Facilitating the LIBOR Transition (Regulation Z)

Federal RegisterDec 8, 2021

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2020-0014]

RIN 3170-AB01

Facilitating the LIBOR Transition (Regulation Z)

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Final rule; official interpretation.

SUMMARY:

The Bureau of Consumer Financial Protection (Bureau) is amending Regulation Z, which implements the Truth in Lending Act (TILA), generally to address the anticipated sunset of LIBOR, which is expected to be discontinued for most U.S. Dollar (USD) tenors in June 2023. Some creditors currently use USD LIBOR as an index for calculating rates for open-end and closed-end products. The Bureau is amending the open-end and closed-end provisions to provide examples of replacement indices for LIBOR indices that meet certain Regulation Z standards. The Bureau also is amending Regulation Z to 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 April 1, 2022, if certain conditions are met. This final rule also addresses change-in-terms notice provisions for HELOCs and credit card accounts and how they apply to accounts transitioning away from using a LIBOR index. Lastly, the Bureau is amending Regulation Z to address how the rate reevaluation provisions applicable to credit card accounts apply to the transition from using a LIBOR index to a replacement index. The Bureau is reserving judgment about whether to include references to a 1-year USD LIBOR index and its replacement index in various comments; the Bureau will consider whether to finalize comments proposed on that issue in a supplemental final rule once it obtains additional information.

DATES:

Effective dates:

This final rule is effective on April 1, 2022, except the amendment to appendix H to part 1026 in amendatory instruction 8, which is effective on October 1, 2023.

Compliance dates:

The mandatory compliance date for revisions to the change-in-terms notice requirements in § 1026.9(c)(1)(ii) and (c)(2)(v)(A) is October 1, 2022. The mandatory compliance date for all other provisions of the final rule is April 1, 2022.

FOR FURTHER INFORMATION CONTACT:

Krista Ayoub, Kristen Phinnessee, or Lanique Eubanks, Senior Counsels, Office of Regulations, at 202-435-7700. If you require this document in an alternative electronic format, please contact

CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

The Bureau is adopting amendments to Regulation Z, which implements TILA, for both open-end and closed-end credit to address the anticipated sunset of LIBOR.

The effective date of this final rule is April 1, 2022. For HELOCs and credit card accounts, the updated requirements in this final rule related to disclosing a reduction in a margin in the change-in-terms notices are effective on April 1, 2022, with a mandatory compliance date of October 1, 2022. For the revisions related to the post-consummation disclosure form for certain adjustable rate mortgages (ARMs), specifically sample form H-4(D)(4) in appendix H (that can be used for complying with § 1026.20(d)), this final rule provides creditors, assignees, and servicers with additional time to add the date at the top of the form if they are not already including the date. Specifically, from April 1, 2022, through September 30, 2023, creditors, assignees, and servicers have the option of either using the version of the form in effect prior to April 1, 2022, that does not include the date at the top of the form (denoted as “Legacy Form” in appendix H), or using the revised form put into effect on April 1, 2022, (denoted as “Revised Form” in appendix H) that includes the date at the top of the form. Creditors, assignees, and servicers are not required to use the revised form that includes the date at the top of the form that will be put into effect on April 1, 2022, until October 1, 2023. Also, this final rule adds a new sample form H-4(D)(2) in appendix H effective April 1, 2022, that references a Secured Overnight Financing Rate (SOFR) index (denoted as “Revised Form” in appendix H) that can be used for complying with § 1026.20(c). This final rule also retains through September 30, 2023, the sample form H-4(D)(2) that was in effect prior to April 1, 2022, that references a LIBOR index (denoted as “Legacy Form” in appendix H). This is discussed in this section and the effective date discussion in part VI, below.

When amending commentary, the Office of the Federal Register requires reprinting of certain subsections being amended in their entirety rather than providing more targeted amendatory instructions. The sections of regulatory text and commentary included in this document show the language of those sections. In addition, the Bureau is releasing an unofficial, informal redline to assist industry and other stakeholders in reviewing the changes made in this final rule to the regulatory text and commentary of Regulation Z. This redline can be found on the Bureau's website, at [placeholder]. If any conflicts exist between the redline and the text of Regulation Z, its commentary, or this final rule, the documents published in the

Federal Register

are the controlling documents.

A. Open-End Credit

The Bureau is adopting several amendments to the open-end credit provisions in Regulation Z to address the anticipated sunset of LIBOR. First, this final rule sets forth a detailed roadmap for HELOC creditors and card issuers to choose a compliant replacement index for the LIBOR index.

Regulation Z already permits HELOC creditors and card issuers to change an index and margin they use to set the annual percentage rate (APR) on a variable-rate account under certain conditions, when the original index becomes unavailable or is no longer available. The Bureau determined, however, that consumers, HELOC creditors, and card issuers would benefit substantially if HELOC creditors and card issuers could transition away from a LIBOR index before LIBOR is expected to become unavailable.

Reverse mortgages structured as open-end credit are HELOCs subject to the provisions in §§ 1026.40 and 1026.9(c)(1).

Under this final rule, HELOC creditors and card issuers can transition away from using the LIBOR index to a replacement index on or after April 1, 2022, before LIBOR is expected to become unavailable. To accomplish this, this final rule imposes certain requirements on selecting a replacement index. HELOC creditors and card issuers must ensure that the APR calculated using the replacement index is substantially similar to the rate calculated using the LIBOR index, based generally on the values of these indices on October 18, 2021.

HELOC creditors

and card issuers may select a replacement index that is newly established and has no history or an index that is not newly established and has historical fluctuations substantially similar to those of the LIBOR index. This final rule provides details on how to determine whether a replacement index has historical fluctuations that are substantially similar to those of a particular LIBOR index for HELOCs and credit card accounts. Specifically, this final rule provides examples of the type of factors to be considered in whether a replacement index meets the Regulation Z “historical fluctuations are substantially similar” standard. The Bureau also has determined that the prime rate published in the Wall Street Journal (Prime) has historical fluctuations substantially similar to those of the 1-month and 3-month USD LIBOR indices. In addition, the Bureau has determined that spread-adjusted

indices based on SOFR recommended by the Alternative Reference Rates Committee (ARRC) for consumer products to the replace 1-month, 3-month, or 6-month USD LIBOR index have historical fluctuations that are substantially similar to those of the applicable USD LIBOR index they are intended to replace. These new provisions that detail specifically how HELOC creditors and card issuers may replace a LIBOR index with a replacement index for accounts on or after April 1, 2022, are set forth in § 1026.40(f)(3)(ii)(B) for HELOCs and § 1026.55(b)(7)(ii) for credit card accounts. The ARRC has indicated that the SOFR-based spread-adjusted indices recommended by ARRC for consumer products to the replace 1-month, 3-month, 6-month, or 1-year USD LIBOR index will not be published until Monday, July 3, 2023, which is the first weekday after Friday, June 30, 2023, when LIBOR is currently anticipated to sunset for these USD LIBOR tenors.

However, the Bureau wishes to facilitate an earlier transition for those HELOC creditors or card issuers that may want to transition to an index other than the SOFR-based spread-adjusted indices recommended by ARRC for consumer products. Accordingly, the Bureau is making these provisions effective on April 1, 2022.

If the replacement index is not published on October 18, 2021, the creditor or card issuer generally must use the next calendar day for which both the LIBOR index and the replacement index are published as the date for selecting indices values in determining whether the APR based on the replacement index is substantially similar to the rate based on the LIBOR index. The one exception is that if the replacement index is the SOFR-based spread-adjusted index recommended by the Alternative Reference Rates Committee (ARRC) for consumer products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR index, the creditor or card issuer must use the index value on June 30, 2023, for the LIBOR index and, for the SOFR-based spread-adjusted index for consumer products, must use the index value on the first date that index is published, in determining whether the APR based on the replacement index is

substantially similar to the rate based on the LIBOR index.

The spread between two indices is the difference between the levels of those indices, which may vary from day to day. For example, if today, index X is 5 percent and index Y is 4 percent, then the X-Y spread today is 1 percentage point (or, equivalently, 100 basis points). A spread adjustment is a term that is added to one index to make it more similar to another index. For example, if the X-Y spread is typically around 100 basis points, then one reasonable spread adjustment may be to add 100 basis points to Y every day. Then the spread-adjusted value of Y will typically be much closer to the value of X than Y is, although there may still be differences between X and the spread-adjusted Y from day to day.

Alt. Reference Rates Comm,

Summary of the ARRC's Fallback Recommendations,

at 11 (Oct. 6, 2021),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/spread-adjustments-narrative-oct-6-2021

(Summary of Fallback Recommendations).

Second, this final rule makes clarifying changes to existing Regulation Z provisions on the replacement of an index when the index becomes unavailable. These changes are set forth in § 1026.40(f)(3)(ii)(A) for HELOCs and in § 1026.55(b)(7)(i) for credit card accounts.

Third, this final rule revises change-in-terms notice requirements for HELOCs and credit card accounts to notify consumers how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced. This final rule ensures that the change-in-terms notices for these accounts will disclose the index that is replacing the LIBOR index and any adjusted margin that will be used to calculate a consumer's rate, regardless of whether the margin is being reduced or increased. These changes will become effective April 1, 2022. From April 1, 2022, through September 30, 2022, creditors will have the option of complying with these revised change-in-terms notice requirements. On or after October 1, 2022, creditors will be required to comply with these revised change-in-terms notice requirements. These changes are set forth in § 1026.9(c)(1)(ii) for HELOCs and in § 1026.9(c)(2)(v)(A) for credit card accounts.

Fourth, this final rule also provides additional details on how a creditor may disclose information about the periodic rate and APR in a change-in-terms notice for HELOCs and credit card accounts when the creditor is replacing a LIBOR index with the SOFR-based spread-adjusted index recommended by ARRC for consumer products to replace 1-month, 3-month, or 6-month USD LIBOR index in certain circumstances. These details are set forth in comment 9(c)(1)-4 for HELOCs and in comment 9(c)(2)(iv)-2.ii for credit card accounts.

Fifth, this final rule adds an exception from the rate reevaluation provisions applicable to credit card accounts. Currently, when a card issuer increases a rate on a credit card account, the card issuer generally must complete an analysis reevaluating the rate increase every six months until the rate is reduced to a certain degree. To facilitate compliance, this final rule adds an exception from these requirements for increases that occur as a result of replacing a LIBOR index using the specific provisions described above for transitioning from a LIBOR index or as a result of the LIBOR index becoming unavailable. This exception is set forth in § 1026.59(h)(3). This exception would not apply to rate increases that are already subject to the rate reevaluation requirements prior to the transition from the LIBOR index. This final rule also would address cases where the card issuer was already required to perform a rate reevaluation review prior to transitioning away from LIBOR and LIBOR was used as the benchmark for comparison for purposes of determining whether the card issuer can terminate the six-month reviews. To facilitate compliance, these changes will address how a card issuer can terminate the obligation to review where the rate applicable immediately prior to the increase was a variable rate calculated using a LIBOR index. These changes are set forth in § 1026.59(f)(3).

Sixth, in relation to the open-end credit provisions, this final rule adopts technical edits to comment 59(d)-2 to replace the LIBOR reference with a reference to a SOFR index and to make related changes and corrections.

B. Closed-End Credit

The Bureau is adopting amendments to the closed-end credit provisions in Regulation Z to address the anticipated sunset of LIBOR. First, this final rule provides details on how to determine whether a replacement index is a comparable index to a particular LIBOR index for purposes of the closed-end refinancing provisions. Currently, under Regulation Z, if the creditor changes the index of a variable-rate closed-end loan to an index that is not a comparable index, the index change may constitute a refinancing for purposes of Regulation Z, triggering certain requirements. Specifically, this final rule provides examples of the type of factors to be considered in whether a replacement index meets the Regulation Z “comparable” standard with respect to a particular LIBOR index for closed-end transactions. This change is set forth in comment 20(a)-3.iv. This final rule also adds an illustrative example to identify the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products to replace the 1-month, 3-month, or 6 month USD LIBOR index as an example of a comparable index for the LIBOR indices that they are intended to replace. This change is set forth in comment 20(a)(3)-ii.B.

