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Agencies address nonfinancial corporations’ LIBOR transition concerns
On August 23, the U.S. Treasury Department, Federal Reserve Board, SEC, Federal Reserve Bank of New York, and CFTC released a letter responding to nonfinancial corporate stakeholders’ concerns as they prepare to transition from LIBOR to another reference rate. The agencies acknowledged that LIBOR’s cessation “presents considerable operational, technological, accounting, tax, and legal challenges for Main Street companies,” and recognized that “a smooth transition will be best supported if financial institutions offer alternatives to USD LIBOR that meet borrower needs and if this is done in a timely fashion.” The agencies further acknowledged challenges some stakeholders have faced when obtaining loan agreements based on the Secured Overnight Financing Rate (SOFR)—“even after they indicated that loan agreements based on SOFR would be their preferred choice”—and expressed concerns that nonfinancial corporations are not being offered such alternatives despite the short period of time before LIBOR’s cessation. Stressing the importance of using “reference rates built on deep, liquid markets that are not susceptible to manipulation” while also reiterating that “the official sector is not positioned to adjudicate the selection of reference rates between banks and their commercial customers,” the agencies stressed that “borrower preferences and needs clearly have a significant role to play in the selection of such rates.”
Find continuing InfoBytes coverage on LIBOR here.
DFPI again modifies draft regulations for commercial financing disclosures
On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a second draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, and last September, California initiated the formal rulemaking process with the Office of Administrative Law (covered by InfoBytes here and here). The second modifications to the proposed regulations follow a consideration of public comments received on the initial proposed text, as well as additional comments received on modifications made to the proposed text in April. Among other things, the proposed modifications (i) amend several terms including “approved advance limit,” “approved credit limit,” and “amount financed”; (ii) clarify the definition of “at the time of extending a specific commercial financing offer”; (iii) replace the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate as one of the benchmark rate options; (iv) add several terms including “broker,” “recipient funds,” “average monthly cost,” “estimated monthly cost,” and “prepaid finance charge”; (v) provide that for disclosure purposes, “a provider shall assume that there are 30 days in every month and 360 days in a year” and specify that the annual percentage rate must be expressed to the nearest ten basis points; (vi) amend certain disclosure requirements and thresholds; (vii) clarify methods for estimating monthly sales, income, or receipt projections for sales-based financing; (viii) amend duties and requirements for financers and brokers; and (ix) clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of funding a recipient will receive.
Comments on the second modifications must be received by August 24.
ARRC announces recommendation for SOFR term rate
On July 29, the Alternative Reference Rates Committee (ARRC) announced its recommendation of CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates, following the completion of key changes in trading conventions on July 26 under the SOFR First initiative. As previously covered by InfoBytes, ARRC announced in March that it “will not be in a position to recommend a forward-looking [SOFR term rate] by mid-2021.” However, the success of the SOFR First convention change, “along with the continued growth in SOFR cash and derivatives markets, has allowed the ARRC to recommend SOFR Term Rates, consistent with the principles and indicators it established to do so.” Federal Reserve Board Vice Chair for Supervision Randal K. Quarles noted that “[a]ll firms should be moving quickly to meet our supervisory guidance advising them to end new use of LIBOR this year.”
In addition to the announcement, ARRC released a factsheet outlining past milestones, SOFR’s strengths, and anticipated milestones. ARRC noted that SOFR is “the best replacement” for USD LIBOR because it is (i) deep enough to “not dry up in times of market stress”; (ii) resilient against market evolution; and (iii) entirely transaction-based, and therefore cannot be easily manipulated.
Agencies clarify LIBOR transition on regulatory capital instruments
On July 29, the FDIC, Federal Reserve Board, and OCC (see FDIC FIL-54-2021, Fed SR 21-12, and OCC Bulletin 2021-32) provided answers to frequently asked questions (FAQs) about the impact on regulatory capital instruments under 12 CFR 324 when transitioning from LIBOR to another reference rate. Among other things, the agencies clarified that “such a transition would not change the capital treatment of the instrument, provided the alternative rate is economically equivalent with the LIBOR-based rate.” Specifically, the FAQs clarify that the agencies do “not consider the replacement or amendment of a capital instrument that solely replaces a reference rate linked to LIBOR with another reference rate or rate structure to constitute an issuance of a new capital instrument for purposes of the capital rule.” Additionally, such a replacement or amendment would not create an incentive to redeem, provided “there are no substantial differences from the original instrument from an economic perspective.” Supervised financial institutions should conduct an appropriate analysis demonstrating that the replacement or amended instrument is not substantially different from the original instrument from an economic perspective and may be asked to provide the analysis to the agencies. “Considerations for determining that a replacement or amended capital instrument is not substantially different from the original instrument from an economic perspective could include, but are not limited to, whether the replacement or amended instrument has amended terms beyond those relevant to implementing the new reference rate or rate structure,” the FAQs state.
