Legal Lending Limit

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 overseen by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC).

Key Takeaways

  • A legal lending limit is the most a bank can lend to a single borrower.
  • The legal limit is 15% of a bank’s capital, as set by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. 
  • If the loan is secured, the limit is an extra 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. 

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 FDIC and 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 banks and savings associations across the nation. The code on lending limits states that a financial institution 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.

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.