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FHA removes LIBOR benchmark for adjustable-rate HECMs
On March 11, FHA issued Mortgagee Letter (ML) 2021-08 announcing changes for adjustable interest rate home equity conversion mortgages (HECMs) as the market transitions away from LIBOR. Among other things, ML 2021-08 (i) removes approval for using the LIBOR index for adjustable interest rate HECMs; and (ii) approves the use of the Secured Overnight Financing Rate (SOFR) index, permitting “mortgagees to commingle index types for newly originated annual adjustable interest rate HECMs when establishing the expected average mortgage interest rate using the U.S. Constant Maturity Treasury” and SOFR index. ML 2021-08 also states that LIBOR-based HECMs must close on or before May 3 to be eligible for FHA insurance.
Find continuing InfoBytes coverage on LIBOR here.
Agencies issue joint statement on LIBOR transition
On November 6, the OCC, the Federal Reserve Board, and the FDIC issued a statement reiterating that the agencies do not intend to recommend a specific credit-sensitive rate for use in place of LIBOR. The agencies recommend that financial institutions “use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs” and emphasize the need for fallback language in lending contracts that provide for the “use of a robust fallback rate if the initial reference rate is discontinued.” The agencies note that examiners will not criticize banks solely regarding their choice of reference rate, including a credit-sensitive rate other than Secured Overnight Financing Rate (SOFR) (the rate recommended by the Alternative Reference Rates Committee). Additionally, the agencies encourage financial institutions to reach out to lending customers to ensure they are prepared for the transition and to consider any technical changes to internal systems that might be needed to accommodate a new reference rate.
As previously covered by InfoBytes, in July, 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 and discussing the supervisory impacts of the LIBOR transition.
Federal agencies will not recommend specific LIBOR replacement rate
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.
ARRC updates fallback language for bilateral business loans
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.”
ARRC releases transition guides for ARMs, private student loans referencing LIBOR
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.
ARRC releases “SOFR Starter Kit”
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.
ARRC releases updated fallback language in the event of LIBOR transition
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.”
ARRC issues LIBOR transition “best practices”
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.
Powell discusses CRA, LIBOR at House hearing
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.”
Fannie, Freddie to drop LIBOR in favor of SOFR
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.