LIBOR CFPB FAQ CCs 4 – Under Condition 2 of the Margin and Index Change Conditions, how does a card issuer 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 card issuer 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 Credit Card FAQ 3, a card issuer may only replace the index on a credit card account if certain conditions are met. If using the Unavailable Provision or the LIBOR-Specific Provision, under the second condition, Historical Fluctuation Comparison, the card issuer 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 § 1026.55(b)(7)(i) and 55(b)(7)(ii).
 
Generally, for the Unavailable Provision, this means the card issuer must look at the historical fluctuations up through the date the index is unavailable. If the card issuer 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 card issuer 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 55(b)(7)(i)-1.
 
If using the LIBOR-Specific Provision, this means a card issuer 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 of the historical fluctuation determination made by the card issuer. If the card issuer 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 card issuer 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 55(b)(7)(ii)-1.
 
Regulation Z provides factors that a card issuer 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 card issuer 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 55(b)(7)(i)-1.iii and 55(b)(7)(ii)-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) 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 the SOFR-Based Spread-Adjusted Indices and Prime meet the criteria in Regulation Z for the Historical Fluctuation Comparison, as discussed above. For all other indices that are not newly established, card issuers 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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