CFPB Joins Other Financial Regulatory Agencies in Issuing Statement on Discontinuation of LIBOR

Sunset of LIBOR as reference rate for many financial products may cause risks to consumer

WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) joined four other federal financial regulatory agencies and state bank and credit union regulators Oct. 20 in issuing a statement highlighting the risks posed by the discontinuation of LIBOR (originally an acronym for London Interbank Offered Rate). The CFPB is urging credit unions, banks and nonbanks alike to continue their efforts to transition to alternative reference rates to mitigate consumer protection, financial, legal, and operational risks.

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. Additionally, consumers may not know when the transition from LIBOR will occur or how institutions will calculate their interest rates if they do not issue required disclosures to consumers

On June 4, 2020, the CFPB issued a Notice of Proposed Rulemaking and FAQs relating to the LIBOR transition. 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 FAQs pertain to compliance with existing CFPB regulations for consumer financial products and services impacted by the anticipated LIBOR discontinuation and the resulting need to transition to other indices.

The CFPB is also committed to helping creditors transition affected consumers from LIBOR in a transparent and orderly manner. In October 2019, the CFPB published a blog post discussing the transition away from LIBOR to help consumers understand this market-wide change. In June, 2020, the CFPB released an updated consumer handbook on adjustable-rate mortgages to help consumers better understand these products and how their payments can change over time.

Banks and nonbanks alike should have risk management processes in place to identify and mitigate risks to consumers that are commensurate with the size and complexity of their exposure and third-party servicer arrangements. The interagency statement identifies specific actions financial institutions can consider in preparation for the elimination of LIBOR-based loans. 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 the industry should consider when selecting alternative rates, and expectations for fallback language.

Read the interagency statement

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Editor's Notes:

The guidance released Wednesday offers a clearer picture of how regulators will supervise the use of new benchmarks in place of the London interbank offered rate.

FIs must conduct the "due diligence necessary" to ensure that whichever benchmark they choose to replace Libor is appropriate for their firm’s risk profile and products.

Although the Alternative Reference Rates Committee — a U.S. group of market participants convened by the Federal Reserve — recommended the Secured Overnight Financing Rate to replace Libor, the banking agencies have said firms are free to choose a substitute benchmark that meets their needs.

That could include Ameribor or the Bloomberg Short-Term Bank Yield Index. Still, the ARRC has maintained that financial institutions should adopt SOFR.

The NCUA encourages all federally insured credit unions to transition away from using the U.S. dollar LIBOR settings as soon as possible, but no later than December 31, 2021. Failure to prepare for LIBOR disruptions could undermine a federally insured credit union’s financial stability, and safety and soundness. As noted in the Federal Financial Institutions Examination Council’s (FFIEC) July 1, 2020, Joint Statement on Managing the LIBOR Transition, the LIBOR transition is a significant event that credit unions should manage carefully. The FFIEC statement recommends that new financial contracts use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.

The recent NCUA supervisory letter provides the supervision framework examiners will use to evaluate a credit union’s risk management processes and planning regarding the transition from LIBOR. The guidance applies to all federally insured credit unions, and all credit unions with LIBOR exposure are encouraged to consult this information.