What are Underwriting Fees?

Underwriting fees are the amounts charged by underwriters for services rendered. The types of underwriting activities will vary by industry, but a common factor is that the amount is not charged or collectible until the related transaction has closed.

Underwriting Fees in Capital Markets

An investment bank charges underwriting fees to help a business go public or issue securities. Underwriting requires an investment banker to assemble a group of investors or brokerage firms that are willing to take a percentage of the total share offering. The banker may also commit to buying up any excess securities that no one else is willing to buy. The underwriting fees charged may be a mix of fixed and variable charges, where the amount charged is partially based on the amount of money raised. Investment banks charge a substantial fee for this assistance.

A hidden underwriting fee from the perspective of the issuer is that the price set for a securities offering may be too low, so that the issuer takes in less money than could have been the case. For example, shares are sold at $15 per share when the investment community might have paid $25 per share instead. The investment banker may allow this in order to appease its most active investor clients, as well as to advertise the issuance as having been completely subscribed. Low issuance pricing is a continuing source of conflict between issuers and investment bankers.

Underwriting Fees in Insurance

In the mortgage industry, underwriting fees are imposed by a mortgage lender to prepare loan documentation; the fee charged is based on a percentage of the loan amount. These fees are charged when the underlying transaction closes.

Underwriting Fees in Lending

A lender will frequently charge an underwriting fee to a borrower. This fee is intended to cover the cost of evaluating the ability of the borrower to pay back the prospective loan, as well as to process the related loan paperwork. This fee is generally charged at the loan closing, and is calculated as a percentage of the amount being lent. A lender’s underwriting fee is also known as an origination fee.