Second, in relation to the closed-end credit provisions, this final rule adopts technical edits to § 1026.36(a)(4)(iii)(C) and (a)(5)(iii)(B), comment 37(j)(1)-1, and sample forms H-4(D)(2) and H-4(D)(4) in appendix H pursuant to § 1026.20(c) and (d). These technical edits would replace LIBOR references with references to a SOFR index and make related changes and corrections. This final rule also adds a date at the top of the sample form H-4(D)(4) that can be used for complying with § 1026.20(d) concerning ARMs. The effective date of the revised sample forms in H-4(D)(2) and H-4(D)(4) in appendix H is April 1, 2022. With respect to sample form H-4(D)(4) in appendix H, from April 1, 2022, through September 30, 2023, creditors, assignees, or servicers will have the option of using a format substantially similar to form H-4(D)(4) either in effect prior to April 1, 2022 (that does not include the date at the top of the form and is denoted as “Legacy Form” in appendix H), or the form that becomes effective on April 1, 2022 (that includes the date at the top of the form and is denoted as “Revised Form” in appendix H). Both versions of the forms will be available in appendix H through September 30, 2023. Starting on or after October 1, 2023, only creditors, assignees, or servicers using a format substantially similar to the form that becomes effective on April 1, 2022, that includes a date at the top of the form, will be deemed to be in compliance. Accordingly, the version of form H-4(D)(4) in effect prior to April 1, 2022, will be removed from appendix H and cannot be used to demonstrate compliance with § 1026.20(d). In addition, the revised form of H-4(D)(4) that will become effective on April 1, 2022, also provides an example of the form using a SOFR index. Because most tenors of USD LIBOR are not expected to be discontinued until June 2023, this final rule retains through September 30, 2023, the sample form H-4(D)(4) that was in effect prior to April 1, 2022, that references a LIBOR index. New sample form H-4(D)(2) in appendix H effective April 1, 2022, (denoted as “Revised Form” in appendix H) can be used for complying with § 1026.20(c) relating to ARMs and provides an example using a SOFR index. This final rule also retains through September 30, 2023, the sample form H-4(D)(2) that was in effect prior to April 1, 2022, (denoted as “Legacy Form” in appendix H) that provides an example using a LIBOR index.

II. Background

A. LIBOR

Introduced in the 1980s, LIBOR (originally an acronym for London Interbank Offered Rate) was intended to measure the average rate at which a bank could obtain unsecured funding in the London interbank market for a given period, in a given currency. LIBOR is calculated based on submissions from a panel of contributing banks and published every London business day for five currencies (USD, British pound sterling (GBP), euro (EUR), Swiss franc (CHF), and Japanese yen (JPY)) and for seven tenors

for each currency (overnight, 1-week, 1-month, 2-month, 3-month, 6-month, and 1-year), resulting in 35 individual rates (collectively, LIBOR). As of September 2021, the panel for USD LIBOR is comprised of sixteen banks, and each bank contributes data for all seven tenors.

The tenor refers to the to the length of time remaining until a loan matures.

The Intercontinental Exch. LIBOR,

Panel Composition, https://www.theice.com/iba/libor.

In 2017, the chief executive of the U.K. Financial Conduct Authority (FCA), which regulates LIBOR, announced that it did not intend to persuade or compel banks to submit information for LIBOR past the end of 2021 (subsequently extended to June 30, 2023, for certain USD LIBOR tenors only) and that the panel banks had agreed to voluntarily sustain LIBOR until then in order to provide sufficient time for the market to transition from using LIBOR indices to alternative indices.

In March 2021, the FCA announced cessation dates for all LIBOR indices. The bank panels are scheduled to end immediately after December 31, 2021, for the 1-week and 2-month USD LIBOR indices and immediately after June 30, 2023, for the remaining USD LIBOR indices. After these dates, representative LIBOR indices will no longer be available.

Andrew Bailey, Fin. Conduct Auth.,

The Future of LIBOR

(2017),

https://www.fca.org.uk/news/speeches/the-future-of-libor;

Fin. Conduct Auth.,

FCA Statement on LIBOR Panels

(2017),

https://www.fca.org.uk/news/statements/fca-statement-libor-panels.

Fin. Conduct Auth.,

Announcements on the End of LIBOR

(2021),

https://www.fca.org.uk/news/press-releases/announcements-end-libor (last updated May 3, 2021);

Fin. Conduct Auth.,

About LIBOR Transition

(2021)

, https://www.fca.org.uk/markets/libor-transition

(last updated May 7, 2021).

B. Consumer Products Using LIBOR

In the United States, financial institutions have used USD LIBOR as a common benchmark rate for a variety of adjustable-rate consumer financial products, including mortgages, credit cards, HELOCs, and student loans. Typically, the consumer pays an interest rate that is calculated as the sum of a benchmark index and a margin. For example, a consumer may pay an interest rate equal to the 1-year USD LIBOR plus two percentage points.

Financial institutions have been developing plans and procedures to transition from the use of LIBOR indices to replacement indices for products that are being newly issued and existing accounts that were originally benchmarked to a LIBOR index. In some markets, such as for HELOCs and credit cards, the vast majority of newly originated lines of credit are already based on indices other than a LIBOR index.

III. Summary of Rulemaking Process

A. 2020 Proposal

On June 4, 2020, the Bureau issued a notice of proposed rulemaking containing several proposed amendments to Regulation Z, which implements TILA, for both open-end and closed-end credit to address the anticipated sunset of LIBOR.

This notice of proposed rulemaking was published in the

Federal Register

on June 18, 2020 (2020 Proposal).

The Bureau generally proposed that the final rule would take effect on March 15, 2021, except for the updated change-in-term disclosure requirements for HELOCs and credit card accounts that would apply as of October 1, 2021.

At the same time as issuing the proposal, the Bureau issued separate written guidance in the form of Frequently Asked Questions (FAQs) for creditors and card issuers to use as they transition away from using LIBOR indices. These FAQs addressed regulatory questions where the existing rule was clear on the requirements and already provides necessary alternatives for the LIBOR transition. The FAQs, as well as additional written guidance materials including an executive summary of this final rule, are available here: Bureau of Consumer Fin. Prot., [Title]

https://www.consumerfinance.gov/policy-compliance/guidance/other-applicable-requirements/libor-transition/.

85 FR 36938 (June 18, 2020).

The Bureau proposed several amendments to the open-end credit provisions in Regulation Z to address the anticipated sunset of LIBOR. Specifically, the Bureau proposed to add new provisions that detail specifically how HELOC creditors and card issuers may replace a LIBOR index with a replacement index for accounts on or after March 15, 2021. In the 2020 Proposal, the Bureau set forth certain proposed conditions that HELOC creditors and card issuers would be required to meet in order to use these newly proposed provisions. Under the 2020 Proposal, HELOC creditors and card issuers would have been required

to ensure that the APR calculated using the replacement index is substantially similar to the rate calculated using the LIBOR index, based generally on the values of these indices on December 31, 2020. The 2020 Proposal also would have imposed other requirements on a replacement index. Under the 2020 Proposal, HELOC creditors and card issuers could select a replacement index that is newly established and has no history, or an index that is not newly established and has a history. As proposed, HELOC creditors and card issuers would have been permitted to replace a LIBOR index with an index that has a history only if the index has historical fluctuations substantially similar to those of the LIBOR index. The Bureau proposed to determine that Prime has historical fluctuations substantially similar to those of the 1-month and 3-month USD LIBOR indices. The Bureau also proposed to determine that the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR indices have historical fluctuations that are substantially similar to those of the LIBOR indices that they are intended to replace.

The Bureau also proposed amendments to the open-end credit provisions to: (1) Make clarifying changes to the existing provisions on the replacement of an index when the index becomes unavailable; (2) revise change-in-terms notice requirements for HELOCs and credit card accounts to ensure that consumers are notified of how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced; (3) add an exception from the rate reevaluation provisions applicable to credit card accounts for increases that occur as a result of replacing a LIBOR index using the specific proposed provisions described above for transitioning from a LIBOR index or as a result of the LIBOR index becoming unavailable; (4) address cases where the card issuer was already required to perform a rate reevaluation review prior to transitioning away from LIBOR and LIBOR was used as the benchmark for comparison for purposes of determining whether the card issuer can terminate the six-month reviews; and (5) make several technical edits to certain commentary to replace LIBOR references with references to a SOFR index.

The Bureau also proposed amendments to the closed-end credit provisions in Regulation Z to address the anticipated sunset of LIBOR, including proposed amendments to: (1) Add an illustrative example to identify the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products as an example of a comparable index for the LIBOR indices that they are intended to replace for purposes of the closed-end refinancing provisions; and (2) make technical edits to certain commentary and sample forms to replace LIBOR references with references to a SOFR index and make related changes and corrections.

The comment period for the 2020 Proposal closed on August 4, 2020. The Bureau received around 30 comment letters. Approximately half of the comment letters were submitted by industry commenters, specifically banks and credit unions and their trade associations. Commenters also included several consumer groups, a financial services education and consulting firm, and several individuals.

Commenters generally supported the proposed provisions that would allow HELOC creditors and card issuers to replace a LIBOR index with a replacement index for accounts on or after March 15, 2021, if certain conditions are met. Nonetheless, several industry commenters encouraged the Bureau to allow HELOC creditors and card issuers to replace a LIBOR index sooner than March 15, 2021. Commenters also generally supported the proposed conditions that must be met for HELOC creditors and card issuers to use the newly proposed provisions described above. Also, several industry commenters and several consumer group commenters supported the Bureau's proposal determining that Prime and certain SOFR-based spread-adjusted indices recommended by ARRC for consumer products have historical fluctuations substantially similar to those of certain LIBOR indices. Nonetheless, a few consumer group commenters indicated that the Bureau should not adopt its proposal that Prime has historical fluctuations that are substantially similar to those of certain LIBOR indices.

Several commenters requested additional guidance on the proposed conditions that must be met by HELOC creditors and card issuers to use the proposed provisions discussed above, including: (1) Many industry commenters and one individual commenter requested that the Bureau identify additional indices that meet the Regulation Z standards that the historical fluctuations of those indices are substantially similar to those of certain tenors of LIBOR; (2) several industry commenters requested that the Bureau provide a principles-based standard for determining when the historical fluctuations of an index are substantially similar to those of a particular LIBOR index; (3) a few consumer group commenters and a financial services education and consulting firm indicated that the Bureau should limit when a newly established index can be used to replace a LIBOR index; and (4) several industry commenters and several consumer group commenters indicated that the Bureau should provide greater detail on the proposed condition that HELOC creditors and card issuers must ensure that the APR calculated using the replacement index is substantially similar to the rate calculated using the LIBOR index.

Several industry commenters and several consumer group commenters also indicated that the Bureau should provide further guidance to HELOC creditors and card issuers to assist them in determining whether LIBOR (or another index) is unavailable for purposes of Regulation Z.

Commenters generally supported the Bureau's proposed revisions to the notice requirements for HELOCs and credit card accounts. Several industry commenters and an individual commenter also requested that the Bureau provide comprehensive sample disclosures for change-in-terms notices for HELOC accounts and for credit card accounts that can be provided to borrowers to help them understand the change in the index. Commenters also generally supported the proposed changes to the rate reevaluation provisions applicable to credit card accounts.

With respect to the proposed amendments related to closed-end credit, commenters generally supported the proposed new illustrative example to identify the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products as an example of a comparable index for the LIBOR indices that they are intended to replace for purposes of the closed-end refinancing provisions. Nonetheless, commenters also requested other changes to the closed-end provisions, including: (1) Many industry commenters generally urged the Bureau to provide additional examples of comparable indices to the LIBOR indices; (2) many industry commenters urged the Bureau to provide additional guidance on how to determine if an index is a comparable index for purposes of Regulation Z; (3) several commenters, including a few consumer groups, a financial services education and consulting firm, and a few individuals, urged the Bureau to require disclosures to consumers with closed-

end loans notifying consumers of the index change; (4) a few industry commenters urged the Bureau to include the same provisions for closed-end loans that it proposed for HELOCs and credit card accounts which would allow HELOC creditors and card issuers to transition from using a LIBOR index on or after March 15, 2021, if certain conditions are met; and (5) several industry commenters urged the Bureau to include the proposed example for the SOFR-based spread-adjusted indices recommended by ARRC for consumer products in the text of the rule, rather than the commentary.

The Bureau responds to the above comments in the section-by-section discussion below.

The Bureau notes that some of the comments the Bureau received raised issues that are beyond the scope of the 2020 Proposal. Specifically, several industry commenters requested that the Bureau provide guidance that the use of certain replacement indices would not raise Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) concerns. The Bureau is not addressing these comments requesting guidance on UDAAP in this final rule because they are outside the scope of the 2020 Proposal.

B. Outreach

Prior to the 2020 Proposal, the Bureau received feedback through both formal and informal channels, regarding ways in which the Bureau could use rulemaking to facilitate the market's orderly transition from using LIBOR indices to alternate indices. The following is a brief summary of some of the Bureau's engagement with industry, consumer groups, regulators, and other stakeholders regarding the transition away from the use of LIBOR indices prior to the 2020 Proposal. The Bureau discusses feedback received through these various channels that is relevant to this final rule throughout the document.

