Q: What index and margin do card issuers use to determine the benchmark comparison APR if the LIBOR-Specific Rate Reevaluation Exception does not apply?
A: In certain cases, the LIBOR-Specific Rate Reevaluation Exception to the rate reevaluation requirements will not apply. For example, the card issuer may be performing rate reevaluations for a rate increase that occurred prior to April 1, 2022, using LIBOR as a benchmark index for comparison. As a result, the card issuer will be required to continue to perform rate reevaluations until the APR is reduced as required even after LIBOR is unavailable.
In this case, the index used for the benchmark of comparison depends on when the next review is scheduled.
If the next review is scheduled prior to April 1, 2022, the card issuer continues to use LIBOR as a benchmark.
However, if the next review is scheduled on or after April 1, 2022, the card issuer may use the replacement formula for comparison specified in the LIBOR Transition Rule. 12 CFR § 1026.59(f)(3). The replacement formula allows the card issuer to obtain a benchmark comparison APR using a “replacement benchmark index” (that is not a LIBOR index) so that it may continue to identify the benchmark APR to which the account must be reduced in order to determine if it may terminate its obligation to complete rate reevaluations.
To use the replacement formula to determine the benchmark comparison APR, a card issuer identifies the value of LIBOR on October 18, 2021 and the account’s margin prior to the increase. It also identifies the value of the replacement benchmark index being used for the replacement formula on October 18, 2021. If LIBOR or the replacement index are not available on October 18, 2021, the card issuer identifies the value of the indices on the first day after October 18, 2021 that the values of both indices are available. However, if the card issuer is using a SOFR-Based Spread-Adjusted Index to replace LIBOR, it must use the LIBOR value on June 30, 2023, and the SOFR-index value from the first day the index will be published, likely July 3, 2023.
Once the card issuer identifies the appropriate index values for the formula, the card issuer can then determine the replacement margin needed to provide an equal APR. That replacement margin is used with the replacement benchmark index as a formula to identify the benchmark APR of comparison for each future review.
Thus, the replacement formula is as follows:
[“replacement index” value on October 18, 2021 (or other applicable date)] +
[replacement margin] = [LIBOR index value on October 18, 2021 (or other
applicable date)] + [account margin prior to increase]
12 CFR § 1026.59(f)(3).
For example, assume a card issuer changed the account index from a LIBOR index in 2019. Thus, the account is not eligible for the LIBOR-Specific Rate Reevaluation Exception, and the creditor is still required to complete rate reevaluations. The next rate reevaluation is scheduled for April 1, 2022. Previously, to determine benchmark of comparison using the LIBOR index, the card issuer used the formula “LIBOR index value plus 10% margin.” For the card issuer to transition from the LIBOR index as the benchmark index for the comparison, the card issuer will need to use the replacement formula discussed above. First, the card issuer determines the LIBOR-based values. Assume the LIBOR-based benchmark comparison APR is 12%, resulting from a LIBOR index value of 2% on October 18, 2021, plus a 10% margin (the margin in effect prior to the increase). Next, the card issuer determines the replacement values. Applying these facts, under the replacement formula the replacement index and margin must equal a 12% APR as well. Assume for purposes of the replacement formula, the card issuer selects Prime as the replacement benchmark index. If the Prime index value is 4% on October 18, 2021, then the replacement margin must be 8%. Thus, the new benchmark for comparison formula for determining whether the card issuer can terminate its rate reevaluation obligation going forward is “Prime value for each review plus 8% margin.” Comment 59(f)(3)-3.
The replacement index used in the replacement rate reevaluation formula must satisfy the conditions in the LIBOR-Specific Provision discussed in LIBOR Credit Card FAQ 3 above.
Note, however, that “replacement index” as used in the formula is not the index for the account, but is the index used specifically for the formula. 12 CFR § 1026.59(f)(3); Comment 59(f)-4. For example, a card issuer transitioning from LIBOR after April 1, 2022, may select Prime as the replacement index for LIBOR for purposes of the rate reevaluations, and may select a SOFR-Based Spread-Adjusted Index as the replacement index for LIBOR for setting the variable rates
on the account.