LIBOR Index Transition

LIBOR stands for London Interbank Offered Rate. It is an interest rate that was meant to reflect rates that major banks charge each other for short-term loans. Historically, LIBOR was used internationally as a benchmark or “reference rate” for setting rates on loans and other financial products. However, the ICE Benchmark Administration (IBA) announced that it would no longer publish LIBOR on a representative basis after June 30, 2023. As a result, the financial industry has transitioned away from LIBOR, and all loans with interest rates based on LIBOR were required to transition to another index.

For more information on the discontinuation of LIBOR, see this article from the Consumer Financial Protection Bureau, available at:

consumerfinance.gov/about-us/blog/the-libor-index-for-adjustable-rate-loans-is-being-discontinued-heres-what-to-watch-for.

For general information on adjustable-rate consumer mortgages, see the Consumer Handbook on Adjustable-Rate Mortgages, maintained by the Consumer Financial Protection Bureau and available at:

files.consumerfinance.gov/f/documents/cfpb_charm_booklet.pdf.

Clients who had loans based on the LIBOR index and were impacted by this change have been contacted via mail in the months leading up to the transition. Don’t hesitate to reach out to your banker or the Client Care Center at (888) 408-0288 if you have any questions.

LIBOR-based consumer and commercial loans transitioned as follows:

Consumer LIBOR-based loans transitioned to a spread-adjusted term Secured Overnight Financing Rate (“Consumer Spread-Adjusted Term SOFR”) as published by Refinitiv after LIBOR ended. Consumer Spread-Adjusted Term SOFR is based on the CME Group’s term Secured Overnight Financing Rate (“Term SOFR”) plus a spread adjustment. The spread adjustment is equal to a five-year historical median spread between LIBOR and SOFR, with a portion of the spread adjustment phased in over the course of one year. The spread adjustment is meant to generally equate the two indexes.

Commercial LIBOR-based loans transitioned to a spread-adjusted term Secured Overnight Financing Rate (“Institutional Spread-Adjusted Term SOFR”) published by Refinitiv. Institutional Spread-Adjusted Term SOFR is based on the CME Group’s Term SOFR plus a spread adjustment. The spread adjustment is equal to a five-year historical median spread between LIBOR and SOFR and it is fully applied without a phase-in period. The spread adjustment is meant to generally equate the two indexes.

We, and the Alternative Reference Rates Committee, believe that both selected indexes represent fair, reasonable and comparable substitute indexes. This LIBOR to SOFR transition approach was also endorsed for loans like yours by the Adjustable Interest Rate (LIBOR) Act of 2021, which was signed into law in March 2022.

A small number of LIBOR-based loans had promissory notes that specified a different replacement index. These loans were transitioned to the replacement index specified therein.

SOFR stands for “Secured Overnight Financing Rate” and is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The index is based on transactions in the Treasury repurchase market, where banks and investors borrow (or loan) Treasuries overnight. For more information on how SOFR is calculated, please visit apps.newyorkfed.org/markets/autorates/SOFR. SOFR was first published in April 2018 and is used to price both derivatives and loans. New index values are published each business day by the Federal Reserve Bank of New York.

After June 30, 2023, LIBOR-based loans that did not specify a different replacement index transitioned based on loan type, as noted below:

• Consumer LIBOR-based loans transitioned to Consumer Spread-Adjusted Term SOFR, published by Refinitiv, in final form after June 30, 2023, and as described above.
• Commercial LIBOR-based loans transitioned to Institutional Spread-Adjusted Term SOFR, published by Refinitiv and as described above.

The interest rate on your loan(s) was either previously determined by or would be determined at the end of your fixed-rate period by adding the value of either 1-month, 3-month, 6-month or 12-month LIBOR and the margin, as further specified in your promissory note.

Now that LIBOR is no longer available, we’ve replaced it with the corresponding tenor of either Consumer Spread-Adjusted Term SOFR or Institutional Spread-Adjusted Term SOFR as determined by your loan type and promissory note. The new index will be used to calculate future interest rate and payment changes for your loan(s). If your loan is still in its fixed-rate period, you will not see the effect of the new index until your initial rate adjustment date.

This transition has been made for you in accordance with the terms of your loan documents. You don’t need to take any action.

If you have any questions on which index and tenor your loan will be transitioned to, please reach out to your banker or the Client Care Center at (888) 408-0288.