Feb. 8 (Bloomberg) -- Treasury Secretary Timothy Geithner has told Democratic lawmakers that banks tapping a U.S. rescue fund will be required to modify mortgages and help borrowers avoid foreclosure, according to a person at a briefing.

Geithner said banks will be subject to other requirements under the Obama administration’s plan to capitalize the financial system, the person said. Geithner, who is scheduled to unveil his plan this week, spoke yesterday in Williamsburg, Virginia, where House Democrats met for a retreat.

A requirement to modify mortgages would be a shift from the approach of Geithner’s predecessor, Henry Paulson, who rejected policies requiring the industry to modify loans for troubled borrowers. Paulson helped to launch a voluntary effort called the Hope Now Alliance to reach borrowers at risk of foreclosure and help them change their loan terms.

Democrats in Congress faulted Paulson for spending $350 billion from the $700 billion Troubled Asset Relief Program without setting requirements for use of the money. Lawmakers have urged President Barack Obama to set limits on how banks spend the fresh U.S. capital, and require stepped up lending and foreclosure relief.

House Financial Services Committee Chairman Barney Frank has sponsored legislation, passed by the House, that would direct further expenditure of funds approved for the TARP to mortgage forbearance and other methods of aiding consumers at risk of losing their homes.

‘Transparency and Accountability’

“Any request for any future funding in that regard, should that be necessary, would have to be conditioned on the Barney Frank legislation, with transparency and accountability,” House Speaker Nancy Pelosi said today at the retreat. “Not only do we want to know where the money is going, we want to make sure that those priorities are addressed.”

Geithner “will be proposing a program that will make certain that we stabilize this system and increasing credit flows,” Larry Summers, director of the White House’s National Economic Council, said today on ABC’s “This Week.”

Summers said Geithner, who had been scheduled to speak on the program tomorrow, will now speak on Feb. 10 “to keep the focus right now on the economic recovery program, which is so very, very important,” Summers said on the program.

“The focus is going to be on increasing the flow of credit and doing it with transparency, with accountability for those who receive support, and with a kind of consistency that, frankly, we haven’t seen so far,” he said.

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: February 8, 2009 10:31 EST