Obama urges community banks to lend more

NEW YORK (CNNMoney.com) -- President Obama brought a dozen community bankers to the White House Tuesday to press them to boost their lending to small businesses.

The roundtable discussion with regional bank leaders was aimed at figuring out "how we move forward over the next year so that businesses are getting the capital that they need, and that we are starting to see people hired again," Obama said afterward.

The meeting comes on the heels of a similar gathering Obama had last week with CEOs from a dozen of the nation's biggest banks, including Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

Big banks have collectively cut their small business lending by more than $11 billion, or 4% of the total, over the last six months. Community banks have been similarly skittish about issuing new loans to small firms struggling through the recession.

With the Wall Street titans, Obama laid the guilt on thick as molasses, reminding the CEOs of the bailout billions taxpayers spent last year to save their banks.

Obama didn't have the same sword of Damocles to hold over those at Tuesday's gathering. "I think it's fair to say that most of these community banks were not engaged in some of the hugely risky activities that helped to precipitate the financial crisis," Obama said. "They are intimately woven into the fabric of the community."

Regional bankers were enthusiastic about the opportunity to be part of the conversation on Washington's center stage.

"I thought the meeting was tremendously positive," said Paul Mello, president and CEO of Solvay Bank, which has assets of $570 million. The Syracuse, N.Y., lender has been in business since 1917. "I think the President and his administration were really focused on improving the economy, getting small business loans they need, and making sure financial reform gets done."

Too much red tape: One of the complaints Obama fielded was a plea for fewer regulatory hurdles. Small banks with minimal staffing say they're overwhelmed with paperwork.

"We are looking to see if there are possibilities to cut some of the red tape," Obama responded.

Mello said he drew the President's attention to the copious bureaucracy involved in Small Business Administration-backed loans. His bank made 16 of them last year, totaling $1.3 million.

"Are there more ways the SBA can look at the restrictions in their program to make it easier for more people to qualify for the SBA programs?" Mello asked.

Another point of discussion was the underwriting scrutiny banks face. Lawmakers want banks to increase their lending, but small business loans are comparatively risky. If too many of their loans default, banks face penalties.

"In many cases, bank examiners are exercising more caution when reviewing bank lending portfolios. This is understandable given the recent financial crisis," Edward L. Yingling, president and CEO of the American Bankers Association, said in a prepared statement. "Yet the bank regulators need to be prudent without being so punitive that they choke off lending in communities across the country."

Obama said he felt bankers' pain on that point.

"We don't have direct influence over our independent regulators, but we think that the more that we can highlight that in some ways the pendulum may have swung too far in the direction of not lending -- after a decade in which it had gone way too far in the direction of getting money out the door no matter the risk -- that if we can get that balance right, that there are businesses and communities out there that are ready to grow again," he said. "We just need to help make that happen."

SBA gets a cash infusion: Most of the federal government's initiatives to boost small business lending are stalled or struggling.

But one program got a bit of good news this week: The Small Business Administration received $125 million to extend bank incentives for two popular lending programs through the end of February. The agency has more than 1,000 pending loans awaiting that funding. It plans to begin issuing approvals next week.

Meanwhile, a Treasury Department program to provide ultra-low-interest loans to community banks that pledge to use the money to boost their small business lending remains on the drawing board, a Treasury Department official said Tuesday. President Obama announced the forthcoming program in October, to a lukewarm response from bankers.

Sovay Bank's Mello said the proposal came up for discussion at Tuesday's meeting, but he's among those who isn't interested. The real challenge, he said, is finding creditworthy borrowers.

"We have plenty of capital to lend," he said. "A less restrictive SBA program would help us."