(Dec. 10, 2021) Creditors must select by April 1 replacement indices for existing LIBOR-linked consumer loans, which include closed- and open-end credit provisions that require a link to an index comparable to the soon-to-be-defunct rate, according to a final rule issued this week by the CFPB.
LIBOR (the London Interbank Offered Rate) is scheduled to be discontinued after Dec. 31; no new contracts or loans may be agreed to using LIBOR after that date. After June 2023, LIBOR may no longer be used for any existing financial contracts.
CFPB said its final rule includes closed-end credit provisions that require creditors to choose an index comparable to LIBOR when changing the index of a variable rate loan, or consider it a refinancing for purposes of its Regulation Z (which implements the Truth in Lending Act (TILA)).
The bureau said that, to help creditors determine a comparable index for closed-end loans, the rule identifies certain spread-adjusted indices based on the Secured Overnight Financing Rate (SOFR), a LIBOR alternative developed by the Federal Reserve-sponsored Alternative Reference Rates Committee (ARRC). The indices are intended for consumer products as examples to illustrate a reference rate that would be comparable to replace 1-month, 3-month, or 6-month tenors of USD LIBOR, according to CFPB.
Another closed-end credit provision of the final rule, the bureau said, includes a “non-exhaustive” list of factors for creditors to help determine whether a replacement index meets the Regulation Z “comparable” standard regarding a particular LIBOR index. The rule also updates post-consummation disclosure sample forms for certain adjustable-rate mortgage loan products replacing LIBOR references with a SOFR index, CFPB said.
Open-end loans, CFPB said, would be covered by the rule under LIBOR-specific provisions to permit creditors or card issuers for home equity lines of credit (HELOCs) and credit card accounts to replace the LIBOR index and adjust the margin used to set a variable rate on or after April 1, 2022, if certain conditions are met.
The conditions, CFPB said, include that the creditor or card issuer generally must choose a replacement index which has historical fluctuations that are substantially similar to those of the LIBOR index and ensure that the new interest rate or APR is substantially similar.
Another “non-exhaustive list” of factors to consider is provided to creditors and card issuers when they are determining whether a replacement index meets the Reg Z “historical fluctuations are substantially similar” standard regarding a particular LIBOR index, and identifies certain SOFR-based spread-adjusted indices recommended by the ARRC for consumer products and the prime rate as examples of indices that meet this standard, the bureau said.
“The rule also finalizes change-in-terms notice requirements proposed by the Bureau for disclosing margin reductions for HELOCs and credit card accounts when LIBOR is replaced,” CFPB said. To help consumers understand how creditors will determine rate changes in the variable rates for their loans, the disclosure requirements will be effective April 1, 2022, and have a mandatory compliance date of Oct. 1, 2022.
The rule also amends Regulation Z to address how the requirement to reevaluate rate increases on credit card accounts applies to the transition from using a LIBOR index to a replacement index.
The bureau noted it did not include a SOFR-based spread-adjustment replacement index for one-year USD LIBOR, saying it was “reserve judgment.”
“Once the Bureau knows which SOFR-based spread-adjusted index the ARRC will recommend for replacing the 1-year USD LIBOR index for consumer products, the Bureau will consider whether that index meets the comparability and ‘historical fluctuations are substantially similar’ standards and, if so, whether to codify such determinations in a supplemental final rule,” CFPB stated.
The agency also released an updated set of frequently asked questions (FAQs) to help creditors address other LIBOR transition topics, regulatory questions, and general implementation considerations.