FDIC Shuts Down Subprime Lending at Fremont; Rumors of Potential Sale Spread

The Federal Deposit Insurance Corporation said late Wednesday that it had issued a widely-expected cease and desist order against Fremont Investment & Loan and its parent corporations, Fremont General Corporation (NYSE:FMT) and Fremont General Credit Corporation. The bank and its parents, without admitting or denying the allegations, consented to the order.

Fremont first disclosed the pending C&D order in a regulatory filing last Friday, and said it would seek to exit residential subprime lending as a result. Rumors have been swirling throughout the week about a potential sale of the troubled subprime unit, with Bloomberg reporting yesterday that the company has been in discussion with as many as six potential suitors.

For its part, Fremont issued a cautionary press statement after markets had closed Wednesday saying “there can be no assurance the company will be able to enter into any transaction involving its residential loan origination platform.”

In taking its action to issue the full C&D order, the FDIC said it found that the bank was operating without effective risk management policies and procedures in place relative to both its subprime mortgage and commercial real estate lending operations. The FDIC determined, among other things, that the bank had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default or other loss to the bank.

“Our concern has always been that banks make loans that borrowers are able to repay,” said FDIC Chairman Sheila C. Bair. “We believe that the agreement with Fremont addresses this basic concern.”

Order applies to residential and commercial lending
The order requires Fremont to correct its lending policies and adopt a five-year strategic plan for its business. The FDIC has mandated that the lending policies outlined much be designed to correct its lending practices, including that it underwrite future subprime loans with an analysis of the borrower’s ability to repay at the fully indexed rate and provide borrowers with clear information about the benefits and risks of the products.

The order also requires the bank within 90 days to describe efforts it will make to restructure loans in distress consistent with the marketability of such loans and with sound principles of underwriting.

Fremont must also correct a number of its commercial real estate lending practices as well, according to the order. Fremont has said it intends to continue to operate in the commerical lending space going forward.

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