Rule2023-09129
Facilitating the LIBOR Transition Consistent With the LIBOR Act (Regulation Z)
Primary source
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Published
May 11, 2023
Effective
May 15, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB or Bureau) is issuing an interim final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), to reflect the enactment of the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act or Act) and its implementing regulation promulgated by the Board of Governors of the Federal Reserve System (Board). This interim final rule further addresses the planned cessation of most U.S. Dollar (USD) LIBOR tenors after June 30, 2023, by incorporating the Board-selected benchmark replacement for consumer loans into Regulation Z. This interim final rule conforms the terminology from the LIBOR Act and the Board's implementing regulation into relevant Regulation Z open-end and closed- end credit provisions and also addresses treatment of the 12-month USD LIBOR index and its replacement index, including permitting creditors to use alternative language in change-in-terms notice content requirements for situations where the 12-month tenor of the LIBOR index is being replaced consistent with the LIBOR Act. The CFPB requests public comment on this interim final rule.
Full Text
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<title>Federal Register, Volume 88 Issue 91 (Thursday, May 11, 2023)</title>
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[Federal Register Volume 88, Number 91 (Thursday, May 11, 2023)]
[Rules and Regulations]
[Pages 30598-30632]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-09129]
[[Page 30597]]
Vol. 88
Thursday,
No. 91
May 11, 2023
Part V
Consumer Financial Protection Bureau
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12 CFR Part 1026
Facilitating the LIBOR Transition Consistent With the LIBOR Act
(Regulation Z); Interim Final Rule
Federal Register / Vol. 88 , No. 91 / Thursday, May 11, 2023 / Rules
and Regulations
[[Page 30598]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1026
[Docket No. CFPB-2023-0030]
RIN 3170-AB19
Facilitating the LIBOR Transition Consistent With the LIBOR Act
(Regulation Z)
AGENCY: Consumer Financial Protection Bureau.
ACTION: Interim final rule with request for public comment.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB or Bureau) is
issuing an interim final rule amending Regulation Z, which implements
the Truth in Lending Act (TILA), to reflect the enactment of the
Adjustable Interest Rate (LIBOR) Act (the LIBOR Act or Act) and its
implementing regulation promulgated by the Board of Governors of the
Federal Reserve System (Board). This interim final rule further
addresses the planned cessation of most U.S. Dollar (USD) LIBOR tenors
after June 30, 2023, by incorporating the Board-selected benchmark
replacement for consumer loans into Regulation Z. This interim final
rule conforms the terminology from the LIBOR Act and the Board's
implementing regulation into relevant Regulation Z open-end and closed-
end credit provisions and also addresses treatment of the 12-month USD
LIBOR index and its replacement index, including permitting creditors
to use alternative language in change-in-terms notice content
requirements for situations where the 12-month tenor of the LIBOR index
is being replaced consistent with the LIBOR Act. The CFPB requests
public comment on this interim final rule.
DATES: This interim final rule is effective May 15, 2023. Comments must
be received on or before June 12, 2023.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0030 or RIN 3170-AB19, by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#f1c3c1c3c2dcbdb8b3bea3dcb8b7a3b192978193df969e87"><span class="__cf_email__" data-cfemail="3d0f0d0f0e1071747f726f10747b6f7d5e5b4d5f135a524b">[email protected]</span></a>. Include Docket No. CFPB-
2023-0030 or RIN 3170-AB19 in the subject line of the message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--LIBOR, c/o
Legal Division Docket Manager, Consumer Financial Protection Bureau,
1700 G Street NW, Washington, DC 20552. Because paper mail in the
Washington, DC area and at the CFPB is subject to delay, commenters are
encouraged to submit comments electronically.
Instructions: The CFPB encourages the early submission of comments.
All submissions must include the document title and docket number.
Please note the number of the topic on which you are commenting at the
top of each response (you do not need to address all topics). In
general, all comments received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Krista Ayoub, Lanique Eubanks, Angela
Fox, or Kristen Phinnessee, 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#82c1c4d2c0ddc3e1e1e7f1f1ebe0ebeeebf6fbc2e1e4f2e0ace5edf4"><span class="__cf_email__" data-cfemail="50131600120f1133333523233932393c39242910333620327e373f26">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Interim Final Rule
The CFPB is issuing this interim final rule amending Regulation Z,
which implements TILA, for both open-end and closed-end credit to make
changes consistent with the LIBOR Act and its implementing regulation
issued by the Board and further address the planned cessation of
LIBOR.\1\ These changes amend and update the CFPB's Facilitating the
LIBOR Transition (Regulation Z) final rule published in the Federal
Register on December 8, 2021 (2021 LIBOR Transition Final Rule).\2\ In
general, the interim final rule makes several conforming terminology
changes to align with the LIBOR Act and the Board's implementing
regulation. In the 2021 LIBOR Transition Final Rule, the CFPB generally
had provided examples of certain indices, including spread-adjusted
Secured Overnight Financing Rate (SOFR)-based indices, that may meet
the applicable Regulation Z standards (referred to hereafter as SOFR-
based replacement indices) for the 1-month, 3-month, and 6-month tenors
of USD LIBOR, but it reserved judgment about whether to include
references to a 1-year (or 12-month) USD LIBOR index and its SOFR-based
replacement index. The CFPB is now also conforming Regulation Z with
the LIBOR Act and the Board's implementing regulation by adding such
references with respect to the SOFR-based replacement for the 12-month
tenor of LIBOR. This interim final rule does not in any way alter or
modify the Bureau's determination in the 2021 LIBOR Transition Final
Rule in relation to the prime rate as a replacement index. As discussed
in part VI, this interim final rule will take effect on May 15, 2023.
The CFPB solicits comment on this interim final rule.
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\1\ When amending the Official Interpretations, the Office of
the Federal Register requires reprinting of certain sections being
amended in their entirety rather than providing more targeted
amendatory instructions. The sections of regulatory text and the
Official Interpretations 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 interim final
rule to the regulatory text and the Official Interpretations of
Regulation Z. This redline can be found on the Bureau's website, at
<a href="https://www.consumerfinance.gov/compliance/compliance-resources/other-applicable-requirements/libor-index-transition/">https://www.consumerfinance.gov/compliance/compliance-resources/other-applicable-requirements/libor-index-transition/</a>. If any
conflicts exist between the redline and the text of Regulation Z,
its Official Interpretations, or this interim final rule, the
documents published in the Federal Register are the controlling
documents.
\2\ 86 FR 69716 (Dec. 8, 2021).
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A. Open-End Credit
The CFPB is amending several open-end credit provisions in
Regulation Z. First, the CFPB is changing the terminology used in the
2021 LIBOR Transition Final Rule to make it consistent with terminology
in the LIBOR Act and the Board's implementing regulation. Specifically,
as discussed in further detail below, the CFPB is replacing all
references to the ``index based on SOFR recommended by the Alternative
Reference Rates Committee for consumer products'' with ``the Board-
selected benchmark replacement for consumer loans'' and adding a new
definition for that term in Sec. 1026.2(a)(28). For this new
definition and throughout this interim final rule, the CFPB is using
the term 12-month tenor instead of the 1-year tenor with respect to the
USD LIBOR index to align with the terminology used in the LIBOR Act and
the Board's implementing regulation. These changes are set forth in
Sec. 1026.40(f)(3)(ii) and related comments for home equity lines of
credit (HELOCs) and in Sec. 1026.55(b)(7) and related comments for
credit card accounts.
Second, the CFPB is revising the Official Interpretations to
incorporate the Board-selected benchmark replacement for consumer loans
to replace the 12-month LIBOR index, as prescribed by the LIBOR Act and
the Board's implementing regulation, as an index that has historical
fluctuations
[[Page 30599]]
that are substantially similar to those of the 12-month USD LIBOR index
it is intended to replace. Consistent with the LIBOR Act and the
Board's implementing regulation, the Bureau's prior determination of
the spread-adjusted indices based on SOFR recommended by the
Alternative Reference Rates Committee (ARRC) is obsolete given that
``the Board-selected benchmark replacement for consumer loans'' to
replace 1-month, 3-month, and 6-month USD LIBOR indices is the same as
the corresponding spread-adjusted index based on SOFR recommended by
the ARRC for consumer products. These changes are set forth in Sec.
1026.40(f)(3)(ii) and related comments for HELOCs and in Sec.
1026.55(b)(7) and related comments for credit card accounts.
Third, the CFPB is adding the Board-selected benchmark replacement
for consumer loans that would replace the 12-month USD LIBOR index to
the list of indices where a creditor is allowed to use an alternative
method to disclose information about the periodic rate and annual
percentage rate (APR) in change-in-terms notices for HELOCs and credit
card accounts as a result of the replacement of the LIBOR index in
certain circumstances. These changes are set forth in comment 9(c)(1)-4
for HELOCs and in comment 9(c)(2)(iv)-2.ii for credit card accounts.
Fourth, the CFPB is adding the Board-selected benchmark replacement
for consumer loans that would replace the 12-month USD LIBOR index to
the list of indices where a card issuer is allowed to use an
alternative method for determining whether the card issuer can
terminate its obligation under the credit card account rate
reevaluation requirements where the rate applicable immediately prior
to a rate increase was a variable rate calculated using a LIBOR index.
The Bureau also deleted its prior determination in the Official
Interpretations given that ``the Board-selected benchmark replacement
for consumer loans'' to replace 1-month, 3-month, and 6-month USD LIBOR
indices is the same as the corresponding spread-adjusted index based on
SOFR recommended by the ARRC for consumer products. These changes are
set forth in Sec. 1026.59(f)(3) and comment 59(f)-4.
B. Closed-End Credit
The CFPB is also amending the closed-end credit provisions in
Regulation Z. First, the CFPB is changing the terminology used in the
CFPB's 2021 LIBOR Transition Final Rule to make it consistent with
terminology in the LIBOR Act. Specifically, as discussed in further
detail below, the CFPB is replacing the reference to the ``index based
on SOFR recommended by the Alternative Reference Rates Committee for
consumer products'' with a reference to ``the Board-selected benchmark
replacement for consumer loans.'' Second, the CFPB is revising an
illustrative example in the Official Interpretations to incorporate the
Board-selected benchmark replacement for consumer loans to replace the
12-month LIBOR index, as prescribed by the LIBOR Act, as an index that
is comparable to the 12-month USD LIBOR index it is intended to replace
for purposes of the closed-end refinancing provisions. These changes
are set forth in comment 20(a)(3)-ii.B.
II. Background
A. Introduction--Consumer Products Using 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. In the United States,
financial institutions have used LIBOR as a common benchmark rate for a
variety of adjustable-rate consumer financial products, including
mortgages, credit cards, HELOCs, reverse mortgages, and student loans.
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 12-month USD LIBOR plus two percentage
points.
LIBOR is set to expire on June 30, 2023. 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.
B. CFPB's 2021 LIBOR Transition Final Rule
On December 8, 2021, the CFPB issued the 2021 LIBOR Transition
Final Rule generally to address the expected discontinuance of most
U.S. Dollar (USD) tenors of LIBOR in June 2023.\3\ The 2021 LIBOR
Transition Final Rule, among other things, amended open-end and closed-
end provisions of Regulation Z to provide examples of replacement
indices to USD LIBOR tenors that meet certain Regulation Z standards.
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\3\ Id.
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For each of these open-end and closed-end provisions, while the
CFPB generally provided examples of certain indices, including SOFR-
based replacement indices for 1-month, 3-month, and 6-month tenors of
USD LIBOR, the CFPB reserved judgment about whether to include a SOFR-
based replacement index for the 1-year (now being referred to as 12-
month in this interim final rule) USD LIBOR index until it obtained
additional information. The CFPB stated that once it knew which SOFR-
based index the ARRC would recommend to replace the 12-month USD LIBOR
index for consumer products, the Bureau would consider determining
whether the replacement index and replacement margin met the
appropriate standards in Regulation Z and would then consider whether
to codify that determination in a supplemental final rule, or otherwise
announce that determination. Most provisions of the 2021 LIBOR
Transition Final Rule were effective on April 1, 2022.\4\
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\4\ October 1, 2023, is the effective date for an amendment that
removes two ``Legacy'' post-consummation change-in-terms forms H-
4(D)(2) and H-4(D)(4) in appendix H of part 1026 that still
reference LIBOR, and prevents these two forms from being used to
demonstrate compliance with part 1026.20.
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C. The LIBOR Act
On March 15, 2022, Congress enacted the LIBOR Act as part of the
Consolidated Appropriations Act, 2022.\5\ Among other things, the LIBOR
Act provides that the Board may identify a replacement index based on
SOFR published by the Federal Reserve Bank of New York (or a successor
administrator), including tenor spread adjustments, to replace the 1-
month, 3-month, 6-month, and 12-month tenors of USD LIBOR for any LIBOR
contracts that do not otherwise specify a replacement rate fallback
provision or method for selecting a fallback rate.\6\ The LIBOR Act
(and the Board's subsequent final rule, discussed below) identify these
replacement indices as the ``Board-selected benchmark replacement''
index.\7\
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\5\ Public Law 117-103, div. U, 136 Stat. 825 (2022).
\6\ LIBOR Act section 104, 136 Stat. 828.
\7\ LIBOR Act section 103(6), 136 Stat. 826. See also 12 CFR
253.2 and 253.4.
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The LIBOR Act provides certain safe harbors for use of a Board-
selected benchmark replacement for consumer loans, including stating
that the Board-
[[Page 30600]]
selected benchmark replacements constitute replacement indices that
have historical fluctuations that are substantially similar to those of
LIBOR for purposes of TILA \8\ and regulations promulgated under that
statute.\9\
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\8\ 15 U.S.C. 1601 et seq.
\9\ Safe harbors provided by the LIBOR Act include, among other
things, determination that use of the identified replacement indices
constitute a reasonable, comparable, or analogous rate, index, or
term for LIBOR, a replacement that is based on a methodology or
information that is similar or comparable to LIBOR, and a
replacement that has historical fluctuations that are substantially
similar to those of LIBOR for purposes of TILA and its implementing
regulations. See LIBOR Act section 105(a), 136 Stat. 830.
Additionally, the safe harbors from the LIBOR Act provide that use
of the identified replacement indices do not constitute, among other
things, a breach of a LIBOR contract. See LIBOR Act section 105(b),
136 Stat. 830. Further, the LIBOR Act provides that creditors using
the identified replacement indices under the specified conditions in
the Act shall not be subject to any claim or cause of action in law
or equity or request for equitable relief, or have liability for
damages, arising out of the selection or use of the identified
replacement index in the Act and the implementation of the
identified changes in the Act. See LIBOR Act section 105(c), 136
Stat. 830.
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D. Board's 2022 LIBOR Act Final Rule
The Board issued a final rule to implement the LIBOR Act on
December 16, 2022, effective February 27, 2023 (Board's 2022 LIBOR Act
Final Rule).\10\ Among other things, the Board's final rule established
benchmark replacements for contracts governed by U.S. law that
reference certain tenors of USD LIBOR, including those of 1-month, 3-
month, 6-month,\11\ and 12-month tenors, that do not have terms that
provide for the use of a clearly defined and practicable replacement
benchmark rate following the cessation of LIBOR.\12\ The LIBOR Act, and
the Board's implementing regulation, provide for certain adjustments in
general for LIBOR contracts and more specifically for LIBOR contracts
that are consumer loans. Consistent with LIBOR Act, the final rule
identified each of those indices as a ``Board-selected benchmark
replacement'' for consumer loans, thereby meeting the safe harbor
criteria in the LIBOR Act.
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\10\ 88 FR 5204 (Jan. 26, 2023).
\11\ While the Board uses ``one-, three-, and six-month'' to
describe these tenors of USD LIBOR, for consistency with this
interim final rule, this notice refers to those tenors as 1-month,
3-month, or 6-month tenors, respectively.
\12\ 12 CFR 253.4(b)(2).
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The final rule provided that the Board-selected benchmark
replacements for LIBOR contracts that are consumer loans using 1-month,
3-month, 6-month, or 12-month tenors of USD LIBOR during the one-year
period beginning on the LIBOR replacement date shall be the
corresponding 1-month, 3-month, 6-month, or 12-month CME Term SOFR plus
an amount that transitions linearly for each business day during that
period from the difference between the relevant CME Term SOFR and the
relevant LIBOR tenor determined as of the day immediately before the
LIBOR replacement date to the applicable tenor spread adjustment
identified in the final rule.\13\ After expiration of that first-year
period, the rule provided that the Board-selected benchmark
replacements shall be the corresponding 1-month, 3-month, 6-month, or
12-month CME Term SOFR plus the applicable tenor spread adjustment
identified in the final rule.\14\ Effectively, the Board-selected
benchmark replacements for LIBOR contracts that are consumer loans as
set forth in the Board's final rule are the indices based on SOFR
recommended by the ARRC for consumer products for the 1-month, 3-month,
6-month and 12-month USD LIBOR tenors.\15\
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\13\ 12 CFR 253.4(b)(2)(i)(B).
\14\ 12 CFR 253.4(b)(2)(ii)(B).
\15\ Alt. Reference Rates Comm., ARRC Recommended Fallbacks for
Implementation of its Hardwired Fallback Language (Mar. 15, 2023),
<a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-statement-on-1-3-6-12-month-USD-LIBOR.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-statement-on-1-3-6-12-month-USD-LIBOR.pdf</a>.
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III. Legal Authority
A. Section 1022 of the Dodd-Frank Act
The CFPB is issuing this interim final rule under Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act) section
1022(b)(1) \16\ and TILA section 105(a). Dodd-Frank Act section
1022(b)(1) authorizes the CFPB 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 thereof.'' \17\ Section 1022(b)(1) of the Dodd-Frank
Act also authorizes the CFPB 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 thereof.'' \18\ Among other statutes, Title X of the
Dodd-Frank Act and TILA are Federal consumer financial laws.\19\
Accordingly, in issuing this interim final rule, the CFPB 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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\16\ Public Law 111-203, section 1022(b)(1), 124 Stat. 1376,
1980 (2010).