Find continuing InfoBytes coverage on LIBOR here.
FHFA releases guidance on alternative reference rates
On July 1, FHFA issued a supervisory letter providing guidance to the Federal Home Loan Banks (FHLBanks) regarding Division of Bank Regulation expectations on the use of alternative reference rates to ensure ongoing “safe and sound FHLBank operations.” According to the letter, FHLBanks should consider, among other things, whether the reference rate: (i) is based on actual daily market transactions; (ii) accurately correlates with the bank’s funding costs; and (iii) is considered the most robust or reflective option of market activity available. In addition, the letter advises FHLBanks to consider whether they have the “necessary information about the underlying transactions and methodology supporting a candidate reference rate to monitor its representativeness over time.” The letter advises that FHLBanks should avoid “rates that contain shortcomings that exist in LIBOR and other recently discontinued or soon to be discontinued reference rates.” FHFA also instructs FHLBanks to provide advance notice to their Examiners-in-Charge if they intend to use an alternative reference rate not already in use.
Agencies call for "robust" alternate reference rates
On June 11, the Treasury Department, OCC, SEC, and the FDIC released separate statements following the meeting of the Financial Stability Oversight Council concerning the LIBOR transition. Acting Comptroller of the Currency Michael Hsu said it is “imperative that banks continue careful planning” for the transition away from LIBOR to an alternate reference rate, such as the Secured Overnight Financing Rate (SOFR), the Alternate Reference Rates Committee’s (ARRC) preferred LIBOR alternative. As previously covered by InfoBytes, the ARRC released the SOFR “Starter Kit” in August 2020, which includes three factsheets that are the result of a series of educational panel discussions held by ARRC. The various panel discussions were designed to educate on “the history of LIBOR; the development and strengths of SOFR; progress made in the transition away from LIBOR to date; and how to ensure organizations are ready for the end of LIBOR.” SEC Chairman Gary Gensler also expressed support for SOFR, calling it a “preferable” alternate rate. In addition, Gensler shared his concerns regarding the Bloomberg Short-Term Bank Yield Index (BSBY), which some commercial banks are advocating as a replacement for LIBOR. Gensler said the BSBY is based upon unsecured, term, bank-to-bank lending, which is like LIBOR. Treasury Secretary Janet Yellen encouraged market participants to “act promptly to support the switch in derivatives from LIBOR to SOFR.” She noted that “[w]hile important progress is being made in some segments of the market, other segments, including business loans, are well behind where they should be at this stage in the transition.” FDIC Chairman Jelena McWilliams pointed out that the “FDIC continues to focus on the LIBOR transition and to assess institutions’ practices and plans to adopt a replacement rate and address legacy contracts before December 31 of this year.” However, she disclosed that “the FDIC does not endorse any particular alternative reference rate.”
CFPB publishes rulemaking agenda
On June 11, the Office of Information and Regulatory Affairs released the CFPB’s spring 2021 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters the Bureau is “currently pursuing under interim leadership pending the appointment and confirmation of a permanent Director.” Any changes made by the new permanent director will be reflected in the fall 2021 rulemaking agenda. Additionally, the Bureau indicates that it plans to continue to focus resources on actions addressing the adverse impacts to consumers due to the ongoing Covid-19 pandemic, and highlighted an interim final rule issued in April that addresses certain debt collector conduct associated with the CDC’s temporary eviction moratorium order (covered by InfoBytes here). The Bureau will also continue to take concrete steps toward furthering the agency’s “commitment to promoting racial and economic equity.”
Key rulemaking initiatives include:
- Small Business Rulemaking. Last September, the Bureau released a Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) outline of proposals under consideration, convened an SBREFA panel last October, and released the panel’s final report last December (covered by InfoBytes here and here). The Bureau reports that it anticipates releasing a notice of proposed rulemaking (NPRM) for the Section 1071 regulations this September to “facilitate enforcement of fair lending laws as well as enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”
- Consumer Access to Financial Records. The Bureau notes that it is considering rulemaking to implement section 1033 of Dodd-Frank in order to address the availability of electronic consumer financial account data. The Bureau is currently reviewing comments received in response to an Advance Notice of Proposed Rulemaking (ANPR) issued last fall regarding consumer data access (covered by InfoBytes here).
- Property Assessed Clean Energy (PACE) Financing. As previously covered by InfoBytes, the Bureau published an ANPR in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA. The Bureau notes that it continues “to engage with stakeholders and collect information for the rulemaking, including by pursuing quantitative data on the effect of PACE on consumers’ financial outcomes.”
- Automated Valuation Models (AVM). Interagency rulemaking is currently being pursued by the Bureau, Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations for AVM quality control standards as required by Dodd-Frank amendments to FIRREA. The standards are designed to, among other things, “ensure a high level of confidence in the estimates produced by the valuation models, protect against the manipulation of data, [ ] avoid conflicts of interest, require random sample testing and reviews,” and account for any other appropriate factors. An NPRM is anticipated for December.
