I understand that Letters of Credit are not a loan, but a letter promising to pay the seller for goods purchased by our customer and that the bank can release funds to the seller upon receiving proof that a shipment has occurred.

With that said, I was hoping to confirm that letters of credit are excluded from the Flood Protection Act requirements based on the fact that they are not loans, or does the requirement get triggered when we release funds?

Thank you for your assistance in advance.

Isn't there an actual note that supports the letter of credit?

Letters of credit present an inherent risk when it comes to flood insurance.

Similar to open-end credit you don't have to have flood insurance until an actual advance is made. However if you do not have flood insurance in place at the time the advance is requested then you have to require the borrower get flood insurance and you will have a 30 day waiting period before you can advance the funds.

If you do not have flood insurance in place to cover the property securing the LOC when the letter is presented for payment you cannot make that advance until flood insurance is in place which as mentioned will require a 30 day waiting period. Under the flood requirements you cannot make that advance until the waiting period has lapsed. This most likely will put you in breach of contract for the terms of the LOC; and if you advance the funds before the flood insurance is in effect you violate the flood insurance requirements.

My advice, get all the notices out and flood insurance in place up front.