A joint regulators’ statement that suggested actions banks and nonbanks alike should consider taking to ensure safe-and-sound practices during the transition away from the LIBOR reference rate was joined Thursday by the federal consumer financial protection agency – essentially making for a “clean sweep” of all financial regulators signing onto the statement.
The Consumer Financial Protection Bureau (CFPB) said it was joining in the statement, issued Wednesday by the federal banking and credit union regulatory agencies, to highlight the risks posed by the discontinuation of LIBOR (the London Interbank Offered Rate), and urging banks and nonbanks alike to continue their efforts to transition to alternative reference rates to mitigate consumer protection
Among other things, the regulators’ statement urges financial institutions to ensure that no new contracts utilizing a LIBOR index reference rate are entered into after Dec. 31 – the day LIBOR becomes defunct.
“The financial services industry uses LIBOR as a reference interest rate for many consumer financial products including mortgage loans, reverse mortgages, home equity lines of credit, credit cards, and student loans,” CFPB said in a press release. “The approaching discontinuation of most LIBOR tenors in June 2023 presents financial, legal, operational, and consumer protection risks. Additionally, consumers may not know when the transition from LIBOR will occur or how institutions will calculate their interest rates if they do not issue required disclosures to consumers.”
In the joint statement issued Wednesday, the regulators outlined supervisory considerations for financial institutions in transitioning away from LIBOR. Among them: clarification on the meaning of new LIBOR contracts, which stated that contracts entered into on or before Dec. 31 should either use a reference rate other than LIBOR or have fallback language that provides for use of a “strong and clearly defined alternative reference rate after LIBOR’s discontinuation.”
The statement also outlines considerations when assessing the appropriateness of alternative reference rates, expectations for fallback language and more.