A group of senators introduced legislation to provide guidance and a federal standard for contracts with interest rates based on the London-Inter-Bank Offered Rate (LIBOR) benchmark, which will expire in 2023.
The Economic Continuity and Stability Act would direct the Federal Reserve to determine replacement rates that can be used for contracts lacking fallback language. This would provide a safe harbor should the contract not specify a non-LIBOR replacement rate following the end of LIBOR.
“Businesses and consumers need certainty to thrive, and if we don’t act quickly to provide that certainty, it’s going to hurt Montanans through rates on their mortgages, student loans, and credit cards and their retirement investments,” U.S. Sen. Jon Tester (D-MT), one of the billʻs sponsors, said. “We need to address this issue preemptively to make sure Montanans are protected from rising costs and legal expenses.”
LIBOR is a financial tool that determines global interest rates for more than $200 trillion in contracts in the United States and worldwide. LIBOR rates are the foundation for many business loans, mortgages, student loans, and credit cards. In 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, said the rates will no longer be available, throwing financial and consumer contracts based on LIBOR rates into jeopardy. For the U.S. dollar, it will cease to be available in mid-2023.
“The LIBOR rate underpins roughly $200 trillion worth of contracts worldwide. With the phase-out of new LIBOR contracts beginning this year and the overall termination of the rate scheduled for 2023, it is critically important that Congress acts to provide a smooth transition away from LIBOR for financial institutions and consumers alike,” U.S. Sen. Thom Tillis (R-NC), another of the billʻs sponsors, said. “I am pleased that my work with Senators Tester, Toomey, and Brown on the Economic Continuity and Stability Act will provide an orderly transition away from LIBOR while still ensuring financial institutions can determine the rate best suited for them in future contracts.”
Along with Tester and Tillis, U.S. Sens. Sherrod Brown (D-OH) and Pat Toomey (R-PA) also sponsored the legislation.
“As our financial system transitions away from LIBOR, our students, homeowners, and consumers are at risk. It’s crucial we protect Americans with legacy loans from surprises,” Brown said. “I support my colleagues’ bipartisan bill to address the changes to loans that could harm borrowers or lead to unnecessary and costly litigation. Their work, along with the efforts of the banking regulators, industry, and consumer groups, will help ensure a smooth transition from LIBOR.”
A group of 23 financial trade associations wrote a letter to Senate leadership, endorsing the billʻs swift passage.
“As LIBOR is phased out, Congress must provide much-needed clarity to banks, borrowers, consumers, and investors regarding the interest rate on certain existing contracts that reference LIBOR,” Toomey said. “Our narrowly-tailored legislation achieves this objective by amending so-called ‘tough legacy contracts’ while ensuring that banks have the flexibility they need to choose interest rates on new contracts.”