First, I hope I am explaining this correctly...If you have a loan to a builder with a corresponding letter of credit going to the local town or municipality for development construction, and the loan is paid or paid off by another lender, how do you handle the Letter of Credit?

If the town or municipality calls in the Letter of Credit due to issues with construction, but the loan is paid or with another lender due to the payoff...How does the orignal lender proceed since the loan is satisfied?

I'm not familiar with this type of situation, but it came up while speaking with a lender yesterday. Can a clause in the Note state that the loan is not considered satisfied until we receive a release of the Letter of Credit from the town or municipality, or do you have any other suggestions?

The bank issueing the L/C is liable for payment of the L/C. It doesn't matter if the loan is paid as that is a seperate transaction.

If the city presents the L/C for payment then the bank pays it as it has guaranteed payment. Thats why you shoud have something to back up payment of the L/C from the customer like a hold on a deposit account for the amount of the L/C.

Look at how long the L/C was issued for and if it has "AUTOMATIC" extensions of the maturity date. In fact you should read all of the terms of the CD so you will have a good idea of what you are dealing with.

It may have a provision that allows the bank to give notice of non renewal 60 - 90 days prior to maturity. You should also expect the L/C to be presented for payment in that time frame.

There should be a good understanding of how the L/C will be paid prior to it issue.

There are circumstances where the L/c may no longer be necessay. IMO read the L/C terms and call the city to see what it will take to get it released. You may have to sit down with the customer and negoiate something out as to payment if the L/C is presented. Probably make them another loan. You should also hope the customer is in a position to handle a loan in the amount of the L/C.

Ask the loan officer that made the loan how the L/C was going to be paid if it was drawn on.

Thanks Don! I appreciate the response!