February 02, 2010, 07:29 PM EST

(Adds unemployment figures, Obama comments, Republican reaction and banking officials beginning in fourth paragraph.)

By Edwin Chen and Nicholas Johnston

Feb. 2 (Bloomberg) — President Barack Obama said $30 billion of the bailout money paid back by Wall Street financial institutions should be used to help community banks provide loans that will spur hiring by small businesses.

Obama said he wants to create a Small Business Lending Fund using money transferred from the Troubled Asset Relief Program. Banks with assets from $1 billion to $10 billion could borrow as much as 3 percent of their risk-weighted assets, while banks with less than $1 billion would get up to 5 percent of their holdings under the plan, which requires congressional approval.

“It’s the small local banks that work most closely with our small businesses,” Obama said at a town hall event in Nashua, New Hampshire. Extending credit will “ensure that small businesses are once again the engine of job growth in America.”

The money would expand lending by as many as 8,000 banks, according to a White House fact sheet. Obama and his economic advisers have said small businesses must be at the forefront of new hiring to reduce the nation’s unemployment rate, which the administration projects will average 10 percent through 2010.

In addition to the new lending program, Obama has endorsed $33 billion in small business tax cuts and incentives for hiring and wage increases. He also is supporting higher loan limits and guarantees through the Small Business Administration.

Jobless Rates

The unemployment rate in New Hampshire was 7 percent in December, up from 4.3 percent a year earlier. That’s still below the national average of 10 percent and better than neighboring states Massachusetts, where the rate was 9.4 percent, and Maine, with 8.3 percent. In Vermont, the rate was 6.9 percent.

“The worst of the storm has passed, but I don’t need to tell you the devastation remains,” Obama told the crowd assembled in the gymnasium of a local high school. “Jobs has to be our No. 1 focus in 2010.”

The cost to a bank for taking capital from the government fund would decline as lending increased, according to a White House fact sheet. Banks would pay the government a 5 percent dividend while using the cash, a rate that could fall to as low as 1 percent if a bank shows it has boosted small-business lending from 2009 levels. After five years, the dividend would increase to encourage repayment, the fact sheet says.

Reaction in Congress

Banks seeking to participate in the program would have to seek approval from their primary federal regulator.

Creating the new fund out of TARP will require legislation. New Hampshire Senator Judd Gregg, the senior Republican on the Banking Committee, said repaid TARP money is required under the law to go toward repaying federal debt.

“TARP is not a piggybank,” Gregg said in a statement. Given the administration’s forecast of a $1.6 trillion deficit this year, “the requirements of the TARP law should not be changed.”

House Minority Leader John Boehner said the program won’t solve the fundamental problem with the economy: uncertainty over government interventions in health care and energy and the growing budget deficit.

“More government spending isn’t what small businesses need,” Boehner, an Ohio Republican, said in a statement.

Trade groups including the American Bankers Association and the Independent Community Bankers of America endorsed the idea, saying they were prepared to work with the administration to enact the proposal.

TARP Taint

Still, community bankers eligible for the program have said a stigma associated with TARP may make participation more difficult, executives of lenders with less than $10 billion in assets told the chairman and staff of the Federal Deposit Insurance Corp. last week.

“We got lumped in with the Wall Street bailout,” Jan A. Miller, the chief executive officer of Boston-based Wainwright Bank & Trust, told FDIC officials at a Jan. 28 meeting of community bankers. “Even though they’re carving it out of TARP legislation, if it’s recognized as TARP, then we run the risk of being tarnished by the bailout.”

Administration officials briefing reporters yesterday said the money would be separated from TARP and wouldn’t have restrictions associated with the bailout, such as limits on executive compensation.

The president’s Nashua town hall meeting is part of a ramped-up effort by the White House to communicate directly with the public and overcome what Obama has called “the noise” that he and his advisers say has detracted from his efforts to revive the economy.

Policy Details

In a Jan. 20 interview with ABC News, Obama said he regretted having immersed himself so deeply in policy details during his first year in office that he “lost some of that sense of speaking directly to the American people.”

Since that interview, he has delivered a State of the Union address before a joint session of Congress, held a town hall meeting in Tampa, Florida; addressed House Republicans in Baltimore; and participated at the White House in a question- and-answer session on Google Inc.’s YouTube that also was streamed on the White House Web site.

–With assistance from Alison Vekshin and Phil Mattingly in Washington. Editors: Joe Sobczyk, Jim Rubin.

To contact the reporters on this story: Edwin Chen in Nashua, New Hampshire at +1-202-624-1844 or Echen32@bloomberg.net; Nicholas Johnston in Washington at +1-202-654-1264 or njohnston3@bloomberg.net

To contact the editor responsible for this story: Jim Kirk at +1-202-654-4315 or jkirk12@bloomberg.net.