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CFPB's LIBOR proposal helps CUs plan ahead, says NAFCU
NAFCU Senior Counsel for Research and Policy Andrew Morris wrote to the CFPB yesterday in response to the bureau's notice of proposed rulemaking related to the transition away from the London Inter-bank Offered Rate (LIBOR) for consumers and regulated entities. LIBOR is set to stop publishing after 2021 and the Secured Overnight Financing Rate (SOFR) has been identified as its alternative.
The rule as proposed would provide:
- new flexibility when selecting a replacement index;
- examples of indices that are substantially similar;
- an explanation about the content and timing of required disclosures; and
- technical updates to ensure, among other things, that card issuers are not burdened with compliance obligations that are impossible to discharge in a post LIBOR environment.
In the letter, Morris offered support for the bureau’s determination that the prime rate published in the Wall Street Journal and certain spread-adjusted indices based on the SOFR have historical fluctuations substantially similar to those of certain U.S. dollar LIBOR indices.
“Not all credit unions rely on LIBOR as a rate index. For those that do, the amendments provide additional clarity and flexibility to support the transition process,” wrote Morris. “Of most value to NAFCU’s members are the provisions that would allow a credit union to select and transition to a replacement index prior to the LIBOR index becoming ‘unavailable.’
“NAFCU also appreciates the inclusion of example indices that are deemed ‘substantially similar’ to LIBOR, clarification of the content and timing of required disclosures, and technical updates to ensure, among other things, that card issuers are not required to needlessly evaluate their decision to transition away from LIBOR when there is no possibility of returning to that rate index,” added Morris.
In addition, Morris suggested the bureau consider ways to alleviate risks to financial institutions if their contracts lack flexible fallback language for switching to a new rate index such as adopting a supervisory policy – consistent with Regulation Z – that will accommodate “reasonable, good faith interpretations of contract language that refers to the unavailability of LIBOR.”
NAFCU highlighted key aspects of the rule that could impact credit unions in a Regulatory Alert. The association will continue to keep credit unions informed of resources available to effectively transition away from LIBOR.