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 determine 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.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.