Rule2021-25825
Facilitating the LIBOR Transition (Regulation Z)
Primary source
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Published
December 8, 2021
Effective
April 1, 2022
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Bureau of Consumer Financial Protection (Bureau) is amending Regulation Z, which implements the Truth in Lending Act (TILA), generally to address the anticipated sunset of LIBOR, which is expected to be discontinued for most U.S. Dollar (USD) tenors in June 2023. Some creditors currently use USD LIBOR as an index for calculating rates for open-end and closed-end products. The Bureau is amending the open-end and closed-end provisions to provide examples of replacement indices for LIBOR indices that meet certain Regulation Z standards. The Bureau also is amending Regulation Z to permit creditors for home equity lines of credit (HELOCs) and card issuers for credit card accounts to transition existing accounts that use a LIBOR index to a replacement index on or after April 1, 2022, if certain conditions are met. This final rule also addresses change-in-terms notice provisions for HELOCs and credit card accounts and how they apply to accounts transitioning away from using a LIBOR index. Lastly, the Bureau is amending Regulation Z to address how the rate reevaluation provisions applicable to credit card accounts apply to the transition from using a LIBOR index to a replacement index. The Bureau is reserving judgment about whether to include references to a 1-year USD LIBOR index and its replacement index in various comments; the Bureau will consider whether to finalize comments proposed on that issue in a supplemental final rule once it obtains additional information.
Full Text
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[Federal Register Volume 86, Number 233 (Wednesday, December 8, 2021)]
[Rules and Regulations]
[Pages 69716-69800]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-25825]
[[Page 69715]]
Vol. 86
Wednesday,
No. 233
December 8, 2021
Part II
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Facilitating the LIBOR Transition (Regulation Z); Final Rule
Federal Register / Vol. 86 , No. 233 / Wednesday, December 8, 2021 /
Rules and Regulations
[[Page 69716]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1026
[Docket No. CFPB-2020-0014]
RIN 3170-AB01
Facilitating the LIBOR Transition (Regulation Z)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Final rule; official interpretation.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
amending Regulation Z, which implements the Truth in Lending Act
(TILA), generally to address the anticipated sunset of LIBOR, which is
expected to be discontinued for most U.S. Dollar (USD) tenors in June
2023. Some creditors currently use USD LIBOR as an index for
calculating rates for open-end and closed-end products. The Bureau is
amending the open-end and closed-end provisions to provide examples of
replacement indices for LIBOR indices that meet certain Regulation Z
standards. The Bureau also is amending Regulation Z to permit creditors
for home equity lines of credit (HELOCs) and card issuers for credit
card accounts to transition existing accounts that use a LIBOR index to
a replacement index on or after April 1, 2022, if certain conditions
are met. This final rule also addresses change-in-terms notice
provisions for HELOCs and credit card accounts and how they apply to
accounts transitioning away from using a LIBOR index. Lastly, the
Bureau is amending Regulation Z to address how the rate reevaluation
provisions applicable to credit card accounts apply to the transition
from using a LIBOR index to a replacement index. The Bureau is
reserving judgment about whether to include references to a 1-year USD
LIBOR index and its replacement index in various comments; the Bureau
will consider whether to finalize comments proposed on that issue in a
supplemental final rule once it obtains additional information.
DATES:
Effective dates: This final rule is effective on April 1, 2022,
except the amendment to appendix H to part 1026 in amendatory
instruction 8, which is effective on October 1, 2023.
Compliance dates: The mandatory compliance date for revisions to
the change-in-terms notice requirements in Sec. 1026.9(c)(1)(ii) and
(c)(2)(v)(A) is October 1, 2022. The mandatory compliance date for all
other provisions of the final rule is April 1, 2022.
FOR FURTHER INFORMATION CONTACT: Krista Ayoub, Kristen Phinnessee, or
Lanique Eubanks, Senior Counsels, Office of Regulations, at 202-435-
7700. If you require this document in an alternative electronic format,
please contact <a href="/cdn-cgi/l/email-protection#df9c998f9d809ebcbcbaacacb6bdb6b3b6aba69fbcb9afbdf1b8b0a9"><span class="__cf_email__" data-cfemail="1754514755485674747264647e757e7b7e636e577471677539707861">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Final Rule
The Bureau is adopting amendments to Regulation Z, which implements
TILA, for both open-end and closed-end credit to address the
anticipated sunset of LIBOR.\1\ The effective date of this final rule
is April 1, 2022. For HELOCs and credit card accounts, the updated
requirements in this final rule related to disclosing a reduction in a
margin in the change-in-terms notices are effective on April 1, 2022,
with a mandatory compliance date of October 1, 2022. For the revisions
related to the post-consummation disclosure form for certain adjustable
rate mortgages (ARMs), specifically sample form H-4(D)(4) in appendix H
(that can be used for complying with Sec. 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 Secured
Overnight Financing Rate (SOFR) index (denoted as ``Revised Form'' in
appendix H) that can be used for complying with Sec. 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). This is
discussed in this section and the effective date discussion in part VI,
below.
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\1\ When amending commentary, the Office of the Federal Register
requires reprinting of certain subsections being amended in their
entirety rather than providing more targeted amendatory
instructions. The sections of regulatory text and commentary
included in this document show the language of those sections. In
addition, the Bureau is releasing an unofficial, informal redline to
assist industry and other stakeholders in reviewing the changes made
in this final rule to the regulatory text and commentary of
Regulation Z. This redline can be found on the Bureau's website, at
[placeholder]. If any conflicts exist between the redline and the
text of Regulation Z, its commentary, or this final rule, the
documents published in the Federal Register are the controlling
documents.
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A. Open-End Credit
The Bureau is adopting several amendments to the open-end credit
provisions in Regulation Z to address the anticipated sunset of LIBOR.
First, this final rule sets forth a detailed roadmap for HELOC
creditors and card issuers to choose a compliant replacement index for
the LIBOR index.\2\ Regulation Z already permits HELOC creditors and
card issuers to change an index and margin they use to set the annual
percentage rate (APR) on a variable-rate account under certain
conditions, when the original index becomes unavailable or is no longer
available. The Bureau determined, however, that consumers, HELOC
creditors, and card issuers would benefit substantially if HELOC
creditors and card issuers could transition away from a LIBOR index
before LIBOR is expected to become unavailable.
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\2\ Reverse mortgages structured as open-end credit are HELOCs
subject to the provisions in Sec. Sec. 1026.40 and 1026.9(c)(1).
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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.\3\
HELOC creditors
[[Page 69717]]
and card issuers may select a replacement index that is newly
established and has no history or an index that is not newly
established and has historical fluctuations substantially similar to
those of the LIBOR index. This final rule provides details on how to
determine whether a replacement index has historical fluctuations that
are substantially similar to those of a particular LIBOR index for
HELOCs and credit card accounts. Specifically, this final rule provides
examples of the type of factors to be considered in whether a
replacement index meets the Regulation Z ``historical fluctuations are
substantially similar'' standard. The Bureau also has determined that
the prime rate published in the Wall Street Journal (Prime) has
historical fluctuations substantially similar to those of the 1-month
and 3-month USD LIBOR indices. In addition, the Bureau has determined
that spread-adjusted \4\ indices based on SOFR recommended by the
Alternative Reference Rates Committee (ARRC) for consumer products to
the replace 1-month, 3-month, or 6-month USD LIBOR index have
historical fluctuations that are substantially similar to those of the
applicable USD LIBOR index they are intended to replace. These new
provisions that detail specifically how HELOC creditors and card
issuers may replace a LIBOR index with a replacement index for accounts
on or after April 1, 2022, are set forth in Sec. 1026.40(f)(3)(ii)(B)
for HELOCs and Sec. 1026.55(b)(7)(ii) for credit card accounts. The
ARRC has indicated that the SOFR-based spread-adjusted indices
recommended by ARRC for consumer products to the replace 1-month, 3-
month, 6-month, or 1-year USD LIBOR index will not be published until
Monday, July 3, 2023, which is the first weekday after Friday, June 30,
2023, when LIBOR is currently anticipated to sunset for these USD LIBOR
tenors.\5\ However, the Bureau wishes to facilitate an earlier
transition for those HELOC creditors or card issuers that may want to
transition to an index other than the SOFR-based spread-adjusted
indices recommended by ARRC for consumer products. Accordingly, the
Bureau is making these provisions effective on April 1, 2022.
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\3\ If the replacement index is not published on October 18,
2021, the creditor or card issuer generally must use the next
calendar day for which both the LIBOR index and the replacement
index are published as the date for selecting indices values in
determining whether the APR based on the replacement index is
substantially similar to the rate based on the LIBOR index. The one
exception is that if the replacement index is the SOFR-based spread-
adjusted index recommended by the Alternative Reference Rates
Committee (ARRC) for consumer products to replace the 1-month, 3-
month, 6-month, or 1-year USD LIBOR index, the creditor or card
issuer must use the index value on June 30, 2023, for the LIBOR
index and, for the SOFR-based spread-adjusted index for consumer
products, must use the index value on the first date that index is
published, in determining whether the APR based on the replacement
index is substantially similar to the rate based on the LIBOR index.
\4\ The spread between two indices is the difference between the
levels of those indices, which may vary from day to day. For
example, if today, index X is 5 percent and index Y is 4 percent,
then the X-Y spread today is 1 percentage point (or, equivalently,
100 basis points). A spread adjustment is a term that is added to
one index to make it more similar to another index. For example, if
the X-Y spread is typically around 100 basis points, then one
reasonable spread adjustment may be to add 100 basis points to Y
every day. Then the spread-adjusted value of Y will typically be
much closer to the value of X than Y is, although there may still be
differences between X and the spread-adjusted Y from day to day.
\5\ Alt. Reference Rates Comm, Summary of the ARRC's Fallback
Recommendations, at 11 (Oct. 6, 2021), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/spread-adjustments-narrative-oct-6-2021">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/spread-adjustments-narrative-oct-6-2021</a> (Summary of Fallback Recommendations).
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Second, this final rule makes clarifying changes to existing
Regulation Z provisions on the replacement of an index when the index
becomes unavailable. These changes are set forth in Sec.
1026.40(f)(3)(ii)(A) for HELOCs and in Sec. 1026.55(b)(7)(i) for
credit card accounts.
Third, this final rule 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. This 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 being
reduced or increased. These changes will become effective April 1,
2022. From April 1, 2022, through September 30, 2022, creditors will
have the option of complying with these revised change-in-terms notice
requirements. On or after October 1, 2022, creditors will be required
to comply with these revised change-in-terms notice requirements. These
changes are set forth in Sec. 1026.9(c)(1)(ii) for HELOCs and in Sec.
1026.9(c)(2)(v)(A) for credit card accounts.
Fourth, this final rule also provides additional details on how a
creditor may disclose information about the periodic rate and APR in a
change-in-terms notice for HELOCs and credit card accounts when the
creditor is replacing a LIBOR index with the SOFR-based spread-adjusted
index recommended by ARRC for consumer products to replace 1-month, 3-
month, or 6-month USD LIBOR index in certain circumstances. These
details are set forth in comment 9(c)(1)-4 for HELOCs and in comment
9(c)(2)(iv)-2.ii for credit card accounts.
Fifth, this final rule adds an exception from the rate reevaluation
provisions applicable to credit card accounts. Currently, when a card
issuer increases a rate on a credit card account, the card issuer
generally must complete an analysis reevaluating the rate increase
every six months until the rate is reduced to a certain degree. To
facilitate compliance, this final rule adds an exception from these
requirements for increases that occur as a result of replacing a LIBOR
index using the specific provisions described above for transitioning
from a LIBOR index or as a result of the LIBOR index becoming
unavailable. This exception is set forth in Sec. 1026.59(h)(3). This
exception would not apply to rate increases that are already subject to
the rate reevaluation requirements prior to the transition from the
LIBOR index. This final rule also would address cases where the card
issuer was already required to perform a rate reevaluation review prior
to transitioning away from LIBOR and LIBOR was used as the benchmark
for comparison for purposes of determining whether the card issuer can
terminate the six-month reviews. To facilitate compliance, these
changes will address how a card issuer can terminate the obligation to
review where the rate applicable immediately prior to the increase was
a variable rate calculated using a LIBOR index. These changes are set
forth in Sec. 1026.59(f)(3).
Sixth, in relation to the open-end credit provisions, this final
rule adopts technical edits to comment 59(d)-2 to replace the LIBOR
reference with a reference to a SOFR index and to make related changes
and corrections.
B. Closed-End Credit
The Bureau is adopting amendments to the closed-end credit
provisions in Regulation Z to address the anticipated sunset of LIBOR.
First, this 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. This
change is set forth in comment 20(a)-3.iv. This 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. This change is
set forth in comment 20(a)(3)-ii.B.
[[Page 69718]]
Second, in relation to the closed-end credit provisions, this final
rule adopts technical edits to Sec. 1026.36(a)(4)(iii)(C) and
(a)(5)(iii)(B), comment 37(j)(1)-1, and sample forms H-4(D)(2) and H-
4(D)(4) in appendix H pursuant to Sec. 1026.20(c) and (d). These
technical edits would replace LIBOR references with references to a
SOFR index and make related changes and corrections. This final rule
also adds a date at the top of the sample form H-4(D)(4) that can be
used for complying with Sec. 1026.20(d) concerning ARMs. The effective
date of the revised sample forms in H-4(D)(2) and H-4(D)(4) in appendix
H is April 1, 2022. With respect to sample form H-4(D)(4) in appendix
H, from April 1, 2022, through September 30, 2023, creditors,
assignees, or servicers will have the option of using a format
substantially similar to form H-4(D)(4) either in effect prior to April
1, 2022 (that does not include the date at the top of the form and is
denoted as ``Legacy Form'' in appendix H), or the form that becomes
effective on April 1, 2022 (that includes the date at the top of the
form and is denoted as ``Revised Form'' in appendix H). Both versions
of the forms will be available in appendix H through September 30,
2023. Starting on or after October 1, 2023, only creditors, assignees,
or servicers using a format substantially similar to the form that
becomes effective on April 1, 2022, that includes a date at the top of
the form, will be deemed to be in compliance. Accordingly, the version
of form H-4(D)(4) in effect prior to April 1, 2022, will be removed
from appendix H and cannot be used to demonstrate compliance with Sec.
1026.20(d). In addition, the revised form of H-4(D)(4) that will become
effective on April 1, 2022, also provides an example of the form using
a SOFR index. Because most tenors of USD LIBOR are not expected to be
discontinued until June 2023, this final rule retains through September
30, 2023, the sample form H-4(D)(4) that was in effect prior to April
1, 2022, that references a LIBOR index. New sample form H-4(D)(2) in
appendix H effective April 1, 2022, (denoted as ``Revised Form'' in
appendix H) can be used for complying with Sec. 1026.20(c) relating to
ARMs and provides an example using a SOFR index. 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, (denoted as ``Legacy Form'' in
appendix H) that provides an example using a LIBOR index.
II. Background
A. LIBOR
Introduced in the 1980s, LIBOR (originally an acronym for London
Interbank Offered Rate) was intended to measure the average rate at
which a bank could obtain unsecured funding in the London interbank
market for a given period, in a given currency. LIBOR is calculated
based on submissions from a panel of contributing banks and published
every London business day for five currencies (USD, British pound
sterling (GBP), euro (EUR), Swiss franc (CHF), and Japanese yen (JPY))
and for seven tenors \6\ for each currency (overnight, 1-week, 1-month,
2-month, 3-month, 6-month, and 1-year), resulting in 35 individual
rates (collectively, LIBOR). As of September 2021, the panel for USD
LIBOR is comprised of sixteen banks, and each bank contributes data for
all seven tenors.\7\
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\6\ The tenor refers to the to the length of time remaining
until a loan matures.
\7\ The Intercontinental Exch. LIBOR, Panel Composition, <a href="https://www.theice.com/iba/libor">https://www.theice.com/iba/libor</a>.
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In 2017, the chief executive of the U.K. Financial Conduct
Authority (FCA), which regulates LIBOR, announced that it did not
intend to persuade or compel banks to submit information for LIBOR past
the end of 2021 (subsequently extended to June 30, 2023, for certain
USD LIBOR tenors only) and that the panel banks had agreed to
voluntarily sustain LIBOR until then in order to provide sufficient
time for the market to transition from using LIBOR indices to
alternative indices.\8\ In March 2021, the FCA announced cessation
dates for all LIBOR indices. The bank panels are scheduled to end
immediately after December 31, 2021, for the 1-week and 2-month USD
LIBOR indices and immediately after June 30, 2023, for the remaining
USD LIBOR indices. After these dates, representative LIBOR indices will
no longer be available.\9\
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\8\ Andrew Bailey, Fin. Conduct Auth., The Future of LIBOR
(2017), <a href="https://www.fca.org.uk/news/speeches/the-future-of-libor">https://www.fca.org.uk/news/speeches/the-future-of-libor</a>;
Fin. Conduct Auth., FCA Statement on LIBOR Panels (2017), <a href="https://www.fca.org.uk/news/statements/fca-statement-libor-panels">https://www.fca.org.uk/news/statements/fca-statement-libor-panels</a>.
\9\ Fin. Conduct Auth., Announcements on the End of LIBOR
(2021), <a href="https://www.fca.org.uk/news/press-releases/announcements-end-libor">https://www.fca.org.uk/news/press-releases/announcements-end-libor</a> (last updated May 3, 2021); Fin. Conduct Auth., About
LIBOR Transition (2021), <a href="https://www.fca.org.uk/markets/libor-transition">https://www.fca.org.uk/markets/libor-transition</a> (last updated May 7, 2021).
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B. Consumer Products Using LIBOR
In the United States, financial institutions have used USD LIBOR as
a common benchmark rate for a variety of adjustable-rate consumer
financial products, including mortgages, credit cards, HELOCs, and
student loans. Typically, the consumer pays an interest rate that is
calculated as the sum of a benchmark index and a margin. For example, a
consumer may pay an interest rate equal to the 1-year USD LIBOR plus
two percentage points.
Financial institutions have been developing plans and procedures to
transition from the use of LIBOR indices to replacement indices for
products that are being newly issued and existing accounts that were
originally benchmarked to a LIBOR index. In some markets, such as for
HELOCs and credit cards, the vast majority of newly originated lines of
credit are already based on indices other than a LIBOR index.
III. Summary of Rulemaking Process
A. 2020 Proposal
On June 4, 2020, the Bureau issued a notice of proposed rulemaking
containing several proposed amendments to Regulation Z, which
implements TILA, for both open-end and closed-end credit to address the
anticipated sunset of LIBOR.\10\ This notice of proposed rulemaking was
published in the Federal Register on June 18, 2020 (2020 Proposal).\11\
The Bureau generally proposed that the final rule would take effect on
March 15, 2021, except for the updated change-in-term disclosure
requirements for HELOCs and credit card accounts that would apply as of
October 1, 2021.
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\10\ At the same time as issuing the proposal, the Bureau issued
separate written guidance in the form of Frequently Asked Questions
(FAQs) for creditors and card issuers to use as they transition away
from using LIBOR indices. These FAQs addressed regulatory questions
where the existing rule was clear on the requirements and already
provides necessary alternatives for the LIBOR transition. The FAQs,
as well as additional written guidance materials including an
executive summary of this final rule, are available here: Bureau of
Consumer Fin. Prot., [Title] <a href="https://www.consumerfinance.gov/policy-compliance/guidance/other-applicable-requirements/libor-transition/">https://www.consumerfinance.gov/policy-compliance/guidance/other-applicable-requirements/libor-transition/</a>.
\11\ 85 FR 36938 (June 18, 2020).
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The Bureau proposed several amendments to the open-end credit
provisions in Regulation Z to address the anticipated sunset of LIBOR.
Specifically, the Bureau proposed to add new provisions that detail
specifically how HELOC creditors and card issuers may replace a LIBOR
index with a replacement index for accounts on or after March 15, 2021.
