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What Is the Legal Lending Limit?
Let me explain the legal lending limit directly: it's the maximum dollar amount a single bank can lend to any one borrower. As a bank, we express this limit as a percentage of our institution’s capital and surplus, and it's all regulated by the Office of the Comptroller of the Currency (OCC).
Key Takeaways
You should know that the legal lending limit is the most a bank or thrift can lend to a single borrower. For national banks, it's 15% of the bank’s capital. If the loan is secured by readily marketable securities, that limit goes up by 10 percentage points to a total of 25%. There are exemptions, like loans secured by U.S. obligations, bankers' acceptances, and certain commercial paper. Remember, banks hold significant capital, so these limits typically only affect institutional borrowers.
How the Legal Lending Limit Works
The legal lending limit for national banks comes from the United States Code, specifically U.S.C. Title 12, Part 32.3. The OCC oversees these limits, and the Federal Deposit Insurance Corp. (FDIC) provides insurance for U.S. depositors. Both the FDIC and OCC handle national bank chartering and ensure we follow the rules in the United States Code, which lays out federal statutes.
This lending limit applies to national banks and savings associations across the country. The federal code states that a national bank or savings association cannot lend more than 15% of its capital and surplus to a single borrower. We have to track our capital and surplus levels closely, as they're regulated under federal law. For collateralized loans, we're allowed an extra 10 percentage points, so up to 25% if readily marketable securities secure the loan.
Just a quick note: state-chartered banks might have their own limits, but they're often similar to the OCC standard. For instance, New York-chartered banks limit to 15% of their capital stock, surplus fund, and undivided profits, or 25% for loans with appropriate collateral.
Special Considerations
Some loans qualify for special lending limits, such as those secured by bills of lading or warehouse receipts, installment consumer paper, loans secured by livestock, and project financing advances under a pre-qualifying commitment.
Loans Not Subject to Lending Limits
- Certain commercial paper or business paper discounted loans
- Bankers' acceptances
- Loans secured by U.S. obligations
- Loans affiliated with a federal agency
- Loans associated with a state or political subdivision
- Loans secured by segregated deposit accounts
- Loans to financial institutions with approval from a specified federal banking agency
- Loans to the Student Loan Marketing Association (Sallie Mae)
- Loans to industrial development authorities
- Loans to leasing companies
- Credit from transactions financing certain government securities
- Intraday credit
More on Capital and Surplus
Banks are required to hold significant capital, which is why lending limits usually only apply to institutional borrowers. Capital gets divided into tiers based on liquidity—Tier 1 includes the most liquid, like statutory reserves, while Tier 2 might include undisclosed reserves and general loss reserves. National banks need a total capital to assets ratio of 8%. Surplus can include profits, loss reserves, convertible debt, and other components.
How Is a Bank's Legal Lending Limit Expressed?
We express a bank's legal lending limit as a percentage of the institution’s capital and surplus. For national banks, it's 15% of the capital. These limits stop excessive loans to one person or related financially dependent persons, as per the OCC.
Which Banks Must Comply with the Legal Lending Limit?
The U.S. lending limit code applies to national banks and savings associations nationwide. It says no loan to a single borrower can exceed 15% of the institution’s capital and surplus. Most state-regulated banks follow similar guidelines.
Will You Face a Loan That Exceeds Banks' Legal Limits?
It's highly unlikely for you as a typical borrower. Banks hold a lot of capital, so these limits mainly affect large institutional borrowers.
The Bottom Line
To wrap this up, the legal lending limit is expressed as a percentage of a bank’s capital and surplus, capping what we can lend to one borrower. Federal code limits national banks and savings associations to 15% for a single borrower, but with banks' extensive capital, this won't impact most retail or small business borrowers.
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