LIBOR CFPB FAQ ARMs 4 – For existing adjustable-rate mortgage loans, are there regulatory limitations on selecting the index replacement under Regulation Z?

Compliance > Regulation Z - TILA > LIBOR Transition
Q:  For existing adjustable-rate mortgage loans, are there regulatory limitations on selecting the index replacement under Regulation Z?
 
A:   Generally, no. While there may be potential contractual limitations, Regulation Z does not place restrictions on the circumstances under which a creditor may replace the index for existing (i.e., legacy) ARMs.
 
However, certain Regulation Z origination-related requirements for closed-end loans are triggered if a comparable index is not selected when a creditor changes the index on a closed-end loan. If a creditor chooses an index that is not comparable, that index replacement adds a variable rate feature to the transaction and results in the refinance of the transaction. Comment 20(a)-3.ii.B.

To determine whether a replacement index is comparable for purposes of the LIBOR transition, a creditor must use the historical data or future expectations to look at certain factors, which include, but are not limited to, whether:
 
  • The movements (increases and decreases in value) of the two indices over time are comparable;
  • The replacement index will have a comparable impact on the consumers’ payments (if there is sufficient data for this analysis);
  • The index levels are comparable (i.e., although indices may increase and decrease at the same rate, is one index always a certain number of basis points higher than another or does it require a spread-adjustment);
  • The replacement index is publicly available; and
  • The replacement index is outside the control of the creditor.
     
Comment 20(a)-3.iv.
 
These factors are not an exhaustive list. Additionally, the relevant factors to be considered in determining whether a replacement index is comparable to a particular LIBOR index will depend on which replacement index is being considered and the LIBOR index being replaced. For example, a creditor may need to consider whether the replacement index is a backward-looking rate (e.g., historical average of rates) such that timing aspects of the data may need to be adjusted to match up with the particular forward-looking LIBOR term-rate being replaced.
 
More information on which indices may be comparable to replace tenors of LIBOR are discussed in LIBOR Adjustable-Rate Mortgage FAQ 5.
 
 
This Q&A was created based on information from the Consumer Financial Protection Bureau’s website (which may be updated from time to time) that provides Answers to Frequently Asked Questions on the Transition Away from LIBOR.  This information may be found here:  https://files.consumerfinance.gov/f/documents/cfpb_libor-transition_faqs.pdf
 

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