Unfunded loan commitments
Encyclopedia
Unfunded loan commitments are those commitments made by a Financial institution
that are contractual obligations for future funding. They should not be confused with Letters of credit which require certain trigger events before funding is needed. Increasingly, originating lending institutions are selling Senior loans and related funded or unfunded commitments to institutional investors like Investment management
firms, mutual funds and insurance companies.
Typically, unfunded commitments are separated into two categories:
Bank
s are required to report unfunded commitments on schedule RC-L of the quarterly Report of Condition and Income (Call Report
).
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
that are contractual obligations for future funding. They should not be confused with Letters of credit which require certain trigger events before funding is needed. Increasingly, originating lending institutions are selling Senior loans and related funded or unfunded commitments to institutional investors like Investment management
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
firms, mutual funds and insurance companies.
Typically, unfunded commitments are separated into two categories:
- Multiple Advance, Closed End: This type of loan (typically a construction loanConstruction loanIn the broadest sense of the term, a Construction Loan is any loan where the proceeds are used to finance construction of some kind. In the United States Financial Services industry however, the term is used to describe a genre of loans designed for construction and containing features such as...
) 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 creditLine of creditA line of credit is any credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of...
) allows the borrower to continue to borrow up to the original loan amount. Principal reductions are immediately available for future advances.
Bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s are required to report unfunded commitments on schedule RC-L of the quarterly Report of Condition and Income (Call Report
Call Report
All regulated financial institutions in the United States are required to file periodic financial and other information with their respective regulators and other parties. For banks in the U.S., one of the key reports required to be filed is the quarterly Report of Condition and Income, generally...
).