FINANCIAL REGULATORS ADDRESS DISCONTINUATION OF LIBOR

By Bryan M. Mull, Gordon Feinblatt LLC

This article highlights rules governing the transition away from LIBOR as an index for interest rates.

Recently, the Consumer Financial Protection Bureau (CFPB), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Association, the Office of the Comptroller of the Currency and certain state financial regulators issued a Joint Statement on Managing the LIBOR Transition.

In this guidance, the regulators clarified that entering into contracts using the London Interbank Offered Rate (LIBOR) as a reference rate after December 31, 2021 would create safety and soundness risks, including litigation, operational and consumer protection risks. The guidance provides that a new LIBOR contract includes agreements that create additional LIBOR exposure or extends the term of an existing LIBOR contract. The guidance further provides that new contracts entered into before the end of the year should use a reference rate other than LIBOR or contain robust fallback language providing for an alternative reference rate. On the heels of the joint guidance, the CFPB issued a final rule amending Regulation Z to facilitate the LIBOR transition. The final rule becomes effective on April 1, 2022, though mandatory compliance does not start until October 1, 2022 for revisions to change-in-terms notice requirements. The final rule affords lenders with the flexibility to transition away from LIBOR-based rates before LIBOR becomes unavailable and sets forth factors to consider in establishing a replacement benchmark index. For closed-end loans, the final rule endorses the use of indices based on the Secured Overnight Funds Rate (SOFR) to replace one-month, three-month, and six-month LIBOR rates. The CFPB did not commit to endorsing a SOFR-based rate to replace the one-year USD LIBOR rate until after the CFPB can evaluate the Alternative Reference Rates Committee’s replacement proposal. For home equity lines of credit, the final rule sets forth factors for adopting a replacement index such as a SOFR-based index or the Wall Street Journal Prime Rate. The replacement index should have substantially similar historical fluctuations and result in a substantially similar APR compared to the outgoing LIBORbased rate.

Endnote

1. Bryan Mull is a member in Gordon Feinblatt’s Financial Services Group, located in Baltimore, Maryland. His practice focuses on the representation of secured and unsecured creditors in collections, bankruptcies, loan workouts, financings, and related matters. Bryan also advises clients in connection with state and federal lending laws, garnishment compliance and legal order processing, mortgage servicing, and debt collection compliance.

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