Community Banks Use Small Biz Money to Repay TARP Posted by AVCU on 12:30 PM

The Wall Street Journal has reported that more than half of $4 billion in federal funds disbursed this year to spur small-business lending by community banks was used to repay bailout funds that the banks received under the government's Troubled Asset Relief Program (TARP).

The Small Business Lending Fund was meant to raise capital at smaller banks, which tend to lend more heavily to small businesses, in the hopes of jump-starting growth and employment. But instead of directly lending to small businesses, many of the banks used the money to rid themselves of higher-cost TARP debt and tougher restrictions.

"It was basically a bailout for 100-plus banks," said Giovanni Coratolo, vice president of small-business policy at the U.S. Chamber of Commerce. "From a point of view of a small business owner, it was very ineffective in getting funds out to small business."

Of 332 banks that received cash through the lending fund, 137 used at least a portion—totaling $2.2 billion—to pay off their TARP obligations, Treasury Department data reviewed by The Wall Street Journal show. The fund began lending to small banks three months ago, and the program concluded last week. Of the total $30 billion available in the fund, only $4 billion in loans to banks were approved.

Under the fund's regulations, the banks weren't prohibited from using the money to pay back TARP debt. But the two programs were designed to be separate, a Treasury Department spokeswoman said, adding that unless the banks increased their small-business lending, they wouldn't enjoy loan rates lower than what they were paying for TARP money.

A recent study by Pepperdine University found up to 60% of small-business loan applications were rejected this year.