More than 80 percent of the U.S. banks that received federal bailout funds said the money had helped them increase lending or avoid a drop in lending as the recession worsened earlier this year, according to a new survey released on Sunday.

The survey by the Special Inspector General for the U.S. Treasury's $700 billion Troubled Asset Relief Program (TARP) found nearly 40 percent of the 360 banks surveyed had used some of the funds to build up capital cushions to absorb unanticipated losses.

And a third of the institutions said they had invested some of the TARP money into mortgage-backed securities issued by Fannie Mae and Freddie Mac .

The survey, conducted from February to June, was aimed at answering a question on the minds of many lawmakers, policy makers and commentators: What have banks done with their bailout money?

The original bank capital infusion program approved by the administration of George W. Bush in October 2008 did not require detailed information from banks on use of TARP funds.

TARP inspector general Neil Barofsky recommended in the report that Treasury require TARP recipients to submit periodic reports to Treasury on their use of the funds, such as lending, investments, acquisitions and other activities, including a description of what actions they were able to take that they would not have taken without TARP funding.

The survey did not make public results from individual banks, partly to address their concerns about divulging business-sensitive information.

But of the 360 banks surveyed, 300 or 83 percent, said it was used to supplement lending activities. About 29 percent of institutions said they used TARP funds to make residential loans, 18 percent used TARP funds for commercial mortgages and 17 percent said they made other consumer loans with TARP funds, such as auto loans and personal lines of credit.

Among the 40 percent of banks that said they used TARP funds to bolster capital cushions, economic uncertainty was a key factor cited. The report cited the following quote as a typical response in this area: It was in the best interest of (the bank's) shareholders for the company to gain additional liquidity and a further capital cushion against the economic uncertainties that lay ahead.

Another 52 institutions, or 14 percent, said they used the funds to pay off other debts because the government funding was more cost effective.

Another 15 banks, or four percent, said they used TARP funds for acquisitions, mostly to take over failed banks at the request of the Federal Deposit Insurance Corp., the regulator that administers most bank failures.

Most TARP participants said they did not segregate the taxpayer funds from their other capital or borrowings.

(Reporting by David Lawder; editing by Todd Eastham)

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