8.5.1.4 Letters and Lines of Credit

A. Letters of intent and letters of credit cannot be used to establish financial capability. At initial endorsement, however, letters of credit may be substituted for cash to set up many of the escrows required at initial and final endorsement or during construction. If a Borrower draws down cash at initial closing to satisfy the escrow requirement, a letter of credit may not be substituted to establish the same escrow requirement.

B. Ratings and requirements for bank issued letters of credit. When a letter of credit is permitted, the ratings and requirements for banks issuing letters of credit for all multifamily project escrows must meet criteria in the Ginnie Mae Guide, as follows:

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Chapter 8 Mortgage Credit 8.5 Evaluating Financial Capacity

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1. Bank Rating Requirements: Irrespective if the loan is pooled with Ginnie Mae, the bank must meet rating requirements for depository institutions and deposit accounts found in Ginnie Mae MBS Guide 5500.3, Chapter 16, Part 8, Section B. It is available at the following link:

https://www.ginniemae.gov/issuers/program_guidelines/MBSGuideLib/Chapter_16.pdf

2. Form and Terms. For loans pooled with Ginnie Mae, the letter of credit must be in the form specified by Ginnie Mae MBS Guide 5500.3, Appendix VI-3 found at the following link: https://www.ginniemae.gov/issuers/program_guidelines/MBSGuideAppendicesLib/Appendix_VI03.pdf

C. If the loan is not pooled with Ginnie Mae, MAP Lenders must prepare beneficiary forms acceptable to HUD at closing (with substantially the same terms as Ginnie Mae). MAP Lenders should coordinate drafting and approval of the proposed forms directly with the Regional Center.

D. The Lender of record (as having a financial stake in the Borrower’s position) may not be the issuer of any letter of credit without prior written consent of the Regional Center Director. Such consent will be granted only on an exception basis with sufficient investigation of a potential conflict of interest. If a demand under any letter of credit is not met immediately, the Lender must provide the cash equivalent to the remaining balance of the letter of credit.

E. On an exception basis and with prior written consent of the Regional Office Director, lines of credit may be used to establish a portion of the principal’s financial capability. With the Firm Commitment application, the Lender must have the principal provide a letter from a lending institution that confirms:

1. The existence of the line of credit, original amount and available balance, repayment terms, and expiration date.

2. The line of credit must not expire prior to project completion.