Washington - President-elect Barack Obama and a key Democratic lawmaker have revealed plans to overhaul the government's US$700 billion (S$1 trillion) financial rescue fund as a way to aid struggling home owners and speed up the flow of credit.

An Obama transition official on Friday confirmed that the new administration planned a broader approach for the second US$350 billion of the US Treasury's Troubled Assets Relief Programme (Tarp).

Some money would be aimed at stemming record foreclosures and helping cash-strapped local governments, which have been forced to cut staff and services.

House Financial Services Committee chairman Barney Frank said he was planning to ensure that money be devoted to housing. Aides said Mr Frank's Bill, which would also tighten restrictions on the use of Tarp funds by recipients, would demand about US$40 billion for foreclosure relief.

The efforts underscore growing dissatisfaction in Washington over the handling of the bailout fund by departing Treasury Secretary Henry Paulson.

Lawmakers have complained that his approach to devote the first half of the Tarp money largely to recapitalise banks as a way to ease the worst credit crisis in a generation has failed to slow soaring foreclosures.

Ms Elizabeth Warren, the chairman of a Tarp congressional oversight panel, told ABC News: 'The Tarp funds themselves have not been used in this way despite congressional statutes requiring them to do so.'

A report from the panel last Friday also sharply criticised a lack of oversight, saying there were 'significant gaps in Treasury's monitoring of the use of taxpayer money', including failure to ask institutions to account for what they have done with the funds.

Congress must give its blessing before the Treasury can dole out the remaining rescue funds and senior Democrats are talking with the Bush administration about making a request as soon as this weekend, sources familiar with the talks said. If that request is approved in the next few days, the rescue cash could be available soon after Mr Obama takes office on Jan 20.

The White House said on Friday evening that it was talking with the Obama team about whether to request the final allotment of aid.

The Obama transition official, who spoke on condition of anonymity, said the Tarp overhaul, spearheaded by Treasury Secretary nominee Timothy Geithner and top Obama economic adviser Larry Summers, would seek to expand loans to municipalities, small business and consumers.

Mr Frank's Bill lays out some key conditions for the programme.

These require the Treasury to develop foreclosure relief plans for owner-occupied homes by March 15 and start committing Tarp funds to it by April 1. The plans can include government guarantees for modified loans, paying down second lines and outright loan purchases to bring down payments.

The measure also would toughen executive compensation rules and make some of them retroactive for banks that have already received funds. 'If they don't like it, they can give the money back,' Mr Frank, a Massachusetts Democrat, told reporters on Capitol Hill.

The Bill would give smaller banks access to Tarp funds and set benchmarks for them to meet in expanding their lending.

It also would prohibit the use of Tarp funds to acquire a 'healthy' institution.

Work on overhauling Tarp comes as Mr Geithner is preparing for a Senate confirmation hearing expected to take place this week, probably on Thursday.

Senators will be eager to question Mr Geithner on his plans for Tarp, among other subjects, just as they regularly grilled Mr Paulson on the subject.

Mr Geithner is considering creating a new bureau within the Treasury to oversee Tarp, the Obama aide also said.

Reuters