Discussion regarding the end of the London Interbank Offered Rate (“LIBOR”) continues to increase as the industry prepares for the index to be phased out at the end of 2021.
As discussed in DocMagic’s previous article, the validity and accuracy of LIBOR was called into question after an investigation showed price fixing. In 2014, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York (“New York Fed”) established the Alternative Reference Rates Committee (“ARRC”), which eventually chose the Secured Overnight Financing Rate (“SOFR”) as the recommended alternative benchmark interest rate. In April 2018, the New York Fed began publishing the alternative rate, SOFR, which is based on overnight repurchase agreement transactions, instead of bank estimates.
Because so many financial products and contracts are dependent on LIBOR benchmark interest rates, there are many legal risks, valuation risks and operational readiness risks tied to the transition. The new year should bring further industry discussion regarding issues like changes to note language, implementation timelines, and possible issues related to the servicing of legacy loans tied to LIBOR.
In September 2019, the Federal Housing Financing Agency (“FHFA”) instructed 11 Federal Home Loan Banks that as of December 31, 2019, they should stop purchasing investments in assets tied to LIBOR with maturities beyond December 31, 2021. FHFA Director Mark Calabria said, “This is an important step in the transition away from LIBOR to a more robust reference rate. Beginning this process immediately and providing clear timelines will help the Federal Home Loan Banks manage the risks associated with LIBOR in the most safe and sound manner possible.”
The Consumer Financial Protection Bureau (“CFPB”) recently posted a blog entry that advises consumers about what LIBOR is and when it will be discontinued. The blog notes that the change to a new index will affect some adjustable (or variable) rate loans and lines of credit like adjustable-rate mortgages, reverse mortgages, home equity lines of credit, credit cards, auto loans, student loans, and other personal loans that use LIBOR as the index.
To view the FHFA News Release, click here.
To view the CFPB blog post, click here.
