US panel calls for stricter lending regulations

US policymakers have recommended stricter regulation of mortgage lenders as part of a broad effort to prevent a repeat of a credit crisis threatening to drive the country into recession.

With problems in the credit and housing markets worsening, the Bush administration now seems to favor a larger role for government -- an approach for which Republicans generally have had little appetite.

Recommendations a presidential advisory group on financial markets cover mortgage lenders and other institutions, as well as investors, credit ratings agencies and regulators.

Secretary of the Treasury Henry Paulson, who leads the group, said the effort is not about "finding excuses and scapegoats."

The suggested actions, he said, are intended to avoid another meltdown in the credit and housing markets.

"The objective here is to get the balance right. Regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson said.

Federal state regulators should strengthen oversight of mortgage lenders, according to the group's report released on Thursday. Also, states should follow strong, uniform licensing standards for mortgage brokers. Legislation in Congress would create a nationwide licensing system.

Democratic New York Senator Charles Schumer said administration officials are "beginning to put their toe in the water when it comes to government involvement to help the economy. The bad news is they're going to have to do a lot more than that to address the problem."

Other urge improvements by credit rating agencies, criticized for not accurately assessing risk on complex mortgage investments. These kinds of business transactions soured, causing market chaos.

The report also suggests clearer disclosures and assessments of risks on investments.

Federal Reserve Chairman Ben Bernanke said the proposals are "an appropriate and effective response to the deficiencies in our financial framework that contributed to the current turmoil in financial markets."

The central bank chairman serves on the advisory group, which was created after the 1987 Wall Street crash to monitor markets, as do the heads of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission.

The advisory group also recommended that credit-rating agencies differentiate between ratings on complex investment products and conventional bonds.

The ratings agencies also should disclose conflicts of interest, Paulson said.

SEC Christopher Cox said Congress recently gave the SEC the power to address issues including conflicts of interest involving credit-rating agencies.

"We will use that authority to help restore investor confidence," he said.

"There is no single, simple solution to the problems that have emerged ... yet we have determined that market participants' behavior must change," Cox said.