Facilitating the LIBOR Transition (Regulation Z)
| Published date | 18 June 2020 |
| Record Number | 2020-12239 |
| Section | Proposed rules |
| Court | Consumer Financial Protection Bureau |
Federal Register, Volume 85 Issue 118 (Thursday, June 18, 2020)
[Federal Register Volume 85, Number 118 (Thursday, June 18, 2020)]
[Proposed Rules]
[Pages 36938-36994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12239]
[[Page 36937]]
Vol. 85
Thursday,
No. 118
June 18, 2020
Part II
Bureau of Consumer Financial Protection
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12 CFR Part 1026
Facilitating the LIBOR Transition (Regulation Z); Proposed Rule
Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 /
Proposed Rules
[[Page 36938]]
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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: Proposed rule with request for public comment.
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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
proposing to amend Regulation Z, which implements the Truth in Lending
Act (TILA), generally to address the sunset of LIBOR, which is expected
to be discontinued after 2021. Some creditors currently use LIBOR as an
index for calculating rates for open-end and closed-end products. The
Bureau is proposing changes to open-end and closed-end provisions to
provide examples of replacement indices for LIBOR indices that meet
certain Regulation Z standards. The Bureau also is proposing 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 March 15, 2021, if certain
conditions are met. The proposal 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 proposing 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.
DATES: Comments must be received on or before August 4, 2020.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2020-
0014 or RIN 3170-AB01, by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include Docket No. CFPB-
2020-0014 or RIN 3170-AB01 in the subject line of the message.
Hand Delivery/Mail/Courier: Comment Intake--LIBOR, Bureau
of Consumer Financial Protection, 1700 G Street NW, Washington, DC
20552. Please note that due to circumstances associated with the COVID-
19 pandemic, the Bureau discourages the submission of comments by hand
delivery, mail, or courier.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, and in light of difficulties associated with mail and
hand deliveries during the COVID-19 pandemic, commenters are encouraged
to submit comments electronically. In general, all comments received
will be posted without change to https://www.regulations.gov. In
addition, once the Bureau's headquarters reopens, comments will be
available for public inspection and copying at 1700 G Street NW,
Washington, DC 20552, on official business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
to inspect the documents by telephoning 202-435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Angela Fox, Counsel, or Krista Ayoub,
Kristen Phinnessee, or Amanda Quester, Senior Counsels, Office of
Regulations, at 202-435-7700. If you require this document in an
alternative electronic format, please contact
[email protected].
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The Bureau is proposing several amendments to Regulation Z, which
implements TILA, for both open-end and closed-end credit to address the
sunset of LIBOR.\1\ At this time, LIBOR is expected to be discontinued
after 2021. These proposed changes are discussed in more detail below.
As discussed in part VI, the Bureau generally is proposing 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. The Bureau also is
issuing additional written guidance related to the LIBOR transition on
its website as discussed in part II.C. The Bureau solicits comment on
the changes proposed in this document and whether there are any
additional regulatory changes or guidance that would be helpful as
creditors and card issuers transition away from using LIBOR indices.
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\1\ 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 if the
Bureau adopts its changes as proposed. In addition, the Bureau is
releasing an unofficial, informal redline to assist industry and
other stakeholders in reviewing the changes that it is proposing to
make to the regulatory text and commentary of Regulation Z. This
redline can be found on the Bureau's website, at https://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/amendments-facilitate-libor-transition-regulation- z/.
If any conflicts exist between the redline and the text of
Regulation Z, its commentary, or this proposed rule, the documents
published in the Federal Register are the controlling documents.
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A. Open-End Credit
The Bureau is proposing several amendments to the open-end credit
provisions in Regulation Z to address the sunset of LIBOR. First, the
Bureau is proposing a detailed roadmap for HELOC creditors and card
issuers to choose a compliant replacement index for the LIBOR index.\2\
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
has preliminarily 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
becomes unavailable. The Bureau is therefore proposing 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. These proposed new provisions are in proposed Sec.
1026.40(f)(3)(ii)(B) for HELOCs and in proposed Sec. 1026.55(b)(7)(ii)
for credit card accounts.
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\2\ Reverse mortgages structured as open-end credit are HELOCs
subject to the provisions in Sec. Sec. 1026.40 and 1026.9(c)(1).
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Under the proposal, 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 on the
values of these indices on December 31, 2020. The proposal also imposes
other requirements on a replacement index. Under the proposal,
[[Page 36939]]
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 a history. HELOC creditors and card issuers may
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 is proposing to determine that the prime rate
published in the Wall Street Journal (Prime) has historical
fluctuations substantially similar to those of certain U.S. Dollar
(USD) LIBOR indices. The Bureau also is proposing to determine that
certain spread-adjusted \3\ indices based on the Secured Overnight
Financing Rate (SOFR) recommended by the Alternative Reference Rates
Committee (ARRC) have historical fluctuations that are substantially
similar to those of certain USD LIBOR indices.
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\3\ 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% and index Y is 4%, then the X-Y
spread today is one 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.
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Second, the Bureau is proposing to make clarifying changes to the
existing provisions on the replacement of an index when the index
becomes unavailable. These proposed changes are in proposed Sec.
1026.40(f)(3)(ii)(A) for HELOCs and in proposed Sec. 1026.55(b)(7)(i)
for credit card accounts.
Third, the Bureau is proposing to revise change-in-terms notice
requirements for HELOCs and credit card accounts to ensure that
consumers know how the variable rates on their accounts will be
determined going forward after the LIBOR index is replaced. The
proposal would ensure 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
proposed changes, if adopted, would become effective October 1, 2021.
The proposed changes are in Sec. 1026.9(c)(1)(ii) for HELOCs and in
Sec. 1026.9(c)(2)(v)(A) for credit card accounts.
Fourth, the Bureau is proposing to add 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, the proposal would add an exception
from these requirements 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. This proposed exception is in
proposed Sec. 1026.59(h)(3). This proposed exception would not apply
to rate increases that are already subject to the rate reevaluation
requirements prior to the transition from the LIBOR index. The proposal
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 proposed changes would 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 proposed changes are set forth in
proposed Sec. 1026.59(f)(3).
Fifth, in relation to the open-end credit provisions, the Bureau is
proposing several technical edits to comments 9(c)(2)(iv)-2 and 59(d)-2
to replace LIBOR references with references to a SOFR index.
B. Closed-End Credit
The Bureau is proposing amendments to the closed-end credit
provisions in Regulation Z to address the sunset of LIBOR. First, the
Bureau is proposing to identify specific indices as an example of a
``comparable 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. The Bureau
is proposing to add an illustrative example to identify the SOFR-based
spread-adjusted replacement indices recommended by the ARRC as an
example of a ``comparable index'' for the LIBOR indices that they are
intended to replace. These proposed changes are in comment 20(a)(3)-ii.
Second, in relation to the closed-end credit provisions, the Bureau
is proposing technical edits to Sec. 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. These proposed technical edits would replace
LIBOR references with references to a SOFR index and make related
changes and corrections.
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 \4\ 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 March 2020, the panel for USD LIBOR
is comprised of sixteen banks, and each bank contributes data for all
seven tenors.\5\ 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 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.\6\ However, the Intercontinental Exchange (ICE) Benchmark
Administration, which administers LIBOR, announced a goal to continue
publishing certain LIBOR tenors past 2021 though it declined to
guarantee their continued availability.\7\ The FCA has indicated that
it would conduct ``representativeness tests'' if LIBOR continues to be
published for some time after 2021 based on submissions from a smaller
number of panel banks (and thus a smaller number of transactions),
raising the possibility that LIBOR could
[[Page 36940]]
be declared to be unrepresentative by its regulator.\8\ As a result,
industry faces uncertainty about the publication and representativeness
of LIBOR, which is neither guaranteed to continue nor guaranteed to
cease.
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\4\ The tenor refers to the length of time remaining until a
loan matures.
\5\ ICE LIBOR, (last visited Mar. 26, 2020), https://www.theice.com/iba/libor.
\6\ Andrew Bailey, The Future of LIBOR, U.K. FCA, (July 27,
2017), https://www.fca.org.uk/news/speeches/the-future-of-libor; FCA
Statement on LIBOR Panels, U.K. FCA, (Nov. 24, 2017), https://www.fca.org.uk/news/statements/fca-statement-libor-panels.
\7\ Intercontinental Exch. Benchmark Admin., ICE Benchmark
Administration Survey on the Use of LIBOR, https://www.theice.com/iba/ice-benchmark-administration-survey-on-the-use-of-libor (last
visited May 18, 2020).
\8\ Andrew Bailey, LIBOR: Preparing for the End, U.K. FCA, (July
15, 2019), https://www.fca.org.uk/news/speeches/libor-preparing-end.
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B. Consumer Products Using LIBOR
In the United States, financial institutions have used LIBOR as a
common benchmark rate for a variety of adjustable-rate consumer
financial products, including mortgages, credit cards, HELOCs, reverse
mortgages, 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.
C. Additional Written Guidance
In addition to this proposed rule, the Bureau is issuing 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 address regulatory questions where the
existing rule is clear on the requirements and already provides
necessary alternatives needed for the LIBOR transition. The guidance
can be found at: https://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/amendments-facilitate-libor-transition-regulation-z/. This guidance deals with issues related to:
(1) Existing mortgage servicing notice requirements (including how
servicers may notify consumers of the index change when sending the
interest rate adjustment notices and periodic statements); (2) existing
HELOC and adjustable-rate mortgage (ARM) loan program notice
requirements disclosing historical index examples; (3) existing
Alternative Mortgage Transaction Parity Act requirements for index
changes that result in an increased interest rate or finance charge for
alternative mortgage transactions; and (4) identification of
implementation and consumer impacts for creditors or card issuers as
they prepare for the LIBOR transition.
III. Outreach
The Bureau has 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 advocates, regulators, and
other stakeholders regarding the transition away from the use of LIBOR
indices. The Bureau discusses feedback received through these various
channels that is relevant to this proposal 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 by December 2021. The group is comprised of financial
institutions and other market participants such as exchanges,
regulators, and consumer advocates. 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 spread-adjusted SOFR-based index being developed
by the ARRC is a ``comparable index'' to the LIBOR index. The Bureau
has also, in coordination with the ARRC, actively sought comments
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 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 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.\9\
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\9\ 84 FR 647 (Jan. 31, 2019).
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Through these various channels, industry trade associations,
consumer groups, and other organizations have 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 market risk
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 inform consumers
of the change and make the necessary changes to their systems.
Industry also recommended that the Bureau announce that it would
not deem a replacement index to be unfair, deceptive, or abusive if it
were recommended by the Board, the New York Fed, or a committee
endorsed or convened by the Board or New York Fed.
Credit card issuers and related trade associations stated that the
prime rate 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, the prime rate 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.
[[Page 36941]]
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 advocates 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. 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.\10\ Accordingly, in setting forth this
proposal, 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.
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\10\ Dodd-Frank Act section 1002(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) (defining ``enumerated consumer laws'' to include
TILA).
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B. The Truth in Lending Act
TILA is a Federal consumer financial law. In adopting TILA,
Congress explained that:
[E]conomic 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. The informed use of credit results from an
awareness of the cost thereof by consumers. It is the purpose of
this subchapter 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 him and avoid the uninformed use of
credit, and to protect the consumer against inaccurate and unfair
credit billing and credit card practices.\11\
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\11\ 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.\12\ 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.\13\
Typically, closed-end credit is credit that does not meet the
definition of open-end credit.\14\
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\12\ TILA section 103(f), codified at 15 U.S.C. 1602(f); 12 CFR
1026.2(a)(14).
\13\ 12 CFR 1026.2(a)(20).
\14\ 12 CFR 1026.2(a)(10).
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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.\15\ 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.\16\
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\15\ See TILA section 103(g), codified at 15 U.S.C. 1602(g); 12
CFR 1026.2(a)(17)(i).
\16\ TILA section 106(a), codified at 15 U.S.C. 1605(a); see 12
CFR 1026.4.
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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.\17\ 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.\18\ A charge card
is a credit card on an account for which no periodic rate is used to
compute a finance charge.\19\ 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 \20\ and in
the Credit Card Accountability Responsibility and Disclosure Act of
2009 (Credit CARD Act) \21\ (if the card accesses an open-end credit
plan), as implemented in Regulation Z subparts B and G.\22\
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\17\ See TILA section 103(g), codified at 15 U.S.C. 1602(g); 12
CFR 1026.2(a)(17)(iii) and (iv).
\18\ See 12 CFR 1026.2(a)(15).
\19\ See 12 CFR 1026.2(a)(15)(iii).
\20\ Title III of Public Law 93-495, 88 Stat. 1511 (1974).
\21\ Public Law 111-24, 123 Stat. 1734 (2009).
\22\ See generally 12 CFR 1026.5(b)(2)(ii), .7(b)(11), .12,
.51-.60.
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TILA section 105(a). As amended by the Dodd-Frank Act, TILA section
105(a) \23\ 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 the Bureau judges 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.\24\ Thus, strengthened competition among financial institutions
is a goal of TILA, achieved through the effectuation of TILA's
purposes.
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\23\ 15 U.S.C. 1604(a).
\24\ TILA section 102(a), codified at 15 U.S.C. 1601(a).
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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
[[Page 36942]]
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).\25\
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\25\ 15 U.S.C. 1602(bb).
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For the reasons discussed in this document, the Bureau is proposing
amendments to Regulation Z with respect to certain provisions that
impact the transition from LIBOR indices to other indices to carry out
TILA's purposes and is proposing 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 the proposal 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) \26\ states that any Bureau regulations requiring any disclosure
which differs from the disclosures previously required in certain
sections shall have an effective date of that 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.
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\26\ 15 U.S.C. 1604(d).
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V. Section-by-Section Analysis
Section 1026.9 Subsequent Disclosure Requirements
9(c) Change in Terms
9(c)(1) Rules Affecting Home-Equity Plans
9(c)(1)(ii) Notice Not Required
Section 1026.9(c)(1)(i) provides that for HELOCs subject to Sec.
1026.40 whenever any term required to be disclosed in the account-
opening disclosures under Sec. 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 Sec.
1026.40, a creditor is not required to provide a change-in-terms notice
under Sec. 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 Sec. 1026.40 is required under
current Sec. 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 Sec. 1026.6(a) and thus, a creditor must provide a
change-in-terms notice disclosing the index that is replacing the LIBOR
index.\27\ The exception in Sec. 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 Sec. 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.
---------------------------------------------------------------------------
\27\ See 12 CFR 1026.6(a)(1)(ii) and (iv) and comment
6(a)(1)(ii)-5.
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Under current Sec. 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 Sec. 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.\28\ Thus, a creditor must provide a change-
in-terms notice under current Sec. 1026.9(c)(1) disclosing the changed
margin, unless Sec. 1026.9(c)(1)(ii) applies. Current Sec.
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 Sec. 1026.9(c)(1), a creditor would only
be required to provide a change-in-terms notice of a change in the
margin under Sec. 1026.9(c)(1) if the margin is increasing.
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\28\ See 12 CFR 1026.6(a)(1)(iv).
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The Proposal
The Bureau is proposing to revise Sec. 1026.9(c)(1)(ii) to provide
that the exception in Sec. 1026.9(c)(1)(ii) under which a creditor is
not required to provide a change-in-terms notice under Sec.
1026.9(c)(1) when the change involves a reduction of any component of a
finance or other charge does not apply on or after October 1, 2021,
where the creditor is reducing the margin when a LIBOR index is
replaced as permitted by proposed Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B).\29\ The proposed changes, if adopted, will ensure
that the change-in-terms notices will disclose the replacement 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.
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\29\ As discussed in more detail in the section-by-section
analysis of proposed Sec. 1026.40(f)(3)(ii)(A), the Bureau is
proposing to move the provisions in current Sec. 1026.40(f)(3)(ii)
that allow a creditor for HELOC plans subject to Sec. 1026.40 to
replace an index and adjust the margin if the index is no longer
available in certain circumstances to proposed Sec.
1026.40(f)(3)(ii)(A) and to revise the proposed moved provisions for
clarity and consistency. Also, as discussed in more detail in the
section-by-section analysis of proposed Sec. 1026.40(f)(3)(ii)(B),
to facilitate compliance, the Bureau is proposing to add new LIBOR-
specific provisions to proposed Sec. 1026.40(f)(3)(ii)(B) that
would permit creditors for HELOC plans subject to Sec. 1026.40 that
use a LIBOR index for calculating a variable rate to replace the
LIBOR index and change the margin for calculating the variable rate
on or after March 15, 2021, in certain circumstances.
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The Bureau also is proposing to add comment 9(c)(1)(ii)-3 to
provide additional detail. Proposed comment 9(c)(1)(ii)-3 provides that
for change-in-terms notices provided under Sec. 1026.9(c)(1) on or
after October 1, 2021, covering changes permitted by proposed Sec.
1026.40(f)(3)(ii)(A) or Sec. 1026.40(f)(3)(ii)(B), a creditor must
provide a change-in-terms notice under Sec. 1026.9(c)(1) disclosing
the replacement index for a LIBOR index and any adjusted margin that is
permitted under proposed Sec. 1026.40(f)(3)(ii)(A) or
[[Page 36943]]
Sec. 1026.40(f)(3)(ii)(B), even if the margin is reduced. Proposed
comment 9(c)(1)(ii)-3 also provides 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 Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B).
To effectuate the purposes of TILA, the Bureau is proposing to use
its TILA section 105(a) authority to amend Sec. 1026.9(c)(1)(ii). TILA
section 105(a) \30\ 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 the Bureau judges are
necessary or proper to effectuate the purposes of TILA, to prevent
circumvention or evasion thereof, or to facilitate compliance. The
Bureau believes that when a creditor for a HELOC plan that is subject
to Sec. 1026.40 is replacing the LIBOR index and adjusting the margin
as permitted by proposed Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B), it may be 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. The Bureau believes that
it may be important that consumers are informed of the replacement
index and any adjusted margin (even a reduction in the margin) so that
consumers will know 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 Bureau solicits
comment generally on the proposed revisions to Sec. 1026.9(c)(1)(ii)
and proposed comment 9(c)(1)(ii)-3.
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\30\ 15 U.S.C. 1604(a).
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The proposed revisions to Sec. 1026.9(c)(1)(ii), if adopted as
proposed, would apply to notices provided on or after October 1, 2021.
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.\31\ Proposed comment 9(c)(1)(ii)-3 clarifies 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 Sec.
1026.40(f)(3)(ii)(A) or Sec. 1026.40(f)(3)(ii)(B). The Bureau believes
that creditors for HELOC plans subject to Sec. 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 proposed Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B) earlier than October 1, 2021. The Bureau believes
that these creditors may want to provide this information to avoid
confusion by consumers and because this reduced margin is beneficial to
consumers. Thus, proposed comment 9(c)(1)(ii)-3 would permit creditors
for HELOC plans subject to Sec. 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 proposed
Sec. 1026.40(f)(3)(ii)(A) or Sec. 1026.40(f)(3)(ii)(B) earlier than
October 1, 2021. The Bureau encourages creditors to include this
information in change-in-terms notices provided earlier than October 1,
2021, even though they are not required to do so, to ensure that
consumers are informed of how the variable rates on their accounts will
be determined going forward after the LIBOR index is replaced.
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\31\ 15 U.S.C. 1604(d).
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The Bureau recognizes that a LIBOR index may be replaced on a HELOC
plan subject to Sec. 1026.40 for reasons other than those set forth in
proposed Sec. 1026.40(f)(3)(ii)(A) or Sec. 1026.40(f)(3)(ii)(B). For
example, pursuant to current Sec. 1026.40(f)(3)(iii), a creditor for a
HELOC plan may replace the LIBOR index used under a plan and adjust the
margin if a consumer specifically agrees to the change in writing at
the time of the change. The Bureau solicits comment on whether the
Bureau should revise Sec. 1026.9(c)(1)(ii) to require that the
creditor in those cases must disclose any decrease in the margin in
change-in-terms notices provided on or after October 1, 2021, in the
change-in-terms notice that discloses the replacement index for a LIBOR
index used under the plan.
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
TILA section 127(i)(1), which was added by the Credit CARD Act,
provides that in the case of a credit card account under an open-end
consumer credit plan, a creditor generally must provide a written
notice of an increase in an APR not later than 45 days prior to the
effective date of the increase.\32\ In addition, TILA section 127(i)(2)
provides that in the case of a credit card account under an open-end
consumer credit plan, a creditor must provide a written notice of any
significant change, as determined by rule of the Bureau, in terms
(other than APRs) of the cardholder agreement not later than 45 days
prior to the effective date of the change.\33\
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\32\ 15 U.S.C. 1637(i)(1).
\33\ 15 U.S.C. 1637(i)(2).
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Section 1026.9(c)(2)(i)(A) provides that for plans other than
HELOCs subject to Sec. 1026.40, a creditor generally must provide a
written notice of a ``significant change in account terms'' at least 45
days prior to the effective date of the change to each consumer who may
be affected. Section 1026.9(c)(2)(ii) defines ``significant change in
account terms'' to mean a change in the terms required to be disclosed
under Sec. 1026.6(b)(1) and (b)(2), an increase in the required
minimum periodic payment, a change to a term required to be disclosed
under Sec. 1026.6(b)(4), or the acquisition of a security interest.
Among other things, Sec. 1026.9(c)(2)(v)(A) provides that a change-in-
terms notice is not required when a change involves a reduction of any
component of a finance or other charge. The change-in-terms provisions
in Sec. 1026.9(c)(2) generally apply to a credit card account under an
open-end (not home-secured) consumer credit plan, and to other open-end
plans that are not subject to Sec. 1026.40.
The creditor is required to provide a change-in-terms notice under
Sec. 1026.9(c)(2) disclosing the index that is replacing the LIBOR
index pursuant to proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii). The index is a term that meets the definition of a
``significant change in account terms'' under Sec. 1026.6(b)(2)(i)(A)
and (4)(ii) and thus, the creditor must provide a change-in-terms
notice disclosing the index that is replacing the LIBOR index.\34\ The
exception in Sec. 1026.9(c)(2)(v)(A) 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 Sec.
1026.9(c)(2) regardless of whether there is also a change in the index
value or margin that involves a reduction in a finance or other charge.
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\34\ See 12 CFR 1026.6(a)(2) and (4) and 1026.9(c)(2)(iv)(D)(1)
and comment 9(c)(2)(iv)-2.
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[[Page 36944]]
Under current Sec. 1026.9(c)(2), for plans other than HELOCs
subject to Sec. 1026.40, 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, the
creditor must disclose the margin as part of an explanation of how the
rate is determined.\35\ Thus, a creditor must provide a change-in-terms
notice under Sec. 1026.9(c)(2) disclosing the changed margin, unless
Sec. 1026.9(c)(2)(v)(A) applies. Current Sec. 1026.9(c)(2)(v)(A)
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 Sec. 1026.9(c)(2), a creditor would only be required to
provide a change-in-terms notice of a change in the margin under Sec.
1026.9(c)(2) if the margin is increasing.
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\35\ 12 CFR 1026.6(b)(4)(ii)(B).
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The Bureau is proposing two changes to the provisions in Sec.
1026.9(c)(2) and its accompanying commentary. First, the Bureau is
proposing technical edits to comment 9(c)(2)(iv)-2 to replace LIBOR
references with references to SOFR. Second, the Bureau is proposing
changes to Sec. 1026.9(c)(2)(v)(A) to provide that for plans other
than HELOCs subject to Sec. 1026.40, the exception in Sec.
1026.9(c)(2)(v)(A) under which a creditor is not required to provide a
change-in-terms notice under Sec. 1026.9(c)(2) when the change
involves a reduction of any component of a finance or other charge does
not apply on or after October 1, 2021, to margin reductions when a
LIBOR index is replaced as permitted by proposed Sec. 1026.55(b)(7)(i)
or Sec. 1026.55(b)(7)(ii). The proposed changes, if adopted, will
ensure that the change-in-terms notices will disclose the replacement
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.
9(c)(2)(iv) Disclosure Requirements
For plans other than HELOCs subject to Sec. 1026.40, comment
9(c)(2)(iv)-2 explains that, if a creditor is changing the index used
to calculate a variable rate, the creditor must disclose the following
information in a tabular format in the change-in-terms notice: The
amount of the new rate (as calculated using the new index) and indicate
that the rate varies and how the rate is determined, as explained in
Sec. 1026.6(b)(2)(i)(A). The comment provides an example, which
indicates that, if a creditor is changing from using a prime rate to
using LIBOR in calculating a variable rate, the creditor would disclose
in the table required by Sec. 1026.9(c)(2)(iv)(D)(1) the new rate
(using the new index) and indicate that the rate varies with the market
based on LIBOR. In light of the anticipated discontinuation of LIBOR,
the proposed rule would amend the example in comment 9(c)(2)(iv)-2 to
substitute a SOFR index for LIBOR. The proposed rule would also make
technical changes for clarity by changing ``prime rate'' to ``prime
index.''
9(c)(2)(v) Notice Not Required
The Bureau is proposing to revise Sec. 1026.9(c)(2)(v)(A) to
provide that for plans other than HELOCs subject to Sec. 1026.40, the
exception in Sec. 1026.9(c)(2)(v)(A) under which a creditor is not
required to provide a change-in-terms notice under Sec. 1026.9(c)(2)
when the change involves a reduction of any component of a finance or
other charge does not apply on or after October 1, 2021, to margin
reductions when a LIBOR index is replaced as permitted by proposed
Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii).\36\ The proposed
changes, if adopted, will ensure that the change-in-terms notices will
disclose the replacement 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.
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\36\ As discussed in more detail in the section-by-section
analysis of proposed Sec. 1026.55(b)(7)(i), the Bureau is proposing
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 Sec.
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 proposed Sec. 1026.55(b)(7)(ii), to
facilitate compliance, the Bureau is proposing to add new LIBOR-
specific provisions to proposed Sec. 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.
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The Bureau also is proposing to add comment 9(c)(2)(v)-14 to
provide additional detail. Proposed comment 9(c)(2)(v)-14 provides that
for change-in-terms notices provided under Sec. 1026.9(c)(2) on or
after October 1, 2021, covering changes permitted by proposed Sec.
1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii), a creditor must provide a
change-in-terms notice under Sec. 1026.9(c)(2) disclosing the
replacement index for a LIBOR index and any adjusted margin that is
permitted under proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii), even if the margin is reduced. Proposed comment
9(c)(2)(v)-14 also provides 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 Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii).
The Bureau believes that when a creditor for plans other than
HELOCs subject to Sec. 1026.40 is replacing the LIBOR index and
adjusting the margin as permitted by proposed Sec. 1026.55(b)(7)(i) or
Sec. 1026.55(b)(7)(ii), it may be 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. The Bureau believes that
it may be important that consumers are informed of the replacement
index and any adjusted margin (even a reduction in the margin) so that
consumers will know 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 Bureau solicits
comment generally on the proposed revisions to Sec. 1026.9(c)(2)(v)(A)
and proposed comment 9(c)(2)(v)-14.
The proposed revisions to Sec. 1026.9(c)(2)(v)(A), if adopted as
proposed, would apply to notices provided on or after October 1, 2021.
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.\37\ Proposed comment 9(c)(2)(v)-14 clarifies 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 Sec. 1026.55(b)(7)(i)
or Sec. 1026.55(b)(7)(ii). The Bureau believes that creditors for
plans other than HELOCs subject to Sec. 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 proposed Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii)
earlier than October 1, 2021. The Bureau believes that these creditors
may want to provide this information to avoid confusion by consumers
and because this reduced margin is beneficial to consumers. Thus,
proposed comment
[[Page 36945]]
9(c)(2)(v)-14 would permit creditors for plans other than HELOCs
subject to Sec. 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 proposed Sec. 1026.55(b)(7)(i)
or Sec. 1026.55(b)(7)(ii) earlier than October 1, 2021. The Bureau
encourages creditors to include this information in change-in-terms
notices provided earlier than October 1, 2021, even though they are not
required to do so, to ensure that consumers are informed of how the
variable rates on their accounts will be determined going forward after
the LIBOR index is replaced.
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\37\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------
The Bureau recognizes that there may be open-end credit plans that
use a LIBOR index to calculate variable rates on the plan where the
plan is not a HELOC that is subject to Sec. 1026.40 and is not a
credit card account under an open-end (not home-secured) consumer
credit plan. For example, there may be overdraft lines of credit and
other types of open-end plans that are not HELOCs and are not credit
card accounts that may use a LIBOR index. The proposed changes to Sec.
1026.9(c)(2)(v)(A) requiring any reduced margin to be disclosed in a
change-in-terms notice when the LIBOR index is being replaced would not
apply to a decrease in the margin when a LIBOR index is replaced for
these open-end plans because the proposed changes only apply when a
LIBOR index is replaced under proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii). These open-end plans are not subject to the
restrictions set forth in proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii) for replacing the LIBOR index and adjusting the
margin. The Bureau solicits comment on whether the Bureau should revise
Sec. 1026.9(c)(2)(v)(A) to require that creditors for those open-end
plans must disclose any decrease in the margin in change-in-terms
notices provided on or after October 1, 2021, where the creditor is
replacing a LIBOR index used under the plan. The Bureau also solicits
comment on the extent to which these types of open-end plans currently
use a LIBOR index.
Section 1026.20 Disclosure Requirements Regarding Post-Consummation
Events
20(a) Refinancings
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 is proposing 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 spread-adjusted index based on SOFR recommended by the
ARRC 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.\38\
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\38\ 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. Thus, if SOFR term rates are not
available and the ARRC recommends a specific spread-adjusted 30-day
SOFR index as a replacement for the 1-year LIBOR, the 1-year USD
LIBOR index would be the ``corresponding USD LIBOR index'' for that
specific spread-adjusted 30-day SOFR index.
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As discussed in part III, the Bureau has received requests from
stakeholders for clarification that the spread-adjusted SOFR-based
index being developed by the ARRC is a ``comparable index'' to LIBOR.
The Bureau recognizes that this issue is of concern for a range of
closed-end credit products because issuing new origination disclosures
in connection with the LIBOR transition could be quite expensive. The
Bureau also recognizes that the issue is of particular concern with
respect to existing LIBOR closed-end mortgage loans because, if
substitution of an index that is not a ``comparable index'' constitutes
a refinancing under Sec. 1026.20(a) for an ARM, Sec. 1026.43 would
require a new ability-to-repay determination if the requirements of
Sec. 1026.43 are otherwise applicable.\39\
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\39\ Comment 43(a)-1 explains that Sec. 1026.43 does not apply
to any change to an existing loan that is not treated as a
refinancing under Sec. 1026.20(a). Comment 43(a)-1 further explains
that Sec. 1026.43 generally applies to consumer credit transactions
secured by a dwelling, but certain dwelling-secured consumer credit
transactions are exempt or partially exempt from coverage under
Sec. 1026.43(a)(1) through (3), and that Sec. 1026.43 does not
apply to an extension of credit primarily for a business,
commercial, or agricultural purpose, even if it is secured by a
dwelling.
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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
anticipates that the spread-adjusted replacement indices that the ARRC
is developing 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 effective Federal
funds rate.\40\ The ARRC made its final recommendation of SOFR after
evaluating and incorporating feedback from a 2016 consultation and from
end users on its advisory group.\41\
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\40\ ARRC, 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.
\41\ Id.
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As the ARRC has explained, SOFR is a broad measure of the cost of
borrowing cash overnight collateralized by U.S. Treasury
securities.\42\ 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 the financial markets. In terms of the
transactions underpinning SOFR, 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.\43\
---------------------------------------------------------------------------
\42\ Id. at 3.
\43\ Fed. Reserve Bank of N.Y., Additional Information About
SOFR and Other Treasury Repo Reference Rates, available at https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information
(last visited May 11. 2020).
---------------------------------------------------------------------------
The ARRC intends to endorse forward-looking term SOFR rates
provided a consensus among its members can be reached that robust
[[Page 36946]]
term benchmarks that are compliant with International Organization of
Securities Commissions (IOSCO) standards and meet appropriate criteria
set by the ARRC can be produced. If the ARRC has not recommended
relevant forward-looking term SOFR rates, it will base its recommended
indices on a compounded average of SOFR over a selected compounding
period.\44\ The ARRC has committed to making sure its recommended
spread adjustments and the resulting spread-adjusted rates are
published and to working with potential vendors to make sure that these
spreads and spread-adjusted rates are made publicly available.\45\ The
New York Fed has already begun daily publication of three compounded
averages of SOFR, 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.\46\
---------------------------------------------------------------------------
\44\ ARRC Consultation on Spread Adjustment Methodologies, supra
note 40, at 5.
\45\ ARRC, ARRC Announces Recommendation of a Spread Adjustment
Methodology for Cash Products (Apr. 8, 2020), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Methodology.pdf.
\46\ Fed. Reserve Bank of N.Y., SOFR Averages and Index Data,
https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind (last
visited May 11, 2020).
---------------------------------------------------------------------------
The Bureau notes that the government-sponsored enterprises (GSEs)
announced in February 2020 that they will begin accepting ARMs based on
30-day average SOFR in 2020.\47\ For purposes of this proposed rule,
the Bureau has conducted its analysis below assuming that the ARRC will
base its recommended replacement indices on 30-day SOFR. Prior to the
start of 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.\48\ The ARRC and the Bureau have compared the
rate history that is available for SOFR (to calculate compounded
averages) with the rate history for the applicable LIBOR indices.\49\
For the reasons discussed in the section-by-section analysis of
proposed Sec. 1026.40(f)(3)(ii)(A), the Bureau is proposing to
determine that the historical fluctuations in the spread-adjusted index
based on 30-day SOFR are substantially similar to those of 1-month, 3-
month, 6-month, and 1-year USD LIBOR.
---------------------------------------------------------------------------
\47\ See, e.g., Fed. Nat'l Mortgage Ass'n, Lender Letter LL-
2020-01 (Feb. 5, 2020), https://singlefamily.fanniemae.com/media/21831/display; Fed. Home Loan Mortgage Corp., Bulletin 2020-1
Selling (Feb. 5, 2020), https://guide.freddiemac.com/app/guide/bulletin/2020-;1.
\48\ See David Bowman, Historical Proxies for the Secured
Overnight Financing Rate (July 15, 2019), available at https://www.federalreserve.gov/econres/notes/feds-notes/historical-proxies-for-the-secured-overnight-financing-rate-20190715.htm.
\49\ See, e.g., ARRC Consultation on Spread Adjustment
Methodologies, supra note 40, 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., Bowman, supra
note 48.
---------------------------------------------------------------------------
While robust, IOSCO-compliant SOFR term rates endorsed by the ARRC
do not yet exist, the Board has published data on ``indicative'' 1-
month, 3-month, and 6-month SOFR term rates.\50\ The Bureau has
compared this data to data for the applicable LIBOR indices. For the
reasons discussed in the section-by-section analysis of proposed Sec.
1026.40(f)(3)(ii)(A), the Bureau is proposing to determine that (1) the
historical fluctuations of 1-year and 6-month USD LIBOR are
substantially similar to those of the 1-month, 3-month, and 6-month
spread-adjusted SOFR term rates; (2) the historical fluctuations of 3-
month USD LIBOR are substantially similar to those of the 1-month and
3-month spread-adjusted SOFR term rates; and (3) the historical
fluctuations of 1-month USD LIBOR are substantially similar to those of
the 1-month spread-adjusted SOFR term rate.
---------------------------------------------------------------------------
\50\ Eric Heitfield & Yang Ho-Park, Indicative Forward-Looking
SOFR Term Rates (Apr. 19, 2019), available at https://www.federalreserve.gov/econres/notes/feds-notes/indicative-forward-looking-sofr-term-rates-20190419.htm. (last updated May 1, 2020).
---------------------------------------------------------------------------
The Bureau is proposing to make these determinations about the
historical fluctuations in the spread-adjusted indices based on 30-day
SOFR, 1-month term SOFR, 3-month term SOFR, and 6-month term SOFR,
while analyzing data on 30-day SOFR, 1-month term SOFR, 3-month term
SOFR, and 6-month term SOFR without spread adjustments. This analysis
is valid because the ARRC has stated that the spread adjustments will
be static, outside of a one-year transition period that has not yet
started and so is not in the historical data. A static spread
adjustment would have no effect on historical fluctuations.
30-day SOFR, the applicable SOFR term rates, and the applicable
LIBOR indices all reflect the cost of borrowing in the United States
and have all generally moved together during SOFR's available history.
However, the ARRC and the Bureau recognize that the SOFR indices will
differ in some respects from the LIBOR indices. The nature and extent
of these differences will depend on whether the SOFR indices are based
on 30-day SOFR or SOFR term rates.
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.\51\ Moreover, 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.
---------------------------------------------------------------------------
\51\ The ``term premium'' is the excess yield that investors
require to buy a long-term bond instead of a series of shorter-term
bonds.
---------------------------------------------------------------------------
SOFR term rates, if they are available, will have fewer differences
with LIBOR term rates than 30-day SOFR does. Since they are also term
rates, they will also include term premia, and these should usually be
similar to the term premia embedded in LIBOR. Since SOFR term 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,
SOFR term rates will still have differences with the LIBOR indices. As
mentioned above, SOFR is a secured rate while the LIBOR indices are
unsecured. SOFR and LIBOR also reflect supply and demand conditions in
different credit markets.
Thus, whether the ARRC bases its recommended indices on forward-
looking SOFR term rates or backward-looking historical averages of
SOFR, its recommended indices 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.\52\ The ARRC's
consultation
[[Page 36947]]
received over 70 responses from consumer advocacy groups, asset
managers, corporations, banks, industry associations, GSEs, and
others.\53\ On April 8, 2020, the ARRC announced that it had agreed on
a recommended spread adjustment methodology for cash products
referencing USD LIBOR.\54\ Following its consideration of feedback
received on its public consultation, the ARRC is recommending a long-
term spread adjustment equal to the historical median of the five-year
spread between USD LIBOR and SOFR. For consumer products, the ARRC is
additionally recommending a 1-year transition period to this five-year
median spread adjustment methodology.\55\ Thus, in the short term, the
transition will be gradual. On the date specified by the ARRC, the
spread adjustment will not be set immediately to its long-run value.
Instead, on the date specified by the ARRC, the spread adjustment will
be set to equalize the value of the SOFR-based spread-adjusted index
and the LIBOR index. The spread adjustment will then transition
steadily over the course of a year to its long-run value. The inclusion
of a transition period for consumer products was endorsed by many
respondents, including consumer advocacy groups.\56\ Although the ARRC
has not yet finalized certain aspects of its recommendations for
replacement indices, it is actively working on doing so.\57\
---------------------------------------------------------------------------
\52\ ARRC Consultation on Spread Adjustment Methodologies, supra
note 40.
\53\ ARRC, 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. [hereinafter
referred to as ARRC Supplemental Spread-Adjustment Consultation]
\54\ ARRC Announces Recommendation of a Spread Adjustment
Methodology, supra note 45.
\55\ Id.
\56\ ARRC Supplemental Spread-Adjustment Consultation, supra
note 53, at 1.
\57\ The ARRC issued a supplemental consultation on spread
adjustment methodology on May 6, 2020, seeking further views on
certain technical issues related to spread adjustment methodologies
for cash products referencing USD LIBOR. Id.
---------------------------------------------------------------------------
The ARRC has stated that each spread-adjusted replacement index
that it recommends will incorporate a spread adjustment that will be
fixed at a specified time at or before LIBOR's cessation and will
remain static after the 1-year transition period.\58\ The ARRC intends
for the 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.\59\ Although the methodology will
be the same across different tenors of LIBOR, it may be applied to each
LIBOR tenor separately, so that there would be a separate recommended
spread adjustment calculated for 1-month, 2-month, 3-month, 6-month,
and 1-year USD LIBOR.\60\
---------------------------------------------------------------------------
\58\ ARRC Consultation on Spread Adjustment Methodologies, supra
note 40, at 1, 2.
