Insights and Resources
Sun setting of LIBOR and the heartburn it’s causing
AML AND COMPLIANCE NEWS |
Authored by RSM US LLP
With London Inter-Bank Offered Rate (LIBOR) sunsetting this year, the Consumer Financial Protection Bureau (CFPB) is still in the process of implementing new rules to assist with the transition. It is expected to transition all LIBOR index products to a new index. Some financial institutions are using this opportunity to switch both LIBOR and non-LIBOR products to a different index. This would standardize the index across the range of products being offered, however, not without challenges.
Non-home secured open-end lines (such as credit cards)
1026.9(c) of Regulation Z required 45 days advance notice for changes to significant account terms, which include how the rate is determined. Rates could be changed with a proper change-in-terms notice under this section of the regulation requirements; however, under the home equity line of credit’s (HELOC) section (1026.40(f)(3)), this prohibits changing any terms of a HELOC agreement (except in specific situations). A change in the index would not qualify as a specific situation.
1026.40(f)(3)(ii) of Regulation Z states “change the index and margin used under the plan if the original index is no longer available, the new index has a historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an annual percentage rate substantially similar to the rate, in effect, at the time the original index became unavailable.” With that said, the regulation would allow a change in index when the original index is no longer available. If a financial institution is wanting to change the current index to a new index, to match other loan products being offered, this change would be prohibited until the original index is no longer available.
1026.40(f)(3)(iv) of Regulation Z states a financial institution may “make a change that will unequivocally benefit the consumer throughout the remainder of the plan.” If the new index change is clearly benefiting the customer, for the remainder of the HELOC term, the regulation would allow financial institutions to change the index. This brings the challenge of predicting future rates with a variety of different variables, including but not limited to different margins, maturity lengths and line amounts. In addition, it would be difficult to predict if the new index unequivocally benefited the customer for the remainder of the HELOC.
1026.40(f)(3)(iii) of Regulation Z would allow a financial institution to change the index if the consumer specifically agrees to do so in writing at the time of change. If a consumer does not agree in writing to the change, and the change in index is not unequivocally to the consumer’s benefit, the regulation would prohibit the financial institution from changing the index of a HELOC when the index is still available.
Call us at +1 213.873.1700, email us at firstname.lastname@example.org or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Rose Prewitt and originally appeared on 2021-04-20.
2020 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.