CFPB Issues Rule to Facilitate LIBOR Wind Down

The Consumer Financial Protection Bureau (CFPB) has issued an interim final rule amending the agency’s 2021 LIBOR transition rule. The interim final rule contains updates to reflect the subsequent enactment of the Adjustable Interest Rate (LIBOR) Act and issuance of an implementing regulation by the Board of Governors of the Federal Reserve Board System. This interim final rule will further facilitate the orderly transition of those consumer loans that currently use the LIBOR index to other indices in anticipation of the planned cessation U.S. Dollar (USD) LIBOR after June 30, 2023.

In the wake of the financial crisis, the public learned that a number of large international banks conspired to set the LIBOR rate in order to conceal weaknesses in the banks and to boost their bottom line. Some of these institutions would later admit to criminal practices and pay billions of dollars in penalties.

On March 15, 2022, Congress enacted the LIBOR Act. Among other things, the LIBOR Act directs the Federal Reserve Board to identify a replacement index based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York, including spread adjustments, to replace the one-month, three-month, six-month, and 12-month USD LIBOR indices. The changes apply to any LIBOR contracts that do not otherwise specify a replacement rate fallback provision or method for selecting a fallback rate. The Federal Reserve Board issued a final rule to implement the LIBOR Act on January 26, 2023 (a rule that became effective on February 27, 2023).

Prior to the enactment of the LIBOR Act, the CFPB published the Facilitating the LIBOR Transition final rule in the Federal Register on December 8, 2021. That rule provides examples of certain indices, including spread-adjusted SOFR-based indices, that may meet the applicable standards under Regulation Z (Truth-in-Lending Act) to replace the one-month, three-month, and six-month USD LIBOR indices. However, the CFPB reserved judgment about whether to include references to a one-year (or 12-month) USD LIBOR index and its SOFR-based replacement index because no such replacement index had yet been recommended.

The CFPB’s interim final rule amends and updates the Facilitating the LIBOR Transition final rule. Specifically, the CFPB is now conforming Regulation Z with the LIBOR Act and the Federal Reserve Board’s implementing regulation by, among other things, adding references to the SOFR-based replacement for the 12-month LIBOR index. This interim final rule does not in any way alter or modify the CFPB’s determination in the 2021 LIBOR Transition final rule in relation to the prime rate as a replacement index.

This interim final rule is effective May 15, 2023. Comments must be received on or before 30 days after publication in the Federal Register.