Nov. 9: LIBOR/SOFR transition in the primary & secondary markets ; state lending law changes

“I’m gonna save a ton of money at Christmas by discussing politics at Thanksgiving dinner!” As we sail toward Veteran’s Day, and then Thanksgiving, let’s jump in to the always-exciting topic of…. LIBOR? Most believe that, given the allegations of fixing, the LIBOR (London Inter-bank Offered Rate) will not be with us for years and years to come. In case you’ve lost track, LIBOR is administered by the Intercontinental Exchange which asks major global banks how much they would charge other banks for short-term loans. Recall that Intercontinental Exchange, Inc. (NYSE: ICE), owns MERSCORP Holding, Inc., owner of Mortgage Electronic Registrations Systems, Inc. (MERS).

With trillions of dollars of securities (and ARM loans) adjusting to fluctuations in interest rates, everyone wants an index that is immune to foul play, is stable, easy to calculate and understand, and is accepted in the marketplace. When one asks someone at Freddie Mac or Fannie about the topic, they often reply that SOFR (Secured Overnight Financing Rate: a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities) is a 30-day average, and the “powers that be” will be moving the adjustments to every 6 months with a 1% cap so they can be hedged better. Look for a margin of 2.25-3.00 for Agency ARM documents, but don’t expect any new note language until June 2020. Work continues.

For any clients with adjustable rate mortgages, the Treasury Department and the IRS issued proposed regulations to help taxpayers avoid negative tax consequences in the transition away from the London Interbank Offered Rate and other interbank rates. Certainly lenders are concerned about potential class action lawsuits from borrowers given ARM loans tied to LIBOR when the lender “knows” that the index is going away.

The publication of LIBOR is not guaranteed beyond 2021. But critics are quick to point out that the problem with SOFR is that it may be even more prone to wild fluctuations than LIBOR as pointed out in this graph from the St. Louis Fed.

If you’re serious about the topic, you should at least skim through the ARRC “Consultation on Fallback Contract Language for Residential ARMs” and its “White Paper on SOFR-Indexed ARM Product Design.”

What’s the Mortgage Bankers Association been up to? Pete Mills scribed, “A lot of work is being done between industry and government to prepare for the ‘end of Libor’ as an official reference rate. Much of the work on the transition is being undertaken by the Alternative Reference Rates Committee’s Consumer Products Working Group, on which MBA actively participates. In July, the ARRC released a consultation on improvements to fallback contract language for new, closed-end, residential ARMs. The idea is to make ARM contract language more robust in the event that the index is no longer available. The consultation focused on improved triggers (i.e., when do you switch to a new index?) and the replacement index/margin (i.e., how do you select a new index/margin?). We expect publication of the final ARRC recommendations shortly.


“For borrowers with existing LIBOR-indexed loans, any changes to the loan will follow the terms of the contract. So, for example, many contracts specify that the Note holder will choose a new index that is based upon comparable information. There is work underway to develop common understandings around the triggers and acceptable replacement indices in these situations. Separately, the ARRC has also been active in terms of providing more information for consumers on the transition away from LIBOR. For example, the ARRC’s FAQs include lots of helpful explanations. MBA has also developed a consumer disclosure template for lenders to provide to consumers when they are considering new ARMs that are linked to LIBOR. MBA is also working on a similar template oriented to consumers with existing LIBOR-linked loans.”

CME Group transitioned on October 16 to the Secured Overnight Financing Rate from Libor as the reference rate for discounting in the cleared swaps market. The revised date coincides with LCH’s transition, leaving open the prospect of a big bang in the market.

The Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), FHFA, and Farm Credit Administration issued a proposed rule to amend regulations related to the exchange of margin for non-cleared swap transactions. Importantly, the proposal would allow covered institutions to amend legacy swaps for purposes of the transition away from the use of the London Inter-Bank Offered Rate (LIBOR), without triggering additional requirements or losing the “grandfathered” status of those swaps. Because LIBOR is likely to be discontinued sometime shortly after the end of 2021, it is critical that market participants begin preparations for the transition to new indices. MBA has contributed to ongoing work related to the development of new adjustable-rate mortgage products, as well as improved contractual fallback language for mortgage notes, and targeted disclosures for borrowers. Comments on the swap margin proposal are due 30 days following publication in the Federal Register.

Securities and Exchange Commission Chairman Jay Clayton has expressed concern to the Fixed Income Market Structure Advisory Committee about the Secured Overnight Financing Rate’s ability to definitively replace Libor, calling like-for-like mapping of a Libor product to a SOFR product challenging.

A number of banks have received approval to flip legacy Libor-linked sterling bonds to the Sterling Overnight Index Average rate, a move welcomed by the UK’s Financial Conduct Authority. Some of the conversions have included the first use of new “negative consent” language.

