2004 Committee Charter : DSL

I. Audit Committee Purpose

The Audit Committee shall be appointed by the Board of Directors, to assist the Board in fulfilling its oversight responsibilities. The Audit Committee's primary duties and responsibilities are to:

Monitor the integrity of the financial reporting process, financial statements and systems of internal controls regarding finance, accounting, and legal compliance as to Downey Financial Corp. and its subsidiaries (individually "DFC" and with DFC's subsidiaries, collectively called "Downey");
Monitor the independence, qualifications and performance of Downey's independent auditors, the performance of the internal auditing department, and the internal asset review function;
Facilitate communication among the independent auditors, management, the internal auditing department, the internal asset review department, and the Board;
Assist the Board in monitoring Downey's compliance with legal and regulatory requirements; and
Prepare any report required by the rules of the United States Securities and Exchange Commission ("SEC") to be included in DFC's annual proxy statement.
The Audit Committee may conduct any investigation it deems appropriate to fulfill its responsibilities, and shall have direct access to the independent auditors as well as anyone within Downey. The Audit Committee shall have the sole authority to appoint or replace the independent auditors, subject to any required shareholder ratification. The Audit Committee may retain, at Downey's expense, independent legal, accounting, or other consultants or experts it deems necessary in the performance of its duties. Downey shall provide for appropriate funding, as determined by the Audit Committee, to compensate the independent auditors and any advisors the Audit Committee employs.

II. Audit Committee Composition and Meetings

Audit Committee members shall satisfy the requirements for independence and expertise established by the New York Stock Exchange, Inc., in Rule 10A-3 of the Securities Exchange Act of 1934 ("Exchange Act") and other rules and regulations of the SEC. The Audit Committee shall be comprised of at least three directors, each of whom shall be independent non-executive directors, free from any relationship that would interfere with the exercise of his or her independent judgment. Each member of the Audit Committee shall be financially literate, as such qualification is interpreted by DFC's Board in its business judgment. At least one member of the Audit Committee shall have accounting or related financial management expertise.

The Audit Committee shall meet at least four times annually, or more frequently as circumstances dictate. The Audit Committee Chair shall prepare and/or approve an agenda in advance of each meeting. The Audit Committee shall meet periodically (at least annually) in separate executive sessions with management, the Director of Internal Audit, the Director of Internal Asset Review, the independent auditors, and as a committee to discuss any matters that the Committee or each of those groups believe should be discussed. In addition, the Audit Committee shall communicate with management and the independent auditors quarterly to review Downey's financial statements and significant findings based upon the independent auditors' review.

III. Audit Committee Responsibilities and Duties

The Audit Committee shall:

1. Review and reassess the adequacy of this Charter at least annually. Submit the Charter to the Board for approval and have the document published at least every three years in accordance with SEC regulations.
2. Review and discuss with management and the independent auditors Downey's quarterly and annual audited financial statements, including disclosures made in management's discussion and analysis prior to filing or distribution and recommend to the Board whether the audited financial statements should be included in DFC's form 10-K. This review should include discussion with management and independent auditors of significant issues regarding accounting principles, practices, and judgments.
3. Consider the integrity of Downey's financial reporting processes and controls, in consultation with the management, the independent auditors, and the internal auditors. Discuss significant financial risk exposures and the steps management has taken to monitor, control, and report such exposures. Review significant findings prepared by the independent auditors and the Internal Audit Department together with management's responses.
4. Discuss with management and the independent auditors significant financial reporting issues and judgments made in connection with the preparation of Downey's financial statements, including any significant changes in Downey's selection or application of accounting principles, any major issues as to the adequacy of Downey's internal controls and any special steps adopted in light of any material control deficiencies identified.
5. Discuss with management and the independent auditors the effect(s) of regulatory and accounting initiatives as well as off-balance sheet structures on Downey's financial statements.
6. Review with financial management and the independent auditors Downey's quarterly financial results and earnings guidance, if any, prior to the release of earnings and/or DFC's quarterly financial statements, (including the results of the independent auditors' reviews of the financial statements,) prior to distribution and filing of the Form 10-Q.
7. Review and discuss quarterly reports from the independent auditors on: all critical accounting policies and practices to be used; all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramifications of the use of such alternative disclosures and treatments and the treatment preferred by the independent auditors; and other material written communications between the independent auditors and management, such as any management letter or schedule of unadjusted differences.
8. Discuss any significant changes to Downey's accounting principles and any items required to be communicated by the independent auditors in accordance with SAS 61.
9. Review the independence and performance of the independent auditors and annually recommend to the Board the appointment of the independent auditors or approve any discharge of independent auditors when circumstances warrant.
10. Assume direct responsibility for the compensation and oversee the work of the independent auditors (including resolution of disagreements between management and the independent auditors regarding financial reporting) for purposes of preparing or issuing an audit report or related work. The independent auditors shall report directly to the Audit Committee. Preapprove all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for Downey by its independent auditors, subject to the de

