In finance, an underwriting rate is a test interest rate used by a lender during the process of underwriting a loan, for the purpose of testing compliance with one or more debt covenants to help deterimine the maximum loan amount. As it is intended as a type of stress test, the underwriting rate is typically somewhat higher than the expected initial interest rate of the loan. Increasing the spread between current interest rates and the underwriting rate is one method of tightening credit, as it would require stronger covenant compliance than a lower underwriting rate; as a matter of course this also makes the loan less risky.
Famous quotes containing the word rate:
“If you could choose your parents,... we would rather have a mother who felt a sense of guilt—at any rate who felt responsible, and felt that if things went wrong it was probably her fault—we’d rather have that than a mother who immediately turned to an outside thing to explain everything, and said it was due to the thunderstorm last night or some quite outside phenomenon and didn’t take responsibility for anything.”
—D.W. Winnicott (20th century)