LIBOR CFPB FAQ CCs 8 – Under Condition 3 of the Margin and Index Change Conditions, how does a card issuer determine if the APR under a potential replacement index is substantially similar to the APR under LIBOR?

Compliance > Regulation Z - TILA > LIBOR Transition
Q:  Under Condition 3 of the Margin and Index Change Conditions, how does a card issuer determine if the APR under a potential replacement index is substantially similar to the APR under LIBOR?
 
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 third condition, APR Comparison, the card issuer must determine that the replacement index and margin will 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 value generally on October 18, 2021, with the applicable margin. 12 CFR § 1026.55(b)(7)(i) and 55(b)(7)(ii).
 
Under the Unavailable Provision, when comparing the APR, a card issuer generally must use the value of the replacement index and the LIBOR index on the day that LIBOR becomes unavailable and the margin applicable to the account at that time. Comment 55(b)(7)(i)-2. If the replacement index is not published on the date LIBOR is unavailable, generally the card issuer 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.
 
Under the LIBOR-Specific Provision, the card issuer generally must use the values 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 55(b)(7)(ii)-2. If the replacement index is not published on October 18, 2021, generally, the card issuer must use the index values applicable on the next calendar day for which both the replacement index and the LIBOR index are 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 the card issuer chooses the applicable SOFR-Based Spread-Adjusted Index to replace 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 unavailable, the card issuer must instead use, with the respective margin values discussed above, 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 § 1026.55(b)(7)(ii).  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 interest rate based on the replacement index becomes effective on the account). Comments 55(b)(7)(i)-2 and 55(b()7)(ii)-2.

For either provision, if a card issuer uses one of 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 card issuer replaces the LIBOR index, the card issuer will be deemed to be in compliance with this third condition. Comments 55(b)(7)(i)-2 and 55(b)(7)(ii)-2. This is not available for transitions to Prime because, although Prime meets the Historical Fluctuation Comparison Condition for credit card 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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