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ARRC Releases New Fallback LIBOR Language for Residential ARM Loans
Practical Law Legal Update w-022-9243 (Approx. 4 pages)
ARRC Releases New Fallback LIBOR Language for Residential ARM Loans
by Practical Law Real Estate
| Published on 22 Nov 2019 • USA (National/Federal) |
The Alternative Reference Rates Committee (ARRC) released recommended LIBOR fallback contract language for adjustable-rate mortgages (ARMs). The language is intended to ensure that agreements remain effective if LIBOR is discontinued.
On November 15, 2019, the Alternative Reference Rates Committee (ARRC) released new recommended fallback contract language for use in closed-end adjustable rate mortgages (ARMs). The language is intended to ensure that the ARMs remain effective if LIBOR is discontinued, which is expected to occur at some point after 2021.
On the same day the recommended fallback language was released, Freddie Mac and Fannie Mae announced that they will incorporate the language in their ARMs beginning the first quarter of 2020.
ARRC Fallback Language
The ARRC fallback language clarifies certain trigger events that require an ARM note holder to convert from the use of LIBOR to a new interest rate reference index. Currently, most ARMs include language that specifies that "if the Index is no longer available, the Note Holder will choose a new index which is based upon comparable information."
The ARRC’s recommended fallback language clarifies in what situations LIBOR will be considered "no longer available" by defining "unavailable" as meaning either:
- The administrator of LIBOR has stopped providing it to the general public.
- The administrator or its regulator announces that LIBOR is no longer reliable or representative.
The fallback language also establishes the following priority of replacement indexes:
- First, a replacement index selected or recommended by
- the Board of Governors of the Federal Reserve System;
- the Federal Reserve Bank of New York; or
- a committee endorsed or convened by the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York.
- Second, a replacement index determined by the note holder, with possible adjustment to the loan’s margin to account for differences between LIBOR and the chosen replacement index.
Practical Implications
The ARRC’s recommended fallback language provides greater clarity in ARMs with respect to the eventual phase out of LIBOR. With LIBOR expected to be phased out by the end of 2021, residential real estate lenders should review their existing agreements referencing LIBOR and begin implementing the recommended fallback language where appropriate.
For more information on the phase out of LIBOR, see Article, Current Trends in LIBOR Successor Rate Provisions.