CFPB Issues Final Rule Addressing LIBOR Transition
On 7 December 2021, the Consumer Financial Protection Bureau (“CFPB”) issued a Final Rule to facilitate LIBOR transition, via amendments to Regulation Z. The amendments take effect on 1 April 2022, and compliance becomes mandatory on 1 October 2022.
Financial institutions in the United States have used the London Interbank Offered Rate (“LIBOR”) as a common benchmark rate for various adjustable-rate loan products. In 2017, the UK Financial Conduct Authority announced it would sunset LIBOR after 31 December 2021. The CFPB published a notice of proposed rulemaking in June of 2020 to plan for the transition. The proposed rulemaking would amend Regulation Z, which implements the Truth in Lending Act, for both open-end and closed-end credit. After a period of notice and comment,[1] the CFPB issued the Final Rule, an Executive Summary, an Unofficial Redline of the rule, a list of LIBOR Transition FAQs, and updated sample forms to assist covered entities in complying with the amended regulations.[2]
The Final Rule makes numerous related amendments to Regulation Z. Broadly speaking, while it does not require covered entities to adopt particular replacement indices for LIBOR, the Final Rule outlines the standards that replacement indices should meet and provides examples to help ensure creditors meet those standards.
With respect to closed-end credit, the rule identifies SOFR-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (“ARRC”) as an example of a “comparable index” for the LIBOR indices that they are intended to replace. The commentary lists factors—such as whether identified aspects of the two indices are comparable and whether the new index is publicly available—to assist creditors in determining whether a replacement index meets Regulation Z standards.
With respect to open-end credit, the Final Rule provides guidance on transitioning away from a LIBOR index on a home equity line of credit (“HELOC”). It identifies examples of replacement indices, such as the Prime Rate published by the Wall Street Journal and the SOFR-based spread-adjusted indices recommended by the ARRC. The rule further includes factors creditors should consider in determining whether a replacement index has historical fluctuations substantially similar to the LIBOR tenor it replaces, as required by Regulation Z. As amended by the Final Rule, Regulation Z also contains revised standards for when credit card issuers may change the index and margin on an existing contract. As with HELOC accounts, a replacement index for a credit card account must meet the historical fluctuation standard. Additionally, a replacement index and margin must result in an annual percentage rate (“APR”) substantially similar to that existing under the replaced index. The rule identifies examples of indices that meet Regulation Z’s standards and provides guidance to assess whether alternate indices are appropriate. It also includes updated guidance on credit card rate reevaluation requirements. Finally, the Final Rule revises disclosure requirements for change-in-terms notices for HELOCs and credit card accounts, now requiring creditors to disclose adjusted margins used to calculate consumers’ rates after LIBOR transition.
What the Final Rule does not do is include references to a 1-year USD LIBOR index and its replacement. The CFPB reserves judgment on that issue until it reviews the index recommended by the ARRC and measures it against the “APR comparison” requirement.
In a related development, also on 7 December 2021, the Adjustable Interest Rate (LIBOR) Act of 2021 (“LIBOR Act”) was reported in the U.S. House of Representatives by the Committee on Financial Services and placed on the Union Calendar. The proposed LIBOR Act would mandate a statutory benchmark replacement, spread adjustment, and one-year transition period for “consumer loans” (as defined in the Truth in Lending Act/Regulation Z) that mirror the ARRC recommendations and are incorporated into the Final Rule.
[1] Contributions from various entities are detailed on pages 11-19 of the Final Rule.
[2] Specifically, the samples are intended to help entities comply with the content and format requirements for mortgage servicing interest rate adjustment forms.
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