# What Is a Bank's Legal Lending Limit, How Does It Work?

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## What Is the Legal Lending Limit?

The legal lending limit represents the maximum dollar amount a single [bank](https://www.investopedia.com/banks-credit-unions-best-for-personal-loan-7570430) can lend to a borrower. A [bank](https://www.investopedia.com/the-best-online-banks-11722209) expresses its legal lending limit as a percentage of the institution’s [capital](https://www.investopedia.com/ask/answers/043015/what-difference-between-tier-1-capital-and-tier-2-capital.asp) and surplus. The limits are regulated by the [Office of the Comptroller of the Currency (OCC)](https://www.investopedia.com/terms/o/office-comptroller-currency-occ.asp).

### Key Takeaways

*   A legal lending limit represents 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 readily marketable securities secure a loan, the limit is raised by 10 percentage points, bringing the total to 25%. 
*   Exemptions from legal lending limits include loans secured by U.S. obligations, bankers' acceptances, and certain types of commercial paper. 
*   Banks must hold significant amounts of capital, which typically causes lending limits to apply only to institutional borrowers.

## How the Legal Lending Limit Works

The legal lending limit for national banks was established under the United States Code (U.S.C.), reported in U.S.C. Title 12, [Part 32.3](https://www.fdic.gov/regulations/laws/rules/8000-7400.html#fdic8000lending32.3).

The Office of the Comptroller of the Currency (OCC) oversees legal lending limits, while the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp) 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](https://www.investopedia.com/the-best-bank-account-bonuses-8763105) follow established rules defined in the United States Code, which details federal statutes.

The lending limit legal code applies to [national banks](https://www.investopedia.com/the-best-student-bank-accounts-11704740) and [savings associations](https://www.investopedia.com/the-best-free-savings-accounts-11695638) nationwide. The federal code on lending limits states that a national bank or [savings association](https://www.investopedia.com/best-high-yield-savings-accounts-2-11690901) may not issue a [loan](https://www.investopedia.com/the-best-personal-loans-8761582) to a single borrower for more than 15% of the institution’s [capital](https://www.investopedia.com/ask/answers/020415/what-difference-between-cost-capital-and-required-return.asp) and surplus.

The base standard of 15% requires an institution to closely follow [capital](https://www.investopedia.com/terms/c/capital.asp) and surplus levels regulated under federal law. [Banks](https://www.investopedia.com/the-best-free-business-accounts-11724168) are allowed an additional 10 percentage points for the lending limit for [collateralized loans](https://www.investopedia.com/the-best-secured-personal-loans-8763319). Thus, they can lend up to 25% of [capital](https://www.investopedia.com/ask/answers/043015/how-does-market-risk-affect-cost-capital.asp) and surplus if readily marketable securities [secure](https://www.investopedia.com/terms/s/secureddebt.asp) the [loan](https://www.investopedia.com/the-best-fast-personal-loans-8761971).

> **Fast Fact**
>
> State-chartered banks may have their own lending limits, but they are often similar to the OCC standard.

For example, New York-chartered banks have a lending limit of 15% of their [capital stock](https://www.investopedia.com/ask/answers/050115/whats-difference-between-capital-stock-and-treasury-stock.asp), surplus fund, and undivided profits (CUPS), but 25% for loans secured by appropriate collateral.  

## Special Considerations

Some [loans](https://www.investopedia.com/the-best-personal-loans-for-debt-consolidation-8762444) can qualify for special lending limits, including loans secured by [bills of lading](https://www.investopedia.com/terms/b/billoflading.asp) or warehouse receipts, installment consumer paper, loans secured by livestock and project financing advances pertaining to a pre-qualifying lending commitment.

Additionally, some [loans](https://www.investopedia.com/terms/l/loan.asp) may not be subject to lending limits at all, including:

*   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 (Sallie Mae)](https://www.investopedia.com/sallie-mae-student-loans-review-4800305)
*   Loans to industrial development authorities,
*   Loans to leasing companies
*   Credit from transactions financing certain government securities
*   Intraday credit

> **Important**
>
> Banks are required to hold significant amounts of capital, which typically causes lending limits to apply only to institutional borrowers.

Generally, [capital](https://www.investopedia.com/ask/answers/050715/how-do-i-calculate-capital-risk-weight-assets-ratio-bank-excel.asp) is divided into tiers based on liquidity. [Tier 1 capital](https://www.investopedia.com/terms/t/tier1capital.asp) includes its most liquid capital, such as statutory reserves. Tier 2 capital may consist of undisclosed reserves and general loss reserves. National banks must 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 be profits, loss reserves, and convertible debt, among others.

## How Is a Bank's Legal Lending Limit Expressed?

A bank's legal lending limit is given as a percentage of an institution’s capital and surplus. The legal limit for national banks is 15% of the bank’s capital. These limits prevent excessive [loans](https://www.investopedia.com/the-best-personal-loans-with-a-cosigner-8763086) to one person, or to related persons who are financially dependent, according to the OCC.

## Which Banks Must Comply with the Legal Lending Limit?

The U.S. lending limit legal code applies to national banks and [savings](https://www.investopedia.com/the-best-high-yield-business-savings-accounts-8780948) associations nationwide. The federal code on lending limits says that a national bank or [savings association](https://www.investopedia.com/the-best-savings-accounts-for-kids-8783880) may not issue a [loan](https://www.investopedia.com/articles/personal-finance/100914/private-student-loans-international-students.asp) to a single borrower for more than 15% of the institution’s capital and surplus. Most state-regulated banks follow similar guidelines for maximum lending limits.

## Will I Be Faced with Applying for a Loan That Exceeds Banks' Legal Limits?

It's highly unlikely. Banks must hold significant amounts of [capital](https://www.investopedia.com/terms/i/invested-capital.asp), which typically causes lending limits to apply only to large, institutional borrowers.

## The Bottom Line

Expressed as a percentage of an institution’s capital and surplus, the legal lending limit represents the maximum amount a bank can lend to a borrower. The federal code on lending limits states that a national bank or [savings association](https://www.investopedia.com/the-best-savings-account-bonuses-8763913) may not issue a [loan](https://www.investopedia.com/emergency-loans-for-bad-credit-5075539) to a single borrower for more than 15% of the institution’s capital and surplus. However, due to the extensive capital holdings of banks, the legal lending limit won't affect most retail or small business borrowers.

> **Article Sources**
>
> 1.  Cornell Law School - Legal Information Institute. "[12 CFR § 32.3 - Lending Limits](https://www.law.cornell.edu/cfr/text/12/32.3#:~:text=A%20national%20bank%27s%20or%20savings%20association%27s%20total%20outstanding,marketable%20collateral%2C%20as%20defined%20in%20%C2%A7%2032.2%20%28v%29.)."
>     
> 2.  New York Department of Financial Services. "[Banking Interpretations – Lending Limit](https://www.dfs.ny.gov/legal/interpret/lo091214.htm)."
>     
> 3.  Cornell Law School, Legal Information Institute. "[12 CFR § 3.10 - Minimum Capital Requirements](https://www.law.cornell.edu/cfr/text/12/3.10)."
>     
> 4.  Office of the Comptroller of the Currency. "[The History of Supervisory Expectations for Capital Adequacy: Part II (1984–2021)](https://www.occ.gov/publications-and-resources/publications/economics/moments-in-history/pub-moments-in-history-supervisory-expectations-part2.pdf)." Page 3.
>     
> 5.  Office of the Controller of the Currency. "[Lending Limits](https://www.occ.gov/topics/supervision-and-examination/credit/commercial-credit/lending-limits.html)."