CFPB Finalizes Rules to Replace the Scandal-Plagued LIBOR in Setting Loan Rates

Lenders must transition away from the London Interbank Offered Rate by June 2023

The U.S. Consumer Financial Protection Bureau (CFPB) has finalized rules to facilitate a transition away from the London Interbank Offered Rate (LIBOR) as a benchmark in consumer lending. The LIBOR will be eliminated over the next year and a half, with the CFPB providing requirements for how lenders must select a replacement.

Key Takeaways

  • The CFPB has issued a final rule on how consumer lenders should transition away from the London Interbank Offered Rate (LIBOR) as a benchmark for setting interest rates on loans.
  • The LIBOR, which is calculated from estimates submitted by banks, was the subject of a criminal rate-fixing scandal that undermined confidence in the index.
  • The CFPB rule provides consumer lenders with requirements for how to select replacements based on the Secured Overnight Financing Rate (SOFR).

What the Change Will Mean for Lenders and Borrowers

In a final rule from the CFPB, issued on Dec. 7, consumer lenders now have until June 2023 to replace the LIBOR as a benchmark for their financial contracts. The LIBOR is being phased out because of a rate-fixing scandal that rocked the global financial industry.

The CFPB has established requirements for how lenders must select a replacement starting in April 2022, though some lenders have already transitioned away from using the index.

The final rule, which is effective on April 1, 2022, includes provisions for lenders that issue closed-end loans, such as mortgages, auto loans, and student loans, to choose a comparable index for setting variable interest rates. 

The rule identifies certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (ARRC) as examples to replace the 1-month, 3-month, and 6-month LIBOR indices. 

The agency said it decided to reserve judgment on using the SOFR-based spread-adjusted replacement index to replace the 1-year LIBOR until further notice. It will provide more information once a recommendation from the ARRC is available, which the CFPB will evaluate for its comparability.

For open-end loans, such as credit cards and lines of credit, the rule includes provisions requiring lenders to use a replacement index that has historical fluctuations that are substantially similar to those of the LIBOR index. They must also ensure that the new interest rate or APR on existing accounts is substantially similar.

The final rule also includes a list of factors lenders can use to help determine whether a replacement index can be considered comparable to the LIBOR index for both closed- and open-end loans.

Lenders have until Oct. 1, 2022, to provide disclosures for consumers showing how they will determine rate changes for loans and lines of credit with variable interest rates.

Finally, the rule amends Regulation Z to address how the requirement to reevaluate rate increases on credit card accounts applies to the transition.

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  1. Consumer Financial Protection Bureau. "CFPB Issues Final Rule to Facilitate Transition From LIBOR."

  2. United States Congress Joint Economic Committee. "The LIBOR Scandal: What We Know, What We Don't, and What to Expect."