Many business owners hoping that the Small Business Association’s emergency loan program would keep their companies afloat have been disappointed to discover that most banks are not participating in the program.

More than 1,000 loans have been granted to small businesses since the SBA’s America’s Recovery Capital program began in mid-June, but of the 8,200 FDIC-insured banks in the country, only about 400 are making ARC loans, according to CNNMoney.com.

The ARC program offers qualifying businesses SBA-insured, interest-free loans of up to $35,000 to help them pay off existing debt.

Many large national banks have been unwilling to participate because small, low-interest loans don’t generate profits and they worry about a high default rate. Even though the loans are guaranteed by the SBA, the administrative costs for collecting on defaulted loans aren’t worth it for many banks.

Only three of the SBA’s 10 most active lenders — Wells Fargo, PNC Financial and Zions Bank – have issued the loans, said CNNMoney.com.

Smaller, regional banks eager to participate in the program have found that many applicants don’t qualify for the loans.

“We’ve screened hundreds of applications from customers and non-customers alike,” Bob Polito, senior vice president of Webster Bank in Waterbury, Conn., told CNNMoney.com. “All need the help, but few qualify.”

Despite the small number of loans issued so far, the SBA says it is on track to provide 10,000 ARC loans by the time the program ends in 2010.

Good news ahead for the banking industry?

Wells Fargo turned a profit in the first three months of 2009, but could also post record quarterly earnings with net income of $3 billion, according to an April 10 story in USA Today.

Investors naturally cheered, sparking a big rally in bank shares.

Wells Fargo jumped 32 percent to $19.61 per share, USA Today said, while other banks like Bank of America, which bounced 35 percent to $9.55, enjoyed similar gains.

Economists and investors hoped the run of good luck meant the system was finally stabilizing.

USA Today said Well Fargo’s results show that homeowners took advantage of low rates. “The bank saw $100 billion in new mortgages in the quarter, with more than 450,000 people purchasing or refinancing homes. Mortgage applications rose 64% from the fourth quarter of 2008 to $190 billion,” the paper said.

Analysts were buoyed, but cautioned against jumping to too much of a rosy conclusion, citing that the results of the government-ordered “stress tests” on bank assets had not yet been revealed.

Ben Wallace, an analyst at Grimes & Co., told the paper: “It’s a good start.”

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