Facilitating the LIBOR Transition (Regulation Z), 36938-36994 [2020-12239]

Download as PDF 36938 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1026 [Docket No. CFPB–2020–0014] RIN 3170–AB01 Facilitating the LIBOR Transition (Regulation Z) Bureau of Consumer Financial Protection. ACTION: Proposed rule with request for public comment. AGENCY: The Bureau of Consumer Financial Protection (Bureau) is proposing to amend Regulation Z, which implements the Truth in Lending Act (TILA), generally to address the sunset of LIBOR, which is expected to be discontinued after 2021. Some creditors currently use LIBOR as an index for calculating rates for open-end and closed-end products. The Bureau is proposing changes to open-end and closed-end provisions to provide examples of replacement indices for LIBOR indices that meet certain Regulation Z standards. The Bureau also is proposing to permit creditors for home equity lines of credit (HELOCs) and card issuers for credit card accounts to transition existing accounts that use a LIBOR index to a replacement index on or after March 15, 2021, if certain conditions are met. The proposal also addresses change-in-terms notice provisions for HELOCs and credit card accounts and how they apply to accounts transitioning away from using a LIBOR index. Lastly, the Bureau is proposing to address how the rate reevaluation provisions applicable to credit card accounts apply to the transition from using a LIBOR index to a replacement index. DATES: Comments must be received on or before August 4, 2020. ADDRESSES: You may submit comments, identified by Docket No. CFPB–2020– 0014 or RIN 3170–AB01, by any of the following methods: • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. • Email: 2020-LIBOR-NPRM@ cfpb.gov. Include Docket No. CFPB– 2020–0014 or RIN 3170–AB01 in the subject line of the message. • Hand Delivery/Mail/Courier: Comment Intake—LIBOR, Bureau of Consumer Financial Protection, 1700 G Street NW, Washington, DC 20552. Please note that due to circumstances associated with the COVID–19 pandemic, the Bureau discourages the SUMMARY: VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 submission of comments by hand delivery, mail, or courier. Instructions: The Bureau encourages the early submission of comments. All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, and in light of difficulties associated with mail and hand deliveries during the COVID–19 pandemic, commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to https:// www.regulations.gov. In addition, once the Bureau’s headquarters reopens, comments will be available for public inspection and copying at 1700 G Street NW, Washington, DC 20552, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment to inspect the documents by telephoning 202–435–7275. All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Proprietary information or sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals, should not be included. Comments will not be edited to remove any identifying or contact information. FOR FURTHER INFORMATION CONTACT: Angela Fox, Counsel, or Krista Ayoub, Kristen Phinnessee, or Amanda Quester, Senior Counsels, Office of Regulations, at 202–435–7700. If you require this document in an alternative electronic format, please contact CFPB_ Accessibility@cfpb.gov. SUPPLEMENTARY INFORMATION: I. Summary of the Proposed Rule The Bureau is proposing several amendments to Regulation Z, which implements TILA, for both open-end and closed-end credit to address the sunset of LIBOR.1 At this time, LIBOR 1 When amending commentary, the Office of the Federal Register requires reprinting of certain subsections being amended in their entirety rather than providing more targeted amendatory instructions. The sections of regulatory text and commentary included in this document show the language of those sections if the Bureau adopts its changes as proposed. In addition, the Bureau is releasing an unofficial, informal redline to assist industry and other stakeholders in reviewing the changes that it is proposing to make to the regulatory text and commentary of Regulation Z. This redline can be found on the Bureau’s website, at https://www.consumerfinance.gov/policycompliance/rulemaking/rules-under-development/ amendments-facilitate-libor-transition-regulationz/. If any conflicts exist between the redline and the PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 is expected to be discontinued after 2021. These proposed changes are discussed in more detail below. As discussed in part VI, the Bureau generally is proposing that the final rule would take effect on March 15, 2021, except for the updated change-in-term disclosure requirements for HELOCs and credit card accounts that would apply as of October 1, 2021. The Bureau also is issuing additional written guidance related to the LIBOR transition on its website as discussed in part II.C. The Bureau solicits comment on the changes proposed in this document and whether there are any additional regulatory changes or guidance that would be helpful as creditors and card issuers transition away from using LIBOR indices. A. Open-End Credit The Bureau is proposing several amendments to the open-end credit provisions in Regulation Z to address the sunset of LIBOR. First, the Bureau is proposing a detailed roadmap for HELOC creditors and card issuers to choose a compliant replacement index for the LIBOR index.2 Regulation Z already permits HELOC creditors and card issuers to change an index and margin they use to set the annual percentage rate (APR) on a variable-rate account under certain conditions, when the original index ‘‘becomes unavailable’’ or ‘‘is no longer available.’’ The Bureau has preliminarily determined, however, that consumers, HELOC creditors, and card issuers would benefit substantially if HELOC creditors and card issuers could transition away from a LIBOR index before LIBOR becomes unavailable. The Bureau is therefore proposing new provisions that detail specifically how HELOC creditors and card issuers may replace a LIBOR index with a replacement index for accounts on or after March 15, 2021. These proposed new provisions are in proposed § 1026.40(f)(3)(ii)(B) for HELOCs and in proposed § 1026.55(b)(7)(ii) for credit card accounts. Under the proposal, HELOC creditors and card issuers must ensure that the APR calculated using the replacement index is substantially similar to the rate calculated using the LIBOR index, based on the values of these indices on December 31, 2020. The proposal also imposes other requirements on a replacement index. Under the proposal, text of Regulation Z, its commentary, or this proposed rule, the documents published in the Federal Register are the controlling documents. 2 Reverse mortgages structured as open-end credit are HELOCs subject to the provisions in §§ 1026.40 and 1026.9(c)(1). E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules HELOC creditors and card issuers may select a replacement index that is newly established and has no history, or an index that is not newly established and has a history. HELOC creditors and card issuers may replace a LIBOR index with an index that has a history only if the index has historical fluctuations substantially similar to those of the LIBOR index. The Bureau is proposing to determine that the prime rate published in the Wall Street Journal (Prime) has historical fluctuations substantially similar to those of certain U.S. Dollar (USD) LIBOR indices. The Bureau also is proposing to determine that certain spread-adjusted 3 indices based on the Secured Overnight Financing Rate (SOFR) recommended by the Alternative Reference Rates Committee (ARRC) have historical fluctuations that are substantially similar to those of certain USD LIBOR indices. Second, the Bureau is proposing to make clarifying changes to the existing provisions on the replacement of an index when the index becomes unavailable. These proposed changes are in proposed § 1026.40(f)(3)(ii)(A) for HELOCs and in proposed § 1026.55(b)(7)(i) for credit card accounts. Third, the Bureau is proposing to revise change-in-terms notice requirements for HELOCs and credit card accounts to ensure that consumers know how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced. The proposal would ensure that the change-in-terms notices for these accounts will disclose the index that is replacing the LIBOR index and any adjusted margin that will be used to calculate a consumer’s rate, regardless of whether the margin is being reduced or increased. These proposed changes, if adopted, would become effective October 1, 2021. The proposed changes are in § 1026.9(c)(1)(ii) for HELOCs and in § 1026.9(c)(2)(v)(A) for credit card accounts. Fourth, the Bureau is proposing to add an exception from the rate reevaluation provisions applicable to 3 The spread between two indices is the difference between the levels of those indices, which may vary from day to day. For example, if today index X is 5% and index Y is 4%, then the X–Y spread today is one percentage point (or, equivalently, 100 basis points). A spread adjustment is a term that is added to one index to make it more similar to another index. For example, if the X–Y spread is typically around 100 basis points, then one reasonable spread adjustment may be to add 100 basis points to Y every day. Then the spread-adjusted value of Y will typically be much closer to the value of X than Y is, although there may still be differences between X and the spreadadjusted Y from day to day. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 credit card accounts. Currently, when a card issuer increases a rate on a credit card account, the card issuer generally must complete an analysis reevaluating the rate increase every six months until the rate is reduced to a certain degree. To facilitate compliance, the proposal would add an exception from these requirements for increases that occur as a result of replacing a LIBOR index using the specific proposed provisions described above for transitioning from a LIBOR index or as a result of the LIBOR index becoming unavailable. This proposed exception is in proposed § 1026.59(h)(3). This proposed exception would not apply to rate increases that are already subject to the rate reevaluation requirements prior to the transition from the LIBOR index. The proposal also would address cases where the card issuer was already required to perform a rate reevaluation review prior to transitioning away from LIBOR and LIBOR was used as the benchmark for comparison for purposes of determining whether the card issuer can terminate the six-month reviews. To facilitate compliance, these proposed changes would address how a card issuer can terminate the obligation to review where the rate applicable immediately prior to the increase was a variable rate calculated using a LIBOR index. These proposed changes are set forth in proposed § 1026.59(f)(3). Fifth, in relation to the open-end credit provisions, the Bureau is proposing several technical edits to comments 9(c)(2)(iv)–2 and 59(d)–2 to replace LIBOR references with references to a SOFR index. B. Closed-End Credit The Bureau is proposing amendments to the closed-end credit provisions in Regulation Z to address the sunset of LIBOR. First, the Bureau is proposing to identify specific indices as an example of a ‘‘comparable index’’ for purposes of the closed-end refinancing provisions. Currently, under Regulation Z, if the creditor changes the index of a variablerate closed-end loan to an index that is not a ‘‘comparable index,’’ the index change may constitute a refinancing for purposes of Regulation Z, triggering certain requirements. The Bureau is proposing to add an illustrative example to identify the SOFR-based spreadadjusted replacement indices recommended by the ARRC as an example of a ‘‘comparable index’’ for the LIBOR indices that they are intended to replace. These proposed changes are in comment 20(a)(3)–ii. Second, in relation to the closed-end credit provisions, the Bureau is proposing technical edits to PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 36939 § 1026.36(a)(4)(iii)(C) and (a)(5)(iii)(B), comment 37(j)(1)–1, and sample forms H–4(D)(2) and H–4(D)(4) in appendix H. These proposed technical edits would replace LIBOR references with references to a SOFR index and make related changes and corrections. II. Background A. LIBOR Introduced in the 1980s, LIBOR (originally an acronym for London Interbank Offered Rate) was intended to measure the average rate at which a bank could obtain unsecured funding in the London interbank market for a given period, in a given currency. LIBOR is calculated based on submissions from a panel of contributing banks and published every London business day for five currencies (USD, British pound sterling (GBP), euro (EUR), Swiss franc (CHF), and Japanese yen (JPY)) and for seven tenors 4 for each currency (overnight, 1-week, 1-month, 2-month, 3-month, 6-month, and 1-year), resulting in 35 individual rates (collectively, LIBOR). As of March 2020, the panel for USD LIBOR is comprised of sixteen banks, and each bank contributes data for all seven tenors.5 In 2017, the chief executive of the U.K. Financial Conduct Authority (FCA), which regulates LIBOR, announced that it did not intend to persuade or compel banks to submit information for LIBOR past the end of 2021 and that the panel banks had agreed to voluntarily sustain LIBOR until then in order to provide sufficient time for the market to transition from using LIBOR indices to alternative indices.6 However, the Intercontinental Exchange (ICE) Benchmark Administration, which administers LIBOR, announced a goal to continue publishing certain LIBOR tenors past 2021 though it declined to guarantee their continued availability.7 The FCA has indicated that it would conduct ‘‘representativeness tests’’ if LIBOR continues to be published for some time after 2021 based on submissions from a smaller number of panel banks (and thus a smaller number of transactions), raising the possibility that LIBOR could 4 The tenor refers to the length of time remaining until a loan matures. 5 ICE LIBOR, (last visited Mar. 26, 2020), https:// www.theice.com/iba/libor. 6 Andrew Bailey, The Future of LIBOR, U.K. FCA, (July 27, 2017), https://www.fca.org.uk/news/ speeches/the-future-of-libor; FCA Statement on LIBOR Panels, U.K. FCA, (Nov. 24, 2017), https:// www.fca.org.uk/news/statements/fca-statementlibor-panels. 7 Intercontinental Exch. Benchmark Admin., ICE Benchmark Administration Survey on the Use of LIBOR, https://www.theice.com/iba/ice-benchmarkadministration-survey-on-the-use-of-libor (last visited May 18, 2020). E:\FR\FM\18JNP2.SGM 18JNP2 36940 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules be declared to be unrepresentative by its regulator.8 As a result, industry faces uncertainty about the publication and representativeness of LIBOR, which is neither guaranteed to continue nor guaranteed to cease. B. Consumer Products Using LIBOR In the United States, financial institutions have used LIBOR as a common benchmark rate for a variety of adjustable-rate consumer financial products, including mortgages, credit cards, HELOCs, reverse mortgages, and student loans. Typically, the consumer pays an interest rate that is calculated as the sum of a benchmark index and a margin. For example, a consumer may pay an interest rate equal to the 1-year USD LIBOR plus two percentage points. Financial institutions have been developing plans and procedures to transition from the use of LIBOR indices to replacement indices for products that are being newly issued and existing accounts that were originally benchmarked to a LIBOR index. In some markets, such as for HELOCs and credit cards, the vast majority of newly originated lines of credit are already based on indices other than a LIBOR index. C. Additional Written Guidance In addition to this proposed rule, the Bureau is issuing separate written guidance in the form of Frequently Asked Questions (FAQs) for creditors and card issuers to use as they transition away from using LIBOR indices. These FAQs address regulatory questions where the existing rule is clear on the requirements and already provides necessary alternatives needed for the LIBOR transition. The guidance can be found at: https:// www.consumerfinance.gov/policycompliance/rulemaking/rules-underdevelopment/amendments-facilitatelibor-transition-regulation-z/. This guidance deals with issues related to: (1) Existing mortgage servicing notice requirements (including how servicers may notify consumers of the index change when sending the interest rate adjustment notices and periodic statements); (2) existing HELOC and adjustable-rate mortgage (ARM) loan program notice requirements disclosing historical index examples; (3) existing Alternative Mortgage Transaction Parity Act requirements for index changes that result in an increased interest rate or finance charge for alternative mortgage transactions; and (4) identification of 8 Andrew Bailey, LIBOR: Preparing for the End, U.K. FCA, (July 15, 2019), https://www.fca.org.uk/ news/speeches/libor-preparing-end. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 implementation and consumer impacts for creditors or card issuers as they prepare for the LIBOR transition. III. Outreach The Bureau has received feedback through both formal and informal channels, regarding ways in which the Bureau could use rulemaking to facilitate the market’s orderly transition from using LIBOR indices to alternate indices. The following is a brief summary of some of the Bureau’s engagement with industry, consumer advocates, regulators, and other stakeholders regarding the transition away from the use of LIBOR indices. The Bureau discusses feedback received through these various channels that is relevant to this proposal throughout the document. The Bureau is an ex officio member of the ARRC, a group of private-market participants convened by the Board of Governors of the Federal Reserve System (Board) and the Federal Reserve Bank of New York (New York Fed) to ensure a successful transition from the use of LIBOR as an index by December 2021. The group is comprised of financial institutions and other market participants such as exchanges, regulators, and consumer advocates. As an ex officio member, the Bureau does not have voting rights and may only offer views and analysis to support the ARRC’s objectives. Through its interaction with other ARRC members, the Bureau has received questions and requests for clarification regarding certain provisions in the Bureau’s rules that could affect the industry’s LIBOR transition plans. For example, the Bureau has received informal requests from members of the ARRC for clarification that the spread-adjusted SOFR-based index being developed by the ARRC is a ‘‘comparable index’’ to the LIBOR index. The Bureau has also, in coordination with the ARRC, actively sought comments regarding a potential rulemaking related to the LIBOR transition. For example, the Bureau convened multiple meetings for members of the ARRC to hear consumer groups’ views on potential issues consumers may face during the sunset of LIBOR and solicited suggestions for potential actions the regulators could take to facilitate a smooth transition. The Bureau has engaged in ongoing market monitoring with individual institutions, trade associations, regulators, and other stakeholders to understand their plans for the LIBOR transition, their concerns, and potential impacts on consumers. Institutions and trade associations have met informally with the Bureau and sent letters PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 outlining their concerns related to the sunset of LIBOR. The Bureau also has received feedback regarding the LIBOR transition through other formal channels that were related to general Bureau activities. For example, in January 2019, the Bureau solicited information from the public about several aspects of the consumer credit card market. The Bureau received comments submitted from a banking trade group regarding changes to Regulation Z that could support the transition away from using LIBOR indices.9 Through these various channels, industry trade associations, consumer groups, and other organizations have provided information about provisions in Bureau regulations that could be modified to reduce market confusion, enable institutions and consumers to transition away from using LIBOR indices in a timely manner, and lower market risk related to the LIBOR transition. A number of financial institutions raised concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable if, as expected, some panel banks stop submitting information before LIBOR finally is discontinued. Stakeholders noted that FCA could declare LIBOR to be ‘‘unrepresentative’’ at some point after 2021 and wanted clarity from U.S. Federal regulators about how U.S. firms should interpret such a declaration. Some industry participants asked that the Bureau declare LIBOR to be ‘‘unavailable’’ for the purposes of Regulation Z. They also requested that the Bureau facilitate a transition timeline that would provide sufficient time for financial institutions to inform consumers of the change and make the necessary changes to their systems. Industry also recommended that the Bureau announce that it would not deem a replacement index to be unfair, deceptive, or abusive if it were recommended by the Board, the New York Fed, or a committee endorsed or convened by the Board or New York Fed. Credit card issuers and related trade associations stated that the prime rate should be permitted to replace a LIBOR index, noting that while a SOFR-based index is expected to replace a LIBOR index in many commercial contexts, the prime rate is the industry standard rate index for credit cards. They also requested that the Bureau permit card issuers to replace the LIBOR index used in setting the variable rates on existing accounts before LIBOR becomes unavailable to facilitate compliance. 9 84 E:\FR\FM\18JNP2.SGM FR 647 (Jan. 31, 2019). 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules They also requested guidance on how the rate reevaluation provisions applicable to credit card accounts apply to accounts that are transitioning away from using LIBOR indices. Consumer advocates emphasized the need for transparency as institutions sunset their use of LIBOR indices and indicated a preference for replacement indices that are publicly available. They recommended regulators protect consumers by preventing institutions from changing the index or margin in a manner that would raise the interest rate paid by the consumer. They also shared industry’s concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable until LIBOR finally is discontinued. Advocates noted that existing contract language may limit how and when institutions can transition away from LIBOR. They also discussed issues specific to particular consumer products, expressing concern, for example, that the contract language in the private student loan market is ambiguous and gives lenders wide leeway in determining a comparable replacement index for LIBOR indices. IV. Legal Authority A. Section 1022 of the Dodd-Frank Act Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules ‘‘as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.’’ Among other statutes, title X of the Dodd-Frank Act and TILA are Federal consumer financial laws.10 Accordingly, in setting forth this proposal, the Bureau is exercising its authority under Dodd-Frank Act section 1022(b) to prescribe rules under TILA and title X that carry out the purposes and objectives and prevent evasion of those laws. B. The Truth in Lending Act TILA is a Federal consumer financial law. In adopting TILA, Congress explained that: [E]conomic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this 10 Dodd-Frank Act section 1002(14) (defining ‘‘Federal consumer financial law’’ to include the ‘‘enumerated consumer laws’’ and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act section 1002(12) (defining ‘‘enumerated consumer laws’’ to include TILA). VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.11 TILA and Regulation Z define credit broadly as the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.12 TILA and Regulation Z set forth disclosure and other requirements that apply to creditors. Different rules apply to creditors depending on whether they are extending ‘‘open-end credit’’ or ‘‘closed-end credit.’’ Under the statute and Regulation Z, open-end credit exists where there is a plan in which the creditor reasonably contemplates repeated transactions; the creditor may impose a finance charge from time to time on an outstanding unpaid balance; and the amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.13 Typically, closedend credit is credit that does not meet the definition of open-end credit.14 The term ‘‘creditor’’ generally means a person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract.15 TILA defines ‘‘finance charge’’ generally as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.16 The term ‘‘creditor’’ also includes a card issuer, which is a person or its agent that issues credit cards, when that person extends credit accessed by the credit card.17 Regulation Z defines the term ‘‘credit card’’ to mean any card, plate, or other single credit device that may be used from time to time to obtain credit.18 A charge card is a credit card 11 TILA section 102(a), codified at 15 U.S.C. 1601(a). 12 TILA section 103(f), codified at 15 U.S.C. 1602(f); 12 CFR 1026.2(a)(14). 13 12 CFR 1026.2(a)(20). 14 12 CFR 1026.2(a)(10). 15 See TILA section 103(g), codified at 15 U.S.C. 1602(g); 12 CFR 1026.2(a)(17)(i). 16 TILA section 106(a), codified at 15 U.S.C. 1605(a); see 12 CFR 1026.4. 17 See TILA section 103(g), codified at 15 U.S.C. 1602(g); 12 CFR 1026.2(a)(17)(iii) and (iv). 18 See 12 CFR 1026.2(a)(15). PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 36941 on an account for which no periodic rate is used to compute a finance charge.19 In addition to being creditors under TILA and Regulation Z, card issuers also generally must comply with the credit card rules set forth in the Fair Credit Billing Act 20 and in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) 21 (if the card accesses an open-end credit plan), as implemented in Regulation Z subparts B and G.22 TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a) 23 directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. Pursuant to TILA section 102(a), a purpose of TILA is to assure a meaningful disclosure of credit terms to enable the consumer to avoid the uninformed use of credit and compare more readily the various credit terms available to the consumer. This stated purpose is tied to Congress’s finding that economic stabilization would be enhanced and competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit.24 Thus, strengthened competition among financial institutions is a goal of TILA, achieved through the effectuation of TILA’s purposes. Historically, TILA section 105(a) has served as a broad source of authority for rules that promote the informed use of credit through required disclosures and substantive regulation of certain practices. Dodd-Frank Act section 1100A clarified the Bureau’s section 105(a) authority by amending that section to provide express authority to prescribe regulations that contain ‘‘additional requirements’’ that the Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. This 19 See 12 CFR 1026.2(a)(15)(iii). III of Public Law 93–495, 88 Stat. 1511 20 Title (1974). 21 Public Law 111–24, 123 Stat. 1734 (2009). 22 See generally 12 CFR 1026.5(b)(2)(ii), .7(b)(11), .12, .51–.60. 23 15 U.S.C. 1604(a). 24 TILA section 102(a), codified at 15 U.S.C. 1601(a). E:\FR\FM\18JNP2.SGM 18JNP2 36942 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules amendment clarified the authority to exercise TILA section 105(a) to prescribe requirements beyond those specifically listed in the statute that meet the standards outlined in section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a) authority to make adjustments and exceptions to the requirements of TILA applies to all transactions subject to TILA, except with respect to the provisions of TILA section 129 that apply to the high-cost mortgages referred to in TILA section 103(bb).25 For the reasons discussed in this document, the Bureau is proposing amendments to Regulation Z with respect to certain provisions that impact the transition from LIBOR indices to other indices to carry out TILA’s purposes and is proposing such additional requirements, adjustments, and exceptions as, in the Bureau’s judgment, are necessary and proper to carry out the purposes of TILA, prevent circumvention or evasion thereof, or to facilitate compliance. In developing these aspects of the proposal pursuant to its authority under TILA section 105(a), the Bureau has considered the purposes of TILA, including ensuring meaningful disclosures, facilitating consumers’ ability to compare credit terms, and helping consumers avoid the uninformed use of credit, and the findings of TILA, including strengthening competition among financial institutions and promoting economic stabilization. TILA section 105(d). As amended by the Dodd-Frank Act, TILA section 105(d) 26 states that any Bureau regulations requiring any disclosure which differs from the disclosures previously required in certain sections shall have an effective date of that October 1 which follows by at least six months the date of promulgation. The section also states that the Bureau may in its discretion lengthen or shorten the amount of time for compliance when it makes a specific finding that such action is necessary to comply with the findings of a court or to prevent unfair or deceptive disclosure practices. The section further states that any creditor or lessor may comply with any such newly promulgated disclosures requirements prior to the effective date of the requirements. 25 15 26 15 U.S.C. 1602(bb). U.S.C. 1604(d). VerDate Sep<11>2014 18:27 Jun 17, 2020 V. Section-by-Section Analysis Section 1026.9 Requirements Subsequent Disclosure 9(c) Change in Terms 9(c)(1) Rules Affecting Home-Equity Plans 9(c)(1)(ii) Notice Not Required Section 1026.9(c)(1)(i) provides that for HELOCs subject to § 1026.40 whenever any term required to be disclosed in the account-opening disclosures under § 1026.6(a) is changed or the required minimum periodic payment is increased, the creditor must mail or deliver written notice of the change to each consumer who may be affected. The notice must be mailed or delivered at least 15 days prior to the effective date of the change. The 15-day timing requirement does not apply if the change has been agreed to by the consumer; the notice must be given, however, before the effective date of the change. Section 1026.9(c)(1)(ii) provides that for HELOCs subject to § 1026.40, a creditor is not required to provide a change-in-terms notice under § 1026.9(c)(1) when the change involves a reduction of any component of a finance or other charge or when the change results from an agreement involving a court proceeding. A creditor for a HELOC subject to § 1026.40 is required under current § 1026.9(c)(1) to provide a change-interms notice disclosing the index that is replacing the LIBOR index. The index is a term that is required to be disclosed in the account-opening disclosures under § 1026.6(a) and thus, a creditor must provide a change-in-terms notice disclosing the index that is replacing the LIBOR index.27 The exception in § 1026.9(c)(1)(ii) that provides that a change-in-terms notice is not required when a change involves a reduction in the finance or other charge does not apply to the index change. The change in the index used in making rate adjustments is a change in a term required to be disclosed in a change-interms notice under § 1026.9(c)(1) regardless of whether there is also a change in the index value or margin that involves a reduction in a finance or other charge. Under current § 1026.9(c)(1), a creditor generally is required to provide a change-in-terms notice of a margin change if the margin is increasing. In disclosing the variable rate in the account-opening disclosures under § 1026.6(a), the creditor must disclose the margin as part of an explanation of 27 See 12 CFR 1026.6(a)(1)(ii) and (iv) and comment 6(a)(1)(ii)–5. Jkt 250001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 how the amount of any finance charge will be determined.28 Thus, a creditor must provide a change-in-terms notice under current § 1026.9(c)(1) disclosing the changed margin, unless § 1026.9(c)(1)(ii) applies. Current § 1026.9(c)(1)(ii) applies to a decrease in the margin because that change would involve a reduction in a component of a finance or other charge. Thus, under current § 1026.9(c)(1), a creditor would only be required to provide a change-interms notice of a change in the margin under § 1026.9(c)(1) if the margin is increasing. The Proposal The Bureau is proposing to revise § 1026.9(c)(1)(ii) to provide that the exception in § 1026.9(c)(1)(ii) under which a creditor is not required to provide a change-in-terms notice under § 1026.9(c)(1) when the change involves a reduction of any component of a finance or other charge does not apply on or after October 1, 2021, where the creditor is reducing the margin when a LIBOR index is replaced as permitted by proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B).29 The proposed changes, if adopted, will ensure that the change-in-terms notices will disclose the replacement index and any adjusted margin that will be used to calculate a consumer’s rate, regardless of whether the margin is being reduced or increased. The Bureau also is proposing to add comment 9(c)(1)(ii)–3 to provide additional detail. Proposed comment 9(c)(1)(ii)–3 provides that for change-interms notices provided under § 1026.9(c)(1) on or after October 1, 2021, covering changes permitted by proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B), a creditor must provide a change-in-terms notice under § 1026.9(c)(1) disclosing the replacement index for a LIBOR index and any adjusted margin that is permitted under proposed § 1026.40(f)(3)(ii)(A) or 28 See 12 CFR 1026.6(a)(1)(iv). discussed in more detail in the section-bysection analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau is proposing to move the provisions in current § 1026.40(f)(3)(ii) that allow a creditor for HELOC plans subject to § 1026.40 to replace an index and adjust the margin if the index is no longer available in certain circumstances to proposed § 1026.40(f)(3)(ii)(A) and to revise the proposed moved provisions for clarity and consistency. Also, as discussed in more detail in the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(B), to facilitate compliance, the Bureau is proposing to add new LIBOR-specific provisions to proposed § 1026.40(f)(3)(ii)(B) that would permit creditors for HELOC plans subject to § 1026.40 that use a LIBOR index for calculating a variable rate to replace the LIBOR index and change the margin for calculating the variable rate on or after March 15, 2021, in certain circumstances. 29 As E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules § 1026.40(f)(3)(ii)(B), even if the margin is reduced. Proposed comment 9(c)(1)(ii)–3 also provides that prior to October 1, 2021, a creditor has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index as permitted by proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B). To effectuate the purposes of TILA, the Bureau is proposing to use its TILA section 105(a) authority to amend § 1026.9(c)(1)(ii). TILA section 105(a) 30 directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. The Bureau believes that when a creditor for a HELOC plan that is subject to § 1026.40 is replacing the LIBOR index and adjusting the margin as permitted by proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B), it may be beneficial for consumers to receive notice not just of the replacement index, but also any adjustments to the margin, even if the margin is decreased. The Bureau believes that it may be important that consumers are informed of the replacement index and any adjusted margin (even a reduction in the margin) so that consumers will know how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced. Otherwise, a consumer that is only notified that the LIBOR index is being replaced with a replacement index that has a higher index value but is not notified that the margin is decreasing could reasonably but mistakenly believe that the APR on the plan is increasing. The Bureau solicits comment generally on the proposed revisions to § 1026.9(c)(1)(ii) and proposed comment 9(c)(1)(ii)–3. The proposed revisions to § 1026.9(c)(1)(ii), if adopted as proposed, would apply to notices provided on or after October 1, 2021. TILA section 105(d) generally requires that changes in disclosures required by TILA or Regulation Z have an effective date of the October 1 that is at least six months after the date the final rule is adopted.31 Proposed comment 9(c)(1)(ii)–3 clarifies that prior to 30 15 31 15 U.S.C. 1604(a). U.S.C. 1604(d). VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 October 1, 2021, a creditor has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index as permitted by proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B). The Bureau believes that creditors for HELOC plans subject to § 1026.40 may want to provide the information about the decreased margin in the change-in-terms notice even if they replace the LIBOR index and adjust the margin pursuant to proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B) earlier than October 1, 2021. The Bureau believes that these creditors may want to provide this information to avoid confusion by consumers and because this reduced margin is beneficial to consumers. Thus, proposed comment 9(c)(1)(ii)–3 would permit creditors for HELOC plans subject to § 1026.40 to provide the information about the decreased margin in the change-in-terms notice even if they replace the LIBOR index and adjust the margin pursuant to proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B) earlier than October 1, 2021. The Bureau encourages creditors to include this information in change-in-terms notices provided earlier than October 1, 2021, even though they are not required to do so, to ensure that consumers are informed of how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced. The Bureau recognizes that a LIBOR index may be replaced on a HELOC plan subject to § 1026.40 for reasons other than those set forth in proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B). For example, pursuant to current § 1026.40(f)(3)(iii), a creditor for a HELOC plan may replace the LIBOR index used under a plan and adjust the margin if a consumer specifically agrees to the change in writing at the time of the change. The Bureau solicits comment on whether the Bureau should revise § 1026.9(c)(1)(ii) to require that the creditor in those cases must disclose any decrease in the margin in change-in-terms notices provided on or after October 1, 2021, in the change-in-terms notice that discloses the replacement index for a LIBOR index used under the plan. 9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans TILA section 127(i)(1), which was added by the Credit CARD Act, provides that in the case of a credit card account under an open-end consumer credit plan, a creditor generally must provide a written notice of an increase in an APR not later than 45 days prior to the PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 36943 effective date of the increase.32 In addition, TILA section 127(i)(2) provides that in the case of a credit card account under an open-end consumer credit plan, a creditor must provide a written notice of any significant change, as determined by rule of the Bureau, in terms (other than APRs) of the cardholder agreement not later than 45 days prior to the effective date of the change.33 Section 1026.9(c)(2)(i)(A) provides that for plans other than HELOCs subject to § 1026.40, a creditor generally must provide a written notice of a ‘‘significant change in account terms’’ at least 45 days prior to the effective date of the change to each consumer who may be affected. Section 1026.9(c)(2)(ii) defines ‘‘significant change in account terms’’ to mean a change in the terms required to be disclosed under § 1026.6(b)(1) and (b)(2), an increase in the required minimum periodic payment, a change to a term required to be disclosed under § 1026.6(b)(4), or the acquisition of a security interest. Among other things, § 1026.9(c)(2)(v)(A) provides that a change-in-terms notice is not required when a change involves a reduction of any component of a finance or other charge. The change-in-terms provisions in § 1026.9(c)(2) generally apply to a credit card account under an open-end (not home-secured) consumer credit plan, and to other open-end plans that are not subject to § 1026.40. The creditor is required to provide a change-in-terms notice under § 1026.9(c)(2) disclosing the index that is replacing the LIBOR index pursuant to proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). The index is a term that meets the definition of a ‘‘significant change in account terms’’ under § 1026.6(b)(2)(i)(A) and (4)(ii) and thus, the creditor must provide a change-in-terms notice disclosing the index that is replacing the LIBOR index.34 The exception in § 1026.9(c)(2)(v)(A) that provides that a change-in-terms notice is not required when a change involves a reduction in the finance or other charge does not apply to the index change. The change in the index used in making rate adjustments is a change in a term required to be disclosed in a change-interms notice under § 1026.9(c)(2) regardless of whether there is also a change in the index value or margin that involves a reduction in a finance or other charge. 32 15 U.S.C. 1637(i)(1). U.S.C. 1637(i)(2). 34 See 12 CFR 1026.6(a)(2) and (4) and 1026.9(c)(2)(iv)(D)(1) and comment 9(c)(2)(iv)–2. 33 15 E:\FR\FM\18JNP2.SGM 18JNP2 36944 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules Under current § 1026.9(c)(2), for plans other than HELOCs subject to § 1026.40, a creditor generally is required to provide a change-in-terms notice of a margin change if the margin is increasing. In disclosing the variable rate in the account-opening disclosures, the creditor must disclose the margin as part of an explanation of how the rate is determined.35 Thus, a creditor must provide a change-in-terms notice under § 1026.9(c)(2) disclosing the changed margin, unless § 1026.9(c)(2)(v)(A) applies. Current § 1026.9(c)(2)(v)(A) applies to a decrease in the margin because that change would involve a reduction in a component of a finance or other charge. Thus, under current § 1026.9(c)(2), a creditor would only be required to provide a change-in-terms notice of a change in the margin under § 1026.9(c)(2) if the margin is increasing. The Bureau is proposing two changes to the provisions in § 1026.9(c)(2) and its accompanying commentary. First, the Bureau is proposing technical edits to comment 9(c)(2)(iv)–2 to replace LIBOR references with references to SOFR. Second, the Bureau is proposing changes to § 1026.9(c)(2)(v)(A) to provide that for plans other than HELOCs subject to § 1026.40, the exception in § 1026.9(c)(2)(v)(A) under which a creditor is not required to provide a change-in-terms notice under § 1026.9(c)(2) when the change involves a reduction of any component of a finance or other charge does not apply on or after October 1, 2021, to margin reductions when a LIBOR index is replaced as permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). The proposed changes, if adopted, will ensure that the change-in-terms notices will disclose the replacement index and any adjusted margin that will be used to calculate a consumer’s rate, regardless of whether the margin is being reduced or increased. 9(c)(2)(iv) Disclosure Requirements For plans other than HELOCs subject to § 1026.40, comment 9(c)(2)(iv)–2 explains that, if a creditor is changing the index used to calculate a variable rate, the creditor must disclose the following information in a tabular format in the change-in-terms notice: The amount of the new rate (as calculated using the new index) and indicate that the rate varies and how the rate is determined, as explained in § 1026.6(b)(2)(i)(A). The comment provides an example, which indicates that, if a creditor is changing from using a prime rate to using LIBOR in calculating a variable rate, the creditor 35 12 CFR 1026.6(b)(4)(ii)(B). VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 would disclose in the table required by § 1026.9(c)(2)(iv)(D)(1) the new rate (using the new index) and indicate that the rate varies with the market based on LIBOR. In light of the anticipated discontinuation of LIBOR, the proposed rule would amend the example in comment 9(c)(2)(iv)–2 to substitute a SOFR index for LIBOR. The proposed rule would also make technical changes for clarity by changing ‘‘prime rate’’ to ‘‘prime index.’’ 9(c)(2)(v) Notice Not Required The Bureau is proposing to revise § 1026.9(c)(2)(v)(A) to provide that for plans other than HELOCs subject to § 1026.40, the exception in § 1026.9(c)(2)(v)(A) under which a creditor is not required to provide a change-in-terms notice under § 1026.9(c)(2) when the change involves a reduction of any component of a finance or other charge does not apply on or after October 1, 2021, to margin reductions when a LIBOR index is replaced as permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii).36 The proposed changes, if adopted, will ensure that the change-in-terms notices will disclose the replacement index and any adjusted margin that will be used to calculate a consumer’s rate, regardless of whether the margin is being reduced or increased. The Bureau also is proposing to add comment 9(c)(2)(v)–14 to provide additional detail. Proposed comment 9(c)(2)(v)–14 provides that for changein-terms notices provided under § 1026.9(c)(2) on or after October 1, 2021, covering changes permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii), a creditor must provide a change-in-terms notice under § 1026.9(c)(2) disclosing the replacement index for a LIBOR index and any adjusted margin that is permitted under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii), even if the margin is reduced. Proposed comment 9(c)(2)(v)–14 also provides 36 As discussed in more detail in the section-bysection analysis of proposed § 1026.55(b)(7)(i), the Bureau is proposing to move the provisions in current comment 55(b)(2)–6 that allow a card issuer to replace an index and adjust the margin if the index becomes unavailable in certain circumstances to proposed § 1026.55(b)(7)(i) and to revise the proposed moved provisions for clarity and consistency. Also, as discussed in more detail in the section-by-section analysis of proposed § 1026.55(b)(7)(ii), to facilitate compliance, the Bureau is proposing to add new LIBOR-specific provisions to proposed § 1026.55(b)(7)(ii) that would permit card issuers for a credit card account under an open-end (not home-secured) consumer credit plan that use a LIBOR index under the plan to replace the LIBOR index and change the margin on such plans on or after March 15, 2021, in certain circumstances. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 that prior to October 1, 2021, a creditor has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index as permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). The Bureau believes that when a creditor for plans other than HELOCs subject to § 1026.40 is replacing the LIBOR index and adjusting the margin as permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii), it may be beneficial for consumers to receive notice not just of the replacement index but also any adjustments to the margin, even if the margin is decreased. The Bureau believes that it may be important that consumers are informed of the replacement index and any adjusted margin (even a reduction in the margin) so that consumers will know how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced. Otherwise, a consumer that is only notified that the LIBOR index is being replaced with a replacement index that has a higher index value but is not notified that the margin is decreasing could reasonably but mistakenly believe that the APR on the plan is increasing. The Bureau solicits comment generally on the proposed revisions to § 1026.9(c)(2)(v)(A) and proposed comment 9(c)(2)(v)–14. The proposed revisions to § 1026.9(c)(2)(v)(A), if adopted as proposed, would apply to notices provided on or after October 1, 2021. TILA section 105(d) generally requires that changes in disclosures required by TILA or Regulation Z have an effective date of the October 1 that is at least six months after the date the final rule is adopted.37 Proposed comment 9(c)(2)(v)–14 clarifies that prior to October 1, 2021, a creditor has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index as permitted by proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). The Bureau believes that creditors for plans other than HELOCs subject to § 1026.40 may want to provide the information about the decreased margin in the change-in-terms notice, even if they replace the LIBOR index and adjust the margin pursuant to proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) earlier than October 1, 2021. The Bureau believes that these creditors may want to provide this information to avoid confusion by consumers and because this reduced margin is beneficial to consumers. Thus, proposed comment 37 15 E:\FR\FM\18JNP2.SGM U.S.C. 1604(d). 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules 9(c)(2)(v)–14 would permit creditors for plans other than HELOCs subject to § 1026.40 to provide the information about the decreased margin in the change-in-terms notice even if they replace the LIBOR index and adjust the margin pursuant to proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) earlier than October 1, 2021. The Bureau encourages creditors to include this information in change-in-terms notices provided earlier than October 1, 2021, even though they are not required to do so, to ensure that consumers are informed of how the variable rates on their accounts will be determined going forward after the LIBOR index is replaced. The Bureau recognizes that there may be open-end credit plans that use a LIBOR index to calculate variable rates on the plan where the plan is not a HELOC that is subject to § 1026.40 and is not a credit card account under an open-end (not home-secured) consumer credit plan. For example, there may be overdraft lines of credit and other types of open-end plans that are not HELOCs and are not credit card accounts that may use a LIBOR index. The proposed changes to § 1026.9(c)(2)(v)(A) requiring any reduced margin to be disclosed in a change-in-terms notice when the LIBOR index is being replaced would not apply to a decrease in the margin when a LIBOR index is replaced for these open-end plans because the proposed changes only apply when a LIBOR index is replaced under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). These open-end plans are not subject to the restrictions set forth in proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) for replacing the LIBOR index and adjusting the margin. The Bureau solicits comment on whether the Bureau should revise § 1026.9(c)(2)(v)(A) to require that creditors for those open-end plans must disclose any decrease in the margin in change-in-terms notices provided on or after October 1, 2021, where the creditor is replacing a LIBOR index used under the plan. The Bureau also solicits comment on the extent to which these types of open-end plans currently use a LIBOR index. Section 1026.20 Disclosure Requirements Regarding PostConsummation Events 20(a) Refinancings Section 1026.20 includes disclosure requirements regarding postconsummation events for closed-end credit. Section 1026.20(a) and its commentary define when a refinancing occurs for closed-end credit and provide VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 that a refinancing is a new transaction requiring new disclosures to the consumer. Comment 20(a)–3.ii.B explains that a new transaction subject to new disclosures results if the creditor adds a variable-rate feature to the obligation, even if it is not accomplished by the cancellation of the old obligation and substitution of a new one. The comment also states that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction to a comparable index, whether the change replaces the existing index or substitutes an index for one that no longer exists. To clarify comment 20(a)–3.ii.B, the Bureau is proposing to add to the comment an illustrative example, which would indicate that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction from the 1-month, 3-month, 6-month, or 1year USD LIBOR index to the spreadadjusted index based on SOFR recommended by the ARRC to replace the 1-month, 3-month, 6-month, or 1year USD LIBOR index respectively because the replacement index is a comparable index to the corresponding USD LIBOR index.38 As discussed in part III, the Bureau has received requests from stakeholders for clarification that the spread-adjusted SOFR-based index being developed by the ARRC is a ‘‘comparable index’’ to LIBOR. The Bureau recognizes that this issue is of concern for a range of closedend credit products because issuing new origination disclosures in connection with the LIBOR transition could be quite expensive. The Bureau also recognizes that the issue is of particular concern with respect to existing LIBOR closed-end mortgage loans because, if substitution of an index that is not a ‘‘comparable index’’ constitutes a refinancing under § 1026.20(a) for an ARM, § 1026.43 would require a new ability-to-repay determination if the requirements of § 1026.43 are otherwise applicable.39 38 By ‘‘corresponding USD LIBOR index,’’ the Bureau means the specific USD LIBOR index for which the ARRC is recommending the replacement index as a replacement. Thus, if SOFR term rates are not available and the ARRC recommends a specific spread-adjusted 30-day SOFR index as a replacement for the 1-year LIBOR, the 1-year USD LIBOR index would be the ‘‘corresponding USD LIBOR index’’ for that specific spread-adjusted 30day SOFR index. 39 Comment 43(a)–1 explains that § 1026.43 does not apply to any change to an existing loan that is not treated as a refinancing under § 1026.20(a). Comment 43(a)–1 further explains that § 1026.43 generally applies to consumer credit transactions secured by a dwelling, but certain dwelling-secured consumer credit transactions are exempt or partially exempt from coverage under § 1026.43(a)(1) through (3), and that § 1026.43 does not apply to an PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 36945 The Bureau has reviewed the SOFR indices upon which the ARRC has indicated it will base its recommended replacement indices and the spread adjustment methodology that the ARRC is recommending using to develop the replacement indices. Based on this review, the Bureau anticipates that the spread-adjusted replacement indices that the ARRC is developing will provide a good example of a comparable index to the tenors of LIBOR that they are designated to replace. On June 22, 2017, the ARRC identified SOFR as its recommended alternative to LIBOR after considering various potential alternatives, including other term unsecured rates, overnight unsecured rates, other secured repurchase agreements (repo) rates, U.S. Treasury bill and bond rates, and overnight index swap rates linked to the effective Federal funds rate.40 The ARRC made its final recommendation of SOFR after evaluating and incorporating feedback from a 2016 consultation and from end users on its advisory group.41 As the ARRC has explained, SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.42 SOFR is determined based on transaction data composed of: (i) Tri-party repo, (ii) General Collateral Finance repo, and (iii) bilateral Treasury repo transactions cleared through Fixed Income Clearing Corporation. SOFR is representative of general funding conditions in the overnight Treasury repo market. As such, it reflects an economic cost of lending and borrowing relevant to the wide array of market participants active in the financial markets. In terms of the transactions underpinning SOFR, SOFR has the widest coverage of any Treasury repo rate available. Averaging over $1 trillion of daily trading, transaction volumes underlying SOFR are far larger than the transactions in any other U.S. money market.43 The ARRC intends to endorse forward-looking term SOFR rates provided a consensus among its members can be reached that robust extension of credit primarily for a business, commercial, or agricultural purpose, even if it is secured by a dwelling. 40 ARRC, ARRC Consultation on Spread Adjustment Methodologies for Fallbacks in Cash Products Referencing USD LIBOR at 3 (Jan. 21, 2020), https://www.newyorkfed.org/medialibrary/ Microsites/arrc/files/2020/ARRC_Spread_ Adjustment_Consultation.pdf. 41 Id. 42 Id. at 3. 43 Fed. Reserve Bank of N.Y., Additional Information About SOFR and Other Treasury Repo Reference Rates, available at https:// www.newyorkfed.org/markets/treasury-reporeference-rates-information (last visited May 11. 2020). E:\FR\FM\18JNP2.SGM 18JNP2 36946 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules term benchmarks that are compliant with International Organization of Securities Commissions (IOSCO) standards and meet appropriate criteria set by the ARRC can be produced. If the ARRC has not recommended relevant forward-looking term SOFR rates, it will base its recommended indices on a compounded average of SOFR over a selected compounding period.44 The ARRC has committed to making sure its recommended spread adjustments and the resulting spread-adjusted rates are published and to working with potential vendors to make sure that these spreads and spread-adjusted rates are made publicly available.45 The New York Fed has already begun daily publication of three compounded averages of SOFR, including a 30-day compounded average of SOFR (30-day SOFR), and a daily index that allows for the calculation of compounded average rates over custom time periods.46 The Bureau notes that the government-sponsored enterprises (GSEs) announced in February 2020 that they will begin accepting ARMs based on 30-day average SOFR in 2020.47 For purposes of this proposed rule, the Bureau has conducted its analysis below assuming that the ARRC will base its recommended replacement indices on 30-day SOFR. Prior to the start of official publication of SOFR in 2018, the New York Fed released data from August 2014 to March 2018 representing modeled, pre-production estimates of SOFR that are based on the same basic underlying transaction data and methodology that now underlie the official publication.48 The ARRC and the Bureau have compared the rate history that is available for SOFR (to calculate compounded averages) with the rate history for the applicable LIBOR indices.49 For the reasons discussed in 44 ARRC Consultation on Spread Adjustment Methodologies, supra note 40, at 5. 