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Introduction

On my first day as a credit analyst at Corus Bank the first task I was given was to read the loan policy manual. Many other analysts have the same experience. There are two flaws with beginning credit analyst training with this task. First, the loan policy manual is completely incomprehensible to someone with no experience in lending. Second, it is deadly dull reading. This primer is an attempt to be everything the loan policy manual is not: chatty, friendly, encouraging, pedantic, subversive. It is what I wish I had been handed on my first day.

The job of a credit analyst is underwriting, whatever that means. Underwriting isn't that difficult, and most of it is fairly logical. Of course, you have to get past the fact that usury is intrinsically immoral. Many of the tasks performed by a credit analyst might not strictly be a part of "underwriting", which I here define as the set of tasks related to analyzing whether a loan is a good or a bad one. Credit analysts are expected to perform a wide variety of jobs for the loan department and the senior officers. Many of them are mundane and irritating: compiling reports, filling out forms, writing letters, xeroxing. Underwriting is by far the most important thing, however. The sooner you learn how to do it well, the better off you will be.

Banks make money by collecting deposits and then lending those deposits to loan customers. Banks compete for the deposits by, among other things, offering as high a rate of interest to the depositors as they can. They compete for loans by offering as low a rate of interest to the borrowers as they can. The difference between the rate of interest paid to the depositors (in the lingo of banks the "cost of funds") and the rate of interest collected from the borrowers, is called the net interest margin of the bank. Subtract the amount that it costs to operate the bank from this number, and you have the bank's profit. When the bank is deciding how to lend the deposits it has collected, it will obviously have two, potentially contradictory, goals: (1) lend out money to people who will pay the highest interest rate possible, and (2) lend out money to people that the bank is sure will be able to pay it back. These are the goals at any lending institution. At Corus, a conservative lender, the policy that the officers have been told to follow is to keep (2) paramount, even at the cost of minimizing (1). Corus would rather be sure the money it lends will be paid back and earn a small interest margin than risk its funds on speculative, but potentially higher return, ventures. At least, that's what the loan policy manual says.

At Corus, the commercial loan department is almost entirely concerned with making commercial real estate mortgage loans, whatever they are. For that reason this primer will focus almost exclusively on the underwriting, documenting, and servicing of commercial real estate loans. Whatever you need to learn about other types of lending will tumble in occasionally, but I will not generally address other kinds of lending specifically.

Return to Table of Contents - Continue to Chapter 1: The Basics of Underwriting