\17\ 12 U.S.C. 5512(b)(1).
\18\ Id.
\19\ Dodd-Frank Act section 1002(14), 123 Stat. 1957 (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)(O), 123 Stat. 1957 (defining
``enumerated consumer laws'' to include TILA).
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B. The Truth in Lending Act
TILA section 105(a), as amended by the Dodd-Frank Act, directs the
CFPB 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 CFPB, are necessary or
proper to effectuate the purposes of TILA, to prevent circumvention or
evasion thereof, or to facilitate compliance.\20\ 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.
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\20\ 15 U.S.C. 1604(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 CFPB's section 105(a)
authority by amending that section to provide express authority to
prescribe regulations that contain ``additional requirements'' that the
CFPB 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) authority 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).\21\
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\21\ 15 U.S.C. 1602(bb).
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For the reasons discussed in this document, the CFPB is amending
Regulation Z with respect to certain provisions that impact the
transition from LIBOR indices to other indices to carry out TILA's
purposes, including such additional requirements, adjustments, and
exceptions as, in the CFPB's judgment, are necessary and proper to
carry out the purposes of TILA, prevent circumvention or evasion
[[Page 30601]]
thereof, or to facilitate compliance. In developing these aspects of
this rule pursuant to its authority under TILA section 105(a), the CFPB
has considered the purposes of TILA, including ensuring meaningful
disclosures, facilitating consumers' ability to compare credit terms,
and helping consumers avoid the uninformed use of credit, and the
findings of TILA, including strengthening competition among financial
institutions and promoting economic stabilization.
IV. Administrative Procedure Act
The Administrative Procedure Act (APA) does not require notice and
opportunity for public comment if an agency for good cause finds that
notice and public comment are impracticable, unnecessary, or contrary
to the public interest.\22\ Similarly, publication of this interim
final rule at least 30 days before its effective date is not required
where the CFPB has identified good cause for a different effective
date.\23\
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\22\ 5 U.S.C. 553(b)(B).
\23\ 5 U.S.C. 553(d)(3).
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The CFPB finds that prior notice and public comment are unnecessary
given the specific nature of the changes contained in this interim
final rule.
First, this interim final rule makes technical changes to conform
the nomenclature of Regulation Z to the nomenclature of the LIBOR Act
and the Board's implementing regulation. Most notably, this interim
final rule substitutes the phrase ``the Board-selected benchmark
replacement for consumer loans'' for the phrase ``spread-adjusted
indices based on SOFR recommended by the ARRC for consumer products.''
As discussed in part II, in the context of consumer loans, the two
phrases are synonymous. In light of the LIBOR Act and the Board's
implementing regulation, there is minimal, if any, basis for
substantive disagreement regarding this replacement of superseded
nomenclature.
Second, this interim final rule acknowledges the determinations
made by Congress in the LIBOR Act that the Board-selected benchmark
replacements for consumer loans are comparable indices and, for
purposes of Regulation Z, have ``historical fluctuations that are
substantially similar'' to the LIBOR indices they replace.\24\ The
enactment of the LIBOR Act and the Board's implementing rule resolved
the ambiguity that existed at the time the CFPB issued its 2021 LIBOR
Transition Final Rule as to which, if any, SOFR-based replacement index
for the 12-month (formerly called the 1-year) tenor would meet these
standards. That is the issue that the CFPB needed to reserve judgment
about at the time it issued its 2021 LIBOR Transition Final Rule
because the ARRC had not yet recommended a SOFR-based replacement index
for that tenor; thus, there was no such tenor for the CFPB to analyze
at the time. In light of the LIBOR Act and the Board's implementing
regulation, the applicable 1-month, 3-month, 6-month, and 12-month
tenor of the Board-selected benchmark replacements for consumer loans
meet the relevant standards; there is minimal, if any, basis for
substantive disagreement on this issue.
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\24\ 12 U.S.C. 5804(a)(2), (3), (5).
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Third, and closely related to the first three changes, this interim
final rule removes prior Bureau determinations that were rendered
obsolete by the LIBOR Act and the Board's implementing regulation.
These determinations concerned the comparability of, and the
substantial similarity of the historical fluctuations of, the spread-
adjusted index based on SOFR recommended by the ARRC for consumer
products compared to the LIBOR index it would replace. See comments
40(f)(3)(ii)(A)-2.ii, 40(f)(3)(ii)(B)-1.ii, 55(b)(7)(i)-1.ii.,
55(b)(7)(ii)-1.ii, and 59(f)-4. But, as discussed above, the spread-
adjusted indices based on SOFR recommended by the ARRC for consumer
products are the same as ``the Board-selected benchmark replacement for
consumer loans.'' In light of the LIBOR Act and the Board's
implementing regulation, there is minimal, if any, basis for
substantive disagreement on this issue.
Fourth, the CFPB's 2021 LIBOR Transition Proposed Rule already
solicited comment on the substance of most of the provisions that are
now amended by this interim final rule, making further notice and
comment on them duplicative. Specifically, the proposed rule solicited
comment on determining that the spread-adjusted index based on SOFR
recommended by the ARRC for consumer products for 1-month, 3-month, 6-
month, and 1-year or 12-month LIBOR would be comparable to, and have
historical fluctuations that substantially similar to, the LIBOR index
it would replace.\25\ The CFPB's 2021 LIBOR Transition Final Rule,
promulgated after notice and an opportunity for public comment, made
such determinations with respect to the 1-month, 3-month, and 6-month
tenors, but explained in the preamble that the Bureau was reserving
judgment on making such determinations with respect to the 1-year or
12-month tenor, leaving those determinations open until the CFPB
obtained further information.\26\ The need for further information has
since been obviated by the determinations made by Congress in the LIBOR
Act discussed above.
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\25\ See 85 FR 36938, 36945-47, 36972, 36987, 36994 (June 18,
2020).
\26\ See 86 FR 69716, 69723, 69730 (Dec. 8, 2021).
---------------------------------------------------------------------------
The CFPB also finds good cause to waive the 30-day delay in
effective date. The CFPB is cognizant of the need for these amendments
to take effect quickly and thereby remove any confusion that may exist
after the Board's regulations implementing the LIBOR Act became
effective on February 27, 2023. In particular, making this interim
final rule effective at least 45 days prior to the planned cessation of
LIBOR on June 30, 2023, is necessary to ensure that consumers with
credit card accounts currently using a LIBOR index can receive timely
change-in-terms notices when their account is changed to the Board-
selected benchmark replacement.
V. Section-by-Section Analysis
Section 1026.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(28) The Board-Selected Benchmark Replacement for Consumer Loans
This interim final rule adds ``the Board-selected benchmark
replacement for consumer loans'' as a new defined term in Sec.
1026.2(a)(28) to reference a specific replacement index for consumer
products when LIBOR becomes unavailable. As discussed in part II above,
the LIBOR Act and the Board's implementing regulation defined ``Board-
selected benchmark replacement'' to mean a benchmark replacement
identified by the Board that is based on SOFR, including any tenor
spread adjustment by the Board.\27\ The LIBOR Act, and the Board's
implementing regulation, provide for certain adjustments in general for
LIBOR contracts and more specifically for LIBOR contracts that are
consumer loans. Accordingly, for purposes of promoting the informed use
of consumer credit under Regulation Z, the CFPB is creating a new term
that is specific to consumer loans. New Sec. 1026.2(a)(28) defines
``the Board-selected benchmark replacement for consumer loans'' as the
SOFR-based index selected by the Board, to replace, as applicable, the
1-month, 3-month, 6-month, or 12-month tenors of USD LIBOR and uses the
term 12-month tenor instead of 1-year tenor to align with the
terminology used in the LIBOR
[[Page 30602]]
Act and the Board's implementing regulation. The definition references
the LIBOR Act and the Board's implementing rule for additional clarity.
The Board-selected benchmark replacements for consumer loans are tenors
of the USD IBOR Cash Fallback index for consumer products, which uses
the same methodology that the ARRC recommended for SOFR-based
replacement indices for consumer products.\28\ As such, these terms
identify the same index, and the addition of the new defined term and
cross-references to it throughout this interim final rule are merely
for consistency with the Act and ease of reading. The CFPB solicits
feedback on these changes of the interim final rule.
---------------------------------------------------------------------------
\27\ LIBOR Act section 104(e), 136 Stat. 829 (codified at 12
U.S.C. 5803(e)); 12 CFR 253.4.
\28\ See 88 FR 5204, 5211-15 (Jan. 26, 2023); see also Alt.
Reference Rates Comm., ARRC Recommended Fallbacks for Implementation
of its Hardwired Fallback Language (Mar. 15, 2023), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-statement-on-1-3-6-12-month-USD-LIBOR.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-statement-on-1-3-6-12-month-USD-LIBOR.pdf</a>.
---------------------------------------------------------------------------
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 creditor must mail or deliver the notice 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 creditor must give the notice, however, before the
effective date of the change.
A creditor 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.\29\
---------------------------------------------------------------------------
\29\ 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).
---------------------------------------------------------------------------
Comment 9(c)(1)-4 provides that if: (1) a creditor is replacing a
LIBOR index with the index based on ``SOFR recommended by the
Alternative Reference Rates Committee for consumer products to replace
the 1-month, 3-month, or 6-month U.S. Dollar LIBOR index''; (2) ``the
creditor is not changing the margin used to calculate the variable rate
as a result of the replacement''; and (3) 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, then the creditor
may comply with any requirement to disclose the amount of the new rate
(as calculated using the new index), or a change in the periodic rate
or the corresponding APR (as calculated using the replacement index),
based on the best information reasonably available, clearly stating
that the disclosure is an estimate. Comment 9(c)(1)-4 provides the
example that, in this situation, 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.
For the reasons discussed below, the CFPB is making several changes
to comment 9(c)(1)-4. First, the CFPB is replacing references to the
spread-adjusted index based on SOFR recommended by the ARRC for
consumer products with the new term ``the Board-selected benchmark
replacement for consumer loans'' to align terminology in the rule with
the LIBOR Act and the Board's 2022 LIBOR Act Final Rule. As discussed
in the section-by-section analysis for Sec. 1026.2(a)(28), this
interim final rule also defines the term ``the Board-selected benchmark
replacement for consumer loans.'' Revised comment 9(c)(1)-4 includes a
cross-reference to that definition. As discussed above, these terms
identify the same index, and the change is merely for consistency with
the Act and ease of reading.
Second, the CFPB is expanding comment 9(c)(1)-4 to include a
replacement index for the 12-month USD LIBOR, which was not previously
addressed in the 2021 LIBOR Transition Final Rule. As discussed in the
Background section, in the 2021 LIBOR Transition Final Rule, the CFPB
generally provided examples of SOFR-based replacement indices for the
1-month, 3-month, and 6-month tenors of USD LIBOR, but reserved
judgment about whether to include a reference to the 12-month (formerly
called the 1-year) USD LIBOR index in comment 9(c)(1)-4 until it
obtained additional information. Since the CFPB promulgated the 2021
LIBOR Transition Final Rule, the LIBOR Act was enacted, and the Board
issued its final rule implementing the Act. By operation of the LIBOR
Act, all tenors of the Board-selected benchmark replacement constitute
a ``comparable index'' to, and have ``historical fluctuations that are
substantially similar to'' the LIBOR tenors they replace.\30\ Thus, the
CFPB is revising comment 9(c)(1)-4 to also apply to the replacement of
the 12-month USD LIBOR index with the Board-selected benchmark
replacement for consumer loans, facilitating compliance with the
advance notice requirements for change-in-terms notices.
---------------------------------------------------------------------------
\30\ LIBOR Act section 105(a)(2), (3) and (5), 136 Stat. 830.
---------------------------------------------------------------------------
While section 104(f) of the LIBOR Act provides that nothing in the
Act ``may be construed to alter or impair-- . . . (5) any provision of
Federal consumer financial law that--(A) requires creditors to notify
borrowers regarding a change-in-terms,'' the CFPB is not relying on the
LIBOR Act for authority to revise comment 9(c)(1)-4. However, in this
unique circumstance, the CFPB has previously stated a need to permit
creditors permission to provide estimates for change-in-terms notices,
and interprets Sec. 1026.5(c) to be consistent with revised comment
9(c)(1)-4 in doing so. 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. Because of the unique circumstances of the LIBOR transition,
the CFPB previously amended comment 9(c)(1)-4 to provide permit
creditors the ability to provide estimates for disclosures previously
excluded from Sec. 1026.5(c). The revisions to comment 9(c)(1)-4 in
this interim final rule are consistent with this reasoning. Thus, the
revisions to comment 9(c)(1)-4 are consistent with revisions discussed
below that provide
[[Page 30603]]
that if a creditor uses the Board-selected benchmark replacement for
consumer loans to replace 12-month USD LIBOR 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.\31\
---------------------------------------------------------------------------
\31\ See comments 40(f)(3)(ii)(A)-3 and (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.
---------------------------------------------------------------------------
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, the
Board-selected benchmark replacement for consumer loans to replace the
12-month USD LIBOR, like the 1-month, 3-month, and 6-month USD LIBOR
replacement tenors, 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. The
revisions to comment 9(c)(1)-4 are 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 Board-selected benchmark
replacement for consumer loans to replace 12-month USD LIBOR being
published, so that creditors are not left without an index to use on
the account after the Board-selected benchmark replacement for consumer
loans to replace 12-month USD LIBOR is published, but before it becomes
effective on the account.
As is the case for the Board-selected benchmark replacements for
consumer loans for 1-month, 3-month, and 6-month USD LIBOR tenors, the
Bureau has determined that the information described in revised comment
9(c)(1)-4 sufficiently notifies consumers of the estimated periodic
rate and APR as calculated using the Board-selected benchmark
replacement for consumer loans to replace 12-month USD LIBOR, even
though the Board-selected benchmark replacement for consumer loans is
not being published at the time the notice is sent, as long as the
Board-selected benchmark replacement for consumer loans is published by
the time the replacement of the index takes effect on the account. 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. The CFPB solicits comment on
these changes in the interim final rule.
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
9(c)(2)(iv) Disclosure Requirements
TILA section 127(i)(1), which was added by the Credit CARD Act of
2009,\32\ 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.\33\ 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 CFPB, in
terms (other than APRs) of the cardholder agreement not later than 45
days prior to the effective date of the change.\34\
---------------------------------------------------------------------------
\32\ Public Law 111-24, 123 Stat. 1734 (2009).
\33\ 15 U.S.C. 1637(i)(1).
\34\ 15 U.S.C. 1637(i)(2).
---------------------------------------------------------------------------
Section 1026.9(c)(2)(i)(A) provides that for open-end 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, in relevant part, a change in the terms
required to be disclosed under Sec. 1026.6(b)(1) and (2), an increase
in the required minimum periodic payment, or a change to a term
required to be disclosed under Sec. 1026.6(b)(4). The index that is
replacing the LIBOR index pursuant to Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii) is a disclosure required under Sec.
1026.6(b)(2)(i)(A) and (4)(ii)(B) and thus, is a term that meets the
definition of a ``significant change in account terms.'' As a result, a
creditor must provide a change-in-terms notice disclosing the index
that is replacing the LIBOR index.
Section 1026.9(c)(2)(iv) provides the disclosure requirements for
this written notice. Comment 9(c)(2)(iv)-2.i provides details about the
general disclosure requirements if the creditor is changing the index
use to calculate a variable rate. 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.\35\
---------------------------------------------------------------------------
\35\ 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.
---------------------------------------------------------------------------
Comment 9(c)(2)(iv)-2.ii provides additional details on how a
creditor may comply with the disclosure requirements under Sec.
1026.9(c)(2)(iv) 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. This comment provides that if: (1) 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''; (2) the creditor is
not changing the margin used to calculate the variable rate as a result
of the replacement; and (3) 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, then the 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. Comment
9(c)(2)(iv)-2.ii provides the example that, in this situation, 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.
[[Page 30604]]
For the reasons discussed below, the CFPB is making several changes
to comment 9(c)(2)(iv)-2.ii. First, the CFPB is replacing references to
the spread-adjusted index based on SOFR recommended by the ARRC for
consumer products with the new term ``the Board-selected benchmark
replacement for consumer loans'' to align terminology in the rule with
the LIBOR Act and the Board's 2022 LIBOR Act Final Rule. As discussed
in the section-by-section analysis for Sec. 1026.2(a)(28), this
interim final rule also defines the term ``the Board-selected benchmark
replacement for consumer loans.'' Revised comment 9(c)(2)(iv)-2.ii
includes a cross-reference to that definition. As discussed above,
these terms identify the same index, and the change is merely for
consistency with the Act and ease of reading.
Second, the CFPB is expanding comment 9(c)(2)(iv)-2.ii to include a
replacement index for the 12-month USD LIBOR, which was not previously
addressed in the 2021 LIBOR Transition Final Rule. As discussed in the
Background section, in the 2021 LIBOR Transition Final Rule, the CFPB
generally provided examples of SOFR-based replacement indices for 1-
month, 3-month, and 6-month tenors of USD LIBOR, but reserved judgment
about whether to include a reference to the 12-month (formerly called
the 1-year) USD LIBOR index in comment 9(c)(2)(iv)-2.ii until it
obtained additional information. Since the CFPB promulgated the 2021
LIBOR Transition Final Rule, the LIBOR Act was enacted, and the Board
issued its final rule implementing the Act. By operation of the LIBOR
Act, all tenors of the Board-selected benchmark replacements constitute
a ``comparable index'' to, and have ``historical fluctuations that are
substantially similar to'' the LIBOR tenors they replace.\36\ Thus, the
CFPB is revising comment 9(c)(2)(iv)-2.ii to also apply to the
replacement of the 12-month USD LIBOR index with the Board-selected
benchmark replacement for consumer loans, facilitating compliance with
the advance notice requirements for change-in-terms notices.
