What is the Legal Lending Limit? Example & How It Works
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Summary:
The legal lending limit, overseen by the Office of the Comptroller of the Currency (OCC), defines the maximum amount a bank can lend to a single borrower, usually expressed as a percentage of the institution’s capital and surplus. National banks face a standard limit of 15%, extendable to 25% for collateralized loans. State-chartered banks often align with the OCC standard. Understanding the legal lending limit is crucial for navigating the intricacies of banking regulations.
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What is the legal lending limit?
The legal lending limit is a crucial factor in banking, determining the maximum amount a bank can lend to an individual borrower. This limit, regulated by the Office of the Comptroller of the Currency (OCC), is expressed as a percentage of the institution’s capital and surplus.
How the legal lending limit works
The legal lending limit for national banks is defined under the United States Code (U.S.C.), specifically in Title 12, Part 32.3. This limit, a regulatory measure overseen by the OCC, ensures that national banks do not issue loans exceeding 15% of their capital and surplus.
National banks must closely monitor capital and surplus levels, regulated under federal law. An additional 10% allowance is granted for collateralized loans, enabling banks to lend up to 25% of their capital and surplus if the loan is secured by readily marketable securities.
State-chartered banks may have their lending limits, which often align with the OCC standard. For example, New York-chartered banks have a lending limit of 15% of their capital, surplus, and undivided profits (CUPS), with an extension to 25% for certain collateralized loans.
Special considerations
Certain loans may qualify for special lending limits. Examples include loans secured by bills of lading or warehouse receipts, installment consumer paper, loans secured by livestock, and project financing advances pertaining to pre-qualifying lending commitments. Additionally, some loans may not be subject to lending limits at all, including certain commercial paper, bankers’ acceptances, and loans affiliated with U.S. obligations.
Banks, to comply with regulations, maintain significant capital holdings. Capital is divided into tiers based on liquidity, with Tier 1 including the most liquid components like statutory reserves. National banks are required to maintain a total capital to assets ratio of 8%.
Surplus may refer to a number of components at a bank. Categories included as surplus may include profits, loss reserves, and convertible debt.
Frequently asked questions
What is the legal lending limit for national banks?
The legal lending limit for national banks is set at 15% of the bank’s capital, extendable to 25% for collateralized loans.
Are state-chartered banks subject to the same lending limits?
While state-chartered banks may have their lending limits, they often align with the OCC standard. For example, New York-chartered banks follow a lending limit of 15%, with an extension to 25% for certain collateralized loans.
What loans may be subject to special lending limits?
Loans secured by bills of lading or warehouse receipts, installment consumer paper, loans secured by livestock, and project financing advances related to pre-qualifying lending commitments may be subject to special lending limits.
Which loans are exempt from lending limits?
Certain loans, such as those secured by U.S. obligations, bankers’ acceptances, loans affiliated with federal agencies, and certain types of commercial paper, may not be subject to lending limits.
Key takeaways
- The legal lending limit is the maximum amount a bank can lend to a single borrower, regulated by the OCC.
- National banks have a standard limit of 15%, extendable to 25% for collateralized loans.
- State-chartered banks often follow similar lending limits to the OCC standard.
- Special considerations exist for loans secured by specific assets, and some loans may be exempt from lending limits.
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