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Consolidated Appropriations Act Advances Federal LIBOR Transition Solution – Finance and Banking – United States – Mondaq News Alerts


United States:

Consolidated Appropriations Act Advances Federal LIBOR Transition Solution


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With the inclusion of the Adjustable Interest Rate (LIBOR) Act
(the “LIBOR Act”) as Division U of H.R. 2471, Consolidated
Appropriations Act, 2022
(the “Appropriations Act”)
passed by the U.S. House of Representatives on 9 March 2022 and the
Senate on 10 March 2022, the United States is on the cusp of a
federal solution for legacy LIBOR-linked contracts that contain
inadequate fallback provisions, or none at all. Indeed, the final
version of the legislation provides additional legal certainty with
respect to the use of non-SOFR benchmarks not included in the
earlier version of the legislation passed by the U.S. House of
Representatives.

Background

The search for a legislative solution to the problem of legacy
contracts linked to the London InterBank Offered Rate
(“LIBOR”) that are impossible, or virtually impossible,
to amend, and that lack fallback provisions that implement a
replacement rate that is not linked to LIBOR or that do not result
in a fixed interest rate, began with the passage by the New York
legislature of Senate Bill S297B on 24 March 2021. Shortly
thereafter, Alabama passed the LIBOR Discontinuance and Replacement Act of
2021
-a virtually identical bill-on 29 April 2021. On 8 December
2021 the U.S. House of Representatives passed H.R. 4616, the Adjustable Interest Rate
(LIBOR) Act in order to provide a federal solution for LIBOR-linked
contracts that need to transition away from LIBOR but that lack the
mechanics to do so.1

On 28 February 2022, Senator Jon Tester (D-MT), along with U.S.
Senate Banking Committee Chair Sherrod Brown (D-OH), Ranking Member
Pat Toomey (R-PA), and Senator Thom Tillis (R-NC), announced that they planned to introduce their
own LIBOR-transition legislation. This legislation made a number of revisions that
tightened the language of the House bill and offered three
substantive changes: new protections for banks that use non-SOFR
benchmarks; broader coverage that includes any interbank offered
rate, not LIBOR only; and tax provisions that confirm that
amendments to a financial contract that implement transition to a
replacement benchmark for LIBOR, and nothing more, will not be
treated as a taxable sale, exchange or other disposition of
property for purposes of section 1001 of the Internal Revenue
Code.

As federal legislation has worked its way through the U.S.
Congress, seven states now have proposed or adopted LIBOR
transition legislation, including New York, Alabama, Florida (House and Senate versions), Georgia, Indiana, Nebraska, and Tennessee. However, the passage of the LIBOR
Act will provide a federal solution to LIBOR transition for legacy
contracts, supersede state legislation to date, and eliminate the
need for additional state-level legislation.

Appropriations Act Version and Status

The LIBOR Act, as incorporated into the Appropriations Act,
differs from the original House version of the bill in several
ways. The major differences are as follows:

  1. Use of non-SOFR replacement benchmarks – Section 106 of
    the LIBOR Act includes the so-called Toomey amendment, which limits
    the ability of bank regulators to take enforcement action against
    any bank that uses a replacement benchmark other than SOFR in loan
    transactions. The additional provision represents a legislative
    response to concerns of various regulatory bodies regarding the
    adoption by regulated institutions of alternate replacement
    benchmarks that are not based on SOFR, such as the Bloomberg Short
    Term Bank Yield Index, or BSBY. Under the LIBOR Act, a bank
    regulator cannot take enforcement actions against a bank that uses
    an alternate reference rate other than SOFR “. solely because
    that benchmark is not SOFR.” The bill sets forth a number of
    criteria that a bank should use in determining whether to use a
    non-SOFR reference rate, none of which directly addresses
    regulators’ concern about using a reference rate that raises
    “inverse pyramid” concerns, or is otherwise not
    “robust.”

  2. Spread adjustments for consumer loans – Section 104(e)(2) of
    the LIBOR Act includes language that modifies benchmark spread
    adjustments applicable to consumer loans during the one-year period
    beginning on the LIBOR replacement date.

  3. Subsequent Federal Reserve regulations – Section 110 of
    the LIBOR Act requires the Federal Reserve Board to promulgate
    regulations to carry out the provisions of the legislation within
    180 days after the date of enactment.

Also of note is the fact that, apparently due to jurisdictional
considerations, the tax provision proposed in the Senate
legislation ultimately was dropped from the final legislation
introduced in the U.S. Senate on 8 March 2022.2

At this time, the Appropriations Act has been sent to President
Biden for signature, which is expected imminently.

Footnotes

1 See our blog post, Adjustable Interest Rate (LIBOR) Act of 2021 Is
Passed by the U.S. House of Representatives
, 9 December
2021.

2 In the Senate, the Senate Finance Committee has
jurisdiction over any bill that includes any changes to the
Internal Revenue Code. Hence, had the tax provision not been
removed, the legislation would have been referred to the Senate
Finance Committee, rather than the Senate Banking Committee, on
which its sponsor and co-sponsors sit.

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