The Bureau is an

ex officio

member of the ARRC, a group of private-market participants convened by the Board of Governors of the Federal Reserve System (Board) and the Federal Reserve Bank of New York (New York Fed) to ensure a successful transition from the use of LIBOR as an index. The group is comprised of a diverse set of private-sector entities that have an important presence in markets affected by USD LIBOR and a wide array of official-sector entities, including banking and financial sector regulators, as ex-officio members. As an

ex officio

member, the Bureau does not have voting rights and may only offer views and analysis to support the ARRC's objectives. Through its interaction with other ARRC members, the Bureau has received questions and requests for clarification regarding certain provisions in the Bureau's rules that could affect the industry's LIBOR transition plans. For example, the Bureau has received informal requests from members of the ARRC for clarification that the SOFR-based spread-adjusted index recommended by ARRC for consumer products is a comparable index to the LIBOR index. The Bureau has also, in coordination with the ARRC, actively sought feedback regarding a potential rulemaking related to the LIBOR transition. For example, the Bureau convened multiple meetings for members of the ARRC to hear consumer groups' views on potential issues consumers may face during the anticipated sunset of LIBOR and solicited suggestions for potential actions the regulators could take to facilitate a smooth transition.

The Bureau has engaged in ongoing market monitoring with individual institutions, trade associations, regulators, and other stakeholders to understand their plans for the LIBOR transition, their concerns, and potential impacts on consumers. Institutions and trade associations have met informally with the Bureau and sent letters outlining their concerns related to the anticipated sunset of LIBOR. The Bureau also has received feedback regarding the LIBOR transition through other formal channels that were related to general Bureau activities. For example, in January 2019, the Bureau solicited information from the public about several aspects of the consumer credit card market.

The Bureau received comments submitted from a banking trade group regarding changes to Regulation Z that could support the transition away from using LIBOR indices.

84 FR 647 (Jan. 31, 2019).

Through these various channels, industry trade associations, consumer groups, and other organizations provided information about provisions in Bureau regulations that could be modified to reduce market confusion, enable institutions and consumers to transition away from using LIBOR indices in a timely manner, and lower risks related to the LIBOR transition. A number of financial institutions raised concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable if, as expected, some panel banks stop submitting information before LIBOR finally is discontinued. Stakeholders noted that FCA could declare LIBOR to be unrepresentative at some point after 2021 and wanted clarity from U.S. Federal regulators about how U.S. firms should interpret such a declaration. Some industry participants asked that the Bureau declare LIBOR to be unavailable for the purposes of Regulation Z. They also requested that the Bureau facilitate a transition timeline that would provide sufficient time for financial institutions to notify consumers of the change and make the necessary changes to their systems.

Credit card issuers and related trade associations stated that Prime should be permitted to replace a LIBOR index, noting that while a SOFR-based index is expected to replace a LIBOR index in many commercial contexts, Prime is the industry standard rate index for credit cards. They also requested that the Bureau permit card issuers to replace the LIBOR index used in setting the variable rates on existing accounts before LIBOR becomes unavailable to facilitate compliance. They also requested guidance on how the rate reevaluation provisions applicable to credit card accounts apply to accounts that are transitioning away from using LIBOR indices.

Consumer groups emphasized the need for transparency as institutions sunset their use of LIBOR indices and indicated a preference for replacement indices that are publicly available. They recommended regulators protect consumers by preventing institutions from changing the index or margin in a manner that would raise the interest rate paid by the consumer. They also shared industry's concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable until LIBOR finally is discontinued. Consumer advocates noted that existing contract language may limit how and when institutions can transition away from LIBOR. They also discussed issues specific to particular consumer products, expressing concern, for example, that the contract language in the private student loan market is ambiguous and gives lenders wide leeway in determining a comparable replacement index for LIBOR indices.

IV. Legal Authority

A. Section 1022 of the Dodd-Frank Act

Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions

thereof.” Among other statutes, title X of the Dodd-Frank Act and TILA are Federal consumer financial laws.

Accordingly, in issuing this final rule, the Bureau is exercising its authority under Dodd-Frank Act section 1022(b) to prescribe rules under TILA and title X that carry out the purposes and objectives and prevent evasion of those laws.

Dodd-Frank Act section 1002(14); codified at 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws” and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act section 1002(12); codified at 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include TILA).

B. The Truth in Lending Act

TILA is a Federal consumer financial law. In adopting TILA, Congress explained that: (1) Economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit; (2) the informed use of credit results from an awareness of the cost thereof by consumers; and (3) it is the purpose of TILA to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to them and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.

TILA section 102(a), codified at 15 U.S.C. 1601(a).

TILA and Regulation Z define credit broadly as the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.

TILA and Regulation Z set forth disclosure and other requirements that apply to creditors. Different rules apply to creditors depending on whether they are extending “open-end credit” or “closed-end credit.” Under the statute and Regulation Z, open-end credit exists where there is a plan in which the creditor reasonably contemplates repeated transactions; the creditor may impose a finance charge from time to time on an outstanding unpaid balance; and the amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

Typically, closed-end credit is credit that does not meet the definition of open-end credit.

TILA section 103(f), codified at 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14).

12 CFR 1026.2(a)(20).

12 CFR 1026.2(a)(10); comment 2(a)(10)-1.

The term “creditor” generally means a person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable, either on the face of the note or contract or by agreement when there is no note or contract.

TILA defines “finance charge” generally as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.

See

TILA section 103(g), codified at 15 U.S.C. 1602(g); 12 CFR 1026.2(a)(17)(i).

TILA section 106(a), codified at 15 U.S.C. 1605(a);

see

12 CFR 1026.4.

The term “creditor” also includes a card issuer, which is a person or its agent that issues credit cards, when that person extends credit accessed by the credit card.

Regulation Z defines the term “credit card” to mean any card, plate, or other single credit device that may be used from time to time to obtain credit.

A charge card is a credit card on an account for which no periodic rate is used to compute a finance charge.

In addition to being creditors under TILA and Regulation Z, card issuers also generally must comply with the credit card rules set forth in the Fair Credit Billing Act

and in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act)

(if the card accesses an open-end credit plan), as implemented in Regulation Z subparts B and G.

See

TILA section 103(g), codified at 15 U.S.C. 1602(g); 12 CFR 1026.2(a)(17)(iii) and (iv).

See

12 CFR 1026.2(a)(15)(i).

See

12 CFR 1026.2(a)(15)(iii).

Fair Credit Billing Act, Pubic Law 93-495, 88 Stat. 1511 (1974).

Credit Card Accountability Responsibility and Disclosure Act of 2009, Public Law 111-24, 123 Stat. 1734 (2009).

See generally

12 CFR 1026.5(b)(2)(ii), 1026.7(b)(11), 1026.12, 1026.51-.60.

TILA section 105(a).

As amended by the Dodd-Frank Act, TILA section 105(a)

directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that, in the judgment of the Bureau, are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. Pursuant to TILA section 102(a), a purpose of TILA is to assure a meaningful disclosure of credit terms to enable the consumer to avoid the uninformed use of credit and compare more readily the various credit terms available to the consumer. This stated purpose is tied to Congress's finding that economic stabilization would be enhanced and competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit.

Thus, strengthened competition among financial institutions is a goal of TILA, achieved through the effectuation of TILA's purposes.

15 U.S.C. 1604(a).

TILA section 102(a), codified at 15 U.S.C. 1601(a).

Historically, TILA section 105(a) has served as a broad source of authority for rules that promote the informed use of credit through required disclosures and substantive regulation of certain practices. Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain “additional requirements” that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. This amendment clarified the authority to exercise TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a) authority to make adjustments and exceptions to the requirements of TILA applies to all transactions subject to TILA, except with respect to the provisions of TILA section 129 that apply to the high-cost mortgages referred to in TILA section 103(bb).

15 U.S.C. 1602(bb).

For the reasons discussed in this document, the Bureau is amending certain provisions in Regulation Z that impact the transition from LIBOR indices to other indices to carry out TILA's purposes and is finalizing such additional requirements, adjustments, and exceptions as, in the Bureau's judgment, are necessary and proper to carry out the purposes of TILA, prevent circumvention or evasion thereof, or to facilitate compliance. In developing these aspects of this final rule pursuant to its authority under TILA section 105(a), the Bureau has considered the purposes of TILA, including ensuring meaningful disclosures, facilitating consumers' ability to compare credit terms, and helping consumers avoid the

uninformed use of credit, and the findings of TILA, including strengthening competition among financial institutions and promoting economic stabilization.

TILA section 105(d).

As amended by the Dodd-Frank Act, TILA section 105(d)

states that any Bureau regulations requiring any disclosure which differs from the disclosures previously required in certain sections shall have an effective date of October 1 which follows by at least six months the date of promulgation. The section also states that the Bureau may in its discretion lengthen or shorten the amount of time for compliance when it makes a specific finding that such action is necessary to comply with the findings of a court or to prevent unfair or deceptive disclosure practices. The section further states that any creditor or lessor may comply with any such newly promulgated disclosures requirements prior to the effective date of the requirements.

15 U.S.C. 1604(d).

V. Section-by-Section Analysis

Section 1026.9 Subsequent Disclosure Requirements

9(c) Change in Terms

9(c)(1) Rules Affecting Home-Equity Plans

Section 1026.9(c)(1)(i) provides that for HELOCs subject to § 1026.40 whenever any term required to be disclosed in the account-opening disclosures under § 1026.6(a) is changed or the required minimum periodic payment is increased, the creditor must mail or deliver written notice of the change to each consumer who may be affected. The notice must be mailed or delivered at least 15 days prior to the effective date of the change. The 15-day timing requirement does not apply if the change has been agreed to by the consumer; the notice must be given, however, before the effective date of the change. Section 1026.9(c)(1)(ii) provides that for HELOCs subject to § 1026.40, a creditor is not required to provide a change-in-terms notice under § 1026.9(c)(1) when the change involves a reduction of any component of a finance or other charge or when the change results from an agreement involving a court proceeding.

A creditor for a HELOC subject to § 1026.40 is required under current § 1026.9(c)(1) to provide a change-in-terms notice disclosing the index that is replacing the LIBOR index. The index is a term that is required to be disclosed in the account-opening disclosures under § 1026.6(a) and thus, a creditor must provide a change-in-terms notice disclosing the index that is replacing the LIBOR index.

The exception in § 1026.9(c)(1)(ii) that provides that a change-in-terms notice is not required when a change involves a reduction in the finance or other charge does not apply to the index change. The change in the index used in making rate adjustments is a change in a term required to be disclosed in a change-in-terms notice under § 1026.9(c)(1) regardless of whether there is also a change in the index value or margin that involves a reduction in a finance or other charge.

See

12 CFR 1026.6(a)(1)(ii) and (iv) and comment 6(a)(1)(ii)-5.

Under current § 1026.9(c)(1), a creditor generally is required to provide a change-in-terms notice of a margin change if the margin is increasing. In disclosing the variable rate in the account-opening disclosures under § 1026.6(a), the creditor must disclose the margin as part of an explanation of how the amount of any finance charge will be determined.

Thus, a creditor must provide a change-in-terms notice under current § 1026.9(c)(1) disclosing the changed margin, unless § 1026.9(c)(1)(ii) applies. Current § 1026.9(c)(1)(ii) applies to a decrease in the margin because that change would involve a reduction in a component of a finance or other charge. Thus, under current § 1026.9(c)(1), a creditor would only be required to provide a change-in-terms notice of a change in the margin under § 1026.9(c)(1) if the margin is increasing.

See

12 CFR 1026.6(a)(1)(iv).

A creditor also is required to disclose in the change-in-terms notice any increased periodic rate or APR as calculated using the replacement index at the time the change-in-terms notice is provided. The periodic rate and APR are terms that are required to be disclosed in the account-opening disclosures under § 1026.6(a) and thus, a creditor must provide a change-in-terms notice disclosing the new periodic rate and APR calculated using the replacement index if the periodic rate or APR is increasing from the rate calculated using the LIBOR index at the time the change-in-terms notice is provided.

Comment 9(c)(1)-1 provides that no notice of a change in terms need be given if the specific change is set forth initially, such as rate increases under a properly disclosed variable-rate plan. Nonetheless, the Bureau determines that this comment does not apply when a periodic rate or APR is increasing because the index is being replaced (as opposed to the periodic rate or APR is increasing because the value of the original index is increasing).

See

12 CFR 1026.6(a)(1)(ii). Comment 6(a)(1)(ii)-3 provides that in disclosing the rate(s) in effect for a variable-rate plan at the time of the account-opening disclosures (as is required by § 1026.6(a)(1)(ii)), the creditor may use an insert showing the current rate; may give the rate as of a specified date and then update the disclosure from time to time, for example, each calendar month; or may disclose an estimated rate under § 1026.5(c).

