Underwriting

Underwriting is the work of deciding whether a borrower can and will repay a loan, and on what terms. The underwriter gathers facts about the borrower, the business, any collateral and any guarantors. Then the underwriter measures the risk against the lender's written policy and recommends whether to approve, decline or change the deal.

Most underwriting answers four questions. What is the money for? Where will repayment come from? What happens if that source falls short? And is the deal priced and structured for the risk? Many lenders organize this around the five Cs of credit: character, capacity, capital, collateral and conditions.

In the US, federal safety-and-soundness standards for banks expect underwriting to weigh, before the lender commits, the borrower's overall financial condition, any guarantor's finances, the value of the collateral, and the borrower's character and willingness to repay. Non-bank lenders aren't bound by those standards, but most follow the same logic.

The work can be manual, automated or a mix. A small, standard business loan may run through rules in minutes. A commercial real estate loan may take weeks of analysis.

Why it matters for lenders

Underwriting is where a lender decides how much risk it takes on. Loose underwriting shows up later as late payments, workouts and charge-offs. Overly tight underwriting turns away good borrowers and slows growth.

Consistency matters as much as accuracy. When policy lives in a senior underwriter's head, similar files get different answers. That creates fair lending risk and makes it hard to write the specific decline reasons US law requires. Written targets protect both the borrower and the lender.

Underwriting also eats staff time. Much of that time goes to assembly work, such as keying numbers from statements, rather than to judgment.

How it works in practice

A credit union's business lender receives a request for a $300,000 equipment loan. The underwriter starts with financial spreading. She lays three years of the company's tax returns side by side and computes key ratios. She checks the debt service coverage ratio (DSCR) against the policy minimum, reviews the owners' credit reports and confirms the equipment's value.

She finds one weak spot. Last year's profit included a one-time insurance payout. She removes it and reruns the numbers. Coverage still clears the target, but with less room. She notes the risk and suggests a personal guarantee to offset it.

She writes it all up in a credit memo and sends it to the approver. If the inputs live in separate spreadsheets, the approver can't easily trace a number back to its source. When every figure links to the document it came from, review is faster and the decision is easier to defend.