Regulators ramp up guidance on LIBOR transition

(Oct. 22, 2021) Actions credit unions, banks and nonbanks alike should consider taking to ensure safe-and-sound practices during the transition away from the LIBOR reference rate were outlined in joint guidance this week by NCUA, the federal bank regulators, state credit union and bank regulators and the CFPB.

NCUA covered the joint statement in letter to credit unions (LTCU) 21-CU-10, Interagency Statement on LIBOR Transition. In the letter, NCUA noted that the regulators are emphasizing the expectation that credit unions and other supervised institutions with exposure to LIBOR (the London Interbank Offered Rate) will continue to progress toward an orderly transition away from LIBOR toward an alternative reference rate.

“The NCUA encourages all federally insured credit unions to transition away from using U.S. dollar LIBOR as a reference rate as soon as possible, but no later than Dec. 31, 2021, and to ensure existing contracts have robust fallback language that includes a clearly defined alternative reference rate,” the NCUA letter states.

LIBOR will be discontinued for new contracts after Dec. 31; existing contracts using LIBOR after that date must transition to an alternative by June 30, 2023.

CFPB said it joined the letter to highlight the consumer risks posed by the discontinuation of LIBOR, and urged credit unions, banks and nonbanks alike to continue their efforts to transition to alternative reference rates to mitigate consumer protection.

“The financial services industry uses LIBOR as a reference interest rate for many consumer financial products including mortgage loans, reverse mortgages, home equity lines of credit, credit cards, and student loans,” CFPB said in a press release. “The approaching discontinuation of most LIBOR tenors in June 2023 presents financial, legal, operational, and consumer protection risks. Additionally, consumers may not know when the transition from LIBOR will occur or how institutions will calculate their interest rates if they do not issue required disclosures to consumers.”

The regulators’ joint statement, among other things, urges financial institutions to ensure that no new contracts utilizing a LIBOR index reference rate are entered into after Dec. 31 – the day LIBOR becomes defunct. NCUA and the other regulators outlined supervisory considerations for financial institutions in transitioning away from LIBOR. Among them: clarification on the meaning of new LIBOR contracts, which stated that contracts entered into on or before Dec. 31 should either use a reference rate other than LIBOR or have fallback language that provides for use of a “strong and clearly defined alternative reference rate after LIBOR’s discontinuation.”

The statement also outlines considerations when assessing the appropriateness of alternative reference rates, expectations for fallback language and more.

Also this week, the OCC released an updated self-assessment tool to aid banks in their LIBOR transition. According to the agency, the tool is aimed at evaluating bank preparedness to deal with the end of the rate, particularly by helping banks evaluate their management processes for identifying and mitigating LIBOR transition risks.


NCUA LTCU 21-CU-10: Interagency Statement on LIBOR Transition

Joint Statement on Managing the LIBOR Transition

CFPB Joins Other Financial Regulatory Agencies in Issuing Statement on Discontinuation of LIBOR

LIBOR Transition: Updated Self-Assessment Tool for Banks