WASHINGTON — The turmoil in the credit markets, stoked by fears of a subprime mortgage meltdown, is increasing the odds of congressional action on lending reform, lawmakers and observers say.

Though the House was already on course to act, observers said recent events are adding momentum there while turning up the heat on Senate Banking Committee Chairman Chris Dodd, D-Conn., to pursue legislation. Even some lawmakers who oppose a bill say it could become inevitable if troubles in the market continue.

"It will all depend on what happens in the next three weeks," said Rep. Tom Price, R-Ga., a member of the House Financial Services Committee, who has said the best solution is to let the market correct itself. "If it's still on the front page, then there will be some kind of a knee-jerk reaction to 'save' the American people."

The House is likely to pass a bill, but the situation is considerably less clear in the Senate, where Democrats hold only a one-seat majority and many Republicans will be reluctant to interfere with the markets.

But trouble in the mortgage market has already prodded several Democratic presidential candidates to make the issue part of their campaign, another factor that may push Sen. Dodd, who has not endorsed passing legislation, to act.

"The intensifying crisis puts even more pressure on Dodd to get a bill done," said Jaret Seiberg, a senior vice president of financial services policy for Stanford Washington Research Group. "He is running for president, and this is a banking issue. A failure to respond with legislation would make him appear ineffective. That is not how presidential candidates want to be seen."

Last week Sen. Hillary Clinton, D-N.Y., announced plans to unveil comprehensive lending reform legislation in the fall that takes particular aim at increasing regulation for brokers. Sen. Barack Obama, D-Ill., reintroduced a mortgage fraud bill this year, and former Sen. John Edwards, D-N.C., has endorsed curbing predatory practices and strengthening underwriting standards.

Sen. Clinton's announcement quickly provoked a response from Sen. Dodd, who said last week in a press release that he already had the situation well in hand. Many observers said they believe he will be forced to take a bolder stance on reform soon.

"Anti-predatory-lending legislation has now entered the presidential lexicon on the Democratic side," said Kurt Pfotenhauer, the Mortgage Bankers Association's senior vice president of government affairs. "That moves Dodd off of the 'I want the regulators to act first; I'm suspicious of the need for legislation' mantra that he was on, right into 'We've got to pass legislation.' "

Observers said Sen. Dodd also may find more support for a bill if housing problems get worse. Lawmakers from states hit particularly hard by problems in the subprime market, such as Florida, Ohio, and California, are more likely to support a bill, regardless of their political party. The situation could get worse if adjustable-rate mortgage resets, which will peak in October, bring the anticipated high rate of defaults and foreclosures, said Mark Zandi, the chief economist and co-founder of Moody's Economy.com Inc.

"There will be more of a response depending on how severe the sort of a crisis is over the next six to 12 months, depending on how many defaults and foreclosures there actually are and what kind of financial fallout there is," Mr. Zandi said. "If we saw the worst of it on Friday, I think a lot of this will peter out. … If the problems continue to intensify, and there's more financial fallout, then I think the odds of something getting through Congress and actually signed by the president will rise quickly, because there will be tremendous pressure."

Financial services lobbyists said that even if a bill gained traction, it would have to be tailored narrowly to pick up Republican support.

"There's enough free marketers in the Senate that I think they'll be looking very closely at anything that would incur too far on the workings of the market," Mr. Pfotenhauer said.

Lendell Porterfield, the chief executive of Porterfield & Lowenthal LLC, a bipartisan government relations firm, and a former staff member for Sen. Richard Shelby of Alabama, Senate Banking's top Republican, said he did not expect the panel to pass a bill that "puts underwriting standards" into law.

"I think the majority of members on that committee believe that underwriting is best kept to the private sector," he said. "On the other hand, there are places they can look for to try to improve market transparency, and I think that might be something that they want to focus on."

For now Sen. Dodd is avoiding any public promises to pursue legislation that specifically addresses subprime lending. But sources said his plans could change quickly if he sees an opportunity to move legislation forward.

"As a committee chairman, Sen. Dodd is about results, and results can be achieved in many ways," a spokesman for the senator said. "Legislation is one of those ways, but not the only way."

The spokesman dismissed any political pressure from other presidential candidates, saying Sen. Dodd has already pushed the banking regulators to finalize subprime mortgage guidance and forced the Federal Reserve Board to agree to write rules under the Home Ownership and Equity Protection Act to combat predatory lending.

"Rhetoric is fine, but Dodd has produced results and is continuing to work to do that," the spokesman said.

But Sen. Dodd is already facing pressure from members of his own committee to act. Sens. Charles Schumer, D-N.Y., Sherrod Brown, D-Ohio, and Robert Casey, D-Pa., have sponsored a bill that would strengthen regulation of mortgage brokers and create new standards for all mortgage originators. The bill would hold lenders accountable for any wrongdoing by brokers and would prohibit them from steering borrowers to loans that were not "reasonably advantageous."

Sen. Jack Reed, D-R.I., the chairman of the Senate Banking securities and insurance subcommittee, introduced legislation in May that would appropriate $615 million to prevent foreclosures. Sen. Robert Menendez, D-N.J., another panel member, has also expressed interest in a subprime lending bill.

Sen. Dodd "has several members on his committee who are equally interested in this issue, and trying to find consensus … is going to be an issue he's going to have to address coming up after Labor Day," said James Ballentine, the director of grassroots and community outreach for the American Bankers Association.

As market problems continue, more lawmakers will focus on the subject, he said.

"Members obviously read the newspaper just like everyone else, and they also look at their own individual investments related to the credit crunch. … I think all those things impact the way they make legislative decisions," Mr. Ballentine said.

House lawmakers expect resistance to a bill to decline as market problems continue to grow. Rep. Melvin Watt, D-N.C., who plans to introduce an anti-predator bill with specific standards for subprime loans next month with House Financial Services Chairman Barney Frank, D-Mass., and Rep. Brad Miller, D-N.C., said market troubles will sway over skeptics.

"To us it demonstrates the strong imperative for passing this bill and some other credit reforms to stabilize the credit market," Rep. Watt said in an interview. "It appears to be a growing concern in the marketplace itself, and that's really what my conservative colleagues pay more attention to than any of us.

"When the market starts telling them, 'You've got a problem,' then even they say, 'Well, OK, let's go solve that problem.' "

Still, some House Financial Services Republicans said they are not convinced that legislation is needed, even if they worry it is gaining steam.

"At this point I'd have to say I'm opposed to just about any type of legislation," Rep. Scott Garrett, R-N.J., said in an interview. "If the Congress steps in, usually they do so with a knee-jerk, heavy-handed, after-the-fact response. … My guess is the same thing will occur here. We'll overplay the hand in Congress, and then we won't be willing to come back and fix it when we realize we overplayed our cards."

Rep. Price agreed that legislation would exacerbate the shortage of available credit.

"I'm just thankful that Congress is out of session for the month of August, or we might have already had an overreaction," he said in an interview.

"If we stayed out until the end of the year, we'd be better off than going back in and trying to solve this nonexistent problem."

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