June 24, 2020
Authored by: Ross Handler and Benjamin Saul
On June 4, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued proposed rules and changes to the Truth in Lending Act (“TILA”) to address the anticipated sunset of the London Interbank Offered Rate (“LIBOR”) at the end of 2021. Some market lenders currently rely on the LIBOR as an index for calculating rates for open-end and closed-end credit products. The CFPB’s proposed rules and changes shed some light on what creditors might expect when the LIBOR is discontinued, and also include a compilation of frequently asked questions (“FAQs”) to help prepare creditors for the eventual transition.
In its proposed rule, the CFPB contemplates several amendments to Regulation Z, which implements TILA, for both open-end and closed-end credit products to address the discontinuation of the LIBOR. Select amendments include:
- To ensure that credit card issuers and HELOC creditors choose acceptable replacement indices for the LIBOR, the CFPB has proposed a detailed roadmap to outline specifically how these creditors may replace the LIBOR before it becomes unavailable. Under these guidelines, credit card issuers and HELOC creditors must select a replacement index where the annual percentage rate (“APR”) for the new index is calculated similarly to the LIBOR index. The CFPB stated that the prime rate published in The Wall Street Journal as well as certain Secured Overnight Financing Rates will be considered suitable replacements as well.
- Regulation Z requires lenders to disclose certain terms to borrowers of open-end credit products. Under the proposed rule, Regulation Z would require creditors to provide further disclosures, including change-in-terms notices to inform borrowers as to which new interest rate their credit product will transition.
- The CFPB also proposes adding an exception from the rate reevaluation provisions applicable to credit card accounts. Under current regulations, when a card issuer increases a rate on a credit account, the creditor must reevaluate the rate increase every six months until such time the rate is then reduced. Per the CFPB’s proposal, a credit card issuer would be exempt from these requirements for increases that occur as a result of replacing the LIBOR index.
The notice and comment period for this proposed rule will be open until August 4, 2020. As many credit products, including mortgages, credit cards, HELOCs, reverse mortgages, and student loans rely on the LIBOR, lenders are closely watching developments as the anticipated sunset of this index approaches.
As the CFPB gains a deeper understanding of the impact of its proposed rule, it may offer further information and supervisory guidance related to the transition away from LIBOR. Entities may choose to consult directly with the prudential regulator when determining how their financial services products might impact consumers and the broader consumer financial services market. We at BCLP have extensive experience helping consumer financial services providers manage the risks associated with CFPB compliance. We will continue to monitor developments in this area and would be happy to address your questions and concerns.