---------------------------------------------------------------------------
\36\ LIBOR Act section 105(a)(2), (3) and (5), 136 Stat. 830.
---------------------------------------------------------------------------
While section 104(f) of the LIBOR Act provides that nothing in the
Act ``may be construed to alter or impair-- . . . (5) any provision of
Federal consumer financial law that--(A) requires creditors to notify
borrowers regarding a change-in-terms,'' the CFPB is not relying on the
LIBOR Act for authority to revise comment 9(c)(2)(iv)-2.ii. Instead, in
this unique circumstance, the CFPB interprets Sec. 1026.5(c) to be
consistent with revised 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. Revised comment
9(c)(2)(iv)-2.ii also is consistent with revisions discussed below that
provide that if a creditor uses the Board-selected benchmark
replacement for consumer loans to replace the 12-month USD LIBOR 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.\37\
---------------------------------------------------------------------------
\37\ See comments 55(b)(7)(i)-2 and (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.
---------------------------------------------------------------------------
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, the
Board-selected benchmark replacement for consumer loans to replace the
12-month USD LIBOR index, like the 1-month, 3-month, and 6-month USD
LIBOR replacement tenors, 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 interim 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 Board-selected benchmark
replacement for consumer loans to replace the 12-month USD LIBOR index
being published, so that creditors are not left without an index to use
on the account after the Board-selected benchmark replacement for
consumer loans to replace the 12-month USD LIBOR index is published,
but before it becomes effective on the account.
As is the case for the Board-selected benchmark replacements for
consumer loans for 1-month, 3-month, and 6-month USD LIBOR tenors, the
Bureau has determined that the information described in revised comment
9(c)(2)(iv)-2.ii sufficiently notifies consumers of the estimated rate
calculated using the Board-selected benchmark replacement for consumer
loans to replace the 12-month USD LIBOR index, even though the Board-
selected benchmark replacement for consumer loans to replace the 12-
month USD LIBOR index is not being published at the time the notice is
sent, as long as the Board-selected benchmark replacement for consumer
loans to replace the 12-month USD LIBOR index is published by the time
the replacement of the index takes effect on the account. 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. The CFPB solicits comment on these
changes in the interim final rule.
Section 1026.20 Disclosure Requirements Regarding Post-Consummation
Events 20(a) Refinancings
Section 1026.20 includes disclosure requirements regarding post-
consummation events for closed-end credit. Section 1026.20(a) and its
Official Interpretations 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.
The comment also includes an illustrative example which provides 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
[[Page 30605]]
replacement index is a comparable index to the corresponding USD LIBOR
index.\38\ Comment 20(a)-3.iv provides examples of the types of factors
that may need to be considered to determine whether a replacement index
is comparable to a particular LIBOR index for closed-end transactions.
---------------------------------------------------------------------------
\38\ By ``corresponding USD LIBOR index,'' the Bureau meant the
specific USD LIBOR index for which the ARRC recommended 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.
---------------------------------------------------------------------------
For the reasons discussed below, the CFPB is making several changes
to comment 20(a)-3.ii.B. First, the CFPB is replacing references to the
term spread-adjusted index based on SOFR recommended by the ARRC for
consumer products with the term ``the Board-selected benchmark
replacement for consumer loans'' to align terminology in the rule with
the LIBOR Act and the Board's 2022 LIBOR Act Final Rule. As discussed
in the section-by-section analysis for Sec. 1026.2(a)(28), this
interim final rule also defines the term ``the Board-selected benchmark
replacement for consumer loans.'' Revised comment 20(a)-3.ii.B includes
a cross-reference to that definition. As discussed above, these terms
identify the same index, and the change is merely for consistency with
the Act and ease of reading.
Second, the CFPB is expanding language in the example set forth in
comment 20(a)-3.ii.B to include a replacement index for the 12-month
USD LIBOR, which was not previously addressed in the 2021 LIBOR
Transition Final Rule. As discussed in the Background section, in the
2021 LIBOR Transition Final Rule, the CFPB generally provided examples
of SOFR-based replacement indices for 1-month, 3-month, and 6-month
tenors of USD LIBOR, but reserved judgment about whether to include a
reference to the 12-month (formerly called the 1-year) USD LIBOR index
in comment 20(a)-3.ii.B until it obtained additional information. Since
the CFPB promulgated the 2021 LIBOR Transition Final Rule, the LIBOR
Act was enacted, and the Board issued its final rule implementing the
Act. By operation of the LIBOR Act, all tenors of the Board-selected
benchmark replacements are considered to constitute a ``comparable
index,'' and have ``historical fluctuations that are substantially
similar to,'' the LIBOR tenors they replace.\39\ As such, as with the
existing examples in comment 20(a)-3.ii.B for the 1-month, 3-month, and
6-month USD LIBOR tenors, in this interim final rule the CFPB is
extending the example to also apply to the replacement of the 12-month
USD LIBOR index with the Board-selected benchmark replacement for
consumer loans to facilitate the LIBOR transition. The example in
revised comment 20(a)-3.ii.B provides a creditor does not add a
variable-rate feature by changing the index of a variable-rate
transaction from the 12-month USD LIBOR tenor to the applicable tenor
of the Board-selected benchmark replacement.
---------------------------------------------------------------------------
\39\ LIBOR Act section 105(a)(2), (3) and (5), 136 Stat. 830.
---------------------------------------------------------------------------
Third, the CFPB is revising comment 20(a)-3.iv by adding an
exception for the Board-selected benchmark replacements for consumer
loans, as defined in new Sec. 1026.2(a)(28). When using the Board-
selected benchmark replacement for consumer loans, a creditor need not
consider the types of factors used to determine whether a replacement
index is comparable to a particular LIBOR tenor for closed-end credit.
Because the Board's final rule, in implementing the LIBOR Act, has
determined that the Board-selected benchmark replacements for consumer
loans are indices that are comparable to their respective LIBOR tenors,
and the Bureau has determined in this interim final rule that this
index meets Regulation Z's ``comparable'' standard with respect to a
particular LIBOR index, the factors need not be considered. While the
CFPB had already applied the factors to the SOFR-based 1-month, 3-
month, and 6-month LIBOR tenor replacement indices in its 2021 LIBOR
Transition Final Rule, by operation of law, the factors now also need
not be considered with respect to the Board-selected benchmark
replacement for consumer loans for the 12-month LIBOR tenor in order
for the index to satisfy Regulation Z's ``comparable'' standard. The
CFPB solicits comments on these changes in the interim final rule.
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).\40\ 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.\41\ 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).
---------------------------------------------------------------------------
\40\ 15 U.S.C. 1647(c).
\41\ 15 U.S.C. 1647(c)(2)(A).
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Section 1026.40(f)(3)(ii)(A) provides that a creditor may change
the index and margin used under the HELOC plan if the original index is
no longer available, the replacement index has historical fluctuations
substantially similar to that of the original index, and the
replacement index and replacement margin would have resulted in an APR
substantially similar to the rate in effect at the time the original
index became unavailable. Section 1026.40(f)(3)(ii)(A) also provides if
the replacement index is newly established and therefore does not have
any rate history, it may be used if it and the replacement margin will
produce an APR substantially similar to the rate in effect when the
original index became unavailable. Section 1026.40(f)(3)(ii)(B)
contains LIBOR-specific provisions that permit creditors for HELOC
plans subject to Sec. 1026.40 that use a LIBOR index for calculating
variable rates to replace the LIBOR index and change the margins for
calculating the variable rates on or after April 1, 2022, in certain
circumstances. 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.
As discussed in more detail below in this section-by-section
analysis, this interim final rule makes a number of changes with
respect to Sec. Sec. 1026.40(f)(3)(ii), (f)(3)(ii)(A), (f)(3)(ii)(B),
and related Official Interpretations. In general, it: (1) replaces
references to the spread-adjusted index based on SOFR recommended by
the ARRC for consumer products with the new defined term ``the Board-
selected benchmark replacement for consumer loans''; (2) replaces
references to the 1-year USD LIBOR index with the 12-month USD LIBOR
index; (3) expands the Official Interpretations to include a
[[Page 30606]]
replacement index for the 12-month USD LIBOR, which was not previously
addressed in the 2021 LIBOR Transition Final Rule; (4) provides that
the Board-selected benchmark replacements for consumer loans to replace
1-month, 3-month, 6-month, and 12-month USD LIBOR indices have
``historical fluctuations that are substantially similar to'' the LIBOR
tenors they replace; (5) provides if the creditor selects to use the
Board-selected benchmark replacement for consumer loans, the creditor
must use the index value of this index and the LIBOR index from a
specified timeframe in determining whether the APR is substantially
similar; (6) updates guidance on determining whether a replacement
index has historical fluctuations that are substantially similar to
those of certain USD LIBOR indices in relation to the Board-selected
benchmark replacement for consumer loans; and (7) explains when a
creditor that uses the Board-selected benchmark replacement for
consumer loans satisfies the condition that the replacement index and
margin would have resulted in an APR substantially similar to the rate
in effect at the time LIBOR becomes unavailable or calculated using the
LIBOR index.
Interaction among Sec. 1026.40(f)(3)(ii)(A) and (B) and
contractual provisions. 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.\42\ It provides examples of when a creditor may
use these provisions. 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 provided under comment
40(f)(3)(ii)-1.i 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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\42\ For further details about these provisions, see the
section-by-section analyses of Sec. 1026.40(f)(3)(ii)(A) and (B),
infra.
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The CFPB is revising the example in comment 40(f)(3)(ii)-1.i by
replacing references to the spread-adjusted index based on SOFR
recommended by the ARRC for consumer products with the new term ``the
Board-selected benchmark replacement for consumer loans'' to align
terminology in the rule with the LIBOR Act and the Board's 2022 LIBOR
Act Final Rule. As discussed above, this interim final rule also
defines the term ``the Board-selected benchmark replacement for
consumer loans.'' It means the SOFR-based index selected by the Board
for consumer loans, as set forth in the LIBOR Act and the Board's
implementing regulation, to replace, as applicable, the 1-month, 3-
month, 6-month, or 12-month tenors of USD LIBOR. Revised comment
40(f)(3)(ii)-1.ii includes a cross-reference to this definition. For
this new definition and throughout this interim final rule, the CFPB is
using the term 12-month tenor instead of 1-year tenor to align with the
terminology used in the LIBOR Act and the Board's implementing
regulation. The Board-selected benchmark replacement for consumer loans
is the USD IBOR Cash Fallback index for consumer products, which uses
the same methodology that the ARRC recommended for SOFR-based
replacement indices for consumer products.\43\ As such, these terms
identify the same index, and the change is merely for consistency with
the Act and ease of reading.
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\43\ See 88 FR 5204, 5211-15 (Jan. 26, 2023). See also Alt.
Reference Rates Comm., Summary of the ARRC's Fallback
Recommendations (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>. See also Alt. References Rates Comm., ARRC
Recommended Fallbacks for Implementation of its Hardwired Fallback
Language (Mar. 15, 2023), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-statement-on-1-3-6-12-month-USD-LIBOR.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-statement-on-1-3-6-12-month-USD-LIBOR.pdf</a>.
---------------------------------------------------------------------------
40(f)(3)(ii)(A)
Section 1026.40(f)(3)(ii)(A) provides that a creditor may change
the index and margin used under the HELOC plan if the original index is
no longer available, the replacement index has historical fluctuations
substantially similar to that of the original index, and the
replacement index and replacement margin would have resulted in an APR
substantially similar to the rate in effect at the time the original
index became unavailable. Section 1026.40(f)(3)(ii)(A) also provides if
the replacement index is newly established and therefore does not have
any rate history, it may be used if it and the replacement margin will
produce an APR substantially similar to the rate in effect when the
original index became unavailable. Comment 40(f)(3)(ii)(A)-2 provides
detail on determining whether a replacement index that is not newly
established has historical fluctuations that are substantially similar
to those of the LIBOR index used under the plan for purposes of Sec.
1026.40(f)(3)(ii)(A). It provides that for purposes of replacing a
LIBOR index used under a plan pursuant to Sec. 1026.40(f)(3)(ii)(A), a
replacement index that is not newly established must have historical
fluctuations that are substantially similar to those of the LIBOR index
used under the plan, considering the historical fluctuations up through
when the LIBOR index becomes unavailable or up through the date
indicated in a Bureau determination that the replacement index and the
LIBOR index have historical fluctuations that are substantially
similar, whichever is earlier.
The Board-selected benchmark replacements for consumer loans have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. Comment
[[Page 30607]]
40(f)(3)(ii)(A)-2.ii provides a determination by the Bureau that
effective April 1, 2022, 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 substantially similar to those of the 1-month, 3-month, or 6-month
USD LIBOR indices respectively.\44\ It provides that the creditor also
must comply with the condition in Sec. 1026.40(f)(3)(ii)(A) that the
SOFR-based spread-adjusted index for consumer products and replacement
margin would have resulted in an APR substantially similar to the rate
in effect at the time the LIBOR index became unavailable in order to
use this SOFR-based spread-adjusted index for consumer products as the
replacement index for the applicable LIBOR index.
---------------------------------------------------------------------------
\44\ 86 FR 69716, 69743 & n.106 (Dec. 8, 2021) (acknowledging
that while the spread-adjusted term SOFR rates have not always moved
in tandem with LIBOR, the Bureau 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 rates).
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The CFPB is making several changes to comments 40(f)(3)(ii)(A)-2, -
2.i, and -2.ii. First, as discussed in more detail in the section-by-
section analysis for Sec. 1026.40(f)(3)(ii) above, and for the reasons
discussed therein, the CFPB is revising comment 40(f)(3)(ii)(A)-2.ii by
replacing references to the spread-adjusted index based on SOFR
recommended by the ARRC for consumer products with the new term ``the
Board-selected benchmark replacement for consumer loans.'' Revised
comment 40(f)(3)(ii)(A)-2.ii includes a cross-reference to this
definition. Based on these changes, revised comment 40(f)(3)(ii)(A)-
2.ii provides that the creditor also must comply with the condition in
Sec. 1026.40(f)(3)(ii)(A) requiring the Board-selected benchmark
replacement for consumer loans and replacement margin would have
resulted in an APR substantially similar to the rate in effect at the
time the LIBOR index became unavailable.
Second, the CFPB is expanding comment 40(f)(3)(ii)(A)-2.ii to
include a replacement index for the 12-month USD LIBOR, which was not
previously addressed in the 2021 LIBOR Transition Final Rule. Comment
40(f)(3)(ii)(A)-2.ii does not discuss the 12-month (formerly called 1-
year) USD LIBOR.\45\ In the 2021 LIBOR Transition Final Rule, the CFPB
generally provided examples of SOFR-based replacement indices for the
1-month, 3-month, and 6-month tenors of USD LIBOR, but reserved
judgment about whether to include a reference to the 1-year USD LIBOR
index in comment 40(f)(3)(ii)(A)-2.ii until it obtained additional
information. Since the CFPB promulgated the 2021 LIBOR Transition Final
Rule, the LIBOR Act was enacted, and the Board issued its final rule
implementing the Act. Section 105(a)(5) of the LIBOR Act provides that,
for purposes of TILA and its implementing regulations, a Board-selected
benchmark replacement and the selection or use of a Board-selected
benchmark replacement as a benchmark replacement with respect to a
LIBOR contract constitutes a replacement that has historical
fluctuations that are substantially similar to those of the LIBOR index
that it is replacing. The Board's regulation provides that for a LIBOR
contract that is a consumer loan, the benchmark replacement shall be
the corresponding 1-month, 3-month, 6-month, or 12-month CME Term SOFR
plus the applicable amounts or tenor spread adjustment.\46\ The CFPB is
relying on the determination in the LIBOR Act and the Board's
implementing regulation that the Board-selected benchmark replacement
for consumer loans has historical fluctuations that are substantially
similar to the USD LIBOR tenor that it is replacing. Thus, the CFPB is
revising comment 40(f)(3)(ii)(A)-2.ii to also apply this determination
of the historical fluctuations substantially similar standard to the
replacement of the 12-month USD LIBOR index with the Board-selected
benchmark replacement for consumer loans.
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\45\ See 85 FR 36938, 36972, 36994 (June 18, 2020) (proposing
comment 59(f)-4 and noting the Bureau's 2020 notice of proposed
rulemaking proposed and solicited comment on allowing use of a
specific replacement formula where the index change involved the 1-
year tenor in addition to the 1-month, 3-month, and 6-month tenors).
\46\ 12 CFR 253.4(b)(2)(i)(B) and (ii)(B).
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Third, based on the LIBOR Act and the Board's implementing
regulation, the Bureau is removing its prior determination that became
effective April 1, 2022, concerning the spread-adjusted indices based
on SOFR recommended by the ARRC for consumer products. By operation of
the LIBOR Act and the Board's implementing regulation, all tenors of
the Board-selected benchmark replacements have ``historical
fluctuations that are substantially similar to'' the LIBOR tenors they
replace.\47\ Thus, revised comment 40(f)(3)(ii)(A)-2.ii provides that
the Board-selected benchmark replacement for consumer loans to replace
the 1-month, 3-month, 6-month, and 12-month USD LIBOR indices has
historical fluctuations that are substantially similar to USD LIBOR
tenor they are replacing. The Bureau's prior determination is obsolete.
