What is LIBOR?
LIBOR is an index that measures interest rates that reflect trends in the overall economy. The index is published by third parties and is used as a benchmark for interest rate changes. Different lenders use different indices for their adjustable rate mortgage as well as lines of credit. Your promissory note will indicate whether your loan’s interest rate is adjusted pursuant to LIBOR or another index.
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 SLS as part of the underlying terms of certain mortgage products serviced, and the financing terms on the mortgage loan originations.
Please consult your promissory note to determine if your loan adjusts pursuant to LIBOR or another index. If your loan adjusts pursuant to LIBOR, an alternative index will be substituted.
Why is LIBOR being discontinued?
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.
When is LIBOR going away?
• 1-week USD LIBOR ceased to be published December 31, 2021.
• 2-month USD LIBOR ceased to be published 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.
What does this transition mean for customers?
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 is transitioning impacted consumer loans from 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).
How do I know if my loan is impacted?
If you have received notice from SLS your loan may contain a LIBOR index. You may also confirm your loan’s index by reviewing your promissory note which will describe the index used to determine your interest rate.
Is there a replacement index already chosen for the transition?
The Federal Reserve has convened a group called the Alternative Reference Rates Committee (ARRC) 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. The ARRC is recommending that all LIBOR index loans transition to the Secured Overnight Financing Rate (SOFR) index with a spread-adjustment. More information about the LIBOR transition and ARRC recommendations can be found on ARRC’s website here.
In March 2022, Congress enacted the Adjustable Interest Rate Act (LIBOR Act), which provides certain safe harbors for use of indices identified by the Federal Reserve Board as replacement indices for LIBOR. On January 26, 2023, the final rule identifying the Federal Reserve Board-selected benchmark replacement index was published. For consumer loans, the final rule identified the USD IBOR Consumer Cash Fallbacks as the safe harbor rate for LIBOR replacement.
The USD IBOR Consumer Cash Fallbacks index relies on the same calculation methodology as recommended by the ARRC for SOFR-based spread-adjusted indices. That is to say that the USD IBOR Consumer Cash Fallbacks index is a SOFR-based index plus a spread-adjustment as recommended by the ARRC.
Additionally, the Consumer Financial Protection Bureau issued a 2023 LIBOR Transition Interim Final Rule illustrates indices comparable to specific tenors of LIBOR including the spread-adjusted index based on SOFR recommended by the ARRC for consumer products also known as USD IBOR Consumer Cash Fallbacks index.
Based upon the Federal Reserve Board final Rule, the ARRC recommendations and Consumer Financial Protection Bureau 2023 LIBOR Transition Interim Final Rule, SLS and the investor of your loan have chosen the respective tenor of the IBOR Consumer Cash Fallback index as the replacement index for LIBOR.
What are SOFR and USD IBOR Consumer Cash Fallbacks?
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.
USD IBOR Consumer Cash Fallbacks are indices with 1-month, 3-month, 6-month and 12-month tenors published by Refinitiv. These rates are based upon SOFR plus the ARRC’s recommended spread adjustments as approved by Congress. More information related to USD IBOR Consumer Cash Fallbacks index and Refinitiv can be found here.
How is SOFR different than LIBOR, and is it comparable?
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 ARRC 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.
When will a consumer be notified of the replacement index?
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.
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 adjustable rate mortgage or line of credit 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: LIBOR Index Transition | Consumer Financial Protection Bureau (consumerfinance.gov).
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.