A spokesman for the comptroller of the currency says the agencies didn't address the problem of early defaults because "the comptroller ... doesn't want to shut credit off to people who deserve credit. He's talking about people who can later afford to refinance."

The spokesman says the agencies' proposal wasn't a rush job to mollify Congress. Chris Dodd, chairman of the Senate's Banking Committee, pushed in January for the new rules, and the Democrats on the House Financial Services Committee did the same in February.

The comptroller proposed the new subprime guidance jointly with the Federal Reserve, Federal Deposit Insurance Corp., Office of Thrift Supervision and National Credit Union Administration.

When lenders qualify borrowers only at the introductory rate, "they are placing consumers at unnecessarily greater risk of foreclosure and other financial harm," the House Democrats wrote Feb. 16 to the regulatory agencies. They added that "with respect to consumers, it appears that many have been sold high-risk 'payment shock' loans without first receiving full disclosure of the key risks and possible outcomes."

With Congress complaining about payment shock and not early defaults, it's not a surprise that regulators focused on payment shock and not early defaults.

Lenders, having been burned by early defaults on loans originated in 2006, already are tightening their loan criteria, making it harder for subprime customers to qualify for mortgages. Now the regulators are proposing new guidelines for subprime loans. "What's the purpose at this point?" asks Kenneth Thomas, a Miami-based banking expert. "Why not a year or two years ago?"

In late 2005 and into 2006, regulators tightened guidelines on interest-only mortgages. Thomas believes they should have addressed subprime ARMs then, too. But Republicans were in charge of Congress at the time, and they didn't ask regulators to change the guidelines for subprime mortgages.

Mortgage companies criticized last year's rule changes for interest-only loans, and they're criticizing this proposal, which could be amended or scrapped after a 60-day comment period. The Mortgage Bankers Association warns about unintended consequences.

"The most obvious concern is the section suggesting that hybrid ARMs should be underwritten at the fully indexed rate at full maturity," says Steve O'Connor, senior vice president of public policy for the MBA. "The fully indexed rate at full maturity" is another way of saying, "the highest possible rate for a particular loan."