NCLC Advocates Caution Consumers to Check ARMs and Private Student Loans for Servicer Mistakes
WASHINGTON – This Friday, June 30, will be the last day for the LIBOR. Starting next week, loan servicers responsible for millions of consumer loans that use the LIBOR will switch borrowers to a new index.
The LIBOR is a widely used index for adjustable rate mortgages and private student loans, but after decades of use, it is being discontinued. If all goes well, the change will have little impact on borrowers. But servicer mistakes could be costly for borrowers.
A loan’s index is used to set the interest rate on an adjustable rate loan. Each time the interest rate changes, the loan servicer calculates a new monthly payment and notifies the borrower. If the owner of a loan selects an inappropriate index as a replacement for LIBOR, or if the servicer makes a mistake when implementing the change, the borrower could see a spike in their new monthly payment.
Most loans will switch to a replacement index based on the Secured Overnight Financing Rate, commonly known as the SOFR. But some loans may switch to other indices. According to Andrew Pizor, senior staff attorney with the National Consumer Law Center (NCLC), “the SOFR-based replacement is a well-designed substitute for the LIBOR, so most consumers shouldn’t have any problem. But everyone with a loan using the LIBOR should pay close attention to their statement when the next scheduled payment change comes and notify their servicer if anything looks wrong.”
If the borrower’s loan servicer does not resolve the problem, the borrower should file a complaint with the Consumer Financial Protection Bureau, on the Bureau’s website, https://www.consumerfinance.gov/ or by phone, (855) 411-2372.
Borrowers do not need to do anything, and this change will not affect borrowers with fixed-rate loans or loans that use other indices. Borrowers with loans using the LIBOR index will receive a notice from their servicer explaining the change and will also be notified whenever their payment changes. A borrower can find out whether their loan uses the LIBOR by reading the promissory note they signed when getting the loan. Adjustable rate loans will clearly say what the index is, often at the top of the first page.
NCLC has additional information about the LIBOR replacement process on its website.