WASHINGTON - House members clashed Friday over whether Congress should use $30 billion from a bank bailout program to help small banks assist small businesses or allocate it to the Small Business Administration to make loans, MarketWatch reported.

Arguing that small businesses continue to face major challenges obtaining credit, Herbert Allison, assistant Treasury Secretary for financial stability, made the case for allocating the funds to small banks to loan to small businesses, based on an Obama administration proposal made earlier this month.

"The proposed design of this new program would provide a clear economic incentive for smaller banks to increase small business lending," Allison said in testimony to a joint congressional committee.

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The House Financial Services and Small Business committees held a joint hearing to examine major challenges in small business and commercial real-estate lending in local markets.

The hearing came after the Federal Deposit Insurance Corp. on Tuesday reported that lending by the banking industry fell by $587 billion in 2009, the largest decline since the 1940s.

The White House proposal, which would assist banks with less than $10 billion in assets make loans to small businesses, requires congressional approval.

Members of both committees are also considering allocating the $30 billion s to the Small Business Administration. That proposal was made by Margot Dorfman, U.S. Women's Chamber of Commerce chief executive, and Steve Gordon, president of Instant-Off Inc., a Florida-based company that makes water-saving devices for faucets.

The SBA would need to make the small business loan proposals it receives available for small banks to take first, before it lends it, as part of the proposal.

"Why not just take that $30 billion and put it in a government account? Why give money to banks when they've proven they aren't going to lend?" asked Gordon. "Banks just don't understand lending."

The proposal was looked at skeptically by Republican committee members, who argued that the real solution was to bring regulatory clarity to small banks and small businesses.

"Lenders are uncertain about the changing regulatory environment," said Rep. Randy Neugebauer, R-Texas. "That's why they aren't lending."

Rep. Spencer Bachus, R-Ala., the top Republican member of the House Financial Services Committee, expressed skepticism about the proposal, arguing that taxpayers would be on the hook if the SBA loan fails.