....and yes, Banks then took advantage of the loosening of regulations, to approve more and more loans, that they would have otherwise not approved.
When the Fed tells you to do something, giving you both a financial incentive to do as much as you can, in the way of apporving such high risk loans, with the added looking over your licensing shoulder, via the FDIC, in the event you don't perform as "encouraged", they yes, banks are going to push that newly provided envelope.
I mean, what could go wrong, when you have the Fed watching your back, via the tax payer?