The Office of the Comptroller of the Currency (OCC) issued a bulletin for community banks offering guidance on how legal lending limits (LLL) affect their loan purchasing activities.
A LLL is the most a bank can lend to a single borrower. These limits protect the safety and soundness of banks, promote diversification of loans, and help ensure equitable access to banking services.
In the bulletin, the OCC stated that, unless an exception applies, all loans and extensions of credit made by a bank are subject to the LLL – whether a loan that a bank purchases is attributable to the seller under the LLL regulations is dependent on the facts of the sale. The agency recommended in these situations bank management should consider more information than it typically would for in-house originations when determining whether the purchased loan complies with the LLL.
“Aggregate exposures attributable to a single seller must be within the bank’s LLL,” the guidance stated. “Loans are attributable to a seller under 12 CFR 32.2(q)(1)(iii) 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 arrangement or other written agreement between the bank and the seller.”
The OCC stated examples of explicit recourse 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. The example of implied recourse is 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 under 12 CFR 32.2(q)(1)(iii),” the bulletin concluded. “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.”