CREF Policy Update July 16, 2020

Last week the Life Risk-Based Capital Working Group of the National Association of Insurance Commissioners approved guidance on property valuations for 2020 life company risk-based capital reporting.

Under the approved guidance, Contemporaneous Property Valuations for 2020 risk-based capital reporting will be based on an average of 2019 and 2020 property value indexes. The Working Group deferred acting on possible guidance on reporting of 2020 net operating income.

MBA and the American Council of Life Insurers had jointly submitted the proposed guidance in letters of June 8 and July 7. The Working Group had already approved proposed guidance on construction loans and on extending the modification period to the end of 2020 on June 30.

• Why it matters: Risk-based capital reporting should not over- or under-represent the impacts of the COVID-19 pandemic on the credit risk of commercial and multifamily mortgages in life company portfolios.
• What’s next: MBA will work with life companies to support NAIC consideration and adoption of a reasonable approach to the treatment of 2020 NOI for risk-based capital reporting during the third quarter. The NAIC Working Group is next schedule to meet on July 30.

For more information, or to join MBA’s Life Company Risk-Based Capital Working Group, contact Bruce Oliver at (202) 557-2840.

2. Supreme Court Agrees to Hear FHFA Constitutionality Case 

Last Thursday, the U.S. Supreme Court agreed to hear a case brought by Fannie Mae and Freddie Mac shareholders challenging the constitutionality of the Federal Housing Finance Agency’s single-director structure.

The suit, Collins v. Mnuchin, claims that the structure of the FHFA violates the separation of powers doctrine, and that a policy that sweeps profits of the government-sponsored enterprises into the U.S. Treasury is unconstitutional.

• Why it matters: In June, the Supreme Court ruled the similar single-director structure of the Consumer Financial Protection Bureau was unconstitutional because the CFPB director could not be removed by the president at will.
• What’s next: The Court will consider the case in its fall 2021 term. 

For more information, contact Bruce Oliver at (202) 557-2840.

3. ARRC Announces Further Details for Recommended Spread-Adjustment Methodology

In January, the Alternative Reference Rate Committee issued a consultation on additional technical details regarding its spread-adjustment methodology in May.

The ARRC announced that it had made determinations on the technical details identified in that consultation to finalize its recommended spread-adjustment methodology. In general, the spread-adjustment methodology allows institutions to minimize the impact of transitioning existing contracts from U.S. dollar LIBOR to SOFR (where the terms of the contract allow such a transition). The ARRC will use a methodology that features a historical median of the difference between U.S. dollar LIBOR and Secured Overnight Financing Rate (SOFR) during a five-year lookback period, with a one-year transition period to this new spread adjustment. The ARRC is now working with potential vendors to make the spread-adjusted rates publicly available.

• Why it matters: The London Interbank Offered Rate, or LIBOR, serves as the primary interest rate benchmark across numerous financial products, including floating-rate mortgages. Due to structural weaknesses in the benchmark that made it susceptible to manipulation during the crisis, regulators have called for markets to transition to more resilient benchmarks. As a result, LIBOR is likely to be discontinued in late 2021, or perhaps even sooner.
• What’s next: The ARRC announced yesterday the SOFR Summer Series, a series of webinars taking place in July and August. These events are designed to educate the public on the history of LIBOR; the development and strengths of the SOFR; the ARRC’s recommended alternative to U.S. dollar LIBOR; progress made in the transition away from LIBOR to date; and how to ensure organizations are ready for the end of LIBOR.

For more information, contact Andrew Foster at (202) 557-2740.

4. FSB Released Statement on LIBOR Transition

On July 1, the Financial Stability Board, an international body charged with coordinating national financial authorities and other standard-setting organizations, released a statement reiterating its view that firms should continue forward with plans to “remove remaining dependencies on LIBOR by the end of 2021,” despite any delays that might have taken place due to the COVID-19 pandemic. 

This statement adds to the growing consensus that regulators and other quasi-regulatory bodies will not view the pandemic as a reason to change the expected timeline of the transition away from LIBOR. Of note, the FSB is chaired by Randal Quarles of the Federal Reserve – yet another indication that U.S. authorities do not expect to delay the key deadlines for the LIBOR transition.

• What’s next: As financial markets continue to progress toward transition, regulators and others will focus more closely on market participants’ preparation. Other examples include developments from the New York State Department of Financial Services (NY DFS); the Securities and Exchange Commission (SEC); and, most recently, the Federal Financial Institutions Examination Council’s (FFIEC) released statement on Managing the LIBOR Transition, applicable to all institutions supervised by the Federal Deposit Insurance Corporation (FDIC) that have exposure to the LIBOR reference rate. The statement highlights the financial, legal, operational, and consumer protection risks that will result from the expected discontinuations of LIBOR.

For more information, contact Andrew Foster at (202) 557-2740.

5. [VIDEO] mPower Moments: Pacific Life Insurance Company’s DeAnne A. Reed on Mentorship and the Five ‘C’s’ to Success

In this month’s mPower Moments, MBA COO and mPower Founder Marcia M. Davies sat down with DeAnne A. Reed, Associate Vice President, Servicing Operations, at Pacific Life Insurance Company to discuss the importance of mentorship and paying it back.

• Why it matters: In this insightful interview, Reed also shared the unique values and experience she gained from being raised by two parents in the U.S. Marines Corps, and also discussed her five “C’s” to success that have benefited her career growth and personal development.
   
• What’s next: To watch more mPower Moments, click here.

For more information, contact Marcia Davies at (202) 557-2707.