\59\ Id. at 2, 3.
\60\ Id. at 7. Thus, the calculated spread adjustment may differ
for each tenor of LIBOR, even if the methodology used to calculate
each is the same. Id. The supplemental consultation issued by the
ARRC on May 6, 2020, invites participants to consider the option to
use the same spread adjustment values that will be used by the
International Swaps and Derivatives Association (ISDA) across all of
the different fallback rates, rather than using the same adjustment
methodology to calculate a different spread adjustment for each
potential fallback rate. ARRC Supplemental Spread-Adjustment
Consultation, supra note 53, at 3-4. The supplemental consultation
also seeks views on a second issue: Recognizing that ISDA will now
include a pre-cessation trigger, the supplemental consultation seeks
views on whether the timing of the calculation of the ARRC's spread
adjustment should match ISDA's timing if a pre-cessation event is
operative. Id.
---------------------------------------------------------------------------
The Bureau is proposing to determine that the spread-adjusted
indices based on SOFR recommended by the ARRC as a replacement for the
1-month, 3-month, 6-month, and 1-year USD LIBOR index are comparable
indices to the 1-month, 3-month, 6-month, and 1-year USD LIBOR index
respectively. The spread-adjusted indices based on SOFR that the ARRC
recommends will be published and made publicly available. The ARRC's
Consultation on its spread adjustment methodology presents several
pieces of evidence that, in the ARRC's view, suggest that spread-
adjusted SOFR rates are likely to experience similar fluctuations to
the corresponding tenors of LIBOR.\61\ 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 that
derived through a public consultation.
---------------------------------------------------------------------------
\61\ ARRC Consultation on Spread Adjustment Methodologies, supra
note 40.
---------------------------------------------------------------------------
The proposed example would be illustrative only, and the Bureau
does not intend to suggest that the spread-adjusted SOFR indices
recommended by the ARRC 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 but believes it would be helpful to add this
example in the commentary. The Bureau requests comment on whether it is
appropriate to add the proposed example to comment 20(a)-3.ii.B and
whether the Bureau should make any other amendments to Sec. 1026.20(a)
or its commentary in connection with the LIBOR transition.
Specifically, the Bureau requests comment on whether there are 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.
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 Sec. 1026.36. Section 1026.36(a)(4)
addresses the three-property exclusion for seller financers and
provides that a person (as defined in Sec. 1026.2(a)(22)) that meets
all of the criteria specified in Sec. 1026.36(a)(4)(i) to (iii) is not
a loan originator under Sec. 1026.36(a)(1). Pursuant to Sec.
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 proposed rule would amend the examples of
indices provided in Sec. 1026.36(a)(4)(iii)(C) to substitute SOFR for
LIBOR.
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 Sec. 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 Sec. 1026.36(a)(5)(i) to (iii) is not a loan originator
under Sec. 1026.36(a)(1). Pursuant to Sec. 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
[[Page 36948]]
for U.S. Treasury securities or LIBOR. In light of the anticipated
discontinuation of LIBOR, the proposed rule would amend the examples of
indices provided in Sec. 1026.36(a)(5)(iii)(B) to substitute SOFR for
LIBOR.
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,
Sec. 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
Sec. 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 proposed rule
would amend this example in comment 37(j)(1)-1 to provide that ``SOFR''
may be disclosed instead of Secured Overnight Financing Rate.
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 which permits a creditor to
change unilaterally any term except in enumerated circumstances set
forth in TILA section 137(c).\62\ 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.\63\ In
implementing TILA section 137(c), Sec. 1026.40(f)(3) prohibits a
creditor from changing the terms of a HELOC subject to Sec. 1026.40
except in enumerated circumstances set forth in Sec. 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.
---------------------------------------------------------------------------
\62\ 15 U.S.C. 1647(c).
\63\ 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 proposed Sec.
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 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
the prime rate 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 proposed Sec. 1026.40(f)(3)(ii)(B), the
Bureau is proposing to add new LIBOR-specific provisions to proposed
Sec. 1026.40(f)(3)(ii)(B) that would permit creditors for HELOC plans
subject to Sec. 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 Sec. 1026.40(f)(3)(ii)(B) provides that if
a variable rate on a HELOC subject to Sec. 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 Sec.
1026.40(f)(3)(ii)(B) also provides 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 proposed Sec. 1026.40(f)(3)(ii)(B), to reduce uncertainty
with respect to selecting a replacement index that meets the standards
in proposed Sec. 1026.40(f)(3)(ii)(B), the Bureau is proposing to
determine that Prime is an example of an index that has historical
fluctuations that are substantially similar to those of certain USD
LIBOR indices. The Bureau also is proposing to determine that certain
spread-adjusted indices based on SOFR recommended by the ARRC have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. The Bureau also is proposing additional
detail in comments 40(f)(3)(ii)(B)-1 through -3 with respect to
proposed Sec. 1026.40(f)(3)(ii)(B).
[[Page 36949]]
In addition, as discussed in more detail in the section-by-section
analysis of proposed Sec. 1026.40(f)(3)(ii)(A), the Bureau is
proposing to move the unavailability provisions in current Sec.
1026.40(f)(3)(ii) and current comment 40(f)(3)(ii)-1 to proposed Sec.
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 is proposing additional detail in
comments 40(f)(3)(ii)(A)-2 through -3 with respect to proposed Sec.
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 Sec. 1026.40(f)(3)(ii)(A), the
Bureau is proposing the same determinations described above related to
Prime and the spread-adjusted indices based on SOFR recommended by the
ARRC in relation to proposed Sec. 1026.40(f)(3)(ii)(A). The Bureau is
proposing to make these revisions and provide additional detail because
the Bureau understands that some HELOC creditors may use the
unavailability provision in proposed Sec. 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.
Bureau is proposing new proposed LIBOR-specific provisions rather
than interpreting when the LIBOR indices are unavailable. For several
reasons, the Bureau is proposing new LIBOR-specific provisions under
proposed Sec. 1026.40(f)(3)(ii)(B), rather than interpreting the LIBOR
indices to be unavailable as of a certain date prior to LIBOR being
discontinued under current Sec. 1026.40(f)(3)(ii) (as proposed to be
moved to proposed Sec. 1026.40(f)(3)(ii)(A)). First, the Bureau is
concerned about making a determination for Regulation Z purposes under
current Sec. 1026.40(f)(3)(ii) (as proposed to be moved to proposed
Sec. 1026.40(f)(3)(ii)(A)) that the LIBOR indices are unavailable or
unreliable when the FCA, the regulator of LIBOR, has not made such a
determination.
Second, the Bureau is concerned that a determination by the Bureau
that the LIBOR indices are unavailable for purposes of current Sec.
1026.40(f)(3)(ii) (as proposed to be moved to proposed Sec.
1026.40(f)(3)(ii)(A)) could have unintended consequences on other
products or markets. For example, the Bureau is concerned that such a
determination could unintentionally cause confusion for creditors for
other products (e.g., ARMs) about whether the LIBOR indices are
unavailable for those products too and could possibly put pressure on
those creditors to replace the LIBOR index used for those products
before those creditors are ready for the change.
Third, even if the Bureau interpreted unavailability under current
Sec. 1026.40(f)(3)(ii) (as proposed to be moved to proposed Sec.
1026.40(f)(3)(ii)(A)) to indicate that the LIBOR indices are
unavailable prior to LIBOR being discontinued, this interpretation
would not completely solve the contractual issues for creditors whose
contracts require them to wait until the LIBOR indices become
unavailable before replacing the LIBOR index. Creditors still would
need to decide for their contracts whether the LIBOR indices are
unavailable. Thus, even if the Bureau decided that the LIBOR indices
are unavailable under Regulation Z as described above, creditors whose
contracts require them to wait until the LIBOR indices become
unavailable before replacing the LIBOR index essentially would remain
in the same position of interpreting their contracts as they would have
been under the current rule.
Thus, the Bureau is not proposing to interpret when the LIBOR
indices are unavailable for purposes of current Sec. 1026.40(f)(3)(ii)
(as proposed to be moved to proposed Sec. 1026.40(f)(3)(ii)(A)). The
Bureau solicits comment, however, on whether the Bureau should
interpret when the LIBOR indices are unavailable for purposes of
current Sec. 1026.40(f)(3)(ii) (as proposed to be moved to proposed
Sec. 1026.40(f)(3)(ii)(A)), and if so, why the Bureau should make that
determination and when should the LIBOR indices be considered
unavailable for purposes of that provision.
The Bureau also solicits comment on an alternative to interpreting
the term ``unavailable.'' Specifically, should the Bureau make
revisions to the unavailability provisions in current Sec.
1026.40(f)(3)(ii) (as proposed to be moved to proposed Sec.
1026.40(f)(3)(ii)(A)) in a manner that would allow those creditors who
need to transition from LIBOR and, for contractual reasons, may not be
able to switch away from LIBOR prior to it being unavailable to be
better able to use the unavailability provisions for an orderly
transition on or after March 15, 2021? If so, what should these
revisions be?
Interaction among proposed Sec. 1026.40(f)(3)(ii)(A) and (B) and
contractual provisions. Proposed comment 40(f)(3)(ii)-1 addresses the
interaction among the unavailability provisions in proposed Sec.
1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in proposed Sec.
1026.40(f)(3)(ii)(B), and the contractual provisions that apply to the
HELOC plan. 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. To facilitate compliance, the Bureau is proposing
detail on the interaction among the unavailability provisions in
proposed Sec. 1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in
proposed Sec. 1026.40(f)(3)(ii)(B), and the contractual provisions for
the HELOC.
Proposed comment 40(f)(3)(ii)-1 provides that a creditor may use
either the provision in proposed Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B) to replace a LIBOR index used under a HELOC plan
subject to Sec. 1026.40 so long as the applicable conditions are met
for the provision used. This proposed comment makes clear, however,
that neither proposed provision excuses the creditor from noncompliance
with contractual provisions. As discussed in more detail below,
proposed comment 40(f)(3)(ii)-1 provides examples to illustrate when a
creditor may use the provisions in proposed Sec. 1026.40(f)(3)(ii)(A)
or Sec. 1026.40(f)(3)(ii)(B) to replace the LIBOR index used under a
HELOC plan and each of these examples assumes that the LIBOR index used
under the plan becomes unavailable after March 15, 2021.
Proposed comment 40(f)(3)(ii)-1.i provides an example where a HELOC
contract provides that a creditor may
[[Page 36950]]
not replace an index unilaterally under a plan unless the original
index becomes unavailable and provides that the replacement index and
replacement margin will result in an APR substantially similar to a
rate that is in effect when the original index becomes unavailable. In
this case, proposed comment 40(f)(3)(ii)-1.i explains that the creditor
may use the unavailability provisions in proposed Sec.
1026.40(f)(3)(ii)(A) to replace the LIBOR index used under the plan so
long as the conditions of that provision are met. Proposed comment
40(f)(3)(ii)-1.i also explains that the proposed LIBOR-specific
provisions in proposed Sec. 1026.40(f)(3)(ii)(B) provide that a
creditor may replace the LIBOR index 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. Proposed comment 40(f)(3)(ii)-1.i notes,
however, that the creditor in this example would be contractually
prohibited from replacing the LIBOR index used under the plan unless
the replacement index and replacement margin also will produce an APR
substantially similar to a rate that is in effect when the LIBOR index
becomes unavailable. The Bureau solicits comments on this proposed
approach and example.
Proposed comment 40(f)(3)(ii)-1.ii provides an example of a HELOC
contract under which a creditor may not replace an index unilaterally
under a plan unless the original index 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
original index becomes unavailable. In this case, the creditor would be
contractually prohibited from unilaterally replacing a LIBOR index used
under the plan until it becomes unavailable. At that time, the creditor
has the option of using proposed Sec. 1026.40(f)(3)(ii)(A) or Sec.
1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of
the applicable provision are met.
The Bureau is proposing to allow the creditor in this case to use
either the proposed unavailability provisions in proposed Sec.
1026.40(f)(3)(ii)(A) or the proposed LIBOR-specific provisions in
proposed Sec. 1026.40(f)(3)(ii)(B). If the creditor uses the
unavailability provisions in proposed Sec. 1026.40(f)(3)(ii)(A), the
creditor must use a replacement index and replacement margin that will
produce an APR substantially similar to the rate in effect when the
LIBOR index became unavailable. If the creditor uses the proposed
LIBOR-specific provisions in proposed Sec. 1026.40(f)(3)(ii)(B), the
creditor must use the replacement index value in effect on December 31,
2020, and the replacement margin that 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.
The Bureau is proposing to allow a creditor in this case to use the
index values of the LIBOR index and replacement index on December 31,
2020, under proposed Sec. 1026.40(f)(3)(ii)(B) to meet the
``substantially similar'' standard with respect to the comparison of
the rates even if the creditor is contractually prohibited from
unilaterally replacing the LIBOR index used under the plan until it
becomes unavailable. The Bureau recognizes that LIBOR may not be
discontinued until the end of 2021, which is around a year later than
the December 31, 2020, date. Nonetheless, the Bureau is proposing to
allow creditors that are restricted by their contracts to replace the
LIBOR index used under the HELOC plans until the LIBOR index becomes
unavailable to use the LIBOR index values and the replacement index
values in effect on December 31, 2020, under proposed Sec.
1026.40(f)(3)(ii)(B), rather than the index values on the day that
LIBOR becomes unavailable under proposed Sec. 1026.40(f)(3)(ii)(A).
This proposal would allow those creditors to use consistent index
values to those creditors that are not restricted by their contracts in
replacing the LIBOR index prior to LIBOR becoming unavailable. This
proposal would also promote consistency for consumers in that all HELOC
creditors would be permitted to use the same LIBOR values in comparing
the rates.
In addition, as discussed in part III, the industry has raised
concerns that LIBOR may continue for some time after December 2021 but
become less representative or reliable until LIBOR finally is
discontinued. Allowing creditors to use the December 31, 2020, values
for comparison of the rates instead of the LIBOR values when the LIBOR
indices become unavailable may address some of these concerns.
Thus, the Bureau is proposing to provide creditors with the
flexibility to choose to compare the rates using the index values for
the LIBOR index and the replacement index on December 31, 2020, by
using the proposed LIBOR-specific provisions under proposed Sec.
1026.40(f)(3)(ii)(B), rather than using the unavailability provisions
in proposed Sec. 1026.40(f)(3)(ii)(A). The Bureau solicits comment on
this proposed approach and example.
Proposed comment 40(f)(3)(ii)-1.iii provides an example of a HELOC
contract under which a creditor may change the terms of the contract
(including the index) as permitted by law. Proposed comment
40(f)(3)(ii)-1.iii explains in this case, if the creditor replaces a
LIBOR index under a plan on or after March 15, 2021, but does not wait
until the LIBOR index becomes unavailable to do so, the creditor may
only use proposed Sec. 1026.40(f)(3)(ii)(B) to replace the LIBOR index
if the conditions of that provision are met. In this case, the creditor
may not use proposed Sec. 1026.40(f)(3)(ii)(A). Proposed comment
40(f)(3)(ii)-1.iii also explains that if the creditor waits until the
LIBOR index used under the plan becomes unavailable to replace the
LIBOR index, the creditor has the option of using proposed Sec.
1026.40(f)(3)(ii)(A) or Sec. 1026.40(f)(3)(ii)(B) to replace the LIBOR
index if the conditions of the applicable provision are met.
The Bureau is proposing to allow the creditor in this case to use
either the unavailability provisions in proposed Sec.
1026.40(f)(3)(ii)(A) or the proposed LIBOR-specific provisions in
proposed Sec. 1026.40(f)(3)(ii)(B) if the creditor waits until the
LIBOR index used under the plan becomes unavailable to replace the
LIBOR index. For the reasons explained above in the discussion of the
example in proposed comment 40(f)(3)(ii)-1.ii, the Bureau is proposing
in the situation described in proposed comment 40(f)(3)(ii)-1.iii to
provide creditors with the flexibility to choose to use the index
values of the LIBOR index and the replacement index on December 31,
2020, by using the proposed LIBOR-specific provisions under proposed
Sec. 1026.40(f)(3)(ii)(B), rather than using the unavailability
provisions in proposed Sec. 1026.40(f)(3)(ii)(A). The Bureau solicits
comment on this proposed approach and example.
40(f)(3)(ii)(A)
Current Sec. 1026.40(f)(3)(ii) provides that a creditor may change
the index and margin used under a HELOC plan subject to Sec. 1026.40
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
[[Page 36951]]
to the rate in effect at the time the original index became
unavailable. Current comment 40(f)(3)(ii)-1 provides that a creditor
may change the index and margin used under the 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.
The Proposal
The Bureau is proposing to move the unavailability provisions in
current Sec. 1026.40(f)(3)(ii) and current comment 40(f)(3)(ii)-1 to
proposed Sec. 1026.40(f)(3)(ii)(A) and proposed comment
40(f)(3)(ii)(A)-1 respectively and revise the moved provisions for
clarity and consistency. In addition, the Bureau is proposing to add
detail in proposed comments 40(f)(3)(ii)(A)-2 and -3 on the conditions
set forth in proposed Sec. 1026.40(f)(3)(ii)(A). For example, to
reduce uncertainty with respect to selecting a replacement index that
meets the standards under proposed Sec. 1026.40(f)(3)(ii)(A), the
Bureau is proposing to determine that Prime is an example of an index
that has historical fluctuations that are substantially similar to
those of certain USD LIBOR indices. The Bureau also is proposing to
determine that certain spread-adjusted indices based on SOFR
recommended by the ARRC have historical fluctuations that are
substantially similar to those of certain USD LIBOR indices. The Bureau
is proposing to make revisions and provide additional detail with
respect to the unavailability provisions in proposed Sec.
1026.40(f)(3)(ii)(A) because the Bureau understands that some HELOC
creditors may use these unavailability provisions to replace a LIBOR
index used under a HELOC plan, depending on the contractual provisions
applicable to their HELOC plans, as discussed above in more detail in
the section-by-section of Sec. 1026.40(f)(3)(ii).
The Bureau solicits comments on proposed Sec. 1026.40(f)(3)(ii)(A)
and proposed comments 40(f)(3)(ii)(A)-1 through -3. These proposed
provisions are discussed in more detail below.
Proposed Sec. 1026.40(f)(3)(ii)(A). Proposed Sec.
1026.40(f)(3)(ii)(A) provides that a creditor for a HELOC plan subject
to Sec. 1026.40 may change the index and margin used under the plan if
the original index is no longer available, the replacement index has
historical fluctuations substantially similar to that of the original
index, and the replacement index and replacement margin would have
resulted in an APR substantially similar to the rate in effect at the
time the original index became unavailable. Proposed Sec.
1020.40(f)(3)(ii)(A) also provides that if the replacement index is
newly established and therefore does not have any rate history, it may
be used if it and the replacement margin will produce an APR
substantially similar to the rate in effect when the original index
became unavailable.
Proposed Sec. 1026.40(f)(3)(ii)(A) differs from current Sec.
1026.40(f)(3)(ii) in three ways. First, proposed Sec.
1026.40(f)(3)(ii)(A) differs from current Sec. 1040(f)(3)(ii) by using
the term ``historical fluctuations'' rather than the term ``historical
movement'' to refer to the original index and the replacement index.
Under current Sec. 1026.40(f)(3)(ii), ``historical fluctuations''
appears to be equivalent to ``historical movement'' because the
regulatory text provision in Sec. 1026.40(f)(3)(ii) uses the term
``historical movement'' while current comment 40(f)(3)(ii)-1 (that
interprets current Sec. 1026.40(f)(3)(ii)) uses the term ``historical
fluctuations.'' For clarity and consistency, the Bureau is proposing to
use ``historical fluctuations'' in both proposed Sec.
1026.40(f)(3)(ii)(A) and proposed comment 40(f)(3)(ii)(A)-1, so that
the proposed regulatory text and related commentary use the same term.
Second, proposed Sec. 1026.40(f)(3)(ii)(A) differs from current
Sec. 1026.40(f)(3)(ii) by including a provision regarding newly
established indices that is not contained in current Sec.
1026.40(f)(3)(ii). This proposed provision is similar to the sentence
in current comment 40(f)(3)(ii)-1 on newly established indices except
that the proposed provision in proposed Sec. 1026.40(f)(3)(ii)(A)
makes clear that a creditor that is using a newly established index
also may adjust the margin so that the newly established index and
replacement margin will produce an APR substantially similar to the
rate in effect when the original index became unavailable. The newly
established index may not have the same index value as the original
index, and the creditor may need to adjust the margin to meet the
condition that the newly established index and replacement margin will
produce an APR substantially similar to the rate in effect when the
original index became unavailable.
Third, proposed Sec. 1026.40(f)(3)(ii)(A) differs from current
Sec. 1026.40(f)(3)(ii) by using the terms ``replacement index'' and
``replacement index and replacement margin'' instead of using ``new
index'' and ``new index and margin,'' respectively as contained in
current Sec. 1026.40(f)(3)(ii). These proposed changes are designed to
avoid any confusion as to when the provision in proposed Sec.
1026.40(f)(3)(ii)(A) is referring to a replacement index and
replacement margin as opposed to a newly established index.
Proposed comment 40(f)(3)(ii)(A)-1. The Bureau is proposing to move
current comment 40(f)(3)(ii)-1 to proposed comment 40(f)(3)(ii)(A)-1.
The Bureau also is proposing to revise this proposed moved comment in
three ways for clarity and consistency with proposed Sec.
1026.40(f)(3)(ii)(A). First, proposed comment 40(f)(3)(ii)(A)-1 differs
from current comment 40(f)(3)(ii)-1 by providing that if an index that
is not newly established is used to replace the original index, the
replacement index and replacement margin will produce a rate
``substantially similar'' to the rate that was in effect at the time
the original index became unavailable. Current comment 40(f)(3)(ii)-1
uses the term ``similar'' instead of ``substantially similar'' for the
comparison of these rates. Nonetheless, this use of the term
``similar'' in current comment 40(f)(3)(ii)-1 is inconsistent with the
use of ``substantially similar'' in current Sec. 1026.40(f)(3)(ii) for
the comparison of these rates. To correct this inconsistency between
the regulation text and the commentary provision that interprets it,
the Bureau is proposing to use ``substantially similar'' consistently
in proposed Sec. 1026.40(f)(3)(ii)(A) and proposed comment
40(f)(3)(ii)(A)-1 for the comparison of these rates.
Second, consistent with the proposed new sentence in proposed Sec.
1026.40(f)(3)(ii)(A) related to newly established indices, proposed
comment 40(f)(3)(ii)(A)-1 differs from current comment 40(f)(3)(ii)-1
by clarifying that a creditor that is using a newly established index
may also adjust the margin so that the newly established index and
replacement margin will produce an APR substantially similar to the
rate in effect when the original index became unavailable.
Third, proposed comment 40(f)(3)(ii)(A)-1 differs from current
comment 40(f)(3)(ii)-1 by using the term ``the replacement index and
replacement margin'' instead of ``the replacement index and margin'' to
make clear when the proposed comment is
[[Page 36952]]
referring to a replacement margin and not the original margin.
Historical fluctuations substantially similar for the LIBOR index
and replacement index. Proposed comment 40(f)(3)(ii)(A)-2 provides
detail on determining whether a replacement index that is not newly
established has ``historical fluctuations'' that are ``substantially
similar'' to those of the LIBOR index used under the plan for purposes
of proposed Sec. 1026.40(f)(3)(ii)(A). Specifically, proposed comment
40(f)(3)(ii)(A)-2 provides that for purposes of replacing a LIBOR index
used under a plan pursuant to proposed Sec. 1026.40(f)(3)(ii)(A), a
replacement index that is not newly established must have historical
fluctuations that are substantially similar to those of the LIBOR index
used under the plan, considering the historical fluctuations up through
when the LIBOR index becomes unavailable or up through the date
indicated in a Bureau determination that the replacement index and the
LIBOR index have historical fluctuations that are substantially
similar, whichever is earlier.
Prime has ``historical fluctuations'' that are ``substantially
similar'' to those of certain USD LIBOR indices. To facilitate
compliance, proposed comment 40(f)(3)(ii)(A)-2.i includes a proposed
determination that Prime has historical fluctuations that are
substantially similar to those of the 1-month and 3-month USD LIBOR
indices and includes a placeholder for the date when this proposed
determination would be effective, if adopted in the final rule. The
Bureau understands that some HELOC creditors may choose to replace a
LIBOR index with Prime.
The Bureau is proposing this determination after reviewing
historical data from January 1986 through January 2020 on 1-month USD
LIBOR, 3-month USD LIBOR, and Prime. The spread between 1-month USD
LIBOR and Prime increased from roughly 142 basis points in 1986 to 281
basis points in 1993. The spread between 3-month USD LIBOR increased
from roughly 151 basis points in 1986 to 270 basis points in 1993. Both
spreads were fairly steady after 1993. Given that for the last 27 years
of history the spreads have remained relatively stable, the data,
analysis, and conclusion discussed below are restricted to the period
beginning in 1993.
While Prime has not always moved in tandem with 1-month USD LIBOR
and 3-month USD LIBOR after 1993, the Bureau believes that since 1993
the historical fluctuations in 1-month USD LIBOR and Prime have been
substantially similar and that the historical fluctuations in 3-month
USD LIBOR and Prime have been substantially similar.\64\
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\64\ There was a temporary but large difference in the movements
of LIBOR rates and Prime for roughly a month after Lehman Brothers
filed for bankruptcy on September 15, 2008, reflecting the effects
this event had on the perception of risk in the interbank lending
market. For example, 1-month USD LIBOR increased over 200 basis
points in the month after September 15, 2008, even as Prime and many
other interest rates fell. The numbers presented in this analysis
include this time period.
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The historical correlation between 1-month USD LIBOR and Prime is
.9956. The historical correlation between 3-month USD LIBOR and Prime
is .9918. While the correlation between these rates is quite high,
correlation is not the only statistical measure of similarity that may
be relevant for comparing the historical fluctuations of these
rates.\65\ The Bureau has reviewed other statistical characteristics of
these rates, such as the variance, skewness, and kurtosis,\66\ and
these characteristics imply that on average both the 1-month USD LIBOR
and 3-month USD LIBOR tend to move closely with Prime and that the 1-
month USD LIBOR and 3-month USD LIBOR tend to present consumers and
creditors with payment changes that are similar to that presented by
Prime.\67\
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\65\ For example, consider two wagers on a series of coin flips.
The first wins one cent for every heads and loses one cent for every
tails. The second wins a million dollars for every heads and loses a
million dollars for every tails. These wagers are perfectly
correlated (i.e., they have a correlation of 1) but have very
different statistical properties.
\66\ Roughly, variance is a statistical measure of how much a
random number tends to deviate from its average value. Skewness is a
statistical measure of whether particularly large deviations in a
random number from its average value tend to be below or above that
average value. Kurtosis is a statistical measure of whether
deviations of a random number from its average value tend to be
small and frequent or rare and large.
\67\ The variance, skewness, and kurtosis of Prime are 4.5605,
.3115, and 1.5337 respectively. The variance, skewness, and kurtosis
of 1-month USD LIBOR are 4.8935, .2715, and 1.5168 respectively. The
variance, skewness, and kurtosis of 3-month USD LIBOR are 4.7955,
.2605, and 1.5252, respectively.
---------------------------------------------------------------------------
Theoretically, these statistical measures could mask important
long-term differences in movements. However, as mentioned above, the
spread between 1-month USD LIBOR and Prime and the spread between 3-
month USD LIBOR and Prime have remained fairly steady after January
1993 to January 2020. For example, the average spread between 1-month
USD LIBOR and Prime was 281 basis points in 1993, and 306 basis points
in 2019. The average spread between 3-month USD LIBOR and Prime was 270
basis points in 1993, and 296 basis points in 2019.
Finally, in performing its analysis, the Bureau also considered the
impact different indices would have on consumer payments. To that end,
the Bureau considered a specific example of a debt with a variable rate
that resets monthly, and a balance that accumulates over time with
interest but without further charges, payments, or fees. The Bureau
used this example for HELOCs and credit card accounts because the
Bureau understands that the rates for many of those accounts reset
monthly. The example considers debt that accumulates interest over a
period of ten years, beginning in January of every year from 1994 to
2009. For this example, the Bureau found that since 1994 historical
fluctuations in 1-month USD LIBOR and Prime, and 3-month USD LIBOR and
Prime, produced substantially similar payment outcomes for consumers
with debt similar to that considered.\68\ For example, if the initial
balance in this example is $10,000, the average difference between the
debt outstanding under Prime and the debt outstanding under adjusted 1-
month USD LIBOR after ten years is about $100. The Bureau also found
similar results for Prime versus the adjusted 3-month USD LIBOR.
---------------------------------------------------------------------------
\68\ In this example, for each starting year, three versions of
debt are considered: (1) One with an interest rate equal to Prime;
(2) one with an interest rate equal to the 1-month USD LIBOR plus
the average spread between 1-month USD LIBOR and Prime for the 12
months preceding the start date; and (3) one with an interest rate
equal to 3-month USD LIBOR plus the average spread between 3-month
USD LIBOR and Prime for the 12 months preceding the start date. For
the 16 initial starting years considered, the average difference
between the debt outstanding under Prime and the debt outstanding
under the adjusted 1-month USD LIBOR after ten years is only around
1% of the initial balance. The average absolute value of the
difference in debt outstanding is around 2% of the initial balance.
For the adjusted 3-month USD LIBOR, the average of the difference is
around 1% of the initial balance, and the average of the absolute
value of the difference is around 3% of the initial balance.
The average difference can be small if the difference is often
far from zero, as long as it is sometimes well above zero and it is
sometimes well below zero. The absolute value of the difference will
be small only if the difference is usually close to zero. For
example, suppose the difference is $1 million one year and -$1
million the next year. The average difference these two years is
zero, indicating that the difference is close to zero on average.
But the average of the absolute value of the difference is $1
million, indicating that the difference is typically far from zero.
Consumers and creditors should care more about the average
difference, and less about the average of the absolute value of the
difference, if they have more liquidity and risk tolerance.
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As discussed in the section-by-section analyses of proposed
Sec. Sec. 1026.40(f)(3)(ii)(B), 1026.55(b)(7)(i) and (ii), the Bureau
also is proposing
[[Page 36953]]
this same determination for purposes of proposed Sec. Sec.
1026.40(f)(3)(ii)(B) and 1026.55(b)(7)(i) and (ii). The Bureau solicits
comment on this proposed determination that Prime has historical
fluctuations that are substantially similar to those of the 1-month and
3-month USD LIBOR indices pursuant to proposed Sec. Sec.
1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii).
Proposed comment 40(f)(3)(ii)(A)-2.i also clarifies that in order
to use Prime as the replacement index for the 1-month or 3-month USD
LIBOR index, the creditor also must comply with the condition in Sec.
1026.40(f)(3)(ii)(A) that Prime and the replacement margin would have
resulted in an APR substantially similar to the rate in effect at the
time the LIBOR index became unavailable. This condition for comparing
the rates under proposed Sec. 1026.40(f)(3)(ii)(A) is discussed in
more detail below.
Certain SOFR-based spread-adjusted indices have ``historical
fluctuations'' that are ``substantially similar'' to those of certain
USD LIBOR indices. To facilitate compliance, proposed comment
40(f)(3)(ii)(A)-2.ii provides a proposed determination that the spread-
adjusted indices based on SOFR recommended by the ARRC to replace the
1-month, 3-month, 6-month, and 1-year USD LIBOR indices have historical
fluctuations that are substantially similar to those of the 1-month, 3-
month, 6-month, and 1-year USD LIBOR indices respectively. The proposed
comment also provides a placeholder for the date when this proposed
determination would be effective, if adopted in the final rule. The
Bureau understands that some HELOC creditors may choose to replace a
LIBOR index with a SOFR-based spread-adjusted index.
As discussed above in the section-by-section analysis of Sec.
1026.20(a), the ARRC intends to endorse forward-looking term SOFR rates
provided a consensus among its members can be reached that robust term
benchmarks that are compliant with IOSCO standards and meet appropriate
criteria set by the ARRC can be produced. If the ARRC has not
recommended relevant forward-looking term SOFR rates, it will base its
recommended indices on a compounded average of SOFR over a selected
compounding period. The Bureau notes that the GSEs announced in
February 2020 that they will begin accepting ARMs based on 30-day
average SOFR in 2020.\69\ For purposes of this proposed rule, the
Bureau has conducted its analysis below assuming that the ARRC will
base its recommended replacement indices on 30-day SOFR.
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\69\ See, e.g., Lender Letter LL-2020-01; Bulletin 2020-1
Selling, supra note 47.
---------------------------------------------------------------------------
In determining whether the SOFR-based spread-adjusted indices have
historical fluctuations substantially similar to those of the
applicable LIBOR indices, the Bureau has reviewed the historical data
on SOFR and historical data on 1-month, 3-month, 6-month, and 1-year
LIBOR from August 22, 2014, to March 16, 2020.\70\ With respect to the
1-year LIBOR, while 30-day SOFR has not always moved in tandem with 1-
year LIBOR, the Bureau is proposing to determine that the historical
fluctuations in 1-year LIBOR and the spread-adjusted index based on 30-
day SOFR have been substantially similar. As discussed in more detail
below, the Bureau also is proposing to determine 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 LIBOR.
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\70\ Prior to the start of 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 New York Fed has
published indicative SOFR averages going back only to May 2, 2018.
See Fed. Reserve Bank of N.Y., SOFR Averages and Index Data, https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind (last visited
May 11, 2020). Therefore, the Bureau has used the estimated SOFR
data going back to 2014 to estimate its own 30-day compound average
of SOFR since 2014. The methodology to calculate compound averages
of SOFR from daily data is described in Fed. Reserve Bank of N.Y.,
Statement Regarding Publication of SOFR Averages and a SOFR Index,
https://www.newyorkfed.org/markets/opolicy/operating_policy_200212.
---------------------------------------------------------------------------
The Bureau is proposing to make these determinations about the
historical fluctuations in the spread-adjusted indices based on 30-day
SOFR, while analyzing data on 30-day SOFR without spread adjustments.
This analysis is valid because the ARRC has stated that the spread
adjustments will be static, outside of a one-year transition period
that has not yet started and so is not in the historical data. A static
spread adjustment would have no effect on historical fluctuations.
The historical correlation between 1-year LIBOR and 30-day SOFR is
.8987. This correlation is high and suggests that on average 30-day
SOFR tends to move closely with 1-year LIBOR. However, the raw
correlation understates the similarity in the movements of these two
rates, because 1-year LIBOR is a forward-looking term rate and 30-day
SOFR is a backward-looking moving average. This means that 30-day SOFR
often moves closely with 1-year LIBOR, but with a lag. For example, the
historical correlation between 30-day SOFR and a 60-day lag of 1-year
LIBOR is .9584. However, as discussed above with respect to the
proposed determination related to Prime, correlation is not the only
statistical measure of similarity that may be relevant for comparing
the historical fluctuations of these rates. The Bureau has reviewed
other statistical characteristics of these rates, such as the variance,
skewness, and kurtosis, and these imply that 30-day SOFR tends to
present consumers and creditors with payment changes that are similar
to that presented by 1-year LIBOR.\71\
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\71\ The variance, skewness, and kurtosis of 30-day SOFR are
.7179, .4098, and 1.6548 respectively. The variance, skewness, and
kurtosis of 1-year LIBOR during the time period are .5829, .1179,
and 1.9242, respectively.
---------------------------------------------------------------------------
Theoretically, these statistical measures could mask important
long-term differences in movements. The spread between 1-year LIBOR and
30-day SOFR decreased from 68 basis points on average in 2015 to 13
basis points on average in 2019. However, this decrease is mainly due
to the timing mismatch issue discussed above together with the fact
that interest rates in general began to decrease at the end of 2018.
Because the backward-looking 30-day moving average of SOFR began to
respond to this decrease in rates well after the forward-looking 1-year
LIBOR term rate did, 30-day SOFR was temporarily high relative to 1-
year LIBOR for a short period in early 2019. The spread between a 60-
day lag of 1-year LIBOR and 30-day SOFR was 59 basis points on average
in 2015 and 39 basis points on average in 2019.
Finally, in performing this analysis, the Bureau also considered
the impact different indices would have on consumer payments. To that
end, the Bureau considered a specific example of a debt with a variable
rate that resets monthly, and a balance that accumulates over time with
interest but without further charges, payments, or fees. The Bureau
used this example for HELOCs and credit card accounts because the
Bureau understands that the rates for many of those accounts reset
monthly. The example considers debt that accumulates interest over the
period of four years, beginning in January of 2016 and ending in
January 2020. For this example, the Bureau found historical
fluctuations in 30-day SOFR and 1-year LIBOR produced substantially
similar payment outcomes for consumers with debt similar to that
[[Page 36954]]
considered.\72\ For example, if the initial balance in this example is
$10,000, the difference between the debt outstanding under 30-day SOFR
and the debt outstanding under adjusted 1-year LIBOR after four years
(called ``4-year balance difference'' in Table 1 below) is roughly $31.
---------------------------------------------------------------------------
\72\ In this example, two versions of debt are considered: (1)
One with an interest rate equal to 30-day SOFR; and (2) one with an
interest rate equal to 1-year LIBOR plus the average spread between
1-year LIBOR and 30-day SOFR for the 12 months preceding the start
date. The average difference between the debt outstanding after four
years under 30-day SOFR and the adjusted 1-year LIBOR is only around
.3% of the initial debt.
---------------------------------------------------------------------------
The Bureau also is proposing to determine that 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 LIBOR.
For the reasons discussed above, the Bureau is proposing to make these
determinations about the historical fluctuations in the spread-adjusted
indices based on 30-day SOFR, while analyzing data on 30-day SOFR
without spread adjustments.
As discussed above, the largest differences between 30-day SOFR and
1-year LIBOR arise because 30-day SOFR is backward-looking and 1-year
LIBOR is forward-looking. Shorter tenors of LIBOR are less forward-
looking, and so in general have even smaller differences with 30-day
SOFR. Echoing the analysis described above to compare historical
fluctuations between 30-day SOFR and 1-year LIBOR, Table 1 provides
statistics on the historical fluctuations in 1-month, 3-month, 6-month,
and 1-year LIBOR during the time period in which data for 30-day SOFR
is available. Based on this analysis, the Bureau is proposing to
determine that historical fluctuations in the spread-adjusted index
based on 30-day SOFR also are substantially similar to those of 1-
month, 3-month, and 6-month LIBOR.
Table 1--Comparison of Historical Fluctuations in Different Tenors of LIBOR and 30-Day SOFR
----------------------------------------------------------------------------------------------------------------
Correlation
Rate with 30-day Variance Skewness Kurtosis 4-Year balance
SOFR difference
----------------------------------------------------------------------------------------------------------------
30-day SOFR..................... N/A 0.7179 0.4098 1.6548 N/A
1-month LIBOR................... .9893 0.6977 0.2376 1.5305 $26
3-month LIBOR................... .9746 0.7241 0.1952 1.5835 60
6-month LIBOR................... .9436 0.652 0.1038 1.7556 63
1-year LIBOR.................... .8987 0.5829 0.1179 1.9242 31
----------------------------------------------------------------------------------------------------------------
As discussed above, the ARRC intends to endorse forward-looking
term SOFR rates provided a consensus among its members can be reached
that robust term benchmarks that are compliant with IOSCO standards and
meet appropriate criteria set by the ARRC can be produced. These term
rates do not yet exist. However, the Board has produced data on
``indicative'' SOFR term rates that likely provide a good indication of
how SOFR term rates would perform.\73\ The Bureau understands that if a
SOFR term rate does not exist for a particular LIBOR tenor, the ARRC
may use the next-longest SOFR term rate to develop the replacement
index for the LIBOR tenor if any applicable SOFR term rate exists. For
example, if there is not a 1-year SOFR term rate, the replacement for
the 1-year LIBOR may be determined using the SOFR term rates in the
following order if they exist: (1) 6-month SOFR; (2) 3-month SOFR; and
(3) 1-month SOFR.
