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Will CFPB weigh in on an appropriate Libor replacement?

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So far, efforts to find a suitable replacement for the London interbank offered rate have largely considered the impact on investors, lenders and other financial market counterparties.

But one voice has been conspicuously missing: consumers.

Speakers at a panel at the Structured Finance Industry Group’s annual conference in Las Vegas on Sunday said that they would like to hear from consumers, or their advocates, as well.

“We’re not hearing from consumer groups, we’re not hearing from the CFPB,” said Jennifer Earyes, director of Treasury risk at Navient, one of the largest student loan servicers. She said that lenders and servicers need try to limit any harm to consumers – and any potential liability. So they are wary of making any decisions about replacing the benchmark on outstanding loans until the Consumer Financial Protection Bureau weighs in.

Stephen Kudenholt, co-chair of the capital markets practice at Dentons and another panelist, said that, ideally the CFPB or some other regulator could produce equivalency guidelines in order to limit any liability to lenders and servicers. But he conceded that it might not even be possible for regulators to cut off the private complaints.

Libor was first called into question when some of the world’s largest banks were discovered in the early part of the decade to have been manipulating it. Since then, the benchmark has fallen out of favor and is no longer considered a reliable gauge of market values.

The U.K. Financial Conduct Authority hastened its departure in July of last year, when it said that it will no longer require banks to contribute quotes by the end of 2021. The decision was not based on concerns about manipulation; rather, the regulator is concerned that the markets underlying Libor are shallow.

A committee formed by the Federal Reserve has selected a broad Treasury repo financing rate to be published by the New York Fed as its preferred replacement for U.S. financial instruments. But this benchmark is far from a perfect substitute. For starters, it does not yet exist. It would also be risk-free, unlike Libor, which is based on rates at which banks would lend to each other. And it has a single tenor, and so would less useful for longer-term instruments.

The vast majority of contracts that reference Libor are derivatives contracts that will expire long before Libor goes away. Much of the rest, including commercial mortgage bonds and collateralized loan obligations, can be called.

But many consumer loans that reference Libor, including mortgages and student loans, cannot be called, and will remain outstanding long after 2021.

One possibility is that the ICE Benchmark Administration will continue to publish Libor rates after 2021; Kudenholt and Earyes noted that there is nothing precluding the benchmark provider from doing so, assuming that banks remain willing to provide quotes.

They suggested that ICE President Timothy Bowler might speak to this at his keynote speech at the conference Monday.

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