CFPB, regulators warn of impact to borrowers from the LIBOR sunset

The London Interbank Offered Rate was previously identified as being susceptible to manipulation

A coalition of federal agencies and regulatory enforcement authorities have issued an statement warning of potentially negative impacts on borrowers from the sunset of the London Interbank Offered Rate (LIBOR) index if no actions are taken to ease the transition.

The statement, issued jointly by the Consumer Financial Protection Bureau (CFPB), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC), is intended to remind supervised institutions and organizations that U.S. dollar (USD)-based LIBOR panels will end on June 30, 2023.

“The agencies also reiterate their expectations that institutions with USD LIBOR exposure should complete their transition of remaining LIBOR contracts as soon as practicable,” the joint statement notes. “As noted in prior interagency statements, failure to adequately prepare for LIBOR’s discontinuance could undermine financial stability and institutions’ safety and soundness and create litigation, operational, and consumer protection risks.”

The agencies expect all financial institutions under their areas of oversight to end their LIBOR exposure and complete an “orderly transition” away from the index by June 30.

“Institutions have reported significant progress in their LIBOR transition efforts; however, work remains for institutions to prepare for the end of the USD LIBOR panels,” the statement reads. “Institutions are encouraged to ensure that replacement alternative rates are negotiated where needed and in place in advance of June 30, 2023, for all LIBOR-referencing financial contracts including investments, derivatives, and loans.”

The agencies also encourage institutions to work with their customers as quickly as possible and coordinate as needed with other institutions to complete this goal.

The Federal Housing Administration (FHA) published in March the “Adjustable Rate Mortgages: Transitioning from LIBOR to Alternate Indices” final rule in the Federal Register, providing guidance for adjustable-rate forward mortgage loans and Home Equity Conversion Mortgages (HECMs).

In that rule, the FHA established the Secured Overnight Financing Rate (SOFR) as the index for the HECM program, something the industry had advocated for when the sunset of the LIBOR index came into clearer view.

When the rule was handed down, a HUD official said the impact on reverse mortgage borrowers should be minimal and the new rule should not be disruptive to the reverse mortgage industry.

“Transitioning to the SOFR index will allow the uninterrupted continuation of FHA-insured adjustable rate mortgages, including HECMs, that are currently tied to the soon-to-be retired LIBOR index,” the spokesperson said.

Industry reaction was positive regarding the adoption of SOFR for adjustable-rate HECMs, with National Reverse Mortgage Lenders Association President Steve Irwin saying at the time that such a move would serve to help further “mainstream the HECM in the marketplace.”

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