    [Senate Hearing 117-357]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-357

            THE LIBOR TRANSITION: PROTECTING CONSUMERS AND INVESTORS

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

      EXAMINING HOW THE FINANCIAL SYSTEM CAN MOVE ON FROM THE LIBOR SYSTEM
                                   __________

                                NOVEMBER 2, 2021
                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

                      [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov/

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE

    48-451   PDF               WASHINGTON : 2023

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                         SHERROD BROWN, Ohio, Chairman

    JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
    ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
    JON TESTER, Montana                  MIKE CRAPO, Idaho
    MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
    ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
    CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
    CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
    TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
    KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
    JON OSSOFF, Georgia                  JERRY MORAN, Kansas
    RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                         STEVE DAINES, Montana

                         Laura Swanson, Staff Director

                     Brad Grantz, Republican Staff Director

                           Elisha Tuku, Chief Counsel

                     Dan Sullivan, Republican Chief Counsel

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                                      (ii)

                                C O N T E N T S

                                  ----------

                           TUESDAY, NOVEMBER 2, 2021

                                                                       Page

    Opening statement of Chairman Brown..............................     1
            Prepared statement.......................................    26

    Opening statements, comments, or prepared statements of:
        Senator Toomey...............................................     3
            Prepared statement.......................................    27

                                   WITNESSES

    Thomas Wipf, Chair of The Alternative Reference Rate Committee
      (ARRC) and Managing Director, Morgan Stanley...................     5
        Prepared statement...........................................    28
        Responses to written questions of:
            Senator Warren...........................................    43
    Andrew Pizor, Staff Attorney, National Consumer Law Center.......     7
        Prepared statement...........................................    30
        Responses to written questions of:
            Senator Warren...........................................    44
    J. Christopher Giancarlo, Senior Counsel, Willkie Farr &
      Gallagher LLP, and Former Chairman, U.S. Commodity Futures
      Trading Commission.............................................     8
        Prepared statement...........................................    34
    Michael Bright, Chief Executive Officer, Structured Finance
      Association....................................................    10
        Prepared statement...........................................    38

                  Additional Material Supplied for the Record

    ICBA letter......................................................    46
    LIBOR letter.....................................................    47
    CAMAC letter.....................................................    49
    NAFCU letter.....................................................    50
    Brookline Bank letter............................................    51
    Statement submitted by SIFMA.....................................    52

                                     (iii)

            THE LIBOR TRANSITION: PROTECTING CONSUMERS AND INVESTORS

                                  ----------

                           TUESDAY, NOVEMBER 2, 2021

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10 a.m., via Webex and in room 538,
    Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
    the Committee, presiding.

              OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

        Chairman Brown. The Committee on Banking, Housing, and
    Urban Affairs will come to order. Welcome to the witnesses, who
    I will introduce in a moment.
        This hearing is in a hybrid format. Members have the option
    to appear either in person or virtually. I think all my
    colleagues know the rules of that and the procedures. Our
    speaking order will be as usual, that is by seniority of the
    Members who have checked in before the gavel comes down, either
    in person or virtually, and then by seniority of Members
    arriving later, alternating between Republicans and Democrats.
        I often begin these hearings by taking us back to 2008, and
    to the years that followed, because we are still living with
    the fallout, and in the case of the LIBOR scandal, we are still
    cleaning up a mess caused by the biggest banks in the world,
    still cleaning up a mess more than a decade later.
        As the housing market crashed and more than eight million
    workers lost their jobs, central bankers began to realize just
    how many markets were broken in the global economy.
        One of those was the interest rate system. Most people had
    never heard, maybe still have never heard of LIBOR. Like so
    much in the financial system, it is an opaque term for
    something that affects millions of people's bills and bank
    accounts and ultimately lives. LIBOR has been the most widely
    used interest rate benchmark around the world. It is used to
    set payments for millions of student loans, mortgages, and
    small business and auto loans. Some $300 trillion--three
    hundred thousand billion dollars--was tied to LIBOR at its
    peak. With that kind of money involved, it should surprise no
    one that bankers figured out a way to conspire to rig the
    interest rate, to enrich themselves.
        After the scandal broke in 2012, uncovering the banks'
    manipulation of LIBOR, this Committee and the Federal financial
    regulators studied the problems to determine who was at fault.
    U.S. and foreign regulators imposed billions of dollars in
    fines on several global banks for manipulating the interest
    rate and taking advantage of consumers and investors.
        Now, nearly a decade later, our financial system is finally
    transitioning away from LIBOR. Today we will consider how the
    financial system can move on from this benchmark set by a
    handful of the world's largest banks, a system we found out was
    ripe for exploitation. Part of that transition involves dealing
    with trillions of dollars in legacy contracts tied to LIBOR,
    and that will continue after the rate is discontinued in June
    of the year after next, of 2023.
        After a slow start, the Federal Reserve Bank of New York
    and the Federal Reserve Board here, along with industry
    stakeholders and consumer advocates, have established a path
    forward. They developed, as we know, a new, more reliable and
    transparent benchmark rate called SOFR, the Secured Overnight
    Financing Rate, and they have put forward a framework to
    address legacy loans and contracts that were written assuming
    that LIBOR would always exist.
        Because LIBOR is so widely used, homeowners and students
    who have never heard of LIBOR will be at risk when it is
    discontinued if we do not take action, and I am particularly
    appreciative of Senator Tester and Elizabeth and the work they
    are doing, and Senator Tillis also on that. If their loans do
    not have specific instructions about what happens if LIBOR
    disappears, or if their loans give loan servicers the
    discretion to pick a different rate, those borrowers would be
    in for a shock.
        Small and large businesses could be in a similar situation,
    forced to negotiate a loan tied to LIBOR at a time when they
    are just getting back on their feet from the pandemic.
        Banking agency officials and stakeholders have all said
    Federal legislation would help address those long-term loans
    and contracts, and reduce the potential for time-consuming and
    costly litigation.
        Our colleagues on House Financial Services began bipartisan
    work on a bill that addresses these problems, and as I
    mentioned, Senators Tester and Tillis are preparing a Senate
    companion. If done right, this legislation can help borrowers
    who do not have the ability to bargain with their student loan
    lender or mortgage banker, while also providing certainty to
    lenders. We know we need to act, and I appreciate these efforts
    by Members of our Committee.
        Under the current proposal, lenders with legacy contracts
    that do not specify a LIBOR alternative can transition to SOFR,
    so long as they do not make other changes that could harm
    borrowers. That would allow them to avoid potentially
    complicated litigation.
        It is frustrating that we are forced to spend taxpayers'
    time and money cleaning up after the biggest banks, again and
    again and again. Unfortunately, if we do not work to mitigate
    the damage from another big bank scandal it is always family
    businesses and homeowners and students and consumers who will
    pay the price.
        Our witnesses and their organizations have developed a
    narrow and consistent solution that protects small businesses,
    and families with mortgages, and Americans paying off student
    loans.
        I look forward to hearing from our witnesses, and to
    working with my colleagues to protect consumers and to protect
    the economy. We have proven we can come together on this
    Committee. We try to do it often and we succeed sometimes, to
    find areas of agreement, and to advance commonsense solutions
    for the people whom we serve. My hope is we can do the same on
    LIBOR.
        Senator Toomey.

             OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

        Senator Toomey. Thank you, Mr. Chairman, and welcome, and
    thank you to our witnesses today.
        LIBOR, the London Interbank Offered Rate, has long been the
    most widely used U.S. dollar-denominated benchmark interest
    rate across all types of financial contracts. In 2013, the G20
    launched a global review of interest rate benchmarks after
    cases of misconduct in the reporting of LIBOR rates by a small
    number of banks and the significant decline in interbank
    lending volumes.
        As the breadth and depth of interbank loan deposit market
    liquidity greatly diminished it became clear that alternative
    rates with greater volume and a larger number of market
    participants would be more appropriate than LIBOR. In the
    United States, the Federal Reserve Board and the New York Fed
    convened the Alternative Reference Rates Committee, or ARRC, to
    identify an alternative to LIBOR.
        In 2017, the ARRC identified the Secured Overnight
    Financing Rate, or SOFR, as its recommended alternative. SOFR
    measures the cost of overnight or short-term borrowings
    collateralized by U.S. Treasury securities.
        Last year, the Fed, FDIC, and OCC directed banks to stop
    entering into new LIBOR contracts as soon as possible and no
    later than the end of 2021. The administrator of LIBOR will
    stop publishing all LIBOR settings by June 30, 2023. And
    although most existing contracts referencing LIBOR will have
    matured by that date, a number of contracts will not, and some
    lack the fallback language to replace LIBOR with a non-LIBOR
    index. As a result, many have called for Federal legislation to
    address these so-called ``tough legacy contracts.''
        Now I agree banks should stop writing new LIBOR contracts
    as soon as it is practical, and Federal legislation is likely
    needed to address tough legacy contracts. The unique and
    anomalous circumstances related to the LIBOR transition
    probably require action by Congress to amend contracts between
    private parties, but such congressional action should be a last
    resort.
        As we consider this measure, any legislation that addresses
    these tough legacy contracts must be very narrowly tailored,
    should not change the equities of these contracts, and they
    certainly should not affect any new contracts.
        In July, the House Financial Services Committee approved a
    bill that would replace LIBOR in these legacy contracts with a
    Fed-selected, SOFR-based benchmark. The bill takes a reasonable
    approach, and the Senate should carefully review it. In so
    doing, we should consider targeted amendments, such as ensuring
    that qualified non-SOFR benchmark rates are not disfavored in
    future contracts.
        While it is appropriate to mandate a SOFR-based index for
    this relatively small universe of tough legacy contracts, for
    new contracts banks should have the option to choose among
    qualified benchmark rates, including credit-sensitive rates, to
    the extent they are appropriate for their business models.
    Risk-free rates like SOFR may work well for some derivatives
    contracts and for some institutions active in the Treasury repo
    market, but they may not be well-suited for loans or certain
    community or regional banks.
        The funding costs for such banks typically increase
    relative to SOFR during periods of stress, which could create
    an asset-liability mismatch if loans were required to reference
    only SOFR. The Fed, FDIC, and OCC have previously acknowledged
    this dynamic. They have said the use of SOFR is voluntary and a
    bank may use, and I quote, ``any reference rate for its loans
    that the bank determines to be appropriate for its funding
    model and customer needs,'' end quote.
        An even broader group of regulators said, in the context of
    bank lending, that, and I quote, ``supervisors will not
    criticize firms solely for using a reference rate (or rates)
    other than SOFR,'' end quote. I think that is very important,
    which is why I am concerned this may be what the Biden
    administration financial regulators are actually not pursuing.
        Just last week, the Acting Comptroller of the Currency said
    the OCC's supervisory efforts will, quote, ``initially focus on
    non-SOFR rates,'' end quote, which suggests to me that the OCC
    may apply heightened supervisory scrutiny to non-SOFR rates.
    And last month, a senior New York Fed official said that banks
    that use a non-SOFR rate must do, quote, ``extra work,'' end
    quote, to ensure that the bank is, quote, ``demonstrably making
    a responsible decision,'' end quote.
        The SEC Chairman, Gary Gensler, has been even more
    explicit. On multiple occasions he has criticized one
    particular credit-sensitive rate. So these statements raise
    serious concerns that regulators, some regulators, are pressing
    all banks to use SOFR without any transparency or public input.
    It seems to me if a bank wants to price its loan off a rate it
    believes is a better reflection of its cost of funding or its
    customer needs than SOFR and regulators should not prohibit the
    bank from doing so.
        This pressure, however, pales in comparison to the
    preferred approach of President Biden's proposed nominee to
    lead the OCC. Professor Saule Omarova has written that widely
    used benchmark rates should either be preapproved by the
    Government, or worse, subject to, quote, ``utility-style
    regulation,'' end quote. In other words, the Government, not
    the market, would have a direct role in actually setting
    benchmark rates as it deems appropriate.
        This is just one example of the many radical ideas that
    Professor Omarova has proposed that demonstrate a clear
    aversion for democratic capitalism, and a clear preference for
    an administrative State where economic and market decisions are
    made by technocrats who think they know more than the market.
        Regulators should never disfavor qualified rates, and banks
    should have the choice to use any rate that meets well-
    established criteria for benchmark rates.
        I hope to hear from today's witnesses about the transition
    from LIBOR, the potential for targeted Federal legislation to
    address these tough legacy contracts, and ways to preserve
    benchmark rate choice.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Toomey.
        I will introduce today's witnesses. Mr. Thomas Wipf serves
    as Chair of the Alternative Reference Rate Committee, which was
    convened by the Federal Reserve Board to help ensure successful
    transition from LIBOR to a more modest reference rate. Mr. Wipf
    is a Managing Director at Morgan Stanley.
        Mr. Andrew Pizor is Staff Attorney at the National Consumer
    Law Center's Washington office, where he works on issues
    related to mortgage financing and defending homeowners from
    foreclosures. He has served as an expert witness on mortgage
    origination and servicing issues.
        The Honorable Christopher Giancarlo is a Senior Counsel at
    Willkie Farr & Gallagher and previous Chair of the Commodity
    Futures Trading Commission. I often saw him on the Agriculture
    Committee and sometimes here. In that role, he oversaw
    regulation of futures options and swaps derivatives markets. He
    has testified often about financial and derivatives markets
    before Congress and to the EU Parliament.
        Mr. Michael Bright, also no stranger here, is Chief
    Executive Officer of the Structured Financial Association. He
    is Executive Vice President and COO of Government National
    Mortgage Association, Ginnie Mae. He was a director at the
    Milken Institute Center for Financial Markets, and we first
    worked with him when he worked in the office of Senator Robert
    Corker.
        Mr. Wipf, please begin. You are recognized for 5 minutes.

     STATEMENT OF THOMAS WIPF, CHAIR OF THE ALTERNATIVE REFERENCE
      RATE COMMITTEE (ARRC) AND MANAGING DIRECTOR, MORGAN STANLEY

        Mr. Wipf. Thank you, Chairman Brown, Ranking Member Toomey,
    and Members of the Committee. I am honored to be here today on
    behalf of the Alternative Reference Rates Committee, the ARRC,
    to testify on the need for Federal legislation to address U.S.
    dollar LIBOR transition for legacy products and support the
    efforts of the Committee to bring that to fruition.
        The ARRC is comprised both of a broad set of private-sector
    firms and associations representing a range of perspectives on
    the LIBOR transition as well as a broad set of U.S. agencies,
    including the Federal Reserve, the CFTC, the SEC, Treasury, the
    OCC, the FDIC, and the FHFA, who observe our work. We were
    convened by the Federal Reserve Board and the Federal Reserve
    Bank of New York in 2014, in order to help address the
    financial stability risks that the Financial Stability
    Oversight Council had publicly identified concerning the use of
    LIBOR in the financial system.
        ARRC working groups have involved thousands of participants
    across more than 300 different institutions including lenders,
    borrowers, investors, and consumer advocacy groups. The ARRC
    has estimated that U.S. dollar LIBOR is referenced in over $200
    trillion notional financial contracts alone, and that roughly a
    third of these contracts will remain outstanding as of June 30,
    2023, when LIBOR will cease.
        The ARRC was convened to help facilitate a smooth
    transition and was asked to identify a robust alternative to
    U.S. dollar LIBOR, one that was appropriate to base trillions
    of dollars of contracts on, and to address risks to legacy
    LIBOR contracts.
        The ARRC selected the Secured Overnight Financing Rate, or
    SOFR, which is the U.S. Treasury repo market, as its
    recommended alternative, based on the fact that it is by far
    the most robust alternative to LIBOR available.
        There will always be a U.S. Treasury repo market both in
    good times and bad, and based on the widespread support from a
    broad range of market participants including end users and
    borrowers, we now expect that many market participants will
    choose to use SOFR, and many have already done so or are
    actively preparing to do so. However, we also support choice,
    and we have been clear since our inception that our
    recommendations are voluntary. At the end of the day, the
    market will determine which rates are used in the future.
        For many existing legacy contracts that reference LIBOR,
    however, things are much less simple. Many legacy non-financial
    corporate contracts referencing LIBOR have no fallback language
    whatsoever. Many financial contracts have fallbacks that would
    require parties to poll an unnamed set of banks in an attempt
    to recreate LIBOR, which we believe would be both burdensome
    and unsuccessful. Others refer only to the last published value
    of LIBOR, effectively converting what were floating-rate
    instruments into fixed-rate instruments. These contracts are
    difficult or impossible to change in the absence of a
    legislative solution. Without legislation, parties to these
    tough legacy contracts will face significant operational and
    market disruptions, contractual disputes, and economic
    hardship.
        To help address this risk to these tough legacy contracts,
    the ARRC developed and promoted legislation for contracts
    governed by New York law to avoid the disruptions, market
    uncertainties, and confusion that would otherwise occur when
    LIBOR ends. The passage of State legislation in New York, and
    subsequently also in Alabama, has been extraordinarily
    important, helping to address the risks of the LIBOR
    transition. In particular, many financial contracts are covered
    under New York law. However, we know that many nonfinancial
    corporate contracts, consumer loans, and securitizations are
    not covered.
        So while the ARRC is prepared to advocate for similar
    legislation in other States, we cannot reasonably hope for a
    comparable legislative solution in all 50 States and the
    District of Columbia. Federal legislation can help to ensure an
    equal outcome for all Americans. The legislative proposal
    before your Committee would help to ensure that equal outcome.
        As with the legislation passed in New York and Alabama, the
    legislative proposal is purposefully narrow, intended only to
    address contracts that could not otherwise be changed. For
    contracts that already allow one party the right to choose a
    new rate, a feature of most consumer contracts referencing
    LIBOR, the proposed legislation does not alter the right of the
    designated party to determine the successor rate, but the
    legislation does provide safe harbor to encourage a choice
    based on SOFR, which has had the strong support of consumer
    advocacy groups in addition to lenders and investors, and this
    is intended to help ensure that consumers are treated fairly in
    this transition.
        For contracts that have no fallback language or language
    that only refers only to a poll of banks or some past value of
    LIBOR, the proposed legislation recognizes that a unique
    successor rate must be named in order to avoid legal conflict.
    We believe that this form of tailored legislation is
    appropriate and necessary to avoid disruption to the economy.
        We support the legislative proposal before your Committee,
    are grateful for your consideration of it, and on behalf of the
    ARRC I thank you.
        Chairman Brown. Thank you, Mr. Wipf. Mr. Pizor, you are
    recognized for 5 minutes. Thank you for joining us.