The ``spread-adjusted indices based on SOFR recommended by the ARRC for
consumer products'' are the same as ``the Board-selected benchmark
replacement for consumer loans'' and the LIBOR Act determined that the
latter has historical fluctuations that are substantially similar to
the LIBOR tenors they replace. Removing this obsolete determination
will avoid confusion.
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\47\ LIBOR Act section 105(a)(5), 136 Stat. 830.
---------------------------------------------------------------------------
Fourth, to facilitate compliance, this interim final rule revises
comment 40(f)(3)(ii)(A)-2 by specifying that the Board-selected
benchmark replacements for consumer loans is an exception to the
general requirement providing that the historical fluctuations
considered when replacing a LIBOR index used under a plan are the
historical fluctuations up through the earlier of when the LIBOR index
becomes unavailable or up through the date indicated in a Bureau
determination that the replacement index and the LIBOR index have
historical fluctuations that are substantially similar. Accordingly,
this interim final rule also revises comment 40(f)(3)(ii)(A)-2.ii to
provide that no further determination is required that the Board-
selected benchmark replacements for consumer loans meets the
``historical fluctuations are substantially similar'' standard. The
changes to comment 40(f)(3)(ii)(A)-2 in relation to the Board-selected
benchmark replacements for consumer loans do not alter or modify the
Bureau's determination set forth in comment 40(f)(3)(ii)(A)-2.i in
relation to the prime rate as the replacement index for the 1-month or
3-month USD LIBOR index, except to provide that no further
determination is needed that the prime rate published in the Wall
Street Journal meets this standard for these tenors. The CFPB solicits
comments on these changes in the interim final rule.
Additional guidance on determining whether a replacement index has
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. In the 2021 LIBOR Transition Final Rule, the
CFPB noted that commenters on the proposed rule had asked for
additional guidance on
[[Page 30608]]
how to determine whether a replacement index has historical
fluctuations that are substantially similar to those of a particular
LIBOR index, including requesting that the CFPB provide a principles-
based standard for making such determinations. The CFPB did not set
forth a principles-based standard at that time because these
determinations are fact-specific, and they depend on the replacement
index being considered and the LIBOR tenor being replaced. Instead, to
facilitate compliance with Regulation Z, the CFPB added comment
40(f)(3)(ii)(A)-2.iii to provide a non-exhaustive list of factors to be
considered in making these determinations. Specifically, comment
40(f)(3)(ii)(A)2.iii provides that the relevant factors to be
considered depend on the replacement index being considered and the
LIBOR index being replaced. Comment 40(f)(3)(ii)(A)-2.iii also provides
that these determinations may need to consider certain aspects of the
historical data itself for a particular replacement index. In the 2021
LIBOR Transition Final Rule, the CFPB considered the relevant factors
in determining that: (1) Prime has historical fluctuations that are
substantially similar to those of the 1-month and 3-month USD LIBOR;
and (2) 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 substantially
similar to those of the 1-month, 3-month, or 6-month USD LIBOR indices
respectively.
The CFPB is revising comment 40(f)(3)(ii)(A)-2.iii by adding an
exception for the Board-selected benchmark replacements for consumer
loans, as defined in new Sec. 1026.2(a)(28). When using the Board-
selected benchmark replacements for consumer loans, a creditor need not
consider the types of factors used to determine whether a replacement
index has historical fluctuations substantially similar to those of a
particular LIBOR index. Because the Board's final rule, in implementing
the LIBOR Act, has determined that the Board-selected benchmark
replacements for consumer loans are replacement indices that have
historical fluctuations that are substantially similar to their
respective LIBOR tenors, and the CFPB has determined in this interim
final rule that this index meets the Regulation Z ``historical
fluctuations are substantially similar'' standard with respect to a
particular LIBOR index, the factors need not be considered. While the
CFPB had already applied the factors to the SOFR-based 1-month, 3-
month, and 6-month LIBOR tenor replacement indices in its 2021 LIBOR
Transition Final Rule, by operation of law, the factors need not be
considered with respect to the Board-selected benchmark replacement for
consumer loans for the 12-month LIBOR tenor in order for the index to
satisfy Regulation Z's ``historical fluctuations are substantially
similar'' standard. The CFPB solicits comments on these changes in the
interim final rule.
Substantially similar rate when LIBOR becomes unavailable. Section
1026.40(f)(3)(ii)(A) provides that the replacement index and
replacement margin must produce an APR substantially similar to the
rate that was in effect based on the LIBOR index used under the plan
when the LIBOR index became unavailable. Comment 40(f)(3)(ii)(A)-3
provides that, for comparing rates, a creditor generally must use the
value of the replacement index and the LIBOR index on the day that the
LIBOR index becomes unavailable. It provides that if the replacement
index is not published on the day that the LIBOR index becomes
unavailable, the creditor generally must use the previous calendar day
that both indices 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 under comment 40(f)(3)(ii)(A)-3 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)(A)-3 also states that for purposes of Sec.
1026.40(f)(3)(ii)(A), 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 condition in Sec. 1026.40(f)(3)(ii)(A) that the replacement
index and replacement margin would have resulted in an APR
substantially similar to the rate in effect at the time the LIBOR index
became unavailable.
The CFPB is making several changes to comment 40(f)(3)(ii)(A)-3.
First, as discussed in more detail in the section-by-section analysis
for Sec. 1026.40(f)(3)(ii) above, and for the reasons discussed
therein, the CFPB is revising comment 40(f)(3)(ii)(A)-3 by replacing
references to the spread-adjusted index based on SOFR recommended by
the ARRC for consumer products with the new term ``the Board-selected
benchmark replacement for consumer loans.''
Second, the CFPB is expanding comment 40(f)(3)(ii)(A)-3 to include
a replacement index for the 12-month USD LIBOR, which was not
previously addressed in the 2021 LIBOR Transition Final Rule. Comment
40(f)(3)(ii)(A)-3 does not discuss the 12-month (formerly called 1-
year) USD LIBOR. In the 2021 LIBOR Transition Final Rule, the CFPB
generally provided examples of SOFR-based replacement indices for the
1-month, 3-month, and 6-month tenors of USD LIBOR, but reserved
judgment about whether to include a reference to the 1-year USD LIBOR
index in comment 40(f)(3)(ii)(A)-3 until it obtains additional
information. Since the CFPB promulgated the 2021 LIBOR Transition Final
Rule, the LIBOR Act was enacted, and the Board issued its final rule
implementing the Act. Sections 105(a)(2), (a)(3), and (a)(5) of the
LIBOR Act provide that, for purposes of TILA and its implementing
regulations, a Board-selected benchmark replacement and the selection
or use of a Board-selected benchmark replacement as a benchmark
replacement with respect to a LIBOR contract constitutes a ``comparable
index'' and ``has historical fluctuations that are substantially
similar'' to those of the USD LIBOR index they are replacing. The
Board's regulation provides that for a LIBOR contract that is a
consumer loan, the benchmark replacement shall be the corresponding 1-
month, 3-month, 6-month, or 12-month CME Term SOFR plus the applicable
amounts or tenor spread adjustment.\48\ The determination in the LIBOR
Act and the Board's implementing regulation applies not only to the
Board-selected benchmark replacement for consumer loans that is
replacing the 1-month, 3-month, and 6-month USD LIBOR, but also to the
Board-selected benchmark replacement for consumer loans that is
replacing the 12-month tenor of LIBOR. Thus, the
[[Page 30609]]
CFPB is revising comment 40(f)(3)(ii)(A)-3 to provide that for purposes
of Sec. 1026.40(f)(3)(ii)(A), if a creditor uses the Board-selected
benchmark replacement for consumer loans to replace the 1-month, 3-
month, 6-month, or 12-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 condition in Sec. 1026.40(f)(3)(ii)(A) that the replacement
index and replacement margin would have resulted in an APR
substantially similar to the rate in effect at the time the LIBOR index
became unavailable. The CFPB solicits comment on these changes of the
interim final rule.
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\48\ 12 CFR 253.4(b)(2)(i)(B) and (ii)(B).
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40(f)(3)(ii)(B)
Section 1026.40(f)(3)(ii)(B) contains LIBOR-specific provisions
that permit creditors for HELOC plans subject to Sec. 1026.40 that use
a LIBOR index for calculating variable rates to replace the LIBOR index
and change the margins for calculating the variable rates on or after
April 1, 2022, in certain circumstances. The CFPB explained in the 2021
LIBOR Transition Final Rule how as a practical matter, Sec.
1026.40(f)(3)(ii)(B) allows creditors for HELOCs to provide the 15-day
change-in-terms notices required under Sec. 1026.9(c)(1) prior to the
LIBOR indices becoming unavailable, and thus allows those creditors to
avoid being left without a LIBOR index to use in calculating the
variable rate before the replacement index and margin become effective.
Also, Sec. 1026.40(f)(3)(ii)(B) allows HELOC creditors to provide the
change-in-terms notices, and replace the LIBOR index used under the
plans, on accounts on a rolling basis, rather than having to provide
the change-in-terms notices, and replace the LIBOR index, for all its
accounts at the same time as the LIBOR index used under the plan
becomes unavailable. The CFPB believes that this advance notice of the
replacement index and any change in the margin is important to
consumers to inform them of how variable rates will be determined going
forward after the LIBOR index is replaced.
Section 1026.40(f)(3)(ii)(B) provides 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 April 1, 2022, 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 October 18, 2021, and 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 newly established and
therefore does not have any rate history, it may be used 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.
Section 1026.40(f)(3)(ii)(B) also provides 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. As set
forth in Sec. 1026.40(f)(3)(ii)(B), 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)(B)-1 provides detail on
determining whether a replacement index that is not newly established
has historical fluctuations that are substantially similar to those of
the LIBOR index used under the plan for purposes of Sec.
1026.40(f)(3)(ii)(B). It provides that for purposes of replacing a
LIBOR index used under a plan pursuant to Sec. 1026.40(f)(3)(ii)(B), a
replacement index that is not newly established must have historical
fluctuations that are substantially similar to those of the LIBOR index
used under the plan, considering the historical fluctuations up through
the relevant date. If the Bureau has made a determination that the
replacement index and the LIBOR index have historical fluctuations that
are substantially similar, the relevant date is the date indicated in
that determination by the Bureau. If the Bureau has not made a
determination that the replacement index and the LIBOR index have
historical fluctuations that are substantially similar, the relevant
date is the later of April 1, 2022, or the date no more than 30 days
before the creditor makes a determination that the replacement index
and the LIBOR index have historical fluctuations that are substantially
similar.
The CFPB is making two changes to Sec. 1026.40(f)(3)(ii)(B). As
discussed in more detail in the section-by-section analysis for Sec.
1026.40(f)(3)(ii) above, and for the reasons discussed therein, the
CFPB is revising Sec. 40(f)(3)(ii)(B) by replacing references to the
spread-adjusted index based on SOFR recommended by the ARRC for
consumer products with the new term ``the Board-selected benchmark
replacement for consumer loans'' and is using the term 12-month tenor
instead of 1-year tenor with respect to the USD LIBOR index.
The Board-selected benchmark replacements for consumer loans have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. Comment 40(f)(3)(ii)(B)-1.ii provides a
determination by the Bureau that, effective April 1, 2022, 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 substantially similar to those of
the 1-month, 3-month, or 6-month USD LIBOR indices respectively.
Comment 40(f)(3)(ii)(B)-1.ii also provides that in order to use this
SOFR-based spread-adjusted index for consumer products as the
replacement index for the applicable LIBOR index, the creditor also
must satisfy the condition in Sec. 1026.40(f)(3)(ii)(B) that the SOFR-
based spread-adjusted index for consumer products and replacement
margin will produce an APR substantially similar to the rate calculated
using the LIBOR index and the margin that applied to the variable rate
immediately prior to the replacement of the LIBOR index used under the
plan. Because of the exception in Sec. 1026.40(f)(3)(ii)(B), 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
[[Page 30610]]
similar to the rate based on the LIBOR index.
For the same reasons as discussed in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(A) with respect to revised comments
40(f)(3)(ii)(A)-2, -2.i, and -2.ii, the interim final rule makes
similar changes to comments 40(f)(3)(ii)(B)-1, -1.i, and -1.ii. First,
the CFPB is revising comments 40(f)(3)(ii)(B)-1.ii by replacing
references to the spread-adjusted index based on SOFR recommended by
the ARRC for consumer products with the new term ``the Board-selected
benchmark replacement for consumer loans.'' Revised comment
40(f)(3)(ii)(B)-1.ii includes a cross-reference to this definition.
Based on these changes, revised comment 40(f)(3)(ii)(B)-1.ii provides
that the creditor also must comply with the condition in Sec.
1026.40(f)(3)(ii)(B) requiring the Board-selected benchmark replacement
for consumer loans and replacement margin to produce an APR
substantially similar to the rate calculated using the LIBOR index and
the margin that applied to the variable rate immediately prior to the
replacement of the LIBOR index used under the plan.
Second, the CFPB is expanding comment 40(f)(3)(ii)(B)-1.ii to
include a replacement index for the 12-month USD LIBOR not previously
addressed in the 2021 LIBOR Transition Final Rule. Comment
40(f)(3)(ii)(B)-1.ii does not discuss the 12-month (formerly called 1-
year) USD LIBOR.\49\ In the 2021 LIBOR Transition Final Rule, the CFPB
generally provided examples of SOFR-based replacement indices for the
1-month, 3-month, and 6-month tenors of USD LIBOR, but reserved
judgment about whether to include a reference to the 1-year USD LIBOR
index in comment 40(f)(3)(ii)(B)-1.ii. until it obtained additional
information. Since the CFPB promulgated the 2021 LIBOR Transition Final
Rule, the LIBOR Act was enacted, and the Board issued its final rule
implementing the Act. Section 105(a)(5) of the LIBOR Act provides that,
for purposes of TILA and its implementing regulations, a Board-selected
benchmark replacement and the selection or use of a Board-selected
benchmark replacement as a benchmark replacement with respect to a
LIBOR contract constitutes a replacement that has historical
fluctuations that are substantially similar to those of the LIBOR index
that it is replacing. The Board's regulation provides that for a LIBOR
contract that is a consumer loan, the benchmark replacement shall be
the corresponding 1-month, 3-month, 6-month, or 12-month CME Term SOFR
plus the applicable amounts or tenor spread adjustment.\50\ The CFPB is
relying on the determination in the LIBOR Act and the Board's
implementing regulation that the Board-selected benchmark replacements
for consumer loans have historical fluctuations that are substantially
similar to the USD LIBOR tenor they are replacing. Thus, the CFPB is
revising comment 40(f)(3)(ii)(B)-1.ii to also apply this determination
of the historical fluctuations substantially similar standard to the
replacement of the 12-month USD LIBOR index with the Board-selected
benchmark replacement for consumer loans.
---------------------------------------------------------------------------
\49\ See 85 FR 36938, 36972, 36994 (June 18, 2020) (proposing
comment 59(f)-4 and noting the Bureau's 2020 notice of proposed
rulemaking proposed and solicited comment on allowing use of a
specific replacement formula where the index change involved the 1-
year tenor in addition to the 1-month, 3-month, and 6-month tenors).
\50\ 12 CFR 253.4(b)(2)(i)(B) and (ii)(B).
---------------------------------------------------------------------------
Third, based on the LIBOR Act and the Board's implementing
regulation, the Bureau is removing its prior determination that became
effective April 1, 2022, concerning the spread-adjusted indices based
on SOFR recommended by the ARRC for consumer products. By operation of
the LIBOR Act and the Board's implementing regulation, all Board-
selected benchmark replacements have ``historical fluctuations that are
substantially similar to'' the LIBOR tenors they replace.\51\ Thus,
revised comment 40(f)(3)(ii)(B)-1.ii provides that the Board-selected
benchmark replacement for consumer loans to the replace 1-month, 3-
month, 6-month, and 12-month USD LIBOR index has historical
fluctuations that are substantially similar to USD LIBOR tenor they are
replacing. The Bureau's prior determination is obsolete. The ``spread-
adjusted indices based on SOFR recommended by the ARRC for consumer
products'' are the same as ``the Board-selected benchmark replacement
for consumer loans'' and the LIBOR Act determined that the latter has
historical fluctuations that are substantially similar to the LIBOR
tenors they replace. Removing this obsolete determination will avoid
confusion.
---------------------------------------------------------------------------
\51\ LIBOR Act section 105(a)(5), 136 Stat. 830.
---------------------------------------------------------------------------
Fourth, to facilitate compliance, this interim final rule revises
comment 40(f)(3)(ii)(B)-1 by specifying that the Board-selected
benchmark replacements for consumer loans are an exception to the
general requirement providing that the historical fluctuations
considered when replacing a LIBOR index under a plan are the historical
fluctuations up through the relevant date set forth in comment
40(f)(3)(ii)(B)-1. Accordingly, this interim final rule also revises
comment 40(f)(3)(ii)(B)-1.ii to provide that no further determination
is required that the Board-selected benchmark replacement for consumer
loans meets the ``historical fluctuations are substantially similar''
standard. The changes to comment 40(f)(3)(ii)(B)-1 in relation to the
Board-selected benchmark replacements for consumer loans do not alter
or modify the Bureau's determination set forth in comment
40(f)(3)(ii)(B)-1.i in relation to the prime rate as the replacement
index for the 1-month or 3-month USD LIBOR index, except to provide
that no further determination is needed that the prime rate published
in the Wall Street Journal meets this standard for these tenors. The
CFPB solicits comments on these changes of the interim final rule.
Additional guidance on determining whether a replacement index has
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. For the same reasons as discussed in the
section-by-section analysis of Sec. 1026.40(f)(3)(ii)(A) with respect
to revised comment 40(f)(3)(ii)(A)-2.iii, the interim final rule makes
similar changes to comment 40(f)(3)(ii)(B)-1.iii, which provides a non-
exhaustive list of factors to be considered in whether a replacement
index meets the Regulation Z ``historical fluctuations are
substantially similar'' standard with respect to a particular LIBOR
index.