45 ARRC, ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products (Apr. 8, 2020), https:// www.newyorkfed.org/medialibrary/Microsites/arrc/ files/2020/ARRC_Spread_Adjustment_ Methodology.pdf. 46 Fed. Reserve Bank of N.Y., SOFR Averages and Index Data, https://apps.newyorkfed.org/markets/ autorates/sofr-avg-ind (last visited May 11, 2020). 47 See, e.g., Fed. Nat’l Mortgage Ass’n, Lender Letter LL–2020–01 (Feb. 5, 2020), https:// singlefamily.fanniemae.com/media/21831/display; Fed. Home Loan Mortgage Corp., Bulletin 2020–1 Selling (Feb. 5, 2020), https:// guide.freddiemac.com/app/guide/bulletin/2020-;1. 48 See David Bowman, Historical Proxies for the Secured Overnight Financing Rate (July 15, 2019), available at https://www.federalreserve.gov/ econres/notes/feds-notes/historical-proxies-for-thesecured-overnight-financing-rate-20190715.htm. 49 See, e.g., ARRC Consultation on Spread Adjustment Methodologies, supra note 40, at 4 (comparing 3-month compounded SOFR relative to VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau is proposing to determine that the historical fluctuations in the spreadadjusted index based on 30-day SOFR are substantially similar to those of 1month, 3-month, 6-month, and 1-year USD LIBOR. While robust, IOSCO-compliant SOFR term rates endorsed by the ARRC do not yet exist, the Board has published data on ‘‘indicative’’ 1-month, 3-month, and 6-month SOFR term rates.50 The Bureau has compared this data to data for the applicable LIBOR indices. For the reasons discussed in the section-bysection analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau is proposing to determine that (1) the historical fluctuations of 1-year and 6month USD LIBOR are substantially similar to those of the 1-month, 3month, and 6-month spread-adjusted SOFR term rates; (2) the historical fluctuations of 3-month USD LIBOR are substantially similar to those of the 1month and 3-month spread-adjusted SOFR term rates; and (3) the historical fluctuations of 1-month USD LIBOR are substantially similar to those of the 1month spread-adjusted SOFR term rate. The Bureau is proposing to make these determinations about the historical fluctuations in the spreadadjusted indices based on 30-day SOFR, 1-month term SOFR, 3-month term SOFR, and 6-month term SOFR, while analyzing data on 30-day SOFR, 1month term SOFR, 3-month term SOFR, and 6-month term SOFR without spread adjustments. This analysis is valid because the ARRC has stated that the spread adjustments will be static, outside of a one-year transition period that has not yet started and so is not in the historical data. A static spread adjustment would have no effect on historical fluctuations. 30-day SOFR, the applicable SOFR term rates, and the applicable LIBOR indices all reflect the cost of borrowing in the United States and have all generally moved together during SOFR’s available history. However, the ARRC and the Bureau recognize that the SOFR indices will differ in some respects from the LIBOR indices. The nature and extent of these differences will depend on whether the SOFR indices are based on 30-day SOFR or SOFR term rates. the 3-month USD LIBOR since 2014). The ARRC and the Bureau have also considered the history of other indices that could be viewed as historical proxies for SOFR. See, e.g., Bowman, supra note 48. 50 Eric Heitfield & Yang Ho-Park, Indicative Forward-Looking SOFR Term Rates (Apr. 19, 2019), available at https://www.federalreserve.gov/ econres/notes/feds-notes/indicative-forwardlooking-sofr-term-rates-20190419.htm. (last updated May 1, 2020). PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 30-day SOFR is a historical, backward-looking 30-day average of overnight rates, while the LIBOR indices are forward-looking term rates published with several different tenors (overnight, 1-week, 1-month, 2-month, 3-month, 6-month, and 1-year). The LIBOR indices, therefore, reflect funding conditions for a different length of time than 30-day SOFR does, and they reflect those funding conditions in advance rather than with a lag as 30-day SOFR does. The LIBOR indices may also include term premia missing from 30day SOFR.51 Moreover, SOFR is a secured rate while the LIBOR indices are unsecured and therefore include an element of bank credit risk. The LIBOR indices also may reflect supply and demand conditions in wholesale unsecured funding markets that also could lead to differences with SOFR. SOFR term rates, if they are available, will have fewer differences with LIBOR term rates than 30-day SOFR does. Since they are also term rates, they will also include term premia, and these should usually be similar to the term premia embedded in LIBOR. Since SOFR term rates will also be forwardlooking, they should adjust quickly to changing expectations about future funding conditions as LIBOR term rates do, rather than following them with a lag as 30-day SOFR does. However, SOFR term rates will still have differences with the LIBOR indices. As mentioned above, SOFR is a secured rate while the LIBOR indices are unsecured. SOFR and LIBOR also reflect supply and demand conditions in different credit markets. Thus, whether the ARRC bases its recommended indices on forwardlooking SOFR term rates or backwardlooking historical averages of SOFR, its recommended indices will without adjustments differ in levels from the LIBOR indices. The ARRC intends to account for these differences from the historical levels of LIBOR term rates through spread adjustments in the replacement indices that it recommends. On January 21, 2020, the ARRC released a consultation on spread adjustment methodologies that provided historical analyses of a number of potential spread adjustment methodologies and that showed that the proposed methodology performed well relative to other options, including potential dynamic spread adjustments.52 The ARRC’s consultation 51 The ‘‘term premium’’ is the excess yield that investors require to buy a long-term bond instead of a series of shorter-term bonds. 52 ARRC Consultation on Spread Adjustment Methodologies, supra note 40. E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules received over 70 responses from consumer advocacy groups, asset managers, corporations, banks, industry associations, GSEs, and others.53 On April 8, 2020, the ARRC announced that it had agreed on a recommended spread adjustment methodology for cash products referencing USD LIBOR.54 Following its consideration of feedback received on its public consultation, the ARRC is recommending a long-term spread adjustment equal to the historical median of the five-year spread between USD LIBOR and SOFR. For consumer products, the ARRC is additionally recommending a 1-year transition period to this five-year median spread adjustment methodology.55 Thus, in the short term, the transition will be gradual. On the date specified by the ARRC, the spread adjustment will not be set immediately to its long-run value. Instead, on the date specified by the ARRC, the spread adjustment will be set to equalize the value of the SOFR-based spreadadjusted index and the LIBOR index. The spread adjustment will then transition steadily over the course of a year to its long-run value. The inclusion of a transition period for consumer products was endorsed by many respondents, including consumer advocacy groups.56 Although the ARRC has not yet finalized certain aspects of its recommendations for replacement indices, it is actively working on doing so.57 The ARRC has stated that each spread-adjusted replacement index that it recommends will incorporate a spread adjustment that will be fixed at a specified time at or before LIBOR’s cessation and will remain static after the 1-year transition period.58 The ARRC intends for the adjustment to reflect and adjust for the historical differences between LIBOR and SOFR in order to make the spread-adjusted rate comparable to LIBOR in a fair and reasonable way, thereby minimizing the 53 ARRC, Summary of Feedback Received in the ARRC Spread-Adjustment Consultation and FollowUp Consultation on Technical Details 2 (May 6, 2020), https://www.newyorkfed.org/medialibrary/ Microsites/arrc/files/2020/ARRC_Spread_ Adjustment_Consultation_Follow_Up.pdf. [hereinafter referred to as ARRC Supplemental Spread-Adjustment Consultation] 54 ARRC Announces Recommendation of a Spread Adjustment Methodology, supra note 45. 55 Id. 56 ARRC Supplemental Spread-Adjustment Consultation, supra note 53, at 1. 57 The ARRC issued a supplemental consultation on spread adjustment methodology on May 6, 2020, seeking further views on certain technical issues related to spread adjustment methodologies for cash products referencing USD LIBOR. Id. 58 ARRC Consultation on Spread Adjustment Methodologies, supra note 40, at 1, 2. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 impact to borrowers and lenders.59 Although the methodology will be the same across different tenors of LIBOR, it may be applied to each LIBOR tenor separately, so that there would be a separate recommended spread adjustment calculated for 1-month, 2month, 3-month, 6-month, and 1-year USD LIBOR.60 The Bureau is proposing to determine that the spread-adjusted indices based on SOFR recommended by the ARRC as a replacement for the 1-month, 3-month, 6-month, and 1-year USD LIBOR index are comparable indices to the 1-month, 3-month, 6-month, and 1-year USD LIBOR index respectively. The spreadadjusted indices based on SOFR that the ARRC recommends will be published and made publicly available. The ARRC’s Consultation on its spread adjustment methodology presents several pieces of evidence that, in the ARRC’s view, suggest that spreadadjusted SOFR rates are likely to experience similar fluctuations to the corresponding tenors of LIBOR.61 Using them as a replacement for the corresponding tenors of LIBOR does not seem likely to significantly change the economic position of the parties to the contract, given that SOFR and the LIBOR indices have generally moved together and the replacement index will be spread adjusted based on a methodology that derived through a public consultation. The proposed example would be illustrative only, and the Bureau does not intend to suggest that the spreadadjusted SOFR indices recommended by the ARRC are the only indices that would be comparable to the LIBOR indices. The Bureau recognizes that there may be other comparable indices that creditors may use as replacements for the various tenors of LIBOR but believes it would be helpful to add this example in the commentary. The 36947 Bureau requests comment on whether it is appropriate to add the proposed example to comment 20(a)–3.ii.B and whether the Bureau should make any other amendments to § 1026.20(a) or its commentary in connection with the LIBOR transition. Specifically, the Bureau requests comment on whether there are any other replacement indices that it should identify as an example of a ‘‘comparable index’’ in comment 20(a)–3.ii.B, and if so, which indices and on what bases. Section 1026.36 Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling 36(a) Definitions 36(a)(4) Seller Financiers; Three Properties 36(a)(4)(iii) 36(a)(4)(iii)(C) Section 1026.36(a)(1) defines the term ‘‘loan originator’’ for purposes of the prohibited acts or practices and requirements for credit secured by a dwelling in § 1026.36. Section 1026.36(a)(4) addresses the threeproperty exclusion for seller financers and provides that a person (as defined in § 1026.2(a)(22)) that meets all of the criteria specified in § 1026.36(a)(4)(i) to (iii) is not a loan originator under § 1026.36(a)(1). Pursuant to § 1026.36(a)(4)(iii)(C), one such criterion requires that, if the financing agreement has an adjustable rate, the index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR. In light of the anticipated discontinuation of LIBOR, the proposed rule would amend the examples of indices provided in § 1026.36(a)(4)(iii)(C) to substitute SOFR for LIBOR. 36(a)(5) Seller Financiers; One Property 36(a)(5)(iii) 59 Id. at 2, 3. 60 Id. at 7. Thus, the calculated spread adjustment may differ for each tenor of LIBOR, even if the methodology used to calculate each is the same. Id. The supplemental consultation issued by the ARRC on May 6, 2020, invites participants to consider the option to use the same spread adjustment values that will be used by the International Swaps and Derivatives Association (ISDA) across all of the different fallback rates, rather than using the same adjustment methodology to calculate a different spread adjustment for each potential fallback rate. ARRC Supplemental Spread-Adjustment Consultation, supra note 53, at 3–4. The supplemental consultation also seeks views on a second issue: Recognizing that ISDA will now include a pre-cessation trigger, the supplemental consultation seeks views on whether the timing of the calculation of the ARRC’s spread adjustment should match ISDA’s timing if a pre-cessation event is operative. Id. 61 ARRC Consultation on Spread Adjustment Methodologies, supra note 40. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 36(a)(5)(iii)(B) Section 1026.36(a)(1) defines the term ‘‘loan originator’’ for purposes of the prohibited acts or practices and requirements for credit secured by a dwelling in § 1026.36. Section 1026.36(a)(5) addresses the one-property exclusion for seller financers and provides that a natural person, estate, or trust that meets all of the criteria specified in § 1026.36(a)(5)(i) to (iii) is not a loan originator under § 1026.36(a)(1). Pursuant to § 1026.36(a)(5)(iii)(B), one such criterion currently requires that, if the financing agreement has an adjustable rate, the index the adjustable rate is based on is a widely available index such as indices E:\FR\FM\18JNP2.SGM 18JNP2 36948 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules for U.S. Treasury securities or LIBOR. In light of the anticipated discontinuation of LIBOR, the proposed rule would amend the examples of indices provided in § 1026.36(a)(5)(iii)(B) to substitute SOFR for LIBOR. Section 1026.37 Content of Disclosures for Certain Mortgage Transactions (Loan Estimate) 37(j) Adjustable Interest Rate Table 37(j)(1) Index and Margin Section 1026.37 governs the content of the Loan Estimate disclosure for certain mortgage transactions. If the interest rate may adjust and increase after consummation and the product type is not a step rate, § 1026.37(j)(1) requires disclosure in the Loan Estimate of, inter alia, the index upon which the adjustments to the interest rate are based. Comment 37(j)(1)–1 explains that the index disclosed pursuant to § 1026.37(j)(1) must be stated such that a consumer reasonably can identify it. The comment further explains that a common abbreviation or acronym of the name of the index may be disclosed in place of the proper name of the index, if it is a commonly used public method of identifying the index. The comment provides, as an example, that ‘‘LIBOR’’ may be disclosed instead of London Interbank Offered Rate. In light of the anticipated discontinuation of LIBOR, the proposed rule would amend this example in comment 37(j)(1)–1 to provide that ‘‘SOFR’’ may be disclosed instead of Secured Overnight Financing Rate. Section 1026.40 Requirements for Home Equity Plans The Proposal 40(f) Limitations on Home Equity Plans 40(f)(3) 40(f)(3)(ii) TILA section 137(c)(1) provides that no open-end consumer credit plan under which extensions of credit are secured by a consumer’s principal dwelling may contain a provision which permits a creditor to change unilaterally any term except in enumerated circumstances set forth in TILA section 137(c).62 TILA section 137(c)(2)(A) provides that a creditor may change the index and margin applicable to extensions of credit under such a plan if the index used by the creditor is no longer available and the substitute index and margin will result in a substantially similar interest rate.63 In implementing TILA section 137(c), § 1026.40(f)(3) prohibits a creditor from changing the 62 15 63 15 U.S.C. 1647(c). U.S.C. 1647(c)(2)(A). VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 terms of a HELOC subject to § 1026.40 except in enumerated circumstances set forth in § 1026.40(f)(3). Section 1026.40(f)(3)(ii) provides that a creditor may change the index and margin used under the HELOC plan if the original index is no longer available, the new index has a historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an APR substantially similar to the rate in effect at the time the original index became unavailable. Current comment 40(f)(3)(ii)–1 provides that a creditor may change the index and margin used under the HELOC plan if the original index becomes unavailable, as long as historical fluctuations in the original and replacement indices were substantially similar, and as long as the replacement index and margin will produce a rate similar to the rate that was in effect at the time the original index became unavailable. Current comment 40(f)(3)(ii)–1 also provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if it produces a rate substantially similar to the rate in effect when the original index became unavailable. As discussed in the section-by-section analysis of proposed § 1026.55(b)(7), card issuers for a credit card account under an openend (not home-secured) consumer credit plan are subject to current comment 55(b)(2)–6, which provides a similar provision on the unavailability of an index as current comment 40(f)(3)(ii)–1. As discussed in part III, the industry has requested that the Bureau permit card issuers to replace the LIBOR index used in setting the variable rates on existing accounts before LIBOR becomes unavailable to facilitate compliance. Among other things, the industry is concerned that if card issuers must wait until LIBOR become unavailable to replace the LIBOR indices used on existing accounts, these card issuers would not have sufficient time to inform consumers of the replacement index and update their systems to implement the change. To reduce uncertainty with respect to selecting a replacement index, the industry has also requested that the Bureau determine that the prime rate has ‘‘historical fluctuations’’ that are ‘‘substantially similar’’ to those of the LIBOR indices. The Bureau believes that similar issues may arise with respect to the transition of existing HELOC accounts away from using a LIBOR index. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 To address these concerns, as discussed in more detail in the sectionby-section analysis of proposed § 1026.40(f)(3)(ii)(B), the Bureau is proposing to add new LIBOR-specific provisions to proposed § 1026.40(f)(3)(ii)(B) that would permit creditors for HELOC plans subject to § 1026.40 that use a LIBOR index under the plan to replace the LIBOR index and change the margins for calculating the variable rates on or after March 15, 2021, in certain circumstances without needing to wait for LIBOR to become unavailable. Specifically, proposed § 1026.40(f)(3)(ii)(B) provides that if a variable rate on a HELOC subject to § 1026.40 is calculated using a LIBOR index, a creditor may replace the LIBOR index and change the margin for calculating the variable rate on or after March 15, 2021, as long as (1) the historical fluctuations in the LIBOR index and replacement index were substantially similar; and (2) the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Proposed § 1026.40(f)(3)(ii)(B) also provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Also, as discussed in more detail in the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(B), to reduce uncertainty with respect to selecting a replacement index that meets the standards in proposed § 1026.40(f)(3)(ii)(B), the Bureau is proposing to determine that Prime is an example of an index that has historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau also is proposing to determine that certain spread-adjusted indices based on SOFR recommended by the ARRC have historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau also is proposing additional detail in comments 40(f)(3)(ii)(B)–1 through –3 with respect to proposed § 1026.40(f)(3)(ii)(B). E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules In addition, as discussed in more detail in the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau is proposing to move the unavailability provisions in current § 1026.40(f)(3)(ii) and current comment 40(f)(3)(ii)–1 to proposed § 1026.40(f)(3)(ii)(A) and proposed comment 40(f)(3)(ii)(A)–1 respectively and to revise the proposed moved provisions for clarity and consistency. The Bureau also is proposing additional detail in comments 40(f)(3)(ii)(A)–2 through –3 with respect to proposed § 1026.40(f)(3)(ii)(A). For example, to reduce uncertainty with respect to selecting a replacement index that meets the standards for selecting a replacement index under proposed § 1026.40(f)(3)(ii)(A), the Bureau is proposing the same determinations described above related to Prime and the spread-adjusted indices based on SOFR recommended by the ARRC in relation to proposed § 1026.40(f)(3)(ii)(A). The Bureau is proposing to make these revisions and provide additional detail because the Bureau understands that some HELOC creditors may use the unavailability provision in proposed § 1026.40(f)(3)(ii)(A) to replace a LIBOR index used under a HELOC plan, depending on the contractual provisions applicable to their HELOC plans, as discussed in more detail below. Bureau is proposing new proposed LIBOR-specific provisions rather than interpreting when the LIBOR indices are unavailable. For several reasons, the Bureau is proposing new LIBOR-specific provisions under proposed § 1026.40(f)(3)(ii)(B), rather than interpreting the LIBOR indices to be unavailable as of a certain date prior to LIBOR being discontinued under current § 1026.40(f)(3)(ii) (as proposed to be moved to proposed § 1026.40(f)(3)(ii)(A)). First, the Bureau is concerned about making a determination for Regulation Z purposes under current § 1026.40(f)(3)(ii) (as proposed to be moved to proposed § 1026.40(f)(3)(ii)(A)) that the LIBOR indices are unavailable or unreliable when the FCA, the regulator of LIBOR, has not made such a determination. Second, the Bureau is concerned that a determination by the Bureau that the LIBOR indices are unavailable for purposes of current § 1026.40(f)(3)(ii) (as proposed to be moved to proposed § 1026.40(f)(3)(ii)(A)) could have unintended consequences on other products or markets. For example, the Bureau is concerned that such a determination could unintentionally cause confusion for creditors for other products (e.g., ARMs) about whether the VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 LIBOR indices are unavailable for those products too and could possibly put pressure on those creditors to replace the LIBOR index used for those products before those creditors are ready for the change. Third, even if the Bureau interpreted unavailability under current § 1026.40(f)(3)(ii) (as proposed to be moved to proposed § 1026.40(f)(3)(ii)(A)) to indicate that the LIBOR indices are unavailable prior to LIBOR being discontinued, this interpretation would not completely solve the contractual issues for creditors whose contracts require them to wait until the LIBOR indices become unavailable before replacing the LIBOR index. Creditors still would need to decide for their contracts whether the LIBOR indices are unavailable. Thus, even if the Bureau decided that the LIBOR indices are unavailable under Regulation Z as described above, creditors whose contracts require them to wait until the LIBOR indices become unavailable before replacing the LIBOR index essentially would remain in the same position of interpreting their contracts as they would have been under the current rule. Thus, the Bureau is not proposing to interpret when the LIBOR indices are unavailable for purposes of current § 1026.40(f)(3)(ii) (as proposed to be moved to proposed § 1026.40(f)(3)(ii)(A)). The Bureau solicits comment, however, on whether the Bureau should interpret when the LIBOR indices are unavailable for purposes of current § 1026.40(f)(3)(ii) (as proposed to be moved to proposed § 1026.40(f)(3)(ii)(A)), and if so, why the Bureau should make that determination and when should the LIBOR indices be considered unavailable for purposes of that provision. The Bureau also solicits comment on an alternative to interpreting the term ‘‘unavailable.’’ Specifically, should the Bureau make revisions to the unavailability provisions in current § 1026.40(f)(3)(ii) (as proposed to be moved to proposed § 1026.40(f)(3)(ii)(A)) in a manner that would allow those creditors who need to transition from LIBOR and, for contractual reasons, may not be able to switch away from LIBOR prior to it being unavailable to be better able to use the unavailability provisions for an orderly transition on or after March 15, 2021? If so, what should these revisions be? Interaction among proposed § 1026.40(f)(3)(ii)(A) and (B) and contractual provisions. Proposed comment 40(f)(3)(ii)–1 addresses the interaction among the unavailability PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 36949 provisions in proposed § 1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B), and the contractual provisions that apply to the HELOC plan. The Bureau understands that HELOC contracts may be written in a variety of ways. For example, the Bureau recognizes that some existing contracts for HELOCs that use LIBOR as an index for a variable rate may provide that (1) a creditor can replace the LIBOR index and the margin for calculating the variable rate unilaterally only if the LIBOR index is no longer available or becomes unavailable; and (2) the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the LIBOR index becomes unavailable. Other HELOC contracts may provide that a creditor can replace the LIBOR index and the margin for calculating the variable rate unilaterally only if the LIBOR index is no longer available or becomes unavailable but does not require that the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the LIBOR index becomes unavailable. In addition, other HELOC contracts may allow a creditor to change the terms of the contract (including the LIBOR index used under the plan) as permitted by law. To facilitate compliance, the Bureau is proposing detail on the interaction among the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B), and the contractual provisions for the HELOC. Proposed comment 40(f)(3)(ii)–1 provides that a creditor may use either the provision in proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B) to replace a LIBOR index used under a HELOC plan subject to § 1026.40 so long as the applicable conditions are met for the provision used. This proposed comment makes clear, however, that neither proposed provision excuses the creditor from noncompliance with contractual provisions. As discussed in more detail below, proposed comment 40(f)(3)(ii)–1 provides examples to illustrate when a creditor may use the provisions in proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B) to replace the LIBOR index used under a HELOC plan and each of these examples assumes that the LIBOR index used under the plan becomes unavailable after March 15, 2021. Proposed comment 40(f)(3)(ii)–1.i provides an example where a HELOC contract provides that a creditor may E:\FR\FM\18JNP2.SGM 18JNP2 36950 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules not replace an index unilaterally under a plan unless the original index becomes unavailable and provides that the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the original index becomes unavailable. In this case, proposed comment 40(f)(3)(ii)–1.i explains that the creditor may use the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A) to replace the LIBOR index used under the plan so long as the conditions of that provision are met. Proposed comment 40(f)(3)(ii)– 1.i also explains that the proposed LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B) provide that a creditor may replace the LIBOR index if the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Proposed comment 40(f)(3)(ii)–1.i notes, however, that the creditor in this example would be contractually prohibited from replacing the LIBOR index used under the plan unless the replacement index and replacement margin also will produce an APR substantially similar to a rate that is in effect when the LIBOR index becomes unavailable. The Bureau solicits comments on this proposed approach and example. Proposed comment 40(f)(3)(ii)–1.ii provides an example of a HELOC contract under which a creditor may not replace an index unilaterally under a plan unless the original index becomes unavailable but does not require that the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the original index becomes unavailable. In this case, the creditor would be contractually prohibited from unilaterally replacing a LIBOR index used under the plan until it becomes unavailable. At that time, the creditor has the option of using proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of the applicable provision are met. The Bureau is proposing to allow the creditor in this case to use either the proposed unavailability provisions in proposed § 1026.40(f)(3)(ii)(A) or the proposed LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B). If the creditor uses the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A), the creditor must VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 use a replacement index and replacement margin that will produce an APR substantially similar to the rate in effect when the LIBOR index became unavailable. If the creditor uses the proposed LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B), the creditor must use the replacement index value in effect on December 31, 2020, and the replacement margin that will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The Bureau is proposing to allow a creditor in this case to use the index values of the LIBOR index and replacement index on December 31, 2020, under proposed § 1026.40(f)(3)(ii)(B) to meet the ‘‘substantially similar’’ standard with respect to the comparison of the rates even if the creditor is contractually prohibited from unilaterally replacing the LIBOR index used under the plan until it becomes unavailable. The Bureau recognizes that LIBOR may not be discontinued until the end of 2021, which is around a year later than the December 31, 2020, date. Nonetheless, the Bureau is proposing to allow creditors that are restricted by their contracts to replace the LIBOR index used under the HELOC plans until the LIBOR index becomes unavailable to use the LIBOR index values and the replacement index values in effect on December 31, 2020, under proposed § 1026.40(f)(3)(ii)(B), rather than the index values on the day that LIBOR becomes unavailable under proposed § 1026.40(f)(3)(ii)(A). This proposal would allow those creditors to use consistent index values to those creditors that are not restricted by their contracts in replacing the LIBOR index prior to LIBOR becoming unavailable. This proposal would also promote consistency for consumers in that all HELOC creditors would be permitted to use the same LIBOR values in comparing the rates. In addition, as discussed in part III, the industry has raised concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable until LIBOR finally is discontinued. Allowing creditors to use the December 31, 2020, values for comparison of the rates instead of the LIBOR values when the LIBOR indices become unavailable may address some of these concerns. Thus, the Bureau is proposing to provide creditors with the flexibility to choose to compare the rates using the PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 index values for the LIBOR index and the replacement index on December 31, 2020, by using the proposed LIBORspecific provisions under proposed § 1026.40(f)(3)(ii)(B), rather than using the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A). The Bureau solicits comment on this proposed approach and example. Proposed comment 40(f)(3)(ii)–1.iii provides an example of a HELOC contract under which a creditor may change the terms of the contract (including the index) as permitted by law. Proposed comment 40(f)(3)(ii)–1.iii explains in this case, if the creditor replaces a LIBOR index under a plan on or after March 15, 2021, but does not wait until the LIBOR index becomes unavailable to do so, the creditor may only use proposed § 1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of that provision are met. In this case, the creditor may not use proposed § 1026.40(f)(3)(ii)(A). Proposed comment 40(f)(3)(ii)–1.iii also explains that if the creditor waits until the LIBOR index used under the plan becomes unavailable to replace the LIBOR index, the creditor has the option of using proposed § 1026.40(f)(3)(ii)(A) or § 1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of the applicable provision are met. The Bureau is proposing to allow the creditor in this case to use either the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A) or the proposed LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B) if the creditor waits until the LIBOR index used under the plan becomes unavailable to replace the LIBOR index. For the reasons explained above in the discussion of the example in proposed comment 40(f)(3)(ii)–1.ii, the Bureau is proposing in the situation described in proposed comment 40(f)(3)(ii)–1.iii to provide creditors with the flexibility to choose to use the index values of the LIBOR index and the replacement index on December 31, 2020, by using the proposed LIBORspecific provisions under proposed § 1026.40(f)(3)(ii)(B), rather than using the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A). The Bureau solicits comment on this proposed approach and example. 40(f)(3)(ii)(A) Current § 1026.40(f)(3)(ii) provides that a creditor may change the index and margin used under a HELOC plan subject to § 1026.40 if the original index is no longer available, the new index has a historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an APR substantially similar E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules to the rate in effect at the time the original index became unavailable. Current comment 40(f)(3)(ii)–1 provides that a creditor may change the index and margin used under the plan if the original index becomes unavailable, as long as historical fluctuations in the original and replacement indices were substantially similar, and as long as the replacement index and margin will produce a rate similar to the rate that was in effect at the time the original index became unavailable. Current comment 40(f)(3)(ii)–1 also provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if it produces a rate substantially similar to the rate in effect when the original index became unavailable. The Proposal The Bureau is proposing to move the unavailability provisions in current § 1026.40(f)(3)(ii) and current comment 40(f)(3)(ii)–1 to proposed § 1026.40(f)(3)(ii)(A) and proposed comment 40(f)(3)(ii)(A)–1 respectively and revise the moved provisions for clarity and consistency. In addition, the Bureau is proposing to add detail in proposed comments 40(f)(3)(ii)(A)–2 and –3 on the conditions set forth in proposed § 1026.40(f)(3)(ii)(A). For example, to reduce uncertainty with respect to selecting a replacement index that meets the standards under proposed § 1026.40(f)(3)(ii)(A), the Bureau is proposing to determine that Prime is an example of an index that has historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau also is proposing to determine that certain spread-adjusted indices based on SOFR recommended by the ARRC have historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau is proposing to make revisions and provide additional detail with respect to the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A) because the Bureau understands that some HELOC creditors may use these unavailability provisions to replace a LIBOR index used under a HELOC plan, depending on the contractual provisions applicable to their HELOC plans, as discussed above in more detail in the section-by-section of § 1026.40(f)(3)(ii). The Bureau solicits comments on proposed § 1026.40(f)(3)(ii)(A) and proposed comments 40(f)(3)(ii)(A)–1 through –3. These proposed provisions are discussed in more detail below. Proposed § 1026.40(f)(3)(ii)(A). Proposed § 1026.40(f)(3)(ii)(A) provides that a creditor for a HELOC plan subject VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 to § 1026.40 may change the index and margin used under the plan if the original index is no longer available, the replacement index has historical fluctuations substantially similar to that of the original index, and the replacement index and replacement margin would have resulted in an APR substantially similar to the rate in effect at the time the original index became unavailable. Proposed § 1020.40(f)(3)(ii)(A) also provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. Proposed § 1026.40(f)(3)(ii)(A) differs from current § 1026.40(f)(3)(ii) in three ways. First, proposed § 1026.40(f)(3)(ii)(A) differs from current § 1040(f)(3)(ii) by using the term ‘‘historical fluctuations’’ rather than the term ‘‘historical movement’’ to refer to the original index and the replacement index. Under current § 1026.40(f)(3)(ii), ‘‘historical fluctuations’’ appears to be equivalent to ‘‘historical movement’’ because the regulatory text provision in § 1026.40(f)(3)(ii) uses the term ‘‘historical movement’’ while current comment 40(f)(3)(ii)–1 (that interprets current § 1026.40(f)(3)(ii)) uses the term ‘‘historical fluctuations.’’ For clarity and consistency, the Bureau is proposing to use ‘‘historical fluctuations’’ in both proposed § 1026.40(f)(3)(ii)(A) and proposed comment 40(f)(3)(ii)(A)–1, so that the proposed regulatory text and related commentary use the same term. Second, proposed § 1026.40(f)(3)(ii)(A) differs from current § 1026.40(f)(3)(ii) by including a provision regarding newly established indices that is not contained in current § 1026.40(f)(3)(ii). This proposed provision is similar to the sentence in current comment 40(f)(3)(ii)–1 on newly established indices except that the proposed provision in proposed § 1026.40(f)(3)(ii)(A) makes clear that a creditor that is using a newly established index also may adjust the margin so that the newly established index and replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. The newly established index may not have the same index value as the original index, and the creditor may need to adjust the margin to meet the condition that the newly established index and replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 36951 Third, proposed § 1026.40(f)(3)(ii)(A) differs from current § 1026.40(f)(3)(ii) by using the terms ‘‘replacement index’’ and ‘‘replacement index and replacement margin’’ instead of using ‘‘new index’’ and ‘‘new index and margin,’’ respectively as contained in current § 1026.40(f)(3)(ii). These proposed changes are designed to avoid any confusion as to when the provision in proposed § 1026.40(f)(3)(ii)(A) is referring to a replacement index and replacement margin as opposed to a newly established index. Proposed comment 40(f)(3)(ii)(A)–1. The Bureau is proposing to move current comment 40(f)(3)(ii)–1 to proposed comment 40(f)(3)(ii)(A)–1. The Bureau also is proposing to revise this proposed moved comment in three ways for clarity and consistency with proposed § 1026.40(f)(3)(ii)(A). First, proposed comment 40(f)(3)(ii)(A)–1 differs from current comment 40(f)(3)(ii)–1 by providing that if an index that is not newly established is used to replace the original index, the replacement index and replacement margin will produce a rate ‘‘substantially similar’’ to the rate that was in effect at the time the original index became unavailable. Current comment 40(f)(3)(ii)–1 uses the term ‘‘similar’’ instead of ‘‘substantially similar’’ for the comparison of these rates. Nonetheless, this use of the term ‘‘similar’’ in current comment 40(f)(3)(ii)–1 is inconsistent with the use of ‘‘substantially similar’’ in current § 1026.40(f)(3)(ii) for the comparison of these rates. To correct this inconsistency between the regulation text and the commentary provision that interprets it, the Bureau is proposing to use ‘‘substantially similar’’ consistently in proposed § 1026.40(f)(3)(ii)(A) and proposed comment 40(f)(3)(ii)(A)–1 for the comparison of these rates. Second, consistent with the proposed new sentence in proposed § 1026.40(f)(3)(ii)(A) related to newly established indices, proposed comment 40(f)(3)(ii)(A)–1 differs from current comment 40(f)(3)(ii)–1 by clarifying that a creditor that is using a newly established index may also adjust the margin so that the newly established index and replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. Third, proposed comment 40(f)(3)(ii)(A)–1 differs from current comment 40(f)(3)(ii)–1 by using the term ‘‘the replacement index and replacement margin’’ instead of ‘‘the replacement index and margin’’ to make clear when the proposed comment is E:\FR\FM\18JNP2.SGM 18JNP2 36952 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules referring to a replacement margin and not the original margin. Historical fluctuations substantially similar for the LIBOR index and replacement index. Proposed comment 40(f)(3)(ii)(A)–2 provides detail on determining whether a replacement index that is not newly established has ‘‘historical fluctuations’’ that are ‘‘substantially similar’’ to those of the LIBOR index used under the plan for purposes of proposed § 1026.40(f)(3)(ii)(A). Specifically, proposed comment 40(f)(3)(ii)(A)–2 provides that for purposes of replacing a LIBOR index used under a plan pursuant to proposed § 1026.40(f)(3)(ii)(A), a replacement index that is not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index used under the plan, considering the historical fluctuations up through when the LIBOR index becomes unavailable or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. Prime has ‘‘historical fluctuations’’ that are ‘‘substantially similar’’ to those of certain USD LIBOR indices. To facilitate compliance, proposed comment 40(f)(3)(ii)(A)–2.i includes a proposed determination that Prime has historical fluctuations that are substantially similar to those of the 1month and 3-month USD LIBOR indices and includes a placeholder for the date when this proposed determination would be effective, if adopted in the final rule. The Bureau understands that some HELOC creditors may choose to replace a LIBOR index with Prime. The Bureau is proposing this determination after reviewing historical data from January 1986 through January 2020 on 1-month USD LIBOR, 3-month USD LIBOR, and Prime. The spread between 1-month USD LIBOR and Prime increased from roughly 142 basis points in 1986 to 281 basis points in 1993. The spread between 3-month USD LIBOR increased from roughly 151 basis points in 1986 to 270 basis points in 1993. Both spreads were fairly steady after 1993. Given that for the last 27 years of history the spreads have remained relatively stable, the data, analysis, and conclusion discussed below are restricted to the period beginning in 1993. While Prime has not always moved in tandem with 1-month USD LIBOR and 3-month USD LIBOR after 1993, the Bureau believes that since 1993 the historical fluctuations in 1-month USD VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 LIBOR and Prime have been substantially similar and that the historical fluctuations in 3-month USD LIBOR and Prime have been substantially similar.64 The historical correlation between 1month USD LIBOR and Prime is .9956. The historical correlation between 3month USD LIBOR and Prime is .9918. While the correlation between these rates is quite high, correlation is not the only statistical measure of similarity that may be relevant for comparing the historical fluctuations of these rates.65 The Bureau has reviewed other statistical characteristics of these rates, such as the variance, skewness, and kurtosis,66 and these characteristics imply that on average both the 1-month USD LIBOR and 3-month USD LIBOR tend to move closely with Prime and that the 1-month USD LIBOR and 3month USD LIBOR tend to present consumers and creditors with payment changes that are similar to that presented by Prime.67 Theoretically, these statistical measures could mask important longterm differences in movements. However, as mentioned above, the spread between 1-month USD LIBOR and Prime and the spread between 3month USD LIBOR and Prime have remained fairly steady after January 1993 to January 2020. For example, the average spread between 1-month USD LIBOR and Prime was 281 basis points in 1993, and 306 basis points in 2019. The average spread between 3-month USD LIBOR and Prime was 270 basis 64 There was a temporary but large difference in the movements of LIBOR rates and Prime for roughly a month after Lehman Brothers filed for bankruptcy on September 15, 2008, reflecting the effects this event had on the perception of risk in the interbank lending market. For example, 1month USD LIBOR increased over 200 basis points in the month after September 15, 2008, even as Prime and many other interest rates fell. The numbers presented in this analysis include this time period. 65 For example, consider two wagers on a series of coin flips. The first wins one cent for every heads and loses one cent for every tails. The second wins a million dollars for every heads and loses a million dollars for every tails. These wagers are perfectly correlated (i.e., they have a correlation of 1) but have very different statistical properties. 66 Roughly, variance is a statistical measure of how much a random number tends to deviate from its average value. Skewness is a statistical measure of whether particularly large deviations in a random number from its average value tend to be below or above that average value. Kurtosis is a statistical measure of whether deviations of a random number from its average value tend to be small and frequent or rare and large. 67 The variance, skewness, and kurtosis of Prime are 4.5605, .3115, and 1.5337 respectively. The variance, skewness, and kurtosis of 1-month USD LIBOR are 4.8935, .2715, and 1.5168 respectively. The variance, skewness, and kurtosis of 3-month USD LIBOR are 4.7955, .2605, and 1.5252, respectively. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 points in 1993, and 296 basis points in 2019. Finally, in performing its analysis, the Bureau also considered the impact different indices would have on consumer payments. To that end, the Bureau considered a specific example of a debt with a variable rate that resets monthly, and a balance that accumulates over time with interest but without further charges, payments, or fees. The Bureau used this example for HELOCs and credit card accounts because the Bureau understands that the rates for many of those accounts reset monthly. The example considers debt that accumulates interest over a period of ten years, beginning in January of every year from 1994 to 2009. For this example, the Bureau found that since 1994 historical fluctuations in 1-month USD LIBOR and Prime, and 3-month USD LIBOR and Prime, produced substantially similar payment outcomes for consumers with debt similar to that considered.68 For example, if the initial balance in this example is $10,000, the average difference between the debt outstanding under Prime and the debt outstanding under adjusted 1-month USD LIBOR after ten years is about $100. The Bureau also found similar results for Prime versus the adjusted 3month USD LIBOR. As discussed in the section-by-section analyses of proposed §§ 1026.40(f)(3)(ii)(B), 1026.55(b)(7)(i) and (ii), the Bureau also is proposing 68 In this example, for each starting year, three versions of debt are considered: (1) One with an interest rate equal to Prime; (2) one with an interest rate equal to the 1-month USD LIBOR plus the average spread between 1-month USD LIBOR and Prime for the 12 months preceding the start date; and (3) one with an interest rate equal to 3-month USD LIBOR plus the average spread between 3month USD LIBOR and Prime for the 12 months preceding the start date. For the 16 initial starting years considered, the average difference between the debt outstanding under Prime and the debt outstanding under the adjusted 1-month USD LIBOR after ten years is only around 1% of the initial balance. The average absolute value of the difference in debt outstanding is around 2% of the initial balance. For the adjusted 3-month USD LIBOR, the average of the difference is around 1% of the initial balance, and the average of the absolute value of the difference is around 3% of the initial balance. The average difference can be small if the difference is often far from zero, as long as it is sometimes well above zero and it is sometimes well below zero. The absolute value of the difference will be small only if the difference is usually close to zero. For example, suppose the difference is $1 million one year and ¥$1 million the next year. The average difference these two years is zero, indicating that the difference is close to zero on average. But the average of the absolute value of the difference is $1 million, indicating that the difference is typically far from zero. Consumers and creditors should care more about the average difference, and less about the average of the absolute value of the difference, if they have more liquidity and risk tolerance. E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules this same determination for purposes of proposed §§ 1026.40(f)(3)(ii)(B) and 1026.55(b)(7)(i) and (ii). The Bureau solicits comment on this proposed determination that Prime has historical fluctuations that are substantially similar to those of the 1-month and 3month USD LIBOR indices pursuant to proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). Proposed comment 40(f)(3)(ii)(A)–2.i also clarifies that in order to use Prime as the replacement index for the 1month or 3-month USD LIBOR index, the creditor also must comply with the condition in § 1026.40(f)(3)(ii)(A) that Prime and the replacement margin would have resulted in an APR substantially similar to the rate in effect at the time the LIBOR index became unavailable. This condition for comparing the rates under proposed § 1026.40(f)(3)(ii)(A) is discussed in more detail below. Certain SOFR-based spread-adjusted indices have ‘‘historical fluctuations’’ that are ‘‘substantially similar’’ to those of certain USD LIBOR indices. To facilitate compliance, proposed comment 40(f)(3)(ii)(A)–2.ii provides a proposed determination that the spreadadjusted indices based on SOFR recommended by the ARRC to replace the 1-month, 3-month, 6-month, and 1year USD LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3month, 6-month, and 1-year USD LIBOR indices respectively. The proposed comment also provides a placeholder for the date when this proposed determination would be effective, if adopted in the final rule. The Bureau understands that some HELOC creditors may choose to replace a LIBOR index with a SOFR-based spread-adjusted index. As discussed above in the section-bysection analysis of § 1026.20(a), the ARRC intends to endorse forwardlooking term SOFR rates provided a consensus among its members can be reached that robust term benchmarks that are compliant with IOSCO standards and meet appropriate criteria set by the ARRC can be produced. If the ARRC has not recommended relevant forward-looking term SOFR rates, it will base its recommended indices on a compounded average of SOFR over a selected compounding period. The Bureau notes that the GSEs announced in February 2020 that they will begin accepting ARMs based on 30-day average SOFR in 2020.69 For purposes of this proposed rule, the Bureau has 69 See, e.g., Lender Letter LL–2020–01; Bulletin 2020–1 Selling, supra note 47. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 conducted its analysis below assuming that the ARRC will base its recommended replacement indices on 30-day SOFR. In determining whether the SOFRbased spread-adjusted indices have historical fluctuations substantially similar to those of the applicable LIBOR indices, the Bureau has reviewed the historical data on SOFR and historical data on 1-month, 3-month, 6-month, and 1-year LIBOR from August 22, 2014, to March 16, 2020.70 With respect to the 1-year LIBOR, while 30-day SOFR has not always moved in tandem with 1year LIBOR, the Bureau is proposing to determine that the historical fluctuations in 1-year LIBOR and the spread-adjusted index based on 30-day SOFR have been substantially similar. As discussed in more detail below, the Bureau also is proposing to determine that the historical fluctuations in the spread-adjusted index based on 30-day SOFR are substantially similar to those of 1-month, 3-month, and 6-month LIBOR. The Bureau is proposing to make these determinations about the historical fluctuations in the spreadadjusted indices based on 30-day SOFR, while analyzing data on 30-day SOFR without spread adjustments. This analysis is valid because the ARRC has stated that the spread adjustments will be static, outside of a one-year transition period that has not yet started and so is not in the historical data. A static spread adjustment would have no effect on historical fluctuations. The historical correlation between 1year LIBOR and 30-day SOFR is .8987. This correlation is high and suggests that on average 30-day SOFR tends to move closely with 1-year LIBOR. However, the raw correlation understates the similarity in the movements of these two rates, because 1-year LIBOR is a forward-looking term rate and 30-day SOFR is a backwardlooking moving average. This means that 30-day SOFR often moves closely 70 Prior to the start of official publication of SOFR in 2018, the New York Fed released data from August 2014 to March 2018 representing modeled, pre-production estimates of SOFR that are based on the same basic underlying transaction data and methodology that now underlie the official publication. The New York Fed has published indicative SOFR averages going back only to May 2, 2018. See Fed. Reserve Bank of N.Y., SOFR Averages and Index Data, https:// apps.newyorkfed.org/markets/autorates/sofr-avgind (last visited May 11, 2020). Therefore, the Bureau has used the estimated SOFR data going back to 2014 to estimate its own 30-day compound average of SOFR since 2014. The methodology to calculate compound averages of SOFR from daily data is described in Fed. Reserve Bank of N.Y., Statement Regarding Publication of SOFR Averages and a SOFR Index, https://www.newyorkfed.org/ markets/opolicy/operating_policy_200212. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 36953 with 1-year LIBOR, but with a lag. For example, the historical correlation between 30-day SOFR and a 60-day lag of 1-year LIBOR is .9584. However, as discussed above with respect to the proposed determination related to Prime, correlation is not the only statistical measure of similarity that may be relevant for comparing the historical fluctuations of these rates. The Bureau has reviewed other statistical characteristics of these rates, such as the variance, skewness, and kurtosis, and these imply that 30-day SOFR tends to present consumers and creditors with payment changes that are similar to that presented by 1-year LIBOR.71 Theoretically, these statistical measures could mask important longterm differences in movements. The spread between 1-year LIBOR and 30day SOFR decreased from 68 basis points on average in 2015 to 13 basis points on average in 2019. However, this decrease is mainly due to the timing mismatch issue discussed above together with the fact that interest rates in general began to decrease at the end of 2018. Because the backward-looking 30-day moving average of SOFR began to respond to this decrease in rates well after the forward-looking 1-year LIBOR term rate did, 30-day SOFR was temporarily high relative to 1-year LIBOR for a short period in early 2019. The spread between a 60-day lag of 1year LIBOR and 30-day SOFR was 59 basis points on average in 2015 and 39 basis points on average in 2019. Finally, in performing this analysis, the Bureau also considered the impact different indices would have on consumer payments. To that end, the Bureau considered a specific example of a debt with a variable rate that resets monthly, and a balance that accumulates over time with interest but without further charges, payments, or fees. The Bureau used this example for HELOCs and credit card accounts because the Bureau understands that the rates for many of those accounts reset monthly. The example considers debt that accumulates interest over the period of four years, beginning in January of 2016 and ending in January 2020. For this example, the Bureau found historical fluctuations in 30-day SOFR and 1-year LIBOR produced substantially similar payment outcomes for consumers with debt similar to that 71 The variance, skewness, and kurtosis of 30-day SOFR are .7179, .4098, and 1.6548 respectively. The variance, skewness, and kurtosis of 1-year LIBOR during the time period are .5829, .1179, and 1.9242, respectively. E:\FR\FM\18JNP2.SGM 18JNP2 36954 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules considered.72 For example, if the initial balance in this example is $10,000, the difference between the debt outstanding under 30-day SOFR and the debt outstanding under adjusted 1-year LIBOR after four years (called ‘‘4-year balance difference’’ in Table 1 below) is roughly $31. The Bureau also is proposing to determine that historical fluctuations in the spread-adjusted index based on 30day SOFR are substantially similar to those of 1-month, 3-month, and 6-month LIBOR. For the reasons discussed above, the Bureau is proposing to make these determinations about the historical fluctuations in the spread-adjusted indices based on 30-day SOFR, while analyzing data on 30-day SOFR without spread adjustments. As discussed above, the largest differences between 30-day SOFR and 1year LIBOR arise because 30-day SOFR is backward-looking and 1-year LIBOR is forward-looking. Shorter tenors of LIBOR are less forward-looking, and so in general have even smaller differences with 30-day SOFR. Echoing the analysis described above to compare historical fluctuations between 30-day SOFR and 1-year LIBOR, Table 1 provides statistics on the historical fluctuations in 1month, 3-month, 6-month, and 1-year LIBOR during the time period in which data for 30-day SOFR is available. Based on this analysis, the Bureau is proposing to determine that historical fluctuations in the spread-adjusted index based on 30-day SOFR also are substantially similar to those of 1-month, 3-month, and 6-month LIBOR. TABLE 1—COMPARISON OF HISTORICAL FLUCTUATIONS IN DIFFERENT TENORS OF LIBOR AND 30-DAY SOFR Correlation with 30-day SOFR Rate 30-day SOFR ....................................................................... 