By KENT HOOVER
khoover@bizjournals.com

Federal Reserve Board Chairman Ben Bernanke pledged to do his part to boost lending to small businesses, including making sure that his bank examiners don't discourage banks from making these loans.

"Our message is clear: Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers," he said. "Doing so is good for the borrower, good for the lender and good for our economy."

Bernanke delivered this message at a daylong forum on small-business financing July 12 at the Federal Reserve's headquarters in Washington, D.C. Small-business representatives were pleased not only with his words - "more must be done," he said, to increase the flow of credit - but also with the fact that he remained at the forum after his welcoming remarks and listened to what lenders and small-business owners had to say. The meeting culminated a series of 40 listening sessions the Fed has held around the country concerning small-business lending.

The Fed can't force banks to lend to small businesses, but Bernanke's high-profile endorsement of doing more to ease the credit crunch could have an important side effect, said Todd McCracken, president of the National Small Business Association.

"It could light a fire under Congress," he said.

In what McCracken called an "almost criminal" act, Congress let a program that was increasing the supply of credit to small businesses expire June 1. That's when lenders could no longer get a 90 percent government guarantee on the SBA's flagship 7(a) loans and borrowers could no longer get their fees waived on SBA loans. These enhancements - first passed as part of the economic stimulus bill - sparked a rebound in SBA lending, but loan volume is down about 60 percent since they expired.

Bankers at the Fed's forum urged Congress to restore these breaks through at least the end of the year.

SBA Administrator Karen Mills said the breaks are essential to the nation's economic recovery.

"Now is not the time to pull back," she told forum attendees. "We have a program that works."

Fed pushes examiners to ease up

During its listening sessions, the Fed often heard "that bank examiners have prevented banks from making good loans," Bernanke said.

"We take this issue very seriously," he said.

The Fed has collaborated with other banking regulators to issue policy statements encouraging banks to make loans to creditworthy businesses. It has conducted extensive training sessions on this policy with its bank examiners.

Sabeth Siddique, assistant director of the Fed's division of banking supervision and regulation, said he has repeatedly told bankers to call him if they feel that their bank examiners have improperly implemented this guidance.

"I have yet to receive one call," Siddique said.

That doesn't necessarily mean, however, that lenders feel bank examiners are always being fair, said Bill Bynum, CEO of Enterprise Corporation of the Delta and Hope Community Credit Union.

Lenders are "a little reluctant" to go over the head of their bank examiner, Bynum said. The Fed should establish whistleblower protections for lenders who disagree with their examiners' findings, he said.

No money for startups

Many small businesses, meanwhile, complain that banks are rejecting them for loans because their sales and profits are down due to the weak economy. Banks are disregarding their past years of strong performance and turning them down even if they have contracts in hand that will boost their future profits, they say.

Robert Hilson, senior vice president of global commercial banking for Bank of America, said these loans are "problematic" because banks are being asked to lend new money when current cash flow is weak. Bank of America, however, will take a second look at small-business loans that were initially rejected, he said. Other banks also have instituted second-look programs.

The bankers at the forum all said they want to make loans - that's how they make their money.

But a new NSBA survey found that one-third of small businesses have had their credit card limits or lines of credit reduced over the past six months.

"There still is a very substantial problem out there," McCracken said.

New businesses are having an especially tough time getting credit. Home equity is no longer a strong source of capital, families and friends are less likely to have money to invest, and banks aren't interested in unproven ventures.

"Financing for startups is virtually impossible to obtain," said Robin Prager, assistant director of the Fed's division of research and statistics.