In the 2020 Proposal, the Bureau set forth certain proposed conditions
that HELOC creditors and card issuers would be required to meet in
order to use these newly proposed provisions. Under the 2020 Proposal,
HELOC creditors and card issuers would have been required
[[Page 69719]]
to 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 December 31, 2020.
The 2020 Proposal also would have imposed other requirements on a
replacement index. Under the 2020 Proposal, HELOC creditors and card
issuers could select a replacement index that is newly established and
has no history, or an index that is not newly established and has a
history. As proposed, HELOC creditors and card issuers would have been
permitted to replace a LIBOR index with an index that has a history
only if the index has historical fluctuations substantially similar to
those of the LIBOR index. The Bureau proposed to determine that Prime
has historical fluctuations substantially similar to those of the 1-
month and 3-month USD LIBOR indices. The Bureau also proposed to
determine that the SOFR-based spread-adjusted indices recommended by
the ARRC for consumer products to replace the 1-month, 3-month, 6-
month, or 1-year USD LIBOR indices have historical fluctuations that
are substantially similar to those of the LIBOR indices that they are
intended to replace.
The Bureau also proposed amendments to the open-end credit
provisions to: (1) Make clarifying changes to the existing provisions
on the replacement of an index when the index becomes unavailable; (2)
revise change-in-terms notice requirements for HELOCs and credit card
accounts to ensure that consumers are notified of how the variable
rates on their accounts will be determined going forward after the
LIBOR index is replaced; (3) add an exception from the rate
reevaluation provisions applicable to credit card accounts for
increases that occur as a result of replacing a LIBOR index using the
specific proposed provisions described above for transitioning from a
LIBOR index or as a result of the LIBOR index becoming unavailable; (4)
address cases where the card issuer was already required to perform a
rate reevaluation review prior to transitioning away from LIBOR and
LIBOR was used as the benchmark for comparison for purposes of
determining whether the card issuer can terminate the six-month
reviews; and (5) make several technical edits to certain commentary to
replace LIBOR references with references to a SOFR index.
The Bureau also proposed amendments to the closed-end credit
provisions in Regulation Z to address the anticipated sunset of LIBOR,
including proposed amendments to: (1) Add an illustrative example to
identify the SOFR-based spread-adjusted indices recommended by the ARRC
for consumer products as an example of a comparable index for the LIBOR
indices that they are intended to replace for purposes of the closed-
end refinancing provisions; and (2) make technical edits to certain
commentary and sample forms to replace LIBOR references with references
to a SOFR index and make related changes and corrections.
The comment period for the 2020 Proposal closed on August 4, 2020.
The Bureau received around 30 comment letters. Approximately half of
the comment letters were submitted by industry commenters, specifically
banks and credit unions and their trade associations. Commenters also
included several consumer groups, a financial services education and
consulting firm, and several individuals.
Commenters generally supported the proposed provisions that would
allow HELOC creditors and card issuers to replace a LIBOR index with a
replacement index for accounts on or after March 15, 2021, if certain
conditions are met. Nonetheless, several industry commenters encouraged
the Bureau to allow HELOC creditors and card issuers to replace a LIBOR
index sooner than March 15, 2021. Commenters also generally supported
the proposed conditions that must be met for HELOC creditors and card
issuers to use the newly proposed provisions described above. Also,
several industry commenters and several consumer group commenters
supported the Bureau's proposal determining that Prime and certain
SOFR-based spread-adjusted indices recommended by ARRC for consumer
products have historical fluctuations substantially similar to those of
certain LIBOR indices. Nonetheless, a few consumer group commenters
indicated that the Bureau should not adopt its proposal that Prime has
historical fluctuations that are substantially similar to those of
certain LIBOR indices.
Several commenters requested additional guidance on the proposed
conditions that must be met by HELOC creditors and card issuers to use
the proposed provisions discussed above, including: (1) Many industry
commenters and one individual commenter requested that the Bureau
identify additional indices that meet the Regulation Z standards that
the historical fluctuations of those indices are substantially similar
to those of certain tenors of LIBOR; (2) several industry commenters
requested that the Bureau provide a principles-based standard for
determining when the historical fluctuations of an index are
substantially similar to those of a particular LIBOR index; (3) a few
consumer group commenters and a financial services education and
consulting firm indicated that the Bureau should limit when a newly
established index can be used to replace a LIBOR index; and (4) several
industry commenters and several consumer group commenters indicated
that the Bureau should provide greater detail on the proposed condition
that 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.
Several industry commenters and several consumer group commenters
also indicated that the Bureau should provide further guidance to HELOC
creditors and card issuers to assist them in determining whether LIBOR
(or another index) is unavailable for purposes of Regulation Z.
Commenters generally supported the Bureau's proposed revisions to
the notice requirements for HELOCs and credit card accounts. Several
industry commenters and an individual commenter also requested that the
Bureau provide comprehensive sample disclosures for change-in-terms
notices for HELOC accounts and for credit card accounts that can be
provided to borrowers to help them understand the change in the index.
Commenters also generally supported the proposed changes to the rate
reevaluation provisions applicable to credit card accounts.
With respect to the proposed amendments related to closed-end
credit, commenters generally supported the proposed new illustrative
example to identify the SOFR-based spread-adjusted indices recommended
by the ARRC for consumer products as an example of a comparable index
for the LIBOR indices that they are intended to replace for purposes of
the closed-end refinancing provisions. Nonetheless, commenters also
requested other changes to the closed-end provisions, including: (1)
Many industry commenters generally urged the Bureau to provide
additional examples of comparable indices to the LIBOR indices; (2)
many industry commenters urged the Bureau to provide additional
guidance on how to determine if an index is a comparable index for
purposes of Regulation Z; (3) several commenters, including a few
consumer groups, a financial services education and consulting firm,
and a few individuals, urged the Bureau to require disclosures to
consumers with closed-
[[Page 69720]]
end loans notifying consumers of the index change; (4) a few industry
commenters urged the Bureau to include the same provisions for closed-
end loans that it proposed for HELOCs and credit card accounts which
would allow HELOC creditors and card issuers to transition from using a
LIBOR index on or after March 15, 2021, if certain conditions are met;
and (5) several industry commenters urged the Bureau to include the
proposed example for the SOFR-based spread-adjusted indices recommended
by ARRC for consumer products in the text of the rule, rather than the
commentary.
The Bureau responds to the above comments in the section-by-section
discussion below.
The Bureau notes that some of the comments the Bureau received
raised issues that are beyond the scope of the 2020 Proposal.
Specifically, several industry commenters requested that the Bureau
provide guidance that the use of certain replacement indices would not
raise Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) concerns.
The Bureau is not addressing these comments requesting guidance on
UDAAP in this final rule because they are outside the scope of the 2020
Proposal.
B. Outreach
Prior to the 2020 Proposal, the Bureau received feedback through
both formal and informal channels, regarding ways in which the Bureau
could use rulemaking to facilitate the market's orderly transition from
using LIBOR indices to alternate indices. The following is a brief
summary of some of the Bureau's engagement with industry, consumer
groups, regulators, and other stakeholders regarding the transition
away from the use of LIBOR indices prior to the 2020 Proposal. The
Bureau discusses feedback received through these various channels that
is relevant to this final rule throughout the document.
The Bureau is an ex officio member of the ARRC, a group of private-
market participants convened by the Board of Governors of the Federal
Reserve System (Board) and the Federal Reserve Bank of New York (New
York Fed) to ensure a successful transition from the use of LIBOR as an
index. The group is comprised of a diverse set of private-sector
entities that have an important presence in markets affected by USD
LIBOR and a wide array of official-sector entities, including banking
and financial sector regulators, as ex-officio members. As an ex
officio member, the Bureau does not have voting rights and may only
offer views and analysis to support the ARRC's objectives. Through its
interaction with other ARRC members, the Bureau has received questions
and requests for clarification regarding certain provisions in the
Bureau's rules that could affect the industry's LIBOR transition plans.
For example, the Bureau has received informal requests from members of
the ARRC for clarification that the SOFR-based spread-adjusted index
recommended by ARRC for consumer products is a comparable index to the
LIBOR index. The Bureau has also, in coordination with the ARRC,
actively sought feedback regarding a potential rulemaking related to
the LIBOR transition. For example, the Bureau convened multiple
meetings for members of the ARRC to hear consumer groups' views on
potential issues consumers may face during the anticipated sunset of
LIBOR and solicited suggestions for potential actions the regulators
could take to facilitate a smooth transition.
The Bureau has engaged in ongoing market monitoring with individual
institutions, trade associations, regulators, and other stakeholders to
understand their plans for the LIBOR transition, their concerns, and
potential impacts on consumers. Institutions and trade associations
have met informally with the Bureau and sent letters outlining their
concerns related to the anticipated sunset of LIBOR. The Bureau also
has received feedback regarding the LIBOR transition through other
formal channels that were related to general Bureau activities. For
example, in January 2019, the Bureau solicited information from the
public about several aspects of the consumer credit card market.\12\
The Bureau received comments submitted from a banking trade group
regarding changes to Regulation Z that could support the transition
away from using LIBOR indices.
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\12\ 84 FR 647 (Jan. 31, 2019).
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Through these various channels, industry trade associations,
consumer groups, and other organizations provided information about
provisions in Bureau regulations that could be modified to reduce
market confusion, enable institutions and consumers to transition away
from using LIBOR indices in a timely manner, and lower risks related to
the LIBOR transition. A number of financial institutions raised
concerns that LIBOR may continue for some time after December 2021 but
become less representative or reliable if, as expected, some panel
banks stop submitting information before LIBOR finally is discontinued.
Stakeholders noted that FCA could declare LIBOR to be unrepresentative
at some point after 2021 and wanted clarity from U.S. Federal
regulators about how U.S. firms should interpret such a declaration.
Some industry participants asked that the Bureau declare LIBOR to be
unavailable for the purposes of Regulation Z. They also requested that
the Bureau facilitate a transition timeline that would provide
sufficient time for financial institutions to notify consumers of the
change and make the necessary changes to their systems.
Credit card issuers and related trade associations stated that
Prime should be permitted to replace a LIBOR index, noting that while a
SOFR-based index is expected to replace a LIBOR index in many
commercial contexts, Prime is the industry standard rate index for
credit cards. They also requested that the Bureau permit card issuers
to replace the LIBOR index used in setting the variable rates on
existing accounts before LIBOR becomes unavailable to facilitate
compliance. They also requested guidance on how the rate reevaluation
provisions applicable to credit card accounts apply to accounts that
are transitioning away from using LIBOR indices.
Consumer groups emphasized the need for transparency as
institutions sunset their use of LIBOR indices and indicated a
preference for replacement indices that are publicly available. They
recommended regulators protect consumers by preventing institutions
from changing the index or margin in a manner that would raise the
interest rate paid by the consumer. They also shared industry's
concerns that LIBOR may continue for some time after December 2021 but
become less representative or reliable until LIBOR finally is
discontinued. Consumer advocates noted that existing contract language
may limit how and when institutions can transition away from LIBOR.
They also discussed issues specific to particular consumer products,
expressing concern, for example, that the contract language in the
private student loan market is ambiguous and gives lenders wide leeway
in determining a comparable replacement index for LIBOR indices.
IV. Legal Authority
A. Section 1022 of the Dodd-Frank Act
Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to
prescribe rules ``as may be necessary or appropriate to enable the
Bureau to administer and carry out the purposes and objectives of the
Federal consumer financial laws, and to prevent evasions
[[Page 69721]]
thereof.'' Among other statutes, title X of the Dodd-Frank Act and TILA
are Federal consumer financial laws.\13\ Accordingly, in issuing this
final rule, the Bureau is exercising its authority under Dodd-Frank Act
section 1022(b) to prescribe rules under TILA and title X that carry
out the purposes and objectives and prevent evasion of those laws.
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\13\ Dodd-Frank Act section 1002(14); codified at 12 U.S.C.
5481(14) (defining ``Federal consumer financial law'' to include the
``enumerated consumer laws'' and the provisions of title X of the
Dodd-Frank Act); Dodd-Frank Act section 1002(12); codified at 12
U.S.C. 5481(12) (defining ``enumerated consumer laws'' to include
TILA).
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B. The Truth in Lending Act
TILA is a Federal consumer financial law. In adopting TILA,
Congress explained that: (1) Economic stabilization would be enhanced
and the competition among the various financial institutions and other
firms engaged in the extension of consumer credit would be strengthened
by the informed use of credit; (2) the informed use of credit results
from an awareness of the cost thereof by consumers; and (3) it is the
purpose of TILA to assure a meaningful disclosure of credit terms so
that the consumer will be able to compare more readily the various
credit terms available to them and avoid the uninformed use of credit,
and to protect the consumer against inaccurate and unfair credit
billing and credit card practices.\14\
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\14\ TILA section 102(a), codified at 15 U.S.C. 1601(a).
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TILA and Regulation Z define credit broadly as the right granted by
a creditor to a debtor to defer payment of debt or to incur debt and
defer its payment.\15\ TILA and Regulation Z set forth disclosure and
other requirements that apply to creditors. Different rules apply to
creditors depending on whether they are extending ``open-end credit''
or ``closed-end credit.'' Under the statute and Regulation Z, open-end
credit exists where there is a plan in which the creditor reasonably
contemplates repeated transactions; the creditor may impose a finance
charge from time to time on an outstanding unpaid balance; and the
amount of credit that may be extended to the consumer during the term
of the plan (up to any limit set by the creditor) is generally made
available to the extent that any outstanding balance is repaid.\16\
Typically, closed-end credit is credit that does not meet the
definition of open-end credit.\17\
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\15\ TILA section 103(f), codified at 15 U.S.C. 1602(f); 12 CFR
1026.2(a)(14).
\16\ 12 CFR 1026.2(a)(20).
\17\ 12 CFR 1026.2(a)(10); comment 2(a)(10)-1.
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The term ``creditor'' generally means a person who regularly
extends consumer credit that is subject to a finance charge or is
payable by written agreement in more than four installments (not
including a down payment), and to whom the obligation is initially
payable, either on the face of the note or contract or by agreement
when there is no note or contract.\18\ TILA defines ``finance charge''
generally as the sum of all charges, payable directly or indirectly by
the person to whom the credit is extended, and imposed directly or
indirectly by the creditor as an incident to the extension of
credit.\19\
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\18\ See TILA section 103(g), codified at 15 U.S.C. 1602(g); 12
CFR 1026.2(a)(17)(i).
\19\ TILA section 106(a), codified at 15 U.S.C. 1605(a); see 12
CFR 1026.4.
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The term ``creditor'' also includes a card issuer, which is a
person or its agent that issues credit cards, when that person extends
credit accessed by the credit card.\20\ Regulation Z defines the term
``credit card'' to mean any card, plate, or other single credit device
that may be used from time to time to obtain credit.\21\ A charge card
is a credit card on an account for which no periodic rate is used to
compute a finance charge.\22\ In addition to being creditors under TILA
and Regulation Z, card issuers also generally must comply with the
credit card rules set forth in the Fair Credit Billing Act \23\ and in
the Credit Card Accountability Responsibility and Disclosure Act of
2009 (Credit CARD Act) \24\ (if the card accesses an open-end credit
plan), as implemented in Regulation Z subparts B and G.\25\
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\20\ See TILA section 103(g), codified at 15 U.S.C. 1602(g); 12
CFR 1026.2(a)(17)(iii) and (iv).
\21\ See 12 CFR 1026.2(a)(15)(i).
\22\ See 12 CFR 1026.2(a)(15)(iii).
\23\ Fair Credit Billing Act, Pubic Law 93-495, 88 Stat. 1511
(1974).
\24\ Credit Card Accountability Responsibility and Disclosure
Act of 2009, Public Law 111-24, 123 Stat. 1734 (2009).
\25\ See generally 12 CFR 1026.5(b)(2)(ii), 1026.7(b)(11),
1026.12, 1026.51-.60.
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TILA section 105(a). As amended by the Dodd-Frank Act, TILA section
105(a) \26\ directs the Bureau to prescribe regulations to carry out
the purposes of TILA, and provides that such regulations may contain
additional requirements, classifications, differentiations, or other
provisions, and may provide for such adjustments and exceptions for all
or any class of transactions, that, in the judgment of the Bureau, are
necessary or proper to effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate compliance. Pursuant
to TILA section 102(a), a purpose of TILA is to assure a meaningful
disclosure of credit terms to enable the consumer to avoid the
uninformed use of credit and compare more readily the various credit
terms available to the consumer. This stated purpose is tied to
Congress's finding that economic stabilization would be enhanced and
competition among the various financial institutions and other firms
engaged in the extension of consumer credit would be strengthened by
the informed use of credit.\27\ Thus, strengthened competition among
financial institutions is a goal of TILA, achieved through the
effectuation of TILA's purposes.
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\26\ 15 U.S.C. 1604(a).
\27\ TILA section 102(a), codified at 15 U.S.C. 1601(a).
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Historically, TILA section 105(a) has served as a broad source of
authority for rules that promote the informed use of credit through
required disclosures and substantive regulation of certain practices.
Dodd-Frank Act section 1100A clarified the Bureau's section 105(a)
authority by amending that section to provide express authority to
prescribe regulations that contain ``additional requirements'' that the
Bureau finds are necessary or proper to effectuate the purposes of
TILA, to prevent circumvention or evasion thereof, or to facilitate
compliance. This amendment clarified the authority to exercise TILA
section 105(a) to prescribe requirements beyond those specifically
listed in the statute that meet the standards outlined in section
105(a). As amended by the Dodd-Frank Act, TILA section 105(a) authority
to make adjustments and exceptions to the requirements of TILA applies
to all transactions subject to TILA, except with respect to the
provisions of TILA section 129 that apply to the high-cost mortgages
referred to in TILA section 103(bb).\28\
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\28\ 15 U.S.C. 1602(bb).
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For the reasons discussed in this document, the Bureau is amending
certain provisions in Regulation Z that impact the transition from
LIBOR indices to other indices to carry out TILA's purposes and is
finalizing such additional requirements, adjustments, and exceptions
as, in the Bureau's judgment, are necessary and proper to carry out the
purposes of TILA, prevent circumvention or evasion thereof, or to
facilitate compliance. In developing these aspects of this final rule
pursuant to its authority under TILA section 105(a), the Bureau has
considered the purposes of TILA, including ensuring meaningful
disclosures, facilitating consumers' ability to compare credit terms,
and helping consumers avoid the
[[Page 69722]]
uninformed use of credit, and the findings of TILA, including
strengthening competition among financial institutions and promoting
economic stabilization.
TILA section 105(d). As amended by the Dodd-Frank Act, TILA section
105(d) \29\ states that any Bureau regulations requiring any disclosure
which differs from the disclosures previously required in certain
sections shall have an effective date of October 1 which follows by at
least six months the date of promulgation. The section also states that
the Bureau may in its discretion lengthen or shorten the amount of time
for compliance when it makes a specific finding that such action is
necessary to comply with the findings of a court or to prevent unfair
or deceptive disclosure practices. The section further states that any
creditor or lessor may comply with any such newly promulgated
disclosures requirements prior to the effective date of the
requirements.
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\29\ 15 U.S.C. 1604(d).
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V. Section-by-Section Analysis
Section 1026.9 Subsequent Disclosure Requirements
9(c) Change in Terms
9(c)(1) Rules Affecting Home-Equity Plans
Section 1026.9(c)(1)(i) provides that for HELOCs subject to Sec.
1026.40 whenever any term required to be disclosed in the account-
opening disclosures under Sec. 1026.6(a) is changed or the required
minimum periodic payment is increased, the creditor must mail or
deliver written notice of the change to each consumer who may be
affected. The notice must be mailed or delivered at least 15 days prior
to the effective date of the change. The 15-day timing requirement does
not apply if the change has been agreed to by the consumer; the notice
must be given, however, before the effective date of the change.
Section 1026.9(c)(1)(ii) provides that for HELOCs subject to Sec.