     STATEMENT OF ANDREW PIZOR, STAFF ATTORNEY, NATIONAL CONSUMER
                               LAW CENTER

        Mr. Pizor. Chairman Brown, Senator Toomey, and Members of
    the Committee, we thank you for the opportunity to testify
    today on the importance of protecting consumers from
    potentially higher loan costs that could be triggered when the
    benchmark LIBOR index ends. I provide my testimony here today
    on behalf of NCLC's low-income clients.
        My primary message is to encourage the Senate to support
    H.R. 4616 but within a central change, a more limited safe
    harbor. With this change, H.R. 4616 will protect both consumers
    and the credit industry from possibly devastating consequences
    from the transition away from the LIBOR.
        The LIBOR is used to adjust the rate on more than $1
    trillion of consumer mortgages, student loans, and other credit
    contracts. When LIBOR ends in less than 2 years, the credit
    industry must substitute a new index. If the transition is not
    done correctly the resulting higher loan payments could force
    millions of consumers into default and lead to widespread
    litigation against industry.
        The typical adjustable-rate loan allows the creditor broad
    discretion to choose a replacement index, but there is no exact
    replacement for the LIBOR. So without clear legal protections,
    both consumers and industry could be at risk, consumers from
    higher payments that could trigger defaults and industry from
    lost profits and litigation.
        Additionally, some contracts require other adjustments when
    a new index is used. These adjustments are called conforming
    changes because they bring the contract into conformity with
    the replacement index. However, there is no consensus on how to
    determine what these conforming changes are or their legality.
        Based on our experience with predatory lending and problems
    in the loan servicing industry, we are concerned that some
    companies may abuse or mismanage their discretion by trying to
    gouge consumers. There are several possible scenarios for how
    this could happen. Our biggest fear is that the lender could
    pick a replacement index that unfairly increases the loan
    payments, or under the guise of conforming changes a lender
    might change the method for calculating payments or the margin
    used to set the interest rate. Consumers have no control over
    this process. If harmed, their only recourse will be to sue.
        Because this issue affects such a broad range of the
    economy, industry participants, Government regulators, and
    consumers groups have been meeting to discuss possible
    solutions. These meetings have produced a consensus that the
    best replacement for the LIBOR is the SOFR. But these groups
    cannot force anyone to use it, and it is not clear how many
    companies will voluntarily adopt it for legacy contracts. We
    understand that note-holders are delaying this decision because
    of concern over litigation risk.
        Currently the House is considering H.R. 4616. This bill
    includes several provisions that deal with replacing the LIBOR.
    For consumers, the single most important creates a safe harbor
    for note-holders that voluntarily use the appropriate version
    of the SOFR to replace the LIBOR.
        The current bill includes broad immunity from lawsuits when
    SOFR is selected and the related conforming changes are made.
    We support the concept of a safe harbor, but the current
    language is just too broad and could allow bad actors to escape
    responsibility, even when they hurt consumers.
        Now we have discussed this problem with industry and we
    have agreed on some adjustments to the safe harbor language
    that would enable us to support it. My written testimony has
    the details on this point.
        But overall, it is very important for Congress to adopt
    legislation that encourages note-holders to use the SOFR in
    legacy contracts when the LIBOR ends. This is important enough
    that we are actually supporting creating a safe harbor for
    note-holders, something we would not normally do, but it is
    equally important that the safe harbor be narrowly tailored so
    it is not abused.
        I want to conclude by thanking industry, the Members of
    this Committee, and the House Committee for working with us to
    find a solution that helps everyone, and I am happy to answer
    any questions you may have. Thank you.
        Chairman Brown. Thank you. Mr. Giancarlo, you are
    recognized for 5 minutes. Thank you for joining us.

    STATEMENT OF J. CHRISTOPHER GIANCARLO, SENIOR COUNSEL, WILLKIE
       FARR & GALLAGHER LLP, AND FORMER CHAIRMAN, U.S. COMMODITY
                       FUTURES TRADING COMMISSION

        Mr. Giancarlo. Chairman Brown, Ranking Member Toomey, and
    Members of the Committee, thank you very much. It is good to be
    before you once again.
        I am Chris Giancarlo, Senior Counsel at Willkie Farr &
    Gallagher. I am the former Chairman of the CFTC, an agency that
    has led and continues to lead the transition away from LIBOR. I
    am also an independent director of the American Financial
    Exchange.
        I have extensive experience both as a market regulator and
    as a business executive with financial benchmarks, and
    particularly with LIBOR. During my 5 years at the CFTC I
    traveled across the country to meet with Americans and
    businesses who depend on futures markets to hedge the prices of
    products and commodities they produce. I walked factor floors
    in Illinois, pecan farms in Georgia, grain elevators in
    Montana, feed lots in Kansas, and power plants in Ohio. I went
    900 feet underground in a Kentucky coal mine, 90 feet in the
    air in a North Dakota natural gas rig, and flew 900 feet in the
    air in an Arkansas crop duster.
        Almost all of the small and medium-sized businesses that I
    met were supported by America's community, minority, and
    regional banks. I support open and competitive U.S. markets,
    but my comments today are frankly less about the need for
    competition but more about choice of complementary benchmarks.
        America's trading markets feature a diverse set of pricing
    benchmarks serving different needs. In our grain futures
    markets, there are multiple pricing benchmarks, including
    Chicago's soft red winter wheat, Kansas City hard red winter
    wheat, and Minneapolis hard red spring wheat. The different
    benchmarks serve to establish the cost of different varieties
    of wheat used in different bread products. Pizza dough, for
    example, is made from different wheat than breakfast cereals.
        In our oil markets there are also different benchmarks.
    West Texas Intermediate and Brent crude oil, again, setting
    distinct prices for different fuel products like domestic auto
    gas or industrial oil.
        And, of course, in our equity markets there are multiple
    benchmarks like the Dow Jones Industrials, the S&P 500, and the
    Russell 2000 to measure the different performance of large
    multinationals compared to early stage growth companies.
        Such variety of specifically designed benchmarks allows
    market participants to make choices that are right for their
    investment needs rather than a one-size-fits-all approach.
    Choice of benchmarks is a reason why U.S. futures and equity
    markets are the envy of the world.
        Strangely, one U.S. market that has not a similar range of
    choice of benchmarks is bank lending, where LIBOR has been
    dominant for decades. In fact, the ubiquity of LIBOR in
    American commercial lending is one of the reasons why ending it
    presents such a potential crisis today. Lack of choice of
    benchmark is itself a systemic risk.
        The United States banking industry is unlike any other in
    the world. On one hand, our large money center and Wall Street
    investment banks lead the world in global trading, investment
    banking, and large project finance. But on the other hand, our
    community, our minority, and our regional banks spread out
    across the urban, suburban, and rural landscape finance the
    everyday needs of America's consumers, small and medium-sized
    businesses, minority communities, and domestic job creators.
        A banking industry that is so varied, so complex, and so
    essential to our economy needs the diversity and durability
    that comes from choice of interest rate benchmark. A one-size-
    fits-all approach would be a source of systemic risk to the
    U.S. economy.
        As we move away from LIBOR, we must be clear that lending
    institutions, be they large money center banks or local,
    regional, or MDI banks, should have the flexibility to choose
    amongst appropriate benchmark alternatives that meet their
    customer needs.
        I urge you to consider legislation ensuring that America's
    community lenders have the ability to choose among sound and
    properly qualified benchmark replacement that meet the
    international standards based upon robust markets with
    transparent price discovery. Having choice among multiple
    qualified benchmarks not only facilitates the transition away
    from LIBOR but it also enhances efficiency, reduces systemic
    risk, and encourages economic growth for generations to come.
        Thank you.
        Chairman Brown. Thank you. Mr. Bright, welcome to the
    Committee. You are recognized for 5 minutes.

