Hi, i fall into the same bug while upgrading from jessie to stretch.
Note however that, with the version of live-build shipped with stretch (20170213) and the '--distribution' set to 'jessie', there is no problem, so the issue seems to come from a difference of behaviour between both version of mkfs.vfat (not a change in live-build source code), the one shipped with stretch seems more picky. Adding a '-I' to the options of mkfs.vfat fixes the issue, but there might be a cleaner way, by specifying the partition, not an offset corresponding to its location on the loop device. Ciao, Thierry