As discussed more in the section-by-section analysis of § 1026.9(c)(1)(ii), the Bureau proposed to revise § 1026.9(c)(1)(ii) which provides an exception under which a creditor is not required to provide a change-in-terms notice under § 1026.9(c)(1) when the change involves a reduction of any component of a finance or other charge. The Bureau proposed to revise § 1026.9(c)(1)(ii) to provide that the exception does not apply on or after October 1, 2021, to situations where the creditor is reducing the margin when a LIBOR index is replaced as permitted by proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B). The Bureau also proposed comment 9(c)(1)(ii)-3 to provide detail on this proposed revision to § 1026.9(c)(1)(ii). This final rule adopts § 1026.9(c)(1)(ii) and comment 9(c)(1)(ii)-3 as proposed except to provide that the revisions to § 1026.9(c)(1)(ii) are effective April 1, 2022, with a mandatory compliance date of October 1, 2022, consistent with the effective date of this final rule and consistent with TILA section 105(d).

This final rule also provides additional details on how a creditor may disclose information about the periodic rate and APR in a change-in-terms notice for HELOCs when the creditor is replacing a LIBOR index with the SOFR-based spread-adjusted index recommended by the ARRC for consumer products in certain circumstances. Specifically, this final rule provides additional details for situations where a creditor is replacing a LIBOR index with the SOFR-based spread-adjusted index recommended by the ARRC for consumer products to replace the 1-month, 3-month, or 6-month USD LIBOR index, the creditor is not changing the margin used to calculate the variable rate as a result of the replacement, and a periodic rate or the corresponding APR based on the replacement index is unknown to the creditor at the time the change-in-terms notice is provided because the SOFR index has not been published at the time the creditor provides the change-in-terms notice but will be published by the time the replacement of the index takes effect on the account. In this case, new comment 9(c)(1)-4 provides that a creditor may comply with any

requirement to disclose in the change-in-terms notice the amount of the periodic rate or APR (or changes in these amounts) as calculated using the replacement index based on the best information reasonably available, clearly stating that the disclosure is an estimate. For example, in this situation, comment 9(c)(1)-4 provides that the creditor may state that: (1) Information about the rate is not yet available but that the creditor estimates that, at the time the index is replaced, the rate will be substantially similar to what it would be if the index did not have to be replaced; and (2) the rate will vary with the market based on a SOFR index.

In this unique circumstance, the Bureau interprets § 1026.5(c) to be consistent with new comment 9(c)(1)-4. Section 1026.5(c) provides, in relevant part, that if any information necessary for accurate disclosure is unknown to the creditor, it must make the disclosure based on the best information reasonably available and must state clearly that the disclosure is an estimate. New comment 9(c)(1)-4 also is consistent with this final rule provisions that provide that if a creditor uses the SOFR-based spread-adjusted index recommended by the ARRC for consumer products to replace the 1-month, 3-month, or 6-month USD LIBOR index as the replacement index and uses as the replacement margin the same margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan, the creditor will be deemed to be in compliance with the conditions in § 1026.40(f)(3)(ii)(A) and (B) that the replacement index and replacement margin would have resulted in an APR substantially similar to the rate calculated using the LIBOR index.

See

comments 40(f)(3)(ii)(A)-3 and 40(f)(3)(ii)(B)-3;

see also

the section-by-section analysis of § 1026.40(f)(3)(ii)(A) for a discussion of the rationale for the Bureau making this determination.

As described above, under § 1026.9(c)(2), the change-in-terms notice for open-end credit that is not subject to § 1026.40 (including credit card accounts) generally must be mailed or delivered at least 45 days prior to the effective date of the change. Also, as discussed above, the ARRC has indicated that the SOFR-based spread-adjusted indices recommended by ARRC for consumer products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR index will not be published until Monday, July 3, 2023, which is the first weekday after Friday, June 30, 2023, when LIBOR is currently anticipated to sunset for these USD LIBOR tenors. This final rule provision is intended to facilitate compliance with the 45-day advance notice requirement for change-in-terms notices by allowing creditors in the situation described above to provide change-in-terms notices prior to the SOFR-based spread-adjusted index being published, so that creditors are not left without an index to use on the account after the SOFR-based spread-adjusted index is published but before it becomes effective on the account. The Bureau has determined that the information described in new comment 9(c)(2)(iv)-2.ii sufficiently notifies consumers of the estimated rate calculated using the SOFR-based spread-adjusted index, even though the SOFR-based spread-adjusted index is not being published at the time the notice is sent, as long as the SOFR-based spread-adjusted index is published by the time the replacement of the index takes effect on the account.

The Bureau is reserving judgment about whether to include a reference to the 1-year USD LIBOR index in comment 9(c)(2)(iv)-2.ii until it obtains additional information. Once the Bureau knows which SOFR-based spread-adjusted index the ARRC will recommend to replace the 1-year USD LIBOR index for consumer products, the Bureau may determine whether the

replacement index and replacement margin would have resulted in an APR substantially similar to the rate calculated using the LIBOR index. Assuming the Bureau determines that the index meets that standard, the Bureau will then consider whether to codify that determination in a supplemental final rule, or otherwise announce that determination.

9(c)(2)(v) Notice Not Required

The Bureau's Proposal

The Bureau proposed to revise § 1026.9(c)(2)(v)(A) to provide that for plans other than HELOCs subject to § 1026.40, the exception in § 1026.9(c)(2)(v)(A) to change-in-terms notice requirements under § 1026.9(c)(2) does not apply on or after October 1, 2021, to margin reductions when a LIBOR index is replaced as permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii).

As discussed in more detail in the section-by-section analysis of § 1026.55(b)(7)(i), the Bureau proposed to move the provisions in current comment 55(b)(2)-6 that allow a card issuer to replace an index and adjust the margin if the index becomes unavailable in certain circumstances to proposed § 1026.55(b)(7)(i) and to revise the proposed moved provisions for clarity and consistency. Also, as discussed in more detail in the section-by-section analysis of § 1026.55(b)(7)(ii), to facilitate compliance, the Bureau proposed to add new LIBOR-specific provisions to proposed § 1026.55(b)(7)(ii) that would permit card issuers for a credit card account under an open-end (not home-secured) consumer credit plan that use a LIBOR index under the plan to replace the LIBOR index and change the margin on such plans on or after March 15, 2021, in certain circumstances.

The Bureau also proposed to add comment 9(c)(2)(v)-14 to provide additional detail. Proposed comment 9(c)(2)(v)-14 provided that for change-in-terms notices provided under § 1026.9(c)(2) on or after October 1, 2021, covering changes permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii), a creditor must provide a change-in-terms notice under § 1026.9(c)(2) disclosing the replacement index for a LIBOR index and any adjusted margin that is permitted under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii), even if the margin is reduced. Proposed comment 9(c)(2)(v)-14 also provided that prior to October 1, 2021, a creditor has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index as permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii).

Comments Received

As discussed in the section-by-section analysis of § 1026.9(c)(1)(ii), in response to the 2020 Proposal, several industry commenters and several individual commenters provided the same comments for both the proposed changes to the change-in-terms notice requirements in proposed § 1026.9(c)(1)(ii) for HELOCs and § 1026.9(c)(2)(v)(A) for credit card accounts under an open-end (not home-secured) consumer credit plan. With respect to these comments, (1) several trade associations and an individual commenter supported the Bureau's proposed revisions to the notice requirements; (2) another individual commenter requested that the Bureau require lenders to show in dollar terms the current rate changes for the previous five years and what these changes would have been under the new index; (3) several industry commenters requested that the Bureau provide comprehensive sample disclosures for change-in-terms notices that can be provided to borrowers to help them understand the change in the index; and (4) an individual commenter indicated that the Bureau should require banks to identify and communicate the replacement index well in advance of the transition date.

The Final Rule

For the reasons discussed below, this final rule adopts § 1026.9(c)(2)(v)(A) and comment 9(c)(2)(v)-14 generally as proposed except to provide that the revisions to § 1026.9(c)(2)(v)(A) and comment 9(c)(2)(v)-14 are effective April 1, 2022, with a mandatory compliance date of October 1, 2022, consistent with the effective date of this final rule and consistent with TILA section 105(d). For the same reasons that the Bureau is adopting the revisions to § 1026.9(c)(1)(ii) for HELOC accounts, the Bureau believes that when a creditor for plans other than HELOCs subject to § 1026.40 is replacing the LIBOR index and adjusting the margin as permitted by § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii), it is beneficial for consumers to receive notice not just of the replacement index but also any adjustments to the margin, even if the margin is decreased. Informing consumers of the replacement index and any adjusted margin (even a reduction in the margin) tells consumers how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced. Otherwise, a consumer that is only notified that the LIBOR index is being replaced with a replacement index that has a higher index value but is not notified that the margin is decreasing could reasonably but mistakenly believe that the APR on the plan is increasing.

The revisions to § 1026.9(c)(2)(v)(A) are effective April 1, 2022, with a mandatory compliance date of October 1, 2022. TILA section 105(d) generally requires that changes in disclosures required by TILA or Regulation Z have an effective date of the October 1 that is at least six months after the date the final rule is adopted.

TILA section 105(d) also provides that a creditor may comply with newly promulgated disclosure requirements prior to the effective date of the requirement. Consistent with TILA section 105(d), comment 9(c)(2)(v)-14 clarifies that from April 1, 2022, through September 30, 2022, a creditor has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index as permitted by § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). Creditors for plans other than HELOCs subject to § 1026.40 may want to provide the information about the decreased margin in the change-in-terms notice, even if they replace the LIBOR index and adjust the margin pursuant to § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) earlier than October 1, 2022, starting on or after April 1, 2022. These creditors may want to provide this information to avoid confusion by consumers and because this reduced margin is beneficial to consumers. Thus, comment 9(c)(2)(v)-14 permits creditors for plans other than HELOCs subject to § 1026.40 to provide the information about the decreased margin in the change-in-terms notice even if they replace the LIBOR index and adjust the margin pursuant to § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) earlier than October 1, 2022, starting on or after April 1, 2022. The Bureau encourages creditors to include this information in change-in-terms notices provided earlier than October 1, 2022, starting on or after April 1, 2022, even though they are not required to do so, to ensure that consumers are notified of how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced.

15 U.S.C. 1604(d).

For the similar reasons discussed in the section-by-section analysis of § 1026.9(c)(1)(ii) for HELOC accounts, this final rule does not provide sample or model forms for the change-in-terms notices required under § 1026.9(c)(2) when a creditor transitions away from a LIBOR index under § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) for plans that are not subject to § 1026.40. The Bureau believes that sample or model forms for such a notice are not necessary or warranted. The change-in-terms notice is not a new requirement. The Bureau believes that § 1026.9(c)(2) and the related commentary provide sufficient

information for creditors to understand change-in-terms notice requirements without the need for a model form.

For similar reasons discussed in the section-by-section analysis of § 1026.9(c)(1)(ii) for HELOC accounts, this final rule also does not change the timing in which change-in-terms notices under § 1026.9(c)(2) must be provided to the consumer when a creditor replaces a LIBOR index for plans that are not subject to § 1026.40. Section 1026.9(c)(2) provides that change-in-terms notices generally must be mailed or delivered at least 45 days prior to the effective date of the change, and the Bureau did not propose changes to the timing of the notices when a creditor replaces a LIBOR index. The Bureau concludes that a 45-day period is appropriate for change-in-terms notices given when a creditor replaces a LIBOR index for plans other than HELOCs subject to § 1026.40; this is the period generally applicable to change-in-terms notices for open-end (not home-secured) plans under § 1026.9(c)(2).

Section 1026.20 Disclosure Requirements Regarding Post-Consummation Events

20(a) Refinancings

The Bureau's Proposal

Section 1026.20 includes disclosure requirements regarding post-consummation events for closed-end credit. Section 1026.20(a) and its commentary define when a refinancing occurs for closed-end credit and provide that a refinancing is a new transaction requiring new disclosures to the consumer. Comment 20(a)-3.ii.B explains that a new transaction subject to new disclosures results if the creditor adds a variable-rate feature to the obligation, even if it is not accomplished by the cancellation of the old obligation and substitution of a new one. The comment also states that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction to a comparable index, whether the change replaces the existing index or substitutes an index for one that no longer exists. To clarify comment 20(a)-3.ii.B, the Bureau proposed to add to the comment an illustrative example, which would indicate that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction from the 1-month, 3-month, 6-month, or 1-year USD LIBOR index to the SOFR-based spread-adjusted index recommended by the ARRC for consumer products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR index respectively because the replacement index is a comparable index to the corresponding USD LIBOR index.

