CFPB Issues Final Rule While House Passes Legislation on LIBOR Transition
Written By: Joel Palmer, Op-Ed Writer
The Consumer Financial Protection Bureau (CFPB) issued its final rule for mortgage lenders and other financial institutions to transition away from the LIBOR interest rate index.
The rule establishes requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans after April 1, 2022.
No new financial contracts may reference LIBOR as the relevant index after the end of 2021. Starting in June 2023, LIBOR can no longer be used for existing financial contracts.
The transition away from LIBOR has been in the works for several years due to a criminal rate-setting conspiracy.
“The criminal manipulation of LIBOR by global financial institutions was extremely costly to our country,” said CFPB Director Rohit Chopra. “LIBOR will soon be a relic of history, and we will be working to ensure that companies make an orderly transition away from this index.”
According to CFPB, approximately $1.4 trillion of consumer loans are estimated to be currently tied to LIBOR, including adjustable rate mortgages and home equity lines of credit. Many of these contracts do not have appropriate language to address the cessation of LIBOR.
The final rule, effective April 1, 2022, includes closed-end credit provisions that require creditors to choose an index comparable to LIBOR when changing the index of a variable rate loan, or consider it a refinancing for purposes of Regulation Z.
To help creditors determine a comparable index for closed-end loans, the rule identifies certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (ARRC).
The final rule also includes a list of factors for creditors to help determine whether a replacement index meets the Regulation Z “comparable” standard regarding a particular LIBOR index. The rule also updates post-consummation disclosure sample forms for certain adjustable-rate mortgage loan products replacing LIBOR references with a SOFR index.
Chopra said that lenders will mostly transition to the SOFR (Secured Overnight Financing Rate) or the prime rate, however CFPB said it is reserving judgment on the SOFR-based spread-adjusted replacement index to replace 1-year USD LIBOR until it obtains additional information.
“SOFR is a robust reference rate that is based on actual transactions data and is not vulnerable to the type of abuse displayed in the LIBOR scandal,” Chopra said.
In addition to the final rule from CFBP, the U.S. House of Representatives also last week passed the Adjustable Interest Rate (Libor) Act of 2021.
The legislation, which now goes to the Senate, would:
Establish a “clear and uniform process” to replace LIBOR in existing contracts that do not provide a clearly defined option for a replacement benchmark.
Preclude litigation related to existing contracts that do not provide for the use of a clearly defined replacement benchmark rate.
Allow existing contracts that reference LIBOR but provide for the use of a clearly defined fallback to operate according to their terms.
“Federal legislation is vital to the success of the transition away from LIBOR,” said Tom Wipf, chairman of the Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board and Federal Reserve Bank of New York to identify risk-free alternative reference rates.
“As we enter LIBOR’s final days, this targeted solution will provide certainty not only to a diverse array of corporate borrowers and lenders, but to retail bondholders and consumers, whose student loans, mortgages, and investment accounts the legislation will protect from disruption and value degradation.”
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.