         STATEMENT OF MICHAEL BRIGHT, CHIEF EXECUTIVE OFFICER,
                     STRUCTURED FINANCE ASSOCIATION

        Mr. Bright. Chairman Brown, Ranking Member Toomey, and
    other Members of the Committee, my name is Michael Bright, CEO
    of the Structured Finance Association, or SFA. On behalf of the
    member companies of SFA I thank you for inviting me to testify.
    I also thank you for your focus on finalizing the transition
    away from LIBOR for millions of consumers and investors.
        The Structured Finance Association is a consensus-driven
    trade association with over 370 institutional members. SFA
    members include issuers and investors, data and analytic firms,
    law firms, servicers, accounting firms, and trustees.
    Importantly, our investor firms are fiduciaries to their
    clients. Unlike some trade associations, before we take any
    advocacy position our governance requires us to achieve
    consensus rather than a simple majority.
        Let me first make abundantly clear that many of SFA member
    companies were impacted by the LIBOR scandal. We need to ensure
    that this never happens again. Contracts based on a floating
    rate index must be able to rely on the integrity of that index.
    This is a critical component of the work SFA is engaged in
    today.
        The cessation of LIBOR has been an enormous challenge
    overhanging the capital markets since 2017. At that time, the
    Financial Conduct Authority, LIBOR's regulator based in London,
    announced that the production of LIBOR would likely end in
    2021. Over the subsequent years, extensive progress has been
    made to move away from these rates. Today, out of over $200
    trillion of contracts that are tied to LIBOR in the U.S.,
    nearly all have managed to put in place a plan for transition.
        Even with this multiyear effort, however, SFA estimates
    that roughly $16 trillion of contracts have no realistic means
    to be renegotiated and amended. These so-called ``tough legacy
    contract'' were made prior to knowing LIBOR was going away.
    These include mortgages, student loans and business loans, and
    therefore impact a broad range of American households and
    communities. Sixteen trillion dollars is a large sum, posing
    serious risk to the financial system.
        After lengthy deliberation and debate, a consensus position
    across the entire market has emerged that a Federal safe harbor
    for the transition of these tough legacy contracts is the only
    option to avoid costly litigation and consumer disruption. The
    many other alternatives examined simply did not work. We now
    see that absent Federal legislation to provide a safe harbor,
    retirees and savers will be forced to absorb tens of billions
    of dollars in legal costs.
        But legislation can offer a solution. A tailored safe
    harbor can provide certainty for all parties in a LIBOR
    contract. If done properly, SFA believes that legislation will
    respect some important principles. For one, legislation to
    address LIBOR should not create any value transfer among
    contractual parties. The safe harbor should be as narrow as
    possible. Legislation should not impact choices of rates for
    new contracts but should instead focus solely on legacy
    contracts. And finally, legislation should not disrupt
    contracts that have adequate fallback language in them already.
        With these principles in mind, SFA is strongly supportive
    of the bill that recently passed out of the House Financial
    Services Committee. Simultaneously, on behalf of the entire
    membership of SFA, I specifically want to thank Senators Tester
    and Tillis for the leadership they are providing on this issue
    in the Senate. We are here to provide any assistance that you
    all need.
        Timing is critical. While market participants are working
    tirelessly to transition contracts that allow it, loans and
    tough legacy contracts are in limbo. Rulemaking by the Fed
    takes time, as will implementation of those rules. So while the
    formal date for the end of most LIBOR rates is now mid-2023,
    the problems and legal costs begin much sooner.
        In conclusion, let me thank you all again for your focus on
    helping to move our markets away from LIBOR once and for all.
    This work is critical to ensuring that all investors,
    consumers, and businesses are treated fairly. It also will help
    to prevent billions of dollars of potential litigation where no
    one wins but savers and retirees foot the bill.
        Thank you, and I look forward to answering any questions
    that you have.
        Chairman Brown. Thank you, Mr. Bright. All of you obviously
    have been essential in your work on the LIBOR transition. I
    would like to ask each of you, and I will start with Mr. Wipf,
    to concisely and briefly just tell us why it is important to
    have Federal legislation to deal with the problematic legacy
    loans and contracts. Mr. Wipf.
        Mr. Wipf. Thank you, Senator. As it relates to tough
    legacy, as we work through this, there have been many, many
    contracts that will be amended bilaterally by market
    participants. As we get down to the most challenging contracts
    with a tough legacy it is critical that we have legislation to
    the extent that it will help smooth that over, and as has been
    mentioned here, minimize value transfer, and present a fair,
    effective, and clear approach. And that clarity to reduce
    uncertainty for those borrowers and lenders in those contracts
    will be critical, and I think time is of the essence because we
    are really in a position where absent a solution, many of those
    note-holders and others may have to take action away from that.
        So our goal really here is to present that fair, effective,
    and clear solution to those toughest legacy contracts, which
    really is one of the final pieces of this transition puzzle and
    will help us close the book on this.
        Chairman Brown. Mr. Pizor.
        Mr. Pizor. Thank you. We are concerned that the industry is
    just paralyzed by litigation risk at this point. They need some
    clarity because they are worried that no matter what index they
    choose they are going to be sued. If payments go up or if
    payments go down, consumers and investors will be affected.
        So our first choice would be that Congress require use of
    the SOFR in legacy contracts, but we understand that is not
    going to happen. So we think a safe harbor will be a good
    inducement to choose the SOFR. It will eliminate the litigation
    risk and we are confident that it has been carefully vetted
    that it is the closest to the LIBOR.
        Congress needs to do this because there just is not time
    for all 50 States to do it, and that will provide the clear
    guidance, clear playing field for the legacy contracts to move
    forward until they are terminated.
        Chairman Brown. Thank you. Mr. Giancarlo.
        Mr. Giancarlo. Quite briefly, it is about moving away from
    the benchmark that is deeply engrained to the U.S. economy and
    has been for four or five decades now, underlying so much of
    what we do, from the consumer level all the way up to our large
    institutions, and to do so in a way to move away from this with
    a minimum amount of adverse impact on our economy, legal costs,
    legal uncertainty, economic costs. So it is about clarity,
    legal certainty, and reducing the trauma to the economy of this
    transition.
        Chairman Brown. Mr. Bright.
        Mr. Bright. Yeah. Echoing everything everyone here has
    said, without legislation, contractual parties are going to see
    court guidance on what rates to use, and if they do that,
    consumers will get different rates and maybe disparate
    treatment there, and also importantly, that costs a lot of
    money, tens of billions of dollars, we estimate. Those costs
    float down through to the investor because often savers,
    retirees, and so it is just court costs that we should avoid.
        Chairman Brown. Thank you. Mr. Pizor, you mentioned the
    discussions among consumer and industry groups on consensus
    language to further tailor the legislation to better protect
    consumers. Give me your thoughts on why that is important,
    benefiting borrowers and lenders.
        Mr. Pizor. I am sorry. I did not hear your quite----
        Chairman Brown. Why those changes protecting consumers are
    important and why they would benefit borrowers and lenders?
        Mr. Pizor. Well, there are certain expectations that all
    the parties have had going into these contracts. And again, I
    just want to emphasize we are focusing on the legacy contracts.
    People have had expectations about what the LIBOR would do,
    what their rates would be like in the future. And so it is
    appropriate that whatever index replaces that should be as
    close as possible to the LIBOR to match those expectations, and
    that will be the SOFR.
        Now we are willing to support a safe harbor to encourage
    companies to do this, but it needs to be properly tailored so
    the safe harbor only encourages selection of the SOFR and
    making appropriate conforming changes. We do not want bad
    actors to see this as an opportunity to encourage some extra
    transfer of value.
        The current language in the House bill, we are concerned,
    is so broad that it would allow bad actors to escape liability
    for taking opportunity to gouge consumers. But we think we have
    agreed with industry on some substitute language that will meet
    everyone's needs. It will give a safe harbor for doing the
    proper conforming changes, for choosing the SOFR, but it will
    not allow people to run amok. And we think it is a very viable
    option.
        Chairman Brown. Thank you. Mr. Wipf, last question. LIBOR
    will not be published until June 2023, as you know, and you and
    ARRC and other stakeholders have indicated it is important for
    Congress to act soon, even though that is 2 years away. Mr.
    Bright said timing is critical just a moment ago. What will
    that lead time allow for? Is there a risk of acting too slowly?
        Mr. Wipf. Yes, I think there is. I think our history in the
    New York legislation gives us a sense that that builds a lot of
    confidence. So as market participants see these outcomes taking
    place and they see progress on these legislative paths that
    gives comfort to the market and I think allows good market
    functioning while these things take place. But we are in a
    pretty short time zone with 18 months after the end of this
    year that, you know, you think about investors that hold these
    securities, borrowers and lenders who do not have the ability
    to amend these contracts may have to take other action, whether
    that be--you know, and we want to reduce the prospect of fire
    sale on these securities and we want to reduce the prospect of,
    you know, litigation as we get there.
        But the goal really is to provide that confidence to the
    market that we are moving down a path, and I think that
    certainly the New York State legislation showed us that that
    can be helpful, so I think we are in a pretty tight shot clock
    right now.
        Chairman Brown. Thank you. Thank you all. Senator Toomey.
        Senator Toomey. Thanks, Mr. Chairman. For Chairman
    Giancarlo, in your testimony you talked about two fatal flaws
    that required and led to the transition of LIBOR. One was the
    shallowness of liquidity, by which I think you were referring
    to a thin trading volume. The other one was the narrowness of
    liquidity, as you put it, by which I think you meant a small
    number of banks that would participate in establishing LIBOR.
        So it seems that a problem with inadequate liquidity is
    that the rate that is determined might not accurately reflect
    actual borrowing and lending costs, and therein lies problem.
    So could you help explain for us how it is that SOFR, Ameribor,
    and maybe other alternatives rates avoid these pitfalls, which
    is the shallowness and narrowness of liquidity not a problem in
    these other rates?
        Mr. Giancarlo. Thank you, Senator Toomey. You know, both at
    my 5 years at the CFTC but also the decade and a half I spent
    before that as a senior executive of a firm that actually
    managed marketplaces for market makers, one of the largest
    marketplaces for a range of sophisticated financial products
    called swaps, and others, so I have spent part of my
    professional career considering the challenge of liquidity in
    trading markets.
        And there is a phrase called the ``liquidity puzzle,'' that
    people that are active in marketplaces understand. Liquidity is
    never one number or one feature. There are a number of facets
    that go into liquidity. And LIBOR suffered from a failure in at
    least two of the most important facets, and that is that the
    trading volume was actually quite shallow. In a number of the
    tenors of LIBOR there is less than a dozen trades a day. But
    another factor was the limited number of actually participants
    in that market, a half dozen or so Wall Street banks.
        So there is a lot that goes into healthy liquidity. As we
    talked about, depth is one. Breadth and diversity of market
    participants is another. Concentration is another. Is the
    liquidity provision concentrated amongst a small number of
    firms?
        And then there is the question of access to the liquidity.
    Is the liquidity available to all participants, and if so, at
    what cost? Are there different cost factors for some
    participants? And then finally dynamics. Under what market
    conditions does that liquidity diminish or does it expand?
        Senator Toomey. And just briefly, do these other indices,
    are they clearly superior in all of these aspects of liquidity
    to LIBOR?
        Mr. Giancarlo. Indeed. I think a lot of the qualified
    benchmarks that we are talking about today address a lot of the
    shortcomings of LIBOR, but address it in different ways,
    because--and the point I am looking to make is that market
    participants have different needs for liquidity at different
    times and different types of liquidity, and the different
    alternative benchmarks present superior aspects to LIBOR and a
    number of these different liquidity factors.
        Senator Toomey. And I think you shared the view that that
    is part of the reason why it is important that financial
    institutions have a range of choices in setting a benchmark
    that suits their business model, their customers' needs, and so
    on.
        Let me move on to another issue, which is, as I mentioned
    earlier. President Biden's nominee to lead the OCC, Professor
    Saule Omarova has proposed a fundamentally different approach
    to benchmark rate regulations. In a paper on, quote,
    ``systemically important prices,'' end quote, or SIPIs, as she
    calls them, she proposes, and I quote, ``requiring licensure or
    preapproval of private institutions that establish or maintain
    widely used benchmarks which receive SIPI designation,'' end
    quote. And alternatively she suggests something that she
    describes as utility-style regulation of benchmark rates, for
    example, through a SIPI rates ports.
        So, in other words, what she is advocating is that the
    Government, not just the market but the Government play a
    direct role in actually setting interest rates to be used in
    commercial contracts.
        Given your experience as a regulator in the private sector,
    do you think it is a good idea for the Government to decide
    what interest rates are generally on a given day?
        Mr. Giancarlo. So I have experience with this, because the
    European approach, the continental EU approach, is often to
    dictate what components go into a benchmark and what the
    formula must be. And the problem with that is benchmark
    providers then design their benchmark to meet regulatory
    standards, as opposed to what I might call the more American
    approach is that benchmark developers develop the benchmark to
    meet commercial standards.
        And there is a big difference between a benchmark that is
    designed to meet the commercial needs and where commercial
    enterprises, if they do not feel that benchmark adequately
    reflects the characteristics they are looking to can go to a
    different benchmark, as opposed to regulators saying, ``We are
    only going to let there be so many benchmarks and they need to
    meet these regulatory requirements,'' which then can be abused
    politically, because you could see that regulators say, ``Well,
    we have a constituent here who feels he is underweighted in
    your benchmark so you need to adjust your benchmark to meet
    these political--''
        Senator Toomey. I get that distinction in how you design
    the benchmark, but is it not an order of magnitude beyond that
    if you are advocating that there be some Government
    representation in terms of the actual setting of the rate on a
    given day?
        Mr. Giancarlo. Yes, indeed.
        Senator Toomey. Yeah. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Toomey. Senator Reed of
    Rhode Island is recognized for 5 minutes.
        Senator Reed. Thank you very much, Mr. Chairman. Let me
    thank the witnesses for their very hard and thoughtful work on
    this very important topic. I appreciate all you have done.
        Mr. Pizor, what kind of protections should Congress and the
    banking agencies consider in order of prioritizing interest of
    consumers during this transition?
        Mr. Pizor. Well, I think it is very important that Congress
    prioritize fairness in the selection of the rates. As I
    mentioned, people who have the LIBOR already in their contract,
    they know what their payments are going to be, they have
    expectations about how much the payments are going to change,
    and the SOFR is really the only one that can match those
    expectations going forward for legacy contracts.
        So we need Congress to ensure that this fairness in the
    selection of the rate, that no one uses that as an opportunity
    to, you know, seek it as a profit-making opportunity. It is
    really just about fairness of continuing these contracts on the
    standards that are already in place.
        Senator Reed. So essentially one of the goals would be to
    maintain a constant, in parentheses, rate, one that a borrower
    expected to have throughout the course of the contract. Is that
    fair?
        Mr. Pizor. Yes, exactly.
        Senator Reed. Thank you. Mr. Wipf--let me find my notes
    here--what design features of SOFR ensure that the
    vulnerability of LIBOR will not reappear down the road, that we
    will not reinvent a LIBOR?
        Mr. Wipf. Thank you, Senator. When the ARRC began our work
    we looked at what we saw were the fault lines within LIBOR, and
    the single biggest, I say, point of failure was the reliance on
    expert judgment. So as Mr. Giancarlo described, if we have a
    very few underlying transactions that represent the interbank
    lending market the rest was filled in by expert judgment by the
    panel banks. So we knew that our path at the ARRC was to
    determine a rate that will be robust and transaction-based, and
    have no reliance on expert judgment.
        That path that led us to SOFR over a 2-year public
    consultation period was defined at the top priority, that we
    could construct a rate that consisted of actual transactions
    that could be administered and transparent, durable, robust
    over good times and bad. So we identified SOFR as the most
    suitable alternative for LIBOR for institutions of all sizes.
    It is based on over $800 to $1 trillion in daily transactions
    in the highly liquid, overnight U.S. Treasury repo market, from
    a wide range of market participants, and is administered by the
    New York Fed.
        So based on the daily repo market transactions, SOFR is, by
    intent and construction, a reliable representative indicator,
    and most importantly, puts no reliance on expert judgment, is
    entirely transaction based, is robust, durable, and will work
    in good times and bad.
        Senator Reed. Thinking back to the LIBOR crisis, it was not
    expert, it was self-interest that caused the deviations from
    what everyone thought was a completely interest-free measure.
    And in the mechanism you are setting up there is no financial
    self-interest in any of the rate setters. Is that fair?
        Mr. Wipf. By having a large dataset of transactions we
    reduce that significantly to near zero. The goal really is to
    make sure that this is transaction-based, no reliance on expert
    judgment, and has a wide dataset, so that $800 to a trillion,
    put that side by side with, as Mr. Giancarlo said, less,
    perhaps, than $1 billion that was underpinning LIBOR and that
    reliance on expert judgment, which we have removed.
        Senator Reed. Final question, that is, this has been
    adopted in Alabama and New York. Is there any experience yet in
    those two States? Has it gone into effect?
        Mr. Wipf. So I think at this point what we have seen is
    that, you know, certainly contracts are covered by New York law
    and provide a lot of confidence for those market participants,
    but until we get to the end of LIBOR we are not going to see
    how those play out. But the actual fallbacks that are in place
    are the same fallbacks that we are talking about here today.
        Senator Reed. So you have seen that contracts have been
    rewritten already to include SOFR in New York State?
        Mr. Wipf. Yes. So that would be the fallback that would be
    applied at the end of LIBOR.
        Senator Reed. Well, thank you all again very much for the
    hard work you have done. This is a very important topic. Thank
    you.
        Chairman Brown. Thank you, Senator Reed. Senator Hagerty
    from Tennessee is recognized for 5 minutes.
        Senator Hagerty. Thank you, Chairman Brown and Ranking
    Member Toomey. I appreciate your holding this hearing. And I
    want to thank our esteemed panel. I appreciate you being here,
    making your testimony today. This is indeed an important topic,
    as we all know.
        It is important to discuss what is potentially needed from
    Congress here, as our financial sector transitions from the
    LIBOR benchmark rate, which is embedded, literally, in
    trillions of dollars of contracts. This issue impacts everyone.
    It includes mortgages, student loans, small business loans, and
    it needs to be addressed.
        The question is how do we accomplish this transition in an
    orderly and timely fashion? How do we do it in a manner that
    minimizes cost and uncertainty? How do we do it in a way that
    protects the interest of consumers and investors? And let me be
    clear here. To the extent that preemption of State law is
    necessary here, it should be done in a narrowly tailored
    manner, one that minimizes adverse Presidential effects.
        I am deeply concerned by the potential ramifications if
    third-party trustees, who administer certain contractual
    provisions in the structured finance market are required to
    seek direction through protracted judicial proceedings. I have
    seen the estimates that there may be roughly $16 trillion of
    legacy contracts, including mortgages, student loans, small
    business loans still outstanding after mid-2023, that would not
    contain fallback language that would address this transition
    from LIBOR.
        I have also heard that certain transaction parties, such as
    trustees and fixed income deals, have already begun to notify
    bond-holders that they will indeed approach the courts for
    guidance some 12 to 18 months out prior to the cessation of
    LIBOR so that they can be ensured to have legally protected
    resolution to continue to make bond payments on time.
        So I would like to ask each of the panelists, in turn, to
    opine on why legislation is required to fix this as well as the
    potential costs and the impact of not getting Federal
    legislation and the importance of getting this done very
    quickly.
        First, Mr. Bright, I would like to turn to you.
        Mr. Bright. Thank you, Senator. I think you articulated it
    exceptionally well. The reason is that trustees will need to
    seek judicial guidance in order to select what rate, you know,
    they are going to administer for these contracts that are
    silent or that do not have adequate fallback language embedded
    in them. And that process is lengthy, which means it will be
    very disruptive and confusing for consumers----
        Senator Hagerty. And not necessarily consistent either.
        Mr. Bright. Completely inconsistent. There is absolutely no
    certainty that there is anything that would be followed as a
    precedent in these contracts. We have analyzed this in great
    detail. These contracts are all very different. They have
    slight differences that could lead, you know, one judge to see
    it differently than someone else. And so yes, consumers would
    not be treated equally. So that is absolutely critical.
        The other point that you make, which I completely agree
    with, is that these court costs, not only are they lengthy but
    they are expensive, and the way these trustee contracts are set
    up, these securitization deals are set up, those costs will
    flow through to the end investor, and the end investor, these
    are fixed-income deals, these are largely retirees, these are,
    you know, stable, pension, 401(k) type investors, and they are
    going to bear the costs. We have put some estimates down that
    we have it in the tens of billions of dollars that just seems
    needless, and hopefully with everybody's work we can avoid
    that.
        Senator Hagerty. Got it. Mr. Wipf, I will turn to you next.
        Mr. Wipf. Thank you. I think the way we have looked at this
    is that with the work of the ARRC and the work across the
    industry on the voluntary solutions to these problems that when
    we look at the numbers of $200-plus trillion a third of that
    remaining post June of 2023, and working down to this tough
    legacy, that what we have seen is an ability for counterparties
    to amend these contracts, working all the way through, and we
    get down to this small--not relatively small but very large
    tough legacy position, where the parties to those contracts
    need to take action and need to do something soon.
        So I think to the extent that we have seen, again, the
    history of the New York State legislation shows us that when
    that legislation is in place we can create confidence, and I
    think that the legislation that will provide sort of fair,
    effective, and clear conclusions. So that is certainty, and
    removing that uncertainty from these contracts is absolutely
    mission critical to the transition, and as I said earlier,
    really one of the last pieces of the puzzle to help us close
    the book.
        Senator Hagerty. Got it. Mr. Pizor.
        Mr. Pizor. The problem with everyone going to court to try
    and get a solution to this is it is time consuming, there are
    going to be various decisions across the country, and the
    delay, all those factors are going to create instability, which
    will harm access to credit in the future, it could affect the
    price of credit. And those things are certainly bad for
    consumers and they are bad for industry as well. So the sooner
    Congress can address this the sooner everyone will know what
    the roadmap is going forward, and that is just going to make
    for a smoother transition.
        Senator Hagerty. I appreciate the sense of urgency. I would
    like to finish with my good friend, my former classmate, the
    Honorable Chris Giancarlo.
        Mr. Giancarlo. It is nice to address you as Senator. The
    last time I did I think it was as Ambassador, so it is a
    delight to see you here in the Senate.
        As a great fan of our Federalist system, which I think has
    provided so many benefits to our citizens, I think, like you,
    cautious whenever we take up Federal legislation that would
    override States' rights. But I think this is one case where,
    done properly, done in a very narrowly tailored way, I think
    this can provide great benefit to the very market participants
    you have mentioned, trustees and others, that need legal
    certainty here and do not have to overly burden our court
    system to try to work out what is the intent here.
        But the narrow tailoring is very important. You know, the
    American people do not like it when they feel the Federal
    Government or others are tipping the scales in favor of perhaps
    winners or losers, and I think it is very important we make
    clear, outside of tough legacy contracts, that market
    participants have choice of benchmark to suit their unique
    needs.
        Senator Hagerty. Got it. Thank you. Thank you, Mr.
    Chairman.
        Chairman Brown. Senator Menendez of New Jersey is
    recognized for 5 minutes.
        Senator Menendez. Thank you, Mr. Chairman. Let me welcome
    Mr. Giancarlo, a fellow New Jerseyan, to the Committee, and I
    certainly thank you for your previous service.
        Today, 3.3 million private student loan borrowers owe an
    estimated $80 billion in loans that reference LIBOR. As lenders
    transition away from LIBOR, I am concerned about a lack of
    protections for borrowers in private student loan contracts.
    Mr. Pizor, as lenders transition away from LIBOR does the
    existing language in many private student loan contracts allow
    those private lenders to choose a replacement reference rate
    that is systematically higher than LIBOR, thereby increasing
    the borrowers' interest rates?
        Mr. Pizor. Yes, it does, and that is one of our concerns.
        Senator Menendez. So how can Congress and regulators ensure
    that lenders choose a replacement rate that is fairest to the
    borrower?
        Mr. Pizor. Well, short of mandating the rate, the best
    thing Congress can do is to offer a safe harbor from litigation
    that will encourage investors to choose that particular rate.
    That eliminates the risk of litigation to them, which is costly
    and destabilizing. The end result will work for consumers. And
    as long as it is narrowly tailored and does not create an
    opportunity for other misconduct we think a safe harbor is the
    best way to go to for SOFR.
        Senator Menendez. In addition, as you know, the CFPB
    proposed rules in June of 2020 that would help facilitate the
    transition away from LIBOR. Those rules were supposed to go
    into effect back in March of 2021, but they still have not been
    finalized. How important would it be for the CFPB to finish its
    guidance to private lenders as they transition away from LIBOR,
    to ensure that borrowers are not stuck permanently paying
    higher interest rates?
        Mr. Pizor. That is very important. The guidance cannot be
    left to the last minute. Industry needs time to adapt, and so
    we hope they will release them as soon as possible.
        Senator Menendez. Let me also ask you, most private student
    loan contracts include a mandatory arbitration provision which
    says that borrowers cannot sue lenders if a problem comes up.
    Instead, borrowers have to undergo a one-sided, back-door
    arbitration process. Is it possible that a lender could game
    the transition away from LIBOR in a way that leads borrowers to
    face higher interest loans?
        Mr. Pizor. Yes, it is certainly possible, and the existence
    of the arbitration clauses in class waivers heightens that
    risk, because it effectively eliminates consumers' recourse if
    there is misconduct.
        Senator Menendez. And would a mandatory arbitration clause
    and a class action waiver, both which are common in private
    student loan contracts, leave the borrower with no meaningful
    path to challenge a lender's actions?
        Mr. Pizor. That is correct. Although industry characterizes
    arbitration as fair and neutral in practice, we have seen
    evidence that it is put into the contracts to essentially
    eliminate the opportunity for consumers to challenge
    misconduct.
        Senator Menendez. Well, our Republican colleagues
    successfully repealed the CFPB's arbitration rule. Student
    borrowers have little recourse if industry chooses to force
    them into higher reference rates. And it is up to Congress and
    the CFPB to ensure that student borrowers are not stuck paying
    higher interest rates as it goes. We are talking about $80
    billion. These are young people who are trying to get underway
    in their careers, but between the debt and then the potential
    multiplier of the interest rates the consequences are you have
    to delaying maybe the purchase of your home, delay the start of
    a family, the delay of being an entrepreneur. And that is why I
    raise these questions.
        Finally, as the Committee discusses LIBOR, I think it is
    important to keep the average consumer in mind. Mr. Pizor, is
    the average consumer aware that their loan references the LIBOR
    rate?
        Mr. Pizor. No, I do not think so. It is a complicated issue
    and people are not aware of it.
        Senator Menendez. Is the average consumer going to have a
    say in choosing their replacement rate?
        Mr. Pizor. No. None at all.
        Senator Menendez. If the lender chooses a rate that causes
    a borrower's payment to become unaffordable, do many lenders
    offer flexible repayment options?
        Mr. Pizor. Unfortunately not.
        Senator Menendez. And these are all the consequences that I
    am fearful of on the consumer side of the equation, which is
    one of the reasons I appreciate your testimony. Thank you very
    much.
        Mr. Pizor. Thank you.
        Senator Menendez. And, Mr. Chairman, I have yielded back 30
    seconds.
        Chairman Brown. Thank you. That is very generous of you.
        Senator Tillis is recognized from his office, remote.
        [No response.]
        Chairman Brown. Senator Tester, who I have tried to avoid,
    is recognized.
        Senator Tester. Yeah, thanks. I do appreciate the extra 30
    seconds that the Chairman is putting on my time to ask
    questions. Thanks for having this hearing, Mr. Chairman and
    Ranking Member. Thank you all for being here today. I
    appreciate your testimony.
        I am going to start with you, Mr. Pizor. LIBOR does impact
    everybody's lives and families in ways that most people do not
    realize. Can you talk to me about how a LIBOR ending is going
    to impact regular folks' lives?
        Mr. Pizor. Well, it actually remains to be seen what will
    happen, but the risk is pretty significant that payments will
    go up, the changes in payments could become more volatile and
    unpredictable, and that affects people's ability to budget. And
    people are just recovering from the financial trauma of the
    pandemic, and to have this instability in monthly payments that
    are pretty critical to their lives--home, student loans--it is
    a very significant issue.
        Senator Tester. Mr. Bright, do you have anything to add to
    that?
        Mr. Bright. No. I mean, I think you are all addressing the
    right concerns. It is going to be very confusing for consumers.
    Once they realize this happens, I think the prior question
    mentioned that a lot of consumers do not even know that their
    rates are tethered to LIBOR. I mean, this would be very
    disconcerting, I think, information to get. So if we can all
    align on a similar replacement rate with similar communication
    strategy, all working together, I think that would really help
    quite a bit.
        Senator Tester. Mr. Giancarlo.
        Mr. Giancarlo. Yes. Thank you. You know, it is important to
    remember, as we talk about this, that all borrowers are not the
    same. All loans are not the same. Some loans are highly secured
    with very liquid capital and collateral. Other loans are
    unsecured or secured with fairly illiquid collateral.
        You know, the real economy of home builders and auto
    dealerships and small manufacturers use collateral that is
    quite illiquid. They put plant and equipment liens up, or auto
    leases, or home mortgages. And so that type of collateral
    causes the borrowers to hold that collateral that they then
    need to use--sorry, the lenders--to fund their own operations.
        And so one of the reasons why diversity of choice of
    benchmark is so important is because those lenders need to be
    able to use what collateral they have, relatively illiquid in
    many cases, to fund their own operations. And so there needs to
    be choice of both credit-sensitive and risk-free borrowing for
    an economy as diverse and as deep and as important as the U.S.
    economy.
        Senator Tester. OK. Mr. Wipf, with your work on ARRC, are
    there any other impacts that you think will happen?
        Mr. Wipf. What we believe is that the legislation would
    provide a structural bridge where these contracts fail, and
    remove uncertainty, minimize value transfer, reduce disruption,
    and preserve good market functioning. And we think that for the
    legacy piece of this we think that SOFR is, you know, far and
    away the best choice. We think a single rate is the best
    choice. And on a go-forward basis, the ARRC's message has
    always been know what is in your reference rate and give the
    market those opportunities.
        Senator Tester. And I will just stay with you, Mr. Wipf. Do
    you see it necessarily as it is just going to happen, that
    rates will go up?
        Mr. Wipf. I cannot comment on that.
        Senator Tester. OK. And does anybody want to comment on
    that? Bright, you always comment on something.
        Mr. Bright. With the transition from LIBOR to SOFR?
        Senator Tester. With the transition with LIBOR going away
    and choice being there.
        Mr. Bright. So I think if we transition from LIBOR to SOFR,
    the recommendations that have come out of a the ARRC committee
    and the recommendations that we are looking at, there is, with
    a smoothing mechanism of a look-back period so that the spread
    between SOFR and LIBOR is calculated over this 5-year average,
    and then there is a 1-year onramp to move to that.
        So every effort is being made to ensure that there is no
    payment shock, rate shock, that those disruptions are as
    minimum as possible. You know, since there are still 2 years of
    interest rate fluctuations that are getting included in the
    calculation of that 5-year lookback, that is hard to predict,
    but nobody wants that. That would be very bad.
        Senator Tester. OK. So, Michael, I will just stick with
    you. So let's just say we have got two folks that live side by
    side, and they each have a mortgage, pretty equivalent
    mortgage. It is possible that those two neighbors, with LIBOR
    going away, is it possible those two neighbors, both at the
    same rate today, could end up with different rates as the
    benchmark goes away?
        Mr. Bright. Without the safe harbor legislation?
        Senator Tester. Yes.
        Mr. Bright. Yes, that is a real possibility and a concern.
    The safe harbor would greatly minimize to eliminate that as a
    risk.
        Senator Tester. OK. Well, thank you all for your testimony.
    I will yield back my 10 seconds, Mr. Chairman.
        Chairman Brown. Thank you, Senator Tester. Senator Cortez
    Masto is recognized from her office.
        Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
    Thank you to the panel members. This is such an important
    conversation. And let me also echo what Bob Menendez said, and
    I think a panel member said. Most consumers really do not
    understand the significance of what LIBOR means and the
    transition away from it. So what you all are doing and what we
    get right here is so important.
        I do commend ARRC's work on making SOFR a robust rate, on a
    durable basis. But let me ask you this because we are talking
    about the risks right now. Does anybody on the panel not
    support transitioning to SOFR? I am just curious. And if you do
    not support it, why not?
        Mr. Bright. For legacy contracts I do not think anybody has
    a problem with SOFR. But I know the Honorable Giancarlo would
    like to comment.
        Mr. Giancarlo. Agree, but for tough legacy contracts only.
    I think Americans traditionally enjoy and benefit from
    diversity of choice to suit their individual needs. As I
    explained in my testimony, we have a very diverse U.S. economy.
    We have large Wall Street banks and we have small community and
    minority depository institutions that make loans against very
    little or very illiquid collateral, and they have to have the
    flexibility that comes from benchmarks that reflect their cost
    of funding and not necessary the cost of funding of Wall Street
    banks.
        So having choice, for everything but tough legacy LIBOR
    contracts is critically important, I believe, to the U.S.
    economy.
        Senator Cortez Masto. And when you talk about choice, Mr.
    Giancarlo--and thank you for those comments--choice based on
    what? I mean, whose decision? Who gets to determine the rate?
    How do you determine that choice?
        Mr. Giancarlo. Well, benchmarks have traditionally been
    choice by the marketplace. It is actually rare to have
    Government authorization of benchmarks. I mean, our lenders are
    in the best position to know what benchmarks are probably most
    appropriate for their customers and for their cost of funding.
        We have both risk-free rates, which are very important and
    serve very well for large banks that are primary dealers of
    Treasury securities and have large inventory of Treasury
    securities, but for our minority, our urban banks, our rural
    banks that are not primary dealers of Treasury or hold illiquid
    securities, credit-sensitive rates serve their needs quite
    well.
        And so I think it is not important that we do not put our
    fingers on the scale. Now, that does not mean every benchmark
    is suitable. I mean, banks are subject to appropriate
    prudential standards. They have got to have the right benefits.
    And benchmarks that are widely based, all these facets of
    liquidity that I talked about, a number of participants not
    concentrated amongst a few large dealers, is a very important
    aspect, and one of the dynamics of that liquidity as well.
        So there are a lot of factors that go in, and I think the
    legislation in the House talks about qualified benchmarks,
    meaning benchmarks that meet certain global standards. The
    International Association of Securities Commissions has put out
    global standards that most of the major benchmarks meet, and I
    think those standards are important.
        So it is not just any willy nilly benchmark. Banks, though,
    do know best what meets the needs of their borrowers and their
    own cost of funding.
        Senator Cortez Masto. And so Mr. Pizor and Mr. Wipf, do you
    agree with that, that the banks and financial institutions and
    other agencies should have that choice? And if you do not agree
    with it, why?
        Mr. Wipf. Our view at the ARRC has been, from the
    beginning, we go back to first principles. We go back to what
    was wrong with LIBOR. And our path to SOFR was to find
    something that was robust and durable that other things could
    be built upon. So when we look at SOFR, and why we chose this
    path, it is the most robust, durable, transparent over time.
        Our guidance from the ARRC has been know what is in your
    reference rate, because I think if we look back and we look at
    the history of LIBOR, that has always been good advice. So when
    we look at some of these other rates that are out there, we
    would encourage market participants--borrowers, lenders,
    issuers, investors--to understand what is in those reference
    rates, to know how they are constructed, to understand how they
    perform over time--I think we have a reference point back to
    March of 2020, that could provide real data--and how do these
    things hold up?
        We know what SOFR does, and that is why we had a 2-year
    public consultation to get to the point of selecting SOFR in
    2017. So from the ARRC's perspective, we believe it is far and
    away the best choice. As it relates to things that can happen
    over and above that for different products, we think that SOFR
    still stands as the foundation. Nonetheless, you know, the
    ARRC's message is if you are going to use other rates, know
    your reference rate.
        Senator Cortez Masto. Well, and is not the point here also
    to guard against any type of manipulation, like we have seen in
    the past with LIBOR?
        Mr. Wipf. Our view has been that when we did our work at
    the ARRC, and we began our work, we looked at what we thought
    the fault lines of LIBOR were. We felt that that is what
    brought us to a rate that is entirely based on transactions,
    and certainly the most liquid product, the overnight Treasury
    repo market, $800 to $100 trillion in transactions, and we
    believe that we have minimized that risk as much as can
    possibly be minimized.
        So because of that, we believe that that solves the problem
    that we were trying to solve, which was the ARRC was never set
    out to recreate LIBOR. We were trying to find a better solution
    to go forward, and we believe SOFR is the best solution.
        Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Cortez Masto. Senator
    Sinema from Arizona is recognized from her office.
        Senator Sinema. Thank you, Chairman Brown, and thank you to
    Ranking Member Toomey for holding this hearing today.
        LIBOR and other benchmark interest rates play an important
    role in our global financial system. They enable banks and
    other financial institutions to manage interest rate risk and
    to anticipate changing loan costs. These rates, including
    LIBOR, have a very real impact on Arizonans who have taken out
    student loans, or mortgages, who have opened lines of credit,
    or who have started or invested in a business. So the
    transition from LIBOR to the SOFR will be a challenging but
    important step toward securing the stability of our financial
    system for all investors and consumers.
        My first question is for Mr. Bright. Thank you for being
    here. There has been some concern about how prepared financial
    institutions are to make the transition from LIBOR to SOFR, and
    how prepared is the industry to make this transition by the
    currently prescribed deadline?
        Mr. Bright. Yeah. Thank you very much, Senator, for the
    question. It is an important one. So for all contracts that
    allow this transition to take place, that is contracts that
    have fallback language or are clear that the trustee can make
    decisions, or that, you know, the lender can make decisions, an
    enormous amount of work has gone into this.
        So I feel reasonably confident that industry is there. I
    think it is worth everybody being, you know, continuing to be
    diligent. The bureau is continuing to promulgate rules for the
    industry to use to make sure it communicates with consumers
    clearly, and we will follow all of those, and I think that is
    important work.
        It is the legacy contracts that have been--you know, that
    do not have clarity around what rate to transition to, that is
    the subject of a lot, I think, of discussion today, and on that
    one we are in limbo and we need to get safe harbor passed so
    that we can borrow from the preparation work that has been
    done, you know, in the other contracts and other loans.
        Senator Sinema. Thank you. So my understanding is that the
    optical character recognition technology, or OCR, will be
    useful in helping companies identify and amend large volumes of
    contracts at a relatively low cost. So what other innovative
    products or services exist on the market that will help
    companies transition from LIBOR to SOFR?
        Mr. Bright. So I had not heard of that technology until
    your staff mentioned it to us this week, so we researched it a
    little. It looks like a helpful tool in helping to identify
    what contracts could fall into the umbrella of needing legacy
    help or you can do word search and the smart AI type stuff. So
    I am not an expert on that but it seems really interesting.
        I think as far as technology, you know, you want to look at
    the exchanges. So the Chicago Mercantile Exchange and the
    Chicago Board of Options Exchange, the CBOE and the CME,
    respectively, have done a lot of groundbreaking work to prepare
    the markets for this transition. And so those are two places
    that I think technology is helpful as well.
        Senator Sinema. Well, that is encouraging to hear, but
    making this transition more logistically feasible does not
    fully resolve the challenges of the tough legacy contracts that
    reference LIBOR. So to help Arizonans and Americans make this
    transition, what ambiguities need to be clarified by Congress?
        Mr. Bright. Again, I think that the legislation that passed
    the House does this. It clarifies that if you are in a contract
    that is inadequate or lack of clear fallback language that you
    have a safe harbor in your transition to SOFR. The Fed will
    promulgate rules for that transition. And if the safe harbor is
    appropriately tailored, all consumer protections will stay in
    place to ensure that communication with consumers is done in
    the appropriate and adequate manner.
        So I think that I would look to that bill, and Senator
    Tester's and Tillis' work in the Senate as well. So that is
    probably the best framework.
        Senator Sinema. Thank you.
        Mr. Giancarlo. And, Senator, if I could just add to that
    answer, I think that in addition to the legal certainty for
    tough legacy contracts, I think it is very important the
    legislation make clear that for all other contracts that there
    is freedom of choice for market participants to choose
    qualified benchmarks that suit their needs. I think it is very
    important that there not be a Government imprimatur place upon
    one benchmark or another outside of the tough legacy area, that
    for outside of the tough legacy area that consumers and their
    bankers have choice of benchmark that suits their particular
    needs.
        Senator Sinema. Thank you. You know, for my last question I
    will ask Mr. Pizor. So I want to ask you, why is this type of
    legislative clarity that I was just discussing with Mr. Bright
    important to consumers in Arizona, including those who hold
    student loans and mortgages?
        Mr. Pizor. Well, clarity is especially important for those
    two groups of consumers because those payments tend to be very
    significant and as a result have a large impact on your monthly
    budget. Clarity is also needed in terms of selecting the rate,
    that most contracts do not give guidance, and the concept of
    conforming changes, which need to be made in conjunction with
    changing the rates. The proposed bill, we are hoping, will ask
    the Federal Reserve to define conforming changes, and that will
    reduce a lot of the ambiguity.
        Senator Sinema. Thank you. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Sinema. We will conclude
    the hearing. Thank you to the witnesses for being here. Thank
    you for providing the testimony that you gave.
        For Senators who wish to submit questions for the record
    they are due 1 week from today, on Tuesday, November 9th. To
    the witnesses, please submit your response to questions for the
    record within 45 days from the day you receive them.
        Thank you again so much for being here. The hearing is
    adjourned.
        [Whereupon, at 11:15 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                  PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
        I often begin these hearings by taking us back to 2008, and to the
    years that followed, because we are still living with the fallout--and
    in the case of the Libor scandal, we are still cleaning up a mess
    caused by the biggest banks in the world, more than a decade later.
        As the housing market crashed and more than eight million workers
    lost their jobs, central bankers began to realize just how many markets
    were broken in the global economy.
        One of those was the interest rate system. Most people have never
    heard of Libor--like so much in the financial system, it's an opaque
    term for something that affects millions of people's bills and bank
    accounts.
        Libor has been the most widely used interest rate benchmark around
    the world, used to set payments for millions of student loans,
    mortgages, and small business and auto loans. Over three hundred
    trillion dollars was tied to Libor at its peak.
        With that kind of money involved, it should surprise no one that
    bankers figured out a way to conspire to rig the interest rate, to
    enrich themselves.
        After the scandal broke in 2012 uncovering the banks' manipulation
    of Libor, this Committee and the Federal financial regulators studied
    the problems with Libor, and who was at fault. U.S. and foreign
    regulators imposed billions of dollars in fines on several global banks
    for manipulating the interest rate and taking advantage of consumers
    and investors.
        Now, nearly a decade later, our financial system is finally
    transitioning away from Libor. Today we will consider how the financial
    system can move on from this benchmark set by a handful of the world's
    largest banks--a system we found out was ripe for exploitation. Part of
    that transition involves dealing with trillions of dollars in legacy
    contracts that are tied to Libor, and that will continue after the rate
    is discontinued in June of 2023.
        After a slow start, the Federal Reserve Bank of New York and the
    Federal Reserve Board, along with industry stakeholders and consumer
    advocates, have established a path forward. They developed a new, more
    reliable and transparent benchmark rate called SOFR--the Secured
    Overnight Financing Rate. And they have put forward a framework to
    address legacy loans and contracts that were written assuming that
    Libor would always exist.
        Because Libor is so widely used, homeowners and students who have
    never heard of Libor will be at risk when it's discontinued if we don't
    take action.
        If their loans don't have specific instructions about what happens
    if Libor disappears, or if their loans give loan servicers the
    discretion to pick a different rate, those borrowers could be in for a
    shock.
        Small and large businesses could be in a similar situation--forced
    to renegotiate a loan tied to Libor at a time when they're just getting
    back on their feet from the pandemic.
        Banking agency officials and stakeholders have all said Federal
    legislation would help address those long-term loans and contracts, and
    reduce the potential for time-consuming and costly litigation.
        Our colleagues on the House Financial Services Committee began
    bipartisan work on a bill that addresses these legacy problems, and
    Senator Tester, working with Senator Tillis, is preparing a Senate
    companion.
        If done right, this legislation can help borrowers who don't have
    the ability to bargain with their student loan lender or mortgage
    banker, while also providing certainty to lenders. We know we need to
    act, and I appreciate these efforts by Members of our Committee.
        Under the current proposal, lenders with legacy contracts that
    don't specify a Libor alternative can transition to SOFR--so long as
    they don't make other changes that could harm borrowers. That would
    allow them to avoid potentially complicated litigation.
        It's frustrating that we are forced to spend taxpayers' time and
    money cleaning up after the biggest banks, over and over again.
    Unfortunately, if we don't work to mitigate the damage from another big
    bank scandal, it's family businesses and homeowners and students who
    will pay the price.
        Our witnesses and their organizations have developed a narrow and
    consistent solution that protects small businesses, and families with
    mortgages, and Americans paying off student loans.
        I look forward to hearing from our witnesses, and to working with
    my colleagues to protect consumers and to protect the economy.
        We have proven we can come together on this Committee to find areas
    of agreement, and to advance commonsense solutions for the people we
    serve.
        My hope is we can do the same on Libor.
                                     ______

                PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
        Thank you, Mr. Chairman.
        The London Interbank Offered Rate--or LIBOR--has long been the most
    widely used U.S. dollar-denominated benchmark interest rate across all
    types of financial contracts. LIBOR is the rate at which large banks
    report they can borrow from one another in the interbank market on a
    short-term, unsecured basis.
        At the end of 2020, over $223 trillion in contracts referenced
    LIBOR, including loans, bonds, derivatives, and securitizations. In
    2013, the G20 launched a global review of interest rate benchmarks
    after cases of misconduct in the reporting of LIBOR rates by a small
    number of banks and the significant decline in interbank lending
    volume.
        As the breadth and depth of interbank loan market liquidity greatly
    diminished, it became clear that alternative rates with greater volume
    and a larger number of market participants would be more appropriate
    than LIBOR. In the United States, the Federal Reserve Board and the New
    York Fed convened the Alternative Reference Rates Committee--or ARRC--
    to identify an alternative to LIBOR.
        In 2017, the ARRC identified the Secured Overnight Financing Rate--
    or SOFR--as its recommended alternative to LIBOR. SOFR measures the
    cost of overnight, or short-term, borrowing collateralized by U.S.
    Treasury securities.
        In 2020, daily volumes underlying SOFR were consistently above $1
    trillion. Last year, the Fed, FDIC, and OCC directed banks to stop
    entering into new LIBOR contracts as soon as possible and no later than
    the end of 2021.
        Earlier this year, the administrator of LIBOR announced that it
    will stop publishing all LIBOR settings by June 30, 2023. Although most
    existing contracts referencing LIBOR will mature by that date, a number
    of contracts will not, and lack fallback language to replace LIBOR with
    a non-LIBOR rate. As a result, many have called for Federal legislation
    to address these so-called ``tough legacy contracts.''
        I agree banks should stop writing new LIBOR contracts as soon as
    possible, and Federal legislation is likely needed to address tough
    legacy contracts. The unique and anomalous circumstances related to the
    LIBOR transition require action by Congress to amend contracts between
    private parties. Such congressional action should be a last resort.
        As we consider this measure, any legislation that addresses tough
    legacy contracts must be very narrowly tailored, not change the
    equities of these contracts, and not affect any new contracts.
        In July, the House Financial Services Committee approved a bill
    that would replace LIBOR in tough legacy contracts with a Fed-selected,
    SOFR-based benchmark. This bill takes a reasonable approach, and the
    Senate should carefully review it. In doing so, we should consider
    targeted amendments, such as ensuring that qualified non-SOFR benchmark
    rates are not disfavored in future contracts.
        While it's appropriate to mandate a SOFR-based index for this
    relatively small universe of tough legacy contracts, for new contracts
    banks must have the option to choose among qualified benchmark rates--
    including credit-sensitive rates--as appropriate for their business
    models. Risk-free rates like SOFR may work well for derivatives
    contracts and institutions active in the Treasury repo market, but they
    may not be well-suited for loans or certain community or regional
    banks.
        The funding costs for such banks typically increase relative to
    SOFR during periods of stress, which could create an asset-liability
    mismatch if loans were required to reference SOFR. The Fed, FDIC, and
    OCC have previously acknowledged this problem. They have said the use
    of SOFR is voluntary and a bank may use ``any reference rate for its
    loans that the bank determines to be appropriate for its funding model
    and customer needs.''
        An even broader group of regulators said, in the context of bank
    lending, that ``supervisors will not criticize firms solely for using a
    reference rate (or rates) other than SOFR.'' However, I am concerned
    this is exactly what Biden administration financial regulators are now
    seeking to do.
        Just last week, the Acting Comptroller of the Currency said the
    OCC's supervisory efforts will ``initially focus on non-SOFR rates.''
    This suggests that the OCC may apply heightened supervisory scrutiny to
    non-SOFR rates. And last month, a senior New York Fed official said
    that banks that use a non-SOFR rate must do ``extra work'' to ensure
    that the bank is ``demonstrably making a responsible decision.''
        SEC Chair Gensler has been even more explicit. On multiple
    occasions, he has criticized one particular credit-sensitive rate.
    These statements raise serious concerns that regulators are pressing
    all banks to use SOFR without any transparency or public input. If a
    bank wants to price its loan off a rate it believes is a better
    reflection of its cost of funding or customer needs than SOFR,
    regulators should not prohibit the bank from doing so.
        This pressure, however, pales in comparison to the preferred
    approach of President Biden's nominee to lead the OCC. Professor Saule
    Omarova has written that widely used benchmark rates should either be
    pre-approved by the Government or, worse, subject to ``utility-style
    regulation.'' In other words, the Government--not the market--would
    have a direct role in actually setting benchmark rates as it deems
    appropriate.
        This is just one example of the many radical ideas that Professor
    Omarova has proposed that demonstrate a clear aversion for democratic
    capitalism, and a clear preference for an administrative State where
    decisions are made by technocrats who think they know more than the
    market.
        Regulators should never disfavor qualified rates, and banks should
    have the choice to use any rate that meets well-established criteria
    for benchmark rates.
        I hope to hear from today's witnesses about the transition from
    LIBOR, the potential for targeted Federal legislation to address tough
    legacy contracts, and ways to preserve benchmark rate choice.
                                     ______

