The Consumer Financial Protection Bureau (CFPB) on Thursday announced that it has joined four other federal agencies in the financial regulatory sector as well as state bank and credit union regulators to highlight the risks associated with the impending transition away from the London Interbank Offered Rate (LIBOR) index, which underpins several financial instruments and which was the basis of the reverse mortgage industry for years.
“The CFPB is urging banks and nonbanks alike to continue their efforts to transition to alternative reference rates to mitigate consumer protection, financial, legal, and operational risks,” the statement said. “The financial services industry uses LIBOR as a reference interest rate for many consumer financial products including mortgage loans, reverse mortgages, home equity lines of credit, credit cards, and student loans. The approaching discontinuation of most LIBOR tenors in June 2023 presents financial, legal, operational, and consumer protection risks.”
Additional risk comes from the fact that there may be many consumers who remain unaware of when the LIBOR transition will precisely take place for a financial service relevant to their interests, the Bureau says.
In June 2020, CFPB issued several pieces of guidance related to the anticipated discontinuation of LIBOR in 2021, in an effort to better facilitate creditors’ transition away from using LIBOR as an index for variable-rate consumer credit products. There is more to come, however, the agency says.
“The CFPB is continuing work on a final rule to address the anticipated expiration of LIBOR and expects to issue it in January 2022,” the statement reads. “The FAQs pertain to compliance with existing CFPB regulations for consumer financial products and services impacted by the anticipated LIBOR discontinuation and resulting need to transition to other indices.”
In terms of what financial institutions should have in place to address the transition, CFPB highlights the need for several risk management processes that can identify and mitigate risks to consumers, and those measures should be “commensurate with the size and complexity of their exposure and third-party servicer arrangements,” the Bureau explains.
The interagency statement includes participation from six entities including CFPB, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC) and state bank and credit union regulators.
“The interagency statement identifies specific actions financial institutions can consider in preparation for the elimination of LIBOR-based loans,” CFPB’s notice reads. “Among those actions include developing and implementing a transition plan for communicating with consumers and including fallback language that defines a fallback reference rate. Finally, the interagency statement includes clarification on the meaning of certain key terms, factors industry should consider when selecting alternative rates, and expectations for fallback language.”
The reverse mortgage industry has been engaged with the Government National Mortgage Association (GNMA, or “Ginnie Mae”) and the Fed-sponsored Alternative Reference Rates Committee (ARRC) in determining the best possible replacement for the reverse mortgage category. Earlier this month, the U.S. Department of Housing and Urban Development (HUD) posted a request for public comment in the Federal Register regarding the ultimate transition away from LIBOR for adjustable-rate mortgages (ARMs).
The comment request relates to mortgagees offering both forward ARMs as well as adjustable-rate Home Equity Conversion Mortgages (HECMs), according to the document.