LIBOR CFPB FAQ HELOCs 10 – Under Condition 3 of the Margin and Index Change Conditions, how does a creditor determine if the APR under a potential replacement index is substantially similar to the APR under the account’s LIBOR index?

Compliance > Regulation Z - TILA > LIBOR Transition
Q:  Under Condition 3 of the Margin and Index Change Conditions, how does a creditor determine if the APR under a potential replacement index is substantially similar to the APR under the account’s 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 third condition, APR Comparison, the creditor must determine that the replacement index and margin will 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 using the LIBOR index value generally on October 18, 2021 with the applicable margin. 12 CFR § 1026.40(f)(3)(ii)(A) and 40(f)(3)(ii)(B).
 
Under the Unavailable Provision, when comparing the APR, a creditor generally must use the value of the replacement index and the LIBOR index on the day that LIBOR is no longer available and the margin applicable to the account at that time. Comment 40(f)(3)(ii)(A)-3. If the replacement index is not published on the date the LIBOR is no longer available, generally, the creditor must use the index values applicable on the prior calendar day for which both the replacement index and the LIBOR index were published. The margin used is still that in effect
just prior to when the change-in-terms notice identifying the replacement index is provided.
 
If using the LIBOR-specific provision, generally the creditor must use the value of the indices in effect on October 18, 2021, and must use the margin in effect just prior to when the change-in-terms notice identifying the replacement index is provided. Comment 40(f)(3)(ii)(B)-2. If the replacement index is not published on October 18, 2021, generally the creditor must use the index values applicable on the next calendar day for which both the replacement index and the LIBOR index were published. The margin used is still that in effect just prior to when the change-in-terms notice identifying the replacement index is provided.
 
Under both provisions, however, if a creditor chooses the applicable SOFR-Based Spread-Adjusted Index to replace the 1-month, 3-month, or 6-month LIBOR tenors, because the SOFR-based indices will not be published as of October 18, 2021, and may not be published at the time LIBOR is no longer available, the creditor must instead use the LIBOR index value as of June 30, 2023, and the SOFR-based index value as of the first day it is published, likely July 3, 2023. 12 CFR § 1026.40(f)(3)(ii)(A) and 40(f)(3)(ii)(B).

Note that the comparison of the APRs is based on the index values specified above, and not on the index values when the replacement index is applied to the account (i.e., when a new periodic rate based on the replacement index is applied to the account). Comments 40(f)(3)(ii)(A)-3 and 40(f)(3)(ii)(B)-3

For either provision, if a creditor uses the SOFR-Based Spread-Adjusted Indices to replace the 1-month, 3-month, or 6-month tenors of LIBOR, so long as the margin does not change from the margin in effect just prior to when the creditor replaces LIBOR, the creditor will be deemed to be in compliance with this third condition. Comments 40(f)(3)(ii)(A)-3 and 40(f)(3)(ii)(B)-3. This is not available for transitions to Prime because, although Prime meets the Historical Fluctuation Comparison Condition for HELOC products, the margin will need to be adjusted to accommodate the spread between LIBOR and Prime.
 
 
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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