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WRAPUP 2-US Treasury:Loan fund to ease credit to small firms

* Treasury says $30 billion fund to spur small-firm loans

* More small banks to participate in non-TARP loan fund

* Small firms call for direct loans from government

* Fed governor sees signs that tight credit may be ending (Recasts, adds comments from lawmaker, supervisors)

By David Lawder

WASHINGTON, Feb 26 (Reuters) - The U.S. Treasury said on Friday that a White House proposal for a $30 billion loan fund would help end a credit drought for small businesses, as business owners said their inability to get financing is curbing expansion.

The Obama administration is concerned that small banks would avoid any program established under the Troubled Asset Relief Program because of a perceived stigma associated with government bailouts, Herbert Allison, assistant Treasury secretary for financial stability, told a joint hearing of the House of Representatives Financial Services and Small Business committees.

“I can tell you that a TARP program would not be nearly as effective to achieve your goals of stimulating lending as a program would be outside of TARP,” Allison said.

President Barack Obama earlier this month proposed a small business loan program that would use $30 billion in TARP funds repaid by larger banks and funnel it to a new program, which would requires congressional approval. Banks would be able to access the funds at reduced rates, and their funding costs would fall as they made loans, encouraging them to boost lending to small businesses.

Allison said smaller institutions that accessed government capital through TARP have struggled with executive compensation restrictions under TARP that are applied equally to all institutions, regardless of size.

Even if Treasury removed some of those restrictions, many lenders would avoid TARP participation due to a belief that there is a stigma associated with the program and fear that they could be subjected to retroactive restrictions, Allison said.

Allison and top bank regulatory executives heard a litany of complaints from lawmakers and business owners about lack of credit and overly harsh bank examinations that led to credit lines being pulled, forcing some businesses to close.

The chairman of the House Small Business Committee, Nydia Velazquez, a New York Democrat, said the Treasury was asking for a “blank check” to give to banks with no guarantee the funds would be loaned out.

She said the current situation reminded her of when former Treasury Secretary Henry Paulson “was sitting there, telling us, ‘Don’t worry, don’t put any restrictions on any of these funds, because I can guarantee that lending from financial institutions will happen for small businesses.’ Today, a year later, we have seen the consequences,” Velazquez said.

SBA DIRECT LOANS, PLEASE

Small business owners and advocates told the panel that they have suffered through a three-year drought in lending and asked lawmakers to simply bypass the banks and turn the Small Business Administration into a direct lender of government funds. Currently, the SBA provides guarantees for up to 90 percent of loans made by banks through its programs.

Steve Gordon, president and owner of Instant Off Inc, a Clearwater, Florida-based manufacturer of water-saving devices that attach to faucets, told the panel that his firm could create 25 new jobs immediately, but it cannot get financing to expand.

“Jobs can only be created with capital, and the bailed out banks are not helping the situation,” Gordon said. “The American people do not want to give any more money to the banks.”

SBA administrator Karen Mills said the fastest way to increase lending was not by creating a direct loan mechanism, but by funneling money to banks while easing restrictions on some of the SBA’s most popular loan restrictions. For a factbox on the Obama adminstration’s loan fund proposal, see: [ID:N26105026].

“BALANCED” REGULATORY GUIDANCE

Bank regulators said they were guiding their supervisors not to turn the screws too tightly on banks.

“As bank supervisors, we have a responsibility to encourage institutions regularly and clearly to continue to make soundly structured and underwritten loans,” said Martin Gruenberg, vice chairman of the Federal Deposit Insurance Corp.

Federal Reserve Governor Elizabeth Duke expressed optimism for an increase in lending this year, saying U.S. banks appeared to be warming to lending to small businesses even though credit remains abnormally tight. A recent Fed survey of senior loan officers showed that a tighteneing of credit standards appeared to be nearing an end.

Duke, who was a community banker in Virginia before joining the Fed’s board in 2008, said there was some anecdotal evidence that bankers were starting to devote more energy toward making new loans in 2010. This contrasts with their “overwhelming preoccupation in 2009 with collecting on or writing down loans already on their books,” she said. (Additional reporting by Glenn Somerville, Karey Wutkowski and Tim Ahmann; Editing by Leslie Adler)

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