CFPB Finalizes Reg Z Libor Proposal

As the industry prepares for the discontinuation of Libor, the CFPB today finalized changes to Regulation Z designed to facilitate the transition to alternate reference rates. The final rule amends open-end and closed-end provisions to provide examples of replacement indexes for Libor indexes that meet Reg Z standards.

The final rule explains how to choose a compliant replacement index for existing open-end and closed end loans, including examples of factors to meet the regulation’s standards for index replacement. The rule identifies certain Secure Overnight Financing Rate-based spread adjusted indices for consumer products as examples of compliant replacements for one-month, three-month or six-month tenors of U.S. dollar Libor for both open-end and closed-end loans. The Wall Street Journal prime rate is also considered a compliant index replacement for home equity lines of credit and credit cards.

The bureau noted that it is reserving judgment about whether to include references to a 1-year USD Libor index and its replacement index, and that it is considering issuing a supplemental final rule once it obtains additional information.

Today’s final rule will take effect April 1, 2022, with a mandatory compliance date of Oct. 1, 2022, for revisions to the change-in-terms notice requirements. One provision—adding a date to the top of the model forms for notices of rate adjustments to adjustable rate mortgages—will take effect Oct. 1, 2023. Along with the final rule, the CFPB also issued an updated set of frequently asked questions regarding the Libor transition.

In related news, the Securities and Exchange Commission issued a statement today outlining key considerations for investment professionals when transitioning from Libor to alternative reference rates. The SEC noted that “when recommending Libor-linked securities or, as applicable, an investment strategy involving Libor-linked investments to retail customers and clients, broker-dealers should consider the best interest standard under regulation best interest and investment advisers should consider their fiduciary obligations.”

The statement also discusses disclosure obligations related to the Libor transition; the potential effects of the transition on valuation measurements using Libor as an input; and operational complexities that the transition could introduce. It also discusses considerations for underwriters of primary offerings of municipal securities, broker-dealers making recommendations of municipal securities.