Loan Underwriting

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Val Stark

When performing a loan review, one of the first documents to look for is the credit presentation/loan approval. A credit presentation should provide detailed information to an outside reader regarding the loan purpose, borrower’s background, sources of repayment, among others.

Loan approval presentations should be thorough, and they should be written for an audience that is not familiar with the borrower that is being granted credit. Smaller community banks frequently grant credit to well-known customers that have a history with the lender, and therefore narrative comments are often missing. We always encourage lenders to include narrative comments regarding the borrower’s background and history of the business to help readers understand why the bank is originating the loan. 

There are several items to look for in the loan approval including (but not limited to): names of the borrowers/guarantors, loan purpose, loan amount, interest rate and terms, loan officer, collateral (value and sources if available), sources of repayment, loan/financial covenants and strengths and weaknesses. Also, it should be ensured that the proper approval is documented (the document is signed and dated by the approving parties). 

Once it has been determined what the loan purpose is, and we understand the line of work the borrower is in, we usually ensure financial/cash flow analysis has been performed and is well documented within the presentation. In some cases, institutions approve credits based on projections of a new venture, so we look for proforma spreads of the project, and details on when profitability should be achieved. Guarantor financial analysis should also be included.

Collateral details are a must. Collateral type, location, value, and sources of valuation should be detailed. Lien position and loan to value ratios should be calculated.

Loan covenants requirements (affirmative and negative) should be included in the approval. Affirmative covenants require the borrower to provide the lender with certain information (i.e., financial reporting); negative covenants are prohibitions to the borrower (i.e., not new debt allowed without bank approval). The frequency of the covenants should be detailed.

One of the last items that should be included in the approval documents are strengths and weaknesses. Strengths should consist of the reasons why management thinks this transaction should be approved. Weaknesses should always be mitigated.

The loan approval presentation should include sufficient information to support the credit decision. It should provide the reader with all the tools to understand the transaction. It should be written for an audience that is not familiar with the individuals requesting the loan.