Sunset on the LIBOR Index
The Bureau of Consumer Financial Protection has issued a final rule that amends Regulation Z in anticipation of the discontinuation of the use of the London Interbank Offered Rate (LIBOR) based indices in consumer transactions.
The LIBOR index is frequently used for products such as Home Equity Lines of Credit (HELOCs), adjustable rate mortgages (ARMs), student loans, credit cards and reverse mortgages. As of the close of 2021, no new consumer products will use the LIBOR index and as of June 2023, it will no longer be used for existing products.
There are several important dates to keep in mind. Most of the amendments are effective on April 1, 2022. Compliance with the revised change-in-term notices for HELOCs and credit cards can begin as early as April 1st, but mandatory compliance is not required until October 1st. The same timeframe applies to loan program origination and servicing disclosures for ARMs.
The amendment also provides examples of indices that can be used as replacements for LIBOR. The Secured Overnight Financing Rate (SOFR) index is a recommend replacement for the 1, 3 or 6 month LIBOR, but there is not a recommended 1 year index yet.
Creditors must carefully select replacement indices. Under the final rule, if a new index is not comparable to the LIBOR in a closed-end transaction, a refinance may be prompted. Open-end creditors can change indices and adjust their margins as of April 1, 2022 if their selection satisfies the rule’s requirement that the index’s historical fluctuations are substantially similar to the LIBOR index.
Both the Alternative Reference Rates Committee and Fannie Mae and Freddie Mac have created detailed guides to prepare lenders in the transition away from LIBOR.
How can we help?
CLA is prepared to assist your institution. Our mortgage professionals can help you evaluate the impact this new rule has on your operations. We are here to know you and help you. Contact Us with any questions or to learn how we can assist your mortgage operations.
Theresa is a Director of Regulatory Compliance with CLA. She is a graduate of Providence College and earned her juris doctor at Suffolk University Law School. She is admitted to both the Massachusetts and New Hampshire Bar.
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