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#1994689 - 02/09/15 09:41 PM Line of Credit to Support a Letter of Credit???
JonseyG Offline
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JonseyG
Joined: May 2014
Posts: 59
California
I have a borrower renewing a line of credit. The purpose of the line is to support a letter of credit. I'm aware that Letters of Credit are not included on the LAR but can be offered to the examiners as "Other Loans." My question is, would the Line that supports the Letter be reportable?

I've read previous threads that provided the opinion that Letters of Credit are not reportable because the money, in most cases, won't be accessed. In this case, it would seem that the line of credit would also (most likely) not ever be accessed.

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#2003810 - 03/25/15 11:09 AM Re: Line of Credit to Support a Letter of Credit??? JonseyG
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
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Assuming you mean "reportable as a small business loan", if the line of credit is on the banks books in categories 1e1/1e2 or 4a of the call report, it is reportable as small business assuming a size of $1 million or less.

A standalone letter of credit is not reportable because it won't be in those categories.
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#2223279 - 10/08/19 02:45 PM Re: Line of Credit to Support a Letter of Credit??? JonseyG
SaaL Offline
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The Texas Hill Country
I’d like to revive this thread because we’re having a debate here about whether or not the underlying obligation/note that is created when a letter of credit is issued is reportable. We book the loan on our system as a commitment for the full amount with a -0- balance. If the LC is submitted for payment then we would fund the loan to pay the required amount. Or is the loan that may not ever fund only included in “other loan data”?

And does the answer change if we’re relying on a line of credit that may also be used for other purposes to support the possible funding of the letter of credit by advancing on the line?
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#2223370 - 10/08/19 08:19 PM Re: Line of Credit to Support a Letter of Credit??? JonseyG
Len S Offline
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Joined: Oct 2004
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Connecticut
Letters of credit are not recognized as small business loans even though lines of credit are qualified. If you issue a letter of credit under a line of credit you would report the line of credit as long as it is otherwise qualified as a small business credit (<=$1million GAR) because you should be reporting the entire line of credit whether it is drawn down or not. A line of credit commitment is reportable but a letter of credit is not.
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#2223377 - 10/08/19 09:19 PM Re: Line of Credit to Support a Letter of Credit??? JonseyG
SaaL Offline
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Posts: 294
The Texas Hill Country
Thanks Len. That makes perfect sense. So what about a Letter of Credit that is supported by an unfunded term “loan” where the loan is not funded unless the Letter of Credit is paid. So we have a commitment for a term loan and the customer signs the loan document with an agreement that the loan will not fund unless and until the Letter of Credit is paid.Do we report that loan “commitment” even though it has not funded?
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#2223584 - 10/11/19 04:53 AM Re: Line of Credit to Support a Letter of Credit??? JonseyG
Len S Offline
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Joined: Oct 2004
Posts: 1,945
Connecticut
First, I made a mistake in my initial response when I mentioned small business credit as <=$1 million GAR. I had intended to say LOC <=$1 million.
Second, you can't report the Letter of Credit, but if you have made a commitment to fund the letter of credit with a loan and the commitment is documented it may depend on the loan documentation details. What does the documentation contain?
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#2266425 - 02/15/22 11:52 PM Re: Line of Credit to Support a Letter of Credit??? JonseyG
Mel in WA Offline
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Joined: Mar 2013
Posts: 1,170
Reviving an old thread about letters of credit.

It is our standard procedure to set up a non-revolving commitment tied to the letter of credit in the event a draft is presented against the letter of credit. I don't understand the comment about "....it may depend on the loan documentation details." Should the commitment be reported in the small business data if the loan is <= $1 million?

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#2266568 - 02/18/22 12:34 AM Re: Line of Credit to Support a Letter of Credit??? JonseyG
Mel in WA Offline
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Joined: Mar 2013
Posts: 1,170
Bump. Len S?

Loan Ops is setting up a "commitment" for the non-revolving line of credit and a "note" for the letter of credit. I'm thinking the commitment/line of credit should be reported??

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#2266622 - 02/18/22 08:47 PM Re: Line of Credit to Support a Letter of Credit??? JonseyG
Len S Offline
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Joined: Oct 2004
Posts: 1,945
Connecticut
I've been very busy and haven't been back to BOL for the last week or so, but someone contacted me about this issue.

Letters of credit are definitely excluded as small business loans, but lines of credit are included. It seems crazy that a line of credit would be eligible while a letter of credit would not be, but that's the case. In the Q&A's it is stated that a bank can present letters of credit commitments for consideration during a CRA exam (but they aren't reported).

Now if you establish a "line of credit" and a letter of credit is issued under that line of credit you wouldn't report the letter of credit, but you would report the line of credit. Don't forget if you issue a line of credit commitment, reporting the letter of credit would be redundant - it would be reporting the same credit twice.

So report the line of credit but don't report the letter of credit. The more I think about it Mel, you may have discovered a way to get credit for letters of credit by extending a line of credit and then issuing a letter of credit pursuant to the line! You're brilliant!
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