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Financial Services Law Insights and Observations

CFPB finalizes LIBOR transition rule

Agency Rule-Making & Guidance CFPB LIBOR SOFR ARRC Consumer Finance Regulation Z TILA

Agency Rule-Making & Guidance

On December 7, the CFPB issued a final rule facilitating the transition from LIBOR for consumer financial products. (Corrected rule published February 16, 2022.) The final rule amends Regulation Z, which implements TILA, to generally address LIBOR’s eventual cessation for most U.S. dollar settings in June 2023, and establishes requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans.

  • Closed-end provision amendments provide examples of indices that meet certain Regulation Z standards, which may be used to replace LIBOR indices. To assist creditors in determining a comparable index for closed-end loans, the final rule identifies certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (ARRC) for consumer products. The final rule also provides a non-exhaustive list of factors for creditors to use when determining whether a replacement index meets the Regulation Z “comparable” standard.
  • Updated post-consummation disclosure sample forms for certain adjustable-rate mortgage loan products replace LIBOR references with a SOFR index.
  • Amendments related to open-end loans add LIBOR-specific provisions, which allow creditors for home equity lines of credit (HELOCs) and credit card issuers to transition existing accounts using a LIBOR index to a replacement index on or after April 1, 2022, provided certain conditions are met. Creditors and card issuers are provided a non-exhaustive list of factors to consider when determining whether a replacement index meets Regulation Z’s “historical fluctuations are substantially similar” standard. In addition to identifying certain ARRC recommended SOFR-based spread-adjusted indices for consumer products, the final rule also lists the Prime rate as an example of an index that also meets this standard.
  • The final rule also addresses change-in-terms notice provisions for HELOCs and credit card accounts related to the disclosure of margin reductions once LIBOR ends. Additionally, the final rule discusses how the requirement for reevaluating rate increases on credit card accounts applies to the transition from using LIBOR indices to a replacement index.

The final rule takes effect April 1, 2022, with the exception of certain provisions related to an amendment to appendix H which is effective October 1, 2023. Additionally, while the mandatory compliance date for change-in-terms notice requirement revisions is October 1, 2022, the mandatory compliance date for all other final rule provisions is April 1, 2022. Furthermore, the Bureau “is reserving judgment about whether to include references to a 1-year USD LIBOR index and its replacement index in various comments; the Bureau will consider whether to finalize comments proposed on that issue in a supplemental final rule once it obtains additional information.”

CFPB Director Rohit Chopra warned that “[n]o new financial contracts may reference LIBOR as the relevant index after the end of 2021,” and that beginning June 2023, “LIBOR can no longer be used for existing financial contracts.” Chopra further emphasized that creditors and servicers must continue to prepare for LIBOR’s cessation and should take clear and orderly steps to reduce risk and mitigate compliance, legal, financial, and operational risks. 

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