The CFPB recently issued a final rule amending Regulation Z to address the anticipated sunset of LIBOR, which is expected to be discontinued for most U.S. Dollar settings in June 2023. The final rule is effective on April 1, 2022, with the exception of an amendment to appendix H which is effective on October 1, 2023.
The CFPB’s final rule amends Regulation Z’s provisions related to open-end and closed-end credit and establishes requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans after April 1, 2022. With respect to closed-end credit, the final rule includes provisions that require creditors to choose an index comparable to LIBOR that meets certain standards under Regulation Z. To assist creditors determine a comparable index for closed-end loans, the rule identifies certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (ARRC) for consumer products. Moreover, the final rule sets forth a non-exhaustive list of factors for creditors to use when determining whether a replacement index meets the Regulation Z “comparable” standard regarding a particular LIBOR index. Finally, the final rule updates post-consummation disclosure sample forms for certain adjustable-rate mortgage loan products replacing LIBOR references with a SOFR index.
With respect to open-end credit, the final rule adds LIBOR-specific provisions to allow creditors or card issuers for 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, so long as certain conditions are met. The final rule includes a non-exhaustive list of factors for creditors and card issuers to use when determining whether a replacement index meets the Regulation Z “historical fluctuations are substantially similar” standard with respect to a particular LIBOR index. The final rule also 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.
Moreover, the final rule finalizes change-in-terms notice requirements related to the disclosure of margin reductions for HELOCs and credit card accounts when LIBOR is replaced. Additionally, the final rule includes amendments that 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 CFPB is “reserving judgment on the SOFR-based spread-adjusted replacement index to replace 1-year USD LIBOR until it obtains additional information.” When the AARC recommends a SOFR-based spread-adjusted index to replace the 1-year USD LIBOR index for consumer products, the CFPB will evaluate whether to codify additional related requirements in a supplemental final rule.
Finally, in order to assist creditors address other LIBOR transition topics, regulatory questions, and general implementation considerations, the CFPB issued an updated set of FAQs.