WASHINGTON (Reuters) - The US Treasury Department wants to find a "responsible" way to provide government aid to troubled lender CIT Group Inc, Representative Barney Frank said yesterday.

"I've spoken with (Treasury) Secretary Geithner, and I understand they're working hard to try to come up with something responsible to try to prevent the failure," Frank, chairman of the House Financial Services Committee, told Reuters in an interview.

If CIT is allowed to fail, Frank said, "I think there would be a great deal of harm to the overall economy".

CIT, a lender to thousands of small businesses, has said it is in talks with regulators about how to improve liquidity after billions of dollars in losses have severely limited its ability to raise money.

Treasury has been working to devise an aid package that could include a temporary loan that would give CIT room to strengthen its balance sheet by raising additional capital through debt or equity, according to a source familiar with regulators' thinking.

Other options include access to the US Federal Reserve's discount window and asset transfers, said the source, who requested anonymity because the plans could change.

Treasury has also been supportive of the Federal Deposit Insurance Corp granting CIT access to its government debt guarantee programme, the source said. The FDIC has been reluctant to do so because the programme is designed for healthy institutions, and it believes CIT's participation involves too much risk.

Frank said Congress needs to design a system that allows for the orderly unwinding of large, troubled financial companies. In the meantime, he said, policymakers need to prevent widespread fallout from the failure of financial companies.

"If CIT doesn't get structured help, then it will have a very negative effect, I'm told, on small businesses around the country."

CIT finances airlines, railways, retailers and manufacturers. It is struggling to refinance its own debt as the two-year financial crisis has cut off access to the corporate bond market.