ARRC Releases Recommended Fallback Language for Student Loans | Practical Law

ARRC Releases Recommended Fallback Language for Student Loans | Practical Law

The Alternative Reference Rates Committee (ARRC) released its final recommended contractual fallback language for new variable rate private student loans that reference USD LIBOR, as well as conventions for how market participants can voluntarily use the Secured Overnight Financing Rate (SOFR) in new student loan products.

ARRC Releases Recommended Fallback Language for Student Loans

Practical Law Legal Update w-026-6408 (Approx. 3 pages)

ARRC Releases Recommended Fallback Language for Student Loans

by Practical Law Finance
Published on 23 Jul 2020 • USA (National/Federal)
The Alternative Reference Rates Committee (ARRC) released its final recommended contractual fallback language for new variable rate private student loans that reference USD LIBOR, as well as conventions for how market participants can voluntarily use the Secured Overnight Financing Rate (SOFR) in new student loan products.
On June 30, 2020, the Alternative Reference Rates Committee (ARRC) released its final recommended contractual fallback language for new variable rate private student loans that reference USD LIBOR, as well as conventions for how market participants can voluntarily use the Secured Overnight Financing Rate (SOFR) in new student loan products.
The recommendations state that fallback language should:
  • Reference a replacement index 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 either of the two governing bodies. If a replacement index has not been recommended, the note holder is to make a reasonable, good faith effort to do so.
  • Include:
    • a pre-cessation trigger that accounts for an announcement by the USD LIBOR administrator that the rate is no longer reliable or representative as well as a permanent cessation trigger that would move the loan to a replacement index if the USD LIBOR administrator stops providing the index to the general public; and
    • fallback language that references SOFR, based either on averages of SOFR or a SOFR terms rate.
  • Have a spread-adjustment to SOFR based on a five-year median of the historical difference between USD LIBOR and SOFR with a one-year transition period to that fixed median spread adjustment.
Further, the conventions state that SOFR-based student loan products should:
  • Use the 30- or 90-day average SOFR, with a monthly or quarterly reset period, respectively.
  • Determine a rate before the interest period begins.
  • Have a margin set by the lender or originator.
As with all ARRC recommendations, compliance with the recommendations is strictly voluntary.
For more information on LIBOR and interest rate benchmark reform, see LIBOR Replacement Toolkit.