minimus exceptions for non-audit services described in Section 10A(I)(1)(B) of the Exchange Act which are approved by the Audit Committee prior to completion of the audit.
11. Annually obtain a written statement from the independent auditors delineating all relationships between the independent auditors and Downey. Engage in an ongoing dialogue with the independent auditors with respect to any disclosed relationships or services that may impact the objectivity and independence of the independent auditors, and recommend that the Board take appropriate action in response to the independent auditors' report to satisfy itself of the independent auditors' independence.
12. Set clear policies for the hiring of employees or former employees of the independent auditors who participated in any capacity in any audit of Downey.
13. Review the independent auditors' audit plan; discuss scope, staffing, locations, reliance upon management, and internal audit and general audit approach and meet with the independent auditors prior to the audit.
14. Prior to releasing the year-end earnings and financial statements, discuss the results of the audit with the independent auditors. Discuss certain matters required to be communicated to audit committees in accordance with AICPA SAS 61.1 Consider the independent auditors' judgments about the quality and appropriateness of DFC's accounting principles as applied in its financial reporting. Obtain assurance that Section 10A(b) of the Exchange Act has not been implicated.
15. Evaluate the lead partner of the independent auditor team. Ensure the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law. Obtain and review a report from the independent auditors at least annually describing (a) the independent auditors' internal quality control procedures, (b) any material issues raised by the most recent internal quality control review or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five (5) years respecting one or more independent audits carried out by the firm, (c) any steps taken to deal with any such issues, and (d) all relationships between the independent auditors and Downey. Evaluate the qualifications, performance and independence of the independent auditors, including considering whether the independent auditors' quality controls are adequate and the provisions of permitted non-audit services to Downey is compatible with maintaining the independent auditors' independence, and taking into account the opinions of management and the internal auditors. The Audit Committee shall present its conclusions with respect to the independent auditors to the Board.

1 Statement of Auditing Standards (SAS) No. 61 requires auditors to discuss certain matters with audit committees. The communication may be in writing or oral and may take place before or after the financial statements are issued. Items to be communicated include:
The auditors' responsibility under Generally Accepted Auditing Standards (GAAS);
Significant accounting policies;
Management's judgments and accounting estimates;
Significant audit adjustments;
Other information in documents containing audited financial statements;
Disagreements with management including accounting principles, scope of audit, disclosures;
Consultation with other accountants by management;
Major issues discussed with management prior to retention; and
Difficulties encountered in performing the audit.

16. Review and discuss with the independent auditors and management policies with respect to risk assessment and risk management, the Internal Audit Department responsibilities, audit plan, organizational structure, qualifications, activities, budget and staffing and any recommended changes in the planned scope of internal audits.
17. Review the appointment, if applicable, performance, and if necessary, replacement of the Director of Internal Audit, and the Director of Internal Asset Review, both of whom shall report directly to the Audit Committee. For administrative purposes only, the Director of Internal Audit and the Director of Internal Asset Review shall report to the Director of Compliance and Risk Management and the Chief Executive Officer.
18. Review significant reports prepared by the Internal Audit and Internal Asset Review Departments together with management's response and follow-up to these reports.
19. Obtain reports from management, Downey's senior auditing executive and the independent auditors, concerning Downey's conformity with applicable legal requirements.
20. Discuss with management and the independent auditors any correspondence with regulators or other governmental agencies and any published reports which raise material issues regarding Downey's financial statements or accounting policies.
21. At least annually, review with Downey's legal counsel any legal matters that could have a significant impact on Downey's financial statements, Downey's compliance with applicable laws and regulations, and inquiries received from regulators or governmental agencies.
22. Annually prepare a report to shareholders as required by the SEC. The report should be included in DFC's annual proxy statement and state whether the Audit Committee has:
Reviewed and discussed the audited financial statements with management;
Discussed with the independent auditors the matters required to be discussed by SAS 61;
Received certain disclosures from the independent auditors regarding their independence; and
Recommended that the Board include the audited financial statements in the annual report filed with the SEC.
23. Establish procedures for Downey's general counsel to receive, retain and address complaints Downey receives regarding accounting, internal accounting controls, or auditing matters, and any confidential, anonymous submissions by Downey employees regarding questionable accounting or auditing matters.
24. Maintain minutes of meetings and periodically report to the Board.
25. Evaluate the Audit Committee's performance annually.
26. Review with the independent auditors any audit problems or difficulties and management's response.
27. Perform any other activities consistent with this Charter, DFC's by-laws, and governing law, as the Audit Committee or the Board deems necessary or appropriate.
While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that DFC's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditors.