Letters of Credit

Form a Strategic Alliance with an FHLBNY Letter of Credit

As a key partner in financing, the Federal Home Loan Bank of New York (FHLBNY) issues triple-A-rated Letters of Credit (L/C) on behalf of its members to support liquidity, asset/liability management, and housing, community, and economic development activities. An FHLBNY L/C is a promise, made at the request of an FHLBNY member, to make payments to a third-party beneficiary in the event of a default of performance.

View a sample of an FHLBNY L/C agreement.

L/Cs are low-cost, easy to use, and do not require a capital stock purchase. The FHLBNY offers two forms of L/Cs to members to support various funding needs:

Regular L/Cs
Can be used if you are looking to collateralize:

Mortgage Revenue Bonds

Community Development Bonds

Certificates of Deposit

Funds Promissory Notes

Construction Funding for Elderly Housing Complexes

Rental Achievement Guarantees

Credit Enhancement for CRA or Community Support

IDA Financing

Interest Rate Swaps

Lease Agreements
More Information
Municipal Letters of Credit (MULOCs)
As permitted by New York*, New Jersey**, Puerto Rico and U.S. Virgin Islands laws, MULOCs can be used if you are looking to collateralize:

State, city, court, or local government (municipal/public fund) deposits

More Information

*In New York, MULOCs can be used for Banking Development Districts and New York State Community Development Program Deposits.

**Other states may allow MULOCs to be used as collateral for public unit deposits.

Key Contacts

Relationship Managers:
(212) 441-6700

What is a Letter of Credit?

A letter of credit (L/C) is a credit instrument, issued by a financial institution, guaranteeing payment on behalf of its customer to a beneficiary, normally to a third party but sometimes to the institution’s customer, for a stated period of time and when certain conditions are met. An FHLBNY L/C substitutes the issuing institution’s (FHLBNY member-lender’s) credit for the credit of the FHLBNY.

The FHLBNY’s L/C process:

The FHLBNY issues two types of L/Cs:  Irrevocable Standby or Irrevocable Direct Pay.

Irrevocable Standby L/C:

Provides that the FHLBNY pay out to the beneficiary in the event of a member’s default or failure to perform under a contract or other agreement between parties.

Irrevocable Direct Pay L/C:

Permits the beneficiary to look directly to the FHLBNY for payment of a member’s obligation.  It cannot be cancelled before a specific date without the agreement of all parties involved.

Key Contacts

Relationship Managers:
(212) 441-6700

Regular Letters of Credit (L/Cs)

When L/Cs are used for general purposes, they:

Provide credit enhancements for collateral subordinated obligations or other mortgage-backed securities

Provide credit support in the sale of whole mortgage loan portfolios

Facilitate the beneficiary’s drawing of interest payments from a bond issue

Support tax-exempt municipal bonds

When L/Cs are used for eligible housing and community lending,* they:

Provide funds at a discounted price, below regular L/C prices, to finance lending activities

Facilitate transactions that promote home financing, housing activity, or financing of commercial and economic development

*Projects must qualify for the FHLBNY’s Community Investment Cash Advance Programs (CIP, RDA, and UDA). For more information on eligible projects, click here or call (212) 441-6850.

Forms

Applying for an FHLBNY Letter of Credit

Step 1: Enroll in the Letter of Credit program by completing the following forms:

1. Global Authorization Form (HLB-106)

Complete this form for employees you wish to grant permissions (Section 4) to execute a Letter of Credit at the FHLBNY.

2. Irrevocable Letter of Credit Reimbursement Agreement (HLB-115)

Complete this one-time enrollment form for the FHLBNY’s Letter of Credit program. Once your institution is enrolled, you need to submit a Letter of Credit Issuance Application (HLB-116) and any supporting documentation requested by the FHLBNY each time you wish to use this credit instrument.

Step 2: Apply for a Regular Letter of Credit product:

1. Complete the Letter of Credit Issuance Application (HLB-116).

Complete this form for employees you wish to grant permissions (Section 4) to execute a Letter of Credit at the FHLBNY.

2. In addition, you may be asked to provide us with the following supporting documents:

Project descriptions;

Project’s exact address;

Bond Official Statement or Private Placement Memorandum (if applicable);

Trust Indenture (if applicable);

Your institution’s Internal Credit Analysis of the transaction;

Your institution’s Internal Credit Approval Memorandum or Report

Copy of your Letter of Credit or a draft Letter of Credit, if you are applying for a confirming Letter of Credit; and

Any additional documentation at the FHLBNY’s request (i.e., documents supporting eligibility for CICA Letters of Credit).

Key Contacts

Relationship Managers:
(212) 441-6700

Municipal Letters of Credit (MULOCs)

MULOCs provide a low–cost, more efficient way to collateralize state, city, court, or local government (municipal/public fund) deposits.

