On August 8, the Office of the Comptroller of the Currency (OCC) issued guidance on the applicability of the legal lending limit (LLL) to purchased loans. This guidance applies to community banks’ purchases of loans. In short, unless an exception applies, all loans and extensions of credit made by banks are subject to the LLL.
As a general rule, aggregate exposures to a single seller must be within the bank’s LLL. However, whether a loan that a bank purchases is attributable to the seller under the LLL depends on the facts and circumstances of that loan. As a result, bank management should consider more information than it otherwise would for in-house originations when determining purchased loan compliance with the LLL. For purchased loans, recourse analysis is key. Under 12 CFR § 32.2(q)(1)(iii), loans are attributable to a seller if the bank has direct or indirect recourse to the seller. Direct or indirect recourse can be explicit or implied:
- Explicit recourse includes 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 includes 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 only be attributable under the LLL to the named borrowers, unless the direct benefit or common enterprise tests under 12 CFR § 32.5 are met or other provisions under the LLL warrant attribution to another party.
For additional information on loan purchase activities, please also refer to OCC Bulletin 2020-81, “Credit Risk: Risk Management of Loan Purchase Activities.”