State and federal shifts in the regulatory climate

Lenders continue to mull over the implications of HUD and DOJ’s announcement of a long-awaited Memorandum of Understanding (MOU), which provides prudential guidance concerning the application of the False Claims Act to matters involving alleged noncompliance with FHA guidelines. The announcement was made by HUD Secretary Dr. Benjamin S. Carson at the Mortgage Bankers Association’s Annual Conference, and both agencies issued releases shortly after Carson’s comments. The intention, HUD noted, is to bring greater clarity to regulatory expectations within the FHA program and ease banks’ worries about facing future penalties for mortgage-lending errors. Read Buckley’s Special Alert in full for more information.

California’s Assembly Bill 539 has passed the state Assembly and the state Senate Committee on Banking and Financial Institutions. The bill would amend the CFL and impose rate caps on all consumer-purpose installment loans. Read Morrison Foerster’s publication for details.

Pennsylvania has enacted House Bill 318, which expands and extends the protections given to Pennsylvania residential and wireless telephone subscribers by the 1996 Telemarketer Registration Act (TRA) in connection with telephone solicitation calls. With specific respect to robocalls, the new law requires telemarketers to establish procedures to allow called persons to opt out of receiving future telephone solicitation calls and be immediately taken off the list. The new law becomes effective on Dec. 3, 2019, providing only a short period of time for telemarketers to upgrade their systems to meet the new requirements. Click here to view details.

In the November 1, 2019, issue of the Texas Register, the Finance Commission of Texas adopted amendments to the Texas Administrative Code rules in 7 TAC §§80.201 and 81.201 concerning the usage of the conditional pre-qualification and conditional loan approval forms (herein “loan status forms”) attached to §§80.201 and 81.201 as Forms A and B. The Finance Commission of Texas also amended the texts of these loan status forms. These adopted amendments to §§80.201 and 81.201 and their respective loan status forms will not take effect until May 1, 2020.

New York’s New Tax Law Section 1409 contains information regarding a new procedure important for any mortgage servicer that is an LLC and is selling/granting property. Last month the Governor signed legislation that changes the information that must be included on TP-584 and NYC RPT forms that accompany deeds that are being recorded, when a limited liability company (LLC) is the Grantor and/or the Grantee. The legislation creates a new recording requirement for certain deeds. The Legislation amends Tax Law § 1409 (requires filing TP584) and NYC Admin Code § 11-2105 (requires filing RPT form). The legislation applies to all such deeds that are recorded on or after Monday, September 23rd.

California has enacted legislation imposing interest rate caps and other restrictions on Consumer Loans. The new law, AB 539, applies only to loans made under the California Financing Law (CFL). Read the Morrison & Foerster Client Alert for details.

Recently, MQMR’s Weekly FAQ asked: Do both Oregon and Washington tie licensing requirements to an applicant’s residency (not just the location of the subject property)? The answer is yes. Washington requires an individual to hold a Washington MLO license if the individual offers mortgage brokering or loan origination services (i) to Washington state citizens or (ii) for property in Washington State. Example: if an applicant is a “resident” of Washington and looking to purchase a home in Texas, the MLO assisting the applicant with his/her mortgage loan would need to be licensed in both Texas AND Washington.

Oregon requires an individual to hold an Oregon mortgage loan originator (“MLO”) license if the individual takes a mortgage loan application or offers or negotiates the terms of a mortgage loan (i) to Oregon residents, (ii) for property located in Oregon State, or (iii) from a fixed physical location in Oregon. Example: if you have a MLO working in Oregon but doing a loan for someone in Florida, that MLO would need to be licensed as an Oregon MLO, in addition to a Florida MLO.

On October 30, the CFPB, along with the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney (together, the “states”), announced an action against a student loan debt relief operation for allegedly deceiving thousands of student-loan borrowers and charging more than $71 million in unlawful advance fees. Read Regulators tackle company offering relief from student loans on the Buckley InfoBytes Blog for details in the complaint.

This quote reflects the way Coach Wooden lived. His father, Joshua Wooden, gave him many key pieces of advice, such as help others and make friendship a fine art, which he followed on a daily basis.

Coach always looked for the good in people. He believed that if you look for the best in others, that’s probably what you’ll find.

In his book Wooden: A Lifetime of Observations and Reflections On and Off the Court with Steve Jamison, Coach repeated a story he often told to make this point:

There’s an old story about a fellow who went to a small town in Indiana with the thought of possibly moving his family there. “What kind of people live around here?” he asked the attendant at the local filling station.

“Well,” the attendant replied as he checked the oil, “what kind of people live back where you’re from?” The visitor took a swallow of his cherry soda and replied, “They’re ornery, mean and dishonest!”

The attendant looked up and answered, “Mister, you’ll find them about like that around here, too.”

A few weeks later, another gentleman stopped by the gas station on a muggy July afternoon with the same question.

“Excuse me,” he said as he mopped off his brow. “I’m thinking of moving to your town with my family. What kind of people live around these parts?”

Again the attendant asked, “Well, what kind of people live back where you’re from?”

The stranger thought for a moment and replied, “I find them to be kind, decent and honest folks.”

The gas station attendant looked up and said, “Mister, you’ll find them about like that around here, too.”

It’s so true. You often find what you’re looking for.

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Rob Chrisman