---------------------------------------------------------------------------
\73\ See Heitfield & Ho-Park, supra note 50.
---------------------------------------------------------------------------
As discussed above, the largest difference between different LIBOR
tenors and 30-day SOFR arises because LIBOR is forward-looking and 30-
day SOFR is backward-looking. Because SOFR term rates are forward-
looking like LIBOR, the differences between SOFR term rates and LIBOR
should in general be smaller than the differences between 30-day SOFR
and LIBOR. The Bureau has reviewed the historical data on these
indicative SOFR term rates and on 1-month, 3-month, 6-month, and 1-year
LIBOR from June 11, 2018 to March 16, 2020.\74\ While the indicative
SOFR term rates have not always moved in tandem with LIBOR, the Bureau
is proposing to determine that (1) the historical fluctuations of 1-
year and 6-month USD LIBOR are substantially similar to those of the 1-
month, 3-month, and 6-month spread-adjusted SOFR term rates; (2) the
historical fluctuations of 3-month USD LIBOR are substantially similar
to those of the 1-month and 3-month spread-adjusted SOFR term rates;
and (3) the historical fluctuations of 1-month USD LIBOR are
substantially similar to those of the 1-month spread-adjusted SOFR term
rate.
---------------------------------------------------------------------------
\74\ June 11, 2018, is the first date for which indicative SOFR
term rate data are available.
---------------------------------------------------------------------------
The Bureau is proposing to make these determinations about the
historical fluctuations in the spread-adjusted indices based on 1-month
term SOFR, 3-month term SOFR, and 6-month term SOFR, while analyzing
data on 1-month term SOFR, 3-month term SOFR, and 6-month term SOFR
without spread adjustments. This analysis is valid because the ARRC has
stated that the spread adjustments will be static, outside of a one-
year transition period that has not yet started and so is not in the
historical data. A static spread adjustment would have no effect on
historical fluctuations.
Statistics that have led the Bureau to propose these determinations
are in Tables 2 and 3.
---------------------------------------------------------------------------
\75\ These correlations are for the period beginning June 11,
2018, the first date for which indicative SOFR term rate data are
available. These correlations are not directly comparable to those
in Table 1, which uses data beginning August 22, 2014, the first
date for which data for 30-day SOFR are available.
Table 2--Correlations Between LIBOR and Indicative SOFR Term Rates \75\
----------------------------------------------------------------------------------------------------------------
LIBOR tenor 1-month SOFR 3-month SOFR 6-month SOFR
----------------------------------------------------------------------------------------------------------------
1-month......................................................... .9890 N/A N/A
3-month......................................................... .8955 .9606 N/A
6-month......................................................... .7606 .8923 .9691
[[Page 36955]]
1-year.......................................................... .6295 .8000 .9274
----------------------------------------------------------------------------------------------------------------
The historical correlations presented in Table 2 are high,
suggesting that the given SOFR term rates tend to move closely with the
given LIBOR tenors. However, the raw correlations understate the
similarity in the movements of the SOFR term rates and the LIBOR tenors
when comparing a LIBOR tenor to a shorter SOFR term rate. This is
because the SOFR term rate is less forward-looking than the LIBOR
tenor, so the SOFR term rate moves closely with the LIBOR tenor but
with a lag. This consideration is especially important during the time
period for which indicative SOFR term rate data are available, when
interest rates in general started to decrease. For example, the
historical correlation between 1-month term SOFR and a 60-day lag of 1-
year LIBOR is .9039.
---------------------------------------------------------------------------
\76\ Table 3 does not report a balance difference as Table 1
does because data on the indicative SOFR term rates are not
available for a sufficiently long period.
Table 3--Statistics on LIBOR and Indicative SOFR Term Rates \76\
----------------------------------------------------------------------------------------------------------------
Rate Variance Skewness Kurtosis
----------------------------------------------------------------------------------------------------------------
1-month LIBOR................................................... 0.0735 -0.5459 2.1022
3-month LIBOR................................................... 0.0852 -0.2913 2.0771
6-month LIBOR................................................... 0.1219 -0.3037 1.6886
12-month LIBOR.................................................. 0.1967 -0.2782 1.4281
1-month SOFR.................................................... 0.093 -0.4791 1.8832
3-month SOFR.................................................... 0.0952 -0.4804 1.8558
6-month SOFR.................................................... 0.1168 -0.4671 1.6877
----------------------------------------------------------------------------------------------------------------
The Bureau has reviewed other statistical characteristics of the
LIBOR rates and the indicative SOFR term rates, such as the variance,
skewness, and kurtosis, as shown in Table 3 and these imply that the
indicative SOFR term rates tend to present consumers and creditors with
payment changes that are similar to that presented by the LIBOR rates.
As discussed in the section-by-section analyses of proposed
Sec. Sec. 1026.40(f)(3)(ii)(B), 1026.55(b)(7)(i) and (ii), the Bureau
also is proposing the same determination for purposes of proposed
Sec. Sec. 1026.40(f)(3)(ii)(B) and 1026.55(b)(7)(i) and (ii). The
Bureau solicits comment on this proposed determination that spread-
adjusted indices based on SOFR recommended by the ARRC to replace the
1-month, 3-month, 6-month, and 1-year USD LIBOR indices have historical
fluctuations that are substantially similar to those of the 1-month, 3-
month, 6-month, and 1-year USD LIBOR indices respectively, for purposes
of proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and
1026.55(b)(7)(i) and (ii).
The Bureau notes that the SOFR-based spread-adjusted indices are
not yet being published and may not be published by the effective date
of the final rule, if adopted. Nonetheless, the Bureau believes that it
is appropriate to consider the underlying SOFR data that is available
in proposing the determinations that the spread-adjusted indices based
on SOFR recommended by the ARRC to replace the 1-month, 3-month, 6-
month, and 1-year USD LIBOR indices have historical fluctuations that
are substantially similar to those of the 1-month, 3-month, 6-month,
and 1-year USD LIBOR indices respectively. The Bureau solicits comment,
however, on whether the Bureau should alternatively consider these
SOFR-based spread-adjusted indices to be newly established indices for
purposes of proposed Sec. Sec. 1026.40(f)(3)(ii)(A) and (B) and
1026.55(b)(7)(i) and (ii), to the extent these indices are not being
published by the effective date of the final rule, if adopted.
Proposed comment 40(f)(3)(ii)(A)-2.ii also clarifies that in order
to use a SOFR-based spread-adjusted index described above as the
replacement index for the applicable LIBOR index, the creditor also
must comply with the condition in Sec. 1026.40(f)(3)(ii)(A) that the
SOFR-based spread-adjusted index and replacement margin would have
resulted in an APR substantially similar to the rate in effect at the
time the LIBOR index became unavailable. This condition under proposed
Sec. 1026.40(f)(3)(ii)(A) is discussed in more detail below. Also, as
discussed in more detail below, the Bureau solicits comment on whether
the Bureau in the final rule, if adopted, should provide for purposes
of proposed Sec. 1026.40(f)(3)(ii)(A) that the rate using the SOFR-
based spread-adjusted index is ``substantially similar'' to the rate in
effect at the time the LIBOR index becomes unavailable, so long as the
creditor uses as the replacement margin the same margin in effect on
the day that the LIBOR index becomes unavailable.
The Bureau also solicits comment on whether there are other indices
that are not newly established for which the Bureau should make a
determination that the index has historical fluctuations that are
substantially similar to those of the LIBOR indices. If so, what are
these other indices, and why should the Bureau make such a
determination with respect to those indices?
Newly established index as replacement for a LIBOR index. Proposed
Sec. 1026.40(f)(3)(ii)(A) provides that if the replacement index is
newly established and therefore does not have any rate history, it may
be used if it and the replacement margin will produce an APR
substantially similar to the rate in effect when the original index
became unavailable. The Bureau solicits comment on whether the Bureau
should provide any additional guidance on, or regulatory changes
addressing, when an index is newly established with respect to
replacing the LIBOR indices for purposes of proposed Sec.
1026.40(f)(3)(ii)(A). The Bureau also solicits comment on whether the
Bureau should provide any examples of indices that are newly
established with respect to replacing the LIBOR indices for
[[Page 36956]]
purposes of Sec. 1026.40(f)(3)(ii)(A). If so, what are these indices
and why should the Bureau determine these indices are newly established
with respect to replacing the LIBOR indices?
Substantially similar rate when LIBOR becomes unavailable. Under
proposed Sec. 1026.40(f)(3)(ii)(A), the replacement index and
replacement margin must produce an APR substantially similar to the
rate that was in effect based on the LIBOR index used under the plan
when the LIBOR index became unavailable. Proposed comment
40(f)(3)(ii)(A)-3 explains that for the comparison of the rates, a
creditor must use the value of the replacement index and the LIBOR
index on the day that the LIBOR index becomes unavailable. The Bureau
solicits comment on whether it should address the situation where the
replacement index is not be published on the day that the LIBOR index
becomes unavailable. For example, should the Bureau provide that if the
replacement index is not published on the day that the LIBOR index
becomes unavailable, the creditor must use the previous calendar day
that both indices are published as the date on which the annual
percentage rate based on the replacement index must be substantially
similar to the rate based on the LIBOR index?
Proposed comment 40(f)(3)(ii)(A)-3 also clarifies that the
replacement index and replacement margin are not required to produce an
APR that is substantially similar on the day that the replacement index
and replacement margin become effective on the plan. Proposed comment
40(f)(3)(ii)(A)-3.i provides an example to illustrate this comment.
The Bureau believes that it may raise compliance issues if the rate
calculated using the replacement index and replacement margin at the
time the replacement index and replacement margin became effective had
to be substantially similar to the rate in effect calculated using the
LIBOR index on the date that the LIBOR index became unavailable.
Specifically, under Sec. 1026.9(c)(1), the creditor must provide a
change-in-terms notice of the replacement index and replacement margin
(including disclosing any reduced margin in change-in-terms notices
provided on or after October 1, 2021, as would be required by proposed
Sec. 1026.9(c)(1)(ii)) at least 15 days prior to the effective date of
the changes. The Bureau believes that this advance notice is important
to consumers to inform them of how variable rates will be determined
going forward after the LIBOR index is replaced. Because advance notice
of the changes must be given prior to the changes becoming effective, a
creditor would not be able to ensure that the rate based on the
replacement index and margin at the time the change-in-terms notice
becomes effective will be substantially similar to the rate in effect
calculated using the LIBOR index at the time the LIBOR index becomes
unavailable. The value of the replacement index may change after the
LIBOR index becomes unavailable and before the change-in-terms notice
becomes effective.
The Bureau notes that proposed Sec. 1026.40(f)(3)(ii)(A) would
require a creditor to use the index values of the replacement index and
the original index on a single day (namely, the day that the original
index becomes unavailable) to compare the rates to determine if they
are ``substantially similar.'' In using a single day to compare the
rates, this proposed provision is consistent with the condition in the
unavailability provision in current Sec. 1026.40(f)(3)(ii), in the
sense that it provides that the new index and margin must result in an
APR that is substantially similar to the rate in effect on a single
day. The Bureau notes that if the replacement index and the original
index have ``historical fluctuations'' that are substantially similar,
the spread between the replacement index and the original index on a
particular day typically will be substantially similar to the
historical spread between the two indices. Nonetheless, the Bureau
recognizes that there is a possibility that the spread between the
replacement index and the original index could differ significantly on
a particular day from the historical spread in certain unusual
circumstances, such as occurred to spreads between LIBOR and other
indices soon after the collapse of Lehman Brothers in 2008.\77\
Therefore, it is possible that two rates may typically be substantially
similar but may not be substantially similar on a given date. It is
also possible that two rates may be substantially similar on a given
date but may not typically be substantially similar. To the extent the
historical spread better reflects the typical spread between the
indices in the long run, it may be more appropriate to use the
historical spread rather than the spread on a specific day in comparing
the rates to help ensure the rates are ``substantially similar'' to
each other in the long run. However, it is also possible that the
spread on a specific, recent date may better reflect the typical spread
between the indices in the future than a historical spread would, if
the spread on that specific date deviates from the historical spread
for reasons that are permanent rather than temporary.\78\ Moreover,
considering the historical spread raises questions about how to define
the ``historical spread,'' such as the date range to consider, and
whether to take a median, mean, trimmed mean, or other statistic from
the data for the date range.
---------------------------------------------------------------------------
\77\ The Bureau analyzed the daily spread between Prime and 1-
month LIBOR from January 1, 1993, through April 23, 2020. For that
timeframe, the median daily spread between those indices was 291
basis points. Since 1993, the spread reached a low of roughly
negative nine basis points on October 10, 2008, soon after the
collapse of Lehman Brothers. Since 1993, the spread has never been
below 200 basis points aside from September, October, and November
2008. It has dipped below 250 basis points several times, including
in May 2000 during the ``dotcom bust'' and in spring 2020 during the
COVID-19 pandemic. As of April 23, 2020, the Prime-LIBOR spread had
recovered to 276 basis points from a low of 223 basis points on
April 1, 2020.
\78\ For example, the spread between 1-month USD LIBOR and Prime
increased from roughly 142 basis points in 1986 to 281 basis points
in 1993 but has been fairly steady ever since. Therefore, the LIBOR-
Prime spread in early 1993 was much closer to the typical spread
from then on than a ``historical spread'' would have been.
---------------------------------------------------------------------------
Given these considerations, the Bureau solicits comment on whether
the Bureau should adopt a different approach to determine whether a
rate using the replacement index is ``substantially similar'' to the
rate using the original index for purposes of proposed Sec.
1026.40(f)(3)(ii)(A) and, if so, what criteria the Bureau should use in
selecting such a different approach. For example, the Bureau solicits
comment on whether it should require creditors to use a historical
median or average of the spread between the replacement index and the
original index over a certain time frame (e.g., the time period the
historical data are available or 5 years, whichever is shorter) for
purposes of determining whether a rate using the replacement index is
``substantially similar'' to the rate using the original index. The
Bureau also solicits comments on any compliance challenges that might
arise as a result of adopting a potentially more complicated method of
comparing the rates calculated using the replacement index and the
rates calculated using the original index, and for any identified
compliance challenges, how the Bureau could ease those compliance
challenges.
The Bureau is not proposing to address for purposes of proposed
Sec. 1026.40(f)(3)(ii)(A) when a rate calculated using the replacement
index and replacement margin is ``substantially similar'' to the rate
in effect when the LIBOR index becomes unavailable. The Bureau is
concerned about providing a ``range'' of rates that
[[Page 36957]]
would be considered to be ``substantially similar'' to the rate in
effect at the time LIBOR becomes unavailable, and about providing other
specific guidance on, or regulatory changes addressing, the
``substantially similar'' standard, because the rates that will be
considered ``substantially similar'' will be context-specific. The
Bureau is concerned that if it provides a range of rates that will be
considered substantially similar, this range might be too narrow or too
broad in some cases depending on the specific circumstances. The Bureau
also is concerned that some creditors may decide to charge an APR that
is the highest APR in the range, even though the specific circumstances
would indicate that the highest APR should not be considered
substantially similar in those circumstances. The Bureau solicits
comment, however, on whether the Bureau should provide guidance on, or
regulatory changes addressing, the ``substantially similar'' standard
in comparing the rates for purposes of proposed Sec.
1026.40(f)(3)(ii)(A), and if so, what guidance, or regulatory changes,
the Bureau should provide. For example, should the Bureau provide a
range of rates that would be considered ``substantially similar'' as
described above, and if so, how should the range be determined? Should
the range of rates depend on context, and if so, what contexts should
be considered? As an alternative to the range of rates approach, the
Bureau solicits comment on whether it should provide factors that
creditors must consider in deciding whether the rates are
``substantially similar'' and if so, what those factors should be. Are
there other approaches the Bureau should consider for addressing the
``substantially similar'' standard for comparing rates?
As discussed above, proposed comment 40(f)(3)(ii)(A)-2.ii clarifies
that in order to use the SOFR-based spread-adjusted index as the
replacement index for the applicable LIBOR index, the creditor must
comply with the condition in Sec. 1026.40(f)(3)(ii)(A) that the SOFR-
based spread-adjusted index and replacement margin would have resulted
in an APR substantially similar to the rate in effect at the time the
LIBOR index became unavailable. The Bureau solicits comment on whether
the Bureau in the final rule, if adopted, should provide for purposes
of proposed Sec. 1026.40(f)(3)(ii)(A) that the rate using the SOFR-
based spread-adjusted index is ``substantially similar'' to the rate in
effect at the time the LIBOR index becomes unavailable, so long as the
creditor uses as the replacement margin the same margin in effect on
the day that the LIBOR index becomes unavailable. As discussed in more
detail in the section-by-section analysis of Sec. 1026.20(a), the
spread adjustments for the SOFR-based spread-adjusted indices are
designed to reflect and adjust for the historical differences between
LIBOR and SOFR in order to make the spread-adjusted rate comparable to
LIBOR. Thus, to facilitate compliance, the Bureau believes that it may
be appropriate to provide for purposes of proposed Sec.
1026.40(f)(3)(ii)(A) that a creditor complies with the ``substantially
similar'' standard for comparing the rates when the creditor replaces
the LIBOR index used under the plan with the applicable SOFR-based
spread-adjusted index and uses as the replacement margin the same
margin in effect at the time the LIBOR index becomes unavailable.
40(f)(3)(ii)(B)
The Proposal
For the reasons discussed below and in the section-by-section
analysis of Sec. 1026.40(f)(3)(ii), the Bureau is proposing to add new
LIBOR-specific provisions to Sec. 1026.40(f)(3)(ii)(B) that would
permit creditors for HELOC plans subject to Sec. 1026.40 that use a
LIBOR index for calculating variable rates to replace the LIBOR index
and change the margins for calculating the variable rates on or after
March 15, 2021, in certain circumstances. Specifically, proposed Sec.
1026.40(f)(3)(ii)(B) provides that if a variable rate on a HELOC
subject to Sec. 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 Sec. 1026.40(f)(3)(ii)(B) also
provides 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.
In addition, proposed Sec. 1026.40(f)(3)(ii)(B) provides that if
either the LIBOR index or the replacement index is not published on
December 31, 2020, the creditor must use the next calendar day that
both indices are published as the date on which the APR based on the
replacement index must be substantially similar to the rate based on
the LIBOR index.
The Bureau also is proposing to add detail in proposed comments
40(f)(3)(ii)(B)-1 through -3 on the conditions set forth in proposed
Sec. 1026.40(f)(3)(ii)(B). For example, to reduce uncertainty with
respect to selecting a replacement index that meets the standards in
proposed Sec. 1026.40(f)(3)(ii)(B), the Bureau is proposing to
determine that Prime is an example of an index that has historical
fluctuations that are substantially similar to those of certain USD
LIBOR indices. The Bureau also is proposing to determine that certain
spread-adjusted indices based on SOFR recommended by the ARRC have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices.
To effectuate the purposes of TILA and to facilitate compliance,
the Bureau is proposing to use its TILA section 105(a) authority to
provide the new LIBOR-specific provisions under proposed Sec.
1026.40(f)(3)(ii)(B). TILA section 105(a) \79\ 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 the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance. The Bureau is proposing these
LIBOR-specific provisions to facilitate compliance with TILA and
effectuate its purposes. Specifically, the Bureau interprets
``facilitate compliance'' to include enabling or fostering continued
operation in conformity with the law.
---------------------------------------------------------------------------
\79\ 15 U.S.C. 1604(a),
---------------------------------------------------------------------------
The Bureau is proposing to set March 15, 2021, as the date on or
after which HELOC creditors are permitted to replace the LIBOR index
used under the plan pursuant to proposed Sec. 1026.40(f)(3)(ii)(B)
prior to LIBOR
[[Page 36958]]
becoming unavailable to facilitate compliance with the change-in-terms
notice requirements applicable to creditors for HELOCs. As a practical
matter, these proposed changes will allow creditors for HELOCs to
provide the 15-day change-in-terms notices required under Sec.
1026.9(c)(1) prior to the LIBOR indices becoming unavailable, and thus
will allow those creditors to avoid being left without a LIBOR index to
use in calculating the variable rate before the replacement index and
margin become effective. Also, these proposed changes will allow HELOC
creditors to provide the change-in-terms notices, and replace the LIBOR
index used under the plans, on accounts on a rolling basis, rather than
having to provide the change-in-terms notices, and replace the LIBOR
index, for all its accounts at the same time as the LIBOR index used
under the plan becomes unavailable.
Without the proposed LIBOR-specific provisions in proposed Sec.
1026.40(f)(3)(ii)(B), as a practical matter, HELOC creditors would have
to wait until the LIBOR index becomes unavailable to provide the 15-day
change-in-terms notice under Sec. 1026.9(c)(1), disclosing the
replacement index and replacement margin (including disclosing any
reduced margin in change-in-terms notices provided on or after October
1, 2021, as would be required by proposed Sec. 1026.9(c)(1)(ii)). The
Bureau believes that this advance notice is important to consumers to
inform them of how variable rates will be determined going forward
after the LIBOR index is replaced.
For several reasons, HELOC creditors would not be able to send out
change-in-terms notices disclosing the replacement index and
replacement margin prior to LIBOR becoming unavailable. First, although
LIBOR is expected to become unavailable around the end of 2021, there
is no specific date known with certainty on which LIBOR will become
unavailable. Thus, HELOC creditors could not send out the change-in-
terms notices prior to LIBOR becoming unavailable because they will not
know when it will become unavailable and thus would not know when to
make the replacement index and replacement margin effective on the
account.
Second, HELOC creditors would need to know the index values of the
LIBOR index and the replacement index prior to sending out the change-
in-terms notice so that they could disclose the replacement margin in
the change-in-terms notice. HELOC creditors will not know these index
values until the day that LIBOR becomes unavailable. Thus, HELOC
creditors would have to wait until LIBOR becomes unavailable before the
creditors could send the 15-day change-in-terms notices under Sec.
1026.9(c)(1) to replace the LIBOR index with a replacement index. Some
creditors could be left without a LIBOR index value to use during the
15-day period before the replacement index and replacement margin
become effective, depending on their existing contractual terms. The
Bureau is concerned this could cause compliance and systems issues.
Also, as discussed in part III, the industry has raised concerns
that LIBOR may continue for some time after December 2021 but become
less representative or reliable until LIBOR finally is discontinued.
Allowing creditors to replace the LIBOR indices on existing HELOC
accounts prior to LIBOR becoming unavailable may address some of these
concerns.
The Bureau solicits comments on proposed Sec. 1026.40(f)(3)(ii)(B)
and proposed comments 40(f)(3)(ii)(B)-1 through -3. The proposed
comments are discussed in detail below.
Consistent conditions with proposed Sec. 1026.40(f)(3)(ii)(A). The
Bureau is proposing conditions in the LIBOR-specific provisions in
proposed Sec. 1026.40(f)(3)(ii)(B) for how a creditor must select a
replacement index and compare rates that are consistent with the
conditions set forth in the unavailability provisions set forth in
proposed Sec. 1026.40(f)(3)(ii)(A). For example, the availability
provisions in proposed Sec. 1026.40(f)(3)(ii)(A) and the LIBOR-
specific provisions in proposed Sec. 1026.40(f)(3)(ii)(B) contain a
consistent requirement that the APR calculated using the replacement
index must be ``substantially similar'' to the rate calculated using
the LIBOR index.\80\ In addition, both proposed Sec.
1026.40(f)(3)(ii)(A) and (B) contain consistent conditions for how a
creditor must select a replacement index.
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\80\ The conditions in proposed Sec. 1026.40(f)(3)(ii)(A) and
(B) are consistent, but they are not the same. For example, although
both proposed provisions use the ``substantially similar'' standard
to compare the rates, they use different dates for selecting the
index values in calculating the rates. The proposed provisions in
proposed Sec. 1026.40(f)(3)(ii)(A) and (B) differ in the timing of
when creditors are permitted to transition away from LIBOR, which
creates some differences in how the conditions apply.
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For several reasons, the Bureau is proposing to keep the conditions
for these two provisions consistent. First, as discussed above in the
section-by-section analysis of Sec. 1026.40(f)(3)(ii), some HELOC
creditors may need to wait until LIBOR become unavailable to transition
to a replacement index because of contractual reasons. The Bureau
believes that keeping the conditions consistent in the unavailability
provisions in proposed Sec. 1026.40(f)(3)(ii)(A) and the LIBOR-
specific provisions in proposed Sec. 1026.40(f)(3)(ii)(B) will help
ensure that creditors must meet consistent conditions in selecting a
replacement index and setting the rates, regardless of whether they are
using the unavailability provisions in proposed Sec.
1026.40(f)(3)(ii)(A), or the LIBOR-specific provisions in proposed
Sec. 1026.40(f)(3)(ii)(B).
Second, some creditors may have the ability to choose between the
unavailability provisions and LIBOR-specific provisions to switch away
from using a LIBOR index, and if the conditions between those two
provisions are inconsistent, these differences could undercut the
purpose of the LIBOR-specific provisions to allow creditors to switch
out earlier. For example, if the conditions for selecting a replacement
index or setting the rates were stricter in the LIBOR-specific
provisions than in the unavailability provisions, this may cause a
creditor to wait until LIBOR becomes unavailable to switch to a
replacement index, which would undercut the purpose of the LIBOR-
specific provisions to allow creditors to switch out earlier and
prevent these creditors from having the time to transition from using a
LIBOR index.
Historical fluctuations substantially similar for the LIBOR index
and replacement index. Proposed comment 40(f)(3)(ii)(B)-1 provides
detail on determining whether a replacement index that is not newly
established has ``historical fluctuations'' that are ``substantially
similar'' to those of the LIBOR index used under the plan for purposes
of proposed Sec. 1026.40(f)(3)(ii)(B). Specifically, proposed comment
40(f)(3)(ii)(B)-1 provides that for purposes of replacing a LIBOR index
used under a plan pursuant to proposed Sec. 1026.40(f)(3)(ii)(B), a
replacement index that is not newly established must have historical
fluctuations that are substantially similar to those of the LIBOR index
used under the plan, considering the historical fluctuations up through
December 31, 2020, or up through the date indicated in a Bureau
determination that the replacement index and the LIBOR index have
historical fluctuations that are substantially similar, whichever is
earlier. The Bureau is proposing the December 31, 2020 date to be
consistent with the date that creditors generally
[[Page 36959]]
must use for selecting the index values to use in comparing the rates
under proposed Sec. 1026.40(f)(3)(ii)(B). The Bureau solicits comment
on the December 31, 2020 date for purposes of proposed comment
40(f)(3)(ii)(B)-1 and whether another date or timeframe would be more
appropriate for purposes of that proposed comment.
To facilitate compliance, proposed comment 40(f)(3)(ii)(B)-1.i
includes a proposed determination that Prime has historical
fluctuations that are substantially similar to those of the 1-month and
3-month USD LIBOR indices and includes a placeholder for the date when
this proposed determination would be effective, if adopted in the final
rule.\81\ The Bureau understands that some HELOC creditors may choose
to replace a LIBOR index with Prime. Proposed comment 40(f)(3)(ii)(B)-
1.i also clarifies that in order to use Prime as the replacement index
for the 1-month or 3-month USD LIBOR index, the creditor also must
comply with the condition in proposed Sec. 1026.40(f)(3)(ii)(B) that
the Prime 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. If either the LIBOR
index or the prime rate is not published on December 31, 2020, the
creditor must use the next calendar day that both indices are published
as the date on which the annual percentage rate based on the prime rate
must be substantially similar to the rate based on the LIBOR index.
This condition for comparing the rates under proposed Sec.
1026.40(f)(3)(ii)(B) is discussed in more detail below.
---------------------------------------------------------------------------
\81\ See the section-by-section analysis of proposed Sec.
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the
Bureau proposing this determination.
---------------------------------------------------------------------------
To facilitate compliance, proposed comment 40(f)(3)(ii)(B)-1.ii
provides a proposed determination that the spread-adjusted indices
based on SOFR recommended by the ARRC to replace the 1-month, 3-month,
6-month, and 1-year USD LIBOR indices have historical fluctuations that
are substantially similar to those of the 1-month, 3-month, 6-month,
and 1-year USD LIBOR indices respectively. The proposed comment also
provides a placeholder for the date when this proposed determination
would be effective, if adopted in the final rule.\82\ The Bureau
understands that some HELOC creditors may choose to replace a LIBOR
index with a SOFR-based spread-adjusted index.
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\82\ See the section-by-section analysis of proposed Sec.
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the
Bureau proposing this determination. Also, as discussed in the
section-by-section analysis of proposed Sec. 1026.40(f)(3)(ii)(A),
the Bureau solicits comment on whether the Bureau should
alternatively consider these SOFR-based spread-adjusted indices to
be newly established indices for purposes of proposed Sec.
1026.40(f)(3)(ii)(B), to the extent these indices are not being
published by the effective date of the final rule, if adopted.
---------------------------------------------------------------------------
Comment 40(f)(3)(ii)(B)-1.ii also clarifies that in order to use
this SOFR-based spread-adjusted index as the replacement index for the
applicable LIBOR index, the creditor also must comply with the
condition in Sec. 1026.40(f)(3)(ii)(B) that the SOFR-based spread-
adjusted 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. If either the LIBOR
index or the SOFR-based spread-adjusted index is not published on
December 31, 2020, the creditor must use the next calendar day that
both indices are published as the date on which the annual percentage
rate based on the SOFR-based spread-adjusted index must be
substantially similar to the rate based on the LIBOR index. This
condition for comparing the rates under proposed Sec.
1026.40(f)(3)(ii)(B) is discussed in more detail below. Also, for the
reasons discussed below, the Bureau solicits comment on whether the
Bureau in the final rule, if adopted, should provide for purposes of
proposed Sec. 1026.40(f)(3)(ii)(B) that the rate using the SOFR-based
spread-adjusted index is ``substantially similar'' to the rate
calculated using the LIBOR index, so long as the creditor uses as the
replacement margin the same margin that applied to the variable rate
immediately prior to the replacement of the LIBOR index.
The Bureau also solicits comment on whether there are other indices
that are not newly established for which the Bureau should make a
determination that the index has historical fluctuations that are
substantially similar to those of the LIBOR indices for purposes of
proposed Sec. 1026.40(f)(3)(ii)(B). If so, what are these other
indices, and why should the Bureau make such a determination with
respect to those indices?
Newly established index as replacement for the LIBOR index.
Proposed Sec. 1026.40(f)(3)(ii)(B) provides 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 the 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. The Bureau solicits comment on whether the Bureau should provide
any additional guidance on, or regulatory changes addressing, when an
index is newly established with respect to replacing the LIBOR indices
for purposes of proposed Sec. 1026.40(f)(3)(ii)(B). The Bureau also
solicits comment on whether the Bureau should provide any examples of
indices that are newly established with respect to replacing the LIBOR
indices for purposes of Sec. 1026.40(f)(3)(ii)(B). If so, what are
these indices and why should the Bureau determine these indices are
newly established with respect to replacing the LIBOR indices?
Substantially similar rate using index values 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. Under
proposed Sec. 1026.40(f)(3)(ii)(B), if both the replacement index and
LIBOR index used under the plan are published on December 31, 2020, the
replacement index value in effect on December 31, 2020, and the
replacement margin must 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 comment 40(f)(3)(ii)(B)-2 also explains that the margin that
applied to the variable rate immediately prior to the replacement of
the LIBOR index used under the plan is the margin that applied to the
variable rate immediately prior to when the creditor provides the
change-in-terms notice disclosing the replacement index for the
variable rate. Proposed comment 40(f)(3)(ii)(B)-2.i provides an example
to illustrate this comment, when the margin used to calculate the
variable rate is increased pursuant to a written agreement under Sec.
1026.40(f)(3)(iii), and this change in the margin occurs after December
31, 2020, but prior to the date that the creditor provides a change-in-
term notice under Sec. 1026.9(c)(1)
[[Page 36960]]
disclosing the replacement index for the variable rate.
In calculating the comparison rates using the replacement index and
the LIBOR index used under the HELOC plan, the Bureau generally is
proposing to require creditors to use the index values for the
replacement index and the LIBOR index in effect on December 31, 2020.
The Bureau is proposing to require HELOC creditors to use these index
values to promote consistency for creditors and consumers in which
index values are used to compare the two rates. Under proposed Sec.
1026.40(f)(3)(ii)(B), HELOC creditors are permitted to replace the
LIBOR index used under the plan and adjust the margin used in
calculating the variable rate used under the plan on or after March 15,
2021, but creditors may vary in the timing of when they provide change-
in-terms notices to replace the LIBOR index used on their HELOC
accounts and when these replacements become effective.
For example, one HELOC creditor may replace the LIBOR index used
under its HELOC plans in April 2021, while another HELOC creditor may
replace the LIBOR index used under its HELOC plans in October 2021. In
addition, a HELOC creditor may not replace the LIBOR index used under
all of its HELOC plans at the same time. For example, a HELOC creditor
may replace the LIBOR index used under some of its HELOC plans in April
2021 but replace the LIBOR index used under other of its HELOC plans in
May 2021.
Nonetheless, regardless of when a particular creditor replaces the
LIBOR index used under its HELOC plans, proposed Sec.
1026.40(f)(3)(ii)(B) generally would require that all creditors for
HELOCs use December 31, 2020, as the day for determining the index
values for the replacement index and the LIBOR index, to promote
consistency for creditors and consumers with respect to which index
values are used to compare the two rates.
In addition, using the December 31, 2020 date for the index values
in comparing the rates may allow creditors for HELOCs to send out
change-in-terms notices prior to March 15, 2021, and have the changes
be effective on March 15, 2021, the proposed date on or after which
creditors for HELOCs would be permitted to switch away from using LIBOR
as an index on an existing HELOC account under proposed Sec.
1026.40(f)(3)(ii)(B). If the Bureau instead required creditors to use
the index values on March 15, 2021, creditors for HELOCs as a practical
matter would not be able to provide change-in-terms notices of the
replacement index and any adjusted margin until after March 15, 2021,
because they would need the index values from that date in order to
calculate the replacement margin. Thus, using the index values on March
15, 2021, would delay when creditors for HELOCs could switch away from
using LIBOR as an index on an existing HELOC account.
Also, as discussed in part III, the industry has raised concerns
that LIBOR may continue for some time after December 2021 but become
less representative or reliable until LIBOR finally is discontinued.
Using the index values for the replacement index and the LIBOR index
used under the plan in effect on December 31, 2020, may address some of
these concerns.
The Bureau solicits comment specifically on the use of the December
31, 2020 index values in calculating the comparison rates under
proposed Sec. 1026.40(f)(3)(ii)(B).
Proposed Sec. 1026.40(f)(3)(ii)(B) provides one exception to the
proposed general requirement to use the index values for the
replacement index and the LIBOR index used under the plan in effect on
December 31, 2020. Proposed Sec. 1026.40(f)(3)(ii)(B) provides that if
either the LIBOR index or the replacement index is not published on
December 31, 2020, the creditor must use the next calendar day that
both indices are published as the date on which the APR based on the
replacement index must be substantially similar to the rate based on
the LIBOR index.
As discussed above, proposed Sec. 1026.40(f)(3)(ii)(B) would
require a creditor to use the index values of the replacement index and
the LIBOR index on a single day (generally December 31, 2020) \83\ to
compare the rates to determine if they are ``substantially similar.''
In using a single day to compare the rates, this proposed provision is
consistent with the condition in the unavailability provision in
current Sec. 1026.40(f)(3)(ii), in the sense that it provides that the
new index and margin must result in an APR that is substantially
similar to the rate in effect on a single day. The Bureau notes that if
the replacement index and the LIBOR index have ``historical
fluctuations'' that are substantially similar, the spread between the
replacement index and the LIBOR index on a particular day typically
will be substantially similar to the historical spread between the two
indices. Nonetheless, the Bureau recognizes that there is a possibility
that the spread between the replacement index and the LIBOR index could
differ significantly on a particular day from the historical spread in
certain unusual circumstances, such as occurred to spreads between
LIBOR and other indices soon after the collapse of Lehman Brothers in
2008.\84\ Therefore, it is possible that two rates may typically be
substantially similar but may not be substantially similar on a given
date. It is also possible that two rates may be substantially similar
on a given date but may not typically be substantially similar. To the
extent the historical spread better reflects the typical spread between
the indices in the long run, it may be more appropriate to use the
historical spread rather than the spread on a specific day in comparing
the rates to help ensure the rates are ``substantially similar'' to
each other in the long run. However, it is also possible that the
spread on a specific, recent date may better reflect the typical spread
between the indices in the future than a historical spread would, if
the spread on that specific date deviates from the historical spread
for reasons that are permanent rather than temporary.\85\ Moreover,
considering the historical spread raises questions about how to define
the ``historical spread,'' such as the date range to consider, and
whether to take a median, mean, trimmed mean, or other statistic from
the data for the date range.
---------------------------------------------------------------------------
\83\ If one or both of the indices are not available on December
31, 2020, proposed Sec. 1026.40(f)(3)(ii)(B) would require that the
creditor use the index values of the indices on the next calendar
day that both indices are published.
\84\ See supra note 72.
\85\ See supra note 78.
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Given these considerations, the Bureau solicits comment on whether
the Bureau should adopt a different approach to determine whether a
rate using the replacement index is ``substantially similar'' to the
rate using the LIBOR index for purposes of proposed Sec.
1026.40(f)(3)(ii)(B) and, if so, what criteria the Bureau should use in
selecting such a different approach. For example, the Bureau solicits
comment on whether it should require creditors to use a historical
median or average of the spread between the replacement index and the
LIBOR index over a certain time frame (e.g., the time period the
historical data are available or 5 years, whichever is shorter) for
purposes of determining whether a rate using the replacement index is
``substantially similar'' to the rate using the LIBOR index. The Bureau
also solicits comments on any compliance challenges that might arise as
a result of adopting a potentially more complicated method of comparing
rates calculated
[[Page 36961]]
using the replacement index and the rates calculated using the LIBOR
index, and for any identified compliance challenges, how the Bureau
could ease those compliance challenges.
Under proposed Sec. 1026.40(f)(3)(ii)(B), in calculating the
comparison rates using the replacement index and the LIBOR index used
under the HELOC plan, the creditor must use the margin that applied to
the variable rate immediately prior to when the creditor provides the
change-in-terms notice disclosing the replacement index for the
variable rate. The Bureau is proposing that creditors must use this
margin, rather than the margin in effect on December 31, 2020. The
Bureau recognizes that creditors for HELOCs in certain instances may
change the margin that is used to calculate the LIBOR variable rate
after December 31, 2020, but prior to when the creditor provides a
change-in-terms notice to replace the LIBOR index used under the plan.
If the Bureau were to require that the creditor use the margin in
effect on December 31, 2020, this would undo any margin changes that
occurred after December 31, 2020, but prior to the creditor providing a
change-in-terms notice of the replacement of the LIBOR index used under
the plan, which would be inconsistent with the purpose of the
comparisons of the rates under proposed Sec. 1026.40(f)(3)(ii)(B).
Proposed comment 40(f)(3)(ii)(B)-3 clarifies that the replacement
index and replacement margin are not required to produce an APR that is
substantially similar on the day that the replacement index and
replacement margin become effective on the plan. Proposed comment
40(f)(3)(ii)(B)-3.i also provides an example to illustrate this
comment. The Bureau believes that it would raise compliance issues if
the rate calculated using the replacement index and replacement margin
at the time the replacement index and replacement margin became
effective had to be substantially similar to the rate calculated using
the LIBOR index in effect on December 31, 2020. Under Sec.