1-month LIBOR .................................................................... 3-month LIBOR .................................................................... 6-month LIBOR .................................................................... 1-year LIBOR ....................................................................... As discussed above, the ARRC intends to endorse forward-looking term SOFR rates provided a consensus among its members can be reached that robust term benchmarks that are compliant with IOSCO standards and meet appropriate criteria set by the ARRC can be produced. These term rates do not yet exist. However, the Board has produced data on ‘‘indicative’’ SOFR term rates that likely provide a good indication of how SOFR term rates would perform.73 The Bureau understands that if a SOFR term rate does not exist for a particular LIBOR tenor, the ARRC may use the nextlongest SOFR term rate to develop the replacement index for the LIBOR tenor if any applicable SOFR term rate exists. For example, if there is not a 1-year SOFR term rate, the replacement for the 1-year LIBOR may be determined using the SOFR term rates in the following order if they exist: (1) 6-month SOFR; Variance N/A .9893 .9746 .9436 .8987 Skewness 0.7179 0.6977 0.7241 0.652 0.5829 (2) 3-month SOFR; and (3) 1-month SOFR. As discussed above, the largest difference between different LIBOR tenors and 30-day SOFR arises because LIBOR is forward-looking and 30-day SOFR is backward-looking. Because SOFR term rates are forward-looking like LIBOR, the differences between SOFR term rates and LIBOR should in general be smaller than the differences between 30-day SOFR and LIBOR. The Bureau has reviewed the historical data on these indicative SOFR term rates and on 1-month, 3-month, 6-month, and 1year LIBOR from June 11, 2018 to March 16, 2020.74 While the indicative SOFR term rates have not always moved in tandem with LIBOR, the Bureau is proposing to determine that (1) the historical fluctuations of 1-year and 6month USD LIBOR are substantially similar to those of the 1-month, 3month, and 6-month spread-adjusted SOFR term rates; (2) the historical fluctuations of 3-month USD LIBOR are 0.4098 0.2376 0.1952 0.1038 0.1179 Kurtosis 1.6548 1.5305 1.5835 1.7556 1.9242 4-Year balance difference N/A $26 60 63 31 substantially similar to those of the 1month and 3-month spread-adjusted SOFR term rates; and (3) the historical fluctuations of 1-month USD LIBOR are substantially similar to those of the 1month spread-adjusted SOFR term rate. The Bureau is proposing to make these determinations about the historical fluctuations in the spreadadjusted indices based on 1-month term SOFR, 3-month term SOFR, and 6month term SOFR, while analyzing data on 1-month term SOFR, 3-month term SOFR, and 6-month term SOFR without spread adjustments. This analysis is valid because the ARRC has stated that the spread adjustments will be static, outside of a one-year transition period that has not yet started and so is not in the historical data. A static spread adjustment would have no effect on historical fluctuations. Statistics that have led the Bureau to propose these determinations are in Tables 2 and 3. TABLE 2—CORRELATIONS BETWEEN LIBOR AND INDICATIVE SOFR TERM RATES 75 1-month SOFR LIBOR tenor 1-month ........................................................................................................................................ 3-month ........................................................................................................................................ 6-month ........................................................................................................................................ 72 In this example, two versions of debt are considered: (1) One with an interest rate equal to 30-day SOFR; and (2) one with an interest rate equal to 1-year LIBOR plus the average spread between 1-year LIBOR and 30-day SOFR for the 12 months preceding the start date. The average difference between the debt outstanding after four VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 years under 30-day SOFR and the adjusted 1-year LIBOR is only around .3% of the initial debt. 73 See Heitfield & Ho-Park, supra note 50. 74 June 11, 2018, is the first date for which indicative SOFR term rate data are available. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 .9890 .8955 .7606 3-month SOFR N/A .9606 .8923 6-month SOFR N/A N/A .9691 75 These correlations are for the period beginning June 11, 2018, the first date for which indicative SOFR term rate data are available. These correlations are not directly comparable to those in Table 1, which uses data beginning August 22, 2014, the first date for which data for 30-day SOFR are available. E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules 36955 TABLE 2—CORRELATIONS BETWEEN LIBOR AND INDICATIVE SOFR TERM RATES 75—Continued 1-month SOFR LIBOR tenor 1-year ........................................................................................................................................... The historical correlations presented in Table 2 are high, suggesting that the given SOFR term rates tend to move closely with the given LIBOR tenors. However, the raw correlations understate the similarity in the movements of the SOFR term rates and the LIBOR tenors when comparing a LIBOR tenor to a shorter SOFR term rate. This is because the SOFR term rate is less forward-looking than the LIBOR tenor, so the SOFR term rate moves closely with the LIBOR tenor but with a lag. This consideration is especially 3-month SOFR .6295 .8000 6-month SOFR .9274 important during the time period for which indicative SOFR term rate data are available, when interest rates in general started to decrease. For example, the historical correlation between 1month term SOFR and a 60-day lag of 1-year LIBOR is .9039. TABLE 3—STATISTICS ON LIBOR AND INDICATIVE SOFR TERM RATES 76 Rate Variance 1-month LIBOR ............................................................................................................................ 3-month LIBOR ............................................................................................................................ 6-month LIBOR ............................................................................................................................ 12-month LIBOR .......................................................................................................................... 1-month SOFR ............................................................................................................................. 3-month SOFR ............................................................................................................................. 6-month SOFR ............................................................................................................................. The Bureau has reviewed other statistical characteristics of the LIBOR rates and the indicative SOFR term rates, such as the variance, skewness, and kurtosis, as shown in Table 3 and these imply that the indicative SOFR term rates tend to present consumers and creditors with payment changes that are similar to that presented by the LIBOR rates. As discussed in the section-by-section analyses of proposed §§ 1026.40(f)(3)(ii)(B), 1026.55(b)(7)(i) and (ii), the Bureau also is proposing the same determination for purposes of proposed §§ 1026.40(f)(3)(ii)(B) and 1026.55(b)(7)(i) and (ii). The Bureau solicits comment on this proposed determination that spread-adjusted indices based on SOFR recommended by the ARRC to replace the 1-month, 3month, 6-month, and 1-year USD LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3-month, 6-month, and 1-year USD LIBOR indices respectively, for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii). The Bureau notes that the SOFRbased spread-adjusted indices are not yet being published and may not be published by the effective date of the final rule, if adopted. Nonetheless, the Bureau believes that it is appropriate to consider the underlying SOFR data that is available in proposing the determinations that the spread-adjusted indices based on SOFR recommended by the ARRC to replace the 1-month, 3month, 6-month, and 1-year USD LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3-month, 6-month, and 1-year USD LIBOR indices respectively. The Bureau solicits comment, however, on whether the Bureau should alternatively consider these SOFR-based spreadadjusted indices to be newly established indices for purposes of proposed §§ 1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii), to the extent these indices are not being published by the effective date of the final rule, if adopted. Proposed comment 40(f)(3)(ii)(A)–2.ii also clarifies that in order to use a SOFR-based spread-adjusted index described above as the replacement index for the applicable LIBOR index, the creditor also must comply with the condition in § 1026.40(f)(3)(ii)(A) that the SOFR-based spread-adjusted index and replacement margin would have resulted in an APR substantially similar to the rate in effect at the time the LIBOR index became unavailable. This condition under proposed § 1026.40(f)(3)(ii)(A) is discussed in more detail below. Also, as discussed in more detail below, the Bureau solicits comment on whether the Bureau in the final rule, if adopted, should provide for purposes of proposed § 1026.40(f)(3)(ii)(A) that the rate using the SOFR-based spread-adjusted index 76 Table 3 does not report a balance difference as Table 1 does because data on the indicative SOFR term rates are not available for a sufficiently long period. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 0.0735 0.0852 0.1219 0.1967 0.093 0.0952 0.1168 Skewness ¥0.5459 ¥0.2913 ¥0.3037 ¥0.2782 ¥0.4791 ¥0.4804 ¥0.4671 Kurtosis 2.1022 2.0771 1.6886 1.4281 1.8832 1.8558 1.6877 is ‘‘substantially similar’’ to the rate in effect at the time the LIBOR index becomes unavailable, so long as the creditor uses as the replacement margin the same margin in effect on the day that the LIBOR index becomes unavailable. The Bureau also solicits comment on whether there are other indices that are not newly established for which the Bureau should make a determination that the index has historical fluctuations that are substantially similar to those of the LIBOR indices. If so, what are these other indices, and why should the Bureau make such a determination with respect to those indices? Newly established index as replacement for a LIBOR index. Proposed § 1026.40(f)(3)(ii)(A) provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. The Bureau solicits comment on whether the Bureau should provide any additional guidance on, or regulatory changes addressing, when an index is newly established with respect to replacing the LIBOR indices for purposes of proposed § 1026.40(f)(3)(ii)(A). The Bureau also solicits comment on whether the Bureau should provide any examples of indices that are newly established with respect to replacing the LIBOR indices for E:\FR\FM\18JNP2.SGM 18JNP2 36956 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules purposes of § 1026.40(f)(3)(ii)(A). If so, what are these indices and why should the Bureau determine these indices are newly established with respect to replacing the LIBOR indices? Substantially similar rate when LIBOR becomes unavailable. Under proposed § 1026.40(f)(3)(ii)(A), the replacement index and replacement margin must produce an APR substantially similar to the rate that was in effect based on the LIBOR index used under the plan when the LIBOR index became unavailable. Proposed comment 40(f)(3)(ii)(A)–3 explains that for the comparison of the rates, a creditor must use the value of the replacement index and the LIBOR index on the day that the LIBOR index becomes unavailable. The Bureau solicits comment on whether it should address the situation where the replacement index is not be published on the day that the LIBOR index becomes unavailable. For example, should the Bureau provide that if the replacement index is not published on the day that the LIBOR index becomes unavailable, the creditor must use the previous calendar day that both indices are published as the date on which the annual percentage rate based on the replacement index must be substantially similar to the rate based on the LIBOR index? Proposed comment 40(f)(3)(ii)(A)–3 also clarifies that the replacement index and replacement margin are not required to produce an APR that is substantially similar on the day that the replacement index and replacement margin become effective on the plan. Proposed comment 40(f)(3)(ii)(A)–3.i provides an example to illustrate this comment. The Bureau believes that it may raise compliance issues if the rate calculated using the replacement index and replacement margin at the time the replacement index and replacement margin became effective had to be substantially similar to the rate in effect calculated using the LIBOR index on the date that the LIBOR index became unavailable. Specifically, under § 1026.9(c)(1), the creditor must provide a change-in-terms notice of the replacement index and replacement margin (including disclosing any reduced margin in change-in-terms notices provided on or after October 1, 2021, as would be required by proposed § 1026.9(c)(1)(ii)) at least 15 days prior to the effective date of the changes. The Bureau believes that this advance notice is important to consumers to inform them of how variable rates will be determined going forward after the LIBOR index is replaced. Because advance notice of the changes must be VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 given prior to the changes becoming effective, a creditor would not be able to ensure that the rate based on the replacement index and margin at the time the change-in-terms notice becomes effective will be substantially similar to the rate in effect calculated using the LIBOR index at the time the LIBOR index becomes unavailable. The value of the replacement index may change after the LIBOR index becomes unavailable and before the change-interms notice becomes effective. The Bureau notes that proposed § 1026.40(f)(3)(ii)(A) would require a creditor to use the index values of the replacement index and the original index on a single day (namely, the day that the original index becomes unavailable) to compare the rates to determine if they are ‘‘substantially similar.’’ In using a single day to compare the rates, this proposed provision is consistent with the condition in the unavailability provision in current § 1026.40(f)(3)(ii), in the sense that it provides that the new index and margin must result in an APR that is substantially similar to the rate in effect on a single day. The Bureau notes that if the replacement index and the original index have ‘‘historical fluctuations’’ that are substantially similar, the spread between the replacement index and the original index on a particular day typically will be substantially similar to the historical spread between the two indices. Nonetheless, the Bureau recognizes that there is a possibility that the spread between the replacement index and the original index could differ significantly on a particular day from the historical spread in certain unusual circumstances, such as occurred to spreads between LIBOR and other indices soon after the collapse of Lehman Brothers in 2008.77 Therefore, it is possible that two rates may typically be substantially similar but may not be substantially similar on a given date. It is also possible that two rates may be substantially similar on a given date but may not typically be substantially similar. To the extent the 77 The Bureau analyzed the daily spread between Prime and 1-month LIBOR from January 1, 1993, through April 23, 2020. For that timeframe, the median daily spread between those indices was 291 basis points. Since 1993, the spread reached a low of roughly negative nine basis points on October 10, 2008, soon after the collapse of Lehman Brothers. Since 1993, the spread has never been below 200 basis points aside from September, October, and November 2008. It has dipped below 250 basis points several times, including in May 2000 during the ‘‘dotcom bust’’ and in spring 2020 during the COVID–19 pandemic. As of April 23, 2020, the Prime-LIBOR spread had recovered to 276 basis points from a low of 223 basis points on April 1, 2020. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 historical spread better reflects the typical spread between the indices in the long run, it may be more appropriate to use the historical spread rather than the spread on a specific day in comparing the rates to help ensure the rates are ‘‘substantially similar’’ to each other in the long run. However, it is also possible that the spread on a specific, recent date may better reflect the typical spread between the indices in the future than a historical spread would, if the spread on that specific date deviates from the historical spread for reasons that are permanent rather than temporary.78 Moreover, considering the historical spread raises questions about how to define the ‘‘historical spread,’’ such as the date range to consider, and whether to take a median, mean, trimmed mean, or other statistic from the data for the date range. Given these considerations, the Bureau solicits comment on whether the Bureau should adopt a different approach to determine whether a rate using the replacement index is ‘‘substantially similar’’ to the rate using the original index for purposes of proposed § 1026.40(f)(3)(ii)(A) and, if so, what criteria the Bureau should use in selecting such a different approach. For example, the Bureau solicits comment on whether it should require creditors to use a historical median or average of the spread between the replacement index and the original index over a certain time frame (e.g., the time period the historical data are available or 5 years, whichever is shorter) for purposes of determining whether a rate using the replacement index is ‘‘substantially similar’’ to the rate using the original index. The Bureau also solicits comments on any compliance challenges that might arise as a result of adopting a potentially more complicated method of comparing the rates calculated using the replacement index and the rates calculated using the original index, and for any identified compliance challenges, how the Bureau could ease those compliance challenges. The Bureau is not proposing to address for purposes of proposed § 1026.40(f)(3)(ii)(A) when a rate calculated using the replacement index and replacement margin is ‘‘substantially similar’’ to the rate in effect when the LIBOR index becomes unavailable. The Bureau is concerned about providing a ‘‘range’’ of rates that 78 For example, the spread between 1-month USD LIBOR and Prime increased from roughly 142 basis points in 1986 to 281 basis points in 1993 but has been fairly steady ever since. Therefore, the LIBORPrime spread in early 1993 was much closer to the typical spread from then on than a ‘‘historical spread’’ would have been. E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules would be considered to be ‘‘substantially similar’’ to the rate in effect at the time LIBOR becomes unavailable, and about providing other specific guidance on, or regulatory changes addressing, the ‘‘substantially similar’’ standard, because the rates that will be considered ‘‘substantially similar’’ will be context-specific. The Bureau is concerned that if it provides a range of rates that will be considered substantially similar, this range might be too narrow or too broad in some cases depending on the specific circumstances. The Bureau also is concerned that some creditors may decide to charge an APR that is the highest APR in the range, even though the specific circumstances would indicate that the highest APR should not be considered substantially similar in those circumstances. The Bureau solicits comment, however, on whether the Bureau should provide guidance on, or regulatory changes addressing, the ‘‘substantially similar’’ standard in comparing the rates for purposes of proposed § 1026.40(f)(3)(ii)(A), and if so, what guidance, or regulatory changes, the Bureau should provide. For example, should the Bureau provide a range of rates that would be considered ‘‘substantially similar’’ as described above, and if so, how should the range be determined? Should the range of rates depend on context, and if so, what contexts should be considered? As an alternative to the range of rates approach, the Bureau solicits comment on whether it should provide factors that creditors must consider in deciding whether the rates are ‘‘substantially similar’’ and if so, what those factors should be. Are there other approaches the Bureau should consider for addressing the ‘‘substantially similar’’ standard for comparing rates? As discussed above, proposed comment 40(f)(3)(ii)(A)–2.ii clarifies that in order to use the SOFR-based spread-adjusted index as the replacement index for the applicable LIBOR index, the creditor must comply with the condition in § 1026.40(f)(3)(ii)(A) that the SOFRbased spread-adjusted index and replacement margin would have resulted in an APR substantially similar to the rate in effect at the time the LIBOR index became unavailable. The Bureau solicits comment on whether the Bureau in the final rule, if adopted, should provide for purposes of proposed § 1026.40(f)(3)(ii)(A) that the rate using the SOFR-based spreadadjusted index is ‘‘substantially similar’’ to the rate in effect at the time the LIBOR index becomes unavailable, so VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 long as the creditor uses as the replacement margin the same margin in effect on the day that the LIBOR index becomes unavailable. As discussed in more detail in the section-by-section analysis of § 1026.20(a), the spread adjustments for the SOFR-based spreadadjusted indices are designed to reflect and adjust for the historical differences between LIBOR and SOFR in order to make the spread-adjusted rate comparable to LIBOR. Thus, to facilitate compliance, the Bureau believes that it may be appropriate to provide for purposes of proposed § 1026.40(f)(3)(ii)(A) that a creditor complies with the ‘‘substantially similar’’ standard for comparing the rates when the creditor replaces the LIBOR index used under the plan with the applicable SOFR-based spreadadjusted index and uses as the replacement margin the same margin in effect at the time the LIBOR index becomes unavailable. 40(f)(3)(ii)(B) The Proposal For the reasons discussed below and in the section-by-section analysis of § 1026.40(f)(3)(ii), the Bureau is proposing to add new LIBOR-specific provisions to § 1026.40(f)(3)(ii)(B) that would permit creditors for HELOC plans subject to § 1026.40 that use a LIBOR index for calculating variable rates to replace the LIBOR index and change the margins for calculating the variable rates on or after March 15, 2021, in certain circumstances. Specifically, proposed § 1026.40(f)(3)(ii)(B) provides that if a variable rate on a HELOC subject to § 1026.40 is calculated using a LIBOR index, a creditor may replace the LIBOR index and change the margin for calculating the variable rate on or after March 15, 2021, as long as (1) the historical fluctuations in the LIBOR index and replacement index were substantially similar; and (2) the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Proposed § 1026.40(f)(3)(ii)(B) also provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 36957 in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. In addition, proposed § 1026.40(f)(3)(ii)(B) provides that if either the LIBOR index or the replacement index is not published on December 31, 2020, the creditor must use the next calendar day that both indices are published as the date on which the APR based on the replacement index must be substantially similar to the rate based on the LIBOR index. The Bureau also is proposing to add detail in proposed comments 40(f)(3)(ii)(B)–1 through –3 on the conditions set forth in proposed § 1026.40(f)(3)(ii)(B). For example, to reduce uncertainty with respect to selecting a replacement index that meets the standards in proposed § 1026.40(f)(3)(ii)(B), the Bureau is proposing to determine that Prime is an example of an index that has historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau also is proposing to determine that certain spread-adjusted indices based on SOFR recommended by the ARRC have historical fluctuations that are substantially similar to those of certain USD LIBOR indices. To effectuate the purposes of TILA and to facilitate compliance, the Bureau is proposing to use its TILA section 105(a) authority to provide the new LIBOR-specific provisions under proposed § 1026.40(f)(3)(ii)(B). TILA section 105(a) 79 directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. The Bureau is proposing these LIBOR-specific provisions to facilitate compliance with TILA and effectuate its purposes. Specifically, the Bureau interprets ‘‘facilitate compliance’’ to include enabling or fostering continued operation in conformity with the law. The Bureau is proposing to set March 15, 2021, as the date on or after which HELOC creditors are permitted to replace the LIBOR index used under the plan pursuant to proposed § 1026.40(f)(3)(ii)(B) prior to LIBOR 79 15 E:\FR\FM\18JNP2.SGM U.S.C. 1604(a), 18JNP2 36958 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules becoming unavailable to facilitate compliance with the change-in-terms notice requirements applicable to creditors for HELOCs. As a practical matter, these proposed changes will allow creditors for HELOCs to provide the 15-day change-in-terms notices required under § 1026.9(c)(1) prior to the LIBOR indices becoming unavailable, and thus will allow those creditors to avoid being left without a LIBOR index to use in calculating the variable rate before the replacement index and margin become effective. Also, these proposed changes will allow HELOC creditors to provide the changein-terms notices, and replace the LIBOR index used under the plans, on accounts on a rolling basis, rather than having to provide the change-in-terms notices, and replace the LIBOR index, for all its accounts at the same time as the LIBOR index used under the plan becomes unavailable. Without the proposed LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B), as a practical matter, HELOC creditors would have to wait until the LIBOR index becomes unavailable to provide the 15-day change-in-terms notice under § 1026.9(c)(1), disclosing the replacement index and replacement margin (including disclosing any reduced margin in change-in-terms notices provided on or after October 1, 2021, as would be required by proposed § 1026.9(c)(1)(ii)). The Bureau believes that this advance notice is important to consumers to inform them of how variable rates will be determined going forward after the LIBOR index is replaced. For several reasons, HELOC creditors would not be able to send out changein-terms notices disclosing the replacement index and replacement margin prior to LIBOR becoming unavailable. First, although LIBOR is expected to become unavailable around the end of 2021, there is no specific date known with certainty on which LIBOR will become unavailable. Thus, HELOC creditors could not send out the changein-terms notices prior to LIBOR becoming unavailable because they will not know when it will become unavailable and thus would not know when to make the replacement index and replacement margin effective on the account. Second, HELOC creditors would need to know the index values of the LIBOR index and the replacement index prior to sending out the change-in-terms notice so that they could disclose the replacement margin in the change-interms notice. HELOC creditors will not know these index values until the day VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 that LIBOR becomes unavailable. Thus, HELOC creditors would have to wait until LIBOR becomes unavailable before the creditors could send the 15-day change-in-terms notices under § 1026.9(c)(1) to replace the LIBOR index with a replacement index. Some creditors could be left without a LIBOR index value to use during the 15-day period before the replacement index and replacement margin become effective, depending on their existing contractual terms. The Bureau is concerned this could cause compliance and systems issues. Also, as discussed in part III, the industry has raised concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable until LIBOR finally is discontinued. Allowing creditors to replace the LIBOR indices on existing HELOC accounts prior to LIBOR becoming unavailable may address some of these concerns. The Bureau solicits comments on proposed § 1026.40(f)(3)(ii)(B) and proposed comments 40(f)(3)(ii)(B)–1 through –3. The proposed comments are discussed in detail below. Consistent conditions with proposed § 1026.40(f)(3)(ii)(A). The Bureau is proposing conditions in the LIBORspecific provisions in proposed § 1026.40(f)(3)(ii)(B) for how a creditor must select a replacement index and compare rates that are consistent with the conditions set forth in the unavailability provisions set forth in proposed § 1026.40(f)(3)(ii)(A). For example, the availability provisions in proposed § 1026.40(f)(3)(ii)(A) and the LIBOR-specific provisions in proposed § 1026.40(f)(3)(ii)(B) contain a consistent requirement that the APR calculated using the replacement index must be ‘‘substantially similar’’ to the rate calculated using the LIBOR index.80 In addition, both proposed § 1026.40(f)(3)(ii)(A) and (B) contain consistent conditions for how a creditor must select a replacement index. For several reasons, the Bureau is proposing to keep the conditions for these two provisions consistent. First, as discussed above in the section-bysection analysis of § 1026.40(f)(3)(ii), some HELOC creditors may need to wait until LIBOR become unavailable to 80 The conditions in proposed § 1026.40(f)(3)(ii)(A) and (B) are consistent, but they are not the same. For example, although both proposed provisions use the ‘‘substantially similar’’ standard to compare the rates, they use different dates for selecting the index values in calculating the rates. The proposed provisions in proposed § 1026.40(f)(3)(ii)(A) and (B) differ in the timing of when creditors are permitted to transition away from LIBOR, which creates some differences in how the conditions apply. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 transition to a replacement index because of contractual reasons. The Bureau believes that keeping the conditions consistent in the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A) and the LIBORspecific provisions in proposed § 1026.40(f)(3)(ii)(B) will help ensure that creditors must meet consistent conditions in selecting a replacement index and setting the rates, regardless of whether they are using the unavailability provisions in proposed § 1026.40(f)(3)(ii)(A), or the LIBORspecific provisions in proposed § 1026.40(f)(3)(ii)(B). Second, some creditors may have the ability to choose between the unavailability provisions and LIBORspecific provisions to switch away from using a LIBOR index, and if the conditions between those two provisions are inconsistent, these differences could undercut the purpose of the LIBOR-specific provisions to allow creditors to switch out earlier. For example, if the conditions for selecting a replacement index or setting the rates were stricter in the LIBOR-specific provisions than in the unavailability provisions, this may cause a creditor to wait until LIBOR becomes unavailable to switch to a replacement index, which would undercut the purpose of the LIBOR-specific provisions to allow creditors to switch out earlier and prevent these creditors from having the time to transition from using a LIBOR index. Historical fluctuations substantially similar for the LIBOR index and replacement index. Proposed comment 40(f)(3)(ii)(B)–1 provides detail on determining whether a replacement index that is not newly established has ‘‘historical fluctuations’’ that are ‘‘substantially similar’’ to those of the LIBOR index used under the plan for purposes of proposed § 1026.40(f)(3)(ii)(B). Specifically, proposed comment 40(f)(3)(ii)(B)-1 provides that for purposes of replacing a LIBOR index used under a plan pursuant to proposed § 1026.40(f)(3)(ii)(B), a replacement index that is not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index used under the plan, considering the historical fluctuations up through December 31, 2020, or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. The Bureau is proposing the December 31, 2020 date to be consistent with the date that creditors generally E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules must use for selecting the index values to use in comparing the rates under proposed § 1026.40(f)(3)(ii)(B). The Bureau solicits comment on the December 31, 2020 date for purposes of proposed comment 40(f)(3)(ii)(B)–1 and whether another date or timeframe would be more appropriate for purposes of that proposed comment. To facilitate compliance, proposed comment 40(f)(3)(ii)(B)–1.i includes a proposed determination that Prime has historical fluctuations that are substantially similar to those of the 1month and 3-month USD LIBOR indices and includes a placeholder for the date when this proposed determination would be effective, if adopted in the final rule.81 The Bureau understands that some HELOC creditors may choose to replace a LIBOR index with Prime. Proposed comment 40(f)(3)(ii)(B)–1.i also clarifies that in order to use Prime as the replacement index for the 1month or 3-month USD LIBOR index, the creditor also must comply with the condition in proposed § 1026.40(f)(3)(ii)(B) that the Prime index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the prime rate is not published on December 31, 2020, the creditor must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the prime rate must be substantially similar to the rate based on the LIBOR index. This condition for comparing the rates under proposed § 1026.40(f)(3)(ii)(B) is discussed in more detail below. To facilitate compliance, proposed comment 40(f)(3)(ii)(B)–1.ii provides a proposed determination that the spreadadjusted indices based on SOFR recommended by the ARRC to replace the 1-month, 3-month, 6-month, and 1year USD LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3month, 6-month, and 1-year USD LIBOR indices respectively. The proposed comment also provides a placeholder for the date when this proposed determination would be effective, if adopted in the final rule.82 The Bureau 81 See the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A) for a discussion of the rationale for the Bureau proposing this determination. 82 See the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A) for a discussion of the VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 understands that some HELOC creditors may choose to replace a LIBOR index with a SOFR-based spread-adjusted index. Comment 40(f)(3)(ii)(B)–1.ii also clarifies that in order to use this SOFRbased spread-adjusted index as the replacement index for the applicable LIBOR index, the creditor also must comply with the condition in § 1026.40(f)(3)(ii)(B) that the SOFRbased spread-adjusted index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the SOFRbased spread-adjusted index is not published on December 31, 2020, the creditor must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the SOFR-based spreadadjusted index must be substantially similar to the rate based on the LIBOR index. This condition for comparing the rates under proposed § 1026.40(f)(3)(ii)(B) is discussed in more detail below. Also, for the reasons discussed below, the Bureau solicits comment on whether the Bureau in the final rule, if adopted, should provide for purposes of proposed § 1026.40(f)(3)(ii)(B) that the rate using the SOFR-based spread-adjusted index is ‘‘substantially similar’’ to the rate calculated using the LIBOR index, so long as the creditor uses as the replacement margin the same margin that applied to the variable rate immediately prior to the replacement of the LIBOR index. The Bureau also solicits comment on whether there are other indices that are not newly established for which the Bureau should make a determination that the index has historical fluctuations that are substantially similar to those of the LIBOR indices for purposes of proposed § 1026.40(f)(3)(ii)(B). If so, what are these other indices, and why should the Bureau make such a determination with respect to those indices? Newly established index as replacement for the LIBOR index. rationale for the Bureau proposing this determination. Also, as discussed in the section-bysection analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau solicits comment on whether the Bureau should alternatively consider these SOFR-based spread-adjusted indices to be newly established indices for purposes of proposed § 1026.40(f)(3)(ii)(B), to the extent these indices are not being published by the effective date of the final rule, if adopted. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 36959 Proposed § 1026.40(f)(3)(ii)(B) provides if the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and the replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The Bureau solicits comment on whether the Bureau should provide any additional guidance on, or regulatory changes addressing, when an index is newly established with respect to replacing the LIBOR indices for purposes of proposed § 1026.40(f)(3)(ii)(B). The Bureau also solicits comment on whether the Bureau should provide any examples of indices that are newly established with respect to replacing the LIBOR indices for purposes of § 1026.40(f)(3)(ii)(B). If so, what are these indices and why should the Bureau determine these indices are newly established with respect to replacing the LIBOR indices? Substantially similar rate using index values in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Under proposed § 1026.40(f)(3)(ii)(B), if both the replacement index and LIBOR index used under the plan are published on December 31, 2020, the replacement index value in effect on December 31, 2020, and the replacement margin must produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Proposed comment 40(f)(3)(ii)(B)–2 also explains that the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan is the margin that applied to the variable rate immediately prior to when the creditor provides the change-in-terms notice disclosing the replacement index for the variable rate. Proposed comment 40(f)(3)(ii)(B)–2.i provides an example to illustrate this comment, when the margin used to calculate the variable rate is increased pursuant to a written agreement under § 1026.40(f)(3)(iii), and this change in the margin occurs after December 31, 2020, but prior to the date that the creditor provides a change-interm notice under § 1026.9(c)(1) E:\FR\FM\18JNP2.SGM 18JNP2 36960 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules disclosing the replacement index for the variable rate. In calculating the comparison rates using the replacement index and the LIBOR index used under the HELOC plan, the Bureau generally is proposing to require creditors to use the index values for the replacement index and the LIBOR index in effect on December 31, 2020. The Bureau is proposing to require HELOC creditors to use these index values to promote consistency for creditors and consumers in which index values are used to compare the two rates. Under proposed § 1026.40(f)(3)(ii)(B), HELOC creditors are permitted to replace the LIBOR index used under the plan and adjust the margin used in calculating the variable rate used under the plan on or after March 15, 2021, but creditors may vary in the timing of when they provide change-in-terms notices to replace the LIBOR index used on their HELOC accounts and when these replacements become effective. For example, one HELOC creditor may replace the LIBOR index used under its HELOC plans in April 2021, while another HELOC creditor may replace the LIBOR index used under its HELOC plans in October 2021. In addition, a HELOC creditor may not replace the LIBOR index used under all of its HELOC plans at the same time. For example, a HELOC creditor may replace the LIBOR index used under some of its HELOC plans in April 2021 but replace the LIBOR index used under other of its HELOC plans in May 2021. Nonetheless, regardless of when a particular creditor replaces the LIBOR index used under its HELOC plans, proposed § 1026.40(f)(3)(ii)(B) generally would require that all creditors for HELOCs use December 31, 2020, as the day for determining the index values for the replacement index and the LIBOR index, to promote consistency for creditors and consumers with respect to which index values are used to compare the two rates. In addition, using the December 31, 2020 date for the index values in comparing the rates may allow creditors for HELOCs to send out change-in-terms notices prior to March 15, 2021, and have the changes be effective on March 15, 2021, the proposed date on or after which creditors for HELOCs would be permitted to switch away from using LIBOR as an index on an existing HELOC account under proposed § 1026.40(f)(3)(ii)(B). If the Bureau instead required creditors to use the index values on March 15, 2021, creditors for HELOCs as a practical matter would not be able to provide change-in-terms notices of the VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 replacement index and any adjusted margin until after March 15, 2021, because they would need the index values from that date in order to calculate the replacement margin. Thus, using the index values on March 15, 2021, would delay when creditors for HELOCs could switch away from using LIBOR as an index on an existing HELOC account. Also, as discussed in part III, the industry has raised concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable until LIBOR finally is discontinued. Using the index values for the replacement index and the LIBOR index used under the plan in effect on December 31, 2020, may address some of these concerns. The Bureau solicits comment specifically on the use of the December 31, 2020 index values in calculating the comparison rates under proposed § 1026.40(f)(3)(ii)(B). Proposed § 1026.40(f)(3)(ii)(B) provides one exception to the proposed general requirement to use the index values for the replacement index and the LIBOR index used under the plan in effect on December 31, 2020. Proposed § 1026.40(f)(3)(ii)(B) provides that if either the LIBOR index or the replacement index is not published on December 31, 2020, the creditor must use the next calendar day that both indices are published as the date on which the APR based on the replacement index must be substantially similar to the rate based on the LIBOR index. As discussed above, proposed § 1026.40(f)(3)(ii)(B) would require a creditor to use the index values of the replacement index and the LIBOR index on a single day (generally December 31, 2020) 83 to compare the rates to determine if they are ‘‘substantially similar.’’ In using a single day to compare the rates, this proposed provision is consistent with the condition in the unavailability provision in current § 1026.40(f)(3)(ii), in the sense that it provides that the new index and margin must result in an APR that is substantially similar to the rate in effect on a single day. The Bureau notes that if the replacement index and the LIBOR index have ‘‘historical fluctuations’’ that are substantially similar, the spread between the replacement index and the LIBOR index on a particular day typically will be substantially similar to 83 If one or both of the indices are not available on December 31, 2020, proposed § 1026.40(f)(3)(ii)(B) would require that the creditor use the index values of the indices on the next calendar day that both indices are published. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 the historical spread between the two indices. Nonetheless, the Bureau recognizes that there is a possibility that the spread between the replacement index and the LIBOR index could differ significantly on a particular day from the historical spread in certain unusual circumstances, such as occurred to spreads between LIBOR and other indices soon after the collapse of Lehman Brothers in 2008.84 Therefore, it is possible that two rates may typically be substantially similar but may not be substantially similar on a given date. It is also possible that two rates may be substantially similar on a given date but may not typically be substantially similar. To the extent the historical spread better reflects the typical spread between the indices in the long run, it may be more appropriate to use the historical spread rather than the spread on a specific day in comparing the rates to help ensure the rates are ‘‘substantially similar’’ to each other in the long run. However, it is also possible that the spread on a specific, recent date may better reflect the typical spread between the indices in the future than a historical spread would, if the spread on that specific date deviates from the historical spread for reasons that are permanent rather than temporary.85 Moreover, considering the historical spread raises questions about how to define the ‘‘historical spread,’’ such as the date range to consider, and whether to take a median, mean, trimmed mean, or other statistic from the data for the date range. Given these considerations, the Bureau solicits comment on whether the Bureau should adopt a different approach to determine whether a rate using the replacement index is ‘‘substantially similar’’ to the rate using the LIBOR index for purposes of proposed § 1026.40(f)(3)(ii)(B) and, if so, what criteria the Bureau should use in selecting such a different approach. For example, the Bureau solicits comment on whether it should require creditors to use a historical median or average of the spread between the replacement index and the LIBOR index over a certain time frame (e.g., the time period the historical data are available or 5 years, whichever is shorter) for purposes of determining whether a rate using the replacement index is ‘‘substantially similar’’ to the rate using the LIBOR index. The Bureau also solicits comments on any compliance challenges that might arise as a result of adopting a potentially more complicated method of comparing rates calculated 84 See 85 See E:\FR\FM\18JNP2.SGM supra note 72. supra note 78. 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules using the replacement index and the rates calculated using the LIBOR index, and for any identified compliance challenges, how the Bureau could ease those compliance challenges. Under proposed § 1026.40(f)(3)(ii)(B), in calculating the comparison rates using the replacement index and the LIBOR index used under the HELOC plan, the creditor must use the margin that applied to the variable rate immediately prior to when the creditor provides the change-in-terms notice disclosing the replacement index for the variable rate. The Bureau is proposing that creditors must use this margin, rather than the margin in effect on December 31, 2020. The Bureau recognizes that creditors for HELOCs in certain instances may change the margin that is used to calculate the LIBOR variable rate after December 31, 2020, but prior to when the creditor provides a change-in-terms notice to replace the LIBOR index used under the plan. If the Bureau were to require that the creditor use the margin in effect on December 31, 2020, this would undo any margin changes that occurred after December 31, 2020, but prior to the creditor providing a change-in-terms notice of the replacement of the LIBOR index used under the plan, which would be inconsistent with the purpose of the comparisons of the rates under proposed § 1026.40(f)(3)(ii)(B). Proposed comment 40(f)(3)(ii)(B)–3 clarifies that the replacement index and replacement margin are not required to produce an APR that is substantially similar on the day that the replacement index and replacement margin become effective on the plan. Proposed comment 40(f)(3)(ii)(B)–3.i also provides an example to illustrate this comment. The Bureau believes that it would raise compliance issues if the rate calculated using the replacement index and replacement margin at the time the replacement index and replacement margin became effective had to be substantially similar to the rate calculated using the LIBOR index in effect on December 31, 2020. Under § 1026.9(c)(1), the creditor must provide a change-in-terms notice of the replacement index and replacement margin (including a reduced margin in a change-in-terms notice provided on or after October 1, 2021, as would be required by proposed § 1026.9(c)(1)(ii)) at least 15 days prior to the effective date of the changes. The Bureau believes that this advance notice is important to consumers to inform them of how variable rates will be determined going forward after the LIBOR index is replaced. Because advance notice of the changes must be given prior to the VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 changes becoming effective, a creditor would not be able to ensure that the rate based on the replacement index and replacement margin at the time the change-in-terms notice becomes effective will be substantially similar to the rate calculated using the LIBOR index in effect on December 31, 2020. The value of the replacement index may change after December 31, 2020, and before the change-in-terms notice becomes effective. The Bureau is not proposing to address for purposes of proposed § 1026.40(f)(3)(ii)(B) when a rate calculated using the replacement index and replacement margin is ‘‘substantially similar’’ to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The Bureau is concerned about providing a ‘‘range’’ of rates that would be considered to be ‘‘substantially similar’’ to the LIBOR rate described above, and about providing other specific guidance on, or regulatory changes addressing, the ‘‘substantially similar’’ standard, because the rates that will be considered ‘‘substantially similar’’ will be context-specific. The Bureau is concerned that if it provides a range of rates that will be considered substantially similar, this range might be too narrow or too broad in some cases depending on the specific circumstances. The Bureau also is concerned that some creditors may decide to charge an APR that is the highest APR in the range, even though the specific circumstances would indicate that the highest APR should not be considered substantially similar in those circumstances. The Bureau solicits comment, however, on whether the Bureau should provide guidance on, or regulatory changes addressing, the ‘‘substantially similar’’ standard in comparing the rates for purposes of proposed § 1026.40(f)(3)(ii)(B), and if so, what guidance, or regulatory changes, the Bureau should provide. For example, should the Bureau provide a range of rates that would be considered ‘‘substantially similar’’ as described above, and if so, how should the range be determined? Should the range of rates depend on context, and if so, what contexts should be considered? As an alternative to the range of rates approach, the Bureau solicits comment on whether it should provide factors that creditors must consider in deciding whether the rates are ‘‘substantially similar’’ and if so, what those factors should be. Are there other approaches PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 36961 the Bureau should consider for addressing the ‘‘substantially similar’’ standard for comparing rates? As discussed above, proposed comment 40(f)(3)(ii)(B)–1.ii clarifies that in order to use the SOFR-based spreadadjusted index as the replacement index for the applicable LIBOR index, the creditor must comply with the condition in § 1026.40(f)(3)(ii)(B) that the SOFR-based spread-adjusted index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the SOFRbased spread-adjusted index is not published on December 31, 2020, the creditor must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the SOFR-based spreadadjusted index must be substantially similar to the rate based on the LIBOR index. The Bureau solicits comment on whether the Bureau in the final rule, if adopted, should provide for purposes of proposed § 1026.40(f)(3)(ii)(B) that the rate using the SOFR-based spreadadjusted index is ‘‘substantially similar’’ to the rate calculated using the LIBOR index, so long as the creditor uses as the replacement margin the same margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. As discussed in more detail in the section-by-section analysis of § 1026.20(a), the spread adjustments for the SOFR-based spread-adjusted indices are designed to reflect and adjust for the historical differences between LIBOR and SOFR in order to make the spreadadjusted rate comparable to LIBOR. Thus, the Bureau believes that it may be appropriate to provide for purposes of proposed § 1026.40(f)(3)(ii)(B) that a creditor complies with the ‘‘substantially similar’’ standard for comparing the rates when the creditor replaces the LIBOR index used under the plan with the applicable SOFRbased spread-adjusted index and uses as the replacement margin the same margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. E:\FR\FM\18JNP2.SGM 18JNP2 36962 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules Section 1026.55 Limitations on Increasing Annual Percentage Rates, Fees, and Charges 55(b) Exceptions 55(b)(7) Index Replacement and Margin Change Exception TILA section 171(a), which was added by the Credit CARD Act, provides that in the case of a credit card account under an open-end consumer credit plan, no creditor may increase any APR, fee, or finance charge applicable to any outstanding balance, except as permitted under TILA section 171(b).86 TILA section 171(b)(2) provides that the prohibition under TILA section 171(a) does not apply to an increase in a variable APR in accordance with a credit card agreement that provides for changes in the rate according to the operation of an index that is not under the control of the creditor and is available to the general public.87 In implementing these provisions of TILA section 171, § 1026.55(a) prohibits a card issuer from increasing an APR or certain enumerated fees or charges set forth in § 1026.55(a) on a credit card account under an open-end (not homesecured) consumer credit plan, except as provided in § 1026.55(b). Section 1026.55(b)(2) provides that a card issuer may increase an APR when: (1) The APR varies according to an index that is not under the card issuer’s control and is available to the general public; and (2) the increase in the APR is due to an increase in the index. Comment 55(b)(2)–6 provides that a card issuer may change the index and margin used to determine the APR under § 1026.55(b)(2) if the original index becomes unavailable, as long as historical fluctuations in the original and replacement indices were substantially similar, and as long as the replacement index and margin will produce a rate similar to the rate that was in effect at the time the original index became unavailable. If the replacement index is newly established and therefore does not have any rate history, it may be used if it produces a rate substantially similar to the rate in effect when the original index became unavailable. The Proposal As discussed in part III, the industry has requested that the Bureau permit card issuers to replace the LIBOR index used in setting the variable rates on existing accounts prior to when the LIBOR indices become unavailable to facilitate compliance. Among other 86 15 87 15 U.S.C. 1666i–1(a). U.S.C. 1666i–1(b)(2). VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 things, the industry is concerned that if card issuers must wait until LIBOR becomes unavailable to replace the LIBOR index used on existing accounts, card issuers would not have sufficient time to inform consumers of the replacement index and update their systems to implement the change. To reduce uncertainty with respect to selecting a replacement index, the industry also has requested that the Bureau determine that the prime rate has ‘‘historical fluctuations’’ that are ‘‘substantially similar’’ to those of the LIBOR indices. To address these concerns, as discussed in more detail in the sectionby-section analysis of proposed § 1026.55(b)(7)(ii), the Bureau is proposing to add new LIBOR-specific provisions to proposed § 1026.55(b)(7)(ii) that would permit card issuers for a credit card account under an open-end (not home-secured) consumer credit plan that uses a LIBOR index under the plan to replace LIBOR and change the margin on such plans on or after March 15, 2021, in certain circumstances. Specifically, proposed § 1026.55(b)(7)(ii) provides that if a variable rate on a credit card account under an open-end (not home-secured) consumer credit plan is calculated using a LIBOR index, a card issuer may replace the LIBOR index and change the margin for calculating the variable rate on or after March 15, 2021, as long as (1) the historical fluctuations in the LIBOR index and replacement index were substantially similar; and (2) the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and the replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Also, as discussed in more detail in the section-by-section analysis of proposed § 1026.55(b)(7)(ii), to reduce uncertainty with respect to selecting a replacement index that meets the standards in proposed § 1026.55(b)(7)(ii), the Bureau is PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 proposing to determine that Prime is an example of an index that has historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau also is proposing to determine that certain spread-adjusted indices based on SOFR recommended by the ARRC have historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau is also proposing additional detail in comments 55(b)(7)(ii)–1 through –3 with respect to proposed § 1026.55(b)(7)(ii). In addition, as discussed in more detail in the section-by-section analysis of proposed § 1026.55(b)(7)(i), the Bureau is proposing to move the unavailability provisions in current comment 55(b)(2)–6 to proposed § 1026.55(b)(7)(i) and to revise the proposed moved provisions for clarity and consistency. The Bureau also is proposing additional detail in comments 55(b)(7)(i)–1 through –2 with respect to proposed § 1026.55(b)(7)(i). For example, to reduce uncertainty with respect to selecting a replacement index that meets the standards under proposed § 1026.55(b)(7)(i), the Bureau is proposing to make the same determinations discussed above related to Prime and the spread-adjusted indices based on SOFR recommended by the ARRC in relation to proposed § 1026.55(b)(7)(i). The Bureau is proposing to make these revisions and provide additional detail in case card issuers use the unavailability provision in proposed § 1026.55(b)(7)(i) to replace a LIBOR index used for their credit card accounts, as discussed in more detail below. Bureau is proposing new proposed LIBOR-specific provisions rather than interpreting when LIBOR is unavailable. For the same reasons that the Bureau is proposing LIBOR-specific provisions for HELOCs under proposed § 1026.40(f)(3)(ii)(B), the Bureau is proposing these new LIBOR-specific provisions under proposed § 1026.55(b)(7)(ii), rather than interpreting LIBOR indices to be unavailable as of a certain date prior to LIBOR being discontinued under current comment 55(b)(2)–6 (as proposed to be moved to proposed § 1026.55(b)(7)(i)). First, the Bureau is concerned about making a determination for Regulation Z purposes under current comment 55(b)(2)–6 (as proposed to be moved to proposed § 1026.55(b)(7)(i)) that the LIBOR indices are unavailable or unreliable when the FCA, the regulator of LIBOR, has not made such a determination. Second, the Bureau is concerned that a determination by the Bureau that the E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules LIBOR indices are unavailable for purposes of comment 55(b)(2)–6 (as proposed to be moved to proposed § 1026.55(b)(7)(i)) could have unintended consequences for other products or markets. For example, the Bureau is concerned that such a determination could unintentionally cause confusion for creditors for other products (e.g., ARMs) about whether the LIBOR indices are unavailable for those products too and could possibly put pressure on those creditors to replace the LIBOR index used for those products before those creditors are ready for the change. Third, even if the Bureau interpreted unavailability under comment 55(b)(2)– 6 (as proposed to be moved to proposed § 1026.55(b)(7)(i)) to indicate that the LIBOR indices are unavailable prior to LIBOR being discontinued, this interpretation would not completely solve the contractual issues for card issuers whose contracts require them to wait until the LIBOR indices become unavailable before replacing the LIBOR index. Card issuers still would need to decide for their contracts whether the LIBOR indices are unavailable. Thus, even if the Bureau decided that the LIBOR indices are unavailable under Regulation Z as described above, card issuers whose contracts require them to wait until the LIBOR indices become unavailable before replacing the LIBOR index essentially would remain in the same position of interpreting their contracts as they would have been under the current rule. Thus, the Bureau is not proposing to interpret when the LIBOR indices are unavailable for purposes of current comment 55(b)(2)–6 (as proposed to be moved to proposed § 1026.55(b)(7)(ii)). The Bureau solicits comment on whether the Bureau should interpret when the LIBOR indices are unavailable for purposes of current comment 55(b)(2)–6 (as proposed to be moved to proposed § 1026.55(b)(7)(i)), and if so, why the Bureau should make that determination and when should the LIBOR indices be considered unavailable for purposes of that provision. The Bureau also solicits comment on an alternative to interpreting the term ‘‘unavailable.’’ Specifically, should the Bureau make revisions to the unavailability provisions in current comment 55(b)(2)–6 (as proposed to be moved to proposed § 1026.55(b)(7)(i)) in a manner that would allow those card issuers who need to transition from LIBOR and, for contractual reasons, may not be able to switch away from LIBOR prior to it being unavailable to be better able to use the unavailability provisions VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 for an orderly transition on or after March 15, 2021? If so, what should these revisions be? Interaction among proposed § 1026.55(b)(7)(i) and (ii) and contractual provisions. Proposed comment 55(b)(7)–1 addresses the interaction among the unavailability provisions in proposed § 1026.55(b)(7)(i), the LIBOR-specific provisions in proposed § 1026.55(b)(7)(ii), and the contractual provisions applicable to the credit card account. The Bureau understands that credit card contracts generally allow a card issuer to change the terms of the contract (including the index) as permitted by law. Proposed comment 55(b)(7)–1 provides detail where this contract language applies. In addition, consistent with the detail proposed in relation to HELOCs subject to § 1026.40 in proposed comment 40(f)(3)(ii)–1, the Bureau also is providing detail on two other types of contract language, in case any credit card contracts include such language. For example, the Bureau is proposing detail in proposed comment 55(b)(7)–1 for credit card contracts that contain language providing that (1) a card issuer can replace the LIBOR index and the margin for calculating the variable rate unilaterally only if the original index is no longer available or becomes unavailable; and (2) the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the original index becomes unavailable. The Bureau also is providing detail in proposed comment 55(b)(7)–1 for credit card contracts that include language providing that the card issuer can replace the original index and the margin for calculating the variable rate unilaterally only if the original index is no longer available or becomes unavailable, but does not require that the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the original index becomes unavailable. Specifically, proposed comment 55(b)(7)–1 provides that a card issuer may use either the provision in proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) to replace a LIBOR index used under a credit card account under an open-end (not home-secured) consumer credit plan so long as the applicable conditions are met for the provision used. This proposed comment makes clear, however, that neither proposed provision excuses the card issuer from noncompliance with contractual provisions. As discussed below, proposed comment 55(b)(7)–1 PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 36963 provides examples to illustrate when a card issuer may use the provisions in proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) to replace the LIBOR index used under a credit card account under an open-end (not home-secured) consumer credit and each of these examples assumes that the LIBOR index used under the plan becomes unavailable after March 15, 2021. Proposed comment 55(b)(7)–1.i provides an example where a contract for a credit card account under an openend (not home-secured) consumer credit plan provides that a card issuer may not unilaterally replace an index under a plan unless the original index becomes unavailable and provides that the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the original index becomes unavailable. In this case, proposed comment 55(b)(7)–1.i explains that the card issuer may use the unavailability provisions in proposed § 1026.55(b)(7)(i) to replace the LIBOR index used under the plan so long as the conditions of that provision are met. Proposed comment 55(b)(7)–1.i also explains that the proposed LIBOR-specific provisions in proposed § 1026.55(b)(7)(ii) provides that a card issuer may replace the LIBOR index if the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Proposed comment 55(b)(7)–1.i notes, however, that the card issuer in this example would be contractually prohibited from replacing the LIBOR index used under the plan unless the replacement index and replacement margin also will produce an APR substantially similar to a rate that is in effect when the LIBOR index becomes unavailable. The Bureau solicits comments on this proposed approach and example. Proposed comment 55(b)(7)–1.ii provides an example of a contract for a credit card account under an open-end (not home-secured) consumer credit plan under which a card issuer may not replace an index unilaterally under a plan unless the original index becomes unavailable but does not require that the replacement index and replacement margin will result in an APR substantially similar to a rate that is in effect when the original index becomes unavailable. In this case, the card issuer would be contractually prohibited from unilaterally replacing a LIBOR index E:\FR\FM\18JNP2.SGM 18JNP2 36964 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules used under the plan until it becomes unavailable. At that time, the card issuer has the option of using proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) to replace the LIBOR index if the conditions of the applicable provision are met. The Bureau is proposing to allow the card issuer in this case to use either the proposed unavailability provisions in proposed § 1026.55(b)(7)(i) or the proposed LIBOR-specific provisions in proposed § 1026.55(b)(7)(ii). If the card issuer uses the unavailability provisions in proposed § 1026.55(b)(7)(i), the card issuer must use a replacement index and replacement margin that will produce an APR substantially similar to the rate in effect when the LIBOR index became unavailable. If the card issuer uses the proposed LIBOR-specific provisions in proposed § 1026.55(b)(7)(ii), the card issuer generally must use a replacement index value in effect on December 31, 2020, and replacement margin that will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The Bureau is proposing to allow a card issuer, in this case, to use the index values for the LIBOR index and the replacement index on December 31, 2020, to meet the ‘‘substantially similar’’ standard with respect to the comparison of the rates even if the card issuer is contractually prohibited from unilaterally replacing a LIBOR index used under the plan until it becomes unavailable. The Bureau recognizes that LIBOR may not be discontinued until the end of 2021, which is around a year later than the December 31, 2020 date. Nonetheless, the Bureau is proposing to allow card issuers that are restricted by their contracts to replace the LIBOR index used under the credit card plans until LIBOR becomes unavailable to use the LIBOR index values and the replacement index values in effect on December 31, 2020 under proposed § 1026.55(b)(7)(ii), rather than the index values on the day that the LIBOR indices become unavailable under proposed § 1026.55(b)(7)(i). This proposal would allow those card issuers to use consistent index values to those card issuers that are not restricted by their contracts in replacing the LIBOR index prior to the LIBOR becoming unavailable. This proposal may also promote consistency for consumers in that all card issuers are permitted to use the same LIBOR values in comparing the rates. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 In addition, as discussed in part III, the industry has raised concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable until LIBOR finally is discontinued. Allowing card issuers to use the December 31, 2020, values for comparison of the rates instead of the LIBOR values when the LIBOR indices become unavailable may address some of these concerns. Thus, the Bureau is proposing to provide card issuers with the flexibility to choose to use the index values for the LIBOR index and the replacement index on December 31, 2020, by using the proposed LIBOR-specific provisions under proposed § 1026.55(b)(7)(ii), rather than using the unavailability provisions in proposed § 1026.55(b)(7)(i). The Bureau solicits comment on this proposed approach and example. Proposed comment 55(b)(7)–1.iii provides an example of a contract for a credit card account under an open-end (not home-secured) consumer credit plan under which a card issuer may change the terms of the contract (including the index) as permitted by law. Proposed comment 55(b)(7)–1.iii explains in this case, if the card issuer replaces a LIBOR index under a plan on or after March 15, 2021, but does not wait until LIBOR becomes unavailable to do so, the card issuer may only use proposed § 1026.55(b)(7)(ii) to replace the LIBOR index if the conditions of that provision are met. In this case, the card issuer may not use proposed § 1026.55(b)(7)(i). Proposed comment 55(b)(7)–1.iii also explains that if the card issuer waits until the LIBOR index used under the plan becomes unavailable to replace the LIBOR index, the card issuer has the option of using proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) to replace the LIBOR index if the conditions of the applicable provision are met. The Bureau is proposing to allow the card issuer, in this case, to use either the unavailability provisions in proposed § 1026.55(b)(7)(i) or the proposed LIBOR-specific provisions in proposed § 1026.55(b)(7)(ii) if the card issuer waits until the LIBOR index used under the plan becomes unavailable to replace the LIBOR index. For the reasons explained above in the discussion of the example in proposed comment 55(b)(7)– 1.ii, the Bureau is proposing in the situation described in proposed comment 55(b)(7)–1.iii to provide card issuers with the flexibility to choose to use the index values for the LIBOR index and the replacement index on December 31, 2020, by using the proposed LIBOR-specific provisions PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 under proposed § 1026.55(b)(7)(ii), rather than using the unavailability provision in proposed § 1026.55(b)(7)(i). The Bureau solicits comment on this proposed approach and example. 55(b)(7)(i) Section 1026.55(a) prohibits a card issuer from increasing an APR or certain enumerated fees or charges set forth in § 1026.55(a) on a credit card account under an open-end (not home-secured) consumer credit plan, except as provided in § 1026.55(b). Section 1026.55(b)(2) provides that a card issuer may increase an APR when: (1) The APR varies according to an index that is not under the card issuer’s control and is available to the general public; and (2) the increase in the APR is due to an increase in the index. Comment 55(b)(2)–6 provides that a card issuer may change the index and margin used to determine the APR under § 1026.55(b)(2) if the original index becomes unavailable, as long as historical fluctuations in the original and replacement indices were substantially similar, and as long as the replacement index and margin will produce a rate similar to the rate that was in effect at the time the original index became unavailable. If the replacement index is newly established and therefore does not have any rate history, it may be used if it produces a rate substantially similar to the rate in effect when the original index became unavailable. The Proposal The Bureau is proposing to move the unavailability provisions in current comment 55(b)(2)–6 to proposed § 1026.55(b)(7)(i) and to revise the proposed moved provisions for clarity and consistency. Proposed § 1026.55(b)(7)(i) provides that a card issuer may increase an APR when the card issuer changes the index and margin used to determine the APR if the original index becomes unavailable, as long as (1) the historical fluctuations in the original and replacement indices were substantially similar; and (2) the replacement index and replacement margin will produce a rate substantially similar to the rate that was in effect at the time the original index became unavailable. If the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce a rate substantially similar to the rate in effect when the original index became unavailable. The Bureau also is proposing comments 55(b)(7)(i)–1 through –2 with respect to proposed § 1026.55(b)(7)(i). E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules For example, to reduce uncertainty with respect to selecting a replacement index that meets the standards under proposed § 1026.55(b)(7)(i), the Bureau is proposing to determine that Prime is an example of an index that has historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau also is proposing to determine that certain spread-adjusted indices based on SOFR recommended by the ARRC have historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau is proposing to make these revisions and provide additional detail, in case card issuers use the unavailability provisions in proposed § 1026.55(b)(7)(i) to replace a LIBOR index used for credit card accounts, as discussed in more detail above in the section-by-section analysis of proposed § 1026.55(b)(7). Proposed § 1026.55(b)(7)(i) differs from current comment 55(b)(2)–6 in three ways. First, proposed § 1026.55(b)(7)(i) provides that if an index that is not newly established is used to replace the original index, the replacement index and replacement margin will produce a rate ‘‘substantially similar’’ to the rate that was in effect at the time the original index became unavailable. Currently, comment 55(b)(2)–6 uses the term ‘‘similar’’ instead of ‘‘substantially similar’’ for the comparison of these rates. Nonetheless, comment 55(b)(2)–6 provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if it produces a rate ‘‘substantially similar’’ to the rate in effect when the original index became unavailable. To correct this inconsistency between the comparison of rates when an existing replacement index is used and when a newly established index is used, the Bureau is proposing to use ‘‘substantially similar’’ consistently in proposed § 1026.55(b)(7)(i) for the comparison of rates. As discussed in the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau also is proposing to use ‘‘substantially similar’’ as the standard for the comparison of rates for HELOC plans when the LIBOR index used under the plan becomes unavailable. Second, proposed § 1026.55(b)(7)(i) differs from current comment 55(b)(2)– 6 in that the proposed provision makes clear that a card issuer that is using a newly established index may also adjust the margin so that the newly established index and replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. The newly VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 established index may not have the same index value as the original index, and the card issuer may need to adjust the margin to meet the condition that the newly established index and replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. Third, proposed § 1026.55(b)(7)(i) differs from current comment 55(b)(2)– 6 in that the proposed provision uses the term ‘‘the replacement index and replacement margin’’ instead of ‘‘the replacement index and margin’’ to make clear when proposed § 1026.55(b)(7)(i) is referring to a replacement margin and not the original margin. To effectuate the purposes of TILA and to facilitate compliance, the Bureau is proposing to use its TILA section 105(a) authority to propose § 1026.55(b)(7)(i). TILA section 105(a) 88 directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. The Bureau is proposing this exception to facilitate compliance with TILA and effectuate its purposes. Specifically, the Bureau interprets ‘‘facilitate compliance’’ to include enabling or fostering continued operation in conformity with the law. The Bureau is proposing to move comment 55(b)(2)–6 to proposed § 1026.55(b)(7)(i) as an exception to the general rule in current § 1026.55(a) restricting rate increases. The Bureau believes that an index change could produce a rate increase at the time of the replacement or in the future. The Bureau is proposing to provide this exception to the general rule in § 1026.55(a) in the circumstances in which an index becomes unavailable in the limited conditions set forth in proposed § 1026.55(b)(7)(i) to enable or foster continued operation in conformity with the law. If the index that is used under a credit card account under an open-end (not home-secured) consumer credit plan becomes unavailable, the card issuer would need to replace the index with another index, so the rate remains a variable rate under the plan. The Bureau is proposing this exception to facilitate compliance with the rule by allowing the card issuer to 88 15 PO 00000 U.S.C. 1604(a). Frm 00029 Fmt 4701 Sfmt 4702 36965 maintain the rate as a variable rate, which is also likely to be consistent with the consumer’s expectation that the rate on the account will be a variable rate. The Bureau is not aware of legislative history suggesting that Congress intended card issuers, in this case, to be required to convert variablerate plans to a non-variable-rate plans when the index becomes unavailable. The Bureau solicits comments on proposed § 1026.55(b)(7)(i) and proposed comments 55(b)(7)(i)–1 through –2. The proposed comments are discussed in more detail below. Historical fluctuations substantially similar for the LIBOR index and replacement index. Proposed comment 55(b)(7)(i)–1 provides detail on determining whether a replacement index that is not newly established has ‘‘historical fluctuations’’ that are ‘‘substantially similar’’ to those of the LIBOR index used under the plan for purposes of proposed § 1026.55(b)(7)(i). Specifically, proposed comment 55(b)(7)(i)–1 provides that for purposes of replacing a LIBOR index used under a plan pursuant to § 1026.55(b)(7)(i), a replacement index that is not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index used under the plan, considering the historical fluctuations up through when the LIBOR index becomes unavailable or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. To facilitate compliance, proposed comment 55(b)(7)(i)–1.i includes a proposed determination that Prime has historical fluctuations that are substantially similar to those of the 1month and 3-month USD LIBOR indices and includes a placeholder for the date when this proposed determination would be effective, if adopted in the final rule.89 The Bureau understands that some card issuers may choose to replace a LIBOR index with Prime. Proposed comment 55(b)(7)(i)–1.i also clarifies that in order to use Prime as the replacement index for the 1-month or 3month USD LIBOR index, the card issuer also must comply with the condition in § 1026.55(b)(7)(i) that Prime and the replacement margin will produce a rate substantially similar to the rate that was in effect at the time the LIBOR index became unavailable. This condition for comparing the rates under 89 See the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A) for a discussion of the rationale for the Bureau proposing this determination. E:\FR\FM\18JNP2.SGM 18JNP2 36966 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules proposed § 1026.55(b)(7)(i) is discussed in more detail below. To facilitate compliance, proposed comment 55(b)(7)(i)–1.ii provides a proposed determination that the spreadadjusted indices based on SOFR recommended by the ARRC to replace the 1-month, 3-month, 6-month, and 1year USD LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3month, 6-month, and 1-year USD LIBOR indices respectively. The proposed comment provides a placeholder for the date when this proposed determination would be effective, if adopted in the final rule.90 The Bureau is proposing this determination in case some card issuers choose to replace a LIBOR index with the SOFR-based spread-adjusted index. Proposed comment 55(b)(7)(i)–1.ii also clarifies that in order to use this SOFR-based spread-adjusted index as the replacement index for the applicable LIBOR index, the card issuer also must comply with the condition in § 1026.55(b)(7)(i) that the SOFR-based spread-adjusted index and replacement margin would have resulted in an APR substantially similar to the rate in effect at the time the LIBOR index became unavailable. This condition under proposed § 1026.55(b)(7)(i) is discussed in more detail below. Also, as discussed in more detail below, the Bureau solicits comment on whether the Bureau in the final rule, if adopted, should provide for purposes of proposed § 1026.55(b)(7)(i) that the rate using the SOFR-based spread-adjusted index is ‘‘substantially similar’’ to the rate in effect at the time the LIBOR index becomes unavailable, so long as the card issuer uses as the replacement margin the same margin in effect on the day that the LIBOR index becomes unavailable. The Bureau also solicits comment on whether there are other indices that are not newly established for which the Bureau should make a determination that the index has historical fluctuations that are substantially similar to those of the LIBOR indices for purposes of proposed § 1026.55(b)(7)(i). If so, what are these other indices, and why should the Bureau make such a determination with respect to those indices? 90 See the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A) for a discussion of the rationale for the Bureau proposing this determination. Also, as discussed in the section-bysection analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau solicits comment on whether the Bureau should alternatively consider these SOFR-based spread-adjusted indices to be newly established indices for purposes of proposed § 1026.55(b)(7)(i), to the extent these indices are not being published by the effective date of the final rule, if adopted. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 Newly established index as replacement for a LIBOR index. Proposed § 1026.55(b)(7)(i) provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce an APR substantially similar to the rate in effect when the original index became unavailable. The Bureau solicits comment on whether the Bureau should provide any additional guidance on, or regulatory changes addressing, when an index is newly established with respect to replacing the LIBOR indices for purposes of proposed § 1026.55(b)(7)(i). The Bureau also solicits comment on whether the Bureau should provide any examples of indices that are newly established with respect to replacing the LIBOR indices for purposes of § 1026.55(b)(7)(i). If so, what are these indices and why should the Bureau determine these indices are newly established with respect to replacing the LIBOR indices? Substantially similar rate when LIBOR becomes unavailable. Under proposed § 1026.55(b)(7)(i), the replacement index and replacement margin must produce an APR substantially similar to the rate that was in effect based on the LIBOR index used under the plan when the LIBOR index became unavailable. Proposed comment 55(b)(7)(i)–2 explains that for the comparison of the rates, a card issuer must use the value of the replacement index and the LIBOR index on the day that LIBOR becomes unavailable. The Bureau solicits comment on whether it should address the situation where the replacement index is not be published on the day that the LIBOR index becomes unavailable. For example, should the Bureau provide that if the replacement index is not published on the day that the LIBOR index becomes unavailable, the card issuer must use the previous calendar day that both indices are published as the date on which the annual percentage rate based on the replacement index must be substantially similar to the rate based on the LIBOR index? Proposed comment 55(b)(7)(i)–2 clarifies that the replacement index and replacement margin are not required to produce an APR that is substantially similar on the day that the replacement index and replacement margin become effective on the plan. Proposed comment 55(b)(7)(i)–2.i provides an example to illustrate this comment. The Bureau believes that it may raise compliance issues if the rate calculated using the replacement index and replacement margin at the time the replacement index and replacement PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 margin became effective had to be substantially similar to the rate calculated using the LIBOR index on the date that the LIBOR index became unavailable. Specifically, under § 1026.9(c)(2), the card issuer must provide a change-in-terms notice of the replacement index and replacement margin (including disclosing any reduced margin in change-in-terms notices provided on or after October 1, 2021, which would be required under proposed § 1026.9(c)(2)(v)(A)) at least 45 days prior to the effective date of the changes. The Bureau believes that this advance notice is important to consumers to inform them of how variable rates will be determined going forward after the LIBOR index is replaced. Because advance notice of the changes must be given prior to the changes becoming effective, a card issuer would not be able to ensure that the rate based on the replacement index and margin at the time the change-interms notice becomes effective will be substantially similar to the rate calculated using the LIBOR index in effect at the time the LIBOR index becomes unavailable. The value of the replacement index may change after the LIBOR index becomes unavailable and before the change-in-terms notice becomes effective. The Bureau notes that proposed § 1026.55(b)(7)(i) would require a card issuer to use the index values of the replacement index and the original index on a single day (namely, the day that the original index becomes unavailable) to compare the rates to determine if they are ‘‘substantially similar.’’ In using a single day to compare the rates, this proposed provision is consistent with the condition in the unavailability provision in current comment 55(b)(2)– 6, in the sense that it provides that the new index and margin must result in an APR that is substantially similar to the rate in effect on a single day. For the reasons discussed in the section-bysection analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau solicits comment on whether the Bureau should adopt a different approach to determine whether a rate using the replacement index is ‘‘substantially similar’’ to the rate using the original index for purposes of § 1026.55(b)(7)(i) and, if so, what criteria the Bureau should use in selecting such a different approach. For example, the Bureau solicits comment on whether it should require card issuers to use a historical median or average of the spread between the replacement index and the original index over a certain time frame (e.g., the E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules time period the historical data are available or 5 years, whichever is shorter) for purposes of determining whether a rate using the replacement index is ‘‘substantially similar’’ to the rate using the original index. The Bureau also solicits comments on any compliance challenges that might arise as a result of adopting a potentially more complicated method of comparing the rates calculated using the replacement index and the rates calculated using the original index, and for any identified compliance challenges, how the Bureau could ease those compliance challenges. For the reasons discussed in more detail in the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau is not proposing to address for purposes of proposed § 1026.55(b)(7)(i) when a rate calculated using the replacement index and replacement margin is ‘‘substantially similar’’ to the rate in effect when the LIBOR index becomes unavailable. The Bureau solicits comment, however, on whether the Bureau should provide guidance on, or regulatory changes addressing, the ‘‘substantially similar’’ standard in comparing the rates for purposes of proposed § 1026.55(b)(7)(i), and if so, what guidance, or regulatory changes, the Bureau should provide. For example, should the Bureau provide a range of rates that would be considered ‘‘substantially similar’’ as described above, and if so, how should the range be determined? Should the range of rates depend on context, and if so, what contexts should be considered? As an alternative to the range of rates approach, the Bureau solicits comment on whether it should provide factors that card issuers must consider in deciding whether the rates are ‘‘substantially similar’’ and if so, what those factors should be. Are there other approaches the Bureau should consider for addressing the ‘‘substantially similar’’ standard for comparing rates? As discussed above, proposed comment 55(b)(7)(i)–1.ii clarifies that in order to use the SOFR-based spreadadjusted index as the replacement index for the applicable LIBOR index, the card issuer must comply with the condition in § 1026.55(b)(7)(i) that the SOFR-based spread-adjusted index and replacement margin would have resulted in an APR substantially similar to the rate in effect at the time the LIBOR index became unavailable. For the reasons discussed in more detail in the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau solicits comment on whether the Bureau in the final rule, if adopted, should provide for purposes of proposed § 1026.55(b)(7)(i) VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 that the rate using the SOFR-based spread-adjusted index is ‘‘substantially similar’’ to the rate in effect at the time the LIBOR index becomes unavailable, so long as the card issuer uses as the replacement margin the same margin in effect on the day that the LIBOR index becomes unavailable. 55(b)(7)(ii) The Proposal For the reasons discussed below and in the section-by-section analysis of proposed § 1026.55(b)(7), the Bureau is proposing to add new LIBOR-specific provisions to proposed § 1026.55(b)(7)(ii) that would permit card issuers for a credit card account under an open-end (not home-secured) consumer credit plan that uses a LIBOR index under the plan for calculating variable rates to replace the LIBOR index and change the margins for calculating the variable rates on or after March 15, 2021, in certain circumstances. Specifically, proposed § 1026.55(b)(7)(ii) provides that if a variable rate on a credit card account under an open-end (not home-secured) consumer credit plan is calculated using a LIBOR index, a card issuer may replace the LIBOR index and change the margin for calculating the variable rate on or after March 15, 2021, as long as (1) the historical fluctuations in the LIBOR index and replacement index were substantially similar; and (2) the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Proposed § 1026.55(b)(7)(ii) also provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. In addition, proposed § 1026.55(b)(7)(ii) provides that if either the LIBOR index or the replacement index is not published on December 31, 2020, the card issuer must use the next calendar day that both indices are published as the date on which the APR based on the replacement index must be substantially PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 36967 similar to the rate based on the LIBOR index. In addition, the Bureau is proposing to add detail in proposed comments 55(b)(7)(ii)–1 through –3 on the conditions set forth in proposed § 1026.55(b)(7)(ii). For example, to reduce uncertainty with respect to selecting a replacement index that meets the standards in proposed § 1026.55(b)(7)(ii), the Bureau is proposing to determine that Prime is an example of an index that has historical fluctuations that are substantially similar to those of certain USD LIBOR indices. The Bureau also is proposing to determine that certain spread-adjusted indices based on SOFR recommended by the ARRC have historical fluctuations that are substantially similar to those of certain USD LIBOR indices. Proposed § 1026.55(b)(7)(ii) and proposed comments 55(b)(7)(ii)–1 through –3 applicable to credit card accounts under an open-end (not homesecured) consumer credit plan are similar to the LIBOR-specific provisions set forth in proposed § 1026.40(f)(3)(ii)(B) and proposed comments 40(f)(3)(ii)(B)–1 through –3 applicable to HELOCs subject to § 1026.40. To effectuate the purposes of TILA and to facilitate compliance, the Bureau is proposing to use its TILA section 105(a) authority to propose new LIBORspecific provisions under proposed § 1026.55(b)(7)(ii). TILA section 105(a) 91 directs the Bureau to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that the Bureau judges are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. The Bureau is proposing this exception to facilitate compliance with TILA and effectuate its purposes. Specifically, the Bureau interprets ‘‘facilitate compliance’’ to include enabling or fostering continued operation in conformity with the law. The Bureau is proposing to set March 15, 2021, as the date on or after which card issuers are permitted to replace the LIBOR index used for a credit card account under an open-end (not homesecured) consumer credit plan under the plan pursuant to proposed § 1026.55(b)(7)(ii) prior to LIBOR becoming unavailable to facilitate compliance with the change-in-terms 91 15 E:\FR\FM\18JNP2.SGM U.S.C. 1604(a). 18JNP2 36968 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules notice requirements applicable to card issuers by allowing them to provide the 45-day change-in-terms notices required under § 1026.9(c)(2) prior to the LIBOR indices becoming unavailable. This proposed change will allow those card issuers to avoid being left without a LIBOR index to use in calculating the variable rate before the replacement index and margin become effective. Also, it will allow card issuers to provide the change-in-terms notices, and replace the LIBOR index used under the plans, on accounts on a rolling basis, rather than having to provide the change-in-terms notices, and replace the LIBOR index, for all its accounts at the same time when the LIBOR index used under the plan becomes unavailable. Without the proposed LIBOR-specific provisions in proposed § 1026.55(b)(7)(ii), as a practical matter, card issuers would have to wait until LIBOR becomes unavailable to provide the 45-day change-in-terms notice under § 1026.9(c)(2) disclosing the replacement index and replacement margin (including disclosing any reduced margin in change-in-terms notices provided on or after October 1, 2021, which would be required under proposed § 1026.9(c)(2)(v)(A)). The Bureau believes that this advance notice is important to consumers to inform them of how variable rates will be determined going forward after the LIBOR index is replaced. Card issuers would not be able to send out change-in-terms notices disclosing the replacement index and replacement margin prior to the LIBOR indices becoming unavailable for several reasons. First, although LIBOR is expected to become unavailable around the end of 2021, there is no specific date known with certainty on which LIBOR will become unavailable. Thus, card issuers could not send out the changein-terms notices prior to the LIBOR index becoming unavailable because they will not know when it will become unavailable and thus would not know when to make the replacement index and replacement margin effective on the account. Second, card issuers would need to know the index values of the LIBOR index and the replacement index prior to sending out the change-in-terms notice so that they could disclose the replacement margin in the change-interms notice. Card issuers will not know these index values until the day that LIBOR becomes unavailable. Thus, card issuers would have to wait until the LIBOR indices become unavailable before the card issuer could send the 45day change-in-terms notice under VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 § 1026.9(c)(2) to replace the LIBOR index with a replacement index. Some card issuers could be left without a LIBOR index value to use during the 45day period before the replacement index and replacement margin become effective, depending on their existing contractual terms. The Bureau is concerned this could cause compliance and systems issues. Also, as discussed in part III, the industry has raised concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable until LIBOR finally is discontinued. Allowing card issuers to replace the LIBOR indices on existing credit card accounts prior to the LIBOR indices becoming unavailable may address some of these concerns. The Bureau solicits comments on proposed § 1026.55(b)(7)(ii) and proposed comments 55(b)(7)(ii)–1 through –3. The proposed comments are discussed in more detail below. Consistent conditions with proposed § 1026.55(b)(7)(i). The Bureau is proposing conditions in the LIBORspecific provisions in proposed § 1026.55(b)(7)(ii) for how a card issuer must select a replacement index and compare rates that are consistent with the conditions set forth in the unavailability provisions set forth in proposed § 1026.55(b)(7)(i). For example, the availability provisions in proposed § 1026.55(b)(7)(i) and the LIBOR-specific provisions in proposed § 1026.55(b)(7)(ii) contain a consistent requirement that the APR calculated using the replacement index must be ‘‘substantially similar’’ to the rate calculated using the LIBOR index.92 In addition, both proposed § 1026.55(b)(7)(i) and (ii) would allow a card issuer to use an index that is not newly established as a replacement index only if the index has historical fluctuations that are substantially similar to those of the LIBOR index. For several reasons, the Bureau is proposing to keep the conditions for these two provisions consistent. First, as discussed above in the section-bysection analysis of proposed § 1026.55(b)(7), to the extent some card issuers may need to wait until the LIBOR indices become unavailable to transition to a replacement index because of contractual reasons, the 92 The conditions in proposed § 1026.55(b)(7)(i) and (ii) are consistent, but they are not the same. For example, although both proposed provisions use the ‘‘substantially similar’’ standard to compare the rates, they use different dates for selecting the index values in calculating the rates. The proposed provisions differ in the timing of when card issuers are permitted to transition away from LIBOR, which creates some differences in how the conditions apply. PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 Bureau believes that keeping the conditions consistent in the unavailability provisions in proposed § 1026.55(b)(7)(i) and the LIBORspecific provisions in proposed § 1026.55(b)(7)(ii) will help ensure that card issuers must meet consistent conditions in selecting a replacement index and setting the rates, regardless of whether they are using the unavailability provisions in proposed § 1026.55(b)(7)(i), or the LIBOR-specific provisions in proposed § 1026.55(b)(7)(ii). Second, most card issuers may have the ability to choose between the unavailability provisions and LIBORspecific provisions to switch away from using a LIBOR index, and if the conditions between those two provisions are inconsistent, these differences could undercut the purpose of the LIBOR-specific provisions to allow card issuers to switch out earlier. For example, if the conditions for selecting a replacement index or setting the rates were stricter in the LIBORspecific provisions than in the unavailability provisions, this may cause a card issuer to wait until the LIBOR indices become unavailable to switch to a replacement index, which would undercut the purpose of the LIBOR-specific provisions to allow card issuers to switch out earlier and prevent these card issuers from having the time required to transition from using a LIBOR index. Historical fluctuations substantially similar for the LIBOR index and replacement index. Proposed comment 55(b)(7)(ii)–1 provides detail on determining whether a replacement index that is not newly established has ‘‘historical fluctuations’’ that are ‘‘substantially similar’’ to those of the LIBOR index used under the plan for purposes of proposed § 1026.55(b)(7)(ii). Specifically, proposed comment 55(b)(7)(ii)–1 provides that for purposes of replacing a LIBOR index used under a plan pursuant to proposed § 1026.55(b)(7)(ii), a replacement index that is not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index used under the plan, considering the historical fluctuations up through December 31, 2020, or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. The Bureau is proposing the December 31, 2020, date to be consistent with the date that card issuers generally must use for selecting the index values to use in comparing the rates under E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules proposed § 1026.55(b)(7)(ii). The Bureau solicits comment on the December 31, 2020 date for purposes of proposed comment 55(b)(7)(ii)–1 and whether another date or timeframe would be more appropriate for purposes of that proposed comment. To facilitate compliance, proposed comment 55(b)(7)(ii)–1.i includes a proposed determination that Prime has historical fluctuations that are substantially similar to those of the 1month and 3-month USD LIBOR indices and includes a placeholder for the date when this proposed determination would be effective, if adopted in the final rule.93 The Bureau understands some card issuers may choose to replace a LIBOR index with Prime. Proposed comment 55(b)(7)(ii)–1.i also clarifies that in order to use Prime as the replacement index for the 1-month or 3month USD LIBOR index, the card issuer also must comply with the condition in § 1026.55(b)(7)(ii) that the Prime index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the prime rate is not published on December 31, 2020, the card issuer must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the prime rate must be substantially similar to the rate based on the LIBOR index. This condition for comparing the rates under proposed § 1026.55(b)(7)(ii) is discussed in more detail below. To facilitate compliance, proposed comment 55(b)(7)(ii)–1.ii provides a proposed determination that the spreadadjusted indices based on SOFR recommended by the ARRC to replace the 1-month, 3-month, 6-month, and 1year USD LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3month, 6-month, and 1-year USD LIBOR indices respectively. The proposed comment provides a placeholder for the date when this proposed determination would be effective, if adopted in the final rule.94 The Bureau is making this 93 See the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A) for a discussion of the rationale for the Bureau proposing this determination. 94 See the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(A) for a discussion of the rationale for the Bureau proposing this determination. Also, as discussed in the section-bysection analysis of proposed § 1026.40(f)(3)(ii)(A), the Bureau solicits comment on whether the Bureau VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 proposed determination in case some card issuers choose to replace a LIBOR index with the SOFR-based spreadadjusted index. Proposed comment 55(b)(7)(ii)–1.ii also clarifies that in order to use this SOFR-based spreadadjusted index as the replacement index for the applicable LIBOR index, the card issuer also must comply with the condition in § 1026.55(b)(7)(ii) that the SOFR-based spread-adjusted index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the SOFRbased spread-adjusted index is not published on December 31, 2020, the card issuer must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the SOFR-based spreadadjusted index must be substantially similar to the rate based on the LIBOR index. This condition for comparing the rates under proposed § 1026.55(b)(7)(ii) is discussed in more detail below. For the reasons discussed below, the Bureau solicits comment on whether the Bureau in the final rule, if adopted, should provide for purposes of proposed § 1026.55(b)(7)(ii) that the rate using the SOFR-based spread-adjusted index is ‘‘substantially similar’’ to the rate calculated using the LIBOR index, so long as the card issuer uses as the replacement margin the same margin that applied to the variable rate immediately prior to the replacement of the LIBOR index. The Bureau also solicits comment on whether there are other indices that are not newly established for which the Bureau should make a determination that the index has historical fluctuations that are substantially similar to those of the LIBOR indices for purposes of proposed § 1026.55(b)(7)(ii). If so, what are these other indices, and why should the Bureau make such a determination with respect to those indices? Newly established index as replacement for a LIBOR index. Proposed § 1026.55(b)(7)(ii) provides that if the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and the replacement margin will produce an APR should alternatively consider these SOFR-based spread-adjusted indices to be newly established indices for purposes of proposed § 1026.55(b)(7)(ii), to the extent these indices are not being published by the effective date of the final rule, if adopted. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 36969 substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The Bureau solicits comment on whether the Bureau should provide any additional guidance on, or regulatory changes addressing, when an index is newly established with respect to replacing the LIBOR indices for purposes of proposed § 1026.55(b)(7)(ii). The Bureau also solicits comment on whether the Bureau should provide any examples of indices that are newly established with respect to replacing the LIBOR indices for purposes of § 1026.55(b)(7)(ii). If so, what are these indices and why should the Bureau determine these indices are newly established with respect to replacing the LIBOR indices? Substantially similar rate using index values on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Under proposed § 1026.55(b)(7)(ii), if both the replacement index and LIBOR index used under the plan are published on December 31, 2020, the replacement index value in effect on December 31, 2020, and replacement margin must produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Proposed comment 55(b)(7)(ii)–2 explains that the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan is the margin that applied to the variable rate immediately prior to when the card issuer provides the change-in-terms notice disclosing the replacement index for the variable rate. Proposed comment 55(b)(7)(ii)–2.i and ii provides examples to illustrate this comment for the following two different scenarios: (1) When the margin used to calculate the variable rate is increased pursuant to § 1026.55(b)(3) for new transactions; and (2) when the margin used to calculate the variable rate is increased for the outstanding balances and new transactions pursuant to § 1026.55(b)(4) because the consumer pays the minimum payment more than 60 days late. In both these proposed examples, the change in the margin occurs after December 31, 2020, but prior to date that the card issuer provides a changein-term notice under § 1026.9(c)(2), E:\FR\FM\18JNP2.SGM 18JNP2 36970 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules disclosing the replacement index for the variable rates. In calculating the comparison rates using the replacement index and the LIBOR index used under a credit card account under an open-end (not homesecured) consumer credit plan, the Bureau generally is proposing to require card issuers to use the index values for the replacement index and the LIBOR index in effect on December 31, 2020. The Bureau is proposing to require card issuers to use these index values to promote consistency for card issuers and consumers in which index values are used to compare the two rates. Under proposed § 1026.55(b)(7)(ii), card issuers are permitted to replace the LIBOR index used under the plan and adjust the margin used in calculating the variable rate used under the plan on or after March 15, 2021, but card issuers may vary in the timing of when they provide change-in-terms notices to replace the LIBOR index used on their credit card accounts and when these replacements become effective. For example, one card issuer may replace the LIBOR index used under its credit card plans in April 2021, while another card issuer may replace the LIBOR index used under its credit card plans in October 2021. In addition, a card issuer may not replace the LIBOR index used under its credit card plans at the same time. For example, a card issuer may replace the LIBOR index used under some of its credit card plans in April 2021 but replace the LIBOR index used under other of its credit card plans in May 2021. Nonetheless, regardless of when a particular card issuer replaces the LIBOR index used under its credit card plans, proposed § 1026.55(b)(7)(ii) generally would require that all card issuers to use the index values for the replacement index and the LIBOR index in effect on December 31, 2020, to promote consistency for card issuers and consumers in which index values are used to compare the two rates. In addition, using the December 31, 2020 date for the index values in comparing the rates may allow card issuers to send out change-in-terms notices prior to March 15, 2021, and have the changes be effective on March 15, 2021, the proposed date on or after which card issuers would be permitted to switch away from using LIBOR as an index on an existing credit card account under proposed § 1026.55(b)(7)(ii). If the Bureau instead required card issuers to use the index values on March 15, 2021, card issuers as a practical matter would not be able to provide change-in-terms notices of the replacement index and any adjusted margin until after March 15, 2021, because they would need the VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 index values from that date in order to calculate the replacement margin. Thus, using the index values on March 15, 2021, would delay when card issuers could switch away from using LIBOR as an index on an existing credit card account. Also, as discussed in part III, the industry has raised concerns that LIBOR may continue for some time after December 2021 but become less representative or reliable until LIBOR finally is discontinued. Using the index values for the replacement index and the LIBOR index used under the plan in effect on December 31, 2020, may address some of these concerns. The Bureau solicits comment specifically on the use of the December 31, 2020 index values in calculating the comparison rates under proposed § 1026.55(b)(7)(ii). Proposed § 1026.55(b)(7)(ii) provides one exception to the proposed general requirement to use the index values for the replacement index and the LIBOR index used under the plan in effect on December 31, 2020. Proposed § 1026.55(b)(7)(ii) provides that if either the LIBOR index or the replacement index is not published on December 31, 2020, the card issuer must use the next calendar day that both indices are published as the date on which the APR based on the replacement index must be substantially similar to the rate based on the LIBOR index. As discussed above, proposed § 1026.55(b)(7)(ii) would require a card issuer to use the index values of the replacement index and the LIBOR index on a single day (generally December 31, 2020) 95 to compare the rates to determine if they are ‘‘substantially similar.’’ In using a single day to compare the rates, this proposed provision is consistent with the condition in the unavailability provision in current comment 55(b)(2)– 6, in the sense that it provides that the new index and margin must result in an APR that is substantially similar to the rate in effect on a single day. For the reasons discussed in the section-bysection analysis of proposed § 1026.40(f)(3)(ii)(B), the Bureau solicits comment on whether the Bureau should adopt a different approach to determine whether a rate using the replacement index is ‘‘substantially similar’’ to the rate using the LIBOR index for purposes of proposed § 1026.55(b)(7)(ii). For example, the Bureau solicits comment on whether it should require card 95 If one or both of the indices are not available on December 31, 2020, proposed § 1026.55(b)(7)(ii) would require that the card issuer use the index values of the indices on the next calendar day that both indices are published. PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 issuers to use a historical median or average of the spread between the replacement index and the LIBOR index over a certain time frame (e.g., the time period the historical data are available or 5 years, whichever is shorter) for purposes of determining whether a rate using the replacement index is ‘‘substantially similar’’ to the rate using the LIBOR index The Bureau also solicits comments on any compliance challenges that might arise as a result of adopting a potentially more complicated method of comparing the rates calculated using the replacement index and the rates calculated using the LIBOR index, and for any identified compliance challenges, how the Bureau could ease those compliance challenges. Under proposed § 1026.55(b)(7)(ii), in calculating the comparison rates using the replacement index and the LIBOR index used under the plan, the card issuer must use the margin that applied to the variable rate immediately prior to when the card issuer provides the change-in-terms notice disclosing the replacement index for the variable rate. The Bureau is proposing that card issuers must use this margin, rather than the margin that applied to the variable rate on December 31, 2020. The Bureau recognizes that card issuers in certain instances may change the margin that is used to calculate the LIBOR variable rate after December 31, 2020, but prior to when the card issuer provides a change-in-terms notice to replace the LIBOR index used under the plan. If the Bureau were to require that the card issuer use the margin that applied to the variable rate on December 31, 2020, this would undo any margin changes that occurred after December 31, 2020, but prior to the card issuer providing a change-in-terms notice of the replacement of the LIBOR index used under the plan, which is inconsistent with the purpose of the comparisons of the rates under proposed § 1026.55(b)(7)(ii). Proposed comment 55(b)(7)(ii)–3 clarifies that the replacement index and replacement margin are not required to produce an APR that is substantially similar on the day that the replacement index and replacement margin become effective on the plan. Proposed comment 55(b)(7)(ii)–3.i provides an example to illustrate this comment. The Bureau believes that it may raise compliance issues if the rate calculated using the replacement index and replacement margin at the time the replacement index and replacement margin became effective had to be substantially similar to the rate calculated using the LIBOR index in effect on December 31, 2020. Under E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules § 1026.9(c)(2), the card issuer must provide a change-in-terms notice of the replacement index and replacement margin (including disclosing a reduced margin in a change-in-terms notice provided on or after October 1, 2021, which would be required under proposed § 1026.9(c)(2)(v)(A)) at least 45 days prior to the effective date of the changes. The Bureau believes that this advance notice is important to consumers to inform them of how variable rates will be determined going forward after the LIBOR index is replaced. Because advance notice of the changes must be given prior to the changes becoming effective, a card issuer would not be able to ensure that the rate based on the replacement index and margin at the time the change-interms notice becomes effective will be substantially similar to the rate calculated using the LIBOR index in effect on December 31, 2020. The value of the replacement index may change after December 31, 2020, and before the change-in-terms notice becomes effective. For the reasons discussed in more detail in the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(B), the Bureau is not proposing to address for purposes of proposed § 1026.55(b)(7)(ii) when a rate calculated using the replacement index and replacement margin is ‘‘substantially similar’’ to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The Bureau solicits comment, however, on whether the Bureau should provide guidance on, or regulatory changes addressing, the ‘‘substantially similar’’ standard in comparing the rates for purposes of proposed § 1026.55(b)(7)(ii), and if so, what guidance, or regulatory changes, the Bureau should provide. For example, should the Bureau provide a range of rates that would be considered ‘‘substantially similar’’ as described above, and if so, how should the range be determined? Should the range of rates depend on context, and if so, what contexts should be considered? As an alternative to the range of rates approach, the Bureau solicits comment on whether it should provide factors that card issuers must consider in deciding whether the rates are ‘‘substantially similar’’ and if so, what those factors should be. Are there other approaches the Bureau should consider for addressing the ‘‘substantially similar’’ standard for comparing rates? As discussed above, proposed comment 55(b)(7)(ii)–1.ii clarifies that VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 in order to use the SOFR-based spreadadjusted index as the replacement index for the applicable LIBOR index, the card issuer must comply with the condition in § 1026.55(b)(7)(ii) that the SOFRbased spread-adjusted index value in effect on December 31, 2020, and replacement margin will produce an APR substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the SOFRbased spread-adjusted index is not published on December 31, 2020, the card issuer must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the SOFR-based spreadadjusted index must be substantially similar to the rate based on the LIBOR index. For the reasons discussed in the section-by-section analysis of proposed § 1026.40(f)(3)(ii)(B), the Bureau solicits comment on whether the Bureau in the final rule, if adopted, should provide for purposes of proposed § 1026.55(b)(7)(ii) that the rate using the SOFR-based spread-adjusted index is ‘‘substantially similar’’ to the rate calculated using the LIBOR index, so long as the card issuer uses as the replacement margin the same margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Section 1026.59 Reevaluation of Rate Increases TILA section 148, which was added by the Credit CARD Act, provides that if a creditor increases the APR applicable to a credit card account under an open-end consumer credit plan, based on factors including the credit risk of the obligor, market conditions, or other factors, the creditor shall consider changes in such factors in subsequently determining whether to reduce the APR for such obligor.96 Section 1026.59 implements this provision. The provisions in § 1026.59 generally apply to card issuers that increase an APR applicable to a credit card account, based on the credit risk of the consumer, market conditions, or other factors. For any rate increase imposed on or after January 1, 2009, card issuers are required to review the account no less frequently than once each six months and, if appropriate based on that review, reduce the APR. The requirement to reevaluate rate increases applies both to increases in APRs based on consumer-specific 96 15 PO 00000 U.S.C. 1665c. Frm 00035 Fmt 4701 Sfmt 4702 36971 factors, such as changes in the consumer’s creditworthiness, and to increases in APRs imposed based on factors that are not specific to the consumer, such as changes in market conditions or the card issuer’s cost of funds. If based on its review a card issuer is required to reduce the rate applicable to an account, the rule requires that the rate be reduced within 45 days after completion of the evaluation. Section 1026.59(f) requires that a card issuer continue to review a consumer’s account each six months unless the rate is reduced to the rate in effect prior to the increase. As discussed in part III, the industry has raised concerns about how the requirements in § 1026.59 would apply to accounts that are transitioning away from using LIBOR indices. The Bureau believes that the sunset of the LIBOR indices and transition to a new index for credit card accounts presents two interrelated issues with respect to compliance with § 1026.59 generally. First, the transition from a LIBOR index to a different index on an account under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) may constitute a rate increase for purposes of whether an account is subject to § 1026.59. Under current § 1026.59 that potential rate increase could occur at the time of transition from the LIBOR index to a different index, or it could occur at a later time. Second, § 1026.59(f) states that, once an account is subject to the general provisions of § 1026.59, the obligation to review factors under § 1026.59(a) ceases to apply if the card issuer reduces the APR to a rate equal to or less than the rate applicable immediately prior to the increase, or if the rate immediately prior to the increase was a variable rate, to a rate equal to or less than a variable rate determined by the same index and margin that applied prior to the increase. In the case where the LIBOR index is no longer available to serve as the ‘‘same index’’ that applied prior to the increase, the current regulation does not provide a mechanism by which a card issuer can determine the rate at which it can discontinue the obligation to review factors. The proposed revisions and additions to the regulation and commentary of § 1026.59 are meant to address these two issues. With respect to the first issue, the addition of proposed § 1026.59(h) excepts rate increases that occur as a result of the transition from the LIBOR index to another index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) from triggering the requirements of § 1026.59. The proposed provision does not except rate E:\FR\FM\18JNP2.SGM 18JNP2 36972 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules increases already subject to the requirements of § 1026.59 prior to the transition from the LIBOR index from the requirements of § 1026.59. With respect to the second issue, proposed § 1026.59(f)(3) provides a mechanism by which card issuers can determine the rate at which they can discontinue the obligations under § 1026.59 where the rate applicable immediately prior to the increase was a variable rate with a formula based on a LIBOR index. As discussed in more detail below, the Bureau also is proposing technical edits to comment 59(d)–2 to replace references to LIBOR with references to the SOFR index. 59(d) Factors Section 1026.59(d) identifies the factors that card issuers must review if they increase an APR that applies to a credit card account under an open-end (not home-secured) consumer credit plan. Under § 1026.59(a), if a card issuer evaluates an existing account using the same factors that it considers in determining the rates applicable to similar new accounts, the review of factors need not result in existing accounts being subject to exactly the same rates and rate structure as a creditor imposes on similar new accounts. Comment 59(d)–2 provides an illustrative example in which a creditor may offer variable rates on similar new accounts that are computed by adding a margin that depends on various factors to the value of the LIBOR index. In light of the anticipated discontinuation of LIBOR, the proposed rule would amend the example in comment 59(d)–2 to substitute a SOFR index for the LIBOR index. The proposed rule would also make technical changes for clarity by changing ‘‘prime rate’’ to ‘‘prime index.’’ In addition, the proposed rule would change ‘‘creditor’’ to ‘‘card issuer’’ in the comment to be consistent with the terminology used in § 1026.59. 59(f) Termination of the Obligation To Review Factors 59(f)(3) Current § 1026.59(f) provides that the obligation to review factors under § 1026.59(a) ceases to apply if the card issuer reduces the APR to a rate equal to or less than the rate applicable immediately prior to the increase, or if the rate applicable immediately prior to the increase was a variable rate, to a rate determined by the same index and margin (previous formula) that applied prior to the increase. Once LIBOR is discontinued, it will not be possible for card issuers to use the ‘‘same index.’’ Thus, neither current § 1026.59(f)(1) nor VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 § 1026.59(f)(2) would appear to allow termination of the obligation to review. Accordingly, proposed § 1026.59(f)(3) provides, effective March 15, 2021, a replacement formula that the card issuers can use to terminate the obligation to review factors under § 1026.59(a) when the rate applicable immediately prior to the increase was a variable rate with a formula based on a LIBOR index. Proposed § 1026.59(f)(3) is intended to apply to situations in which a LIBOR index is used as the index in the formula used to determine the rate at which the obligation to review factors ceases,97 and is intended to cover situations where LIBOR will be discontinued. Proposed § 1026.59(f)(3), if adopted, will be effective as of March 15, 2021, for accounts that are subject to § 1026.59 and use a LIBOR index as the index in the formula to determine the rate at which a card issuer can cease the obligation to review factors under § 1026.59(a). The Bureau believes that March 15, 2021, may be a reasonable date at which issuers can begin using the replacement formula outlined in proposed § 1026.59(f)(3). It is the date when the proposed rulemaking generally is proposed to be effective and provides issuers with a sufficient amount of time to transition to the replacement formula before the estimated sunset of LIBOR. The Bureau solicits comment on whether proposed § 1026.59(f)(3) should have an effective date different than March 15, 2021. Proposed § 1026.59(f)(3) provides a replacement formula that issuers can use to determine the rate at which a card issuer can cease the obligation to review factors under § 1026.59(a). Under proposed § 1026.59(f)(3), the replacement formula, which includes the replacement index on December 31, 2020, plus replacement margin, must equal the LIBOR index value on December 31, 2020, plus the margin used to calculate the rate immediately prior to the increase. Proposed § 1026.59(f)(3) also provides that a card issuer must satisfy the conditions set forth in proposed § 1026.55(b)(7)(ii) for selecting a replacement index. The Bureau believes that the conditions set 97 As noted below in the discussion regarding proposed § 1026.59(h)(3), proposed § 1026.59(f)(3) is not intended to apply to rate increases that may result from the switch from a LIBOR index to another index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) as those potential rate increases will be excepted from the provisions of § 1026.59. Proposed § 1026.59(f)(3) is, however, intended to cover rate increases that were already subject to the provisions of § 1026.59 and use a formula under § 1026.59(f) based on a LIBOR index to determine whether to terminate the review obligations under § 1026.59. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 forth in proposed § 1026.55(b)(7)(ii) may provide a reasonable method of selecting a replacement index to the LIBOR index for the reasons set forth in the discussion regarding proposed § 1026.55(b)(7)(ii), above. Proposed comment 59(f)–4 provides further clarification on how the replacement index must be selected and refers to the requirements described in proposed § 1026.55(b)(7)(ii) and proposed comment 55(b)(7)(ii)–1. Proposed § 1026.59(f)(3) uses, in part, the values of the replacement index and the LIBOR index on December 31, 2020, to determine the replacement formula. The Bureau believes that using the December 31, 2020, value of both indices provides a static and consistent reference point by which to determine the formula and is consistent with the index values used in proposed § 1026.55(b)(7)(ii). If either the replacement index or the LIBOR index is not published on December 31, 2020, the card issuer must use the next available date that both indices are published as the index values to use to determine the replacement formula. Proposed § 1026.59(f)(3) also provides that in calculating the replacement formula, the card issuer must use the margin used to calculate the rate immediately prior to the rate increase. In essence, the replacement formula is calculated as: (Replacement index on December 31, 2020) plus (replacement margin) equals (LIBOR index on December 31, 2020) plus (margin immediately prior to the rate increase). If the replacement index on December 31, 2020, the LIBOR index on December 31, 2020, and the margin immediately prior to the rate increase are known, the replacement margin can be calculated. Once the replacement margin is calculated, the replacement formula is the replacement index value plus the replacement margin value. Proposed comment 59(f)–3 sets forth two examples of how to calculate the replacement formula. Proposed comment 59(f)–3ii.A provides an example of how to calculate the replacement formula in the scenario where the account was subject to § 1026.59 as of March 15, 2021. Proposed comment 59(f)–3ii.B provides an example of how to calculate the replacement formula in the scenario where the account was not subject to § 1026.59 as of March 15, 2021, but does become subject to § 1026.59 prior to the account being transitioned from a LIBOR index in accordance with proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). Proposed § 1026.59(f)(3) provides that the replacement formula must equal the E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules previous formula, within the context of the timing constraints (namely the value of the replacement and LIBOR indices as of December 31, 2020). The Bureau believes that providing that the rates must match up when determining the replacement formula may provide the fairest way to produce a replacement mechanism where consumers will not be unduly harmed by the transition away from a LIBOR index used in the formula to determine the rate at which a card issuer may cease its review obligation under § 1026.59. The Bureau recognizes that this may create some inconsistencies in the rates on some accounts. For example, assume that Account A is a variable-rate account with a LIBOR index where an APR increase occurred under § 1026.55(b)(4) prior to the transition from a LIBOR index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). In order to cease the obligation for review on Account A under § 1026.59, the card issuer must reduce the APR on Account A to an amount based on a formula that is ‘‘equal’’ to the LIBOR index value on December 31, 2020, plus the margin immediately prior to the rate increase. In contrast, Account B is a variable-rate account with a LIBOR index that is not subject to § 1026.59. Account B is transitioned from the LIBOR index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) and the resulting APR on Account B must be ‘‘substantially similar’’ to the account’s pre-transition rate, which means the rate does not have to exactly equal to the pre-transition rate. Account B is subject to the exception in proposed § 1026.59(h)(3) with respect to the transition away from the LIBOR index, and will not be required to meet the requirements of proposed § 1026.59(f)(3). Thus, Account A and Account B may be treated differently with respect to what rate must be applied to the account. The Bureau solicits comment on whether the standard for proposed § 1026.59(f)(3) should be that the replacement formula should be substantially similar to the previous formula (rather than equal to as in the current proposal) to provide consistency with the language in proposed § 1026.55(b)(7)(ii). 59(h) Exceptions 59(h)(3) Transition From LIBOR Exception Current § 1026.59(h) provides two situations that are excepted from the requirements of § 1026.59. Proposed § 1026.59(h)(3) would add a third exception based upon the transition from a LIBOR index to a replacement VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 index used in setting a variable rate. Specifically, proposed § 1026.59(h)(3) excepts from the requirements of § 1026.59 increases in an APR that occur as the result of the transition from the use of a LIBOR index as the index in setting a variable rate to the use of a replacement index in setting a variable rate if the change from the use of the LIBOR index to a replacement index occurs in accordance with proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). Proposed comment 59(h)–1 clarifies that the proposed exception to the requirements of § 1026.59 does not apply to rate increases already subject to § 1026.59 prior to the transition from the use of a LIBOR index as the index in setting a variable rate to the use of a different index in setting a variable rate, where the change from the use of a LIBOR index to a different index occurred in accordance with proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). The Bureau is proposing this exception because the requirements of proposed § 1026.55(b)(7)(i) and (ii) may provide sufficient protection for the consumers when a card issuer is replacing an index under these circumstances for the reasons listed above in the discussion of proposed § 1026.55(b)(7)(i) and (ii). The Bureau believes that absent this proposed exception, some of the accounts transitioning away from a LIBOR index to a replacement index in setting a variable rate under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) would become subject to the requirements of § 1026.59, either at the time of transition or at a later date. The Bureau believes that the potential for compliance issues in transitioning away from a LIBOR index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii) while also complying with the requirements of § 1026.59 may be heightened. The Bureau is concerned that requiring card issuers to comply with the rate reevaluation requirements under § 1026.59 with respect to the LIBOR transition under § 1026.55(b)(7)(ii) may cause some card issuers to delay the transition away from the LIBOR index so as to avoid the requirements under § 1026.59. Even if the requirements of § 1026.59 were to apply to the LIBOR transition under § 1026.55(b)(7)(ii), the card issuer would likely only be required to perform one review prior to LIBOR’s expected discontinuance sometime after December 2021. Nonetheless, the card issuer could avoid this review if it delayed transitioning the account under § 1026.55(b)(7)(ii) so that the transition occurred within six months of when PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 36973 LIBOR is likely to be discontinued. The Bureau does not believe that this delay in the LIBOR transition would benefit card issuers or consumers. The Bureau seeks comment on issuers’ understanding as to whether, and to what extent, the accounts in their portfolios will become subject to § 1026.59 in the transition away from a LIBOR index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii), absent the proposed § 1026.59(h)(3) exception. The Bureau also seeks comment on potential compliance issues in transitioning away from a LIBOR index while also becoming subject to the requirements of § 1026.59. As noted above, proposed comment 59(h)–1 provides clarification that the exception in proposed § 1026.59(h)(3) does not apply to rate increases already subject to the requirements of § 1026.59 prior to the transition away from a LIBOR index to a replacement index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). In these circumstances, the Bureau is proposing that the accounts should continue to be subject to the requirements of § 1026.59 and consumers should not have to forego reviews on their accounts that could potentially result in rate reductions. The Bureau is proposing not to except these circumstances (where an account is already subject to the requirements of § 1026.59 prior to the transition away from a LIBOR index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii)) because they differ from the situation where an account may become subject to the requirements of § 1026.59 as a result of the transition away from a LIBOR index to a replacement index under proposed § 1026.55(b)(7)(i) or § 1026.55(b)(7)(ii). In particular, proposed § 1026.55(b)(7)(i) and (ii) provide that the replacement index plus replacement margin must produce a rate that is substantially similar to the rate in effect at the time the original index became unavailable or the rate that was in effect based on the LIBOR index on December 31, 2020, depending on the provision. These provisions provide safeguards that the consumer will not be unduly harmed after the transition away from a LIBOR index with a rate that is substantially dissimilar to the rate prior to the transition. No similar safeguard exists for accounts on which a rate increase occurred prior to the transition that subjected the account to the requirements of § 1026.59. Absent the requirements of § 1026.59, issuers would not have to continue to review these accounts for possible rate reductions that could potentially bring E:\FR\FM\18JNP2.SGM 18JNP2 36974 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules the rate on the account in line with the rate prior to the increase, as the requirements of § 1026.59 (and proposed § 1026.59(f)(3)) ensure that the account continues to be reviewed for a rate reduction that could potentially return the rate on the account to a rate that is the same as the rate before the increase. Appendix H to Part 1026—Closed-End Model Forms and Clauses Appendix H to part 1026 provides a sample form for ARMs for complying with the requirements of § 1026.20(c) in form H–4(D)(2) and a sample form for ARMs for complying with the requirements of § 1026.20(d) in form H– 4(D)(4).98 Both of these sample forms refer to the 1-year LIBOR. In light of the anticipated discontinuation of LIBOR, the proposed rule would substitute the 30-day average SOFR index for the 1year LIBOR index in the explanation of how the interest rate is determined in sample forms H–4(D)(2) and H–4(D)(4) in appendix H to provide more relevant samples. The proposed rule would also make related changes to other information listed on these sample forms, such as the effective date of the interest rate adjustment, the dates when future interest rate adjustments are scheduled to occur, the date the first new payment is due, the source of information about the index, the margin added in determining the new payment, and the limits on interest rate increases at each interest rate adjustment. To conform to the requirements in § 1026.20(d)(2)(i) and (d)(3)(ii) and to make form H–4(D)(4) consistent with form H–4(D)(3), the Bureau is also proposing to add the date of the disclosure at the top of form H–4(D)(4), which was inadvertently omitted from the original form H–4(D)(4) as published in the Federal Register on February 14, 2013.99 The Bureau requests comment on whether these revisions to sample forms H–4(D)(2) and H–4(D)(4) are appropriate and whether the Bureau should make any other changes to the forms in appendix H in connection with the LIBOR transition. If the Bureau finalizes the proposed changes to forms H– 4(D)(2) and H–4(D)(4), the Bureau also requests comment on whether some creditors, assignees, or servicers might still wish to use the original forms H– 4(D)(2) and H–4(D)(4) as published on February 14, 2013, after this final rule’s effective date. This might include, for 98 The Bureau notes that these are not required forms and that forms that meet the requirements of § 1026.20(c) or (d) would be considered in compliance with those subsections, respectively. 99 78 FR 10902, 11012 (Feb. 14, 2013). VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 example, creditors, assignees, or servicers who might wish to rely on the original sample forms for notices sent out for LIBOR loans after the proposed March 15, 2021 effective date but before the LIBOR index is replaced or, alternatively, for non-LIBOR loans after the proposed effective date. The Bureau requests comment on whether it would be helpful for the Bureau to indicate in the final rule that the Bureau will deem creditors, assignees, or servicers properly using the original forms H– 4(D)(2) and H–4(D)(4) to be in compliance with the regulation with regard to the disclosures required by § 1026.20(c) and (d) respectively, even after the final rule’s effective date. VI. Effective Date Except as noted below, the Bureau is proposing that the final rule would take effect on March 15, 2021. This proposed effective date generally would mean that the changes to the regulation and commentary would be effective around nine months prior to the expected discontinuation of LIBOR, which is some time after December 2021. For example, creditors for HELOCs and card issuers would have around nine months to transition away from using the LIBOR indices for existing accounts prior to the expected discontinuation of LIBOR. The Bureau requests comment on this proposed effective date. The Bureau notes that the updated change-in-term disclosure requirements for HELOCs and credit card accounts in the final rule would apply as of October 1, 2021, if the final rule is adopted. This proposed October 1, 2021, date is consistent with TILA section 105(d), which generally requires that changes in disclosures required by TILA or Regulation Z have an effective date of the October 1 that is at least six months after the date the final rule is adopted.100 VII. Dodd-Frank Act Section 1022(b) Analysis A. Overview In developing the proposed rule, the Bureau has considered the proposed rule’s potential benefits, costs, and impacts.101 The Bureau requests comment on the preliminary analysis 100 15 U.S.C. 1604(d). section 1022(b)(2)(A) of the Dodd-Frank Act (12 U.S.C. 5512(b)(2)(A)) requires the Bureau to consider the potential benefits and costs of the regulation to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products and services; the impact of proposed rules on insured depository institutions and insured credit unions with $10 billion or less in total assets as described in section 1026 of the Dodd-Frank Act (12 U.S.C. 5516); and the impact on consumers in rural areas. 101 Specifically, PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 presented below as well as submissions of additional data that could inform the Bureau’s analysis of the benefits, costs, and impacts. In developing the proposed rule, the Bureau has consulted, or offered to consult with, the appropriate prudential regulators and other Federal agencies, including regarding consistency with any prudential, market, or systemic objectives administered by such agencies. The proposed rule is primarily designed to address potential compliance issues for creditors affected by the sunset of LIBOR. At this time, LIBOR is expected to be discontinued some time after 2021. The proposed rule would amend and add several provisions for open-end credit. First, the proposed rule would add LIBOR-specific provisions that would permit creditors for HELOCs and card issuers for credit card accounts to replace the LIBOR index and adjust the margin used to set a variable rate on or after March 15, 2021, if certain conditions are met. Specifically, under the proposed rule, the APR calculated using the replacement index must be substantially similar to the rate calculated using the LIBOR index, based on the values of these indices on December 31, 2020. In addition, creditors for HELOCs and card issuers would be required to meet certain requirements in selecting a replacement index. Under the proposed rule, creditors for HELOCs and card issuers can select an index that is not newly established as a replacement index only if the index has historical fluctuations that are substantially similar to those of the LIBOR index. Creditors for HELOCs or card issuers can also use a replacement index that is newly established in certain circumstances. To reduce uncertainty with respect to selecting a replacement index that meets these standards, the Bureau is proposing to determine that Prime is an example of an index that has historical fluctuations that are substantially similar to those of certain USD LIBOR indices.102 The Bureau is also proposing to determine that certain spreadadjusted indices based on the SOFR recommended by the ARRC are indices that have historical fluctuations that are substantially similar to those of certain USD LIBOR indices.103 102 Specifically, the Bureau is proposing to add to the commentary a proposed determination that Prime has historical fluctuations that are substantially similar to those of the 1-month and 3month USD LIBOR. 103 Specifically, the Bureau is proposing to add to the commentary a proposed determination that the spread-adjusted indices based on SOFR E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules Second, the proposed rule also would revise existing language in Regulation Z that allows creditors for HELOCs and card issuers to replace an index and adjust the margin on an account if the index becomes unavailable if certain conditions are met. Third, the proposed rule would revise change-in-terms notice requirements, effective October 1, 2021, for HELOCs and credit card accounts to provide that if a creditor is replacing a LIBOR index on an account pursuant to the proposed LIBOR-specific provisions or because the LIBOR index becomes unavailable as discussed above, the creditor must provide a change-in-terms notice of any reduced margin that will be used to calculate the consumer’s variable rate. This would help ensure that consumers are informed of how their variable rates will be determined after the LIBOR index is replaced. Fourth, the proposed rule would add a LIBOR-specific exception from the rate reevaluation requirements of § 1026.59 applicable to credit card accounts for increases that occur as a result of replacing a LIBOR index to another index in accordance with the LIBORspecific provisions or as a result of the LIBOR indices becoming unavailable as discussed above. Fifth, the proposed rule would add provisions to address how a card issuer, where an account was subject to the requirements of the reevaluation reviews in § 1026.59 prior to the switch from a LIBOR index, can terminate the obligation to review where the rate applicable immediately prior to the increase was a variable rate calculated using a LIBOR index. Sixth, the proposed rule would make technical edits to several open-end provisions to replace LIBOR references with references to a SOFR index and to make related changes. The Bureau is also proposing several amendments to the closed-end provisions to address the sunset of LIBOR. First, the Bureau is proposing to amend comment 20(a)–3.ii to identify specific indices as an example of a ‘‘comparable index’’ for purposes of the closed-end refinancing provisions.104 recommended by the ARRC to replace the 1-month, 3-month, 6-month, and 1-year USD LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3-month, 6-month, and 1-year USD LIBOR indices respectively. 104 Specifically, the Bureau is proposing to add to the comment an illustrative example indicating that a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction from the 1-month, 3-month, 6-month, or 1-year USD LIBOR index to the spread-adjusted index based on the SOFR recommended by the ARRC as replacements for these indices, because the replacement index is a comparable index to the corresponding USD LIBOR index. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 Second, the Bureau is proposing technical edits to various closed-end provisions to replace LIBOR references with references to a SOFR index and to make related changes and corrections. B. Provisions To Be Analyzed The analysis below considers the potential benefits, costs, and impacts to consumers and covered persons of significant provisions of the proposed rule (proposed provisions), which include the first, third, and fourth openend provisions described above. The analysis also includes the first closedend provision described above.105 Therefore, the Bureau has analyzed in more detail the following four proposed provisions: 1. LIBOR-specific provisions for index changes for HELOCs and credit card accounts, 2. Revisions to change-in-terms notices requirements for HELOCs and credit card accounts to disclose margin decreases, if any, 3. LIBOR-specific exception from the rate reevaluation provisions applicable to credit card accounts, and 4. Commentary stating that specific indices are comparable to certain LIBOR tenors for purposes of the closed-end refinancing provisions. Because the proposed rule would address the transition of credit products from LIBOR to other indices, which should be complete within the next several years under both the baseline and the proposed rule, the analysis below is limited to considering the benefits, costs, and impacts of the proposed provisions over the next several years. C. Data Limitations and Quantification of Benefits, Costs, and Impacts The discussion below relies on information that the Bureau has obtained from industry, other regulatory agencies, and publicly available sources. The Bureau has performed outreach on many of the issues addressed by the proposed rule, as described in part III. However, as discussed further below, the data are generally limited with which to quantify the potential costs, benefits, and impacts of the proposed provisions. In light of these data limitations, the analysis below generally provides a qualitative discussion of the benefits, costs, and impacts of the proposed provisions. General economic principles and the Bureau’s expertise in consumer financial markets, together with the 105 The Bureau does not believe that the other provisions described above would have any significant costs, benefits, or impacts for consumers or covered persons. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 36975 limited data that are available, provide insight into these benefits, costs, and impacts. The Bureau requests additional data or studies that could help quantify the benefits and costs to consumers and covered persons of the proposed provisions. D. Baseline for Analysis In evaluating the potential benefits, costs, and impacts of the proposed rule, the Bureau takes as a baseline the current legal framework governing changes in indices used for variable-rate open-end and closed-end credit products, as applicable. The FCA has announced that it cannot guarantee the publication of LIBOR beyond 2021 and has urged relevant parties to prepare for the transition to alternative reference rates. Therefore, it is likely that even under current regulations, existing contracts for HELOCs, credit card accounts, and closed-end credit tied to a LIBOR index will have transitioned to other indices soon after the end of 2021. Furthermore, for HELOCs, credit card accounts, and closed-end credit, the proposed rule would not significantly alter the requirements that replacement indices for a LIBOR index must satisfy, nor would it alter how these requirements must be evaluated. Hence, the analysis below assumes the proposed rule would not substantially alter the number of HELOCs, credit card accounts, and closed-end credit accounts switched from a LIBOR index to other indices nor would it significantly alter the indices that HELOC creditors, card issuers, and closed-end creditors use to replace a LIBOR index. However, the proposed rule would enable HELOC creditors, card issuers, and closed-end creditors under Regulation Z to transfer existing contracts away from a LIBOR index with more certainty about what is required by and permitted under Regulation Z. The proposed rule would also enable HELOC creditors and card issuers to transfer existing contracts away from a LIBOR index earlier they could under the baseline, if they choose to do so. The proposed rule, however, would not excuse creditors or card issuers from noncompliance with contractual provisions. For example, a contract for a HELOC or a credit card account may provide that the creditor or card issuer respectively may not replace an index unilaterally under a plan unless the original index becomes unavailable. In this case, even under the proposed rule, the creditor or card issuer would be contractually prohibited from unilaterally replacing a LIBOR index used under the plan until LIBOR becomes unavailable. E:\FR\FM\18JNP2.SGM 18JNP2 36976 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules E. Potential Benefits and Costs of the Proposed Rule for Consumers and Covered Persons Reliable data on the indices credit products are linked to is not generally available, so the Bureau cannot estimate the dollar value of debt tied to LIBOR in the distinct credit markets that may be impacted by the proposed rule. However, the ARRC has estimated that, at the end of 2016, there was $1.2 trillion of mortgage debt (including ARMs, HELOCs, and reverse mortgages) and $100 billion of non-mortgage debt tied to LIBOR.106 1. LIBOR-Specific Provisions for Index Changes for HELOCs and Credit Card Accounts For consumers with HELOCs and credit card accounts with APRs tied to a LIBOR index, and for creditors of HELOCs and card issuers with APRs tied to a LIBOR index, the main effect of the LIBOR-specific provisions that allows HELOC creditors or card issuers under Regulation Z to replace a LIBOR index before it becomes unavailable would be that some creditors and card issuers for HELOCs and credit card accounts respectively would switch those contracts from a LIBOR index to other indices earlier than they would have without the proposed provision. Since the LIBOR indices are likely to become unavailable some time after December 2021, and the proposed provision would allow many creditors and card issuers under Regulation Z to switch on or after March 15, 2021, creditors and card issuers would likely switch contracts from a LIBOR index to other indices at most around nine months earlier than they would without the proposed provision (if permitted by the contractual provisions as discussed above). The Bureau cannot estimate when these accounts will be switched from a LIBOR index under the proposed provision. The Bureau also cannot estimate the number of accounts that contractually cannot be switched from a LIBOR index until that LIBOR index becomes unavailable, although the Bureau believes that a larger proportion of HELOC contracts than credit card contracts are affected by this issue.107 106 ARRC, Second Report (Mar. 2018), https:// www.newyorkfed.org/medialibrary/Microsites/arrc/ files/2018/ARRC-Second-report. 107 Furthermore, some HELOC creditors and card issuers may be able to switch indices from LIBOR to replacement indices even before LIBOR becomes unavailable (under the baseline) or March 15, 2021 (under the proposed rule). For HELOCs, some creditors may be able to switch earlier if the consumer specifically agrees to the change in writing under § 1026.40(f)(3)(iii). For credit card accounts that have been open for at least a year, card issuers may be able to switch indices earlier VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 The proposed provision also would include revisions to commentary to Regulation Z to state that certain SOFRbased indices have historical fluctuations that are substantially similar to those of certain tenors of LIBOR and that Prime has historical fluctuations that are substantially similar to those of certain tenors of LIBOR. The Bureau believes that market participants, using analysis similar to that the Bureau has performed, would come to these conclusions even without the proposed commentary. Therefore, the Bureau estimates that the proposed commentary would not significantly change the indices that HELOC creditors or card issuers switch to, the dates on which indices are switched, or the manner in which those switches are made. Potential Benefits and Costs to Consumers The Bureau believes that the proposed provision would benefit consumers primarily by making their experience transitioning from a LIBOR index more informed and less disruptive than it otherwise could be, although the Bureau does not have the data to quantify the value of this benefit. The Bureau expects this consumer benefit to arise because creditors for HELOCs and card issuers would have more time to transition contracts from LIBOR indices to replacement indices, giving them more time to plan for the transition, communicate with consumers about the transition, and avoid technical or system issues that could affect consumers’ accounts during the transition. The Bureau does not anticipate that the proposed provision would impose any significant costs on consumers on average. Under the proposed provision, creditors for HELOCs and card issuers would have to adjust margins used to calculate the variable rates on the accounts so that consumers’ APRs calculated using the value of the replacement index in effect on December 31, 2020, and the replacement margin will produce a rate that is substantially similar to their rates calculated using the value of the LIBOR index in effect on December 31, 2020, and the margins that applied to the variable rates immediately prior to the replacement of the LIBOR index. After the transition, consumers’ APRs will be tied to the replacement indices and not to the LIBOR indices. Because the replacement indices creditors for for new transactions under § 1026.55(b)(3). The Bureau cannot estimate the number of such accounts that could be switched early. PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 HELOCs and card issuers would switch to are not identical to the LIBOR indices, they will not move identically to the LIBOR indices, and so for the roughly nine months affected by this proposed provision, affected consumers’ payments will be different under the proposed provision than they would be under the baseline. On some dates in which indexed rates reset, some replacement indices may have increased relative to the LIBOR index. Consumers with these indices would then pay a cost due to the proposed provision until the next rate reset. On some dates in which indexed rates reset, some replacement indices may have decreased relative to the LIBOR index. Consumers with these indices would then benefit from the proposed provision until the next rate reset. Consumers vary in their constraints and preferences, the credit products they have, the dates those credit products reset, the replacement indices their creditors or card issuers would choose, and the transition dates their creditors or card issuers would choose. The benefits and costs that would accrue to consumers from the proposed provision and that arise because of differences in index movements will vary across consumers and over time. However, the Bureau expects ex-ante for these benefits and costs to be small on average, because the rates creditors or card issuers switch to must be substantially similar to existing LIBORbased rates using index values in effect on December 31, 2020, and because replacement indices that are not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index. Potential Benefits and Costs to Covered Persons The Bureau believes the proposed provision will have three primary benefits for creditors for HELOCs and card issuers. First, under the proposed provision these creditors and card issuers would have more certainty about the transition date and more time to make the transition away from the LIBOR indices. This should increase the ability of HELOC creditors and card issuers to plan for the transition, improving their communication with consumers about the transition, and decreasing the likelihood of technical or system issues that affect consumers’ accounts during the transition. Both of these effects should lower the cost of the transition to creditors. Second, the proposed provision will provide creditors for HELOCs and card issuers with additional detail for how to comply with their legal obligations E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules under Regulation Z with respect to the LIBOR transition. This should decrease the cost of legal and compliance staff time preparing for the transition beforehand and dealing with litigation after. Third, the proposed provision also would include revisions to commentary on Regulation Z stating that certain SOFR-based indices have historical fluctuations that are substantially similar to those of certain tenors of LIBOR and that Prime has historical fluctuations that are substantially similar to those of certain tenors of LIBOR. This should decrease the cost of compliance staff time coming to the same conclusions as the proposed commentary before the transition from LIBOR, and it should decrease the cost of litigation after. As discussed under ‘‘Potential Benefits and Costs to Consumers’’ above, because the replacement indices creditors for HELOCs and card issuers would switch to are not identical to the LIBOR indices, they will not move identically to the LIBOR indices, and so for the roughly nine months affected by this proposed provision, affected consumers’ payments will be different under the proposed provision than they would be under the baseline. On some dates in which indexed rates reset, some replacement indices will have increased relative to the LIBOR index. HELOC creditors and card issuers with rates linked to these indices will then benefit from the proposed provision until the next rate reset. On some dates in which indexed rates reset, some replacement indices will have decreased relative to the LIBOR index. HELOC creditors and card issuers with rates linked to these indices will then pay a cost due to the proposed provision until the next rate reset. Creditors and card issuers vary in their constraints and preferences, the credit products they issue, the dates those credit products reset, the replacement indices they would choose under the proposed provision, and the transition dates they would choose under the proposed provision. The benefits and costs that would accrue to HELOC creditors and card issuers from the proposed provision and that arise because of differences in index movements will vary across creditors and card issuers and over time. However, the Bureau expects ex-ante for these benefits and costs to be small on average, because the rates creditors or card issuers switch to must be substantially similar to existing LIBORbased rates using index values in effect on December 31, 2020, and replacement indices that are not newly established must have historical fluctuations that VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 are substantially similar to those of the LIBOR index. The proposed provision would allow creditors for HELOCs and card issuers under Regulation Z to switch contracts from a LIBOR index earlier than they otherwise would have, but it does not require them to do so. Therefore, this aspect of the proposed provision does not impose any significant costs on HELOC creditors and card issuers. The proposed commentary would not determine that any specific indices have historical fluctuations that are not substantially similar to those of LIBOR, so the proposed revisions would not prevent creditors or card issuers from switching to other indices as long as those indices still satisfy regulatory requirements. Therefore, the proposed commentary also does not impose any significant costs on HELOC creditors and card issuers. However, as noted above, the replacement indices HELOC creditors and card issuers choose may move less favorably for them than the LIBOR indices would have. 2. Revisions to Change-in-Terms Notices Requirements for HELOCs and Credit Card Accounts To Disclose Margin Decreases, if Any The proposed provision would, effective October 1, 2021, require creditors for HELOCs and card issuers to disclose margin reductions to consumers when they switch contracts from using LIBOR indices to other indices. Under both the existing regulation and this proposed provision, creditors for HELOCs and card issuers are required to send consumers changein-term notices when indices change, disclosing the replacement index and any increase in the margin. Therefore, this proposed provision would not affect the number of consumers who receive change-in-terms notices nor the number of change-in-terms notices creditors for HELOCs or card issuers must provide. The benefits, costs, and impacts of this proposed provision depend on whether HELOC creditors or card issuers would choose to disclose margin decreases even if not required to do so under the existing regulation. Creditors for HELOCs or card issuers that would not otherwise disclose margin decreases in their change-in-term notices would bear the cost of having to provide slightly longer notices. They may also have to develop distinct notices for different groups of consumers with different initial margins. Consumers with HELOC or credit card accounts from those creditors or card issuers would benefit by having an improved understanding of how and why their PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 36977 APRs would change. However, the Bureau believes it is likely that most creditors for HELOCs and card issuers would choose to disclose margin decreases in their change-in-terms notices even if the existing regulation does not require them to so, because margin decreases are beneficial for consumers, and because in these situations the creditors or card issuers likely benefit from improved consumer understanding. Further, this proposed provision would be effective only beginning October 1, 2021. HELOC creditors and card issuers that would prefer not to disclose margin decreases could choose to change indices before this proposed provision becomes effective (if the change in indices are permitted by the contractual provisions at that time). Therefore, the Bureau expects that both the benefits and costs of this proposed provision for consumers and for HELOC creditors and card issuers would be small. 3. LIBOR-Specific Exception From the Rate Reevaluation Provisions Applicable to Credit Card Accounts Rate increases may occur due to the LIBOR transition either at the time of transition from the LIBOR index to a different index or at a later time. Under current § 1026.59, in these scenarios card issuers would have to reevaluate the APRs until they equal or fall below what they would have been had they remained tied to LIBOR. The proposed provision would except card issuers from these rate reevaluation requirements for rate increases that occur as a result of the transition from the LIBOR index to another index under the LIBOR-specific provisions discussed above or under the existing regulation that allows card issuers to replace an index when the index becomes unavailable. The proposed provision does not except rate increases already subject to the rate reevaluation requirements prior to the transition from the LIBOR index to another index as discussed above. Because relative rate movements are hard to anticipate exante, it is unlikely that this proposed provision would affect the indices that card issuers use as replacements. Because card issuers can only switch from LIBOR-based rates to rates that are substantially similar using index values in effect on December 31, 2020, and use a replacement index (if the replacement index is not newly established) that has historical fluctuations that are substantially similar to those of the LIBOR index, it is unlikely such rate reevaluations would result in significant rate reductions for consumers before LIBOR is discontinued. Therefore, E:\FR\FM\18JNP2.SGM 18JNP2 36978 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules before LIBOR is discontinued, the impact of this proposed provision on consumers is likely to be small. After LIBOR is discontinued, it will not be possible to compute what consumer rates would have been under the LIBOR indices, and so it is not clear how card issuers would conduct such rate reevaluations after that time. Therefore, after LIBOR is discontinued, the impact of this proposed provision on consumers is not clear. This proposed provision would benefit affected card issuers by saving them the cost of reevaluating rates until LIBOR is discontinued. This proposed provision would impose no costs on affected card issuers because they could still perform rate reevaluations if they choose to do so prior to LIBOR being discontinued. 4. Commentary Stating That Specific Indices are Comparable to Certain LIBOR Tenors for Purposes of the Closed-End Refinancing Provisions The Bureau is proposing to revise comment 20(a)–3.ii to Regulation Z to state that certain SOFR-based indices are comparable to certain tenors of LIBOR. The Bureau believes that market participants, using analysis similar to that the Bureau has performed, would come to this conclusion even without the proposed commentary. Therefore, the Bureau believes that the proposed commentary would not significantly change the indices that creditors switch to, the dates on which indices are switched, or the manner in which those switches are made. Hence, the Bureau estimates that the proposed revisions would have no significant benefits, costs, or impacts for consumers. For covered persons, the proposed provision would decrease costs by providing additional clarity and certainty about whether indices are comparable for purposes of Regulation Z. For creditors that would switch from certain LIBOR indices to certain SOFR indices, the proposed provision would decrease the compliance staff time required to come to the conclusion that the SOFR index is comparable to the LIBOR index. The proposed provision could also decrease litigation costs for creditors after the transition from certain LIBOR indices to certain SOFR indices. The proposed commentary would not determine that any specific indices are not comparable to LIBOR. Therefore, the proposed provision would not prevent creditors from switching to other indices as long as those indices still satisfy regulatory requirements. Therefore, the proposed provision would impose no significant costs on creditors. