Fremont General Corp.’s attempts to exit subprime mortgage lending by selling its subsidiary, Fremont Investment & Loan, are being complicated by a cease-and-desist order filed by federal bank regulators.
Fremont General announced March 2 it would sell its Brea, Calif.-based subprime subsidiary or, failing that, exit the subprime mortgage business.
On March 7, the Federal Deposit Insurance Corp. issued a cease and desist order to Fremont Investment & Loan, alleging the bank lacked adequate underwriting criteria, and “was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default or other loss to the bank.”
The FDIC order gave the bank 90 days to adopt a subprime mortgage lending policy that includes qualifying future subprime loans on the basis of a borrower’s ability to repay at the fully indexed rate, and providing borrowers with clear information about the benefits and risks of the products.
The FDIC also gave Fremont Investment & Loan 90 days to describe the efforts it will make to work with borrowers to restructure loans in distress and fully comply with all consumer protection laws
In a Securities and Exchange Commission filing today, Fremont General said it would continue originating commercial real estate loans and maintain its retail deposit franchise and its residential real estate loan servicing operation.
But the company said it was unable to estimate the costs it will incur to exit the subprime lending business, and warned investors that it may not be able to sell Franklin Investment & Loan.
“No agreement has yet been reached regarding the sale of this business and there is no assurance that the Company will be able to enter into any transaction involving its subprime residential real estate loan origination operations,” the SEC filing said.
Fremont Investment & Loan had previously cut ties to 8,000 mortgage brokers after early payment defaults rose to 6 percent, and had the highest rate of defaults on subprime loans in 2006, according to UBS.