1026.9(c)(1), the creditor must provide a change-in-terms notice of the
replacement index and replacement margin (including a reduced margin in
a change-in-terms notice provided on or after October 1, 2021, as would
be required by proposed Sec. 1026.9(c)(1)(ii)) at least 15 days prior
to the effective date of the changes. The Bureau believes that this
advance notice is important to consumers to inform them of how variable
rates will be determined going forward after the LIBOR index is
replaced. Because advance notice of the changes must be given prior to
the changes becoming effective, a creditor would not be able to ensure
that the rate based on the replacement index and replacement margin at
the time the change-in-terms notice becomes effective will be
substantially similar to the rate calculated using the LIBOR index in
effect on December 31, 2020. The value of the replacement index may
change after December 31, 2020, and before the change-in-terms notice
becomes effective.
The Bureau is not proposing to address for purposes of proposed
Sec. 1026.40(f)(3)(ii)(B) when a rate calculated using the replacement
index and replacement margin is ``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. The Bureau is
concerned about providing a ``range'' of rates that would be considered
to be ``substantially similar'' to the LIBOR rate described above, and
about providing other specific guidance on, or regulatory changes
addressing, the ``substantially similar'' standard, because the rates
that will be considered ``substantially similar'' will be context-
specific. The Bureau is concerned that if it provides a range of rates
that will be considered substantially similar, this range might be too
narrow or too broad in some cases depending on the specific
circumstances. The Bureau also is concerned that some creditors may
decide to charge an APR that is the highest APR in the range, even
though the specific circumstances would indicate that the highest APR
should not be considered substantially similar in those circumstances.
The Bureau solicits comment, however, on whether the Bureau should
provide guidance on, or regulatory changes addressing, the
``substantially similar'' standard in comparing the rates for purposes
of proposed Sec. 1026.40(f)(3)(ii)(B), and if so, what guidance, or
regulatory changes, the Bureau should provide. For example, should the
Bureau provide a range of rates that would be considered
``substantially similar'' as described above, and if so, how should the
range be determined? Should the range of rates depend on context, and
if so, what contexts should be considered? As an alternative to the
range of rates approach, the Bureau solicits comment on whether it
should provide factors that creditors must consider in deciding whether
the rates are ``substantially similar'' and if so, what those factors
should be. Are there other approaches the Bureau should consider for
addressing the ``substantially similar'' standard for comparing rates?
As discussed above, proposed comment 40(f)(3)(ii)(B)-1.ii clarifies
that in order to use the SOFR-based spread-adjusted index as the
replacement index for the applicable LIBOR index, the creditor must
comply with the condition in Sec. 1026.40(f)(3)(ii)(B) that the SOFR-
based spread-adjusted 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. If
either the LIBOR index or the SOFR-based spread-adjusted index is not
published on December 31, 2020, the creditor must use the next calendar
day that both indices are published as the date on which the annual
percentage rate based on the SOFR-based spread-adjusted index must be
substantially similar to the rate based on the LIBOR index. The Bureau
solicits comment on whether the Bureau in the final rule, if adopted,
should provide for purposes of proposed Sec. 1026.40(f)(3)(ii)(B) that
the rate using the SOFR-based spread-adjusted index is ``substantially
similar'' to the rate calculated using the LIBOR index, so long as the
creditor 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. As discussed in more detail in the section-
by-section analysis of Sec. 1026.20(a), the spread adjustments for the
SOFR-based spread-adjusted indices are designed to reflect and adjust
for the historical differences between LIBOR and SOFR in order to make
the spread-adjusted rate comparable to LIBOR. Thus, the Bureau believes
that it may be appropriate to provide for purposes of proposed Sec.
1026.40(f)(3)(ii)(B) that a creditor complies with the ``substantially
similar'' standard for comparing the rates when the creditor replaces
the LIBOR index used under the plan with the applicable SOFR-based
spread-adjusted 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.
[[Page 36962]]
Section 1026.55 Limitations on Increasing Annual Percentage Rates,
Fees, and Charges
55(b) Exceptions
55(b)(7) Index Replacement and Margin Change Exception
TILA section 171(a), which was added by the Credit CARD Act,
provides that in the case of a credit card account under an open-end
consumer credit plan, no creditor may increase any APR, fee, or finance
charge applicable to any outstanding balance, except as permitted under
TILA section 171(b).\86\ TILA section 171(b)(2) provides that the
prohibition under TILA section 171(a) does not apply to an increase in
a variable APR in accordance with a credit card agreement that provides
for changes in the rate according to the operation of an index that is
not under the control of the creditor and is available to the general
public.\87\
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\86\ 15 U.S.C. 1666i-1(a).
\87\ 15 U.S.C. 1666i-1(b)(2).
---------------------------------------------------------------------------
In implementing these provisions of TILA section 171, Sec.
1026.55(a) prohibits a card issuer from increasing an APR or certain
enumerated fees or charges set forth in Sec. 1026.55(a) on a credit
card account under an open-end (not home-secured) consumer credit plan,
except as provided in Sec. 1026.55(b). Section 1026.55(b)(2) provides
that a card issuer may increase an APR when: (1) The APR varies
according to an index that is not under the card issuer's control and
is available to the general public; and (2) the increase in the APR is
due to an increase in the index.
Comment 55(b)(2)-6 provides that a card issuer may change the index
and margin used to determine the APR under Sec. 1026.55(b)(2) 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. 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.
The 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 prior to when the LIBOR indices
become unavailable to facilitate compliance. Among other things, the
industry is concerned that if card issuers must wait until LIBOR
becomes unavailable to replace the LIBOR index used on existing
accounts, 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 also has requested that the Bureau
determine that the prime rate has ``historical fluctuations'' that are
``substantially similar'' to those of the LIBOR indices.
To address these concerns, as discussed in more detail in the
section-by-section analysis of proposed Sec. 1026.55(b)(7)(ii), the
Bureau is proposing to add new LIBOR-specific provisions to proposed
Sec. 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 uses a LIBOR index under the plan to replace LIBOR and change the
margin on such plans on or after March 15, 2021, in certain
circumstances.
Specifically, proposed Sec. 1026.55(b)(7)(ii) provides that if a
variable rate on a credit card account under an open-end (not home-
secured) consumer credit plan is calculated using a LIBOR index, a card
issuer 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. 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
the 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 proposed Sec. 1026.55(b)(7)(ii), to reduce uncertainty
with respect to selecting a replacement index that meets the standards
in proposed Sec. 1026.55(b)(7)(ii), the Bureau is proposing to
determine that Prime is an example of an index that has historical
fluctuations that are substantially similar to those of certain USD
LIBOR indices. The Bureau also is proposing to determine that certain
spread-adjusted indices based on SOFR recommended by the ARRC have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. The Bureau is also proposing additional
detail in comments 55(b)(7)(ii)-1 through -3 with respect to proposed
Sec. 1026.55(b)(7)(ii).
In addition, as discussed in more detail in the section-by-section
analysis of proposed Sec. 1026.55(b)(7)(i), the Bureau is proposing to
move the unavailability provisions in current comment 55(b)(2)-6 to
proposed Sec. 1026.55(b)(7)(i) and to revise the proposed moved
provisions for clarity and consistency. The Bureau also is proposing
additional detail in comments 55(b)(7)(i)-1 through -2 with respect to
proposed Sec. 1026.55(b)(7)(i). For example, to reduce uncertainty
with respect to selecting a replacement index that meets the standards
under proposed Sec. 1026.55(b)(7)(i), the Bureau is proposing to make
the same determinations discussed above related to Prime and the
spread-adjusted indices based on SOFR recommended by the ARRC in
relation to proposed Sec. 1026.55(b)(7)(i). The Bureau is proposing to
make these revisions and provide additional detail in case card issuers
use the unavailability provision in proposed Sec. 1026.55(b)(7)(i) to
replace a LIBOR index used for their credit card accounts, as discussed
in more detail below.
Bureau is proposing new proposed LIBOR-specific provisions rather
than interpreting when LIBOR is unavailable. For the same reasons that
the Bureau is proposing LIBOR-specific provisions for HELOCs under
proposed Sec. 1026.40(f)(3)(ii)(B), the Bureau is proposing these new
LIBOR-specific provisions under proposed Sec. 1026.55(b)(7)(ii),
rather than interpreting LIBOR indices to be unavailable as of a
certain date prior to LIBOR being discontinued under current comment
55(b)(2)-6 (as proposed to be moved to proposed Sec.
1026.55(b)(7)(i)). First, the Bureau is concerned about making a
determination for Regulation Z purposes under current comment 55(b)(2)-
6 (as proposed to be moved to proposed Sec. 1026.55(b)(7)(i)) that the
LIBOR indices are unavailable or unreliable when the FCA, the regulator
of LIBOR, has not made such a determination.
Second, the Bureau is concerned that a determination by the Bureau
that the
[[Page 36963]]
LIBOR indices are unavailable for purposes of comment 55(b)(2)-6 (as
proposed to be moved to proposed Sec. 1026.55(b)(7)(i)) could have
unintended consequences for other products or markets. For example, the
Bureau is concerned that such a determination could unintentionally
cause confusion for creditors for other products (e.g., ARMs) about
whether the LIBOR indices are unavailable for those products too and
could possibly put pressure on those creditors to replace the LIBOR
index used for those products before those creditors are ready for the
change.
Third, even if the Bureau interpreted unavailability under comment
55(b)(2)-6 (as proposed to be moved to proposed Sec. 1026.55(b)(7)(i))
to indicate that the LIBOR indices are unavailable prior to LIBOR being
discontinued, this interpretation would not completely solve the
contractual issues for card issuers whose contracts require them to
wait until the LIBOR indices become unavailable before replacing the
LIBOR index. Card issuers still would need to decide for their
contracts whether the LIBOR indices are unavailable. Thus, even if the
Bureau decided that the LIBOR indices are unavailable under Regulation
Z as described above, card issuers whose contracts require them to wait
until the LIBOR indices become unavailable before replacing the LIBOR
index essentially would remain in the same position of interpreting
their contracts as they would have been under the current rule.
Thus, the Bureau is not proposing to interpret when the LIBOR
indices are unavailable for purposes of current comment 55(b)(2)-6 (as
proposed to be moved to proposed Sec. 1026.55(b)(7)(ii)). The Bureau
solicits comment on whether the Bureau should interpret when the LIBOR
indices are unavailable for purposes of current comment 55(b)(2)-6 (as
proposed to be moved to proposed Sec. 1026.55(b)(7)(i)), and if so,
why the Bureau should make that determination and when should the LIBOR
indices be considered unavailable for purposes of that provision.
The Bureau also solicits comment on an alternative to interpreting
the term ``unavailable.'' Specifically, should the Bureau make
revisions to the unavailability provisions in current comment 55(b)(2)-
6 (as proposed to be moved to proposed Sec. 1026.55(b)(7)(i)) in a
manner that would allow those card issuers who need to transition from
LIBOR and, for contractual reasons, may not be able to switch away from
LIBOR prior to it being unavailable to be better able to use the
unavailability provisions for an orderly transition on or after March
15, 2021? If so, what should these revisions be?
Interaction among proposed Sec. 1026.55(b)(7)(i) and (ii) and
contractual provisions. Proposed comment 55(b)(7)-1 addresses the
interaction among the unavailability provisions in proposed Sec.
1026.55(b)(7)(i), the LIBOR-specific provisions in proposed Sec.
1026.55(b)(7)(ii), and the contractual provisions applicable to the
credit card account. The Bureau understands that credit card contracts
generally allow a card issuer to change the terms of the contract
(including the index) as permitted by law. Proposed comment 55(b)(7)-1
provides detail where this contract language applies. In addition,
consistent with the detail proposed in relation to HELOCs subject to
Sec. 1026.40 in proposed comment 40(f)(3)(ii)-1, the Bureau also is
providing detail on two other types of contract language, in case any
credit card contracts include such language.
For example, the Bureau is proposing detail in proposed comment
55(b)(7)-1 for credit card contracts that contain language providing
that (1) a card issuer can replace the LIBOR index and the margin for
calculating the variable rate unilaterally only if the original 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 original index becomes
unavailable. The Bureau also is providing detail in proposed comment
55(b)(7)-1 for credit card contracts that include language providing
that the card issuer can replace the original index and the margin for
calculating the variable rate unilaterally only if the original 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 original
index becomes unavailable.
Specifically, proposed comment 55(b)(7)-1 provides that a card
issuer may use either the provision in proposed Sec. 1026.55(b)(7)(i)
or Sec. 1026.55(b)(7)(ii) to replace a LIBOR index used under a credit
card account under an open-end (not home-secured) consumer credit plan
so long as the applicable conditions are met for the provision used.
This proposed comment makes clear, however, that neither proposed
provision excuses the card issuer from noncompliance with contractual
provisions. As discussed below, proposed comment 55(b)(7)-1 provides
examples to illustrate when a card issuer may use the provisions in
proposed Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii) to replace
the LIBOR index used under a credit card account under an open-end (not
home-secured) consumer credit and each of these examples assumes that
the LIBOR index used under the plan becomes unavailable after March 15,
2021.
Proposed comment 55(b)(7)-1.i provides an example where a contract
for a credit card account under an open-end (not home-secured) consumer
credit plan provides that a card issuer may not unilaterally replace an
index under a plan unless the original index becomes unavailable and
provides that the replacement index and replacement margin will result
in an APR substantially similar to a rate that is in effect when the
original index becomes unavailable. In this case, proposed comment
55(b)(7)-1.i explains that the card issuer may use the unavailability
provisions in proposed Sec. 1026.55(b)(7)(i) to replace the LIBOR
index used under the plan so long as the conditions of that provision
are met. Proposed comment 55(b)(7)-1.i also explains that the proposed
LIBOR-specific provisions in proposed Sec. 1026.55(b)(7)(ii) provides
that a card issuer may replace the LIBOR index 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. Proposed comment 55(b)(7)-1.i
notes, however, that the card issuer in this example would be
contractually prohibited from replacing the LIBOR index used under the
plan unless the replacement index and replacement margin also will
produce an APR substantially similar to a rate that is in effect when
the LIBOR index becomes unavailable. The Bureau solicits comments on
this proposed approach and example.
Proposed comment 55(b)(7)-1.ii provides an example of a contract
for a credit card account under an open-end (not home-secured) consumer
credit plan under which a card issuer may not replace an index
unilaterally under a plan unless the original index 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 original index becomes unavailable. In this case, the card
issuer would be contractually prohibited from unilaterally replacing a
LIBOR index
[[Page 36964]]
used under the plan until it becomes unavailable. At that time, the
card issuer has the option of using proposed Sec. 1026.55(b)(7)(i) or
Sec. 1026.55(b)(7)(ii) to replace the LIBOR index if the conditions of
the applicable provision are met.
The Bureau is proposing to allow the card issuer in this case to
use either the proposed unavailability provisions in proposed Sec.
1026.55(b)(7)(i) or the proposed LIBOR-specific provisions in proposed
Sec. 1026.55(b)(7)(ii). If the card issuer uses the unavailability
provisions in proposed Sec. 1026.55(b)(7)(i), the card issuer must use
a replacement index and replacement margin that will produce an APR
substantially similar to the rate in effect when the LIBOR index became
unavailable. If the card issuer uses the proposed LIBOR-specific
provisions in proposed Sec. 1026.55(b)(7)(ii), the card issuer
generally must use a replacement index value in effect on December 31,
2020, and replacement margin that 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.
The Bureau is proposing to allow a card issuer, in this case, to
use the index values for the LIBOR index and the replacement index on
December 31, 2020, to meet the ``substantially similar'' standard with
respect to the comparison of the rates even if the card issuer is
contractually prohibited from unilaterally replacing a LIBOR index used
under the plan until it becomes unavailable. The Bureau recognizes that
LIBOR may not be discontinued until the end of 2021, which is around a
year later than the December 31, 2020 date. Nonetheless, the Bureau is
proposing to allow card issuers that are restricted by their contracts
to replace the LIBOR index used under the credit card plans until LIBOR
becomes unavailable to use the LIBOR index values and the replacement
index values in effect on December 31, 2020 under proposed Sec.
1026.55(b)(7)(ii), rather than the index values on the day that the
LIBOR indices become unavailable under proposed Sec. 1026.55(b)(7)(i).
This proposal would allow those card issuers to use consistent index
values to those card issuers that are not restricted by their contracts
in replacing the LIBOR index prior to the LIBOR becoming unavailable.
This proposal may also promote consistency for consumers in that all
card issuers are permitted to use the same LIBOR values in comparing
the rates.
In addition, as discussed in part III, the industry has raised
concerns that LIBOR may continue for some time after December 2021 but
become less representative or reliable until LIBOR finally is
discontinued. Allowing card issuers to use the December 31, 2020,
values for comparison of the rates instead of the LIBOR values when the
LIBOR indices become unavailable may address some of these concerns.
Thus, the Bureau is proposing to provide card issuers with the
flexibility to choose to use the index values for the LIBOR index and
the replacement index on December 31, 2020, by using the proposed
LIBOR-specific provisions under proposed Sec. 1026.55(b)(7)(ii),
rather than using the unavailability provisions in proposed Sec.
1026.55(b)(7)(i). The Bureau solicits comment on this proposed approach
and example.
Proposed comment 55(b)(7)-1.iii provides an example of a contract
for a credit card account under an open-end (not home-secured) consumer
credit plan under which a card issuer may change the terms of the
contract (including the index) as permitted by law. Proposed comment
55(b)(7)-1.iii explains in this case, if the card issuer replaces a
LIBOR index under a plan on or after March 15, 2021, but does not wait
until LIBOR becomes unavailable to do so, the card issuer may only use
proposed Sec. 1026.55(b)(7)(ii) to replace the LIBOR index if the
conditions of that provision are met. In this case, the card issuer may
not use proposed Sec. 1026.55(b)(7)(i). Proposed comment 55(b)(7)-
1.iii also explains that if the card issuer waits until the LIBOR index
used under the plan becomes unavailable to replace the LIBOR index, the
card issuer has the option of using proposed Sec. 1026.55(b)(7)(i) or
Sec. 1026.55(b)(7)(ii) to replace the LIBOR index if the conditions of
the applicable provision are met.
The Bureau is proposing to allow the card issuer, in this case, to
use either the unavailability provisions in proposed Sec.
1026.55(b)(7)(i) or the proposed LIBOR-specific provisions in proposed
Sec. 1026.55(b)(7)(ii) if the card issuer waits until the LIBOR index
used under the plan becomes unavailable to replace the LIBOR index. For
the reasons explained above in the discussion of the example in
proposed comment 55(b)(7)-1.ii, the Bureau is proposing in the
situation described in proposed comment 55(b)(7)-1.iii to provide card
issuers with the flexibility to choose to use the index values for the
LIBOR index and the replacement index on December 31, 2020, by using
the proposed LIBOR-specific provisions under proposed Sec.
1026.55(b)(7)(ii), rather than using the unavailability provision in
proposed Sec. 1026.55(b)(7)(i). The Bureau solicits comment on this
proposed approach and example.
55(b)(7)(i)
Section 1026.55(a) prohibits a card issuer from increasing an APR
or certain enumerated fees or charges set forth in Sec. 1026.55(a) on
a credit card account under an open-end (not home-secured) consumer
credit plan, except as provided in Sec. 1026.55(b). Section
1026.55(b)(2) provides that a card issuer may increase an APR when: (1)
The APR varies according to an index that is not under the card
issuer's control and is available to the general public; and (2) the
increase in the APR is due to an increase in the index. Comment
55(b)(2)-6 provides that a card issuer may change the index and margin
used to determine the APR under Sec. 1026.55(b)(2) 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. 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.
The Proposal
The Bureau is proposing to move the unavailability provisions in
current comment 55(b)(2)-6 to proposed Sec. 1026.55(b)(7)(i) and to
revise the proposed moved provisions for clarity and consistency.
Proposed Sec. 1026.55(b)(7)(i) provides that a card issuer may
increase an APR when the card issuer changes the index and margin used
to determine the APR if the original index becomes unavailable, as long
as (1) the historical fluctuations in the original and replacement
indices were substantially similar; and (2) the replacement index and
replacement margin will produce a rate substantially similar to the
rate that was in effect at the time the original index became
unavailable. If the replacement index is newly established and
therefore does not have any rate history, it may be used if it and the
replacement margin will produce a rate substantially similar to the
rate in effect when the original index became unavailable.
The Bureau also is proposing comments 55(b)(7)(i)-1 through -2 with
respect to proposed Sec. 1026.55(b)(7)(i).
[[Page 36965]]
For example, to reduce uncertainty with respect to selecting a
replacement index that meets the standards under proposed Sec.
1026.55(b)(7)(i), the Bureau is proposing to determine that Prime is an
example of an index that has historical fluctuations that are
substantially similar to those of certain USD LIBOR indices. The Bureau
also is proposing to determine that certain spread-adjusted indices
based on SOFR recommended by the ARRC have historical fluctuations that
are substantially similar to those of certain USD LIBOR indices. The
Bureau is proposing to make these revisions and provide additional
detail, in case card issuers use the unavailability provisions in
proposed Sec. 1026.55(b)(7)(i) to replace a LIBOR index used for
credit card accounts, as discussed in more detail above in the section-
by-section analysis of proposed Sec. 1026.55(b)(7).
Proposed Sec. 1026.55(b)(7)(i) differs from current comment
55(b)(2)-6 in three ways. First, proposed Sec. 1026.55(b)(7)(i)
provides that if an index that is not newly established is used to
replace the original index, the replacement index and replacement
margin will produce a rate ``substantially similar'' to the rate that
was in effect at the time the original index became unavailable.
Currently, comment 55(b)(2)-6 uses the term ``similar'' instead of
``substantially similar'' for the comparison of these rates.
Nonetheless, comment 55(b)(2)-6 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. To correct this
inconsistency between the comparison of rates when an existing
replacement index is used and when a newly established index is used,
the Bureau is proposing to use ``substantially similar'' consistently
in proposed Sec. 1026.55(b)(7)(i) for the comparison of rates. As
discussed in the section-by-section analysis of proposed Sec.
1026.40(f)(3)(ii)(A), the Bureau also is proposing to use
``substantially similar'' as the standard for the comparison of rates
for HELOC plans when the LIBOR index used under the plan becomes
unavailable.
Second, proposed Sec. 1026.55(b)(7)(i) differs from current
comment 55(b)(2)-6 in that the proposed provision makes clear that a
card issuer that is using a newly established index may also adjust the
margin so that the newly established index and replacement margin will
produce an APR substantially similar to the rate in effect when the
original index became unavailable. The newly established index may not
have the same index value as the original index, and the card issuer
may need to adjust the margin to meet the condition that the newly
established index and replacement margin will produce an APR
substantially similar to the rate in effect when the original index
became unavailable.
Third, proposed Sec. 1026.55(b)(7)(i) differs from current comment
55(b)(2)-6 in that the proposed provision uses the term ``the
replacement index and replacement margin'' instead of ``the replacement
index and margin'' to make clear when proposed Sec. 1026.55(b)(7)(i)
is referring to a replacement margin and not the original margin.
To effectuate the purposes of TILA and to facilitate compliance,
the Bureau is proposing to use its TILA section 105(a) authority to
propose Sec. 1026.55(b)(7)(i). TILA section 105(a) \88\ 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 the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance. The Bureau is proposing this
exception to facilitate compliance with TILA and effectuate its
purposes. Specifically, the Bureau interprets ``facilitate compliance''
to include enabling or fostering continued operation in conformity with
the law.
---------------------------------------------------------------------------
\88\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------
The Bureau is proposing to move comment 55(b)(2)-6 to proposed
Sec. 1026.55(b)(7)(i) as an exception to the general rule in current
Sec. 1026.55(a) restricting rate increases. The Bureau believes that
an index change could produce a rate increase at the time of the
replacement or in the future. The Bureau is proposing to provide this
exception to the general rule in Sec. 1026.55(a) in the circumstances
in which an index becomes unavailable in the limited conditions set
forth in proposed Sec. 1026.55(b)(7)(i) to enable or foster continued
operation in conformity with the law. If the index that is used under a
credit card account under an open-end (not home-secured) consumer
credit plan becomes unavailable, the card issuer would need to replace
the index with another index, so the rate remains a variable rate under
the plan. The Bureau is proposing this exception to facilitate
compliance with the rule by allowing the card issuer to maintain the
rate as a variable rate, which is also likely to be consistent with the
consumer's expectation that the rate on the account will be a variable
rate. The Bureau is not aware of legislative history suggesting that
Congress intended card issuers, in this case, to be required to convert
variable-rate plans to a non-variable-rate plans when the index becomes
unavailable.
The Bureau solicits comments on proposed Sec. 1026.55(b)(7)(i) and
proposed comments 55(b)(7)(i)-1 through -2. The proposed comments are
discussed in more detail below.
Historical fluctuations substantially similar for the LIBOR index
and replacement index. Proposed comment 55(b)(7)(i)-1 provides detail
on determining whether a replacement index that is not newly
established has ``historical fluctuations'' that are ``substantially
similar'' to those of the LIBOR index used under the plan for purposes
of proposed Sec. 1026.55(b)(7)(i). Specifically, proposed comment
55(b)(7)(i)-1 provides that for purposes of replacing a LIBOR index
used under a plan pursuant to Sec. 1026.55(b)(7)(i), a replacement
index that is not newly established must have historical fluctuations
that are substantially similar to those of the LIBOR index used under
the plan, considering the historical fluctuations up through when the
LIBOR index becomes unavailable or up through the date indicated in a
Bureau determination that the replacement index and the LIBOR index
have historical fluctuations that are substantially similar, whichever
is earlier. To facilitate compliance, proposed comment 55(b)(7)(i)-1.i
includes a proposed determination that Prime has historical
fluctuations that are substantially similar to those of the 1-month and
3-month USD LIBOR indices and includes a placeholder for the date when
this proposed determination would be effective, if adopted in the final
rule.\89\ The Bureau understands that some card issuers may choose to
replace a LIBOR index with Prime. Proposed comment 55(b)(7)(i)-1.i also
clarifies that in order to use Prime as the replacement index for the
1-month or 3-month USD LIBOR index, the card issuer also must comply
with the condition in Sec. 1026.55(b)(7)(i) that Prime and the
replacement margin will produce a rate substantially similar to the
rate that was in effect at the time the LIBOR index became unavailable.
This condition for comparing the rates under
[[Page 36966]]
proposed Sec. 1026.55(b)(7)(i) is discussed in more detail below.
---------------------------------------------------------------------------
\89\ See the section-by-section analysis of proposed Sec.
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the
Bureau proposing this determination.
---------------------------------------------------------------------------
To facilitate compliance, proposed comment 55(b)(7)(i)-1.ii
provides a proposed determination that the spread-adjusted indices
based on SOFR recommended by the ARRC to replace the 1-month, 3-month,
6-month, and 1-year USD LIBOR indices have historical fluctuations that
are substantially similar to those of the 1-month, 3-month, 6-month,
and 1-year USD LIBOR indices respectively. The proposed comment
provides a placeholder for the date when this proposed determination
would be effective, if adopted in the final rule.\90\ The Bureau is
proposing this determination in case some card issuers choose to
replace a LIBOR index with the SOFR-based spread-adjusted index.
---------------------------------------------------------------------------
\90\ See the section-by-section analysis of proposed Sec.
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the
Bureau proposing this determination. Also, as discussed in the
section-by-section analysis of proposed Sec. 1026.40(f)(3)(ii)(A),
the Bureau solicits comment on whether the Bureau should
alternatively consider these SOFR-based spread-adjusted indices to
be newly established indices for purposes of proposed Sec.
1026.55(b)(7)(i), to the extent these indices are not being
published by the effective date of the final rule, if adopted.
---------------------------------------------------------------------------
Proposed comment 55(b)(7)(i)-1.ii also clarifies that in order to
use this SOFR-based spread-adjusted index as the replacement index for
the applicable LIBOR index, the card issuer also must comply with the
condition in Sec. 1026.55(b)(7)(i) that the SOFR-based spread-adjusted
index and replacement margin would have resulted in an APR
substantially similar to the rate in effect at the time the LIBOR index
became unavailable. This condition under proposed Sec.
1026.55(b)(7)(i) is discussed in more detail below. Also, as discussed
in more detail below, the Bureau solicits comment on whether the Bureau
in the final rule, if adopted, should provide for purposes of proposed
Sec. 1026.55(b)(7)(i) that the rate using the SOFR-based spread-
adjusted index is ``substantially similar'' to the rate in effect at
the time the LIBOR index becomes unavailable, so long as the card
issuer uses as the replacement margin the same margin in effect on the
day that the LIBOR index becomes unavailable.
The Bureau also solicits comment on whether there are other indices
that are not newly established for which the Bureau should make a
determination that the index has historical fluctuations that are
substantially similar to those of the LIBOR indices for purposes of
proposed Sec. 1026.55(b)(7)(i). If so, what are these other indices,
and why should the Bureau make such a determination with respect to
those indices?
Newly established index as replacement for a LIBOR index. Proposed
Sec. 1026.55(b)(7)(i) provides that if the replacement index is newly
established and therefore does not have any rate history, it may be
used if it and the replacement margin will produce an APR substantially
similar to the rate in effect when the original index became
unavailable. The Bureau solicits comment on whether the Bureau should
provide any additional guidance on, or regulatory changes addressing,
when an index is newly established with respect to replacing the LIBOR
indices for purposes of proposed Sec. 1026.55(b)(7)(i). The Bureau
also solicits comment on whether the Bureau should provide any examples
of indices that are newly established with respect to replacing the
LIBOR indices for purposes of Sec. 1026.55(b)(7)(i). If so, what are
these indices and why should the Bureau determine these indices are
newly established with respect to replacing the LIBOR indices?
Substantially similar rate when LIBOR becomes unavailable. Under
proposed Sec. 1026.55(b)(7)(i), the replacement index and replacement
margin must produce an APR substantially similar to the rate that was
in effect based on the LIBOR index used under the plan when the LIBOR
index became unavailable. Proposed comment 55(b)(7)(i)-2 explains that
for the comparison of the rates, a card issuer must use the value of
the replacement index and the LIBOR index on the day that LIBOR becomes
unavailable. The Bureau solicits comment on whether it should address
the situation where the replacement index is not be published on the
day that the LIBOR index becomes unavailable. For example, should the
Bureau provide that if the replacement index is not published on the
day that the LIBOR index becomes unavailable, the card issuer must use
the previous calendar day that both indices are published as the date
on which the annual percentage rate based on the replacement index must
be substantially similar to the rate based on the LIBOR index?
Proposed comment 55(b)(7)(i)-2 clarifies that the replacement index
and replacement margin are not required to produce an APR that is
substantially similar on the day that the replacement index and
replacement margin become effective on the plan. Proposed comment
55(b)(7)(i)-2.i provides an example to illustrate this comment.
The Bureau believes that it may raise compliance issues if the rate
calculated using the replacement index and replacement margin at the
time the replacement index and replacement margin became effective had
to be substantially similar to the rate calculated using the LIBOR
index on the date that the LIBOR index became unavailable.
Specifically, under Sec. 1026.9(c)(2), the card issuer must provide a
change-in-terms notice of the replacement index and replacement margin
(including disclosing any reduced margin in change-in-terms notices
provided on or after October 1, 2021, which would be required under
proposed Sec. 1026.9(c)(2)(v)(A)) at least 45 days prior to the
effective date of the changes. The Bureau believes that this advance
notice is important to consumers to inform them of how variable rates
will be determined going forward after the LIBOR index is replaced.
Because advance notice of the changes must be given prior to the
changes becoming effective, a card issuer would not be able to ensure
that the rate based on the replacement index and margin at the time the
change-in-terms notice becomes effective will be substantially similar
to the rate calculated using the LIBOR index in effect at the time the
LIBOR index becomes unavailable. The value of the replacement index may
change after the LIBOR index becomes unavailable and before the change-
in-terms notice becomes effective.
The Bureau notes that proposed Sec. 1026.55(b)(7)(i) would require
a card issuer to use the index values of the replacement index and the
original index on a single day (namely, the day that the original index
becomes unavailable) to compare the rates to determine if they are
``substantially similar.'' In using a single day to compare the rates,
this proposed provision is consistent with the condition in the
unavailability provision in current comment 55(b)(2)-6, in the sense
that it provides that the new index and margin must result in an APR
that is substantially similar to the rate in effect on a single day.
For the reasons discussed in the section-by-section analysis of
proposed Sec. 1026.40(f)(3)(ii)(A), the Bureau solicits comment on
whether the Bureau should adopt a different approach to determine
whether a rate using the replacement index is ``substantially similar''
to the rate using the original index for purposes of Sec.
1026.55(b)(7)(i) and, if so, what criteria the Bureau should use in
selecting such a different approach. For example, the Bureau solicits
comment on whether it should require card issuers to use a historical
median or average of the spread between the replacement index and the
original index over a certain time frame (e.g., the
[[Page 36967]]
time period the historical data are available or 5 years, whichever is
shorter) for purposes of determining whether a rate using the
replacement index is ``substantially similar'' to the rate using the
original index. The Bureau also solicits comments on any compliance
challenges that might arise as a result of adopting a potentially more
complicated method of comparing the rates calculated using the
replacement index and the rates calculated using the original index,
and for any identified compliance challenges, how the Bureau could ease
those compliance challenges.
For the reasons discussed in more detail in the section-by-section
analysis of proposed Sec. 1026.40(f)(3)(ii)(A), the Bureau is not
proposing to address for purposes of proposed Sec. 1026.55(b)(7)(i)
when a rate calculated using the replacement index and replacement
margin is ``substantially similar'' to the rate in effect when the
LIBOR index becomes unavailable. The Bureau solicits comment, however,
on whether the Bureau should provide guidance on, or regulatory changes
addressing, the ``substantially similar'' standard in comparing the
rates for purposes of proposed Sec. 1026.55(b)(7)(i), and if so, what
guidance, or regulatory changes, the Bureau should provide. For
example, should the Bureau provide a range of rates that would be
considered ``substantially similar'' as described above, and if so, how
should the range be determined? Should the range of rates depend on
context, and if so, what contexts should be considered? As an
alternative to the range of rates approach, the Bureau solicits comment
on whether it should provide factors that card issuers must consider in
deciding whether the rates are ``substantially similar'' and if so,
what those factors should be. Are there other approaches the Bureau
should consider for addressing the ``substantially similar'' standard
for comparing rates?
As discussed above, proposed comment 55(b)(7)(i)-1.ii clarifies
that in order to use the SOFR-based spread-adjusted index as the
replacement index for the applicable LIBOR index, the card issuer must
comply with the condition in Sec. 1026.55(b)(7)(i) that the SOFR-based
spread-adjusted index and replacement margin would have resulted in an
APR substantially similar to the rate in effect at the time the LIBOR
index became unavailable. For the reasons discussed in more detail in
the section-by-section analysis of proposed Sec. 1026.40(f)(3)(ii)(A),
the Bureau solicits comment on whether the Bureau in the final rule, if
adopted, should provide for purposes of proposed Sec. 1026.55(b)(7)(i)
that the rate using the SOFR-based spread-adjusted index is
``substantially similar'' to the rate in effect at the time the LIBOR
index becomes unavailable, so long as the card issuer uses as the
replacement margin the same margin in effect on the day that the LIBOR
index becomes unavailable.
55(b)(7)(ii)
The Proposal
For the reasons discussed below and in the section-by-section
analysis of proposed Sec. 1026.55(b)(7), the Bureau is proposing to
add new LIBOR-specific provisions to proposed Sec. 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 uses a LIBOR index
under the plan for calculating variable rates to replace the LIBOR
index and change the margins for calculating the variable rates on or
after March 15, 2021, in certain circumstances. Specifically, proposed
Sec. 1026.55(b)(7)(ii) provides that if a variable rate on a credit
card account under an open-end (not home-secured) consumer credit plan
is calculated using a LIBOR index, a card issuer 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 Sec. 1026.55(b)(7)(ii) also provides 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. In addition, proposed Sec.
1026.55(b)(7)(ii) provides that if either the LIBOR index or the
replacement index is not published on December 31, 2020, the card
issuer must use the next calendar day that both indices are published
as the date on which the APR based on the replacement index must be
substantially similar to the rate based on the LIBOR index.
In addition, the Bureau is proposing to add detail in proposed
comments 55(b)(7)(ii)-1 through -3 on the conditions set forth in
proposed Sec. 1026.55(b)(7)(ii). For example, to reduce uncertainty
with respect to selecting a replacement index that meets the standards
in proposed Sec. 1026.55(b)(7)(ii), the Bureau is proposing to
determine that Prime is an example of an index that has historical
fluctuations that are substantially similar to those of certain USD
LIBOR indices. The Bureau also is proposing to determine that certain
spread-adjusted indices based on SOFR recommended by the ARRC have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices. Proposed Sec. 1026.55(b)(7)(ii) and
proposed comments 55(b)(7)(ii)-1 through -3 applicable to credit card
accounts under an open-end (not home-secured) consumer credit plan are
similar to the LIBOR-specific provisions set forth in proposed Sec.
1026.40(f)(3)(ii)(B) and proposed comments 40(f)(3)(ii)(B)-1 through -3
applicable to HELOCs subject to Sec. 1026.40.
To effectuate the purposes of TILA and to facilitate compliance,
the Bureau is proposing to use its TILA section 105(a) authority to
propose new LIBOR-specific provisions under proposed Sec.
1026.55(b)(7)(ii). TILA section 105(a) \91\ 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 the Bureau judges are necessary or proper to
effectuate the purposes of TILA, to prevent circumvention or evasion
thereof, or to facilitate compliance. The Bureau is proposing this
exception to facilitate compliance with TILA and effectuate its
purposes. Specifically, the Bureau interprets ``facilitate compliance''
to include enabling or fostering continued operation in conformity with
the law.
---------------------------------------------------------------------------
\91\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------
The Bureau is proposing to set March 15, 2021, as the date on or
after which card issuers are permitted to replace the LIBOR index used
for a credit card account under an open-end (not home-secured) consumer
credit plan under the plan pursuant to proposed Sec. 1026.55(b)(7)(ii)
prior to LIBOR becoming unavailable to facilitate compliance with the
change-in-terms
[[Page 36968]]
notice requirements applicable to card issuers by allowing them to
provide the 45-day change-in-terms notices required under Sec.
1026.9(c)(2) prior to the LIBOR indices becoming unavailable. This
proposed change will allow those card issuers to avoid being left
without a LIBOR index to use in calculating the variable rate before
the replacement index and margin become effective. Also, it will allow
card issuers to provide the change-in-terms notices, and replace the
LIBOR index used under the plans, on accounts on a rolling basis,
rather than having to provide the change-in-terms notices, and replace
the LIBOR index, for all its accounts at the same time when the LIBOR
index used under the plan becomes unavailable.
Without the proposed LIBOR-specific provisions in proposed Sec.
1026.55(b)(7)(ii), as a practical matter, card issuers would have to
wait until LIBOR becomes unavailable to provide the 45-day change-in-
terms notice under Sec. 1026.9(c)(2) disclosing the replacement index
and replacement margin (including disclosing any reduced margin in
change-in-terms notices provided on or after October 1, 2021, which
would be required under proposed Sec. 1026.9(c)(2)(v)(A)). The Bureau
believes that this advance notice is important to consumers to inform
them of how variable rates will be determined going forward after the
LIBOR index is replaced.
Card issuers would not be able to send out change-in-terms notices
disclosing the replacement index and replacement margin prior to the
LIBOR indices becoming unavailable for several reasons. First, although
LIBOR is expected to become unavailable around the end of 2021, there
is no specific date known with certainty on which LIBOR will become
unavailable. Thus, card issuers could not send out the change-in-terms
notices prior to the LIBOR index becoming unavailable because they will
not know when it will become unavailable and thus would not know when
to make the replacement index and replacement margin effective on the
account.
