Jan. 8 (Bloomberg) -- Representative Barney Frank, chairman of the House Financial Services Committee, said the second half of the government’s $700 billion financial rescue should include aid for municipal bond issuers hurt by the credit crisis.

In a memo to House colleagues yesterday, Frank said he was crafting legislation with “new conditions” for spending the funds. Even if the bill is rejected, Frank said “it would be our hope” that President-elect Barack Obama will agree to follow its provisions.

Frank’s letter listed six elements he said are necessary for Congress to support releasing the other half of the Troubled Asset Relief Program. Along with help for cities and states, Frank said the measure will include “substantial efforts” to reduce foreclosures, a demand for banks to disclose how they’re spending TARP money and “explicit authority to make sure” funds are used for auto financing.

“If we are able to get guarantees that funds will be re- lent, a reduction in mortgage foreclosures, aid for the purchasers of automobiles, help for tax-exempt bond issuers and for home buying going forward, then I believe the $350 billion could make a very important contribution to our economic efforts,” wrote Frank, a Massachusetts Democrat.

Democrats have pushed for federal assistance -- from tax breaks to debt guarantees -- for state and municipal governments trying to pay for infrastructure projects by selling bonds.

Municipalities and other tax-exempt issuers, usually among the safest borrowers, are finding they “cannot find investors,” Frank wrote.

Federal Backstop

Obama has already expressed support for the municipal bond market. Yesterday a group of regional bond dealers said it supports Obama’s proposal to provide a federal backstop for the municipal bond market to free up credit for state and municipal borrowers.

Under the proposal, included in Obama’s agenda for the economy, the Federal Reserve and the Treasury would set up a system to guarantee municipal debt, similar to one for commercial paper. Many borrowers that pay for schools, streets and roads have been frozen out of the $2.66 trillion municipal bond market.

Municipal bond sales fell last year in part because state and local governments couldn’t get insurance or acceptable borrowing rates as a result of the credit crisis that affected securities markets.

Yesterday, Treasury Secretary Henry Paulson said Obama will be the “decision-maker” on how to use the rest of TARP.

“We’ve been quite clear with them that if they would like us to notify Congress on their behalf of the takedown of the $350 billion tranche, we’re willing to work with them on that,” Paulson said after a speech in Washington.

Financial Firms

Paulson has come under fire from lawmakers of both parties over his refusal to use the funds for mortgage foreclosures. Instead, Paulson has used the bulk of the first half of the TARP for injecting capital into banks and other financial companies, while also providing loans to the U.S. automakers.

Under the bailout law passed in October, Congress gave itself some authority to block the use of the second half of the rescue funds.

In the letter, Frank also included possible financial help for “brokers, homebuilders and others” that have expressed interest in making funding available for low mortgage rates. “This is a concept that we are still discussing and may well represent something that members would want to see in the bill,” he wrote.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.

Last Updated: January 8, 2009 00:01 EST