Consumer Compliance Outlook: First Issue 2021

Compliance Alert: Agencies Issue Statements on LIBOR Transition

The London Interbank Offered Rate (LIBOR) is a reference rate many institutions use in their financial instruments, including variable-rate consumer mortgages, credit cards, home equity lines of credit (HELOCs), reverse mortgages, and student loans. A typical consumer loan instrument has a variable rate tied to LIBOR plus a margin. LIBOR’s administrators are phasing it out beginning at the end of 2021, and regulators have issued guidance to address this. This Compliance Alert discusses recent developments in LIBOR’s phaseout from a consumer compliance perspective.

In response to the phaseout, the Federal Financial Institutions Examination Council issued the Joint Statement on Managing the LIBOR Transition (statement), which highlights the financial, legal, operational, and consumer protection risks resulting from LIBOR’s sunset. With respect to consumer compliance implications of the LIBOR transition, the statement notes:

Retail loans, such as adjustable-rate home mortgages, home equity lines of credit, student loans, credit cards, and other personal loans may reference LIBOR. If LIBOR is no longer available, a replacement reference rate may be necessary. Any alternative rate not specified in fallback language may impact consumers, increase reputation risk, and result in legal exposure to institutions and the financial industry. Institutions should understand the legal, operational, and other risks they face associated with various consumer financial products as a result of the LIBOR transition. Institutions should plan appropriate actions to address or mitigate these risks. Transition plans should identify affected consumer loan contracts, highlight necessary risk mitigation efforts, and address development of clear and timely consumer disclosures regarding changes in terms. Disclosure of these altered terms should, and in some cases are required by law to, be communicated to borrowers in advance of a reference rate change to help them understand how a new reference rate affects their contractual principal and interest payments, APR, and other terms.

The statement also discusses the implications for institutions using third-party vendors:

The LIBOR transition could also affect critical activities performed by third-party service providers. Institutions should evaluate their reliance on third-party service providers that provide valuation/pricing services that reference or use LIBOR and associated discount curves in the services they deliver. Institutions should determine whether those third-party service providers will be able to accommodate alternative reference rates after LIBOR’s discontinuation. Third-party service providers that provide modeling, document preparation, accounting or other services should also be considered. When relying on third-party service providers for the processing of loan, investment, funding, or derivative transactions, institutions should evaluate the preparedness and transition planning of those entities for the LIBOR transition to mitigate potential risk.

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency also addressed LIBOR’s phaseout in their Statement on LIBOR Transition, which was issued on November 30, 2020. The agencies “encourage banks to transition away from U.S. dollar (USD) LIBOR as soon as practicable” and to not enter into new contracts using LIBOR as a reference rate after December 31, 2021. The agencies further suggested that “[n]ew contracts entered into before December 31, 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.”

The Consumer Financial Protection Bureau (Bureau) has also addressed the phaseout in a June 18, 2020, rulemaking proposal under Regulation Z titled Facilitating the LIBOR Transition, which permits creditors for 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 the effect of the phaseout on Regulation Z’s rate reevaluation provisions for credit card accounts as well as the regulation’s change-in-terms notice provisions for HELOCs and credit card accounts and includes model forms for that purpose. The comment period closed on August 4, 2020, and the Bureau has not yet issued a final rule.

Finally, the Bureau has taken these additional steps to facilitate transitioning from LIBOR: