The Secured Overnight Financing Rate (SOFR) is the new standard that is used to determine the current variable interest rate on loans. SOFR replaced the London Interbank Offered Rate (LIBOR) index as the go-to standard for new loans that originated in the United States at the end of 2021. While LIBOR will no longer be used to price new loans starting in 2022, it will formally stick around until at least 2023.
Financial institutions use LIBOR and SOFR as tools for pricing corporate and consumer loans. SOFR bases its rate on what financial institutions pay one another for overnight loans, which is why the source is named overnight financing. The SOFR rate is published daily by the Federal Reserve Bank of New York which can be found here.
Why the switch?
The LIBOR Index was a common metric used to determine the variable interest rates on setting commercial and consumer loans. However, in 2021, the U.K. Financial Conduct Authority (FCA) announced it would cease publication of the London Interbank Offered Rate (LIBOR) on new loans originated in 2022. As a result, any loan product that references LIBOR would need to transition to an alternative index by June 2023.
SOFR has become the new industry benchmark because it’s more risk-averse, holistic, and transparent to borrowers and lenders. This is because SOFR is based on more than $1 trillion in cleared marketplace transactions which are all observable. The SOFR Index is intended to be more dependable and has a stronger emphasis on comprehensibility. The change will impact borrowers who are needing new private student loans, refinance existing ones, or even those who are wanting to take out a mortgage.
How is the rate determined?
The largest financial institutions will lend money to each other using the Treasury repurchase market. They do this by using Treasury bond repurchase agreements which have become known as repos. These repo agreements allow institutions to use their Treasuries as collateral to make overnight loans to ensure they’re meeting liquidity and reserve requirements. The SOFR rate is then determined by taking the weighted average of all the interest rates of these repo transactions.
How will this impact Variable Rate SoFi loans originated prior to 10/31/2021?
Your loan will continue to utilize the LIBOR Index for the interim period until LIBOR is no longer published. It is expected that values for the LIBOR Index will no longer be published, or no longer deemed suitable for industry use, after June 30, 2023. Assuming this date does not change, for interest rate adjustments occurring on and after August 1, 2023, your interest rate will be based on a new index plus the margin.
At that time, the LIBOR Index will be replaced by the spread adjusted 1 month Chicago Mercantile Exchange (“CME”) Term Secured Overnight Financing Rate (“SOFR”), which is administered and published by Refinitiv Limited. The replacement SOFR Index will be used for future accrual, and any changes to your loan will be reflected on your monthly statements. We’ll notify any client impacted by this transition via email prior to the change occurring.
If you have an existing SoFi loan, no action is needed from you. Loan documents and disclosures will not need to be replaced as outlined in Section E. Interest in your loan agreement. The interest rate on your variable rate loan will be set based upon the Refinitiv published spread adjusted 1 month CME Term SOFR Index as the 25th of each month (or the next business day) plus whatever margin you originally agreed to, to be the effective rate beginning on the 1st day of the following month. You can find more information on the Refinitiv website here: https://www.refinitiv.com/en/financial-data/financial-benchmarks/usd-ibor-cash-fallbacks/usd-ibor-consumer-cash-fallbacks-sofr-compound-in-advance-summary
There will be no changes to Variable Rate SoFi Loans originated after 10/30/2021 that currently use the 30-Day Average SOFR as outlined in your loan agreement.