subject to the full "stop-loss" settlement.

Loans which are special assessment local improvement debentures are not subject to any penalty if prepayment of funds are received from the local ratepayers.

Loans made after January 1, 2004 are subject to full cost settlement policy.

The prepayment policy is structured to protect the Authority from the significant losses that would occur in accepting prepayments of high interest rate loans and relending these funds at lower rates. The Authority does not have the ability to prepay or refinance its debt. In order to minimize our borrowing costs and satisfy our borrowers desire for long term borrowing and payment stability, funds were borrowed in the fixed rate market which typically does not provide an option to repay in advance. To include such additional features as prepayment or refinancing options would impose higher costs. In fact, the Authority borrowed for shorter terms than local authorities when rates were high and this provided substantial benefits to our shareholders; to do more would not have been prudent. The costs of options to repay or refinance, and the importance of the stability of annual payments has dictated the manner in which the Authority borrowed.

The prepayment policy is an integral part of our long-term financial planning and has been subject to review and revision since the Authority made its first interest reduction in 1987 to its last $75 million interest rebate. The Authority has since November 1983 considered and made many changes to the prepayment policy. In December 1993, the policy was changed to reduce the cumulative prepayment allowed under the penalty provision from 20% to 7½% of loans outstanding at the prior year-end.

The Authority operates on a break-even policy with the retention of a minimum level of equity. Changes to allow more prepayments with reduced penalties would place equity in a negative position which would have to be recovered from future loans.

In addition, the Board considered that paying out an interest rebate rather than increasing the cumulative limit beyond the 7½% was the fairest way to pass the benefits on to all shareholders, not only to those who could afford the prepayments.

The Authority's mission is to provide our shareholders with borrowing flexibility and with funding at the lowest possible cost, consistent with our continued viability, and all of ACFA lending and financing policies were established to fulfill this mission.

We hope this information provides you with a better understanding of the Authority's position. However, should you wish to make further inquiries, please do not hesitate to contact us.