Q: Are there limitations for credit card issuers 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 card issuer to change the index and margin 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 margin adjustment) only when the index is unavailable and other conditions are met. 12 CFR § 1026.55(b)(7)(i). The LIBOR-Specific Provision allows card issuers to transition a LIBOR-based contract from the LIBOR index (and make respective margin adjustments) on or after April 1, 2022, if certain conditions are met. 12 CFR § 1026.55(b)(7)(ii). Thus, on or after April 1, 2022, a card issuer may use either the Unavailable Provision (waiting until LIBOR is unavailable) or the LIBOR-Specific Provision (transitioning on or after April 1, 2022). 12 CFR § 1026.55(b)(7)(i) and 55(b)(7)(ii).
For either option in replacing the LIBOR index, the card issuer must meet all of the following conditions:
1. Trigger for index replacement: The index may be changed either a) when the index is unavailable under the Unavailable Provision, or b) on or after April 1, 2022, under the LIBOR-Specific Provision. Note that there is no definition of “unavailable” in Regulation Z, and as a result, the LIBOR-Specific Provision may be more definitive for when the transition can occur for card issuers, 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 Credit Card FAQ 4 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 becomes unavailable under the Unavailable Provision, or if using the LIBOR-Specific Provision, to the APR calculated using the LIBOR index values generally on October 18, 2021, and the account’s existing margin. See LIBOR Credit Card FAQ 9 for a discussion of the APR Comparison requirements.
12 CFR § 1026.55(b)(7)(i) and 55(b)(7)(ii).
Conditions on APR changes. Regulation Z restricts card issuers from increasing an APR on credit card accounts except in limited circumstances. A card issuer is permitted to increase an APR when the change is based on an index that is not under the card issuer's control, is available to the general public, and the increase in the rate is due to an increase in the index. 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 use to verify the APR applied to the account. Comment 55(b)(2)-3.
In addition to the Conditions on Index and Margin Changes and Conditions on APR Changes, some credit card products may have other limitations outside of Regulation Z. For example, some products may have contractual provisions that limit when the index can be replaced. See LIBOR Credit Card FAQ 9, for more information about contractual impacts.
Card issuers 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 card issuers identify the steps in that analysis. See LIBOR General FAQ 4 for more information on ARRC resources.