In addition to CUGMA, omnibus spending package includes “Adjustable Interest Rate (LIBOR) Act”
Last week, we blogged about the Credit Union Governance Modernization Act (CUGMA), which was included in the Consolidated Appropriations Act, 2022. The passage of CUGMA was a much-anticipated piece of legislation, which will help Federal credit unions deal with problematic members more efficiently. However, the omnibus spending package also includes an important update via the Adjustable Interest Rate (LIBOR) Act, which addresses the replacement of the London Interbank Offered Rate (LIBOR) in existing contracts.
The Adjustable Interest Rate (LIBOR) Act is found in Division U of the appropriations act, immediately after the CUGMA. It’s main purpose is to “establish a clear and uniform process, on a nationwide basis, for replacing LIBOR in existing contracts the terms of which do not provide for the use of a clearly defined or practicable replacement benchmark rate, without affecting the ability of parties to use any appropriate benchmark rate in new contracts.” It also purports to preclude litigation around contracts that do not provide for a LIBOR replacement, to allow existing contracts that reference LIBOR and do provide for the use of a LIBOR replacement, and to address LIBOR references in Federal law. Section 110 provides the Federal Reserve Board with 180 days to issue regulations to carry out the Act.
Let’s get into some details of the act which could be relevant to credit unions.
Section 104 of the law addresses LIBOR contracts, and outlines that the Board selected benchmark replacement (based on the Secured Overnight Financing Rate (SOFR)) shall be the benchmark replacement for contracts containing no LIBOR fallback provisions, or containing fallback provisions that do not identify a specific LIBOR replacement or a “determining person.” Pursuant to the Act, a determining person is “with respect to any LIBOR contract, any person with the authority, right, or obligation, including on a temporary basis (as identified by the LIBOR contract or the governing law of the LIBOR contract, as appropriate) to determine a benchmark replacement.” Fallback provisions means “terms in a LIBOR contract for determining a benchmark replacement, including any terms relating to the date on which the benchmark replacement becomes effective.”
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