With the inclusion of the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) as Division U of H.R. 2471, Consolidated Appropriations Act, 2022 (the “Appropriations Act”) passed by the U.S. House of Representatives on 9 March 2022 and the Senate on 10 March 2022, the United States is on the cusp of a federal solution for legacy LIBOR-linked contracts that contain inadequate fallback provisions, or none at all. Indeed, the final version of the legislation provides additional legal certainty with respect to the use of non-SOFR benchmarks not included in the earlier version of the legislation passed by the U.S. House of Representatives.

Background

The search for a legislative solution to the problem of legacy contracts linked to the London InterBank Offered Rate (“LIBOR”) that are impossible, or virtually impossible, to amend, and that lack fallback provisions that implement a replacement rate that is not linked to LIBOR or that do not result in a fixed interest rate, began with the passage by the New York legislature of Senate Bill S297B on 24 March 2021. Shortly thereafter, Alabama passed the LIBOR Discontinuance and Replacement Act of 2021—a virtually identical bill—on 29 April 2021. On 8 December 2021 the U.S. House of Representatives passed H.R. 4616, the Adjustable Interest Rate (LIBOR) Act in order to provide a federal solution for LIBOR-linked contracts that need to transition away from LIBOR but that lack the mechanics to do so.[1]

On 28 February 2022, Senator Jon Tester (D-MT), along with U.S. Senate Banking Committee Chair Sherrod Brown (D-OH), Ranking Member Pat Toomey (R-PA), and Senator Thom Tillis (R-NC), announced that they planned to introduce their own LIBOR-transition legislation. This legislation made a number of revisions that tightened the language of the House bill and offered three substantive changes: new protections for banks that use non-SOFR benchmarks; broader coverage that includes any interbank offered rate, not LIBOR only; and tax provisions that confirm that amendments to a financial contract that implement transition to a replacement benchmark for LIBOR, and nothing more, will not be treated as a taxable sale, exchange or other disposition of property for purposes of section 1001 of the Internal Revenue Code.

As federal legislation has worked its way through the U.S. Congress, seven states now have proposed or adopted LIBOR transition legislation, including New York, Alabama, Florida (House and Senate versions), Georgia, Indiana, Nebraska, and Tennessee. However, the passage of the LIBOR Act will provide a federal solution to LIBOR transition for legacy contracts, supersede state legislation to date, and eliminate the need for additional state-level legislation.

Appropriations Act Version and Status

The LIBOR Act, as incorporated into the Appropriations Act, differs from the original House version of the bill in several ways. The major differences are as follows:

  1. Use of non-SOFR replacement benchmarks – Section 106 of the LIBOR Act includes the so-called Toomey amendment, which limits the ability of bank regulators to take enforcement action against any bank that uses a replacement benchmark other than SOFR in loan transactions. The additional provision represents a legislative response to concerns of various regulatory bodies regarding the adoption by regulated institutions of alternate replacement benchmarks that are not based on SOFR, such as the Bloomberg Short Term Bank Yield Index, or BSBY. Under the LIBOR Act, a bank regulator cannot take enforcement actions against a bank that uses an alternate reference rate other than SOFR “… solely because that benchmark is not SOFR.” The bill sets forth a number of criteria that a bank should use in determining whether to use a non-SOFR reference rate, none of which directly addresses regulators’ concern about using a reference rate that raises “inverse pyramid” concerns, or is otherwise not “robust.”
  2. Spread adjustments for consumer loans – Section 104(e)(2) of the LIBOR Act includes language that modifies benchmark spread adjustments applicable to consumer loans during the one-year period beginning on the LIBOR replacement date.
  3. Subsequent Federal Reserve regulations – Section 110 of the LIBOR Act requires the Federal Reserve Board to promulgate regulations to carry out the provisions of the legislation within 180 days after the date of enactment.

Also of note is the fact that, apparently due to jurisdictional considerations, the tax provision proposed in the Senate legislation ultimately was dropped from the final legislation introduced in the U.S. Senate on 8 March 2022.[2]

At this time, the Appropriations Act has been sent to President Biden for signature, which is expected imminently.

[1]  See our blog post, Adjustable Interest Rate (LIBOR) Act of 2021 Is Passed by the U.S. House of Representatives, 9 December 2021.

[2]  In the Senate, the Senate Finance Committee has jurisdiction over any bill that includes any changes to the Internal Revenue Code. Hence, had the tax provision not been removed, the legislation would have been referred to the Senate Finance Committee, rather than the Senate Banking Committee, on which its sponsor and co-sponsors sit.

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