Second, card issuers would need to know the index values of the
LIBOR index and the replacement index prior to sending out the change-
in-terms notice so that they could disclose the replacement margin in
the change-in-terms notice. Card issuers will not know these index
values until the day that LIBOR becomes unavailable. Thus, card issuers
would have to wait until the LIBOR indices become unavailable before
the card issuer could send the 45-day change-in-terms notice under
Sec. 1026.9(c)(2) to replace the LIBOR index with a replacement index.
Some card issuers could be left without a LIBOR index value to use
during the 45-day period before the replacement index and replacement
margin become effective, depending on their existing contractual terms.
The Bureau is concerned this could cause compliance and systems issues.
Also, as discussed in part III, the industry has raised concerns
that LIBOR may continue for some time after December 2021 but become
less representative or reliable until LIBOR finally is discontinued.
Allowing card issuers to replace the LIBOR indices on existing credit
card accounts prior to the LIBOR indices becoming unavailable may
address some of these concerns.
The Bureau solicits comments on proposed Sec. 1026.55(b)(7)(ii)
and proposed comments 55(b)(7)(ii)-1 through -3. The proposed comments
are discussed in more detail below.
Consistent conditions with proposed Sec. 1026.55(b)(7)(i). The
Bureau is proposing conditions in the LIBOR-specific provisions in
proposed Sec. 1026.55(b)(7)(ii) for how a card issuer must select a
replacement index and compare rates that are consistent with the
conditions set forth in the unavailability provisions set forth in
proposed Sec. 1026.55(b)(7)(i). For example, the availability
provisions in proposed Sec. 1026.55(b)(7)(i) and the LIBOR-specific
provisions in proposed Sec. 1026.55(b)(7)(ii) contain a consistent
requirement that the APR calculated using the replacement index must be
``substantially similar'' to the rate calculated using the LIBOR
index.\92\ In addition, both proposed Sec. 1026.55(b)(7)(i) and (ii)
would allow a card issuer to use an index that is not newly established
as a replacement index only if the index has historical fluctuations
that are substantially similar to those of the LIBOR index.
---------------------------------------------------------------------------
\92\ The conditions in proposed Sec. 1026.55(b)(7)(i) and (ii)
are consistent, but they are not the same. For example, although
both proposed provisions use the ``substantially similar'' standard
to compare the rates, they use different dates for selecting the
index values in calculating the rates. The proposed provisions
differ in the timing of when card issuers are permitted to
transition away from LIBOR, which creates some differences in how
the conditions apply.
---------------------------------------------------------------------------
For several reasons, the Bureau is proposing to keep the conditions
for these two provisions consistent. First, as discussed above in the
section-by-section analysis of proposed Sec. 1026.55(b)(7), to the
extent some card issuers may need to wait until the LIBOR indices
become unavailable to transition to a replacement index because of
contractual reasons, the Bureau believes that keeping the conditions
consistent in the unavailability provisions in proposed Sec.
1026.55(b)(7)(i) and the LIBOR-specific provisions in proposed Sec.
1026.55(b)(7)(ii) will help ensure that card issuers must meet
consistent conditions in selecting a replacement index and setting the
rates, regardless of whether they are using the unavailability
provisions in proposed Sec. 1026.55(b)(7)(i), or the LIBOR-specific
provisions in proposed Sec. 1026.55(b)(7)(ii).
Second, most card issuers may have the ability to choose between
the unavailability provisions and LIBOR-specific provisions to switch
away from using a LIBOR index, and if the conditions between those two
provisions are inconsistent, these differences could undercut the
purpose of the LIBOR-specific provisions to allow card issuers to
switch out earlier. For example, if the conditions for selecting a
replacement index or setting the rates were stricter in the LIBOR-
specific provisions than in the unavailability provisions, this may
cause a card issuer to wait until the LIBOR indices become unavailable
to switch to a replacement index, which would undercut the purpose of
the LIBOR-specific provisions to allow card issuers to switch out
earlier and prevent these card issuers from having the time required to
transition from using a LIBOR index.
Historical fluctuations substantially similar for the LIBOR index
and replacement index. Proposed comment 55(b)(7)(ii)-1 provides detail
on determining whether a replacement index that is not newly
established has ``historical fluctuations'' that are ``substantially
similar'' to those of the LIBOR index used under the plan for purposes
of proposed Sec. 1026.55(b)(7)(ii). Specifically, proposed comment
55(b)(7)(ii)-1 provides that for purposes of replacing a LIBOR index
used under a plan pursuant to proposed Sec. 1026.55(b)(7)(ii), a
replacement index that is not newly established must have historical
fluctuations that are substantially similar to those of the LIBOR index
used under the plan, considering the historical fluctuations up through
December 31, 2020, or up through the date indicated in a Bureau
determination that the replacement index and the LIBOR index have
historical fluctuations that are substantially similar, whichever is
earlier. The Bureau is proposing the December 31, 2020, date to be
consistent with the date that card issuers generally must use for
selecting the index values to use in comparing the rates under
[[Page 36969]]
proposed Sec. 1026.55(b)(7)(ii). The Bureau solicits comment on the
December 31, 2020 date for purposes of proposed comment 55(b)(7)(ii)-1
and whether another date or timeframe would be more appropriate for
purposes of that proposed comment.
To facilitate compliance, proposed comment 55(b)(7)(ii)-1.i
includes a proposed determination that Prime has historical
fluctuations that are substantially similar to those of the 1-month and
3-month USD LIBOR indices and includes a placeholder for the date when
this proposed determination would be effective, if adopted in the final
rule.\93\ The Bureau understands some card issuers may choose to
replace a LIBOR index with Prime. Proposed comment 55(b)(7)(ii)-1.i
also clarifies that in order to use Prime as the replacement index for
the 1-month or 3-month USD LIBOR index, the card issuer also must
comply with the condition in Sec. 1026.55(b)(7)(ii) that the Prime
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. If either the LIBOR index or the
prime rate is not published on December 31, 2020, the card issuer must
use the next calendar day that both indices are published as the date
on which the annual percentage rate based on the prime rate must be
substantially similar to the rate based on the LIBOR index. This
condition for comparing the rates under proposed Sec.
1026.55(b)(7)(ii) is discussed in more detail below.
---------------------------------------------------------------------------
\93\ See the section-by-section analysis of proposed Sec.
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the
Bureau proposing this determination.
---------------------------------------------------------------------------
To facilitate compliance, proposed comment 55(b)(7)(ii)-1.ii
provides a proposed determination that the spread-adjusted indices
based on SOFR recommended by the ARRC to replace the 1-month, 3-month,
6-month, and 1-year USD LIBOR indices have historical fluctuations that
are substantially similar to those of the 1-month, 3-month, 6-month,
and 1-year USD LIBOR indices respectively. The proposed comment
provides a placeholder for the date when this proposed determination
would be effective, if adopted in the final rule.\94\ The Bureau is
making this proposed determination in case some card issuers choose to
replace a LIBOR index with the SOFR-based spread-adjusted index.
Proposed comment 55(b)(7)(ii)-1.ii also clarifies that in order to use
this SOFR-based spread-adjusted index as the replacement index for the
applicable LIBOR index, the card issuer also must comply with the
condition in Sec. 1026.55(b)(7)(ii) that the SOFR-based spread-
adjusted 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. If either the LIBOR
index or the SOFR-based spread-adjusted index is not published on
December 31, 2020, the card issuer must use the next calendar day that
both indices are published as the date on which the annual percentage
rate based on the SOFR-based spread-adjusted index must be
substantially similar to the rate based on the LIBOR index. This
condition for comparing the rates under proposed Sec.
1026.55(b)(7)(ii) is discussed in more detail below. For the reasons
discussed below, the Bureau solicits comment on whether the Bureau in
the final rule, if adopted, should provide for purposes of proposed
Sec. 1026.55(b)(7)(ii) that the rate using the SOFR-based spread-
adjusted index is ``substantially similar'' to the rate calculated
using the LIBOR index, so long as the card issuer uses as the
replacement margin the same margin that applied to the variable rate
immediately prior to the replacement of the LIBOR index.
---------------------------------------------------------------------------
\94\ See the section-by-section analysis of proposed Sec.
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the
Bureau proposing this determination. Also, as discussed in the
section-by-section analysis of proposed Sec. 1026.40(f)(3)(ii)(A),
the Bureau solicits comment on whether the Bureau should
alternatively consider these SOFR-based spread-adjusted indices to
be newly established indices for purposes of proposed Sec.
1026.55(b)(7)(ii), to the extent these indices are not being
published by the effective date of the final rule, if adopted.
---------------------------------------------------------------------------
The Bureau also solicits comment on whether there are other indices
that are not newly established for which the Bureau should make a
determination that the index has historical fluctuations that are
substantially similar to those of the LIBOR indices for purposes of
proposed Sec. 1026.55(b)(7)(ii). If so, what are these other indices,
and why should the Bureau make such a determination with respect to
those indices?
Newly established index as replacement for a LIBOR index. Proposed
Sec. 1026.55(b)(7)(ii) provides 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
the 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. The
Bureau solicits comment on whether the Bureau should provide any
additional guidance on, or regulatory changes addressing, when an index
is newly established with respect to replacing the LIBOR indices for
purposes of proposed Sec. 1026.55(b)(7)(ii). The Bureau also solicits
comment on whether the Bureau should provide any examples of indices
that are newly established with respect to replacing the LIBOR indices
for purposes of Sec. 1026.55(b)(7)(ii). If so, what are these indices
and why should the Bureau determine these indices are newly established
with respect to replacing the LIBOR indices?
Substantially similar rate using index values 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. Under proposed
Sec. 1026.55(b)(7)(ii), if both the replacement index and LIBOR index
used under the plan are published on December 31, 2020, the replacement
index value in effect on December 31, 2020, and replacement margin must
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 comment 55(b)(7)(ii)-2
explains that the margin that applied to the variable rate immediately
prior to the replacement of the LIBOR index used under the plan is the
margin that applied to the variable rate immediately prior to when the
card issuer provides the change-in-terms notice disclosing the
replacement index for the variable rate. Proposed comment 55(b)(7)(ii)-
2.i and ii provides examples to illustrate this comment for the
following two different scenarios: (1) When the margin used to
calculate the variable rate is increased pursuant to Sec.
1026.55(b)(3) for new transactions; and (2) when the margin used to
calculate the variable rate is increased for the outstanding balances
and new transactions pursuant to Sec. 1026.55(b)(4) because the
consumer pays the minimum payment more than 60 days late. In both these
proposed examples, the change in the margin occurs after December 31,
2020, but prior to date that the card issuer provides a change-in-term
notice under Sec. 1026.9(c)(2),
[[Page 36970]]
disclosing the replacement index for the variable rates.
In calculating the comparison rates using the replacement index and
the LIBOR index used under a credit card account under an open-end (not
home-secured) consumer credit plan, the Bureau generally is proposing
to require card issuers to use the index values for the replacement
index and the LIBOR index in effect on December 31, 2020. The Bureau is
proposing to require card issuers to use these index values to promote
consistency for card issuers and consumers in which index values are
used to compare the two rates. Under proposed Sec. 1026.55(b)(7)(ii),
card issuers are permitted to replace the LIBOR index used under the
plan and adjust the margin used in calculating the variable rate used
under the plan on or after March 15, 2021, but card issuers may vary in
the timing of when they provide change-in-terms notices to replace the
LIBOR index used on their credit card accounts and when these
replacements become effective. For example, one card issuer may replace
the LIBOR index used under its credit card plans in April 2021, while
another card issuer may replace the LIBOR index used under its credit
card plans in October 2021. In addition, a card issuer may not replace
the LIBOR index used under its credit card plans at the same time. For
example, a card issuer may replace the LIBOR index used under some of
its credit card plans in April 2021 but replace the LIBOR index used
under other of its credit card plans in May 2021. Nonetheless,
regardless of when a particular card issuer replaces the LIBOR index
used under its credit card plans, proposed Sec. 1026.55(b)(7)(ii)
generally would require that all card issuers to use the index values
for the replacement index and the LIBOR index in effect on December 31,
2020, to promote consistency for card issuers and consumers in which
index values are used to compare the two rates.
In addition, using the December 31, 2020 date for the index values
in comparing the rates may allow card issuers to send out change-in-
terms notices prior to March 15, 2021, and have the changes be
effective on March 15, 2021, the proposed date on or after which card
issuers would be permitted to switch away from using LIBOR as an index
on an existing credit card account under proposed Sec.
1026.55(b)(7)(ii). If the Bureau instead required card issuers to use
the index values on March 15, 2021, card issuers as a practical matter
would not be able to provide change-in-terms notices of the replacement
index and any adjusted margin until after March 15, 2021, because they
would need the index values from that date in order to calculate the
replacement margin. Thus, using the index values on March 15, 2021,
would delay when card issuers could switch away from using LIBOR as an
index on an existing credit card account.
Also, as discussed in part III, the industry has raised concerns
that LIBOR may continue for some time after December 2021 but become
less representative or reliable until LIBOR finally is discontinued.
Using the index values for the replacement index and the LIBOR index
used under the plan in effect on December 31, 2020, may address some of
these concerns.
The Bureau solicits comment specifically on the use of the December
31, 2020 index values in calculating the comparison rates under
proposed Sec. 1026.55(b)(7)(ii).
Proposed Sec. 1026.55(b)(7)(ii) provides one exception to the
proposed general requirement to use the index values for the
replacement index and the LIBOR index used under the plan in effect on
December 31, 2020. Proposed Sec. 1026.55(b)(7)(ii) provides that if
either the LIBOR index or the replacement index is not published on
December 31, 2020, the card issuer must use the next calendar day that
both indices are published as the date on which the APR based on the
replacement index must be substantially similar to the rate based on
the LIBOR index.
As discussed above, proposed Sec. 1026.55(b)(7)(ii) would require
a card issuer to use the index values of the replacement index and the
LIBOR index on a single day (generally December 31, 2020) \95\ to
compare the rates to determine if they are ``substantially similar.''
In using a single day to compare the rates, this proposed provision is
consistent with the condition in the unavailability provision in
current comment 55(b)(2)-6, in the sense that it provides that the new
index and margin must result in an APR that is substantially similar to
the rate in effect on a single day. For the reasons discussed in the
section-by-section analysis of proposed Sec. 1026.40(f)(3)(ii)(B), the
Bureau solicits comment on whether the Bureau should adopt a different
approach to determine whether a rate using the replacement index is
``substantially similar'' to the rate using the LIBOR index for
purposes of proposed Sec. 1026.55(b)(7)(ii). For example, the Bureau
solicits comment on whether it should require card issuers to use a
historical median or average of the spread between the replacement
index and the LIBOR index over a certain time frame (e.g., the time
period the historical data are available or 5 years, whichever is
shorter) for purposes of determining whether a rate using the
replacement index is ``substantially similar'' to the rate using the
LIBOR index The Bureau also solicits comments on any compliance
challenges that might arise as a result of adopting a potentially more
complicated method of comparing the rates calculated using the
replacement index and the rates calculated using the LIBOR index, and
for any identified compliance challenges, how the Bureau could ease
those compliance challenges.
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\95\ If one or both of the indices are not available on December
31, 2020, proposed Sec. 1026.55(b)(7)(ii) would require that the
card issuer use the index values of the indices on the next calendar
day that both indices are published.
---------------------------------------------------------------------------
Under proposed Sec. 1026.55(b)(7)(ii), in calculating the
comparison rates using the replacement index and the LIBOR index used
under the plan, the card issuer must use the margin that applied to the
variable rate immediately prior to when the card issuer provides the
change-in-terms notice disclosing the replacement index for the
variable rate. The Bureau is proposing that card issuers must use this
margin, rather than the margin that applied to the variable rate on
December 31, 2020. The Bureau recognizes that card issuers in certain
instances may change the margin that is used to calculate the LIBOR
variable rate after December 31, 2020, but prior to when the card
issuer provides a change-in-terms notice to replace the LIBOR index
used under the plan. If the Bureau were to require that the card issuer
use the margin that applied to the variable rate on December 31, 2020,
this would undo any margin changes that occurred after December 31,
2020, but prior to the card issuer providing a change-in-terms notice
of the replacement of the LIBOR index used under the plan, which is
inconsistent with the purpose of the comparisons of the rates under
proposed Sec. 1026.55(b)(7)(ii).
Proposed comment 55(b)(7)(ii)-3 clarifies that the replacement
index and replacement margin are not required to produce an APR that is
substantially similar on the day that the replacement index and
replacement margin become effective on the plan. Proposed comment
55(b)(7)(ii)-3.i provides an example to illustrate this comment.
The Bureau believes that it may raise compliance issues if the rate
calculated using the replacement index and replacement margin at the
time the replacement index and replacement margin became effective had
to be substantially similar to the rate calculated using the LIBOR
index in effect on December 31, 2020. Under
[[Page 36971]]
Sec. 1026.9(c)(2), the card issuer must provide a change-in-terms
notice of the replacement index and replacement margin (including
disclosing a reduced margin in a change-in-terms notice provided on or
after October 1, 2021, which would be required under proposed Sec.
1026.9(c)(2)(v)(A)) at least 45 days prior to the effective date of the
changes. The Bureau believes that this advance notice is important to
consumers to inform them of how variable rates will be determined going
forward after the LIBOR index is replaced. Because advance notice of
the changes must be given prior to the changes becoming effective, a
card issuer would not be able to ensure that the rate based on the
replacement index and margin at the time the change-in-terms notice
becomes effective will be substantially similar to the rate calculated
using the LIBOR index in effect on December 31, 2020. The value of the
replacement index may change after December 31, 2020, and before the
change-in-terms notice becomes effective.
For the reasons discussed in more detail in the section-by-section
analysis of proposed Sec. 1026.40(f)(3)(ii)(B), the Bureau is not
proposing to address for purposes of proposed Sec. 1026.55(b)(7)(ii)
when a rate calculated using the replacement index and replacement
margin is ``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. The Bureau solicits comment,
however, on whether the Bureau should provide guidance on, or
regulatory changes addressing, the ``substantially similar'' standard
in comparing the rates for purposes of proposed Sec.
1026.55(b)(7)(ii), and if so, what guidance, or regulatory changes, the
Bureau should provide. For example, should the Bureau provide a range
of rates that would be considered ``substantially similar'' as
described above, and if so, how should the range be determined? Should
the range of rates depend on context, and if so, what contexts should
be considered? As an alternative to the range of rates approach, the
Bureau solicits comment on whether it should provide factors that card
issuers must consider in deciding whether the rates are ``substantially
similar'' and if so, what those factors should be. Are there other
approaches the Bureau should consider for addressing the
``substantially similar'' standard for comparing rates?
As discussed above, proposed comment 55(b)(7)(ii)-1.ii clarifies
that in order to use the SOFR-based spread-adjusted index as the
replacement index for the applicable LIBOR index, the card issuer must
comply with the condition in Sec. 1026.55(b)(7)(ii) that the SOFR-
based spread-adjusted 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. If
either the LIBOR index or the SOFR-based spread-adjusted index is not
published on December 31, 2020, the card issuer must use the next
calendar day that both indices are published as the date on which the
annual percentage rate based on the SOFR-based spread-adjusted index
must be substantially similar to the rate based on the LIBOR index. For
the reasons discussed in the section-by-section analysis of proposed
Sec. 1026.40(f)(3)(ii)(B), the Bureau solicits comment on whether the
Bureau in the final rule, if adopted, should provide for purposes of
proposed Sec. 1026.55(b)(7)(ii) that the rate using the SOFR-based
spread-adjusted index is ``substantially similar'' to the rate
calculated using the LIBOR index, so long as the card issuer 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.
Section 1026.59 Reevaluation of Rate Increases
TILA section 148, which was added by the Credit CARD Act, provides
that if a creditor increases the APR applicable to a credit card
account under an open-end consumer credit plan, based on factors
including the credit risk of the obligor, market conditions, or other
factors, the creditor shall consider changes in such factors in
subsequently determining whether to reduce the APR for such
obligor.\96\ Section 1026.59 implements this provision. The provisions
in Sec. 1026.59 generally apply to card issuers that increase an APR
applicable to a credit card account, based on the credit risk of the
consumer, market conditions, or other factors. For any rate increase
imposed on or after January 1, 2009, card issuers are required to
review the account no less frequently than once each six months and, if
appropriate based on that review, reduce the APR. The requirement to
reevaluate rate increases applies both to increases in APRs based on
consumer-specific factors, such as changes in the consumer's
creditworthiness, and to increases in APRs imposed based on factors
that are not specific to the consumer, such as changes in market
conditions or the card issuer's cost of funds. If based on its review a
card issuer is required to reduce the rate applicable to an account,
the rule requires that the rate be reduced within 45 days after
completion of the evaluation. Section 1026.59(f) requires that a card
issuer continue to review a consumer's account each six months unless
the rate is reduced to the rate in effect prior to the increase.
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\96\ 15 U.S.C. 1665c.
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As discussed in part III, the industry has raised concerns about
how the requirements in Sec. 1026.59 would apply to accounts that are
transitioning away from using LIBOR indices. The Bureau believes that
the sunset of the LIBOR indices and transition to a new index for
credit card accounts presents two interrelated issues with respect to
compliance with Sec. 1026.59 generally. First, the transition from a
LIBOR index to a different index on an account under proposed Sec.
1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii) may constitute a rate
increase for purposes of whether an account is subject to Sec.
1026.59. Under current Sec. 1026.59 that potential rate increase could
occur at the time of transition from the LIBOR index to a different
index, or it could occur at a later time. Second, Sec. 1026.59(f)
states that, once an account is subject to the general provisions of
Sec. 1026.59, the obligation to review factors under Sec. 1026.59(a)
ceases to apply if the card issuer reduces the APR to a rate equal to
or less than the rate applicable immediately prior to the increase, or
if the rate immediately prior to the increase was a variable rate, to a
rate equal to or less than a variable rate determined by the same index
and margin that applied prior to the increase. In the case where the
LIBOR index is no longer available to serve as the ``same index'' that
applied prior to the increase, the current regulation does not provide
a mechanism by which a card issuer can determine the rate at which it
can discontinue the obligation to review factors.
The proposed revisions and additions to the regulation and
commentary of Sec. 1026.59 are meant to address these two issues. With
respect to the first issue, the addition of proposed Sec. 1026.59(h)
excepts rate increases that occur as a result of the transition from
the LIBOR index to another index under proposed Sec. 1026.55(b)(7)(i)
or Sec. 1026.55(b)(7)(ii) from triggering the requirements of Sec.
1026.59. The proposed provision does not except rate
[[Page 36972]]
increases already subject to the requirements of Sec. 1026.59 prior to
the transition from the LIBOR index from the requirements of Sec.
1026.59. With respect to the second issue, proposed Sec. 1026.59(f)(3)
provides a mechanism by which card issuers can determine the rate at
which they can discontinue the obligations under Sec. 1026.59 where
the rate applicable immediately prior to the increase was a variable
rate with a formula based on a LIBOR index.
As discussed in more detail below, the Bureau also is proposing
technical edits to comment 59(d)-2 to replace references to LIBOR with
references to the SOFR index.
59(d) Factors
Section 1026.59(d) identifies the factors that card issuers must
review if they increase an APR that applies to a credit card account
under an open-end (not home-secured) consumer credit plan. Under Sec.
1026.59(a), if a card issuer evaluates an existing account using the
same factors that it considers in determining the rates applicable to
similar new accounts, the review of factors need not result in existing
accounts being subject to exactly the same rates and rate structure as
a creditor imposes on similar new accounts. Comment 59(d)-2 provides an
illustrative example in which a creditor may offer variable rates on
similar new accounts that are computed by adding a margin that depends
on various factors to the value of the LIBOR index. In light of the
anticipated discontinuation of LIBOR, the proposed rule would amend the
example in comment 59(d)-2 to substitute a SOFR index for the LIBOR
index. The proposed rule would also make technical changes for clarity
by changing ``prime rate'' to ``prime index.'' In addition, the
proposed rule would change ``creditor'' to ``card issuer'' in the
comment to be consistent with the terminology used in Sec. 1026.59.
59(f) Termination of the Obligation To Review Factors
59(f)(3)
Current Sec. 1026.59(f) provides that the obligation to review
factors under Sec. 1026.59(a) ceases to apply if the card issuer
reduces the APR to a rate equal to or less than the rate applicable
immediately prior to the increase, or if the rate applicable
immediately prior to the increase was a variable rate, to a rate
determined by the same index and margin (previous formula) that applied
prior to the increase. Once LIBOR is discontinued, it will not be
possible for card issuers to use the ``same index.'' Thus, neither
current Sec. 1026.59(f)(1) nor Sec. 1026.59(f)(2) would appear to
allow termination of the obligation to review.
Accordingly, proposed Sec. 1026.59(f)(3) provides, effective March
15, 2021, a replacement formula that the card issuers can use to
terminate the obligation to review factors under Sec. 1026.59(a) when
the rate applicable immediately prior to the increase was a variable
rate with a formula based on a LIBOR index. Proposed Sec.
1026.59(f)(3) is intended to apply to situations in which a LIBOR index
is used as the index in the formula used to determine the rate at which
the obligation to review factors ceases,\97\ and is intended to cover
situations where LIBOR will be discontinued.
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\97\ As noted below in the discussion regarding proposed Sec.
1026.59(h)(3), proposed Sec. 1026.59(f)(3) is not intended to apply
to rate increases that may result from the switch from a LIBOR index
to another index under proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii) as those potential rate increases will be excepted
from the provisions of Sec. 1026.59. Proposed Sec. 1026.59(f)(3)
is, however, intended to cover rate increases that were already
subject to the provisions of Sec. 1026.59 and use a formula under
Sec. 1026.59(f) based on a LIBOR index to determine whether to
terminate the review obligations under Sec. 1026.59.
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Proposed Sec. 1026.59(f)(3), if adopted, will be effective as of
March 15, 2021, for accounts that are subject to Sec. 1026.59 and use
a LIBOR index as the index in the formula to determine the rate at
which a card issuer can cease the obligation to review factors under
Sec. 1026.59(a). The Bureau believes that March 15, 2021, may be a
reasonable date at which issuers can begin using the replacement
formula outlined in proposed Sec. 1026.59(f)(3). It is the date when
the proposed rulemaking generally is proposed to be effective and
provides issuers with a sufficient amount of time to transition to the
replacement formula before the estimated sunset of LIBOR. The Bureau
solicits comment on whether proposed Sec. 1026.59(f)(3) should have an
effective date different than March 15, 2021.
Proposed Sec. 1026.59(f)(3) provides a replacement formula that
issuers can use to determine the rate at which a card issuer can cease
the obligation to review factors under Sec. 1026.59(a). Under proposed
Sec. 1026.59(f)(3), the replacement formula, which includes the
replacement index on December 31, 2020, plus replacement margin, must
equal the LIBOR index value on December 31, 2020, plus the margin used
to calculate the rate immediately prior to the increase. Proposed Sec.
1026.59(f)(3) also provides that a card issuer must satisfy the
conditions set forth in proposed Sec. 1026.55(b)(7)(ii) for selecting
a replacement index. The Bureau believes that the conditions set forth
in proposed Sec. 1026.55(b)(7)(ii) may provide a reasonable method of
selecting a replacement index to the LIBOR index for the reasons set
forth in the discussion regarding proposed Sec. 1026.55(b)(7)(ii),
above. Proposed comment 59(f)-4 provides further clarification on how
the replacement index must be selected and refers to the requirements
described in proposed Sec. 1026.55(b)(7)(ii) and proposed comment
55(b)(7)(ii)-1.
Proposed Sec. 1026.59(f)(3) uses, in part, the values of the
replacement index and the LIBOR index on December 31, 2020, to
determine the replacement formula. The Bureau believes that using the
December 31, 2020, value of both indices provides a static and
consistent reference point by which to determine the formula and is
consistent with the index values used in proposed Sec.
1026.55(b)(7)(ii). If either the replacement index or the LIBOR index
is not published on December 31, 2020, the card issuer must use the
next available date that both indices are published as the index values
to use to determine the replacement formula. Proposed Sec.
1026.59(f)(3) also provides that in calculating the replacement
formula, the card issuer must use the margin used to calculate the rate
immediately prior to the rate increase.
In essence, the replacement formula is calculated as: (Replacement
index on December 31, 2020) plus (replacement margin) equals (LIBOR
index on December 31, 2020) plus (margin immediately prior to the rate
increase). If the replacement index on December 31, 2020, the LIBOR
index on December 31, 2020, and the margin immediately prior to the
rate increase are known, the replacement margin can be calculated. Once
the replacement margin is calculated, the replacement formula is the
replacement index value plus the replacement margin value. Proposed
comment 59(f)-3 sets forth two examples of how to calculate the
replacement formula. Proposed comment 59(f)-3ii.A provides an example
of how to calculate the replacement formula in the scenario where the
account was subject to Sec. 1026.59 as of March 15, 2021. Proposed
comment 59(f)-3ii.B provides an example of how to calculate the
replacement formula in the scenario where the account was not subject
to Sec. 1026.59 as of March 15, 2021, but does become subject to Sec.
1026.59 prior to the account being transitioned from a LIBOR index in
accordance with proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii).
Proposed Sec. 1026.59(f)(3) provides that the replacement formula
must equal the
[[Page 36973]]
previous formula, within the context of the timing constraints (namely
the value of the replacement and LIBOR indices as of December 31,
2020). The Bureau believes that providing that the rates must match up
when determining the replacement formula may provide the fairest way to
produce a replacement mechanism where consumers will not be unduly
harmed by the transition away from a LIBOR index used in the formula to
determine the rate at which a card issuer may cease its review
obligation under Sec. 1026.59.
The Bureau recognizes that this may create some inconsistencies in
the rates on some accounts. For example, assume that Account A is a
variable-rate account with a LIBOR index where an APR increase occurred
under Sec. 1026.55(b)(4) prior to the transition from a LIBOR index
under proposed Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii). In
order to cease the obligation for review on Account A under Sec.
1026.59, the card issuer must reduce the APR on Account A to an amount
based on a formula that is ``equal'' to the LIBOR index value on
December 31, 2020, plus the margin immediately prior to the rate
increase. In contrast, Account B is a variable-rate account with a
LIBOR index that is not subject to Sec. 1026.59. Account B is
transitioned from the LIBOR index under proposed Sec. 1026.55(b)(7)(i)
or Sec. 1026.55(b)(7)(ii) and the resulting APR on Account B must be
``substantially similar'' to the account's pre-transition rate, which
means the rate does not have to exactly equal to the pre-transition
rate. Account B is subject to the exception in proposed Sec.
1026.59(h)(3) with respect to the transition away from the LIBOR index,
and will not be required to meet the requirements of proposed Sec.
1026.59(f)(3). Thus, Account A and Account B may be treated differently
with respect to what rate must be applied to the account. The Bureau
solicits comment on whether the standard for proposed Sec.
1026.59(f)(3) should be that the replacement formula should be
substantially similar to the previous formula (rather than equal to as
in the current proposal) to provide consistency with the language in
proposed Sec. 1026.55(b)(7)(ii).
59(h) Exceptions
59(h)(3) Transition From LIBOR Exception
Current Sec. 1026.59(h) provides two situations that are excepted
from the requirements of Sec. 1026.59. Proposed Sec. 1026.59(h)(3)
would add a third exception based upon the transition from a LIBOR
index to a replacement index used in setting a variable rate.
Specifically, proposed Sec. 1026.59(h)(3) excepts from the
requirements of Sec. 1026.59 increases in an APR that occur as the
result of the transition from the use of a LIBOR index as the index in
setting a variable rate to the use of a replacement index in setting a
variable rate if the change from the use of the LIBOR index to a
replacement index occurs in accordance with proposed Sec.
1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii). Proposed comment 59(h)-1
clarifies that the proposed exception to the requirements of Sec.
1026.59 does not apply to rate increases already subject to Sec.
1026.59 prior to the transition from the use of a LIBOR index as the
index in setting a variable rate to the use of a different index in
setting a variable rate, where the change from the use of a LIBOR index
to a different index occurred in accordance with proposed Sec.
1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii).
The Bureau is proposing this exception because the requirements of
proposed Sec. 1026.55(b)(7)(i) and (ii) may provide sufficient
protection for the consumers when a card issuer is replacing an index
under these circumstances for the reasons listed above in the
discussion of proposed Sec. 1026.55(b)(7)(i) and (ii). The Bureau
believes that absent this proposed exception, some of the accounts
transitioning away from a LIBOR index to a replacement index in setting
a variable rate under proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii) would become subject to the requirements of Sec.
1026.59, either at the time of transition or at a later date. The
Bureau believes that the potential for compliance issues in
transitioning away from a LIBOR index under proposed Sec.
1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii) while also complying with
the requirements of Sec. 1026.59 may be heightened. The Bureau is
concerned that requiring card issuers to comply with the rate
reevaluation requirements under Sec. 1026.59 with respect to the LIBOR
transition under Sec. 1026.55(b)(7)(ii) may cause some card issuers to
delay the transition away from the LIBOR index so as to avoid the
requirements under Sec. 1026.59. Even if the requirements of Sec.
1026.59 were to apply to the LIBOR transition under Sec.
1026.55(b)(7)(ii), the card issuer would likely only be required to
perform one review prior to LIBOR's expected discontinuance sometime
after December 2021. Nonetheless, the card issuer could avoid this
review if it delayed transitioning the account under Sec.
1026.55(b)(7)(ii) so that the transition occurred within six months of
when LIBOR is likely to be discontinued. The Bureau does not believe
that this delay in the LIBOR transition would benefit card issuers or
consumers. The Bureau seeks comment on issuers' understanding as to
whether, and to what extent, the accounts in their portfolios will
become subject to Sec. 1026.59 in the transition away from a LIBOR
index under proposed Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii),
absent the proposed Sec. 1026.59(h)(3) exception. The Bureau also
seeks comment on potential compliance issues in transitioning away from
a LIBOR index while also becoming subject to the requirements of Sec.
1026.59.
As noted above, proposed comment 59(h)-1 provides clarification
that the exception in proposed Sec. 1026.59(h)(3) does not apply to
rate increases already subject to the requirements of Sec. 1026.59
prior to the transition away from a LIBOR index to a replacement index
under proposed Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii). In
these circumstances, the Bureau is proposing that the accounts should
continue to be subject to the requirements of Sec. 1026.59 and
consumers should not have to forego reviews on their accounts that
could potentially result in rate reductions. The Bureau is proposing
not to except these circumstances (where an account is already subject
to the requirements of Sec. 1026.59 prior to the transition away from
a LIBOR index under proposed Sec. 1026.55(b)(7)(i) or Sec.
1026.55(b)(7)(ii)) because they differ from the situation where an
account may become subject to the requirements of Sec. 1026.59 as a
result of the transition away from a LIBOR index to a replacement index
under proposed Sec. 1026.55(b)(7)(i) or Sec. 1026.55(b)(7)(ii). In
particular, proposed Sec. 1026.55(b)(7)(i) and (ii) provide that the
replacement index plus replacement margin must produce a rate that is
substantially similar to the rate in effect at the time the original
index became unavailable or the rate that was in effect based on the
LIBOR index on December 31, 2020, depending on the provision. These
provisions provide safeguards that the consumer will not be unduly
harmed after the transition away from a LIBOR index with a rate that is
substantially dissimilar to the rate prior to the transition. No
similar safeguard exists for accounts on which a rate increase occurred
prior to the transition that subjected the account to the requirements
of Sec. 1026.59. Absent the requirements of Sec. 1026.59, issuers
would not have to continue to review these accounts for possible rate
reductions that could potentially bring
[[Page 36974]]
the rate on the account in line with the rate prior to the increase, as
the requirements of Sec. 1026.59 (and proposed Sec. 1026.59(f)(3))
ensure that the account continues to be reviewed for a rate reduction
that could potentially return the rate on the account to a rate that is
the same as the rate before the increase.
Appendix H to Part 1026--Closed-End Model Forms and Clauses
Appendix H to part 1026 provides a sample form for ARMs for
complying with the requirements of Sec. 1026.20(c) in form H-4(D)(2)
and a sample form for ARMs for complying with the requirements of Sec.
1026.20(d) in form H-4(D)(4).\98\ Both of these sample forms refer to
the 1-year LIBOR. In light of the anticipated discontinuation of LIBOR,
the proposed rule would substitute the 30-day average SOFR index for
the 1-year LIBOR index in the explanation of how the interest rate is
determined in sample forms H-4(D)(2) and H-4(D)(4) in appendix H to
provide more relevant samples. The proposed rule would also make
related changes to other information listed on these sample forms, such
as the effective date of the interest rate adjustment, the dates when
future interest rate adjustments are scheduled to occur, the date the
first new payment is due, the source of information about the index,
the margin added in determining the new payment, and the limits on
interest rate increases at each interest rate adjustment. To conform to
the requirements in Sec. 1026.20(d)(2)(i) and (d)(3)(ii) and to make
form H-4(D)(4) consistent with form H-4(D)(3), the Bureau is also
proposing to add the date of the disclosure at the top of form H-
4(D)(4), which was inadvertently omitted from the original form H-
4(D)(4) as published in the Federal Register on February 14, 2013.\99\
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\98\ The Bureau notes that these are not required forms and that
forms that meet the requirements of Sec. 1026.20(c) or (d) would be
considered in compliance with those subsections, respectively.
\99\ 78 FR 10902, 11012 (Feb. 14, 2013).
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The Bureau requests comment on whether these revisions to sample
forms H-4(D)(2) and H-4(D)(4) are appropriate and whether the Bureau
should make any other changes to the forms in appendix H in connection
with the LIBOR transition. If the Bureau finalizes the proposed changes
to forms H-4(D)(2) and H-4(D)(4), the Bureau also requests comment on
whether some creditors, assignees, or servicers might still wish to use
the original forms H-4(D)(2) and H-4(D)(4) as published on February 14,
2013, after this final rule's effective date. This might include, for
example, creditors, assignees, or servicers who might wish to rely on
the original sample forms for notices sent out for LIBOR loans after
the proposed March 15, 2021 effective date but before the LIBOR index
is replaced or, alternatively, for non-LIBOR loans after the proposed
effective date. The Bureau requests comment on whether it would be
helpful for the Bureau to indicate in the final rule that the Bureau
will deem creditors, assignees, or servicers properly using the
original forms H-4(D)(2) and H-4(D)(4) to be in compliance with the
regulation with regard to the disclosures required by Sec. 1026.20(c)
and (d) respectively, even after the final rule's effective date.
VI. Effective Date
Except as noted below, the Bureau is proposing that the final rule
would take effect on March 15, 2021. This proposed effective date
generally would mean that the changes to the regulation and commentary
would be effective around nine months prior to the expected
discontinuation of LIBOR, which is some time after December 2021. For
example, creditors for HELOCs and card issuers would have around nine
months to transition away from using the LIBOR indices for existing
accounts prior to the expected discontinuation of LIBOR. The Bureau
requests comment on this proposed effective date.
The Bureau notes that the updated change-in-term disclosure
requirements for HELOCs and credit card accounts in the final rule
would apply as of October 1, 2021, if the final rule is adopted. This
proposed October 1, 2021, date is consistent with TILA section 105(d),
which 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.\100\
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\100\ 15 U.S.C. 1604(d).
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VII. Dodd-Frank Act Section 1022(b) Analysis
A. Overview
In developing the proposed rule, the Bureau has considered the
proposed rule's potential benefits, costs, and impacts.\101\ The Bureau
requests comment on the preliminary analysis presented below as well as
submissions of additional data that could inform the Bureau's analysis
of the benefits, costs, and impacts. In developing the proposed rule,
the Bureau has consulted, or offered to consult with, the appropriate
prudential regulators and other Federal agencies, including regarding
consistency with any prudential, market, or systemic objectives
administered by such agencies.
