Lawmakers probe banks’ lending to small businesses

House lawmakers are examining a crucial element of the economic recovery: banks' lending to small businesses and for commercial real estate.

Small businesses are seen as a linchpin for the recovery, with the potential to expand and soak up some of the high unemployment that has ravaged the country and preoccupied Congress.

At the same time losses are mounting on loans for commercial real estate, such as stores and office complexes, buildings sit vacant and builders default. A cascade of hundreds of billions in losses on the loans could deepen the hurt for regional banks and quicken the pace of bank failures—which reached 140 last year.

Two House committees, Small Business and Financial Services, are hearing Friday from federal regulators, business owners, bankers and developers to gauge the condition of lending to small business and commercial real estate.

At the gates stand the banks. In many cases their thinning capital reserves are one of the key factors limiting credit and clogging the pump of economic growth, Obama administration officials maintain.

U.S. bank lending last year posted the steepest drop since World War II, with the volume of loans falling by $587.3 billion, or 7.5 percent, from 2008, the government reported Tuesday.

Yet many in the banking industry say lending isn't hampered by a lack of capital, with even well-capitalized banks having trouble finding creditworthy borrowers. And small businesses may be reluctant to borrow in the toughest economic climate since the Great Depression.

The administration has proposed using $30 billion of leftover money from the $700 billion federal bailout program to help community banks increase lending to small businesses. Congress must approve the new small-business fund, which would be open to banks with $10 billion or less in assets.

But many lawmakers want the money to be dispensed not by banks but directly by the federal Small Business Administration, which would decide which businesses should get loans. The House passed legislation a year ago and again last October to allow for that.

"The problem is that, to date, most efforts have focused on helping banks, assuming that the benefits would eventually trickle down to entrepreneurs," Rep. Nydia Velazquez, D-N.Y., who heads the Small Business Committee, said Thursday. "That hasn't happened and it's unlikely that simply writing another check to banks will get small businesses the financing they need to create jobs."

She said the Small Business Administration already does direct lending through its disaster loan program, "which means the agency has the expertise, experience and people to fill the current gaps that banks seem unwilling or unable to fill."

One Florida entrepreneur has taken the case to President Barack Obama.

Steve Gordon stood up at Obama's town hall meeting in Tampa, Fla., last month, saying he was exasperated because he's raring to create 500 jobs but can't get a loan from the skittish banks. Where's the fairness, he asked, when the government loaned billions directly to Wall Street banks and automakers but not to small businesses?

"The bottom line here is that businesses can't stabilize and we can't expand without capital," Gordon said in a telephone interview Thursday. "The banks aren't getting out capital to the companies that need it. … They've got their hands full with foreclosures," he said.

Gordon, whose company Instant-Off Inc. makes valves that automatically shut off faucets to save water, is scheduled to testify at Friday's hearing along with Margot Dorfman, CEO of the U.S. Women's Chamber of Commerce, and other business owners.

Sheila Bair, the chairman of the Federal Deposit Insurance Corp., is among the regulators slated to appear, as well as SBA Administrator Karen Mills, Assistant Treasury Secretary Herbert Allison and Federal Reserve Gov. Elizabeth Duke. The bankers include executives of Wells Fargo & Co. and Citizens Republic Bancorp Inc.