What is '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).

BREAKING DOWN 'Legal Lending Limit'

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.

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.

Calculating Lending Limits

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.

Exceptions

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.

Capital and Surplus

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.

RELATED TERMS
  1. Excess Loans

    Excess loans are loans made by a state chartered or national ...
  2. Loan Loss Provision

    A loan loss provision is an expense set aside as an allowance ...
  3. Lending Freeze

    A period of time when banks either do not have excess money to ...
  4. Commercial Loan

    A debt-based funding arrangement that a business can set up with ...
  5. Federal Home Loan Bank System - ...

    The Federal Home Loan Bank (FHLB) System is an organization created ...
  6. Lending Facility

    A lending facility is a mechanism used by central banks when ...
Related Articles
  1. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  2. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  3. Investing

    Securities Lending: Cause Of The Next Financial Crisis?

    Securities lending can pose risks to investor's portfolios and the entire financial system.
  4. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  5. Personal Finance

    Different needs, different loans

    When it comes to loans, there are many different types according to your needs. Find out what options are available when it comes to borrowing money.
  6. Investing

    Cash Flow Lending Vs. Asset-Based Lending

    When companies need financing, they rely on two primary forms of lending: cash flow-based and asset-based lending. We look at the pros and cons of each.
  7. Personal Finance

    States That Allow Car Title Loans

    Only some states permit car title loans – and those that do may have restrictions. Check this list to see what to expect.
  8. Personal Finance

    Getting a loan without your parents

    Do you want to receive a loan without the help of your parents? Use these five tips to finance your dreams without banking on a second signature.
  9. Personal Finance

    Student Loan Asset-Backed Securities: Safe or Subprime?

    Similar to the mortgage-backed securities that caused the 2008 recession, student loan asset-backed securities could lead to the next financial crisis.
  10. Retirement

    10 Ways to Borrow in Retirement

    Before you take money from your nest egg, consider these 10 other ways to borrow in retirement.
RELATED FAQS
  1. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Trading Center