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 F. Alternative Provisions Considered As discussed above in the section-bysection analyses of § 1026.40(f)(3)(ii) and proposed § 1026.55(b)(7), the Bureau considered interpreting the LIBOR indices to be unavailable as of a certain date prior to LIBOR being discontinued. The Bureau briefly discusses the costs, benefits, and impacts of the considered interpretation below. If the Bureau were to interpret the LIBOR indices to be unavailable under the existing Regulation Z rules prior to LIBOR being discontinued, it could provide benefits similar to those of the proposed rule by allowing creditors and card issuers to switch away from LIBOR indices before LIBOR is discontinued. It might also potentially provide some benefit to consumers and covered persons whose contracts require them to wait until the LIBOR indices become unavailable before replacing the LIBOR index, by providing some additional clarity in interpreting that provision of their contracts. However, a determination by the Bureau that the LIBOR indices are unavailable could have unintended consequences on other products or markets. For example, the Bureau is concerned that such a determination could unintentionally cause confusion for creditors for other products (e.g., ARMs) about whether the LIBOR indices are also unavailable for those products and could possibly put pressure on those creditors to replace the LIBOR index used for those products before those creditors are ready for the change. This could impose significant costs on affected consumers and creditors in the markets for these other products. In addition, even if the Bureau interpreted unavailability to indicate that the LIBOR indices are unavailable prior to LIBOR being discontinued, this interpretation would not completely solve the contractual issues for creditors and card issuers whose contracts require them to wait until the LIBOR indices become unavailable before replacing the LIBOR index. Creditors and card issuers still would need to decide for their contracts whether the LIBOR indices are unavailable, and that decision could result in litigation or arbitration under the contracts. Thus, even if the Bureau decided that the LIBOR indices are unavailable under Regulation Z as described above, creditors and card issuers whose contracts require them to wait until the LIBOR indices become unavailable before replacing the LIBOR index essentially would be in the same position under the proposed rule as they PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 would be under the current rule. Therefore, the benefits of the considered interpretation would be small even for the main intended beneficiaries of such an interpretation, specifically the consumers, creditors, and card issuers under contracts that require creditors and card issuers to wait until the LIBOR indices become unavailable before replacing the LIBOR index. G. Potential Specific Impacts of the Proposed Rule 1. Depository Institutions and Credit Unions With $10 Billion or Less in Total Assets, as Described in Section 1026 The Bureau believes that the consideration of benefits and costs of covered persons presented above provides a largely accurate analysis of the impacts of the proposed provisions on depository institutions and credit unions with $10 billion or less in total assets that issue credit products that are tied to LIBOR and are covered by the proposed provisions. 2. Impact of the Proposed Rule on Consumer Access to Credit and on Consumers in Rural Areas Because the proposed rule would affect only existing accounts that are tied to LIBOR and would generally not affect new loans, the proposed rule would not directly impact consumer access to credit. While the proposed rule would provide some benefits and costs to creditors and card issuers in connection to the transition away from LIBOR, it is unlikely to affect the costs of providing new credit and therefore the Bureau believes that any impact on creditors and card issuers from the proposed rule is not likely to have a significant impact on consumer access to credit. Consumers in rural areas may experience benefits or costs from the proposed rule that are larger or smaller than the benefits and costs experienced by consumers in general if credit products in rural areas are more or less likely to be linked to LIBOR than credit products in other areas. The Bureau does not have any data or other information to understand whether this is the case. The Bureau will further consider the impact of the proposed rule on consumers in rural areas. The Bureau therefore asks interested parties to provide data, research results, and other information on the impact of the proposed rule on consumers in rural areas. E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules VIII. Regulatory Flexibility Act Analysis A. Overview The Regulatory Flexibility Act (RFA) generally requires an agency to conduct an initial regulatory flexibility analysis (IRFA) and a final regulatory flexibility analysis of any rule subject to noticeand-comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities.108 The Bureau also is subject to certain additional procedures under the RFA involving the convening of a panel to consult with small business representatives before proposing a rule for which an IRFA is required.109 An IRFA is not required for this proposed rule because the proposed rule, if adopted, would not have a significant economic impact on a substantial number of small entities. B. Impact of Proposed Provisions on Small Entities The analysis below evaluates the potential economic impact of the proposed provisions on small entities as defined by the RFA.110 A card issuer or depository institution is considered ‘‘small’’ if it has $600 million or less in assets.111 Except for card issuers, nondepository creditors are considered ‘‘small’’ if their average annual receipts are less than $41.5 million.112 Based on its market intelligence, the Bureau believes that there are few, if any, small card issuers with LIBORbased cards. Based on its market intelligence, the Bureau estimates that there are approximately 200 to 300 small institutional lenders with variable-rate student loans tied to LIBOR. There are also a few statesponsored nonbank lenders that offer 108 5 U.S.C. 601 et seq. U.S.C. 609. 110 For purposes of assessing the impacts of the proposed rule on small entities, ‘‘small entities’’ is defined in the RFA to include small businesses, small not-for-profit organizations, and small government jurisdictions. 5 U.S.C. 601(6). A ‘‘small business’’ is determined by application of Small Business Administration regulations and reference to the North American Industry Classification System (NAICS) classifications and size standards. 5 U.S.C. 601(3). A ‘‘small organization’’ is any ‘‘notfor-profit enterprise which is independently owned and operated and is not dominant in its field.’’ 5 U.S.C. 601(4). A ‘‘small governmental jurisdiction’’ is the government of a city, county, town, township, village, school district, or special district with a population of less than 50,000. 5 U.S.C. 601(5). 111 U. S. Small Bus. Admin., Table of Small Business Size Standards Matched to North American Industry Classification System Codes, https://www.sba.gov/sites/default/files/2019-08/ SBA%20Table%20of%20Size%20Standards_ Effective%20Aug%2019%2C%202019_Rev.pdf (current SBA size standards). 112 Id. variable-rate student loans based on LIBOR. To estimate the number of small mortgage lenders that may be impacted by the proposed rule, the Bureau has analyzed the 2018 Home Mortgage Disclosure Act (HMDA) data.113 The HMDA data cover mortgage originations, while entities may be impacted by the proposed rule if they hold debt tied to LIBOR. The data will therefore not include entities that originated LIBOR-linked debt before 2018 but not during 2018, even if those entities still hold that debt. The data will include entities that originated LIBOR-linked debt in 2018 but will have sold it before the proposed rule would come into effect, and so would not be impacted by the proposed rule. Other limitations of the data are discussed below. Despite these limitations, the HMDA data are the best data source currently available to the Bureau to quantify the number of small mortgage lenders that may be impacted by the proposed rule. The HMDA data include entities that originate ARMs, HELOCs, and reverse mortgages. The data include information on whether mortgages are open-end or closed-end, although some entities are exempt from reporting this information.114 The data do not include information on whether or not mortgages have rates that are tied to LIBOR. The data do indicate whether or not mortgages have rates that may change. This measure is used as a proxy for potential exposure to the proposed rule. Mortgages may have rates that are linked to indices besides LIBOR. They may also have ‘‘step rates’’ that switch from one pre-determined rate to another pre-determined rate that is not linked to any index. Therefore, the proxy for potential exposure to the proposed rule 109 5 VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 113 See Bureau of Consumer Fin. Prot., Introducing New and Revised Data Points in HMDA (Aug. 2019), available at https:// files.consumerfinance.gov/f/documents/cfpb_newrevised-data-points-in-hmda_report.pdf. 114 In May 2017, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) that granted certain HMDA reporters partial exemptions from HMDA reporting. The closed-end partial exemption applies to HMDA reporters that are insured depository institutions or insured credit unions and that originated fewer than 500 closed-end mortgages in each of the two preceding years. HMDA reporters that are insured depository institutions or insured credit unions that originated fewer than 500 openend lines of credit in each of the two preceding years also qualify for a partial exemption with respect to reporting their open-end transactions. The insured depository institutions must also not have received certain less than satisfactory examination ratings under the Community Reinvestment Act of 1977 to qualify for the partial exemptions. PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 36979 likely overstates the number of entities with rates tied to LIBOR. Based on this data, the Bureau estimates that there are 117 small depositories that originated at least one closed-end adjustable-rate mortgage product in 2018 and so may be affected by the closed-end provisions of the proposed rule, and there are 669 small depositories that originated at least one open-end adjustable-rate mortgage product and so may be affected by the open-end provisions of the proposed rule. Of these, 82 small depositories originated at least one closed-end adjustable rate mortgage product and one open-end adjustable rate mortgage product, and so may be affected by both the open-end and closed-end provisions of the proposed rule. The definition of ‘‘small’’ for purposes of the RFA for non-depository institutions that originate mortgages depends on average annual receipts. The HMDA data do not include this information, and so the Bureau cannot estimate the number of small nondepository mortgage lenders that may be affected by the proposed rule. The Bureau estimates that there are 50 nondepository mortgage lenders that originated at least one closed-end adjustable-rate mortgage product and 640 non-depository mortgage lenders that originated at least one open-end adjustable-rate mortgage product. Of these, 43 originated at least one closedend and one open-end adjustable-rate mortgage product. The numbers above do not include entities that reported originating mortgages but under the EGRRCPA were exempt from reporting whether or not those mortgages had adjustable rates. There are 1,530 such small depositories in the 2018 HMDA data. There are five such non-depository institutions in the 2018 HMDA data. These entities may have originated adjustable-rate mortgage products that were not explicitly reported as such. Finally, the numbers above also do not include entities that may have originated adjustable-rate mortgages in 2018 that were exempt entirely from reporting any 2018 HMDA data. The Bureau has estimated that approximately 11,800 institutions originated at least one closed-end mortgage loan in 2018, and 5,666 institutions reported HMDA data in 2018.115 This implies that approximately 6,134 institutions originated at least one closed-end 115 See Bureau of Consumer Fin. Prot., Data Point: 2018 Mortgage Market Activity and Trends (Aug. 2019), available at https:// files.consumerfinance.gov/f/documents/cfpb_2018mortgage-market-activity-trends_report.pdf. E:\FR\FM\18JNP2.SGM 18JNP2 36980 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules mortgage in 2018 but are not in the HMDA data. Because these institutions are not in the HMDA data, the Bureau cannot estimate the number that may have originated adjustable-rate mortgages. Furthermore, the Bureau cannot confirm that they are small for purposes of the RFA, although it is likely they are because HMDA reporting thresholds are based in part on origination volume. Finally, the Bureau cannot estimate the number of institutions that did not report HMDA data in 2018 but did originate at least one open-end mortgage loan in 2018, or at least one closed-end and one openend mortgage loan in 2018. As discussed above in part VII, there are four main proposed provisions: 1. LIBOR-specific provisions for index changes for HELOCs and credit card accounts, 2. Revisions to change-in-terms notices requirements for HELOCs and credit card accounts to disclose margin decreases, if any, 3. LIBOR-specific exception from the rate reevaluation provisions applicable to credit card accounts, and 4. Commentary stating that specific indices are comparable to certain LIBOR tenors for purposes of the closed-end refinancing provisions. The proposed LIBOR-specific provisions for index change requirements for open-end credit would allow HELOC creditors and card issuers, including small entities, under Regulation Z to switch away from LIBOR earlier than they would under the baseline, but it does not require them to do so.116 This additional flexibility would benefit small entities with these outstanding credit products tied to LIBOR, by reducing uncertainty and allowing them to implement the switch in a more orderly way. This additional flexibility would not impose any significant costs on HELOC creditors and card issuers, including small entities. The proposed LIBOR-specific provisions for index change requirements for open-end credit also would include revisions to commentary to Regulation Z to state that certain 116 As discussed in the section-by-section analyses of § 1026.40(f)(3)(ii) and proposed § 1026.55(b)(7) above, the proposal, however, would not excuse creditors or card issuers from noncompliance with contractual provisions. For example, a contract for a HELOC or a credit card account may provide that the creditor or card issuer respectively may not replace an index unilaterally under a plan unless the original index becomes unavailable. In this case, even under the proposal the creditor or card issuer would be contractually prohibited from unilaterally replacing a LIBOR index used under the plan until it becomes unavailable. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 SOFR-based indices have historical fluctuations that are substantially similar to those of certain tenors of LIBOR and that Prime has historical fluctuations that are substantially similar to those of certain tenors of LIBOR. The proposed commentary would not determine that any specific indices have historical fluctuations that are not substantially similar to those of LIBOR, so the proposed revisions would not prevent creditors or card issuers from switching to other indices as long as those indices still satisfy regulatory requirements. Therefore, the proposed commentary does not impose any significant costs on HELOC creditors and card issuers, including small entities. Therefore, the proposed LIBORspecific provisions for index change requirements for open-end credit would impose no significant burden on small entities. The proposed revisions to change-interms notices requirements to disclose margin decreases, if any, expand regulatory requirements for creditors for HELOCs and card issuers, including small entities, and therefore may increase their compliance costs. The proposed provision would, effective October 1, 2021, require creditors for HELOCs and card issuers, including small entities, to disclose margin reductions to consumers when they switch contracts from using LIBOR indices to other indices. Under both the existing regulation and the proposed provision, creditors for HELOCs and card issuers, including small entities, are required to send consumers changein-term notices when indices change, disclosing the replacement index and any increase in the margin. Therefore, this proposed provision would not affect the number of consumers who receive change-in-terms notices nor the number of change-in-terms notices creditors for HELOCs or card issuers, including small entities, must provide. The benefits, costs, and impacts of this proposed provision depend on whether HELOC creditors or card issuers, including small entities, would choose to disclose margin decreases even if not required to do so under the existing regulation. Creditors for HELOCs or card issuers, including small entities, that would not otherwise disclose margin decreases in their change-in-term notices would bear the cost of having to provide slightly longer notices. They may also have to develop distinct notices for different groups of consumers with different initial margins. However, the Bureau believes it is likely that most creditors for HELOCs and card issuers, including small entities, would choose to disclose PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 margin decreases in their change-interms notices even if the existing regulation does not require them to so, because margin decreases are beneficial for consumers, and because in these situations the creditors or card issuers likely benefit from improved consumer understanding. Further, this proposed provision would be effective only beginning effective October 1, 2021. HELOC creditors and card issuers, including small entities, that would prefer not to disclose margin decreases could choose to change indices before this proposed provision becomes effective (if the change in indices are permitted by the contractual provisions at that time). Therefore, the Bureau expects that both the benefits and costs of this proposed provision for HELOC creditors and card issuers, including small entities, would be small. Therefore, this proposed provision would not impose significant costs on a significant number of small entities. The LIBOR-specific exception from the rate reevaluation provisions applicable to credit card accounts would benefit affected card issuers, including small entities, by saving them the cost of reevaluating rate increases that occur as a result of the transition from the LIBOR index to another index under the LIBOR-specific provisions discussed above or under the existing regulation that allows card issuers to replace an index when the index becomes unavailable. This proposed provision would impose no costs on affected card issuers, including small entities, because they could still perform rate reevaluations if they choose to do so until LIBOR is discontinued. Therefore, this proposed provision would impose no significant burden on small entities. The Bureau is proposing to revise comment 20(a)–3.ii to Regulation Z to state that certain SOFR-based indices are comparable to certain tenors of LIBOR. The proposed commentary would not determine that any specific indices are not comparable to LIBOR. Therefore, the proposed provision would not prevent creditors from switching to other indices as long as those indices still satisfy regulatory requirements. Therefore, the proposed provision would impose no significant costs on creditors, including small entities. Accordingly, the Director hereby certifies that this proposed rule, if adopted, would not have a significant economic impact on a substantial number of small entities. Thus, neither an IRFA nor a small business review panel is required for this proposal. The Bureau requests comment on the E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules analysis above and requests any relevant data. § 1026.9 Subsequent disclosure requirements. * IX. Paperwork Reduction Act Under the Paperwork Reduction Act of 1995 (PRA),117 Federal agencies are generally required to seek the Office of Management and Budget’s (OMB’s) approval for information collection requirements prior to implementation. The collections of information related to Regulation Z have been previously reviewed and approved by OMB and assigned OMB Control number 3170– 0015. Under the PRA, the Bureau may not conduct or sponsor and, notwithstanding any other provision of law, a person is not required to respond to an information collection unless the information collection displays a valid control number assigned by OMB. The Bureau has determined that this proposed rule would not impose any new or revised information collection requirements (recordkeeping, reporting or disclosure requirements) on covered entities or members of the public that would constitute collections of information requiring OMB approval under the PRA. X. Signing Authority The Director of the Bureau, having reviewed and approved this document, is delegating the authority to electronically sign this document to Laura Galban, a Bureau Federal Register Liaison, for purposes of publication in the Federal Register. List of Subjects in 12 CFR Part 1026 Advertising, Appraisal, Appraiser, Banking, Banks, Consumer protection, Credit, Credit unions, Mortgages, National banks, Reporting and recordkeeping requirements, Savings associations, Truth in lending. * * * * (c) * * * (1) * * * (ii) Notice not required. For homeequity plans subject to the requirements of § 1026.40, a creditor is not required to provide notice under this section when the change involves a reduction of any component of a finance or other charge (except that on or after October 1, 2021, this provision on when the change involves a reduction of any component of a finance or other charge does not apply to any change in the margin when a LIBOR index is replaced, as permitted by § 1026.40(f)(3)(ii)(A) or (B)) or when the change results from an agreement involving a court proceeding. * * * * * (2) * * * (v) * * * (A) When the change involves charges for documentary evidence; a reduction of any component of a finance or other charge (except that on or after October 1, 2021, this provision on when the change involves a reduction of any component of a finance or other charge does not apply to any change in the margin when a LIBOR index is replaced, as permitted by § 1026.55(b)(7)(i) or (ii)); suspension of future credit privileges (except as provided in paragraph (c)(2)(vi) of this section) or termination of an account or plan; when the change results from an agreement involving a court proceeding; when the change is an extension of the grace period; or if the change is applicable only to checks that access a credit card account and the changed terms are disclosed on or with the checks in accordance with paragraph (b)(3) of this section; * * * * * Authority and Issuance Subpart E—Special Rules for Certain Home Mortgage Transactions For the reasons set forth above, the Bureau proposes to amend Regulation Z, 12 CFR part 1026, as set forth below: § 1026.36 PART 1026—TRUTH IN LENDING (REGULATION Z) 1. The authority citation for part 1026 continues to read as follows: ■ Authority: 12 U.S.C. 2601, 2603–2605, 2607, 2609, 2617, 3353, 5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq. Subpart B—Open-End Credit 2. Section 1026.9 is amended by revising paragraphs (c)(1)(ii) and (c)(2)(v)(A) to read as follows: ■ 117 44 U.S.C. 3501 et seq. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 [Amended] 3. Section 1026.36 is amended by removing ‘‘LIBOR’’ and adding in its place ‘‘SOFR’’ in paragraphs (a)(4)(iii)(C) and (a)(5)(iii)(B). ■ 4. Section 1026.40 is amended by revising paragraph (f)(3)(ii) to read as follows: ■ § 1026.40 plans. Requirements for home equity * * * * * (f) * * * (3) * * * (ii)(A) Change the index and margin used under the plan if the original index is no longer available, the replacement index has historical fluctuations substantially similar to that of the PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 36981 original index, and the replacement index and replacement margin would have resulted in an annual percentage rate substantially similar to the rate in effect at the time the original index became unavailable. If the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce an annual percentage rate substantially similar to the rate in effect when the original index became unavailable; or (B) If a variable rate on the plan is calculated using a LIBOR index, change the LIBOR index and the margin for calculating the variable rate on or after March 15, 2021, to a replacement index and a replacement margin, as long as historical fluctuations in the LIBOR index and replacement index were substantially similar, and as long as the replacement index value in effect on December 31, 2020, and replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and the replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the replacement index is not published on December 31, 2020, the creditor must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the replacement index must be substantially similar to the rate based on the LIBOR index. * * * * * Subpart G—Special Rules Applicable to Credit Card Accounts and Open-End Credit Offered to College Students 5. Section 1026.55 is amended by adding paragraph (b)(7) to read as follows: ■ § 1026.55 Limitations on increasing annual percentage rates, fees, and charges. * * * * * (b) * * * (7) Index replacement and margin change exception. A card issuer may E:\FR\FM\18JNP2.SGM 18JNP2 36982 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules increase an annual percentage rate when: (i) The card issuer changes the index and margin used to determine the annual percentage rate if the original index becomes unavailable, as long as historical fluctuations in the original and replacement indices were substantially similar, and as long as the replacement index and replacement margin will produce a rate substantially similar to the rate that was in effect at the time the original index became unavailable. If the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce a rate substantially similar to the rate in effect when the original index became unavailable; or (ii) If a variable rate on the plan is calculated using a LIBOR index, the card issuer changes the LIBOR index and the margin for calculating the variable rate on or after March 15, 2021, to a replacement index and a replacement margin, as long as historical fluctuations in the LIBOR index and replacement index were substantially similar, and as long as the replacement index value in effect on December 31, 2020, and replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 under the plan. If the replacement index is newly established and therefore does not have any rate history, it may be used if the replacement index value in effect on December 31, 2020, and the replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the replacement index is not published on December 31, 2020, the card issuer must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the replacement index must be substantially similar to the rate based on the LIBOR index. * * * * * ■ 6. Section 1026.59 is amended by adding paragraphs (f)(3) and (h)(3) to read as follows: § 1026.59 Reevaluation of rate increases. * * * * * (f) * * * (3) Effective March 15, 2021, in the case where the rate applicable immediately prior to the increase was a variable rate with a formula based on a LIBOR index, the card issuer reduces the annual percentage rate to a rate determined by a replacement formula that is derived from a replacement index value on December 31, 2020, plus PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 replacement margin that is equal to the LIBOR index value on December 31, 2020, plus the margin used to calculate the rate immediately prior to the increase (previous formula). A card issuer must satisfy the conditions set forth in § 1026.55(b)(7)(ii) for selecting a replacement index. If either the LIBOR index or the replacement index is not published on December 31, 2020, the card issuer must use the values of the indices on the next calendar day that both indices are published as the index values to use to determine the replacement formula. * * * * * (h) * * * (3) Transition from LIBOR. The requirements of this section do not apply to increases in an annual percentage rate that occur as a result of the transition from the use of a LIBOR index as the index in setting a variable rate to the use of a replacement index in setting a variable rate if the change from the use of the LIBOR index to a replacement index occurs in accordance with § 1026.55(b)(7)(i) or (ii). ■ 7. Appendix H to part 1026 is amended by revising the entries for H– 4(D)(2) and H–4(D)(4) to read as follows: Appendix H to Part 1026—Closed-End Model Forms and Clauses * * * * * H–4(D)(2) Sample Form for § 1026.20(c) BILLING CODE 4810–AM–P E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules * * VerDate Sep<11>2014 * H–4(D)(4) Sample Form for § 1026.20(d) * 18:27 Jun 17, 2020 Jkt 250001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 E:\FR\FM\18JNP2.SGM 18JNP2 EP18JN20.000</GPH> * 36983 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules BILLING CODE 4810–AM–C * * * * ■ 8. In supplement I to part 1026: ■ a. Under Section 1026.9—Subsequent Disclosure Requirements, revise 9(c)(1)(ii) Notice not Required, 9(c)(2)(iv) Disclosure Requirements, and 9(c)(2)(v) Notice not Required. VerDate Sep<11>2014 18:27 Jun 17, 2020 b. Under Section 1026.20—Disclosure Requirements Regarding PostConsummation Events, revise 20(a) Refinancings. ■ c. Under Section 1026.37—Content of Disclosures for Certain Mortgage Transactions (Loan Estimate), revise 37(j)(1) Index and margin. ■ * Jkt 250001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 d. Under Section 1026.40— Requirements for Home-Equity Plans, revise Paragraph 40(f)(3)(ii) and add Paragraph 40(f)(3)(ii)(A) and Paragraph 40(f)(3)(ii)(B). ■ e. Under Section 1026.55— Limitations on Increasing Annual Percentage Rates, Fees, and Charges, ■ E:\FR\FM\18JNP2.SGM 18JNP2 EP18JN20.001</GPH> 36984 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules Supplement I to Part 1026—Official Interpretations provided under § 1026.9(c)(1) on or after October 1, 2021 covering changes permitted by § 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B), a creditor must provide a change-in-terms notice under § 1026.9(c)(1) disclosing the replacement index for a LIBOR index and any adjusted margin that is permitted under § 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B), even if the margin is reduced. Prior to October 1, 2021, a creditor has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index as permitted by § 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B). * * revise 55(b)(2) Variable rate exception and add 55(b)(7) Index replacement and margin change exception. ■ f. Under Section 1026.59— Reevaluation of Rate Increases, revise 59(d) Factors and 59(f) Termination of Obligation to Review Factors and add 59(h) Exceptions. The revisions and additions read as follows: * * * * Section 1026.9—Subsequent Disclosure Requirements * * * * * 9(c)(1)(ii) Notice Not Required 1. Changes not requiring notice. The following are examples of changes that do not require a change-in-terms notice: i. A change in the consumer’s credit limit. ii. A change in the name of the credit card or credit card plan. iii. The substitution of one insurer for another. iv. A termination or suspension of credit privileges. (But see § 1026.40(f).) v. Changes arising merely by operation of law; for example, if the creditor’s security interest in a consumer’s car automatically extends to the proceeds when the consumer sells the car. 2. Skip features. If a credit program allows consumers to skip or reduce one or more payments during the year, or involves temporary reductions in finance charges, no notice of the change in terms is required either prior to the reduction or upon resumption of the higher rates or payments if these features are explained on the initial disclosure statement (including an explanation of the terms upon resumption). For example, a merchant may allow consumers to skip the December payment to encourage holiday shopping, or a teachers’ credit union may not require payments during summer vacation. Otherwise, the creditor must give notice prior to resuming the original schedule or rate, even though no notice is required prior to the reduction. The change-in-terms notice may be combined with the notice offering the reduction. For example, the periodic statement reflecting the reduction or skip feature may also be used to notify the consumer of the resumption of the original schedule or rate, either by stating explicitly when the higher payment or charges resume, or by indicating the duration of the skip option. Language such as ‘‘You may skip your October payment,’’ or ‘‘We will waive your finance charges for January,’’ may serve as the change-in-terms notice. 3. Replacing LIBOR. The exception in § 1026.9(c)(1)(ii) under which a creditor is not required to provide a change-in-terms notice under § 1026.9(c)(1) when the change involves a reduction of any component of a finance or other charge does not apply on or after October 1, 2021, to margin reductions when a LIBOR index is replaced, as permitted by § 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B). For change-in-terms notices VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 * * * * 9(c)(2)(iv) Disclosure Requirements 1. Changing margin for calculating a variable rate. If a creditor is changing a margin used to calculate a variable rate, the creditor must disclose the amount of the new rate (as calculated using the new margin) in the table described in § 1026.9(c)(2)(iv), and include a reminder that the rate is a variable rate. For example, if a creditor is changing the margin for a variable rate that uses the prime rate as an index, the creditor must disclose in the table the new rate (as calculated using the new margin) and indicate that the rate varies with the market based on the prime rate. 2. Changing index for calculating a variable rate. If a creditor is changing the index used to calculate a variable rate, the creditor must disclose the amount of the new rate (as calculated using the new index) and indicate that the rate varies and how the rate is determined, as explained in § 1026.6(b)(2)(i)(A). For example, if a creditor is changing from using a prime index to using a SOFR index in calculating a variable rate, the creditor would disclose in the table the new rate (using the new index) and indicate that the rate varies with the market based on a SOFR index. 3. Changing from a variable rate to a nonvariable rate. If a creditor is changing a rate applicable to a consumer’s account from a variable rate to a non-variable rate, the creditor generally must provide a notice as otherwise required under § 1026.9(c) even if the variable rate at the time of the change is higher than the non-variable rate. However, a creditor is not required to provide a notice under § 1026.9(c) if the creditor provides the disclosures required by § 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in connection with changing a variable rate to a lower non-variable rate. Similarly, a creditor is not required to provide a notice under § 1026.9(c) when changing a variable rate to a lower nonvariable rate in order to comply with 50 U.S.C. app. 527 or a similar Federal or state statute or regulation. Finally, a creditor is not required to provide a notice under § 1026.9(c) when changing a variable rate to a lower nonvariable rate in order to comply with § 1026.55(b)(4). 4. Changing from a non-variable rate to a variable rate. If a creditor is changing a rate applicable to a consumer’s account from a non-variable rate to a variable rate, the creditor generally must provide a notice as otherwise required under § 1026.9(c) even if the non-variable rate is higher than the variable rate at the time of the change. PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 36985 However, a creditor is not required to provide a notice under § 1026.9(c) if the creditor provides the disclosures required by § 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in connection with changing a non-variable rate to a lower variable rate. Similarly, a creditor is not required to provide a notice under § 1026.9(c) when changing a non-variable rate to a lower variable rate in order to comply with 50 U.S.C. app. 527 or a similar Federal or state statute or regulation. Finally, a creditor is not required to provide a notice under § 1026.9(c) when changing a nonvariable rate to a lower variable rate in order to comply with § 1026.55(b)(4). See comment 55(b)(2)–4 regarding the limitations in § 1026.55(b)(2) on changing the rate that applies to a protected balance from a nonvariable rate to a variable rate. 5. Changes in the penalty rate, the triggers for the penalty rate, or how long the penalty rate applies. If a creditor is changing the amount of the penalty rate, the creditor must also redisclose the triggers for the penalty rate and the information about how long the penalty rate applies even if those terms are not changing. Likewise, if a creditor is changing the triggers for the penalty rate, the creditor must redisclose the amount of the penalty rate and information about how long the penalty rate applies. If a creditor is changing how long the penalty rate applies, the creditor must redisclose the amount of the penalty rate and the triggers for the penalty rate, even if they are not changing. 6. Changes in fees. If a creditor is changing part of how a fee that is disclosed in a tabular format under § 1026.6(b)(1) and (2) is determined, the creditor must redisclose all relevant information related to that fee regardless of whether this other information is changing. For example, if a creditor currently charges a cash advance fee of ‘‘Either $5 or 3% of the transaction amount, whichever is greater (Max: $100),’’ and the creditor is only changing the minimum dollar amount from $5 to $10, the issuer must redisclose the other information related to how the fee is determined. For example, the creditor in this example would disclose the following: ‘‘Either $10 or 3% of the transaction amount, whichever is greater (Max: $100).’’ 7. Combining a notice described in § 1026.9(c)(2)(iv) with a notice described in § 1026.9(g)(3). If a creditor is required to provide a notice described in § 1026.9(c)(2)(iv) and a notice described in § 1026.9(g)(3) to a consumer, the creditor may combine the two notices. This would occur if penalty pricing has been triggered, and other terms are changing on the consumer’s account at the same time. 8. Content. Sample G–20 contains an example of how to comply with the requirements in § 1026.9(c)(2)(iv) when a variable rate is being changed to a nonvariable rate on a credit card account. The sample explains when the new rate will apply to new transactions and to which balances the current rate will continue to apply. Sample G–21 contains an example of how to comply with the requirements in § 1026.9(c)(2)(iv) when the late payment fee on a credit card account is being increased, and the returned payment fee is also being E:\FR\FM\18JNP2.SGM 18JNP2 36986 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules increased. The sample discloses the consumer’s right to reject the changes in accordance with § 1026.9(h). 9. Clear and conspicuous standard. See comment 5(a)(1)–1 for the clear and conspicuous standard applicable to disclosures required under § 1026.9(c)(2)(iv)(A)(1). 10. Terminology. See § 1026.5(a)(2) for terminology requirements applicable to disclosures required under § 1026.9(c)(2)(iv)(A)(1). 11. Reasons for increase. i. In general. Section 1026.9(c)(2)(iv)(A)(8) requires card issuers to disclose the principal reason(s) for increasing an annual percentage rate applicable to a credit card account under an open-end (not home-secured) consumer credit plan. The regulation does not mandate a minimum number of reasons that must be disclosed. However, the specific reasons disclosed under § 1026.9(c)(2)(iv)(A)(8) are required to relate to and accurately describe the principal factors actually considered by the card issuer in increasing the rate. A card issuer may describe the reasons for the increase in general terms. For example, the notice of a rate increase triggered by a decrease of 100 points in a consumer’s credit score may state that the increase is due to ‘‘a decline in your creditworthiness’’ or ‘‘a decline in your credit score.’’ Similarly, a notice of a rate increase triggered by a 10% increase in the card issuer’s cost of funds may be disclosed as ‘‘a change in market conditions.’’ In some circumstances, it may be appropriate for a card issuer to combine the disclosure of several reasons in one statement. However, § 1026.9(c)(2)(iv)(A)(8) requires that the notice specifically disclose any violation of the terms of the account on which the rate is being increased, such as a late payment or a returned payment, if such violation of the account terms is one of the four principal reasons for the rate increase. ii. Example. Assume that a consumer made a late payment on the credit card account on which the rate increase is being imposed, made a late payment on a credit card account with another card issuer, and the consumer’s credit score decreased, in part due to such late payments. The card issuer may disclose the reasons for the rate increase as a decline in the consumer’s credit score and the consumer’s late payment on the account subject to the increase. Because the late payment on the credit card account with the other issuer also likely contributed to the decline in the consumer’s credit score, it is not required to be separately disclosed. However, the late payment on the credit card account on which the rate increase is being imposed must be specifically disclosed even if that late payment also contributed to the decline in the consumer’s credit score. 9(c)(2)(v) Notice Not Required 1. Changes not requiring notice. The following are examples of changes that do not require a change-in-terms notice: i. A change in the consumer’s credit limit except as otherwise required by § 1026.9(c)(2)(vi). ii. A change in the name of the credit card or credit card plan. iii. The substitution of one insurer for another. VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 iv. A termination or suspension of credit privileges. v. Changes arising merely by operation of law; for example, if the creditor’s security interest in a consumer’s car automatically extends to the proceeds when the consumer sells the car. 2. Skip features. i. Skipped or reduced payments. If a credit program allows consumers to skip or reduce one or more payments during the year, no notice of the change in terms is required either prior to the reduction in payments or upon resumption of the higher payments if these features are explained on the account-opening disclosure statement (including an explanation of the terms upon resumption). For example, a merchant may allow consumers to skip the December payment to encourage holiday shopping, or a teacher’s credit union may not require payments during summer vacation. Otherwise, the creditor must give notice prior to resuming the original payment schedule, even though no notice is required prior to the reduction. The change-in-terms notice may be combined with the notice offering the reduction. For example, the periodic statement reflecting the skip feature may also be used to notify the consumer of the resumption of the original payment schedule, either by stating explicitly when the higher resumes or by indicating the duration of the skip option. Language such as ‘‘You may skip your October payment’’ may serve as the change-in-terms notice. ii. Temporary reductions in interest rates or fees. If a credit program involves temporary reductions in an interest rate or fee, no notice of the change in terms is required either prior to the reduction or upon resumption of the original rate or fee if these features are disclosed in advance in accordance with the requirements of § 1026.9(c)(2)(v)(B). Otherwise, the creditor must give notice prior to resuming the original rate or fee, even though no notice is required prior to the reduction. The notice provided prior to resuming the original rate or fee must comply with the timing requirements of § 1026.9(c)(2)(i) and the content and format requirements of § 1026.9(c)(2)(iv)(A), (B) (if applicable), (C) (if applicable), and (D). See comment 55(b)–3 for guidance regarding the application of § 1026.55 in these circumstances. 3. Changing from a variable rate to a nonvariable rate. See comment 9(c)(2)(iv)–3. 4. Changing from a non-variable rate to a variable rate. See comment 9(c)(2)(iv)–4. 5. Temporary rate or fee reductions offered by telephone. The timing requirements of § 1026.9(c)(2)(v)(B) are deemed to have been met, and written disclosures required by § 1026.9(c)(2)(v)(B) may be provided as soon as reasonably practicable after the first transaction subject to a rate that will be in effect for a specified period of time (a temporary rate) or the imposition of a fee that will be in effect for a specified period of time (a temporary fee) if: i. The consumer accepts the offer of the temporary rate or temporary fee by telephone; ii. The creditor permits the consumer to reject the temporary rate or temporary fee offer and have the rate or rates or fee that PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 previously applied to the consumer’s balances reinstated for 45 days after the creditor mails or delivers the written disclosures required by § 1026.9(c)(2)(v)(B), except that the creditor need not permit the consumer to reject a temporary rate or temporary fee offer if the rate or rates or fee that will apply following expiration of the temporary rate do not exceed the rate or rates or fee that applied immediately prior to commencement of the temporary rate or temporary fee; and iii. The disclosures required by § 1026.9(c)(2)(v)(B) and the consumer’s right to reject the temporary rate or temporary fee offer and have the rate or rates or fee that previously applied to the consumer’s account reinstated, if applicable, are disclosed to the consumer as part of the temporary rate or temporary fee offer. 6. First listing. The disclosures required by § 1026.9(c)(2)(v)(B)(1) are only required to be provided in close proximity and in equal prominence to the first listing of the temporary rate or fee in the disclosure provided to the consumer. For purposes of § 1026.9(c)(2)(v)(B), the first statement of the temporary rate or fee is the most prominent listing on the front side of the first page of the disclosure. If the temporary rate or fee does not appear on the front side of the first page of the disclosure, then the first listing of the temporary rate or fee is the most prominent listing of the temporary rate on the subsequent pages of the disclosure. For advertising requirements for promotional rates, see § 1026.16(g). 7. Close proximity—point of sale. Creditors providing the disclosures required by § 1026.9(c)(2)(v)(B) of this section in person in connection with financing the purchase of goods or services may, at the creditor’s option, disclose the annual percentage rate or fee that would apply after expiration of the period on a separate page or document from the temporary rate or fee and the length of the period, provided that the disclosure of the annual percentage rate or fee that would apply after the expiration of the period is equally prominent to, and is provided at the same time as, the disclosure of the temporary rate or fee and length of the period. 8. Disclosure of annual percentage rates. If a rate disclosed pursuant to § 1026.9(c)(2)(v)(B) or (c)(2)(v)(D) is a variable rate, the creditor must disclose the fact that the rate may vary and how the rate is determined. For example, a creditor could state ‘‘After October 1, 2009, your APR will be 14.99%. This APR will vary with the market based on the Prime Rate.’’ 9. Deferred interest or similar programs. If the applicable conditions are met, the exception in § 1026.9(c)(2)(v)(B) applies to deferred interest or similar promotional programs under which the consumer is not obligated to pay interest that accrues on a balance if that balance is paid in full prior to the expiration of a specified period of time. For purposes of this comment and § 1026.9(c)(2)(v)(B), ‘‘deferred interest’’ has the same meaning as in § 1026.16(h)(2) and associated commentary. For such programs, a creditor must disclose pursuant to § 1026.9(c)(2)(v)(B)(1) the length of the deferred interest period and the rate that will E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules apply to the balance subject to the deferred interest program if that balance is not paid in full prior to expiration of the deferred interest period. Examples of language that a creditor may use to make the required disclosures under § 1026.9(c)(2)(v)(B)(1) include: i. ‘‘No interest if paid in full in 6 months. If the balance is not paid in full in 6 months, interest will be imposed from the date of purchase at a rate of 15.99%.’’ ii. ‘‘No interest if paid in full by December 31, 2010. If the balance is not paid in full by that date, interest will be imposed from the transaction date at a rate of 15%.’’ 10. Relationship between §§ 1026.9(c)(2)(v)(B) and 1026.6(b). A disclosure of the information described in § 1026.9(c)(2)(v)(B)(1) provided in the account-opening table in accordance with § 1026.6(b) complies with the requirements of § 1026.9(c)(2)(v)(B)(2), if the listing of the introductory rate in such tabular disclosure also is the first listing as described in comment 9(c)(2)(v)–6. 11. Disclosure of the terms of a workout or temporary hardship arrangement. In order for the exception in § 1026.9(c)(2)(v)(D) to apply, the disclosure provided to the consumer pursuant to § 1026.9(c)(2)(v)(D)(2) must set forth: i. The annual percentage rate that will apply to balances subject to the workout or temporary hardship arrangement; ii. The annual percentage rate that will apply to such balances if the consumer completes or fails to comply with the terms of, the workout or temporary hardship arrangement; iii. Any reduced fee or charge of a type required to be disclosed under § 1026.6(b)(2)(ii), (b)(2)(iii), (b)(2)(viii), (b)(2)(ix), (b)(2)(xi), or (b)(2)(xii) that will apply to balances subject to the workout or temporary hardship arrangement, as well as the fee or charge that will apply if the consumer completes or fails to comply with the terms of the workout or temporary hardship arrangement; iv. Any reduced minimum periodic payment that will apply to balances subject to the workout or temporary hardship arrangement, as well as the minimum periodic payment that will apply if the consumer completes or fails to comply with the terms of the workout or temporary hardship arrangement; and v. If applicable, that the consumer must make timely minimum payments in order to remain eligible for the workout or temporary hardship arrangement. 12. Index not under creditor’s control. See comment 55(b)(2)–2 for guidance on when an index is deemed to be under a creditor’s control. 13. Temporary rates—relationship to § 1026.59. i. General. Section 1026.59 requires a card issuer to review rate increases imposed due to the revocation of a temporary rate. In some circumstances, § 1026.59 may require an issuer to reinstate a reduced temporary rate based on that review. If, based on a review required by § 1026.59, a creditor reinstates a temporary rate that had been revoked, the card issuer is not required to provide an additional notice to the consumer VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 when the reinstated temporary rate expires, if the card issuer provided the disclosures required by § 1026.9(c)(2)(v)(B) prior to the original commencement of the temporary rate. See § 1026.55 and the associated commentary for guidance on the permissibility and applicability of rate increases. i. Example. A consumer opens a new credit card account under an open-end (not homesecured) consumer credit plan on January 1, 2011. The annual percentage rate applicable to purchases is 18%. The card issuer offers the consumer a 15% rate on purchases made between January 1, 2012 and January 1, 2014. Prior to January 1, 2012, the card issuer discloses, in accordance with § 1026.9(c)(2)(v)(B), that the rate on purchases made during that period will increase to the standard 18% rate on January 1, 2014. In March 2012, the consumer makes a payment that is ten days late. The card issuer, upon providing 45 days’ advance notice of the change under § 1026.9(g), increases the rate on new purchases to 18% effective as of June 1, 2012. On December 1, 2012, the issuer performs a review of the consumer’s account in accordance with § 1026.59. Based on that review, the card issuer is required to reduce the rate to the original 15% temporary rate as of January 15, 2013. On January 1, 2014, the card issuer may increase the rate on purchases to 18%, as previously disclosed prior to January 1, 2012, without providing an additional notice to the consumer. 14. Replacing LIBOR. The exception in § 1026.9(c)(2)(v)(A) under which a creditor is not required to provide a change-in-terms notice under § 1026.9(c)(2) when the change involves a reduction of any component of a finance or other charge does not apply on or after October 1, 2021, to margin reductions when a LIBOR index is replaced as permitted by § 1026.55(b)(7)(i) or (b)(7)(ii). For changein-terms notices provided under § 1026.9(c)(2) on or after October 1, 2021, covering changes permitted by § 1026.55(b)(7)(i) or (b)(7)(ii), a creditor must provide a change-in-terms notice under § 1026.9(c)(2) disclosing the replacement index for a LIBOR index and any adjusted margin that is permitted under § 1026.55(b)(7)(i) or (b)(7)(ii), even if the margin is reduced. Prior to October 1, 2021, a creditor has the option of disclosing a reduced margin in the change-in-terms notice that discloses the replacement index for a LIBOR index as permitted by § 1026.55(b)(7)(i) or (b)(7)(ii). * * * * * Section 1026.20—Disclosure Requirements Regarding Post-Consummation Events 20(a) Refinancings 1. Definition. A refinancing is a new transaction requiring a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties’ contract and applicable law. The refinancing may involve the consolidation of several existing obligations, disbursement of new money to the consumer or on the consumer’s behalf, or PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 36987 the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the prior one. i. Changes in the terms of an existing obligation, such as the deferral of individual installments, will not constitute a refinancing unless accomplished by the cancellation of that obligation and the substitution of a new obligation. ii. A substitution of agreements that meets the refinancing definition will require new disclosures, even if the substitution does not substantially alter the prior credit terms. 2. Exceptions. A transaction is subject to § 1026.20(a) only if it meets the general definition of a refinancing. Section 1026.20(a)(1) through (5) lists 5 events that are not treated as refinancings, even if they are accomplished by cancellation of the old obligation and substitution of a new one. 3. Variable-rate. i. If a variable-rate feature was properly disclosed under the regulation, a rate change in accord with those disclosures is not a refinancing. For example, no new disclosures are required when the variable-rate feature is invoked on a renewable balloon-payment mortgage that was previously disclosed as a variable-rate transaction. ii. Even if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transaction subject to new disclosures results if the creditor either: A. Increases the rate based on a variablerate feature that was not previously disclosed; or B. Adds a variable-rate feature to the obligation. A creditor does not add a variable-rate feature by changing the index of a variable-rate transaction to a comparable index, whether the change replaces the existing index or substitutes an index for one that no longer exists. For example, a creditor does not add a variable-rate feature by changing the index of a variable-rate transaction from the 1-month, 3-month, 6month, or 1-year U.S. Dollar LIBOR index to the spread-adjusted index based on SOFR recommended by the Alternative Reference Rates Committee to replace the 1-month, 3month, 6-month, or 1-year U.S. Dollar LIBOR index respectively because the replacement index is a comparable index to the corresponding U.S. Dollar LIBOR index. iii. If either of the events in paragraph 20(a)–3.ii.A or ii.B occurs in a transaction secured by a principal dwelling with a term longer than one year, the disclosures required under § 1026.19(b) also must be given at that time. 4. Unearned finance charge. In a transaction involving precomputed finance charges, the creditor must include in the finance charge on the refinanced obligation any unearned portion of the original finance charge that is not rebated to the consumer or credited against the underlying obligation. For example, in a transaction with an addon finance charge, a creditor advances new money to a consumer in a fashion that extinguishes the original obligation and replaces it with a new one. The creditor neither refunds the unearned finance charge on the original obligation to the consumer E:\FR\FM\18JNP2.SGM 18JNP2 36988 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules nor credits it to the remaining balance on the old obligation. Under these circumstances, the unearned finance charge must be included in the finance charge on the new obligation and reflected in the annual percentage rate disclosed on refinancing. Accrued but unpaid finance charges are included in the amount financed in the new obligation. 