COVENTRY — At the request of a Town Council candidate, the attorney general’s office is investigating whether the town can legally tap into two charitable trusts to finance a low-interest loan program for small businesses.

The Horatio N. Waterman Trust, established in 1902, and the Isaac Fiske Fund, formed in the 1940s, were both set up by wealthy residents to help the poor. As of June 30, 2007, the latest date for which figures were available, they contained a total of $2.2 million, according to town Finance Director Warren West.

The Town Council, which is the funds’ trustee, in February established a low-interest loan program to help small businesses with remodeling or other upgrades. Businesses could apply to the Planning Department for loans up to $10,000, repayable over five years at 3 percent interest.

The program — meant to dovetail with new town guidelines for architectural designs — has yet to be established, and no applications have been received.

No action will be taken until the attorney general’s office completes its review, said Town Planner Paul K. Sprague, who for the last year also has been acting town manager.

The review was prompted by an inquiry from Laura Flanagan, a Republican candidate for the District 2 seat on the Town Council.

Flanagan asserted there are more appropriate uses for the money, such as to assist people who may struggle to heat their homes this winter.

“The Town Council has the fiduciary responsibility to make good decisions,” Flanagan said. “At the end of the day, they need to do their due diligence and not make an arbitrary decision. I think it’s a very admirable thing to do, to help businesses, but not with a trust fund.”

The attorney general’s Charitable Trust Unit, in a letter to town officials last month, directed that both trusts be registered with the state and that the town provide copies of the documentation that established the trusts, said attorney general spokesman Michael J. Healey.

As of yesterday, the office had not received either proof of registration or the supporting documents, Healey said.

“It’s the town’s assertion that the loan program is an investment of the trust. On its face, however, we definitely have concerns. Until we can see the relevant documents and further talk to the town’s attorney, we have to reserve judgment,” Healey said.

Town Solicitor Patrick J. Sullivan said he sent a written response and submitted the financial data on the trusts this week.

He stressed that a formal loan program has not been set up yet.

“We were supposed to develop a protocol. They received a complaint that it has started. It hasn’t started. But the town considers it an investment for the money, secured by the [loan applicant’s] real estate,” Sullivan said.

“We are waiting to get guidance,” Sprague said. “I thought it was a good idea at the time, to help businesses.”

This is not the first loan effort to rely on the two trusts. In 2004, the Town Council lent money to allow tenants of two mobile home parks, Ramblewood Estates and Mapleroot Mobile Home Park, to buy the properties.

The council was assured by Francis A. Frobel, then town manager, that the use of the trusts was appropriate, recalled Councilman Frank Hyde, who was on the council at the time.

“It was within the council’s authority,” Hyde said.

“We thought it was a good thing to do.”

As for the program unanimously launched in February, he said, it was “an effort to help businesses. You can’t put demands on people without giving them some relief.”

lsparks@projo.com