3 ways credit unions can prepare for the LIBOR transition
Many credit union leaders know that the London Interbank Offered Rate, the most widely used short-term lending benchmark in the world, is being phased out. A new benchmark, the Secured Overnight Financing Rate (SOFR), will be replacing LIBOR completely as early as 2021.
Many credit union leaders might not be fully aware of the speed and impact of this transition. Ideally, as credit union leaders we should begin preparing for the transition now. The Federal Reserve Bank of New York is already publishing SOFR daily, and has urged financial institutions to stop using LIBOR as soon as possible.
Here are some tips to help your credit union navigate a successful transition:
1. Know your resources
Identify your exposures to LIBOR and assess your vulnerabilities. How many members and contracts will be affected? You should already be thinking about adding language to loan contracts that are LIBOR-based to more easily transition to SOFR. Consider also how many work hours that will require. For new adjustable-rate loans, make sure you’re crafting new fallback language, and that you’re using the SOFR rate.
NCUA is revising its Credit Union Profile form to collect information that will help determine credit unions’ exposure to LIBOR. Examiners will utilize the results to “assess credit unions’ exposure, governance, risk management and readiness,” according to Regulatory Report.
2. Educate your members
A total of $1.2 trillion in U.S. home mortgages, $3.4 trillion in business loans and $1.3 trillion in consumer retail loans are linked to LIBOR, so educating your members on the impacts of the transition is critical. Even if your loans are not tied to LIBOR, you may get questions from members, so make sure member service teams have talking points and answers to frequently asked questions.
It is important to communicate that this change does not mean credit unions will be charging higher prices to members; most monthly payments will stay the same. Also, not all members will be affected. Members with adjustable-rate mortgages (about half of mortgage loans in the U.S.), reverse mortgages and private student loans (8% of the student loan market) may be affected by the change.
Credit unions can also encourage members who have loans with other financial institutions to refinance if their loans will be affected. This could also be an opportunity to entice new members. Now is a great time to remind potential members that credit unions can provide better rates than banks, since earnings don’t go to shareholders.
3. Prepare your technology
The amount of preparation necessary will vary by scale. IT systems may need to be updated to reflect the new reference rate. Contract, tax and compliance departments may also require technology updates. Considering your IT needs now will help you budget appropriately.
As the changeover deadline approaches, consider creating a committee to oversee the transition. The change will affect member service, marketing, accounting, loans, financial advisors, technology and security departments. It is important to make sure all departments understand what the new benchmark means for their work, and what steps they need to take to ensure a smooth transition.