The Fed, FDIC, and OCC have issued a “Statement on Reference Rates for Loans” that addresses replacement rates for the London Inter-Bank Offered Rate (LIBOR). LIBOR, which many creditors currently use as the index for calculating the interest rate on credit cards and other variable-rate consumer credit products, is expected to be discontinued sometime after 2021.
In July 2020, the Federal Financial Institutions Examination 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 LIBOR’s expected discontinuation. It indicated that new loan contracts should either use a reference rate other than LIBOR or have fallback language that includes an alternative reference rate after LIBOR’s discontinuation. The Secured Overnight Financing 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 both cash and derivative transactions. (The Committee is a group of private-market participants convened to ensure a successful transition from LIBOR.)
In the new statement, the agencies emphasize that they are not endorsing a specific replacement rate for LIBOR for loans. They indicate that they recognize that banks have differing funding models and that in structuring their lending activities, it is appropriate for banks to select LIBOR replacement rates that are most appropriate for their specific circumstances, such as credit-sensitive LIBOR alternatives. (SOFR is understood not to be 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 initial reference rate is discontinued. Banks are advised to have risk management processes in place to identify and mitigate their LIBOR transition risks and that they will not be criticized by examiners solely for using a reference rate for loans other than SOFR.
Banks are encouraged to begin transitioning loans away from LIBOR “without delay,” accelerate outreach to lending customers to ensure they are aware of, and prepared for, the transition, and consider any technical changes that may be required for internal systems to accommodate new reference or fallback rates.
In June 2020, the CFPB proposed amendments to Regulation Z to address the discontinuation of LIBOR.