The CFPB is making two changes to comment 40(f)(3)(ii)(B)-1.iii.
First, the CFPB is making a technical correction in comment
40(f)(3)(ii)(B)-1.iii to change ``substantial'' to ``substantially''
when considering the relevant factors in determining whether a
replacement index has historical fluctuations substantially similar to
those of a particular LIBOR index. Second, similar to changes in
revised comment 40(f)(3)(ii)(A)-2.iii above, the CFPB is revising
comment 40(f)(3)(ii)(B)-1.iii by adding an exception for the Board-
selected benchmark replacements for consumer loans, as defined in new
Sec. 1026.2(a)(28). When using the Board-selected benchmark
replacements for consumer loans, a creditor need not consider the types
of factors that have historical fluctuations substantially similar to
those of a particular LIBOR index. Because the Board's final rule, in
implementing the LIBOR Act, has determined that the Board-selected
benchmark replacements for consumer loans are indices that have
historical fluctuations that are substantially similar to their
respective LIBOR tenors,
[[Page 30611]]
and the CFPB has determined in this interim final rule that this index
meets the Regulation Z ``historical fluctuations are substantially
similar'' standard with respect to a particular LIBOR index, the
factors need not be considered. While the CFPB had already applied the
factors to the SOFR-based 1-month, 3-month, and 6-month LIBOR tenor
replacement indices in its 2021 LIBOR Transition Final Rule, by
operation of law, the factors need not be considered with respect to
the Board-selected benchmark replacement for consumer loans for the 12-
month LIBOR tenor in order for the index to satisfy Regulation Z's
``historical fluctuations are substantially similar'' standard. The
CFPB solicits comments on these changes of the interim final rule.
Substantially similar rate. Pursuant to Sec. 1026.40(f)(3)(ii)(B),
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)(B)-3 also provides that for purposes of Sec.
1026.40(f)(3)(ii)(B), 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 condition in Sec. 1026.40(f)(3)(ii)(B) that the replacement
index and replacement margin would have resulted in an APR
substantially similar to the rate calculated using the LIBOR index.
For the same reasons discussed in the section-by-section analysis
of Sec. 1026.40(f)(3)(ii)(A) above for revised comment
40(f)(3)(ii)(A)-3, the CFPB is making several changes to comment
40(f)(3)(ii)(B)-3. First, the CFPB is revising comment 40(f)(3)(ii)(B)-
3 by replacing references to the spread-adjusted index based on SOFR
recommended by the ARRC for consumer products with the new term ``the
Board-selected benchmark replacement for consumer loans.''
Second, the CFPB is expanding comment 40(f)(3)(ii)(B)-3 to include
a replacement index for the 12-month USD LIBOR, which was not
previously addressed in the 2021 LIBOR Transition Final Rule. This
interim final rule revises comment 40(f)(3)(ii)(B)-3 to provide that
the APR based on the replacement index is substantially similar to the
rate based on the LIBOR index for purposes of Sec.
1026.40(f)(3)(ii)(B) if a creditor uses the Board-selected benchmark
replacement for consumer loans to replace the 1-month, 3-month, 6-
month, or 12-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
condition in Sec. 1026.40(f)(3)(ii)(B) that the replacement index and
replacement margin would have resulted in an APR substantially similar
to the rate calculated using the LIBOR index. Thus, a creditor that
uses the Board-selected benchmark replacement for consumer loans to
replace the 1-month, 3-month, 6-month, or 12-month USD LIBOR index as
the replacement index still must comply with the condition in Sec.
1026.40(f)(3)(ii)(B) that the replacement index and replacement margin
would have resulted in an APR substantially similar to the rate
calculated using the LIBOR index, but the creditor will be deemed to be
in compliance with this condition if the creditor 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 CFPB solicits comments on these changes in the interim final
rule.
Section 1026.55 Limitations on Increasing Annual Percentage Rates,
Fees, and Charges
55(b) Exceptions
55(b)(7) Index Replacement and Margin Change Exception
TILA section 171(a), 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, no creditor may increase any APR, fee, or finance
charge applicable to any outstanding balance, except as permitted under
TILA section 171(b).\52\ TILA section 171(b)(2) provides that the
prohibition under TILA section 171(a) does not apply to an increase in
a variable APR in accordance with a credit card 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.\53\ In implementing these provisions of TILA section 171, Sec.
1026.55(a) prohibits a card issuer from increasing an APR or certain
enumerated fees or charges set forth in Sec. 1026.55(a) on a credit
card account under an open-end (not home-secured) consumer credit plan,
except as provided in Sec. 1026.55(b).
---------------------------------------------------------------------------
\52\ 15 U.S.C. 1666i-1(a).
\53\ 15 U.S.C. 1666i-1(b)(2).
---------------------------------------------------------------------------
Section 1026.55(b)(7) provides a card issuer may increase an APR
pursuant to certain exceptions. Section 1026.55(b)(7)(i) discusses the
exception for index replacement and margin changes and provides that a
card issuer may increase an APR when the card issuer changes the index
and margin used to determine the APR 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 replacement margin will produce a rate
substantially similar to the rate that was in effect at the time the
original index became unavailable. Section 1026.55(b)(7)(i) also
provides if the replacement index is newly established and therefore
does not have any rate history, it may be used if it and the
replacement margin will produce a rate substantially similar to the
rate in effect when the original index became unavailable.
Section 1026.55(b)(7)(ii) contains LIBOR-specific provisions that
permit card issuers for a credit card account under an open-end (not
home-secured) consumer credit plan that uses a LIBOR index under the
plan for calculating variable rates to replace the LIBOR index and
change the margins for calculating the variable rates on or after April
1, 2022, in certain circumstances. Comment 55(b)(7)-1 addresses the
interaction among the unavailability provisions in Sec.
1026.55(b)(7)(i), the LIBOR-specific provisions in Sec.
1026.55(b)(7)(ii), and the contractual provisions applicable to the
credit card account.
As discussed in more detail below in this section-by-section
analysis, this interim final rule makes a number of changes to
Sec. Sec. 1026.55(b)(7)(i) and (b)(7)(ii) and the Official
Interpretations below. In general, it: (1) replaces references to the
spread-adjusted index based on SOFR recommended by the ARRC for
consumer products with the new defined term ``the Board-selected
benchmark replacement for consumer
[[Page 30612]]
loans''; (2) replaces the reference to the 1-year USD LIBOR index with
the 12-month USD LIBOR index; (3) expands the Official Interpretations
to include a replacement index for the 12-month USD LIBOR, which was
not previously addressed in the 2021 LIBOR Transition Final Rule; (4)
provides that the Board-selected benchmark replacements for consumer
loans to replace 1-month, 3-month, 6-month, and 12-month USD LIBOR
indices have ``historical fluctuations that are substantially similar
to'' the LIBOR tenors they replace; (5) provides if the creditor uses
the Board-selected benchmark replacement for consumer loans, the
creditor must use the index value of this index and the LIBOR index
from a specified timeframe in determining whether the APR is
substantially similar; and (6) explains when a card issuer that uses
the Board-selected benchmark replacement for consumer loans satisfies
the condition that the replacement index and replacement margin would
have resulted in an APR substantially similar to the rate in effect at
the time the LIBOR index became unavailable or calculated using the
LIBOR index.
Interaction among Sec. 1026.55(b)(7)(i) and (ii) and contractual
provisions. Comment 55(b)(7)-1 provides that a card issuer may use
either the provision in Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii) to replace a LIBOR index used under a credit card
account under an open-end (not home-secured) consumer credit plan so
long as the applicable conditions are met for the provision used. It
provides examples illustrating when a card issuer may use these
provisions. Each of these examples assumes that the LIBOR index used
under the plan becomes unavailable after June 30, 2023. Specifically,
comment 55(b)(7)-1.i provides an example where a contract for a credit
card account under an open-end (not home-secured) consumer credit plan
provides that a card issuer may not unilaterally replace an index 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 55(b)(7)-1.i explains
that the card issuer may use the unavailability provisions in Sec.
1026.55(b)(7)(i) to replace the LIBOR index used under the plan so long
as the conditions of that provision are met. Comment 55(b)(7)-1.i also
explains that the LIBOR-specific provisions in Sec. 1026.55(b)(7)(ii)
provide that a card issuer may replace the LIBOR index if the
replacement index value in effect on October 18, 2021, and 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 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 provided under comment 55(b)(7)-1.i 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 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.
For the same reasons as discussed in the section-by-section
analysis of Sec. 1026.40(f)(3) with respect to revised comment
40(f)(3)(ii)-1.i, this interim final rule makes similar changes to
comment 55(b)(7)-1.i. The CFPB is revising the example in comment
55(b)(7)-1.i by replacing references to the spread-adjusted index based
on SOFR recommended by the ARRC for consumer products with the new term
``the Board-selected benchmark replacement for consumer loans'' to
align terminology with the LIBOR Act and the Board's 2022 LIBOR Act
Final Rule.
55(b)(7)(i)
Section 1026.55(b)(7)(i) contains an exception to the general rule
in Sec. 1026.55(a) restricting rate increases for index replacement
and margin changes. Section 1026.55(b)(7)(i) provides that a card
issuer may increase an APR when the card issuer changes the index and
margin used to determine the APR 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 replacement margin will produce a rate
substantially similar to the rate that was in effect at the time the
original index became unavailable. Section 1026.55(b)(7)(i) also
provides that if the replacement index is newly established and
therefore does not have any rate history, it may be used if it and the
replacement margin will produce a rate substantially similar to the
rate in effect when the original index became unavailable. Comment
55(b)(7)(i)-1 provides that for purposes of replacing a LIBOR index
used under a plan pursuant to Sec. 1026.55(b)(7)(i), a replacement
index that is not newly established must have historical fluctuations
that are substantially similar to those of the LIBOR index used under
the plan, considering the historical fluctuations up through when the
LIBOR index becomes unavailable or up through the date indicated in a
Bureau determination that the replacement index and the LIBOR index
have historical fluctuations that are substantially similar, whichever
is earlier.
The Board-selected benchmark replacements for consumer loans have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. Comment 55(b)(7)(i)-1.ii provides a
determination by the Bureau that effective April 1, 2022, 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 substantially similar to those of
the 1-month, 3-month, or 6-month USD LIBOR indices respectively. It
provides that the card issuer also must comply with the condition in
Sec. 1026.55(b)(7)(i) that the SOFR-based spread-adjusted index for
consumer products and replacement margin will produce an APR
substantially similar to the rate in effect at the time the LIBOR index
became unavailable in order to use this SOFR-based spread-adjusted
index for consumer products as the replacement index for the applicable
LIBOR index.
For the same reasons as discussed in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(A) with respect to revised comments
40(f)(3)(ii)(A)-2, -2.i, and -2.ii, the interim final rule makes
similar changes to comments 55(b)(7)(i)-1, -1.i, and -1.ii. First, the
CFPB is revising comment 55(b)(7)(i)-1.ii by replacing references to
the spread-adjusted index based on SOFR recommended by the ARRC for
consumer products with the new term ``the Board-selected benchmark
replacement for consumer loans.'' Revised comment 55(b)(7)(i)-1.ii
includes a cross-reference to this definition. Based on these changes,
[[Page 30613]]
revised comment 55(b)(7)(i)-1.ii provides that the card issuer also
must comply with the condition in Sec. 1026.55(b)(7)(i) requiring the
Board-selected benchmark replacement for consumer loans and replacement
margin result would have resulted in an APR substantially similar to
the rate in effect at the time the LIBOR index became unavailable. The
substantially similar standard for the APR is discussed in further
detail below in relation to comment 55(b)(7)(i)-2.
Second, the CFPB is expanding comment 55(b)(7)(i)-1.ii to include a
replacement index for the 12-month USD LIBOR, which was not previously
addressed in the 2021 LIBOR Transition Final Rule. Comment 55(b)(7)(i)-
1.ii does not discuss the 12-month (formerly called 1-year) USD
LIBOR.\54\ In the 2021 LIBOR Transition Final Rule, the CFPB generally
provided examples of SOFR-based replacement indices for the 1-month, 3-
month, and 6-month tenors of USD LIBOR, but reserved judgment about
whether to include a reference to the 1-year USD LIBOR index in comment
55(b)(7)(i)-1.ii until it obtained additional information. Since the
CFPB promulgated the 2021 LIBOR Transition Final Rule, the LIBOR Act
was enacted, and the Board issued its final rule implementing the Act.
Section 105(a)(5) of the LIBOR Act provides that, for purposes of TILA
and its implementing regulations, a Board-selected benchmark
replacement and the selection or use of a Board-selected benchmark
replacement as a benchmark replacement with respect to a LIBOR contract
constitutes a replacement that has historical fluctuations that are
substantially similar to those of the LIBOR index that it is replacing.
The Board's regulation provides that for a LIBOR contract that is a
consumer loan, the benchmark replacement shall be the corresponding 1-
month, 3-month, 6-month, or 12-month CME Term SOFR plus the applicable
amounts or tenor spread adjustment.\55\ The CFPB is relying on the
determination in the LIBOR Act and the Board's implementing regulation
that the Board-selected benchmark replacements for consumer loans have
historical fluctuations that are substantially similar to the USD LIBOR
tenor that it is replacing. Thus, the CFPB is revising comment
55(b)(7)(i)-1.ii to also apply this determination of the historical
fluctuations substantially similar standard to the replacement of the
12-month USD LIBOR index with the Board-selected benchmark replacement
for consumer loans.
---------------------------------------------------------------------------
\54\ See 85 FR 36938, 36972, 36994 (June 18, 2020) (proposing
comment 59(f)-4 and noting the Bureau's 2020 notice of proposed
rulemaking proposed and solicited comment on allowing use of a
specific replacement formula where the index change involved the 1-
year tenor in addition to the 1-month, 3-month, and 6-month tenors).
\55\ 12 CFR 253.4(b)(2)(i)(B) and (ii)(B).
---------------------------------------------------------------------------
Third, based on the LIBOR Act and the Board's implementing
regulation, the Bureau is removing its prior determination, that became
effective April 1, 2022, concerning the spread-adjusted indices based
on SOFR recommended by the ARRC for consumer products. By operation of
the LIBOR Act and the Board's implementing regulation, all tenors of
the Board-selected benchmark replacements have ``historical
fluctuations that are substantially similar to'' the LIBOR tenors they
replace.\56\ Thus, revised comment 55(b)(7)(i)-1.ii provides that the
Board-selected benchmark replacements for consumer loans to replace the
1-month, 3-month, 6-month, and 12-month USD LIBOR index has historical
fluctuations that are substantially similar to USD LIBOR tenor they are
replacing. The Bureau's prior determination is obsolete. The ``spread-
adjusted indices based on SOFR recommended by the ARRC for consumer
products'' are the same as ``the Board-selected benchmark replacement
for consumer loans'' and the LIBOR Act determined that the latter has
historical fluctuations that are substantially similar to the LIBOR
tenors they replace. Removing this obsolete determination will avoid
confusion.
---------------------------------------------------------------------------
\56\ LIBOR Act section 105(a)(5), 136 Stat. 830.
---------------------------------------------------------------------------
Fourth, to facilitate compliance, this interim final rule revises
comment 55(b)(7)(i)-1.ii by specifying that the Board-selected
benchmark replacements for consumer loans are an exception to the
requirement providing that the historical fluctuations considered when
replacing a LIBOR index under a plan are the historical fluctuations up
through the relevant date set forth in comment 55(b)(7)(i)-1.ii.
Accordingly, this interim final rule also revises comment 55(b)(7)(i)-
1.ii to provide that no further determination is required that the
Board-selected benchmark replacements for consumer loans meets the
``historical fluctuations are substantially similar'' standard. The
changes to comment 55(b)(7)(i)-1 in relation to the Board-selected
benchmark replacements for consumer loans do not alter or modify the
Bureau's determination set forth in comment 55(b)(7)(i)-1.i in relation
to the prime rate as the replacement index for the 1-month or 3-month
USD LIBOR index, except to provide that no further determination is
needed that the prime rate published in the Wall Street Journal meets
this standard for these tenors.
Additional guidance on determining whether a replacement index has
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. For the same reasons as discussed in the
section-by-section analysis of Sec. 1026.40(f)(3)(ii)(A) with respect
to revised comment 40(f)(3)(ii)(A)-2.iii, the interim final rule makes
similar changes to comment 55(b)(7)(i)-1.iii, which provides a non-
exhaustive list of factors to be considered in whether a replacement
index meets the Regulation Z ``historical fluctuations are
substantially similar'' standard with respect to a particular LIBOR
index.
The CFPB is making two changes to comment 55(b)(7)(i)-1.iii. First,
the CFPB is making a technical correction in comment 55(b)(7)(i)-1.iii
to change ``substantial'' to ``substantially'' when considering the
relevant factors in determining whether a replacement index has
historical fluctuations substantially similar to those of a particular
LIBOR index. Second, similar to changes in revised comment
40(f)(3)(ii)(A)-2.iii above, the CFPB is revising comment 55(b)(7)(i)-
1.iii by adding an exception for the Board-selected benchmark
replacements for consumer loans, as defined in new Sec. 1026.2(a)(28).
