Senator Demands Banks that Received Capital Start Lending

NEW YORK(CNNMoney.com) -- The head of the Senate Banking Committee Thursday said banks receiving money as part of the $700 billion federal bailout must step up their lending to consumers and businesses.

Banks are failing to use public funds to make credit more available and to help troubled homeowners, said Sen. Christopher Dodd, D-Conn. 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."

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

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.