Federal law to the rescue? (The Senate version) | Arent Fox Schiff


Federal law to the rescue? (The Senate version)

LIBOR relief included in the appropriations bill

New York law concerns[1]

New York law enacted in April 2021 provides for the “Get Out of Jail” card[2] for banks in disputes related to the transition from LIBOR (London InterBank Offered Rate), whether the recommended reference and spread adjustments are applied or not.

Parallel legislation has been passed by:

  • Alabama
  • Florida
  • Georgia House of Representatives
  • Indiana
  • Nebraska Legislature
  • Tennessee

Legislation of the United States House of Representatives

In December 2021, by a vote of 415 to 9, the United States House of Representatives passed legislation (HR 4616) sponsored by Congressman Brad Sherman (D-CA). This legislation was generally fair and reasonable for banks and borrowers in the transition from LIBOR, but not without some concerns about the requirement to adjust spreads from the International Swaps and Derivatives Association.[3]

US Senate Legislation/Federal Law Enacted

On March 8, 2022, related LIBOR legislation was first introduced in the US Senate. However, this legislation, which was signed into law on March 15 as part of the Consolidated Appropriations Act, presents significant problems.


Typically, an appropriations bill would deal with – you guessed it, appropriations:[4]

  • Agriculture, Rural Development and FDA (Division A)
  • Commerce, Justice and Science (Division B)
  • Defense (C Division)
  • Energy and Water Development (Division D)
  • Financial Services and Public Administration (E Division)
  • Homeland Security (F Division)
  • Interior and Environment (Division G)
  • Labour, Health and Social Services and Education (H Division)
  • Legislative power (Section I)
  • Military Construction and Veterans Affairs (J&S Divisions)
  • Foreign Operations and Intelligence (K & X Divisions)
  • Transportation and HUD (L Division)

Special credits

It was essential that certain special appropriations be included in the Consolidated Appropriations Act to deal with the following recent significant events:

  • COVID (M Division)
  • Ukraine (N Division)
  • Haiti (V Division)

Miscellaneous legislation

Other than appropriations and the last bullet point, the following made minor or contemplated changes to the existing law:

  • Health (Division P – Telehealth)
  • Consumer Protection (Q Division)
  • Credit Union Governance (T Division)
  • Reform EB-5 (BB Division)
  • Adjustable Interest Rate (LIBOR) Act (U Division)


Typically, the appropriations for each division were finalized in the House of Representatives in July 2021 and taken up in the Senate no later than October 2021. This excludes provisions for Ukraine aid and COVID, which were considered recently given world events.

The only significant exception to the above was Division U which was signed into law in the House in December, introduced the same day the Ukrainian relief package was introduced in the Senate, but completely different from the generally fair and reasonable HR 4616 and closer to New York’s LIBOR law.


Section U lists valid reasons for adopting it as part of the LIBOR transition:

  • implementation of a clear and uniform process
  • prevention of unnecessary litigation

However, there is no provision in Division U that requires the effective interest rate immediately before and after the transition from LIBOR to be “substantially equivalent” as required by the Internal Revenue Service (IRS) in order to ensure a fair and reasonable transition from LIBOR. . To see ‘IRS LIBOR Transition Rules’ below.

Parallel regulatory guidelines had been provided by U.S. banking regulators, though this is now prohibited by the U Division. To see “Prohibition of Regulatory Actions” below.

Inapplicability to non-bank loans

Division U does not cover loans made by non-bank institutions. Examples of non-banks include FinTech lenders, hedge funds, and some student lenders.

No negative presumption

Division U specifically excludes any negative inference or presumption if a Federal Reserve-approved benchmark is not used in the LIBOR transition. Presumably, this is intended to protect a financial institution from challenges if a regulator-approved benchmark is not used as part of the LIBOR transition, but may not protect against other benchmarks that are not commercially reasonable.

It should be noted that regulators have expressed concerns that the alternatives could be subject to the same manipulation as LIBOR.

Consumer loans

During the first year of the LIBOR transition, under the U division, the benchmark rate is determined on June 29, 2023, the day before the scheduled end date of LIBOR. There will likely be significant escalations in LIBOR rates a month before the scheduled end date, let alone a day before.

