Using Letters of Credit

An FHLBank Boston letter of credit (LOC) provides the backing of a highly rated institution that ensures wide acceptance for multiple purposes including:

  • Securing public unit deposits,
  • Credit support for certain tax-exempt bonds and taxable bonds,
  • Performance guaranty in lieu of a construction performance bond,
  • Collateral for obligations arising pursuant to an interest-rate swap, interest-rate exchange, or other such comparable agreement,
  • Credit support for other financial obligations, and
  • Guaranteeing contractual performance. 

Securing Public Unit Deposits

Members value public unit deposit business, but the required pledging of collateral can be onerous and costly. FHLBank Boston LOCs offer an efficient and flexible alternative that provides your customers with the security they need by leveraging FHLBank Boston’s strong credit position.

The LOC (issued on behalf of the member) guarantees that FHLBank Boston will pay the public-unit depositor (the beneficiary) upon demand, should a member default on the deposit. This efficient, low-cost option allows members to retain securities for liquidity and other purposes. It also allows the public unit immediate access to its funds without having to liquidate securities that are normally pledged to them.

Common types of LOCs used for Public Unit Deposits include:

  • Fixed balance
  • Variable balance
  • Master variable
  • Refundable 

Guaranteeing Contractual Performance

Any letter of credit from the FHLBank Boston offers members a well-established means of guaranteeing contracts and obligations on behalf of themselves and their customers. By leveraging the strong credit rating of FHLBank Boston, a Standby LOC may specifically assist with guaranteeing contractual performance. Please note that the beneficiary of a non-Confirming Standby LOC must be a customer, vendor, or financial counterparty of the member or housing associate on behalf of whom the LOC is issued.

Providing Credit Support for Bonds

Construction companies and developers often partner with state housing and development agencies to issue tax-exempt or taxable bonds that fund public initiatives ranging from housing developments to community development projects. When your borrower is involved in this type of initiative, you may be asked to issue an LOC to pay principal and interest payments to the bondholders or "guarantee" your loan customer’s obligation to make principal and interest payments.

The bondholders will require that your institution have a certain rating level, but your institution may not be able to meet that standard. In such instances, the bondholders may still accept an LOC from your institution if it is "wrapped" by a highly rated bank like FHLBank Boston.

Common types of LOCs used to provide credit support for bonds include the Standby LOC.

To determine whether a bond transaction would qualify for a "wrap" from FHLBank Boston, please contact your relationship manager.

Types of LOCs

There are many types of LOCs to fit your needs. Learn more.

More Details

For detailed information about letters of credit, please view our webinar or review our Products + Solutions Guide.

LOC Terms + Fees 

View the terms and conditions, fees, and billing information for letters of credit here.

Forms + Applications

Find the LOC or membership form you need here.