1026.40, a creditor is not required to provide a change-in-terms notice
under Sec. 1026.9(c)(1) when the change involves a reduction of any
component of a finance or other charge or when the change results from
an agreement involving a court proceeding.
A creditor for a HELOC subject to Sec. 1026.40 is required under
current Sec. 1026.9(c)(1) to provide a change-in-terms notice
disclosing the index that is replacing the LIBOR index. The index is a
term that is required to be disclosed in the account-opening
disclosures under Sec. 1026.6(a) and thus, a creditor must provide a
change-in-terms notice disclosing the index that is replacing the LIBOR
index.\30\ The exception in Sec. 1026.9(c)(1)(ii) that provides that a
change-in-terms notice is not required when a change involves a
reduction in the finance or other charge does not apply to the index
change. The change in the index used in making rate adjustments is a
change in a term required to be disclosed in a change-in-terms notice
under Sec. 1026.9(c)(1) regardless of whether there is also a change
in the index value or margin that involves a reduction in a finance or
other charge.
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\30\ See 12 CFR 1026.6(a)(1)(ii) and (iv) and comment
6(a)(1)(ii)-5.
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Under current Sec. 1026.9(c)(1), a creditor generally is required
to provide a change-in-terms notice of a margin change if the margin is
increasing. In disclosing the variable rate in the account-opening
disclosures under Sec. 1026.6(a), the creditor must disclose the
margin as part of an explanation of how the amount of any finance
charge will be determined.\31\ Thus, a creditor must provide a change-
in-terms notice under current Sec. 1026.9(c)(1) disclosing the changed
margin, unless Sec. 1026.9(c)(1)(ii) applies. Current Sec.
1026.9(c)(1)(ii) applies to a decrease in the margin because that
change would involve a reduction in a component of a finance or other
charge. Thus, under current Sec. 1026.9(c)(1), a creditor would only
be required to provide a change-in-terms notice of a change in the
margin under Sec. 1026.9(c)(1) if the margin is increasing.
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\31\ See 12 CFR 1026.6(a)(1)(iv).
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A creditor also is required to disclose in the change-in-terms
notice any increased periodic rate or APR as calculated using the
replacement index at the time the change-in-terms notice is provided.
The periodic rate and APR are terms that are required to be disclosed
in the account-opening disclosures under Sec. 1026.6(a) and thus, a
creditor must provide a change-in-terms notice disclosing the new
periodic rate and APR calculated using the replacement index if the
periodic rate or APR is increasing from the rate calculated using the
LIBOR index at the time the change-in-terms notice is provided.\32\
Comment 9(c)(1)-1 provides that no notice of a change in terms need be
given if the specific change is set forth initially, such as rate
increases under a properly disclosed variable-rate plan. Nonetheless,
the Bureau determines that this comment does not apply when a periodic
rate or APR is increasing because the index is being replaced (as
opposed to the periodic rate or APR is increasing because the value of
the original index is increasing).
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\32\ See 12 CFR 1026.6(a)(1)(ii). Comment 6(a)(1)(ii)-3 provides
that in disclosing the rate(s) in effect for a variable-rate plan at
the time of the account-opening disclosures (as is required by Sec.
1026.6(a)(1)(ii)), the creditor may use an insert showing the
current rate; may give the rate as of a specified date and then
update the disclosure from time to time, for example, each calendar
month; or may disclose an estimated rate under Sec. 1026.5(c).
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As discussed more in the section-by-section analysis of Sec.
1026.9(c)(1)(ii), the Bureau proposed to revise Sec. 1026.9(c)(1)(ii)
which provides an exception under which a creditor is not required to
provide a change-in-terms notice under Sec. 1026.9(c)(1) when the
change involves a reduction of any component of a finance or other
charge. The Bureau proposed to revise Sec. 1026.9(c)(1)(ii) to provide
that the exception does not apply on or after October 1, 2021, to
situations where the creditor is reducing the margin when a LIBOR index
is replaced as permitted by proposed Sec. 1026.40(f)(3)(ii)(A) or
Sec. 1026.40(f)(3)(ii)(B). The Bureau also proposed comment
9(c)(1)(ii)-3 to provide detail on this proposed revision to Sec.
1026.9(c)(1)(ii). This final rule adopts Sec. 1026.9(c)(1)(ii) and
comment 9(c)(1)(ii)-3 as proposed except to provide that the revisions
to Sec. 1026.9(c)(1)(ii) are effective April 1, 2022, with a mandatory
compliance date of October 1, 2022, consistent with the effective date
of this final rule and consistent with TILA section 105(d).
This final rule also provides additional details on how a creditor
may disclose information about the periodic rate and APR in a change-
in-terms notice for HELOCs when the creditor is replacing a LIBOR index
with the SOFR-based spread-adjusted index recommended by the ARRC for
consumer products in certain circumstances. Specifically, this final
rule provides additional details for situations where a creditor is
replacing a LIBOR index with the SOFR-based spread-adjusted index
recommended by the ARRC for consumer products to replace the 1-month,
3-month, or 6-month USD LIBOR index, the creditor is not changing the
margin used to calculate the variable rate as a result of the
replacement, and a periodic rate or the corresponding APR based on the
replacement index is unknown to the creditor at the time the change-in-
terms notice is provided because the SOFR index has not been published
at the time the creditor provides the change-in-terms notice but will
be published by the time the replacement of the index takes effect on
the account. In this case, new comment 9(c)(1)-4 provides that a
creditor may comply with any
[[Page 69723]]
requirement to disclose in the change-in-terms notice the amount of the
periodic rate or APR (or changes in these amounts) as calculated using
the replacement index based on the best information reasonably
available, clearly stating that the disclosure is an estimate. For
example, in this situation, comment 9(c)(1)-4 provides that the
creditor may state that: (1) Information about the rate is not yet
available but that the creditor estimates that, at the time the index
is replaced, the rate will be substantially similar to what it would be
if the index did not have to be replaced; and (2) the rate will vary
with the market based on a SOFR index.
In this unique circumstance, the Bureau interprets Sec. 1026.5(c)
to be consistent with new comment 9(c)(1)-4. Section 1026.5(c)
provides, in relevant part, that if any information necessary for
accurate disclosure is unknown to the creditor, it must make the
disclosure based on the best information reasonably available and must
state clearly that the disclosure is an estimate. New comment 9(c)(1)-4
also is consistent with this final rule provisions that provide that if
a creditor uses the SOFR-based spread-adjusted index recommended by the
ARRC for consumer products to replace the 1-month, 3-month, or 6-month
USD LIBOR index as the replacement index and uses as the replacement
margin the same margin that applied to the variable rate immediately
prior to the replacement of the LIBOR index used under the plan, the
creditor will be deemed to be in compliance with the conditions in
Sec. 1026.40(f)(3)(ii)(A) and (B) that the replacement index and
replacement margin would have resulted in an APR substantially similar
to the rate calculated using the LIBOR index.\33\
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\33\ See comments 40(f)(3)(ii)(A)-3 and 40(f)(3)(ii)(B)-3; see
also the section-by-section analysis of Sec. 1026.40(f)(3)(ii)(A)
for a discussion of the rationale for the Bureau making this
determination.
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As described above, under Sec. 1026.9(c)(1)(i), the change-in-
terms notice for HELOC accounts subject to Sec. 1026.40 generally must
be mailed or delivered at least 15 days prior to the effective date of
the change. Also, as discussed above, the ARRC has indicated that the
SOFR-based spread-adjusted indices recommended by ARRC for consumer
products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR
will not be published until Monday, July 3, 2023, which is the first
weekday after Friday, June 30, 2023, when LIBOR is currently
anticipated to sunset for these USD LIBOR tenors. This final rule
provision is intended to facilitate compliance with the 15-day advance
notice requirement for change-in-terms notices by allowing creditors in
the situation described above to provide change-in-terms notices prior
to the SOFR-based spread-adjusted index being published, so that
creditors are not left without an index to use on the account after the
SOFR-based spread-adjusted index is published but before it becomes
effective on the account. The Bureau has determined that the
information described in new comment 9(c)(1)-4 sufficiently notifies
consumers of the estimated periodic rate and APR as calculated using
the SOFR-based spread-adjusted index, even though the SOFR-based
spread-adjusted index is not being published at the time the notice is
sent, as long as the SOFR-based spread-adjusted index is published by
the time the replacement of the index takes effect on the account.
The Bureau is reserving judgment about whether to include a
reference to the 1-year USD LIBOR index in comment 9(c)(1)-4 until it
obtains additional information. Once the Bureau knows which SOFR-based
spread-adjusted index the ARRC will recommend to replace the 1-year USD
LIBOR index for consumer products, the Bureau may determine whether the
replacement index and replacement margin would have resulted in an APR
substantially similar to the rate calculated using the LIBOR index.
Assuming the Bureau determines that the index meets that standard, the
Bureau will then consider whether to codify that determination in a
supplemental final rule, or otherwise announce that determination.
9(c)(1)(ii) Notice Not Required
The Bureau's Proposal
The Bureau proposed to revise Sec. 1026.9(c)(1)(ii) which provides
an exception under which a creditor is not required to provide a
change-in-terms notice under Sec. 1026.9(c)(1) when the change
involves a reduction of any component of a finance or other charge. The
Bureau proposed to revise Sec. 1026.9(c)(1)(ii) to provide that the
exception does not apply on or after October 1, 2021, to situations
where the creditor is reducing the margin when a LIBOR index is
replaced as permitted by proposed Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B).\34\
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\34\ As discussed in more detail in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(A), the Bureau proposed to move
the provisions in current Sec. 1026.40(f)(3)(ii) that allow a
creditor for HELOC plans subject to Sec. 1026.40 to replace an
index and adjust the margin if the index is no longer available in
certain circumstances to proposed Sec. 1026.40(f)(3)(ii)(A) and to
revise the proposed moved provisions for clarity and consistency.
Also, as discussed in more detail in the section-by-section analysis
of Sec. 1026.40(f)(3)(ii)(B), to facilitate compliance, the Bureau
proposed to add new LIBOR-specific provisions to proposed Sec.
1026.40(f)(3)(ii)(B) that would permit creditors for HELOC plans
subject to Sec. 1026.40 that use a LIBOR index for calculating a
variable rate to replace the LIBOR index and change the margin for
calculating the variable rate on or after March 15, 2021, in certain
circumstances.
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The Bureau also proposed to add comment 9(c)(1)(ii)-3 to provide
additional detail. Proposed comment 9(c)(1)(ii)-3 provided that for
change-in-terms notices provided under Sec. 1026.9(c)(1) on or after
October 1, 2021, covering changes permitted by proposed Sec.
1026.40(f)(3)(ii)(A) or Sec. 1026.40(f)(3)(ii)(B), a creditor must
provide a change-in-terms notice under Sec. 1026.9(c)(1) disclosing
the replacement index for a LIBOR index and any adjusted margin that is
permitted under proposed Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B), even if the margin is reduced. Proposed comment
9(c)(1)(ii)-3 also provided that prior to October 1, 2021, a creditor
has the option of disclosing a reduced margin in the change-in-terms
notice that discloses the replacement index for a LIBOR index as
permitted by proposed Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B).
As discussed below, this final rule adopts Sec. 1026.9(c)(1)(ii)
and comment 9(c)(1)(ii)-3 generally as proposed except to provide that
the revisions to Sec. 1026.9(c)(1)(ii) are effective April 1, 2022,
with a mandatory compliance date of October 1, 2022, consistent with
the effective date of this final rule and consistent with TILA section
105(d).
Comments Received
Revisions to change-in-terms notice requirements. In response to
the 2020 Proposal, the Bureau received comments from trade
associations, consumer groups, and individual commenters on the
proposed change-in-terms notice requirements. Several trade
associations provided the same comments for both the proposed changes
to the change-in-terms notice requirements in proposed Sec.
1026.9(c)(1)(ii) for HELOCs and Sec. 1026.9(c)(2)(v)(A) for credit
card accounts under an open-end (not home-secured) consumer credit
plan. These trade associations supported the Bureau's proposed
revisions to the notice requirements, stating that the proposed
amendments will help consumers understand changes they
[[Page 69724]]
may see as a result of the move away from LIBOR.
A few industry commenters specifically addressed the proposed
amendments in Sec. 1026.9(c)(1)(ii) for HELOCs. A trade association
commented that the proposed revisions to Sec. 1026.9(c)(1)(ii) are
appropriate to inform consumers of the index that is replacing LIBOR
and any adjustment to the margin, regardless of whether the margin is
increasing or decreasing, and should reduce confusion for consumers
during the transition. Another trade association representing credit
unions supported the proposed changes to Sec. 1026.9(c)(1)(ii) because
it believed that the proposed amendments would help inform borrowers of
the changes that could affect their loans.
Several consumer group commenters supported the proposed amendments
to the change-in-terms notice requirements under proposed Sec.
1026.9(c)(1)(ii) for HELOCs but indicated that these proposed
amendments should not be limited just to the LIBOR transition, but
should apply to any future index transitions as well.
An individual commenter stated that the proposed revisions to the
change-in-terms notice requirements under proposed Sec.
1026.9(c)(1)(ii) for HELOCs and Sec. 1026.9(c)(2)(v)(A) for credit
card accounts are important in ensuring that the change is properly
disclosed to the borrower. A few individual commenters specifically
supported the proposed revisions to the change-in-terms notice
requirements under proposed Sec. 1026.9(c)(1)(ii) for HELOCs. Another
individual commenter requested that the Bureau require creditors to
show in dollar terms the current rate changes for the previous five
years and what these changes would have been under the new index. The
commenter stated that this additional information would enable
borrowers to understand exactly how the change in the index would
affect them.
Sample or model notices. Several industry commenters requested that
the Bureau provide comprehensive sample disclosures for change-in-terms
notices required under Sec. 1026.9(c)(1) for HELOC accounts and Sec.
1026.9(c)(2) for credit card accounts that can be provided to borrowers
to help them understand the change in the index. An individual
commenter indicated that the Bureau should provide model disclosures
for the proposed amendments under proposed Sec. 1026.9(c)(1)(ii).
Timing of notice. An individual commenter indicated that the Bureau
should require banks to identify and communicate the replacement index
well in advance of the transition date.
The Final Rule
For the reasons discussed below, this final rule adopts Sec.
1026.9(c)(1)(ii) and comment 9(c)(1)(ii)-3 as proposed except to
provide that the revisions to Sec. 1026.9(c)(1)(ii) are effective
April 1, 2022, with a mandatory compliance date of October 1, 2022,
consistent with the effective date of this final rule and consistent
with TILA section 105(d). To effectuate the purposes of TILA, the
Bureau is using its TILA section 105(a) authority to amend Sec.
1026.9(c)(1)(ii) and adopt comment 9(c)(1)(ii)-3. TILA section 105(a)
\35\ directs the Bureau to prescribe regulations to carry out the
purposes of TILA, and provides that such regulations may contain
additional requirements, classifications, differentiations, or other
provisions, and may provide for such adjustments and exceptions for all
or any class of transactions, that, in the judgment of the Bureau, are
necessary or proper to effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate compliance. The
Bureau believes that when a creditor for a HELOC plan that is subject
to Sec. 1026.40 is replacing the LIBOR index and adjusting the margin
as permitted by Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B), it is beneficial for consumers to receive notice
not just of the replacement index, but also any adjustments to the
margin, even if the margin is decreased. This information will help
ensure that consumers are notified of the replacement index and any
adjusted margin (even a reduction in the margin) so that consumers will
know how the variable rates on their accounts will be determined going
forward after the LIBOR index is replaced. Otherwise, a consumer that
is only notified that the LIBOR index is being replaced with a
replacement index that has a higher index value but is not notified
that the margin is decreasing could reasonably but mistakenly believe
that the APR on the plan is increasing.
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\35\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------
The revisions to Sec. 1026.9(c)(1)(ii) are effective April 1,
2022, with a mandatory compliance date of October 1, 2022. TILA section
105(d) generally requires that changes in disclosures required by TILA
or Regulation Z have an effective date of October 1 that is at least
six months after the date the final rule is adopted.\36\ TILA section
105(d) also provides that a creditor may comply with newly promulgated
disclosure requirements prior to the effective date of the requirement.
Consistent with TILA section 105(d), comment 9(c)(1)(ii)-3 clarifies
that from April 1, 2022, through September 30, 2022, a creditor has the
option of disclosing a reduced margin in the change-in-terms notice
that discloses the replacement index for a LIBOR index as permitted by
Sec. 1026.40(f)(3)(ii)(A) or Sec. 1026.40(f)(3)(ii)(B). Creditors for
HELOC plans subject to Sec. 1026.40 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 pursuant to
Sec. 1026.40(f)(3)(ii)(A) or Sec. 1026.40(f)(3)(ii)(B) earlier than
October 1, 2022, starting on or after April 1, 2022. These creditors
may want to provide this information to avoid confusion by consumers
and because this reduced margin is beneficial to consumers. Thus,
comment 9(c)(1)(ii)-3 permits creditors for HELOC plans subject to
Sec. 1026.40 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 pursuant to Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B) earlier than October 1, 2022, starting on or after
April 1, 2022. The Bureau encourages creditors to include this
information in change-in-terms notices provided earlier than October 1,
2022, starting on or after April 1, 2022, even though they are not
required to do so, to ensure that consumers are notified of how the
variable rates on their accounts will be determined going forward after
the LIBOR index is replaced.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------
This final rule does not provide sample or model forms for the
change-in-terms notices required under Sec. 1026.9(c)(1) when a
creditor for HELOC plans subject to Sec. 1026.40 transitions away from
a LIBOR index under Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B). The Bureau believes that sample or model forms
for such a notice are not necessary or warranted. The change-in-terms
notice is not a new requirement. The Bureau believes that Sec.
1026.9(c)(1) and the related commentary provide sufficient information
for creditors to understand change-in-terms notice requirements without
the need for sample or model forms.
This final rule also does not change the timing in which change-in-
terms notices under Sec. 1026.9(c)(1) must be provided to the consumer
when a creditor replaces a LIBOR index for HELOC plans subject to Sec.
1026.40. Section 1026.9(c)(1) provides that change-in-terms notices
generally must be mailed or delivered at least 15 days
[[Page 69725]]
prior to the effective date of the change, and the Bureau did not
propose changes to the timing of the notices when a creditor replaces a
LIBOR index. The Bureau concludes that a 15-day period is appropriate
for change-in-terms notices given when a creditor replaces a LIBOR
index for HELOC plans subject to Sec. 1026.40; this is the period
generally applicable to change-in-terms notices for HELOCs under Sec.
1026.9(c)(1).
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
TILA section 127(i)(1), which was added by the Credit CARD Act,
provides that in the case of a credit card account under an open-end
consumer credit plan, a creditor generally must provide written notice
of an increase in an APR not later than 45 days prior to the effective
date of the increase.\37\ In addition, TILA section 127(i)(2) provides
that in the case of a credit card account under an open-end consumer
credit plan, a creditor must provide written notice of any significant
change, as determined by a rule of the Bureau, in terms (other than
APRs) of the cardholder agreement not later than 45 days prior to the
effective date of the change.\38\
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\37\ 15 U.S.C. 1637(i)(1).
\38\ 15 U.S.C. 1637(i)(2).
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Section 1026.9(c)(2)(i)(A) provides that for plans other than
HELOCs subject to Sec. 1026.40, a creditor generally must provide
written notice of a ``significant change in account terms'' at least 45
days prior to the effective date of the change to each consumer who may
be affected. Section 1026.9(c)(2)(ii) defines ``significant change in
account terms'' to mean a change in the terms required to be disclosed
under Sec. 1026.6(b)(1) and (b)(2), an increase in the required
minimum periodic payment, a change to a term required to be disclosed
under Sec. 1026.6(b)(4), or the acquisition of a security interest.
