WASHINGTON — Regulators were picked apart Friday by members of two House committees, who blamed them for a dramatic drop in lending and urged them to ease up on bankers.

Top leaders at all four banking and thrift regulatory agencies attempted to defend themselves, arguing that the tightening of credit was not their fault, but rather the natural response to an economic downturn and a drop in demand. Some even suggested that examiners were right to curb lending, particularly by troubled institutions.

"I've seen some executives at banking institutions quoted as saying they want to lend more but that their regulators won't let them," Office of Thrift Supervision Acting Director John Bowman said. "In some cases that is certainly true. An institution with soaring levels of bad loans and insufficient capital faces the all-too-real prospect of failure if capital and loan-loss reserves do not increase. And to state the obvious, a closed institution doesn't make any more loans."

Such responses did not sit well with lawmakers, who argued the regulators were being defensive and evasive.

"If all we are getting is a defense of every single thing you've ever done, there's no change in the status quo, then we've got a problem," said House Financial Services Committee Chairman Barney Frank. "So I urge you to not be totally defensive. … The frustration is when we get issue-by-issue, decision by decision a perfectly plausible and rational defense of what's happened, but then people go away saying 'I guess there's no change.' "

The joint hearing by the Financial Services and Small Business committees came a few days after the Federal Deposit Insurance Corp. reported that total loans in 2009 plummeted 7.5%, to $7.3 trillion, the largest decline since 1942.

Lawmakers acknowledged the tough credit environment, but member after member cited anecdotes from their local bankers about how regulators are preventing them from lending to small businesses.

"You exacerbate the problem to a standpoint of going in and restricting the ability of these folks," said Rep. Erik Paulsen, R-Minn. "Quite frankly, you guys are a part of the problem."

But regulators refused to take the fall for the drop in lending, saying they have issued repeated advisories to banks encouraging them to lend and told their examiners to allow loans to creditworthy borrowers.

"Many have questioned whether the regulatory pendulum has swung too far, to the point where regulators and examiners are impeding banks' ability to make even prudent loans," Comptroller of the Currency John Dugan said. "We take this matter very seriously, and as a result, have taken and continue to take a number of steps to ensure that OCC examiners are applying supervisory policies in a balanced and consistent manner across the country."

But lawmakers said that message is not reaching examiners.

"What you are saying in Washington is very different from what's happening with your examiners and regional supervisors on the ground," said Rep. Judy Biggert, R-Ill.

Bankers testifying before the hearing also tried to put the blame on regulators.

"Community banks confront the toughest regulatory environment in more than two decades," said Stephen Andrews, the president and chief executive of Bank of Alameda in California and representing the Independent Community Bankers of America. "While Washington policymakers exhort community banks to lend to businesses and consumers, banking regulators, particularly field examiners, place restrictions on banks well beyond what is required to protect bank safety and soundness. The banking agencies have moved the regulatory pendulum too far in the direction of overregulation at the expense of lending."

William Grant, the chairman and CEO of First United Bank and Trust in Oakland, Md., testifying on behalf of the American Bankers Association, agreed.

"Banks are working every day to make credit available," he said. "Those efforts, however, are made more difficult by regulatory pressures and accounting treatments that exacerbate, rather than help to mitigate, the problems."

Herb Allison, the assistant Treasury secretary for financial stability, attempted to use the hearing to build political support for the administration's proposed $30 billion program to help spur lending to small businesses by community banks.

"Banks want to lend and the regulators want to make sure the banks are lending responsibly and have adequate capital to support their lending," Allison said. "We can solve all three if Congress will approve this new capital fund so we can provide this capital to banks so they can increase their capital dramatically. I think, without being presumptive of my regulators at this table, that should make regulators more comfortable about the strength of these banks and they will be able to lend more."

But Small Business Committee Chairman Nydia Velazquez blasted the program, saying it would have little impact.

"Taking $30 billion and simply handing it to banks — in the hopes that they will make loans — is not sound policy," she said.