Another Chance for Small Business Loans? President Obama urges banks to increase lending--again.

By Diana Ransom

When President Barack Obama met with banking CEOs earlier this week, he urged them to "take a third and fourth look" at small businesses that they had rejected for loans during the year. The question is, will the banks follow through?

The CEO of US Bancorp Richard Davis told meeting attendees that his bank would take a second look at every loan it rejects. Separately, JPMorgan Chase's (JPM) CEO Jamie Dimon also agreed to take another look at small business credit applications that have been declined. James E. Rohr the chairman and CEO of Pittsburgh's PNC Bank (PNC) said he would evaluate existing procedures that offer a second look at small-business applications.

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Other banks including Bank of America (BAC), Wells Fargo (WFC) and even American Express (AXP) claim to have had second-look-style programs in place for a year or longer. However, in recent months, they've been "ramping up" these programs--hiring new staff, widening their application inspection criteria and formalizing appeals programs, according to spokespeople with all three banks.

Further, the Financial Services Roundtable, a banking industry group in Washington, D.C., is attempting to corral other banks behind installing a program. "We're making the proposal and asking them to make it a policy," says Scott Talbott, a spokesman for the organization. Although the details on existing programs and how to take advantage of them are spotty, such policies will receive more structure in the coming months, says Talbott. At this point, he recommends small businesses to speak with their own bank to see if there's a second-look program.

In addition to being given a second chance, several banking giants recently announced more generous small-business loan targets for 2010. Bank of America offered to increase its lending to small- and medium-sized businesses by $5 billion next year. Separately, JPMorgan Chase set its small-business lending goal at $10 billion, while Wells Fargo, the nation's largest small business lender, said it would lend up to a whopping $16 billion in 2010.

"Small and medium sized businesses are the lifeblood of the U.S. economy," said outgoing Bank of America CEO Ken Lewis in a statement. "Our improved financial condition and our optimism about the economy will allow us to step up lending to support these clients."

Still, lending remains low. Since April, Bank of America slashed its outstanding loans to small businesses by 5 percent, or $2.2 billion, according to the latest Treasury survey. JPMorgan's lending total dropped by 2.5 percent since April, while Wells Fargo's small business loan portfolio shed $3 billion since then, said the Treasury. Overall, the country's top 22 banks receiving capital injections from the U.S. government have decreased total lending to small business by $11.6 billion over the period. Even when the banks do lend, some business owners say they are being asked for more advantageous terms.

Some owners have even backed out of trying to get a loan because of all the red tape at banks. Sue Taggart, the president of ADinfinitum, a marketing firm in New York, recently applied for the Small Business Administration's American Recovery Capital, or ARC, loan program. To attain an interest free $35,000 loan that's meant to help struggling business owners pay down their debts, she needed to submit a 40- to 50-page application, profit and loss statements and show old receipts. The process was too unwieldy and the restrictions from banks were too oppressive, she says. "Sure, I could pay off my vendors, but it's not worth the headache," Taggart says.

--Write to Diana Ransom at dransom@smartmoney.com