June 7 (Bloomberg) -- U.S. Senate Banking Committee Chairman Christopher Dodd said the Federal Reserve must develop more aggressive consumer protections for mortgage lending, writing new regulations instead of settling for unenforceable guidelines.

``I think they're just assuming the market is going to take care of all of this,'' Dodd said yesterday in an interview in Washington. ``We're still out there without any clear rulemaking as to what's tolerable and what's intolerable.''

Dodd and Federal Reserve Chairman Ben S. Bernanke are at odds over how best to prevent abuse and fraud in consumer lending at a time when delinquency rates on subprime home loans have soared to a four-year high.

Fed officials prefer to promote sound lending principles through discreet channels of supervision and guidance letters. Dodd prefers ``bright line'' rules, which he spelled out in an April letter to Bernanke.

Dodd's latest comments put the Federal Reserve on notice ahead of the agency's June 14 public hearing, scheduled under pressure from the Senate chairman, to review options for strengthening mortgage lending standards. Dodd, a Connecticut Democrat who is seeking his party's 2008 presidential nomination, has oversight authority over the Federal Reserve.

Legislation Considered

Dodd said he preferred to give the Fed time to act, because that would be quicker than passing legislation. If the Fed doesn't take strong action, he said he'll write a bill.

``I'd like them to be aggressive,'' Dodd said. If the Fed's course of action is ``rather anemic and weak,'' then ``I would certainly have to consider moving in,'' Dodd said.

Bernanke and Dodd have disagreed before on the Fed's authority and how it should be used. On May 17, Bernanke said the Fed is ``authorized'' to write rules prohibiting unfair and deceptive practices in lending. Hours later, Dodd sent out a press release challenging Bernanke's interpretation. ``The law requires the Federal Reserve to write rules,'' he said.

In April, Dodd sent a letter to Bernanke spelling out in detail the specific regulations he would like to see the Fed implement.

``Dodd's letter to Chairman Bernanke states that it's a mandate, not a choice,'' said Sarah Ludwig, co-director of the Neighborhood Economic Development Advocacy Project in New York and a member of the Fed Board's Consumer Advisory Council. ``There are millions of homeowners in distress. It is a travesty and the Federal Reserve has so far abdicated here.''

June Hearing

Bernanke has already chosen topics endorsed by Dodd for the June hearing, including restrictions on prepayment penalties, limiting loans made without verifying a borrower's income and requiring lenders to ensure a borrower's ability to repay.

In a speech this week, Bernanke changed his language about the Fed's role, saying ``the Board has the responsibility to prohibit mortgage lending practices that it finds to be unfair and deceptive.''

While the new phrasing makes concessions to Dodd about the Fed's responsibility toward consumers, the chairman and the senator still seem far apart.

Bernanke is keeping close to the free-market views promoted by his predecessor Alan Greenspan. Bernanke's previous speeches show he favors regulation based on ``principles'' rather than rules when a product or practice can't universally be defined as abusive. He also favors consensual arrangements between borrowers and creditors, better disclosure, and consumer education.

Bernanke's Fine Line

``We must walk a fine line,'' Bernanke said in a June 5 speech via satellite to a monetary conference in Cape Town, South Africa. ``We have an obligation to prevent fraud and abusive lending; at the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.''

Federal Reserve spokesman David Skidmore declined to comment on Dodd's latest remarks, referring to Bernanke's speech.

Bernanke agreed meet this month with a group of housing activists who targeted the Fed in a nationwide series of protests yesterday. The Association of Community Organizations for Reform Now, or ACORN, rallied in 17 cities, including New York and Washington, to press regulators for stronger consumer protections from abusive lending practices.

ACORN will meet with Bernanke on June 20 in Washington, the group said in a statement today.

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net.

Last Updated: June 7, 2007 19:21 EDT