Independent Banker - June 2020 - 21

it's substantially similar to the bank's previous index or
method, and as long as the bank is prepared to explain its
choice to regulators and borrowers.
Considering SOFR?
In March, the Federal Reserve Bank of New York, in cooperation
with the Treasury Department's Office of Financial
Research, began publishing 30-day, 90-day and 180-day
SOFR averages, as well as a SOFR index, to support a successful
transition from LIBOR.
The New York Fed also released information about the
policies and procedures related to administration of the
SOFR averages and index. The information included the
calculation methodology, treatment of nonbusiness days
and a revision policy.
Tom Hauck, a managing director of advisory firm ProBank
Austin in Toledo, Ohio, says that in conversations
with his community bank clients, he's hearing they're still
very early in the process of preparing for the transition. His
clients are telling him that " no definite plans are in place. "
" Having said that, one of my bank clients was contacted
by the Federal Reserve, which regulates [the bank's] holding
company, asking questions about their process and
what they plan on doing, " Hauck says. " The examiners are
starting to ramp up their processes, so banks have to start
developing their plans. "
For community banks contemplating using SOFR, he
says, they will need to take time to monitor the New York
Fed's SOFR averages and index for each of the averages to
determine what kind of correlation each has with the rates
of the various terms of the U.S. Treasuries.
" Banks will want to make sure their customers are getting
a similar rate as they did before, so they will put an appropriate
spread over the index to achieve the similar rate, "
Hauck says. " For example, if a customer currently is paying
three-month LIBOR plus 200 basis points and the SOFR
rate is lower than three-month LIBOR, the bank will have
to adjust the spread to keep the customer's rate the same. "
It will take a number of months of published SOFR rates
to adequately determinate the correlation with LIBOR and
Treasury rates, so Hauck expects banks won't make their
final determination on whether to use SOFR until the end
of 2020 or early 2021.
For community banks making mortgage loans sold to
Fannie Mae and Freddie Mac, the Federal Housing Finance
Agency announced in February 2020 the following timeline
as the GSEs transition away from LIBOR:
Q New language will be required for single-family uniform
adjustable rate mortgage instruments closed on or after
June 1, 2020.
Q All LIBOR-based single-family and multifamily
adjustable-rate mortgages (ARMs) must have loan
application dates on or before Sept. 30, 2020, to be
eligible for acquisition.
Q Acquisitions of single-family and multifamily LIBOR
ARMs will cease on or before Dec. 31, 2020.
Community banks can look to vendors to help them
maintain and deliver loan document templates published
by GSEs, says Christine Heine, a principal consultant
based in St. Cloud, Minn., for Wolters Kluwer's Compliance
Center of Excellence.
For national and regional banks managing their own
release cycle, changes to language pertaining to the LIBOR
" At this point,
[community banks] are
keeping watchful eyes
and ears to see what they
can learn. "
-Anna Kooi, Wipfli LLP
switch was in Wolters Kluwer's March release of the updated
loan document templates, Heine says. For community
banks that do not manage their own release cycle and use
Wolters Kluwer's ComplianceOne software solution to generate
compliant loan documents, documents with updated
language were in its April software update.
" In the short term, banks need to decide what they will
replace LIBOR with, because they will no longer be able
to use it on agency paper with an application date after
Sept. 30, " Heine says. " If they are already using some
other index in addition to LIBOR, that may be easy: Just
only offer the other index. But if banks need to add another
index, there could also be changes to marketing materials
and their calculations systems or processes. "
Considering AMERIBOR or another method?
In February, 10 banks wrote a letter to banking regulators
that AMERIBOR would work better for them than SOFR,
which requires borrowers to post collateral like U.S. Treasuries
for the secured rate.
The group of banks, which according to Bloomberg have
assets ranging from $8 billion to $60 billion, wrote that
independentbanker.org Q 21
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