Is “underwriting” simply a department within the bank, staffed by bank employees, following bank-created rules and guidelines, or is it something outside the bank itself, like an insurance company?
Underwriting is a practice/function, is it not?
In what context are you asking? Did you get a letter from “Underwriting”, get called by someone claiming to work in Underwriting for a bank, or did a bank employee say something like “Before I can open an account for you, I need to talk to Underwriting”?
I imagine you have applied for a loan of some sort, and the loan officer has said that the loan must go to/through “underwriting” before it is approved.
“Underwriting” is a department (or group of departments) in a bank that reviews the data submitted in connection with a loan application, and determines whether it meets the bank’s standards for granting that type of loan. In the case of a home, car or other common consumer loan, the standards may be fairly rigid, and the efforts of underwriting may be little more than checking the documents and financial ratios and scores against a checklist, though there are usually supervisors who can grant exceptions in cases where warranted. For larger and more complex commercial loans, the process can be much more subtle, with a great deal of judgment involved.
Bank employees in loan depts for instance talk about “underwriting” as though they are an entity making final determinations on things like loans. “Well, underwriting requires X…”
So it’s just a department within the bank itself, it’s not outside the bank, so it’s using/applying/enforcing the bank’s rules (in combination with whatever rules the bank must legally follow, of course).
Previous posters have pretty much answered the question. As far as this point, yes, the underwriting group will make the final determination on loan approvals. Alternately (but related), sometimes a sentence like this may be used where “underwriting” means “underwriting guidelines”.
Yes. It serves as an independent check within the bank on the loan officers, who want to do what they can to get loans approved because their pay or bonus is usually driven in some large part by how many loans they can originate. It makes sure that the bank’s standards are enforced. For larger or more complex loans, there is also a “credit committee” of senior bank officers that must approve the transaction.
I should point out that in some cases lenders may outsource their underwriting function for standard home loans, particularly non-bank lenders like mortgage bankers. In large part, the failure to observe underwriting standards (and the relaxing of underwriting standards) was a substantial cause of the mortgage crisis. These days, it can be much harder to get loans through underwriting than it was a few years ago.
I believe INGDirect outsources their underwriting, in some cases, to another, completely unrelated bank’s in-house underwriting department.
It certainly happens.
A key point that **Billdo **made a bit obliquely and that might be missed by some readers is that even if the orogonating bank does their own underwriting function 100% in-house, they may be applying standards that came from outside.
Your local Bank of Podunck may well originate all their own loans using in-house people to do the work. But they intend to sell all new loans to either CitiBank or JP Morgan. Who will then securitize them and sell them on the open market. Now Citi or JP sets out standards in advance for what they will buy. If Bank of Podunck doesn’t follow those standards exactly, they’ll be 100% able to give you a loan. And 100% stuck with it when Citibank says “No way we’re buying the non-conforming piece of trash.”
So even your friendly local Bank of Podunck loan officer who’s known you for 40 years and wants to help you out is totally hands-tied by the mean fat cats at big, mean, impersonal Citi*.
That’s what “underwriting” is often about nowadays.
*Mostly tongue in cheek, but not 100% so.
at the risk of belaboring the issue further:
an external underwriter is the original and desirable format, still practiced in investment banking. a big company issues loans or offers new equity to the investing public and naturally, the investing public will want an assessment by a third party (the investment bank.) an external underwriter is also good for the debt or equity issuer since they (underwriters) usually guarantee the stated cash proceeds to the issuer and bear the burden of selling the debt/equity securities to the public.
for bank loans, the individual amounts proposed are usually well within the bank’s financial capability but the number of proposals are huge, so it makes sense to have an in-house underwriting department. now those backroom guys in banks are better known as credit analysts, or risk managers. bankign regulators require full-time credit/risk assessment specialists since banks lend out depositors’ money.
Thanks.
you make an interesting point and I wonder if you could clarify. Your explanation has large banks buying up loans and reselling them on the open market. I understand that there are many different kinds of loans and that home mortgages are only one portion of the loan market. What about home mortgages? Do private banks still buy those loans? It is my understanding based on news reports that Freddie and Fannie (ie the federal Gov’t) buys virtually all mortgages now. Do you know whether that is in fact the case? Is there still a private market for home loans?