Among other things, Sec. 1026.9(c)(2)(v)(A) provides that a change-in-
terms notice is not required when a change involves a reduction of any
component of a finance or other charge. The change-in-terms provisions
in Sec. 1026.9(c)(2) generally apply to a credit card account under an
open-end (not home-secured) consumer credit plan, and to other open-end
plans that are not subject to Sec. 1026.40.
The creditor is required to provide a change-in-terms notice under
Sec. 1026.9(c)(2) disclosing the index that is replacing the LIBOR
index pursuant to Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii). A
creditor is required to disclose the index under Sec.
1026.6(b)(2)(i)(A) and (4)(ii)(B) and thus, the index is a term that
meets the definition of a ``significant change in account terms,'' as
discussed above.\39\ As a result, a creditor must provide a change-in-
terms notice disclosing the index that is replacing the LIBOR index.
The exception in Sec. 1026.9(c)(2)(v)(A) that provides that a change-
in-terms notice is not required when a change involves a reduction in
the finance or other charge does not apply to the index change. The
change in the index used in making rate adjustments is a change in a
term required to be disclosed in a change-in-terms notice under Sec.
1026.9(c)(2) regardless of whether there is also a change in the index
value or margin that involves a reduction in a finance or other charge.
---------------------------------------------------------------------------
\39\ See also12 CFR 1026.9(c)(2)(iv)(D)(1) and comment
9(c)(2)(iv)-2.
---------------------------------------------------------------------------
Under current Sec. 1026.9(c)(2), for plans other than HELOCs
subject to Sec. 1026.40, a creditor generally is required to provide a
change-in-terms notice of a margin change if the margin is increasing.
In disclosing the variable rate in the account-opening disclosures, the
creditor must disclose the margin as part of an explanation of how the
rate is determined.\40\ Thus, a creditor must provide a change-in-terms
notice under Sec. 1026.9(c)(2) disclosing the changed margin, unless
Sec. 1026.9(c)(2)(v)(A) applies. Current Sec. 1026.9(c)(2)(v)(A)
applies to a decrease in the margin because that change would involve a
reduction in a component of a finance or other charge. Thus, under
current Sec. 1026.9(c)(2), a creditor would only be required to
provide a change-in-terms notice of a change in the margin under Sec.
1026.9(c)(2) if the margin is increasing.
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\40\ 12 CFR 1026.6(b)(4)(ii)(B).
---------------------------------------------------------------------------
When an index is being replaced, a creditor is required to disclose
the replacement index as well as information relevant to the change, if
that relevant information is required by Sec. 1026.6(b)(1) and
(b)(2).\41\ Comment 9(c)(2)(iv)-2 explains that, if a creditor is
changing the index used to calculate a variable rate, the creditor must
disclose the following information in a tabular format in the change-
in-terms notice: the amount of the new rate (as calculated using the
new index) and indicate that the rate varies and how the rate is
determined, as explained in Sec. 1026.6(b)(2)(i)(A). The comment
provides an example, which indicates that, if a creditor is changing
from using a prime rate to using LIBOR in calculating a variable rate,
the creditor would disclose in the table required by Sec.
1026.9(c)(2)(iv)(D)(1) the new rate (using the new index) and indicate
that the rate varies with the market based on LIBOR.
---------------------------------------------------------------------------
\41\ See 12 CFR 1026.9(c)(2)(iv)(A)(1) and (D)(1).
---------------------------------------------------------------------------
A creditor also is required to disclose in the change-in-terms
notice any increased periodic rate or APR calculated using the
replacement index at the time the change-in-terms notice is provided.
The periodic rate and APR are terms that are required to be disclosed
in the account-opening disclosures under Sec. 1026.6(b) and thus, a
creditor must provide a change-in-terms notice disclosing the new
periodic rate and APR calculated using the replacement index if the
periodic rate or APR is increasing from the rate calculated using the
LIBOR index at the time the change-in-terms notice is provided.\42\
Section 1026.9(c)(2)(v)(C) provides that a change-in-terms notice is
not required when the change is an increase in a variable APR in
accordance with a credit card or other account agreement that provides
for changes in the rate according to the operation of an index that is
not under the control of the creditor and is available to the general
public. Nonetheless, the Bureau determines that Sec.
1026.9(c)(2)(v)(C) does not apply when a periodic rate or APR is
increasing because the index is being replaced (as opposed to the
periodic rate or APR is increasing because the value of the original
index is increasing).
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\42\ See 12 CFR 1026.6(b)(4)(i)(A). Section 1026.6(b)(4)(ii)(G)
provides that for purposes of disclosing variable rates in the
account-opening disclosures, a rate generally is accurate if it is a
rate as of a specified date and this rate was in effect within the
last 30 days before the disclosures are provided.
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The Bureau proposed two changes to the provisions in Sec.
1026.9(c)(2) and its accompanying commentary. First, the Bureau
proposed technical edits to comment 9(c)(2)(iv)-2 to replace LIBOR
references with references to SOFR. Second, the Bureau proposed changes
to Sec. 1026.9(c)(2)(v)(A) which provides an exception under which a
creditor is not required to provide a change-in-terms notice under
Sec. 1026.9(c)(2) when the change involves a reduction of any
component of a finance or other charge. The Bureau proposed to revise
Sec. 1026.9(c)(2)(v)(A) to provide that the exception does not apply
on or after October 1, 2021, to situations where the creditor is
reducing the margin when a LIBOR index is replaced as permitted by
proposed Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii). For the
reasons discussed below, this final rule adopts the amendments to Sec.
1026.9(c)(2)(v)(A) and its accompanying commentary generally as
proposed except to provide that the revisions to Sec.
1026.9(c)(2)(v)(A) and accompanying commentary are effective April 1,
2022, with a
[[Page 69726]]
mandatory compliance date of October 1, 2022, consistent with the
effective date of this final rule and consistent with TILA section
105(d). This final rule also adds new comment 9(c)(2)(iv)-2.ii to
provide additional details on how a creditor may disclose information
about the periodic rate and APR in a change-in-terms notice for credit
card accounts when the creditor is replacing a LIBOR index with the
SOFR-based spread-adjusted index recommended by ARRC for consumer
products in certain circumstances. This final rule also makes other
revisions to current comment 9(c)(2)(iv)-2 to be consistent with the
revision described above.
9(c)(2)(iv) Disclosure Requirements
For plans other than HELOCs subject to Sec. 1026.40, comment
9(c)(2)(iv)-2 explains that, if a creditor is changing the index used
to calculate a variable rate, the creditor must disclose the following
information in a tabular format in the change-in-terms notice: the
amount of the new rate (as calculated using the new index) and indicate
that the rate varies and how the rate is determined, as explained in
Sec. 1026.6(b)(2)(i)(A). The comment provides an example, which
indicates that, if a creditor is changing from using a prime rate to
using LIBOR in calculating a variable rate, the creditor would disclose
in the table required by Sec. 1026.9(c)(2)(iv)(D)(1) the new rate
(using the new index) and indicate that the rate varies with the market
based on LIBOR. In light of the anticipated discontinuation of LIBOR,
the Bureau proposed to amend the example in comment 9(c)(2)(iv)-2 to
substitute SOFR for the LIBOR index. The Bureau also proposed to make
technical changes for clarity by changing ``prime rate'' to ``prime
index.'' The Bureau did not receive any comments on the proposed
amendments.
This final rule revises comment 9(c)(2)(iv)-2 from the proposal in
several ways. First, this final rule moves the proposed language in
comment 9(c)(2)(iv)-2 to comment 9(c)(2)(iv)-2.i and makes revisions to
the example. New comment 9(c)(2)(iv)-2.i provides that if a creditor is
changing the index used to calculate a variable rate, the creditor must
disclose the amount of the new rate (as calculated using the new index)
and indicate that the rate varies and how the rate is determined, as
explained in Sec. 1026.6(b)(2)(i)(A). For example, if a creditor is
changing from using a LIBOR index to using a Prime index in calculating
a variable rate, the creditor would disclose in the table the new rate
(using the new index) and indicate that the rate varies with the market
based on a Prime index.
This final rule also adds new comment 9(c)(2)(iv)-2.ii to provide
additional details on how a creditor may disclose information about the
periodic rate and APR in a change-in-terms notice for credit card
accounts when the creditor is replacing a LIBOR index with the SOFR-
based spread-adjusted index recommended by the ARRC for consumer
products in certain circumstances. Specifically, this final rule
provides additional details for situations where a creditor is
replacing a LIBOR index with the SOFR-based spread-adjusted index
recommended by the ARRC for consumer products to replace the 1-month,
3-month, or 6-month USD LIBOR index, the creditor is not changing the
margin used to calculate the variable rate as a result of the
replacement, and a periodic rate or the corresponding APR based on the
replacement index is unknown to the creditor at the time the change-in-
terms notice is provided because the SOFR index has not been published
at the time the creditor provides the change-in-terms notice but will
be published by the time the replacement of the index takes effect on
the account. In this case, new comment 9(c)(2)(iv)-2.ii provides that a
creditor may comply with any requirement to disclose in the change-in-
terms notice the amount of the periodic rate or APR (or changes in
these amounts) as calculated using the replacement index based on the
best information reasonably available, clearly stating that the
disclosure is an estimate. For example, in this situation, comment
9(c)(2)(iv)-2.ii provides that the creditor may state that: (1)
Information about the rate is not yet available but that the creditor
estimates that, at the time the index is replaced, the rate will be
substantially similar to what it would be if the index did not have to
be replaced; and (2) the rate will vary with the market based on a SOFR
index.
In this unique circumstance, the Bureau interprets Sec. 1026.5(c)
to be consistent with new comment 9(c)(2)(iv)-2.ii. Section 1026.5(c)
provides in relevant part, that if any information necessary for
accurate disclosure is unknown to the creditor, it must make the
disclosure based on the best information reasonably available and must
state clearly that the disclosure is an estimate. New comment
9(c)(2)(iv)-2.ii also is consistent with this final rule provisions
that provide that if a creditor uses the SOFR-based spread-adjusted
index recommended by the ARRC for consumer products to replace the 1-
month, 3-month, or 6-month USD LIBOR index as the replacement index and
uses as the replacement margin the same margin that applied to the
variable rate immediately prior to the replacement of the LIBOR index
used under the plan, the creditor will be deemed to be in compliance
with the conditions in Sec. 1026.55(b)(7)(i) and (ii) that the
replacement index and replacement margin would have resulted in an APR
substantially similar to the rate calculated using the LIBOR index.\43\
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\43\ See comments 55(b)(7)(i)-2 and 55(b)(7)(ii)-3; see also the
section-by-section analysis of Sec. 1026.40(f)(3)(ii)(A) for a
discussion of the rationale for the Bureau making this
determination.
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As described above, under Sec. 1026.9(c)(2), the change-in-terms
notice for open-end credit that is not subject to Sec. 1026.40
(including credit card accounts) generally must be mailed or delivered
at least 45 days prior to the effective date of the change. Also, as
discussed above, the ARRC has indicated that the SOFR-based spread-
adjusted indices recommended by ARRC for consumer products to replace
the 1-month, 3-month, 6-month, or 1-year USD LIBOR index will not be
published until Monday, July 3, 2023, which is the first weekday after
Friday, June 30, 2023, when LIBOR is currently anticipated to sunset
for these USD LIBOR tenors. This final rule provision is intended to
facilitate compliance with the 45-day advance notice requirement for
change-in-terms notices by allowing creditors in the situation
described above to provide change-in-terms notices prior to the SOFR-
based spread-adjusted index being published, so that creditors are not
left without an index to use on the account after the SOFR-based
spread-adjusted index is published but before it becomes effective on
the account. The Bureau has determined that the information described
in new comment 9(c)(2)(iv)-2.ii sufficiently notifies consumers of the
estimated rate calculated using the SOFR-based spread-adjusted index,
even though the SOFR-based spread-adjusted index is not being published
at the time the notice is sent, as long as the SOFR-based spread-
adjusted index is published by the time the replacement of the index
takes effect on the account.
The Bureau is reserving judgment about whether to include a
reference to the 1-year USD LIBOR index in comment 9(c)(2)(iv)-2.ii
until it obtains additional information. Once the Bureau knows which
SOFR-based spread-adjusted index the ARRC will recommend to replace the
1-year USD LIBOR index for consumer products, the Bureau may determine
whether the
[[Page 69727]]
replacement index and replacement margin would have resulted in an APR
substantially similar to the rate calculated using the LIBOR index.
Assuming the Bureau determines that the index meets that standard, the
Bureau will then consider whether to codify that determination in a
supplemental final rule, or otherwise announce that determination.
9(c)(2)(v) Notice Not Required
The Bureau's Proposal
The Bureau proposed to revise Sec. 1026.9(c)(2)(v)(A) to provide
that for plans other than HELOCs subject to Sec. 1026.40, the
exception in Sec. 1026.9(c)(2)(v)(A) to change-in-terms notice
requirements under Sec. 1026.9(c)(2) does not apply on or after
October 1, 2021, to margin reductions when a LIBOR index is replaced as
permitted by proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii).\44\
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\44\ As discussed in more detail in the section-by-section
analysis of Sec. 1026.55(b)(7)(i), the Bureau proposed to move the
provisions in current comment 55(b)(2)-6 that allow a card issuer to
replace an index and adjust the margin if the index becomes
unavailable in certain circumstances to proposed Sec.
1026.55(b)(7)(i) and to revise the proposed moved provisions for
clarity and consistency. Also, as discussed in more detail in the
section-by-section analysis of Sec. 1026.55(b)(7)(ii), to
facilitate compliance, the Bureau proposed to add new LIBOR-specific
provisions to proposed Sec. 1026.55(b)(7)(ii) that would permit
card issuers for a credit card account under an open-end (not home-
secured) consumer credit plan that use a LIBOR index under the plan
to replace the LIBOR index and change the margin on such plans on or
after March 15, 2021, in certain circumstances.
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The Bureau also proposed to add comment 9(c)(2)(v)-14 to provide
additional detail. Proposed comment 9(c)(2)(v)-14 provided that for
change-in-terms notices provided under Sec. 1026.9(c)(2) on or after
October 1, 2021, covering changes permitted by proposed Sec.
1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii), a creditor must provide a
change-in-terms notice under Sec. 1026.9(c)(2) disclosing the
replacement index for a LIBOR index and any adjusted margin that is
permitted under proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii), even if the margin is reduced. Proposed comment
9(c)(2)(v)-14 also provided that prior to October 1, 2021, a creditor
has the option of disclosing a reduced margin in the change-in-terms
notice that discloses the replacement index for a LIBOR index as
permitted by proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii).
Comments Received
As discussed in the section-by-section analysis of Sec.
1026.9(c)(1)(ii), in response to the 2020 Proposal, several industry
commenters and several individual commenters provided the same comments
for both the proposed changes to the change-in-terms notice
requirements in proposed Sec. 1026.9(c)(1)(ii) for HELOCs and Sec.
1026.9(c)(2)(v)(A) for credit card accounts under an open-end (not
home-secured) consumer credit plan. With respect to these comments, (1)
several trade associations and an individual commenter supported the
Bureau's proposed revisions to the notice requirements; (2) another
individual commenter requested that the Bureau require lenders to show
in dollar terms the current rate changes for the previous five years
and what these changes would have been under the new index; (3) several
industry commenters requested that the Bureau provide comprehensive
sample disclosures for change-in-terms notices that can be provided to
borrowers to help them understand the change in the index; and (4) an
individual commenter indicated that the Bureau should require banks to
identify and communicate the replacement index well in advance of the
transition date.
The Final Rule
For the reasons discussed below, this final rule adopts Sec.
1026.9(c)(2)(v)(A) and comment 9(c)(2)(v)-14 generally as proposed
except to provide that the revisions to Sec. 1026.9(c)(2)(v)(A) and
comment 9(c)(2)(v)-14 are effective April 1, 2022, with a mandatory
compliance date of October 1, 2022, consistent with the effective date
of this final rule and consistent with TILA section 105(d). For the
same reasons that the Bureau is adopting the revisions to Sec.
1026.9(c)(1)(ii) for HELOC accounts, the Bureau believes that when a
creditor for plans other than HELOCs subject to Sec. 1026.40 is
replacing the LIBOR index and adjusting the margin as permitted by
Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii), it is beneficial for
consumers to receive notice not just of the replacement index but also
any adjustments to the margin, even if the margin is decreased.
Informing consumers of the replacement index and any adjusted margin
(even a reduction in the margin) tells consumers how the variable rates
on their accounts will be determined going forward after the LIBOR
index is replaced. Otherwise, a consumer that is only notified that the
LIBOR index is being replaced with a replacement index that has a
higher index value but is not notified that the margin is decreasing
could reasonably but mistakenly believe that the APR on the plan is
increasing.
The revisions to Sec. 1026.9(c)(2)(v)(A) are effective April 1,
2022, with a mandatory compliance date of October 1, 2022. TILA section
105(d) generally requires that changes in disclosures required by TILA
or Regulation Z have an effective date of the October 1 that is at
least six months after the date the final rule is adopted.\45\ TILA
section 105(d) also provides that a creditor may comply with newly
promulgated disclosure requirements prior to the effective date of the
requirement. Consistent with TILA section 105(d), comment 9(c)(2)(v)-14
clarifies that from April 1, 2022, through September 30, 2022, a
creditor has the option of disclosing a reduced margin in the change-
in-terms notice that discloses the replacement index for a LIBOR index
as permitted by Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii).
Creditors for plans other than HELOCs subject to Sec. 1026.40 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 pursuant to Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii)
earlier than October 1, 2022, starting on or after April 1, 2022. These
creditors may want to provide this information to avoid confusion by
consumers and because this reduced margin is beneficial to consumers.
Thus, comment 9(c)(2)(v)-14 permits creditors for plans other than
HELOCs subject to Sec. 1026.40 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 pursuant to Sec. 1026.55(b)(7)(i) or
Sec. 1026.55(b)(7)(ii) earlier than October 1, 2022, starting on or
after April 1, 2022. The Bureau encourages creditors to include this
information in change-in-terms notices provided earlier than October 1,
2022, starting on or after April 1, 2022, even though they are not
required to do so, to ensure that consumers are notified of how the
variable rates on their accounts will be determined going forward after
the LIBOR index is replaced.
---------------------------------------------------------------------------
\45\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------
For the similar reasons discussed in the section-by-section
analysis of Sec. 1026.9(c)(1)(ii) for HELOC accounts, this final rule
does not provide sample or model forms for the change-in-terms notices
required under Sec. 1026.9(c)(2) when a creditor transitions away from
a LIBOR index under Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii)
for plans that are not subject to Sec. 1026.40. The Bureau believes
that sample or model forms for such a notice are not necessary or
warranted. The change-in-terms notice is not a new requirement. The
Bureau believes that Sec. 1026.9(c)(2) and the related commentary
provide sufficient
[[Page 69728]]
information for creditors to understand change-in-terms notice
requirements without the need for a model form.
For similar reasons discussed in the section-by-section analysis of
Sec. 1026.9(c)(1)(ii) for HELOC accounts, this final rule also does
not change the timing in which change-in-terms notices under Sec.
1026.9(c)(2) must be provided to the consumer when a creditor replaces
a LIBOR index for plans that are not subject to Sec. 1026.40. Section
1026.9(c)(2) provides that change-in-terms notices generally must be
mailed or delivered at least 45 days prior to the effective date of the
change, and the Bureau did not propose changes to the timing of the
notices when a creditor replaces a LIBOR index. The Bureau concludes
that a 45-day period is appropriate for change-in-terms notices given
when a creditor replaces a LIBOR index for plans other than HELOCs
subject to Sec. 1026.40; this is the period generally applicable to
change-in-terms notices for open-end (not home-secured) plans under
Sec. 1026.9(c)(2).