When using the Board-selected benchmark replacements for consumer
loans, a creditor need not consider the types of factors that have
historical fluctuations substantially similar to those of a particular
LIBOR index. Because the Board's final rule, in implementing the LIBOR
Act, has determined that the Board-selected benchmark replacements for
consumer loans are indices that have historical fluctuations that are
substantially similar to their respective LIBOR tenors, and the CFPB
has determined in this interim final rule that this index meets the
Regulation Z ``historical fluctuations are substantially similar''
standard with respect to a particular LIBOR index, the factors need not
be considered. While the CFPB had already applied the factors to the
SOFR-based 1-month, 3-month, and 6-month LIBOR tenor replacement
indices in its 2021 LIBOR Transition Final Rule, by operation of law,
the factors need not be considered with respect to the Board-selected
benchmark replacement for consumer loans for the 12-month LIBOR tenor
in order for the index to satisfy Regulation Z's ``historical
fluctuations are substantially similar'' standard. The CFPB solicits
comments on these changes of the interim final rule.
[[Page 30614]]
Substantially similar rate when LIBOR becomes unavailable. Section
1026.55(b)(7)(i) provides that the replacement index and replacement
margin must produce an APR substantially similar to the rate that was
in effect based on the LIBOR index used under the plan when the LIBOR
index became unavailable. Comment 55(b)(7)(i)-2 provides that, for
comparing rates, a card issuer generally must use the value of the
replacement index and the LIBOR index on the day that the LIBOR index
becomes unavailable. It provides that if the replacement index is not
published on the day that the LIBOR index becomes unavailable, the card
issuer generally must use the previous calendar day that both indices
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 under comment
55(b)(7)(i)-2 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
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.
Comment 55(b)(7)(i)-2 also provides that for purposes of Sec.
1026.55(b)(7)(i), if a card issuer 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 card issuer will be deemed to be in compliance
with the condition in Sec. 1026.55(b)(7)(i) that the replacement index
and replacement margin would have resulted in an APR substantially
similar to the rate calculated using the LIBOR index.
For the same reasons as discussed in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(A) with respect to revised comment
40(f)(3)(ii)(A)-3, the interim final rule makes similar changes to
comment 55(b)(7)(i)-2. First, the CFPB is revising comment 55(b)(7)(i)-
2 by replacing references to the spread-adjusted index based on SOFR
recommended by the ARRC for consumer products with the new term ``the
Board-selected benchmark replacement for consumer loans.''
Second, the CFPB is expanding comment 55(b)(7)(i)-2 to include a
replacement index for the 12-month USD LIBOR, which was not previously
addressed in the 2021 LIBOR Transition Final Rule. Comment 55(b)(7)(i)-
2 does not discuss the 12-month (formerly called 1-year) USD LIBOR. In
the 2021 LIBOR Transition Final Rule, the CFPB generally provided
examples of SOFR-based replacement indices for the 1-month, 3-month,
and 6-month tenors of USD LIBOR, but reserved judgment about whether to
include a reference to the 1-year USD LIBOR index in comment
55(b)(7)(i)-2 until it obtains additional information. Since the CFPB
promulgated the 2021 LIBOR Transition Final Rule, the LIBOR Act was
enacted, and the Board issued its final rule implementing the Act.
Sections 105(a)(2), (a)(3), and (a)(5) of the LIBOR Act provide that,
for purposes of TILA and its implementing regulations, a Board-selected
benchmark replacement and the selection or use of a Board-selected
benchmark replacement as a benchmark replacement with respect to a
LIBOR contract constitutes a ``comparable index'' and ``has historical
fluctuations that are substantially similar'' to those of the USD LIBOR
index they are replacing. The Board's regulation provides that for a
LIBOR contract that is a consumer loan, the benchmark replacement shall
be the corresponding 1-month, 3-month, 6-month, or 12-month CME Term
SOFR plus the applicable amounts or tenor spread adjustment.\57\ The
determination in the LIBOR Act and the Board's implementing regulation
applies not only to the Board-selected benchmark replacements for
consumer loans that are replacing the 1-month, 3-month, and 6-month USD
LIBOR, but also to the Board-selected benchmark replacement for
consumer loans that is replacing the 12-month tenor of LIBOR. Thus, the
CFPB is revising comment 55(b)(7)(i)-2 to provide that for purposes of
Sec. 1026.55(b)(7)(i), if a card issuer uses the Board-selected
benchmark replacements for consumer loans to replace the 1-month, 3-
month, 6-month, or 12-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 card issuer will be deemed to be in compliance
with the condition in Sec. 1026.55(b)(7)(i) that the replacement index
and replacement margin would have resulted in an APR substantially
similar to the rate in effect at the time the LIBOR index became
unavailable. The CFPB solicits comment on these changes of the interim
final rule.
---------------------------------------------------------------------------
\57\ 12 CFR 253.4(b)(2)(i)(B) and (ii)(B).
---------------------------------------------------------------------------
55(b)(7)(ii)
Section 1026.55(b)(7)(ii) contains LIBOR-specific provisions that
permit card issuers for a credit card account under an open-end (not
home-secured) consumer credit plan that uses a LIBOR index under the
plan for calculating variable rates to replace the LIBOR index and
change the margins for calculating the variable rates on or after April
1, 2022, in certain circumstances. The CFPB explained in the 2021 LIBOR
Transition Final Rule how, as a practical matter, Sec.
1026.55(b)(7)(ii) allows card issuers to provide the 45-day change-in-
terms notices required under Sec. 1026.9(c)(2) prior to the LIBOR
indices becoming unavailable, and thus allows those card issuers to
avoid being left without a LIBOR index to use in calculating the
variable rate before the replacement index and margin become effective.
Also, Sec. 1026.55(b)(7)(ii) allows card issuers to provide the
change-in-terms notices, and replace the LIBOR index used under the
plans, on accounts on a rolling basis, rather than having to provide
the change-in-terms notices, and replace the LIBOR index, for all its
accounts at the same time as the LIBOR index used under the plan
becomes unavailable. The CFPB believes that this advance notice of the
replacement index and any change in the margin is important to
consumers to inform them of how variable rates will be determined going
forward after the LIBOR index is replaced.
Section 1026.55(b)(7)(ii) provides that if a variable rate on a
credit card account under an open-end (not home-secured) consumer
credit plan is calculated using a LIBOR index, a card issuer may
replace the LIBOR index and change the margin for calculating the
variable rate on or after April 1, 2022, 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
October 18, 2021, and 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 newly established and
therefore does not have any rate history, it may be used if the
replacement index value in effect on
[[Page 30615]]
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. Section 1026.55(b)(7)(ii) also provides that if
the replacement index is not published on October 18, 2021, the 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. As set forth in Sec. 1026.55(b)(7)(ii), 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 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. Comment
55(b)(7)(ii)-1 provides detail on determining whether a replacement
index that is not newly established has historical fluctuations that
are substantially similar to those of the LIBOR index used under the
plan for purposes of Sec. 1026.55(b)(7)(ii). It provides that for
purposes of replacing a LIBOR index used under a plan pursuant to Sec.
1026.55(b)(7)(ii), a replacement index that is not newly established
must have historical fluctuations that are substantially similar to
those of the LIBOR index used under the plan, considering the
historical fluctuations up through the relevant date. If the Bureau has
made a determination that the replacement index and the LIBOR index
have historical fluctuations that are substantially similar, the
relevant date is the date indicated in that determination by the
Bureau. If the Bureau has not made a determination that the replacement
index and the LIBOR index have historical fluctuations that are
substantially similar, the relevant date is the later of April 1, 2022,
or the date no more than 30 days before the card issuer makes a
determination that the replacement index and the LIBOR index have
historical fluctuations that are substantially similar.
For the same reasons as discussed in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(B), the interim final rule is
making two changes to Sec. 1026.55(b)(7)(ii). First, the CFPB is
revising Sec. 1026.55(b)(7)(ii) by replacing references to the spread-
adjusted index based on SOFR recommended by the ARRC for consumer
products with the new term ``the Board-selected benchmark replacement
for consumer loans.'' Second, the CFPB is using the term 12-month tenor
instead of 1-year tenor with respect to the USD LIBOR index.
The Board-selected benchmark replacements for consumer loans have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. Comment 55(b)(7)(ii)-1.ii provides a
determination by the Bureau that, effective April 1, 2022, 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 substantially similar to those of
the 1-month, 3-month, or 6-month USD LIBOR indices respectively. The
Bureau made this determination in case some card issuers choose to
replace a LIBOR index with the SOFR-based spread-adjusted index
recommended by the ARRC for consumer products. Comment 55(b)(7)(ii)-
1.ii also provides that in order to use this SOFR-based spread-adjusted
index recommended by the ARRC for consumer products discussed above as
the replacement index for the applicable LIBOR index, the card issuer
also must satisfy the condition in Sec. 1026.55(b)(7)(ii) that the
SOFR-based spread-adjusted index for consumer products and replacement
margin will produce an APR substantially similar to the rate calculated
using the LIBOR index and the margin that applied to the variable rate
immediately prior to the replacement of the LIBOR index used under the
plan. Comment 55(b)(7)(ii)-1.ii provides that because of the exception
in Sec. 1026.55(b)(7)(ii), the card issuer must use the index value on
June 30, 2023, for the LIBOR index and, for the SOFR-based spread-
adjusted index recommended by the ARRC 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.
For the same reasons as discussed in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii)(B) with respect to revised comments
40(f)(3)(ii)(B)-1, -1.i, and -1.ii and discussed below, the interim
final rule makes similar changes to comments 55(b)(7)(ii)-1, -1.i, and
-1.ii. First, the CFPB is replacing references to the spread-adjusted
index based on SOFR recommended by the ARRC for consumer products with
the new term ``the Board-selected benchmark replacement for consumer
loans.'' Revised comment 55(b)(7)(ii)-1.ii includes a cross-reference
to this definition. Based on these changes, revised comment
55(b)(7)(ii)-1.ii provides that the card issuer also must comply with
the condition in Sec. 1026.55(b)(7)(ii) requiring the Board-selected
benchmark replacement for consumer loans and replacement margin to
produce an APR substantially similar to the rate calculated using the
LIBOR index and the margin that applied to the variable rate
immediately prior to the replacement of the LIBOR index used under the
plan. The substantially similar standard for this interim final rule is
discussed in further detail below in relation to comment 55(b)(7)(ii)-
3.
Second, the CFPB is expanding comment 55(b)(7)(ii)-1.ii to include
a replacement index for the 12-month USD LIBOR not previously addressed
in the 2021 LIBOR Transition Final Rule. Comment 55(b)(7)(ii)-1.ii does
not discuss the 12-month (formerly called 1-year) USD LIBOR.\58\ In the
2021 LIBOR Transition Final Rule, the CFPB generally provided examples
of SOFR-based replacement indices for the 1-month, 3-month, and 6-month
tenors of USD LIBOR, but reserved judgment about whether to include a
reference to the 1-year USD LIBOR index in comment 55(b)(7)(ii)-1.ii
until it obtained additional information. Since the CFPB promulgated
the 2021 LIBOR Transition Final Rule, the LIBOR Act was enacted, and
the Board issued its final rule implementing the Act. Section 105(a)(5)
of the LIBOR Act provides that, for purposes of TILA and its
implementing regulations, a Board-selected benchmark replacement and
the selection or use of a Board-selected benchmark replacement as a
benchmark replacement with respect to a LIBOR contract constitutes a
replacement that has historical fluctuations that are substantially
similar to those of the LIBOR index that it is replacing. The Board's
regulation provides that for a LIBOR contract that is a consumer loan,
the benchmark replacement shall be the corresponding 1-month, 3-month,
6-
[[Page 30616]]
month, or 12-month CME Term SOFR plus the applicable amounts or tenor
spread adjustment.\59\ The CFPB is relying on the determination in the
LIBOR Act and the Board's implementing regulation that the Board-
selected benchmark replacements for consumer loans have historical
fluctuations that are substantially similar to the USD LIBOR tenor that
they are replacing. Thus, the CFPB is revising comment 55(b)(7)(ii)-
1.ii to also apply this determination of the historical fluctuations
substantially similar standard to the replacement of the 12-month USD
LIBOR index with the Board-selected benchmark replacement for consumer
loans.
---------------------------------------------------------------------------
\58\ See 85 FR 36938, 36972, 36994 (June 18, 2020) (proposing
comment 59(f)-4 and noting the Bureau's 2020 notice of proposed
rulemaking proposed and solicited comment on allowing use of a
specific replacement formula where the index change involved the 1-
year tenor in addition to the 1-month, 3-month, and 6-month tenors).
\59\ 12 CFR 253.4(b)(2)(i)(B) and (ii)(B).
---------------------------------------------------------------------------
Third, based on the LIBOR Act and the Board's implementing
regulation, the Bureau is removing its prior determination, that became
effective April 1, 2022, concerning the spread-adjusted indices based
on SOFR recommended by the ARRC for consumer products. By operation of
the LIBOR Act and the Board's implementing regulation, all tenors of
the Board-selected benchmark replacements have ``historical
fluctuations that are substantially similar to'' the LIBOR tenors they
replace.\60\ Thus, revised comment 55(b)(7)(ii)-1.ii provides that the
Board-selected benchmark replacements for consumer loans to replace the
1-month, 3-month, 6-month, and 12-month USD LIBOR index has historical
fluctuations that are substantially similar to USD LIBOR tenor they are
replacing. The Bureau's prior determination is obsolete. The ``spread-
adjusted indices based on SOFR recommended by the ARRC for consumer
products'' are the same as ``the Board-selected benchmark replacement
for consumer loans'' and the LIBOR Act determined that the latter has
historical fluctuations that are substantially similar to the LIBOR
tenors they replace. Removing this obsolete determination will avoid
confusion.
---------------------------------------------------------------------------
\60\ LIBOR Act section 105(a)(5), 136 Stat. 830.
---------------------------------------------------------------------------
Fourth, to facilitate compliance, this interim final rule revises
comment 55(b)(7)(ii)-1 by specifying that the Board-selected benchmark
replacements for consumer loans are an exception to the requirement
providing that the historical fluctuations considered when replacing a
LIBOR index under a plan are the historical fluctuations up through the
relevant date set forth in comment 55(b)(7)(ii)-1.ii. Accordingly, this
interim final rule also revises comment 55(b)(7)(ii)-1.ii to provide
that no further determination is required to determine that the Board-
selected benchmark replacements for consumer loans meet the
``historical fluctuations are substantially similar'' standard. The
changes to comment 55(b)(7)(ii)-1 in relation to the Board-selected
benchmark replacements for consumer loans do not alter or modify the
Bureau's determination set forth in comment 55(b)(7)(ii)-1.i in
relation to the prime rate as the replacement index for the 1-month or
3-month USD LIBOR index, except to provide that no further
determination is needed that the prime rate published in the Wall
Street Journal meets this standard for these tenors. The CFPB solicits
comments on these changes of the interim final rule.
Additional guidance on determining whether a replacement index has
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. For the same reasons as discussed in the
section-by-section analysis of Sec. 1026.40(f)(3)(ii)(B) with respect
to revised comment 40(f)(3)(ii)(B)-1.iii, the interim final rule makes
similar changes to comment 55(b)(7)(ii)-1.iii, which provides a non-
exhaustive list of factors to be considered in whether a replacement
index meets the Regulation Z ``historical fluctuations are
substantially similar'' standard with respect to a particular LIBOR
index.
The CFPB is making two changes to comment 55(b)(7)(ii)-1.iii.
First, the CFPB is making a technical correction in comment
55(b)(7)(ii)-1.iii to change ``substantial'' to ``substantially'' when
considering the relevant factors in determining whether a replacement
index has historical fluctuations substantially similar to those of a
particular LIBOR index. Second, similar to changes in revised comment
40(f)(3)(ii)(B)-1.iii above, the CFPB is revising comment 55(b)(7)(ii)-
1.iii by adding an exception for the Board-selected benchmark
replacements for consumer loans, as defined in new Sec. 1026.2(a)(28).
When using the Board-selected benchmark replacement for consumers
loans, a creditor need not consider the types of factors that have
historical fluctuations substantially similar to those of a particular
LIBOR index. Because the Board's final rule, in implementing the LIBOR
Act, has determined that the Board-selected benchmark replacements for
consumer loans are indices that have historical fluctuations that are
substantially similar to their respective LIBOR tenors, and the CFPB
has determined in this interim final rule that this index meets the
Regulation Z ``historical fluctuations are substantially similar''
standard with respect to a particular LIBOR index, the factors need not
be considered. While the CFPB had already applied the factors to the
SOFR-based 1-month, 3-month, and 6-month LIBOR tenor replacement
indices in its 2021 LIBOR Transition Final Rule, by operation of law,
the factors need not be considered with respect to the Board-selected
benchmark replacement for consumer loans for the 12-month LIBOR tenor
in order for the index to satisfy Regulation Z's ``historical
fluctuations are substantially similar'' standard. The CFPB solicits
comments on these changes of the interim final rule.
Substantially similar rate. Pursuant to Sec. 1026.55(b)(7)(ii), 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 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.
Comment 55(b)(7)(ii)-3 also provides for purposes of Sec.
1026.55(b)(7)(ii), if a card issuer 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 index as the replacement index and uses
as the replacement margin that applied to the variable rate immediately
prior to the replacement of the LIBOR index used under the plan, the
card issuer will be deemed to be in compliance with the condition in
Sec. 1026.55(b)(7)(ii) that the replacement index and replacement
margin would have resulted in an APR substantially similar to the rate
calculated using the LIBOR index.
For the same reasons discussed in the section-by-section analysis
of Sec. 1026.40(f)(3)(ii)(B) above for revised comment
40(f)(3)(ii)(B)-3, this interim final rule implements a number of
changes to comment 55(b)(7)(ii)-3. First, the CFPB is revising comment
55(b)(7)(ii)-3 by replacing references to the spread-adjusted index
based on SOFR recommended by the ARRC for consumer products with the
new term ``the Board-selected benchmark replacement for consumer
loans.''
