Skip to main content

GSEs to Modify ARM Note Language in Preparation for Discontinuance of LIBOR

Gavin T. Ales
Feb 25, 2020
Photo credit: Getty Images/Sundaemorning

On Nov. 15, 2019, the Alternative Reference Rates Committee (ARRC) released “recommended contractual fallback language” for closed-end, residential adjustable-rate mortgages (ARMs). Following this announcement, Fannie Mae and Freddie Mac (GSEs) both released statements that they will adopt the recommended language and anticipate publishing updates to uniform ARM notes and other legal documents for ARMs as early as the first quarter of 2020. The GSEs have both indicated that they plan to “work closely with ARRC, the Federal Housing Finance Agency, and other industry participants throughout the transition away from LIBOR” which is expected to be phased out at the end of 2021.
Gavin T. Ales is Chief Compliance Officer with Torrance, Calif.-based DocMagic Inc.
ARRC is a group of private-market participants that was convened in 2014 by the Federal Reserve Board and the New York Fed, in cooperation with the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, and other federal agencies to identify alternative reference rates for U.S. dollar (USD) LIBOR. In 2017, ARRC identified the alternative index, Secured Overnight Financing Rate (SOFR), which is based on repurchase agreement index rates on U.S. Treasury securities. ARRC later released a Paced Transition Plan that includes timeline recommendations for the adoption of the alternate index.
ARRC states that the newly released contractual fallback language was “developed with the goal of reducing the risk of serious market disruption in the event that LIBOR is no longer usable.” The contract language is meant to be considered for use in new closed-end, residential ARM loans, and its use is completely voluntary.
Currently, the Index section of most standard ARM notes state that “If the index is no longer available, the Note Holder will choose a new index that is based upon comparable information.” Although the contract language allows lenders to replace the index if LIBOR is no longer available, it does not provide any guidance regarding the process.
In addition to updates to the Index and Calculation of Changes sections, the ARRC recommendations include sample language for a whole new section of the note, entitled “Replacement Index and Replacement Margin.” The section states that the index will be deemed as no longer available and will be replaced if either “Replacement Event” occurs:
►The Administrator has permanently or indefinitely stopped providing the Index to the general public; or
►The Administrator or its regulator issues an official public statement that the Index is no longer reliable or representative.
The more defined language in the new section provides consumers with clarity on when a replacement index can be selected if the current LIBOR index is no longer available and goes on to further outline the process for selection of a “Replacement Index” and “Replacement Margin.”

Gavin T. Ales is chief compliance officer with Torrance, Calif.-based DocMagic Inc. He may be reached by phone at (800) 649-1362, ext. 6446 or e-mail [email protected].

This Sponsored Editorial originally appeared in the December 2019 print edition of National Mortgage Professional Magazine. 

Feb 25, 2020
CFPB Names 4 To Key Senior Positions

The appointees include two who helped create the bureau and two who served on the CFPB staff during the Obama administration.

Regulation and Compliance
Oct 14, 2021
FHFA Raises Enterprises' Multifamily Loan Purchase Caps

The Federal Housing Finance Agency (FHFA) said the 2022 multifamily loan purchase caps will be $78 billion for each Enterprise, for a combined total of $156 billion to support the multifamily market.

Regulation and Compliance
Oct 13, 2021
CFPB Hits AAG With Complaint For Deceptive Marketing Of Reverse Mortgages

The Consumer Financial Protection Bureau filed a complaint and proposed consent order, which alleges that American Advisors Group (AAG) used inflated and deceptive home estimates to attract reverse mortgage consumers.

Regulation and Compliance
Oct 12, 2021
Waterstone Mortgage Names VP Of Compliance

Waterstone Mortgage Corporation named Kris Barros as the company's vice president of compliance.

Oct 08, 2021
Battling The ‘Giant Purple Snorklewacker’

The confirmation of Rohit Chopra as CFPB director has the mortgage industry anxious, but former MBA CEO David Stevens offers some advice: follow the rules.

Regulation and Compliance
Oct 08, 2021
The Compliance Contradiction

Staunch compliance stances often lead to contradictory actions.

Regulation and Compliance
Oct 06, 2021