On March 15, 2022, the Consolidated Appropriations Act of 2022 was signed into law. Division U, the Adjustable Interest Rate (LIBOR) Act, resolves what had otherwise been a pending concern with variable interest rate loan contracts that use LIBOR as their index.
LIBOR, which historically had been used as the variable rate index in many commercial and consumer loan contracts, is scheduled to sunset on June 30, 2023. While commercial and consumer lenders have now largely transitioned away from writing new contracts using LIBOR, there are $200 trillion worth of LIBOR-based legacy contracts. Many of those contracts do not clearly provide for a specific replacement to LIBOR, raising the issue of what would happen to those contracts when LIBOR is discontinued. The LIBOR Act now provides a legislative answer to that question and a safe harbor for lenders who comply with its provisions.
The LIBOR Act provides that the benchmark replacement rate selected by the Federal Reserve Board (FRB) will replace LIBOR as the variable rate index in all affected loan contracts. It is widely anticipated that the FRB will designate the Secured Overnight Financing Rate (SOFR) as the benchmark replacement rate. The LIBOR Act also provides that use of the designated benchmark replacement constitutes the use of a "comparable" or "commercially reasonable replacement rate" using language commonly found in variable interest rate contract provisions. In addition, the LIBOR Act provides that use of the designated benchmark replacement constitutes a safe harbor that protects the creditor from any legal liability.
Specifically addressing consumer variable rate loans, the LIBOR Act authorizes the FRB to adjust the benchmark replacement over a one-year period starting on June 30, 2023. The purpose of these adjustments is to "transition linearly from the difference between" the LIBOR tenor specified in the consumer loan documents to the benchmark replacement over that time period. At the end of that period, the FRB will publish the benchmark replacement incorporating the "tenor spread adjustments" specified in the LIBOR Act. Presumably, this phase-in for consumer loans will lessen the impact of the transition away from LIBOR on consumer borrowers.
Finally, the LIBOR Act directs the FRB to promulgate regulations to implement the LIBOR Act within 180 days of enactment, meaning that such regulations are expected in September. The LIBOR Act and its forthcoming regulations, taken together with the amendments to Regulation Z and its Official Comments that address disclosure issues related to the LIBOR transition and that take effect on April 1, 2022, appear to resolve the contractual and consumer protection issues arising from the demise of LIBOR.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
