In a capitalist world based on debt, the roles of the lender and underwriter are crucial. Most people first hear of lenders and underwriters when they go to take out a loan for a house, but this is only a small fraction of their activity.
Anywhere there is debt or marketable securities, as well as uncertainty about how much those services are worth (i.e how high the interest should go, or what the stock price should be), there are lenders and underwriters. Their relationship, moreover, revolves around assuming risk and calculating the cost needed to take it on.
The key difference between a lender and underwriter is that a lender assumes financial risk by providing a loan (or other security), whereas an underwriter determines the value of the risk, which is the core criteria for approving the loan and setting an interest rate.
Is an underwriter the same as a lender?
If you walk into a bank to take out a loan, you’ll undoubtedly hear “underwriter” and “lenders” in the same sentence. To the non-financial mind, it may seem like they’re the same thing.
It’s true that underwriters and lenders nearly always show up together, and in some cases a lender may actually have a dual role as and underwriter. However, they are not the same thing.
The role of the lender is to provide the debt resource for client, and it’s the underwriter’s job to figure out how much the client should pay for the money, and if she/he is worth it. In other words, the underwriter determines the interest rate and decides whether to approve the client.
Do underwriters work for the lender?
So if the two almost always work together, and a single entity can be both the underwriter and lender, then who works for who?
In most cases, an underwriter is an individual who works for a bank, while the bank as a whole is known as the lender. There are individual firms of underwriters that work on contract with lenders, but — due to regulatory requirements and workflows — it is less common.
Underwriters That Don’t Work with Lenders
This article is concerned with underwriters that work with lenders, but another type of underwriter exists: insurance underwriters.
Insurance underwriters work within insurance companies to determine premiums that different health profiles should pay for coverage, so they don’t have a direct relationship to lenders.
Contexts for the underwriter-lender relationship
The underwriter-lender relationship occurs under two primary contexts: (1) commercial & personal loans, and (2) pre-purchasing stock before an IPO. While there are plenty of niche disciplines where you would find underwriters and lenders, these are by far the two most common (and the two most publicized).
Providing Commercial and Personal Loans
When a company wants to take out a big, long-term loan to fund its business, it consults a lender (usually a bank) for the funds. In theory, this loan allows the company to buy an asset that will generate much more money than the cost of the loan. This way, the company makes a profit and the bank gets paid.
Once the bank decides on a loan offer, the underwriters steps in to evaluate two criteria: (1) if the company can afford the loan, and (2) how risky it is. The commercial loan underwriter estimates the company’s risk profile, which consists of:
- On-time payment history.
- Rolling credit facility payment history.
- The lender’s credit policy, which changes on a cyclical basis.
- Special credit considerations of the business line (gambling presents higher public image risk, for example).
- Market conditions.
It’s important to note that the risk an underwriter evaluates can change over time, since the lender’s credit policy is what we call pro-cyclical — it follows the market.
Changes in the macroeconomic market and demand from clients incentivizes a lender to change its rates. This is why you often hear things like “rates are really high right now.”
The same general criteria apply to personal loans. Except that underwriters evaluate a personal risk profile based on credit scores, payment history, and income.
Pre-Purchasing Stock Before an Initial Public Offering (IPO)
The second context in which we see underwriters and lenders is in the case of an initial public offering (IPO). If you’re unfamiliar, an IPO occurs when a private company wants to issue stock to the public (retail investors) through a stock exchange (i.e NASDAQ or NYSE).
The work of the underwriter in an IPO is to speak with potential institutional investors to understand how many shares they might be interested to buy, and at what price. It is through these privileged relationships that they can get a good risk assessment and determine an offering and opening price. They will then buy these shares from the companies at a discount, and take their “underwriting fees” by reselling at the market price to retail investors — who are the ultimate lenders.
In an IPO, we often refer to the bank as the underwriter itself. This is because the bank will estimate the market value of the stock using a host of methodologies, buy the stock from the company at a discount, and resell it on the open market.
Importantly, you should note that in this case, the bank is not the lender! The retail investors who buy the stocks from the bank are the lenders. The “bank” is the underwriter. How can you tell? Ask where the money ultimately comes from? (Retail investors) And who evaluates the price? (The Bank)
While they’re a traditional part of the process, not all public offerings involve lenders and underwriters
Roles and responsibilities in the underwriter-lender approval workflow for loans
If you’ve ever attempted to get a personal loan, you may have heard a bank employee mention a “waiting period” or “approval step” for the loan. When lenders and underwriters work together, they have a set of steps, or guidelines, for approving a loan. In general, there are three.
Any person or business owner looking to secure debt should know these three steps!
1. Lender determines an attractive loan offer (loan officer)
A client seeking debt funding from a lender always starts by contacting the lender. In nearly all cases, the person representing the lender is called the loan officer. This is the only person with whom the client interacts from start to finish of the process.
Upon meeting with the officer, the two decide on the amount of the loan they wish to secure — this is known as the principle amount. Then, the client expresses any desired criteria for the loan. These criteria consist of 1 or more of the following 5 items:
- Interest rate
- Payment periods (months, quarters)
- Number of payments
- Late fees
- Early payment fees
The loan officer then takes this into consideration and makes a pre-approved offer for the loan.
2. The client agrees or negotiates (client or business owner)
If the client accepts the offer, the offer is sent to underwriting. However, if he/she would like to negotiate, this takes place on the basis of the 5 criteria above. For example, the client may want to negotiate the interest rate, and modify the number of payments.
