NYDFS Requires Regulated Institutions to Submit Their Plans for LIBOR Transition

The New York Department of Financial Services (“NYDFS”) recently issued an industry letter to institutions that it regulates including depository institutions (banks, credit unions, and savings associations), non-depository institutions (including licensed lenders, mortgage companies, and premium finance companies), and property, health and life insurance companies directing them to submit transition plans for the discontinuation of the London Interbank Offered Rate (“LIBOR”). 

The NYDFS emphasizes a need for institutions to prepare for the cessation and transition away from LIBOR at the end of 2021.  Resultantly, the NYDFS is seeking assurance that regulated institutions’ boards of directors or equivalent governing authorities “fully understand and have assessed the risks associated with the potential cessation of LIBOR, have developed an appropriate plan to manage them, and have initiated actions to facilitate transition to alternative reference rates.” 

Each NYDFS-regulated institution is required to submit a response by February 7, 2020, describing the institution’s transition plans, which should include the following:

1. programs that would identify, measure, monitor and manage all financial and non-financial risks of transition,
2. processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties,
3. processes for communications with customers and counterparties,
4. a process and plan for operation readiness, including related accounting, tax, and reporting aspects of such transition, and
5. the governance framework, including oversight by the board of directors, or the equivalent governing authority, of the regulated institutions.

The NYDFS notes that while LIBOR-based residential mortgage loans typically include language that gives the lender the option to choose a comparable rate if LIBOR is no longer available, a change to the interest rate basis in a consumer loan presents various types of risks that must be considered and managed to minimize the adverse impact on both consumers and financial markets.

DocMagic will continue to monitor for updates regarding the discontinuation of LIBOR.  If you have questions about the information in this article, please contact DocMagic’s Compliance Department.