The NAFCU compliance team has blogged about the London Interbank Offered Rate (LIBOR) several times over the past couple of years. That is because of the imminent end of publishing of the LIBOR benchmarks. There was a blog in January 2020 about the National Credit Union Administration’s (NCUA) 2020 supervisory priorities that discussed LIBOR exposure. There was a subsequent blog in June 2020 that focused on resources on the LIBOR transition issued by the Consumer Financial Protection Bureau (CFPB), including a set of frequently asked questions and a proposed rule to amend Regulation Z to address issues that might arise when credit unions have to replace LIBOR with another index in their credit agreements. There was another blog in March of this year addressing issues under Regulation Z specific to changing indices for home equity lines of credit (HELOCs). And the most recent blog to examine LIBOR was this past June when we looked at the CFPB’s spring 2021 rulemaking agenda and its update on when to expect the CFPB to finalize the proposed rule mentioned above.
Last week, NCUA, CFPB, the federal banking agencies, and state regulators issued a joint statement about their expectations for how credit unions and other financial institutions should manage the risk associated with the shift away from LIBOR. The joint statement noted that the federal banking agencies had issued earlier guidance “encourag[ing] supervised institutions to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable, but no later than December 31, 2021.” The joint statement also noted that (1) NCUA provided substantially similar guidance to credit unions, and (2) the NCUA’s guidance recommended that credit unions “ensure existing contracts have robust fallback language that includes a clearly defined alternative reference rate.”
The joint statement examined four separate issues. First, it clarified what the regulators meant by the phrase new LIBOR contracts: “a new contract would include an agreement that (i) creates additional LIBOR exposure for a supervised institution or (ii) extends the term of an existing LIBOR contract.” The statement identified a draw against an existing credit agreement as something that is not a new LIBOR contract. Moreover, the statement expressed the regulators’ expectations that contacts entered into before January 1, 2022, should either not use LIBOR or have fallback language incorporating “a strong and clearly defined alternative reference rate after LIBOR’s discontinuation.”
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