The Bureau requested comment on whether it was appropriate to add the proposed example to comment 20(a)-3.ii.B and whether the Bureau should make any other amendments to § 1026.20(a) or its commentary in connection with the LIBOR transition. The Bureau also requested comment on whether there were any other replacement indices that it should identify as an example of a comparable index in comment 20(a)-3.ii.B, and if so, which indices and on what bases. For the reasons discussed below, the Bureau is finalizing the amendments to comment 20(a)-3.ii.B generally as proposed with a revision to cross-reference new comment 20(a)(3)-iv and with a revision not to include 1-year USD LIBOR in the comment at this time pending the Bureau's receipt of additional information and further consideration by the Bureau. This final rule also adds new comment 20(a)(3)-iv to provide examples of the type of factors to be considered in whether a replacement index meets the Regulation Z “comparable” standard with respect to a particular LIBOR index for closed-end transactions.

By “corresponding USD LIBOR index,” the Bureau means the specific USD LIBOR index for which the ARRC is recommending the replacement index as a replacement for consumer products. Thus, because the ARRC has recommended, for consumer products, a specific spread-adjusted 6-month term rate SOFR index for consumer products as a replacement for the 6-month USD LIBOR index, the 6-month USD LIBOR index would be the “corresponding USD LIBOR index” for that specific spread-adjusted 6-month term rate SOFR index for consumer products.

Comments Received

SOFR spread-adjusted index.

Several industry commenters, several consumer group commenters, and a financial services education and consulting firm expressed support for the proposed new illustrative example in comment 20(a)-3.ii.B, which indicated that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction from the 1-month, 3-month, 6-month, or 1-year USD LIBOR index to the SOFR-based spread-adjusted index recommended by the ARRC for consumer products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR index respectively because the replacement index is a comparable index to the corresponding USD LIBOR index. A few industry commenters and an individual commenter expressed concern about SOFR's lack of history.

Additional examples of indices that are comparable to the LIBOR.

Many industry commenters generally urged the Bureau to provide additional examples of comparable indices to the LIBOR indices. Some commenters mentioned specific indices that the Bureau should clarify are comparable to LIBOR, such as Prime, AMERIBOR® rates,

the effective Federal funds rate (EFFR),

and the Constant Maturity Treasury (CMT) rates.

An industry commenter urged the Bureau to designate other replacement indices as compliant if recommended by the Board.

According to its website, “AMERIBOR® is a new interest rate benchmark created by the American Financial Exchange [that] reflects the actual borrowing costs of thousands of small, medium and regional banks across America [and] is also useful for larger banks and financial institutions that do business with these banks.” Am. Fin. Exch.,

AMERIBOR® Brochure, https://ameribor.net/background.

The EFFR is a rate produced by the New York Fed which is calculated as a volume-weighted median of overnight Federal funds transactions reported in the FR 2420 Report of Selected Money Market Rates. Fed. Rsrv. Bank of N.Y.,

Effective Federal Funds Rate, https://www.newyorkfed.org/markets/reference-rates/effr.

The CMT rates are Treasury Yield Curve Rates where the “[y]ields are interpolated by the Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of indicative, bid-side market quotations (not actual transactions) obtained by the Federal Reserve Bank of New York at or near 3:30 p.m. each trading day.” U.S. Dep't of the Treasury,

Daily Treasury Yield Curve Rates, https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield

(last updated Sept. 24, 2021).

In addition, several industry commenters expressed support for the Bureau's statement that the example provided in comment 20(a)-3.ii.B is not the only index that is comparable to LIBOR. In addition, an industry commenter urged the Bureau to avoid mandating the use of any particular replacement index.

Additional guidance on what constitutes a comparable index.

Many industry commenters urged the Bureau to provide additional guidance on how to determine if an index is a comparable index for purposes of Regulation Z. Some of these commenters shared views on what types of index the Bureau should consider as comparable for purposes of Regulation Z. Several industry commenters urged that any guidance that the Bureau provides on how to determine if an index is comparable should provide alternatives to reliance on historical fluctuations because such historical evidence would not be available for new indices. Several consumer group commenters and a financial services education and consulting firm commenter cautioned

the Bureau against recognizing newly established indices as suitable replacement indices for LIBOR indices, unless they satisfy the criteria reviewed by the ARRC in selecting SOFR. Several commenters asserted that any guidance on what constitutes a comparable index should clarify that the index change should be “value neutral,” meaning that the change should not raise or lower the interest rate on the loan. A few industry commenters urged the Bureau to clarify that a creditor may use any “reasonable method” to determine if a replacement index is comparable. Several industry commenters urged the Bureau to clarify that an index is comparable if the index and the margin achieve a substantially similar interest rate.

Disclosures concerning index changes.

Several commenters, including several consumer groups, a financial services education and consulting firm, and a few individuals, urged the Bureau to require disclosures to consumers with closed-end loans informing consumers of the index change. Several industry commenters stated that if the Bureau requires a disclosure for closed-end products, the Bureau should require it to be provided 45 days before the index change. Another industry commenter urged the Bureau to provide guidance on how to complete a Loan Estimate or Closing Disclosure for a SOFR product.

Timing of transition.

A few industry commenters urged the Bureau to include the same provisions for closed-end loans that it proposed for HELOCs and credit card accounts which would allow creditors for HELOCs and card issuers to transition from using a LIBOR index on or after March 15, 2021, if certain conditions are met.

Placement of example in Regulation Z.

Several industry commenters urged the Bureau to include the proposed example in the text of the rule, rather than the commentary, and explained their perception that including the example in the commentary would not provide sufficient legal protection.

The Final Rule

The Bureau is finalizing the amendments to comment 20(a)-3.ii.B generally as proposed with a revision to cross-reference comment 20(a)-3.iv and with a revision not to include 1-year USD LIBOR in the comment at this time pending the Bureau's receipt of additional information and further consideration by the Bureau. This final rule also adds new comment 20(a)-3.iv to provide examples of the type of factors to be considered in whether a replacement index meets the Regulation Z “comparable” standard with respect to a particular LIBOR index for closed-end transactions.

SOFR spread-adjusted index.

The Bureau agrees with the commenters that expressed support for the new illustrative example in comment 20(a)-3.ii.B.

The Bureau has reviewed the SOFR indices upon which the ARRC has indicated it will base its recommended replacement indices and the spread adjustment methodology that the ARRC is recommending using to develop the replacement indices. Based on this review, the Bureau has determined that the spread-adjusted replacement indices that the ARRC is recommending for consumer products to replace the 1-month, 3-month, or 6-month USD LIBOR index will provide a good example of a comparable index to the tenors of LIBOR that they are designated to replace.

On June 22, 2017, the ARRC identified SOFR as its recommended alternative to LIBOR after considering various potential alternatives, including other term unsecured rates, overnight unsecured rates, other secured repurchase agreements (repo) rates, U.S. Treasury bill and bond rates, and overnight index swap rates linked to the EFFR.

The ARRC made its final recommendation of SOFR after evaluating and incorporating feedback from a 2016 consultation and end-users on its advisory group.

The Fed. Rsrv. Bank of N.Y.,

ARRC Consultation on Spread Adjustment Methodologies for Fallbacks in Cash Products Referencing USD LIBOR

at 3 (Jan. 21, 2020),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation.pdf

(ARRC Consultation on Spread Adjustment Methodologies).

Id.

As the ARRC has explained, SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.

SOFR is determined based on transaction data composed of: (i) Tri-party repo, (ii) General Collateral Finance repo, and (iii) bilateral Treasury repo transactions cleared through Fixed Income Clearing Corporation. SOFR is representative of general funding conditions in the overnight Treasury repo market. As such, it reflects an economic cost of lending and borrowing relevant to the wide array of market participants active in financial markets. In terms of the transaction volume underpinning it, SOFR has the widest coverage of any Treasury repo rate available. Averaging over $1 trillion of daily trading, transaction volumes underlying SOFR are far larger than the transactions in any other U.S. money market.

Id.

Fed. Rsrv. Bank of N.Y.,

Additional Information About SOFR and Other Treasury Repo Reference Rates, https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information

(last updated Apr. 16, 2021).

On April 21, 2021, CME Group Benchmark Administration Ltd (CME Group) started producing term rates for 1-month SOFR, 3-month SOFR, and 6-month SOFR, which now go back as far as January 3, 2019.

Prior to that, the Board produced data on 1-month, 3-month, and 6-month “indicative” term SOFR rates that likely provide a good indication of how term SOFR rates would have performed starting from June 11, 2018.

On July 29, 2021, the ARRC formally recommended the 1-month, 3-month, and 6-month term SOFR rates produced by the CME Group as the underlying SOFR rates for use in replacing the 1-month, 3-month, and 6-month USD LIBOR tenors respectively for existing accounts.

On October 6, 2021, the ARRC published a summary of the decisions that the ARRC has made to that date concerning its recommended SOFR-based spread-adjusted indices for contracts referencing USD LIBOR.

In that summary, for consumer products, the ARRC indicated that for 1-year USD LIBOR, the ARRC's recommended replacement index will be to a spread-adjusted index based on a 1-year term SOFR rate or to a spread-adjusted index based on the 6-month term SOFR rate. The replacement index will use the spread adjustment for 1-year USD LIBOR mentioned in Table 1 below for arriving at the recommended replacement index for replacing 1-year USD LIBOR in consumer products.

The ARRC indicated that it will make a recommendation on the SOFR-based

spread-adjusted index to replace 1-year USD LIBOR and all other remaining details of its recommended replacement indices for consumer products no later than one year before the date when 1-year USD LIBOR is expected to cease (

i.e.,

by June 30, 2022).

In March 2021, the ARRC announced that it has selected Refinitiv, a London Stock Exchange Group (LSEG) business, to publish the ARRC's recommended spread adjustments and SOFR-based spread-adjusted indices for cash products.

Refinitiv will publicly make available, for free, the SOFR-based spread-adjusted indices for consumer products so that consumers can see the actual indices that are used by industry in the pricing of their adjustable-rate consumer loan contracts that will be transitioning to the SOFR-based spread-adjusted indices for consumer products.

Press Release, The Chi. Mercantile Exch.,

CME Group Announces Launch of CME Term SOFR Reference Rates

(Apr. 21, 2021),

https://www.cmegroup.com/media-room/press-releases/2021/4/21/cme_group_announceslaunchofcmetermsofrreferencerates.html#;

The Chi. Mercantile Exch,

CME Term SOFR Reference Rates Benchmarks

(Sept. 21, 2021),

https://www.cmegroup.com/market-data/files/cme-term-sofr-reference-rates-benchmarks.pdf.

June 11, 2018, is the first date for which indicative term SOFR rate data are available. Erik Heitfield & Yang-Ho- Park,

Indicative Forward-Looking SOFR Term Rates

(Apr. 19, 2019), The Fed. Rsrv. Bank,

FEDS Notes, https://www.federalreserve.gov/econres/notes/feds-notes/indicative-forward-looking-sofr-term-rates-20190419.htm

(last updated May 26, 2021).

Press Release, Alt. Reference Rates Comm.,

ARRC Formally Recommends Term SOFR

(July 29, 2021),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf.

Summary of Fallback Recommendations,

supra

note 5, at 1.

Id.

at 10.

Id.

Fed. Rsrv. Bank of N.Y.,

ARRC Announces Refinitiv as Publisher of its Spread Adjustment Rates for Cash Products

(Mar. 17, 2021),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210317-press-release-Spread-Adjustment-Vendor-Refinitiv.pdf.

Id.

The Bureau is reserving judgment about whether to include a reference to the 1-year USD LIBOR index in comment 20(a)-3.ii.B until it obtains additional information. Once the Bureau knows which SOFR-based spread-adjusted index the ARRC will recommend to replace the 1-year USD LIBOR index for consumer products, the Bureau may determine whether that index meets the “comparable” standard based on information available at that time. Assuming the Bureau determines that the index meets that standard, the Bureau will then consider whether to codify that determination by finalizing the proposed comment related to the 1-year USD LIBOR index in a supplemental final rule, or otherwise announce that determination.

The Bureau has reviewed the historical data on the 1-month, 3-month, and 6-month term SOFR rates produced by CME Group and the indicative term SOFR rates produced by the Board and on 1-month, 3-month, and 6-month USD LIBOR from June 11, 2018, to October 18, 2021. The Bureau calculated the spread-adjusted term SOFR rates by adding the long-term values of the spread-adjustments set forth in Table 1 described below to the historical data on the 1-month, 3-month, and 6-month term SOFR rates described above.

