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CFPB Proposes Rule to Ease Transition to LIBOR for Creditors

On June 4, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued proposed rules and changes to the Truth in Lending Act (“TILA”) to address the anticipated sunset of the London Interbank Offered Rate (“LIBOR”) at the end of 2021.  Some market lenders currently rely on the LIBOR as an index for calculating rates for open-end and closed-end credit products.  The CFPB’s proposed rules and changes shed some light on what creditors might expect when the LIBOR is discontinued, and also include a compilation of frequently asked questions (“FAQs”) to help prepare creditors for the eventual transition.

In its proposed rule, the CFPB contemplates several amendments to Regulation Z, which implements TILA, for both open-end and closed-end credit products to address the discontinuation of the LIBOR.  Select amendments include:    

  • To ensure that credit card issuers and HELOC creditors choose acceptable replacement indices for the LIBOR, the CFPB has proposed a detailed roadmap to outline specifically how these creditors may replace the LIBOR before it becomes unavailable.  Under these guidelines, credit card issuers and HELOC creditors must select a replacement index where the annual percentage rate (“APR”) for the new index is calculated similarly to the LIBOR index.  The CFPB stated that the prime rate published in The Wall Street Journal as well as certain Secured Overnight Financing Rates will be considered suitable replacements as well. 
  • Regulation Z requires lenders to disclose certain terms to borrowers of open-end credit products.  Under the proposed rule, Regulation Z would require creditors to provide further disclosures, including change-in-terms notices to inform borrowers as to which new interest rate their credit product will transition.   
  • The CFPB also proposes adding an exception from the rate reevaluation provisions applicable to credit card accounts.  Under current regulations, when a card issuer increases a rate on a credit account, the creditor must reevaluate the rate increase every six months until such time the rate is then reduced.  Per the CFPB’s proposal, a credit card issuer would be exempt from these requirements for increases that occur as a result of replacing the LIBOR index.         
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The Transition Away from LIBOR

LIBOR, or the London Interbank Offered Rate, is a benchmark utilized in a variety of financial transactions (including the setting of interest rates in credit agreements). It was intended to be an average of the rates at which banks can obtain unsecured funding in the London interbank market for a specified time period in a specified currency. The rate is based on submissions by banks to the LIBOR administrator (currently ICE Benchmark Administration Limited) of their good faith estimate of borrowing costs and not necessarily actual transactions. Since estimates can at times be imprecise, together with the fact that (particularly after the financial crisis) unsecured credit was not generally available to banks in the London interbank market for periods of time, LIBOR as a benchmark was ripe for reconsideration.

On July 27th, Mr. Andrew Bailey, Chief Executive of the U.K. Financial Conduct Authority (FCA) announced that the FCA will no longer require banks to submit quotes for LIBOR rates in sterling by the end of 2021, indicating that the benchmark that underpins trillions of dollars in financial contracts will be phased out by 2021 and replaced with a benchmark that is more closely tied to interest rates for actual transactions in the lending markets. This announcement has prompted plenty of concerns and more than a few troubling headlines, especially given the extremely common use of LIBOR as an interest rate benchmark in commercial credit agreements, adjustable rate mortgages and other financing arrangements.

Notwithstanding some of the more recent reactions, the financial markets have seemingly taken this development in stride without much turmoil. There are a few reasons for this. First off, there are almost 4 ½ years before this reporting requirement ends, and work has already begun to determine LIBOR’s replacement.1 Second, LIBOR may still be available even if banks are no longer required to report their quotes, although caution has been expressed not to rely on this. Last, in the commercial loan context, customary fallbacks have been built into the “LIBOR” definitions in most well-drafted credit agreements that could provide short term solutions in the event of the unavailability of the LIBOR screen rate.

While the market does seem to be generally in agreement that it is premature to attempt to craft a definitive solution to this issue now, since there is insufficient information as to what will “replace” LIBOR (and how that replacement might affect the all-in rate in any particular credit facility), market participants can take proactive steps now to prepare for the eventual transition away from LIBOR to a new benchmark rate.

First, we would recommend a review of any applicable fallback provisions mentioned above to analyze whether these provisions should be amended now (or in the next couple of years) to attempt to facilitate a smoother transition to an eventual discontinuation of LIBOR (as opposed to temporary unavailability). As highlighted by the August 3rd LSTA article, “LIBOR (Transition) in the Loan Market”, these fallbacks were designed for temporary disruptions rather than a full transition away from the use of LIBOR as a benchmark. Moreover, some fallback language is better than others. For example, some language focuses on the unavailability of the publication of LIBOR, rather than the actual underlying rate itself. If the underlying benchmark rate goes away, as opposed to just the referenced information source, the ability of an agent or designated bank to specify an alternative information source as a screen rate will be of no use. Other fallback language is much more broad, in the sense that it permits a lender or agent to determine LIBOR “in good faith” based on a variety of factors that can include, among others, an offered quotation rate to first class banks for deposits in the London interbank market by the agent or a designated bank as well as a rate determined on the basis of quotes from designated “reference banks”. This creates more flexibility in this context, but it could be argued that it gives the lender or agent too much control in an environment where the traditional LIBOR has simply disappeared.

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New Broad Treasuries Repo Rate “Best Practice” Benchmark

On June 22, the Alternative Reference Rates Committee (the “ARRC”) identified a broad Treasuries repo financing rate (the “Broad Treasuries Financing Rate”) that, according to the ARRC, in its consensus view represents best practice for use in certain new U.S. dollar derivatives and other financial contracts.

The work of the ARRC grew out of the past instances of manipulation of the LIBOR market which caused a loss of confidence in LIBOR – particularly as it had previously been determined and reported – as a reliable interest rate benchmark.  That led the G20 to instruct the Financial Stability Board to review broadly-recognized interest rate benchmarks and devise a plan to ensure that the construction of these benchmarks are sound and used appropriately in the markets.  According to the Working Group on Alternative Interest Rates initiated by the Federal Reserve in furtherance of the plan, the goals were two-fold: (1) strengthen the integrity of existing benchmark rates, and (2) develop alternative reference rates that would be free of many of the risks (including manipulation) associated with existing benchmarks.  The Broad Treasuries Financing Rate would be one such alternative rate.

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BBA LIBOR No Longer Exists

BBA LIBOR No Longer Exists

February 5, 2014

Authored by: Brian Devling

Commercial and consumer loans commonly accrue interest at a rate calculated in reference to LIBOR, the London Interbank Offered Rate. LIBOR was designed to be the average interest rate that leading banks in London, England would charge other banks. The British Bankers Association (BBA) administered LIBOR and many loan documents refer to BBA LIBOR. Effective February 1, 2014, the BBA no longer administers LIBOR. The Intercontinental Exchange Benchmark Administration Ltd (ICE) now has responsibility for LIBOR. The handover is part of the fallout from the recent scandal caused by banks trying to manipulate LIBOR.

Going forward any references to BBA LIBOR in your loan document templates should be updated. There is no need to refer to the entity administering LIBOR. A general reference to the London Interbank Offered Rate should suffice. Even better, many loan documents refer to LIBOR as reported by Reuters because that is where the lender is actually obtaining the rate. Loan documents should also contain provisions to accommodate future, unexpected changes in LIBOR or the Reuters reporting service.

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