On June 4, 2020 the Consumer Financial Protection Bureau (CFPB) released a notice of proposed rulemaking (proposal) to address the sunset of LIBOR, which is expected to be discontinued after 2021. The proposal would provide examples of replacement indices that meet certain Regulation Z (Reg Z) standards, permit creditors new means to transition home equity lines of credit and credit card accounts from LIBOR to a replacement index, and address change-in-terms notice provisions.
Reg Z contains separate provisions for open-end credit that is home secured and open-end credit that is not home secured. These distinctions are important for identifying applicability of various rules, and the proposal amends each separate rule appropriately. However, from a conceptual standpoint, the changes are fundamentally similar. To present these fundamental changes in a manner that is simpler to understand from a conceptual standpoint, and to avoid redundancy, provisions for open-end home-secured and not home-secured plans have been presented together.
Open-end Credit Subsequent Disclosure Requirements
Reg Z specifies when change-in-terms notifications must be sent to consumers. The transition from LIBOR may trigger certain notification requirements, which CFPB seeks to clarify in the proposal. For example, the proposal would specify that any change-in-terms notice must include any replacement index, including any adjusted margin, regardless of whether the margin is reduced or increased. Reg Z Section 1026.9(c) contains rules for when written change-in-terms notifications are required, both for open-end credit plans secured by the consumer’s dwelling and open-end not home-secured plans. Those rules can be summarized in a way that is relevant to the proposal as follows:1
- For open-end credit plans secured by the consumer’s dwelling, a creditor must provide a notice whenever a term required to be disclosed (required term) is changed, or the required minimum periodic payment is increased.
- For open-end (not home-secured) plans, a creditor must provide a notice whenever a significant change in required account terms is made.
- Both rules provide an exception from notice requirements when the change involves a reduction of any component of a finance or other charge.
Because the index is a required term, a creditor must provide a change-in-terms notice disclosing the index that is replacing the LIBOR index for both open-end credit plans secured by the consumer’s dwelling and for non-home-secured plans. The exception does not apply to the index change, regardless of whether there is also a change in the index value or margin that involves a reduction in a finance or other charge.
Reg Z currently requires notification of a margin change if the margin is increasing. However, a decrease in the margin would be excepted from the notification requirements because the change would involve a reduction in a component of a finance or other charge. The proposal would revise the exception when the change involves a reduction of any component of a finance or other charge so that it does not apply on or after Oct. 1, 2021, where the creditor is reducing the margin when a LIBOR index is replaced. Thus, the proposal would make it clear that a change-in-terms notice for any replacement index must include any adjusted margin regardless of whether the margin is reduced or increased.
The Truth in Lending Act generally requires that changes in disclosures have an effective date of the 1st of October that is at least six months after the date the final rule is adopted. However, in the proposal, CFPB notes that creditors may want to provide the information about the decreased margin in the change-in-terms notice even if they replace the LIBOR index and adjust the margin earlier than Oct. 1, 2021.
Requirements for Home Equity Plans and Credit Cards
Reg Z generally prohibits a creditor from changing the terms of a HELOC except under certain circumstances. Additionally, Reg Z Subpart G contains rules implementing requirements under the Credit CARD Act. In the case of a credit card account under an open-end consumer credit plan, a card issuer may not increase an APR (or certain other charges) except under certain circumstances.
Existing unavailability provisions exist for both HELOC plans and credit card plans, which permits the creditor to change the index and margin. In both instances, the proposal would revise existing unavailability provisions, primarily for technical, conforming, and clarification purposes. The proposal would also create LIBOR-specific provisions and permit a creditor to use either those new provisions or the existing, updated unavailability provisions.
