CFPB Issues Final Rule Facilitate LIBOR Transition

Many U.S. financial institutions have used the London Interbank Offered Rate ("LIBOR") as a standard index for their variable-rate loan products since its introduction in the 1980s. However, in 2017, the regulator of LIBOR, the U.K. Financial Conduct Authority, announced it did not intend to publish LIBOR rates beyond December 31, 2021. This deadline was subsequently extended to June 30, 2023 for the overnight, one-, three-, and six-month LIBOR settings.  Publication of the one-week and two-month LIBOR settings ceased at the end of 2021.

On December 7, 2021 the Consumer Financial Protection Bureau ("CFPB") issued a final rule to amend portions of Regulation Z, the regulation which implements the Truth in Lending Act ("TILA"), in anticipation of LIBOR's sunset. The final rule made major changes to the open-end and closed-end provisions and change-in-term notice provisions.

Open-End Credit

Under the final rule, HELOC creditors and card issuers "can transition away from using the LIBOR index to a replacement index on or after April 1, 2022, before LIBOR is expected to become unavailable." However, to do so, HELOC creditors and card issuers are required ensure the APR calculated using the replacement index is "substantially similar" to the APR calculated using LIBOR. The replacement index can be either a new index with no history or an established index with "historical fluctuations substantially similar to those of the LIBOR index." In determining whether the historical fluctuations of an established index are substantially similar to those of LIBOR, the CFPB will consider whether:

(1) the movements over time are substantially similar; and

(2) consumers' payments using the replacement index compared to payments using the LIBOR index are substantially similar if there is sufficient historical data for this analysis.

The final rule also includes safe harbors for certain indices such as the Wall Street Journal prime rate ("Prime") and SOFR with respect to open-end credit. Therefore, in the event a creditor replaces LIBOR with either Prime or SOFR, its replacement index will be considered by the CFPB to be substantially similar to LIBOR pursuant to the safe harbor.

Closed-End Credit

With respect to closed-end credit, the final rule details how to determine whether a replacement index is, as it relates to a particular LIBOR index, a "comparable index." If a creditor changes a variable-rate closed-end loan's index to an index that is not comparable to a particular LIBOR index, it may constitute a refinancing under Regulation Z and may trigger certain requirements. When determining whether a replacement index is a comparable index, the CFPB will consider whether:

(1) the movements over time are comparable;

(2) the consumer's payments using the replacement index compared to payments using the LIBOR index are comparable if there is sufficient data for this analysis;

(3) the index levels are comparable;

(4) the replacement index is publicly available; and

(5) the replacement index is outside the control of the creditor.

In the final rule, the CFPB notes that whether a replacement index is a comparable index is a fact-specific determination that depends on "the replacement index being considered and the LIBOR tenor being replaced, as well as prevailing market conditions." The final rule specifically lists SOFR as an example of a comparable index but declined to do so with respect to Prime or any other index.

Change-in-Terms Notice Requirements

As they relate to HELOCs and credit card accounts, the final rule revises the change-in-terms notice provisions to require creditors to notify consumers regarding how their variable interest rates will be determined after LIBOR is replaced. Regardless of whether the margin is being reduced or increased, change-in-terms notices for HELOCs must include:

(1)    The index that is replacing the LIBOR index; and

(2)    Any adjusted margin that will be used to calculate the consumer's interest rate.

For non-HELOCs, the change-in-terms notice must:

(1)    Include the amount of the new rate (as calculated using the new index); and

(2)    Indicate that the new rate varies and how the rate is determined.

For both HELOCs and non-HELOCs, the change-in-terms notice must also disclose "any increased periodic rate or APR as calculated using the replacement index at the time the change-in-terms notice is provided.