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.
FAQs
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.
What is a bank's legal lending limit? ›
A national bank's or savings association's total outstanding loans and extensions of credit to one borrower may not exceed 15 percent of the bank's or savings association's capital and surplus, plus an additional 10 percent of the bank's or savings association's capital and surplus, if the amount that exceeds the ...
What is the maximum amount a bank can lend out? ›
The amount of reserve a bank has in excess of the legally required amount is known as excess reserve, which banks can either lend out or keep as extra reserve. Hence, the maximum amount of a bank can lend out is the excess reserve.
What is a legal lending limit violation? ›
Legal Lending Limit Violations
A borrower's debt at a bank may consist of several notes of different dates. When the total of such notes exceeds state or federal lending limits, courts have generally held that only the note(s) that created the excess above the lending limit constitutes an illegal extension.
Why does the government impose lending limits on banks? ›
Lending limits protect the safety and soundness of national banks, promote diversification of loans, and help ensure equitable access to banking services. These limits prevent excessive loans to one person, or loans to related persons who are financially dependent.
What is the maximum permissible bank limit? ›
Maximum Permissible Bank Finance method, also known as MPBF method is a standardized approach used by banks to determine the maximum amount of working capital financing that a business can avail from them. It uses operational and financial parameters to calculate the working capital needs of a company.
What is the maximum loan a bank can give? ›
Banks and NBFCs usually offer personal loans for amounts ranging from Rs 10,000 to Rs 40 lakh. However, the personal loan amount you are eligible for would primarily depend on your loan repayment capacity.
Can banks lend all the money they have? ›
Banks can't lend out all the deposits they collect, or they wouldn't have funds to pay out to depositors. Therefore, they keep primary and secondary reserves.
How much can a bank lend you? ›
Personal loan amounts vary by lender, but some lenders allow consumers to borrow up to $100,000. The amount a lender may approve you to borrow will depend on various factors, such as your credit score, income and debt-to-income ratio (DTI).
What is the normally permitted lending limit? ›
(iv) Normally permitted lending limit (NPLL), means 50 percent of the incremental funds raised by the specified borrower over and above its ASCL as on the reference date, in the financial years (FYs) succeeding the FY in which the reference date falls.
Federal law set a ceiling on interest rates for savings accounts and generally prohibited interest payments on checking and other demand deposit accounts. Federal law also prohibited banks from offering money market accounts.
What are 2 examples of fair lending violations? ›
For example, if a lender refuses to make a mortgage loan because of your race or ethnicity, or if a lender charges excessive fees to refinance your current mortgage loan based on your race or ethnicity, the lender is in violation of the federal Fair Housing Act.
Can banks legally loan money? ›
A national bank may make, sell, purchase, participate in, or otherwise deal in loans and interests in loans that are not secured by liens on, or interests in, real estate, subject to such terms, conditions, and limitations prescribed by the Comptroller of the Currency and any other applicable Federal law.
How to determine a bank's legal lending limit? ›
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%.
Thanks to the U.S. fractional reserve banking system, commercial banks can lend out much of their cash deposits, keeping only a fraction as reserves.
What stops banks from creating money? ›
Required reserves are to give the Federal Reserve control over the amount of lending or deposits that banks can create. In other words, required reserves help the Fed control credit and money creation. Banks cannot loan beyond their excess reserves.
What is the lending capacity of a bank? ›
According to the above portrayal, the lending capacity of a bank is limited by the magnitude of its customers' deposits. In order to lend out more, a bank must secure new deposits by attracting more customers. Without deposits, there would be no loans, or in other words, deposits create loans.
Do banks have a loan limit? ›
When lenders approve a loan or a line of credit, it typically comes with a maximum loan amount. This is the maximum amount of money that can be borrowed.