Second, the CFPB is expanding comment 55(b)(7)(ii)-3 to include a
replacement index for the 12-month USD LIBOR, which was not previously
addressed in the 2021 LIBOR Transition Final Rule. This interim final
rule revises comment 55(b)(7)(ii)-3 to provide that for purposes of
[[Page 30617]]
Sec. 1026.55(b)(7)(ii), if a card issuer uses the Board-selected
benchmark replacement for consumer loans to replace the 1-month, 3-
month, 6-month, or 12-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 card issuer will be deemed to be in compliance
with the condition in Sec. 1026.55(b)(7)(ii) that the replacement
index and replacement margin would have resulted in an APR
substantially similar to the rate calculated using the LIBOR index.
Thus, a card issuer that uses the Board-selected benchmark replacement
for consumer loans to replace the 1-month, 3-month, 6-month, or 12-
month USD LIBOR index as the replacement index still must comply with
the condition in Sec. 1026.55(b)(7)(ii) that the replacement index and
replacement margin would have resulted in an APR substantially similar
to the rate calculated using the LIBOR index, but the card issuer will
be deemed to be in compliance with this condition if the card issuer
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 CFPB solicits comments on these changes in the
interim final rule.
Section 1026.59 Reevaluation of Rate Increases
59(f) Termination of the Obligation To Review Factors
59(f)(3)
TILA section 148, which was added by the Credit CARD Act of
2009,\61\ provides that if a creditor increases the APR applicable to a
credit card account under an open-end consumer credit plan, based on
factors including the credit risk of the obligor, market conditions, or
other factors, the creditor shall consider changes in such factors in
subsequently determining whether to reduce the APR for such
obligor.\62\ Section 1026.59 implements this provision. The provisions
in Sec. 1026.59 generally apply to card issuers that increase an APR
applicable to a credit card account, based on the credit risk of the
consumer, market conditions, or other factors. For any rate increase
imposed on or after January 1, 2009, card issuers generally are
required to review the account no less frequently than once each six
months and, if appropriate based on that review, reduce the APR.
---------------------------------------------------------------------------
\61\ Public Law 111-24, 123 Stat. 1734 (2009).
\62\ 15 U.S.C. 1665c.
---------------------------------------------------------------------------
Section 1026.59(f) provides that this obligation to review the rate
increase ceases to apply if the card issuer reduces the APR to a rate
equal to or less than the rate applicable immediately prior to the
increase, or if the rate applicable immediately prior to the increase
was a variable rate, to a rate determined by the same index and margin
(previous formula) that applied prior to the increase. Once LIBOR is
discontinued, it will not be possible for card issuers to use the
``same index.'' As discussed in the CFPB's 2021 LIBOR Transition Final
Rule, because the discontinuation of LIBOR means that after
discontinuation, the card issuer will not have a LIBOR index for use in
the ``previous formula'' to determine the rate that applied prior to
the increase, the existing methods to terminate the obligation to
review would not apply.
Section 1026.59(f)(3) provides, effective April 1, 2022, a
replacement formula that card issuers can use to terminate the
obligation to review factors under Sec. 1026.59(a) when the rate
applicable immediately prior to the increase was a variable rate with a
formula based on a LIBOR index. Section 1026.59(f)(3) applies to
situations in which a LIBOR index is used as the index in the
``previous formula'' (i.e., the formula used to determine the rate at
which the obligation to review factors ceases).\63\ Under Sec.
1026.59(f)(3), the replacement formula, which includes the replacement
index on October 18, 2021, plus replacement margin, must equal the
LIBOR index value on October 18, 2021, plus the margin used to
calculate the rate immediately prior to the increase.\64\ Section
1026.59(f)(3) also provides that a card issuer must satisfy the
conditions set forth in Sec. 1026.55(b)(7)(ii) for selecting a
replacement index. Under Sec. 1026.59(f)(3), if the replacement index
is not published on October 18, 2021, the card issuer generally must
use the values of the indices on the next calendar day for which both
the LIBOR index and the replacement index are published as the index
values to use to determine the replacement formula. The one exception
in Sec. 1026.59(f)(3) is that if the replacement index is the spread-
adjusted index based on SOFR recommended by the ARRC for consumer
products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR
index, the 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, as the index values to use to determine the
replacement formula.
---------------------------------------------------------------------------
\63\ Section 1026.59(f)(3) does not apply to rate increases that
may result from the switch from a LIBOR index to another index under
Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii) as those potential
rate increases will be excepted from the provisions of Sec.
1026.59. Section 1026.59(f)(3) does, however, cover rate increases
that were already subject to the provisions of Sec. 1026.59 and
that use a formula under Sec. 1026.59(f) based on a LIBOR index to
determine whether to terminate the review obligations under Sec.
1026.59.
\64\ For purposes of Sec. 1026.59(f)(3) ``replacement index,''
as defined in comment 59(f)-4, refers to the index used in the
replacement formula, which identifies the value for benchmark
comparison to determine if the obligation to conduct rate
reevaluations terminates.
---------------------------------------------------------------------------
Additionally, comment 59(f)-4 provides methods for identifying the
replacement index to be used in the formula by providing instructions
for determining the relevant date through which the card issuer must
determine that historical fluctuations between the indices are
substantially similar. Comment 59(f)-4 provides that if the Bureau has
made a determination that the replacement index and the LIBOR index
have historical fluctuations that are substantially similar, the
relevant date is the date indicated in that determination, but if the
Bureau has not made such a determination, the relevant date is the
later of April 1, 2022, or the date no more than 30 days before the
card issuer makes a determination that the replacement index and the
LIBOR index have historical fluctuations that are substantially
similar. Comment 59(f)-4 states the Bureau's determination that the
prime rate published in the Wall Street Journal has historical
fluctuations that are substantially similar to those of the 1-month and
3-month USD LIBOR indices and that the spread-adjusted indices based on
SOFR 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 substantially similar to those of the 1-month, 3-
month, or 6-month USD LIBOR indices respectively.
For the reasons discussed below, and as discussed in the section-
by-section analysis of Sec. 1026.59(f)(3) and comment 59(f)-4 below,
this interim final rule implements several revisions related to rate
reevaluation provisions. First, as discussed in more detail in the
section-by-section analysis for Sec. 1026.55(b)(7) above, and for the
reasons discussed therein, the CFPB is revising Sec. 1026.59(f)(3) by
replacing references to the spread-adjusted index based on SOFR
recommended by the ARRC for consumer products with the new term
[[Page 30618]]
``the Board-selected benchmark replacement for consumer loans'' to
align terminology in the rule with the LIBOR Act and the Board's 2022
LIBOR Act Final Rule. As discussed in the section-by-section analysis
for Sec. 1026.2(a)(28), this interim final rule also defines the term
``the Board-selected benchmark replacement for consumer loans.''
Revised comment 59(f)-4 includes a cross-reference to that definition.
As discussed above, these terms identify the same index, and the change
is merely for consistency with the Act and ease of reading.
Second, the CFPB is expanding comment 59(f)-4 to include a
replacement index for the 12-month USD LIBOR, which was not previously
addressed in the 2021 LIBOR Transition Final Rule. Comment 59(f)-4 does
not discuss the 12-month (formerly called 1-year) USD LIBOR.\65\ In the
2021 LIBOR Transition Final Rule, the CFPB generally provided examples
of SOFR-based replacement indices for the 1-month, 3-month, and 6-month
tenors of USD LIBOR, but reserved judgment about whether to include a
reference to the 1-year USD LIBOR index in comment 59(f)-4 until it
obtained additional information. Since the CFPB promulgated the 2021
LIBOR Transition Final Rule, the LIBOR Act was enacted, and the Board
issued its final rule implementing the Act. Section 105(a)(5) of the
LIBOR Act provides that, for purposes of TILA and its implementing
regulations, a Board-selected benchmark replacement and the selection
or use of a Board-selected benchmark replacement as a benchmark
replacement with respect to a LIBOR contract constitutes a replacement
that has historical fluctuations that are substantially similar to
those of the LIBOR index that it is replacing. The Board's regulation
provides that for a LIBOR contract that is a consumer loan, the
benchmark replacement shall be the corresponding 1-month, 3-month, 6-
month, or 12-month CME Term SOFR plus the applicable amounts or tenor
spread adjustment.\66\ The CFPB is relying on the determination in the
LIBOR Act and the Board's implementing regulation that the Board-
selected benchmark replacements for consumer loans have historical
fluctuations that are substantially similar to the USD LIBOR tenor that
they are replacing. While section 104(f) of the LIBOR Act provides that
nothing in the Act ``may be construed to alter or impair-- . . . (5)
any provision of Federal consumer financial law that--(A) . . . govern
the reevaluation of rate increases on credit card accounts under open-
end (not home-secured) consumer credit plans,'' \67\ the CFPB is not
relying on the LIBOR Act for its authority to provide an alternative
method for determining whether the card issuer can terminate its
obligation under the credit card account rate reevaluation requirements
where the rate applicable immediately prior to a rate increase was a
variable rate calculated using a LIBOR index. Instead, the CFPB is
revising Sec. 1026.59(f)(3) and comment 59(f)-4 pursuant to its
authority to implement TILA section 148, as discussed above.
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\65\ See 85 FR 36938, 36972, 36994 (June 18, 2020) (proposing
comment 59(f)-4 and noting the Bureau's 2020 notice of proposed
rulemaking proposed and solicited comment on allowing use of a
specific replacement formula where the index change involved the 1-
year tenor in addition to the 1-month, 3-month, and 6-month tenors).
\66\ 12 CFR 253.4(b)(2)(i)(B) and (ii)(B).
\67\ LIBOR Act section 104(f), 136 Stat. 829.
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Third, based on the LIBOR Act and the Board's implementing
regulation, the Bureau is removing its prior determination, that became
effective April 1, 2022, concerning the spread-adjusted indices based
on SOFR recommended by the ARRC for consumer products. By operation of
the LIBOR Act and the Board's implementing regulation, all tenors of
the Board-selected benchmark replacements for consumer loans have
``historical fluctuations that are substantially similar to'' the LIBOR
tenors they replace.\68\ Thus, the CFPB is revising comment 59(f)-4 to
provide that the Board-selected benchmark replacements for consumer
loans to replace the 1-month, 3-month, 6-month, and 12-month USD LIBOR
index have historical fluctuations that are substantially similar to
USD LIBOR tenor they are replacing. The Bureau's prior determination is
obsolete. The ``spread-adjusted indices based on SOFR recommended by
the ARRC for consumer products'' are the same as ``the Board-selected
benchmark replacement for consumer loans'' and the LIBOR Act determined
that the latter has historical fluctuations that are substantially
similar to the LIBOR tenors they replace. Removing this obsolete
determination will avoid confusion.
---------------------------------------------------------------------------
\68\ LIBOR Act section 105(a)(5), 136 Stat. 830.
---------------------------------------------------------------------------
Fourth, to facilitate compliance, this interim final rule revises
comment 59(f)-4 by specifying that the Board-selected benchmark
replacements for consumer loans are an exception to the requirement
providing that the historical fluctuations considered when replacing a
LIBOR index under a plan are the historical fluctuations up through the
relevant date as set forth in comment 59(f)-4. Accordingly, this
interim final rule also revises comment 59(f)-4 to provide that no
further determination is required that the Board-selected benchmark
replacement for consumer loans meets the ``historical fluctuations are
substantially similar'' standard. The changes to comment 59(f)-4 in
relation to the Board-selected benchmark replacements for consumer
loans do not alter or modify the Bureau's determination set forth in
comment 59(f)-4 in relation to the prime rate as the replacement index
for the 1-month or 3-month USD LIBOR index, except to provide that no
further determination is needed that the prime rate published in the
Wall Street Journal meets this standard for these tenors. The CFPB
solicits comments on these changes in the interim final rule.
VI. Effective Date
The final rule will take effect on May 15, 2023, which should be
approximately 45 days before the expected discontinuation of LIBOR.
VII. Dodd-Frank Act Section 1022(b) Analysis
A. Overview
In developing the interim final rule, the CFPB has considered the
interim final rule's potential benefits, costs, and impacts.\69\ The
CFPB requests comment on the analysis presented below as well as
submissions of additional data that could inform the CFPB's analysis of
the benefits, costs, and impacts. In developing the interim final rule,
the CFPB has consulted with, or offered to consult with, the
appropriate prudential regulators and other Federal agencies regarding
consistency with any prudential, market, or systemic objectives
administered by such agencies.
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\69\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act
requires the Bureau to consider the potential benefits and costs of
the regulation to consumers and covered persons, including the
potential reduction of access by consumers to consumer financial
products and services; the impact of proposed rules on insured
depository institutions and insured credit unions with less than $10
billion in total assets as described in section 1026 of the Dodd-
Frank Act; and the impact on consumers in rural areas. The
applicability of section 1022(b)(2)(A) to this rulemaking is
unclear, but the Bureau has performed the described analysis.
---------------------------------------------------------------------------
The CFPB is issuing an interim final rule amending Regulation Z,
which implements TILA, to reflect the enactment of the LIBOR Act and
its implementing regulation promulgated by the Board. This interim
final rule further addresses the planned cessation of most USD LIBOR
tenors after June 30, 2023, by incorporating the Board-
[[Page 30619]]
selected benchmark replacements for consumer loans into Regulation Z.
This interim final rule conforms the terminology from the LIBOR Act and
the Board's implementing regulation into relevant Regulation Z open-end
and closed-end credit provisions and also addresses treatment of the
12-month USD LIBOR index and its replacement index, including
permitting creditors to use alternative language in change-in-terms
notice content requirements for situations where the 12-month tenor of
the LIBOR index is being replaced consistent with the LIBOR Act.
The CFPB is making four categories of amendments to various
provisions in Regulation Z to make changes consistent with the LIBOR
Act to address the anticipated sunset of LIBOR.
First, (the ``terminology amendments'') the CFPB is changing the
terminology used in the CFPB's 2021 LIBOR Transition Final Rule to make
it consistent with terminology in the LIBOR Act. Specifically, for
both-open and closed-end credit as discussed in further detail below,
the CFPB is replacing all references to the ``index based on SOFR
recommended by the Alternative Reference Rates Committee for consumer
products'' with references to the ``the Board-selected benchmark
replacement for consumer loans'' and adding a new definition for that
term in the Official Interpretations. The CFPB is also replacing all
references to the ``1-year'' USD LIBOR with references to the ``12-
month'' USD LIBOR.
Second, (``12-month historical fluctuations amendments'') for both
open- and closed-end credit, the CFPB is revising the Official
Interpretations to incorporate the Board-selected benchmark replacement
for consumer loans to replace the 12-month LIBOR, as prescribed by the
LIBOR Act, as an index that has historical fluctuations that are
substantially similar to those of the 12-month USD LIBOR index it is
intended to replace. The Bureau's prior determination that the spread-
adjusted indices based on SOFR recommended by the ARRC to replace 1-
month, 3-month, and 6-month USD LIBOR have historical fluctuations that
are substantially similar to the indices they are intended to replace
is obsolete, given that the Board-selected benchmark replacement for
consumer loans to replace 1-month, 3-month, and 6-month USD LIBOR
indices is the same as the corresponding spread-adjusted index based on
SOFR recommended by the ARRC.
Third, (``12-month LIBOR notice requirements amendments'') the CFPB
is adding the Board-selected benchmark replacement for consumer loans
that would replace the 12-month USD LIBOR index to the list of indices
where a creditor is allowed to use an alternative method to disclose
information about the periodic rate and APR in change-in-terms notices
for HELOCs and credit card accounts as a result of the replacement of
the LIBOR index in certain circumstances.
Fourth, (``12-month LIBOR rate reevaluation amendments'') the CFPB
is adding the Board-selected benchmark replacement for consumer loans
that would replace the 12-month USD LIBOR index to the list of indices
where a card issuer is allowed to use an alternative method for
determining whether the card issuer can terminate its obligation under
the credit card account rate reevaluation requirements where the rate
applicable immediately prior to a rate increase was a variable rate
calculated using a LIBOR index. The Bureau also deleted its prior
determination in the Official Interpretations that the spread-adjusted
indices based on SOFR recommended by the ARRC to replace 1-month, 3-
month, and 6-month USD LIBOR have historical fluctuations that are
substantially similar to the indices they are intended to replace,
given that ``the Board-selected benchmark replacement for consumer
loans'' to replace 1-month, 3-month, and 6-month USD LIBOR indices is
the same as the corresponding spread-adjusted index based on SOFR
recommended by the ARRC for consumer products.
B. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the CFPB has
obtained from industry, other regulatory agencies, and publicly
available sources. The data are generally limited with which to
quantify the potential costs, benefits, and impacts of the final
provisions.
In light of these data limitations, the analysis below generally
provides a qualitative discussion of the benefits, costs, and impacts
of the final provisions. General economic principles and the CFPB's
expertise in consumer financial markets, together with the limited data
that are available, provide insight into these benefits, costs, and
impacts.
C. Baseline for Analysis
In evaluating the potential benefits, costs, and impacts of the
interim final rule, the CFPB takes as a baseline the current legal
framework regarding the LIBOR transition. Therefore, the baseline for
the analysis of the interim final rule includes the amendments to
Regulation Z in the CFPB's 2021 LIBOR Transition Final Rule, the LIBOR
Act, and the Board's implementing regulation as law.
When finalized, the rule will affect the market as described below
as long as it is in effect. However, with or without the interim final
rule, the transfer from LIBOR would be complete by June 30, 2023, when
LIBOR is set to expire. Therefore, the analysis below of the benefits,
costs, and impacts of the interim final rule applies mostly to the
period between May 15, 2023 (when the interim final rule takes effect)
and June 30, 2023 (when LIBOR is set to expire).
