Last week, the CFPB, together with the Federal Reserve Board (Board), FDIC, OCC, and NCUA, issued a “Joint Statement on Completing the LIBOR Transition.” The agencies issued the statement to remind supervised institutions that LIBOR will be discontinued on June 30, 2023 and to reiterate their expectations that institutions with LIBOR exposure should complete their transition of remaining LIBOR contracts as soon as possible. The agencies encourage institutions to ensure that replacement alternative rates are negotiated where needed and in place by June 30, 2023 for all LIBOR-referencing contracts including investments, derivatives, and loans. They remind institutions that (1) safe and sound practices include conducting the due diligence necessary to ensure that alternative rates are appropriate for the institution’s products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities, and (2) due diligence should include having an understanding of how a chosen alternate rate is constructed and what fragilities, if any, are associated with that rate and the markets underlying it.
In the joint statement, the agencies note Congress’s enactment of the LIBOR Act to provide a uniform, nationwide solution for replacing references to LIBOR in existing contracts with no or inadequate fallback provisions, meaning no or inadequate contract provisions for determining an alternative reference rate. In addition, they note the final rule issued by the Board in January 2023 to implement the LIBOR Act. The rule establishes default rules for benchmark replacements in certain contracts that use LIBOR as a reference rate.
Concurrently with the issuance of the joint statement, the CFPB issued an interim final rule amending and updating the CFPB’s December 2021 final rule that amended Regulation Z and the Official Staff Commentary to address the discontinuation of LIBOR. (The December 2021 final rule became fully effective on October 1, 2022.) Before the amendments, Regulation Z’s open-end credit provisions only allowed HELOC creditors and card issuers to change an index and margin used to set the APR on a variable-rate account when the original index “becomes unavailable” or “is no longer available” and certain other conditions are met. Having determined that all parties would benefit if creditors and issuers could replace a LIBOR-based index before LIBOR becomes unavailable, the CFPB’s final rule added a new provision that allows HELOC creditors and card issuers (subject to contractual limitations) to replace a LIBOR-based index with a replacement index and margin on or after April 1, 2021, including an index based on the Secured Overnight Financing Rate (SOFR). The replacement index must be either an established index with a history or a newly established index with no history. An established index with a history may only be used if the index’s historical fluctuations are substantially similar to those of the LIBOR index.
For closed-end credit, Regulation Z provides that a refinancing subject to new disclosures results if a creditor adds a variable-rate feature to a closed-end credit product but that a variable-rate feature is not added when a creditor changes the index to one that is “comparable.” The CFPB’s final rule added new commentary that provides examples of the types of factors to be considered in determining whether a replacement index is a “comparable” index to a particular LIBOR-based index.
The December 2021 final rule included the Bureau’s determinations that (1) the prime rate published in the Wall Street Journal has historical fluctuations substantially similar to those of the 1- and 3-month U.S. Dollar LIBOR indices, and (2) the spread-adjusted indices based on the SOFR recommended by the Alternative Reference Rates Committee (ARRC) to replace the 1-, 3-, and 6-month U.S. Dollar LIBOR indices have historical fluctuations substantially similar to those of the 1-, 3-, and 6-month U.S. Dollar (USD) LIBOR indices. The CFPB reserved judgment on whether it would identify a SOFR-based index as comparable to the 12-month LIBOR index, indicating that it would consider whether to issue a supplemental final rule on replacements to the 12-month LIBOR index after reviewing the ARRC’s recommendations for a replacement rate. The ARRC subsequently recommended the use of the 12-month term SOFR rate to replace 12-month LIBOR rate and in its final rule, the Board selected the indices based on SOFR recommended by the ARRC for consumer products for 1-month, 3-month, 6-month and 12-month USD LIBOR indices as the benchmark replacements for LIBOR contracts that are consumer loans (the “Board-selected benchmark replacements”).
In its discussion of the interim final rule, the CFPB states that the enactment of the LIBOR Act and the Board’s final rule resolved the ambiguity that existed at the time the CFPB issued its December 2021 final rule as to which, if any SOFR-based replacement index for the 12-month LIBOR index would meet the standards that it be a “comparable” index and have “historical fluctuations substantially similar” to the LIBOR index it replaces. It also states that by operation of the LIBOR Act, all of the Board-selected benchmark replacements constitute a “comparable index” to, and have “historical fluctuations that are substantially similar to” the LIBOR indices they replace.
Accordingly, the interim final rule makes changes to the CFPB’s December 2021 final rule that are intended to conform the December 2021 final rule’s terminology and substantive provisions with the LIBOR Act and Board final rule. For example, the interim final rule replaces references to the “index based on SOFR recommended by the Alternative Reference Rates Committee for consumer products” with a reference to the “Board-selected benchmark replacement rate for consumer loans.” It also removes the CFPB’s determinations concerning the comparability of, and the substantial similarity of the historical fluctuations of, the spread-adjusted indices based on the SOFR recommended by the ARRC for consumer products compared to the LIBOR indices they would replace. The CFPB states that these determinations were “rendered obsolete” by the LIBOR Act and the Board’s final rule. In removing the CFPB’s determinations, the interim final rule makes various changes to the December 2021 final rule to reflect that the LIBOR Act represents a Congressional determination that all of the Board-selected benchmark replacements constitute a “comparable index” to, and have “historical fluctuations that are substantially similar to,” the LIBOR indices they replace.
Comments on the CFPB’s interim final rule must be received no later than 30 days after the date it is published in the Federal Register.
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