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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.”
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.
On May 28, the FHFA announced the launch of new Fannie Mae and Freddie Mac (GSEs) websites (see here and here), which are designed to provide key resources for lenders and investors as the GSEs transition from LIBOR. The LIBOR Transition Playbook and frequently asked questions describe key transition milestones and recommended actions related to the GSEs’ transition from LIBOR to the Alternative Reference Rates Committee’s preferred Secured Overnight Financing Rate (SOFR) before the anticipated cessation of LIBOR at the end of 2021. The playbook provides resources related to, among other things, single-family adjustable-rate mortgages (ARMs) and mortgage-backed securities (MBS), as well as single-family credit risk transfer transactions, collateralized mortgage obligations, and multifamily ARMs, MBS and floating-rate loans, and credit risk transfers. The websites also provide details related to the transition of the GSEs’ Credit Risk Transfer (CRT) programs and their collateralized mortgage obligations.
Find continuing InfoBytes coverage on LIBOR here.
On May 27, the Alternative Reference Rates Committee (ARRC)—a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York—released a set of best practices for market participants to transition from LIBOR to the Secured Overnight Financing Rate (SOFR) before the anticipated cessation of LIBOR at the end of 2021. Key practices recommended include: (i) new USD LIBOR cash products should include ARRC-recommended fallback language as soon as possible; (ii) third-party technology and operations vendors should complete enhancements necessary to support the preferred alternative SOFR by the end of 2020 as outlined in previously issued guidance; (iii) new use of LIBOR should end no later than June 30, 2021, depending on the specific cash product market; and (iv) parties that choose to select a replacement rate at their discretion following a LIBOR transition event should disclose the planned rate selection to relevant parties at least six months prior to the new rate’s effective date.
Find continuing InfoBytes coverage on LIBOR here.
On April 29, the United Kingdom’s Financial Conduct Authority (FCA) issued a follow-up statement that allows firms the ability to use the LIBOR interest rate benchmark in new sterling LIBOR linked loans for an addition six months due to the Covid-19 pandemic. The FCA acknowledges that due to challenges presented by the current operating environment, it is not feasible for lenders to complete the transition from LIBOR across all new sterling LIBOR linked loans before the original Q3 2020 target end date. The FCA provides several recommendations including: (i) lenders should be in a position to offer non-LIBOR linked products by the end of Q3; (ii) from Q3 onward, lenders and borrowers should agree on a process to facilitate conversion to an alternative rate prior to the end of 2021; and (iii) all new issuances of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021. The announcement also reiterates the FCA’s previously stated position that the central assumption that firms cannot rely on LIBOR being published after the end of 2021 remains unchanged (covered by InfoBytes here).
Find continuing InfoBytes coverage on LIBOR here.
On March 25, the United Kingdom’s Financial Conduct Authority (FCA) issued a statement addressing the potential impact of Covid-19 on firms’ LIBOR transition plans. While the FCA states that the assumption that firms cannot rely on LIBOR being published after the end of 2021 is unchanged, it acknowledges that Covid-19 has impacted the timing of some aspects of the transition programs for many firms. The FCA states that it will continue to assess the impact on transition timelines and will update the market as soon as possible.
Find continuing InfoBytes coverage on LIBOR here.
On March 6, the Alternative Reference Rates Committee (ARRC) announced a legislative proposal for New York state legislation for U.S. dollar LIBOR contracts intended to “minimize legal uncertainty and adverse economic impacts associated with LIBOR transition.” The ARRC—a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York in cooperation with a number of other federal financial regulatory agencies—explained that it proposed legislation in New York because the state’s law governs a substantial number of financial contracts that refer to U.S. dollar LIBOR. The proposed bill includes measures to address the absence of sufficient LIBOR fallback or transition language in existing financial contracts referencing LIBOR. The proposed legislation would prohibit parties from being able to use the discontinuance of LIBOR as a reason for declaring a breach of contract, establish a recommended benchmark replacement index as a commercially reasonable substitute for LIBOR, and override contractual language referencing a LIBOR-based rate and require use of the benchmark replacement. Contractual parties would also be permitted to mutually opt-out of any mandatory application of the proposed legislation under the bill. The ARRC specifically highlighted that its proposed legislation would not override existing contract language that already delineated a non-LIBOR rate as a fallback to LIBOR.
