Obama calls for $30 billion small business lending fund

NEW YORK (CNNMoney.com) -- President Obama called on Congress Tuesday to recycle $30 billion of the remaining Troubled Asset Relief Program (TARP) funds into a new government lending program offering super-cheap capital to community banks that boost their small business lending this year.

Touted last week in Obama's State of the Union address, the plan is the latest incarnation of a proposal the president first floated in October. While credit conditions for large businesses have improved over the past year, small companies are still widely reporting problems finding the capital they need to fund their operations.

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Since small businesses employ about half of American workers, policymakers worry that the ongoing credit crunch they face is contributing to the nation's high rate of job losses. Improving the job market "must be our No. 1 focus in 2010," Obama said last week.

At a town hall meeting in Nashua, N.H., Obama unveiled his proposed new Small Business Lending Fund. The initiative targets banks with assets of under $10 billion, which collectively account for more than half of the nation's small business lending, according to White House estimates.

Those banks would be able to borrow money from the Treasury at a dividend rate as low as 1% if they use the cash to make more small business loans this year than they did in 2009.

Lend more, pay less: The first draft of Obama's plan, announced three months ago, involved lending TARP money to community banks to use for local business loans. But community bankers reacted warily to the plan -- they had little interest in taking capital from a program that has drawn so much criticism. TARP's extensive regulatory requirements were also a turn-off.

Obama's new proposal asks Congress to divert TARP funds into an entirely new lending program. The administration hopes that scrapping the TARP taint will make the offering more attractive to bankers.

"In this proposal, we have recognized that small banks are not interested in borrowing from TARP," Small Business Administrator Karen Mills said at a press briefing aboard Air Force One en route to N.H. "We have proposed here to Congress that we create a separate lending facility that is not affiliated with TARP and does not carry any of those issues."

Banks with less than $1 billion in assets would be able to receive capital infusions of up to 5% of their assets, and banks with assets of $1 billion to $10 billion would be eligible to access investments totaling 3% of assets. More than 8,000 of the country's 8,400 banks would be eligible to participate under these terms, according to government estimates.

The dividend rate for the capital would start at 5% and decrease by 1% for every 2.5% increase in small business lending the bank shows compared to a 2009 baseline. The dividend rate could drop as low as 1% for a community bank that increases its small business lending balance by 10%. That rate would stay frozen for five years, allowing the bank to pay the Treasury back gradually.

"We think this incentive structure will help maximize the best bang for the buck," a senior administration official said during a briefing with reporters. "We give banks an incentive not to hoard or hold their capital, but to increase their lending to get the better rates."

Bank hoarding is a common complaint among small business owners. The nation's 22 largest recipients of TARP capital have cut their outstanding small business lending balance by a total of $12.5 billion since April, shaving 4.6% off their collective portfolio.

With Wall Street banks backing away from Main Street, the administration is hoping community banks will take the lead in funneling dollars to small business customers.

Sparks fly on Capitol Hill: For the $30 billion program to take effect, Obama needs Congress to enact it.

"There is a lot of interest on the Hill in solving this problem," Mills said. "So there's a lot of support for helping community banks, and a lot of understanding that capital is part of the issue."

However, the idea of tapping TARP funds has already hit stiff opposition.

"The law is very clear. The monies recouped from the TARP shall be paid into the general fund of the Treasury for the reduction of the public debt," Sen. Judd Gregg, R-N.H., said in a Senate Budget Committee hearing Tuesday. "It's not for a piggy bank because you're concerned about lending to small businesses."

President Obama pressed for bipartisan support during his town hall meeting in Nashua. "I can't do this alone. Democrats can't do this alone -- nor should we," he said. "We've got two parties in this country."

Direct lending a no-go: Wall Street giants, AIG (AIG, Fortune 500) and the Detroit automakers got direct, low-interest loans from the government, but small businesses shouldn't hold out hope for a similar bailout. That's caused grumbling among entrepreneurs frustrated by the freeze-out they've endured from banks.

Steve Gordon, a small manufacturer from Clearwater, Fla., put Obama on the hot seat during a town hall meeting last week in Tampa.

"I appreciate the pledge of $30 billion to small businesses. But lending it to the banks to lend to us is not the answer," Gordon told the president. "You lent directly to the automakers, you lent directly to the banks -- why can't the government make [loans] available directly to us?"

The Small Business Administration doesn't have the staff or infrastructure for a lending program of that magnitude, Obama responded. The nation's banks have to be part of the solution.

"I am absolutely sympathetic to what you're saying because I'm hearing it everywhere I go," he said. "You've got a lot of small business owners who are ready to grow, ready to hire, but they just can't get financing. So we're going to use the SBA as one tool; this $30 billion is going to help."

While the banks helped cause an economic meltdown by lending too freely, now "the pendulum has shifted too far in the other direction," Obama said. "What we're trying to do is to encourage [banks] to get that happy medium where they're not taking such exorbitant risks that they threaten the entire system, but they're also open to enough risk that America's dynamic free enterprise system is actually able to work."