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"As we continue to address current market stress, we must also examine the appropriate policy responses," Paulson said in a speech at the National Press Club.
"The President's Working Group on Financial Markets, the PWG, has been reviewing policy issues to help reduce the likelihood that mistakes of the past are repeated," he said.
"The objective here is to get the balance right regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," said Paulson, chairman of the PWG, which includes the Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The PWG is recommending that the federal and state regulators should strengthen oversight of all mortgage originators. The state financial regulators should implement strong nationwide licensing standards for mortgage brokers and the Federal Reserve will issue revised rules for consumer protection and disclosure requirements, said Paulson.
Meanwhile, Credit Rating Agencies will clearly differentiate structured product ratings from ratings for corporate and municipal securities. They will also disclose reviews performed on asset originators, and strengthen data integrity, models and assumptions, said Paulson.
Issuers of Mortgage-Backed Securities will disclose the level and scope of due diligence performed on underlying assets, disclose more granular information regarding underlying credits. And, if issuers have shopped for ratings, disclose the what and why of that as well.
Moreover, investors will conduct more independent analysis and be less reliant on ratings. They will require, receive and use more information and more clearly differentiate between structured credits and corporate and municipal securities.
These practices will better align the interests of mortgage originators and homebuyers, of originators and securitizers, of securitizers and rating agencies and, ultimately, investors, Paulson noted.
"Regulators have a role to play in every change," he stressed. "They will issue new rules and seek regulatory authorities as needed, evaluate progress, provide guidance and enforce laws to ensure that implementation follows recommendation."
He said the U.S. regulators will continue to re-assess conditions, monitor progress, put forward new recommendations and take additional steps as necessary.