The Coming Shift From LIBOR

For decades, many loans in the U.S., including adjustable-rate mortgages, have been tied to the London InterBank Offered Rate (LIBOR). After long use, the benchmark fell out of favor in the 2010s when it became clear that some U.K. banks were reporting erroneous data to manipulate the benchmark and inflate interest rates.

After years of working on a better solution, the Federal Reserve will replace LIBOR with the Secured Overnight Financing Rate (SOFR) as the primary index for interest rates in 2022. The biggest change for lenders will involve loan contracts, for both new and existing mortgage loans. Any contract for a loan that is expected to extend beyond the end of 2021 and require a benchmark interest rate should not include LIBOR.

Mortgage servicers can take these three steps now to prepare for the transition to SOFR: 

1. Make sure your current mortgage servicing software can support the shift to a new benchmark. Your servicing software should be able to:

• Seamlessly integrate the new rate codes for the various SOFR products.
• Utilize an adjustment spread if necessary.
• Easily modify legacy loans to SOFR specifications.
• Ensure that interest rate adjustments can be determined using both LIBOR and the new SOFR products.
• Modify third-party reporting with the new SOFR products.

2. Create a program to educate your staff so they have answers to borrower questions, and

3. Talk to your legal counsel about creating a plan for existing contracts.

Read the Today's Lending Insight article.