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A senior House Republican scolded the Treasury Department on Wednesday for rejecting recommendations from a government watchdog to prevent fraud in a new $30 billion bank capital program to boost lending to small businesses.

“There is no justification for Treasury’s failure to implement sensible recommendations suggested by SIGTARP that go a long way to protect taxpayers, and ensure participating financial institutions actually lend to small businesses,” Rep. Spencer Bachus of Alabama, the new chairman of the House Financial Services Committee, said in a statement.

SIGTARP – the acronym for the special inspector general monitoring the $700 billion Troubled Asset Relief Program – said in a quarterly report to Congress that Treasury rejected a pair of recommendations to discourage fraud and abuse in the Small Business Lending Fund program to help banks make more credit available.

The fund, created by Congress last summer, provides capital to small banks with assets under $10 billion to stimulate lending to local businesses.The application deadline for the program is March 31, 2011.

One recommendation urged Treasury to exclude any money from TARP’s Capital Purchase Program when analyzing a bank’s health and viability for the small business lending program. “Treasury has rejected this recommendation, citing its belief that current CPP participants may be unfairly disadvantaged in their Small Business Lending Fund applications if their existing CPP investments are not counted as part of their capital base,” the SIGTARP report said. But allowing banks that have not yet repaid their TARP money to count that toward the capital requirement for the small business program amounts to a “significant and unnecessary subsidy,” the report said.

The other recommendation rejected by Treasury would have prevented TARP banks that are healthy enough to enter the small business program from enjoying a “windfall dividend reduction” without any significant increase in lending, the SIGTARP report said.

At a House Oversight and Government Reform Committee hearing on the new SIGTARP report, a Treasury official told lawmakers that the two recommendations were rejected because the department wanted to follow the intent of Congress when it created the Small Business Lending Fund. However, the Treasury Department did accept a third SIGTARP recommendation that all banks applying for the program undergo a new financial health analysis.

Tim Massad, acting assistant Treasury secretary, also said that the department would re-evaluate if a bank was well capitalized enough to qualify for the Small Business Lending Fund and money would not be given to weak banks dependent on TARP.

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