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Loan underwriting has long been a crucial function of financial institutions. The C’s of credit (character, capacity, capital, conditions and collateral) are taught in many college-level finance and banking courses and the process is even mentioned in popular movies such as “It’s a Wonderful Life.” The process is also recognized as being costly in terms of time and money. Regulations are promulgated and enforced to assure the safety and soundness of lending institutions. Nevertheless, there are situations when the risk to safety and soundness are so small that less extensive underwriting procedures may be appropriate. Benefits to lenders and borrowers alike are that alternative procedures generally save time and money in the underwriting process, which in turn should make credit more available as well as more affordable.
One of the consequences of the financial crisis of the 1980’s was the adoption of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 better known as FIRREA. In turn was the creation of rules regarding the valuation of collateral involving federally related lending institutions, referred to as the Interagency Guidelines. The purpose of the Interagency Guidelines is to enhance the prospects, even assure, loan repayment. In general, a federally insured lending institution must obtain an appraisal from a state licensed or certified appraiser for lending transactions involving real estate.