Term: 2 weeks to 3 years
Fees: $100 Draw Fee

Several states and territories, including New York, New Jersey, Puerto Rico and the U.S. Virgin Islands, have amended their laws to permit the use of MULOCs as eligible collateral. In addition, New York thrift members are eligible to use FHLBNY MULOCs to secure local government (municipal/public fund) deposits if they are located in designated Banking Development Districts.

FHLBNY MULOC Benefits for Members

When MULOCs are used to collateralize state, city, court, or local government (municipal/public fund) deposits, they:

Utilize the FHLBNY’s triple-A credit rating to secure deposits

Increase a member’s liquidity position by freeing up the securities portfolio for other uses

Increase earnings on the investment portfolio (MULOC can take the place of lower-yielding investments, such as Treasuries)

Reduce the operational expense associated with monitoring deposits (eliminates the need to match CUSIPs, monitor principal paydowns, monitor securities calls, etc.)

Refundable MULOCs are also available to collateralize transaction accounts more effectively and have the potential to lower FHLBNY MULOC fees.

Refundable MULOCs

Refundable Municipal Letters of Credit

On June 1, 2009, the FHLBNY launched a new type of letter of credit — the Refundable Municipal Letter of Credit (Refundable MULOC). This letter of credit is more flexible in collateralizing municipal/public fund transaction accounts, whose balances fluctuate over time.

Term: 2 weeks to 3 years
Fees: $100 Draw Fee

Regular Municipal Letters of Credit (MULOC) are traditionally used to collateralize fixed-balance and term certificates of deposit. As such, matching the MULOC to the balance in the deposit is easy. With a transaction account, the balance will fluctuate with municipal/public fund receipts and disbursements.

To avoid having to issue multiple MULOCs as the balance fluctuates, a member can obtain one Refundable MULOC in an amount equal to an estimated high-balance in the transaction account. A portion of the MULOC fee can be refunded at maturity if the actual high-balance in the transaction account remains below the amount of the Refundable MULOC during its entire term.

Example: You estimate your transaction account high-balance to be $5 million for the year. At the end of the year, your actual high-balance is $4 million. You will be reimbursed the fee for the unused $1 million.

In short, the new Refundable MULOC provides all the advantages of a regular MULOC, but it also offers a partial fee reimbursement when the MULOC is not fully utilized.*

Benefits of the Refundable MULOC

In addition to the regular MULOC benefits, Refundable MULOCs:

Reduce MULOC fees if full MULOC is not utilized

Eliminate over-collateralization of municipal/public fund deposits with fluctuating balances

Are operationally efficient

*To receive a refund, you must complete and fax the Refundable MULOC Certification Form (HLB-118r) within 5 business days of the L/C’s maturity.

NJ GUDPA Participation

New Jersey Governmental Unit Deposit Protection Act (GUDPA)

The Governmental Unit Deposit Protection Act is a supplemental insurance program enacted by the New Jersey Legislature to protect the public deposits of municipalities and local government agencies. The GUDPA program is administered by the Commissioner of the New Jersey Department of Banking and Insurance.

Currently, the first $250,000 of governmental deposits in each insured depository are protected by the Federal Deposit Insurance (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF) in most situations. Public funds in excess of the FDIC or NCUSIF insured amounts are protected by GUDPA.

Local government entities are required by law to deposit their funds in a depository institution that protects such funds pursuant to GUDPA. State and federally chartered banks, savings banks, savings and loan associations, and credit unions with offices in New Jersey must be certified by the Department of Banking and Insurance for participation in the GUDPA system before a local government entity can open a depository account with them.

Some of the GUDPA application requirements for new participants are:

Set up an account with an approved custodian such as the Federal Home Loan Bank of New York – if you are using the FHLBNY for safekeeping, you can supply a copy of the Correspondent Services Agreement that you completed for membership. (If you need a copy please contact us.)

Provide a fully executed copy of your custodial agreement that names the “Commissioner, New Jersey Department of Banking and Insurance” as the beneficiary – use the form SFK-005 to pledge securities.

Each depository participating in the GUDPA program must pledge eligible collateral equal to at least 5% of the average amount of its public deposits, and 100% of the average amount of its public funds in excess of the lesser of 75% of its capital funds or $200 million. New participants are required to collateralize 100% of their public deposits for a period of at least twelve months.

The FHLBNY can help you efficiently collateralize your public deposits. Members can:

Use our Municipal Letter of Credit (MULOC) product, specifically designed for the collateralization of state, city, court, or local government deposits. MULOCs are easy to use, require no capital stock purchase, and can be collateralized with the same assets (loans and securities) that are used to secure FHLBNY advances; or

Use our Refundable MULOC product that offers all the benefits of a MULOC, but is more efficient for collateralizing transaction accounts since it provides an opportunity for a partial fee reimbursement if the MULOC is not fully utilized.

