July 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is mobilizing to placate Democrats in Congress who claim he isn't doing enough to crack down on predatory lending.

Bernanke begins two days of testimony to Congress tomorrow, and he is already anticipating the questions. The Fed and state regulators today announced a pilot program to collaborate on supervision and enforcement of non-bank supbrime lenders. The central bank, which House Financial Services Committee Chairman Barney Frank has threatened to strip of some regulatory powers, also plans an overhaul of lenders' disclosure standards.

The steps that Bernanke, 53, is being pushed into amount to rolling back at least part of the free-market legacy bequeathed to him by predecessor Alan Greenspan. During Greenspan's 18-year reign, the central bank was loath to meddle with banks' business practices, relying on guidelines instead of enforceable public rules.

``They did not use the supervisory authority they had sufficiently,'' said Alan Blinder, who was vice chairman under Greenspan and taught with the current Fed chief at Princeton University. Bernanke needs to tell lawmakers that policy makers ``learned something from it and they will do better in the future,'' said Blinder, who called Greenspan ``the great anti- regulator.''

Goading by Congress

After goading by Congress, the Fed last month told lenders to toughen standards for subprime home loans, in an effort to curb abuses that have led to the highest foreclosure rate in five years. Subprime loans are those given to people with a poor or sketchy credit history.

Fed Governor Randall Kroszner, Bernanke's point man on regulations, told lawmakers June 13 the Fed ``will seriously consider'' an outright ban on some practices. Officials have also initiated a redesign of mortgage disclosures, with help from focus groups and consumer advocates.

``We continue to move forward,'' Sandra Braunstein, the Fed's director of consumer affairs, said in an interview. ``We've brought in people from the industry and from the consumer side.''

The steps by Bernanke, who took office in February 2006, aren't enough to satisfy lawmakers who say they'll consider legislation to toughen standards. Even Republicans are unhappy.

``Homeownership should remain the American dream, not a nightmare,'' said Republican Representative Paul Gillmor of Ohio, who is co-sponsoring a bill to turn the Fed's new guidelines into law. The Fed has ``got to take steps that effectively address the problems,'' added Gillmor.

Not Waiting

Some of the Fed's fellow banking regulators aren't waiting for the central bank to take the lead on protecting mortgage borrowers from deceptive-lending practices.

The Office of Thrift Supervision said July 11 it's considering new rules to end deceptive mortgage and credit-card lending among savings and loan companies it oversees. Housing and Urban Development Secretary Alphonso Jackson created a division to investigate allegations of discrimination in mortgage lending.

Some 85 anti-predatory lending bills were introduced in 30 states this year.

``The Fed has the authority to spell out rules about what is unfair and deceptive,'' Frank, a Massachusetts Democrat, said in an interview. ``If by default the Fed is not in the process of doing it, we, I think, should pass a law giving the authority'' to other agencies.

Lawmakers' Ire

Much of lawmakers' ire focuses on adjustable-rate loans that some borrowers couldn't afford after low introductory rates jumped following the Fed's 17 interest-rate increases from 2004 to 2006.

``The Fed is doing a good job in many ways, but regulating isn't one of them,'' said Democratic Representative Charles Wilson of Ohio, who sponsored an anti-predatory lending bill when he was a state senator in Ohio last year. ``We need to find a way to do it'' if the Fed doesn't step up, he said. ``There are a lot of predatory loans that are absolutely wrecking people's lives.''

The Fed under Greenspan did take some steps on consumer protection. Officials issued guidance letters to banks on non- traditional mortgages, home-equity loans and unfair and deceptive practices. The recommendations didn't stop abuses.

Response to Failures

The central bank's cautious approach toward new restrictions arises from policy makers' response to bank failures between 1980 and 1994, when 1,600 banks with more than $206 billion in assets went bust. The losses came at a time when, unlike today, lenders kept loans on their books instead of distributing risk by packaging them into securities that are resold.

Officials promoted innovation and flexibility, preferring ``guidance'' letters that stressed principles rather than limiting new products -- such as in the subprime-mortgage business -- with direct rules.

The Fed ``wanted a regulatory structure that creates incentives to induce safe, sound and efficient behavior,'' Edward Ettin, one of Greenspan's top advisers on bank regulation at the Fed, said in an interview. ``Too often, regulations that are too detailed or too prohibitory have undesirable unintended consequences.''

The approach was flawed, some Fed experts say: Disclosures were written by lawyers; the preference for guidance limited the power of consumers to litigate against abuse; behind-the-scenes enforcement left regulators with little credibility.

``The biggest flaw in the current system is that unless a new product proves to be completely lethal to its new buyers, we will let the market work its course,'' says Tom Schlesinger, president of the Financial Markets Center, a Fed watchdog in Howardsville, Virginia.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: July 17, 2007 14:09 EDT