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CFPB Takes Actions on LIBOR Transition
Practical Law Legal Update w-039-3377 (Approx. 5 pages)
CFPB Takes Actions on LIBOR Transition
by Practical Law Finance
| Published on 04 May 2023 • USA (National/Federal) |
The Consumer Financial Protection Bureau (CFPB) has taken actions, independently and in concert with other regulators, to facilitate the orderly transition away from US Dollar (USD) LIBOR.
On April 26, 2023 the Consumer Financial Protection Bureau (CFPB) together with the Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and state bank and credit union regulators issued a joint statement on completing the LIBOR transition. On April 28, 2023, the CFPB issued an interim final rule that updates its 2021 LIBOR transition rule.
The joint statement reminds supervised institutions that LIBOR will be discontinued on June 30, 2023, and reiterates their expectation that institutions with LIBOR exposure should complete their transition of remaining LIBOR contracts as soon as practicable. The statement also reminds institutions that a failure to adequately prepare for LIBOR's discontinuance could undermine financial stability and institutions' safety and soundness and create litigation, operational, and consumer protection risks (see Legal Update, Federal Agencies and State Regulators Issue Joint Statement on Managing the LIBOR Transition). The joint statement notes two supervisory considerations:
- Expeditious transition of remaining legacy contracts. The joint statement encourages supervised institutions to ensure that replacement alternative rates are negotiated where needed and in place in advance of June 30, 2023 for all LIBOR-referencing financial contracts including investments, derivatives, and loans.
- Appropriate alternative rate selection. The joint statement encourages supervised institutions to conduct the due diligence necessary to ensure that alternative rate selections are appropriate for the institution's:
- products;
- risk profile;
- risk management capabilities;
- customer and funding needs; and
- operational capabilities.
- Due diligence should also include having an understanding of how a chosen alternate rate is constructed and what fragilities, if any, are associated with the rate and the markets underlying it.
The interim final rule, which becomes effective on May 15, 2023, amends and updates the CFPB's 2021 LIBOR transition rule to reflect enactment of the following:
- Adjustable Interest Rate (LIBOR) Act. On March 15, 2022, Congress enacted the LIBOR Act as part of the Consolidated Appropriations Act of 2022, 12 U.S.C. 5801 et seq., which directs the FRB to identify a replacement index based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York, including spread adjustments, to replace the one-month, three-month, six-month, and 12-month USD LIBOR indices (see Legal Updates, Adjustable Interest Rate (LIBOR) Act of 2021 Introduced to Assist with LIBOR Transition).
- LIBOR Benchmark Replacement Rule. On January 26, 2023, the FRB published a final rule implementing the LIBOR Act (see Legal Update, Fed Adopts LIBOR Benchmark Replacement Rule). The rule establishes benchmark replacements that are SOFR-based and incorporate spread adjustments for each specified tenor of LIBOR, for contracts governed by US law that:
- reference the overnight and one-, three-, six-, and 12-month tenors of USD LIBOR; or
- lack terms providing for the use of a clearly defined and practicable replacement benchmark rate for LIBOR following the cessation of LIBOR.
By adding references to the SOFR-based replacement for the 12-month LIBOR index, the CFPB interim rule brings Regulation Z, which implements Truth in Lending Act, in conformity with LIBOR Act and Benchmark Replacement Rule.
In conjunction with the interim rule, the CFPB issued Fast Facts, which provides an overview of the interim rule and updated the LIBOR Transition Frequently Asked Questions (FAQs). The Fast Facts describe how the interim rule affects open-end and closed-end financial products, such as:
- Home equity lines of credit.
- Open-end reverse mortgages.
- Credit cards.
- Closed-end mortgages.
- Student loans.
- Closed-end consumer loans.
For more information on the LIBOR transition, see LIBOR Replacement Toolkit.