LIBOR CFPB FAQ HELOCs 6 – Under Condition 2 of the Margin and Index Change Conditions, how does a creditor determine if a potential replacement index has historical fluctuations that are substantially similar to those of the LIBOR index?

Compliance > Regulation Z - TILA > LIBOR Transition
Q:  Under Condition 2 of the Margin and Index Change Conditions, how does a creditor determine if a potential replacement index has historical fluctuations that are substantially similar to those of the LIBOR index?
 
A:   As discussed above in LIBOR Home Equity Line of Credit FAQ 5, a creditor may only replace the index on a HELOC account if certain conditions are met. If using the Unavailable Provision or the LIBOR-Specific Provision, under the second condition, Historical Fluctuation Comparison, the creditor generally must determine that the replacement index has historical fluctuations that are substantially similar to those of the LIBOR index being replaced, so long as the replacement index is not newly established. 12 CFR § 1026.40(f)(3)(ii)(A) and 40(f)(3)(ii)(B).
 
Generally, for the Unavailable Provision, this means the creditor must look at the historical fluctuations up through the date the LIBOR index is no longer available. If the creditor is using Prime or one of the identified SOFR-Based Spread-Adjusted Indices to replace certain tenors of LIBOR and transitioning after April 1, 2022, the creditor may rely on the Bureau’s determination that these indices have historical fluctuations that are substantially similar as of October 18, 2021, and need not complete further historical fluctuation analysis. Comment 40(f)(3)(ii)(A)-2.
 
If using the LIBOR-Specific Provision, this means a creditor must look at the historical fluctuations through April 1, 2022, or if the determination is made later, through the date that is 30 days prior to the date the historical fluctuation determination is being made by the creditor. If the creditor is using Prime or one of the identified SOFR-Based Spread-Adjusted Indices to replace certain tenors of LIBOR and transitioning after April 1, 2022, the creditor may rely on the Bureau’s determination that these indices have historical fluctuations that are substantially similar as of October 18, 2021, and need not complete further historical fluctuation analysis. Comment 40(f)(3)(ii)(B)-1.
 
Regulation Z provides examples of factors a creditor must use when comparing historical fluctuations for purposes of the LIBOR transition. While the analysis for each index comparison will be unique, these factors highlight key concepts in determining whether a replacement index has historical fluctuations that are substantially similar to those of the particular LIBOR index being replaced. The non-exhaustive list of factors a creditor must look at include whether:
 
  • The movements (increases and decreases in value) of the two indices over time are substantially similar; and
  • The consumers’ payments using the replacement index compared to payments using the LIBOR index are substantially similar (if there is sufficient historical data for this analysis).

Comments 40(f)(3)(ii)(A)-2.iii and 40(f)(3)(ii)(B)-1.iii.
 
Effective April 1, 2022, the Bureau has determined the following two indices meet the Historical Fluctuations Comparison condition when compared to their applicable tenors of LIBOR: 1) the SOFR-Based Spread-Adjusted Indices for 1-month, 3-month, and 6-month LIBOR (for the tenors they are intended to replace), and 2) Prime for the 1-month and 3-month LIBOR tenors. The LIBOR Transition Rule provided an analysis the Bureau used to determine that both SOFR-Based Spread-Adjusted Indices and Prime meet the criteria for the Historical Fluctuation Comparison condition, as discussed above. For all other indices that are not newly established, creditors will need to perform their own analysis, and determine if the replacement index meets this condition, as well as the other requirements in Regulation Z discussed above.
 
 
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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