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Treasury Wants TARP Rules Eased For Small Biz Lending

The Treasury Department will ask Congress for legislation to relax rules governing the Troubled Asset Relief Program, or TARP, to help small business get loans from smaller banks, CNBC has learned.

The current TARP rules include such items as executive compensation restrictions.

Treasury reportedly wants to commit $30 billion to $40 billion of TARP for small business lending. The relaxed TARP legislation could be part of a jobs package in 2010 to help ease the country's unemployment picture. The Treasury Department plans to make the case that the TARP restrictions were for the bigger banks, not smaller institutions.

However, many small banks have reportedly told the Treasury Department that they do not want government funds for small business loans. The banks are concerned about restrictions including compensation caps that might be imposed if they take the TARP funds. They have also expressed concern over the 'stigma' of having to receive government funds to increase loans.

No final decisions have been taken on how much TARP money might be used or how it might be apportioned, the Treasury official. The Obama administration has been speaking with bankers, both large and small, about how to get credit flowing more freely to support a recovering economy.

The TARP fund was initially set up last year, with Congress' approval, for the purpose of buying toxic assets from struggling banks but was almost immediately converted into a program for injecting capital into banks.

Much of the bailout money now is being repaid, frequently with interest, but the administration is trying to find a formula for balancing a message of greater banking accountability with the need for small businesses to be able to get access to loans.

Treasury Secretary Timothy Geithner on Tuesday identified tight lending as one of the most severe risks a recovering economy faces. Small businesses create most jobs, so it is especially critical for them to be able to get credit.

"Right now, the real risk we face is that banks are not lending enough and not going to provide the capital businesses need to grow for the economy to strengthen going forward," Geithner said in an interview on National Public Radio.