On February 19, the U.S. Treasury Department issued a joint statement on the U.S. – EU Financial Regulatory Forum held February 11-12 in Washington, D.C. U.S. participants included officials from the Federal Reserve Board, CFTC, FDIC, SEC, OCC, and Treasury. Forum topics focused on five key themes: “(1) supervision and regulation of cross-border activities, particularly in the areas of derivatives and central clearing; (2) the importance of monitoring market developments, both in relation to financial assets classes, like leveraged loans and collateralized loan obligations, and reference rates, like the London Interbank Offered Rate; (3) implementation of international standards in banking and insurance; (4) regulatory issues presented by fintech/digital finance; and (5) EU regulations related to sustainable finance.”
Among other topics, participants discussed U.S. banking developments concerning prudential requirements for foreign banks, including tailoring standards based on risk; proposed amendments to the Volcker Rule; EU data protection rules; cross-border supervision and data flow in financial services; the transition period following the U.K.’s departure from the EU; and European Commission priorities such as preventing and combating money laundering and the financing of terrorism. Participants acknowledged the importance of fostering continued dialogue between the U.S. and the EU noting that, “[r]egular communication on supervisory and regulatory issues of mutual concern should foster financial stability, supervisory cooperation, investor protection, market integrity, and a level playing field.”
On February 11, Federal Reserve Chairman Jerome Powell provided testimony to the House Financial Services Committee during a hearing titled “Monetary Policy and the State of the Economy,” discussing regulatory issues concerning, among other things, proposed rulemaking related to the Community Reinvestment Act (CRA) and the transition away from reliance on LIBOR as an interest rate benchmark in financial products. During the hearing, Powell fielded a number of questions concerning the Fed’s plan to update CRA regulations. Reaffirming his support for Fed Governor Lael Brainard’s disapproval of how quickly the FDIC and OCC issued their notice of proposed rulemaking (covered by a Buckley Special Alert), Powell stated that he is “very comfortable with. . .the thinking” Brainard recently outlined in a speech describing alternative approaches to the CRA modernization process (covered by InfoBytes here). Powell emphasized, however, that the ideas in Brainard’s speech do not yet represent a formal framework, stating “[w]e want to be very, very sure. . .that what comes out of this is a proposal. . .from us that will leave all major participants in CRA better off. And so we think it’s important that each metric, each change that we make is grounded in data.”
Powell also discussed the upcoming transition from LIBOR to the Secured Overnight Financing Rate (SOFR), stating that federal regulators are working to ensure financial institutions are prepared for LIBOR’s possible cessation. When asked whether Congress should “simply give the Fed the right to prescribe backup rates when the debt instruments do not do so,” or explicitly adopt SOFR, Powell responded that he did not believe a federal law change is necessary at this time. Powell further responded that the Fed will inform Congress if a change in federal law is needed, emphasizing that the Fed’s “process is ongoing” and that it is “committed to having the banks ready by the end of next year to switch. . .away from LIBOR in case [the rate] is no longer published.” Powell noted that while SOFR will be the main substitute for LIBOR, the Fed is “working with regional [banks] and some of the larger banks, too, about the idea of also having a credit sensitive rate.”
On February 5, the FHFA announced updated LIBOR transition plans for Fannie Mae and Freddie Mac (GSEs) single-family and multi-family mortgage sellers and lenders, providing the next steps in the transition from LIBOR to the Secured Overnight Financing Rate (SOFR) for adjustable rate mortgage (ARM) instruments. The next steps include (i) a “[n]ew language require[ment] for single-family Uniform…ARM instruments closed on or after June 1, 2020”; (ii) a requirement that “[a]ll LIBOR-based single-family and multifamily ARMs…loan application dates [must be] on or before September 30, 2020 to be eligible for acquisition”; and (iii) that “[a]cquisitions of single-family and multifamily LIBOR ARMs will cease on or before December 31, 2020.” The announcement links to information directly from the two GSEs: Fannie Mae Multifamily Mortgage Business Lender Letter 20-02, and Fannie Mae Single-Family Sellers Lender Letter LL-2020-01; and Freddie Mac Selling Updates Bulletin 2020-1 and Freddie Mac Multifamily Update on LIBOR Transition. The FHFA LIBOR Transition page notes that the GSEs have already stopped buying ARMs based on LIBOR that mature after 2021 in preparation for the termination of the benchmark’s use.
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