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Unfunded loan commitments are those commitments made by a
Financial institution
Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...
that are contractual obligations for future funding. They should not be confused with
Letters of credit
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exp ...
which require certain trigger events before funding is needed. Increasingly, originating lending institutions are selling
Senior loans
Senior (shortened as Sr.) means "the elder" in Latin and is often used as a suffix for the elder of two or more people in the same family with the same given name, usually a parent or grandparent. It may also refer to:
* Senior (name), a surname ...
and related funded or unfunded commitments to institutional investors like
Investment management
Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be institut ...
firms,
mutual funds
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
and
insurance companies
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
.
Typically, unfunded commitments are separated into two categories:
*Multiple Advance, Closed End: This type of loan (typically a construction loan) advances incremental amounts up to a certain limit, based upon some criteria such as inspection and approval of a draw request. Any principal reductions received during the loan period are not available to be drawn on, but rather have paid down the loan balance.
*Revolving or Open End: This type of loan (known informally as a
Line of credit
A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds. A line of credit takes se ...
) allows the borrower to continue to borrow up to the original loan amount. Principal reductions are immediately available for future advances.
Bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
s are required to report unfunded commitments on schedule RC-L of the quarterly Report of Condition and Income ( Call Report).