The Alternative Reference Rates Committee (ARRC) released
guidance Thursday afternoon on how the Secured Overnight
Financing Rate (SOFR) can be used when issuing newly
adjustable-rate mortgages (ARMs). The move was welcomed by
other members of the US financial regulatory arena, including
the Federal Housing Finance Agency (FHFA), the Federal Reserve
and the Consumer Financial Protection Bureau (CFPB).
The ARRC, a group of private-market participants established
by the Federal Reserve Board and the New York Fed. Their
guidance highlights the key points to consider when using SOFR
in newly issued ARMs as they relate to borrowers, originators,
servicers and investors.
Federal Reserve vice chair for supervision, Randal Quarles,
said: "The official sector has emphasised the need to move away
from Libor, and it is encouraging to see the ARRC and leaders
in the mortgage industry putting forward creative solutions
that offer consumers competitive alternatives."
"This work demonstrates that it is possible to develop new
options for consumers using SOFR that can be made available
well before the end of 2021, when Libor may stop," he
"It is possible to develop
new options for consumers using SOFR that can be made
available well before the end of 2021"
The white paper itself highlights the thoughts of the
Consumer Products Working Group. Among other considerations, it
suggests that these financial products should either explicitly
or implicitly use an average rate SOFR, not a single reading of
the overnight rate, in determining payments on floating-rate
It also says they should not use SOFR in arrears because
consumers would be given very short notice periods; and, states
that new ARM product based on SOFR should be structured to fit
the needs of consumers and be offered at rates and terms
consistent with, and as determined by, the competitive markets
in which they are transacted.
CFPB likened to predator-protection agency under
These consumer focused moves, intended to ensure that the
industry stays competitive yet fair for mortgage buyers, were
welcomed by the new CFPB director Kathleen Kraninger. Kraninger
has been widely criticised since she was confirmed as the
permanent director, with Dennis Kelleher of Better Markets
suggesting that, under her leadership,
the CFPB: "is being transformed from a consumer
protection agency into a predator protection agency".
That being said, the ARRC's move has drawn a positive
reaction from Kraninger. "The CFPB is committed to working with
the other ex-officio members of the ARRC to help the market
successfully transition away from Libor," she said.
"Today’s release of the white paper relating to
adjustable rate mortgages by the ARRC is an important step in
helping all market participants, including consumers, to move
away from Libor in a transparent, orderly, and fair
Tom Wipf, chairman of the ARRC and vice chairman of
institutional securities at Morgan Stanley, said that the white
paper demonstrates SOFR can be used to benefit consumers. "The
paper shows that there are ways to avoid subjecting consumers
to the risks inherent in Libor. It is possible to use SOFR now
to develop products that are built on a robust reference rate
that is firmly grounded in market transactions," he said.
See also in Practice Insight:
Libor fallbacks still not aligned across
This is the ARRC's first move to ease the transition at the
consumer level, with previous iterations looking at investor
grade concerns such as
bi-lateral business loans. Previously the guidance has been
in the form of fallback language that can be used to
recalibrate existing contracts that reference IBORs so that
they reference SOFR instead.
"It is possible to use SOFR
now to develop products that are built on a robust
reference rate that is firmly grounded in market
Today's white paper, however, addresses how US residential
ARMs, and those in other countries referencing US markets, can
initiate a new SOFR based product from the outset. There are
issues however, such as the suggestion that the less
representative rates could push up initial rates for
newly-issued SOFR based ARM products.
FHFA principal deputy director, Adolfo Marzol, commended the
work of the ARRC and the release today of the white paper
outlining a framework for developing newly-originated consumer
residential products. "The FHFA is committed to the important
work of developing a path to a successful transition away from
Libor," he said.
This release is yet another example of the Fed and the New
York Fed taking steps to ensure that it stays ahead of the
curve in making sure it is prepared when the time inevitably
See also in Practice Insight:
Loan market still concerned by lack of term Libor