Troubled subprime lender Fremont General (NYSE:FMT) said late Friday it will exit subprime residential lending, citing mounting pressure from loan repurchases and likely regulatory action. The company had first hinted at problems on February 28, when it said it would delay its fourth quarter and full year earnings. The company said its decision to exit was prompted primarily by the receipt of a Proposed Cease and Desist Order from the FDIC on February 27. Fremont said it has entered into discussions to see if it will be possible to sell its subprime business, although no information regarding a potential buyer was provided. Fremont officials did not return calls seeking comment, and calls to the FDIC had not been returned by the time HW published its story. Numerous industry sources expressed shock at the move, and said that a sale of the company’s subprime operations would not be easy, given current market conditions. “I really don’t know what to say,” said one source, on the condition of anonymity. “Does this mean the FDIC is going to go after any institution making subprime loans with the same stance that it took on Fremont?” According to Fremont’s filing with the SEC today, the FDIC order calls for the lender to make sweeping changes to both its subprime residential and commercial mortgage businesses, including an allegation that the company violated Section 23B of the Federal Reserve Act by engaging in transactions with its affiliates on terms and under circumstances that in good faith would not be offered to, or would not apply to, nonaffiliated companies. Fremont did not disclose in its SEC filing which transactions were involved in the FDIC allegations. Other allegations in the proposed FDIC order claim that Fremont’s mortgage lending businesses engaged in “unsatisfactory” lending practices, operated with inadequate underwriting criteria as well as inadequate capital, and that the company did not have effective risk management policies for managing and reigning in the company’s subprime and commercial mortgage brokers. The order also would charge Fremont with marketing adjustable-rate loans in an “unsafe and unsound” manner, and that the lender had operated in violation of recent inter-agency guidance on subprime lending programs. Fremont said in a press statement that it felt had already begun taking significant steps in the past year to adapt its subprime residential real estate lending business to changing conditions in the mortgage market, suggesting that it believed the FDIC order to be without merit. The company had recently eliminated funding of subprime seconds, according to earlier media reports. The proposed order would not seek any changes in the company’s retail deposit gathering business, Fremont said, and it will continue to seek FDIC-insurable deposits as a result. Fremont said that, in spite of the pending FDIC order, it will also continue to originate commercial real estate loans. The company’s commercial real estate loan portfolio stood at $6.5 billion at the end of 2006. It is likely, however, that Fremont’s commercial lending operations will undergo a number of signficant changes as a result of the proposed FDIC order. The proposed order will require the company to engage in a planned material reduction in the volume of funded and unfunded nonrecourse lending and loans for condominium conversion and construction, among other restrictions on its business. Fremont president Louis Rampano sought to calm investor’s nerves by pointing to the company’s substantial deposits. “Thanks in part to its very substantial equity and 8 billion retail deposit franchise, Fremont Investment & Loan has significant balance sheet strength and funding capacity that we believe will enable us to exit the subprime lending business in an orderly and disciplined way. We also remain a premier commercial real estate lender,” said Rampino. “In addition, we remain in the retail deposit business and continue to provide excellent service to our depositors in our over 70-year-old retail deposit business. Our valued deposit customers should be reassured by both our strong capital level and the fact that deposits at FIL of up to $100,000 are insured by the FDIC.” Full disclosure: Housing Wire will always disclose the financial position of any authors or contributing writers to a story involving a publicly-held company. The author of this story does not and has never owned securities in or associated with Fremont General.