Loan Purchase Activities: Legal Lending Limit Guidance

The OCC has published guidance to banks regarding the applicability of the legal lending limit (LLL) to purchased loans. Under the current law, there are limits applied on credit institutions regarding the amount of loans and credit extensions per borrower (i.e. they are subject to LLL).
The guidelines specify that „Aggregate exposures attributable to a single seller must be within the bank’s LLL“. According to 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 recourse is specified in an agreement between the bank and the seller, whereas indirect recourse comes from the course of dealing.
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 there is neither direct nor indirect recourse between the bank and the seller, the loans are not attributable and thus do not fall under LLL.