The London Interbank Offered Rate (LIBOR) has been an interest or reference rate benchmark frequently used by financial institutions to price assets, liabilities, and other financial instruments for decades. Although viewed as a benchmark used primarily by large institutions, LIBOR can important for small institutions as well.

At some point after 2021, LIBOR is expected to be discontinued. LIBOR is based on transactions among banks that don’t occur as often as they did in prior years, making the index less reliable and credible. The United Kingdom regulator that oversees the LIBOR panel has stated that it cannot guarantee LIBOR’s availability beyond the end of 2021. Across the world, governments and financial institutions have been working to identify alternatives. In the U.S., the Federal Reserve has convened a working group called the Alternative Reference Rates Committee (ARRC) to help facilitate the likely transition away from LIBOR. The ARRC is comprised of a diverse set of private sector entities, and a wide array of official sector entities (including regulators such as the CFPB) as non-voting ex-officio members. The ARRC has recommended an index called the Secured Overnight Financing

Rate (SOFR) as its recommended alternative to LIBOR and has published a transition plan to promote the use of SOFR on a voluntary basis.

Of course, this change will affect adjustable rate loans or lines of credits which use LIBOR as the index. An index is a benchmark interest rate that reflects market conditions and changes based on the market. There are many indexes in the marketplace. Currently, common indexes include LIBOR, the U.S. Prime Rate, and the Constant Maturity Treasury Index (CMT). Many different adjustable-rate products use LIBOR, with ARMs being the most common. There are an estimated $1.3 trillion in consumer loans with an interest rate based on LIBOR. The bulk of the debt is for residential mortgages.

As LIBOR becomes discontinued, institutions will need to assess the impact on its loan contracts and operations. For existing customers in which the loan contract uses LIBOR, institutions will be required to replace (in accordance with the terms of such loan contracts) the index to a different index. Loan contracts entered into going forward will use the new index. Also, institutions should be aware of how this change may affect other contracts that it has with other parties and its general operations.


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