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What is loan underwriting?

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Loan underwriting is the process by which a potential lender originates a loan and assesses the creditworthiness a prospective borrower, from credit application or request for financing proposal to advancing the loan.  Loan underwriters, as original lenders, conduct risk assessment of the borrower and the transaction, arrange the financing and assume its credit and funding risk.

The Credit Approval Process
This illustrates the steps in the credit/loan approval process, starting with the credit application followed by data collection, credit review, risk assessment, facility documentation, credit approval and concluding with the credit/loan agreement.

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This illustrates the steps in the credit/loan approval process, starting with the credit application followed by data collection, credit review, risk assessment, facility documentation, credit approval and concluding with the credit/loan agreement.

Collectively, the definitions, calculations, documentation, guidelines, standards, policies and other requirements used to determine a transaction’s eligibility criteria and price are underwriting requirements.  The underwriting requirements may tighten or loosen relative to the cost of funds for the transaction.  Regulations require banks to establish prudent, clear and measurable underwriting standards.  Underwriting is the key risk control element in transaction financing.

In order to avoid liability, arrangers require participant lenders to perform their own independent due diligence and credit analysis of the transaction with the information provided.  Lead arrangers will typically require representations from each co-lender that the co-lender has done its own credit analysis and made its own decision with respect to joining the syndicate group.

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