LIBOR and COFI Transition FAQs

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Many companies in the financial industry are in the process of assessing their portfolios and the requirement to move away from LIBOR, the London Interbank Offered Rate, which is the most commonly used worldwide interest rate benchmark for the last thirty years. The LIBOR was retired as a reference rate for new origination as of December 31, 2021, and it will be retired as a reference rate for certain active loans in two phases, on December 31, 2021 and on June 30, 2023, depending upon which LIBOR rate is tied to the loan. Banks have relied on LIBOR to determine the interest rates charged to borrowers on certain loan products, including adjustable-rate mortgages. Since the announcement of the impending sunset of LIBOR, the industry has been in the process of determining the benchmark rate that will ultimately succeed LIBOR for determining interest rates.  

The Federal Home Loan Bank of San Francisco has announced that it will stop publishing all cost of funds indices early in 2022 because of the significant decline in the number of financial institutions eligible to report the data used to calculate the indices. The Bank will no longer calculate the 11th District Monthly Weighted Average Cost of Funds Index (COFI) after the publication of the December 2021 COFI on January 31, 2022. The 11th District Monthly Weighted Average Cost of Funds Index (COFI) is one of many indices used by mortgage lenders to adjust the interest rate on adjustable-rate mortgages.

Specialized Loan Servicing (SLS) will be reaching out to impacted customers to educate them on the LIBOR and COFI transitions and how it will impact their loan. SLS continues to monitor the industry and relevant developments and will provide updates pertaining to the LIBOR and COFI transitions as it is available. Please refer to the FAQs for more details.


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LIBOR and COFI Transition FAQs

LIBOR and COFI are both indices that measure interest rates that reflect trends in the overall economy. Both indices are published by third parties and are used as a benchmark for interest rate changes. Different lenders use different indices for their adjustable rate mortgage as well as lines of credit. In some cases, your promissory note will indicate whether your loan’s interest rate is adjusted pursuant to LIBOR or COFI.

LIBOR is the London Interbank Offered Rate and may be the current index used to determine the interest rate change on your loan, depending on your loan documents. LIBOR is set to be discontinued as a published, referenced rate. LIBOR is tied to a multitude of financial instruments, including residential mortgage loans and securitizations. LIBOR-referenced rates are relevant to Specialized Loan Servicing (SLS) as part of the underlying terms of certain mortgage products serviced, and the financing terms on the mortgage loan originations.

COFI is the Cost of Funds Index and is an alternative index which may be used for rate changes, depending on the terms of your loan. The Federal Home Loan Bank of San Francisco also announced that it will stop publishing COFI in early 2022. COFI is a weighted average of what it costs banks to pay interest on savings accounts or on money borrowed from other financial institutions and is tied to many residential mortgage loans.

Please consult your promissory note to determine if your loan adjusts pursuant to LIBOR or COFI. If your loan adjusts pursuant to either LIBOR or COFI, an alternative index will need to be substituted prior to expiration. If your loan is affected, we will contact you to ensure you are aware of the new index chosen.

An inability to ensure true market representation has led regulators to decide that the financial industry should no longer reference the LIBOR rate. The Alternative Reference Rate Committee (ARRC) was created in 2014 by the Federal Reserve for the purpose of identifying robust alternatives to USD LIBOR and supporting the transition to a new index. In 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it would not compel panel banks to submit to LIBOR past 2021. With this announcement, financial institutions were given a LIBOR publication end date to reference while developing timelines for a transition plan to a new benchmark rate.

The Federal Home Loan Bank of San Francisco has announced that it will stop publishing all cost of funds indices because of the significant decline in the number of financial institutions eligible to report the data used to calculate the indices.

  • 1-week USD LIBOR either will cease to be published or will be deemed no longer representative immediately after December 31, 2021.
  • 2-month USD LIBOR either will cease to be published or will be deemed no longer representative immediately after December 31, 2021.
  • All other USD LIBOR tenors either will cease to be published or will be deemed no longer representative immediately after June 30, 2023.
  • The COFI index either will cease to be published or will be deemed no longer representative after January 31, 2022.

The transition away from LIBOR will affect some adjustable (or variable) rate loans and lines of credit, such as adjustable-rate mortgages and home equity lines of credit. Loan contracts that reference LIBOR and mature on or before June 30, 2023, may not be impacted.  Loan contracts that reference LIBOR and mature after June 30, 2023, will be assigned a new benchmark interest rate.  SLS continues to monitor the industry to ensure any new benchmark is consistent with accepted market practices and substantially equivalent to the LIBOR index rate.

SLS is making preparations to transition impacted consumer loans from COFI and LIBOR-based indices into a new index. This change will affect some adjustable rate loans and lines of credit such as adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCS).   Customers impacted by the discontinuation of LIBOR will be notified by SLS in a timely manner with realistic notice of the new benchmark prior to transition.

If you have received notice from SLS in 2021, your loan contains either a COFI index or a 1-week or 2-month LIBOR index. 1-week and 2-month LIBOR indices are set to expire December 31, 2021 and the COFI index will cease January 31, 2022.  All other LIBOR indices are set to expire immediately following the LIBOR publication on June 30, 2023. If you have not yet received a notice from SLS regarding the LIBOR or COFI transition, you will receive information regarding the transition and the new index chosen to replace your LIBOR or COFI index.

