The CFPB has proposed amendments to Regulation Z to address the discontinuation of the London Inter-Bank Offered Rate (LIBOR) that is currently used by many creditors as the index for calculating the interest rate on credit cards and other variable-rate consumer credit products. In 2017, the United Kingdom’s Financial Conduct Authority, the regulator that oversees the panel of banks that comprise LIBOR, announced that it would discontinue LIBOR sometime after 2021. Comments on the CFPB’s proposal are due no later than August 4, 2020.
The final rule would take effect on March 15, 2021, except for the revised change-in-term disclosure requirements for home equity lines of credit (which include reverse mortgages structured as open-end credit) (HELOCs) and credit cards.
The key proposed Regulation Z amendments consist of the following:
Open-end credit.
Change in index. Regulation Z currently allows HELOC creditors and card issuers to change an index and margin used to set the APR on a variable-rate account under certain conditions when the original index “becomes unavailable” or “is no longer available.” Having made a preliminary determination that all parties would benefit if creditors and issuers could replace a LIBOR index before LIBOR becomes unavailable, the proposal includes a new provision that would allow HELOC creditors and issuers (subject to contractual limitations) to replace a LIBOR index with a replacement index on or after March 15, 2021. (The proposal includes the existing provision, with modification, that allows an index to be replaced when it becomes unavailable.) To do so, the APR calculated using the replacement index must be substantially similar to the APR calculated using the LIBOR index, based on the values of those indices on December 31, 2020. The replacement index must be one that is newly established with no history or an established index with a 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. The proposal includes the Bureau’s determinations that (1) the prime rate published in the Wall Street Journal has historical fluctuations substantially similar to the those of the 1- and 3-month U.S. Dollar LIBOR indices, and (2) the spread-adjusted indices based on the Secured Overnight Financing Rate (SOFR) recommended by the Alternative Reference Rates Committee to replace the 1-, 3-, and 6-month and 1-year U.S. Dollar LIBOR indices have historical fluctuations substantially similar to those of the 1-, 3-, and 6-month and 1-year U.S. Dollar LIBOR indices. (The Committee was convened by the Federal Reserve Board and the New York Fed to address the transition from LIBOR.)
Change-in-terms notices. Regulation Z currently does not require HELOC creditors or card issuers to provide a change-in-terms notice when the change involves a reduction of any component of a finance charge or other charge. The proposal would create an exception that requires creditors or issuers, on or after October 1, 2021, to provide a change-in-terms notice when the margin is reduced in conjunction with replacement of a LIBOR index. The change-in-terms notice must disclose the replacement index and new margin. Before October 1, 2021, a creditor or issuer has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index.
Rate increase reviews. Regulation Z currently requires a card issuer, when increasing the rate on a credit card account, to periodically review the increased rate. The proposal would create an exception from this requirement for rate increases that result from the replacement of a LIBOR index. It would also add a provision establishing conditions for how an issuer that was already subject to a periodic review requirement before transitioning from a LIBOR index can terminate that requirement.
Closed-end credit. Regulation Z currently provides that a transaction subject to new disclosures results if a creditor adds a variable-rate feature to 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 proposal would add new commentary language that provides by way of example that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction from the 1-, 3-, 6-month or 1-year U.S. Dollar LIBOR index to the spread-adjusted index based on the SOFR recommended by the Alternative Reference Rates Committee to replace the 1-, 3-, 6-month or 1-year U.S. Dollar LIBOR index, respectively, because the replacement index is a comparable index to the corresponding U.S. Dollar LIBOR index. (The new language does not refer to changing the index of a variable-rate transaction from the 1- or 3-month U.S. Dollar LIBOR index to the Wall Street Journal prime rate. However, by referring to a change from a LIBOR index to the spread-adjusted index based on the SOFR as an example of when a creditor does not add a variable-rate feature, the new language leaves open the possibility that a change in index from LIBOR to the WSJ prime rate would similarly not be considered the addition of a variable-rate feature because the Bureau considers the WSJ prime rate to be a comparable index to the corresponding LIBOR index.)
Other issuances. Contemporaneously with the proposed Regulation Z amendments, the CFPB also issued the following items:
