The Consumer Financial Protection Bureau (CFPB) finalized a rule this week that facilitates the transition away from the LIBOR interest rate index for consumer financial products.
The new rule establishes requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans after April 1, 2022. Specifically, it states that no new financial contracts may reference LIBOR as the relevant index after the end of 2021. Then, starting in June 2023, LIBOR can no longer be used for existing financial contracts.
The transition away from LIBOR began after a criminal rate-setting conspiracy implicated large international banks and undermined public confidence in the index. Approximately $1.4 trillion of consumer loans are estimated to be currently tied to LIBOR.
“The criminal manipulation of LIBOR by global financial institutions was extremely costly to our country,” CFPB Director Rohit Chopra said. “LIBOR will soon be a relic of history, and we will be working to ensure that companies make an orderly transition away from this index.”
The final rule includes closed-end credit provisions that require creditors to choose an index comparable to LIBOR when changing the index of a variable rate loan. To help creditors determine a comparable index for closed-end loans, the rule identifies certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (ARRC) for consumer products.
For open-end loans, the rule adds LIBOR-specific provisions to permit creditors or card issuers for HELOCs and credit card accounts to replace the LIBOR index and adjust the margin used to set a variable rate on or after April 1, 2022.
This rule follows other efforts by the CFPB to help financial markets prepare for the discontinuation of LIBOR. The CFPB is also issuing an updated set of Frequently Asked Questions (FAQs) to help creditors address other LIBOR transition topics, regulatory questions, and general implementation considerations.