This is particularly relevant if a benchmark not approved by the Federal Reserve is selected, as benchmark spread adjustments will not be predetermined but rather determined at the discretion of the lender on the rate lock date.

Student loans

With respect to special allowances for student loans, Division U permits the permanent waiver of all contractual, statutory, and other legal rights relating to such special allowances.

Trust deeds

Division U provides that the rights of bondholders, where the related trust deed is subject to the Trust Deeds Act 1939, are not impaired or affected by Division U. This is contrary to the general requirement under which the consent of each bondholder must be obtained for a change of interest. financing rate.

It would be an understandable change if the interest rate immediately before and after the transition from LIBOR were to be substantially equivalent, however, this is specifically not a Division U requirement as noted above.

Ask how tax-exempt bondholders, where the trust deed is not subject to the Trust Deeds Act, will be affected in light of Division U.

Prohibition of regulatory actions

Pursuant to the provisions of Division U, federal and state regulators cannot take any enforcement action, provide regulatory guidance, or even initiate any “matters needing attention” if a Secured Overnight Funding Rate (SOFR) n was not used as a reference.

These alternatives include the Bloomberg Short-Term Bank Yield Index (BSBY), Ameribor and any other alternative benchmark developed by the financial industry, including, but not limited to, LIBOR.

These alternative indices, with the exception of Term SOFR, have not been approved by federal regulators because there are concerns that the alternatives could be subject to manipulation similar to LIBOR.

The following regulators are specifically prohibited from taking such actions:

  • Treasury
  • Commodity Futures Trading Commission (CFTC)
  • Consumer Financial Protection Bureau (CFPB)
  • Federal Deposit Insurance Corporation (FDIC)
  • National Credit Union Administration (NCUA)
  • Office of the Comptroller of the Currency (OCC)
  • Securities and Exchange Commission (SEC)
  • State banking/securities departments and agencies
  • Federal Reserve

Interestingly, the Federal Reserve is responsible for issuing regulations to implement the U division.

IRS LIBOR transition rules

On January 4, 2022, the IRS released final regulations, along with amendments to the Internal Revenue Code and related guidance (the “IRS LIBOR Transition Rules”).

The IRS LIBOR transition rules were issued in order to avoid (i) the triggering of a tax event as a result of the LIBOR transition for the borrower or lender, (ii) costly transition expenses (for example, breaches of contract, bankruptcies, litigation) and (iii) significant disruptions in the US financial market.

Among other things, the IRS LIBOR transition rules provide safe harbors if:

  • the fair market value of the contract immediately before and after the modification is “substantially equivalent” (within 25 basis points)
  • SOFR or Term SOFR is used
  • other benchmarks approved by the Federal Reserve or recommended by the ARRC are used (currently, no other benchmarks are so approved or recommended)
  • arm’s length negotiations between the parties to the transition

IRS LIBOR transition rules became effective for benchmark transition changes entered into on or after March 7, 2022.[5]

Next steps

To the extent that a party believes that it is disadvantaged by the adoption of Division U, the only alternatives are:

  • enactment of ameliorative federal laws
  • modification of industry standard contracts to address the negative impacts of the U division

[1] To see the section entitled ‘Material Adverse Impacts of Proposed New York Legislation’ in ‘The End of LIBOR: The Twilight ZoneTM Edition’ Customer alertdated March 11, 2021.

[2] To see Monopoly board games, card games and online games – Hasbro MonopolyTM board game from Hasbro, Inc., an American-Canadian multinational conglomerate.

[3] To see the section titled “But – Significant Concerns Related to Spread Adjustments” in the Customer alert entitled “Federal law to the rescue?” from November 3, 2021, with Michael Lengel.

[4] Division references refer to enacted federal legislation, but have not been analyzed to confirm that the legislation specifically addressed appropriations only.

[5] It should be noted that a proposed version of Division U was introduced in the Senate on March 2, shortly before the IRS LIBOR transition rules took effect. This proposed version included language that reduced or eliminated the effectiveness of the IRS LIBOR transition rules. Fortunately, when passed by the Senate the following week, these provisions were removed and not included in Division U.

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