5. Coverage. Section 1026.20(a) applies only to refinancings undertaken by the original creditor or a holder or servicer of the original obligation. A ‘‘refinancing’’ by any other person is a new transaction under the regulation, not a refinancing under this section. Paragraph 20(a)(1) 1. Renewal. This exception applies both to obligations with a single payment of principal and interest and to obligations with periodic payments of interest and a final payment of principal. In determining whether a new obligation replacing an old one is a renewal of the original terms or a refinancing, the creditor may consider it a renewal even if: i. Accrued unpaid interest is added to the principal balance. ii. Changes are made in the terms of renewal resulting from the factors listed in § 1026.17(c)(3). iii. The principal at renewal is reduced by a curtailment of the obligation. Paragraph 20(a)(2) 1. Annual percentage rate reduction. A reduction in the annual percentage rate with a corresponding change in the payment schedule is not a refinancing. If the annual percentage rate is subsequently increased (even though it remains below its original level) and the increase is effected in such a way that the old obligation is satisfied and replaced, new disclosures must then be made. 2. Corresponding change. A corresponding change in the payment schedule to implement a lower annual percentage rate would be a shortening of the maturity, or a reduction in the payment amount or the number of payments of an obligation. The exception in § 1026.20(a)(2) does not apply if the maturity is lengthened, or if the payment amount or number of payments is increased beyond that remaining on the existing transaction. Paragraph 20(a)(3) 1. Court agreements. This exception includes, for example, agreements such as reaffirmations of debts discharged in bankruptcy, settlement agreements, and postjudgment agreements. (See the commentary to § 1026.2(a)(14) for a discussion of courtapproved agreements that are not considered ‘‘credit.’’) Paragraph 20(a)(4) 1. Workout agreements. A workout agreement is not a refinancing unless the annual percentage rate is increased or additional credit is advanced beyond amounts already accrued plus insurance premiums. Paragraph 20(a)(5) 1. Insurance renewal. The renewal of optional insurance added to an existing VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 credit transaction is not a refinancing, assuming that appropriate Truth in Lending disclosures were provided for the initial purchase of the insurance. * * * * * Section 1026.37—Content of Disclosures for Certain Mortgage Transactions (Loan Estimate) * * * * * 37(j)(1) Index and Margin 1. Index and margin. The index disclosed pursuant to § 1026.37(j)(1) must be stated such that a consumer reasonably can identify it. A common abbreviation or acronym of the name of the index may be disclosed in place of the proper name of the index, if it is a commonly used public method of identifying the index. For example, ‘‘SOFR’’ may be disclosed instead of Secured Overnight Financing Rate. The margin should be disclosed as a percentage. For example, if the contract determines the interest rate by adding 4.25 percentage points to the index, the margin should be disclosed as ‘‘4.25%.’’ * * * * * Section 1026.40—Requirements for HomeEquity Plans * * * * * Paragraph 40(f)(3)(ii) 1. Replacing LIBOR. A creditor may use either the provision in § 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B) to replace a LIBOR index used under a plan so long as the applicable conditions are met for the provision used. Neither provision, however, excuses the creditor from noncompliance with contractual provisions. The following examples illustrate when a creditor may use the provisions in § 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B) to replace the LIBOR index used under a plan. i. Assume that LIBOR becomes unavailable after March 15, 2021, and assume a contract provides that a creditor may not replace an index unilaterally under a plan unless the original index becomes unavailable and provides that the replacement index and replacement margin will result in an annual percentage rate substantially similar to a rate that is in effect when the original index becomes unavailable. In this case, the creditor may use § 1026.40(f)(3)(ii)(A) to replace the LIBOR index used under the plan so long as the conditions of that provision are met. Section 1026.40(f)(3)(ii)(B) provides that a creditor may replace the LIBOR index if, among other conditions, the replacement index value in effect on December 31, 2020, and replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. In this case, however, the creditor would be contractually prohibited from replacing the LIBOR index used under the plan unless the replacement index and replacement margin also will produce an annual percentage rate substantially similar to a rate that is in effect when the LIBOR index becomes unavailable. PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 ii. Assume that LIBOR becomes unavailable after March 15, 2021, and assume a contract provides that a creditor may not replace an index unilaterally under a plan unless the original index becomes unavailable but does not require that the replacement index and replacement margin will result in an annual percentage rate substantially similar to a rate that is in effect when the original index becomes unavailable. In this case, the creditor would be contractually prohibited from unilaterally replacing a LIBOR index used under the plan until it becomes unavailable. At that time, the creditor has the option of using § 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B) to replace the LIBOR index if the conditions of the applicable provision are met. iii. Assume that LIBOR becomes unavailable after March 15, 2021, and assume a contract provides that a creditor may change the terms of the contract (including the index) as permitted by law. In this case, if the creditor replaces a LIBOR index under a plan on or after March 15, 2021, but does not wait until the LIBOR index becomes unavailable to do so, the creditor may only use § 1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of that provision are met. In this case, the creditor may not use § 1026.40(f)(3)(ii)(A). If the creditor waits until the LIBOR index used under the plan becomes unavailable to replace the LIBOR index, the creditor has the option of using § 1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B) to replace the LIBOR index if the conditions of the applicable provision are met. Paragraph 40(f)(3)(ii)(A) 1. Substitution of index. A creditor may change the index and margin used under the plan if the original index becomes unavailable, as long as historical fluctuations in the original and replacement indices were substantially similar, and as long as the replacement index and replacement margin will produce a rate substantially similar to the rate that was in effect at the time the original index became unavailable. If the replacement index is newly established and therefore does not have any rate history, it may be used if it and the replacement margin will produce a rate substantially similar to the rate in effect when the original index became unavailable. 2. Replacing LIBOR. For purposes of replacing a LIBOR index used under a plan, a replacement index that is not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index used under the plan, considering the historical fluctuations up through when the LIBOR index becomes unavailable or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. i. The Bureau has determined that effective [applicable date] the prime rate published in the Wall Street Journal has historical fluctuations that are substantially similar to those of the 1-month and 3-month U.S. Dollar LIBOR indices. In order to use this prime rate as the replacement index for the 1-month or 3-month U.S. Dollar LIBOR index, the creditor also must comply with the condition E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules in § 1026.40(f)(3)(ii)(A) that the prime rate and replacement margin would have resulted in an annual percentage rate substantially similar to the rate in effect at the time the LIBOR index became unavailable. See also comment 40(f)(3)(ii)(A)–3. ii. The Bureau has determined that effective [applicable date] the spreadadjusted indices based on SOFR recommended by the Alternative Reference Rates Committee to replace the 1-month, 3month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. In order to use this SOFR-based spread-adjusted index as the replacement index for the applicable LIBOR index, the creditor also must comply with the condition in § 1026.40(f)(3)(ii)(A) that the SOFR-based spread-adjusted index and replacement margin would have resulted in an annual percentage rate substantially similar to the rate in effect at the time the LIBOR index became unavailable. See also comment 40(f)(3)(ii)(A)–3. 3. Substantially similar rate when LIBOR becomes unavailable. Under § 1026.40(f)(3)(ii)(A), the replacement index and replacement margin must produce an annual percentage rate substantially similar to the rate that was in effect based on the LIBOR index used under the plan when the LIBOR index became unavailable. For this comparison of the rates, a creditor must use the value of the replacement index and the LIBOR index on the day that LIBOR becomes unavailable. The replacement index and replacement margin are not required to produce an annual percentage rate that is substantially similar on the day that the replacement index and replacement margin become effective on the plan. The following example illustrates this comment. i. Assume that the LIBOR index used under a plan becomes unavailable on December 31, 2021, and on that day the LIBOR index value is 2%, the margin is 10%, and the annual percentage rate is 12%. Also, assume that a creditor has selected a prime index as the replacement index, and the value of the prime index is 5% on December 31, 2021. The creditor would satisfy the requirement to use a replacement index and replacement margin that will produce an annual percentage rate substantially similar to the rate that was in effect when the LIBOR index used under the plan became unavailable by selecting a 7% replacement margin. (The prime index value of 5% and the replacement margin of 7% would produce a rate of 12% on December 31, 2021.) Thus, if the creditor provides a change-in-terms notice under § 1026.9(c)(1) on January 2, 2022, disclosing the prime index as the replacement index and a replacement margin of 7%, where these changes will become effective on January 18, 2022, the creditor satisfies the requirement to use a replacement index and replacement margin that will produce an annual percentage rate substantially similar to the rate that was in effect when the LIBOR index used under the plan became unavailable. This is true even if the prime index value changes after December 31, 2021, and the annual VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 percentage rate calculated using the prime index value and 7% margin on January 18, 2022, is not substantially similar to the rate calculated using the LIBOR index value on December 31, 2021. Paragraph 40(f)(3)(ii)(B) 1. Replacing LIBOR. For purposes of replacing a LIBOR index used under a plan, a replacement index that is not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index used under the plan, considering the historical fluctuations up through December 31, 2020, or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. i. The Bureau has determined that effective [applicable date] the prime rate published in the Wall Street Journal has historical fluctuations that are substantially similar to those of the 1-month and 3-month U.S. Dollar LIBOR indices. In order to use this prime rate as the replacement index for the 1-month or 3-month U.S. Dollar LIBOR index, the creditor also must comply with the condition in § 1026.40(f)(3)(ii)(B) that the prime rate index value in effect on December 31, 2020, and replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the prime rate is not published on December 31, 2020, the creditor must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the prime rate must be substantially similar to the rate based on the LIBOR index. See also comments 40(f)(3)(ii)(B)–2 and –3. ii. The Bureau has determined that effective [applicable date] the spreadadjusted indices based on SOFR recommended by the Alternative Reference Rates Committee to replace the 1-month, 3month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. In order to use this SOFR-based spread-adjusted index as the replacement index for the applicable LIBOR index, the creditor also must comply with the condition in § 1026.40(f)(3)(ii)(B) that the SOFR-based spread-adjusted index value in effect on December 31, 2020, and replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the SOFR-based spreadadjusted index is not published on December 31, 2020, the creditor must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the SOFR-based spreadadjusted index must be substantially similar to the rate based on the LIBOR index. See also comments 40(f)(3)(ii)(B)–2 and –3. PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 36989 2. Using index values on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Under § 1026.40(f)(3)(ii)(B), if both the replacement index and the LIBOR index used under the plan are published on December 31, 2020, the replacement index value in effect on December 31, 2020, and replacement margin must produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan is the margin that applied to the variable rate immediately prior to when the creditor provides the change-in-terms notice disclosing the replacement index for the variable rate. The following example illustrates this comment. i. Assume a variable rate used under the plan that is based on a LIBOR index and assume that LIBOR becomes unavailable after March 15, 2021. On December 31, 2020, the LIBOR index value is 2%, the margin on that day is 10% and the annual percentage rate using that index value and margin is 12%. Assume on January 1, 2021, a creditor provides a change-in-terms notice under § 1026.9(c)(1) disclosing a new margin of 12% for the variable rate pursuant to a written agreement under § 1026.40(f)(3)(iii), and this change in the margin becomes effective on January 1, 2021, pursuant to § 1026.9(c)(1). Assume that there are no more changes in the margin that is used in calculating the variable rate prior to February 27, 2021, the date on which the creditor provides a change-in-term notice under § 1026.9(c)(1), disclosing the replacement index and replacement margin for the variable rate that will be effective on March 15, 2021. In this case, the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan is 12%. Assume that the creditor has selected a prime index as the replacement index, and the value of the prime index is 5% on December 31, 2020. A replacement margin of 9% is permissible under § 1026.40(f)(3)(ii)(B) because that replacement margin combined with the prime index value of 5% on December 31, 2020, will produce an annual percentage rate of 14%, which is substantially similar to the 14% annual percentage rate calculated using the LIBOR index value in effect on December 31, 2020, (which is 2%) and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan (which is 12%). 3. Substantially similar rates using index values on December 31, 2020. Under § 1026.40(f)(3)(ii)(B), if both the replacement index and the LIBOR index used under the plan are published on December 31, 2020, the replacement index value in effect on December 31, 2020, and replacement margin must produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on E:\FR\FM\18JNP2.SGM 18JNP2 36990 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The replacement index and replacement margin are not required to produce an annual percentage rate that is substantially similar on the day that the replacement index and replacement margin become effective on the plan. The following example illustrates this comment. i. Assume that the LIBOR index used under the plan has a value of 2% on December 31, 2020, the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan is 10%, and the annual percentage rate based on that LIBOR index value and that margin is 12%. Also, assume that the creditor has selected a prime index as the replacement index, and the value of the prime index is 5% on December 31, 2020. A creditor would satisfy the requirement to use a replacement index value in effect on December 31, 2020, and replacement margin that will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan, by selecting a 7% replacement margin. (The prime index value of 5% and the replacement margin of 7% would produce a rate of 12%.) Thus, if the creditor provides a change-in-terms notice under § 1026.9(c)(1) on February 27, 2021, disclosing the prime index as the replacement index and a replacement margin of 7%, where these changes will become effective on March 15, 2021, the creditor satisfies the requirement to use a replacement index value in effect on December 31, 2020, and replacement margin that will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. This is true even if the prime index value or the LIBOR index value changes after December 31, 2020, and the annual percentage rate calculated using the prime index value and 7% margin on March 15, 2021, is not substantially similar to the rate calculated using the LIBOR index value on December 31, 2020, or substantially similar to the rate calculated using the LIBOR index value on March 15, 2021. * * * * * Section 1026.55—Limitations on Increasing Annual Percentage Rates, Fees, and Charges * * * * * 55(b)(2) Variable Rate Exception 1. Increases due to increase in index. Section 1026.55(b)(2) provides that an annual percentage rate that varies according to an index that is not under the card issuer’s control and is available to the general public may be increased due to an increase in the index. This section does not permit a card issuer to increase the rate by changing the method used to determine a rate that varies with an index (such as by increasing the margin), even if that change will not result VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 in an immediate increase. However, from time to time, a card issuer may change the day on which index values are measured to determine changes to the rate. 2. Index not under card issuer’s control. A card issuer may increase a variable annual percentage rate pursuant to § 1026.55(b)(2) only if the increase is based on an index or indices outside the card issuer’s control. For purposes of § 1026.55(b)(2), an index is under the card issuer’s control if: i. The index is the card issuer’s own prime rate or cost of funds. A card issuer is permitted, however, to use a published prime rate, such as that in the Wall Street Journal, even if the card issuer’s own prime rate is one of several rates used to establish the published rate. ii. The variable rate is subject to a fixed minimum rate or similar requirement that does not permit the variable rate to decrease consistent with reductions in the index. A card issuer is permitted, however, to establish a fixed maximum rate that does not permit the variable rate to increase consistent with increases in an index. For example, assume that, under the terms of an account, a variable rate will be adjusted monthly by adding a margin of 5 percentage points to a publicly-available index. When the account is opened, the index is 10% and therefore the variable rate is 15%. If the terms of the account provide that the variable rate will not decrease below 15% even if the index decreases below 10%, the card issuer cannot increase that rate pursuant to § 1026.55(b)(2). However, § 1026.55(b)(2) does not prohibit the card issuer from providing in the terms of the account that the variable rate will not increase above a certain amount (such as 20%). iii. The variable rate can be calculated based on any index value during a period of time (such as the 90 days preceding the last day of a billing cycle). A card issuer is permitted, however, to provide in the terms of the account that the variable rate will be calculated based on the average index value during a specified period. In the alternative, the card issuer is permitted to provide in the terms of the account that the variable rate will be calculated based on the index value on a specific day (such as the last day of a billing cycle). For example, assume that the terms of an account provide that a variable rate will be adjusted at the beginning of each quarter by adding a margin of 7 percentage points to a publicly-available index. At account opening at the beginning of the first quarter, the variable rate is 17% (based on an index value of 10%). During the first quarter, the index varies between 9.8% and 10.5% with an average value of 10.1%. On the last day of the first quarter, the index value is 10.2%. At the beginning of the second quarter, § 1026.55(b)(2) does not permit the card issuer to increase the variable rate to 17.5% based on the first quarter’s maximum index value of 10.5%. However, if the terms of the account provide that the variable rate will be calculated based on the average index value during the prior quarter, § 1026.55(b)(2) permits the card issuer to increase the variable rate to 17.1% (based on the average index value of 10.1% during the first quarter). In the alternative, if the terms of the PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 account provide that the variable rate will be calculated based on the index value on the last day of the prior quarter, § 1026.55(b)(2) permits the card issuer to increase the variable rate to 17.2% (based on the index value of 10.2% on the last day of the first quarter). 3. Publicly available. The index or indices must be available to the public. A publiclyavailable index need not be published in a newspaper, but it must be one the consumer can independently obtain (by telephone, for example) and use to verify the annual percentage rate applied to the account. 4. Changing a non-variable rate to a variable rate. Section 1026.55 generally prohibits a card issuer from changing a nonvariable annual percentage rate to a variable annual percentage rate because such a change can result in an increase. However, a card issuer may change a non-variable rate to a variable rate to the extent permitted by one of the exceptions in § 1026.55(b). For example, § 1026.55(b)(1) permits a card issuer to change a non-variable rate to a variable rate upon expiration of a specified period of time. Similarly, following the first year after the account is opened, § 1026.55(b)(3) permits a card issuer to change a non-variable rate to a variable rate with respect to new transactions (after complying with the notice requirements in § 1026.9(b), (c) or (g)). 5. Changing a variable rate to a nonvariable rate. Nothing in § 1026.55 prohibits a card issuer from changing a variable annual percentage rate to an equal or lower nonvariable rate. Whether the non-variable rate is equal to or lower than the variable rate is determined at the time the card issuer provides the notice required by § 1026.9(c). For example, assume that on March 1 a variable annual percentage rate that is currently 15% applies to a balance of $2,000 and the card issuer sends a notice pursuant to § 1026.9(c) informing the consumer that the variable rate will be converted to a nonvariable rate of 14% effective April 15. On April 15, the card issuer may apply the 14% non-variable rate to the $2,000 balance and to new transactions even if the variable rate on March 2 or a later date was less than 14%. * * * * * 55(b)(7) Index Replacement and Margin Change Exception 1. Replacing LIBOR. A card issuer may use either the provision in § 1026.55(b)(7)(i) or (b)(7)(ii) to replace a LIBOR index used under the plan so long as the applicable conditions are met for the provision used. Neither provision, however, excuses the card issuer from noncompliance with contractual provisions. The following examples illustrate when a card issuer may use the provisions in § 1026.55(b)(7)(i) or (b)(7)(ii) to replace a LIBOR index on the plan. i. Assume that LIBOR becomes unavailable after March 15, 2021, and assume a contract provides that a card issuer may not replace an index unilaterally under a plan unless the original index becomes unavailable and provides that the replacement index and replacement margin will result in an annual percentage rate substantially similar to a rate that is in effect when the original index E:\FR\FM\18JNP2.SGM 18JNP2 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules becomes unavailable. The card issuer may use § 1026.55(b)(7)(i) to replace the LIBOR index used under the plan so long as the conditions of that provision are met. Section 1026.55(b)(7)(ii) provides that a card issuer may replace the LIBOR index if, among other conditions, the replacement index value in effect on December 31, 2020, and replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. In this case, however, the card issuer would be contractually prohibited from replacing the LIBOR index used under the plan unless the replacement index and replacement margin also will produce an annual percentage rate substantially similar to a rate that is in effect when the LIBOR index becomes unavailable. ii. Assume that LIBOR becomes unavailable after March 15, 2021, and assume a contract provides that a card issuer may not replace an index unilaterally under a plan unless the original index becomes unavailable but does not require that the replacement index and replacement margin will result in an annual percentage rate substantially similar to a rate that is in effect when the original index becomes unavailable. In this case, the card issuer would be contractually prohibited from unilaterally replacing the LIBOR index used under the plan until it becomes unavailable. At that time, the card issuer has the option of using § 1026.55(b)(7)(i) or (b)(7)(ii) to replace the LIBOR index used under the plan if the conditions of the applicable provision are met. iii. Assume that LIBOR becomes unavailable after March 15, 2021, and assume a contract provides that a card issuer may change the terms of the contract (including the index) as permitted by law. In this case, if the card issuer replaces the LIBOR index used under the plan on or after March 15, 2021, but does not wait until the LIBOR index becomes unavailable to do so, the card issuer may only use § 1026.55(b)(7)(ii) to replace the LIBOR index if the conditions of that provision are met. In that case, the card issuer may not use § 1026.55(b)(7)(i). If the card issuer waits until the LIBOR index used under the plan becomes unavailable to replace LIBOR, the card issuer has the option of using § 1026.55(b)(7)(i) or (b)(7)(ii) to replace the LIBOR index if the conditions of the applicable provisions are met. Paragraph 55(b)(7)(i) 1. Replacing LIBOR. For purposes of replacing a LIBOR index used under a plan, a replacement index that is not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index used under the plan, considering the historical fluctuations up through when the LIBOR index becomes unavailable or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. i. The Bureau has determined that effective [applicable date] the prime rate published in VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 the Wall Street Journal has historical fluctuations that are substantially similar to those of the 1-month and 3-month U.S. Dollar LIBOR indices. In order to use this prime rate as the replacement index for the 1-month or 3-month U.S. Dollar LIBOR index, the card issuer also must comply with the condition in § 1026.55(b)(7)(i) that the prime rate and replacement margin will produce a rate substantially similar to the rate that was in effect at the time the LIBOR index became unavailable. See also comment 55(b)(7)(i)–2. ii. The Bureau has determined that effective [applicable date] the spreadadjusted indices based on SOFR recommended by the Alternative Reference Rates Committee to replace the 1-month, 3month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. In order to use this SOFR-based spread-adjusted index as the replacement index for the applicable LIBOR index, the card issuer also must comply with the condition in § 1026.55(b)(7)(i) that the SOFR-based spread-adjusted index replacement margin will produce a rate substantially similar to the rate that was in effect at the time the LIBOR index became unavailable. See also comment 55(b)(7)(i)–2. 2. Substantially similar rate when LIBOR becomes unavailable. Under § 1026.55(b)(7)(i), the replacement index and replacement margin must produce an annual percentage rate substantially similar to the rate that was in effect at the time the LIBOR index used under the plan became unavailable. For this comparison of the rates, a card issuer must use the value of the replacement index and the LIBOR index on the day that LIBOR becomes unavailable. The replacement index and replacement margin are not required to produce an annual percentage rate that is substantially similar on the day that the replacement index and replacement margin become effective on the plan. The following example illustrates this comment. i. Assume that the LIBOR index used under the plan becomes unavailable on December 31, 2021, and on that day the LIBOR value is 2%, the margin is 10%, and the annual percentage rate is 12%. Also, assume that a card issuer has selected a prime index as the replacement index, and the value of the prime index is 5% on December 31, 2021. The card issuer would satisfy the requirement to use a replacement index and replacement margin that will produce an annual percentage rate substantially similar to the rate that was in effect when the LIBOR index used under the plan became unavailable by selecting a 7% replacement margin. (The prime index value of 5% and the replacement margin of 7% would produce a rate of 12% on December 31, 2021.) Thus, if the card issuer provides a change-in-terms notice under § 1026.9(c)(2) on January 2, 2022, disclosing the prime index as the replacement index and a replacement margin of 7%, where these changes will become effective on February 17, 2022, the card issuer satisfies the requirement to use a replacement index and PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 36991 replacement margin that will produce an annual percentage rate substantially similar to the rate that was in effect when the LIBOR index used under the plan became unavailable. This is true even if the prime index value changes after December 31, 2021, and the annual percentage rate calculated using the prime index value and 7% margin on February 17, 2022, is not substantially similar to the rate calculated using the LIBOR index value on December 31, 2021. Paragraph 55(b)(7)(ii) 1. Replacing LIBOR. For purposes of replacing a LIBOR index used under a plan, a replacement index that is not newly established must have historical fluctuations that are substantially similar to those of the LIBOR index used under the plan, considering the historical fluctuations up through December 31, 2020, or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. i. The Bureau has determined that effective [applicable date] the prime rate published in the Wall Street Journal has historical fluctuations that are substantially similar to those of the 1-month and 3-month U.S. Dollar LIBOR indices. In order to use this prime rate as the replacement index for the 1-month or 3-month U.S. Dollar LIBOR index, the card issuer also must comply with the condition in § 1026.55(b)(7)(ii) that the prime rate index value in effect on December 31, 2020, and replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the prime rate is not published on December 31, 2020, the card issuer must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the prime rate must be substantially similar to the rate based on the LIBOR index. See also comments 55(b)(7)(ii)–2 and –3. ii. The Bureau has determined that effective [applicable date] the spreadadjusted indices based on SOFR recommended by the Alternative Reference Rates Committee to replace the 1-month, 3month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. In order to use this SOFR-based spread-adjusted index as the replacement index for the applicable LIBOR index, the card issuer also must comply with the condition in § 1026.55(b)(7)(ii) that the SOFR-based spread-adjusted index value in effect on December 31, 2020, and replacement margin will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. If either the LIBOR index or the SOFR-based spread-adjusted index is not published on December 31, 2020, the card E:\FR\FM\18JNP2.SGM 18JNP2 36992 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules issuer must use the next calendar day that both indices are published as the date on which the annual percentage rate based on the SOFR-based spread-adjusted index must be substantially similar to the rate based on the LIBOR index. See also comments 55(b)(7)(ii)–2 and –3. 2. Using index values on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. Under § 1026.55(b)(7)(ii), if both the replacement index and the LIBOR index used under the plan are published on December 31, 2020, the replacement index value in effect on December 31, 2020, and replacement margin must produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. The margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan is the margin that applied to the variable rate immediately prior to when the card issuer provides the change-in-terms notice disclosing the replacement index for the variable rate. The following examples illustrate how to determine the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. i. Assume a variable rate used under the plan that is based on a LIBOR index, and assume that LIBOR becomes unavailable after March 15, 2021. On December 31, 2020, the LIBOR index value is 2%, the margin on that day is 10% and the annual percentage rate using that index value and margin is 12%. Assume that on November 16, 2020, pursuant to § 1026.55(b)(3), a card issuer provides a change-in-terms notice under § 1026.9(c)(2) disclosing a new margin of 12% for the variable rate that will apply to new transactions after November 30, 2020, and this change in the margin becomes effective on January 1, 2021. The margin for the variable rate applicable to the transactions that occurred on or prior to November 30, 2020, remains at 10%. Assume that there are no more changes in the margin used on the variable rate that applied to transactions that occurred after November 30, 2020, or to the margin used on the variable rate that applied to transactions that occurred on or prior to November 30, 2020, prior to when the card issuer provides a change-in-terms notice on January 28, 2021, disclosing the replacement index and replacement margins for both variable rates that will be effective on March 15, 2021. In this case, the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan for transactions that occurred on or prior to November 30, 2020, is 10%. The margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan for transactions that occurred after November 30, 2020, is 12%. Assume that the card issuer has selected a prime index as the replacement index, and the value of the prime index is 5% on December 31, 2020. A VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 replacement margin of 7% is permissible under § 1026.55(b)(7)(ii) for transactions that occurred on or prior to November 30, 2020, because that replacement margin combined with the prime index value of 5% on December 31, 2020, will produce an annual percentage rate of 12%, which is substantially similar to the 12% annual percentage rate calculated using the LIBOR index value in effect on December 31, 2020, (which is 2%) and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan for that balance (which is 10%). A replacement margin of 9% is permissible under § 1026.55(b)(7)(ii) for transactions that occurred after November 30, 2020, because that replacement margin combined with the prime index value of 5% on December 31, 2020, will produce an annual percentage rate of 14%, which is substantially similar to the 14% annual percentage rate calculated using the LIBOR index value in effect on December 31, 2020, (which is 2%) and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan for transactions that occurred after November 30, 2020, (which is 12%). ii. Assume a variable rate used under the plan that is based on a LIBOR index, and assume that LIBOR becomes unavailable after March 15, 2021. On December 31, 2020, the LIBOR index value is 2%, the margin on that day is 10% and the annual percentage rate using that index value and margin is 12%. Assume that on November 16, 2020, pursuant to § 1026.55(b)(4), a card issuer provides a penalty rate notice under § 1026.9(g) increasing the margin for the variable rate to 20% that will apply to both outstanding balances and new transactions effective January 1, 2021, because the consumer was more than 60 days late in making a minimum payment. Assume that there are no more changes in the margin used on the variable rate for either the outstanding balance or new transactions prior to January 28, 2021, the date on which the card issuer provides a change-in-terms notice under § 1026.9(c)(2) disclosing the replacement index and replacement margin for the variable rate that will be effective on March 15, 2021. The margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan for the outstanding balance and new transactions is 12%. Assume that the card issuer has selected a prime index as the replacement index, and the value of the prime index is 5% on December 31, 2020. A replacement margin of 17% is permissible under § 1026.55(b)(7)(ii) for the outstanding balance and new transactions because that replacement margin combined with the prime index value of 5% on December 31, 2020, will produce an annual percentage rate of 22%, which is substantially similar to the 22% annual percentage rate calculated using the LIBOR index value in effect on December 31, 2020, (which is 2%) and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan for the outstanding balance and new transactions (which is 20%). 3. Substantially similar rate using index values on December 31, 2020. Under PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 § 1026.55(b)(7)(ii), if both the replacement index and the LIBOR index used under the plan are published on December 31, 2020, the replacement index value in effect on December 31, 2020, and replacement margin must produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. A card issuer is not required to produce an annual percentage rate that is substantially similar on the day that the replacement index and replacement margin become effective on the plan. The following example illustrates this comment. i. Assume that the LIBOR index used under the plan has a value of 2% on December 31, 2020, the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan is 10%, and the annual percentage rate based on that LIBOR index value and that margin is 12%. Also, assume that the card issuer has selected a prime index as the replacement index, and the value of the prime index is 5% on December 31, 2020. A card issuer would satisfy the requirement to use a replacement index value in effect on December 31, 2020, and replacement margin that will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR index value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan, by selecting a 7% replacement margin. (The prime index value of 5% and the replacement margin of 7% would produce a rate of 12%.) Thus, if the card issuer provides a change-in-terms notice under § 1026.9(c)(2) on January 28, 2021, disclosing the prime index as the replacement index and a replacement margin of 7%, where these changes will become effective on March 15, 2021, the card issuer satisfies the requirement to use a replacement index value in effect on December 31, 2020, and replacement margin that will produce an annual percentage rate substantially similar to the rate calculated using the LIBOR value in effect on December 31, 2020, and the margin that applied to the variable rate immediately prior to the replacement of the LIBOR index used under the plan. This is true even if the prime index value or the LIBOR value change after December 31, 2020, and the annual percentage rate calculated using the prime index value and 7% margin on March 15, 2021, is not substantially similar to the rate calculated using the LIBOR index value on December 31, 2020, or substantially similar to the rate calculated using the LIBOR index value on March 15, 2021. * * * * * Section 1026.59—Reevaluation of Rate Increases * * * * * 59(d) Factors 1. Change in factors. A creditor that complies with § 1026.59(a) by reviewing the factors it currently considers in determining E:\FR\FM\18JNP2.SGM 18JNP2 36993 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules the annual percentage rates applicable to similar new credit card accounts may change those factors from time to time. When a creditor changes the factors it considers in determining the annual percentage rates applicable to similar new credit card accounts from time to time, it may comply with § 1026.59(a) by reviewing the set of factors it considered immediately prior to the change in factors for a brief transition period, or may consider the new factors. For example, a creditor changes the factors it uses to determine the rates applicable to similar new credit card accounts on January 1, 2012. The creditor reviews the rates applicable to its existing accounts that have been subject to a rate increase pursuant to § 1026.59(a) on January 25, 2012. The creditor complies with § 1026.59(a) by reviewing, at its option, either the factors that it considered on December 31, 2011 when determining the rates applicable to similar new credit card accounts or the factors that it considers as of January 25, 2012. For purposes of compliance with § 1026.59(d), a transition period of 60 days from the change of factors constitutes a brief transition period. 2. Comparison of existing account to factors used for similar new accounts. Under § 1026.59(a), if a card issuer evaluates an existing account using the same factors that it considers in determining the rates applicable to similar new accounts, the review of factors need not result in existing accounts being subject to exactly the same rates and rate structure as a card issuer imposes on similar new accounts. For example, a card issuer may offer variable rates on similar new accounts that are computed by adding a margin that depends on various factors to the value of a SOFR index. The account that the card issuer is required to review pursuant to § 1026.59(a) may have variable rates that were determined by adding a different margin, depending on different factors, to a published prime index. In performing the review required by § 1026.59(a), the card issuer may review the factors it uses to determine the rates applicable to similar new accounts. If a rate reduction is required, however, the card issuer need not base the variable rate for the existing account on the SOFR index but may continue to use the published prime index. Section 1026.59(a) requires, however, that the rate on the existing account after the reduction, as determined by adding the published prime index and margin, be comparable to the rate, as determined by adding the margin and the SOFR index, charged on a new account for which the factors are comparable. 3. Similar new credit card accounts. A card issuer complying with § 1026.59(d)(1)(ii) is required to consider the factors that the card issuer currently considers when determining the annual percentage rates applicable to similar new credit card accounts under an open-end (not home-secured) consumer credit plan. For example, a card issuer may review different factors in determining the annual percentage rate that applies to credit card plans for which the consumer pays an annual fee and receives rewards points than it reviews in determining the rates for credit card plans with no annual fee and no VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 rewards points. Similarly, a card issuer may review different factors in determining the annual percentage rate that applies to private label credit cards than it reviews in determining the rates applicable to credit cards that can be used at a wider variety of merchants. In addition, a card issuer may review different factors in determining the annual percentage rate that applies to private label credit cards usable only at Merchant A than it may review for private label credit cards usable only at Merchant B. However, § 1026.59(d)(1)(ii) requires a card issuer to review the factors it considers when determining the rates for new credit card accounts with similar features that are offered for similar purposes. 4. No similar new credit card accounts. In some circumstances, a card issuer that complies with § 1026.59(a) by reviewing the factors that it currently considers in determining the annual percentage rates applicable to similar new accounts may not be able to identify a class of new accounts that are similar to the existing accounts on which a rate increase has been imposed. For example, consumers may have existing credit card accounts under an open-end (not homesecured) consumer credit plan but the card issuer may no longer offer a product to new consumers with similar characteristics, such as the availability of rewards, size of credit line, or other features. Similarly, some consumers’ accounts may have been closed and therefore cannot be used for new transactions, while all new accounts can be used for new transactions. In those circumstances, § 1026.59 requires that the card issuer nonetheless perform a review of the rate increase on the existing customers’ accounts. A card issuer does not comply with § 1026.59 by maintaining an increased rate without performing such an evaluation. In such circumstances, § 1026.59(d)(1)(ii) requires that the card issuer compare the existing accounts to the most closely comparable new accounts that it offers. 5. Consideration of consumer’s conduct on existing account. A card issuer that complies with § 1026.59(a) by reviewing the factors that it currently considers in determining the annual percentage rates applicable to similar new accounts may consider the consumer’s payment or other account behavior on the existing account only to the same extent and in the same manner that the issuer considers such information when one of its current cardholders applies for a new account with the card issuer. For example, a card issuer might obtain consumer reports for all of its applicants. The consumer reports contain certain information regarding the applicant’s past performance on existing credit card accounts. However, the card issuer may have additional information about an existing cardholder’s payment history or account usage that does not appear in the consumer report and that, accordingly, it would not generally have for all new applicants. For example, a consumer may have made a payment that is five days late on his or her account with the card issuer, but this information does not appear on the consumer report. The card issuer may consider this additional information in performing its review under § 1026.59(a), but only to the PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 extent and in the manner that it considers such information if a current cardholder applies for a new account with the issuer. 6. Multiple rate increases between January 1, 2009 and February 21, 2010. i. General. Section 1026.59(d)(2) applies if an issuer increased the rate applicable to a credit card account under an open-end (not homesecured) consumer credit plan between January 1, 2009 and February 21, 2010, and the increase was not based solely upon factors specific to the consumer. In some cases, a credit card account may have been subject to multiple rate increases during the period from January 1, 2009 to February 21, 2010. Some such rate increases may have been based solely upon factors specific to the consumer, while others may have been based on factors not specific to the consumer, such as the issuer’s cost of funds or market conditions. In such circumstances, when conducting the first two reviews required under § 1026.59, the card issuer may separately review: (i) Rate increases imposed based on factors not specific to the consumer, using the factors described in § 1026.59(d)(1)(ii) (as required by § 1026.59(d)(2)); and (ii) rate increases imposed based on consumer-specific factors, using the factors described in § 1026.59(d)(1)(i). If the review of factors described in § 1026.59(d)(1)(i) indicates that it is appropriate to continue to apply a penalty or other increased rate to the account as a result of the consumer’s payment history or other factors specific to the consumer, § 1026.59 permits the card issuer to continue to impose the penalty or other increased rate, even if the review of the factors described in § 1026.59(d)(1)(ii) would otherwise require a rate decrease. i. Example. Assume a credit card account was subject to a rate of 15% on all transactions as of January 1, 2009. On May 1, 2009, the issuer increased the rate on existing balances and new transactions to 18%, based upon market conditions or other factors not specific to the consumer or the consumer’s account. Subsequently, on September 1, 2009, based on a payment that was received five days after the due date, the issuer increased the applicable rate on existing balances and new transactions from 18% to a penalty rate of 25%. When conducting the first review required under § 1026.59, the card issuer reviews the rate increase from 15% to 18% using the factors described in § 1026.59(d)(1)(ii) (as required by § 1026.59(d)(2)), and separately but concurrently reviews the rate increase from 18% to 25% using the factors described in paragraph § 1026.59(d)(1)(i). The review of the rate increase from 15% to 18% based upon the factors described in § 1026.59(d)(1)(ii) indicates that a similarly situated new consumer would receive a rate of 17%. The review of the rate increase from 18% to 25% based upon the factors described in § 1026.59(d)(1)(i) indicates that it is appropriate to continue to apply the 25% penalty rate based upon the consumer’s late payment. Section 1026.59 permits the rate on the account to remain at 25%. * E:\FR\FM\18JNP2.SGM * * 18JNP2 * * 36994 Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / Proposed Rules 59(f) Termination of Obligation To Review Factors 1. Revocation of temporary rates. i. In general. If an annual percentage rate is increased due to revocation of a temporary rate, § 1026.59(a) requires that the card issuer periodically review the increased rate. In contrast, if the rate increase results from the expiration of a temporary rate previously disclosed in accordance with § 1026.9(c)(2)(v)(B), the review requirements in § 1026.59(a) do not apply. If a temporary rate is revoked such that the requirements of § 1026.59(a) apply, § 1026.59(f) permits an issuer to terminate the review of the rate increase if and when the applicable rate is the same as the rate that would have applied if the increase had not occurred. ii. Examples. Assume that on January 1, 2011, a consumer opens a new credit card account under an open-end (not homesecured) consumer credit plan. The annual percentage rate applicable to purchases is 15%. The card issuer offers the consumer a 10% rate on purchases made between February 1, 2012 and August 1, 2013 and discloses pursuant to § 1026.9(c)(2)(v)(B) that on August 1, 2013 the rate on purchases will revert to the original 15% rate. The consumer makes a payment that is five days late in July 2012. A. Upon providing 45 days’ advance notice and to the extent permitted under § 1026.55, the card issuer increases the rate applicable to new purchases to 15%, effective on September 1, 2012. The card issuer must review that rate increase under § 1026.59(a) at least once each six months during the period from September 1, 2012 to August 1, 2013, unless and until the card issuer reduces the rate to 10%. The card issuer performs reviews of the rate increase on January 1, 2013 and July 1, 2013. Based on those reviews, the rate applicable to purchases remains at 15%. Beginning on August 1, 2013, the card issuer is not required to continue periodically reviewing the rate increase, because if the temporary rate had expired in accordance with its previously disclosed terms, the 15% rate would have applied to purchase balances as of August 1, 2013 even if the rate increase had not occurred on September 1, 2012. B. Same facts as above except that the review conducted on July 1, 2013 indicates that a reduction to the original temporary rate of 10% is appropriate. Section 1026.59(a)(2)(i) requires that the rate be reduced no later than 45 days after completion of the review, or no later than August 15, 2013. Because the temporary rate would have expired prior to the date on which the rate decrease is required to take effect, the card issuer may, at its option, reduce the rate to 10% for any portion of the period from July 1, 2013, to August 1, 2013, or may continue to impose the 15% rate for that entire period. The card issuer is not required to conduct further reviews of the 15% rate on purchases. C. Same facts as above except that on September 1, 2012 the card issuer increases the rate applicable to new purchases to the penalty rate on the consumer’s account, which is 25%. The card issuer conducts reviews of the increased rate in accordance VerDate Sep<11>2014 18:27 Jun 17, 2020 Jkt 250001 with § 1026.59 on January 1, 2013 and July 1, 2013. Based on those reviews, the rate applicable to purchases remains at 25%. The card issuer’s obligation to review the rate increase continues to apply after August 1, 2013, because the 25% penalty rate exceeds the 15% rate that would have applied if the temporary rate expired in accordance with its previously disclosed terms. The card issuer’s obligation to review the rate terminates if and when the annual percentage rate applicable to purchases is reduced to the 15% rate. 2. Example—relationship to § 1026.59(a). Assume that on January 1, 2011, a consumer opens a new credit card account under an open-end (not home-secured) consumer credit plan. The annual percentage rate applicable to purchases is 15%. Upon providing 45 days’ advance notice and to the extent permitted under § 1026.55, the card issuer increases the rate applicable to new purchases to 18%, effective on September 1, 2012. The card issuer conducts reviews of the increased rate in accordance with § 1026.59 on January 1, 2013 and July 1, 2013, based on the factors described in § 1026.59(d)(1)(ii). Based on the January 1, 2013 review, the rate applicable to purchases remains at 18%. In the review conducted on July 1, 2013, the card issuer determines that, based on the relevant factors, the rate it would offer on a comparable new account would be 14%. Consistent with § 1026.59(f), § 1026.59(a) requires that the card issuer reduce the rate on the existing account to the 15% rate that was in effect prior to the September 1, 2012 rate increase. 3. Transition from LIBOR. i. General. Effective March 15, 2021, in the case where the rate applicable immediately prior to the increase was a variable rate with a formula based on a LIBOR index, a card issuer may terminate the obligation to review if the card issuer reduces the annual percentage rate to a rate determined by a replacement formula that is derived from a replacement index value on December 31, 2020, plus replacement margin that is equal to the annual percentage rate of the LIBOR index value on December 31, 2020, plus the margin used to calculate the rate immediately prior to the increase (previous formula). ii. Examples. A. Assume that on March 15, 2021, the previous formula is a LIBOR index plus a margin of 10% equal to a 12% annual percentage rate. In this case, the LIBOR index value is 2%. The card issuer selects a prime index as the replacement index. The replacement formula used to derive the rate at which the card issuer may terminate its obligation to review factors must be set at a replacement index plus replacement margin that equals 12%. If the prime index is 4% on December 31, 2020, the replacement margin must be 8% in the replacement formula. The replacement formula for purposes of determining when the card issuer can terminate the obligation to review factors is the prime index plus 8%. B. Assume that on March 15, 2021, the account was not subject to § 1026.59 and the annual percentage rate was a LIBOR index plus a margin of 10% equal to 12%. On April 1, 2021, the card issuer raises the annual percentage rate to a LIBOR index plus a margin of 12% equal to 14%. On May 1, PO 00000 Frm 00058 Fmt 4701 Sfmt 9990 2021, the card issuer transitions the account from a LIBOR index in accordance with § 1026.55(b)(7)(i) or (b)(7)(ii). The card issuer selects a prime index as the replacement index with a value on December 31, 2020, of 4%. The replacement formula used to derive the rate at which the card issuer may terminate its obligation to review factors must be set at the value of a replacement index on December 31, 2020, plus replacement margin that equals 12%. In this example, the replacement formula is the prime index plus 8%. 4. Selecting a replacement index. In selecting a replacement index for purposes of § 1026.59(f)(3), the card issuer must meet the conditions for selecting a replacement index that are described in § 1026.55(b)(7)(ii) and comment 55(b)(7)(ii)–1. For example, a card issuer may select a replacement index that is not newly established for purposes of § 1026.59(f)(3), so long as the replacement index has historical fluctuations that are substantially similar to those of the LIBOR index used in the previous formula, considering the historical fluctuations up through December 31, 2020, or up through the date indicated in a Bureau determination that the replacement index and the LIBOR index have historical fluctuations that are substantially similar, whichever is earlier. The Bureau has determined that effective [applicable date] the prime rate published in the Wall Street Journal has historical fluctuations that are substantially similar to those of the 1-month and 3-month U.S. Dollar LIBOR indices. The Bureau also has determined that effective [applicable date] the spread-adjusted indices based on SOFR recommended by the Alternative Reference Rates Committee to replace the 1-month, 3month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical fluctuations that are substantially similar to those of the 1-month, 3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. See comment 55(b)(7)(ii)–1. Also, for purposes of § 1026.59(f)(3), a card issuer may select a replacement index that is newly established as described in § 1026.55(b)(7)(ii). * * * * * 59(h) Exceptions 1. Transition from LIBOR. The exception to the requirements of this section does not apply to rate increases already subject to § 1026.59 prior to the transition from the use of a LIBOR index as the index in setting a variable rate to the use of a different index in setting a variable rate where the change from the use of a LIBOR index to a different index occurred in accordance with § 1026.55(b)(7)(i) or (b)(7)(ii). Dated: June 2, 2020. Laura Galban, Federal Register Liaison, Bureau of Consumer Financial Protection. [FR Doc. 2020–12239 Filed 6–17–20; 8:45 am] BILLING CODE 4810–AM–P E:\FR\FM\18JNP2.SGM 18JNP2

