U.S. Regulators Examining Subprime Lender Practices

Investors in Orange County’s subprime lenders better brace for another scandal in the beleaguered industry.

Federal banking regulators are raising concerns about what they call widespread abuses by lenders that specialize in making loans to borrowers with bad credit, also known as subprime lending.

According to the U.S. comptroller of the currency, some subprime lenders have intentionally failed to report their borrowers’ good payment histories to the nation’s top credit bureaus, thus preventing consumers from rebuilding their damaged credit.

It seems that some subprime lenders fear that rival lenders might steal their steady-paying customers or that once borrowers repair their credit, they will take their business elsewhere.

Of course, that’s the point of a subprime loan. Consumers with poor credit must pay higher fees and interest rates, but as long as they make payments on time, eventually the old credit problems fade away. But if lenders don’t report the good stuff, a consumer’s credit report won’t improve.

In Orange County, home to several subprime lenders that specialize in mortgages and car loans, the brewing investigation will undoubtedly take its toll.

When asked if they faithfully report their borrowers’ good payment histories, two Irvine firms--First Alliance Corp. and New Century Financial Corp.--issued curt no-comments.

Even if local companies do not engage in the practice, their stocks probably will take a beating if the investigation begins to hurt the entire industry.

It’s the latest in a series of negative publicity that has kept the subprime stocks down for nearly two years. In 1997, the subprime industry was rocked by accusations that it was using questionable accounting gimmicks to boost profits. Then in 1998, fears about a global recession caused many subprime lenders to lose their funding, forcing several out of business.