As has been reported, the London Inter-Bank Offered Rate (“LIBOR”) index, which has been used to set the interest rate for many closed-end and open-end adjustable-rate loans, will be discontinued by June 2023. To facilitate the transition away from the LIBOR index, on December 7, 2021, the Consumer Financial Protection Bureau (CFPB) issued a final rule that becomes effective on April 1, 2022.

Closed-End Loans

The final rule includes amendments to the closed-end credit provisions in Regulation Z that provide details on how to determine whether a replacement index is comparable to the LIBOR index. Specifically, the rule provides examples of factors to be considered in determining whether the “comparable” standard to the particular LIBOR index for closed-end loans has been met. If the comparable standard is not satisfied, then the replacement of the index for an adjustable-rate mortgage may be deemed a refinance transaction that triggers certain requirements.

In addition, the final rule adds, as examples, certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted[1] indices recommended by the Alternative Reference Rates Committee (ARRC) for consumer products to illustrate a reference rate that would be comparable to replace the 1-month, 3-month, or 6-month tenors[2] of US Dollar (USD) LIBOR. 

Finally, the final rule makes technical edits to certain closed-end provisions of Regulation Z, replacing references to the LIBOR index with the SOFR index, and updates post-consummation sample forms H- 4(D)(2) and H-4(D)(4).

Open-End Loans

The CFPB adopted six amendments to Regulation Z’s open-end credit provisions to address the discontinuance of the LIBOR index, as follows:

1.     The final rule provides a detailed roadmap for HELOC creditors and card issuers for replacing the LIBOR index before LIBOR becomes unavailable. HELOC creditors and card issuers may select a replacement index that is newly established and has no history or an existing index that has historical fluctuations substantially similar to those of the LIBOR index. (For example, the CFPB has determined that the prime rate published in the Wall Street Journal (Prime) has historical fluctuations similar to the 1-month and 3-month USD LIBOR indices.) The final rule provides examples of the types of factors to be considered in determining whether a replacement index meets the Regulation Z “historical fluctuations are substantially similar” standard.

2.     The final rule clarifies changes to existing Regulation Z provisions on the replacement of an index when it becomes unavailable.

3.     The final rule revises change-in-terms notice requirements for HELOCs and credit card accounts for notifying consumers on how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced.

4.     The final rule provides additional details on how a creditor may disclose information about the periodic rate and APR in a change-in-terms notice for HELOCs and credit card accounts when the creditor is replacing a LIBOR index with the SOFR-based spread-adjusted index recommended by ARRC for consumer products to replace 1-month, 3-month, or 6-month USD LIBOR index in certain circumstances.

5.     The final rule makes an exception from the rate reevaluation provisions that are applicable to credit card accounts for increases that occur as a result of replacing the LIBOR index using current reevaluation provisions for transitioning from a LIBOR index or as a result of the LIBOR index becoming unavailable. The final rule also addresses whether a card issuer may terminate its six-month reviews in cases in which the card issuer was already required to perform a rate reevaluation review prior to transitioning away from LIBOR and LIBOR was used as the benchmark for comparison.

6.     The final rule makes technical edits and related changes to certain open-end provisions to replace references to the LIBOR index with the SOFR index.

Replacement of 1-Year USD LIBOR

The CFPB indicated in its final rule that it is reserving judgment on the SOFR-based spread-adjusted replacement index to replace the 1-year USD LIBOR index until it obtains additional information. The CFPB will await the ARRC’s recommendation on which SOFR-based spread-adjusted index should replace the 1-year USD LIBOR index for consumer products so that it may determine whether the replacement index and replacement margin would have resulted in an APR substantially similar to the rate calculated using the LIBOR index. If the CFPB determines that the index meets the standard, it will consider whether to issue a supplemental final rule to codify its determination or otherwise make an announcement of its determination.

Conclusion

The final rule contains various discretionary periods and mandatory compliance dates for certain amendments. Accordingly, please carefully read the final rule here: LIBOR Transition (Reg Z) Final Rule (consumerfinance.gov) for details concerning the amendments to the Regulation Z closed-end and open-end provisions as well as to sample forms H-4(D)(2) and H-4(D)(4) and compliance dates. For further guidance about the LIBOR transition and implementation of the final rule, check out the CFPB’s updated FAQs here: LIBOR Transition Frequently Asked Questions (consumerfinance.gov). Finally, to read the CFPB’s announcement of its final rule, click here.

Fannie Mae and Freddie Mac’s promissory notes for adjustable-rate mortgages that use an index, including the LIBOR index, contain a provision requiring the lender or servicer to replace the existing index with one that is comparable or substantially similar. Home equity line of credit (“HELOC”) agreements may also have a similar provision. In addition to satisfying their obligations under the note and/or HELOC agreements (to the extent there is no conflict with the final rule’s provisions) with respect to the replacement of the index, lenders will now need to take the provisions of the final rule into account.

Please contact me at mfeliciano@garrishorn.com if you would like to discuss any of these issues.

[1] As stated in Footnote 4 of the final rule, the spread between two indices is the difference between the levels of those indices, which may vary from day to day. For example, if today, index X is 5 percent and index Y is 4 percent, then the X-Y spread today is 1 percentage point (or, equivalently, 100 basis points). A spread adjustment is a term that is added to one index to make it more similar to another index. For example, if the X-Y spread is typically around 100 basis points, then one reasonable spread adjustment may be to add 100 basis points to Y every day. Then the spread-adjusted value of Y will typically be much closer to the value of X than Y is, although there may still be differences between X and the spread-adjusted Y from day to day.

 [2] According to Footnote 6 of the final rule, a tenor refers to the length of time remaining until a loan matures.