Continuing their efforts to support the financial industry’s move away from LIBOR, the Consumer Financial Protection Bureau (“CFPB”) published a final rule that modifies Regulation Z. The rule amends Regulation Z to add “comparable indexes” that lenders may use as a replacement index, contemplated by existing financial contracts based on LIBOR, and also updates sample notification forms in Appendix H to Regulation Z.
The rule adds a comment to 12 CFR 1024.20(a) for changes to the interest rate after consummation of a closed-end transaction. The comment makes clear the factors a creditor should consider in determining a replacement index for closed loans, so as to avoid a “refinancing” under this section of the regulation. The comment lays out five factors to consider:
- The movements over time are comparable.
- The consumers’ payments using the replacement index compared to payments using the LIBOR index are comparable if there is sufficient data for this analysis.
- The index levels are comparable.
- The replacement index is publicly available.
- The replacement index is outside the control of the creditor.
The rule also adds an illustrative example to the commentary of SOFR-based indexes which may be used to as comparable to existing LIBOR indices.
The CFPB is also updating the sample notification forms provided in Appendix H, specifically forms H-4(D)(2) and H-4(D)(4). These forms may be used after April 1, 2022 but must be used beginning October 1, 2023.
In addition to the above closed-end section updates, the rule also includes updates for the similar open-end provisions. Those updates include a modification to the “Notice not required” provision of 1026.9(c)(1)(ii) for clarity on the notice a creditor must provide when replacing LIBOR. The open-end modifications also include changes to 1026.40(f)(3)(ii) that creditors must comply with when choosing a replacement for LIBOR.
This final rule is generally effective April 1, 2022, though it does include some requirements that are not actionable until October 1, 2023, such as required use of the new sample notification forms.
