Compliance: Start from a place of ‘yes’

Compliance: NCUA issues letters on LIBOR transition

May 24, 2021

NCUA recently issued both a Letter to Credit Unions (21-CU-03) and a related Supervisory Letter (21-01) on the transition from the London Inter-Bank Offered Rate (LIBOR). CUNA’s CompBlog examines both letters in detail in a recent entry.

The LIBOR administrator announced in March it will stop publishing the one-week and two-month LIBOR settings immediately following the Dec. 31, 2021, LIBOR publication. The remaining LIBOR settings will cease immediately following the LIBOR publication on June 30, 2023.

“While the extension of the publication of certain LIBOR settings through June 30, 2023, is not an opportunity to continue using LIBOR, it will allow some legacy LIBOR contracts to mature naturally,” NCUA’s letter reads. “The NCUA encourages all federally insured credit unions to transition away from using the U.S. dollar LIBOR settings as soon as possible, but no later than Dec. 31, 2021.”

Failure to prepare for LIBOR disruptions could undermine a federally insured credit union’s financial stability, and safety and soundness, NCUA notes.

The Federal Financial Institutions Examination Council’s (FFIEC) July 1, 2020, Joint Statement on Managing the LIBOR Transition recommends that new financial contracts use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.

Potential areas for LIBOR exposure include such areas as those below:

  • Customized adjustable rate mortgages (ARMs) or Non-Conforming ARMs;
  • Student Loans;
  • Auto loans;
  • Credit card loans; and
  • Shares, if any indexes used to reprice share accounts are LIBOR-based.