As discussed in more detail in the section-by-section analysis of § 1026.40(f)(3)(ii)(A), the Bureau has determined that: (1) The historical fluctuations of 6-month USD LIBOR are substantially similar to those of the 6-month spread-adjusted term SOFR rates; (2) the historical fluctuations of 3-month USD LIBOR are substantially similar to those of 3-month spread-adjusted term SOFR rates; and (3) the historical fluctuations of 1-month USD LIBOR are substantially similar to those of the 1-month spread-adjusted term SOFR rate.

The ARRC and the Bureau also have compared the rate history that is available for SOFR (to calculate compounded averages) with the rate history for the applicable LIBOR indices.

The New York Fed publishes three compounded averages of SOFR on a daily basis, including a 30-day compounded average of SOFR (30-day SOFR), and a daily index that allows for the calculation of compounded average rates over custom time periods.

Prior to the start of the official publication of SOFR in 2018, the New York Fed released data from August 2014 to March 2018 representing modeled, pre-production estimates of SOFR that are based on the same basic underlying transaction data and methodology that now underlie the official publication.

The Bureau analyzed the spread-adjusted indices based on the 30-day SOFR. The Bureau calculated the spread-adjusted 30-day SOFR rates by adding the long-term values of the spread-adjustments set forth in Table 1 described below to the historical data on 30-day SOFR. For the reasons discussed in the section-by-section analysis of § 1026.40(f)(3)(ii)(A), the Bureau finds that the historical fluctuations in the spread-adjusted index based on 30-day SOFR are substantially similar to those of 1-month, 3-month, and 6-month USD LIBOR.

See, e.g.,

ARRC Consultation on Spread Adjustment Methodologies,

supra

note 50, at 4 (comparing 3-month compounded SOFR relative to the 3-month USD LIBOR since 2014). The ARRC and the Bureau have also considered the history of other indices that could be viewed as historical proxies for SOFR.

See, e.g.,

David Bowman,

Historical Proxies for the Secured Overnight Financing Rate

(July 15, 2019),

https://www.federalreserve.gov/econres/notes/feds-notes/historical-proxies-for-the-secured-overnight-financing-rate-20190715.htm

(Historical SOFR).

Fed. Rsrv. Bank of N.Y.,

SOFR Averages and Index Data, https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind.

See

Historical SOFR,

supra

note 62.

Term SOFR rates will have fewer differences with LIBOR term rates than 30-day SOFR does.

Since they are also term rates, they also include term premia, and these should usually be similar to the term premia embedded in LIBOR. Since term SOFR rates will also be forward-looking, they should adjust quickly to changing expectations about future funding conditions as LIBOR term rates do, rather than following them with a lag as 30-day SOFR does. However, term SOFR rates will still have differences from the LIBOR indices. SOFR is a secured rate while the LIBOR indices are unsecured and therefore include an element of bank credit risk. The LIBOR indices also may reflect supply and demand conditions in wholesale unsecured funding markets that also could lead to differences with SOFR.

30-day SOFR is a historical, backward-looking 30-day average of overnight rates, while the LIBOR indices are forward-looking term rates published with several different tenors (overnight, 1-week, 1-month, 2-month, 3-month, 6-month, and 1-year). The LIBOR indices, therefore, reflect funding conditions for a different length of time than 30-day SOFR does, and they reflect those funding conditions in advance rather than with a lag as 30-day SOFR does. The LIBOR indices may also include term premia missing from 30-day SOFR. (The “term premium” is the excess yield that investors require to buy a long-term bond instead of a series of shorter-term bonds.)

Forward-looking term SOFR rates will without adjustments differ in levels from the LIBOR indices. The ARRC intends to account for these differences from the historical levels of LIBOR term rates through spread adjustments in the replacement indices that it recommends. On January 21, 2020, the ARRC released a consultation on spread adjustment methodologies that provided historical analyses of a number of potential spread adjustment methodologies and that showed that the proposed methodology performed well relative to other options, including potential dynamic spread adjustments.

On April 8, 2020, the ARRC announced that it had agreed on a recommended spread adjustment methodology for cash products referencing USD LIBOR.

In response to the January 2020 consultation, the ARRC received over 70 responses from consumer advocacy groups, asset managers, corporations, banks, industry associations, GSEs, and others.

In May 2020, the ARRC released a follow-up consultation on the spread adjustment methodologies with respect to two

technical issues.

In June 2020, the ARRC announced recommendations on these two technical issues.

Following its consideration of feedback received on its public consultations, the ARRC is recommending a long-term spread adjustment equal to the historical median of the five-year spread between USD LIBOR and SOFR. On March 8, 2021, the ARRC issued an announcement

recognizing a set of values as the long-term spread adjustment for the SOFR-based spread-adjusted indices,

as shown in Table 1 below, based on the March 5, 2021, announcements by the ICE Benchmarks Administration and the FCA.

ARRC Consultation on Spread Adjustment Methodologies,

supra

note 50.

Press Release, Alt. Reference Rates Comm.,

ARRC Announces Recommendation of a Spread Adjustment Methodology

(Apr. 8, 2020),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Methodology.pdf

(ARRC Announces Recommendation of a Spread Adjustment Methodology).

Alt. Reference Rates Comm.,

Summary of Feedback Received in the ARRC Spread-Adjustment Consultation and Follow-Up Consultation on Technical Details

2 (May 6, 2020),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation_Follow_Up.pdf

(ARRC Supplemental Spread-Adjustment Consultation).

Id.

Press Release, Alt. Reference Rates Comm.,

ARRC Announces Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products

(June 30, 2020),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf.

Press Release, Alt. Reference Rates Comm.,

ARRC Confirms a “Benchmark Transition Event” has occurred under ARRC Fallback Language

(Mar. 8, 2021),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Benchmark_Transition_Event_Statement.pdf.

Press Release, Bloomberg,

Bloomberg Notice on IBOR Fallbacks

(Mar. 5, 2021),

https://www.bloomberg.com/company/press/bloomberg-notice-on-ibor-fallbacks/;

Summary of Fallback Recommendations,

supra

note 5, at 4.

Table 1—Values of the Long-Term Spread-Adjustment for the SOFR-Based Spread-Adjusted Indices

USD LIBOR tenor being replaced

Spread applied to SOFR based rate

(bps)

1-month LIBOR

11.448

3-month LIBOR

26.161

6-month LIBOR

42.826

1-year LIBOR

71.513

For consumer products, the ARRC is additionally recommending a 1-year transition period to this five-year median spread adjustment methodology.

Thus, the transition will be gradual. Specifically, the ARRC has recommended, for a period of one year, a short-term spread adjustment for SOFR-based spread-adjusted indices in order to ensure that consumers do not encounter a sudden change in their monthly payments when the LIBOR index is replaced. The short-term spread adjustment initially will be the 2-week average of the LIBOR-SOFR spread up to July 3, 2023, for the SOFR-based spread-adjusted indices for consumer products to replace 1-month, 3-month, 6-month, or 1-year USD LIBOR.

For these indices, over the first “transition” year following July 3, 2023, the daily published short-term spread adjustment will move linearly toward the longer-term fixed spread adjustment.

After the initial transition year, the spread adjustment will be permanently set at the longer-term fixed rate spread.

The ARRC also stated that it was not aware of any consumer products using 1-week and 2-month LIBOR, which will cease publication immediately after December 31, 2021.

The inclusion of a transition period for consumer products was endorsed by many respondents, including consumer advocacy groups.

ARRC Announces Recommendation of a Spread Adjustment Methodology,

supra

note 67; Summary of Fallback Recommendations,

supra

note 5, at 11.

Summary of Fallback Recommendations,

supra

note 5, at 11.

Id.

ARRC Supplemental Spread-Adjustment Consultation,

supra

note 68, at 1.

The ARRC intends for the spread adjustment to reflect and adjust for the historical differences between LIBOR and SOFR in order to make the spread-adjusted rate comparable to LIBOR in a fair and reasonable way, thereby minimizing the impact to borrowers and lenders.

Id.

at 2, 3.

The Bureau finds that the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products as a replacement for the 1-month, 3-month, or 6-month USD LIBOR index are comparable indices to the 1-month, 3-month, or 6-month USD LIBOR index respectively. The SOFR-based spread-adjusted indices that the ARRC recommends for consumer products will be published and made publicly available on Refinitiv's website. The Bureau has concluded that using them as a replacement for the corresponding tenors of LIBOR does not seem likely to significantly change the economic position of the parties to the contract, given that SOFR and the LIBOR indices have generally moved together and the replacement index will be spread adjusted based on a methodology derived through public consultation.

For the reasons discussed above, the Bureau is finalizing the amendment to comment 20(a)-3.ii.B to add an illustrative example, which indicates that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction from the 1-month, 3-month, or 6-month USD LIBOR index to the SOFR-based spread-adjusted index recommended by the ARRC for consumer products to replace the 1-month, 3-month, or 6-month USD LIBOR index respectively because the replacement index is a comparable index to the corresponding USD LIBOR index.

Additional examples of indices that are comparable to the LIBOR.

As discussed in more detail above, the Bureau received comments from industry requesting additional safe harbors, meaning additional examples of indices that are comparable to the LIBOR indices for closed-end transactions such as Prime, AMERIBOR® rates, EFFR, and CMT rates.

This final rule does not set forth safe harbors indicating that Prime, AMERIBOR® rates, EFFR, or the CMT rates satisfy the Regulation Z “comparable” standard for appropriate replacement indices for a particular LIBOR index in a closed-end transaction. First, for Prime, AMERIBOR® rates, EFFR, or CMT rates, with respect to the Regulation Z “comparable” standard for closed-end credit, all of these rates may need to be “spread-adjusted” to account for the differences in rate levels from the LIBOR rates in order to potentially comply with the standard. This step is important for comparability because unlike for HELOC and credit card contracts, some closed-end contracts, especially mortgages, typically do not allow for margin adjustments to account for any spread adjustment needed when changing the index. The Bureau is not aware of market participants having developed a methodology to spread adjust the rates. Without spread adjustments to the indices, the indices do not appear to be able to meet the “comparable” standard. Second, as discussed in more detail below, the Bureau notes that the determinations of whether an index is comparable to a LIBOR index are fact-specific, and they depend on the replacement index being considered and the LIBOR tenor being replaced. The commenters did not specify which AMERIBOR® rates, EFFR, or CMT rates should be used as the replacement tenor and which LIBOR tenor the rate would replace.

In addition, the Bureau understands that the vast majority of the impacted industry participants will use the indices for which this final rule provides a safe harbor (

i.e.,

certain SOFR-based spread-adjusted indices recommended by the ARRC for consumer products) as replacement indices for closed-end transactions. The Bureau notes that this final rule does not disallow the use of other replacement indices if they comply with Regulation Z.

An industry commenter urged the Bureau to designate other replacement indices as compliant if recommended by

the Board. The Bureau notes in response that the Board has not recommended other replacement indices.

The Bureau appreciates commenters' suggestion to reiterate that the example included in comment 20(a)-3.ii.B is not intended to provide an exhaustive list of indices that are comparable to LIBOR. The example included in comment 20(a)-3.ii.B is illustrative only, and the Bureau does not intend to suggest that the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products to replace the 1-month, 3-month, or 6-month USD LIBOR index are the only indices that would be comparable to the LIBOR indices. The Bureau recognizes that there may be other comparable indices that creditors may use as replacements for the various tenors of LIBOR.

Additional guidance on what constitutes a comparable index.

As discussed in more detail above, numerous industry commenters asked the Bureau to provide additional guidance on how to determine if an index is comparable for purposes of Regulation Z.

To facilitate compliance with Regulation Z, this final rule adds new comment 20(a)-3.iv to provide a non-exhaustive list of factors to be considered in whether a replacement index meets the Regulation Z “comparable” standard with respect to a particular LIBOR index for closed-end transactions. Specifically, new comment 20(a)-3.iv provides that the relevant factors to be considered in determining whether a replacement index is comparable to a particular LIBOR index depend on the replacement index being considered and the LIBOR index being replaced. New comment 20(a)-3.iv also provides that the types of relevant factors to establish if a replacement index could meet the “comparable” standard with respect to a particular LIBOR index using historical data or future expectations, include but are not limited to, whether: (1) The movements over time are comparable; (2) the consumers' payments using the replacement index compared to payments using the LIBOR index are comparable if there is sufficient data for this analysis; (3) the index levels are comparable; (4) the replacement index is publicly available; and (5) the replacement index is outside the control of the creditor. The first three factors are important to help minimize the financial impact on consumers, including the payments they must make, when LIBOR is replaced with another index. The last two factors would promote transparency for consumers and help reduce potential manipulation of the replacement rate by the creditor in the future. As discussed above, the Bureau has considered these factors in determining that the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products to replace the 1-month, 3-month, or 6-month USD LIBOR indices have historical fluctuations that are comparable to those of the 1-month, 3-month, or 6-month USD LIBOR indices respectively. There is sufficient historical data to analyze, which shows that the consumers' payments using the SOFR index are comparable to payments using the LIBOR index and the index levels are comparable. Further, the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products will be publicly available and are outside of the creditor's control.

