319-325-1171
5438 South Prairie View Drive West Des Moines, IA 50266
Blog Post
The Labor Associated with LIBOR
michaelchristians • June 7, 2020
I’ve blogged previously about the industry’s transition away from the LIBOR index. However, recent rulemaking from our friends at the Consumer Financial Protection Bureau (CFPB) requires us to return to the topic once more.
First, some background. LIBOR stands for the London Interbank Offered Rate. It is an index used by many financial institutions in connection with their adjustable rate mortgages, home equity lines of credit and credit cards. The UK’s Financial Conduct Authority has stated that publication of the index is not guaranteed beyond 2021.
On June 4th, the CFPB issued both a proposed rule and an FAQ document to help the industry prepare for discontinuation of the LIBOR index. I’ll discuss the content of both based on product type.
Adjustable Rate Mortgages (ARMs)
Financial institutions (FIs) with an ARM product tied to the LIBOR index need to be aware of the following:
- Once the FI has decided on a replacement index, it will need to update its variable rate program disclosure provided in connection with an application for an ARM. The disclosure will need to identify the replacement index and how that index has performed historically over the previous 15 years.
- The FI should begin using the revised version of the Consumer Handbook on Adjustable Rate Mortgages. The CFPB revised the CHARM booklet to remove all references to the LIBOR index.
- Under Regulation Z, an FI is required to provide advance notice of a change to an ARMs interest rate if that change results in a corresponding change in payment. This notice must be provided between 210 and 240 days before the first payment at the adjusted level is due if it is the first time the borrower’s rate has changed in connection with the ARM. For subsequent rate adjustments, the notice must be provided between 60 and 120 days before the first payment at the adjusted level is due.
Home Equity Lines of Credit (HELOCs)
FIs with a HELOC tied to the LIBOR index need to be aware of the following:
- Once the FI has decided on a replacement index, it will need to update its HELOC application disclosure to identify the replacement index and how that index has performed historically over the previous 15 years.
- According to Regulation Z, an FI may not replace the index in connection with a HELOC until the current index is no longer available. The CFPB’s proposed rule would allow an FI to replace the index beginning March 15, 2021, regardless of the date on which the LIBOR index is no longer available.
- For purposes of selecting a replacement index, Regulation Z provides that the new index must have “historical movement substantially similar to that of the original index.” The proposed rule provides that FIs should use December 31, 2020 as the comparison date to make this determination.
- FIs will be required to provide a change-in-terms notice at least 15 days in advance of making a change to the index associated with its HELOCs.
Credit Cards
FIs with credit cards tied to the LIBOR index need to be aware of the following:
- According to Regulation Z, an FI may not replace the index in connection with a credit card until the current index is no longer available. The CFPB’s proposed rule would allow an FI to replace the index beginning March 15, 2021, regardless of the date on which the LIBOR index is no longer available.
- For purposes of selecting a replacement index, Regulation Z provides that the new index must have “historical movement substantially similar to that of the original index.” The proposed rule provides that FIs should use December 31, 2020 as the comparison date to make this determination.
- Under Regulation Z, if an FI increases the APR associated with a consumer’s credit card account, it must re-evaluate the increase every 6 months. The proposed rule clarifies that an APR increase resulting from the LIBOR transition is not subject to the re-evaluation requirement.
- FIs will be required to provide a change-in-terms notice at least 45 days in advance of making a change to the index associated with its credit card accounts.
Should your financial institution need any guidance or support in preparing for the LIBOR transition, please don’t hesitate to reach out to Michael Christians Consulting, LLC at michael@mchristiansconsulting.com. We’d be more than happy to help!
The post The Labor Associated with LIBOR appeared first on Michael Christians Consulting, LLC.
Share this post
Recent Blog Posts
In Letter to Credit Unions 25-CU-03 , the National Credit Union Administration (NCUA) announced its new exam scheduling policy. Effective January 1, 2025, federally insured credit unions (FICUs) will be examined according to the following schedule: 8 to 12 months following its last examination date FICUs with ANY of the following characteristics - A CAMELS rating of 3, 4, or 5, Considered less than well capitalized, An outstanding enforcement action, or Assets greater than or equal to $10 billion. FICUs with assets between $1 billion and $10 billion, and A CAMELS rating of 3, 4, or 5, or A change in CEO since its last examination. 12 to 16 months following its last examination date FICUs with assets between $1 billion and $10 billion, and A CAMELS rating of 1 or 2, and No change in CEO since its last examination. 14 to 18 months following its last examination date Federal credit unions (FCUs) not included above Once every 5 years Federally insured state-chartered credit unions (FISCUs) not included above The NCUA believes this revised schedule will allow it to better respond to emerging risks and priorities using available resources. It is important to note that nothing in the new schedule limits the NCUA's authority to examine any FICU as frequently as the agency deems necessary.
Back in December 2023, the Federal Communications Commission (FCC) adopted a new rule amending the prior express written consent requirements under the Telephone Consumer Protection Act (TCPA). That rulemaking would have done a couple of things. First, it would have clarified that a consumer’s prior express written consent can apply to not more than one seller. In other words, the rule would have prevented a company from obtaining a consumer’s consent to the receipt of advertising and telemarketing messages both for itself as well as its affiliates. Second, the rule would have required that a consumer’s consent be logically and topically associated with the interaction that prompted the consent. That second requirement was particularly concerning for financial institutions. The language of the rulemaking seemed to suggest that an institution that captured prior express written consent at the time of account opening could not later rely on that same consent for purposes of sending advertising or telemarketing messages related to loans, credit cards, or other non-deposit products. The Insurance Marketing Coalition asked for a judicial review of the rulemaking at the Eleventh Circuit Court of Appeals. On January 24, 2025, that court vacated the new requirements. In its order, the court found that the FCC exceeded its statutory authority because the amendments to the definition of prior express written consent impermissibly conflicted with the statutory definition of the same term under the TCPA.
Following years of litigation, the Consumer Financial Protection Bureau’s 2017 payday lending rule will take effect on March 30, 2025. Three types of consumer loans are covered by the payday lending rule: Short-term loans that require repayment within 45 days, Longer term loans with a balloon payment, and Longer term loans for which the APR exceeds 36% and automatic payment is required from the consumer's account. Under the rule, covered lenders will have to adhere to both payment restrictions and notice requirements. First, when two consecutive automatic payment attempts have failed in connection with a covered loan, the lender is prohibited from attempting another withdrawal until it has obtained a new and specific authorization from the consumer. Second, the rule imposes the following notice requirements in connection with a covered loan: Written notice before the lender attempts to withdraw the first automatic payment from the consumer's account, Written notice before a subsequent automatic payment attempt that will differ in amount or effective date, and Written notice when two consecutive payment attempts have failed. Lenders that do not originate more than 2,500 covered loans in a calendar year are exempt from the rule’s requirements. Additional implementation resources regarding the payday lending rule are available from the CFPB here .
Address
5438 South Prairie View Drive
West Des Moines, IA 50266
Phone
319-325-1171
michael@mchristiansconsulting.com
Michael Christians Consulting, LLC
This website has been built to be accessible for all users. If you experience any difficulty in accessing this website, please contact us for assistance.