D. Potential Benefits and Costs of the Interim Final Rule to Consumers
and Covered Persons
Reliable data on the indices credit products are linked to are not
generally available, so the CFPB cannot estimate the dollar value of
debt tied to LIBOR in the distinct credit markets that will be impacted
by this interim final rule. However, the ARRC has estimated that in
2021 there was $1.3 trillion of mortgage debt and $100 billion of non-
mortgage debt tied to LIBOR.\70\
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\70\ Alt. Reference Rates Comm., Progress Report: The Transition
from U.S. Dollar LIBOR (Mar. 2021), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf</a>.
---------------------------------------------------------------------------
1. ``Terminology Amendments''
For clarity, the CFPB is replacing references to the index based on
``SOFR recommended by the Alternative Reference Rates Committee for
consumer products'' with references to the ``the Board-selected
benchmark replacement for consumer loans.''
The CFPB believes that, even absent these amendments, nearly all
creditors would likely correctly construe the term ``SOFR recommended
by the Alternative References Rate Committee for consumer products'' to
mean the ``the Board-selected benchmark replacement for consumer
loans.'' Therefore, the CFPB believes that, in the vast majority of
cases, the amendments will not change the indices creditors would
switch to, the timing of those changes, or the disclosures they provide
to consumers. Therefore, the amendments will impose very few costs on
consumers or firms. The amendments will provide some benefits to firms
and consumers by decreasing uncertainty.
2. ``12-Month Historical Fluctuations'' Amendments
For both open- and closed-end credit, the CFPB is including the
Board-selected benchmark replacement for consumer loans to replace 12-
month LIBOR, as prescribed by the LIBOR Act,
[[Page 30620]]
as an index that has historical fluctuations that are substantially
similar to those of the 12-month USD LIBOR index it is intended to
replace.
Under both the interim final rule and the baseline, the LIBOR Act
and the Board's implementing regulation determine that the Board-
selected benchmark replacement for consumer loans to replace 12-month
LIBOR has historical fluctuations that are substantially similar to
those of the 12-month USD LIBOR index it is intended to replace.
Therefore, by operation of law, the amendments to Regulation Z by this
interim final rule will not change whether the Board-selected benchmark
replacement for consumer loans to replace 12-month LIBOR has historical
fluctuations that are substantially similar to those of the 12-month
USD LIBOR index it is intended to replace. Hence these amendments will
impose very few costs on consumers or firms. The amendments will
provide some benefits to firms and consumers by decreasing uncertainty.
3. ``12-Month LIBOR Notice Requirements'' Amendments
These amendments by the interim final rule will add the Board-
selected benchmark replacement for consumer loans for 12-month USD
LIBOR, in addition to those Board-selected benchmark replacements for
consumer loans for 1-month, 3-month, and 6-month USD LIBOR, as another
circumstance where creditors may follow comments 9(c)(1)-4 (for HELOCs)
and 9(c)(2)(iv)-2.ii (for credit cards) for how to disclose information
about the periodic rate and APR in a change-in-terms notice for HELOCs
and credit cards, assuming the other conditions in the comment are met.
Without these amendments, it is not clear how creditors could
provide required change-in-terms notices to switch consumers from the
12-month USD LIBOR index to the Board-selected benchmark replacement
for consumer loans to replace 12-month USD LIBOR index, prior to the
publication of the Board-selected benchmark replacement for consumer
loans to replace 12-month USD LIBOR index. Therefore, it is not clear
what creditors would do under the baseline absent these amendments.
Some creditors may be legally required to switch consumers to the
Board-selected benchmark replacements for consumer loans. Presumably,
they would still do so even absent these amendments, although they
might face significant legal uncertainty and experience significant
legal costs by doing so. They might face this legal uncertainty if they
decide to send out the change-in-terms notice prior to the Board-
selected benchmark replacements for consumer loans being published.
Alternatively, if they decide not to send out the change-in-terms
notice until after the Board-selected benchmark replacements for
consumer loans are published, they might face legal uncertainty in how
to calculate the rate after the LIBOR index is discontinued, but prior
to the Board-selected benchmark replacements for consumer loans
becoming effective on the account.
Other creditors could choose under the baseline to switch to the
Board-selected benchmark replacements for consumer loans even if not
required to do so. For these creditors, these amendments would decrease
costs by providing additional clarity and certainty about the required
change-in-terms notices. These amendments will likely also decrease
litigation costs for these creditors after the transition from 12-month
LIBOR to the Board-selected benchmark replacement for consumer loans.
Consumers with loans from these creditors would have their loans
switched from 12-month LIBOR to the Board-selected benchmark
replacement for consumer loans both under these amendments and under
the baseline. The CFPB expects that, under these amendments and under
the baseline, these consumers would receive similar change-in-terms
notices with only minimal adjustments to the content of those notices.
Hence, the CFPB estimates that these amendments will have no
significant benefits, costs, or impacts for these consumers.
It is possible that there may be creditors that would switch to the
Board-selected benchmark replacements for consumer loans under these
amendments that might be deterred by existing change-in-terms notice
requirements from switching consumers to the Board-selected benchmark
replacement for consumer loans without this amendment. Therefore,
without this amendment these creditors would choose different indices
to replace LIBOR indices. Because these creditors would prefer to
switch to the Board-selected benchmark replacement for consumer loans
and this provision will allow them to do so, the CFPB expects that this
provision would generate substantial benefits for these creditors.
However, based on its market intelligence, the CFPB believes there to
be very few such creditors, if any, as market participants have
informed the CFPB that other factors will dominate the determination
about which index to switch to. The CFPB expects that, based partly on
a final rule promulgated by the U.S. Department of Housing and Urban
Development (HUD),\71\ most Home Equity Conversion Mortgages (HECMs)
will transition to one of the Board-selected benchmark replacement for
consumer loans under this interim final rule and under the baseline.
The CFPB expects that most non-HECM HELOCS and credit cards will switch
to the Prime rate under this interim final rule and under the baseline,
because most HELOC creditors and credit card issuers prefer to have
their portfolio based on a single index and they have portfolios that
are already mostly linked to the Prime rate.
---------------------------------------------------------------------------
\71\ See 88 FR 12822 (Mar. 1, 2023).
---------------------------------------------------------------------------
Under these amendments, consumers with loans from these creditors
will have their loans switched to the Board-selected benchmark
replacement for consumer loans. Under the baseline, consumers with
loans from these creditors would have their loans switched to other
indices. Therefore, after the transition, these consumers' APRs will be
tied to the Board-selected benchmark replacement for consumer loans,
while under the baseline they would be tied to other indices. Because
these other replacement indices creditors would switch to are not
identical to the Board-selected benchmark replacement for consumer
loans, they will not move identically to the Board-selected benchmark
replacement for consumer loans, so affected consumers' payments would
be different under the provision than they would be under the baseline.
On some dates in which indexed rates reset, some replacement indices
may have increased relative to the Board-selected benchmark replacement
for consumer loans. Consumers with these indices would then pay a cost
due to this provision until the next rate reset. On some dates in which
indexed rates reset, some replacement indices may have decreased
relative to the Board-selected benchmark replacement for consumer
loans. Consumers with these indices would then benefit from this
provision until the next rate reset. Consumers vary in their
constraints and preferences, the credit products they have, the dates
those credit products reset, the replacement indices their creditors
would choose, and the transition dates their creditors will choose. The
benefits and costs that will accrue to consumers from this provision
and that arise because of differences in index movements will vary
across consumers and over time. However, the CFPB expects ex-ante for
these benefits and costs to be small on average, because the rates
creditors switch to must be
[[Page 30621]]
substantially similar to existing LIBOR-based rates generally using
index values in effect on October 18, 2021, and because replacement
indices that are not newly established must have historical
fluctuations that are substantially similar to those of the LIBOR
index. As discussed above, the CFPB also expects for these benefits and
costs to small because the CFPB believes there will likely be few, if
any, loans that transition to different indices because of the interim
final rule.
4. ``12-Month LIBOR Rate Reevaluation Amendments''
The CFPB is amending Sec. 1026.59(f)(3) and comment 59(f)-4 to
conform to the LIBOR Act and the Board's implementing regulation.
Specifically, revised comment 59(f)-4 provides that the Board-selected
benchmark replacements for consumer loans to replace 1-month, 3-month,
6-month, and 12-month USD LIBOR index have historical fluctuations that
are substantially similar to those of the USD LIBOR tenors they are
replacing. Section 105(a)(5) of the LIBOR Act provides that, for
purposes of TILA and its implementing regulations, a Board-selected
benchmark replacement and the selection or use of a Board-selected
benchmark replacement as a benchmark replacement with respect to a
LIBOR contract constitutes a replacement that has historical
fluctuations that are substantially similar to those of the LIBOR index
that it is replacing. The Board's regulation provides that for a LIBOR
contract that is a consumer loan, the benchmark replacement shall be
the corresponding 1-month, 3-month, 6-month, or 12-month CME Term SOFR
plus the applicable amounts or tenor spread adjustment. The CFPB is
relying on the determination in the LIBOR Act and the Board's
implementing regulation that the Board-selected benchmark replacement
for consumer loans has historical fluctuations that are substantially
similar to the USD LIBOR tenor that it is replacing.
The determination in the LIBOR Act and the Board's implementing
regulation that the Board-selected benchmark replacement for consumer
loans has historical fluctuations that are substantially similar to the
USD LIBOR tenor that it is replacing applies not only to the Board-
selected benchmark replacements for consumer loans that are replacing
the 1-month, 3-month, and 6-month USD LIBOR, but also to the Board-
selected benchmark replacement for consumer loans that is replacing the
12-month tenor of LIBOR. Accordingly, the Board-selected benchmark
replacement for consumer loans to replace the 12-month USD LIBOR tenor
has historical fluctuations that are substantially similar to the 12-
month USD LIBOR tenor for purposes of complying with Sec.
1026.59(f)(3) and comment 59(f)-4. The Bureau also found that its prior
determination in relation to the use of SOFR-based spread-adjusted
index recommended by the ARRC for consumer products to replace the 1-
month, 3-month, or 6-month U.S. Dollar LIBOR indices is obsolete given
that ``the Board-selected benchmark replacement for consumer loans'' to
replace 1-month, 3-month, and 6-month USD LIBOR indices is the same as
the corresponding spread-adjusted index based on SOFR recommended by
the ARRC for consumer products to replace the 1-month, 3-month, and 6-
month U.S. Dollar LIBOR indices.
The LIBOR Act and the Board's implementing regulation would be
effective even under the baseline. By operation of the LIBOR Act, all
tenors of the Board-selected benchmark replacements for consumer loans
have historical fluctuations that are substantially similar to the
LIBOR tenors they replace. Therefore, even without these amendments,
creditors would likely conclude that the Board-selected benchmark
replacement for consumer loans has historical fluctuations that are
substantially similar to 12-month USD LIBOR for purposes of Sec.
1026.59(f)(3) and comment 59(f)-4. Therefore, the amendments will
likely not impose any significant costs or benefits on consumers. The
amendments will likely provide some benefits to creditors by reducing
regulatory uncertainty and compliance burden.
E. Potential Specific Impacts of This Interim Final Rule
1. Depository Institutions and Credit Unions With $10 Billion or Less
in Total Assets, as Described in Section 1026
The CFPB believes that the consideration of benefits and costs of
covered persons presented above provides a largely accurate analysis of
the impacts of the interim final rule on depository institutions and
credit unions with $10 billion or less in total assets that issue
credit products that are tied to LIBOR and are covered by these final
provisions.
2. Impact of This Interim Final Rule on Consumer Access to Credit and
on Consumers in Rural Areas
Because this interim final rule will affect only existing accounts
that are tied to LIBOR and would generally not affect new loans, this
interim final rule will not directly impact consumer access to credit.
While this interim final rule will provide some benefits and costs to
creditors and card issuers in connection to the transition away from
LIBOR, it is unlikely to affect the costs of providing new credit and
therefore the CFPB believes that any impact on creditors and card
issuers from this interim final rule is not likely to have a
significant impact on consumer access to credit.
Consumers in rural areas may experience benefits or costs from this
interim final rule that are larger or smaller than the benefits and
costs experienced by consumers in general if credit products in rural
areas are more or less likely to be linked to LIBOR than credit
products in other areas. The CFPB does not have any data or other
information to understand whether this is the case. The CFPB requests
comment regarding the impact of the amended provisions on consumers in
rural areas and how those impacts may differ from those experienced by
consumers generally.
VIII. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) does not require an initial or
final regulatory flexibility analysis in a rulemaking where a general
notice of proposed rulemaking is not required.\72\ As noted previously,
the CFPB has determined that it is unnecessary to publish a general
notice of proposed rulemaking for this interim final rule. As an
additional basis, the CFPB's Director certifies that this interim final
rule will not have a significant economic impact on a substantial
number of small entities, and so an initial or final regulatory
flexibility analysis is also not required for that reason.\73\ The rule
will not impose significant costs on creditors, including small
entities, for the reasons discussed in the section 1022(b) analysis.
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\72\ 5 U.S.C. 603(a), 604(a).
\73\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\74\ Federal
agencies are generally required to seek the Office of Management and
Budget's (OMB's) approval for information collection requirements prior
to implementation. The collections of information related to Regulation
Z have been previously reviewed and approved by OMB and assigned OMB
Control number 3170-0015. Under the PRA, the CFPB may not conduct or
sponsor and, notwithstanding any other provision of law, a person is
not required to respond
[[Page 30622]]
to an information collection unless the information collection displays
a valid control number assigned by OMB.
The CFPB has determined that this interim final rule would not
impose any new or revised information collection requirements
(recordkeeping, reporting or disclosure requirements) on covered
entities or members of the public that would constitute collections of
information requiring OMB approval under the PRA.
The CFPB has a continuing interest in the public's opinions
regarding this determination. At any time, comments regarding this
determination may be sent to: Consumer Financial Protection Bureau
(Attention: PRA Office), 1700 G Street NW, Washington, DC 20552, or by
email to <a href="/cdn-cgi/l/email-protection#65262335273a351007090c063a35372425060315074b020a13"><span class="__cf_email__" data-cfemail="65262335273a351007090c063a35372425060315074b020a13">[email protected]</span></a>.
XI. Congressional Review Act
Pursuant to the Congressional Review Act,\75\ the CFPB will submit
a report containing this rule and other required information to the
U.S. Senate, the U.S. House of Representatives, and the Comptroller
General of the United States prior to the rule's published effective
date. The Office of Information and Regulatory Affairs has designated
this rule as not a ``major rule'' as defined by 5 U.S.C. 804(2). As
discussed in part IV, the CFPB finds that there is good cause for the
rule to take effect without prior notice and comment. Accordingly, this
rule may take effect at such time as the CFPB determines. 5 U.S.C.
808(2).
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\75\ 5 U.S.C. 801 et seq.
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List of Subjects in 12 CFR Part 1026
Advertising, Banks, banking, Consumer protection, Credit, Credit
unions, Mortgages, National banks, Reporting and recordkeeping
requirements, Savings associations, Truth-in-lending.
Authority and Issuance
For the reasons set forth in the preamble, the Bureau revises
Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart A--General
0
2. Amend Sec. 1026.2 by adding paragraph (a)(28) to read as follows:
Sec. 1026.2 Definitions and rules of construction
(a) * * *
(28) The Board-selected benchmark replacement for consumer loans
means the SOFR-based index selected by the Board of Governors of the
Federal Reserve System to replace, as applicable, the 1-month, 3-month,
6-month, or 12-month tenor of U.S. Dollar LIBOR, as set forth in the
Board of Governors of the Federal Reserve System's regulation at 12 CFR
part 253, which implements the Adjustable Interest Rate (LIBOR) Act,
Public Law 117-103, division U.
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
0
3. Amend Sec. 1026.40 by revising paragraph (f)(3)(ii)(B) to read as
follows:
Sec. 1026.40 Requirements for home equity plans.
* * * * *
(f) * * *
(3) * * *
(ii) * * *
(B) If a variable rate on the plan is calculated using a LIBOR
index, change the LIBOR index and the margin for calculating the
variable rate on or after April 1, 2022, to a replacement index and a
replacement margin, as long as historical fluctuations in the LIBOR
index and replacement index were substantially similar, and as long as
the replacement index value in effect on October 18, 2021, and
replacement margin will produce an annual percentage rate 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 newly established and therefore does
not have any rate history, it may be used if the replacement index
value in effect on October 18, 2021, and the replacement margin will
produce an annual percentage rate 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 annual percentage rate 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 Board-selected benchmark replacement for consumer loans to replace
the 1-month, 3-month, 6-month, or 12-month U.S. Dollar LIBOR index, the
creditor must use the index value on June 30, 2023, for the LIBOR index
and, for the Board-selected benchmark replacement for consumer loans,
must use the index value on the first date that index is published, in
determining whether the annual percentage rate based on the replacement
index is substantially similar to the rate based on the LIBOR index.
* * * * *
Subpart G--Special Rules Applicable to Credit Card Accounts and
Open-End Credit Offered to College Students
0
4. Amend Sec. 1026.55 by revising paragraph (b)(7)(ii) to read as
follows:
Sec. 1026.55 Limitations on increasing annual percentage rates,
fees, and charges.
* * * * *
(b) * * *
(7) * * *
(ii) If a variable rate on the plan is calculated using a LIBOR
index, the card issuer changes the LIBOR index and the margin for
calculating the variable rate on or after April 1, 2022, to a
replacement index and a replacement margin, as long as historical
fluctuations in the LIBOR index and replacement index were
substantially similar, and as long as the replacement index value in
effect on October 18, 2021, and replacement margin will produce an
annual percentage rate 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 newly established and therefore does not have any rate
history, it may be used if the replacement index value in effect on
October 18, 2021, and the replacement margin will produce an annual
percentage rate 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 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
[[Page 30623]]
the annual percentage rate 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 Board-selected
benchmark replac
[…truncated; see source link]Indexed from Federal Register on May 11, 2023.
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.