The Bureau notes that this final rule does not set forth a principles-based standard for determining whether a replacement index is comparable to a particular LIBOR tenor for closed-end credit. These determinations are fact-specific and depend on the replacement index being considered and the LIBOR tenor being replaced, as well as prevailing market conditions. For example, these determinations may need to consider certain aspects of the historical data itself for a particular replacement index, such as (1) the length of time the data has been available and how much of the available data to consider in the analysis of whether the Regulation Z standards have been satisfied; (2) the quality of the historical data, including the methodology of how the rate is determined and whether it sufficiently represents a market rate; and (3) whether the replacement index is a backward-looking rate (

e.g.,

historical average of rates) such that timing aspects of the data may need to be adjusted to match up with the particular forward-looking LIBOR term-rate being replaced. These considerations will vary depending on the replacement index being considered and the LIBOR tenor that is being replaced. Therefore, this final rule does not provide a principles-based standard for determining whether a replacement index for closed-end credit is comparable to those of a particular LIBOR index.

Disclosures concerning index changes.

This final rule does not adopt commenters' suggestion to require a new disclosure informing consumers about a change in an index. The Bureau did not propose to require a new disclosure and lacks sufficient information about the potential benefits and costs of such a new disclosure.

The Bureau anticipates, however, that industry practices and existing legal requirements will provide consumers with information about changes to their interest rate that affect their loan payments. The Bureau understands that industry is developing best practices and model communications that creditors can use to inform consumers about the LIBOR transition.

In addition, other provisions in Regulation Z require disclosures to consumers with adjustable-rate mortgages if the interest rate or payment amount will change. For example, initial interest rate adjustment notices required by § 1026.20(d) alert consumers to the initial reset of an adjustable-rate mortgage, and subsequent interest rate adjustment notices required by § 1026.20(c) alert consumers to interest rate adjustments and provide the consumer with information about the new interest rate and new periodic payment prior to each adjustment that results in a payment change. In addition, required periodic statements for closed-end consumer credit transactions secured by a dwelling provide consumers with mortgage loan account information, including alerting the consumer to upcoming interest rate changes for each billing cycle.

See, e.g.,

The Fed. Nat'l Mortg. Ass'n,

LIBOR Transition Playbook, https://capitalmarkets.fanniemae.com/media/5206/display;

The Fed. Home Loan Mortg. Corp.,

LIBOR Transition Playbook

(Apr. 2021),

http://www.freddiemac.com/about/pdf/LIBOR_transition_playbook.pdf;

Mortg. Bankers Ass'n,

Adjustable-Rate Mortgage Disclosure: Possible Discontinuation of LIBOR

(Apr. 2021),

https://www.mba.org/Documents/Policy/Issue%20Briefs/20305_MBA_LIBOR_Consumer_Disclosure.pdf;

Alt. Reference Rates Comm.,

LIBOR ARM Transition Resource Guide

(Aug. 18, 2020),

https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/LIBOR_ARM_Transition_Resource_Guide.pdf.

12 CFR 1026.41.

The Bureau appreciates commenters' suggestion to provide guidance on completing a Loan Estimate or Closing Disclosure for a SOFR product and will consider providing that guidance in the future through implementation materials.

Timing of transition.

The Bureau declines to adopt the commenter's suggestion to include the same provisions for closed-end loans that it proposed for HELOCs and credit card accounts which would allow creditors for HELOCs and card issuers to transition from using a LIBOR index on or after March 15, 2021, if certain conditions are met. It is not necessary or warranted for Regulation Z to address the timing of the transition from using the LIBOR indices for closed-end loans

because Regulation Z does not address when a creditor may transition a closed-end loan to a new index. Instead, Regulation Z provides guidance on the circumstances when an index change requires creditors to treat the transaction as a refinancing and, accordingly, to provide the disclosures required at origination.

Placement of example in Regulation Z.

The Bureau declines to adopt commenters' suggestion to include the proposed example in the text of the rule rather than the commentary because it is not necessary or warranted to protect creditors from liability. Good faith compliance with the commentary affords protection from liability under TILA section 130(f), which protects entities from civil liability for any act done or omitted in good faith in conformity with any interpretation issued by the Bureau.

15 U.S.C. 1640; comment 1 to 12 CFR part 1026.

Section 1026.36 Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling

36(a) Definitions

36(a)(4) Seller Financiers; Three Properties

36(a)(4)(iii)

36(a)(4)(iii)(C)

Section 1026.36(a)(1) defines the term “loan originator” for purposes of the prohibited acts or practices and requirements for credit secured by a dwelling in § 1026.36. Section 1026.36(a)(4) addresses the three-property exclusion for seller financers and provides that a person (as defined in § 1026.2(a)(22)) that meets all of the criteria specified in § 1026.36(a)(4)(i) to (iii) is not a loan originator under § 1026.36(a)(1). Pursuant to § 1026.36(a)(4)(iii)(C), one such criterion requires that, if the financing agreement has an adjustable rate, the index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR. In light of the anticipated discontinuation of LIBOR, the Bureau proposed to amend the examples of indices provided in § 1026.36(a)(4)(iii)(C) to substitute SOFR for LIBOR. The Bureau received no comments on the proposed amendments to § 1026.36(a)(4)(iii)(C) and is finalizing the amendments as proposed.

36(a)(5) Seller Financiers; One Property

36(a)(5)(iii)

36(a)(5)(iii)(B)

Section 1026.36(a)(1) defines the term “loan originator” for purposes of the prohibited acts or practices and requirements for credit secured by a dwelling in § 1026.36. Section 1026.36(a)(5) addresses the one-property exclusion for seller financers and provides that a natural person, estate, or trust that meets all of the criteria specified in § 1026.36(a)(5)(i) to (iii) is not a loan originator under § 1026.36(a)(1). Pursuant to § 1026.36(a)(5)(iii)(B), one such criterion currently requires that, if the financing agreement has an adjustable rate, the index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR. In light of the anticipated discontinuation of LIBOR, the Bureau proposed to amend the examples of indices provided in § 1026.36(a)(5)(iii)(B) to substitute SOFR for LIBOR. The Bureau received no comments on the proposed amendments to § 1026.36(a)(5)(iii)(B) and is finalizing the amendments as proposed.

Section 1026.37 Content of Disclosures for Certain Mortgage Transactions (Loan Estimate)

37(j) Adjustable Interest Rate Table

37(j)(1) Index and Margin

Section 1026.37 governs the content of the Loan Estimate disclosure for certain mortgage transactions. If the interest rate may adjust and increase after consummation and the product type is not a step rate, § 1026.37(j)(1) requires disclosure in the Loan Estimate of,

inter alia,

the index upon which the adjustments to the interest rate are based. Comment 37(j)(1)-1 explains that the index disclosed pursuant to § 1026.37(j)(1) must be stated such that a consumer reasonably can identify it. The comment further explains that a common abbreviation or acronym of the name of the index may be disclosed in place of the proper name of the index, if it is a commonly used public method of identifying the index. The comment provides, as an example, that “LIBOR” may be disclosed instead of London Interbank Offered Rate. In light of the anticipated discontinuation of LIBOR, the Bureau proposed to amend this example in comment 37(j)(1)-1 to provide that “SOFR” may be disclosed instead of Secured Overnight Financing Rate. The Bureau did not receive any comments on the proposed amendments to comment 37(j)(1)-1 and is finalizing the amendments as proposed.

Section 1026.40 Requirements for Home Equity Plans

40(f) Limitations on Home Equity Plans

40(f)(3)

40(f)(3)(ii)

TILA section 137(c)(1) provides that no open-end consumer credit plan under which extensions of credit are secured by a consumer's principal dwelling may contain a provision that permits a creditor to change unilaterally any term except in enumerated circumstances set forth in TILA section 137(c).

TILA section 137(c)(2)(A) provides that a creditor may change the index and margin applicable to extensions of credit under such a plan if the index used by the creditor is no longer available and the substitute index and margin will result in a substantially similar interest rate.

In implementing TILA section 137(c), § 1026.40(f)(3) prohibits a creditor from changing the terms of a HELOC subject to § 1026.40 except in enumerated circumstances set forth in § 1026.40(f)(3). Section 1026.40(f)(3)(ii) provides that a creditor may change the index and margin used under the HELOC plan if the original index is no longer available, the new index has a historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an APR substantially similar to the rate in effect at the time the original index became unavailable.

15 U.S.C. 1647(c).

15 U.S.C. 1647(c)(2)(A).

Current comment 40(f)(3)(ii)-1 provides that a creditor may change the index and margin used under the HELOC plan if the original index becomes unavailable, as long as historical fluctuations in the original and replacement indices were substantially similar, and as long as the replacement index and margin will produce a rate similar to the rate that was in effect at the time the original index became unavailable. Current comment 40(f)(3)(ii)-1 also provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if it produces a rate substantially similar to the rate in effect when the original index became unavailable. As discussed in the section-by-section analysis of § 1026.55(b)(7), card issuers for a credit card account under an open-end (not home-secured) consumer credit plan are subject to current comment 55(b)(2)-6, which provides a similar provision on the unavailability of an index as current comment 40(f)(3)(ii)-1.

The Bureau's Proposal

As discussed in part III, the industry has requested that the Bureau permit card issuers to replace the LIBOR index used in setting the variable rates on existing accounts before LIBOR becomes unavailable to facilitate compliance. Among other things, the industry is concerned that if card issuers must wait until LIBOR become unavailable to replace the LIBOR indices used on existing accounts, these card issuers would not have sufficient time to inform consumers of the replacement index and update their systems to implement the change. To reduce uncertainty with respect to selecting a replacement index, the industry has also requested that the Bureau determine that Prime has historical fluctuations that are substantially similar to those of the LIBOR indices. The Bureau believes that similar issues may arise with respect to the transition of existing HELOC accounts away from using a LIBOR index.

To address these concerns, as discussed in more detail in the section-by-section analysis of § 1026.40(f)(3)(ii)(B), the Bureau proposed to add new LIBOR-specific provisions to proposed § 1026.40(f)(3)(ii)(B). These proposed provisions would have permitted creditors for HELOC plans subject to § 1026.40 that use a LIBOR index under the plan to replace the LIBOR index and change the margins for calculating the variable rates on or after March 15, 2021, in certain circumstances without needing to wait for LIBOR to become unavailable.

Specifically, proposed § 1026.40(f)(3)(ii)(B) provided that if a variable rate on a HELOC subject to § 1026.40 is calculated using a LIBOR index, a creditor may replace the LIBOR index and change the margin for calculating the variable rate on or after March 15, 2021, as long as: (1) The historical fluctuations in the LIBOR index and replacement index were substantially similar; and (2) the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Proposed § 1026.40(f)(3)(ii)(B) also provided that if the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan.

Also, as discussed in more detail in the section-by-section analysis of § 1026.40(f)(3)(ii)(B), to reduce uncertainty with respect to selecting a replacement index that meets the standards in proposed § 1026.40(f)(3)(ii)(B), the Bureau proposed to determine that Prime is an example of an index that has historical fluctuations that are substantially similar to those of the 1-month and 3-month USD LIBOR indices. The Bureau also proposed to determine that the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR have historical fluctuations that are substantially similar to those of the LIBOR indices that they are intended to replace. The Bureau also proposed additional detail in comments 40(f)(3)(ii)(B)-1 through -3 with respect to proposed § 1026.40(f)(3)(ii)(B).

In addition, as discussed in more detail in the section-by-section analysis of § 1026.40(f)(3)(ii)(A), the Bureau proposed to move the unavailability provisions in current § 1026.40(f)(3)(ii) and current comment 40(f)(3)(ii)-1 to proposed § 1026.40(f)(3)(ii)(A) and proposed comment 40(f)(3)(ii)(A)-1 respectively and to revise the proposed moved provisions for clarity and consistency. The Bureau also proposed additional detail in comments 40(f)(3)(ii)(A)-2 and -3 with respect to proposed § 1026.40(f)(3)(ii)(A). For example, to reduce uncertainty with respect to selecting a replacement index that meets the standards for selecting a replacement index under proposed § 1026.40(f)(3)(ii)(A), the Bureau proposed the same determinations described above related to Prime and the SOFR-based spread-adjusted indices recommended by the ARRC for consumer products in relation to proposed § 1026.40(f)(3)(ii)(A). The Bureau proposed to make these revisions and provide additional detail because the Bureau understands that some HELOC creditors may use the unavailability provision in proposed § 1026.40(f)(3)(ii)(A) to replace a LIBOR index used under a HELOC plan, depending on the contractual provisions applicable to their HELOC plans, as discussed in more detail below.