- Amendments to Regulation Z to Facilitate LIBOR Transition. As previously covered by InfoBytes, the Bureau issued an NPRM in June 2020 to amend Regulation Z to address the sunset of LIBOR, and to facilitate creditors’ transition away from using LIBOR as an index for variable-rate consumer products. A final rule is expected in January 2022.
- Reviewing Existing Regulations. The Bureau notes in its announcement that while it will conduct an assessment of a rule implementing HMDA (most of which took effect January 2018), it will no longer pursue two HMDA proposed rulemakings previously listed in earlier agendas related to the reporting of HMDA data points and public disclosure of HMDA data. Additionally, the Bureau states that it finished a review of Regulation Z rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 and plans to publish any resulting changes in the fall 2021 agenda.
The Bureau’s announcement also highlights several completed rulemaking items, including (i) a final rule that formally extended the mandatory compliance date of the General Qualified Mortgage final rule to October 1, 2022 (covered by InfoBytes here); (ii) proposed amendments to the mortgage servicing early intervention and loss mitigation-related provisions under RESPA/Regulation X (covered by a Buckley Special Alert) (the Bureau anticipates issuing a final rule before June 30, when the federal foreclosure moratoria are set to expire); and (iii) a proposed rule (covered by InfoBytes here), which would extend the effective date of two final debt collection rules to allow affected parties additional time to comply due to the ongoing Covid-19 pandemic (the Bureau plans to issue a final rule in June on whether, and for how long, it will extend the effective date once it reviews comments).
FSB updates LIBOR transition roadmap
On June 2, the Financial Stability Board released an updated version of the Global Transition Roadmap for LIBOR, which is intended to advise those with exposure to LIBOR benchmarks of some of the steps they should take now and over the remaining period to LIBOR cessation dates to successfully mitigate risks. As previously covered by InfoBytes, the Financial Stability Board released the roadmap last October to outline the steps financial firms and their clients should take “in order to ensure a smooth LIBOR transition” from now through 2021. According to the recent announcement, “transition away from LIBOR requires significant commitment and sustained effort from both financial and non-financial institutions across many LIBOR and non-LIBOR jurisdictions.” In addition to identifying actions that should already be complete, the roadmap details the following steps:
- ISDA Fallback Protocol Effective Date. Firms should adhere to the International Swaps and Derivatives Association’s (ISDA) IBOR Fallback Protocol and IBOR Fallback Supplement, which were launched last October and took effect in January 2021 (covered by InfoBytes here).
- By mid-2021. Firms should have identified which contracts can be amended and contact other parties to prepare for the use of alternative rates. Firms should also execute formalized plans to covert legacy LIBOR contracts to alternative rates.
- By the end of 2021. All new business should be conducted in, or capable of switching immediately to, alternative rates.
- By June 2023. Firms should “be prepared for all remaining USD LIBOR settings to cease.”
New York enacts LIBOR replacement provisions
On April 6, the New York Governor signed S297B into law, which addresses the permanent discontinuance of LIBOR for specified contracts, securities, and other instruments that are economically tied to LIBOR. Among other things, S297B stipulates that contracts using LIBOR as a benchmark that do not contain adequate interest rate fallback provisions (or contain a fallback provision “that result[s] in a benchmark replacement, other than a recommended benchmark replacement, that is based in any way on any LIBOR value”) will automatically convert to the “recommended benchmark replacement”—currently the secured overnight financing rate (SOFR)—when LIBOR is no longer available. As previously covered by InfoBytes, all sterling, euro, Swiss franc and Japanese yen settings, and one-week and two-month U.S. dollar settings will cease immediately after December 31, 2021, while all remaining U.S. dollar settings will cease immediately after June 30, 2023. Of note, S297B will not override LIBOR replacements that are mutually agreed upon by contracting parties, and provides a safe harbor from liability for parties that use a recommended benchmark replacement. Further, parties are also prohibited from discharging or refusing to perform contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of a replacement.
Find continuing InfoBytes coverage on LIBOR here.
U.S.-EU release statement on Joint Financial Regulatory Forum
On March 24 and 25, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S.-EU Joint Financial Regulatory Forum to discuss topics of mutual interest, including those related to (i) “next steps” for Covid-19 recovery and for mitigating financial stability risks; (ii) “sustainable finance”; (iii) banking and insurance multilateral and bilateral engagement; (iv) capital market regulatory and supervisory cooperation; (v) regulatory and supervisory developments pertaining to financial innovation, including the importance of promoting ongoing “responsible innovation and international supervisory cooperation”; and (vi) anti-money laundering and countering the financing of terrorism (AML/CFT) issues, including “the potential for enhanced cooperation to combat money laundering and terrorist financing bilaterally and in the framework of [the Financial Action Task Force].” Participants also discussed possible responses to climate-related financial risks, as well as “the progress in their respective legislative and supervisory efforts to ensure a smooth transition away from LIBOR.”