Downey Financial Group Inc.'s savings and loan unit will close its wholesale loan department and shrink its retail operation, affecting about 200 employees, as it said fewer borrowers are able to qualify for loans amid the ongoing credit crisis.

The move comes about a month after federal banking regulators clamped down on Downey. The Office of Thrift Supervision issued a cease-and-desist order that required the bank to raise capital, name a permanent chief executive and take other actions including the sale of bank real estate.

As part of Thursday's action, Downey said it will continue to originate loans through a contracted retail lending department to better reflect changes in the industry but shut down its wholesale operations. Such businesses lend money to third parties to make loans, and numerous banking have been pulling out of that business as the housing bubble deflate.

The lender also attributed the lending retrenchment to its capital requirements.

Last month, Downey named Charles Rinehart as its new CEO as part of a management shake-up that began in July when Downey also appointed Michael Bozarth as chairman.

Of all the large lenders that wrote option-ARMs, in particular so-called Pick-A-Pay mortgages, Downey is one of only two - along with BankUnited Financial Corp. - that remain independent. Wachovia Corp., Countrywide Financial, Washington Mutual Inc. and IndyMac Bancorp were among the top five issuers of the failing loans. All of them have been forced to sell themselves at fire-sale prices to healthier banks - or, in the case of IndyMac, to be liquidated after being seized by regulators.

Option-ARMs have quickly become synonymous with the fast-and-loose loan writing that fueled this decade's nationwide boom in housing prices. In an effort to entice prospective borrowers with ever-looser loan terms, option-ARMs allowed most borrowers to avoid paying portions of the loans' monthly interest and instead added that deferred interest to the mortgage's balance.

Downey has said it held $6.2 billion in option-ARM mortgages as of June 30, while BankUnited held $7.1 billion of the loans at the end of the bank's third quarter.

Downey shares were flat recently at $2.06.

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