By Phil Mattingly, CQ Staff

Banks that use infusions of federal funds for anything other than lending will be violating the terms of the financial rescue, House Financial Services Chairman Barney Frank warned Friday.

House Majority Leader Steny Hoyer, D-Mass., issued a similar statement, indicating growing concern about how the program is being implemented among leaders of both parties on Capitol Hill.

Meanwhile, Sen. Charles E. Grassley of Iowa, the top Republican on the Senate Finance Committee, asked insurance giant AIG to detail how it has spent most of a $123 billion Federal Reserve loan it received to stay afloat.

As reports continue to circulate about the banks potentially hoarding portions of the $250 billion Treasury has offered to invest in exchange for senior preferred stock, or using the money for purposes other than lending, Frank said Treasury Secretary Henry M. Paulson Jr. “must make it absolutely clear to any participating entity that the federal government will insist on compliance” with the rescue law (PL 110-343), which was aimed at using federal funds to unfreeze the credit market.

“Any use of the these funds for any purpose other than lending— for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. — is a violation of the terms of the act,” Frank said in a statement.

Hoyer seconded those comments in a statement issued later in the day.

“In the past few days, it has become apparent that some financial institutions are misinterpreting the intent of Secretary Paulson’s ‘Troubled Asset Relief Program,’” he said. “...It is the responsibility of all parties involved to remember not only the terms, but the spirit of this program.”

Several reports have indicated institutions receiving funds are considering acquisitions of smaller, troubled banks; intend to pay dividends to shareholders; and are planning generous executive bonuses.

While Treasury has imposed some limits on executive compensation at financial institutions that participate in the rescue program, the administration has been more tolerant about acquisitions.

“If a larger bank, a stronger bank, is able to acquire [a smaller bank], and capital is put into that combined entity, that community is now better served,” Neel Kashkari, the interim assistant Treasury secretary for financial stability, said Oct. 23. “And so we have to be very careful about not discouraging prudent acquisitions because that can actually help us get through these troubled times that we’re in right now.”

As for dividend payments, White House spokesman Tony Fratto said Friday “if the capital injections were used to pay for dividends, I think that’s probably something that we would object to, too. But that’s not the intent of their use, and there’s no evidence that that’s taking place.”

Treasury officials have also said they don’t want to discourage participation in the rescue program by imposing too many conditions.

Senate Banking Chairman Christopher J. Dodd , D-Conn., who stood side by side with Frank through the process of crafting the $700 billion bailout legislation, agreed with Kashkari’s assessment on bank mergers. But he said the idea of banks hoarding funds has “really distracted me.”