                       PREPARED STATEMENT OF THOMAS WIPF
     Chair of The Alternative Reference Rate Committee (ARRC) and Managing
                            Director, Morgan Stanley
                                November 2, 2021
        Chairman Brown, Ranking Member Toomey, and Members of the
    Committee. I am honored to be here today on behalf of the Alternative
    Reference Rates Committee (or ARRC) to testify on the need for Federal
    legislation to address the LIBOR transition for legacy products and
    support the efforts of this Committee to bring that to fruition.
        The ARRC is comprised both of a broad set of private-sector firms
    and associations representing a range of perspectives on the LIBOR
    transition as well as a broad set of U.S. agencies, including the
    Federal Reserve, the CFTC, the SEC, Treasury, the OCC, the FDIC, and
    FHFA, who provide oversight to our work. \1\ We were convened by the
    Federal Reserve Board and Federal Reserve Bank of New York in 2014 in
    order to help address the financial stability risks that the Financial
    Stability Oversight Council had publicly identified concerning the use
    of LIBOR in the financial system.
    ---------------------------------------------------------------------------
         \1\ Reflecting the importance of its work, the ARRC's ex officio
    members include the Commodity Futures Trading Commission, Consumer
    Financial Protection Bureau, Federal Deposit Insurance Corporation,
    Federal Housing Finance Agency, Federal Reserve Bank of New York,
    Federal Reserve Board, National Association of Insurance Commissioners,
    New York Department of Financial Services, Office of Financial
    Research, Office of the Comptroller of the Currency, U.S. Department of
    Housing and Urban Development, U.S. Securities and Exchange Commission,
    and the U.S. Treasury. As the ARRC has explained, this ``structure
    facilitates collaboration between the market and the official sector''
    and ``allows the group to have diverse participation across financial
    services.''
    ---------------------------------------------------------------------------
        Over time, LIBOR had grown to be a pervasive part of our economy;
    it has been referenced in nearly every floating rate business and
    consumer loan, floating rate debt and securitization contract, in
    nonfinancial corporate contractual agreements, and in a staggering
    amount of derivatives. The ARRC has estimated that U.S. dollar LIBOR is
    referenced in over $200 trillion financial contracts alone, roughly ten
    times the size of the annual U.S. gross domestic product. But despite
    the fact that so much of the financial system depended on LIBOR, few if
    any bothered to understand what this rate was based on, and in fact we
    now understand that it was based on very little. LIBOR had both a weak
    and opaque governance structure and was based on what had become a very
    thin market. As a result of these shortcomings, LIBOR was in danger of
    failing, and the official sector had to step in to prevent a sudden and
    disruptive end to it and instead has sought an orderly winddown. The
    ARRC was convened to help facilitate a smooth transition and was asked
    to identify a robust alternative to U.S. dollar LIBOR, one that was
    appropriate to base trillions of dollars of contracts on, and to
    address risks to legacy LIBOR contracts. I believe that the ARRC is a
    truly successful example of public-private sector cooperation, but it
    is important to understand that all of the ARRC's recommendations are
    voluntary; no one is required to follow them, and no one is required to
    use the ARRC's recommended rate, the Secured Overnight Financing Rate,
    or SOFR.
        SOFR is based on overnight borrowing transactions in the U.S.
    Treasury repo market, the largest interest rates market in the world, a
    key source of secured financing for a broad range of financial market
    participants, and a key component of overall Treasury markets in the
    United States. The ARRC selected SOFR after several years of work
    examining all potential alternatives and public consultation. The ARRC
    selected SOFR as its recommended alternative based on the fact that it
    is by far the most robust alternative to LIBOR available--there will
    always be a U.S. Treasury repo market both in good times and bad--and
    based on the widespread support from a broad range of market
    participants including end users and borrowers.
        The ARRC believes that SOFR is an appropriate rate for new use in
    products that have historically referenced LIBOR, and that it is robust
    enough to ensure that we do not recreate the problems that we have had
    to deal with in LIBOR. We expect that many market participants will in
    fact choose to use SOFR, and many have already done so or are actively
    preparing to. However, we also support choice, and we have been clear
    since our inception that our recommendations are voluntary. At the end
    of the day, the market will determine which rates are used.
        For many legacy products things are much less simple and will
    create additional challenges and considerations. The ARRC's Second
    Report, published in March 2018, provided a survey of contractual
    fallbacks in various cash products referencing LIBOR and noted that
    many of these contracts did not envision the possibility that LIBOR
    might permanently cease or had fallbacks that would not be economically
    appropriate if such an event occurred. Unlike derivatives, which are
    covered by standardized documentation and have developed efficient
    mechanisms allowing for contractual amendments, many cash instruments,
    such as floating rate bonds and securitizations, have fallback language
    that is difficult or impossible to change after they have been issued.
        Based on the ARRC's work, we know that many legacy nonfinancial
    corporate contracts referencing LIBOR have no workable fallback
    language or no fallback language whatsoever and that many financial
    contracts have fallbacks that would require parties to poll an unnamed
    set of banks in an attempt to recreate LIBOR, which we believe would be
    both burdensome and unsuccessful, or refer only to the last published
    value of LIBOR, effectively converting what were intended to be
    floating rate instruments to fixed-rate instruments.
        The ARRC established several working groups to work with market
    participants to develop more robust fallback language and publish
    consensus recommendations on such language. ARRC working groups have
    involved more than 300 different institutions, including lenders,
    borrowers, investors, and consumer advocacy groups. Recognizing the
    single importance of clarity and certainty with respect to fallbacks
    for consumer contracts, the ARRC published a separate set of Guiding
    Principles specifically designed for its work on consumer products. The
    ARRC's work on fallback recommendations included numerous consultations
    with market participants, each of which is publicly available. Many new
    issuances now contain ARRC-recommended fallback language thanks to this
    work. \2\
    ---------------------------------------------------------------------------
         \2\ Following the work of each working group and the
    consultations, the ARRC published recommended contractual fallback
    language for floating rate notes, syndicated and bilateral loans,
    securitizations, consumer adjustable rate mortgages, and student loans.
    ---------------------------------------------------------------------------
        While developing recommended fallback language that could be
    adopted in new contracts referencing LIBOR, the ARRC also recognized
    that not all contracts can or will be amended by the time of LIBOR
    cessation and that there will be a significant amount of legacy
    contracts outstanding that will have no clear or effective reference
    rate when the main tenors of U.S. dollar LIBOR cease or become no
    longer representative immediately after June 30, 2023. To help to
    address this, the ARRC developed and promoted legislation for contracts
    governed by New York law to avoid the disruptions, market
    uncertainties, and confusion that would otherwise occur when LIBOR
    ends.
        In March 2021, the New York State legislature passed legislation
    supported by the ARRC that provided clear fallbacks to any contract
    referencing LIBOR governed by New York law that otherwise has no
    effective fallback language, either because it is has no fallback or
    because it falls back to a LIBOR-based rate (or to a dealer poll to
    determine a LIBOR rate). The State of Alabama subsequently passed
    similar legislation. The passage of State legislation has been
    extraordinarily important in helping to address the risks of the LIBOR
    transition. In particular, many financial contracts are covered under
    New York law. However, we know that many nonfinancial corporate
    contracts, consumer loans, and securitizations are not covered by New
    York or Alabama State law. While the ARRC is prepared to advocate for
    similar legislation in other States, we cannot reasonably hope for
    comparable legislative solutions in all 50 States and the District of
    Columbia. Federal legislation can help to ensure an equal outcome for
    all Americans.
        The legislative proposal that I understand Members of this
    Committee are working on and that a House committee passed earlier in
    the year would help to ensure that equal outcome. As with the
    legislation passed in New York and Alabama, the legislative proposal is
    purposefully narrow, intended only to address contracts that could not
    otherwise be changed. For contracts that already allow one party the
    right to choose a new rate, a feature of most consumer contracts
    referencing LIBOR, the proposed legislation does not alter the right of
    the designated party to determine the successor rate, but it does
    provide a safe harbor to encourage a choice based on SOFR, which has
    had the strong support of consumer advocacy groups in addition to
    lenders and investors. For contracts that do not grant a particular
    party the right to name a successor rate to LIBOR and have no fallback
    language or language that refers only to a poll of banks or some past
    value of LIBOR, the proposal recognizes that a unique successor rate
    must be named in order to avoid legal conflict and it names a successor
    rate based on SOFR for that purpose, but again only for those contracts
    that will not otherwise work in the absence of a legislative solution.
    The proposed legislation has no impact for contacts that already
    specify a non-LIBOR floating rate if LIBOR is unavailable, which is the
    case for most legacy business loans. Parties may also opt out of the
    legislation at any time.
        As I have noted, the ARRC represents a very diverse set of
    participants. We have worked by consensus to develop recommendations to
    help ensure that the U.S. economy can successfully transition from
    LIBOR. ARRC members have for some time strongly held the consensus view
    that legislation addressing legacy LIBOR contracts is an important
    component of the transition. We support your efforts to introduce
    legislation in the Senate and, in conjunction with your counterparts in
    the House, urge you to pass it as expeditiously as possible. We thank
    you in advance for your consideration and stand ready to be a resource
    in any way we can.
                                     ______

