The OCC Supplemental Lending Limits Program: Opportunities for Growing Loan Portfolios in a Challenging Environment

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December 29, 2020

Legal Update

In today’s environment, the need for banks to retain as much of their high asset quality of loan origination as possible is critical. One option for national banks and federal savings associations is to take advantage of the OCC’s Supplemental Lending Limits Program (the “Program”). The Program allows national banks and savings associations to make certain loans to a single borrower that exceed combined normal lending limits. Thus, national banks and savings associations have the potential to make larger loans to accommodate borrower needs, while simultaneously making productive use of excess liquidity. The purpose of this client alert is to outline the parameters of the Program and how to implement it.

Background on the Supplemental Lending Limits Program

The Program originated in 2001 in response to the OCC issuing an advanced notice of proposed rulemaking inviting comments on potential regulatory changes to benefit community banks.[1] The OCC received numerous responses commenting that the lending limit was problematic for nationally chartered community banks. A majority of the commenters pointed out that the limit prevented national banks from continuing to lend to creditworthy customers. Others noted that some states had lending limits higher than the limits imposed on national banks, putting national banks at a competitive disadvantage. To address these concerns, the OCC established the Program with hopes it would address the imbalance.

The Program was originally enacted as a three-year pilot program and initially only applied to residential real estate and small business loans.[2] However, in 2004, the Program was extended for an additional three years and expanded to include certain agricultural loans. The Program was permanently incorporated into Part 32 of the Code of Federal Regulations in 2007, with technical changes being made as recent as October 1, 2020.[3]

Requirements to Participate in the Program

First and foremost, a national bank or savings association must be “eligible” to participate in the Program.[4] An eligible national bank or savings association is one that is: (i) “well-capitalized” as defined under Prompt Corrective Action and (ii) has a CAMELS composite rating of 1 or 2 in connection with their most recent examination or subsequent review, with at least a rating of 2 for asset quality and management.[5]

If a national bank or savings association is eligible, it can then submit an application to its supervisory office seeking approval to use the supplemental lending limits. A complete application must include the following information:

Certification that the national bank or savings association is “eligible”;
Citations to relevant state laws or regulations;
Board resolutions approving the use of the special limits and confirming the terms and conditions for use of this lending authority; and
A description of how the board will exercise its continuing responsibility to oversee the use of this lending authority.[6]

Upon approval from the OCC, a national bank or savings association may implement the Program. However, there are general safeguards and limitations of which participants must be aware. First, the total outstanding amount of loans and extensions of credit to one borrower made under the general lending limits, together with loans and extensions of credit to the borrower made pursuant to the Program cannot exceed 25 percent of capital and surplus.[7] Second, the total outstanding amount of a national bank’s or savings association’s loans and extensions of credit to all borrowers made under the Program cannot exceed 100 percent of capital and surplus.[8]

Loans that Qualify for the Program

There are three categories of loans and extensions of credit eligible for the Program:

Residential real estate loans;
Loans to small businesses; and
Loans to small farms.

Loans and extensions of credit are defined broadly to include any direct or indirect advance of funds to or on behalf of a borrower based on an obligation of the borrower to repay the funds or repayable from specific property pledged by or on behalf of the borrower.[9] For purposes of the lending limits and the Program, the OCC further defines loans or extension of credit to include contractual commitments to advance funds, overdrafts, securities purchased subject to repurchase, charged off loans, derivative transactions, as well as various other categories.[10]

Residential Real Estate – Residential real estate loan generally means a loan or extension of credit that is secured by one-to-four family residential real estate. For purposes of the Program, an eligible residential real estate loan is a loan secured by a perfected first-lien security interest in a one-to-four residential real estate in an amount that does not exceed 80 percent of the appraised value of the collateral at the time the loan or extension of credit is made.[11]

Small Businesses – Loans to small businesses includes loans or extensions of credit with original amounts of $1 million or less and that are “secured by nonfarm residential properties” or “commercial and industrial loans” as described in the instructions for the preparation of the Consolidated Report of Condition and Income (the “Call Report”).[12]

Small Farm Loans – Loans to small farms consists of loans with original amounts of $500,000 or less that involve “loans secured by farmland (including farm residential or other improvements)” and “loans to finance agricultural production and other loans to farmers” as reported in Schedule RC-C of the Call Report.[13]

The OCC issued a proposed rule on July 14, 2020, revising the definition of “small business” loan to align with the definitions in the Call Report Instructions. These revisions clarify that the $500,000 limit contained within the “loans to small farms” definition in the Call Report instructions does not apply for purposes of the Program.[14]

For each of the three categories, eligible banks are authorized to make loans or extensions of credit to one borrower in the lesser of the following two amounts: (1) 10 percent of the bank’s capital and surplus; or (2) the percent of its capital and surplus, in excess of 15 percent, that a state-chartered bank or savings association is permitted to lend under the state lending limit that is available for the specific loan category in the state where the main office of the national bank or savings association is located. The applicable amount is in addition to the general 15 percent lending limit.[15]

The amount that a bank may lend under the Program is subject to an individual borrower cap and an aggregate borrower cap expressed as percentages of the bank’s capital and surplus. Combining the standard lending limits with loans made under the special limits authorized by the Program, the individual borrower cap may not exceed 25 percent of the bank’s capital and surplus. The aggregate cap provides that the outstanding amount of loans made to all borrowers under the special limits authorized by the Program may not exceed 100 percent of the bank’s capital and surplus. Additionally, participating banks and savings associations will need to consider the attribution rules to determine the specific borrower limits, which includes restrictions on certain common enterprises and common control.[16]

Closing Considerations

National banks and savings associations that are not already participating in the Program and are interested in doing so should submit an application to the OCC. With increasing pressure on margins, the Program may provide attractive options for expanding the bank’s loan portfolio with loans to creditworthy customers.

The OCC retains the authority to rescind a national bank’s or savings association’s authority to use the supplemental lending limits in the Program at any time based upon concerns about credit quality, undue concentrations in the portfolio of residential real estate, loans to small businesses, or loans or extension of credit to small forms, or concerns about the bank’s or saving association’s overall credit risk management systems or controls. Banks have to carefully assess loans originated under the Program and continue to maintain sound lending practices in order to avoid the risk of losing the ability to take advantage of the increased lending limits permitted by participation in the Program.

[1] 64 Fed. Reg. 25,469 (May 12, 1999).

[2] 66 Fed. Reg. 31,114 (June 11, 2001).

[3] 12 C.F.R. § 32.7. See, e.g., Supplemental Lending Limits Program: Technical Correction, available at https://www.federalregister.gov/documents/2020/10/01/2020-18937/supplemental-lending-limits-program-technical-correction.

[4] 12 C.F.R. § 32.7(b).

[5] 12 C.F.R. § 32.2(n).

[6] 12 C.F.R. § 32.7(b).

[7] 12 C.F.R. § 32.7(a)(4).

[8] 12 C.F.R. § 32.7(a)(5).

[9] 12 U.S.C. § 84(b)(1); 12 C.F.R. § 32.2(q).

[10] 12 C.F.R. § 32.2(q)(1).

[11] 12 C.F.R. § 32.7(a)(1).

[12] 12 C.F.R. § 32.7(a)(2). Call Report is available at: https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_201812_i.pdf