Legal Lending Limit
What Is the Legal Lending Limit?
The legal lending limit is the maximum dollar amount that a single bank can loan to a given borrower. This limit is communicated as a percentage of an institution's capital and surplus. The limits are regulated by the Office of the Comptroller of the Currency (OCC).
How the Legal Lending Limit Works
The legal lending limit for national banks was laid out under the United States Code (U.S.C.) and is managed by the OCC. Subtleties on national bank lending limits are reported in U.S.C. Title 12, Part 32.3.
The FDIC gives insurance to U.S. depositors. Both the FDIC and the OCC are associated with the national bank sanctioning cycle. The two substances likewise work to guarantee that national banks follow laid out rules defined in the United States Code which subtleties federal statutes.
The lending limit legal code applies to national banks and savings associations across the nation. The federal code on lending limits states that a national bank or savings association may not issue a loan to a single borrower for over 15% of the institution's capital and surplus.
This is the base standard and requires an institution to closely follow capital and surplus levels which are additionally regulated under federal law. Banks are permitted another 10% for collateralized loans. Hence, they can loan up to 25% of capital and surplus in the event that a loan is secured by promptly marketable securities.
State-contracted banks might have their own lending limits however are frequently like the OCC standard. For instance, New York-contracted banks have a lending limit of 15% of their capital, surplus and undivided profits (CUPS), and 25% for loans secured by fitting collateral.
Special Considerations
A few loans might be permitted special lending limits. Loans that might meet all requirements for special lending limits incorporate the following — loans secured by bills of lading or warehouse receipts, installment consumer paper, loans secured by animals and project financing advances relating to a pre-qualifying lending commitment.
Furthermore, some loans may not be subject to lending limits by any means. These loans might incorporate certain commercial paper or business paper discounted loans, bankers' acknowledgments, loans secured by U.S. obligations, loans affiliated with a federal agency, loans associated with a state or political region, loans secured by segregated deposit accounts, loans to financial institutions with the endorsement of a predetermined Federal banking agency, loans to the Student Loan Marketing Association, loans to industrial development specialists, loans to leasing companies, credit from transactions financing certain government securities and intraday credit.
Banks are required to hold huge amounts of capital which normally makes lending limits just apply to institutional borrowers. Generally, capital is partitioned into tiers based on liquidity. Tier 1 capital incorporates its most liquid capital like statutory reserves. Tier 2 capital might incorporate undisclosed reserves and general loss reserves. National banks are required to have a total capital to assets ratio of 8%.
Surplus might allude to a number of parts at a bank. Categories included as surplus might incorporate profits, loss reserves, and convertible debt.
Rectification April 3, 2022: This article has been altered to feature the job of the OCC as a regulator, and the qualification among federal and state lending limits.
Features
- A few loans are not subject to loan limits, for example, loans secured by U.S. obligations, bankers' acknowledgments, or certain types of commercial paper, among others.
- The legal limit for national banks is 15% of the bank's capital.
- Assuming the loan is secured by promptly marketable securities, the limit is raised by 10%, carrying the total to 25%.
- A legal lending limit is the most a bank or thrift can loan to a single borrower.
- State-contracted banks might have their own lending limits, yet they are frequently like the OCC standard.
