WASHINGTON The chairman of the U.S. Senate Banking Committee took issue on Thursday with Federal Reserve Chairman Ben Bernanke's defense of the Fed's oversight of the subprime mortgage sector, arguing the central bank failed to fulfill its regulatory duty.
The criticism from Democratic Sen. Christopher Dodd of Connecticut came after Bernanke outlined the steps the Fed had taken to try to protect borrowers and promised to review ways to improve consumer protections.
In a statement, Dodd said federal law "requires the Federal Reserve to write rules to protect home borrowers from unfair or deceptive practices," taking issue with Bernanke's characterization that the Fed was "authorized" to write such rules.
"For far too many years, far too many risky and abusive subprime loans were made without a reasonable analysis of the borrower's ability to repay the loan," Dodd, a Democratic presidential candidate, said.
Dodd was referring to the Home Ownership and Equity Protection Act, a law that seeks to protect mortgage borrowers from fraud and other abuses.
Bernanke made his remarks in a speech addressing the subprime mortgage crisis, which has been marked by increasing defaults among borrowers with damaged credit.
The Fed chief said the central bank may prohibit some specific lending practices in the wake of the mortgage crisis and it is mulling steps to curb questionable lending, but regulators must "walk a fine line" and not unduly limit credit to worthy borrowers.
On June 14, the Fed will host a fact-finding hearing on how it might expand its oversight of the mortgage market.
Bernanke has not yet responded to an April letter from Dodd and other Democrats on the banking panel asking the Fed to expand its enforcement of homeownership act.
A spokeswoman for the Fed said she would not comment on correspondence between the regulator and lawmakers.
The April 23 letter notes that an increasing share of mortgage financing in recent years has come from Wall Street and other investors who do not answer to federal banking regulators. Enforcing the homeownership act is one way the Fed could directly and immediately halt the worst of subprime loans, the letter states.
In a separate statement on Thursday, Sen. Robert Menendez, a New Jersey Democrat said he supports "congressional action that would eliminate predatory lending and otherwise help strengthen the mortgage lending system so that we can prevent mass foreclosures in the long term."
While he supported Bernanke's promise to examine lending practices, Menendez said that "force of law will most effectively and efficiently help solve the underlying problems."