OCC Bulletin 2023-27 | August 8, 2023

Loan Purchase Activities: Legal Lending Limit Guidance

To

Chief Executive Officers of All National Banks, Federal Savings Associations, and Federal Branches and Agencies; Department and Division Heads; All Examining Personnel; and Other Interested Parties

Summary

The Office of the Comptroller of the Currency (OCC) is issuing this bulletin to provide banks¹ with guidance regarding the applicability of the legal lending limit (LLL) to purchased loans.

Note for Community Banks

This bulletin applies to community banks’ purchases of loans.

Highlights

This bulletin

provides background information on loan purchase activities and the LLL.
provides guidance on the applicability of the LLL to purchased loans and types of recourse arrangements.

Background

Loan purchase activities are long-standing banking practices that serve the legitimate business needs of the buying and selling institutions and the public interest. The extensive network of loan-broker channels and increased involvement of nonbank lenders have resulted in growth in the availability of loans for purchase.²

Unless an exception applies, all loans and extensions of credit made by banks are subject to the LLL, which provides limitations on the total amount of loans and extensions of credit to any one borrower.³ Whether a loan that a bank purchases is attributable to the seller under the LLL regulation depends on specific facts and circumstances. 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.

Guidance

Aggregate exposures attributable to a single seller must be within the bank’s LLL. 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. Implied recourse is established through the bank’s course of dealing⁴ or conduct with a seller even if the contract or written agreement with the provider does not contain explicit recourse. The following are 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 under 12 CFR 32.2(q)(1)(iii). 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.⁵

Further Information

Please contact your OCC supervisory office.

Grovetta N. Gardineer
Senior Deputy Comptroller for Bank Supervision Policy

¹ “Banks” refers collectively to national banks, federal savings associations, and federal branches and agencies of foreign banking organizations.

² For additional information on loan purchase activities, refer to OCC Bulletin 2020-81, “Credit Risk: Risk Management of Loan Purchase Activities.”

³ The LLL statute is 12 USC 84, “Lending Limits,” for national banks and 12 USC 1464(u), “Limits on Loans to One Borrower,” for federal savings associations. 12 USC 84 applies to federal savings associations pursuant to 12 USC 1464(u). The regulation for national banks and federal savings associations is 12 CFR 32, “Lending Limits.” “Loans and extensions of credit” are defined in 12 CFR 32.2(q). 12 CFR 32.3(a) provides the combined general limit; 12 CFR 32.3(b) provides loans and extensions of credit that are subject to special lending limits; and 12 CFR 32.3(c) provides loans and extensions of credit that are not subject to the LLL.

⁴ Section 1-303 of the Uniform Commercial Code and section 223 of the Restatement (Second) of Contracts (1981) generally describe a course of dealing as a sequence of previous conduct between the parties to an agreement or a particular transaction that is fairly regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. A course of dealing may give meaning to certain terms or supplement or qualify the terms of an agreement.

⁵ The direct benefit and common enterprise tests under the combination rules are separate and distinct from 12 CFR 32.2(q)(1)(iii). A loan is subject to the direct benefit and common enterprise tests under the 12 CFR 32.5 combination rules independent of its attribution to a seller under 12 CFR 32.2(q)(1)(iii).