Commitment Vs. Proposal Letters - When to Use Each LetterBanker Resource
December 10, 2012 — 1,807 views
Commitment Vs. Proposal Letters - When to Use Each Letter
Today’s economic times require nearly every person desiring to make a major purchase to borrow the funds that are needed. For this reason individuals must petition financial institutions and wait for the approval or rejection. Whether the proposed borrower is seeking assistance to purchase a new home, to renovate an old house, to buy a vehicle or to realize some other dream, that person will have to solicit financial assistance. If the applicant is not required to make a personal appearance before a financial review board, the results of the board’s decisions are directed to the applicant through the mail.
When any message is put “in writing,” it emphasizes reality and implies responsibility. Any time a letter is prepared for a representative of a financial institution, that letter should plainly state the current status of a pending issue together with explicit details of actions being proposed.
Proposal letters are offers for possible future agreements. Commitment letters are pledges for future agreements. The wording of either type of letter should be clear and concise. This effort will enhance the validity of any message and help to eliminate the possibility of misunderstandings.
As a precaution, proposal letters should contain severability clauses allowing for withdrawals or adjustments for the purpose of purging any unsanctioned obligations based on erroneous or incomplete proposals. When this step is not taken, proposals are assumed to be the final word concerning the subject rather than a suggestion or approach to the settlement of the matter.
When a financial institution is debating the approval of a loan, many factors can affect the outcome. At the point that a proposal is generated, the bank is in the negotiation stage of reaching an agreement. Such things as down payments, total loan amount, the interest rates and the monthly payment obligations will greatly affect the outcome. A proposal issued at this time will probably reflect the final agreement totals; however, the fact should be stressed that this is merely a proposal and that changes to any or all of the line items may occur.
At the point in time that the parties involved reach an agreement, it is appropriate to provide a commitment letter stating the details of that agreement and the dates proposed for implementation. This commitment letter can become a portion of the formal loan documents.
Much care should be taken by any financial institution reviewing a loan application to submit to the applicant correspondence that best described the current status and that the proposal letter does not commit or imply commitment.