Bureau proposes changes in disclosure provisions for open-, closed-end products after LIBOR runs out

Changes in disclosure provisions for open-end and closed-end loan products to provide examples of replacement indices for a widely used reference rate whose use is expected to be discontinued after 2021 was proposed by the consumer financial protection agency Thursday.

In a proposed rule, the Consumer Financial Protection Bureau (CFPB) said it would amend Regulation Z, which implements the Truth in Lending Act (TILA), to address the sunset of the reference rate London Interbank Offered Rate (LIBOR), which is expected to be discontinued after 2021. LIBOR is widely used by lenders for setting adjustable rates on mortgages and other loan products.

“Some creditors currently use LIBOR as an index for calculating rates for open-end and closed-end products,” CFPB said in its proposal. “The Bureau is proposing changes to open-end and closed-end provisions to provide examples of replacement indices for LIBOR indices that meet certain Regulation Z standards.”

CFPB said the proposal would also:

  • Permit creditors for home equity lines of credit (HELOCs) and card issuers for credit card accounts to transition existing accounts that use a LIBOR index to a replacement index on or after March 15, 2021, if certain conditions are met.
  • Speak to change-in-terms notice provisions for HELOCs and credit card accounts and how they apply to accounts transitioning away from using a LIBOR index.
  • Address how the rate reevaluation provisions applicable to credit card accounts apply to the transition from using a LIBOR index to a replacement index.

Comments will be due, according to the agency, by Aug. 4.

LIBOR is being phased out, according to the CFPB, because the rate is based on transactions among banks that don’t occur as often as they did in prior years, making the index less reliable and credible. According to the CFPB, the United Kingdom regulator that oversees LIBOR has stated that it cannot guarantee LIBOR’s availability beyond the end of next year.

The Federal Reserve has also urged financial institutions to begin adopting the new benchmark Secured Overnight Financing Rate (SOFR). That rate was developed by the Alternative Reference Rates Committee (ARRC) convened by the Federal Reserve. The rate is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.

Specifically, SOFR includes all trades in the “Broad General Collateral Rate” plus bilateral Treasury repurchase agreement (repo) transactions cleared through the Delivery-versus-Payment (DVP) service offered by the Fixed Income Clearing Corporation (FICC), which is filtered to remove a portion of transactions considered “specials.”

However, in follow-up responses to questions from members of the Senate Banking Committee, Fed Chair Jerome H. (“Jay”) Powell indicated another alternative rate, the so-called “Ameribor,” is a “fully appropriate” alternative for banks when it reflects their cost of funds. But it may not work for everybody, he said.

“While (Ameribor) is a fully appropriate rate for the banks that fund themselves through the American Financial Exchange or for other similar institutions for whom Ameribor may reflect their cost of funding, it may not be a natural fit for many market participants,” he wrote in response to a question from Sen. Tom Cotton (R-Ark.).

Ameribor is an International Organization of Securities Commissions (IOSCO)-compliant benchmark; it is based on nearly $1 trillion in actual unsecured interbank transactions by American Financial Exchange member institutions, which include banks and other financial institutions.

Amendments to Facilitate the LIBOR Transition (Regulation Z)