Lawmakers question structure of $30 billion small business lending fund

Lawmakers questioned President Obama's proposed $30 billion small business lending fund during a hearing Friday, amid suggestions the program could be run better by the Small Business Administration than banks.

Small businesses, regulators and the administration are struggling to figure out how to increase lending that they say is crucial to creating jobs and getting the economy on sound footing. In 2009, loan balances declined by $587.3 billion, or 7.5 percent - the largest percentage drop since 1942, the FDIC reported.  

Small businesses blame banks for being overly cautious with their lending, while banks say onerous regulations are causing them to be more wary with capital. Despite a recent memo from regulators saying banks will not be criticized for making prudent small business loans, "on the ground, the reality is different," Rep. Bill Posey (R-Fla.) said.  

Obama's proposed fund would use $30 billion from the Troubled Asset Relief Program to create a separate initiative that would infuse banks with cash that they could then lend to small businesses. 

At the joint hearing of the House Financial Services Committee and Small Business Committee, several small business owners expressed skepticism that the $30 billion would even be enough to improve the situation for small businesses. 

Rep. Nydia Velázquez (D-N.Y.), who chairs the Small Business Committee, questioned whether there are any restrictions that would prevent small banks from simply using the funds to cover their losses in commercial real estate. 

"Taking $30 billion and simply handing it to banks -- in the hopes that they will make loans -- is not sound policy," Velázquez said in her prepared remarks.  

Among the witnesses was Steve Gordon, a small business owner from Florida, who passionately critiqued the administration's efforts to aid small businesses. He said that because the government already helped banks, automakers, AIG Group Inc. and others, SBA should be able to offer a bailout in the form of loans directly to small businesses. Other witnesses echoed his sentiments. 

Under questioning from Rep. Al Green (D-Tex.), Treasury's TARP overseer, Herbert Allison, and acting director of the Office of Thrift Supervision, John Bowman, said the funding should be funneled through banks, as Obama's proposal calls for. 

But John Dugan, who leads the Office of the Comptroller of the Currency, said the funding would work better if it went through SBA and directly to businesses, bypassing banks. SBA Administrator Karen Mills would not answer Green's question about the best approach.  

Allison, Treasury's assistant secretary for financial stability, staunchly defended the administration's proposal, saying banks would have an incentive to lend since their dividends they would pay to the government on the cash they received would drop "dramatically" the more they lend.  

"The small banks we're talking about have done a pretty good job at maintaining lending balances during this difficult recession," Allison said. "We think many of them are eager to lend." 

He also repeated another argument the administration has made in support of the fund: banks that sign up would not suffer the same stigma as they do from TARP.  

But Velázquez said regulators' promises about the fund brought back memories of assurances from former Treasury Secretary Henry Paulson about TARP.

"What you're doing is giving a blank check - again," Velázquez said.