The New York Department of Financial Services has sent a letter to the institutions that it regulates requiring each such institution, by February 7, 2020, to provide to DFS a description of its “plan to address its LIBOR cessation and transition risk.”  (LIBOR is the acronym for the London Inter-Bank Offered Rate.)

The letter references the 2017 announcement by the United Kingdom’s Financial Conduct Authority (the regulator that oversees the LIBOR panel) that, by the end of 2021, it will discontinue the index.  The letter also references the new index named the Secured Overnight Financing Rate (SOFR) created by the Federal Reserve Board of Governors and the Federal Reserve Bank of New York (FRBNY) in conjunction with the Treasury Department.  The FRBNY began publishing the SOFR in April 2018 and the working group convened by the Federal Reserve Board and FRBNY to address the transition from LIBOR has recommended it as a replacement for LIBOR.

In the letter, the NYDFS discusses the types of transactions that will be impacted by the discontinuation of LIBOR, which include consumer loans and residential mortgage loans, and emphasizes the significant risks the discontinuation presents if not appropriately managed.  It observes that the transition from LIBOR “requires a significant amount of work, which should have already commenced.”  The NYDFS states that, due to such risks, it has issued the letter “to seek assurance that regulated institutions’ boards of directors, or the equivalent governing authorities, and senior management fully understand and have assessed the risks associated with LIBOR cessation, have developed an appropriate plan to manage them and have initiated actions to facilitate transition.”

Most significantly, the NYDFS states that it “requires that each regulated institution submit a response to the Department describing the institution’s plan to address its LIBOR cessation and transition risk” and lists five items that the plan should describe. (emphasis added)  The regulated institutions that must submit their plans consist of:

  • Depository institutions (including banks, credit unions and savings associations)
  • Non-depository institutions (including licensed lenders, sales finance companies and premium finance companies, mortgage companies, money transmitters and virtual currency companies)
  • Property insurance companies
  • Health insurance companies
  • Life insurance companies and pension funds

The five items that a plan should describe are:

  • Programs that would identify, measure, monitor and manage all financial and non-financial risks of transition
  • Processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties
  • Processes fro communications with customers and counterparties
  • A process and plan for operational readiness, including related accounting, tax and reporting aspects of such transition
  • The governance framework, including oversight by the board of director, or the equivalent governing authority, of the regulated institution

Regulated institutions could face similar requirements from the CFPB, federal banking agencies, and/or regulators in other states.  The significant risks presented by the transition from LIBOR include safety and soundness risks as well as legal, reputational, and operational risks.  As a result, regardless of the need for institutions to provide information to their regulators regarding LIBOR transition plans, the transition demands careful consultation with counsel regarding how best to proceed.  We have been working closely with clients to assist them with this process.