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\101\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act
(12 U.S.C. 5512(b)(2)(A)) requires the Bureau to consider the
potential benefits and costs of the regulation to consumers and
covered persons, including the potential reduction of access by
consumers to consumer financial products and services; the impact of
proposed rules on insured depository institutions and insured credit
unions with $10 billion or less in total assets as described in
section 1026 of the Dodd-Frank Act (12 U.S.C. 5516); and the impact
on consumers in rural areas.
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The proposed rule is primarily designed to address potential
compliance issues for creditors affected by the sunset of LIBOR. At
this time, LIBOR is expected to be discontinued some time after 2021.
The proposed rule would amend and add several provisions for open-
end credit. First, the proposed rule would add LIBOR-specific
provisions that would permit creditors for HELOCs and card issuers for
credit card accounts to replace the LIBOR index and adjust the margin
used to set a variable rate on or after March 15, 2021, if certain
conditions are met. Specifically, under the proposed rule, the APR
calculated using the replacement index must be substantially similar to
the rate calculated using the LIBOR index, based on the values of these
indices on December 31, 2020. In addition, creditors for HELOCs and
card issuers would be required to meet certain requirements in
selecting a replacement index. Under the proposed rule, creditors for
HELOCs and card issuers can select an index that is not newly
established as a replacement index only if the index has historical
fluctuations that are substantially similar to those of the LIBOR
index. Creditors for HELOCs or card issuers can also use a replacement
index that is newly established in certain circumstances. To reduce
uncertainty with respect to selecting a replacement index that meets
these standards, the Bureau is proposing to determine that Prime is an
example of an index that has historical fluctuations that are
substantially similar to those of certain USD LIBOR indices.\102\ The
Bureau is also proposing to determine that certain spread-adjusted
indices based on the SOFR recommended by the ARRC are indices that have
historical fluctuations that are substantially similar to those of
certain USD LIBOR indices.\103\
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\102\ Specifically, the Bureau is proposing to add to the
commentary a proposed determination that Prime has historical
fluctuations that are substantially similar to those of the 1-month
and 3-month USD LIBOR.
\103\ Specifically, the Bureau is proposing to add to the
commentary a proposed determination that the spread-adjusted indices
based on SOFR recommended by the ARRC to replace the 1-month, 3-
month, 6-month, and 1-year USD LIBOR indices have historical
fluctuations that are substantially similar to those of the 1-month,
3-month, 6-month, and 1-year USD LIBOR indices respectively.
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[[Page 36975]]
Second, the proposed rule also would revise existing language in
Regulation Z that allows creditors for HELOCs and card issuers to
replace an index and adjust the margin on an account if the index
becomes unavailable if certain conditions are met.
Third, the proposed rule would revise change-in-terms notice
requirements, effective October 1, 2021, for HELOCs and credit card
accounts to provide that if a creditor is replacing a LIBOR index on an
account pursuant to the proposed LIBOR-specific provisions or because
the LIBOR index becomes unavailable as discussed above, the creditor
must provide a change-in-terms notice of any reduced margin that will
be used to calculate the consumer's variable rate. This would help
ensure that consumers are informed of how their variable rates will be
determined after the LIBOR index is replaced.
Fourth, the proposed rule would add a LIBOR-specific exception from
the rate reevaluation requirements of Sec. 1026.59 applicable to
credit card accounts for increases that occur as a result of replacing
a LIBOR index to another index in accordance with the LIBOR-specific
provisions or as a result of the LIBOR indices becoming unavailable as
discussed above.
Fifth, the proposed rule would add provisions to address how a card
issuer, where an account was subject to the requirements of the
reevaluation reviews in Sec. 1026.59 prior to the switch from a LIBOR
index, can terminate the obligation to review where the rate applicable
immediately prior to the increase was a variable rate calculated using
a LIBOR index.
Sixth, the proposed rule would make technical edits to several
open-end provisions to replace LIBOR references with references to a
SOFR index and to make related changes.
The Bureau is also proposing several amendments to the closed-end
provisions to address the sunset of LIBOR. First, the Bureau is
proposing to amend comment 20(a)-3.ii to identify specific indices as
an example of a ``comparable index'' for purposes of the closed-end
refinancing provisions.\104\ Second, the Bureau is proposing technical
edits to various closed-end provisions to replace LIBOR references with
references to a SOFR index and to make related changes and corrections.
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\104\ Specifically, the Bureau is proposing to add to the
comment an illustrative example indicating 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 spread-adjusted index based on the SOFR recommended by
the ARRC as replacements for these indices, because the replacement
index is a comparable index to the corresponding USD LIBOR index.
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B. Provisions To Be Analyzed
The analysis below considers the potential benefits, costs, and
impacts to consumers and covered persons of significant provisions of
the proposed rule (proposed provisions), which include the first,
third, and fourth open-end provisions described above. The analysis
also includes the first closed-end provision described above.\105\
Therefore, the Bureau has analyzed in more detail the following four
proposed provisions:
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\105\ The Bureau does not believe that the other provisions
described above would have any significant costs, benefits, or
impacts for consumers or covered persons.
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1. LIBOR-specific provisions for index changes for HELOCs and
credit card accounts,
2. Revisions to change-in-terms notices requirements for HELOCs and
credit card accounts to disclose margin decreases, if any,
3. LIBOR-specific exception from the rate reevaluation provisions
applicable to credit card accounts, and
4. Commentary stating that specific indices are comparable to
certain LIBOR tenors for purposes of the closed-end refinancing
provisions.
Because the proposed rule would address the transition of credit
products from LIBOR to other indices, which should be complete within
the next several years under both the baseline and the proposed rule,
the analysis below is limited to considering the benefits, costs, and
impacts of the proposed provisions over the next several years.
C. Data Limitations and Quantification of Benefits, Costs, and Impacts
The discussion below relies on information that the Bureau has
obtained from industry, other regulatory agencies, and publicly
available sources. The Bureau has performed outreach on many of the
issues addressed by the proposed rule, as described in part III.
However, as discussed further below, the data are generally limited
with which to quantify the potential costs, benefits, and impacts of
the proposed provisions.
In light of these data limitations, the analysis below generally
provides a qualitative discussion of the benefits, costs, and impacts
of the proposed provisions. General economic principles and the
Bureau's expertise in consumer financial markets, together with the
limited data that are available, provide insight into these benefits,
costs, and impacts. The Bureau requests additional data or studies that
could help quantify the benefits and costs to consumers and covered
persons of the proposed provisions.
D. Baseline for Analysis
In evaluating the potential benefits, costs, and impacts of the
proposed rule, the Bureau takes as a baseline the current legal
framework governing changes in indices used for variable-rate open-end
and closed-end credit products, as applicable. The FCA has announced
that it cannot guarantee the publication of LIBOR beyond 2021 and has
urged relevant parties to prepare for the transition to alternative
reference rates. Therefore, it is likely that even under current
regulations, existing contracts for HELOCs, credit card accounts, and
closed-end credit tied to a LIBOR index will have transitioned to other
indices soon after the end of 2021. Furthermore, for HELOCs, credit
card accounts, and closed-end credit, the proposed rule would not
significantly alter the requirements that replacement indices for a
LIBOR index must satisfy, nor would it alter how these requirements
must be evaluated. Hence, the analysis below assumes the proposed rule
would not substantially alter the number of HELOCs, credit card
accounts, and closed-end credit accounts switched from a LIBOR index to
other indices nor would it significantly alter the indices that HELOC
creditors, card issuers, and closed-end creditors use to replace a
LIBOR index. However, the proposed rule would enable HELOC creditors,
card issuers, and closed-end creditors under Regulation Z to transfer
existing contracts away from a LIBOR index with more certainty about
what is required by and permitted under Regulation Z. The proposed rule
would also enable HELOC creditors and card issuers to transfer existing
contracts away from a LIBOR index earlier they could under the
baseline, if they choose to do so.
The proposed rule, however, would not excuse creditors or card
issuers from noncompliance with contractual provisions. For example, a
contract for a HELOC or a credit card account may provide that the
creditor or card issuer respectively may not replace an index
unilaterally under a plan unless the original index becomes
unavailable. In this case, even under the proposed rule, the creditor
or card issuer would be contractually prohibited from unilaterally
replacing a LIBOR index used under the plan until LIBOR becomes
unavailable.
[[Page 36976]]
E. Potential Benefits and Costs of the Proposed Rule for Consumers and
Covered Persons
Reliable data on the indices credit products are linked to is not
generally available, so the Bureau cannot estimate the dollar value of
debt tied to LIBOR in the distinct credit markets that may be impacted
by the proposed rule. However, the ARRC has estimated that, at the end
of 2016, there was $1.2 trillion of mortgage debt (including ARMs,
HELOCs, and reverse mortgages) and $100 billion of non-mortgage debt
tied to LIBOR.\106\
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\106\ ARRC, Second Report (Mar. 2018), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
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1. LIBOR-Specific Provisions for Index Changes for HELOCs and Credit
Card Accounts
For consumers with HELOCs and credit card accounts with APRs tied
to a LIBOR index, and for creditors of HELOCs and card issuers with
APRs tied to a LIBOR index, the main effect of the LIBOR-specific
provisions that allows HELOC creditors or card issuers under Regulation
Z to replace a LIBOR index before it becomes unavailable would be that
some creditors and card issuers for HELOCs and credit card accounts
respectively would switch those contracts from a LIBOR index to other
indices earlier than they would have without the proposed provision.
Since the LIBOR indices are likely to become unavailable some time
after December 2021, and the proposed provision would allow many
creditors and card issuers under Regulation Z to switch on or after
March 15, 2021, creditors and card issuers would likely switch
contracts from a LIBOR index to other indices at most around nine
months earlier than they would without the proposed provision (if
permitted by the contractual provisions as discussed above). The Bureau
cannot estimate when these accounts will be switched from a LIBOR index
under the proposed provision. The Bureau also cannot estimate the
number of accounts that contractually cannot be switched from a LIBOR
index until that LIBOR index becomes unavailable, although the Bureau
believes that a larger proportion of HELOC contracts than credit card
contracts are affected by this issue.\107\
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\107\ Furthermore, some HELOC creditors and card issuers may be
able to switch indices from LIBOR to replacement indices even before
LIBOR becomes unavailable (under the baseline) or March 15, 2021
(under the proposed rule). For HELOCs, some creditors may be able to
switch earlier if the consumer specifically agrees to the change in
writing under Sec. 1026.40(f)(3)(iii). For credit card accounts
that have been open for at least a year, card issuers may be able to
switch indices earlier for new transactions under Sec.
1026.55(b)(3). The Bureau cannot estimate the number of such
accounts that could be switched early.
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The proposed provision also would include revisions to commentary
to Regulation Z to state that certain SOFR-based indices have
historical fluctuations that are substantially similar to those of
certain tenors of LIBOR and that Prime has historical fluctuations that
are substantially similar to those of certain tenors of LIBOR. The
Bureau believes that market participants, using analysis similar to
that the Bureau has performed, would come to these conclusions even
without the proposed commentary. Therefore, the Bureau estimates that
the proposed commentary would not significantly change the indices that
HELOC creditors or card issuers switch to, the dates on which indices
are switched, or the manner in which those switches are made.
Potential Benefits and Costs to Consumers
The Bureau believes that the proposed provision would benefit
consumers primarily by making their experience transitioning from a
LIBOR index more informed and less disruptive than it otherwise could
be, although the Bureau does not have the data to quantify the value of
this benefit. The Bureau expects this consumer benefit to arise because
creditors for HELOCs and card issuers would have more time to
transition contracts from LIBOR indices to replacement indices, giving
them more time to plan for the transition, communicate with consumers
about the transition, and avoid technical or system issues that could
affect consumers' accounts during the transition.
The Bureau does not anticipate that the proposed provision would
impose any significant costs on consumers on average. Under the
proposed provision, creditors for HELOCs and card issuers would have to
adjust margins used to calculate the variable rates on the accounts so
that consumers' APRs calculated using the value of the replacement
index in effect on December 31, 2020, and the replacement margin will
produce a rate that is substantially similar to their rates calculated
using the value of the LIBOR index in effect on December 31, 2020, and
the margins that applied to the variable rates immediately prior to the
replacement of the LIBOR index. After the transition, consumers' APRs
will be tied to the replacement indices and not to the LIBOR indices.
Because the replacement indices creditors for HELOCs and card issuers
would switch to are not identical to the LIBOR indices, they will not
move identically to the LIBOR indices, and so for the roughly nine
months affected by this proposed provision, affected consumers'
payments will be different under the proposed provision than they would
be under the baseline. On some dates in which indexed rates reset, some
replacement indices may have increased relative to the LIBOR index.
Consumers with these indices would then pay a cost due to the proposed
provision until the next rate reset. On some dates in which indexed
rates reset, some replacement indices may have decreased relative to
the LIBOR index. Consumers with these indices would then benefit from
the proposed provision until the next rate reset. Consumers vary in
their constraints and preferences, the credit products they have, the
dates those credit products reset, the replacement indices their
creditors or card issuers would choose, and the transition dates their
creditors or card issuers would choose. The benefits and costs that
would accrue to consumers from the proposed provision and that arise
because of differences in index movements will vary across consumers
and over time. However, the Bureau expects ex-ante for these benefits
and costs to be small on average, because the rates creditors or card
issuers switch to must be substantially similar to existing LIBOR-based
rates using index values in effect on December 31, 2020, and because
replacement indices that are not newly established must have historical
fluctuations that are substantially similar to those of the LIBOR
index.
Potential Benefits and Costs to Covered Persons
The Bureau believes the proposed provision will have three primary
benefits for creditors for HELOCs and card issuers. First, under the
proposed provision these creditors and card issuers would have more
certainty about the transition date and more time to make the
transition away from the LIBOR indices. This should increase the
ability of HELOC creditors and card issuers to plan for the transition,
improving their communication with consumers about the transition, and
decreasing the likelihood of technical or system issues that affect
consumers' accounts during the transition. Both of these effects should
lower the cost of the transition to creditors. Second, the proposed
provision will provide creditors for HELOCs and card issuers with
additional detail for how to comply with their legal obligations
[[Page 36977]]
under Regulation Z with respect to the LIBOR transition. This should
decrease the cost of legal and compliance staff time preparing for the
transition beforehand and dealing with litigation after. Third, the
proposed provision also would include revisions to commentary on
Regulation Z stating that certain SOFR-based indices have historical
fluctuations that are substantially similar to those of certain tenors
of LIBOR and that Prime has historical fluctuations that are
substantially similar to those of certain tenors of LIBOR. This should
decrease the cost of compliance staff time coming to the same
conclusions as the proposed commentary before the transition from
LIBOR, and it should decrease the cost of litigation after.
As discussed under ``Potential Benefits and Costs to Consumers''
above, because the replacement indices creditors for HELOCs and card
issuers would switch to are not identical to the LIBOR indices, they
will not move identically to the LIBOR indices, and so for the roughly
nine months affected by this proposed provision, affected consumers'
payments will be different under the proposed provision than they would
be under the baseline. On some dates in which indexed rates reset, some
replacement indices will have increased relative to the LIBOR index.
HELOC creditors and card issuers with rates linked to these indices
will then benefit from the proposed provision until the next rate
reset. On some dates in which indexed rates reset, some replacement
indices will have decreased relative to the LIBOR index. HELOC
creditors and card issuers with rates linked to these indices will then
pay a cost due to the proposed provision until the next rate reset.
Creditors and card issuers vary in their constraints and preferences,
the credit products they issue, the dates those credit products reset,
the replacement indices they would choose under the proposed provision,
and the transition dates they would choose under the proposed
provision. The benefits and costs that would accrue to HELOC creditors
and card issuers from the proposed provision and that arise because of
differences in index movements will vary across creditors and card
issuers and over time. However, the Bureau expects ex-ante for these
benefits and costs to be small on average, because the rates creditors
or card issuers switch to must be substantially similar to existing
LIBOR-based rates using index values in effect on December 31, 2020,
and replacement indices that are not newly established must have
historical fluctuations that are substantially similar to those of the
LIBOR index.
The proposed provision would allow creditors for HELOCs and card
issuers under Regulation Z to switch contracts from a LIBOR index
earlier than they otherwise would have, but it does not require them to
do so. Therefore, this aspect of the proposed provision does not impose
any significant costs on HELOC creditors and card issuers. The proposed
commentary would not determine that any specific indices have
historical fluctuations that are not substantially similar to those of
LIBOR, so the proposed revisions would not prevent creditors or card
issuers from switching to other indices as long as those indices still
satisfy regulatory requirements. Therefore, the proposed commentary
also does not impose any significant costs on HELOC creditors and card
issuers. However, as noted above, the replacement indices HELOC
creditors and card issuers choose may move less favorably for them than
the LIBOR indices would have.
2. Revisions to Change-in-Terms Notices Requirements for HELOCs and
Credit Card Accounts To Disclose Margin Decreases, if Any
The proposed provision would, effective October 1, 2021, require
creditors for HELOCs and card issuers to disclose margin reductions to
consumers when they switch contracts from using LIBOR indices to other
indices. Under both the existing regulation and this proposed
provision, creditors for HELOCs and card issuers are required to send
consumers change-in-term notices when indices change, disclosing the
replacement index and any increase in the margin. Therefore, this
proposed provision would not affect the number of consumers who receive
change-in-terms notices nor the number of change-in-terms notices
creditors for HELOCs or card issuers must provide.
The benefits, costs, and impacts of this proposed provision depend
on whether HELOC creditors or card issuers would choose to disclose
margin decreases even if not required to do so under the existing
regulation. Creditors for HELOCs or card issuers that would not
otherwise disclose margin decreases in their change-in-term notices
would bear the cost of having to provide slightly longer notices. They
may also have to develop distinct notices for different groups of
consumers with different initial margins. Consumers with HELOC or
credit card accounts from those creditors or card issuers would benefit
by having an improved understanding of how and why their APRs would
change. However, the Bureau believes it is likely that most creditors
for HELOCs and card issuers would choose to disclose margin decreases
in their change-in-terms notices even if the existing regulation does
not require them to so, because margin decreases are beneficial for
consumers, and because in these situations the creditors or card
issuers likely benefit from improved consumer understanding. Further,
this proposed provision would be effective only beginning October 1,
2021. HELOC creditors and card issuers that would prefer not to
disclose margin decreases could choose to change indices before this
proposed provision becomes effective (if the change in indices are
permitted by the contractual provisions at that time). Therefore, the
Bureau expects that both the benefits and costs of this proposed
provision for consumers and for HELOC creditors and card issuers would
be small.
3. LIBOR-Specific Exception From the Rate Reevaluation Provisions
Applicable to Credit Card Accounts
Rate increases may occur due to the LIBOR transition either at the
time of transition from the LIBOR index to a different index or at a
later time. Under current Sec. 1026.59, in these scenarios card
issuers would have to reevaluate the APRs until they equal or fall
below what they would have been had they remained tied to LIBOR. The
proposed provision would except card issuers from these rate
reevaluation requirements for rate increases that occur as a result of
the transition from the LIBOR index to another index under the LIBOR-
specific provisions discussed above or under the existing regulation
that allows card issuers to replace an index when the index becomes
unavailable. The proposed provision does not except rate increases
already subject to the rate reevaluation requirements prior to the
transition from the LIBOR index to another index as discussed above.
Because relative rate movements are hard to anticipate ex-ante, it is
unlikely that this proposed provision would affect the indices that
card issuers use as replacements. Because card issuers can only switch
from LIBOR-based rates to rates that are substantially similar using
index values in effect on December 31, 2020, and use a replacement
index (if the replacement index is not newly established) that has
historical fluctuations that are substantially similar to those of the
LIBOR index, it is unlikely such rate reevaluations would result in
significant rate reductions for consumers before LIBOR is discontinued.
Therefore,
[[Page 36978]]
before LIBOR is discontinued, the impact of this proposed provision on
consumers is likely to be small. After LIBOR is discontinued, it will
not be possible to compute what consumer rates would have been under
the LIBOR indices, and so it is not clear how card issuers would
conduct such rate reevaluations after that time. Therefore, after LIBOR
is discontinued, the impact of this proposed provision on consumers is
not clear. This proposed provision would benefit affected card issuers
by saving them the cost of reevaluating rates until LIBOR is
discontinued. This proposed provision would impose no costs on affected
card issuers because they could still perform rate reevaluations if
they choose to do so prior to LIBOR being discontinued.
4. Commentary Stating That Specific Indices are Comparable to Certain
LIBOR Tenors for Purposes of the Closed-End Refinancing Provisions
The Bureau is proposing to revise comment 20(a)-3.ii to Regulation
Z to state that certain SOFR-based indices are comparable to certain
tenors of LIBOR. The Bureau believes that market participants, using
analysis similar to that the Bureau has performed, would come to this
conclusion even without the proposed commentary. Therefore, the Bureau
believes that the proposed commentary would not significantly change
the indices that creditors switch to, the dates on which indices are
switched, or the manner in which those switches are made. Hence, the
Bureau estimates that the proposed revisions would have no significant
benefits, costs, or impacts for consumers.
For covered persons, the proposed provision would decrease costs by
providing additional clarity and certainty about whether indices are
comparable for purposes of Regulation Z. For creditors that would
switch from certain LIBOR indices to certain SOFR indices, the proposed
provision would decrease the compliance staff time required to come to
the conclusion that the SOFR index is comparable to the LIBOR index.
The proposed provision could also decrease litigation costs for
creditors after the transition from certain LIBOR indices to certain
SOFR indices.
The proposed commentary would not determine that any specific
indices are not comparable to LIBOR. Therefore, the proposed provision
would not prevent creditors from switching to other indices as long as
those indices still satisfy regulatory requirements. Therefore, the
proposed provision would impose no significant costs on creditors.
F. Alternative Provisions Considered
As discussed above in the section-by-section analyses of Sec.
1026.40(f)(3)(ii) and proposed Sec. 1026.55(b)(7), the Bureau
considered interpreting the LIBOR indices to be unavailable as of a
certain date prior to LIBOR being discontinued. The Bureau briefly
discusses the costs, benefits, and impacts of the considered
interpretation below.
If the Bureau were to interpret the LIBOR indices to be unavailable
under the existing Regulation Z rules prior to LIBOR being
discontinued, it could provide benefits similar to those of the
proposed rule by allowing creditors and card issuers to switch away
from LIBOR indices before LIBOR is discontinued. It might also
potentially provide some benefit to consumers and covered persons whose
contracts require them to wait until the LIBOR indices become
unavailable before replacing the LIBOR index, by providing some
additional clarity in interpreting that provision of their contracts.
However, a determination by the Bureau that the LIBOR indices are
unavailable could have unintended consequences on other products or
markets. For example, the Bureau is concerned that such a determination
could unintentionally cause confusion for creditors for other products
(e.g., ARMs) about whether the LIBOR indices are also unavailable for
those products and could possibly put pressure on those creditors to
replace the LIBOR index used for those products before those creditors
are ready for the change. This could impose significant costs on
affected consumers and creditors in the markets for these other
products.
In addition, even if the Bureau interpreted unavailability to
indicate that the LIBOR indices are unavailable prior to LIBOR being
discontinued, this interpretation would not completely solve the
contractual issues for creditors and card issuers whose contracts
require them to wait until the LIBOR indices become unavailable before
replacing the LIBOR index. Creditors and card issuers still would need
to decide for their contracts whether the LIBOR indices are
unavailable, and that decision could result in litigation or
arbitration under the contracts. Thus, even if the Bureau decided that
the LIBOR indices are unavailable under Regulation Z as described
above, creditors and card issuers whose contracts require them to wait
until the LIBOR indices become unavailable before replacing the LIBOR
index essentially would be in the same position under the proposed rule
as they would be under the current rule. Therefore, the benefits of the
considered interpretation would be small even for the main intended
beneficiaries of such an interpretation, specifically the consumers,
creditors, and card issuers under contracts that require creditors and
card issuers to wait until the LIBOR indices become unavailable before
replacing the LIBOR index.
G. Potential Specific Impacts of the Proposed Rule
1. Depository Institutions and Credit Unions With $10 Billion or Less
in Total Assets, as Described in Section 1026
The Bureau believes that the consideration of benefits and costs of
covered persons presented above provides a largely accurate analysis of
the impacts of the proposed provisions on depository institutions and
credit unions with $10 billion or less in total assets that issue
credit products that are tied to LIBOR and are covered by the proposed
provisions.
2. Impact of the Proposed Rule on Consumer Access to Credit and on
Consumers in Rural Areas
Because the proposed rule would affect only existing accounts that
are tied to LIBOR and would generally not affect new loans, the
proposed rule would not directly impact consumer access to credit.
While the proposed rule would provide some benefits and costs to
creditors and card issuers in connection to the transition away from
LIBOR, it is unlikely to affect the costs of providing new credit and
therefore the Bureau believes that any impact on creditors and card
issuers from the proposed rule is not likely to have a significant
impact on consumer access to credit.
Consumers in rural areas may experience benefits or costs from the
proposed rule that are larger or smaller than the benefits and costs
experienced by consumers in general if credit products in rural areas
are more or less likely to be linked to LIBOR than credit products in
other areas. The Bureau does not have any data or other information to
understand whether this is the case. The Bureau will further consider
the impact of the proposed rule on consumers in rural areas. The Bureau
therefore asks interested parties to provide data, research results,
and other information on the impact of the proposed rule on consumers
in rural areas.
[[Page 36979]]
VIII. Regulatory Flexibility Act Analysis
A. Overview
The Regulatory Flexibility Act (RFA) generally requires an agency
to conduct an initial regulatory flexibility analysis (IRFA) and a
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements, unless the agency certifies that
the rule will not have a significant economic impact on a substantial
number of small entities.\108\ The Bureau also is subject to certain
additional procedures under the RFA involving the convening of a panel
to consult with small business representatives before proposing a rule
for which an IRFA is required.\109\
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\108\ 5 U.S.C. 601 et seq.
\109\ 5 U.S.C. 609.
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An IRFA is not required for this proposed rule because the proposed
rule, if adopted, would not have a significant economic impact on a
substantial number of small entities.
B. Impact of Proposed Provisions on Small Entities
The analysis below evaluates the potential economic impact of the
proposed provisions on small entities as defined by the RFA.\110\ A
card issuer or depository institution is considered ``small'' if it has
$600 million or less in assets.\111\ Except for card issuers, non-
depository creditors are considered ``small'' if their average annual
receipts are less than $41.5 million.\112\
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\110\ For purposes of assessing the impacts of the proposed rule
on small entities, ``small entities'' is defined in the RFA to
include small businesses, small not-for-profit organizations, and
small government jurisdictions. 5 U.S.C. 601(6). A ``small
business'' is determined by application of Small Business
Administration regulations and reference to the North American
Industry Classification System (NAICS) classifications and size
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small
governmental jurisdiction'' is the government of a city, county,
town, township, village, school district, or special district with a
population of less than 50,000. 5 U.S.C. 601(5).
\111\ U. S. Small Bus. Admin., Table of Small Business Size
Standards Matched to North American Industry Classification System
Codes, https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf (current SBA size standards).
\112\ Id.
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Based on its market intelligence, the Bureau believes that there
are few, if any, small card issuers with LIBOR-based cards. Based on
its market intelligence, the Bureau estimates that there are
approximately 200 to 300 small institutional lenders with variable-rate
student loans tied to LIBOR. There are also a few state-sponsored
nonbank lenders that offer variable-rate student loans based on LIBOR.
To estimate the number of small mortgage lenders that may be
impacted by the proposed rule, the Bureau has analyzed the 2018 Home
Mortgage Disclosure Act (HMDA) data.\113\ The HMDA data cover mortgage
originations, while entities may be impacted by the proposed rule if
they hold debt tied to LIBOR. The data will therefore not include
entities that originated LIBOR-linked debt before 2018 but not during
2018, even if those entities still hold that debt. The data will
include entities that originated LIBOR-linked debt in 2018 but will
have sold it before the proposed rule would come into effect, and so
would not be impacted by the proposed rule. Other limitations of the
data are discussed below. Despite these limitations, the HMDA data are
the best data source currently available to the Bureau to quantify the
number of small mortgage lenders that may be impacted by the proposed
rule.
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\113\ See Bureau of Consumer Fin. Prot., Introducing New and
Revised Data Points in HMDA (Aug. 2019), available at https://files.consumerfinance.gov/f/documents/cfpb_new-revised-data-points-in-hmda_report.pdf.
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The HMDA data include entities that originate ARMs, HELOCs, and
reverse mortgages. The data include information on whether mortgages
are open-end or closed-end, although some entities are exempt from
reporting this information.\114\ The data do not include information on
whether or not mortgages have rates that are tied to LIBOR. The data do
indicate whether or not mortgages have rates that may change. This
measure is used as a proxy for potential exposure to the proposed rule.
Mortgages may have rates that are linked to indices besides LIBOR. They
may also have ``step rates'' that switch from one pre-determined rate
to another pre-determined rate that is not linked to any index.
Therefore, the proxy for potential exposure to the proposed rule likely
overstates the number of entities with rates tied to LIBOR.
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\114\ In May 2017, Congress passed the Economic Growth,
Regulatory Relief, and Consumer Protection Act (EGRRCPA) that
granted certain HMDA reporters partial exemptions from HMDA
reporting. The closed-end partial exemption applies to HMDA
reporters that are insured depository institutions or insured credit
unions and that originated fewer than 500 closed-end mortgages in
each of the two preceding years. HMDA reporters that are insured
depository institutions or insured credit unions that originated
fewer than 500 open-end lines of credit in each of the two preceding
years also qualify for a partial exemption with respect to reporting
their open-end transactions. The insured depository institutions
must also not have received certain less than satisfactory
examination ratings under the Community Reinvestment Act of 1977 to
qualify for the partial exemptions.
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Based on this data, the Bureau estimates that there are 117 small
depositories that originated at least one closed-end adjustable-rate
mortgage product in 2018 and so may be affected by the closed-end
provisions of the proposed rule, and there are 669 small depositories
that originated at least one open-end adjustable-rate mortgage product
and so may be affected by the open-end provisions of the proposed rule.
Of these, 82 small depositories originated at least one closed-end
adjustable rate mortgage product and one open-end adjustable rate
mortgage product, and so may be affected by both the open-end and
closed-end provisions of the proposed rule.
The definition of ``small'' for purposes of the RFA for non-
depository institutions that originate mortgages depends on average
annual receipts. The HMDA data do not include this information, and so
the Bureau cannot estimate the number of small non-depository mortgage
lenders that may be affected by the proposed rule. The Bureau estimates
that there are 50 non-depository mortgage lenders that originated at
least one closed-end adjustable-rate mortgage product and 640 non-
depository mortgage lenders that originated at least one open-end
adjustable-rate mortgage product. Of these, 43 originated at least one
closed-end and one open-end adjustable-rate mortgage product.
The numbers above do not include entities that reported originating
mortgages but under the EGRRCPA were exempt from reporting whether or
not those mortgages had adjustable rates. There are 1,530 such small
depositories in the 2018 HMDA data. There are five such non-depository
institutions in the 2018 HMDA data. These entities may have originated
adjustable-rate mortgage products that were not explicitly reported as
such.
Finally, the numbers above also do not include entities that may
have originated adjustable-rate mortgages in 2018 that were exempt
entirely from reporting any 2018 HMDA data. The Bureau has estimated
that approximately 11,800 institutions originated at least one closed-
end mortgage loan in 2018, and 5,666 institutions reported HMDA data in
2018.\115\ This implies that approximately 6,134 institutions
originated at least one closed-end
[[Page 36980]]
mortgage in 2018 but are not in the HMDA data. Because these
institutions are not in the HMDA data, the Bureau cannot estimate the
number that may have originated adjustable-rate mortgages. Furthermore,
the Bureau cannot confirm that they are small for purposes of the RFA,
although it is likely they are because HMDA reporting thresholds are
based in part on origination volume. Finally, the Bureau cannot
estimate the number of institutions that did not report HMDA data in
2018 but did originate at least one open-end mortgage loan in 2018, or
at least one closed-end and one open-end mortgage loan in 2018.
---------------------------------------------------------------------------
\115\ See Bureau of Consumer Fin. Prot., Data Point: 2018
Mortgage Market Activity and Trends (Aug. 2019), available at
https://files.consumerfinance.gov/f/documents/cfpb_2018-mortgage-market-activity-trends_report.pdf.
---------------------------------------------------------------------------
As discussed above in part VII, there are four main proposed
provisions:
1. LIBOR-specific provisions for index changes for HELOCs and
credit card accounts,
2. Revisions to change-in-terms notices requirements for HELOCs and
credit card accounts to disclose margin decreases, if any,
3. LIBOR-specific exception from the rate reevaluation provisions
applicable to credit card accounts, and
4. Commentary stating that specific indices are comparable to
certain LIBOR tenors for purposes of the closed-end refinancing
provisions.
The proposed LIBOR-specific provisions for index change
requirements for open-end credit would allow HELOC creditors and card
issuers, including small entities, under Regulation Z to switch away
from LIBOR earlier than they would under the baseline, but it does not
require them to do so.\116\ This additional flexibility would benefit
small entities with these outstanding credit products tied to LIBOR, by
reducing uncertainty and allowing them to implement the switch in a
more orderly way. This additional flexibility would not impose any
significant costs on HELOC creditors and card issuers, including small
entities.
---------------------------------------------------------------------------
\116\ As discussed in the section-by-section analyses of Sec.
1026.40(f)(3)(ii) and proposed Sec. 1026.55(b)(7) above, the
proposal, however, would not excuse creditors or card issuers from
noncompliance with contractual provisions. For example, a contract
for a HELOC or a credit card account may provide that the creditor
or card issuer respectively may not replace an index unilaterally
under a plan unless the original index becomes unavailable. In this
case, even under the proposal the creditor or card issuer would be
contractually prohibited from unilaterally replacing a LIBOR index
used under the plan until it becomes unavailable.
---------------------------------------------------------------------------
The proposed LIBOR-specific provisions for index change
requirements for open-end credit also would include revisions to
commentary to Regulation Z to state that certain SOFR-based indices
have historical fluctuations that are substantially similar to those of
certain tenors of LIBOR and that Prime has historical fluctuations that
are substantially similar to those of certain tenors of LIBOR. The
proposed commentary would not determine that any specific indices have
historical fluctuations that are not substantially similar to those of
LIBOR, so the proposed revisions would not prevent creditors or card
issuers from switching to other indices as long as those indices still
satisfy regulatory requirements. Therefore, the proposed commentary
does not impose any significant costs on HELOC creditors and card
issuers, including small entities. Therefore, the proposed LIBOR-
specific provisions for index change requirements for open-end credit
would impose no significant burden on small entities.
The proposed revisions to change-in-terms notices requirements to
disclose margin decreases, if any, expand regulatory requirements for
creditors for HELOCs and card issuers, including small entities, and
therefore may increase their compliance costs. The proposed provision
would, effective October 1, 2021, require creditors for HELOCs and card
issuers, including small entities, to disclose margin reductions to
consumers when they switch contracts from using LIBOR indices to other
indices. Under both the existing regulation and the proposed provision,
creditors for HELOCs and card issuers, including small entities, are
required to send consumers change-in-term notices when indices change,
disclosing the replacement index and any increase in the margin.
Therefore, this proposed provision would not affect the number of
consumers who receive change-in-terms notices nor the number of change-
in-terms notices creditors for HELOCs or card issuers, including small
entities, must provide.
The benefits, costs, and impacts of this proposed provision depend
on whether HELOC creditors or card issuers, including small entities,
would choose to disclose margin decreases even if not required to do so
under the existing regulation. Creditors for HELOCs or card issuers,
including small entities, that would not otherwise disclose margin
decreases in their change-in-term notices would bear the cost of having
to provide slightly longer notices. They may also have to develop
distinct notices for different groups of consumers with different
initial margins. However, the Bureau believes it is likely that most
creditors for HELOCs and card issuers, including small entities, would
choose to disclose margin decreases in their change-in-terms notices
even if the existing regulation does not require them to so, because
margin decreases are beneficial for consumers, and because in these
situations the creditors or card issuers likely benefit from improved
consumer understanding. Further, this proposed provision would be
effective only beginning effective October 1, 2021. HELOC creditors and
card issuers, including small entities, that would prefer not to
disclose margin decreases could choose to change indices before this
proposed provision becomes effective (if the change in indices are
permitted by the contractual provisions at that time). Therefore, the
Bureau expects that both the benefits and costs of this proposed
provision for HELOC creditors and card issuers, including small
entities, would be small. Therefore, this proposed provision would not
impose significant costs on a significant number of small entities.
The LIBOR-specific exception from the rate reevaluation provisions
applicable to credit card accounts would benefit affected card issuers,
including small entities, by saving them the cost of reevaluating rate
increases that occur as a result of the transition from the LIBOR index
to another index under the LIBOR-specific provisions discussed above or
under the existing regulation that allows card issuers to replace an
index when the index becomes unavailable. This proposed provision would
impose no costs on affected card issuers, including small entities,
because they could still perform rate reevaluations if they choose to
do so until LIBOR is discontinued. Therefore, this proposed provision
would impose no significant burden on small entities.
The Bureau is proposing to revise comment 20(a)-3.ii to Regulation
Z to state that certain SOFR-based indices are comparable to certain
tenors of LIBOR. The proposed commentary would not determine that any
specific indices are not comparable to LIBOR. Therefore, the proposed
provision would not prevent creditors from switching to other indices
as long as those indices still satisfy regulatory requirements.
Therefore, the proposed provision would impose no significant costs on
creditors, including small entities.
Accordingly, the Director hereby certifies that this proposed rule,
if adopted, would not have a significant economic impact on a
substantial number of small entities. Thus, neither an IRFA nor a small
business review panel is required for this proposal. The Bureau
requests comment on the
[[Page 36981]]
analysis above and requests any relevant data.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\117\ Federal
agencies are generally required to seek the Office of Management and
Budget's (OMB's) approval for information collection requirements prior
to implementation. The collections of information related to Regulation
Z have been previously reviewed and approved by OMB and assigned OMB
Control number 3170-0015. Under the PRA, the Bureau may not conduct or
sponsor and, notwithstanding any other provision of law, a person is
not required to respond to an information collection unless the
information collection displays a valid control number assigned by OMB.
---------------------------------------------------------------------------
\117\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The Bureau has determined that this proposed rule would not impose
any new or revised information collection requirements (recordkeeping,
reporting or disclosure requirements) on covered entities or members of
the public that would constitute collections of information requiring
OMB approval under the PRA.
X. Signing Authority
The Director of the Bureau, having reviewed and approved this
document, is delegating the authority to electronically sign this
document to Laura Galban, a Bureau Federal Register Liaison, for
purposes of publication in the Federal Register.
List of Subjects in 12 CFR Part 1026
Advertising, Appraisal, Appraiser, Banking, Banks, Consumer
protection, Credit, Credit unions, Mortgages, National banks, Reporting
and recordkeeping requirements, Savings associations, Truth in lending.
Authority and Issuance
For the reasons set forth above, the Bureau proposes to amend
Regulation Z, 12 CFR part 1026, as set forth below:
PART 1026--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 1026 continues to read as follows:
Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353,
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.
Subpart B--Open-End Credit
0
2. Section 1026.9 is amended by revising paragraphs (c)(1)(ii) and
(c)(2)(v)(A) to read as follows:
Sec. 1026.9 Subsequent disclosure requirements.
* * * * *
(c) * * *
(1) * * *
(ii) Notice not required. For home-equity plans subject to the
requirements of Sec. 1026.40, a creditor is not required to provide
notice under this section when the change involves a reduction of any
component of a finance or other charge (except that on or after October
1, 2021, this provision on when the change involves a reduction of any
component of a finance or other charge does not apply to any change in
the margin when a LIBOR index is replaced, as permitted by Sec.
