The CFPB has amended Regulation Z to address the anticipated sunset of LIBOR, which is expected to be discontinued in June 2023.  Some creditors currently use LIBOR as an index for calculating rates for open-end and closed-end products.  The effective date of this final rule is April 1, 2022.

Open-End Credit

The final rule sets forth a detailed road map for home equity lines of credit (HELOC) creditors (including reverse mortgages) and credit card issuers to choose a compliant replacement index for the LIBOR index.  Under this final rule, HELOC creditors and card issuers can transition away from using the LIBOR index to a replacement index on or after April 1, 2022, before LIBOR is expected to become unavailable. To accomplish this, this final rule imposes certain requirements on selecting a replacement index. HELOC creditors and card issuers must ensure that the APR calculated using the replacement index is substantially similar to the rate calculated using the LIBOR index, based generally on the values of these indices on October 18, 2021.  The final rule provides examples of the types of factors to be considered in whether a replacement index meets this substantially similar standard.  The CFPB also has determined that the prime rate published by the Wall Street Journal has historical fluctuations substantially similar to those of the 1-month and 3-month LIBOR indices, and that the spread-adjusted indices based on the Secured Overnight Financing Rate (SOFR) recommended by the Alternative Reference Rates Committee (ARRC) for consumer products to replace 1-month, 3-month or 6-month LIBOR indices have historical fluctuations that are substantially similar to those of the applicable LIBOR index they are intended to replace.  Therefore, creditors may use these indices as replacements for a LIBOR index.

The final rule also revises change-in-terms notice requirements for HELOCs and credit card accounts to notify consumers how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced.  The final rule ensures that the change-in-terms notices for these accounts will disclose the index that is replacing the LIBOR index and any adjusted margin that will be used to calculate a consumer’s rate, regardless of whether the margin is increased or reduced.  These requirements are effective April 1, 2022, with a mandatory compliance date of October 1, 2022.

Closed-End Credit

The final rule provides details on how to determine whether a replacement index is a comparable index to a particular LIBOR index for purposes of the closed-end refinancing provisions. Currently, under Regulation Z, if the creditor changes the index of a variable-rate closed-end loan to an index that is not a comparable index, the index change may constitute a refinancing for purposes of Regulation Z, triggering certain requirements. Specifically, this final rule provides examples of the type of factors to be considered in whether a replacement index meets the Regulation Z “comparable” standard with respect to a particular LIBOR index for closed-end transactions, including but not limited to whether (i) the movements over time are comparable; (ii) the consumers’ payments using the replacement index compared to payments using the LIBOR index are comparable if there is sufficient data for this analysis; (iii) the index levels are comparable; (iv) the replacement index is publicly available; and (v) the replacement index is outside the control of the creditor. The final rule also adds an illustrative example to identify the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products to replace the 1-month, 3-month, or 6 month USD LIBOR index as an example of a comparable index for the LIBOR indices that they are intended to replace.

For the revisions related to the post-consummation disclosure form for certain adjustable rate mortgages, or ARMs, specifically sample form H-4(D)(4) in appendix H (that can be used for complying with § 1026.20(d)), this final rule provides creditors, assignees, and servicers with additional time to add the date at the top of the form if they are not already including the date. Specifically, from April 1, 2022, through September 30, 2023, creditors, assignees, and servicers have the option of either using the version of the form in effect prior to April 1, 2022, that does not include the date at the top of the form (denoted as “Legacy Form” in appendix H), or using the revised form put into effect on April 1, 2022, (denoted as “Revised Form” in appendix H) that includes the date at the top of the form. Creditors, assignees, and servicers are not required to use the revised form that includes the date at the top of the form that will be put into effect on April 1, 2022, until October 1, 2023. Also, this final rule adds a new sample form H-4(D)(2) in appendix H effective April 1, 2022, that references a SOFR index (denoted as “Revised Form” in appendix H) that can be used for complying with § 1026.20(c). This final rule also retains through September 30, 2023, the sample form H-4(D)(2) that was in effect prior to April 1, 2022, that references a LIBOR index (denoted as “Legacy Form” in appendix H).

Putting It Into Practice

Creditors with adjustable rate consumer products featuring a LIBOR index need to be thinking now about which index they will choose to replace LIBOR.  These revisions to Regulation Z and the Commentary provide guidance on how to proceed.