                       PREPARED STATEMENT OF ANDREW PIZOR
                  Staff Attorney, National Consumer Law Center
                                November 2, 2021
        Chairman Brown, Senator Toomey, and Members of the Committee, thank
    you for the opportunity to testify today on the importance of
    protecting consumers when the benchmark LIBOR index comes to an end. I
    have been an attorney with the National Consumer Law Center (NCLC) \1\
    for 12 years. I provide my testimony here today on behalf of NCLC's
    low-income clients.
    ---------------------------------------------------------------------------
         \1\ Since 1969, the nonprofit National Consumer Law Centerr
    (NCLCr) has used its expertise in consumer law and energy policy to
    work for consumer justice and economic security for low-income and
    other disadvantaged people, including older adults, in the United
    States. NCLC's expertise includes policy analysis and advocacy;
    consumer law and energy publications; litigation; expert witness
    services, and training and advice for advocates. NCLC works with
    nonprofit and legal services organizations, private attorneys,
    policymakers, and Federal and State Government and courts across the
    Nation to stop exploitive practices, help financially stressed families
    build and retain wealth, and advance economic fairness.
    ---------------------------------------------------------------------------
    Introduction
        My primary message here today is to encourage the Members of this
    Committee, as well as the full Senate, to support H.R. 4616 but with a
    more limited safe harbor, as I will explain today. This bill will
    protect consumers and the credit industry from potentially devastating
    consequences that could otherwise occur as the credit world transitions
    away from the LIBOR index.
        The LIBOR is currently written into more than a trillion dollars of
    outstanding consumer mortgages, student loans, and other consumer
    credit contracts. But it will cease to exist on June 30, 2023. \2\ When
    that happens the companies that own and service those contracts must be
    ready to adapt by substituting a new index for the LIBOR. If the
    transition goes smoothly, few people will notice. But if they get it
    wrong, the consequences could force millions of consumers into default
    and lead to widespread litigation.
    ---------------------------------------------------------------------------
         \2\ Fed. Reserve. Bd., CFPB, FDIC, et al., Joint statement on
    Managing the LIBOR Transition at 1 (Oct. 20, 2021), available at
    https://files.consumerfinance.gov/f/documents/cfpb--interagency-libor-
    transition-statement-2021-10.pdf.
    ---------------------------------------------------------------------------
    Replacing the LIBOR Is a Complex Problem Fraught With Risk for Industry
            and Consumers
        The LIBOR is a benchmark interest rate compiled and maintained by
    ICE, a private corporation based in London, U.K. According to ICE, the
    LIBOR is ``designed to produce an average rate that is representative
    of the rates at which large, leading internationally active banks with
    access to the wholesale, unsecured funding market could fund themselves
    in such market in particular currencies for certain tenors.'' \3\
    Currently the U.S. Dollar version of the LIBOR is based on data
    submitted voluntarily by sixteen contributor banks. \4\ Due to various
    problems with the LIBOR, the U.K.'s Financial Conduct Authority has
    announced that on December 31, 2023, ICE will stop publishing the
    versions commonly used in consumer contracts. \5\
    ---------------------------------------------------------------------------
         \3\ ICE website, available at https://www.theice.com/iba/libor.
         \4\ Id.
         \5\ U.K. Financial Conduct Authority, FCA announcement on future
    cessation and loss of representativeness of the LIBOR benchmarks (Mar.
    3, 2021), available at https://www.fca.org.uk/publication/documents/
    future-cessation-loss-representativeness-libor-benchmarks.pdf.
    ---------------------------------------------------------------------------
        In relation to consumer transactions, the LIBOR is commonly used as
    an index in adjustable rate home mortgages and student loans.
    Typically, a loan contract will specify a starting interest rate that
    will change at regular intervals over the life of the loan. The new
    interest rate at each change is based on the current value of a
    benchmark index named in the contract. The index value is then added to
    a ``margin'' (a fixed number written into the contract), and that total
    becomes the new interest rate on the contract. The servicer then
    recalculates the monthly payment based on the new interest rate.
        The typical contract also has a clause, known as ``fallback
    language,'' that authorizes the noteholder to replace the index if the
    original one becomes unavailable. The fallback language is central to
    replacing the LIBOR. But it has never been used before, and the
    standard language in almost all legacy contracts is too vague. For
    example, until recently the fallback language in Fannie Mae and Freddie
    Mac's contract forms said: ``If the Index is no longer available, the
    Note Holder will choose a new index that is based upon comparable
    information.'' Most non-GSE and student loan contracts use similar
    language. A minority of contracts give the noteholder unlimited
    discretion to select a replacement. Significantly, there is no accepted
    understanding or definition of what is ``comparable.'' And the few
    regulations addressing the selection of a replacement index only apply
    to a small portion of the market. \6\
    ---------------------------------------------------------------------------
         \6\ See, e.g., Reg. Z, 12 CFR 1026.40(f)(3)(ii) (replacing index
    for home equity line of credit); Reg. Z Off'l Interpretations, 12 CFR
    1026.55(b)(2)-6 (replacing index for credit card).
    ---------------------------------------------------------------------------
        The complexity of selecting a replacement is compounded in other
    ways too. Most importantly, there is no alternative index that will
    perfectly match the cost and movement of the LIBOR. As a result, any
    replacement will entail some compromises and will risk imposing a cost
    on one party to the contract. Nobody can predict future interest rates,
    so--even if the transition is conducted fairly--it is difficult to
    predict who will bear the burden and how big a burden that will be.
        A related problem is that some contracts may require other
    adjustments to incorporate the new index. These adjustments are
    generically called ``conforming changes,'' because they are intended to
    bring the contract into conformity with the replacement index. One of
    the most significant conforming changes will be to the margin. Because
    the new index will almost certainly have a different starting and
    average rate, the margin will need to be changed to result in a
    ``comparable'' contract rate. Some contracts allow the noteholder to
    make this change but many do not. \7\ Other adjustments may be
    necessary too. This is another source of risk and controversy because
    there is no consensus on what conforming changes are appropriate or
    whether the fallback language authorizes noteholders to make them.
    ---------------------------------------------------------------------------
         \7\ Regulation Z specifically allows creditors to change the
    margin for home equity lines of credit. 12 CFR 1026.40(f)(3)(ii). But
    there is no equivalent provision for closed-end mortgages.
    ---------------------------------------------------------------------------
        The crux of the risk for consumers and industry participants is
    that making the wrong decisions will lead to an unreasonable transfer
    of value. One party to the contract will unfairly profit and the
    counterparty will be harmed.
        As long-time representatives of consumers, we are very familiar
    with the devastating consequences of predatory lending. This underlies
    our concern that some noteholders may abuse or mismanage their broad
    discretion in a way that gouges consumers. There are a number of ways
    this might happen. Unscrupulous, or even just sloppy, lenders or
    mortgage loan servicers could--

        use a replacement index that is too volatile or that trends
            at a higher rate than the LIBOR;

        employ a different margin that is too high and results in a
            windfall for the noteholder;

        make other inappropriate and harmful changes to the
            contract under the guise of ``conforming changes,'' such as by
            changing the method by which payments are calculated, or even
            changing the due date for payments;

        fail to replace the LIBOR altogether, leaving the loan
            stuck at the last LIBOR and locking in a higher-than-market
            rate; or

        botch the mechanics of replacing the LIBOR, such as by
            using a different date to measure the applicable index in a way
            that unfairly benefits the lender.

        Consumers have no control over what happens in this process and
    contracts provide them with no say in which index the noteholder
    selects. Their only recourse will be to complain or initiate
    litigation.
    The Credit Industry Should Adopt the ARRC's Recommended Replacement:
            The SOFR
        For the past several years, a committee of industry participants,
    known as the Alternative Reference Rate Committee (ARRC) \8\ has worked
    to prepare for this transition. NCLC and other consumer groups have
    participated in these deliberations. The ARRC has developed a set of
    well-vetted plans and recommendations that will protect consumers as
    well as industry. Unfortunately, their recommendations are non-binding.
    And, as the situation stands today, too few industry participants have
    committed to follow them. We believe fear of litigation is a major
    reason for the recalcitrance. They are worried that whatever index they
    choose, someone will sue them: either consumers, whose payments may
    increase, or investors, who may believe they are losing money.
    ---------------------------------------------------------------------------
         \8\ ``The ARRC is a group of private-market participants convened
    to help ensure a successful transition from USD LIBOR to a more robust
    reference rate, its recommended alternative, the Secured Overnight
    Financing Rate (SOFR). It is comprised of a diverse set of private-
    sector entities, each with an important presence in markets affected by
    USD LIBOR, and a wide array of official-sector entities, including
    banking and financial sector regulators, as ex officio members.'' Fed.
    Reserve Bank of N.Y. website, https://www.newyorkfed.org/arrc/about.
    ---------------------------------------------------------------------------
        The refusal of a significant part of the credit industry to agree
    to abide by the recommendations of the ARRC endangers consumers. This
    refusal also endangers the stability of the economy in the United
    States.
        Replacing the index is the primary challenge of the LIBOR
    transition. Fortunately, the ARRC has identified the most suitable
    replacement index: the Secured Overnight Refinancing Rate (SOFR). The
    technical aspects of why the SOFR is appropriate are beyond the scope
    of NCLC's discussion today, but there is no doubt that the ARRC and the
    Federal Reserve Bank of New York have sufficiently vetted the SOFR. As
    a result of their work, it has become clear that the SOFR, when
    implemented as recommended by the ARRC, \9\ will minimize any value
    transfer caused by the end of LIBOR. It is the best option for both
    industry and consumers.
    ---------------------------------------------------------------------------
         \9\ Including the recommended spread-adjustments.
    ---------------------------------------------------------------------------
    Congress Should Mandate Use of the SOFR or Offer a Safe Harbor for
            Voluntary Use
        Despite the ARRC's recommendations, too few industry participants
    have announced that they will adopt the SOFR for legacy consumer
    contracts. Delaying this decision to the last minute will increase the
    risk of implementation errors and the potential for broader economic
    instability. NCLC and other consumer advocates have urged Federal
    regulators to adopt strong regulations that will compel industry to
    adopt the ARRC's recommendations, but they have not done so. States
    have limited ability to adequately address the problem because of
    Federal bank law preemption. However, leaving the transition entirely
    to the market poses too great a risk to the financial markets, to bank
    safety and soundness, and to millions of individual homeowners, student
    loan borrowers, and their families.
        The best solution is for Congress to require noteholders to replace
    the LIBOR with the SOFR in all consumer contracts. But this proposal
    has been rejected by the credit industry, so we have agreed with
    industry trade groups on a suitable compromise. As an alternative to a
    mandate, Congress should create a safe harbor from litigation for
    noteholders that voluntarily adopt the ARRC's recommended benchmark
    replacement index.
        The House of Representatives is already considering such a bill,
    H.R. 4616, the Adjustable Interest Rate (LIBOR) Act of 2021. We support
    the ideas behind H.R. 4616 but only with changes to the safe harbor
    that will prevent abuse.
        While consumer advocates generally oppose safe harbors from
    litigation, we believe a narrowly tailored one is appropriate for this
    unique situation. A safe harbor provides a company with immunity from
    lawsuits by anyone claiming to have been harmed by conduct within the
    scope of the safe harbor. Safe harbor laws are often too broad, poorly
    drafted, and more likely to protect wrongdoers than to accomplish
    anything positive for society. But in this case, we have negotiated a
    narrowly focused safe harbor law that--while not our first choice--will
    avoid the greater harm we expect if noteholders adopt indices other
    than the SOFR.
        Specifically, we recommend that Congress adopt a safe harbor for
    consumer contracts that is limited to liability for:

        the selection or use of the SOFR recommended by the ARRC
            and Federal Reserve Board; and

        the implementation of necessary conforming changes.

        While we support the concept of a safe harbor embodied in H.R.
    4616, the language of the bill is currently too broad. In its current
    form, the safe harbor would also include consumer claims arising out of
    the determination and performance of conforming changes. We are
    concerned that disreputable actors could harm consumers by taking an
    overly broad interpretation of what conforming changes are necessary to
    implement a new index. If that happens, the current version of H.R.
    4616 could immunize some of the misconduct I describe in section II,
    supra, of my testimony.
        Based on our experience with consumer contracts, we believe that
    very few--if any--conforming changes will be needed. And those that may
    be needed will be so basic and ministerial that there is no reason to
    incentivize them with the offer of a safe harbor. Therefore, we have
    agreed with industry representatives that the safe harbor for consumer
    contracts will not include the determination of what conforming changes
    are necessary or the performance of conforming changes. Instead, the
    definition of ``conforming changes'' will be determined by the Federal
    Reserve Board (FRB). Only those changes will be within the scope of the
    safe harbor. Appendix A [Ed.: Not included] to my testimony is a
    document showing the changes that we and industry representatives
    recommend making to H.R. 4616. This document has already been shared
    with House and Senate staff.
        In the statutory language that we have proposed, the selection of
    the replacement index refers only to the question of whether to use one
    index or another. If a noteholder selects the appropriate SOFR, that
    decision will be protected by the safe harbor. Selecting any other
    index will be outside the safe harbor. This will encourage noteholders
    to follow the ARRC and FRB's recommendation, but will not require them
    to do so.
        Use of the replacement index refers only to routine performance of
    the contract once the new index has been substituted for the LIBOR.
    This primarily refers to the regular rate and payment changes called
    for by the loan contract. So, for example, if a borrower has an ARM
    that calls for annual rate changes, the safe harbor would cover
    calculation of the new interest rate and loan payment each year based
    on the SOFR. Neither a consumer nor an investor could claim that they
    were harmed because the new payment was based on the SOFR. But if the
    servicer makes a mistake in doing so, for example by using the SOFR
    from the wrong date, making a typo when entering the value into the
    computer, or miscalculating the new payment, those mistakes would not
    be protected by the safe harbor and the consumer would retain the right
    to seek appropriate relief.
    Conclusion
        NCLC represents the interests of millions of low-income consumers
    who will be directly affected by the end of the LIBOR. If industry
    participants replace the LIBOR with an inappropriate index; if they
    mismanage the transition; or if they take advantage of the opportunity
    to make other changes that cost consumers, many people will be harmed.
        That risk can only be avoided if Congress acts by passing
    legislation to ensure that industry participants adopt the most
    appropriate replacement for the LIBOR--the Secured Overnight
    Refinancing Rate (SOFR). After extensive discussions, we have agreed
    with some of the most important industry trade groups that H.R. 4616 is
    the best vehicle for doing so--but only if it is amended to narrowly
    tailor the safe harbor in a way that will protect consumers.
        Recommendation: The Senate should pass a bill modeled on H.R. 4616
    but with a more limited safe harbor connected to a narrow definition of
    ``conforming changes'' to be provided by the Federal Reserve Board.
        I want to conclude by praising industry, the Members of this
    Committee, and the House committee for working together to find a
    solution that is good for everyone. Thank you for considering the views
    of consumers. I am happy to answer any questions.
                                     ______

                 PREPARED STATEMENT OF J. CHRISTOPHER GIANCARLO
    Senior Counsel, Willkie Farr & Gallagher LLP, and Former Chairman, U.S.
                      Commodity Futures Trading Commission
                                November 2, 2021
    Introduction
        Thank you, Chairman Brown, Ranking Member Toomey, and Committee
    Members. It is an honor to appear before this Committee once again.
        I am Chris Giancarlo, Senior Counsel at the law firm of Willkie
    Farr & Gallagher.
        I had the honor to serve our country as the thirteenth Chairman of
    the U.S. Commodity Futures Trading Commission (CFTC), a Federal agency
    that has led and continues to lead the transition away from the LIBOR
    interest rate benchmark, the subject of today's hearing. I am also an
    independent director of the American Financial Exchange.
        I commend Chairman Brown and Ranking Member Toomey for holding this
    hearing. Congressional leadership on this issue is important to ensure
    banks and all financial institutions of every size, shape and location
    understand that LIBOR will be replaced and will be replaced soon.
        Over 4 years ago, on the very day that the U.S. Senate unanimously
    confirmed my nomination as CFTC Chairman, Federal Reserve Chairman
    Jerome Powell and I published an opinion piece in the Wall Street
    Journal, entitled ``How to Fix Libor Pains''. In it, we wrote:

             . . . the time has come for market participants and regulators
            to work together on a plan for dealing with existing Libor-
            based contracts maturing after 2021. This plan must also
            address how to expand adoption of the broad Treasury repo rate
            into a wider array of products that rely on a benchmark . . .
            There is time for this transition to be done thoughtfully. Our
            agencies are prepared to help ensure that it is done
            cooperatively and smoothly.

