The dominoes began falling in Monroe County. In 2002 and 2003, the state Department of Banking detected a rash of mortgage defaults in the Poconos, where New Yorkers had flooded into northeast Pennsylvania's bedroom villages. Soon, defaults spread to Philadelphia, then its suburbs; and before long, 60 percent of foreclosure filings in Pennsylvania had originated out of the subprime market.

As the full weight of the subprime mortgage crisis descends upon Wall Street and American communities large and small, state officials both elected and appointed say Pennsylvania must better regulate mortgage issuers, cracking down on lenders that take advantage of greenhorn home buyers by offering loans that the borrowers have little chance of repaying.

How best to do that was the topic of discussion yesterday when the House Commerce Committee met in Belle Vernon. The state Department of Banking is recommending a host of new regulations for lenders -- they must clearly disclose all loan features, such as adjustable interest rates and prepayment penalties, that might be punitive to the borrower down the road. Lenders also would have to honestly evaluate a borrower's assets and ability to pay back the loan, rather than dumping high-risk, poor-credit borrowers into the volatile subprime market and hoping for the best.

Subprime loans have higher rates, fees and penalties than conventional mortgages because they are issued to people with credit problems. That can be a good thing -- people who ordinarily would have been unable to secure mortgages have become part of the ownership class, fueling the decade's housing boom.

But subprime lenders cross the line when they steer borrowers who could qualify for regular credit into a high-cost loan, or fail to divulge to the borrowers just how much their monthly payments will spike when their adjustable interest rate resets.

As a result, 20 percent of all subprime loans issued in recent years will end up in default.

"Too many people have been getting mortgages they simply can't afford," said acting Banking Secretary Steven Kaplan. Victoria Reider, executive deputy secretary of the same department, said the market had been plagued by the "exotic" nature of the loans and language included therein.

To mitigate the effects of the exotic loans and language, the new regulations would, if put into law, require a lender to explain a loan's basic features in a one-page consumer disclosure worksheet, within three days of receiving a loan application.

Banks worry that the new policies -- some of which, such as the three-day disclosure, would involve extra paperwork on expedited schedules -- could harm honest Pennsylvania lenders.

"One of the goals here is to prevent Pennsylvania from becoming an island of mortgage lending requirements that makes our states lenders uncompetitive or overpriced," or forces lending institutions out of Pennsylvania altogether, said Alan Bennet, senior vice president of First National Bank of Pennsylvania.

That fear isn't unreasonable, as Pennsylvania is one of the first states to move to tighten its banking regulations since the subprime lending meltdown, said Dan Egan, spokesman for the banking department.

Small banks, meanwhile, worry that they'll be unfairly penalized by the new regulations, even though small banks had little to do with the exploding foreclosure rate.

The Pennsylvania Association of Community Bankers say small banks and their subsidiaries should be carved out of whatever new regulations are imposed.

Another item that lenders say is worrisome is language that could effectively eliminate "stated income" mortgages. Those are loans issued to people who have an unpredictable stream of income -- say, because they operate a cash business such as a carwash or a dry cleaner.

The industry wants to keep those loans on the table. Otherwise, people with no W-2s or assets to point to as a source of income verification might be ineligible for loans, even if they bring home enough to meet monthly payments, lenders say.

But a representative from Pittsburgh's ACORN, a community housing group, told legislators to take bankers' concerns with a grain of salt, since they've used the same arguments in the past to thwart lending reform.

"It's like a big house of cards that's been built up," said Mary Ellen Hayden. "Guys, it's time to do something about predatory lending." She said that in 2006, 79 percent of foreclosure filings in Allegheny County stemmed from subprime loans, which is higher than the statewide rate.

The proposed regulations were published this summer in the Pennsylvania Bulletin and next will be reviewed by the Independent Regulatory Review Commission, the agency that vets all regulations proposed by the various state agencies.

The regulation changes are separate from the package of bills designed to weed out predatory lenders that were proposed by lawmakers earlier this year.

The new banking regulations could be in place by early next year. The changes, which include higher fines for lenders who violate the lending rules, will have to be approved by both chambers of the Legislature and signed by the governor.