OCC bulletin notes legal lending limit’s applicability to purchased loans

Noting growth in the availability of loans for purchase, the national bank regulator this week issued guidance for community banks on loan purchase activities and the legal lending limit (LLL) the applies under federal regulation.

In its Bulletin 2023-27, the Office of the Comptroller of the Currency (OCC) said the extensive network of loan-broker channels and increased involvement of nonbank lenders have led to this growth, and it reminded that unless an exception applies, “all loans and extensions of credit made by banks are subject to the LLL.”

The LLL limits the total amount of loans and extensions of credit to any one borrower. “Whether a loan that a bank purchases is attributable to the seller under the LLL regulation depends on specific facts and circumstances,” the OCC wrote. “Consequently, bank management would typically consider more information than it would for in-house originations when determining compliance with the LLL regulation for purchased loans.”

The bulletin notes that aggregate exposures attributable to a single seller must be within the bank’s LLL. Loans are attributable to a seller, it states, if the bank has direct or indirect recourse to the seller, and this recourse can be explicit or implied. It notes the following a examples of explicit and implied recourse scenarios:

  • Explicit recourse: Examples 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: Examples 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 loans are generally not attributable to the seller,” the OCC bulletin notes. “In such cases, the purchased loans would generally be attributable under the LLL regulation to only the named borrowers on the loans, unless the direct benefit or common enterprise tests under 12 CFR 32.5 are met or other provisions under the LLL regulation warrant attribution to another party.”

More details are in the bulletin.

OCC Bulletin 2023-27