Bank regulators issue more guidance on the LIBOR transition

November 9, 2020 at 10:24 am Leave a comment

Okay, so this may not be as exciting as the recent election news, but every credit union should know what the London Interbank Offered Rate is; whether or not your credit union uses it for any of your adjustable rate loan products, and what indexes it is considering replacing it with when it is finally discontinued in 2021.

The latest LIBOR news came in the form of a joint statement issued by bank regulators on Friday. NCUA did not join in issuing this statement, but it has worked closely with these regulators on the issue. One of the indexes most talked about as a replacement for LIBOR is the Secured Overnight Finance Rate. The SOFR is already in use and is updated at 8 AM every day on the Federal Reserve Bank of New York’s website. While the transition from LIBOR has a limited but important impact for some credit unions, for larger and more sophisticated banks, which engage in high volumes of derivative transactions on a daily basis, the end of LIBOR is a big deal. In yesterday’s statement, the bank regulators emphasized that regulated institutions are free to utilize an index other than SOFR as a replacement for LIBOR. They also reiterated the need to update contract language in transaction agreements, advice which would certainly apply to those of you who use adjustable rate mortgages (ARMs) tied to LIBOR. 

While the banks may have flexibility, those of you who underwrite and sell mortgages to Fannie and Freddie should remember that both GSEs have already decided to transition to SOFR. In fact, on January 1, 2021, the GSEs will no longer purchase LIBOR ARMs. 

Entry filed under: Compliance, Mortgage Lending, Regulatory. Tags: , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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