On March 6, the Student Borrower Protection Center, Americans for Financial Reform Education Fund, the National Community Reinvestment Coalition, and the National Consumer Law Center sent a letter to the Alternative Reference Rates Committee (ARRC) urging the ARRC “to consider the unique risks inherent to the private student loan market and to prioritize the protection of student loan borrowers” in connection with the change from LIBOR to the new Secured Overnight Financing Rate (SOFR) index.
In anticipation of the elimination of LIBOR, the Federal Reserve Board and the Federal Reserve Bank of New York (FRBNY) convened the ARRC to identify alternative indices to replace LIBOR. Last year, the FRBNY began publishing the SOFR and the ARRC recommended the use of SOFR to replace LIBOR. Earlier this year, the ARRC released a consultation on methodologies for spread adjustments for products referencing LIBOR and solicited feedback on the calculation of spreads. The consumer groups sent their letter in response to the AARC’s solicitation.
The consumer groups assert that student loan borrowers have limited avenues “for borrower recourse in the event of harm resulting from the LIBOR transition.” Specifically, they point to provisions in private student loan contracts that give the lender “nearly unilateral authority to select a replacement index when LIBOR becomes unavailable,” mandatory arbitration clauses in such contracts, “inconsistencies in how lenders and servicers offer alternative repayment plans to private student loan borrowers,” and borrowers’ inability to discharge loans in bankruptcy.
The groups urge the AARC to:
- Take steps to ensure that borrowers will not face higher rates due to the transition from LIBOR, such as by recommending that there be at least a one-year transition period for the introduction of a spread adjustment to SOFR
- Insist that industry be more transparent, such as by providing details to the ARRC and borrowers regarding when they will indicate whether they will accept the ARRC’s recommendations and when they will transition to a new index
- Remain committed to the adoption of a replacement index that is based on actual transaction data
- Take steps to promote the broad adoption of SOFR (citing reports indicating “that industry has recently pushed for regulators to rubber-stamp the use of additional alternative reference rates”)