LIBOR CFPB FAQ HELOCs 5 – Are there limitations for HELOC creditors when selecting a replacement index for the LIBOR transition?

Compliance > Regulation Z - TILA > LIBOR Transition
Q:  Are there limitations for HELOC creditors when selecting a replacement index for the LIBOR transition?
 
A:   Yes. Regulation Z provides limitations on index, margin, and APR changes.

Conditions on index and margin changes. Regulation Z allows a creditor to change the index and margin only under certain conditions. Of those, they include the Unavailable Provision and the LIBOR-Specific Provision. Similar to the provision as it existed before the LIBOR Transition Rule, the Unavailable Provision allows index replacement (and respective margin adjustments) only when the index is no longer available and other conditions are met. 12 CFR § 1026.40(f)(3)(ii)(A). The LIBOR-Specific Provision allows creditors of LIBOR-based contracts to transition from a LIBOR index (and make respective margin adjustments) on or after April 1, 2022, if certain conditions are met. 12 CFR § 1026.40(f)(3)(ii)(B). Thus, on or after April 1, 2022, a creditor transitioning from LIBOR may use either the Unavailable Provision (waiting until LIBOR is no longer available) or the LIBOR-Specific Provision (transitioning on or after April 1, 2022). 12 CFR § 1026.40(f)(3)(ii)(A) and 40(f)(3)(ii)(B).
 
For either option in replacing the LIBOR index, the creditor must meet all of the following conditions:

1. Trigger for index replacement: The index may only be changed if either a) the index is no longer available under the Unavailable Provision, or b) on April 1, 2022, under the LIBOR-Specific Provision. Note that there is no definition of “no longer available” in Regulation Z, and as a result, the LIBOR-Specific Provision may be more definitive as to when the transition can occur, if allowed by contract.

2. Historical fluctuation comparison: Generally, the replacement index must have historical fluctuations substantially similar to those of the LIBOR tenor being replaced. This condition does not apply if the replacement index is newly established. See LIBOR Home Equity Line of Credit FAQs 6 through 9 for a discussion of the Historical Fluctuation Comparison requirements.

3. APR comparison: The replacement index and replacement margin must result in an APR substantially similar to the APR in effect at the time LIBOR is no longer available under the Unavailable Provision, or if using the LIBOR-Specific Provision, to the APR calculated generally using the LIBOR index values on October 18, 2021, and the
account’s existing margin. See LIBOR Home Equity Line of Credit FAQ 10, for a discussion of the APR Comparison requirements.

12 CFR § 1026.40(f)(3)(ii)(A) and 40(f)(3)(ii)(B).

Conditions on APR changes. Regulation Z also prohibits a change in the APR unless the change is based on an index that is not under the creditor's control and is available to the general public. Note that a publicly available index need not be published in a newspaper, but it must be one the consumer can independently obtain (by viewing on a publicly available website or by telephone, for example) and can use to verify rates imposed under the plan. Comment 40(f)(1)-2.

In addition to the Conditions on Index and Margin Changes and Conditions on APR Changes, certain HELOC products may have other limitations outside of Regulation Z. For example, some may have contractual provisions that limit when the index can be replaced. See LIBOR Home Equity Line of Credit FAQ 12, for more information about contractual impacts. Additionally, certain reverse mortgage products also may be subject to requirements of the Federal Housing Administration (FHA), a part of the US Department of Housing and Urban Development (HUD).

For all HELOC products, creditors should complete a full legal analysis to determine the limitations that may exist in addition to these Regulation Z provisions. Resources provided by the ARRC can help creditors identify the steps in that analysis. See LIBOR General FAQ 4 for more information on ARRC resources.  
 
 
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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