3. The underwriter provides feedback (underwriter)
The underwriter looks at the risk profile of the client and determines two things: (1) if the client can afford the loan based on the given criteria, and (2) if the interest earned is enough to cover the risk exposure of the lender. The exact calculation used includes the criteria we mentioned in the “Contexts” section above.
He/she will then accept or reject the offer on the table with a rationale and give this back to the loan officer. This process continues until both the underwriter and client accept the terms… or not.
Salary: Underwriter vs Lender (Loan Officer)
In general, to compare salaries we look at the underwriter and loan officer salaries, since a lender is usually an organization. Here’s data that I collected to compare these two salaries in locations from all around the world.
| Country | City | Underwriter Salary | Loan Officer Salary |
|---|---|---|---|
| United States of America | New York | $ 68,522 | $ 51,228 |
| United States of America | Los Angeles | $ 64,336 | $ 55,508 |
| United States of America | Chicago | $ 64,172 | $ 45,175 |
| United States of America | Houston | $ 63,040 | $ 53,168 |
| United States of America | Phoenix | $ 55,655 | $ 42,364 |
| United States of America | Philadelphia | $ 60,108 | $ 41,627 |
| United States of America | San Antonio | $ 59,910 | $ 53,655 |
| United States of America | San Diego | $ 59,693 | $ 48,429 |
| United States of America | Dallas | $ 56,697 | $ 47,582 |
| United States of America | San Jose | $ 63,321 | $ 56,977 |
| England | London | $ 62,679 | $ 35,966 |
| Germany | Berlin | $ 58,988 | $ 62,236 |
| Spain | Madrid | $ 33,868 | $ 68,400 |
| Italy | Rome | $ 37,715 | $ 10,397 |
| France | Paris | $ 55,628 | $ 57,628 |
| Austria | Vienna | $ 51,576 | $ 85,555 |
| Germany | Hamburg | $ 60,984 | $ 51,962 |
| United Arab Emirates | Dubai | $ 32,400 | $ 40,500 |
| Isreal | Tel Aviv | $ 83,200 | $ 43,939 |
| China | Beijing | $ 43,959 | $ 25,893 |
| India | Mumbai | $ 9,890 | $ 5,297 |
| South Africa | Johannesburg | $ 11,311 | $ 13,524 |
| Kenya | Nairobi | $ 10,101 | $ 2,184 |
| Argentina | Buenos Aires | $ 16 | $ 7 |
| Brazil | Rio de Janeiro | $ 6,943 | $ 13,051 |
Job Satisfaction Rates: Underwriter vs Lender (Loan Officer)
According to a PayScale.com survey, underwriters have a 70% job satisfaction rating, and a 37% estimation of the high meaningfulness of their job. Loan officers, on the other hand, have a 74% job satisfaction rating, and a 53% estimation of the high meaningfulness of their job.
In this study, Percent High Satisfaction is the percentage of respondents with the given job who answered “Extremely satisfied” or “Fairly satisfied” to the question, “How satisfied are you in your job?”
Likewise, Percent High Meaning This is the percentage of respondents with the given job who answered “Very much so” or “Yes” to the question, “Does your work make the world a better place?”
Stress Levels: Underwriter vs Lender (Loan Officer)
So, loan officers (working for lenders) are slightly more satisfied than underwriters. This dynamic leaves us to question why? One major factor is stress levels.
Pressure from above
Underwriters experience significantly more pressure to perform since their work is categorical — until they complete a task, the bank cannot start generating revenue.
Loan officers work, however, is more relational. While it is critically important for them to incentivize clients to take a loan, the decision comes down to hard criteria. This means the metric for their performance is less rigid, and they get less pressure from management.
Importance of precision
Underwriters may analyze risk for a host of different clients. This means the risk they evaluate is as varied as people and business are!
While for many a diverse work environment can be highly stimulating, it brings a serious amount of pressure to underwriters.
Loan officers, on the other hand, don’t need to understand the complexity behind different kinds of clients. They need to be relationally adept, but this presents less stress than the strenuous details that an underwriter must manage.
Communication in underwriting is stressful
Like many analytical roles, underwriters need to explain their finding in a clear and simple way. This can be a real challenge.
Imagine, for example. The underwriter needs to present a loan refusal to a young family with a small child. This client doesn’t have much bandwidth to understand why they were refused — but it can be painful to live their disappointment.
Loan officers, on the other hand, can pass the refusal onto the decision of the underwriter, which may make them feel less guilty.
Career Outlook: Underwriter vs Lender (Loan Officer)
According to the U.S. Bureau of Labor Statistics4, the demand for underwriters will grow by 3% from 2019 to 2029 (average growth of the market), whereas the demand for loan officers will see little to no change. We can explain this dynamic through the growth of underwriters evaluating commercial loans. One company may require the work of several underwriters, whereas it would not usually require the work of multiple loan officers.
Conclusion
Underwriters and lenders are certainly not the same. The lender assumes risk and the underwriter determines its value. Underwriters and lender work together on commercial and personal loans, as well as shares sold in initial public offerings. Underwriters make more than loan officers in almost every part of the world, but loan officers are more satisfied with their jobs. This is in part due to the high stress levels on underwriters. In the end, underwriters will see more growth through 2029.
