Banks must start lending: Senate panel

Committee grills bankers over $700 billion bailout. Dodd: 'We want to see more progress.'

By Tami Luhby, CNNMoney.com senior writer
Last Updated: November 13, 2008

NEW YORK (CNNMoney.com) - Lawmakers pressed bank executives on Thursday to explain how they were using the billions of dollars they've received from the federal government as part of the $700 billion bailout.

Banks are failing to use public funds to make credit more available and to help troubled homeowners, said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee. Congress did not pass the bailout plan so banks could hoard the money or use it to scoop up faltering rivals, he said.

"We want to see more progress from our friends in the financial sector, more progress in foreclosure mitigation, in affordable lending, and in curbing excessive compensation," Dodd said. "And if that progress is not forthcoming, we are prepared to legislate."

Members of Dodd's committee covered much of the same ground as they have in recent weeks, demanding that banks use the capital they are receiving from the rescue plan to help stimulate the economy through lending and assist homeowners facing foreclosure. They also renewed calls to amend the bankruptcy law to allow judges to modify loan terms on primary homes. And they voiced support for Federal Deposit Insurance Corp. Chairman Sheila Bair's plan to help homeowners by having the government backstop a portion of the modified loan.

Bank executives once again pointed to their efforts to increase lending and to work with delinquent homeowners.

JPMorgan Chase, for instance, is lending billions to consumers, businesses, non-profits and municipalities, said Barry Zubrow, executive vice president at JPMorgan Chase (JPM, Fortune 500). In addition, since early 2007, Chase has helped about 250,000 families avoid foreclosure, and a new program announced last month will aid another 400,000 people. The bank plans to open 24 regional counseling centers to provide borrowers with face-to-face help in areas with high delinquency.

"The [Capital Purchase Program] enhances our ability to lend to consumers and businesses, large and small," he said. "In short, we have been and continue to be open to new business."

That said, JPMorgan Chase will maintain prudent underwriting standards, since irresponsible lending is a main reason America is in its current situation, Zubrow said.

Bank of America (BAC, Fortune 500), meanwhile, originated more than $50 billion in mortgage loans and more than $6 billion home equity loans in the third quarter, said Anne Finucane, the institution's global marketing and corporate affairs executive.

Overall, the funding of new loan commitments has increased by 6% this year over previous year, Finucane said. The bank is also actively buying mortgage-backed securities, adding liquidity to this market that's crucial to funding new loans.

At Wells Fargo (WFC, Fortune 500), commercial loans made to mid-sized company are up 24% since a year ago, while consumer loans are up almost 9% in the third quarter compared to a year ago, said Jon Campbell, Wells' regional banking president.

Addressing the 9,000 daily foreclosure filings Senators also heard from consumer advocates who said that banks' foreclosure mitigation efforts haven't done enough. Dodd noted that 9,000 homes a day are still going into foreclosure.

"Voluntary efforts haven't worked," said Nancy Zirkin, public policy director, Leadership Conference on Civil Rights.

Bank executives defended their modification programs and said they are working with investors of securitized mortgages to get their approval to change loan terms.

But they roundly opposed allowing bankruptcy judges to modify loans on primary homes, a measure many Democrats support. Such a change would further drive away investors, who are already skittish about putting money into the mortgage-backed securities market.

"While we need to find a way to stimulate the housing market, do we want to put at risk that market by taking that step," Campbell said.

Addressing lawmakers' anger over lofty executive compensation levels, witnesses also said bonuses and payment packages will be skimpier this year as the economy and corporate performance weaken.

"Compensation also will be down very significantly this year across the firm, particularly at senior levels," said Gregory Palm, general counsel at Goldman Sachs (GS, Fortune 500). "We get it."

Lawmakers on both sides of the aisle have been critical of the Treasury Department's implementation of the bailout of the financial sector.

Democrats are concerned that banks are not increasing their lending, despite getting capital infusions from the government. They also want to move faster to help the homeowner.

On Thursday, lawmakers pressed bank executives on whether they intend to use the bailout funds to pay dividends to shareholders or to acquire healthy banks. They answered no to both.

Republicans, meanwhile, want more disclosure on how the Treasury Department is carrying out the plan.

"Real transparency and accountability are critical to the success of the economic rescue plan, and taxpayers have every right to know how the federal government is allocating tax dollars as part of the program," House Republican Leader John Boehner, R-Ohio., said in a statement Wednesday.

Treasury Secretary Henry Paulson said Wednesday that the government would broaden the reach of the plan to support non-bank financial institutions that provide consumer credit, such as credit cards and auto loans.

In this second stage of the bailout, officials also hope to attract private capital, possibly through matching investments, to give the government's injections more heft.

Paulson also said the government is no longer planning to buy troubled mortgage assets, the original goal of the plan. Therefore, it must come up with new ways to help homeowners and slow the tide of foreclosures, which it had hoped to do once it owned the troubled loans.

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