On November 6, 2020, the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation (collectively, the agencies) issued a Statement on Reference Rates for Loans. The statement reiterates that the agencies are not endorsing a specific replacement rate for LIBOR for loans. A bank may use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs. However, the bank should include fallback language in its lending contracts that provides for use of a robust fallback rate if the initial reference rate is discontinued.
As discussed in the recent FFIEC “Joint Statement on Managing the LIBOR Transition,” new contracts should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation. The Alternative Reference Rates Committee (ARRC), a group of private-market participants convened to help ensure a successful transition from LIBOR, recommended the Secured Overnight Financing Rate (SOFR) as its preferred alternative for both cash and derivative transactions. The use of SOFR is voluntary.
Needed Action
All institutions should have risk management processes in place to identify and mitigate their LIBOR transition risks that are commensurate with the size and complexity of their exposures. Examiners will not criticize banks solely for using a reference rate, including a credit-sensitive rate, other than SOFR for loans.
The agencies encourage banks to determine appropriate reference rates for lending activities and begin transitioning loans away from LIBOR without delay. The agencies also encourage banks to accelerate outreach to lending customers to ensure that they are aware of, and prepared for, the transition from LIBOR. Finally, the agencies encourage banks to consider any technical changes that might be required for internal systems to accommodate new reference rates or fallback rates.
Compliance Management System
Most financial institutions do not use LIBOR as a reference rate; however, all financial institutions should survey all loan products to detect the use of LIBOR. If use of LIBOR is detected then the financial institution should follow established procedures to implement a replacement index.
To assist in this effort Compliance Resource has developed two Compliance Management System (CMS) options. The Compliance Management System, which consists of a Training manual, PowerPoint slides, a Policy Update, Procedures Update and related forms. The Premium Compliance Management System includes all of the contents of the Compliance Management system, plus a two-hour recorded webinar.