Section 1026.20 Disclosure Requirements Regarding Post-Consummation
Events
20(a) Refinancings
The Bureau's Proposal
Section 1026.20 includes disclosure requirements regarding post-
consummation events for closed-end credit. Section 1026.20(a) and its
commentary define when a refinancing occurs for closed-end credit and
provide that a refinancing is a new transaction requiring new
disclosures to the consumer. Comment 20(a)-3.ii.B explains that a new
transaction subject to new disclosures results if the creditor adds a
variable-rate feature to the obligation, even if it is not accomplished
by the cancellation of the old obligation and substitution of a new
one. The comment also states that a creditor does not add a variable-
rate feature by changing the index of a variable-rate transaction to a
comparable index, whether the change replaces the existing index or
substitutes an index for one that no longer exists. To clarify comment
20(a)-3.ii.B, the Bureau proposed to add to the comment an illustrative
example, which would indicate that a creditor does not add a variable-
rate feature by changing the index of a variable-rate transaction from
the 1-month, 3-month, 6-month, or 1-year USD LIBOR index to the SOFR-
based spread-adjusted index recommended by the ARRC for consumer
products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR
index respectively because the replacement index is a comparable index
to the corresponding USD LIBOR index.\46\ The Bureau requested comment
on whether it was appropriate to add the proposed example to comment
20(a)-3.ii.B and whether the Bureau should make any other amendments to
Sec. 1026.20(a) or its commentary in connection with the LIBOR
transition. The Bureau also requested comment on whether there were any
other replacement indices that it should identify as an example of a
comparable index in comment 20(a)-3.ii.B, and if so, which indices and
on what bases. For the reasons discussed below, the Bureau is
finalizing the amendments to comment 20(a)-3.ii.B generally as proposed
with a revision to cross-reference new comment 20(a)(3)-iv and with a
revision not to include 1-year USD LIBOR in the comment at this time
pending the Bureau's receipt of additional information and further
consideration by the Bureau. This final rule also adds new comment
20(a)(3)-iv to provide 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.
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\46\ By ``corresponding USD LIBOR index,'' the Bureau means the
specific USD LIBOR index for which the ARRC is recommending the
replacement index as a replacement for consumer products. Thus,
because the ARRC has recommended, for consumer products, a specific
spread-adjusted 6-month term rate SOFR index for consumer products
as a replacement for the 6-month USD LIBOR index, the 6-month USD
LIBOR index would be the ``corresponding USD LIBOR index'' for that
specific spread-adjusted 6-month term rate SOFR index for consumer
products.
---------------------------------------------------------------------------
Comments Received
SOFR spread-adjusted index. Several industry commenters, several
consumer group commenters, and a financial services education and
consulting firm expressed support for the proposed new illustrative
example in comment 20(a)-3.ii.B, which indicated that a creditor does
not add a variable-rate feature by changing the index of a variable-
rate transaction from the 1-month, 3-month, 6-month, or 1-year USD
LIBOR index to the SOFR-based spread-adjusted index recommended by the
ARRC for consumer products to replace the 1-month, 3-month, 6-month, or
1-year USD LIBOR index respectively because the replacement index is a
comparable index to the corresponding USD LIBOR index. A few industry
commenters and an individual commenter expressed concern about SOFR's
lack of history.
Additional examples of indices that are comparable to the LIBOR.
Many industry commenters generally urged the Bureau to provide
additional examples of comparable indices to the LIBOR indices. Some
commenters mentioned specific indices that the Bureau should clarify
are comparable to LIBOR, such as Prime, AMERIBOR[supreg] rates,\47\ the
effective Federal funds rate (EFFR),\48\ and the Constant Maturity
Treasury (CMT) rates.\49\ An industry commenter urged the Bureau to
designate other replacement indices as compliant if recommended by the
Board.
---------------------------------------------------------------------------
\47\ According to its website, ``AMERIBOR[supreg] is a new
interest rate benchmark created by the American Financial Exchange
[that] reflects the actual borrowing costs of thousands of small,
medium and regional banks across America [and] is also useful for
larger banks and financial institutions that do business with these
banks.'' Am. Fin. Exch., AMERIBOR[supreg] Brochure, <a href="https://ameribor.net/background">https://ameribor.net/background</a>.
\48\ The EFFR is a rate produced by the New York Fed which is
calculated as a volume-weighted median of overnight Federal funds
transactions reported in the FR 2420 Report of Selected Money Market
Rates. Fed. Rsrv. Bank of N.Y., Effective Federal Funds Rate,
<a href="https://www.newyorkfed.org/markets/reference-rates/effr">https://www.newyorkfed.org/markets/reference-rates/effr</a>.
\49\ The CMT rates are Treasury Yield Curve Rates where the
``[y]ields are interpolated by the Treasury from the daily yield
curve. This curve, which relates the yield on a security to its time
to maturity is based on the closing market bid yields on actively
traded Treasury securities in the over-the-counter market. These
market yields are calculated from composites of indicative, bid-side
market quotations (not actual transactions) obtained by the Federal
Reserve Bank of New York at or near 3:30 p.m. each trading day.''
U.S. Dep't of the Treasury, Daily Treasury Yield Curve Rates,
<a href="https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield">https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield</a> (last updated Sept. 24, 2021).
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In addition, several industry commenters expressed support for the
Bureau's statement that the example provided in comment 20(a)-3.ii.B is
not the only index that is comparable to LIBOR. In addition, an
industry commenter urged the Bureau to avoid mandating the use of any
particular replacement index.
Additional guidance on what constitutes a comparable index. Many
industry commenters urged the Bureau to provide additional guidance on
how to determine if an index is a comparable index for purposes of
Regulation Z. Some of these commenters shared views on what types of
index the Bureau should consider as comparable for purposes of
Regulation Z. Several industry commenters urged that any guidance that
the Bureau provides on how to determine if an index is comparable
should provide alternatives to reliance on historical fluctuations
because such historical evidence would not be available for new
indices. Several consumer group commenters and a financial services
education and consulting firm commenter cautioned
[[Page 69729]]
the Bureau against recognizing newly established indices as suitable
replacement indices for LIBOR indices, unless they satisfy the criteria
reviewed by the ARRC in selecting SOFR. Several commenters asserted
that any guidance on what constitutes a comparable index should clarify
that the index change should be ``value neutral,'' meaning that the
change should not raise or lower the interest rate on the loan. A few
industry commenters urged the Bureau to clarify that a creditor may use
any ``reasonable method'' to determine if a replacement index is
comparable. Several industry commenters urged the Bureau to clarify
that an index is comparable if the index and the margin achieve a
substantially similar interest rate.
Disclosures concerning index changes. Several commenters, including
several consumer groups, a financial services education and consulting
firm, and a few individuals, urged the Bureau to require disclosures to
consumers with closed-end loans informing consumers of the index
change. Several industry commenters stated that if the Bureau requires
a disclosure for closed-end products, the Bureau should require it to
be provided 45 days before the index change. Another industry commenter
urged the Bureau to provide guidance on how to complete a Loan Estimate
or Closing Disclosure for a SOFR product.
Timing of transition. A few industry commenters urged the Bureau to
include the same provisions for closed-end loans that it proposed for
HELOCs and credit card accounts which would allow creditors for HELOCs
and card issuers to transition from using a LIBOR index on or after
March 15, 2021, if certain conditions are met.
Placement of example in Regulation Z. Several industry commenters
urged the Bureau to include the proposed example in the text of the
rule, rather than the commentary, and explained their perception that
including the example in the commentary would not provide sufficient
legal protection.
The Final Rule
The Bureau is finalizing the amendments to comment 20(a)-3.ii.B
generally as proposed with a revision to cross-reference comment 20(a)-
3.iv and with a revision not to include 1-year USD LIBOR in the comment
at this time pending the Bureau's receipt of additional information and
further consideration by the Bureau. This final rule also adds new
comment 20(a)-3.iv to provide 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.
SOFR spread-adjusted index. The Bureau agrees with the commenters
that expressed support for the new illustrative example in comment
20(a)-3.ii.B.
The Bureau has reviewed the SOFR indices upon which the ARRC has
indicated it will base its recommended replacement indices and the
spread adjustment methodology that the ARRC is recommending using to
develop the replacement indices. Based on this review, the Bureau has
determined that the spread-adjusted replacement indices that the ARRC
is recommending for consumer products to replace the 1-month, 3-month,
or 6-month USD LIBOR index will provide a good example of a comparable
index to the tenors of LIBOR that they are designated to replace.
On June 22, 2017, the ARRC identified SOFR as its recommended
alternative to LIBOR after considering various potential alternatives,
including other term unsecured rates, overnight unsecured rates, other
secured repurchase agreements (repo) rates, U.S. Treasury bill and bond
rates, and overnight index swap rates linked to the EFFR.\50\ The ARRC
made its final recommendation of SOFR after evaluating and
incorporating feedback from a 2016 consultation and end-users on its
advisory group.\51\
---------------------------------------------------------------------------
\50\ The Fed. Rsrv. Bank of N.Y., ARRC Consultation on Spread
Adjustment Methodologies for Fallbacks in Cash Products Referencing
USD LIBOR at 3 (Jan. 21, 2020), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation.pdf</a> (ARRC Consultation on Spread
Adjustment Methodologies).
\51\ Id.
---------------------------------------------------------------------------
As the ARRC has explained, SOFR is a broad measure of the cost of
borrowing cash overnight collateralized by U.S. Treasury
securities.\52\ SOFR is determined based on transaction data composed
of: (i) Tri-party repo, (ii) General Collateral Finance repo, and (iii)
bilateral Treasury repo transactions cleared through Fixed Income
Clearing Corporation. SOFR is representative of general funding
conditions in the overnight Treasury repo market. As such, it reflects
an economic cost of lending and borrowing relevant to the wide array of
market participants active in financial markets. In terms of the
transaction volume underpinning it, SOFR has the widest coverage of any
Treasury repo rate available. Averaging over $1 trillion of daily
trading, transaction volumes underlying SOFR are far larger than the
transactions in any other U.S. money market.\53\
---------------------------------------------------------------------------
\52\ Id.
\53\ Fed. Rsrv. Bank of N.Y., Additional Information About SOFR
and Other Treasury Repo Reference Rates, <a href="https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information">https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information</a> (last updated Apr.
16, 2021).
---------------------------------------------------------------------------
On April 21, 2021, CME Group Benchmark Administration Ltd (CME
Group) started producing term rates for 1-month SOFR, 3-month SOFR, and
6-month SOFR, which now go back as far as January 3, 2019.\54\ Prior to
that, the Board produced data on 1-month, 3-month, and 6-month
``indicative'' term SOFR rates that likely provide a good indication of
how term SOFR rates would have performed starting from June 11,
2018.\55\ On July 29, 2021, the ARRC formally recommended the 1-month,
3-month, and 6-month term SOFR rates produced by the CME Group as the
underlying SOFR rates for use in replacing the 1-month, 3-month, and 6-
month USD LIBOR tenors respectively for existing accounts.\56\ On
October 6, 2021, the ARRC published a summary of the decisions that the
ARRC has made to that date concerning its recommended SOFR-based
spread-adjusted indices for contracts referencing USD LIBOR.\57\ In
that summary, for consumer products, the ARRC indicated that for 1-year
USD LIBOR, the ARRC's recommended replacement index will be to a
spread-adjusted index based on a 1-year term SOFR rate or to a spread-
adjusted index based on the 6-month term SOFR rate. The replacement
index will use the spread adjustment for 1-year USD LIBOR mentioned in
Table 1 below for arriving at the recommended replacement index for
replacing 1-year USD LIBOR in consumer products.\58\ The ARRC indicated
that it will make a recommendation on the SOFR-based
[[Page 69730]]
spread-adjusted index to replace 1-year USD LIBOR and all other
remaining details of its recommended replacement indices for consumer
products no later than one year before the date when 1-year USD LIBOR
is expected to cease (i.e., by June 30, 2022).\59\ In March 2021, the
ARRC announced that it has selected Refinitiv, a London Stock Exchange
Group (LSEG) business, to publish the ARRC's recommended spread
adjustments and SOFR-based spread-adjusted indices for cash
products.\60\ Refinitiv will publicly make available, for free, the
SOFR-based spread-adjusted indices for consumer products so that
consumers can see the actual indices that are used by industry in the
pricing of their adjustable-rate consumer loan contracts that will be
transitioning to the SOFR-based spread-adjusted indices for consumer
products.\61\
---------------------------------------------------------------------------
\54\ Press Release, The Chi. Mercantile Exch., CME Group
Announces Launch of CME Term SOFR Reference Rates (Apr. 21, 2021),
<a href="https://www.cmegroup.com/media-room/press-releases/2021/4/21/cme_group_announceslaunchofcmetermsofrreferencerates.html#">https://www.cmegroup.com/media-room/press-releases/2021/4/21/cme_group_announceslaunchofcmetermsofrreferencerates.html#</a>; The Chi.
Mercantile Exch, CME Term SOFR Reference Rates Benchmarks (Sept. 21,
2021), <a href="https://www.cmegroup.com/market-data/files/cme-term-sofr-reference-rates-benchmarks.pdf">https://www.cmegroup.com/market-data/files/cme-term-sofr-reference-rates-benchmarks.pdf</a>.
\55\ June 11, 2018, is the first date for which indicative term
SOFR rate data are available. Erik Heitfield & Yang-Ho- Park,
Indicative Forward-Looking SOFR Term Rates (Apr. 19, 2019), The Fed.
Rsrv. Bank, FEDS Notes, <a href="https://www.federalreserve.gov/econres/notes/feds-notes/indicative-forward-looking-sofr-term-rates-20190419.htm">https://www.federalreserve.gov/econres/notes/feds-notes/indicative-forward-looking-sofr-term-rates-20190419.htm</a> (last updated May 26, 2021).
\56\ Press Release, Alt. Reference Rates Comm., ARRC Formally
Recommends Term SOFR (July 29, 2021), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf</a>.
\57\ Summary of Fallback Recommendations, supra note 5, at 1.
\58\ Id. at 10.
\59\ Id.
\60\ Fed. Rsrv. Bank of N.Y., ARRC Announces Refinitiv as
Publisher of its Spread Adjustment Rates for Cash Products (Mar. 17,
2021), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210317-press-release-Spread-Adjustment-Vendor-Refinitiv.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210317-press-release-Spread-Adjustment-Vendor-Refinitiv.pdf</a>.
\61\ Id.
---------------------------------------------------------------------------
The Bureau is reserving judgment about whether to include a
reference to the 1-year USD LIBOR index in comment 20(a)-3.ii.B until
it obtains additional information. Once the Bureau knows which SOFR-
based spread-adjusted index the ARRC will recommend to replace the 1-
year USD LIBOR index for consumer products, the Bureau may determine
whether that index meets the ``comparable'' standard based on
information available at that time. Assuming the Bureau determines that
the index meets that standard, the Bureau will then consider whether to
codify that determination by finalizing the proposed comment related to
the 1-year USD LIBOR index in a supplemental final rule, or otherwise
announce that determination.
The Bureau has reviewed the historical data on the 1-month, 3-
month, and 6-month term SOFR rates produced by CME Group and the
indicative term SOFR rates produced by the Board and on 1-month, 3-
month, and 6-month USD LIBOR from June 11, 2018, to October 18, 2021.
The Bureau calculated the spread-adjusted term SOFR rates by adding the
long-term values of the spread-adjustments set forth in Table 1
described below to the historical data on the 1-month, 3-month, and 6-
month term SOFR rates described above.
As discussed in more detail in the section-by-section analysis of
Sec. 1026.40(f)(3)(ii)(A), the Bureau has determined that: (1) The
historical fluctuations of 6-month USD LIBOR are substantially similar
to those of the 6-month spread-adjusted term SOFR rates; (2) the
historical fluctuations of 3-month USD LIBOR are substantially similar
to those of 3-month spread-adjusted term SOFR rates; and (3) the
historical fluctuations of 1-month USD LIBOR are substantially similar
to those of the 1-month spread-adjusted term SOFR rate.
The ARRC and the Bureau also have compared the rate history that is
available for SOFR (to calculate compounded averages) with the rate
history for the applicable LIBOR indices.\62\ The New York Fed
publishes three compounded averages of SOFR on a daily basis, including
a 30-day compounded average of SOFR (30-day SOFR), and a daily index
that allows for the calculation of compounded average rates over custom
time periods.\63\ Prior to the start of the official publication of
SOFR in 2018, the New York Fed released data from August 2014 to March
2018 representing modeled, pre-production estimates of SOFR that are
based on the same basic underlying transaction data and methodology
that now underlie the official publication.\64\ The Bureau analyzed the
spread-adjusted indices based on the 30-day SOFR. The Bureau calculated
the spread-adjusted 30-day SOFR rates by adding the long-term values of
the spread-adjustments set forth in Table 1 described below to the
historical data on 30-day SOFR. For the reasons discussed in the
section-by-section analysis of Sec. 1026.40(f)(3)(ii)(A), the Bureau
finds that the historical fluctuations in the spread-adjusted index
based on 30-day SOFR are substantially similar to those of 1-month, 3-
month, and 6-month USD LIBOR.
---------------------------------------------------------------------------
\62\ See, e.g., ARRC Consultation on Spread Adjustment
Methodologies, supra note 50, at 4 (comparing 3-month compounded
SOFR relative to the 3-month USD LIBOR since 2014). The ARRC and the
Bureau have also considered the history of other indices that could
be viewed as historical proxies for SOFR. See, e.g., David Bowman,
Historical Proxies for the Secured Overnight Financing Rate (July
15, 2019), <a href="https://www.federalreserve.gov/econres/notes/feds-notes/historical-proxies-for-the-secured-overnight-financing-rate-20190715.htm">https://www.federalreserve.gov/econres/notes/feds-notes/historical-proxies-for-the-secured-overnight-financing-rate-20190715.htm</a> (Historical SOFR).
\63\ Fed. Rsrv. Bank of N.Y., SOFR Averages and Index Data,
<a href="https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind">https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind</a>.
\64\ See Historical SOFR, supra note 62.
---------------------------------------------------------------------------
Term SOFR rates will have fewer differences with LIBOR term rates
than 30-day SOFR does.\65\ Since they are also term rates, they also
include term premia, and these should usually be similar to the term
premia embedded in LIBOR. Since term SOFR rates will also be forward-
looking, they should adjust quickly to changing expectations about
future funding conditions as LIBOR term rates do, rather than following
them with a lag as 30-day SOFR does. However, term SOFR rates will
still have differences from the LIBOR indices. SOFR is a secured rate
while the LIBOR indices are unsecured and therefore include an element
of bank credit risk. The LIBOR indices also may reflect supply and
demand conditions in wholesale unsecured funding markets that also
could lead to differences with SOFR.
---------------------------------------------------------------------------
\65\ 30-day SOFR is a historical, backward-looking 30-day
average of overnight rates, while the LIBOR indices are forward-
looking term rates published with several different tenors
(overnight, 1-week, 1-month, 2-month, 3-month, 6-month, and 1-year).
The LIBOR indices, therefore, reflect funding conditions for a
different length of time than 30-day SOFR does, and they reflect
those funding conditions in advance rather than with a lag as 30-day
SOFR does. The LIBOR indices may also include term premia missing
from 30-day SOFR. (The ``term premium'' is the excess yield that
investors require to buy a long-term bond instead of a series of
shorter-term bonds.)
---------------------------------------------------------------------------
Forward-looking term SOFR rates will without adjustments differ in
levels from the LIBOR indices. The ARRC intends to account for these
differences from the historical levels of LIBOR term rates through
spread adjustments in the replacement indices that it recommends. On
January 21, 2020, the ARRC released a consultation on spread adjustment
methodologies that provided historical analyses of a number of
potential spread adjustment methodologies and that showed that the
proposed methodology performed well relative to other options,
including potential dynamic spread adjustments.\66\ On April 8, 2020,
the ARRC announced that it had agreed on a recommended spread
adjustment methodology for cash products referencing USD LIBOR.\67\ In
response to the January 2020 consultation, the ARRC received over 70
responses from consumer advocacy groups, asset managers, corporations,
banks, industry associations, GSEs, and others.\68\ In May 2020, the
ARRC released a follow-up consultation on the spread adjustment
methodologies with respect to two
[[Page 69731]]
technical issues.\69\ In June 2020, the ARRC announced recommendations
on these two technical issues.\70\ Following its consideration of
feedback received on its public consultations, the ARRC is recommending
a long-term spread adjustment equal to the historical median of the
five-year spread between USD LIBOR and SOFR. On March 8, 2021, the ARRC
issued an announcement \71\ recognizing a set of values as the long-
term spread adjustment for the SOFR-based spread-adjusted indices,\72\
as shown in Table 1 below, based on the March 5, 2021, announcements by
the ICE Benchmarks Administration and the FCA.
