LIBOR CFPB FAQ HELOCs 7 – What if the replacement index selected does not have historical fluctuations to compare to LIBOR for Condition 2 of the Margin and Index Change Conditions?

Compliance > Regulation Z - TILA > LIBOR Transition
Q:  What if the replacement index selected does not have historical fluctuations to compare to LIBOR for Condition 2 of the Margin and Index Change Conditions?
 
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 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 index is not newly established. 12 CFR § 1026.40(f)(3)(ii)(A) and 40(f)(3)(ii)(B).
 
For purposes of the LIBOR transition, if a creditor selects a replacement index that is newly established, and therefore does not have a rate history for comparison, the Historical Fluctuation Comparison condition does not apply. The newly established index may still be used as a replacement if it meets the third condition (APR Comparison), i.e., it produces an APR substantially similar to the APR in effect when LIBOR is no longer available under the Unavailable Provision or, if using the LIBOR-Specific Provision, the APR calculated using the LIBOR index values generally on October 18, 2021. 12 CFR § 1026.40(f)(3)(ii)(A) and 40(f)(3)(ii)(B). More information about the APR Comparison condition is discussed in LIBOR Home Equity Line of Credit FAQ 10, below.
 
“Newly established” is not defined in Regulation Z and is a fact-specific determination. For example, the Bureau does not consider the SOFR-Based Spread-Adjusted Indices to be newly established, as used in Regulation Z. Although the SOFR-Based Spread-Adjusted Indices have not yet been published, these indices will be based on an underlying SOFR rate, which has been published and therefore the indices have rate history that can be used to determine the historical fluctuations.
 
 
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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