Compliance Blog

The Consumer Financial Protection Bureau (CFPB) completed a final rule (rule) that will help the financial services industry transition from the London Interbank Offered Rate (LIBOR) for consumer credit products. The rule helps credit unions transition from LIBOR-linked indices and provides guidance to credit unions in how to accomplish the rule’s goals.

It may be helpful to briefly review why the financial services industry with the CFPB’s blessing is transitioning to other indices. The Financial Conduct Authority (FCA) has indicated over the years its intention of ending LIBOR as a benchmark. In addition, key U.S.-based regulators have advised financial institutions to not enter any new LIBOR contracts after December 31^st, 2021. The CFPB’s rule will allow credit unions to move from LIBOR by establishing standards a credit union may use to find replacement indices for both open-end and closed-end credit products.

Open-End Credit Products

Credit unions may “choose a compliant replacement index” for LIBOR-linked, open-end credit products on or after April 1, 2022, before LIBOR is set to expire. However, the added flexibility to transition from LIBOR before LIBOR becomes unavailable is contingent on what a credit union's contract allows. When a credit union replaces the LIBOR index, the credit unions must either “ensure that the APR calculated using the replacement index is substantially similar to the rate calculated using the LIBOR index” or “select a replacement index that is newly established or an index that is not newly established and has historical fluctuations substantially similar to those of the LIBOR index.” A credit union may satisfy the “historical fluctuations are substantially similar” standard by showing the replacement index has “movements over time [that] are substantially similar…and the consumers’ payments using the replacement index compared to payments using the LIBOR index are substantially similar if there is sufficient historical data for this analysis.” The CFPB ignored calls from commenters to implement a principles-based standard in favor of a non-exhaustive list of factors to satisfy the “historical fluctuations are substantially similar” standard, citing the fact-specific nature of determining “whether a replacement index has historical fluctuations that are substantially similar” to LIBOR.

The rule also alters the change-in-terms notice requirements for HELOC and credit card accounts. The rule requires change-in-terms notices to notify members a new index is “replacing the LIBOR index and any adjusted margin that will be used to calculate a consumer’s rate.” A credit union may disclose in its change-in-terms notices the periodic rate and the APR of the replacement index using the “best information reasonably available” when the LIBOR index is replaced with a SOFR-based spread-adjusted index. Comment 9(c)(1)-4 and Comment 9(c)(2)(iv)-2.ii detail these changes for both HELOCs and credit card accounts.

In addition, the rule highlights Regulation Z provisions that discuss the “replacement of an index when the index becomes unavailable.” The rule also includes a newly added exception to § 1026.59(h). The rule exempts creditors from reevaluating a rate increase caused by replacing a LIBOR index or because the LIBOR index once used is no longer available. Card issuers are also advised on what to do when a rate reevaluation is previously required before a credit union has the chance to transition from the LIBOR index and “LIBOR was used as the benchmark” to determine whether the card issuer can stop the reviews.

Closed-End Credit Products

The final rule also makes changes to how a credit union may replace the indices in LIBOR-linked, closed-end credit products. The final rule asks credit unions to replace LIBOR-linked indices with a “comparable” index. Comment 20(a)(3)-iv,  which is adopted in the final rule, provides examples of the type of factors a credit union may consider when weighing whether a replacement index meets the “comparable” standard. The factors of Comment 20(a)(3)-iv are as follows:

The final rule also makes technical edits to Comment 37(j)(1)-1 and the sample forms in Appendix H. The CFPB’s rule and the accompanied standards aim to help transition credit unions from LIBOR-linked indices.

Credit unions may want to review the final rule in more depth to prepare for the replacement of all LIBOR-linked indices with indices that meet the promulgated standards. Credit unions may also review the updated Frequently Asked Questions (FAQs), or contact the NAFCU Compliance team with specific questions.