We have a few 12-month ARMs tied to LIBOR. Will you please help me understand the difference in treatment between the "one-year period beginning on the LIBOR replacement date" and "one year after the LIBOR replacement date and thereafter in the final rule"?

The “one year after the LIBOR replacement date and thereafter” is easy enough. It’s the corresponding SOFR tenor plus the spread adjustment based on the adjustment period (in our ARM case, 12-month SOFR + 12-month spread, which is SOFR + 0.71513).

But the one-year period beginning on the LIBOR replacement date is different. It refers to “plus an amount that transitions linearly for each business day during that period from: (1) The difference between the relevant CME Term SOFR and the relevant LIBOR tenor determined as of the day immediately before the LIBOR replacement date; to (2) The applicable tenor spread adjustment identified in paragraph (c) of this section."

I can’t figure out what the difference and its calculation means between the two periods.

July 1, 2023 index = 12 mo CME Term SOFR + (difference between 12 mo CME Term SOFR and one year LIBOR as of 6/30/22)
July 1, 2024 index = 12 mo CME Term SOFR + 0.71513

During the period in between, the index is adjusted a little bit each day incrementally to move from the tenor spread amount on 7/1/23 to 0.71513 which is the tenor spread adjustment specified by the FRB (and the LIBOR Act) as the ultimate "landing place" for the spread amount. So if the difference between 12 mo CME SOFR and one year LIBOR as of 6/30/22 is 1.0513%, the replacement benchmark would transition divide that 30 basis points by the number of days for which the benchmark is published in a year, and would adjust the tenor spread downward by that amount each day.

The good news is that you don't have to do that calculation. You can just use the replacement index published by Refinitiv, who has been hired/designated to make the calculation and publish the replacement index values. That's what FNMA has directed its servicers to do.

Great. I appreciate your explanation and clearing that up for me.

Just thought I’d check to see if all are still using the former Refinitiv, now FTSE Russell*, website to obtain the 12-month tenor SOFR rates that replaced the 12-month LIBOR rates on ARM rate adjustments?

* https://www.lseg.com/en/ftse-russel...llbacks-sofr-compound-in-advance-summary

Our ARM loans with the previous LIBOR adjust every twelve months. As a follow up, on the end of the transition on June 30, below is in the final rule Regulations Implementing the Adjustable Interest Rate (LIBOR) Act (page 66). I checked the CME SOFR rates values on CME’s website and saw the 12-month CME Term SOFR is 5.05249 on June 13. If I add the 0.71513 tenor spread adjustment for the 12-month LIBOR in rule’s (c) Tenor spread adjustments, the resulting rate is 5.76762. I also looked at the formerly named Refinitiv, now FTSE Russell, rates for June 13 and the 12-month rate is 5.76423. Am I approaching this correctly? Also, on our ARM rate adjustment notices, should we list the FTSE Russell website as the reference for the borrowers to review the index (or should I chose the CME website and add the addition of the tenor race adjustment in the notice)?

§ 253.4 Board-selected benchmark replacements.
(2) For a LIBOR contract that is a consumer loan—
(ii) On the date one year after the LIBOR replacement date and thereafter:
(A) In place of overnight LIBOR, the benchmark replacement shall be SOFR plus the tenor spread
adjustment identified in paragraph (c)(1) of this section; and
(B) In place of one-, three-, six-, or 12-month tenors of LIBOR, the benchmark replacement shall be
the corresponding one-, three-, six-, or 12-month CME Term SOFR plus the applicable tenor spread
adjustment identified in paragraph (c) of this section.
(iii) The rates published or provided by Refinitiv Limited as “USD IBOR Cash Fallbacks” for
“Consumer” products shall be deemed equal to the rates identified in paragraphs (b)(2)(i) and (ii) of
this section.