CFPB Issues Guidance on LIBOR Transition
Written By: Joel Palmer, Op-Ed Writer
The Consumer Financial Protection Bureau (CFPB) released updated documents last week as part of its transition away from using the LIBOR index on financial products, including mortgages.
The bureau released an updated version of its Consumer Handbook on Adjustable Rate Mortgages (CHARM). Among the changes is removing references to LIBOR.
CFPB also released a Notice of Proposed Rulemaking (NPRM) concerning the anticipated discontinuation of LIBOR. The NPRM includes examples of replacement indices that meet Regulation Z standards.
The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another. It is calculated and published daily by the Intercontinental Exchange.
LIBOR is expected to be discontinued sometime next year, as regulators in the United Kingdom will no longer require banks to report transactions used to calculate LIBOR.
This change will affect some adjustable rate loans and lines of credit, such as adjustable-rate mortgages, reverse mortgages, and home equity lines of credit.
Regulation Z has requirements for certain products regarding consumer notification of a change to the contract terms, limits on when the index can change, and requirements for selecting an appropriate replacement index.
Also, lenders of ARMs must disclose a loan program example illustrating the effect of interest rate changes. This can be done by providing a historical example illustrating the interest rate impacts on the payments and loan balance for the most recent 15 years of index values for the consumer’s loan program terms. However, possible replacements for LIBOR may not have existed the last 15 years.
If an index that has not been available for 15 years is used, the creditor need only provide index values that go back as far as values are available.
Lenders can also provide an initial and maximum interest rate and payments example and a statement that the payment may increase or decrease substantially depending on rate changes.
In the NPRM, CFPB proposes to permit creditors for home equity lines of credit (HELOCs) and credit card issuers to replace a LIBOR index with a replacement index on or after March 15, 2021, if certain conditions are met.
Creditors and issuers must ensure that the rate calculated using the replacement index is substantially similar to the rate using the LIBOR index.
For closed-end credit provisions, the NPRM proposes to identify specific indices as an example of a comparable index for the LIBOR index that will be replaced. In the NPRM, the SOFR-based spread adjusted indices recommended by the Alternative Reference Rates Committee (ARRC) are proposed as an example of a comparable index.
The ARRC was convened by the Federal Reserve to help facilitate the LIBOR transition.
It is widely expected that LIBOR will be replaced by the Secured Overnight Financing Rate (SOFR). This is a benchmark interest rate for dollar-denominated derivatives and loans.
However, Federal Reserve Board Chairman Jerome Powell recently issued a statement also supporting the use of AMERIBOR. This is a new interest rate benchmark created by American Financial Exchange. It reflects unsecured borrowing costs of more than 1,000 financial institutions.
The NPRM will be open for public comments until August 4, 2020.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
