United States: CFPB finalizes LIBOR transitional rule
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The CFPB has issued a final rule to facilitate the transition to LIBOR. The rule amends the provisions of Regulation Z, which implements the Law on Truth About Lending.
The changes serve to move away from LIBOR indices for open and closed products. The rule will update (i) LIBOR-related provisions for closed-end products such as variable rate mortgages, personal student loans, auto loans and personal installment loans, (ii) update LIBOR-related provisions for open products, including index changes, change notices and interest rate revaluation requirements for credit cards and home equity lines, and (iii) Revise Regulation Z in its entirety to apply to certain maturities the Spread-Adjusted Secured Overnight Financing Rate (“SOFR”) index instead of a LIBOR index. The final rule will also restructure template ARM rate adjustment notification forms for the LIBOR transition.
The CFPB has also issued updated FAQs to help creditors comply with the Final Rule and provide guidance on related LIBOR transition issues and regulatory issues and considerations.
The changes made to Regulation Z will take effect on April 1, 2022, although some notification requirements of changes to the conditions do not require compliance until October 1, 2022. The updated sample ARM Rate Adjustment Notice forms are available for use starting April 1, 2022, and must be used starting October 1, 2023.
Commentary – Daniel Meade
Interestingly, the last rule identifies the one-month, three-month or six-month spread-adjusted SOFR as a comparable substitute index within the meaning of Reg. Z, but reserves the right to assess the one-year term of the spread-adjusted SOFR. However, the CFPB made it clear that just because certain tenors were usually identified by SOFR, it did not preclude other indices from being found as comparable replacements for LIBOR.
The CFPB also noted that it has established The Wall Street Journal One-month and three-month base rates (together with the SOFR tenors mentioned above) meet the “comparison condition of historical fluctuations” for replacement rates for perpetual loans such as credit cards and HELOCs.
Primary sources
- CFPB press release: CFPB issues final rules to facilitate transition from LIBOR
- CFPB Final Rule: Facilitating the LIBOR transition (Regulation Z)
- CFPB report: Unofficial redline of the final rule on LIBOR transition
- CFPB Executive Summary: Executive Summary of the LIBOR transition rule 2021
- CFPB FAQ: Frequently asked questions about the LIBOR transition
- CFPB resource: sample forms for the LIBOR transition
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.
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