A key House Democrat on Friday urged the Obama administration to work with lawmakers who want to send bailout money directly to small businesses rather than through banks.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said "I would urge the administration to work closely" with the head of the Small Business Committee to agree on legislation.

The administration has proposed using $30 billion of leftover money from the $700 billion federal bailout program to help community banks increase lending to small businesses. But many lawmakers want the money to be dispensed directly by the federal Small Business Administration.

Frank spoke at a hearing examining a crucial element of the economic recovery: banks' lending to small businesses.

Congress must approve the new small-business fund proposed by President Barack Obama, which would be open to banks with $10 billion or less in assets.

Frank urged the administration to work instead with Rep. Nydia Velazquez, D-N.Y., who heads the Small Business Committee.

Velazquez wants the $30 billion from the bailout program sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.

"If we are truly going to open up financing options for small businesses, we need a more balanced approach," Velazquez said. "That does not mean doing more for financial institutions and expecting the benefits to trickle through to small firms. Taking $30 billion and simply handing it to banks — in the hopes that they will make loans — is not sound policy."

The House passed legislation a year ago and again last October to allow for direct funding.

Some lawmakers appeared resistant to the idea. Rep. Spencer Bachus of Alabama, the Financial Services panel's senior Republican, questioned the wisdom of injecting billions more into a federal agency. What is keeping banks from lending to businesses, he said, are the strictures that federal bank regulators are imposing on them.

Small businesses are seen as a linchpin for the recovery, with the potential to expand and soak up some of the high unemployment that has ravaged the country and preoccupied Congress.

At the same time losses are mounting on loans for commercial real estate, such as stores and office complexes, as buildings sit vacant and builders default. A cascade of hundreds of billions in losses on the loans could deepen the hurt for regional banks and quicken the pace of bank failures — which reached 140 last year.

At the gates stand the banks. In many cases their thinning capital reserves are one of the key factors limiting credit and clogging the pump of economic growth, Obama administration officials maintain.

U.S. bank lending last year posted the steepest drop since World War II, with the volume of loans falling by $587.3 billion, or 7.5 percent, from 2008, the government reported Tuesday.

Yet many in the banking industry say lending isn't hampered by a lack of capital, with even well-capitalized banks having trouble finding creditworthy borrowers. And small businesses may be reluctant to borrow in the toughest economic climate since the Great Depression.

Martin Gruenberg, vice chairman of the Federal Deposit Insurance Corp., is among the regulators slated to testify at Friday's hearing, as well as SBA Administrator Karen Mills, Assistant Treasury Secretary Herbert Allison and Federal Reserve Gov. Elizabeth Duke. Bankers with Wells Fargo & Co. and Citizens Republic Bancorp Inc. are also expected to speak.