The Consumer Financial Protection Bureau has issued its final rule implementing the Fair Debt Collection Practices Act by making revisions to Regulation F, 12 CFR part 1006.
Read about the first part of the rule, released on October 30, 2020.
Read about the second part of the rule, released on December 18, 2020.
Until now, LIBOR replacement amendments have mostly consisted of placeholder language that describes the process and principles that the parties will follow to transition to a new rate while the market works out the details of how the new rate will work. The variations have included a consensual amendment approach, a hardwired approach of mutually agreed preferred alternative rates with the lender to determine the details, and a lender discretion approach where the borrower has little if any say in what the replacement will look like.
Now that the phase out of LIBOR is on the horizon and the replacement details are starting to come together, it’s time to focus on what the actual amendments to delete LIBOR and insert a new rate into the countless LIBOR loan agreements should look like. A traditional amendment approach would use surgical precision to delete every LIBOR definition and go section by section, and perhaps even sentence by sentence or line by line, to delete the use and effect of LIBOR throughout the agreement, then do the same thing to add in the provisions for the new rate. This approach depends on detailed due diligence of the underlying loan agreements. Absolute precision is required to do it right- if the wrong term is used because a template definition was changed in a particular loan agreement, or the wrong section is referred to because a template provision was moved in a particular loan agreement, the amendment will also be wrong and won’t work. Precision takes time and money, and it’s not clear that borrowers will want to honor their obligations to pay for expensive loan amendments that they never wanted in the first place.
Since no one is perfect, should we just tolerate sloppy drafting when it happens, or is there a better way? As complicated as it can be to amend countless loan agreements, the concept is simple—after a specified date, all LIBOR terms and provisions will be deleted and replaced with new SOFR (or Ameribor or some other rate) provisions. Why can’t the amendment just say that? The drafting required isn’t literally that simple, but this type of universal descriptive amendment should be able to amend almost any loan agreement without knowing exactly what LIBOR terms are used, exactly where they are used or exactly what the LIBOR provisions say.
Our recent Alert discusses how a universal descriptive amendment might work and the potential advantages it may have to successfully achieve LIBOR transition.
Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo, and Han Wang.
As lenders start to prepare for the transition from LIBOR, practical concerns as to how to implement the change are coming to the forefront. Many sources have highlighted the need for lenders to review the loan agreements in their portfolios, but not many have given much insight on the actual scope of review that is needed.
Best practices dictate that every loan agreement should be reviewed to see exactly what LIBOR terms are used, exactly where they are used and exactly what the LIBOR provisions say. Even if a lender’s loan agreements generally follow a template, there are bound to be a few that vary. Unless there is already a reliable list of these variances, all the loan agreements (in a perfect world) need to be reviewed to find these few that vary. In larger, more negotiated loan portfolios, these loans that vary may be more than just a few.
All of this is obviously expensive and time consuming. Is there a better way? Our recent Alert explores that question.
Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo, and Han Wang.
As we noted in our prior blog post over the summer, the IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement for interest rate derivatives to be published by the International Swaps and Derivatives Association (ISDA) has been on hold while ISDA waits for a positive business review letter from the US Department of Justice (DOJ). This past Friday, ISDA issued a press release that it received the letter from the DOJ on October 1, 2020.
The DOJ letter does not foreclose the possibility that other regulators in Australia, Canada, the European Union and other jurisdictions may raise their own objections. However, the Board of Directors of ISDA has determined that it will release the Supplement and Protocol on Friday, October 23, 2020, and the Supplement and Protocol will take effect approximately three months later on Monday, January 25, 2021. The draft Supplement and draft Protocol have been posted for review, together with a FAQ, sample adoption amendments and descriptive outline.
Continue reading “LIBOR Transition: The Protocol is Coming! The Supplement is Coming!”
Tick-tock. No, not the controversial social networking platform. That’s the sound of time slipping away on the existence of LIBOR. Regulated bank lenders are at varying stages in their transition to a new interest rate, with some even testing the waters originating new loans bearing interest based on SOFR. Non-bank lenders and asset managers are no less subject to the phase out of LIBOR, but for many the transition process is not quite so far along.
For those who missed it, our new partner, Anastasia Kaup, wrote an informative Alert outlining some of the developments in LIBOR transition over the summer and some of the developments yet to come. Since the summer, at least one syndicated loan has reportedly been originated using the ARRC recommended hardwired approach. However, it remains to be seen whether the rest of the market will follow or stick with the amendment approach and simply go straight to SOFR amendments. It’s still a bit early for SOFR amendments, but the LSTA is working on a sample for the syndicated loan market based on a form that Duane Morris developed. Our Alert highlights some of the LIBOR transition issues for non-bank lenders and asset managers to consider as we march towards the end of the year.
Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo, and Han Wang.
In a consensual lending world, a commercial borrower is usually obligated to pay for a lender’s expenses relating to a loan. Depending on the loan agreement, the borrower might agree to pay closing costs, enforcement costs if the loan goes bad, and fees and expenses for amending the loan agreement. Even if a loan agreement is silent, a borrower may find that the lender is unwilling to amend the agreement unless the borrower pays the costs. Regardless of the language or lack thereof, whether a lender can and should impose such costs may be an open question.
If the borrower is asking for an amendment, then it only seems fair that the borrower pay for the lender’s amendment costs if requested. In a committed loan, it is unusual for a lender to ask for an amendment that the borrower doesn’t also want―but if it does, it doesn’t seem fair for the borrower to have to pay the lender’s costs.
As two of the largest participants in the lending market, Fannie Mae and Freddie Mac (the “GSEs”) are busy preparing for the transition away from LIBOR. Both GSEs have established milestones for beginning acquisition and issuance of SOFR-indexed products and ceasing LIBOR-indexed products. Below are reminders of important deadlines:
Single-Family (“SF”) ARMs and Securities:
| August 3, 2020 | Fannie Mae began accepting delivery of SOFR-indexed ARMs. |
| September 30, 2020 | LIBOR applications end. All LIBOR loans must have Application Received Date on or before this date. |
| November 16, 2020 | Freddie Mac will begin accepting delivery of SOFR-indexed ARMs. |
| December 1, 2020 | This the last MBS/Guarantor PC issue date for LIBOR-indexed ARM pools. |
| December 31, 2020 | This is the last date for cash/whole loan purchase of LIBOR-indexed ARMs. |
Continue reading “Fannie Mae and Freddie Mac Deadlines are Fast Approaching”
The question is not nearly as existential as the question phrased by William Shakespeare, but it is a significant one in the lending world as the transition from LIBOR to SOFR ideally happens by the middle of next year. The official answer is easy—hardwired LIBOR transition language is recommended by the ARRC for syndicated loans and bilateral loans. For diligent lenders, adopting hardwired language is part of a proactive approach to addressing the LIBOR transition process. By setting the broad parameters of the new rate up front now, the ultimate details of implementing the new rate can be simplified with a notice to the borrower rather than negotiating an amendment in the future when time is short. Our prior Alert discusses the hardwired approach in more detail.
Still, for some lenders there are solid reasons to adopt a wait and see approach and possibly skip the hardwired language. These lenders are no less diligent in their desire to do the right thing, but the developments in the LIBOR/SOFR transition are starting to accelerate, with major details still unsettled at this point. Determining how the broad market will handle the transition and keeping a lender’s actions in line with the market without getting ahead of the developments may suggest a more cautious approach.
With the phase out of LIBOR just over a year away and the ARRC having identified the Secured Overnight Financing Rate (SOFR) as its preferred replacement for US dollar loans, it appears that the market has the guidance it needs to make the transition.
Not so fast, say some Main Street banks. SOFR may work for much of the loan market and particularly larger banks that can borrow on a secured basis. However, this does not represent the reality for many smaller and regional banks, which often can borrow only on an unsecured basis. Using SOFR can lead to a mismatch between the borrowing risk that such banks take and the interest they can earn on their loans.
What are such banks to do? Some of them have voiced their support for an alternative LIBOR replacement rate―the American Interbank Offered Rate (AMERIBOR).
Continue reading “Is There Room for AMERIBOR in a SOFR Future?”
As we patiently wait for the International Swaps and Derivatives Association (ISDA) to publish its long planned IBOR Fallback Protocol and IBOR Fallback Supplement for interest rate derivatives, we thought we would highlight some recent announcements on the topic.
According to ISDA’s letter on July 22, 2020 to the Alternative Reference Rates Committee (ARRC), ISDA planned to finalize the Protocol and the Supplement by the end of July. On July 29, 2020, ISDA announced that it would publish the Protocol “soon”. This is hardly the first time that things have been delayed, but it’s important to get it right. Among other things, it’s possible that ISDA is still waiting for a positive business review letter from the US Department of Justice and similar feedback from competition authorities in other jurisdictions.
Continue reading “A Hot Issue for a Hot Summer: Time to Understand ISDA IBOR Benchmark Fallbacks”
