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Financial Services Law Insights and Observations


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  • Federal agencies will not recommend specific LIBOR replacement rate

    Federal Issues

    On October 21, a group of U.S. financial agencies wrote to the executives of financial institutions that participated in the Credit Sensitivity Group workshops, stating that the agencies do not intend to recommend a specific credit-sensitive rate for use in commercial lending products in place of LIBOR. The letter states that “[t]he transition away from LIBOR is a significant and complex undertaking,” and there are multiple suitable alternative reference rates to replace LIBOR. The letter acknowledges that the use of the Secured Overnight Financial Rate (SOFR), which is recommended by the Alternative Reference Rates Committee is “voluntary.” After participating in the workshops, the agencies concluded that they are “not well positioned to adjudicate the selection of a reference rate between banks and their commercial customers” due to various business needs and terms of commercial loans that are based on the negotiation of banks and borrowing parties. Thus, the letter states, the agencies will continue to convene additional working sessions to highlight innovation in the credit-sensitive rates and explore implementing solutions for commercial loans transitioning away from LIBOR.

    For continuing InfoBytes covering on the LIBOR transition see here.

    Federal Issues LIBOR SOFR ARRC Federal Reserve CFTC OCC FDIC

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  • FSB releases LIBOR transition roadmap

    Federal Issues

    On October 16, the Financial Stability Board released a “Global Transition Roadmap for LIBOR,” which details the steps financial firms and their clients should take “in order to ensure a smooth LIBOR transition” from now through 2021. In addition to identifying actions that should already be complete, the roadmap details the following steps:

    • ISDA Fallbacks Protocol Effective Date. Firms should adhere to the International Swaps and Derivatives Association’s (ISDA) IBOR Fallback Protocol and IBOR Fallback Supplement, which will be launched on October 23 and take effect on January 25, 2021 (covered by InfoBytes here).
    • By the end of 2020. Lenders should be able to offer non-LIBOR products to customers.
    • By mid-2021. Firms should have identified which contracts can be amended and make contact with other parties to prepare for the use of alternative rates. Firms should 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.

    For continuing InfoBytes coverage on the LIBOR transition see here.

    Federal Issues LIBOR Financial Stability Board

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  • Fed recommends derivatives market follow IBOR Fallback Protocol

    Federal Issues

    On October 9, the Federal Reserve Board issued SR 20-22,which strongly advises supervised institutions to transition away from LIBOR and consider following the International Swaps and Derivatives Association’s (ISDA) IBOR Fallback Protocol and IBOR Fallback Supplement (collectively, “the Protocol”). The Fed warned market participants that because the publication of LIBOR is not guaranteed after 2021, its continued use poses financial stability risks. The Fed recommended that examiners alert supervised firms active in the derivatives market to strongly consider adhering to the Protocol, which will, among other things, “facilitate[] the transition away from LIBOR by providing derivatives market participants with new fallbacks for legacy and new derivative contracts,” and will “allow LIBOR derivatives contracts to continue to perform through the transition.” The ISDA released a statement the same day announcing the Protocol will be launched on October 23 and take effect on January 25, 2021.

    Find continuing InfoBytes coverage on LIBOR here.

    Federal Issues LIBOR IBOR Federal Reserve Agency Rule-Making & Guidance

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  • LIBOR-based loans will not be eligible for Ginnie Mae pooling

    Federal Issues

    On September 21, Ginnie Mae issued All Participant Memorandum 20-12, which states that Ginnie Mae will stop accepting the delivery of single-family forward adjustable rate mortgage (ARM) loans, dated on or after January 1, 2021, with any interest term based on LIBOR, for securitization in any pool. Additionally, any adjustable rate reverse mortgages (HECMs) will be ineligible for securitization into any HMBS pool that relies on LIBOR if not securitized as of January 1, 2021, “without regard to their date of origination or the date in which the corresponding FHA case number was assigned.” Participations associated with HECM loans backing HMBS will continue to be eligible without restriction, so long as the issuance date is on or before December 1.

    Federal Issues Ginnie Mae Mortgages Securities LIBOR

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  • ARRC updates fallback language for bilateral business loans

    Federal Issues

    On August 27, the Alternative Reference Rates Committee (ARRC) released updated recommended fallback language for market participants to use for new originations of LIBOR-referenced bilateral business loans. The proposed language is intended to align with revisions made to the recommended fallback language for syndicated loans (covered by InfoBytes here). The updated fallback language amends the previously proposed “hardwired” and the “hedged loan” approaches. ARRC emphasizes that “cash markets will benefit by adopting a more consistent, transparent and resilient approach to contractual fallback arrangements for new LIBOR products,” and reminds financial market participants that it does not recommend waiting “until a forward-looking term [Secured Overnight Financing Rate] SOFR exists to begin using SOFR in cash products.”

    Federal Issues ARRC LIBOR SOFR Lending

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  • ARRC releases transition guides for ARMs, private student loans referencing LIBOR

    Federal Issues

    On August 18, the Alternative Reference Rates Committee (ARRC) released reference rate transition guides for adjustable-rate mortgages (ARMs) and variable rate private student loans that reference LIBOR. Both guides are intended to support the transition from LIBOR to an alternative reference rate, such as the Secured Overnight Financing Rate (SOFR), and focus on LIBOR-based contracts that will continue to exist after LIBOR’s anticipated cessation at the end of 2021. The LIBOR ARM Transition Resource Guide and the LIBOR-Based Private Student Loan Transition Resource Guide cover key milestones, suggested readiness timeframes, transition risks, and stakeholder impacts, and include various resource guidance, tools, and templates to assist institutions in “fortify[ing] their products and support[ing] consumers’ transitions to SOFR.”

