Q: For existing private student loans, are there regulatory limitations on selecting the replacement index under Regulation Z?
A: Generally, no. While there may be potential contractual limitations, Regulation Z does not place restrictions on the circumstances under which the creditor may replace the index for existing (i.e., legacy) private student loans.
However, certain Regulation Z origination-related requirements for closed-end loans are triggered if a comparable index is not selected when the creditor transitions from LIBOR. 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, and look at relevant factors that 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 require a spread-adjustment);
The replacement index is publicly available; and
The replacement index is outside the control of the creditor.
These factors are not an exhaustive list. Additionally, the relevant factors considered may depend on the replacement index 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 are comparable to certain tenors of LIBOR can be found in LIBOR Private Student Loan FAQ 2.