---------------------------------------------------------------------------
\66\ ARRC Consultation on Spread Adjustment Methodologies, supra
note 50.
\67\ Press Release, Alt. Reference Rates Comm., ARRC Announces
Recommendation of a Spread Adjustment Methodology (Apr. 8, 2020),
<a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Methodology.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Methodology.pdf</a> (ARRC Announces
Recommendation of a Spread Adjustment Methodology).
\68\ Alt. Reference Rates Comm., Summary of Feedback Received in
the ARRC Spread-Adjustment Consultation and Follow-Up Consultation
on Technical Details 2 (May 6, 2020), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation_Follow_Up.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation_Follow_Up.pdf</a> (ARRC Supplemental
Spread-Adjustment Consultation).
\69\ Id.
\70\ Press Release, Alt. Reference Rates Comm., ARRC Announces
Further Details Regarding Its Recommendation of Spread Adjustments
for Cash Products (June 30, 2020), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf</a>.
\71\ Press Release, Alt. Reference Rates Comm., ARRC Confirms a
``Benchmark Transition Event'' has occurred under ARRC Fallback
Language (Mar. 8, 2021), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Benchmark_Transition_Event_Statement.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Benchmark_Transition_Event_Statement.pdf</a>.
\72\ Press Release, Bloomberg, Bloomberg Notice on IBOR
Fallbacks (Mar. 5, 2021), <a href="https://www.bloomberg.com/company/press/bloomberg-notice-on-ibor-fallbacks/">https://www.bloomberg.com/company/press/bloomberg-notice-on-ibor-fallbacks/</a>; Summary of Fallback
Recommendations, supra note 5, at 4.
Table 1--Values of the Long-Term Spread-Adjustment for the SOFR-Based
Spread-Adjusted Indices
------------------------------------------------------------------------
Spread applied to
USD LIBOR tenor being replaced SOFR based rate
(bps)
------------------------------------------------------------------------
1-month LIBOR........................................ 11.448
3-month LIBOR........................................ 26.161
6-month LIBOR........................................ 42.826
1-year LIBOR......................................... 71.513
------------------------------------------------------------------------
For consumer products, the ARRC is additionally recommending a 1-
year transition period to this five-year median spread adjustment
methodology.\73\ Thus, the transition will be gradual. Specifically,
the ARRC has recommended, for a period of one year, a short-term spread
adjustment for SOFR-based spread-adjusted indices in order to ensure
that consumers do not encounter a sudden change in their monthly
payments when the LIBOR index is replaced. The short-term spread
adjustment initially will be the 2-week average of the LIBOR-SOFR
spread up to July 3, 2023, for the SOFR-based spread-adjusted indices
for consumer products to replace 1-month, 3-month, 6-month, or 1-year
USD LIBOR.\74\ For these indices, over the first ``transition'' year
following July 3, 2023, the daily published short-term spread
adjustment will move linearly toward the longer-term fixed spread
adjustment.\75\ After the initial transition year, the spread
adjustment will be permanently set at the longer-term fixed rate
spread.\76\ The ARRC also stated that it was not aware of any consumer
products using 1-week and 2-month LIBOR, which will cease publication
immediately after December 31, 2021.\77\ The inclusion of a transition
period for consumer products was endorsed by many respondents,
including consumer advocacy groups.\78\
---------------------------------------------------------------------------
\73\ ARRC Announces Recommendation of a Spread Adjustment
Methodology, supra note 67; Summary of Fallback Recommendations,
supra note 5, at 11.
\74\ Summary of Fallback Recommendations, supra note 5, at 11.
\75\ Id.
\76\ Id.
\77\ Id.
\78\ ARRC Supplemental Spread-Adjustment Consultation, supra
note 68, at 1.
---------------------------------------------------------------------------
The ARRC intends for the spread adjustment to reflect and adjust
for the historical differences between LIBOR and SOFR in order to make
the spread-adjusted rate comparable to LIBOR in a fair and reasonable
way, thereby minimizing the impact to borrowers and lenders.\79\
---------------------------------------------------------------------------
\79\ Id. at 2, 3.
---------------------------------------------------------------------------
The Bureau finds that the SOFR-based spread-adjusted indices
recommended by the ARRC for consumer products as a replacement for the
1-month, 3-month, or 6-month USD LIBOR index are comparable indices to
the 1-month, 3-month, or 6-month USD LIBOR index respectively. The
SOFR-based spread-adjusted indices that the ARRC recommends for
consumer products will be published and made publicly available on
Refinitiv's website. The Bureau has concluded that using them as a
replacement for the corresponding tenors of LIBOR does not seem likely
to significantly change the economic position of the parties to the
contract, given that SOFR and the LIBOR indices have generally moved
together and the replacement index will be spread adjusted based on a
methodology derived through public consultation.
For the reasons discussed above, the Bureau is finalizing the
amendment to comment 20(a)-3.ii.B to add an illustrative example, which
indicates that a creditor does not add a variable-rate feature by
changing the index of a variable-rate transaction from the 1-month, 3-
month, or 6-month USD LIBOR index to the SOFR-based spread-adjusted
index recommended by the ARRC for consumer products to replace the 1-
month, 3-month, or 6-month USD LIBOR index respectively because the
replacement index is a comparable index to the corresponding USD LIBOR
index.
Additional examples of indices that are comparable to the LIBOR. As
discussed in more detail above, the Bureau received comments from
industry requesting additional safe harbors, meaning additional
examples of indices that are comparable to the LIBOR indices for
closed-end transactions such as Prime, AMERIBOR[supreg] rates, EFFR,
and CMT rates.
This final rule does not set forth safe harbors indicating that
Prime, AMERIBOR[supreg] rates, EFFR, or the CMT rates satisfy the
Regulation Z ``comparable'' standard for appropriate replacement
indices for a particular LIBOR index in a closed-end transaction.
First, for Prime, AMERIBOR[supreg] rates, EFFR, or CMT rates, with
respect to the Regulation Z ``comparable'' standard for closed-end
credit, all of these rates may need to be ``spread-adjusted'' to
account for the differences in rate levels from the LIBOR rates in
order to potentially comply with the standard. This step is important
for comparability because unlike for HELOC and credit card contracts,
some closed-end contracts, especially mortgages, typically do not allow
for margin adjustments to account for any spread adjustment needed when
changing the index. The Bureau is not aware of market participants
having developed a methodology to spread adjust the rates. Without
spread adjustments to the indices, the indices do not appear to be able
to meet the ``comparable'' standard. Second, as discussed in more
detail below, the Bureau notes that the determinations of whether an
index is comparable to a LIBOR index are fact-specific, and they depend
on the replacement index being considered and the LIBOR tenor being
replaced. The commenters did not specify which AMERIBOR[supreg] rates,
EFFR, or CMT rates should be used as the replacement tenor and which
LIBOR tenor the rate would replace.
In addition, the Bureau understands that the vast majority of the
impacted industry participants will use the indices for which this
final rule provides a safe harbor (i.e., certain SOFR-based spread-
adjusted indices recommended by the ARRC for consumer products) as
replacement indices for closed-end transactions. The Bureau notes that
this final rule does not disallow the use of other replacement indices
if they comply with Regulation Z.
An industry commenter urged the Bureau to designate other
replacement indices as compliant if recommended by
[[Page 69732]]
the Board. The Bureau notes in response that the Board has not
recommended other replacement indices.
The Bureau appreciates commenters' suggestion to reiterate that the
example included in comment 20(a)-3.ii.B is not intended to provide an
exhaustive list of indices that are comparable to LIBOR. The example
included in comment 20(a)-3.ii.B is illustrative only, and the Bureau
does not intend to suggest that 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 are the only indices that would be
comparable to the LIBOR indices. The Bureau recognizes that there may
be other comparable indices that creditors may use as replacements for
the various tenors of LIBOR.
Additional guidance on what constitutes a comparable index. As
discussed in more detail above, numerous industry commenters asked the
Bureau to provide additional guidance on how to determine if an index
is comparable for purposes of Regulation Z.
To facilitate compliance with Regulation Z, this final rule adds
new comment 20(a)-3.iv to provide a non-exhaustive list 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. Specifically, new comment 20(a)-3.iv provides
that the relevant factors to be considered in determining whether a
replacement index is comparable to a particular LIBOR index depend on
the replacement index being considered and the LIBOR index being
replaced. New comment 20(a)-3.iv also provides that the types of
relevant factors to establish if a replacement index could meet the
``comparable'' standard with respect to a particular LIBOR index using
historical data or future expectations, include but are not limited to,
whether: (1) The movements over time are comparable; (2) the consumers'
payments using the replacement index compared to payments using the
LIBOR index are comparable if there is sufficient data for this
analysis; (3) the index levels are comparable; (4) the replacement
index is publicly available; and (5) the replacement index is outside
the control of the creditor. The first three factors are important to
help minimize the financial impact on consumers, including the payments
they must make, when LIBOR is replaced with another index. The last two
factors would promote transparency for consumers and help reduce
potential manipulation of the replacement rate by the creditor in the
future. As discussed above, the Bureau has considered these factors in
determining that 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 indices have historical fluctuations that are
comparable to those of the 1-month, 3-month, or 6-month USD LIBOR
indices respectively. There is sufficient historical data to analyze,
which shows that the consumers' payments using the SOFR index are
comparable to payments using the LIBOR index and the index levels are
comparable. Further, the SOFR-based spread-adjusted indices recommended
by the ARRC for consumer products will be publicly available and are
outside of the creditor's control.
The Bureau notes that this final rule does not set forth a
principles-based standard for determining whether a replacement index
is comparable to a particular LIBOR tenor for closed-end credit. These
determinations are fact-specific and depend on the replacement index
being considered and the LIBOR tenor being replaced, as well as
prevailing market conditions. For example, these determinations may
need to consider certain aspects of the historical data itself for a
particular replacement index, such as (1) the length of time the data
has been available and how much of the available data to consider in
the analysis of whether the Regulation Z standards have been satisfied;
(2) the quality of the historical data, including the methodology of
how the rate is determined and whether it sufficiently represents a
market rate; and (3) whether the replacement index is a backward-
looking rate (e.g., historical average of rates) such that timing
aspects of the data may need to be adjusted to match up with the
particular forward-looking LIBOR term-rate being replaced. These
considerations will vary depending on the replacement index being
considered and the LIBOR tenor that is being replaced. Therefore, this
final rule does not provide a principles-based standard for determining
whether a replacement index for closed-end credit is comparable to
those of a particular LIBOR index.
Disclosures concerning index changes. This final rule does not
adopt commenters' suggestion to require a new disclosure informing
consumers about a change in an index. The Bureau did not propose to
require a new disclosure and lacks sufficient information about the
potential benefits and costs of such a new disclosure.
The Bureau anticipates, however, that industry practices and
existing legal requirements will provide consumers with information
about changes to their interest rate that affect their loan payments.
The Bureau understands that industry is developing best practices and
model communications that creditors can use to inform consumers about
the LIBOR transition.\80\ In addition, other provisions in Regulation Z
require disclosures to consumers with adjustable-rate mortgages if the
interest rate or payment amount will change. For example, initial
interest rate adjustment notices required by Sec. 1026.20(d) alert
consumers to the initial reset of an adjustable-rate mortgage, and
subsequent interest rate adjustment notices required by Sec.
1026.20(c) alert consumers to interest rate adjustments and provide the
consumer with information about the new interest rate and new periodic
payment prior to each adjustment that results in a payment change. In
addition, required periodic statements for closed-end consumer credit
transactions secured by a dwelling provide consumers with mortgage loan
account information, including alerting the consumer to upcoming
interest rate changes for each billing cycle.\81\
---------------------------------------------------------------------------
\80\ See, e.g., The Fed. Nat'l Mortg. Ass'n, LIBOR Transition
Playbook, <a href="https://capitalmarkets.fanniemae.com/media/5206/display">https://capitalmarkets.fanniemae.com/media/5206/display</a>;
The Fed. Home Loan Mortg. Corp., LIBOR Transition Playbook (Apr.
2021), <a href="http://www.freddiemac.com/about/pdf/LIBOR_transition_playbook.pdf">http://www.freddiemac.com/about/pdf/LIBOR_transition_playbook.pdf</a>; Mortg. Bankers Ass'n, Adjustable-Rate
Mortgage Disclosure: Possible Discontinuation of LIBOR (Apr. 2021),
<a href="https://www.mba.org/Documents/Policy/Issue%20Briefs/20305_MBA_LIBOR_Consumer_Disclosure.pdf">https://www.mba.org/Documents/Policy/Issue%20Briefs/20305_MBA_LIBOR_Consumer_Disclosure.pdf</a>; Alt. Reference Rates Comm.,
LIBOR ARM Transition Resource Guide (Aug. 18, 2020), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/LIBOR_ARM_Transition_Resource_Guide.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/LIBOR_ARM_Transition_Resource_Guide.pdf</a>.
\81\ 12 CFR 1026.41.
---------------------------------------------------------------------------
The Bureau appreciates commenters' suggestion to provide guidance
on completing a Loan Estimate or Closing Disclosure for a SOFR product
and will consider providing that guidance in the future through
implementation materials.
Timing of transition. The Bureau declines to adopt the commenter's
suggestion to include the same provisions for closed-end loans that it
proposed for HELOCs and credit card accounts which would allow
creditors for HELOCs and card issuers to transition from using a LIBOR
index on or after March 15, 2021, if certain conditions are met. It is
not necessary or warranted for Regulation Z to address the timing of
the transition from using the LIBOR indices for closed-end loans
[[Page 69733]]
because Regulation Z does not address when a creditor may transition a
closed-end loan to a new index. Instead, Regulation Z provides guidance
on the circumstances when an index change requires creditors to treat
the transaction as a refinancing and, accordingly, to provide the
disclosures required at origination.
Placement of example in Regulation Z. The Bureau declines to adopt
commenters' suggestion to include the proposed example in the text of
the rule rather than the commentary because it is not necessary or
warranted to protect creditors from liability. Good faith compliance
with the commentary affords protection from liability under TILA
section 130(f), which protects entities from civil liability for any
act done or omitted in good faith in conformity with any interpretation
issued by the Bureau.\82\
---------------------------------------------------------------------------
\82\ 15 U.S.C. 1640; comment 1 to 12 CFR part 1026.
---------------------------------------------------------------------------
Section 1026.36 Prohibited Acts or Practices and Certain Requirements
for Credit Secured by a Dwelling
36(a) Definitions
36(a)(4) Seller Financiers; Three Properties
36(a)(4)(iii)
36(a)(4)(iii)(C)
Section 1026.36(a)(1) defines the term ``loan originator'' for
purposes of the prohibited acts or practices and requirements for
credit secured by a dwelling in Sec. 1026.36. Section 1026.36(a)(4)
addresses the three-property exclusion for seller financers and
provides that a person (as defined in Sec. 1026.2(a)(22)) that meets
all of the criteria specified in Sec. 1026.36(a)(4)(i) to (iii) is not
a loan originator under Sec. 1026.36(a)(1). Pursuant to Sec.
1026.36(a)(4)(iii)(C), one such criterion requires that, if the
financing agreement has an adjustable rate, the index the adjustable
rate is based on is a widely available index such as indices for U.S.
Treasury securities or LIBOR. In light of the anticipated
discontinuation of LIBOR, the Bureau proposed to amend the examples of
indices provided in Sec. 1026.36(a)(4)(iii)(C) to substitute SOFR for
LIBOR. The Bureau received no comments on the proposed amendments to
Sec. 1026.36(a)(4)(iii)(C) and is finalizing the amendments as
proposed.
36(a)(5) Seller Financiers; One Property
36(a)(5)(iii)
36(a)(5)(iii)(B)
Section 1026.36(a)(1) defines the term ``loan originator'' for
purposes of the prohibited acts or practices and requirements for
credit secured by a dwelling in Sec. 1026.36. Section 1026.36(a)(5)
addresses the one-property exclusion for seller financers and provides
that a natural person, estate, or trust that meets all of the criteria
specified in Sec. 1026.36(a)(5)(i) to (iii) is not a loan originator
under Sec. 1026.36(a)(1). Pursuant to Sec. 1026.36(a)(5)(iii)(B), one
such criterion currently requires that, if the financing agreement has
an adjustable rate, the index the adjustable rate is based on is a
widely available index such as indices for U.S. Treasury securities or
LIBOR. In light of the anticipated discontinuation of LIBOR, the Bureau
proposed to amend the examples of indices provided in Sec.
1026.36(a)(5)(iii)(B) to substitute SOFR for LIBOR. The Bureau received
no comments on the proposed amendments to Sec. 1026.36(a)(5)(iii)(B)
and is finalizing the amendments as proposed.
Section 1026.37 Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate)
37(j) Adjustable Interest Rate Table
37(j)(1) Index and Margin
Section 1026.37 governs the content of the Loan Estimate disclosure
for certain mortgage transactions. If the interest rate may adjust and
increase after consummation and the product type is not a step rate,
Sec. 1026.37(j)(1) requires disclosure in the Loan Estimate of, inter
alia, the index upon which the adjustments to the interest rate are
based. Comment 37(j)(1)-1 explains that the index disclosed pursuant to
Sec. 1026.37(j)(1) must be stated such that a consumer reasonably can
identify it. The comment further explains that a common abbreviation or
acronym of the name of the index may be disclosed in place of the
proper name of the index, if it is a commonly used public method of
identifying the index. The comment provides, as an example, that
``LIBOR'' may be disclosed instead of London Interbank Offered Rate. In
light of the anticipated discontinuation of LIBOR, the Bureau proposed
to amend this example in comment 37(j)(1)-1 to provide that ``SOFR''
may be disclosed instead of Secured Overnight Financing Rate. The
Bureau did not receive any comments on the proposed amendments to
comment 37(j)(1)-1 and is finalizing the amendments as proposed.
Section 1026.40 Requirements for Home Equity Plans
40(f) Limitations on Home Equity Plans
40(f)(3)
40(f)(3)(ii)
TILA section 137(c)(1) provides that no open-end consumer credit
plan under which extensions of credit are secured by a consumer's
principal dwelling may contain a provision that permits a creditor to
change unilaterally any term except in enumerated circumstances set
forth in TILA section 137(c).\83\ TILA section 137(c)(2)(A) provides
that a creditor may change the index and margin applicable to
extensions of credit under such a plan if the index used by the
creditor is no longer available and the substitute index and margin
will result in a substantially similar interest rate.\84\ In
implementing TILA section 137(c), Sec. 1026.40(f)(3) prohibits a
creditor from changing the terms of a HELOC subject to Sec. 1026.40
except in enumerated circumstances set forth in Sec. 1026.40(f)(3).
Section 1026.40(f)(3)(ii) provides that a creditor may change the index
and margin used under the HELOC plan if the original index is no longer
available, the new index has a historical movement substantially
similar to that of the original index, and the new index and margin
would have resulted in an APR substantially similar to the rate in
effect at the time the original index became unavailable.
---------------------------------------------------------------------------
\83\ 15 U.S.C. 1647(c).
\84\ 15 U.S.C. 1647(c)(2)(A).
