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ARRC Sets out "Guiding Principles" for Consumer Product Fallback Language

The Alternative Reference Rates Committee ("ARRC") Consumer Products Working Group (the "Working Group") outlined "guiding principles" on contractual fallback language for consumer loan products.

According to the Working Group, when dealing with consumer loan products, it is crucial to:

  • engage with stakeholders, including lenders, servicers, investors, regulators and consumer groups, and comply with any relevant consumer protection laws and regulations during LIBOR transition planning;

  • ensure that stakeholders understand the details of fallback recommendations prior to the transition;

  • minimize the expected value transfer in connection with proposed fallbacks for LIBOR;

  • limit flexibility and discretion allotted in fallback recommendations to, among other things, reduce potential disputes; and

  • "maintain alignment in outcomes for investors in order to minimize basis risk between consumer loan products and any related loans and securities, securitizations or hedges."

Additionally, the Working Group outlined the scope of its responsibilities, which include:

  • recommending models for using the Secured Overnight Financing Rate ("SOFR") in consumer products that meet stakeholders' needs;

  • clarifying best practices for new LIBOR- and SOFR-based consumer notes;

  • providing guidance on best practices for fallback contract language in existing notes; and

  • creating a strategic plan for LIBOR replacement.

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