A criminal London Inter-Bank Offered Rate (LIBOR) rate-setting conspiracy that implicated major international banks has resulted in the Consumer Financial Protection Bureau (CFPB) finalizing a rule to transition away from the LIBOR interest rate index for all consumer financial products starting in 2022.
The rule establishes how creditors must select replacement indices for existing LIBOR-linked consumer loans starting April 1, 2022. The transition away from LIBOR must be complete by June 2023.
The CPFB estimates there are about $1.4 trillion of consumer loans tied to LIBOR.
“The criminal manipulation of LIBOR by global financial institutions was extremely costly to our country,” said CFPB Director Rohit Chopra. “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.”
According to a press release, the final rule, effective April 1, 2022, includes closed-end credit provisions that require creditors to choose an index comparable to LIBOR when changing the index of a variable rate loan, or consider it a refinancing for purposes of Regulation Z. 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 as examples to illustrate a reference rate that would be comparable to replace 1-month, 3-month, or 6-month tenors of USD LIBOR.
“In the years leading up to the subprime crisis, one opaque and easily manipulable index, LIBOR, came to dominate adjustable rate home mortgage loan contracts. In the wake of the crisis, we learned that large international banks had conspired to set the LIBOR rate in order to conceal weaknesses in the financial system and to boost their bottom line,” Chopra said in a prepared statement. “This banking cartel, at times, illegally increased LIBOR to maximize the value of their derivatives bets and other financial positions. For years, the interest rate that underpins hundreds of trillions of dollars of financial contracts, including the exploding adjustable rate mortgages, was a lie. Many large financial institutions would later plead guilty to criminal price-fixing.”
“Approximately $1.4 trillion of consumer loans—loans to individual human beings, to buy a home or finance their education—are currently tied to LIBOR. Families and homeowners, students seeking higher education, and other borrowers all paid too much when LIBOR was falsely inflated. Structural flaws in the financial system stoked collusion and rent-seeking over fair competition.”
“In issuing today’s rule, the CFPB is playing its part to move the financial system away from this opaque and too easily manipulated index. No new financial contracts may reference LIBOR as the relevant index after the end of 2021. Starting in June 2023, LIBOR can no longer be used for existing financial contracts. The final rule issued today helps set the guardrails for an orderly transition away from the LIBOR index. In most circumstances, lenders will replace the LIBOR index with new indices based on the SOFR (Secured Overnight Financing Rate) or the prime rate SOFR is a robust reference rate that is based on actual transactions data and is not vulnerable to the type of abuse displayed in the LIBOR scandal. The prime rate has long been used as an index in consumer contracts.”