The Office of the Comptroller of the Currency (OCC) recently issued OCC Bulletin 2023-27 providing guidance on legal lending limits that apply to purchased loans. As the OCC notes, purchasing loans is a well-established banking practice that serve the needs of not only the buying and selling institutions, but also the public at large. As the number of brokers and non-bank lenders have increased, so have the number of loans available for financial institutions to purchase.
Unless an exception applies, all loans and extensions of credit made by banks are subject to the legal lending limit indicated in 12 CFR § 32.3, which provides limitations on the total amount of loans and extensions of credit to any one borrower. The lending limit regulation speaks to the following type of loans that are exceptions to the general lending limit: 1) those arising from the discount of commercial or business paper, 2) bankers’ acceptances, 3) secured by U.S. obligations, 4) guaranteed by a Federal agency, 5) guaranteed by State or political subdivision, 6) secured by segregated deposit accounts, 7) loans to financial institutions with the approval of the appropriate Federal banking agency, 8) loans to the Student Loan Marketing Association, 9) loans to industrial development authorities, 10) loans to leasing companies, 11) credit exposures arising from transactions financing certain government securities, and 12) intraday credit exposures. These exceptions are described in more detail in 12 CFR § 32.3(c).
Whether a loan that a bank purchases is attributable to the seller under the legal lending limit regulations depends on the facts and circumstances for each specific instance. Therefore, banks would generally consider greater information than for in-house originations to make their determinations about applicability.
Aggregate exposures attributable to a single seller must be within the bank’s legal lending limit. Loans are attributable to a seller under if the bank has direct or indirect recourse to the seller. Direct or indirect recourse can be explicit or implied. Explicit recourse is generally provided under contractual or some other type of written agreement between the bank and the seller. Examples of explicit recourse would include a requirement or contractual obligation to substitute or repurchase defaulted loans or refill a reserve account, even if no substitutions, repurchases, or replenishments of the reserve account have occurred to date.
Implied recourse is established through the bank’s dealing with a seller even if the written agreement does not contain explicit recourse. Examples of implied recourse would include when the seller has routinely substituted or repurchased loans or refilled or replenished a reserve account even when the contract does not require those actions.
If the bank does not have explicit or implied recourse to the seller, the purchased loans would generally be attributable under the legal lending limit regulation to only the named borrowers on the loans, unless the direct benefit or common enterprise tests are met or other provisions under the legal lending limit regulation would attribute them to another party.
As always, feel free to reach out to us on the hotline if you have any questions about legal lending limits, this recently published OCC Bulletin, or any of the exceptions that apply.