CFPB finalizes rules to replace LIBOR as loan benchmark

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The US Consumer Financial Protection Bureau (CFPB) has finalized rules to ease the transition from the London Interbank Offered Rate (LIBOR) as the benchmark for consumer lending. LIBOR will be phased out over the next year and a half, with the CFPB providing requirements on how lenders should select a replacement.

Key points to remember

  • The CFPB has issued a final rule on how consumer lenders should abandon the London Interbank Offered Rate (LIBOR) as a benchmark for setting interest rates on loans.
  • LIBOR, which is calculated from estimates submitted by banks, has been the subject of a criminal rate-fixing scandal that has undermined confidence in the index.
  • The CFPB rule provides consumer lenders with requirements on how to select replacements based on the Guaranteed Overnight Funding Rate (SOFR).

What the change will mean for lenders and borrowers

In a final CFPB rule, released on December 7, consumer lenders now have until June 2023 to replace LIBOR as the benchmark for their financial contracts. LIBOR is being phased out due to a rate-fixing scandal that rocked the global financial industry.

The CFPB has established requirements on how lenders should select a replacement from April 2022, although some lenders have already stopped using the index.

The final rule, which comes into effect on April 1, 2022, includes provisions allowing lenders who issue open-ended loans, such as mortgages, auto loans and student loans, to choose a comparable index to set rates. of variable interest.

The rule identifies certain Guaranteed Overnight Funding Rate (SOFR) indices based on the spread-adjusted recommended by the Alternative Reference Rates Committee (ARRC) as examples to replace the 1-month, 3-month and 6-month LIBOR indices. .

The agency said it has decided to reserve judgment on using the SOFR-based spread-adjusted replacement index to replace 1-year LIBOR until further notice. It will provide more information once an ARRC recommendation is available, which the CFPB will assess for comparability.

For open-ended loans, such as credit cards and lines of credit, the rule includes provisions requiring lenders to use a replacement index whose historical fluctuations are substantially similar to those of the LIBOR index. They should also ensure that the new interest rate or APR on existing accounts is substantially similar.

The final rule also includes a list of factors lenders can use to help determine whether a replacement index can be considered comparable to the LIBOR index for both closed and open loans.

Lenders have until October 1, 2022 to provide information to consumers showing how they will determine rate changes for variable interest rate loans and lines of credit.

Finally, the rule amends Regulation Z to determine how the requirement to reassess rate increases on credit card accounts applies to the transition.