Fraudulent lenders blamed for US crisis

American banking regulators defended their handling of the sub-prime mortgage market yesterday, blaming abusive lending and fraud by unsupervised lenders for the current surge in defaults that has sent tremors through credit and financial markets.

Christopher Dodd, chairman of the Democrat-controlled Senate Banking Committee, said: "Our nation's financial regulators were supposed to be the cops of the beat, protecting Americans from unscrupulous financial actors." Instead, "they were spectators for far too long".

Yesterday's hearing by the Committee came the day after the Federal Reserve indicated it might cut interest rates in the months ahead. That move was aimed in part at limiting the fallout of the crisis engulfing some banks and other lenders specialising in loans to borrowers with low incomes or bad credit ratings.

Among those testifying were top officials of four leading sub-prime lenders: the American arm of HSBC, Countrywide Financial, WMC Mortgage and First Financial. A notable absentee was New Century Financial, the second largest lender and the worst hit by the crisis, which has been ordered to cease all lending in its home state of California.

Mr Dodd accused the Fed of being aware three years ago that lending standards were slipping amid the credit boom fuelled by historically low interest rates. Yet the central bank encouraged the spread of precisely the sort of adjustable mortgages whose rates are now jumping higher, forcing overstretched borrowers into default and foreclosure.

"A sort of frenzy gripped the markets," the Connecticut Senator said. "Many brokers and lenders started selling these complicated mortgages to lower-income borrowers, many with less than perfect credit." Both Mr Dodd and his opposite numbers in the House are drawing up new legislation to clamp down on so-called predatory lending, but fierce resistance is certain from the financial sector.

Federal regulators say the main problem is that about half of such loans are issued by state-licensed and standalone mortgage brokers and finance companies that largely escape federal supervision.

Roger Cole, head of the Fed's bank supervision department, told the committee: "Given what we know now, yes, we could have done more sooner."