Millions of Borrowers will be Put at Risk by the Student Loan Industry’s Failure to Prepare for the LIBOR Transition and Move to Other Reference Rates
December 8, 2021 | WASHINGTON, DC — Yesterday, the Consumer Financial Protection Bureau (CFPB) announced that it had finalized a rule to facilitate the financial services industry’s transition away from the London Interbank Offered Rate (LIBOR), a benchmark interest rate index that underlies trillions of dollars of financial contracts. The SBPC has been closely involved in efforts to protect borrowers during this transition, including by co-chairing a subgroup within the Alternative Reference Rates Committee (ARRC) aimed at addressing issues related to legacy student loan contracts that will be outstanding at the time of LIBOR cessation.
In response, Student Borrower Protection Center Head of Investigations and Senior Policy Advisor Ben Kaufman issued the following statement:
“The announcement of the Bureau’s final rule is a key step forward in efforts to protect consumers during the upcoming transition away from LIBOR and to accelerate the adoption of appropriate SOFR-based replacement rates. The Bureau’s action will help ensure that borrowers don’t suffer further for a change that they neither caused nor called for, but which was made necessary by industry scandal at the height of the last financial crisis.
“However, many of the largest financial institutions in the world—which regularly hound student loan borrowers for payments that are days late or pennies short—remain entirely unprepared for the end of LIBOR. These firms have had a decade to prepare for LIBOR’s cessation and even received an extension of deadlines for this massive event during COVID. Nevertheless, these companies continue to put student loan borrowers at risk by still basing new student loan contracts on LIBOR. Further, there is little evidence that these companies have incorporated any of the contractual language the ARRC generously provided them regarding fallbacks to other rates at the time of LIBOR’s end.
“The SBPC intends to remain extremely vigilant as the CFPB’s June 2023 deadline for movement away from LIBOR approaches. As federal regulators have been saying for years, but as appears still not to have resonated with industry, these deadlines will arrive—and the time for excuses has long passed.”
LIBOR, the London Inter-Bank Offered Rate, was a benchmark interest rate underlying $800 trillion of financial assets. During the last financial crisis, it came to light that LIBOR was being rigged by the bankers on whose expertise it depended—sometimes so that they could rob struggling American cities for millions of dollars, and sometimes just to score leftover sushi from their friends.
In 2014, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC), a consortium of private and public-sector stakeholders tasked with finding a new global benchmark index to replace LIBOR. The ARRC recommended the Secured Overnight Financing Rate (SOFR) as its preferred replacement to LIBOR in 2017. SOFR is based on actual transactions in the massive market for overnight loans backed by Treasury securities, making it more robust than LIBOR and less susceptible to manipulation.
The SBPC has repeatedly warned that the contracts underlying many private student loans grant note holders broad authority to select new index rates in the event of LIBOR’s discontinuation, as well as to modify key aspects of the loan upon a new index’s adoption. These terms open the door for industry to attempt to offload the cost of the transition away from LIBOR onto borrowers. If that happens, borrowers will have extremely limited avenues for recourse, as most private student loan contracts contain mandatory arbitration clauses and class-action waivers.
Read the SBPC’s blog on how the transition away from LIBOR puts student loan borrowers at risk: Are Millions of Student Loan Borrowers About to Pay for Banks’ LIBOR Fraud?
Read the SBPC and coalition partners’ comments on the CFPB’s initial proposal for a rule to facilitate the transition from LIBOR here.
Read the SBPC and coalition partners’ comments to the Alternative Reference Rates Committee on proposed fallback language for private student loan contracts to address the end of LIBOR here.
Read the SBPC and coalition partners’ comments to the Alternative Reference Rates Committee on proposed spread adjustments to SOFR-based rates here.
The Student Borrower Protection Center is a nonprofit organization focused on alleviating the burden of student debt for millions of Americans. The SBPC engages in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance economic opportunity for the next generation of students.