Reg Z currently provides that a creditor may change the index and margin used under either plan under certain circumstances, namely beginning with the situation where the original index has become no longer available. The proposal would update both existing unavailability provisions so that a creditor may change the index and margin used under the plan if the original index is no longer available, the replacement index has historical fluctuations substantially similar to that of the original index, and the replacement index and replacement margin would have resulted in an APR substantially similar to the rate in effect at the time the original index became unavailable. The proposal would also provide that if the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. Thus, the proposal would change the existing requirements in the following three ways:
- Using the term “historical fluctuations” rather than the term “historical movement” to refer to the original index and the replacement index. This would primarily be a technical change with the revised definition being shaped by conforming changes throughout the rule.
- Including a provision regarding newly established indices. A similar provision currently exists in Reg Z requiring newly established indices to produce a rate substantially similar to the original index. The proposal would clarify that the creditor using a newly established index may adjust the margin in order to produce a substantially similar APR.
- The terms “replacement index” and “replacement index and replacement margin” are used instead of “new index” and “new index and margin.” This proposed change is intended to avoid any confusion when the rule refers to a replacement index and replacement margin as opposed to a newly established index.
The proposal would also add new LIBOR-specific provisions to Reg Z. These provisions would permit creditors for both types of plans that use a LIBOR index under the plan to replace the LIBOR index and change the margins for calculating the variable rates on or after March 15, 2021, under certain circumstances, without needing to wait for LIBOR to become unavailable.
Specifically, the proposal would provide that if a variable rate is calculated using a LIBOR index, a creditor may replace the LIBOR index and change the margin for calculating the variable rate on or after March 15, 2021, as long as:
- The historical fluctuations in the LIBOR index and replacement index were substantially similar; and
- The replacement index value in effect on Dec. 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on Dec. 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan.
Additionally, if the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and the replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on Dec. 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan.
Card Issuer Reevaluation of Rate Increases
Reg Z contains provisions that requires a card issuer to perform an ongoing review for credit card accounts when an APR is increased. Thus, if the LIBOR transition results in an APR increase, a card issuer would be required to complete an analysis reevaluating the rate on that account every 6 months until certain requirements are met. For this purpose, LIBOR must be used as the comparison index.
The proposal would create an exception for those card issuers that transitioned from LIBOR using either Reg Z’s existing unavailability provision, or the proposal’s LIBOR-specific provision discussed above. The proposal also would provide instructions on how to replace LIBOR as a benchmark for comparison for card issuers who were already required to perform a review as of March 15, 2021.
Where the transition results in an APR increase, no analysis reevaluating the rate would be required. The proposal also would provide instructions on how to replace LIBOR as a benchmark for comparison for card issuers who were already required to perform a §1026.59 review as of March 15, 2021.
Pursuant to Reg Z, if a 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. The proposal would provide an example of an index that is a “comparable index” to LIBOR for closed-end products. Specifically, CFPB would add an illustrative example to identify the Secured Overnight Financing Rate-based spread-adjusted replacement indices recommended by the Alternative Reference Rates Committee as an example of a “comparable index” for the LIBOR indices that they are intended to replace.
CFPB’s proposal would provide examples of replacement indices for LIBOR, permit a means for creditors to transition existing accounts that use LIBOR to a replacement index, address change-in-terms notice provisions, and address the rate reevaluation provisions applicable to credit card accounts. Financial institutions using LIBOR as an index for calculating rates for open-end and closed-end products should consider how these changes affect their plans for the transition to replacement indices. As noted above, this article has been presented to understand the proposal on a conceptual level. As such, financial institutions should refer to the applicable provisions within the proposal itself depending on the types of products they offer for more specific requirements. CFPB has also provided FAQs (which includes other transition topics in addition to the proposal) and “fast facts” regarding the proposal.
Questions can also be directed to the WBA Legal Call program at firstname.lastname@example.org.
Birrenkott is WBA assistant director - legal.
Note: The above information is not intended to provide legal advice; rather, it is intended to provide general information about banking issues. Consult your institution's attorney for special legal advice or assistance.
The requirements as presented in this article are summarized to better present the proposal and do not represent an accurate summary of requirements in their totality. See Reg Z Sections 1026.9(c)(1) and 1026.9(c)(2) for the full requirements.