At the end of April 2023 the CFPB published an interim final rule to reflect the enactment of the Adjustable Interest Rate (LIBOR) Act (LIBOR Act). This rule addresses the planned cessation of most U.S. Dollar LIBOR tenors after June 30, 2023, by incorporating the benchmark replacement for consumer loans into Regulation Z. This interim final rule conforms the terminology from the LIBOR Act into relevant open-end and closed-end credit provisions in Regulation Z, and also addresses treatment of the 12- month USD LIBOR index and its replacement index, including permitting creditors to use alternative language in change-in-terms notices in situations where the 12- month tenor of the LIBOR index is being replaced consistent with the LIBOR Act. The effective date of the interim final rule is May 15, 2023, but the CFPB invites comment up until 30 days after the rule is published in the federal register.
Introduced in the 1980s, LIBOR (London Interbank Offered Rate) was intended to measure the average rate at which a bank could obtain unsecured funding for a given period. In the US, financial institutions have used LIBOR as a common benchmark rate for a variety of adjustable-rate consumer financial products, including mortgages, credit cards, HELOCs, reverse mortgages, and student loans. Because of the role LIBOR played in the 2008 financial crisis, it was decided that LIBOR would be phased out over time, and that time ends in June 2023 when the 1-month, 3-month, 6-month, and 12-month LIBOR rates will cease to be published. The need to address upcoming LIBOR changes was included as part of the 2010 Dodd-Frank Act, with previous and current changes to Reg Z regarding LIBOR being done under that authority.
Previously, in the 2021 LIBOR Transition Final Rule, the CFPB provided examples of certain Secured Overnight Financing Rate (SOFR)-based indices, that may meet the applicable Regulation Z standards for the 1-month, 3-month, and 6-month LIBOR tenors, but reserved judgment for the 1-year LIBOR tenor and its SOFR-based replacement index in order to gather more information and wait to see what the Alternative Reference Rates Committee recommended. In this newly released interim final rule, the CFPB is now also adding references to the SOFR-based replacement for the 12-month tenor of LIBOR.
The interim final rule checks in at 138 pages with about 90 pages being substantive discussion of the changes and nearly 50 pages of actual changes to the regulation. For quicker reference, the CFPB has also published a 3 page Fast Facts: 2023 LIBOR Transition Interim Final Rule, which should be helpful in quickly digesting the specific changes and to which products they apply.
The CFPB also updated several of the LIBOR Transition FAQs on their website, which cover such areas as consumer financial products and services, adjustable-rate mortgage products, private student loan products, home equity line of credit products, and credit card products.
Although these changes have been a long time coming, not everyone has yet made the necessary changes to transition their borrowers away from LIBOR to another index, and Compliance Alliance is here to help. We have tools to help with the LIBOR transition, and we’re also available on the hotline to answer whatever questions you might have.