Adjustable-rate mortgages (ARMs) occupy a valued place in residential lending at Orion, as well as other areas like commercial loans. The percent of loans being locked in that are adjustable vary from week to week, and our brokers know that Orion offers several ARM programs that help a variety of borrowers. Our AEs are well versed in describing the attributes of ARMs, including the start rate, adjustment capsand periods, and indices.

We bring this up because the Federal Reserve Board issued a final rule in December that establishes default rules for benchmark replacements in certain contracts that use the London Interbank Offered Rate (LIBOR) as a reference rate. LIBOR will be discontinued in June 2023. The rule implements the Adjustable Interest Rate (LIBOR) Act, which was enacted in March 2022.

Congressenacted the LIBOR Act to provide a uniform, nationwide solution for replacing references to LIBOR in existing contracts with no or inadequate fallback provisions, meaning no or inadequate contract provisions for determining analternative reference rate. For these contracts, the final rule replaces references to LIBOR in the contracts with the applicable Board-selected replacement rate after June 30, 2023 and identifies five separate Fed-selected replacement reference rates for different types of contracts, including consumer credit transactions. Each replacement reference rate is based on the Secured Overnight Financing Rate (SOFR).

The majority of Orion’s loans go to Fannie Mae and Freddie Mac, and they announced there placement indices for the legacy LIBOR loans and securities for which Fannie and Freddie are responsible for selecting the replacement index. The replacement indices match the benchmark replacements recommended by the Federal Reserve Board and are based on the Secured Overnight Financing Rate (SOFR). The transition to these replacement indices will occur the day after June 30, 2023.

Brokers probably already know that the Consumer Finance Protection Bureau addressed the discontinuation of LIBOR through Regulation Z and Official Staff Commentary amendments issued in December 2021. The final rule became effective on April 1, 2022, with the exception of certain changes to two post-consummation disclosure forms that become effective on October 1, 2023.

The CFPB’s final rule added a new provision that allows HELOC creditors and card issuers (subject to contractual limitations) to replace a LIBOR-based index with a replacement index and margin on or after April 1, 2021, including an index based on the SOFR. It was recommended using the 12-month SOFR term rate to replace 12-month LIBOR rates.

In the formal ending of using LIBOR, and the move into SOFR, there is a lot of technical language about closed-end credit, Regulation Z, closed-end adjustable-rate notes, and safe harbor provisions. Orion’s brokers and your clients should know that our compliance team is on top of the changes, and has already made necessary adjustments to our ARM line-up.

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