Don’t Forget About LIBOR

Now that the compliance induced frenzy triggered by the pandemic has stabilized (knock on wood), I wanted to remind you of one of those meddlesome compliance changes that seemed so far away when it was first announced in early 2017, but is fast approaching.

I am talking about the end of the London Interbank Offered Rate (LIBOR) which is the index that many financial institutions and credit unions use to set interest rates for their adjustable rate mortgages and credit cards.  If you start working now, you still have enough time to easily make the necessary adjustments.  If you wait any longer, a simple problem will become increasingly troublesome, just like those college papers that some people—of course not readers of this blog—put off to the day before it was due.  Some of you actually got an adrenaline rush from doing this.  But to this day, yours truly is a morning person.

First, although a drop dead date for LIBOR’s demise has not been announced, the keepers of the index are still committed to stop publishing some time in 2021.  There are important compliance considerations tied to the drop dead date.  Most importantly, adjustable rate mortgage indexes can be switched without notice provided that the replacement index is substantially similar to the old one.  The CFPB has proposed regulations and guidance which would make this transition straightforward by providing examples of comparable indexes and providing specific dates when the transition can take place irrespective of what the actual drop dead date ends up being.

If you provide adjustable rate mortgages for sale for the secondary market, then your compliance deadline is fast approaching.  Fannie Mae will no longer be offering LIBOR based products effective September 30, 2020.  Freddie Mac will no longer be offering LIBOR based floating rate products after this year.  These deadlines do not impact your ability to continue to service existing loans using LIBOR.

Then there are those pesky adjustable rate credit cards.  The CFPB proposes to permit creditors for home equity lines of credit (HELOCs) and credit card issuers to replace a LIBOR index with a replacement index on or after March 15, 2021, if certain conditions are met.

While a specific new index is not being required, unless you have a baseline level of sophistication which allows you to compare competing indexes, regulators are implicitly encouraging you to replace the LIBOR with the Secured Overnight Financing Rate (SOFR) which is the new index of choice for the GSEs.

On the bright side, it is quite possible that your credit union has no LIBOR based products.  I would still document that your credit union took the time to confirm that LIBOR has no impact on your compliance framework.

Peace out!