Bank of North Dakota Transitioning to New Interest Rate Index

Summary

Bank of North Dakota bases many of its variable interest rate loans using the benchmark index U.S. Dollar LIBOR (USD LIBOR). USD LIBOR will be discontinued after June 30, 2023.

  1. A change in the benchmark index for calculating interest on your loan is supported by either the Federal Adjustable Interest Rate (LIBOR) Act of 2021 or the terms of your promissory note. Based on the discontinuation of LIBOR, the interest rate calculation index for your student loan will change to a Secured Overnight Financing Rate (SOFR) based index.
  2. Because LIBOR is generally higher than SOFR, this change of index alone will not increase your interest rate. Bank of North Dakota plans to transition to SOFR effective July 1, 2023, for student loan customers. The transition for business and agricultural loan customers is occurring during the loan renewal process.
  3. The transition to SOFR does not change the length of the loan term.
  4. No action from customers is required.
How will the transition to SOFR affect interest rates?

The interest rate on fixed rate loans remains the same. The interest rate on variable rate loans will generally remain the same or be slightly lower because LIBOR is generally higher than SOFR. This change of index alone will not increase your interest rate.

However, customers should realize that in general, we are in an environment of increasing interest rates. It is expected that Bank of North Dakota customers with variable rate loans may see an increase in their interest rate due to market volatility. For individuals with a DEAL One variable rate student loan, the interest rate increase cannot be more than 1% from one year to the next on the anniversary date of the loan commitment.

For more information

Read below for more detailed information about the transition to SOFR. If you have questions, please submit them by clicking on this link. Under department, identify your loan type, whether ag, business, home, or student loan.

Click here to submit questions regarding SOFR
Details

The Congressional Research Service released this updated report March 21, 2022. The New York Federal Reserve issued this User’s Guide in February 2021 which is also helpful.

What are the differences between SOFR and LIBOR?

SOFR is based on actual cost of borrowing cash overnight, collateralized by U.S. Treasury securities in the repo market, rather than on very small number of transactions between banks, which was the case with LIBOR. SOFR is considered more robust and less prone to manipulation.

How is the LIBOR index set?

London Interbank Offered Rate (LIBOR) is used extensively in the U.S. and globally as a baseline reference rate to establish the interest rate for many variable rate loans, including private student loans. LIBOR is regulated by the U.K.’s Financial Conduct Authority (FCA) and administered by the Intercontinental Exchange (ICE) Benchmark Association (IBA). LIBOR is based upon reports from a panel of major global banks as to the interest rates they think they would pay if they had to borrow money from another bank on an unsecured basis in the interbank market.

How is the SOFR index set?

According to the New York Federal Reserve, “SOFR reflects the cost of overnight borrowing and lending in the U.S. Treasury repo market. It is a fully transactions-based rate and has the widest coverage of any Treasury repo rate available. SOFR is a rate produced by the Federal Reserve Bank of New York for the public good.”

How was it decided to use SOFR?

In 2014, the U.S. Federal Reserve tasked the Alternative Reference Rates Committee (ARRC), a group of market participants, with developing a rate to replace LIBOR and ensuring a successful transition. In 2017, the ARRC identified SOFR to be the recommended successor rate to USD LIBOR.

Why are customers being informed of this transition?

Bank of North Dakota loan documents state that interest rates are based on the LIBOR index. Bank of North Dakota wants to keep you informed of anything that may impact interest rates, even if it stays the same or decreases.