---------------------------------------------------------------------------
Current comment 40(f)(3)(ii)-1 provides that a creditor may change
the index and margin used under the HELOC plan if the original index
becomes unavailable, as long as historical fluctuations in the original
and replacement indices were substantially similar, and as long as the
replacement index and margin will produce a rate similar to the rate
that was in effect at the time the original index became unavailable.
Current comment 40(f)(3)(ii)-1 also provides that if the replacement
index is newly established and therefore does not have any rate
history, it may be used if it produces a rate substantially similar to
the rate in effect when the original index became unavailable. As
discussed in the section-by-section analysis of Sec. 1026.55(b)(7),
card issuers for a credit card account under an open-end (not home-
secured) consumer credit plan are subject to current comment 55(b)(2)-
6, which provides a similar provision on the unavailability of an index
as current comment 40(f)(3)(ii)-1.
[[Page 69734]]
The Bureau's Proposal
As discussed in part III, the industry has requested that the
Bureau permit card issuers to replace the LIBOR index used in setting
the variable rates on existing accounts before LIBOR becomes
unavailable to facilitate compliance. Among other things, the industry
is concerned that if card issuers must wait until LIBOR become
unavailable to replace the LIBOR indices used on existing accounts,
these card issuers would not have sufficient time to inform consumers
of the replacement index and update their systems to implement the
change. To reduce uncertainty with respect to selecting a replacement
index, the industry has also requested that the Bureau determine that
Prime has historical fluctuations that are substantially similar to
those of the LIBOR indices. The Bureau believes that similar issues may
arise with respect to the transition of existing HELOC accounts away
from using a LIBOR index.
To address these concerns, as discussed in more detail in the
section-by-section analysis of Sec. 1026.40(f)(3)(ii)(B), the Bureau
proposed to add new LIBOR-specific provisions to proposed Sec.
1026.40(f)(3)(ii)(B). These proposed provisions would have permitted
creditors for HELOC plans subject to Sec. 1026.40 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, in
certain circumstances without needing to wait for LIBOR to become
unavailable.
Specifically, proposed Sec. 1026.40(f)(3)(ii)(B) provided that if
a variable rate on a HELOC subject to Sec. 1026.40 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: (1) The historical fluctuations in the LIBOR index and
replacement index were substantially similar; and (2) the replacement
index value in effect on December 31, 2020, and replacement margin will
produce an APR substantially similar to the rate calculated using the
LIBOR index value in effect on December 31, 2020, and the margin that
applied to the variable rate immediately prior to the replacement of
the LIBOR index used under the plan. Proposed Sec.
1026.40(f)(3)(ii)(B) also provided that 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 replacement margin will produce an APR substantially similar to the
rate calculated using the LIBOR index value in effect on December 31,
2020, and the margin that applied to the variable rate immediately
prior to the replacement of the LIBOR index used under the plan.
Also, as discussed in more detail in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(B), to reduce uncertainty with
respect to selecting a replacement index that meets the standards in
proposed Sec. 1026.40(f)(3)(ii)(B), the Bureau proposed to determine
that Prime is an example of an index that has historical fluctuations
that are substantially similar to those of the 1-month and 3-month USD
LIBOR indices. The Bureau also proposed to determine that the SOFR-
based spread-adjusted indices recommended by the ARRC for consumer
products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR
have historical fluctuations that are substantially similar to those of
the LIBOR indices that they are intended to replace. The Bureau also
proposed additional detail in comments 40(f)(3)(ii)(B)-1 through -3
with respect to proposed Sec. 1026.40(f)(3)(ii)(B).
In addition, as discussed in more detail in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(A), the Bureau proposed to move the
unavailability provisions in current Sec. 1026.40(f)(3)(ii) and
current comment 40(f)(3)(ii)-1 to proposed Sec. 1026.40(f)(3)(ii)(A)
and proposed comment 40(f)(3)(ii)(A)-1 respectively and to revise the
proposed moved provisions for clarity and consistency. The Bureau also
proposed additional detail in comments 40(f)(3)(ii)(A)-2 and -3 with
respect to proposed Sec. 1026.40(f)(3)(ii)(A). For example, to reduce
uncertainty with respect to selecting a replacement index that meets
the standards for selecting a replacement index under proposed Sec.
1026.40(f)(3)(ii)(A), the Bureau proposed the same determinations
described above related to Prime and the SOFR-based spread-adjusted
indices recommended by the ARRC for consumer products in relation to
proposed Sec. 1026.40(f)(3)(ii)(A). The Bureau proposed to make these
revisions and provide additional detail because the Bureau understands
that some HELOC creditors may use the unavailability provision in
proposed Sec. 1026.40(f)(3)(ii)(A) to replace a LIBOR index used under
a HELOC plan, depending on the contractual provisions applicable to
their HELOC plans, as discussed in more detail below.
Proposed comment 40(f)(3)(ii)-1 would have addressed the
interaction among the unavailability provisions in proposed Sec.
1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in proposed Sec.
1026.40(f)(3)(ii)(B), and the contractual provisions that apply to the
HELOC plan. Proposed comment 40(f)(3)(ii)-1 provided that a creditor
may use either the provision in proposed Sec. 1026.40(f)(3)(ii)(A) or
proposed Sec. 1026.40(f)(3)(ii)(B) to replace a LIBOR index used under
a HELOC plan subject to Sec. 1026.40 so long as the applicable
conditions are met for the provision used. This proposed comment made
clear, however, that neither provision excuses the creditor from
noncompliance with contractual provisions.
To facilitate compliance, proposed comment 40(f)(3)(ii)-1 also
provided examples on the interaction among the unavailability
provisions in proposed Sec. 1026.40(f)(3)(ii)(A), the LIBOR-specific
provisions in proposed Sec. 1026.40(f)(3)(ii)(B), and three types of
contractual provisions for HELOCs because the Bureau understands that
HELOC contracts may be written in a variety of ways. For example, the
Bureau recognizes that some existing contracts for HELOCs that use
LIBOR as an index for a variable rate may provide that: (1) A creditor
can replace the LIBOR index and the margin for calculating the variable
rate unilaterally only if the LIBOR index is no longer available or
becomes unavailable; and (2) the replacement index and replacement
margin will result in an APR substantially similar to a rate that is in
effect when the LIBOR index becomes unavailable. Other HELOC contracts
may provide that a creditor can replace the LIBOR index and the margin
for calculating the variable rate unilaterally only if the LIBOR index
is no longer available or becomes unavailable but does not require that
the replacement index and replacement margin will result in an APR
substantially similar to a rate that is in effect when the LIBOR index
becomes unavailable. In addition, other HELOC contracts may allow a
creditor to change the terms of the contract (including the LIBOR index
used under the plan) as permitted by law.
As discussed in the section-by-section analysis of Sec.
1026.40(f)(3)(ii)(A), this final rule adopts Sec. 1026.40(f)(3)(ii)(A)
as proposed. As discussed in the section-by-section analysis of Sec.
1026.40(f)(3)(ii)(B), this final rule adopts Sec. 1026.40(f)(3)(ii)(B)
generally as proposed with revisions to: (1) Set April 1, 2022, as the
date on or after which HELOC creditors are permitted to replace the
LIBOR index used under the plan pursuant to Sec. 1026.40(f)(3)(ii)(B)
prior to LIBOR becoming unavailable;
[[Page 69735]]
(2) set October 18, 2021, as the date creditors generally must use
under Sec. 1026.40(f)(3)(ii)(B) for selecting indices values in
determining whether the APRs using the LIBOR index and the replacement
index are substantially similar; and (3) provide that if the
replacement index is not published on October 18, 2021, the creditor
generally must use the next calendar day for which both the LIBOR index
and the replacement index are published as the date for selecting
indices values in determining whether the APR based on the replacement
index is substantially similar to the rate based on the LIBOR
index.\85\
---------------------------------------------------------------------------
\85\ See the section-by-section analysis of Sec.
1026.40(f)(3)(ii)(B) for the rationale for why the Bureau selected
the October 18, 2021, date. The one exception is that if the
replacement index is the SOFR-based spread-adjusted index
recommended by the ARRC for consumer products to replace the 1-
month, 3-month, 6-month, or 1-year USD LIBOR index, the creditor
must use the index value on June 30, 2023, for the LIBOR index and,
for the SOFR-based spread-adjusted index for consumer products, must
use the index value on the first date that index is published, in
determining whether the APR based on the replacement index is
substantially similar to the rate based on the LIBOR index.
---------------------------------------------------------------------------
Comments Received
The Bureau received a significant number of comments on proposed
Sec. 1026.40(f)(3)(ii)(A) and (B) from industry, including banks,
credit unions, and their trade associations. The Bureau also received
several comment letters from consumer groups and individual consumers.
In response to the 2020 Proposal, most commenters generally provided
the same comments for both proposed Sec. 1026.40(f)(ii)(A) and (B) for
HELOC accounts and Sec. 1026.55(b)(7)(i) and (ii) for credit card
accounts under an open-end (not home-secured) consumer credit plan.
Allow transition from a LIBOR index prior to LIBOR becoming
unavailable. The Bureau received comments from industry, consumer
groups, and individuals on proposed Sec. 1026.40(f)(3)(ii)(B) and
proposed Sec. 1026.55(b)(7)(ii) that would permit creditors for HELOC
plans subject to Sec. 1026.40 and card issuers 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, in certain
circumstances without needing to wait for LIBOR to become unavailable.
Several industry commenters encouraged the Bureau to adopt these
proposed provisions. A trade association indicated that these proposed
provisions, if adopted, would allow HELOC creditors and card issuers to
undertake the transition on a timeline that is more manageable and less
likely to cause disruption for both HELOC creditors and consumers. A
few other trade associations indicated that these proposed provisions
allowing transition to a replacement index prior to LIBOR becoming
unavailable, if adopted, would address concerns that LIBOR may continue
to be available but may become less representative or reliable.
Several consumer group commenters and an individual commenter
generally supported proposed Sec. 1026.40(f)(3)(ii)(B) for HELOC
accounts and Sec. 1026.55(b)(7)(ii) for credit card accounts,
indicating that the Bureau should allow HELOC creditors and card
issuers to replace a LIBOR index used under a plan before LIBOR becomes
unavailable. The individual commenter indicated that these provisions
would allow HELOC creditors and card issuers enough lead time to
communicate with borrowers regarding the changes to the index.
A few credit union trade association commenters supported the
Bureau's proposal to allow creditors for HELOCs and card issuers to
make the transition away from a LIBOR index as soon as March 15, 2021,
but requested that the Bureau consider moving this date up even
earlier. Several trade association commenters requested that HELOC
creditors and card issuers be allowed to transition away from a LIBOR
index as early as December 31, 2020.
A trade association commenter representing reverse mortgage
creditors requested that the Bureau coordinate with both the U.S.
Department of Housing and Urban Development (HUD) and the Government
National Mortgage Association (Ginnie Mae) with respect to the March
15, 2021, date in proposed Sec. 1026.40(f)(3)(ii)(B). This commenter
was concerned that if HUD decides to switch the HECM index to a SOFR
index as of January 1, 2021, creditors would need to comply with that
in order to make HECM loans insured by the Federal Housing
Administration (FHA). This commenter indicated that it was not clear
how such a required change by HUD would interact with proposed Sec.
1026.40(f)(3)(ii)(B), if adopted.
Determination that Prime and certain SOFR-based spread-adjusted
indices recommended by the ARRC for consumer products have historical
fluctuations that are substantially similar to those of certain USD
LIBOR indices. The Bureau received comments from several trade
associations and consumer groups on the Bureau's proposed determination
that Prime and certain SOFR-based spread-adjusted indices recommended
by the ARRC have historical fluctuations that are substantially similar
to those of certain USD LIBOR indices. Several trade association
commenters, including trade association commenters that represent
credit unions, supported the Bureau's proposal determining that Prime
has historical fluctuations substantially similar to those of certain
LIBOR indices for purposes of proposed Sec. Sec. 1026.40(f)(3)(ii)(A)
and (B) and 1026.55(b)(7)(i) and (ii). A few of these trade association
commenters that represent credit unions indicated that many credit
unions already use Prime for new open-end plans in lieu of LIBOR or
plan to transition away from LIBOR to Prime for existing open-end
plans. Several trade association commenters supported the Bureau's
proposal determining that certain SOFR-based spread-adjusted indices
recommended by the ARRC have historical fluctuations substantially
similar to those of certain LIBOR indices for purposes of proposed
Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii).
A few consumer group commenters indicated that the Bureau should
not adopt its proposal that Prime has historical fluctuations that are
substantially similar to those of certain LIBOR indices for purposes of
proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i)
and (ii). These consumer group commenters instead indicated that the
Bureau should signal its expectation that industry participants will
select the SOFR-based spread-adjusted indices recommended by ARRC for
consumer products as the replacement index and that failure to do so
will invite increased scrutiny of compliance with Regulation Z. Several
other consumer group commenters indicated that they support the
Bureau's proposal that both Prime and the SOFR-based spread-adjusted
indices recommended by the ARRC have historical fluctuations that are
substantially similar to certain LIBOR indices. These consumer group
commenters believed the SOFR-based spread-adjusted indices recommended
by the ARRC are the best replacement for consumers and the only
appropriate replacement in contracts where the margin cannot be
adjusted. However, these consumer group commenters supported the
Bureau's proposal under proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and
(B) and 1026.55(b)(7)(i) and (ii) that: (1) Prime has substantially
similar historic fluctuations to those of certain LIBOR indices; and
(2) a creditor or card issuer using Prime must comply with the
condition that the replacement index
[[Page 69736]]
and replacement margin result in an APR substantially similar to the
rate at the time the LIBOR became unavailable.
Additional examples of indices that have historical fluctuations
that are substantially similar to those of certain USD LIBOR indices.
Many industry commenters and one individual commenter requested that
the Bureau identify additional indices which meet the Regulation Z
standards in proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and
1026.55(b)(7)(i) and (ii) that the historical fluctuations of those
indices are substantially similar to those of certain tenors of LIBOR.
A few trade associations and several banks requested that the Bureau
consider providing a safe harbor for AMERIBOR[supreg] rates that the
historical fluctuations of those indices would be considered
substantially similar to those of certain LIBOR indices for purposes of
Regulation Z's standards. A few trade associations representing credit
unions requested that the Bureau consider providing a safe harbor for
EFFR that the historical fluctuations of that rate would be considered
substantially similar to those of certain LIBOR indices for purposes of
Regulation Z's standards. A few trade associations requested that the
Bureau consider providing a safe harbor for CMT rates that the
historical fluctuations of those rates would be considered
substantially similar to those of certain LIBOR indices for purposes of
Regulation Z's standards. A trade association commenter representing
reverse mortgage creditors requested that the Bureau expressly provide
a safe harbor for the index prescribed by the HUD Secretary for
replacement of the LIBOR index for HECMs, if that index is different
from the SOFR-spread adjusted indices recommended by ARRC for consumer
products, that the historical fluctuations of that index would be
considered substantially similar to those of certain LIBOR indices for
purposes of Regulation Z's standards. This trade group encouraged the
Bureau, HUD, and Ginnie Mae to conduct statistical analyses to
determine what the effect of such a replacement index will be on, for
example, existing pools of securitized HECMs to ensure that such
replacement index is truly substantially similar.
An individual commenter indicated that the difference among LIBOR
and SOFR rates would trigger issues around the pricing of loans linked
to SOFR and that the Bureau needs to study this issue. This commenter
noted that various lenders have already started looking at other
indices like AMERIBOR[supreg].
Additional guidance on determining whether historical fluctuations
are substantially similar to those of certain USD LIBOR indices.
Several industry commenters requested that the Bureau provide guidance
by defining when the historical fluctuations of an index are
substantially similar to those of a particular LIBOR index for purposes
of proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and
1026.55(b)(7)(i) and (ii). A few trade associations requested that the
Bureau provide guidance on the meaning of ``substantially similar'' and
also adopt a flexible principles-based standard in order to avoid
effectively ``mandating'' any specific index as the replacement for
LIBOR. A credit union trade association commenter indicated that
although the proposal allows the use of an established index with
historical fluctuations substantially similar to those of a LIBOR
index, the proposal does not define what it means for a rate to be
substantially similar. This commenter indicated that credit unions
would benefit from the Bureau clarifying when historical fluctuations
are considered substantially similar to those of a LIBOR index.
Newly established index as replacement for a LIBOR index. The
Bureau received comments from industry, consumer groups, and a
financial services education and consulting firm in relation to the use
of a newly established index for purposes of proposed Sec. Sec.
1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). An industry
trade association indicated that in order to enhance compliance
certainty, the Bureau should provide greater detail to HELOC creditors
and card issuers regarding the factors or considerations that should be
taken into account to determine that an index is newly established for
purposes of proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and
1026.55(b)(7)(i) and (ii). This commenter suggested that such factors
could include the length of time in which an index has been published
or made available, as well as the period of time since the index has
gained broad acceptance or use in financial markets. A financial
services education and consulting firm indicated that the Bureau should
only recognize newly established indices as being appropriate
replacements for LIBOR if they are developed with the same high
standards as SOFR. This commenter indicated its belief that all efforts
should be made to minimize any value transfer in relation to replacing
a LIBOR index.
A few consumer group commenters indicated that the Bureau should
limit its recognition of a newly established index as an appropriate
replacement for LIBOR for purposes of proposed Sec. Sec.
1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). These
consumer group commenters indicated their belief that without any
historical track record, the appropriateness of a newly established
index cannot be determined based only on the fact of it reflecting
LIBOR on a single day.
Several consumer group commenters indicated that the Bureau should
restrict the use of new indices that lack historical data. These
consumer group commenters indicated that if the Bureau allows newly
established indices, the Bureau should require HELOC creditors or card
issuers to demonstrate in advance, with a verifiable methodology, that
the newly established index would have had substantially similar
historical fluctuations as the original index. These consumer group
commenters indicated that the Bureau should base this requirement on
the steps the New York Fed used to evaluate the SOFR and prove that it
was sufficiently similar to the LIBOR index.
Substantially similar rates. The Bureau received several comments
from industry, consumer groups, and individuals in relation to whether
an APR calculated using a replacement index is substantially similar to
the APR using the LIBOR index for purposes of proposed Sec. Sec.
1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii).
A trade association commenter indicated that the Bureau should
provide greater detail as to the process HELOC creditors and card
issuers must use to determine whether an APR calculated using a
replacement index is substantially similar to the APR using the LIBOR
index for purposes of proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and (B)
and 1026.55(b)(7)(i) and (ii). Several consumer group commenters
indicated that the Bureau should interpret ``substantially similar'' to
require HELOC creditors or card issuers to minimize any value transfer
when selecting a replacement index and setting a new margin for
purposes of proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and
1026.55(b)(7)(i) and (ii).
An individual commenter indicated that consumers should be allowed
to refinance their existing debt at no cost into existing market rate
products at their discretion and banks should be forced to not
artificially inflate rates ahead of the anticipated sunset date of
LIBOR.
In determining whether the APRs are substantially similar, the
Bureau received comments from industry and consumer groups on the
Bureau's proposal to use a single date for the index values for
purposes of proposed
[[Page 69737]]
Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii),
rather than using a historical median or average of the index values. A
trade association commenter indicated that: (1) The Bureau should give
HELOC creditors and card issuers the option to either use a single date
for purposes of the index values or use the median value of the
difference between the two indices over a slightly longer period of
time; and (2) such an approach would preserve flexibility and recognize
that different indices will present different challenges with respect
to evaluation on a single date.
A trade association commenter representing reverse mortgage
creditors indicated that the Bureau should require the use of the
historical spread rather than the spread on a specific day in comparing
rates to help ensure such rates are substantially similar to each
other. This commenter: (1) Indicated that a historical median or
average of the spread between the replacement index and LIBOR over the
time period the historical data is available, or 5 years, whichever is
shorter, should be used for purposes of determining whether a rate
using the replacement index is substantially similar to the rate using
the LIBOR index; and (2) raised concerns that the use of a single day
to compare the rates of LIBOR and its replacement could be problematic
if such dates happen to occur during a period of extreme volatility.
