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).

Key Takeaways

  • A legal lending limit is the most a bank or thrift can lend to a single borrower.
  • The legal limit for national banks is 15% of the bank’s capital.
  • If the loan is secured by readily marketable securities, the limit is raised by 10%, bringing the total to 25%. 
  • Some loans are not subject to loan limits, such as loans secured by U.S. obligations, bankers' acceptances, or certain types of commercial paper, among others. 
  • State-chartered banks may have their own lending limits, but they are often similar to the OCC standard.

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 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 which are also regulated under federal law. Banks are allowed another 10% for collateralized loans. Thus, they can lend up to 25% of capital and surplus if a loan is secured by readily marketable securities.

State-chartered banks may have their own lending limits but are often similar to the OCC standard. For example, New York-chartered banks have a lending limit of 15% of their capital, surplus 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, loans to industrial development authorities, loans to leasing companies, credit from transactions financing certain government securities and intraday credit.

Banks are required to hold significant amounts of capital which typically causes lending limits to only apply to institutional borrowers. 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 include 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.

Article Sources
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  1. Legal Information Institute. "12 CFR S 32.3 – Lending Limits."

  2. New York Department of Financial Services. "Banking Interpretations – Lending Limit."

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