CFPB Issues Guidance Related to LIBOR Transition

The Consumer Financial Protection Bureau (CFPB) on Thursday issued several pieces of guidance related to the anticipated discontinuation of the London Interbank Offered Rate (LIBOR) index in 2021, in an effort to better facilitate creditors’ transition away from using LIBOR as an index for variable-rate consumer credit products.

“The Bureau released an updated Consumer Handbook on Adjustable Rate Mortgages (CHARM) to help consumers better understand adjustable rate mortgage loan products,” the agency said in a press release announcing the new guidance and materials. “The Bureau also released a Notice of Proposed Rulemaking (NPRM) concerning the anticipated discontinuation of LIBOR, including proposing examples of replacement indices that meet Regulation Z standards.”

On top of these steps, the Bureau is issuing a frequently asked questions (FAQ) document on other important topics related to the transition away from LIBOR, including those that do not require amendments to Regulation Z.

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“The CHARM booklet is intended to provide information to consumers about the features and risks of adjustable rate mortgage loans,” the Bureau said. “Creditors must provide the disclosure or a suitable substitute generally no later than three days following certain ARM applications.”

A slew of different financial products currently rely on the LIBOR index, as detailed by CFPB.

“Interest rates on certain financial products, including some mortgages, credits cards, home equity lines of credit, reverse mortgages, and student loans, rely on LIBOR as the benchmark index to determine the interest rate that consumers will pay,” the Bureau explained. “To prepare for the anticipated discontinuation of LIBOR, financial institutions have been developing plans for the transition to replacement indices for new and existing loans that use the LIBOR index.”

The 10-year LIBOR SWAP is used to calculate the principal limit of new Home Equity Conversion Mortgage (HECM) loans. For the HECM program in particular, the LIBOR 10-year SWAP rate is of vital importance, since the sum of the weekly 10-year SWAP average plus the lender margin accounts for the loan’s “expected interest rate,” which is a major factor in determining a borrower’s principal limits at the time of application.

After international investigations determined that LIBOR was vulnerable to widespread manipulation efforts identified between 2003 and 2012, global regulators started more actively advising financial institutions to move away from the LIBOR standard, preferably by 2021. In 2014, the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC) to identify best practices for alternative rates, and to develop an implementation plan.

The NPRM on this topic will be open until August 4, 2020 according to CFPB.
The CHARM booklet, LIBOR transition FAQs, proposed amendments to Regulation Z and the NPRM request for public comment are all available on CFPB’s website.

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  • Although rarely cited there is another important aspect to indices. The note interest rate index must be selected are monthly or annually. The initial note interest rate is the basis upon which the note interest rate caps are determined. For example if the index rate is 0.32% and the margin is 2.7% the initial note interest rate will 3.02% and the cap for a monthly adjustable rate HECM will be no greater than 13.02% and no less than 0%. For the annually adjusting HECM, the first rate cap one year after closinging can be no greater than 5.02% and no less than 1.02% and the lifetime cap can be no greater than 8.02% and no less than 0%.

    • Now for industry speculation, several of us believe that HUD will move to the CMT sometime before the end of LIBOR. This is gut reaction without any indication from HUD what they will end up choosing.

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