In anticipation of the transition away from LIBOR in 2021, NRMLA’s outside counsel, Weiner Brodsky Kider PC, published a comprehensive article that highlights efforts underway by the Alternative Reference Rates Committee (ARRC) to find a replacement and potential servicing issues and concerns.
The firm notes that for existing legacy LIBOR-indexed single-family closed-end ARM loans and open-end variable rate HELOCs, the contract language in the loan documents control the relationship between the parties. On existing LIBOR-based single-family ARM loans, the contract typically states that if the reference rate is no longer available, the note holder has the right to choose a new, comparable index.
“However, existing ARM loan contracts often do not specify how to determine if the index – in this case, LIBOR – is ‘no longer available,’ or if a new index is comparable to LIBOR,” the firm says. “Additionally, such ARM loan contracts typically do not address explicitly whether the note holder can adjust the margin that is added to the reference rate to determine the interest rate. The absence of express authority in the notes to adjust the margin can become an issue if the replacement index is lower or higher than LIBOR.” To learn more, read the full article.