Proposed comment 40(f)(3)(ii)-1 would have addressed the interaction among the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B), and the contractual provisions that apply to the HELOC plan. Proposed comment 40(f)(3)(ii)-1 provided that a creditor may use either the provision in proposed § 1026.40(f)(3)(ii)(A) or proposed § 1026.40(f)(3)(ii)(B) to replace a LIBOR index used under a HELOC plan subject to § 1026.40 so long as the applicable conditions are met for the provision used. This proposed comment made clear, however, that neither provision excuses the creditor from noncompliance with contractual provisions.

To facilitate compliance, proposed comment 40(f)(3)(ii)-1 also provided examples on the interaction among the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B), and three types of contractual provisions for HELOCs because the Bureau understands that HELOC contracts may be written in a variety of ways. For example, the Bureau recognizes that some existing contracts for HELOCs that use LIBOR as an index for a variable rate may provide that: (1) A creditor can replace the LIBOR index and the margin for calculating the variable rate unilaterally only if the LIBOR index is no longer available or becomes unavailable; and (2) the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the LIBOR index becomes unavailable. Other HELOC contracts may provide that a creditor can replace the LIBOR index and the margin for calculating the variable rate unilaterally only if the LIBOR index is no longer available or becomes unavailable but does not require that the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the LIBOR index becomes unavailable. In addition, other HELOC contracts may allow a creditor to change the terms of the contract (including the LIBOR index used under the plan) as permitted by law.

As discussed in the section-by-section analysis of § 1026.40(f)(3)(ii)(A), this final rule adopts § 1026.40(f)(3)(ii)(A) as proposed. As discussed in the section-by-section analysis of § 1026.40(f)(3)(ii)(B), this final rule adopts § 1026.40(f)(3)(ii)(B) generally as proposed with revisions to: (1) Set April 1, 2022, as the date on or after which HELOC creditors are permitted to replace the LIBOR index used under the plan pursuant to § 1026.40(f)(3)(ii)(B) prior to LIBOR becoming unavailable;

(2) set October 18, 2021, as the date creditors generally must use under § 1026.40(f)(3)(ii)(B) for selecting indices values in determining whether the APRs using the LIBOR index and the replacement index are substantially similar; and (3) provide that if the replacement index is not published on October 18, 2021, the creditor generally must use the next calendar day for which both the LIBOR index and the replacement index are published as the date for selecting indices values in determining whether the APR based on the replacement index is substantially similar to the rate based on the LIBOR index.

See the section-by-section analysis of § 1026.40(f)(3)(ii)(B) for the rationale for why the Bureau selected the October 18, 2021, date. The one exception is that if the replacement index is the SOFR-based spread-adjusted index recommended by the ARRC for consumer products to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR index, the creditor must use the index value on June 30, 2023, for the LIBOR index and, for the SOFR-based spread-adjusted index for consumer products, must use the index value on the first date that index is published, in determining whether the APR based on the replacement index is substantially similar to the rate based on the LIBOR index.

Comments Received

The Bureau received a significant number of comments on proposed § 1026.40(f)(3)(ii)(A) and (B) from industry, including banks, credit unions, and their trade associations. The Bureau also received several comment letters from consumer groups and individual consumers. In response to the 2020 Proposal, most commenters generally provided the same comments for both proposed § 1026.40(f)(ii)(A) and (B) for HELOC accounts and § 1026.55(b)(7)(i) and (ii) for credit card accounts under an open-end (not home-secured) consumer credit plan.

Allow transition from a LIBOR index prior to LIBOR becoming unavailable.

The Bureau received comments from industry, consumer groups, and individuals on proposed § 1026.40(f)(3)(ii)(B) and proposed § 1026.55(b)(7)(ii) that would permit creditors for HELOC plans subject to § 1026.40 and card issuers that use a LIBOR index under the plan to replace the LIBOR index and change the margins for calculating the variable rates on or after March 15, 2021, in certain circumstances without needing to wait for LIBOR to become unavailable. Several industry commenters encouraged the Bureau to adopt these proposed provisions. A trade association indicated that these proposed provisions, if adopted, would allow HELOC creditors and card issuers to undertake the transition on a timeline that is more manageable and less likely to cause disruption for both HELOC creditors and consumers. A few other trade associations indicated that these proposed provisions allowing transition to a replacement index prior to LIBOR becoming unavailable, if adopted, would address concerns that LIBOR may continue to be available but may become less representative or reliable.

Several consumer group commenters and an individual commenter generally supported proposed § 1026.40(f)(3)(ii)(B) for HELOC accounts and § 1026.55(b)(7)(ii) for credit card accounts, indicating that the Bureau should allow HELOC creditors and card issuers to replace a LIBOR index used under a plan before LIBOR becomes unavailable. The individual commenter indicated that these provisions would allow HELOC creditors and card issuers enough lead time to communicate with borrowers regarding the changes to the index.

A few credit union trade association commenters supported the Bureau's proposal to allow creditors for HELOCs and card issuers to make the transition away from a LIBOR index as soon as March 15, 2021, but requested that the Bureau consider moving this date up even earlier. Several trade association commenters requested that HELOC creditors and card issuers be allowed to transition away from a LIBOR index as early as December 31, 2020.

A trade association commenter representing reverse mortgage creditors requested that the Bureau coordinate with both the U.S. Department of Housing and Urban Development (HUD) and the Government National Mortgage Association (Ginnie Mae) with respect to the March 15, 2021, date in proposed § 1026.40(f)(3)(ii)(B). This commenter was concerned that if HUD decides to switch the HECM index to a SOFR index as of January 1, 2021, creditors would need to comply with that in order to make HECM loans insured by the Federal Housing Administration (FHA). This commenter indicated that it was not clear how such a required change by HUD would interact with proposed § 1026.40(f)(3)(ii)(B), if adopted.

Determination that Prime and certain SOFR-based spread-adjusted indices recommended by the ARRC for consumer products have historical fluctuations that are substantially similar to those of certain USD LIBOR indices.

The Bureau received comments from several trade associations and consumer groups on the Bureau's proposed determination that Prime and certain SOFR-based spread-adjusted indices recommended by the ARRC have historical fluctuations that are substantially similar to those of certain USD LIBOR indices. Several trade association commenters, including trade association commenters that represent credit unions, supported the Bureau's proposal determining that Prime has historical fluctuations substantially similar to those of certain LIBOR indices for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). A few of these trade association commenters that represent credit unions indicated that many credit unions already use Prime for new open-end plans in lieu of LIBOR or plan to transition away from LIBOR to Prime for existing open-end plans. Several trade association commenters supported the Bureau's proposal determining that certain SOFR-based spread-adjusted indices recommended by the ARRC have historical fluctuations substantially similar to those of certain LIBOR indices for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii).

A few consumer group commenters indicated that the Bureau should not adopt its proposal that Prime has historical fluctuations that are substantially similar to those of certain LIBOR indices for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). These consumer group commenters instead indicated that the Bureau should signal its expectation that industry participants will select the SOFR-based spread-adjusted indices recommended by ARRC for consumer products as the replacement index and that failure to do so will invite increased scrutiny of compliance with Regulation Z. Several other consumer group commenters indicated that they support the Bureau's proposal that both Prime and the SOFR-based spread-adjusted indices recommended by the ARRC have historical fluctuations that are substantially similar to certain LIBOR indices. These consumer group commenters believed the SOFR-based spread-adjusted indices recommended by the ARRC are the best replacement for consumers and the only appropriate replacement in contracts where the margin cannot be adjusted. However, these consumer group commenters supported the Bureau's proposal under proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii) that: (1) Prime has substantially similar historic fluctuations to those of certain LIBOR indices; and (2) a creditor or card issuer using Prime must comply with the condition that the replacement index

and replacement margin result in an APR substantially similar to the rate at the time the LIBOR became unavailable.

Additional examples of indices that have historical fluctuations that are substantially similar to those of certain USD LIBOR indices.

Many industry commenters and one individual commenter requested that the Bureau identify additional indices which meet the Regulation Z standards in proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii) that the historical fluctuations of those indices are substantially similar to those of certain tenors of LIBOR. A few trade associations and several banks requested that the Bureau consider providing a safe harbor for AMERIBOR® rates that the historical fluctuations of those indices would be considered substantially similar to those of certain LIBOR indices for purposes of Regulation Z's standards. A few trade associations representing credit unions requested that the Bureau consider providing a safe harbor for EFFR that the historical fluctuations of that rate would be considered substantially similar to those of certain LIBOR indices for purposes of Regulation Z's standards. A few trade associations requested that the Bureau consider providing a safe harbor for CMT rates that the historical fluctuations of those rates would be considered substantially similar to those of certain LIBOR indices for purposes of Regulation Z's standards. A trade association commenter representing reverse mortgage creditors requested that the Bureau expressly provide a safe harbor for the index prescribed by the HUD Secretary for replacement of the LIBOR index for HECMs, if that index is different from the SOFR-spread adjusted indices recommended by ARRC for consumer products, that the historical fluctuations of that index would be considered substantially similar to those of certain LIBOR indices for purposes of Regulation Z's standards. This trade group encouraged the Bureau, HUD, and Ginnie Mae to conduct statistical analyses to determine what the effect of such a replacement index will be on, for example, existing pools of securitized HECMs to ensure that such replacement index is truly substantially similar.

An individual commenter indicated that the difference among LIBOR and SOFR rates would trigger issues around the pricing of loans linked to SOFR and that the Bureau needs to study this issue. This commenter noted that various lenders have already started looking at other indices like AMERIBOR®.

Additional guidance on determining whether historical fluctuations are substantially similar to those of certain USD LIBOR indices.

Several industry commenters requested that the Bureau provide guidance by defining when the historical fluctuations of an index are substantially similar to those of a particular LIBOR index for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). A few trade associations requested that the Bureau provide guidance on the meaning of “substantially similar” and also adopt a flexible principles-based standard in order to avoid effectively “mandating” any specific index as the replacement for LIBOR. A credit union trade association commenter indicated that although the proposal allows the use of an established index with historical fluctuations substantially similar to those of a LIBOR index, the proposal does not define what it means for a rate to be substantially similar. This commenter indicated that credit unions would benefit from the Bureau clarifying when historical fluctuations are considered substantially similar to those of a LIBOR index.

Newly established index as replacement for a LIBOR index.

The Bureau received comments from industry, consumer groups, and a financial services education and consulting firm in relation to the use of a newly established index for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). An industry trade association indicated that in order to enhance compliance certainty, the Bureau should provide greater detail to HELOC creditors and card issuers regarding the factors or considerations that should be taken into account to determine that an index is newly established for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). This commenter suggested that such factors could include the length of time in which an index has been published or made available, as well as the period of time since the index has gained broad acceptance or use in financial markets. A financial services education and consulting firm indicated that the Bureau should only recognize newly established indices as being appropriate replacements for LIBOR if they are developed with the same high standards as SOFR. This commenter indicated its belief that all efforts should be made to minimize any value transfer in relation to replacing a LIBOR index.

A few consumer group commenters indicated that the Bureau should limit its recognition of a newly established index as an appropriate replacement for LIBOR for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). These consumer group commenters indicated their belief that without any historical track record, the appropriateness of a newly established index cannot be determined based only on the fact of it reflecting LIBOR on a single day.

Several consumer group commenters indicated that the Bureau should restrict the use of new indices that lack historical data. These consumer group commenters indicated that if the Bureau allows newly established indices, the Bureau should require HELOC creditors or card issuers to demonstrate in advance, with a verifiable methodology, that the newly established index would have had substantially similar historical fluctuations as the original index. These consumer group commenters indicated that the Bureau should base this requirement on the steps the New York Fed used to evaluate the SOFR and prove that it was sufficiently similar to the LIBOR index.

Substantially similar rates.

The Bureau received several comments from industry, consumer groups, and individuals in relation to whether an APR calculated using a replacement index is substantially similar to the APR using the LIBOR index for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii).

A trade association commenter indicated that the Bureau should provide greater detail as to the process HELOC creditors and card issuers must use to determine whether an APR calculated using a replacement index is substantially similar to the APR using the LIBOR index for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). Several consumer group commenters indicated that the Bureau should interpret “substantially similar” to require HELOC creditors or card issuers to minimize any value transfer when selecting a replacement index and setting a new margin for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii).

An individual commenter indicated that consumers should be allowed to refinance their existing debt at no cost i

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