Understanding the Legal Lending Limit
The legal lending limit signifies the maximum amount a single bank can loan to a specific borrower. It is calculated as a percentage of the institution’s capital and surplus. These limits are overseen by the Office of the Comptroller of the Currency (OCC).
Key Insights
- A legal lending limit defines the maximum loan amount a bank can extend to an individual borrower.
- National banks have a set legal limit of 15% of their capital for lending.
- Securing a loan with readily marketable securities can increase the limit by 10%, reaching a total of 25%.
- Certain loans, like those backed by U.S. obligations, are exempt from lending limits.
- While state-chartered banks may have their own limits, they often align with the OCC standard.
Mechanisms of the Legal Lending Limit
The legal lending limit framework for national banks is established in the United States Code (U.S.C.) and is regulated by the OCC. Specifics regarding these limits are outlined in U.S.C. Title 12, Part 32.3.
The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance to U.S. depositors, and both the FDIC and OCC are integral to the national bank chartering process. These entities ensure national banks adhere to rules laid out in the United States Code, which encompasses federal statutes.
The legal lending limit code applies to national banks and savings associations nationwide. According to federal law, these institutions cannot lend more than 15% of their capital and surplus to a single borrower. An additional 10% leeway is granted for secured loans, allowing up to 25% lending against the capital and surplus.
State-chartered banks may have their own limitations mirroring the OCC standard. For instance, New York-chartered banks have a lending cap of 15% of their capital, surplus, and undivided profits, with 25% permitted for collateralized loans.
Special Considerations in Legal Lending
Certain loans may qualify for special lending limits, including those secured by bills of lading or warehouse receipts, consumer paper with installment plans, and loans backed by specific collateral like livestock.
Some loans are exempt from standard lending limits, such as particular forms of commercial paper or loans associated with federal agencies. Banks are mandated to maintain substantial capital reserves, aligning lending limits with institutional borrowers.
Capital in banks is classified into tiers based on liquidity, with Tier 1 capital including the most liquid assets like statutory reserves. National banks must maintain a total capital to assets ratio of 8%.
Surplus in banks encompasses various components such as profits, loss reserves, and convertible debt.
Correction–April 3, 2022: This article has been edited to highlight the role of the OCC as a regulator, and the distinction between federal and state lending limits.