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Letters of credit (LOCs) issued by the Federal Home Loan Bank of Boston support a wide range of business activity. Our standby and confirming LOCs issued to members (and eligible non-members) can be used to facilitate residential housing finance and community lending, assist with asset/liability management, or to provide liquidity or other funding. An LOC issued by FHLB Boston 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; and
  • Credit support for other financial obligations.

FHLB Boston LOCs are most commonly used to secure deposits made by state government, municipalities and other public instrumentalities ( “public units”) and to provide credit support for tax-exempt bonds.

Securing Public Unit Deposits
You value the deposit business provided by your public unit clients, but the required pledging of collateral can be onerous and costly. You need an alternative that is efficient and flexible yet still provides your clients with the security they demand. Because of our strong credit position, many public units will accept an FHLB Boston LOC in lieu of pledging securities for their deposits. The LOC guarantees that FHLB Boston will pay the public unit depositor, upon demand, if you default on the deposit. This efficient, low-cost option allows you to retain securities for liquidity and other purposes. It also allows the public unit immediate access to its funds without having to first liquidate securities, which are normally pledged to them. We offer an easy application process and flexible terms and conditions.

To secure public unit deposits, the member applies to FHLB Boston for the LOC. The member is the applicant, while the public unit is the beneficiary; FHLB Boston issues the LOC on behalf of the applicant, in favor of the beneficiary. The LOC must have an expiry date and can only be cancelled with the public unit’s consent. To draw on the LOC in the event of default by the member, the public unit must present a statement to FHLB Boston certifying that the member has failed to redeem its deposits as per the terms of the LOC. Should the public unit submit such a statement to FHLB Boston, the LOC would guarantee payment to the public unit as long as the statement meets the terms of the LOC. FHLB Boston honors the obligation of the member bank to redeem deposits to the public unit. Public units may determine that they will accept a LOC issued by FHLB Boston as collateral for their deposits because the LOC constitutes “satisfactory security” pursuant to applicable state law.

Treasurers often view the FHLB Boston LOC as having advantages over traditional securities collateral. Specifically, in the unlikely event of your default, the public unit need only present documentation in accordance with the terms of the LOC to FHLB Boston to receive full payment and thereby avoid the delays involved with an attachment and liquidation of securities. The LOC relieves the public unit of having to seek recovery of your securities in the event of default and instead places that burden on FHLB Boston, which can seek to recover only after it has paid the public unit for your debt.

Refundable Balance LOC
The Refundable Balance Letter of Credit is a flexible, cost-effective LOC that would account for balance fluctuations associated with state, local and other public unit deposit accounts.

Members can request a Refundable Balance LOC equal to the estimated highest balance in the public unit deposit account for terms of one month or greater. If the average daily balance in the account throughout the term of the LOC is below the original face amount of the Refundable Balance LOC, a portion of the fee is eligible for a refund to the member when the LOC matures (or annually, whichever occurs first). The Refundable Balance LOC provides added flexibility when bidding on public unit deposits and offers a collateralization option with the added benefit of the potential for a refund.

Example: A member opens a deposit account for a local municipality. Based on the municipality’s high-balance estimate, the member requests that the Bank issue a $5 million, one-year Refundable Balance LOC. The up-front fee that the member pays to the Bank to issue the LOC is $7,500 ($5 million times 15 basis points for one year). If during the one-year term, the municipality’s average daily deposit balance was only $4 million, the member would be able to request a refund of $1,400 ($1 million times 15 basis points for one year less a $100 administrative fee for processing the refund).

Providing Credit Support for Bonds
Construction companies and development businesses 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 loan customer in the construction or development business is involved in this type of initiative, you may be asked to issue a LOC to either directly pay principal and interest payments to the bondholders or “guaranty” your loan customer’s obligation to make principal and interest payments. The bondholders require that your institution have a certain rating, but your institution may not have a rating. In such instances, the bondholders may still accept a LOC from your institution, but it must have a “wrap” by a highly rated bank. A confirming LOC from FHLB Boston can satisfy that requirement. With this arrangement, you, the member, will issue your own LOC to the benefit of the bondholders. You promise to pay the bondholders in the event the “borrower” (bond issuer) defaults on its obligation to pay principal and interest to the bondholders. FHLB Boston will then issue a confirming LOC, also to the benefit of the bondholders, that promises to pay the bondholders if your institution defaults on its LOC.

To determine whether a bond transaction would qualify for a “wrap” from FHLB Boston, please contact your relationship manager.

Collateral and Capital Requirements
A LOC issued by FHLB Boston must be collateralized, but you may use any form of collateral that is acceptable for advances, including one- to four-family loans, which you may already have pledged to FHLB Boston. There is also a requirement to purchase FHLB Boston capital stock, which is 25 basis points.

Pricing is based on the term of the letter of credit, and a minimum fee may be charged. A processing fee will be charged for confirming letters of credit issued in support of bond transactions. LOC fees are calculated and billed on an actual/360 basis. See the letter of credit pricing schedule.

Forms and Applications
Applications for an LOC to secure a public unit deposit must be received by FHLB Boston by noon of a Boston Business Day in order for the LOC to be issued and effective on the next Boston Business Day.

FHLB, may in its sole discretion, accept expedited requests for a same-day effective date if the application is received no later than noon of such day; however, no guarantee can be made that FHLB will be able to issue a same-day LOC.

You may email a scanned version of the application to locnotify@fhlbboston.com or fax a signed copy of the application to the Legal Department at 617-261-3309 (Attention: Felicia Miles) and to Bank Operations at 617-261-3327 (Attention:  Margaret Louie), and mail the original signed copy to Legal Department, Federal Home Loan Bank of Boston, 800 Boylston Street, Boston, MA 02199. Applications for all other LOCs will be processed in a time frame to be determined on a case by case basis.

LOC application and other related forms

Sample Documents

External resources

For more information on using FHLB Boston letters of credit, please consult your relationship manager.

Rates Specials
Products and Solutions Guide
Forms and Applications