Frequently Asked Questions about LIBOR
1. What is LIBOR?
LIBOR stands for London Interbank Offered Rate. It is a benchmark interest rate that was meant to reflect interest rates major banks charge each other for short-term loans. Historically, LIBOR was used internationally as a benchmark or “reference rate” for setting rates on loans and other financial products. However, the Financial Conduct Authority (FCA), which regulates LIBOR, announced that representative LIBOR rates would no longer be available after June 2023. As a result, due to factors outside of our control, the financial industry is transitioning away from LIBOR, and all loans with interest rates based on LIBOR must transition to another index.
2. Does the LIBOR transition only impact United Community Bank and its customers?
No, the transition is happening worldwide. All financial institutions with loans referencing LIBOR will be impacted.
3. How will I know if my loan with United Community Bank will be impacted by this change?
All United Community Bank customers that currently have loans based on LIBOR will be impacted by this change and contacted in advance of the transition. You don’t need to take any action.
4. Which index has United Community Bank selected to replace LIBOR?
The Federal Reserve Board and the New York Fed convened the Alternative Reference Rates Committee (“ARRC") to guide the industry's successful transition from LIBOR. In addition, the Federal Reserve has adopted regulations (the “Final Rule”) implementing the Adjustable Interest Rate (LIBOR) Act that was signed by President Biden on March 15, 2022 (the “Act”).
Based on the Final Rule and the Act, commercial loans will transition from LIBOR to CME Term SOFR, plus certain spread adjustments specified by Congress.
The Final Rule also sets out special rules for consumer loans, like adjustable rate mortgages and HELOCs. Consumer loans will transition from LIBOR to Refinitiv USD IBOR Consumer Cash Fallbacks (the “Consumer Replacement Index”), which is based on CME Term SOFR and is comparable to LIBOR. More information about the Consumer Replacement Index is available at Refinitiv’s website: https://www.refinitiv.com/usdiborconsumercashfallbacks
Some loans may reference the ICE Swap Rate index (also sometimes referred to as the “swap rate,” “constant maturity swap rate,” or “ISDAFIX”). Because LIBOR is a component used to determine the swap rate index, that index will also no longer be available after June 30, 2023. Loans that reference the swap rate will transition to the USD SOFR Spread-Adjusted ICE Swap Rate index, which is calculated in accordance with the methodology suggested by ARRC.
5. What is SOFR?
SOFR stands for “Secured Overnight Financing Rate.” SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The index is based on transactions in the Treasury repurchase market, where banks and investors borrow (or loan) Treasuries overnight. For more information on how SOFR is calculated, please visit newyorkfed.org/markets/reference-rates/sofr
. New index values are published each business day by the Federal Reserve Bank of New York.
Term SOFR is forward-looking measurement of SOFR rates published by CME Group
Benchmark Administration, Ltd. Please visit https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html
for more information about Term SOFR.
6. Will the adjustable interest rate I pay increase as result of the LIBOR transition?
The interest rate for all adjustable rate loans (also called “floating” or “variable” rate loans) are subject to increases or decreases over time regardless of the index used to calculate the rate. The actual impact on your interest rate or payment cannot be determined until your next regularly-scheduled change date.
The transition from LIBOR will not
affect your interest rate during any period when your loan contract provides for a fixed rate. Similarly, any maximum or minimum rates specified in your loan contract will not be affected.
7. If I have an interest rate swap with United Community Bank that references LIBOR, how will I be impacted?
United Community Bank will contact you in advance of June 30, 2023 regarding transition of your loan and interest rate swap to spread-adjusted Term SOFR.