The Death of LIBOR and its impact on adjustable rate lending
Member Arthur Rotatori (Cleveland) moderated a Roundtable titled “The Death of LIBOR and its impact on adjustable rate lending” during the CFSC Roundtable Program at the ABA’s Consumer Financial Services Committee Business Law Section Spring 2018 Meeting in Orlando, Florida on Friday, April 13.
Due to the real problems of being a (mostly) theoretical rate, as well as the rate rigging scandal, LIBOR is being phased out by the end of 2021. The NY Federal Reserve Bank and the US Treasury Department have come up with a replacement: the Secured Overnight Financing Rate (SOFR). That sounds well and good but for the fact that many variable rate consumer loans have used LIBOR as the rate index for years. What happens when the variable rate index used in the loan documents disappears? Does contractual language that says, if LIBOR is unavailable, that the lender can replace LIBOR with a “comparable rate” really help? By the way, what makes two rates “comparable?” After all, the idea of using SOFR to replace LIBOR is driven primarily by capital marker considerations, not consumer finance issues. Can the lender unilaterally replace LIBOR with SOFR or does the borrower have to agree, in writing, to the change? What happens if the borrower doesn’t agree? Is this the next great wave of consumer loan class actions? The Roundtable addressed these questions and more.