With the inclusion of the Adjustable Interest Rate Act (LIBOR) (the “LIBOR Act”) as Division U of HR 2471, Consolidated Appropriations Act, 2022 (the “Credits Act”) enacted by the United States House of Representatives on March 9, 2022 and in the Senate on March 10, 2022, the United States is poised to find a federal solution for legacy LIBOR-related contracts that contain inadequate fallback provisions, if any. Indeed, the final version of the legislation provides additional legal certainty regarding the use of non-SOFR benchmarks not included in the earlier version of the legislation passed by the US House of Representatives.
The search for a legislative solution to the problem of old contracts linked to the London InterBank Offered Rate (“LIBOR”) which are impossible, or practically impossible, to modify and which lack fallback provisions implementing a replacement rate not linked to LIBOR or which do not result in a fixed interest rate, began with the New York Legislature’s passage of Senate Bill S297B on March 24, 2021. Shortly thereafter, Alabama passed the LIBOR Discontinuation and Replacement Act of 2021 – a virtually identical bill – on April 29, 2021. On December 8, 2021, the United States House of Representatives passed HR 4616, the LIBOR Rate Act. Adjustable Interest (LIBOR) to provide a federal solution for LIBOR-linked contracts that need to move away from LIBOR but do not have the mechanisms to do so.
On Feb. 28, 2022, Sen. Jon Tester (D-MT), along with U.S. Senate Banking Committee Chairman Sherrod Brown (D-OH), Ranking Member Pat Toomey (R-PA), and Sen. Thom Tillis (R-NC), have announced that they plan to introduce their own LIBOR transition legislation. This legislation made a number of revisions that tightened the language of the House bill and proposed three substantive changes: new protections for banks that use non-SOFR credentials; broader coverage that includes any interbank offered rate, not just LIBOR; and tax provisions that confirm that amendments to a financial contract that implement the transition to a replacement benchmark for LIBOR, and nothing more, will not be treated as a sale, exchange or other disposition taxable property for the purposes of Section 1001 of the Internal Revenue Code.
While the federal legislation has made its way through the US Congress, seven states have now proposed or passed LIBOR transitional legislation, including New York, Alabama, Florida (House and Senate versions), Georgia, ‘Indiana, Nebraska and Tennessee. However, passage of the LIBOR Act will provide a federal solution to the LIBOR transition for legacy contracts, replace state legislation to date, and eliminate the need for additional state level legislation.
Version and status of the appropriations act
LIBOR, as incorporated into the Appropriations Act, differs from the original version of the House bill in several respects. The main differences are:
- Use of non-SOFR replacement benchmarks – Section 106 of the LIBOR Act includes the so-called Toomey Amendment, which limits the ability of banking regulators to take enforcement action against any bank that uses a replacement benchmark other than than the SOFR. The additional provision represents a legislative response to the concerns of various regulators regarding the adoption by regulated institutions of alternative replacement indices that are not based on SOFR, such as the Bloomberg Short Term Bank Yield Index, or BSBY. Under LIBOR, a banking regulator cannot take enforcement action against a bank that uses a benchmark rate other than SOFR “…solely because that benchmark is not the SOFR”. The bill sets out a number of criteria a bank should use to determine whether to use a non-SOFR benchmark rate, none of which directly address regulators’ concerns about using a benchmark rate that raises issues of “inverted pyramid”, or otherwise not being “robust.”
- Spread Adjustments for Consumer Loans – LIBOR Section 104(e)(2) includes language that changes the benchmark spread adjustments applicable to consumer loans during the one-year period beginning on LIBOR replacement date.
- Subsequent Federal Reserve Regulations – Section 110 of LIBOR requires the Federal Reserve Board to promulgate regulations to implement the provisions of the legislation within 180 days of the date of promulgation.
Also noteworthy is the fact that, apparently due to jurisdictional considerations, the proposed tax provision in the Senate legislation was ultimately deleted from the final legislation presented to the US Senate on March 8, 2022.
As of now, the Appropriations Act has been sent to President Biden for signature, which is expected shortly.