› View Print Version
Tap into the FHLBNY’s Letters of Credit Program to Help Preserve Liquidity and Enhance Business
The FHLBNY carries out its housing finance mission by providing various credit products to assist members with advancing housing opportunity and economic development in their communities. In line with our mission, we offer Letters of Credit (L/Cs) to guarantee performance/payment on behalf of you to a named third-party beneficiary for protection in the event of a default.
L/Cs have become a key component to our members’ businesses and have gained significant momentum over the years. Keeping highly liquid securities unencumbered has grown in importance with the onset of new regulations. Our members have begun to tap into the value of the FHLBNY’s products (including L/Cs) to a larger degree and utilize whole loan mortgage collateral to the greatest extent possible so that their liquid assets remain unencumbered. Members’ ability to obtain liquidity from whole loan mortgages is one of the premier benefits of Federal Home Loan Bank membership. L/Cs are triple-A-rated, cost effective, operationally-efficient, widely-accepted, and do not require a capital stock purchase (however, they do require collateralization). Read further to learn more about our L/C products and how they can be used to for liquidity management.
Municipal Letters of Credit (MULOCs)
What’s Required to Create an L/C — Seven Checkpoints
- An executed Letter of Credit Reimbursement Agreement on file with the FHLBNY
- The member’s board resolution approving the L/C Reimbursement Agreement with the FHLBNY
- Proper employee transaction authorization on the FHLBNY’s Global Authorization Form (GAF)
- A completed Letter of Credit Application: Include as much information as possible on the application with respect to the underlying project and purpose of the L/C, including all of the reasons that could trigger a default and a subsequent “draw” by the beneficiary. It is also recommended that you include identification of all parties involved and their relationship to the transaction. A copy of your institution’s credit underwriting to support the transaction is also required.
- A copy of the bond prospectus if the deal supports a bond issuance
- If it is a confirming L/C, then the FHLBNY will require a copy of your institution’s Letter of Credit Agreement. The FHLBNY does not support “evergreen” clauses (i.e., automatic renewals).
- If the L/C is CICA eligible, the FHLBNY will require additional information in order to qualify this transaction
MULOCs are L/Cs used specifically to back municipal deposits, and are deemed as acceptable collateral by both New York and New Jersey (New Jersey allows the product to be integrated into the GUDPA program). The term of the MULOC can range between two weeks and three years and does not require a capital stock purchase.
Members find MULOCs to be operationally efficient (there is no need to monitor market value of security collateral or deal with margin calls), cost effective, and an efficient way to keep liquidity available for lending or investing in higher-yielding securities (rather than having funds tied up in lower-yielding investments often used to collateralize municipal deposits). The cost of a MULOC is 9 bps of the notional amount per annum, with a minimum fee of $1001. For more information about this particular L/C product, please refer to the April 2014 edition of the FHLBNY Advantage.
Although MULOCs presently make up the majority of our L/C business, members are increasingly turning to the FHLBNY’s L/Cs for other general purpose needs. The FHLBNY can issue regular L/Cs to members for the following purposes:
- In facilitating residential housing finance;
- In facilitating community lending;
- To assist the member with asset/liability management; or
- For the member’s liquidity or other funding purposes.
Any well-capitalized member and eligible housing associate with sufficient collateral can apply to use L/Cs. The maximum term of our regular L/C is 15 years, and, as is the case with MULOCs, a capital stock purchase is not required. Regular L/Cs are competitively priced and are based on the L/C’s notional amount, with a minimum fee of $100.1
- Stand-by: The FHLBNY, along with our member and the beneficiary, create an L/C that will be presented by the beneficiary in the event the member’s customer does not fulfill the requirements of the underlying transaction. Upon a proper draw by the beneficiary, the FHLBNY will make payment to the beneficiary. Then, the FHLBNY will debit the member’s account for the proceeds of the distribution.
- Confirming: The FHLBNY along with our member and the beneficiary create an L/C that will wrap (credit enhance) an existing L/C created by our member. In the event our member does not make payment to the beneficiary, the beneficiary may then request payment from the FHLBNY. Upon receipt of a proper draw from the beneficiary, the FHLBNY will make payment to the beneficiary. Then, the FHLBNY will debit the member’s account for the proceeds of the distribution.
- Community Investment Cash Advances (CICA) L/C: All L/C types may benefit from our CICA-qualified L/C rate that is priced below the regular rate. A member can qualify for a CICA L/C if the underlying project meets the criteria of our Community Lending Program. Sufficient documentary evidence of supporting qualified community investment projects would be required. Please consult your Calling Officer for more information.
The FHLBNY will work closely with you to determine the eligibility of a transaction and to assist with meeting your targeted timeframes. Once all completed documentation is received, the L/C process, on average, takes up to two weeks. For more information on regular L/Cs or MULOCs and the benefits these products can offer, contact your Calling Officer at (212) 441-6700.
For more information on regular L/Cs or MULOCs and the benefits these products can offer, contact your Calling Officer at (212) 441-6700. Visit our LC page for additional information.
1Pricing may vary and term restrictions may apply to both MULOCs and L/Cs, based upon a member’s FHLBNY internal credit score and their respective regulatory CAMELS rating.
New Jersey Credit Union Members: Applying to be a GUDPA Participant? The FHLBNY Can Help.
Check out the FHLBNY’s New Jersey GUDPA Program page created specifically for members interested in participating in the program.
Take Advantage of the Member Resource Center
The Resource Center centralizes information that is often requested by our members and houses strategies and tools to help address funding needs for various market challenges.
Check out the Resource Center today.