The guidelines, issued Wednesday by the Federal Reserve and three other federal banking regulators, also encourage institutions to work with mortgage borrowers to avoid defaults. In addition, the guidelines encourage the banks to set dividend payments for shareholders and compensation for executives with the current crisis in mind.
The guidelines seek to address criticism that banks obtaining funds from the $700 billion rescue plan could simply use the money for their own purposes rather than helping struggling homeowners and the overall economy.
Critics are concerned that banks, which are getting $250 billion through government purchases of their stock, are not using the money to boost lending to customers, one of the main reasons why the economy is in a crisis.
"If underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential damage to the economy," according to the regulators' guidance.