Several consumer group commenters indicated that the Bureau should
require HELOC creditors and card issuers to use a historical median
value rather than the value from a single day when comparing the APR
using a replacement index to the APR using the LIBOR index to determine
if the two rates are substantially similar for purposes of proposed
Sec. 1026.40(f)(3)(ii)(A) and (B) and Sec. 1026.55(b)(7)(i) and (ii).
These commenters noted that the ARRC and the International Swaps and
Derivatives Association (ISDA) have endorsed using a historical median
to calculate the spread-adjustment between the LIBOR and SOFR (the
historical median over a five-year lookback period). These commenters
indicated that the Bureau should require HELOC creditors and card
issuers to make a similar calculation for other replacement indices
rather than comparing the original and replacement indices on a single
day.
With respect to the SOFR-based spread-adjusted indices recommended
by the ARRC, a trade association commenter indicated that the Bureau
should clarify that the APR calculated using a spread-adjusted SOFR
index is substantially similar to the APR calculated using a
corresponding LIBOR index, provided the HELOC creditor or card issuer
uses the same margin in effect immediately prior to the transition.
Determination that LIBOR index is no longer available. The Bureau
received comments from industry and consumer groups in relation to
determining when a LIBOR index is no longer available. Several trade
associations commenters indicated that the Bureau should provide
further guidance to HELOC creditors and card issuers to assist them in
making the determination of whether LIBOR (or another index) is
unavailable for purposes of Regulation Z. These commenters indicated
that the Bureau should, for example, provide the triggers used in the
ARRC's recommended contractual fallback language for new closed-end,
residential ARMs as examples of when an index is unavailable, such as
when an index administrator permanently or indefinitely stops providing
the index to the general public, or when an index administrator or its
regulator issues an official public statement that the index is no
longer reliable or representative.\86\ These commenters stated their
belief that such guidance would be beneficial to financial institutions
and consumers and would help provide further certainty, not only for
the upcoming LIBOR transition but for any transitions in the future as
well.
---------------------------------------------------------------------------
\86\ Alt. Reference Rates Comm., ARRC Recommendations Regarding
More Robust LlBOR Fallback Contract Language for New Closed-End,
Residential Adjustable Rate Mortgages (Nov. 15, 2019), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARM_Fallback_Language.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARM_Fallback_Language.pdf</a> (LIBOR Fallback).
---------------------------------------------------------------------------
Another trade association commenter that represents reverse
mortgage creditors indicated that the Bureau should include language in
the final rule clarifying when LIBOR is deemed to be no longer
available. This commenter indicated that the Bureau should permit
lenders to make the determination that a LIBOR index is no longer
available when LIBOR is no longer widely used or supported in the
industry at large (or is becoming less available as time goes on) as
opposed to LIBOR being unavailable (since it is likely that it will
take some time before LIBOR disappears completely), and that if
creditors make this assessment in good faith and switch the index
accordingly, the Bureau will not subject them to sanctions or other
punitive measures.
Another trade association commenter indicated that the Bureau
should clarify the extent to which LIBOR would become unavailable in
the event that it continued to be reported but became unreliable or
that there was uncertainty about its ongoing status. Another trade
association commenter indicated that the Bureau should make a
determination that after year-end 2021, LIBOR is unavailable.
Several trade associations commenters indicated that the Bureau
should provide, applicable to all variable rate loan products, that a
creditor may replace the LIBOR index before the publication of LIBOR is
discontinued, even when the contract only provides for replacement upon
the unavailability of LIBOR. In addition, these trade associations
indicated that the Bureau should make clear that a creditor can replace
both the index and the margin even in cases where the consumer credit
agreement does not explicitly contemplate the replacement of the pre-
existing LIBOR index and margin.
Several consumer group commenters indicated that the Bureau should
either define ``unavailable'' or ban the use of LIBOR indices after
December 2021 in any consumer credit product, including credit cards,
student loans, and mortgages. These consumer group commenters stated
their belief that defining ``unavailable'' would help avoid future
ambiguity for index transitions. Nonetheless, these consumer group
commenters indicated that their preferred approach is for the Bureau to
ban the use of LIBOR indices after December 2021.
The Final Rule
As discussed in the section-by-section analysis of Sec.
1026.40(f)(3)(ii)(A), this final rule adopts Sec. 1026.40(f)(3)(ii)(A)
as proposed. As discussed in the section-by-section analysis of Sec.
1026.40(f)(3)(ii)(B), this final rule adopts Sec. 1026.40(f)(3)(ii)(B)
generally as proposed with revisions to: (1) Set April 1, 2022, as the
date on or after which HELOC creditors are permitted to replace the
LIBOR index used under the plan pursuant to Sec. 1026.40(f)(3)(ii)(B)
prior to LIBOR becoming unavailable; (2) set October 18, 2021, as the
date creditors generally must use under Sec. 1026.40(f)(3)(ii)(B) for
selecting indices values in determining whether the APRs using the
LIBOR index and the replacement index are substantially similar; \87\
and (3) provide that if the replacement index is not published on
October 18, 2021, the creditor generally must use the next calendar day
for
[[Page 69738]]
which both the LIBOR index and the replacement index are published as
the date for selecting indices values in determining whether the APR
based on the replacement index is substantially similar to the rate
based on the LIBOR index.\88\ Revisions to comment 40(f)(3)(ii)-1 as
proposed are discussed in more detail below.\89\
---------------------------------------------------------------------------
\87\ See the section-by-section analysis of Sec.
1026.40(f)(3)(ii)(B) for the rationale for why the Bureau selected
the October 18, 2021, date.
\88\ As set forth in Sec. 1026.40(f)(3)(ii)(B), one exception
is that if the replacement index is the SOFR-based spread-adjusted
index recommended by the ARRC for consumer products to replace the
1-month, 3-month, 6-month, or 1-year USD LIBOR index, the creditor
must use the index value on June 30, 2023, for the LIBOR index and,
for the SOFR-based spread-adjusted index for consumer products, must
use the index value on the first date that index is published, in
determining whether the APR based on the replacement index is
substantially similar to the rate based on the LIBOR index.
\89\ Revisions to comments 40(f)(3)(ii)(A)-1 through -3 as
proposed are discussed in the section-by-section analysis of Sec.
1026.40(f)(3)(ii)(A). Revisions to comments 40(f)(3)(ii)(B)-1
through -3 as proposed are discussed in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(B).
---------------------------------------------------------------------------
This final rule adopts new LIBOR-specific provisions rather than
interpreting when the LIBOR indices are unavailable. The Bureau
declines to adopt the industry commenters' suggestions to provide
further guidance to creditors to assist them in making the
determination of whether LIBOR (or another index) is unavailable for
purposes of Regulation Z. The Bureau also declines the consumer group
commenters' suggestion to either define ``unavailable'' or ban the use
of LIBOR indices after December 2021 in any consumer credit product,
including credit cards, student loans, and mortgages. For several
reasons discussed below, the Bureau determines that it is appropriate
for this final rule to adopt new LIBOR-specific provisions under Sec.
1026.40(f)(3)(ii)(B), rather than interpreting the LIBOR indices to be
unavailable as of a certain date prior to LIBOR being discontinued
under current Sec. 1026.40(f)(3)(ii) (as moved to Sec.
1026.40(f)(3)(ii)(A)).
The Bureau recognizes that the ARRC's recommended contractual
fallback language for new closed-end, residential ARMs provides
triggers for when an index is unavailable under the contract, including
when an index administrator or its regulator issues an official public
statement that the index is no longer reliable or representative.\90\
In March 2021, the FCA (the regulator of LIBOR) issued an official
public statement that all USD LIBOR tenors (other than 1-week and 2-
month USD LIBOR) will either cease to be provided by any administrator
or no longer be representative after June 30, 2023.\91\ The FCA also
indicated that the FCA does not expect that USD LIBOR tenors (other
than 1-week and 2-month USD LIBOR) will become unrepresentative before
June 30, 2023.\92\ The June 30, 2023 date generally will be applicable
to most USD LIBOR tenors used in existing HELOC contracts because the
Bureau understands that HELOCs contracts generally do not use the 1-
week or 2-month USD LIBOR tenors. Given the June 30, 2023 date for when
the FCA will consider most USD LIBOR tenors to be unrepresentative, the
Bureau has concluded that it is not advisable to make a determination
in this final rule that the LIBOR indices are unavailable or
unrepresentative as of the effective date of this final rule (i.e.,
April 1, 2022) for Regulation Z purposes under current Sec.
1026.40(f)(3)(ii) (as moved to Sec. 1026.40(f)(3)(ii)(A)). For similar
reasons, the Bureau is not banning in this final rule use of a LIBOR
index after December 2021 under Regulation Z.
---------------------------------------------------------------------------
\90\ See LIBOR Fallback, supra note 86.
\91\ The FCA stated that the 1-week and 2-month USD LIBOR will
either cease to be provided by any administrator or no longer be
representative after December 31, 2021. Press Release, Fin. Conduct
Auth., FCA announcement on future cessation and loss of
representativeness of the LIBOR benchmarks (Mar. 05, 2021), <a href="https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf">https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf</a>.
\92\ Press Release, Fin. Conduct Auth., Announcements on the end
of LIBOR (May 03, 2021), <a href="https://www.fca.org.uk/news/press-releases/announcements-end-libor">https://www.fca.org.uk/news/press-releases/announcements-end-libor</a>.
---------------------------------------------------------------------------
The Bureau also is concerned that a determination in this final
rule that the LIBOR indices are unavailable as of the effective date of
this final rule (i.e., April 1, 2022) for purposes of current Sec.
1026.40(f)(3)(ii) (as moved to Sec. 1026.40(f)(3)(ii)(A)) could have
unintended consequences on other products or markets. For example, such
a determination could unintentionally cause confusion for creditors for
other products (e.g., ARMs) about whether the LIBOR indices are
unavailable at this time for those products too and could possibly put
pressure on those creditors to replace the LIBOR index used for those
products before those creditors are ready for the change.
Moreover, even if the Bureau interpreted unavailability under
current Sec. 1026.40(f)(3)(ii) (as moved to Sec.
1026.40(f)(3)(ii)(A)) in this final rule to indicate that the LIBOR
indices are unavailable as of the effective date of this final rule
(i.e., April 1, 2022) or as of June 30, 2023, (the date after which the
FCA will consider most USD LIBOR tenors to be unrepresentative even if
the rates are still being published), this interpretation would not
completely solve the contractual issues for creditors whose contracts
require them to wait until the LIBOR indices become unavailable before
replacing the LIBOR index. As discussed below, this final rule does not
override contractual provisions that require creditors to wait until
LIBOR indices become unavailable for replacing the LIBOR index.
Creditors still would need to decide for their specific contracts
whether the LIBOR indices are unavailable. Thus, even if the Bureau
decided that the LIBOR indices are unavailable under Regulation Z as
described above, creditors whose contracts require them to wait until
the LIBOR indices become unavailable before replacing the LIBOR index
essentially would remain in the same position of interpreting their
contracts as they would have been under the current rule.
Thus, this final rule does not interpret when the LIBOR indices are
unavailable for purposes of current Sec. 1026.40(f)(3)(ii) (as moved
to Sec. 1026.40(f)(3)(ii)(A)).
Interaction among Sec. 1026.40(f)(3)(ii)(A) and (B) and
contractual provisions. Comment 40(f)(3)(ii)-1 provides detail on the
interaction among the unavailability provisions in Sec.
1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in Sec.
1026.40(f)(3)(ii)(B), and the contractual provisions that apply to a
HELOC plan. This final rule adopts comment 40(f)(3)(ii)-1 generally as
proposed, with several revisions consistent with the changes this final
rule makes to proposed Sec. 1026.40(f)(3)(ii)(B). Specifically, this
final rule revises comment 40(f)(3)(ii)-1 from the proposal to reflect
that: (1) April 1, 2022, is the date on or after which a creditor may
replace a LIBOR index under Sec. 1026.40(f)(3)(ii)(B) if certain
conditions are met; (2) October 18, 2021, is the date that creditors
generally must use for selecting indices values in determining whether
the APRs using the LIBOR index and the replacement index are
substantially similar under Sec. 1026.40(f)(3)(ii)(B); \93\ and (3) if
the replacement index is not published on October 18, 2021, the
creditor generally must use the next calendar day for which both the
LIBOR index and the replacement index are published as the date for
selecting indices values in determining whether the APR based on the
replacement index is substantially similar to the rate based on the
LIBOR index.\94\
---------------------------------------------------------------------------
\93\ See the section-by-section analysis of Sec.
1026.40(f)(3)(ii)(B) for the rationale for why the Bureau selected
the October 18, 2021, date.
\94\ The one exception is that if the replacement index is the
SOFR-based spread-adjusted index recommended by the ARRC for
consumer products to replace the 1-month, 3-month, 6-month, or 1-
year USD LIBOR index, the creditor must use the index value on June
30, 2023, for the LIBOR index and, for the SOFR-based spread-
adjusted index for consumer products, must use the index value on
the first date that index is published, in determining whether the
APR based on the replacement index is substantially similar to the
rate based on the LIBOR index.
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[[Page 69739]]
Specifically, comment 40(f)(3)(ii)-1 provides that a creditor may
use either the provision in Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B) to replace a LIBOR index used under a HELOC plan
subject to Sec. 1026.40 so long as the applicable conditions are met
for the provision used. This comment makes clear, however, that neither
provision excuses the creditor from noncompliance with contractual
provisions. The Bureau does not find it appropriate for the provisions
in the LIBOR-specific provisions in Sec. 1026.40(f)(3)(ii)(B) to
override the consumer's contract with the creditor. TILA section 111(d)
provides that, subject to certain exceptions, TILA and Regulation Z do
not affect the validity or enforceability of any contract or obligation
under State or Federal law.\95\ Further, Sec. 1026.28(a) generally
provides that provisions of State law that are inconsistent with
certain TILA provisions and the implementing Regulation Z provisions
are preempted to the extent of the inconsistency.\96\ A State law is
inconsistent if it requires a creditor to make disclosures or take
actions that contradict the requirements of the Federal law. The Bureau
believes that contractual provisions that require a creditor to wait to
replace a LIBOR index used under the plan until LIBOR is unavailable
are not inconsistent with Sec. 1026.40(f)(3)(ii)(B) and do not require
a creditor to take action that contradicts Regulation Z. Section
1026.40(f)(3)(ii)(B) permits a creditor to replace a LIBOR index used
under a HELOC plan and adjust the margin on or after April 1, 2022, if
certain conditions are met but does not require the creditor to do so.
If a creditor's contract with the consumer requires the creditor to
wait until the LIBOR index is unavailable before replacing the index,
the creditor can still comply with the contract without violating
Regulation Z. Thus, the Bureau believes that these contractual
provisions are not inconsistent with, and should not be preempted by,
Sec. 1026.40(f)(3)(ii)(B).
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\95\ 15 U.S.C. 1610(d).
\96\ Section 1026.28 generally provides that State law
requirements that are inconsistent with the requirements contained
in chapter 1 (General Provisions), chapter 2 (Credit Transactions),
or chapter 3 (Credit Advertising) of TILA and the implementing
Regulation Z provisions are preempted to the extent of the
inconsistency.
---------------------------------------------------------------------------
To facilitate compliance, comment 40(f)(3)(ii)-1 also provides
examples of the interaction among the unavailability provisions in
Sec. 1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in Sec.
1026.40(f)(3)(ii)(B), and three types of contractual provisions for
HELOCs. Each of these examples assumes that the LIBOR index used under
the plan becomes unavailable after June 30, 2023. Specifically, comment
40(f)(3)(ii)-1.i provides an example where a HELOC contract provides
that a creditor may not replace an index unilaterally under a plan
unless the original index becomes unavailable and provides that the
replacement index and replacement margin will result in an APR
substantially similar to a rate that is in effect when the original
index becomes unavailable. In this case, comment 40(f)(3)(ii)-1.i
explains that the creditor may use the unavailability provisions in
Sec. 1026.40(f)(3)(ii)(A) to replace the LIBOR index used under the
plan so long as the conditions of that provision are met. Comment
40(f)(3)(ii)-1.i also explains that the LIBOR-specific provisions in
Sec. 1026.40(f)(3)(ii)(B) generally provide that a creditor may
replace the LIBOR index if the replacement index value in effect on
October 18, 2021, and the replacement margin will produce an APR
substantially similar to the rate calculated using the LIBOR index
value in effect on October 18, 2021, and the margin that applied to the
variable rate immediately prior to the replacement of the LIBOR index
used under the plan. If the replacement index is not published on
October 18, 2021, the creditor generally must use the next calendar day
for which both the LIBOR index and the replacement index are published
as the date for selecting indices values in determining whether the APR
based on the replacement index is substantially similar to the rate
based on the LIBOR index. The one exception is that if the replacement
index is the SOFR-based spread-adjusted index recommended by the ARRC
for consumer products to replace the 1-month, 3-month, 6-month, or 1-
year USD LIBOR index, the creditor must use the index value on June 30,
2023, for the LIBOR index and, for the SOFR-based spread-adjusted index
for consumer products, must use the index value on the first date that
index is published, in determining whether the APR based on the
replacement index is substantially similar to the rate based on the
LIBOR index. Comment 40(f)(3)(ii)-1.i notes, however, that the creditor
in this example would be contractually prohibited from replacing the
LIBOR index used under the plan unless the replacement index and
replacement margin also will produce an APR substantially similar to a
rate that is in effect when the LIBOR index becomes unavailable.
Comment 40(f)(3)(ii)-1.ii provides an example of a HELOC contract
under which a creditor may not replace an index unilaterally under a
plan unless the original index becomes unavailable but does not require
that the replacement index and replacement margin will result in an APR
substantially similar to a rate that is in effect when the original
index becomes unavailable. In this case, the creditor would be
contractually prohibited from unilaterally replacing a LIBOR index used
under the plan until it becomes unavailable. At that time, the creditor
has the option of using Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of
the applicable provision are met.
This final rule allows the creditor in this case to use either the
unavailability provisions in Sec. 1026.40(f)(3)(ii)(A) or the LIBOR-
specific provisions in Sec. 1026.40(f)(3)(ii)(B). If the creditor uses
the unavailability provisions in Sec. 1026.40(f)(3)(ii)(A), the
creditor must use a replacement index and replacement margin that will
produce an APR substantially similar to the rate in effect when the
LIBOR index became unavailable. If the creditor uses the LIBOR-specific
provisions in Sec. 1026.40(f)(3)(ii)(B), the creditor generally must
use the replacement index value in effect on October 18, 2021, and the
replacement margin that will produce an APR substantially similar to
the rate calculated using the LIBOR index value in effect on October
18, 2021, and the margin that applied to the variable rate immediately
prior to the replacement of the LIBOR index used under the plan. If the
replacement index is not published on October 18, 2021, the creditor
generally must use the next calendar day for which both the LIBOR index
and the replacement index are published as the date for selecting
indices values in determining whether the APR based on the replacement
index is substantially similar to the rate based on the LIBOR
index.\97\
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\97\ The one exception is that if the replacement index is the
SOFR-based spread-adjusted index recommended by the ARRC for
consumer products to replace the 1-month, 3-month, 6-month, or 1-
year USD LIBOR index, the creditor must use the index value on June
30, 2023, for the LIBOR index and, for the SOFR-based spread-
adjusted index for consumer products, must use the index value on
the first date that index is published, in determining whether the
APR based on the replacement index is substantially similar to the
rate based on the LIBOR index.
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Provided that the replacement index is published on October 18,
2021, this
[[Page 69740]]
final rule allows a creditor in this case to use the index values of
the LIBOR index and replacement index on October 18, 2021, under Sec.
1026.40(f)(3)(ii)(B) to meet the ``substantially similar'' standard
[…truncated; see source link]Indexed from Federal Register on December 8, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.