What is a Legal Lending Limit?

The legal lending limit refers to the highest amount that a bank can lend to a borrower, the limit is in dollar amount. The legal lending limit of many states vary depending on whether the financial institution operates at a national or state level. The legal lending limit is calculated based on the financial institution's capital and surplus. In the United States for instance, the legal lending limit helps to guarantee the financial safety and strength of banks and to avoid a single bank lending too much to a given borrower.

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How Does a Legal Lending Limit Work?

The lending limit refers to the highest amount that a single bank can lend a borrower at a particular time. In the United States, information regarding the national bank lending limits are contained in Part 32 of Title 12 of the U.S.C. The Federal Deposit Insurance Corporation (FDIC) and the Controller of the Currency (OCC) are the offices that guide the legal lending limit in the U.S. Bank charters and their processes are overseen by FDIC and OCC.

Calculating Lending Limits

Despite that FDIC and OCC oversee legal lending limits for banks in the United States, there are ways lending limits are calculated. Usually, the percentage of an institutions capital and surplus is essential in the calculation of lending limits, all banks, financial institutions and savings associations are expected to use the capital and surplus levels. For a financial institution, a loan issued to a single borrower should not exceed 15% of its capital and surplus. However, for secured loans, up to 25% of capital and surplus can be loaned given the fact that there is an allowance of an extra 10% for collateralized or secured loans.

Exceptions to Legal Lending Limits?

Not all loans allow for legal lending limits, while some loans are not subject to legal lending limits, special lending limits can be applied for some. Loans that are not subject to lending limits are;

• Loans issued due to U.S obligations or those related to a federal agency.
• Bankers acceptances
• Loans to a financial institution approved by a Federal banking agency.
• Discounted loans, whether it is commercial paper or business paper.
• Loans to students association
• Loans to leasing companies and industrial development agencies, and many others.

Examples of loans that attract special lending limits are loans secured by bills of lading installment consumer paper, warehouse receipts and a few other loans.

Capital and Surplus

Financial institutions are required to have a certain amount in their reserve as their capital and surplus levels. In the United States, the base standard required for an institutions capital and surplus levels are regulated by the federal law. The capital that a bank can have are three categories based on the amount of liquidity the bank has. There are three tiers of capital; Tier 1 capital, Tier 2 and Tier 3 capital which suggest the amount of liquidity of a bank. Profits earned by banks are generally referred to as the surplus, convertible debt also qualify as surplus.