    Find continuing InfoBytes coverage on LIBOR here.

    Federal Issues ARRC LIBOR SOFR Of Interest to Non-US Persons Adjustable Rate Mortgage Student Lending

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  • ARRC releases “SOFR Starter Kit”

    Federal Issues

    On August 7, the Alternative Reference Rates Committee (ARRC) released the “Secured Overnight Financing Rate (SOFR) Starter Kit,” which includes three factsheets that are the result of a series of educational panel discussions held by ARRC in July and August. 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.” Highlights of the three factsheets include (i) background on LIBOR and the selection of SOFR; (ii) key facts on SOFR, including how it works and common misconceptions; and (iii) next steps, including SOFR best practices and recommended fallback language. Additionally, ARRC provided FAQs covering additional background details on the committee and the transition from LIBOR.

    Federal Issues ARRC LIBOR SOFR Of Interest to Non-US Persons

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  • FFIEC addresses LIBOR transition

    Federal Issues

    On July 1, the member agencies of the Federal Financial Institutions Examinations Council (FFIEC) issued a joint statement highlighting several risks that will result from the anticipated cessation of LIBOR at the end of 2021. Institutions with LIBOR exposures should put in place appropriate risk management processes “commensurate with the size and complexity of their exposures” to identify and mitigate financial, legal, operational, and consumer protection risks related to the transition, the FFIEC warned. Among other things, the FFIEC noted that as part of the agencies’ examination activities, “supervisory staff will ask institutions about their planning for the LIBOR transition including the identification of exposures, efforts to include fallback language or use alternative reference rates in new contracts, operational preparedness, and consumer protection considerations.” Additionally, agencies will increase their supervisory focus on evaluating institutions’ preparedness for LIBOR’s discontinuation during 2020 and 2021, “particularly for institutions with significant LIBOR exposure or less-developed transition processes.” Key recommendations include (i) identifying and quantifying LIBOR exposure across all products; (ii) discontinuing the origination or purchase of LIBOR-indexed instruments to limit exposure; (iii) creating transition plans for consumer financial products in order to develop clear, timely consumer disclosures regarding any changes in terms; and (iv) developing strategic transition plans with milestones and key completion dates addressing areas such as third-party risk management.

    The OCC also issued a bulletin expanding on the joint statement and providing guidance for regulated banks.

    Federal Issues FFIEC LIBOR OCC Risk Management

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  • ARRC releases updated fallback language in the event of LIBOR transition

    Federal Issues

    On June 30, the Alternative Reference Rates Committee (ARRC) released updated recommended fallback language for U.S. dollar LIBOR denominated syndicated loans and new variable rate private student loans. ARRC noted that the private student loan language is intended to minimize risk and market disruption in the event of LIBOR’s anticipated cessation at the end of 2021. ARRC also released conventions for how market participants can voluntarily use the Secured Overnight Financing Rate (SOFR) in new student loan products. With respect to syndicated loans, ARRC noted that the updated fallback language recommends “the use of simple daily SOFR in arrears,” which, among other things, includes “a more permissive early opt-in trigger” to “allow parties involved in the loan to switch over to an alternative rate like SOFR before LIBOR is officially discontinued or determined to be unrepresentative.” Additionally, ARRC announced new details regarding its recommendation of spread adjustments for cash products that reference LIBOR. Market participants may voluntarily use ARRC’s recommended methodology to produce spread adjustments “where a spread-adjusted [SOFR] can be selected as a fallback.”

    Federal Issues ARRC LIBOR SOFR Student Lending Lending

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  • CFPB issues LIBOR transition materials

    Agency Rule-Making & Guidance

    On June 4, the CFPB released three documents to assist in the LIBOR transition before its anticipated cessation at the end of 2021. Highlights of the documents include:

    • Notice of Proposed Rulemaking. The Bureau issued a proposed rule 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. For open-end products, among other things, the proposal would (i) require creditors to include in the change-in-terms notice the replacement index and any adjusted margin; (ii) add a LIBOR-specific provision allowing the LIBOR transition to occur on or after March 15, 2021, as opposed to the current rule’s “no longer available” standard; and (iii) allow creditors to elect a replacement index that is newly established and has no history, or is not newly established and has a history, if certain conditions are met. For closed-end credit, among other things, the proposal provides the Secured Overnight Financing Rate (SOFR) recommended by the Alternative Reference Rates Committee (ARRC) as a “comparable index” to LIBOR. In conjunction with the proposal, the Bureau released a “Fast Facts” high-level summary and an unofficial redline
    • FAQ Guidance. The Bureau released FAQ guidance to address other LIBOR transition topics and regulatory questions that do not require amendments to Regulation Z. Among other things, the FAQs cover general regulatory implementation considerations and specific requirements related to adjustable rate mortgage and HELOC disclosures.
    • CHARM Booklet. The Bureau released revisions to their Consumer Handbook on Adjustable Rate Mortgages (CHARM) booklet, which aims to help consumers better understand adjustable rate mortgage loan products. The revisions provide updates based on consumer testing and remove LIBOR-based rate examples.

    Agency Rule-Making & Guidance CFPB Regulation Z Open-End Credit Closed-End Credit LIBOR ARRC

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