Submitted by: Franc Jo

Underwriting is the process by which a lender decides whether an applicant is creditworthy and should be granted a loan. An effective underwriting and loan approval process is a key predecessor to favorable portfolio quality, and a main task of the function is to avoid as many undue risks as possible. When credit card loans are underwritten with sensible, well-defined credit principals, sound credit quality is much more likely to prevail.

Credit underwriting process entails in-depth analysis of financial statements and other financial information of a borrower; due diligence on the borrower and its principal(s); verification of information provided by borrower. Basically, a credit underwriter is guided by the requirements of his/her institution s loan underwriting policy. The loan policy establishes minimum guidelines for information and analysis upon which the credit is to be based. It is through those minimum requirements that management steers lending decisions toward planned strategic objectives and maintains desired levels of risk within the loan portfolio. Loan policies provide procedures for eliminating prospects from solicitation lists in order to weed out consumers that may be non-creditworthy in relation to the bank s risk tolerance level, identified target market, or product type(s) offered.

Small personal loans are largely automated. However, business and some personal loans require human analysis and mitigation of risk. Whether automated, judgmental or a combination of thereof, consistent inclusion of sufficient information to support the credit granting decision is necessary. Underwriting standards for business loans generally include:

Verification procedures of borrower name, address, social security number, other application information and detection of duplicate application.

Identification and assessment of the applicant s repayment willingness and capacity, including consideration of credit history and performance on past and existing obligations. While underwriting of personal loans is based on Debt to Income ratio and payment history in most instances, there are cases in which guidelines also consider income verification procedures. For example, assessments of income like self-employment income, investment income, and bonuses might be used as borrower s income. Commercial loans are more complicated because income and losses of all entities held by the borrower are considered to determine global debt coverage ratio. Qualifying depreciation, amortization and interest are also added back to income.

Capitalization level and structure of the borrowing entity

Credit risk score and report.

Pledged collateral analysis and valuation.

Economic and other conditions that may impact on the performance of the borrowing entity

Borrower s aggregate credit relationship with the lending institution

Loan structure

Besides financial analysis, underwriting also includes preparation of loan documentation, loan closing, loan disbursement, collection of delinquent loans, foreclosing on uncollectable loans and determining loan loss allowance.

Loan underwriters are normally in-house personnel, however, some lending institutions outsource experienced, remote underwriting firms to clear loan requests backlogs, inject new and superior underwriting techniques, fill staffing gaps or simply cut underwriting costs. The later form of underwriting is becoming very popular with start-up private lenders, community banks, credit unions and to some extent the larger banks. Remote loan underwriting firms are available right here in USA. Their work is highly professional and the fee structures are fairly competitive to those found overseas.

About the Author: Franc Jo is a Senior Underwriter at Loans Underwriting LLC, the leading provider of outsourced Credit Underwriting support to lenders and funding solutions consultant to small businesses throughout USA. He may be reached at 3330 Pkwy Suite 324-178 Acworth, GA 30101, Phone 1-800-858-8593, Email: info@loansunderwriting.com and Website: http://www@loansunderwriting.com. Visit the website to learn how you can enhance shareholder value using our lenders’ and small businesses’ solutions.Find similar articles and tips on money matters at

loansunderwriting.com/Pages/Articles.aspx

Source:

isnare.com

Permanent Link:

isnare.com/?aid=1877112&ca=Finances