WASHINGTON — Though lawmakers said Tuesday they support the goal of President Obama's $30 billion program to spur small-business lending, many sharply criticized the proposal, arguing it either would not work or could be done more directly.
Concerns about the plan were bipartisan, with some Democrats saying the problem was not a lack of funds at banks but overzealous examiners. Others said the administration's efforts would be better directed through the Small Business Administration.
"You go to the community banks, and they say the same thing … , which is … 'Well, we can't lend because the regulators won't let us lend,' " Sen. Bill Nelson, D-Fla., said during a Senate Finance Committee hearing Tuesday.
Republicans said that repaid Troubled Asset Relief Program money, which would fund the new program, should instead be used to pay down the deficit.
"Tarp money is all borrowed money," and "it needs to be repaid," Sen. Jon Kyl, R-Ariz., the Republican whip, said in an interview. "We should not be funding things by more borrowed money that just gets us deeper and deeper in the hole."
Even some Democrats echoed that argument.
"I'm for the lending program for small businesses. … The question of how to pay for that is something else," Sen. Evan Bayh, D-Ind., said in an interview. "I think we ought to take most of those Tarp funds and use that to pay back the taxpayers to pay down the debt."
To be sure, some Democrats were supportive and tried to build momentum for the idea. "This is very important. What we need to do is redirect our attention from major financial institutions to our community banks," said Sen. Jeff Merkley, D-Ore. "They are having a difficult time lending to small businesses, so only if they are strengthened are we going to be able to succeed in getting the loans to small businesses and rejuvenating this economy."
Congressional support is crucial for the plan, which needs legislative approval.
Under the plan, which Obama unveiled last week and detailed Tuesday during a town hall forum in New Hampshire, the diverted money would be used to establish a Small Business Lending Fund. Participation would be limited to banks with less than $10 billion of assets.
Institutions that used the funds would get special incentives to boost lending. For every 2.5% increase in small-bank lending, the dividend the bank would have to pay the government would drop by one percentage point. If a bank boosted its lending by 10%, for example, the initial 5% dividend would drop to 1%.
Banks could also convert their existing Tarp money into the small-business fund, qualifying for cheaper funding and removing the stigma attached to the broader bailout program.
"This seems to offer an exit strategy for banks that took Tarp capital," said Jaret Seiberg, an analyst at Washington Research Group, a division of Concept Capital. "If they boost their business lending, they can reduce the cost of that capital, and they can immediately disentangle themselves from the Tarp."
But some Democratic lawmakers said the strategy does not go far enough.
Sen. Maria Cantwell, D-Wash., said in a statement Monday that it would be better for the administration to immediately make Tarp funds available directly to community banks for small-business lending rather than setting up a new fund that requires congressional approval.
"Getting capital to small banks and businesses is far too urgent and must be done immediately," she said. "I encourage the administration to do this immediately under the" Tarp "program and not wait for Congress."
She expanded on that point Tuesday at the Finance Committee hearing, which featured Treasury Secretary Tim Geithner.
"Where is the urgency Mr. Secretary in solving this?" she said. "Why not come to terms right now with the community banks? The big banks — someone came to terms with them, and they walked away very happy."
But others said the plan could fill a critical need of stable small businesses that simply cannot find access to credit.
Sen. Byron Dorgan, D-N.D., called the plan a "decent proposal."
At a recent hearing, "we had three small- to medium-sized businesses. … All of them were successful. All of them were profitable. All of them wanted to expand," Dorgan said.
"None of them could find the credit with which to expand," he said, "and I think if you can convert some opportunity for additional capital for small- and medium-sized businesses, you can create a lot of jobs."
Meanwhile, Republicans who never liked Tarp to start with said Obama was simply trying to put different clothing on the controversial program.
"He's still using Tarp. He's just doing it through legislation. That's still not the right solution," said Sen. Mike Crapo, R-Idaho.
Community bankers and industry watchers were also split on the plan.
Cynthia Blankenship, the vice chairman and chief operating officer of Bank of the West in Grapevine, Texas, said she appreciated the administration's effort to keep the program separate from Tarp.
"I'm highly encouraged," said Blankenship, a former chairman of the Independent Community Bankers of America, which supports the plan. "Banks would embrace it if the terms were truly promulgated as they're detailed right now."
But others said it would be a difficult sell for bankers, who are concerned that the government could change the rules later.
"A lot of the banks feel burned by the rhetoric from the last year," said Thomas O'Brien, the president and chief executive of the $1.6 billion-asset State Bancorp Inc. in Jericho, N.Y. "I'd be reluctant to get involved in any kind of a program like that because they just changed the rules after the fact."
He added that the perception that small businesses want credit if banks would make it available is overblown.
"It's a little bit of folklore that there's this huge pool of unmet demand out there," he said. "I don't think it's true."