CFPB Proposes Reg Z Changes for Libor Transition

As part of the planned transition away from the London Interbank Offered Rate—which is not guaranteed to be available after 2021—the Consumer Financial Protection Bureau today proposed a rule addressing the rate transition and Regulation Z. Specifically, the bureau proposed changes to open-end and closed-end provisions to provide examples of replacement indexes for Libor indexes that meet Reg Z standards.

While Reg Z permits home equity line of credit creditors and card issuers to change the index and margin they use to set annual percentage rates when a rate is no longer available, the CFPB said that early transition from a Libor index could benefit consumers and the industry. The bureau also proposed that WSJ Prime and certain Secured Overnight Financing Rate indexes are suitable replacements. The proposal would create provisions for this transition starting in March 2021.

It would also identify specific indexes as examples of a “comparable index” for closed-end loans to avoid a rate change constituting a refinancing under Reg Z. The bureau said that it “anticipates that the spread-adjusted replacement [SOFR] indexes that the [Alternative Reference Rates Committee] is developing will provide a good example of a comparable index to the tenors of Libor that they are designated to replace” and sought comment on other comparable indexes. Comments are due by Aug. 4.

The bureau also released a Libor transition FAQ to provide guidance not requiring amendments to Reg Z, and it revised the Consumer Handbook on Adjustable-Rate Mortgages (required by RESPA) to eliminate references to Libor, among other changes.