Adjustable Interest Rate (LIBOR) Act

On March 15, 2022, President Biden signed the Consolidated Appropriations Act of 2022. One part of that 2,741-page omnibus bill is the Adjustable Interest Rate (LIBOR) Act, which solves an immense challenge: how to transition “tough legacy contracts” that use LIBOR as a benchmark for adjustable interest rates to another benchmark, once LIBOR is permanently discontinued after June 30, 2023 (the “LIBOR replacement date”). Without a clear benchmark replacement, the parties to tough legacy contracts could be left without a benchmark to use, or have their intended variable rate converted into a fixed rate — results that are bound to create unintended consequences, uncertainty and litigation risk.

The new statute provides, among other things, that:

• a default alternative benchmark selected by the Board of Governors of the Federal Reserve System based on the Secured Overnight Financing Rate (“SOFR”) published by the New York Federal Reserve Bank will apply after the LIBOR replacement date for any contract that does not contain a fallback provision that identifies either a specific alternative benchmark or a person with the authority to select such an alternative benchmark (“determining person”) (§ 104(b));
• any reference in a fallback provision that is based on LIBOR or requires polling for quotes on lending or deposit rates will be null and void after the LIBOR replacement date (§ 104(b));
• if a determining person under a contract selects the SOFR-based Board-selected benchmark replacement, that selection will, by law, be irrevocable and will be used in any determination of the applicable rate under that contract after the LIBOR replacement date (§ 104(c)(2)); and
• if a determining person under a contract does not select a benchmark replacement before the LIBOR replacement date, then the Board-selected benchmark replacement automatically applies to that contract (§ 104(c)(3)).

To reduce the litigation risk created by replacing the benchmark that the parties to a contract originally agreed on, the statute also provides that as long as the Board-selected benchmark replacement is selected or used:

• the person responsible under a contract for determining values is not required to obtain the consent of anyone before determining values based on that benchmark replacement (§ 104(d)(2));
• selection of that Board-selected benchmark replacement by law constitutes substantial performance of any obligation to use LIBOR as a benchmark, and that benchmark replacement is considered (i) a commercially reasonable replacement for LIBOR, (ii) a rate that is comparable or analogous to LIBOR, (iii) a replacement that is based on a methodology and information similar to that underlying LIBOR, and (iv) a replacement that is deemed to have historical fluctuations that are substantially similar to those of LIBOR for purposes of the Truth in Lending Act and its associated regulations (§ 105(a));
• selection or use of such a Board-selected benchmark replacement with respect to a contract cannot be deemed a breach of that contract or an impairment of the right of any person to receive payment under that contract, cannot excuse any party from performance of that contract, cannot give any person to the right unilaterally to terminate that contract, and cannot void that contract (§ 105(b)); and
• no person can be held liable for selecting or using a Board-selected benchmark replacement (§ 105(c)).

The new statute also specifies that the transition from LIBOR to the Board-selected benchmark replacement for consumer loans be phased in over a one-year period, to avoid abrupt changes in interest rates for consumers (§ 104(e)(2)). During the one-year period after LIBOR is discontinued, the Board-selected benchmark replacement for consumer loans must be adjusted linearly by a fraction of the difference between the Board-selected benchmark replacement and the LIBOR rate that existed immediately prior to the LIBOR replacement date.

Section 107 of the statute expressly preempts any state or local statute or regulation relating to the selection or use of a benchmark replacement (and so preempts New York’s and Alabama’s LIBOR transition statutes that were enacted last year). Sections 108 and 109, respectively, amend the Trust Indenture Act and the Higher Education Act to conform to the replacement of LIBOR as the benchmark under contracts and loans governed by those statutes.

Finally, § 110 of the new statute authorizes the Board of the Federal Reserve to promulgate regulations under the statute within six months of its enactment.