The Federal Reserve will consider whether new regulations could curtail lending practices that have contributed to a rise in mortgage delinquencies, Fed Chairman Ben Bernanke said in a letter released on Friday.
"With respect to the recent problems in the subprime mortgage market, the Board plans to consider how it might further use its rulemaking authority ... to address particular lending practices," Bernanke said in a May 18 letter to Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.
At the same time, the Fed will tread carefully to avoid choking off legitimate credit, Bernanke said.
"We are mindful, however, that loan terms that may be harmful to some borrowers may provide benefits in other transactions," he wrote. "Accordingly, any rules should be tailored to avoid the unintended and undesirable consequences of limited credit availability in legitimate transactions," he said.
The Fed is due to hold a hearing on rules governing lending on June 14.
A slowdown in house price gains and rising interest rates have led to a jump in delinquencies and foreclosures in the United States, particularly among borrowers with weak credit who took out loans with adjustable rates.
The rise in delinquencies and the failure of numbers of lenders in the subprime mortgage sector, as the market for loans to borrowers considered greater credit risks is called, exposed loose lending practices.
Dodd, a presidential candidate, has criticized the Fed's oversight of subprime mortgage lenders. The Fed is required to write rules to protect borrowers from unfair or deceptive practices, he has said.
The Connecticut lawmaker on Friday urged the Fed to issue rules that would require lenders to fully evaluate a borrower's ability to repay and to restrict lending with little or no documentation of the borrower's income or ability to make payments.
"These protections, while not comprehensive, will stem some of the most abusive practices we see in the marketplace today," he said in a statement.