The replacement index for COFI loans has been chosen to be the Enterprise 11th District COFI Replacement Index which will be published starting February 8, 2022.

If you have a LIBOR index loan, a replacement index may not have yet been chosen. SLS is continuing to work with the investor or owner of your loan to determine the index which will be used for the transition. With that said, the Federal Reserve has convened a group called the Alternative Reference Rates Committee (AARC) to help facilitate the transition into a new index, including replacement index selection recommendations. The ARRC is comprised of a diverse set of private-sector entities in markets affected by LIBOR, and a wide array of official-sector entities. Currently, the AARC is recommending that all LIBOR index loans transition to the Secured Overnight Financing Rate (SOFR) index. More information about the LIBOR transition and AARC recommendations can be found on ARRC's website here.

​SOFR is based on actual transactions in the U.S. Treasury repurchase market, one of the largest markets in the world. This is the market where borrowers can sell their U.S. Treasury bond assets to investors with a promise to repurchase them the following day, thus effectively creating an overnight loan where the collateral is a U.S. Treasury bond asset.

SOFR is the preferred alternate reference rate for the U.S. dollar-denominated LIBOR contracts, as selected by the ARRC, because SOFR is based on actual transactions in a market where extensive trading happens every day. In contrast, LIBOR is based on estimates of interbank borrower rates in the London market provided by global banks that agree to serve as LIBOR panel banks. For more information on SOFR and how the SOFR daily benchmark rate is determined and published by the Federal Reserve, please click here.

The transaction volumes underlying SOFR are far larger than the transactions in any other U.S. money market and dwarf the volumes underlying LIBOR. SOFR is a representation of general funding conditions in the overnight Treasury repurchase market. As such, SOFR reflects the economic cost of lending and borrowing relevant to the wide array of market participants active in the Treasury repurchase market.

The AARC believes that SOFR is the most appropriate reference rate for wide-spread and long-term adoption because, among other reasons, it:

  • Is compliant with the International Organization of Securities Commissions which is an association of organizations that regulate the world's securities and futures markets.
  • Is fully transaction-based.
  • Encompasses a robust underlying repurchase market with more than $1 trillion in daily transactions.
  • Is an overnight nearly risk-free reference rate that correlates closely with other money market rates.
  • Covers multiple repurchase market segments allowing for future market evolution.

Additionally, the Consumer Financial Protection Bureau (CFPB) has determined that SOFR-Based Spread-Adjusted indices are comparable to LIBOR. The New York Fed, as administrator of SOFR and in cooperation with the Treasury Department's office of Financial Research, publishes the SOFR compound averages as well as an overnight SOFR index and can be found here.

The Enterprise 11th District COFI replacement index will be based on the federal cost of funds index currently published by Freddie Mac, plus an appropriate spread adjustment. Freddie Mac will publish the Enterprise 11th District COFI Replacement Index on the last business day of every month, starting February 28, 2022, on Freddie Mac’s web page dedicated to the replacement index.

Based on current comparability analysis, and based on good faith determination, the government sponsored enterprises (GSEs) have selected the Federal Cost of Funds Index plus a spread adjustment, as the replacement index. The purpose of the spread adjustment is to minimize or eliminate any value transfer between investors and consumers. The GSEs anticipate that the methodology for the spread adjustment will be similar to the spread adjustment methodology that was recommended by the AARC for the LIBOR transition.

The GSEs considered several potential alternative indices with the objective of finding a fair, reasonable and comparable substitute index that met the following criteria:

  • Based upon reliable, broad-based sources of information;
  • Based on instruments with a range of maturities; and
  • High correlation to the original index.

A spread-adjusted Federal COFI was determined to be the most fair, reasonable and comparable substitute index for COFI. This determination was made in consultation with the Federal Housing Finance Agency (FHFA) following a review of 13 other indices.

The Enterprise 11th District COFI Replacement Index is set to be published by Freddie Mac on its website starting February 28, 2022. Please click here for more information.

If you have a COFI index loan or a 1-week or 2-month LIBOR index loan, you should have already received an initial letter from SLS advising you of the COFI and LIBOR transition. If you did not receive such letter, please contact our office at the phone number below and we will be happy to assist you. You will also be receiving a second notification and/or proper disclosures indicating the new index, interest rate and/or margin change (if applicable) before the end of 2021.

If you have a LIBOR index loan that is not set to expire by the end of 2021, but rather will expire in 2023, you will receive communications from SLS and disclosures (if applicable) in accordance with the terms of your Note and Deed of Trust/Mortgage as the expiration date approaches.

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We are here for you

We want to help you understand the terms of your loan and any changes related to the index replacement. If you have any questions or concerns about your LOC and the possible index change, please contact us at 1-800-315-4757.

For more information on the discontinuation of LIBOR, please see the Consumer Financial Protection Bureau’s website providing information: https://www.consumerfinance.gov/about-us/newsroom/cfpb-facilitates-libor-transition/

For more information on the discontinuation of COFI, please see the Frequently Asked Questions published by Freddie Mac providing information: http://www.freddiemac.com/about/pdf/COFI_transition_faqs.pdf.



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