When Congress created the Small Business Lending Fund (“SBLF”) as part of the Small Business Jobs Act of 2010, the goal was to encourage community banks to increase small business lending. But a recent government watchdog report found that about $2.1 billion--80 percent of the total fund-- was used to pay back government bailout money instead.

The report was released yesterday by the Office of the Special Inspector General for the Troubled Asset Relief Program (TARP) and revealed that of the 137 former TARP banks, 26 of them have not increased their lending to small businesses, and the remaining have only increased lending by $1.13 for each SBLF dollar they received. In comparison, non-TARP banks have increased lending by $3.45 for each SBLF dollar they received.

How did this happen? Part of the problem seems to be oversight. To receive SBLF money, the small banks had to submit a plan for how they would increase small business lending. 

According to the report: 

Congress’ safeguard of requiring that banks submit a small-business lending plan did not have the intended effect because Treasury and the Federal banking regulators – Federal Reserve Board (“Federal Reserve”), Federal Deposit Insurance Corporation (“FDIC”), and Office of the Comptroller of the Currency (“OCC”) – did not adequately assess whether the banks’ plans to increase small-business lending were achievable – they did not focus on whether the TARP banks were prepared to lend SBLF capital. SIGTARP found that Treasury and the Federal banking regulators did not effectively communicate with each other, each claiming that the other had responsibility to assess the banks’ lending plans.

The Associated Press reported this morning that The Treasury Department "disputed the report's findings." 

So what happens now? Well, former TARP banks that received money from SBLF but failed to increase lending won' t be penalized, according to the report.

Interesting note: the phenomenon is nothing new, as more than half of the $4 billion of SBLF fund in 2011 was used by banks to pay off their TARP loans.