The Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule that would implement several amendments to Regulation Z to address the discontinuance of the London Interbank Offered Rate (“LIBOR”) by the end of 2021. In addition to the proposed rule, the CFPB issued a set of Frequently Asked Questions (“FAQs”) that include LIBOR transition questions and general regulatory questions about current Regulation Z requirements.
The proposed rule would make changes to open-end and closed-end provisions of Regulation Z that include examples of replacement indices for LIBOR that meet regulatory standards and several technical edits to replace LIBOR references with references to the Secured Overnight Financing Rate (“SOFR”). The amendments are intended to “provide a detailed roadmap” for creditors to choose a compliant replacement index for LIBOR.
The CFPB has “preliminarily determined” that consumers and Home Equity Line of Credit (“HELOC”) creditors would benefit by a transition away from LIBOR before the benchmark index becomes unavailable. One proposed amendment would permit creditors to transition existing HELOC accounts that use a LIBOR index to a replacement index on or after March 15, 2021, contingent on meeting certain conditions. One such condition would be for HELOC creditors to ensure that there is no substantial difference to the APR calculated with a replacement index, based on the value of the indices on December 31, 2020.
Another proposed amendment would revise change-in-term notice requirements for HELOCs that would require disclosing the replacement index and any adjusted margin used to calculate the consumer’s rate. If adopted, the notice requirement would be effective October 1, 2021.
The proposed amendments for closed-end credit provisions include identifying specific SOFR-based indices as examples of a “comparable index” for the LIBOR indices that they are intended to replace.
The CFPB released LIBOR Transition FAQs along with the proposed rule to address questions regarding statutory requirements under the current rule and how those affect creditors as they prepare to transition away from the LIBOR index. For example, creditors must be aware of consumer notification requirements regarding changes to contract terms, selecting a replacement index and limitations to when an index can change. The FAQs also discuss how transitioning to a new index will affect adjustable-rate disclosures that include an historical example.
The CFPB is accepting comments on the proposed rule until August 4, 2020 and is proposing that a final rule would be effective on March 15, 2021.
DocMagic will continue to provide updates about ongoing changes related to the transition away from LIBOR as a benchmark index.
If you have any questions about this change, please contact our Compliance Department.