        I was committed then and remain committed today to do everything
    possible to assist the transition away from LIBOR. The transition is
    here and now. Beginning in January 2022, no new capital markets or
    lending contracts can be based on LIBOR.
        Beginning in June 2023, all existing LIBOR contracts must be
    replaced with a LIBOR replacement. This hearing is an important step in
    getting it done.
    The Shortcomings of LIBOR
        As you well know, the London Interbank Offered Rate, or LIBOR,
    plays an important role in American finance. The credit cards,
    floating-rate mortgages and car loans of many of our fellow American
    citizens and even the day-to-day funding for the companies where they
    work are all influenced by LIBOR. This arcane interest rate is meant to
    reflect the rate that large banks must pay to borrow short term. It is
    used to calculate the rate of interest on more than half of American
    home mortgages. LIBOR is cited in financial contracts setting trillions
    of dollar-denominated loans, securitizations, and derivatives.
        I have extensive experience, both as a market regulator and
    business executive, with financial benchmarks and, most particularly,
    with LIBOR. Before entering public service, I served as the Executive
    Vice President of GFI Group, a leading trading platform and technology
    vendor to global markets for OTC swaps and other financial derivatives,
    many of which refer to LIBOR. As former Chairman of the CFTC, I am
    familiar with the critical importance of reference benchmarks for the
    sound functioning of U.S. markets for risk mitigation and reliable
    price discovery.
        The shortcomings of LIBOR first came to light during the 2008
    financial crisis with reports of manipulation of the rates used to
    calculate it. My former agency, the Commodity Futures Trading
    Commission, was a leader in investigating and sanctioning a number of
    major banks for benchmark manipulation. Prosecution of many of those
    cases proceeded determinedly under my administration.
        LIBOR is calculated daily from the quoted rates that a panel of a
    few large banks provide to ICE Benchmark Administration, an independent
    subsidiary of the Atlantabased firm Intercontinental Exchange. The
    quotes represent the rates at which the banks estimate they would be
    able to borrow in short-term money markets. Yet, apart from overnight
    transactions, the large banks providing those submissions no longer
    borrow much in those markets. There are very few actual loan
    transactions on which these quoted rates are based. In essence, a few
    large banks are contributing a daily judgment about something they no
    longer do.
        As a result, LIBOR suffers from two fatal flaws: shallowness of
    liquidity because of thin trading volume and narrowness of liquidity
    because of its reliance on only a handful of rate setters. When it
    comes to the potential for manipulation, the second shortcoming may be
    worse than the first.
        Back in 2017 during my CFTC service, the U.K.'s Financial Conduct
    Authority, the agency primarily responsible for regulating LIBOR,
    called for a worldwide transition away from LIBOR because of these very
    shortcomings and the risk they present. Here in the United States, we
    welcomed this move. The CFTC's Market Risk Advisory Committee under the
    keen leadership of Commissioner Russ Benham, now Acting Chair and the
    President's nominee for CFTC Chairman, led agency efforts during my
    Administration and continues to lead efforts to spur the transition
    away from LIBOR.
    LIBOR Alternatives: SOFR
        At the same time in 2017 as the CFTC was prosecuting LIBOR
    manipulators and considering its risk to financial markets, the Federal
    Reserve Board convened a group of institutional participants that
    broker and clear LIBOR transactions to form the Alternative Reference
    Rates Committee, known as ARRC. It is a pleasure to appear today
    alongside Tom Wipf of Morgan Stanley, who chairs ARRC. Tom has worked
    tirelessly on these issues and has ably led the ARRC Committee. Under
    his leadership, the ARRC is focused on ensuring a smooth transition
    away from LIBOR for existing and new contracts.
        Following an extensive consultation, the ARRC committee recommended
    replacing LIBOR with a rate derived from short-term loans that are
    backed by a range of Treasury securities as collateral (known as
    Treasury repurchase agreements or ``Repo''). The Treasury Repo market
    is a fully collateralized financing market that enables the largest
    institutions to lend and borrow amongst each other, typically on a very
    short term basis. This interest rate derived from this market is a
    measure of practically risk-free borrowing because U.S. Treasury
    securities serve as collateral. With such risk-free collateral, the
    interest rate does not reflect the credit quality of the market
    participants, but rather the status of U.S. Treasury securities as the
    world's safest investment.
        Unlike LIBOR, SOFR is built upon actual market transactions of
    roughly $800 billion in daily activity. That provides much greater
    depth of trading liquidity than LIBOR. This feature directly addresses
    a key weakness of LIBOR: shallowness of trading liquidity.
        The Treasury Repo market is not only critical to the world's
    largest financial institutions, but it is also critical for ensuring
    liquidity in the U.S. Treasury debt market.
        The Federal Reserve Bank of New York is deeply involved in the Repo
    market in its role of managing Fed Open Market Operations in
    implementing Federal Reserve monetary policy. Widespread adoption of
    the SOFR benchmark is supportive of the U.S. Treasury debt market.
        SOFR is complementary to the cost of funding for many of America's
    largest banks that are primary dealers of Treasury securities and can
    use them as collateral for funding. Combined, these institutions have
    over eleven trillion dollars in assets. SOFR is therefore a highly
    appropriate LIBOR replacement for a broad range of financial
    institutions, especially primary dealers of U.S. Treasuries and other
    large firms that participate in that essential marketplace. I am very
    supportive of widespread adoption of SOFR as a well-constructed and
    durable, risk free interest rate benchmark.
    LIBOR Alternatives: AMERIBOR
        Away from Wall Street, America has almost 5,000 community and
    regional banks and lending institutions with another $11 trillion in
    assets. These institutions lend to the real economy of America's small
    to medium-sized businesses, including manufacturers, equipment dealers,
    service providers, agriculture producers, and home builders that are
    America's job creators. These community lenders generally do not hold
    U.S. Treasury securities and other risk free collateral. Rather, they
    lend against relatively illiquid collateral of plant and equipment
    liens, property mortgages, auto leases, and personal guarantees. In
    effect, these lenders take real risk. They are highly credit sensitive.
        Over my 5 years at the CFTC, I traveled over half the country to
    meet with thousands of Americans who depend on CFTC-regulated markets
    to hedge the prices of agriculture, mineral, or energy commodities they
    produce. In the course of those travels, I descended 900 feet
    underground in a Kentucky coal mine, climbed 90 feet in the air on a
    North Dakota natural gas rig and flew 900 feet in the air in a Arkansas
    crop duster. I walked factory floors in Illinois, pecan farms in
    Georgia, grain elevators in Montana, feed lots in Kansas, and power
    plants in Ohio. Almost all of the small and medium-sized businesses I
    met were supported by America's community, State, and regional banks. I
    know how much those community banks, in turn, need support from
    Washington.
        Among other roles I have assumed since completing my service at the
    CFTC, I serve as an independent member of the Board of Directors of the
    American Financial Exchange (AFX). AFX was founded in 2015 by Dr.
    Richard Sandor, American economist and entrepreneur, who pioneered
    interest rate futures and created the world's first trading exchange
    for the reduction and trading of greenhouse gas emissions, for which he
    is known as, ``The Father of Carbon Trading.'' My professional
    relationship with Dr. Sandor began almost two decades ago in the
    private sector. Upon completion of my Government service, I was
    delighted when Dr. Sandor invited me to serve as an independent board
    member of AFX.
        AFX is an electronic marketplace where banks in the U.S. can
    directly lend and borrow short term funds to one another on an
    unsecured, credit sensitive basis. AFX has over 225 members as well as
    over 1,000 correspondent American banks. The assets of AFX members
    exceeds $5.3 trillion dollars. Measured by both the number of U.S.
    banks and aggregate bank assets, AFX members constitute about 25
    percent of America's banks and community lenders, including the 5th,
    6th, and 7th largest banks in the United States.
        AFX member banks are in all 50 U.S. States, including States
    represented by every Member of this Committee. AFX members include some
    of America's most respected local and regional banks as U.S. Bank,
    Keybank, Zions, First Financial, Citizens Trust, Brookline, East-West,
    Abacus Federal Savings, Cambridge Savings, Cape Cod Five Cents Savings,
    Cathay Bank, Customers Bank, Dime Community, Fulton Bank, Glacier Bank,
    Hope Bank, Asian Bank, Dollar Bank and Signature, ServisFirst, Unity,
    and Truist Banks.
        AFX members are highly representative of America's community,
    minority-owned and regional banks. That includes a significant share of
    America's critical minority-owned depository institutions that play a
    vital role in serving traditionally underserved communities, often
    lending to businesses and entrepreneurs with minimal collateral. By
    asset size, AFX members today represent about forty (40 percent)
    percent of U.S. Minority Depository Institutions (MDIs), including some
    of America's most innovative African-American, Asian-American, Hispanic
    and Native-American banks. The National Bankers Association, the
    leading minority-owned bank trade association in America, has endorsed
    AFX's interest benchmark as an approved rate to be used for loan
    documentation for its members.
        AFX was conceived and founded well before the decision to
    transition away from LIBOR. AFX was not created to benefit from LIBOR's
    demise. Like all good ideas, AFX was created to address a commercial
    need: to provide America's community and regional banks with a way to
    lend to and borrow from each another in a regulated, transparent market
    on a peer-to-peer basis. AFX offers America's community and regional
    banks a complementary alternative to their traditional source of
    funding from large money center banks on Wall Street.
        Every business day, tens of billions of dollars of loans are lent
    and borrowed by hundreds of participants in the AFX institutional
    marketplace. The marketplace is electronic, transparent and self-
    regulated under the scope of the CFTC's comprehensive regulatory
    framework. It is compliant with standards developed by the
    International Organization of Securities Commissions (IOSCO) for
    appropriate LIBOR benchmark replacements. The interest rate at which
    AFX members independently agree to borrow and lend are tracked and
    compiled into a series of benchmarks that include the
    AMERIBOR' Term-30 index. The index is published nightly and
    displayed on almost all financial data feeds like Reuters and Bloomberg
    and financial broadcast media.
        These AMERIBOR benchmarks are complementary to the cost of funding
    for thousands of AFX members and correspondent firms whose lending
    activities to the real economy is highly credit sensitive and supported
    by relatively illiquid, physical collateral, and personal guarantees.
    For these institutions, AMERIBOR best represents their cost and risk of
    funding. As a result, AMERIBOR benchmarks are favored by the thousands
    of AFX members and correspondent firms as an interest rate benchmark
    for commercial lending contracts. For this reason, I support adoption
    of AMERIBOR by institutional lenders who require a well-constructed and
    durable, credit sensitive interest rate benchmark.
    Market Diversity and Durability
        It will not surprise the Committee to hear that at my core I
    believe in open and competitive U.S. markets. But my comments today are
    frankly less about the need for competition in the LIBOR replacement
    market and more about choice. SOFR and AMERIBOR should not be viewed as
    competitive but as complementary. They are different. SOFR is a risk-
    free rate and AMERIBOR is a credit sensitive rate. They are
    alternatives for different needs and different sectors of the
    marketplace.
        From my service at the CFTC, I know that most of America's
    important trading markets feature a diverse set of pricing benchmarks
    serving different needs. In our grain futures markets there are
    multiple pricing benchmarks, including Chicago soft red winter wheat,
    Kansas City hard red winter wheat, and Minneapolis hard red spring
    wheat. The different benchmarks serve to establish the cost of
    different varieties of wheat used in different bread products. (Pizza
    dough is made from different wheat than breakfast cereal). In oil
    markets there is West Texas Intermediate and Brent crude oil, again
    setting distinct prices for different fuel products, like domestic auto
    gas or industrial diesel. Of course, in our equity markets, there are
    multiple benchmarks like the Dow Jones Industrials, the S&P 500, and
    the Russell 2000 to measure the different performance of large cap and
    small cap companies. Such existence of a variety of specifically
    designed benchmarks allows market participants to engage in investment
    activities that are specifically crafted to their investment needs
    rather than a ``one-size-fits-all'' approach. Choice of benchmark is
    one reason why U.S. futures and equity markets are the world's deepest,
    most liquid, and most attractive to global capital.
        Strangely, one U.S. market that has not traditionally enjoyed a
    similar choice of benchmark is bank lending, where LIBOR has been
    dominant for decades. In fact, the ubiquity of LIBOR and long absence
    of competing, commercially derived interest rate benchmarks is one of
    the reasons why the demise of LIBOR presents a potential crisis today.
    Lack of choice of interest rate benchmark is itself a systemic risk.
        Nassim Nicholas Taleb, the well-known market observer who coined
    the phrase ``Black Swan'' has written about the increased fragility of
    today's top-down designed, overly complicated economic systems. \1\ He
    warns that concentration in complex systems such as financial markets
    makes them more vulnerable, not less to cascading runaway chains of
    reactions and ultimately fragile in the face of outsized crisis events.
    ---------------------------------------------------------------------------
         \1\ See, generally, Nassim Nicholas Taleb, ``Antifragile: Things
    That Gain From Disorder'', (Random House) 2012.
    ---------------------------------------------------------------------------
        He posits that the opposite of such fragility is ``antifragile,''
    meaning systems that become stronger when subject to stress, the way a
    human body becomes immune to a disease through exposure or inoculation.
    He explains that financial markets that are allowed to grow organically
    through gain and loss with plenty of redundancy and choice best
    resemble biological organisms that adapt and, indeed, thrive.
        The United States banking industry is quite unique and
    extraordinary. On the one hand, its large money center and Wall Street
    investment banks lead the world in sophisticated global trading,
    investment banking, and large project finance. On the other hand,
    America's community and regional banks spread out across the urban,
    suburban, and rural landscape finance the everyday needs of America's
    consumers, small and medium-sized businesses, and domestic job
    creators.
        A banking industry that is so varied, so complex and so essential
    to the American economy needs the diversity and durability that comes
    from choice in interest rate benchmark. A one-size-fits-all response to
    the demise of LIBOR would be a source of systemic risk to the U.S.
    economy. As we rightfully move away from LIBOR, we should make clear
    that lending institutions--be they money center banks or local,
    regional or MDI banks--should have the flexibility to choose among
    IOSCO compliant benchmark alternatives that best meet both their
    lending activity and their customers' needs.
    Federal Legislation
        There is a clear consensus, that I share, that Federal legislation
    is necessary to ensure smooth and efficient transition away from LIBOR.
    As Treasury Secretary Janet Yellen stated in her testimony before the
    House Financial Services Committee earlier this year, legislation is
    necessary for tough legacy contracts that do not specify a workable
    fallback rate making it not feasible for private-sector actors to
    modify on their own. \2\ Legal certainty is absolutely critical to
    ensuring that institutions with existing tough legacy contracts can
    replace their LIBOR benchmark before the end of June 2023, the
    termination date for all existing LIBOR contracts.
    ---------------------------------------------------------------------------
         \2\ Oversight of the Treasury Department's and Federal Reserve's
    Pandemic Response. U.S. House Financial Services Committee (March 23,
    2021), https://www.youtube.com/watch?v=AQsLydo6mJI&t=3488s at 58:44.
    ---------------------------------------------------------------------------
        There is legislation moving through the House of Representatives,
    H.R. 4616, the Adjustable Interest Rate (Libor) Act of 2021, that would
    provide much needed legal certainty. The legislation makes clear that
    all LIBOR contracts must be converted to an alternative benchmark
    before June 30, 2023. Furthermore, if the contract does not provide
    clarity how an alternative benchmark can be reassigned, the institution
    would have legal certainty if LIBOR is replaced with SOFR. Also, as it
    relates to ``new'' contracts, the legislation, in the ``Findings''
    section, provides helpful language that institutions entering into new
    contracts will have choice of which benchmark they can utilize. AFX
    supported this legislation when it was before the House Financial
    Services Committee where it was ordered to be reported to the full
    House.
        Enactment of legislation providing legal certainty for the
    conversion of those tough legacy contracts is absolutely critical. I
    would also urge the Committee to consider providing stronger language
    ensuring that, as institutions are entering into new contracts, they
    have the clear ability to choose among properly qualified benchmark
    replacements. Qualifying factors could include, for example, benchmarks
    meeting the IOSCO standards and benchmarks that are built around
    market-based trading and fully transparent price discovery.
    Conclusion
        LIBOR has been the world's most used interest rate benchmark. A
    such, the transition away from LIBOR has been, and continues to be, a
    long journey. In less than 2 months LIBOR will cease as the benchmark
    for new contracts and in less than 20 months all legacy LIBOR contracts
    must be replaced with an alternative benchmark. SOFR and Ameribor and,
    no doubt others, will help us put LIBOR in the rear view mirror. But
    this Committee and this Congress can help facilitate that smooth
    transition by providing legal certainty as it relates to tough legacy
    contracts and responsible choice for new contracts.
        If I can leave you with one thought, it is that there is simply no
    one-size-fits-all lending benchmark for an economy as unique and
    diverse as the United States. Having choice among multiple, properly
    qualified benchmarks not only facilitates the transition away from
    LIBOR, but it also enhances efficiency, reduces systemic risk and
    encourages economic growth as we progress through the transition
    process. Both SOFR and AMERIBOR represent the kind of home grown
    American ingenuity and innovation, along with a sound regulatory
    infrastructure, that has helped make U.S. markets the deepest, most
    liquid and most efficient markets in the world.
        Thank you and I look forward to your questions on this important
    matter.
                                     ______

