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Our bank issues standby letters of credit for real estate developers to bond the various stages of the project with the local government agencies. We have a form we use that was drawn up by a local attorney. It is probably one of the best LC forms you'll ever see.

Many of the local governments are now requiring the use of their form over our's. We've attempted to negotiate the language or to point out that our language meets their requirements with additional language we desire. In a recent example, I was told 64 days after delivery of the LC that the city would not accept our form. If we didn't use their form, the contractor would be required to obtain an LC from another bank or put up a cash bond.

I am frustrated. I feel that the beneficiary dictating the terms of the LC in their favor is akin to someone coming into the bank with their own promissory note and asking us to cut them a check against it. No one would dare suggest the bank use someone else's loan documents, but they see no problem with demanding we use their LC.

I'm wondering if other banks are running into this kind of thing and how they handle it.

Are other banks just using whatever form the beneficiary suggests and do not think twice about it?

Loan documents protect the bank - not the borrower. The standby LC is to protect the beneficiary, not the bank. The cities want to make sure that they are protected, according to what their attorney says.

I've been out of LC's for some time, but as long as you write what their performance bond requires, you should be OK.

So, if the city's LC says they can change the amount of the LC at anytime, that is okay with you? I've seen it. We have two sitting out there now.

No, it wasn't what they meant, but it is what they said. Most of the forms I've been presented to copy are very poorly written.

Sorry MJ - that didn't come out right. The beneficiary can call for certain documents and terms, but cannot change the document unilaterally after it is issued - no-one can! The amount of credit and expiration is at the discretion of the bank. You're the only one to judge what your customer can repay, especially because standby LC's are only used if the borrower has defaulted on their obligations.

The city can reduce the amount of the credit, but thay cannot increase it. The amount and duration of the LC is a joint agreement between your customer and you.

I'm sorry, but I have done many many LCs over the years. The bank has every right to insist on language it wants in the LC, along with putting the language the parties want - as long as the bank is willing to go along with that language and feels it puts no unreasonable burden on the bank, or is too vague, etc.

The bank needs to make sure it is comfortable with the language in LCs it issues. It is a commitment by the bank and the bank should not be bullied into issuing an LC it is not comfortable with.

From what I've gathered in discussions with various city officials, most banks just use whatever is put before them. We have a few cities around here that have adopted an LC format and language by vote of the city council and try to enforce it upon the banks by saying it is legally required.

I've even had trouble with state level officials who require a letter of credit, but I've had to explain to them how the letter of credit relationships work. Totally ignorant.

Like I said, I'm frustrated. I've asked the state bankers association to lobby to have some language changed in the UCC that would bar a beneficiary from dictating the terms of the LC but would allow for negotiation of language. When I send our form, and they reject it, I ask for specific reasons and offer to negotiate the language with them, but all I get is "The city requires the use of our own form and no other".

State law currently states that LCs will be issued in a form that meets the industry standard. I'm hoping that I can establish the the industry standard is not to be bulldozed by city agencies.

You could require cash collateral from the customer if all parties refuse to negotiate to language that would be more acceptable to the bank! That would mitigate your risk.