What you need to know about LIBOR and adjustable-rate loans
Peter D. Antonoplos
Washington D.C., November 15, 2019 – During the end of 2021, the London interbank offered rate (LIBOR) is going to be discontinued. This change will affect some adjustable-rate loans and lines of credit like adjustable-rate mortgages (ARMs), reverse mortgages, home equity lines of credit, credit cards, auto loans, student loans, and any other personal loans that incorporate LIBOR as the choice index.
What is LIBOR?
LIBOR is the most common marker used by banks to set the interest rate for many adjustable-rate consumer financial products as it reflects market conditions.
While many adjustable-rate products use LIBOR, ARMs are the most common. There are an estimated $1.3 trillion in consumer loans with an interest rate based on LIBOR and the majority of the debt lies within residential mortgages.
When and why is LIBOR going away?
As the number of banks and total traffic that uses LIBOR has decreased, the index has become less reliable and credible. The UK regulator that oversees the LIBOR panel stated that it cannot guarantee LIBOR’s availability beyond the end of 2021. Across the globe, governments and financial institutions have been pushing to find credible alternatives.
What will replace LIBOR?
In the U.S., the Federal Reserve has convened a working group called the Alternative Reference Rates Committee (ARRC) to help smooth the transition away from LIBOR. The ARRC is comprised of many private sector organizations and a diverse selection of official sector entities (including regulators such as the CFPB) as non-voting ex-officio members. The Secured Overnight Financing Rate (SOFR) is the preferred marker for the ARRC to replace LIBOR and the committee has published a plan that aims to promote the use of SOFR with the hopes of avoiding the use of disciplinary measures.
How does an index affect my interest rate?
The principal is the original amount you take out a loan or line of credit. Interest is the amount you will pay over a certain period of time for the opportunity to borrow that amount of money. Your interest rate is the amount of extra dollars you must pay back expressed as a percentage of your principal. The amount extra that you will pay over the life of your loan is determined by your interest rate. For adjustable rate loans and lines of credit, lenders typically decide your interest rate using two numbers: the index and the margin. The index works as a benchmark interest rate which reflects market conditions for borrowers and is dependent on the current and future success of the economy. There are multiple indexes present in the marketplace. Currently, common indexes include LIBOR, the U.S. Prime Rate, and the Constant Maturity Treasury Index (CMT).
The other indicator is the margin or the number of percentage points added to the index by the lender to get your total interest rate.
Index + Margin = Your Interest Rate
For instance, you could have a mortgage with an interest rate of LIBOR, plus 2 percent.
What do I need to know if I have a loan or line of credit based on LIBOR?
With trillions of dollars of products based upon LIBOR, you are likely to be wrapped into these numbers and will need to be vigilant of which index your lender switches to after the end of 2021 when this marker shuts down.
To prepare yourself for this consequential change, check whether your loan or line of credit may be impacted. Your loan contract will lay out the terms of your contract and specifically state whether your interest rate is fixed or adjustable. If adjustable, your loan contract should list which index is used to calculate your interest rate. As lenders and servicers are currently planning for this transition, they might not have answers to all your questions at this time, however, more information will be available as the transition date comes closer.
What if I’m shopping for a new adjustable-rate loan or line of credit?
Be aware that if you’re applying for an adjustable loan or line of credit and you choose a product that uses a LIBOR-based marker, your interest rates may change drastically after 2021 when your lender changes to a different index.
In order to be prepared for change, plan to ask questions and consider your options before you agree to loan terms:
§ Request quotes from at least three different lenders.
§ Ask lenders about the various loan options they offer, including fixed interest rate options.
§ If you are considering an adjustable-rate loan, make sure you are confident you know what your maximum payment maybe and that you can afford it.
§ If you’re thinking about refinancing your loan or line of credit, there are costs, benefits, and risks to getting a new loan.
§ If you’re having a problem with your loan or line of credit, try reaching out to your lender or servicer and see if they can solve your problem. You can also submit a complaint to the Consumer Financial Protection Bureau (CFPB).
§ Finally, if you are concerned about affording your loan, contact your lender or servicer. If you have a mortgage, you can also contact a HUD-approved housing counselor at (800) 569-4287 or https://www.consumerfinance.gov/find-a-housing-counselor/.
The Antonoplos & Associates financial services branch provides our diverse base of banking clients with a comprehensive range of solutions for LIBOR loan-related legal issues. Our LIBOR practice provides the banking industry with over twenty years of client-focused practice in title litigation, loan modification, title curation and equitable subrogation resolutions in connection with loan portfolios. By striving to holistically understand the issues that our clients face, our financial services attorneys’ are able to provide forward-thinking loan documentation and amendments through title curative actions including the correction of legal description errors, resolution by judicial action, equitable subrogation, and securing releases of prior liens, mortgages, and deeds of trust while also prescribing remedies for corrections to promissory notes and deeds of trust.
Antonoplos & Associates financial services lawyers routinely litigate equitable subrogation matters on behalf of nationally and locally chartered banks. Our clients include mortgage lenders, mortgage servicers, banks, banking associations, and other financial institutions including the title insurance industry. Overall, our LIBOR attorneys’ have extensive experience representing loan portfolios and managing mutli-jurisdiction loan modifications and litigation for clients located within the financial services industry.
Peter D. Antonoplos, Esq.Partner
Antonoplos & Associates, Attorneys At Law
1725 Desales Street, N.W.Suite 600,
Washington, D.C. 20036
Email: Peter@ AntonLegal.com