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    OCC Finalizes Rule on Permissible Interest on Transferred Loans

    June 02, 2020

    OCC issued a final rule to clarify that when a national bank or savings association sells, assigns, or otherwise transfers a loan, interest permissible before the transfer continues to be permissible after the transfer. The final rule goes into effect on August 03, 2020. Additionally, US Agencies (FDIC, FED, and OCC) issued the host state loan-to-deposit ratios that they will use to determine compliance with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The new ratios replace ratios from the prior year (released on May 28, 2019).

    Final Rule on Permissible Interest on Loans—Federal law establishes that banks may charge interest on loans at the maximum rate permitted to any state-chartered or licensed lending institution in the state where the bank is located. In addition, banks are generally authorized to transfer loans and to enter into and assign loan contracts. Despite these clear authorities, recent developments have created legal uncertainty about the ongoing permissibility of the interest term after a bank transfers a loan. OCC is issuing this rule to clarify that a bank may transfer a loan without impacting the permissibility or enforceability of the interest term in the loan contract. The proposal on this rule was issued in November 2019 and OCC received over sixty comments on its proposal, including comments from industry trade associations, non-bank lenders, community groups, academics, state government representatives, and members of the public. 

    Host State Loan-to-Deposit Ratios—Due to the legislative intent against imposing regulatory burden, no additional data were collected from institutions to implement section 109. However, since insufficient lending data were available on a geographic basis to calculate the host state loan-to-deposit ratios directly, the agencies used a proxy to estimate the ratios. Accordingly, the agencies calculated the host state loan-to-deposit ratios using data obtained from the Call Reports and the Summary of Deposits Surveys as of June 30, 2019. Section 109 provides a process to test compliance with the statutory requirements. The first step in the process involves a loan-to-deposit ratio test that compares a bank's statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state. A second step is conducted if a bank's statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate agency to determine whether a bank is reasonably helping to meet credit needs of the communities served by its interstate branches. A bank that fails both steps is in violation of section 109 and is subject to sanctions by the appropriate agency.


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    Effective Date: August 03, 2020

    Keywords: Americas, US, Banking, Loan to Deposit Ratio, Call Reports, Interest on Loan, Credit Risk, US Agencies

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