CFPB releases final rule for transition from LIBOR

by Justin White, NAFCU Compliance Blog

The Consumer Financial Protection Bureau (CFPB) completed a final rule (rule) that will help the financial services industry transition from the London Interbank Offered Rate (LIBOR) for consumer credit products. The rule helps credit unions transition from LIBOR-linked indices and provides guidance to credit unions in how to accomplish the rule’s goals.

It may be helpful to briefly review why the financial services industry with the CFPB’s blessing is transitioning to other indices. The Financial Conduct Authority (FCA) has indicated over the years its intention of ending LIBOR as a benchmark. In addition, key U.S.-based regulators have advised financial institutions to not enter any new LIBOR contracts after December 31st, 2021. The CFPB’s rule will allow credit unions to move from LIBOR by establishing standards a credit union may use to find replacement indices for both open-end and closed-end credit products.

Open-End Credit Products

Credit unions may “choose a compliant replacement index” for LIBOR-linked, open-end credit products on or after April 1, 2022, before LIBOR is set to expire. However, the added flexibility to transition from LIBOR before LIBOR becomes unavailable is contingent on what a credit union’s contract allows. When a credit union replaces the LIBOR index, the credit unions must either “ensure that the APR calculated using the replacement index is substantially similar to the rate calculated using the LIBOR index” or “select a replacement index that is newly established or an index that is not newly established and has historical fluctuations substantially similar to those of the LIBOR index.” A credit union may satisfy the “historical fluctuations are substantially similar” standard by showing the replacement index has “movements over time [that] are substantially similar…and the consumers’ payments using the replacement index compared to payments using the LIBOR index are substantially similar if there is sufficient historical data for this analysis.” The CFPB ignored calls from commenters to implement a principles-based standard in favor of a non-exhaustive list of factors to satisfy the “historical fluctuations are substantially similar” standard, citing the fact-specific nature of determining “whether a replacement index has historical fluctuations that are substantially similar” to LIBOR.

 

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