1026.40(f)(3)(ii)(A) or (B)) or when the change results from an
agreement involving a court proceeding.
* * * * *
(2) * * *
(v) * * *
(A) When the change involves charges for documentary evidence; a
reduction of any component of a finance or other charge (except that on
or after October 1, 2021, this provision on when the change involves a
reduction of any component of a finance or other charge does not apply
to any change in the margin when a LIBOR index is replaced, as
permitted by Sec. 1026.55(b)(7)(i) or (ii)); suspension of future
credit privileges (except as provided in paragraph (c)(2)(vi) of this
section) or termination of an account or plan; when the change results
from an agreement involving a court proceeding; when the change is an
extension of the grace period; or if the change is applicable only to
checks that access a credit card account and the changed terms are
disclosed on or with the checks in accordance with paragraph (b)(3) of
this section;
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
Sec. 1026.36 [Amended]
0
3. Section 1026.36 is amended by removing ``LIBOR'' and adding in its
place ``SOFR'' in paragraphs (a)(4)(iii)(C) and (a)(5)(iii)(B).
0
4. Section 1026.40 is amended by revising paragraph (f)(3)(ii) to read
as follows:
Sec. 1026.40 Requirements for home equity plans.
* * * * *
(f) * * *
(3) * * *
(ii)(A) Change the index and margin used under the plan if the
original index is no longer available, the replacement index has
historical fluctuations substantially similar to that of the original
index, and the replacement index and replacement margin would have
resulted in an annual percentage rate substantially similar to the rate
in effect at the time the original index became unavailable. If the
replacement index is newly established and therefore does not have any
rate history, it may be used if it and the replacement margin will
produce an annual percentage rate substantially similar to the rate in
effect when the original index became unavailable; or
(B) If a variable rate on the plan is calculated using a LIBOR
index, change the LIBOR index and the margin for calculating the
variable rate on or after March 15, 2021, to a replacement index and a
replacement margin, as long as historical fluctuations in the LIBOR
index and replacement index were substantially similar, and as long as
the replacement index value in effect on December 31, 2020, and
replacement margin will produce an annual percentage rate 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. 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 the replacement margin will
produce an annual percentage rate 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. If either the
LIBOR index or the replacement index is not published on December 31,
2020, the creditor must use the next calendar day that both indices are
published as the date on which the annual percentage rate based on the
replacement index must be substantially similar to the rate based on
the LIBOR index.
* * * * *
Subpart G--Special Rules Applicable to Credit Card Accounts and
Open-End Credit Offered to College Students
0
5. Section 1026.55 is amended by adding paragraph (b)(7) to read as
follows:
Sec. 1026.55 Limitations on increasing annual percentage rates, fees,
and charges.
* * * * *
(b) * * *
(7) Index replacement and margin change exception. A card issuer
may
[[Page 36982]]
increase an annual percentage rate when:
(i) The card issuer changes the index and margin used to determine
the annual percentage rate 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 replacement margin will produce a rate substantially similar
to the rate that was in effect at the time the original index became
unavailable. If the replacement index is newly established and
therefore does not have any rate history, it may be used if it and the
replacement margin will produce a rate substantially similar to the
rate in effect when the original index became unavailable; or
(ii) If a variable rate on the plan is calculated using a LIBOR
index, the card issuer changes the LIBOR index and the margin for
calculating the variable rate on or after March 15, 2021, to a
replacement index and a replacement margin, as long as historical
fluctuations in the LIBOR index and replacement index were
substantially similar, and as long as the replacement index value in
effect on December 31, 2020, and replacement margin will produce an
annual percentage rate 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. 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 the replacement margin will produce an annual
percentage rate 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. If either the LIBOR index or the
replacement index is not published on December 31, 2020, the card
issuer must use the next calendar day that both indices are published
as the date on which the annual percentage rate based on the
replacement index must be substantially similar to the rate based on
the LIBOR index.
* * * * *
0
6. Section 1026.59 is amended by adding paragraphs (f)(3) and (h)(3) to
read as follows:
Sec. 1026.59 Reevaluation of rate increases.
* * * * *
(f) * * *
(3) Effective March 15, 2021, in the case where the rate applicable
immediately prior to the increase was a variable rate with a formula
based on a LIBOR index, the card issuer reduces the annual percentage
rate to a rate determined by a replacement formula that is derived from
a replacement index value on December 31, 2020, plus replacement margin
that is equal to the LIBOR index value on December 31, 2020, plus the
margin used to calculate the rate immediately prior to the increase
(previous formula). A card issuer must satisfy the conditions set forth
in Sec. 1026.55(b)(7)(ii) for selecting a replacement index. If either
the LIBOR index or the replacement index is not published on December
31, 2020, the card issuer must use the values of the indices on the
next calendar day that both indices are published as the index values
to use to determine the replacement formula.
* * * * *
(h) * * *
(3) Transition from LIBOR. The requirements of this section do not
apply to increases in an annual percentage rate that occur as a result
of the transition from the use of a LIBOR index as the index in setting
a variable rate to the use of a replacement index in setting a variable
rate if the change from the use of the LIBOR index to a replacement
index occurs in accordance with Sec. 1026.55(b)(7)(i) or (ii).
0
7. Appendix H to part 1026 is amended by revising the entries for H-
4(D)(2) and H-4(D)(4) to read as follows:
Appendix H to Part 1026--Closed-End Model Forms and Clauses
* * * * *
H-4(D)(2) Sample Form for Sec. 1026.20(c)
BILLING CODE 4810-AM-P
[[Page 36983]]
[GRAPHIC] [TIFF OMITTED] TP18JN20.000
* * * * *
H-4(D)(4) Sample Form for Sec. 1026.20(d)
[[Page 36984]]
[GRAPHIC] [TIFF OMITTED] TP18JN20.001
BILLING CODE 4810-AM-C
* * * * *
0
8. In supplement I to part 1026:
0
a. Under Section 1026.9--Subsequent Disclosure Requirements, revise
9(c)(1)(ii) Notice not Required, 9(c)(2)(iv) Disclosure Requirements,
and 9(c)(2)(v) Notice not Required.
0
b. Under Section 1026.20--Disclosure Requirements Regarding Post-
Consummation Events, revise 20(a) Refinancings.
0
c. Under Section 1026.37--Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate), revise 37(j)(1) Index and margin.
0
d. Under Section 1026.40--Requirements for Home-Equity Plans, revise
Paragraph 40(f)(3)(ii) and add Paragraph 40(f)(3)(ii)(A) and Paragraph
40(f)(3)(ii)(B).
0
e. Under Section 1026.55--Limitations on Increasing Annual Percentage
Rates, Fees, and Charges,
[[Page 36985]]
revise 55(b)(2) Variable rate exception and add 55(b)(7) Index
replacement and margin change exception.
0
f. Under Section 1026.59--Reevaluation of Rate Increases, revise 59(d)
Factors and 59(f) Termination of Obligation to Review Factors and add
59(h) Exceptions.
The revisions and additions read as follows:
Supplement I to Part 1026--Official Interpretations
* * * * *
Section 1026.9--Subsequent Disclosure Requirements
* * * * *
9(c)(1)(ii) Notice Not Required
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit.
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges. (But see
Sec. 1026.40(f).)
v. Changes arising merely by operation of law; for example, if
the creditor's security interest in a consumer's car automatically
extends to the proceeds when the consumer sells the car.
2. Skip features. If a credit program allows consumers to skip
or reduce one or more payments during the year, or involves
temporary reductions in finance charges, no notice of the change in
terms is required either prior to the reduction or upon resumption
of the higher rates or payments if these features are explained on
the initial disclosure statement (including an explanation of the
terms upon resumption). For example, a merchant may allow consumers
to skip the December payment to encourage holiday shopping, or a
teachers' credit union may not require payments during summer
vacation. Otherwise, the creditor must give notice prior to resuming
the original schedule or rate, even though no notice is required
prior to the reduction. The change-in-terms notice may be combined
with the notice offering the reduction. For example, the periodic
statement reflecting the reduction or skip feature may also be used
to notify the consumer of the resumption of the original schedule or
rate, either by stating explicitly when the higher payment or
charges resume, or by indicating the duration of the skip option.
Language such as ``You may skip your October payment,'' or ``We will
waive your finance charges for January,'' may serve as the change-
in-terms notice.
3. Replacing LIBOR. The exception in Sec. 1026.9(c)(1)(ii)
under which a creditor is not required to provide a change-in-terms
notice under Sec. 1026.9(c)(1) when the change involves a reduction
of any component of a finance or other charge does not apply on or
after October 1, 2021, to margin reductions when a LIBOR index is
replaced, as permitted by Sec. 1026.40(f)(3)(ii)(A) or
(f)(3)(ii)(B). For change-in-terms notices provided under Sec.
1026.9(c)(1) on or after October 1, 2021 covering changes permitted
by Sec. 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B), a creditor must
provide a change-in-terms notice under Sec. 1026.9(c)(1) disclosing
the replacement index for a LIBOR index and any adjusted margin that
is permitted under Sec. 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B), even
if the margin is reduced. 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 Sec. 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B).
* * * * *
9(c)(2)(iv) Disclosure Requirements
1. Changing margin for calculating a variable rate. If a
creditor is changing a margin used to calculate a variable rate, the
creditor must disclose the amount of the new rate (as calculated
using the new margin) in the table described in Sec.
1026.9(c)(2)(iv), and include a reminder that the rate is a variable
rate. For example, if a creditor is changing the margin for a
variable rate that uses the prime rate as an index, the creditor
must disclose in the table the new rate (as calculated using the new
margin) and indicate that the rate varies with the market based on
the prime rate.
2. Changing index for calculating a variable rate. If a creditor
is changing the index used to calculate a variable rate, the
creditor must disclose the amount of the new rate (as calculated
using the new index) and indicate that the rate varies and how the
rate is determined, as explained in Sec. 1026.6(b)(2)(i)(A). For
example, if a creditor is changing from using a prime index to using
a SOFR index in calculating a variable rate, the creditor would
disclose in the table the new rate (using the new index) and
indicate that the rate varies with the market based on a SOFR index.
3. Changing from a variable rate to a non-variable rate. If a
creditor is changing a rate applicable to a consumer's account from
a variable rate to a non-variable rate, the creditor generally must
provide a notice as otherwise required under Sec. 1026.9(c) even if
the variable rate at the time of the change is higher than the non-
variable rate. However, a creditor is not required to provide a
notice under Sec. 1026.9(c) if the creditor provides the
disclosures required by Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in
connection with changing a variable rate to a lower non-variable
rate. Similarly, a creditor is not required to provide a notice
under Sec. 1026.9(c) when changing a variable rate to a lower non-
variable rate in order to comply with 50 U.S.C. app. 527 or a
similar Federal or state statute or regulation. Finally, a creditor
is not required to provide a notice under Sec. 1026.9(c) when
changing a variable rate to a lower non-variable rate in order to
comply with Sec. 1026.55(b)(4).
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing a rate applicable to a consumer's account from
a non-variable rate to a variable rate, the creditor generally must
provide a notice as otherwise required under Sec. 1026.9(c) even if
the non-variable rate is higher than the variable rate at the time
of the change. However, a creditor is not required to provide a
notice under Sec. 1026.9(c) if the creditor provides the
disclosures required by Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in
connection with changing a non-variable rate to a lower variable
rate. Similarly, a creditor is not required to provide a notice
under Sec. 1026.9(c) when changing a non-variable rate to a lower
variable rate in order to comply with 50 U.S.C. app. 527 or a
similar Federal or state statute or regulation. Finally, a creditor
is not required to provide a notice under Sec. 1026.9(c) when
changing a non-variable rate to a lower variable rate in order to
comply with Sec. 1026.55(b)(4). See comment 55(b)(2)-4 regarding
the limitations in Sec. 1026.55(b)(2) on changing the rate that
applies to a protected balance from a non-variable rate to a
variable rate.
5. Changes in the penalty rate, the triggers for the penalty
rate, or how long the penalty rate applies. If a creditor is
changing the amount of the penalty rate, the creditor must also
redisclose the triggers for the penalty rate and the information
about how long the penalty rate applies even if those terms are not
changing. Likewise, if a creditor is changing the triggers for the
penalty rate, the creditor must redisclose the amount of the penalty
rate and information about how long the penalty rate applies. If a
creditor is changing how long the penalty rate applies, the creditor
must redisclose the amount of the penalty rate and the triggers for
the penalty rate, even if they are not changing.
6. Changes in fees. If a creditor is changing part of how a fee
that is disclosed in a tabular format under Sec. 1026.6(b)(1) and
(2) is determined, the creditor must redisclose all relevant
information related to that fee regardless of whether this other
information is changing. For example, if a creditor currently
charges a cash advance fee of ``Either $5 or 3% of the transaction
amount, whichever is greater (Max: $100),'' and the creditor is only
changing the minimum dollar amount from $5 to $10, the issuer must
redisclose the other information related to how the fee is
determined. For example, the creditor in this example would disclose
the following: ``Either $10 or 3% of the transaction amount,
whichever is greater (Max: $100).''
7. Combining a notice described in Sec. 1026.9(c)(2)(iv) with a
notice described in Sec. 1026.9(g)(3). If a creditor is required to
provide a notice described in Sec. 1026.9(c)(2)(iv) and a notice
described in Sec. 1026.9(g)(3) to a consumer, the creditor may
combine the two notices. This would occur if penalty pricing has
been triggered, and other terms are changing on the consumer's
account at the same time.
8. Content. Sample G-20 contains an example of how to comply
with the requirements in Sec. 1026.9(c)(2)(iv) when a variable rate
is being changed to a non-variable rate on a credit card account.
The sample explains when the new rate will apply to new transactions
and to which balances the current rate will continue to apply.
Sample G-21 contains an example of how to comply with the
requirements in Sec. 1026.9(c)(2)(iv) when the late payment fee on
a credit card account is being increased, and the returned payment
fee is also being
[[Page 36986]]
increased. The sample discloses the consumer's right to reject the
changes in accordance with Sec. 1026.9(h).
9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required
under Sec. 1026.9(c)(2)(iv)(A)(1).
10. Terminology. See Sec. 1026.5(a)(2) for terminology
requirements applicable to disclosures required under Sec.
1026.9(c)(2)(iv)(A)(1).
11. Reasons for increase. i. In general. Section
1026.9(c)(2)(iv)(A)(8) requires card issuers to disclose the
principal reason(s) for increasing an annual percentage rate
applicable to a credit card account under an open-end (not home-
secured) consumer credit plan. The regulation does not mandate a
minimum number of reasons that must be disclosed. However, the
specific reasons disclosed under Sec. 1026.9(c)(2)(iv)(A)(8) are
required to relate to and accurately describe the principal factors
actually considered by the card issuer in increasing the rate. A
card issuer may describe the reasons for the increase in general
terms. For example, the notice of a rate increase triggered by a
decrease of 100 points in a consumer's credit score may state that
the increase is due to ``a decline in your creditworthiness'' or ``a
decline in your credit score.'' Similarly, a notice of a rate
increase triggered by a 10% increase in the card issuer's cost of
funds may be disclosed as ``a change in market conditions.'' In some
circumstances, it may be appropriate for a card issuer to combine
the disclosure of several reasons in one statement. However, Sec.
1026.9(c)(2)(iv)(A)(8) requires that the notice specifically
disclose any violation of the terms of the account on which the rate
is being increased, such as a late payment or a returned payment, if
such violation of the account terms is one of the four principal
reasons for the rate increase.
ii. Example. Assume that a consumer made a late payment on the
credit card account on which the rate increase is being imposed,
made a late payment on a credit card account with another card
issuer, and the consumer's credit score decreased, in part due to
such late payments. The card issuer may disclose the reasons for the
rate increase as a decline in the consumer's credit score and the
consumer's late payment on the account subject to the increase.
Because the late payment on the credit card account with the other
issuer also likely contributed to the decline in the consumer's
credit score, it is not required to be separately disclosed.
However, the late payment on the credit card account on which the
rate increase is being imposed must be specifically disclosed even
if that late payment also contributed to the decline in the
consumer's credit score.
9(c)(2)(v) Notice Not Required
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit except as otherwise
required by Sec. 1026.9(c)(2)(vi).
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges.
v. Changes arising merely by operation of law; for example, if
the creditor's security interest in a consumer's car automatically
extends to the proceeds when the consumer sells the car.
2. Skip features. i. Skipped or reduced payments. If a credit
program allows consumers to skip or reduce one or more payments
during the year, no notice of the change in terms is required either
prior to the reduction in payments or upon resumption of the higher
payments if these features are explained on the account-opening
disclosure statement (including an explanation of the terms upon
resumption). For example, a merchant may allow consumers to skip the
December payment to encourage holiday shopping, or a teacher's
credit union may not require payments during summer vacation.
Otherwise, the creditor must give notice prior to resuming the
original payment schedule, even though no notice is required prior
to the reduction. The change-in-terms notice may be combined with
the notice offering the reduction. For example, the periodic
statement reflecting the skip feature may also be used to notify the
consumer of the resumption of the original payment schedule, either
by stating explicitly when the higher resumes or by indicating the
duration of the skip option. Language such as ``You may skip your
October payment'' may serve as the change-in-terms notice.
ii. Temporary reductions in interest rates or fees. If a credit
program involves temporary reductions in an interest rate or fee, no
notice of the change in terms is required either prior to the
reduction or upon resumption of the original rate or fee if these
features are disclosed in advance in accordance with the
requirements of Sec. 1026.9(c)(2)(v)(B). Otherwise, the creditor
must give notice prior to resuming the original rate or fee, even
though no notice is required prior to the reduction. The notice
provided prior to resuming the original rate or fee must comply with
the timing requirements of Sec. 1026.9(c)(2)(i) and the content and
format requirements of Sec. 1026.9(c)(2)(iv)(A), (B) (if
applicable), (C) (if applicable), and (D). See comment 55(b)-3 for
guidance regarding the application of Sec. 1026.55 in these
circumstances.
3. Changing from a variable rate to a non-variable rate. See
comment 9(c)(2)(iv)-3.
4. Changing from a non-variable rate to a variable rate. See
comment 9(c)(2)(iv)-4.
5. Temporary rate or fee reductions offered by telephone. The
timing requirements of Sec. 1026.9(c)(2)(v)(B) are deemed to have
been met, and written disclosures required by Sec.
1026.9(c)(2)(v)(B) may be provided as soon as reasonably practicable
after the first transaction subject to a rate that will be in effect
for a specified period of time (a temporary rate) or the imposition
of a fee that will be in effect for a specified period of time (a
temporary fee) if:
i. The consumer accepts the offer of the temporary rate or
temporary fee by telephone;
ii. The creditor permits the consumer to reject the temporary
rate or temporary fee offer and have the rate or rates or fee that
previously applied to the consumer's balances reinstated for 45 days
after the creditor mails or delivers the written disclosures
required by Sec. 1026.9(c)(2)(v)(B), except that the creditor need
not permit the consumer to reject a temporary rate or temporary fee
offer if the rate or rates or fee that will apply following
expiration of the temporary rate do not exceed the rate or rates or
fee that applied immediately prior to commencement of the temporary
rate or temporary fee; and
iii. The disclosures required by Sec. 1026.9(c)(2)(v)(B) and
the consumer's right to reject the temporary rate or temporary fee
offer and have the rate or rates or fee that previously applied to
the consumer's account reinstated, if applicable, are disclosed to
the consumer as part of the temporary rate or temporary fee offer.
6. First listing. The disclosures required by Sec.
1026.9(c)(2)(v)(B)(1) are only required to be provided in close
proximity and in equal prominence to the first listing of the
temporary rate or fee in the disclosure provided to the consumer.
For purposes of Sec. 1026.9(c)(2)(v)(B), the first statement of the
temporary rate or fee is the most prominent listing on the front
side of the first page of the disclosure. If the temporary rate or
fee does not appear on the front side of the first page of the
disclosure, then the first listing of the temporary rate or fee is
the most prominent listing of the temporary rate on the subsequent
pages of the disclosure. For advertising requirements for
promotional rates, see Sec. 1026.16(g).
7. Close proximity--point of sale. Creditors providing the
disclosures required by Sec. 1026.9(c)(2)(v)(B) of this section in
person in connection with financing the purchase of goods or
services may, at the creditor's option, disclose the annual
percentage rate or fee that would apply after expiration of the
period on a separate page or document from the temporary rate or fee
and the length of the period, provided that the disclosure of the
annual percentage rate or fee that would apply after the expiration
of the period is equally prominent to, and is provided at the same
time as, the disclosure of the temporary rate or fee and length of
the period.
8. Disclosure of annual percentage rates. If a rate disclosed
pursuant to Sec. 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) is a variable
rate, the creditor must disclose the fact that the rate may vary and
how the rate is determined. For example, a creditor could state
``After October 1, 2009, your APR will be 14.99%. This APR will vary
with the market based on the Prime Rate.''
9. Deferred interest or similar programs. If the applicable
conditions are met, the exception in Sec. 1026.9(c)(2)(v)(B)
applies to deferred interest or similar promotional programs under
which the consumer is not obligated to pay interest that accrues on
a balance if that balance is paid in full prior to the expiration of
a specified period of time. For purposes of this comment and Sec.
1026.9(c)(2)(v)(B), ``deferred interest'' has the same meaning as in
Sec. 1026.16(h)(2) and associated commentary. For such programs, a
creditor must disclose pursuant to Sec. 1026.9(c)(2)(v)(B)(1) the
length of the deferred interest period and the rate that will
[[Page 36987]]
apply to the balance subject to the deferred interest program if
that balance is not paid in full prior to expiration of the deferred
interest period. Examples of language that a creditor may use to
make the required disclosures under Sec. 1026.9(c)(2)(v)(B)(1)
include:
i. ``No interest if paid in full in 6 months. If the balance is
not paid in full in 6 months, interest will be imposed from the date
of purchase at a rate of 15.99%.''
ii. ``No interest if paid in full by December 31, 2010. If the
balance is not paid in full by that date, interest will be imposed
from the transaction date at a rate of 15%.''
10. Relationship between Sec. Sec. 1026.9(c)(2)(v)(B) and
1026.6(b). A disclosure of the information described in Sec.
1026.9(c)(2)(v)(B)(1) provided in the account-opening table in
accordance with Sec. 1026.6(b) complies with the requirements of
Sec. 1026.9(c)(2)(v)(B)(2), if the listing of the introductory rate
in such tabular disclosure also is the first listing as described in
comment 9(c)(2)(v)-6.
11. Disclosure of the terms of a workout or temporary hardship
arrangement. In order for the exception in Sec. 1026.9(c)(2)(v)(D)
to apply, the disclosure provided to the consumer pursuant to Sec.
1026.9(c)(2)(v)(D)(2) must set forth:
i. The annual percentage rate that will apply to balances
subject to the workout or temporary hardship arrangement;
ii. The annual percentage rate that will apply to such balances
if the consumer completes or fails to comply with the terms of, the
workout or temporary hardship arrangement;
iii. Any reduced fee or charge of a type required to be
disclosed under Sec. 1026.6(b)(2)(ii), (b)(2)(iii), (b)(2)(viii),
(b)(2)(ix), (b)(2)(xi), or (b)(2)(xii) that will apply to balances
subject to the workout or temporary hardship arrangement, as well as
the fee or charge that will apply if the consumer completes or fails
to comply with the terms of the workout or temporary hardship
arrangement;
iv. Any reduced minimum periodic payment that will apply to
balances subject to the workout or temporary hardship arrangement,
as well as the minimum periodic payment that will apply if the
consumer completes or fails to comply with the terms of the workout
or temporary hardship arrangement; and
v. If applicable, that the consumer must make timely minimum
payments in order to remain eligible for the workout or temporary
hardship arrangement.
12. Index not under creditor's control. See comment 55(b)(2)-2
for guidance on when an index is deemed to be under a creditor's
control.
13. Temporary rates--relationship to Sec. 1026.59. i. General.
Section 1026.59 requires a card issuer to review rate increases
imposed due to the revocation of a temporary rate. In some
circumstances, Sec. 1026.59 may require an issuer to reinstate a
reduced temporary rate based on that review. If, based on a review
required by Sec. 1026.59, a creditor reinstates a temporary rate
that had been revoked, the card issuer is not required to provide an
additional notice to the consumer when the reinstated temporary rate
expires, if the card issuer provided the disclosures required by
Sec. 1026.9(c)(2)(v)(B) prior to the original commencement of the
temporary rate. See Sec. 1026.55 and the associated commentary for
guidance on the permissibility and applicability of rate increases.
i. Example. A consumer opens a new credit card account under an
open-end (not home-secured) consumer credit plan on January 1, 2011.
The annual percentage rate applicable to purchases is 18%. The card
issuer offers the consumer a 15% rate on purchases made between
January 1, 2012 and January 1, 2014. Prior to January 1, 2012, the
card issuer discloses, in accordance with Sec. 1026.9(c)(2)(v)(B),
that the rate on purchases made during that period will increase to
the standard 18% rate on January 1, 2014. In March 2012, the
consumer makes a payment that is ten days late. The card issuer,
upon providing 45 days' advance notice of the change under Sec.
1026.9(g), increases the rate on new purchases to 18% effective as
of June 1, 2012. On December 1, 2012, the issuer performs a review
of the consumer's account in accordance with Sec. 1026.59. Based on
that review, the card issuer is required to reduce the rate to the
original 15% temporary rate as of January 15, 2013. On January 1,
2014, the card issuer may increase the rate on purchases to 18%, as
previously disclosed prior to January 1, 2012, without providing an
additional notice to the consumer.
14. Replacing LIBOR. The exception in Sec. 1026.9(c)(2)(v)(A)
under which a creditor is not required to provide a change-in-terms
notice under Sec. 1026.9(c)(2) when the change involves a reduction
of any component of a finance or other charge does not apply on or
after October 1, 2021, to margin reductions when a LIBOR index is
replaced as permitted by Sec. 1026.55(b)(7)(i) or (b)(7)(ii). For
change-in-terms notices provided under Sec. 1026.9(c)(2) on or
after October 1, 2021, covering changes permitted by Sec.
1026.55(b)(7)(i) or (b)(7)(ii), a creditor must provide a change-in-
terms notice under Sec. 1026.9(c)(2) disclosing the replacement
index for a LIBOR index and any adjusted margin that is permitted
under Sec. 1026.55(b)(7)(i) or (b)(7)(ii), even if the margin is
reduced. 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
Sec. 1026.55(b)(7)(i) or (b)(7)(ii).
* * * * *
Section 1026.20--Disclosure Requirements Regarding Post-
Consummation Events
20(a) Refinancings
1. Definition. A refinancing is a new transaction requiring a
complete new set of disclosures. Whether a refinancing has occurred
is determined by reference to whether the original obligation has
been satisfied or extinguished and replaced by a new obligation,
based on the parties' contract and applicable law. The refinancing
may involve the consolidation of several existing obligations,
disbursement of new money to the consumer or on the consumer's
behalf, or the rescheduling of payments under an existing
obligation. In any form, the new obligation must completely replace
the prior one.
i. Changes in the terms of an existing obligation, such as the
deferral of individual installments, will not constitute a
refinancing unless accomplished by the cancellation of that
obligation and the substitution of a new obligation.
ii. A substitution of agreements that meets the refinancing
definition will require new disclosures, even if the substitution
does not substantially alter the prior credit terms.
2. Exceptions. A transaction is subject to Sec. 1026.20(a) only
if it meets the general definition of a refinancing. Section
1026.20(a)(1) through (5) lists 5 events that are not treated as
refinancings, even if they are accomplished by cancellation of the
old obligation and substitution of a new one.
3. Variable-rate. i. If a variable-rate feature was properly
disclosed under the regulation, a rate change in accord with those
disclosures is not a refinancing. For example, no new disclosures
are required when the variable-rate feature is invoked on a
renewable balloon-payment mortgage that was previously disclosed as
a variable-rate transaction.
ii. Even if it is not accomplished by the cancellation of the
old obligation and substitution of a new one, a new transaction
subject to new disclosures results if the creditor either:
A. Increases the rate based on a variable-rate feature that was
not previously disclosed; or
B. Adds a variable-rate feature to the obligation. 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. For example, 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 U.S. Dollar LIBOR index to
the spread-adjusted index based on SOFR recommended by the
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, or 1-year U.S. Dollar LIBOR index respectively
because the replacement index is a comparable index to the
corresponding U.S. Dollar LIBOR index.
iii. If either of the events in paragraph 20(a)-3.ii.A or ii.B
occurs in a transaction secured by a principal dwelling with a term
longer than one year, the disclosures required under Sec.
1026.19(b) also must be given at that time.
4. Unearned finance charge. In a transaction involving
precomputed finance charges, the creditor must include in the
finance charge on the refinanced obligation any unearned portion of
the original finance charge that is not rebated to the consumer or
credited against the underlying obligation. For example, in a
transaction with an add-on finance charge, a creditor advances new
money to a consumer in a fashion that extinguishes the original
obligation and replaces it with a new one. The creditor neither
refunds the unearned finance charge on the original obligation to
the consumer
[[Page 36988]]
nor credits it to the remaining balance on the old obligation. Under
these circumstances, the unearned finance charge must be included in
the finance charge on the new obligation and reflected in the annual
percentage rate disclosed on refinancing. Accrued but unpaid finance
charges are included in the amount financed in the new obligation.
5. Coverage. Section 1026.20(a) applies only to refinancings
undertaken by the original creditor or a holder or servicer of the
original obligation. A ``refinancing'' by any other person is a new
transaction under the regulation, not a refinancing under this
section.
Paragraph 20(a)(1)
1. Renewal. This exception applies both to obligations with a
single payment of principal and interest and to obligations with
periodic payments of interest and a final payment of principal. In
determining whether a new obligation replacing an old one is a
renewal of the original terms or a refinancing, the creditor may
consider it a renewal even if:
i. Accrued unpaid interest is added to the principal balance.
ii. Changes are made in the terms of renewal resulting from the
factors listed in Sec. 1026.17(c)(3).
iii. The principal at renewal is reduced by a curtailment of the
obligation.
Paragraph 20(a)(2)
1. Annual percentage rate reduction. A reduction in the annual
percentage rate with a corresponding change in the payment schedule
is not a refinancing. If the annual percentage rate is subsequently
increased (even though it remains below its original level) and the
increase is effected in such a way that the old obligation is
satisfied and replaced, new disclosures must then be made.
2. Corresponding change. A corresponding change in the payment
schedule to implement a lower annual percentage rate would be a
shortening of the maturity, or a reduction in the payment amount or
the number of payments of an obligation. The exception in Sec.
1026.20(a)(2) does not apply if the maturity is lengthened, or if
the payment amount or number of payments is increased beyond that
remaining on the existing transaction.
Paragraph 20(a)(3)
1. Court agreements. This exception includes, for example,
agreements such as reaffirmations of debts discharged in bankruptcy,
settlement agreements, and post-judgment agreements. (See the
commentary to Sec. 1026.2(a)(14) for a discussion of court-approved
agreements that are not considered ``credit.'')
Paragraph 20(a)(4)
1. Workout agreements. A workout agreement is not a refinancing
unless the annual percentage rate is increased or additional credit
is advanced beyond amounts already accrued plus insurance premiums.
Paragraph 20(a)(5)
1. Insurance renewal. The renewal of optional insurance added to
an existing credit transaction is not a refinancing, assuming that
appropriate Truth in Lending disclosures were provided for the
initial purchase of the insurance.
* * * * *
Section 1026.37--Content of Disclosures for Certain Mortgage
Transactions (Loan Estimate)
* * * * *
37(j)(1) Index and Margin
1. Index and margin. The index disclosed pursuant to Sec.
1026.37(j)(1) must be stated such that a consumer reasonably can
identify it. 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. For
example, ``SOFR'' may be disclosed instead of Secured Overnight
Financing Rate. The margin should be disclosed as a percentage. For
example, if the contract determines the interest rate by adding 4.25
percentage points to the index, the margin should be disclosed as
``4.25%.''
* * * * *
Section 1026.40--Requirements for Home-Equity Plans
* * * * *
Paragraph 40(f)(3)(ii)
1. Replacing LIBOR. A creditor may use either the provision in
Sec. 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B) to replace a LIBOR index
used under a plan so long as the applicable conditions are met for
the provision used. Neither provision, however, excuses the creditor
from noncompliance with contractual provisions. The following
examples illustrate when a creditor may use the provisions in Sec.
1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B) to replace the LIBOR index
used under a plan.
i. Assume that LIBOR becomes unavailable after March 15, 2021,
and assume a contract provides that a creditor may not replace an
index unilaterally under a plan unless the original index becomes
unavailable and provides that the replacement index and replacement
margin will result in an annual percentage rate substantially
similar to a rate that is in effect when the original index becomes
unavailable. In this case, the creditor may use Sec.
1026.40(f)(3)(ii)(A) to replace the LIBOR index used under the plan
so long as the conditions of that provision are met. Section
1026.40(f)(3)(ii)(B) provides that a creditor may replace the LIBOR
index if, among other conditions, the replacement index value in
effect on December 31, 2020, and replacement margin will produce an
annual percentage rate 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. In this case,
however, the creditor would be contractually prohibited from
replacing the LIBOR index used under the plan unless the replacement
index and replacement margin also will produce an annual percentage
rate substantially similar to a rate that is in effect when the
LIBOR index becomes unavailable.
ii. Assume that LIBOR becomes unavailable after March 15, 2021,
and assume a contract provides that a creditor may not replace an
index unilaterally under a plan unless the original index becomes
unavailable but does not require that the replacement index and
replacement margin will result in an annual percentage rate
substantially similar to a rate that is in effect when the original
index becomes unavailable. In this case, the creditor would be
contractually prohibited from unilaterally replacing a LIBOR index
used under the plan until it becomes unavailable. At that time, the
creditor has the option of using Sec. 1026.40(f)(3)(ii)(A) or
(f)(3)(ii)(B) to replace the LIBOR index if the conditions of the
applicable provision are met.
iii. Assume that LIBOR becomes unavailable after March 15, 2021,
and assume a contract provides that a creditor may change the terms
of the contract (including the index) as permitted by law. In this
case, if the creditor replaces a LIBOR index under a plan on or
after March 15, 2021, but does not wait until the LIBOR index
becomes unavailable to do so, the creditor may only use Sec.
1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of
that provision are met. In this case, the creditor may not use Sec.
1026.40(f)(3)(ii)(A). If the creditor waits until the LIBOR index
used under the plan becomes unavailable to replace the LIBOR index,
the creditor has the option of using Sec. 1026.40(f)(3)(ii)(A) or
(f)(3)(ii)(B) to replace the LIBOR index if the conditions of the
applicable provision are met.
Paragraph 40(f)(3)(ii)(A)
1. Substitution of index. A creditor may change the index and
margin used under the 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 replacement margin will produce a rate
substantially similar to the rate that was in effect at the time the
original index became unavailable. If the replacement index is newly
established and therefore does not have any rate history, it may be
used if it and the replacement margin will produce a rate
substantially similar to the rate in effect when the original index
became unavailable.
2. Replacing LIBOR. For purposes of replacing a LIBOR index used
under a plan, a replacement index that is not newly established must
have historical fluctuations that are substantially similar to those
of the LIBOR index used under the plan, considering the historical
fluctuations up through when the LIBOR index becomes unavailable or
up through the date indicated in a Bureau determination that the
replacement index and the LIBOR index have historical fluctuations
that are substantially similar, whichever is earlier.
i. The Bureau has determined that effective [applicable date]
the prime rate published in the Wall Street Journal has historical
fluctuations that are substantially similar to those of the 1-month
and 3-month U.S. Dollar LIBOR indices. In order to use this prime
rate as the replacement index for the 1-month or 3-month U.S. Dollar
LIBOR index, the creditor also must comply with the condition
[[Page 36989]]
in Sec. 1026.40(f)(3)(ii)(A) that the prime rate and replacement
margin would have resulted in an annual percentage rate
substantially similar to the rate in effect at the time the LIBOR
index became unavailable. See also comment 40(f)(3)(ii)(A)-3.
ii. The Bureau has determined that effective [applicable date]
the spread-adjusted indices based on SOFR recommended by the
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical
fluctuations that are substantially similar to those of the 1-month,
3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively.
In order to use this SOFR-based spread-adjusted index as the
replacement index for the applicable LIBOR index, the creditor also
must comply with the condition in Sec. 1026.40(f)(3)(ii)(A) that
the SOFR-based spread-adjusted index and replacement margin would
have resulted in an annual percentage rate substantially similar to
the rate in effect at the time the LIBOR index became unavailable.
See also comment 40(f)(3)(ii)(A)-3.
3. Substantially similar rate when LIBOR becomes unavailable.
Under Sec. 1026.40(f)(3)(ii)(A), the replacement index and
replacement margin must produce an annual percentage rate
substantially similar to the rate that was in effect based on the
LIBOR index used under the plan when the LIBOR index became
unavailable. For this comparison of the rates, a creditor must use
the value of the replacement index and the LIBOR index on the day
that LIBOR becomes unavailable. The replacement index and
replacement margin are not required to produce an annual percentage
rate that is substantially similar on the day that the replacement
index and replacement margin become effective on the plan. The
following example illustrates this comment.
i. Assume that the LIBOR index used under a plan becomes
unavailable on December 31, 2021, and on that day the LIBOR index
value is 2%, the margin is 10%, and the annual percentage rate is
12%. Also, assume that a creditor has selected a prime index as the
replacement index, and the value of the prime index is 5% on
December 31, 2021. The creditor would satisfy the requirement to use
a replacement index and replacement margin that will produce an
annual percentage rate substantially similar to the rate that was in
effect when the LIBOR index used under the plan became unavailable
by selecting a 7% replacement margin. (The prime index value of 5%
and the replacement margin of 7% would produce a rate of 12% on
December 31, 2021.) Thus, if the creditor provides a change-in-terms
notice under Sec. 1026.9(c)(1) on January 2, 2022, disclosing the
prime index as the replacement index and a replacement margin of 7%,
where these changes will become effective on January 18, 2022, the
creditor satisfies the requirement to use a replacement index and
replacement margin that will produce an annual percentage rate
substantially similar to the rate that was in effect when the LIBOR
index used under the plan became unavailable. This is true even if
the prime index value changes after December 31, 2021, and the
annual percentage rate calculated using the prime index value and 7%
margin on January 18, 2022, is not substantially similar to the rate
calculated using the LIBOR index value on December 31, 2021.
Paragraph 40(f)(3)(ii)(B)
1. Replacing LIBOR. For purposes of replacing a LIBOR index used
under a plan, a replacement index that is not newly established must
have historical fluctuations that are substantially similar to those
of the LIBOR index used under the plan, considering the historical
fluctuations up through December 31, 2020, or up through the date
indicated in a Bureau determination that the replacement index and
the LIBOR index have historical fluctuations that are substantially
similar, whichever is earlier.
i. The Bureau has determined that effective [applicable date]
the prime rate published in the Wall Street Journal has historical
fluctuations that are substantially similar to those of the 1-month
and 3-month U.S. Dollar LIBOR indices. In order to use this prime
rate as the replacement index for the 1-month or 3-month U.S. Dollar
LIBOR index, the creditor also must comply with the condition in
Sec. 1026.40(f)(3)(ii)(B) that the prime rate index value in effect
on December 31, 2020, and replacement margin will produce an annual
percentage rate 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. If either the
LIBOR index or the prime rate is not published on December 31, 2020,
the creditor must use the next calendar day that both indices are
published as the date on which the annual percentage rate based on
the prime rate must be substantially similar to the rate based on
the LIBOR index. See also comments 40(f)(3)(ii)(B)-2 and -3.
ii. The Bureau has determined that effective [applicable date]
the spread-adjusted indices based on SOFR recommended by the
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical
fluctuations that are substantially similar to those of the 1-month,
3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively.
