I have searched everywhere I can think of and cannot seem to find anything even similar to the situation I am about to describe. I hope someone out there can point me in the right direction.

A contractor has requested a letter of credit in the event additional funds are needed to complete a project he will soon begin. The lender wants to secure the letter of credit with the property being constructed. The property is in a SFHA. The question has come up as to whether or not flood insurance should be required on a Letter of Credit secured by property in a SFHA. We always require proof of flood insurance at time of loan closing, but with a Letter of Credit, a loan has not actually been closed. Therefore, I don't think flood insurance is necessary unless the lender receives a request to fund the LOC. Am I correct? Does anyone know where I might find any reference to this type of situation? Thank you.

Since the L/C is an "unfunded committment" we look at it the same as a line of credit. If the line of credit is at a -0- balance would we still require evidence of flood insurance - You bet.

Once you make the committment to offer the LOC you have made a committment to produce funds. If the LOC gets drawn down on due to an issue with the contractor, you're going to have a hard time getting the guy to buy flood insurance at that point.

It makes good sense to shore up (no pun intended) all collateral documents at closing, not afterwards. Proof should be required now.

Lynn and Dawnie, Thank you both for your reply. Not exactly the answer the lender wants to hear, but I have my armor on and I'm ready to do battle. Thanks again.