What Is a Bank's Legal Lending Limit, How Does It Work?

What Is the Legal Lending Limit?

The legal lending limit is the maximum dollar amount that a single bank can lend to a given borrower. This limit is expressed 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 established under the United States Code (U.S.C.) and is overseen by the OCC. Details on national bank lending limits are reported in U.S.C. Title 12, Part 32.3.

The Federal Deposit Insurance Corp. (FDIC) provides insurance for U.S. depositors. Both the FDIC and the OCC are involved in the national bank chartering process. Both entities also work to ensure that national banks follow established rules defined in the United States Code, which details 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 more than 15% of the institution’s capital and surplus.

This is the base standard and requires an institution to closely follow capital and surplus levels that are also regulated under federal law. Banks are allowed an additional 10 percentage points for the lending limit for collateralized loans. Thus, they can lend up to 25% of capital and surplus if a loan is secured by readily marketable securities.

For example, New York-chartered banks have a lending limit of 15% of their capital stock, surplus fund, and undivided profits (CUPS), and 25% for loans secured by appropriate collateral.

Special Considerations

Some loans may be allowed special lending limits. Loans that may qualify for special lending limits include the following—loans secured by bills of lading or warehouse receipts, installment consumer paper, loans secured by livestock and project financing advances pertaining to a pre-qualifying lending commitment.

Additionally, some loans may not be subject to lending limits at all. These loans may include 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 the approval of 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, and intraday credit.

Generally, capital is divided into tiers based on liquidity. Tier 1 capital includes its most liquid capital such as statutory reserves. Tier 2 capital may include undisclosed reserves and general loss reserves. National banks are required to have a total capital to assets ratio of 8%.

Surplus may refer to a number of components at a bank. Categories included as surplus may be profits, loss reserves, and convertible debt, among others.

The Bottom Line

The legal lending limit is the maximum amount that a single bank can lend to a given borrower. It's expressed as a percentage of an institution’s capital and surplus. The limits are regulated by the OCC. Lending limit law 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 more than 15% of the institution’s capital and surplus.

But because most banks' capital holdings are extensive, the majority of retail or smaller business borrowers won't be affected by the legal lending limit.