In order to use this SOFR-based spread-adjusted index as the
replacement index for the applicable LIBOR index, the creditor also
must comply with the condition in Sec. 1026.40(f)(3)(ii)(B) that
the SOFR-based spread-adjusted index value in effect on December 31,
2020, and replacement margin will produce an annual percentage rate
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. If either the LIBOR index or the SOFR-
based spread-adjusted index is not published on December 31, 2020,
the creditor must use the next calendar day that both indices are
published as the date on which the annual percentage rate based on
the SOFR-based spread-adjusted index must be substantially similar
to the rate based on the LIBOR index. See also comments
40(f)(3)(ii)(B)-2 and -3.
2. Using index values 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. Under Sec.
1026.40(f)(3)(ii)(B), if both the replacement index and the LIBOR
index used under the plan are published on December 31, 2020, the
replacement index value in effect on December 31, 2020, and
replacement margin must produce an annual percentage rate
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. The margin that applied to the variable
rate immediately prior to the replacement of the LIBOR index used
under the plan is the margin that applied to the variable rate
immediately prior to when the creditor provides the change-in-terms
notice disclosing the replacement index for the variable rate. The
following example illustrates this comment.
i. Assume a variable rate used under the plan that is based on a
LIBOR index and assume that LIBOR becomes unavailable after March
15, 2021. On December 31, 2020, the LIBOR index value is 2%, the
margin on that day is 10% and the annual percentage rate using that
index value and margin is 12%. Assume on January 1, 2021, a creditor
provides a change-in-terms notice under Sec. 1026.9(c)(1)
disclosing a new margin of 12% for the variable rate pursuant to a
written agreement under Sec. 1026.40(f)(3)(iii), and this change in
the margin becomes effective on January 1, 2021, pursuant to Sec.
1026.9(c)(1). Assume that there are no more changes in the margin
that is used in calculating the variable rate prior to February 27,
2021, the date on which the creditor provides a change-in-term
notice under Sec. 1026.9(c)(1), disclosing the replacement index
and replacement margin for the variable rate that will be effective
on March 15, 2021. In this case, the margin that applied to the
variable rate immediately prior to the replacement of the LIBOR
index used under the plan is 12%. Assume that the creditor has
selected a prime index as the replacement index, and the value of
the prime index is 5% on December 31, 2020. A replacement margin of
9% is permissible under Sec. 1026.40(f)(3)(ii)(B) because that
replacement margin combined with the prime index value of 5% on
December 31, 2020, will produce an annual percentage rate of 14%,
which is substantially similar to the 14% annual percentage rate
calculated using the LIBOR index value in effect on December 31,
2020, (which is 2%) and the margin that applied to the variable rate
immediately prior to the replacement of the LIBOR index used under
the plan (which is 12%).
3. Substantially similar rates using index values on December
31, 2020. Under Sec. 1026.40(f)(3)(ii)(B), if both the replacement
index and the LIBOR index used under the plan are published on
December 31, 2020, the replacement index value in effect on December
31, 2020, and replacement margin must produce an annual percentage
rate substantially similar to the rate calculated using the LIBOR
index value in effect on
[[Page 36990]]
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. The replacement index and replacement margin are not
required to produce an annual percentage rate that is substantially
similar on the day that the replacement index and replacement margin
become effective on the plan. The following example illustrates this
comment.
i. Assume that the LIBOR index used under the plan has a value
of 2% on December 31, 2020, the margin that applied to the variable
rate immediately prior to the replacement of the LIBOR index used
under the plan is 10%, and the annual percentage rate based on that
LIBOR index value and that margin is 12%. Also, assume that the
creditor has selected a prime index as the replacement index, and
the value of the prime index is 5% on December 31, 2020. A creditor
would satisfy the requirement to use a replacement index value in
effect on December 31, 2020, and replacement margin that will
produce an annual percentage rate 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, by
selecting a 7% replacement margin. (The prime index value of 5% and
the replacement margin of 7% would produce a rate of 12%.) Thus, if
the creditor provides a change-in-terms notice under Sec.
1026.9(c)(1) on February 27, 2021, disclosing the prime index as the
replacement index and a replacement margin of 7%, where these
changes will become effective on March 15, 2021, the creditor
satisfies the requirement to use a replacement index value in effect
on December 31, 2020, and replacement margin that will produce an
annual percentage rate substantially similar to the rate calculated
using the LIBOR 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. This is true
even if the prime index value or the LIBOR index value changes after
December 31, 2020, and the annual percentage rate calculated using
the prime index value and 7% margin on March 15, 2021, is not
substantially similar to the rate calculated using the LIBOR index
value on December 31, 2020, or substantially similar to the rate
calculated using the LIBOR index value on March 15, 2021.
* * * * *
Section 1026.55--Limitations on Increasing Annual Percentage Rates,
Fees, and Charges
* * * * *
55(b)(2) Variable Rate Exception
1. Increases due to increase in index. Section 1026.55(b)(2)
provides that an annual percentage rate that varies according to an
index that is not under the card issuer's control and is available
to the general public may be increased due to an increase in the
index. This section does not permit a card issuer to increase the
rate by changing the method used to determine a rate that varies
with an index (such as by increasing the margin), even if that
change will not result in an immediate increase. However, from time
to time, a card issuer may change the day on which index values are
measured to determine changes to the rate.
2. Index not under card issuer's control. A card issuer may
increase a variable annual percentage rate pursuant to Sec.
1026.55(b)(2) only if the increase is based on an index or indices
outside the card issuer's control. For purposes of Sec.
1026.55(b)(2), an index is under the card issuer's control if:
i. The index is the card issuer's own prime rate or cost of
funds. A card issuer is permitted, however, to use a published prime
rate, such as that in the Wall Street Journal, even if the card
issuer's own prime rate is one of several rates used to establish
the published rate.
ii. The variable rate is subject to a fixed minimum rate or
similar requirement that does not permit the variable rate to
decrease consistent with reductions in the index. A card issuer is
permitted, however, to establish a fixed maximum rate that does not
permit the variable rate to increase consistent with increases in an
index. For example, assume that, under the terms of an account, a
variable rate will be adjusted monthly by adding a margin of 5
percentage points to a publicly-available index. When the account is
opened, the index is 10% and therefore the variable rate is 15%. If
the terms of the account provide that the variable rate will not
decrease below 15% even if the index decreases below 10%, the card
issuer cannot increase that rate pursuant to Sec. 1026.55(b)(2).
However, Sec. 1026.55(b)(2) does not prohibit the card issuer from
providing in the terms of the account that the variable rate will
not increase above a certain amount (such as 20%).
iii. The variable rate can be calculated based on any index
value during a period of time (such as the 90 days preceding the
last day of a billing cycle). A card issuer is permitted, however,
to provide in the terms of the account that the variable rate will
be calculated based on the average index value during a specified
period. In the alternative, the card issuer is permitted to provide
in the terms of the account that the variable rate will be
calculated based on the index value on a specific day (such as the
last day of a billing cycle). For example, assume that the terms of
an account provide that a variable rate will be adjusted at the
beginning of each quarter by adding a margin of 7 percentage points
to a publicly-available index. At account opening at the beginning
of the first quarter, the variable rate is 17% (based on an index
value of 10%). During the first quarter, the index varies between
9.8% and 10.5% with an average value of 10.1%. On the last day of
the first quarter, the index value is 10.2%. At the beginning of the
second quarter, Sec. 1026.55(b)(2) does not permit the card issuer
to increase the variable rate to 17.5% based on the first quarter's
maximum index value of 10.5%. However, if the terms of the account
provide that the variable rate will be calculated based on the
average index value during the prior quarter, Sec. 1026.55(b)(2)
permits the card issuer to increase the variable rate to 17.1%
(based on the average index value of 10.1% during the first
quarter). In the alternative, if the terms of the account provide
that the variable rate will be calculated based on the index value
on the last day of the prior quarter, Sec. 1026.55(b)(2) permits
the card issuer to increase the variable rate to 17.2% (based on the
index value of 10.2% on the last day of the first quarter).
3. Publicly available. The index or indices must be available to
the public. A publicly-available index need not be published in a
newspaper, but it must be one the consumer can independently obtain
(by telephone, for example) and use to verify the annual percentage
rate applied to the account.
4. Changing a non-variable rate to a variable rate. Section
1026.55 generally prohibits a card issuer from changing a non-
variable annual percentage rate to a variable annual percentage rate
because such a change can result in an increase. However, a card
issuer may change a non-variable rate to a variable rate to the
extent permitted by one of the exceptions in Sec. 1026.55(b). For
example, Sec. 1026.55(b)(1) permits a card issuer to change a non-
variable rate to a variable rate upon expiration of a specified
period of time. Similarly, following the first year after the
account is opened, Sec. 1026.55(b)(3) permits a card issuer to
change a non-variable rate to a variable rate with respect to new
transactions (after complying with the notice requirements in Sec.
1026.9(b), (c) or (g)).
5. Changing a variable rate to a non-variable rate. Nothing in
Sec. 1026.55 prohibits a card issuer from changing a variable
annual percentage rate to an equal or lower non-variable rate.
Whether the non-variable rate is equal to or lower than the variable
rate is determined at the time the card issuer provides the notice
required by Sec. 1026.9(c). For example, assume that on March 1 a
variable annual percentage rate that is currently 15% applies to a
balance of $2,000 and the card issuer sends a notice pursuant to
Sec. 1026.9(c) informing the consumer that the variable rate will
be converted to a non-variable rate of 14% effective April 15. On
April 15, the card issuer may apply the 14% non-variable rate to the
$2,000 balance and to new transactions even if the variable rate on
March 2 or a later date was less than 14%.
* * * * *
55(b)(7) Index Replacement and Margin Change Exception
1. Replacing LIBOR. A card issuer may use either the provision
in Sec. 1026.55(b)(7)(i) or (b)(7)(ii) to replace a LIBOR index
used under the plan so long as the applicable conditions are met for
the provision used. Neither provision, however, excuses the card
issuer from noncompliance with contractual provisions. The following
examples illustrate when a card issuer may use the provisions in
Sec. 1026.55(b)(7)(i) or (b)(7)(ii) to replace a LIBOR index on the
plan.
i. Assume that LIBOR becomes unavailable after March 15, 2021,
and assume a contract provides that a card issuer may not replace an
index unilaterally under a plan unless the original index becomes
unavailable and provides that the replacement index and replacement
margin will result in an annual percentage rate substantially
similar to a rate that is in effect when the original index
[[Page 36991]]
becomes unavailable. The card issuer may use Sec. 1026.55(b)(7)(i)
to replace the LIBOR index used under the plan so long as the
conditions of that provision are met. Section 1026.55(b)(7)(ii)
provides that a card issuer may replace the LIBOR index if, among
other conditions, the replacement index value in effect on December
31, 2020, and replacement margin will produce an annual percentage
rate 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. In this case, however, the card
issuer would be contractually prohibited from replacing the LIBOR
index used under the plan unless the replacement index and
replacement margin also will produce an annual percentage rate
substantially similar to a rate that is in effect when the LIBOR
index becomes unavailable.
ii. Assume that LIBOR becomes unavailable after March 15, 2021,
and assume a contract provides that a card issuer may not replace an
index unilaterally under a plan unless the original index becomes
unavailable but does not require that the replacement index and
replacement margin will result in an annual percentage rate
substantially similar to a rate that is in effect when the original
index becomes unavailable. In this case, the card issuer would be
contractually prohibited from unilaterally replacing the LIBOR index
used under the plan until it becomes unavailable. At that time, the
card issuer has the option of using Sec. 1026.55(b)(7)(i) or
(b)(7)(ii) to replace the LIBOR index used under the plan if the
conditions of the applicable provision are met.
iii. Assume that LIBOR becomes unavailable after March 15, 2021,
and assume a contract provides that a card issuer may change the
terms of the contract (including the index) as permitted by law. In
this case, if the card issuer replaces the LIBOR index used under
the plan on or after March 15, 2021, but does not wait until the
LIBOR index becomes unavailable to do so, the card issuer may only
use Sec. 1026.55(b)(7)(ii) to replace the LIBOR index if the
conditions of that provision are met. In that case, the card issuer
may not use Sec. 1026.55(b)(7)(i). If the card issuer waits until
the LIBOR index used under the plan becomes unavailable to replace
LIBOR, the card issuer has the option of using Sec.
1026.55(b)(7)(i) or (b)(7)(ii) to replace the LIBOR index if the
conditions of the applicable provisions are met.
Paragraph 55(b)(7)(i)
1. Replacing LIBOR. For purposes of replacing a LIBOR index used
under a plan, a replacement index that is not newly established must
have historical fluctuations that are substantially similar to those
of the LIBOR index used under the plan, considering the historical
fluctuations up through when the LIBOR index becomes unavailable or
up through the date indicated in a Bureau determination that the
replacement index and the LIBOR index have historical fluctuations
that are substantially similar, whichever is earlier.
i. The Bureau has determined that effective [applicable date]
the prime rate published in the Wall Street Journal has historical
fluctuations that are substantially similar to those of the 1-month
and 3-month U.S. Dollar LIBOR indices. In order to use this prime
rate as the replacement index for the 1-month or 3-month U.S. Dollar
LIBOR index, the card issuer also must comply with the condition in
Sec. 1026.55(b)(7)(i) that the prime rate and replacement margin
will produce a rate substantially similar to the rate that was in
effect at the time the LIBOR index became unavailable. See also
comment 55(b)(7)(i)-2.
ii. The Bureau has determined that effective [applicable date]
the spread-adjusted indices based on SOFR recommended by the
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical
fluctuations that are substantially similar to those of the 1-month,
3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively.
In order to use this SOFR-based spread-adjusted index as the
replacement index for the applicable LIBOR index, the card issuer
also must comply with the condition in Sec. 1026.55(b)(7)(i) that
the SOFR-based spread-adjusted index replacement margin will produce
a rate substantially similar to the rate that was in effect at the
time the LIBOR index became unavailable. See also comment
55(b)(7)(i)-2.
2. Substantially similar rate when LIBOR becomes unavailable.
Under Sec. 1026.55(b)(7)(i), the replacement index and replacement
margin must produce an annual percentage rate substantially similar
to the rate that was in effect at the time the LIBOR index used
under the plan became unavailable. For this comparison of the rates,
a card issuer must use the value of the replacement index and the
LIBOR index on the day that LIBOR becomes unavailable. The
replacement index and replacement margin are not required to produce
an annual percentage rate that is substantially similar on the day
that the replacement index and replacement margin become effective
on the plan. The following example illustrates this comment.
i. Assume that the LIBOR index used under the plan becomes
unavailable on December 31, 2021, and on that day the LIBOR value is
2%, the margin is 10%, and the annual percentage rate is 12%. Also,
assume that a card issuer has selected a prime index as the
replacement index, and the value of the prime index is 5% on
December 31, 2021. The card issuer would satisfy the requirement to
use a replacement index and replacement margin that will produce an
annual percentage rate substantially similar to the rate that was in
effect when the LIBOR index used under the plan became unavailable
by selecting a 7% replacement margin. (The prime index value of 5%
and the replacement margin of 7% would produce a rate of 12% on
December 31, 2021.) Thus, if the card issuer provides a change-in-
terms notice under Sec. 1026.9(c)(2) on January 2, 2022, disclosing
the prime index as the replacement index and a replacement margin of
7%, where these changes will become effective on February 17, 2022,
the card issuer satisfies the requirement to use a replacement index
and replacement margin that will produce an annual percentage rate
substantially similar to the rate that was in effect when the LIBOR
index used under the plan became unavailable. This is true even if
the prime index value changes after December 31, 2021, and the
annual percentage rate calculated using the prime index value and 7%
margin on February 17, 2022, is not substantially similar to the
rate calculated using the LIBOR index value on December 31, 2021.
Paragraph 55(b)(7)(ii)
1. Replacing LIBOR. For purposes of replacing a LIBOR index used
under a plan, a replacement index that is not newly established must
have historical fluctuations that are substantially similar to those
of the LIBOR index used under the plan, considering the historical
fluctuations up through December 31, 2020, or up through the date
indicated in a Bureau determination that the replacement index and
the LIBOR index have historical fluctuations that are substantially
similar, whichever is earlier.
i. The Bureau has determined that effective [applicable date]
the prime rate published in the Wall Street Journal has historical
fluctuations that are substantially similar to those of the 1-month
and 3-month U.S. Dollar LIBOR indices. In order to use this prime
rate as the replacement index for the 1-month or 3-month U.S. Dollar
LIBOR index, the card issuer also must comply with the condition in
Sec. 1026.55(b)(7)(ii) that the prime rate index value in effect on
December 31, 2020, and replacement margin will produce an annual
percentage rate 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. If either the
LIBOR index or the prime rate is not published on December 31, 2020,
the card issuer must use the next calendar day that both indices are
published as the date on which the annual percentage rate based on
the prime rate must be substantially similar to the rate based on
the LIBOR index. See also comments 55(b)(7)(ii)-2 and -3.
ii. The Bureau has determined that effective [applicable date]
the spread-adjusted indices based on SOFR recommended by the
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical
fluctuations that are substantially similar to those of the 1-month,
3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively.
In order to use this SOFR-based spread-adjusted index as the
replacement index for the applicable LIBOR index, the card issuer
also must comply with the condition in Sec. 1026.55(b)(7)(ii) that
the SOFR-based spread-adjusted index value in effect on December 31,
2020, and replacement margin will produce an annual percentage rate
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. If either the LIBOR index or the SOFR-
based spread-adjusted index is not published on December 31, 2020,
the card
[[Page 36992]]
issuer must use the next calendar day that both indices are
published as the date on which the annual percentage rate based on
the SOFR-based spread-adjusted index must be substantially similar
to the rate based on the LIBOR index. See also comments
55(b)(7)(ii)-2 and -3.
2. Using index values 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. Under Sec. 1026.55(b)(7)(ii),
if both the replacement index and the LIBOR index used under the
plan are published on December 31, 2020, the replacement index value
in effect on December 31, 2020, and replacement margin must produce
an annual percentage rate 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. The
margin that applied to the variable rate immediately prior to the
replacement of the LIBOR index used under the plan is the margin
that applied to the variable rate immediately prior to when the card
issuer provides the change-in-terms notice disclosing the
replacement index for the variable rate. The following examples
illustrate how to determine the margin that applied to the variable
rate immediately prior to the replacement of the LIBOR index used
under the plan.
i. Assume a variable rate used under the plan that is based on a
LIBOR index, and assume that LIBOR becomes unavailable after March
15, 2021. On December 31, 2020, the LIBOR index value is 2%, the
margin on that day is 10% and the annual percentage rate using that
index value and margin is 12%. Assume that on November 16, 2020,
pursuant to Sec. 1026.55(b)(3), a card issuer provides a change-in-
terms notice under Sec. 1026.9(c)(2) disclosing a new margin of 12%
for the variable rate that will apply to new transactions after
November 30, 2020, and this change in the margin becomes effective
on January 1, 2021. The margin for the variable rate applicable to
the transactions that occurred on or prior to November 30, 2020,
remains at 10%. Assume that there are no more changes in the margin
used on the variable rate that applied to transactions that occurred
after November 30, 2020, or to the margin used on the variable rate
that applied to transactions that occurred on or prior to November
30, 2020, prior to when the card issuer provides a change-in-terms
notice on January 28, 2021, disclosing the replacement index and
replacement margins for both variable rates that will be effective
on March 15, 2021. In this case, the margin that applied to the
variable rate immediately prior to the replacement of the LIBOR
index used under the plan for transactions that occurred on or prior
to November 30, 2020, is 10%. The margin that applied to the
variable rate immediately prior to the replacement of the LIBOR
index used under the plan for transactions that occurred after
November 30, 2020, is 12%. Assume that the card issuer has selected
a prime index as the replacement index, and the value of the prime
index is 5% on December 31, 2020. A replacement margin of 7% is
permissible under Sec. 1026.55(b)(7)(ii) for transactions that
occurred on or prior to November 30, 2020, because that replacement
margin combined with the prime index value of 5% on December 31,
2020, will produce an annual percentage rate of 12%, which is
substantially similar to the 12% annual percentage rate calculated
using the LIBOR index value in effect on December 31, 2020, (which
is 2%) and the margin that applied to the variable rate immediately
prior to the replacement of the LIBOR index used under the plan for
that balance (which is 10%). A replacement margin of 9% is
permissible under Sec. 1026.55(b)(7)(ii) for transactions that
occurred after November 30, 2020, because that replacement margin
combined with the prime index value of 5% on December 31, 2020, will
produce an annual percentage rate of 14%, which is substantially
similar to the 14% annual percentage rate calculated using the LIBOR
index value in effect on December 31, 2020, (which is 2%) and the
margin that applied to the variable rate immediately prior to the
replacement of the LIBOR index used under the plan for transactions
that occurred after November 30, 2020, (which is 12%).
ii. Assume a variable rate used under the plan that is based on
a LIBOR index, and assume that LIBOR becomes unavailable after March
15, 2021. On December 31, 2020, the LIBOR index value is 2%, the
margin on that day is 10% and the annual percentage rate using that
index value and margin is 12%. Assume that on November 16, 2020,
pursuant to Sec. 1026.55(b)(4), a card issuer provides a penalty
rate notice under Sec. 1026.9(g) increasing the margin for the
variable rate to 20% that will apply to both outstanding balances
and new transactions effective January 1, 2021, because the consumer
was more than 60 days late in making a minimum payment. Assume that
there are no more changes in the margin used on the variable rate
for either the outstanding balance or new transactions prior to
January 28, 2021, the date on which the card issuer provides a
change-in-terms notice under Sec. 1026.9(c)(2) disclosing the
replacement index and replacement margin for the variable rate that
will be effective on March 15, 2021. The margin that applied to the
variable rate immediately prior to the replacement of the LIBOR
index used under the plan for the outstanding balance and new
transactions is 12%. Assume that the card issuer has selected a
prime index as the replacement index, and the value of the prime
index is 5% on December 31, 2020. A replacement margin of 17% is
permissible under Sec. 1026.55(b)(7)(ii) for the outstanding
balance and new transactions because that replacement margin
combined with the prime index value of 5% on December 31, 2020, will
produce an annual percentage rate of 22%, which is substantially
similar to the 22% annual percentage rate calculated using the LIBOR
index value in effect on December 31, 2020, (which is 2%) and the
margin that applied to the variable rate immediately prior to the
replacement of the LIBOR index used under the plan for the
outstanding balance and new transactions (which is 20%).
3. Substantially similar rate using index values on December 31,
2020. Under Sec. 1026.55(b)(7)(ii), if both the replacement index
and the LIBOR index used under the plan are published on December
31, 2020, the replacement index value in effect on December 31,
2020, and replacement margin must produce an annual percentage rate
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. A card issuer is not required to produce
an annual percentage rate that is substantially similar on the day
that the replacement index and replacement margin become effective
on the plan. The following example illustrates this comment.
i. Assume that the LIBOR index used under the plan has a value
of 2% on December 31, 2020, the margin that applied to the variable
rate immediately prior to the replacement of the LIBOR index used
under the plan is 10%, and the annual percentage rate based on that
LIBOR index value and that margin is 12%. Also, assume that the card
issuer has selected a prime index as the replacement index, and the
value of the prime index is 5% on December 31, 2020. A card issuer
would satisfy the requirement to use a replacement index value in
effect on December 31, 2020, and replacement margin that will
produce an annual percentage rate 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, by
selecting a 7% replacement margin. (The prime index value of 5% and
the replacement margin of 7% would produce a rate of 12%.) Thus, if
the card issuer provides a change-in-terms notice under Sec.
1026.9(c)(2) on January 28, 2021, disclosing the prime index as the
replacement index and a replacement margin of 7%, where these
changes will become effective on March 15, 2021, the card issuer
satisfies the requirement to use a replacement index value in effect
on December 31, 2020, and replacement margin that will produce an
annual percentage rate substantially similar to the rate calculated
using the LIBOR 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. This is true
even if the prime index value or the LIBOR value change after
December 31, 2020, and the annual percentage rate calculated using
the prime index value and 7% margin on March 15, 2021, is not
substantially similar to the rate calculated using the LIBOR index
value on December 31, 2020, or substantially similar to the rate
calculated using the LIBOR index value on March 15, 2021.
* * * * *
Section 1026.59--Reevaluation of Rate Increases
* * * * *
59(d) Factors
1. Change in factors. A creditor that complies with Sec.
1026.59(a) by reviewing the factors it currently considers in
determining
[[Page 36993]]
the annual percentage rates applicable to similar new credit card
accounts may change those factors from time to time. When a creditor
changes the factors it considers in determining the annual
percentage rates applicable to similar new credit card accounts from
time to time, it may comply with Sec. 1026.59(a) by reviewing the
set of factors it considered immediately prior to the change in
factors for a brief transition period, or may consider the new
factors. For example, a creditor changes the factors it uses to
determine the rates applicable to similar new credit card accounts
on January 1, 2012. The creditor reviews the rates applicable to its
existing accounts that have been subject to a rate increase pursuant
to Sec. 1026.59(a) on January 25, 2012. The creditor complies with
Sec. 1026.59(a) by reviewing, at its option, either the factors
that it considered on December 31, 2011 when determining the rates
applicable to similar new credit card accounts or the factors that
it considers as of January 25, 2012. For purposes of compliance with
Sec. 1026.59(d), a transition period of 60 days from the change of
factors constitutes a brief transition period.
2. Comparison of existing account to factors used for similar
new accounts. Under Sec. 1026.59(a), if a card issuer evaluates an
existing account using the same factors that it considers in
determining the rates applicable to similar new accounts, the review
of factors need not result in existing accounts being subject to
exactly the same rates and rate structure as a card issuer imposes
on similar new accounts. For example, a card issuer may offer
variable rates on similar new accounts that are computed by adding a
margin that depends on various factors to the value of a SOFR index.
The account that the card issuer is required to review pursuant to
Sec. 1026.59(a) may have variable rates that were determined by
adding a different margin, depending on different factors, to a
published prime index. In performing the review required by Sec.
1026.59(a), the card issuer may review the factors it uses to
determine the rates applicable to similar new accounts. If a rate
reduction is required, however, the card issuer need not base the
variable rate for the existing account on the SOFR index but may
continue to use the published prime index. Section 1026.59(a)
requires, however, that the rate on the existing account after the
reduction, as determined by adding the published prime index and
margin, be comparable to the rate, as determined by adding the
margin and the SOFR index, charged on a new account for which the
factors are comparable.
3. Similar new credit card accounts. A card issuer complying
with Sec. 1026.59(d)(1)(ii) is required to consider the factors
that the card issuer currently considers when determining the annual
percentage rates applicable to similar new credit card accounts
under an open-end (not home-secured) consumer credit plan. For
example, a card issuer may review different factors in determining
the annual percentage rate that applies to credit card plans for
which the consumer pays an annual fee and receives rewards points
than it reviews in determining the rates for credit card plans with
no annual fee and no rewards points. Similarly, a card issuer may
review different factors in determining the annual percentage rate
that applies to private label credit cards than it reviews in
determining the rates applicable to credit cards that can be used at
a wider variety of merchants. In addition, a card issuer may review
different factors in determining the annual percentage rate that
applies to private label credit cards usable only at Merchant A than
it may review for private label credit cards usable only at Merchant
B. However, Sec. 1026.59(d)(1)(ii) requires a card issuer to review
the factors it considers when determining the rates for new credit
card accounts with similar features that are offered for similar
purposes.
4. No similar new credit card accounts. In some circumstances, a
card issuer that complies with Sec. 1026.59(a) by reviewing the
factors that it currently considers in determining the annual
percentage rates applicable to similar new accounts may not be able
to identify a class of new accounts that are similar to the existing
accounts on which a rate increase has been imposed. For example,
consumers may have existing credit card accounts under an open-end
(not home-secured) consumer credit plan but the card issuer may no
longer offer a product to new consumers with similar
characteristics, such as the availability of rewards, size of credit
line, or other features. Similarly, some consumers' accounts may
have been closed and therefore cannot be used for new transactions,
while all new accounts can be used for new transactions. In those
circumstances, Sec. 1026.59 requires that the card issuer
nonetheless perform a review of the rate increase on the existing
customers' accounts. A card issuer does not comply with Sec.
1026.59 by maintaining an increased rate without performing such an
evaluation. In such circumstances, Sec. 1026.59(d)(1)(ii) requires
that the card issuer compare the existing accounts to the most
closely comparable new accounts that it offers.
5. Consideration of consumer's conduct on existing account. A
card issuer that complies with Sec. 1026.59(a) by reviewing the
factors that it currently considers in determining the annual
percentage rates applicable to similar new accounts may consider the
consumer's payment or other account behavior on the existing account
only to the same extent and in the same manner that the issuer
considers such information when one of its current cardholders
applies for a new account with the card issuer. For example, a card
issuer might obtain consumer reports for all of its applicants. The
consumer reports contain certain information regarding the
applicant's past performance on existing credit card accounts.
However, the card issuer may have additional information about an
existing cardholder's payment history or account usage that does not
appear in the consumer report and that, accordingly, it would not
generally have for all new applicants. For example, a consumer may
have made a payment that is five days late on his or her account
with the card issuer, but this information does not appear on the
consumer report. The card issuer may consider this additional
information in performing its review under Sec. 1026.59(a), but
only to the extent and in the manner that it considers such
information if a current cardholder applies for a new account with
the issuer.
6. Multiple rate increases between January 1, 2009 and February
21, 2010. i. General. Section 1026.59(d)(2) applies if an issuer
increased the rate applicable to a credit card account under an
open-end (not home- secured) consumer credit plan between January 1,
2009 and February 21, 2010, and the increase was not based solely
upon factors specific to the consumer. In some cases, a credit card
account may have been subject to multiple rate increases during the
period from January 1, 2009 to February 21, 2010. Some such rate
increases may have been based solely upon factors specific to the
consumer, while others may have been based on factors not specific
to the consumer, such as the issuer's cost of funds or market
conditions. In such circumstances, when conducting the first two
reviews required under Sec. 1026.59, the card issuer may separately
review: (i) Rate increases imposed based on factors not specific to
the consumer, using the factors described in Sec. 1026.59(d)(1)(ii)
(as required by Sec. 1026.59(d)(2)); and (ii) rate increases
imposed based on consumer-specific factors, using the factors
described in Sec. 1026.59(d)(1)(i). If the review of factors
described in Sec. 1026.59(d)(1)(i) indicates that it is appropriate
to continue to apply a penalty or other increased rate to the
account as a result of the consumer's payment history or other
factors specific to the consumer, Sec. 1026.59 permits the card
issuer to continue to impose the penalty or other increased rate,
even if the review of the factors described in Sec.
1026.59(d)(1)(ii) would otherwise require a rate decrease.
i. Example. Assume a credit card account was subject to a rate
of 15% on all transactions as of January 1, 2009. On May 1, 2009,
the issuer increased the rate on existing balances and new
transactions to 18%, based upon market conditions or other factors
not specific to the consumer or the consumer's account.
Subsequently, on September 1, 2009, based on a payment that was
received five days after the due date, the issuer increased the
applicable rate on existing balances and new transactions from 18%
to a penalty rate of 25%. When conducting the first review required
under Sec. 1026.59, the card issuer reviews the rate increase from
15% to 18% using the factors described in Sec. 1026.59(d)(1)(ii)
(as required by Sec. 1026.59(d)(2)), and separately but
concurrently reviews the rate increase from 18% to 25% using the
factors described in paragraph Sec. 1026.59(d)(1)(i). The review of
the rate increase from 15% to 18% based upon the factors described
in Sec. 1026.59(d)(1)(ii) indicates that a similarly situated new
consumer would receive a rate of 17%. The review of the rate
increase from 18% to 25% based upon the factors described in Sec.
1026.59(d)(1)(i) indicates that it is appropriate to continue to
apply the 25% penalty rate based upon the consumer's late payment.
Section 1026.59 permits the rate on the account to remain at 25%.
* * * * *
[[Page 36994]]
59(f) Termination of Obligation To Review Factors
1. Revocation of temporary rates. i. In general. If an annual
percentage rate is increased due to revocation of a temporary rate,
Sec. 1026.59(a) requires that the card issuer periodically review
the increased rate. In contrast, if the rate increase results from
the expiration of a temporary rate previously disclosed in
accordance with Sec. 1026.9(c)(2)(v)(B), the review requirements in
Sec. 1026.59(a) do not apply. If a temporary rate is revoked such
that the requirements of Sec. 1026.59(a) apply, Sec. 1026.59(f)
permits an issuer to terminate the review of the rate increase if
and when the applicable rate is the same as the rate that would have
applied if the increase had not occurred.
ii. Examples. Assume that on January 1, 2011, a consumer opens a
new credit card account under an open-end (not home-secured)
consumer credit plan. The annual percentage rate applicable to
purchases is 15%. The card issuer offers the consumer a 10% rate on
purchases made between February 1, 2012 and August 1, 2013 and
discloses pursuant to Sec. 1026.9(c)(2)(v)(B) that on August 1,
2013 the rate on purchases will revert to the original 15% rate. The
consumer makes a payment that is five days late in July 2012.
A. Upon providing 45 days' advance notice and to the extent
permitted under Sec. 1026.55, the card issuer increases the rate
applicable to new purchases to 15%, effective on September 1, 2012.
The card issuer must review that rate increase under Sec.
1026.59(a) at least once each six months during the period from
September 1, 2012 to August 1, 2013, unless and until the card
issuer reduces the rate to 10%. The card issuer performs reviews of
the rate increase on January 1, 2013 and July 1, 2013. Based on
those reviews, the rate applicable to purchases remains at 15%.
Beginning on August 1, 2013, the card issuer is not required to
continue periodically reviewing the rate increase, because if the
temporary rate had expired in accordance with its previously
disclosed terms, the 15% rate would have applied to purchase
balances as of August 1, 2013 even if the rate increase had not
occurred on September 1, 2012.
B. Same facts as above except that the review conducted on July
1, 2013 indicates that a reduction to the original temporary rate of
10% is appropriate. Section 1026.59(a)(2)(i) requires that the rate
be reduced no later than 45 days after completion of the review, or
no later than August 15, 2013. Because the temporary rate would have
expired prior to the date on which the rate decrease is required to
take effect, the card issuer may, at its option, reduce the rate to
10% for any portion of the period from July 1, 2013, to August 1,
2013, or may continue to impose the 15% rate for that entire period.
The card issuer is not required to conduct further reviews of the
15% rate on purchases.
C. Same facts as above except that on September 1, 2012 the card
issuer increases the rate applicable to new purchases to the penalty
rate on the consumer's account, which is 25%. The card issuer
conducts reviews of the increased rate in accordance with Sec.
1026.59 on January 1, 2013 and July 1, 2013. Based on those reviews,
the rate applicable to purchases remains at 25%. The card issuer's
obligation to review the rate increase continues to apply after
August 1, 2013, because the 25% penalty rate exceeds the 15% rate
that would have applied if the temporary rate expired in accordance
with its previously disclosed terms. The card issuer's obligation to
review the rate terminates if and when the annual percentage rate
applicable to purchases is reduced to the 15% rate.
2. Example--relationship to Sec. 1026.59(a). Assume that on
January 1, 2011, a consumer opens a new credit card account under an
open-end (not home-secured) consumer credit plan. The annual
percentage rate applicable to purchases is 15%. Upon providing 45
days' advance notice and to the extent permitted under Sec.
1026.55, the card issuer increases the rate applicable to new
purchases to 18%, effective on September 1, 2012. The card issuer
conducts reviews of the increased rate in accordance with Sec.
1026.59 on January 1, 2013 and July 1, 2013, based on the factors
described in Sec. 1026.59(d)(1)(ii). Based on the January 1, 2013
review, the rate applicable to purchases remains at 18%. In the
review conducted on July 1, 2013, the card issuer determines that,
based on the relevant factors, the rate it would offer on a
comparable new account would be 14%. Consistent with Sec.
1026.59(f), Sec. 1026.59(a) requires that the card issuer reduce
the rate on the existing account to the 15% rate that was in effect
prior to the September 1, 2012 rate increase.
3. Transition from LIBOR. i. General. Effective March 15, 2021,
in the case where the rate applicable immediately prior to the
increase was a variable rate with a formula based on a LIBOR index,
a card issuer may terminate the obligation to review if the card
issuer reduces the annual percentage rate to a rate determined by a
replacement formula that is derived from a replacement index value
on December 31, 2020, plus replacement margin that is equal to the
annual percentage rate of the LIBOR index value on December 31,
2020, plus the margin used to calculate the rate immediately prior
to the increase (previous formula).
ii. Examples. A. Assume that on March 15, 2021, the previous
formula is a LIBOR index plus a margin of 10% equal to a 12% annual
percentage rate. In this case, the LIBOR index value is 2%. The card
issuer selects a prime index as the replacement index. The
replacement formula used to derive the rate at which the card issuer
may terminate its obligation to review factors must be set at a
replacement index plus replacement margin that equals 12%. If the
prime index is 4% on December 31, 2020, the replacement margin must
be 8% in the replacement formula. The replacement formula for
purposes of determining when the card issuer can terminate the
obligation to review factors is the prime index plus 8%.
B. Assume that on March 15, 2021, the account was not subject to
Sec. 1026.59 and the annual percentage rate was a LIBOR index plus
a margin of 10% equal to 12%. On April 1, 2021, the card issuer
raises the annual percentage rate to a LIBOR index plus a margin of
12% equal to 14%. On May 1, 2021, the card issuer transitions the
account from a LIBOR index in accordance with Sec. 1026.55(b)(7)(i)
or (b)(7)(ii). The card issuer selects a prime index as the
replacement index with a value on December 31, 2020, of 4%. The
replacement formula used to derive the rate at which the card issuer
may terminate its obligation to review factors must be set at the
value of a replacement index on December 31, 2020, plus replacement
margin that equals 12%. In this example, the replacement formula is
the prime index plus 8%.
4. Selecting a replacement index. In selecting a replacement
index for purposes of Sec. 1026.59(f)(3), the card issuer must meet
the conditions for selecting a replacement index that are described
in Sec. 1026.55(b)(7)(ii) and comment 55(b)(7)(ii)-1. For example,
a card issuer may select a replacement index that is not newly
established for purposes of Sec. 1026.59(f)(3), so long as the
replacement index has historical fluctuations that are substantially
similar to those of the LIBOR index used in the previous formula,
considering the historical fluctuations up through December 31,
2020, or up through the date indicated in a Bureau determination
that the replacement index and the LIBOR index have historical
fluctuations that are substantially similar, whichever is earlier.
The Bureau has determined that effective [applicable date] the prime
rate published in the Wall Street Journal has historical
fluctuations that are substantially similar to those of the 1-month
and 3-month U.S. Dollar LIBOR indices. The Bureau also has
determined that effective [applicable date] the spread-adjusted
indices based on SOFR recommended by the Alternative Reference Rates
Committee to replace the 1-month, 3-month, 6-month, and 1-year U.S.
Dollar LIBOR indices have historical fluctuations that are
substantially similar to those of the 1-month, 3-month, 6-month, and
1-year U.S. Dollar LIBOR indices respectively. See comment
55(b)(7)(ii)-1. Also, for purposes of Sec. 1026.59(f)(3), a card
issuer may select a replacement index that is newly established as
described in Sec. 1026.55(b)(7)(ii).
* * * * *
59(h) Exceptions
1. Transition from LIBOR. The exception to the requirements of
this section does not apply to rate increases already subject to
Sec. 1026.59 prior to the transition from the use of a LIBOR index
as the index in setting a variable rate to the use of a different
index in setting a variable rate where the change from the use of a
LIBOR index to a different index occurred in accordance with Sec.
1026.55(b)(7)(i) or (b)(7)(ii).
Dated: June 2, 2020.
Laura Galban,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-12239 Filed 6-17-20; 8:45 am]
BILLING CODE 4810-AM-P
