Federal Banking Regulators Issue Statement on Benchmark Lending Rates, Advise Swift LIBOR Transition | Ballard Spahr LLP
The Fed, FDIC and OCC issued a “Statement on reference loan ratesWhich deals with replacement rates for the London Interbank Offered Rate (LIBOR). LIBOR, which many creditors currently use as an index to calculate the interest rate on credit cards and other variable-rate consumer credit products, is expected to be discontinued after 2021.
In July 2020, the Federal Financial Institutions Review Council issued a “Joint statement on managing the LIBOR transition. The statement highlighted the financial, legal, consumer protection and operational risks that will result from the planned shutdown of LIBOR. He said new loan contracts should either use a benchmark rate other than LIBOR or have fallback language that includes an alternative benchmark rate after LIBOR is removed. The Guaranteed Overnight Funding Rate (SOFR) published by the Federal Reserve Bank of New York has been recommended by the Alternative Reference Rates Committee as its preferred alternative for spot and derivative transactions. (The committee is a group of private market players brought together to ensure a successful transition from LIBOR.)
In the new statement, the agencies stress that they do not approve a specific LIBOR replacement rate for loans. They indicate that they recognize that banks have different funding models and that in structuring their lending activities, banks should choose the LIBOR replacement rates most appropriate to their specific circumstances, such as the LIBOR-sensitive alternatives. credit. (SOFR is not considered a credit-sensitive rate.) The agencies stress that banks should include fallback language that provides for the use of a “robust fallback rate” if the original benchmark rate is removed. Banks are advised to have risk management processes in place to identify and mitigate their LIBOR transition risks and not to be criticized by reviewers just for using a benchmark rate for loans other than SOFR.
Banks are encouraged to begin the transition of lending out of LIBOR ‘without delay’, to accelerate outreach to lender clients to ensure they are aware of and prepared for the transition, and to consider any technical changes. that might be required for internal systems to support a new baseline. or rate of decline.
In June 2020, the CFPB proposed changes to rule Z to remedy the removal of LIBOR.