FHLB Letters of Credit

The Federal Home Loan Bank is promoting the use of its letters of credit to back community banks letters of credit for tax exempt bond issues.  

In the past, community banks generally could not compete with regionally rated banks in transactions which are typically "variable rate demand bonds" backed by the rated bank's letter of credit. This new provision in the housing bill (officially the Foreclosure Prevention Act of 2008) signed into law by President Bush on July 31 permits the Federal Home Loan Bank ("FHLB") to issue letters of credit to community banks guaranteeing their payment in backing tax exempt municipal bonds in areas other than housing. Previously FHLB was only permitted to issue letters of credit for projects that dealt with housing transactions.

Under the new law, the FHLB can now provide letter of credit "wraps" for community banks. Although pricing may be key, heretofore community banks have been unable to compete with regionally rated banks for tax exempt bond financing bonds because their banks are not rated. These bonds are most often used in smaller government projects, non-profit corporation bonds, manufacturing and solid waste bonds. This new Act may permit community banks to compete in a market in which they previously had been unable to compete.

Posted by: William (Bill) L. Skees, Jr.

Categories: Bankruptcy & Banking Law