Federal bank regulators on Wednesday ordered Fremont Investment & Loan, a major lender in the troubled subprime home-mortgage business, to tighten its loan policies and operations to avoid future losses from defaults by borrowers.
It was the first move by federal regulators against an individual institution related to the recent turmoil in the market for subprime mortgages — higher-interest loans for people with blemished credit records or low incomes who are considered higher risk.
The Federal Deposit Insurance Corp. announced the cease-and-desist order with Fremont Investment, a bank based in Brea, Calif., and its parents, Fremont General Corp. and Fremont General Credit Corp. The companies agreed to the order without admitting or denying the FDIC’s allegation that Fremont Investment was operating “without effective risk-management policies and procedures” in its subprime mortgage and commercial real-estate lending operations.
The FDIC said it found, among other things, that the bank was making subprime mortgage loans without having the proper criteria for assessing borrowers’ ability to repay, and that it was marketing and making the loans “in a way that substantially increased the likelihood of borrower default or other loss to the bank.”
Fremont General said recently that it is getting out of subprime mortgage lending and has been in talks with potential buyers of its home mortgage business.
The FDIC and other federal bank regulators, in general, have been worried recently about a surge in defaults on subprime home mortgages, in an increasingly troubled market for them. The regulators called on lenders last week to exercise caution in making subprime loans and to strictly evaluate borrowers’ ability to repay them.
“Our concern has always been that banks make loans that borrowers are able to repay,” FDIC Chairman Sheila Bair said in a statement. “We believe that the agreement with Fremont addresses this basic concern.”
Home-mortgage delinquencies and foreclosures are spiking, especially for people who took out subprime mortgages during the sizzling housing boom that waned in the second half of 2005.
Fremont General and several other financial companies that specialize in subprime mortgages have seen their shares plummet in recent weeks, roiling the industry sector. The weakness in the subprime market was seen as a factor in last week’s tumultuous decline on Wall Street.
On Wednesday, Fremont General’s battered stock rebounded 26 percent, to $8.53, on the New York Stock Exchange as the company told employees that its subprime mortgage business had drawn interest from five or six potential buyers.
The company, based in Santa Monica, Calif., has said it expects to report a loss from operations in the fourth quarter of last year. Fremont General has postponed the release of its fourth-quarter financial results, which were due last week.