By Alison Vekshin and Scott Lanman May 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said any new regulations to raise mortgage-lending standards should be careful to avoid limiting the availability of loans in ``legitimate transactions.'' The Fed will consider how it might use its rulemaking powers to curb abusive lending, Bernanke wrote in a May 18 letter to Senate Banking Committee Chairman Christopher Dodd. Dodd, a Connecticut Democrat who is running for president, released the letter today, calling on the Fed to require lenders to ``fully evaluate'' borrowers' ability to repay the debt they take on. The letter is the latest clash with Dodd, who is pressuring the Fed to use its authority under a 1994 mortgage consumer- protection law. Bernanke, who stated last week that more disclosure is the best way to persuade banks to tighten lending standards, said the Fed will study its rule-making ability. Dodd has countered that the law is clear on the central bank's powers. Dodd and other legislators have blamed the Fed for insufficient oversight during the housing boom that has ended in rising defaults and a rout in the subprime market. Bernanke's comments are a response to an April 23 letter that Dodd and nine other members of the Banking Committee sent to the Fed chairman saying the 1994 law ``clearly mandates action by the Federal Reserve Board.'' Bernanke noted that the Fed plans to hold a public hearing on June 14 to consider the issue. Seeking Views ``Through the hearing and other outreach efforts, the Board will seek the views of interested parties on how it might use its rulemaking authority to address concerns about predatory lending without discouraging responsible subprime lending,'' Bernanke wrote. Dodd called the hearing ``a first step.'' The Fed should move quickly to issue a rule that requires lenders to consider a borrower's ability to repay the loan, he said in a statement today. He also urged that the Fed require escrows for taxes and insurance and restrict mortgages that involve little or no documentation from borrowers on their income and credit history. ``Any rules should be tailored to avoid the unintended and undesirable consequence of limiting credit availability in legitimate transactions,'' Bernanke wrote in his letter to Dodd. Delinquency rates on subprime mortgages rose to 13.3 percent in the final quarter of 2006, a 3 1/2-year high. Subprime loans made last year have recorded the most defaults relative to how long they've been outstanding since the market emerged in the 1980s, according to Moody's Investors Service. Bernanke said last week delinquencies are likely to continue to rise into next year. `First Line' ``In my judgment, effective disclosures should be the first line of defense against improper lending,'' Bernanke said at a May 17 conference in Chicago. ``If consumers are well informed, they are in a much better position to make decisions in their own best interest.'' The Fed chief also noted that after some lenders loosened their standards for getting credit, there has been some ``self- correction in the market.'' The committee chaired by Dodd has held two hearings on the subprime mortgage crisis, including a March 22 session focusing on the role of regulators, where senators blasted them for not doing enough. Beginning in 2003, the Fed took three formal and three informal enforcement actions to stop predatory and ``ill advised'' subprime lending. Two of the public steps related to mortgage-security accounting issues at companies in Puerto Rico. The third was a $70 million action against a Citigroup Inc. unit stemming from loans in 2000 and 2001, before the mortgage boom began in 2004, Fed data show. `Asleep' ``It just seems to me you all were asleep at the switch,'' Democratic Senator Robert Menendez of New Jersey, said in the March hearing. Roger Cole, the Fed's director of banking supervision and regulation, acknowledged to lawmakers that ``given what we know now, yes, we could have done more sooner.'' The Fed, the Federal Deposit Insurance Corp., and other bank regulators in March released proposed guidelines for subprime mortgage lending that would direct lenders to offer clearer information to borrowers on their mortgage terms and ensure they can repay the loans. In a May 17 letter to regulators, Dodd and four other banking committee members pressed them to ``move expeditiously'' to complete the guidelines. Schumer Bill Democratic Senator Charles Schumer of New York introduced legislation on May 3 that outlines standards for brokers and originators to use in assessing a borrower's ability to repay a mortgage and holds lenders accountable for brokers and appraisers. He also proposed $300 million in emergency federal funds for community housing groups to help avert foreclosures. Democratic Senators Barack Obama and Dick Durbin of Illinois introduced legislation last month to increase penalties for lenders who commit mortgage fraud. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, is drafting a bill he said will protect borrowers from ``predatory'' lenders. Subprime mortgages typically carry rates 2 or 3 percentage points above those for prime loans. Borrowers typically have poor credit histories or high debt relative to income. To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net Scott Lanman in Washington at slanman@bloomberg.net Last Updated: May 25, 2007 13:18 EDT http://www.bloomberg.com/apps/news?pid=20601068&sid=aKnVbdRhEx9c&refer=economy