                      PREPARED STATEMENT OF MICHAEL BRIGHT
            Chief Executive Officer, Structured Finance Association
                                November 2, 2021
    Introduction and Background
        Chairman Brown, Ranking Member Toomey, and other Members of the
    Committee, my name is Michael Bright, CEO of the Structured Finance
    Association, or ``SFA.'' On behalf of the member companies of SFA, I
    thank you for inviting me to testify. I also thank you for your focus
    on finalizing the transition away from LIBOR for millions of consumers
    and investors with loans or savings tethered to these rates.
        The Structured Finance Association is a consensus-driven trade
    association with over 370 institutional members representing the entire
    value chain of the securitization market. By facilitating the issuance
    and investing of loans and securities, this market provides trillions
    of dollars of capital to consumers and businesses in communities across
    the country. Our members facilitate credit and capital formation across
    a wide breadth of asset types and industries, including auto loans,
    mortgage loans, student loans, commercial real estate, business loans,
    among others.
        SFA members include issuers and investors, data and analytic firms,
    law firms, servicers, accounting firms, and trustees. Importantly, many
    of our investor members are fiduciaries to their customers. Unlike some
    trade associations, before we take any advocacy position our governance
    requires us to achieve consensus by agreement rather than majority
    vote, ensuring the perspectives of all our diverse membership are
    included. This diversity is our strength, as it builds healthy tension
    in arriving at our consensus positions. Because of this, we are
    methodical and thoughtful as we analyze the pros and cons of
    legislative and regulatory proposals, as well as market dynamics,
    before we reach a mutually acceptable position that represents the
    entirety of the capital markets.
        Formed in 2013, the Structured Finance Association's stated mission
    is: ``To help its members and public policy makers grow credit
    availability and the real economy in a responsible manner.'' \1\ There
    are very few issues that touch on this core mission as much as the work
    we are doing to help responsibly transition away from U.S. dollar (USD)
    LIBOR. Further, this issue is one that has unified all participants in
    our membership--from issuer to investor, and everyone in between--on
    the need for Federal legislation to help ensure a final transition
    takes place smoothly and efficiently.
    ---------------------------------------------------------------------------
         \1\ https://structuredfinance.org/about-us/
    ---------------------------------------------------------------------------
        Absent Federal legislation to provide a consistent and fair
    solution as well as a safe harbor for certain so called ``tough
    legacy'' contracts--that is, USD LIBOR contracts lacking clear fallback
    language--retirees and savers will be forced to foot the bill for
    billions if not tens of billions of dollars in legal costs. This will
    occur as trustees would need to seek court guidance on which
    replacement rates to select and how to incorporate that rate into the
    existing contract. The absence of Federal legislation for these
    contracts also opens the possibility that consumers could be left in an
    uncertain position under contracts that fail to provide a fallback
    directive upon LIBOR's cessation. With legislation, however, there are
    critical incentives for lenders to provide consistent treatment to all
    consumers. I will outline in detail in my written testimony below how
    this dynamic has come about, and why, as to this remaining pool of
    legacy contracts, the market is unable to resolve this issue without
    enormous litigation expense.
        Securitization and structured finance are critical elements of
    today's economy. The pooling of loans into a security, coupled with the
    separation of highest credit and prepayment risks from lower prepayment
    and credit risks, allow for efficient matching of borrower and investor
    preferences. This segmentation of risks lowers the cost of credit to
    the consumers and businesses that the capital markets fund while
    providing more tailored investment options to investors with varying
    risk preferences. Our members know that, when done properly, this work
    facilitates economic growth and capital formation across all
    communities.
    Background on LIBOR Transition to Date
        Let me first make abundantly clear that many of SFA's member
    companies were impacted by the LIBOR scandal. In particular, SFA
    investor members need to assured that this never happens again. All of
    our members must know that, going forward, contracts based on a
    floating rate index can rely on the integrity of that index. For these
    reasons, SFA has been an active member in the Federal Reserve's
    Alternative References Rate Committee, or ``ARRC'', a group whose
    purpose includes ensuring an orderly transition away from LIBOR.
        Extensive progress has been made on this gigantic financial
    undertaking. Out of over $200 trillion of U.S. dollar-based contracts
    that are tied to LIBOR, nearly all have managed to put in place a plan
    for transition to a new rate. This was achieved across banking and
    financial sector regulators, market participants and consumer groups.
    As there wasn't a natural replacement rate for U.S. dollar LIBOR in
    existence, the transition started with the critical task of identifying
    and developing trusted and widely adopted alternative reference rates
    and ensuring those rates won't present the same flaws as LIBOR or other
    systemic deficiencies. As the alternative replacement rates were not
    previously published, groundbreaking work was launched to build market
    understanding, acceptance, and liquidity in these alternative rates
    required by borrowers, lenders, and investors.
        With alternative rates available and the liquidity and market
    acceptance of those rates steadily building, attention quickly turned
    to ensuring that all new contracts that still referenced LIBOR
    incorporated so called ``fallback'' language. This fallback language is
    agreed to by all contract parties and clearly specifies what interest
    rate would be used in the event that LIBOR is unavailable or ceases to
    exist. In parallel to incorporating fallback language in new contracts,
    work began in large scale by lenders, borrowers and investors to amend
    millions of existing LIBOR contracts that mature after the expected
    cessation date of LIBOR. All this effort, significantly supported and
    helped by a widespread number of market participants, consumer groups,
    and regulators within product-specific working groups of the ARRC, has
    reduced the USD LIBOR exposure that will remain after the June 2023
    LIBOR cessation date from over $200 trillion to an estimated $16
    trillion. \2\
    ---------------------------------------------------------------------------
         \2\ This is a best guess estimate taken by surveying our member
    firms. This number includes many types of contracts, ranging from
    floating rate mortgage to student loans, loans to businesses, and
    embedded interest rate swaps in contracts.
    ---------------------------------------------------------------------------
        Meanwhile, market participants have continued to work to build
    liquidity and transparency in the alternative reference rates, which
    allow for the hedging of interest rate risk in a liquid capital market.
    That hedging allows borrowers to access products like the fully
    prepayable fixed rate mortgage, or to issue corporate debt that matches
    a company's assets and cash flows.
        Finally, new security issuance continues to increase in all product
    types. Building off the liquidity of a secondary market for hedging,
    the amount non-LIBOR floating rate contracts continues to increase each
    month.
    ``Tough Legacy'' Contracts, and Other Remaining Challenges
        Even with this well-organized multiyear effort, these estimated $16
    trillion contracts have no realistic means to be renegotiated and
    amended. While small compared to the overall size of outstanding LIBOR
    contracts, this is still a large sum, posing an enormous risk to the
    financial system and the underlying borrowers, investors and banks if
    not dealt with properly. These so-called ``tough legacy'' contracts
    include mortgages, student loans, business loans, and capital market
    transactions that finance and hedge these legacy LIBOR-based contracts,
    and therefore impact a broad range of American households and
    businesses.
        The simplest explanation for these contracts is that, after more
    than 30 years of publication and use in over 98 percent of U.S. dollar
    floating rate contracts, most contracts that were entered into prior to
    the announcement of LIBOR's end simply did not contemplate the
    permanent cessation of such a ubiquitous rate. While in hindsight today
    it may seem obvious that LIBOR could come and go, for many decades this
    simply and unfortunately was not the case.
        These tough legacy contracts often have very high legal and
    operational hurdles to amending their terms, not the least of which is
    identifying, contacting, and negotiating with the large number of
    contractual parties who must consent to any such amendment. For
    instance, in all widely distributed bonds there are upwards of hundreds
    of bondholders who must be involved in the negotiation--and most often
    unanimous consent--that is required to change the interest rate of the
    bond. Moreover, even in normal market circumstances, due to investor
    privacy constraints and operational hurdles, identifying and
    communicating with bondholders in certain products is very challenging,
    if not impossible. On the massive scale required by the LIBOR
    transition, it is viewed as fruitless.
        Finally, in the likely absence of meeting these impractical
    hurdles, the third-party trustees, who administer certain contractual
    provisions in the structured finance market, would need to seek
    direction through judicial proceedings to navigate the transition to a
    replacement rate. This is what will happen in the absence of safe
    harbor legislation, and--as per the contracts--most of the legal costs
    for structured finance bonds will be borne by the underlying investors
    and savers.
        Recognizing the significant economic, operational and legal risks
    of these $16 trillion contracts, for the past few years SFA investors,
    bond issuers, lenders, trustees, paying agents and servicers members
    have worked extensively with each other, and with consumer groups,
    regulators and other sector participants, to evaluate potential
    solutions. Early in the process of managing away from LIBOR, many of
    these stakeholders expressed concern about the use of legislative
    action that would affect previously agreed contractual matters.
    However, after lengthy deliberation and debate, a consensus position
    across the entire market emerged that the cessation of this critically
    important benchmark rate presents such a unique challenge that other
    alternatives examined were inoperable, could lead to inequitable
    outcomes for investors or consumers, presented extensive and costly
    litigation risk, or all the above. As such, firms that would under
    normal circumstances find legislation to amend contracts anathema, are
    now strong advocates for Federal legislation to ensure a smooth and
    fair transition.
    Principles of a Legislative Solution
        Again, after much discussion amongst our members and stakeholders,
    SFA members found that legislation is not only the best option, but the
    only viable option to safely, fairly, and equitably transition tough
    legacy contracts. Moreover, it became clear that, absent congressional
    action, the remaining challenges of the LIBOR transition will create a
    great deal of confusion for borrowers and investors while further
    degrading the value of these fixed-income investments for savers,
    pensioners, and retirees.
        With that as background, SFA market participants identified five
    key principles of a legislative approach:

        Minimize any value transfer among the contractual parties

        Use a single, consistent replacement benchmark for all
            similar LIBOR contracts based upon a liquid, robust replacement
            benchmark

        Minimize litigation risk through a comprehensive but narrow
            safe harbor that provides adequate operational flexibility for
            billing and paying agents to implement the use of the new
            replacement benchmark

        Narrowly scope legislation to facilitate the transition
            away from LIBOR without impacting investor, consumer, or other
            counterparty rights and protections

        Do not impact contracts that already have a sufficient
            replacement mechanism unless contract parties opt-in on their
            own

        To be clear, SFA believes that legislation should in no way
    prohibit parties from agreeing together on a different replacement
    rate, if they so choose. Legislation should pay careful attention to
    all Constitutional rights embedded in contracts, and for this reason
    SFA has spent considerable time working with experts in this area of
    the law. And legislation should in no way contribute to wealth transfer
    between parties. These all represent important boundary conditions on
    how any law would work, and therefore discussions over every provision
    of proposed legislation have taken thousands of hours of work.
        With these principles in mind, SFA is strongly supportive of the
    prospective Federal legislation that recently passed out of the House
    Financial Services Committee. We also know that legislation may undergo
    additional technical edits, and we know that the Senate is working on
    similar legislation with similar goals. With the principles enumerated
    above, we continue to be appreciative of all this legislative work. On
    behalf of the entire membership of SFA, I specifically want to thank
    Senators Tester and Tillis for the leadership they are providing on
    this issue.
        As you likely know, recently, both Chairman Powell and Secretary
    Yellen also expressed their support for Federal legislation. On
    February 24, 2021, Jay Powell, Chair of the Federal Reserve, called
    Federal legislation the ``best solution'' to address outstanding legacy
    contracts that will have not run off by June 2023. On March 23, 2021,
    Treasury Secretary Janet Yellen agreed with Chairman Powell's assertion
    and stated that the transition of certain legacy contracts would be
    difficult without legislation, specifically noting, ``Congress does
    need to provide legislation for the LIBOR transition.'' We understand
    that these statements of support are the result of meaningful
    examination of the issues and challenges involved.
    State-by-State Patchwork Approach Is Not Viable
        Recognizing the importance of legislative assistance to transition
    away from LIBOR, on April 6, New York State passed AB164B \3\ into law.
    The legislation provides businesses and consumers paying or receiving
    LIBOR-based payments crucial clarity, minimizing adverse economic
    impact and legal uncertainty in New York-based tough legacy contracts.
    The bill passed by the New York State legislature was also consistent
    with our five key principles.
    ---------------------------------------------------------------------------
         \3\ https://legislation.nysenate.gov/pdf/bills/2021/A164B
    ---------------------------------------------------------------------------
        This was a big, positive step forward in the orderly transition of
    LIBOR as we estimate almost half of tough legacy contracts are governed
    by the law of New York State. But a uniform Federal framework would
    expand the protections to also include all other tough legacy contracts
    remaining across the United States, allowing for all tough legacy LIBOR
    contracts to transition on time and in an equitable and fair manner.
    Timely and consistent treatment is crucial for the acceptance of the
    replacement rate by the investing and borrowing public. The success of
    the transition ultimately depends not only on the coordination across
    easily amendable contracts, but also on the fair and timely resolution
    of tough legacy contracts.
        The most important reason for a Federal legislative approach is to
    avoid the foreseeable downside risk to a State level approach. Simply
    put, a State-by-State approach would provide fewer comprehensive
    protections than what could be achievable at the Federal level given
    the very limited time remaining until LIBOR's end in just over 2 years.
    Additionally, we risk a patchwork of varying State laws, which would
    compromise the very intent to provide a smooth transition.
        State-by-State solutions cannot ensure all borrowers, lenders,
    investors, and financial intermediaries of tough legacy contracts have
    the same fair, equitable and consistent treatment across the country
    which is paramount to ensuring the public and market confidence in the
    fairness, viability and liquidity of the replacement rate they receive
    for the remaining term of their contract. Ultimately, any States that
    take no legislative actions will fail to articulate a path forward at
    all, leaving Americans and their businesses with potentially negative
    economic consequences and legal costs needed to protect their
    interests. By providing the certainty of an equitable, liquid, and
    transparent replacement rate and eliminating the potential for costly
    litigation, the legislation recently passed in New York State will
    serve to protect New York consumers, investors and other market
    participants if their contracts are governed by New York law. Similar
    legislation--adopted at the Federal level--would provide the same
    protections to help ensure all consumers, investors, and borrowers
    receive equitable and fair treatment regardless of where their contract
    is governed.
    Conclusion
        In conclusion, let me thank you all again for your focus on helping
    to transition our markets and economy away from LIBOR once and for all.
    The work that some Members of this Committee are currently undertaking
    is critical to ensuring that all investors, consumers, and business
    borrowers and lenders are treated equally and fairly. It also will help
    to prevent billions of dollars of potential litigation, where no one
    wins but savers and retirees foot the bill.
        Please know that the membership of the Structured Finance
    Association has been committed to being part of the healthy evolution
    and productive improvements in our markets as they continue their final
    transition away from reliance on LIBOR, and we thank you for your work
    in helping to facilitate this important market evolution.
            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                            FROM THOMAS WIPF

    Q.1. In a recent speech, Federal Reserve Governor Randal
    Quarles noted ``a handful of firms have said that they may want
    more time to evaluate potential alternative rates'' to SOFR.
    Please describe the consequences of these firms not following
    the recommendations of the Alternative Reference Rates
    Committee (ARRC) to transition to SOFR.

    A.1. The ARRC believes that SOFR is the strongest alternative
    to USD LIBOR. However, the ARRC's recommendations have always
    been voluntary, and it recognizes that market participants may
    choose other rates. With that in mind, it is important to note
    that the ARRC has expressed its support for a vibrant and
    innovative market with reference rates that are robust, IOSCO
    compliant, and were available for use before the end of 2021 in
    order to promote a timely transition. (Source: Freguently Asked
    Questions Version: August 27, 2021)

    Q.2. Please describe the consequences of some market
    participants potentially continuing to use LIBOR after 2021,
    including any potential risks to financial stability that could
    arise.

    A.2. The Financial Stability Oversight Council, the Financial
    Stability Board and other domestic and global authorities have
    emphasized the clear risk to financial stability posed by the
    continued reliance on LIBOR. As such, the transition off of
    LIBOR, and toward robust alternative rates that do not
    reintroduce the vulnerabilities of LIBOR, is an important
    foundation for financial stability going forward.
        In the U.S., banking regulators have stated that they
    believe there are safety and soundness concerns for supervised
    entities that continue new use of U.S. dollar LIBOR this year.
    The ARRC has supported this supervisory guidance and has
    encouraged all market participants to end new use of U.S.
    dollar LIBOR. Because LIBOR has been used in such a large
    volume and broad range of financial products and contracts,
    failing to take advantage of the next 15 months to wind down
    legacy positions and instead continuing to create new LIBOR
    contracts would pose a potential threat to individual financial
    institutions and to financial stability.
        It is estimated that current outstanding contracts
    referencing USD LIBOR, including corporate loans, adjustable-
    rate mortgages, floating rate notes (FRNs), securitized
    products and a wide range of derivatives products, total more
    than $200 trillion, roughly equivalent to 10 times U.S. Gross
    Domestic Product. The ARRC has estimated that roughly \2/3\ of
    these exposures will mature by June 2023; however, if new LIBOR
    contracts continued to be written then there would be a much
    larger set of contracts that would be forced to suddenly
    transition when LIBOR ends. Without advanced preparation, a
    sudden cessation of such a heavily used reference rate would
    cause considerable disruptions to, and uncertainties around the
    large gross flows of LIBOR related payments and receipts
    between many firms. It would also impair the normal functioning
    of a variety of markets, including markets for business and
    consumer lending. Continuing to use LIBOR would seem to ignore
    both its impending end and that its liquidity and usefulness
    will likely continue to diminish; it will also impede the
    ability of corporate borrowers and consumers to transition.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                           FROM ANDREW PIZOR

    Q.1. Do existing student loan contracts that use LIBOR
    generally specify the required replacement rate if LIBOR is
    terminated?

    A.1. No. Most existing LIBOR contracts grant note holders sole
    discretion to choose a new rate to replace LIBOR without
    specifying any particular replacement and also to make
    adjustments at the note holder's sole discretion. For example,
    a recent student loan contract from Discover states:

            If the 3-month LIBOR Index is no longer available, we
            will substitute an index that is comparable, in our
            sole opinion, and we may adjust the Margin so that the
            resulting variable interest rate is consistent with the
            variable interest rate described in this paragraph. If
            at any time the fixed or variable interest rate as
            provided in this paragraph is not permitted by
            applicable law, interest will accrue at the highest
            rate allowed by applicable law.

        It is also not clear that market participants have adjusted
    their contracts to reflect the upcoming cessation of LIBOR.

    Q.2. Please describe the implications of student loan servicers
    having the discretion to choose an alternative rate to the
    Secured Overnight Financing Rate (SOFR), including the impact
    on student loan borrowers.

    A.2. Allowing servicers the discretion to choose the
    replacement rate creates significant risk for consumers. The
    primary risk is that servicers will choose a rate that
    generates more profit for them and the note holder by being
    consistantly higher than LIBOR, such as the prime rate. Or they
    may choose a rate that is unsuitable for other reasons, such as
    a rate that is more volatile, one that is less representative
    of market rates, one that is not based on actual transaction
    data, or one that is easily manipulated--as the LIBOR was. For
    example, as consumer advocates have noted, industry
    representatives had advocated for the use of Ameribor and the
    Constant Maturity Treasury (CMT) rate to replace LIBOR, even
    though Ameribor is based on an extremely thin market relative
    to the market SOFR references and CMT is based on
    ``indicative'' rate quotations instead of actual transaction
    data.

    Q.3. Are existing rules sufficient to protect against companies
    putting any costs of the LIBOR transition onto consumers
    through an increase in interest rates? If not, what new
    protections are needed to mitigate any harms to student
    borrowers?

    A.3. No, they are not. Right now, companies can readily replace
    LIBOR with rates that are more favorable to them at borrowers'
    expense, and many contracts allow note holders to make
    additional changes to the terms of consumer contracts (such as
    adjusting the margin on the loan) in the context of the
    adoption of a new reference rate that could put borrowers at
    risk.
        As we previously recommended to the Consumer Financial
    Protection Bureau, several measures are necessary to protect
    student borrowers:

        The CFPB should signal its expectation that
            industry participants will select SOFR as a replacement
            index and that failure to do so will invite increased
            scrutiny of compliance with Regulation Z.

        Consumers should be informed at each critical stage
            of the transition.

         The CFPB should require that lenders and servicers
            make information about the transition, including the
            new replacement rate, readily available to existing and
            prospective customers, even when their debts transition
            to spread-adjusted SOFR.

         It should be expected that institutions that
            continue making loans that use the LIBOR as an index
            ahead of the rate's cessation will add unambiguous
            language to their loan contracts clearly articulating
            the index that any LIBOR-based loan will fall back to
            upon LIBOR's cessation and any associated changes that
            will be made to the loan's margin at that time. Lenders
            that do not adopt the ARRC's recommendations for
            fallback language should be subjected to heightened
            scrutiny from the Bureau.

        The CFPB should use all available authorities to
            ensure the timely transition away from LIBOR.

        The Bureau's recently announced final rule is a strong step
    in the right direction, but more is still necessary.
                  Additional Material Supplied for the Record
                                  ICBA LETTER

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                                  LIBOR LETTER

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                                  CAMAC LETTER

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                                  NAFCU LETTER

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                             BROOKLINE BANK LETTER

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                          STATEMENT SUBMITTED BY SIFMA

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