Alternatively, you can pledge securities already held with us, by using form SFK-005.

Municipal Information

Municipal Letters of Credit (MULOCs)

In the past, some financial institutions did not have this alternate way to collateralize municipal/public fund deposits. Now several states and territories, including New York, New Jersey, Puerto Rico and the U.S. Virgin Islands, have amended their laws to permit these institutions to utilize an FHLBNY L/C as eligible collateral.

FHLBNY MULOC Benefits for Municipalities

The following are some of the benefits that come with accepting an FHLBNY MULOC as collateral:

No cost to you — the MULOC is paid for by the FHLBNY member institution, not the municipality

Immediate pay out — in the unlikely event of a default in performance by the member institution, municipalities get paid promptly upon submission of a proper draw certificate, as opposed to selling securities to the market

Convenient — municipalities will receive, on the day of the transaction, a one page MULOC via fax with the original transmitted via an overnight delivery service

Secure — MULOCs are triple-A-rated and irrevocable, which means they can only be altered or cancelled if all three parties agree in writing to the changes

Deposit products for your excess funds

Operationally efficient for all parties — the MULOC eliminates the need for the depository institution to match securities and monitor margin calls, which reduces operational expenses; eliminates the municipality’s need to monitor third party custodian safekeeping reports or statements; and MULOCs are issued quickly, usually within a few hours

How do you request an FHLBNY MULOC?

Only members of the FHLBNY can request a MULOC from the FHLBNY, so third parties must work with a member-lender that participates in the MULOC program. With over 330 member-lenders, there’s a good chance that your current lender is an FHLBNY member.

Click here for a complete listing of FHLBNY members. Please contact members directly to see if they participate in the MULOC program, or click here to request a list of participating members in your area.

Laws

Legislation Pertaining to the Collection of Deposits

The following laws permit the use of FHLBNY MULOCs as collateral to secure state and local government (municipal) deposits:

New York Laws
(Deposit type: City, Municipal, State, Court, BDD, NYSCDP)

New Jersey Laws
(Deposit type: City, Municipal, State, Court)

Puerto Rico Laws (in English) or Puerto Rico Laws (in Spanish)
(Deposit type: Municipal/Public Fund)

U.S. Virgin Islands Laws
(Deposit type: Municipal/Public Fund)

Note: Other states may allow FHLBNY MULOCs to be used as collateral for public unit deposits. Please contact your Relationship Manager at (212) 441-6700 for more information.

Forms

Applying for an FHLBNY MULOC or Refundable MULOC

Step 1: Enroll in the Letter of Credit program by completing the following forms:

  1. Global Authorization Form (HLB-106)Complete this form for employees you wish to grant permissions (Section 4) to execute a Letter of Credit at the FHLBNY.
    Note:     If you have a form on file with us, please contact us for a copy.
  2. Irrevocable Letter of Credit Reimbursement Agreement (HLB-115)Complete this one-time enrollment form for the FHLBNY’s Letter of Credit program. Once your institution is enrolled, you need to submit a Municipal Letters of Credit or Refundable Municipal Letters of Credit Issuance Application (HLB-117 or HLB-118) and any supporting documentation requested by the FHLBNY each time you wish to use this credit instrument.

Step 2: Apply for a MULOC or Refundable MULOC product:

For MULOCs:

  1. Complete the MULOC Issuance Application (HLB-117) or HLB-117A for Puerto Rico Members.
  2. Supply a copy of the Certificate of Deposit you issued to the Beneficiary or provide a statement of your Beneficiary’s Demand Deposit Account.

For Refundable MULOCs:

  1. Complete the Refundable MULOC Issuance Application (HLB-118) or HLB-118A for Puerto Rico Members.
  2. Supply a copy of the Certificate of Deposit you issued to the Beneficiary or provide a statement of your Beneficiary’s Demand Deposit Account.
  3. Complete and fax the Refundable MULOC Certification Form (HLB-118r) within 5 business days of maturity. If this form is not received within 5 business days of maturity, the reimbursement may be forfeited.

Key Contacts

Relationship Managers:
(212) 441-6700

Additional Information

Today the FHLBNY has gained greater acceptance of the L/C program by working with municipal trade organizations to increase municipal awareness and acceptance of the L/C, such as: the Government Finance Officers Association of New York State, the New York State Association of Counties, the New York State Conference of Mayors and Municipal Officials, the Association of Towns of the State of New York, the New Jersey League of Municipalities, and the New Jersey Conference of Mayors.

View the Letters of Credit & MULOC Overview

View the Letters of Credit & MULOC Overview – Spanish translation

Key Contacts

Relationship Managers:
(212) 441-6700