Agencies

[Federal Register Volume 85, Number 118 (Thursday, June 18, 2020)]
[Proposed Rules]
[Pages 36938-36994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12239]



[[Page 36937]]

Vol. 85

Thursday,

No. 118

June 18, 2020

Part II





 Bureau of Consumer Financial Protection





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12 CFR Part 1026





Facilitating the LIBOR Transition (Regulation Z); Proposed Rule

Federal Register / Vol. 85, No. 118 / Thursday, June 18, 2020 / 
Proposed Rules

[[Page 36938]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2020-0014]
RIN 3170-AB01


Facilitating the LIBOR Transition (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is 
proposing to amend Regulation Z, which implements the Truth in Lending 
Act (TILA), generally to address the sunset of LIBOR, which is expected 
to be discontinued after 2021. Some creditors currently use LIBOR as an 
index for calculating rates for open-end and closed-end products. The 
Bureau is proposing changes to open-end and closed-end provisions to 
provide examples of replacement indices for LIBOR indices that meet 
certain Regulation Z standards. The Bureau also is proposing to permit 
creditors for home equity lines of credit (HELOCs) and card issuers for 
credit card accounts to transition existing accounts that use a LIBOR 
index to a replacement index on or after March 15, 2021, if certain 
conditions are met. The proposal also addresses change-in-terms notice 
provisions for HELOCs and credit card accounts and how they apply to 
accounts transitioning away from using a LIBOR index. Lastly, the 
Bureau is proposing to address how the rate reevaluation provisions 
applicable to credit card accounts apply to the transition from using a 
LIBOR index to a replacement index.

DATES: Comments must be received on or before August 4, 2020.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2020-
0014 or RIN 3170-AB01, by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include Docket No. CFPB-
2020-0014 or RIN 3170-AB01 in the subject line of the message.
     Hand Delivery/Mail/Courier: Comment Intake--LIBOR, Bureau 
of Consumer Financial Protection, 1700 G Street NW, Washington, DC 
20552. Please note that due to circumstances associated with the COVID-
19 pandemic, the Bureau discourages the submission of comments by hand 
delivery, mail, or courier.
    Instructions: The Bureau encourages the early submission of 
comments. All submissions should include the agency name and docket 
number or Regulatory Information Number (RIN) for this rulemaking. 
Because paper mail in the Washington, DC area and at the Bureau is 
subject to delay, and in light of difficulties associated with mail and 
hand deliveries during the COVID-19 pandemic, commenters are encouraged 
to submit comments electronically. In general, all comments received 
will be posted without change to https://www.regulations.gov. In 
addition, once the Bureau's headquarters reopens, comments will be 
available for public inspection and copying at 1700 G Street NW, 
Washington, DC 20552, on official business days between the hours of 10 
a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment 
to inspect the documents by telephoning 202-435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Proprietary information or sensitive personal information, such as 
account numbers or Social Security numbers, or names of other 
individuals, should not be included. Comments will not be edited to 
remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Angela Fox, Counsel, or Krista Ayoub, 
Kristen Phinnessee, or Amanda Quester, Senior Counsels, Office of 
Regulations, at 202-435-7700. If you require this document in an 
alternative electronic format, please contact 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

    The Bureau is proposing several amendments to Regulation Z, which 
implements TILA, for both open-end and closed-end credit to address the 
sunset of LIBOR.\1\ At this time, LIBOR is expected to be discontinued 
after 2021. These proposed changes are discussed in more detail below. 
As discussed in part VI, the Bureau generally is proposing that the 
final rule would take effect on March 15, 2021, except for the updated 
change-in-term disclosure requirements for HELOCs and credit card 
accounts that would apply as of October 1, 2021. The Bureau also is 
issuing additional written guidance related to the LIBOR transition on 
its website as discussed in part II.C. The Bureau solicits comment on 
the changes proposed in this document and whether there are any 
additional regulatory changes or guidance that would be helpful as 
creditors and card issuers transition away from using LIBOR indices.
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    \1\ When amending commentary, the Office of the Federal Register 
requires reprinting of certain subsections being amended in their 
entirety rather than providing more targeted amendatory 
instructions. The sections of regulatory text and commentary 
included in this document show the language of those sections if the 
Bureau adopts its changes as proposed. In addition, the Bureau is 
releasing an unofficial, informal redline to assist industry and 
other stakeholders in reviewing the changes that it is proposing to 
make to the regulatory text and commentary of Regulation Z. This 
redline can be found on the Bureau's website, at https://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/amendments-facilitate-libor-transition-regulation- z/. 
If any conflicts exist between the redline and the text of 
Regulation Z, its commentary, or this proposed rule, the documents 
published in the Federal Register are the controlling documents.
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A. Open-End Credit

    The Bureau is proposing several amendments to the open-end credit 
provisions in Regulation Z to address the sunset of LIBOR. First, the 
Bureau is proposing a detailed roadmap for HELOC creditors and card 
issuers to choose a compliant replacement index for the LIBOR index.\2\ 
Regulation Z already permits HELOC creditors and card issuers to change 
an index and margin they use to set the annual percentage rate (APR) on 
a variable-rate account under certain conditions, when the original 
index ``becomes unavailable'' or ``is no longer available.'' The Bureau 
has preliminarily determined, however, that consumers, HELOC creditors, 
and card issuers would benefit substantially if HELOC creditors and 
card issuers could transition away from a LIBOR index before LIBOR 
becomes unavailable. The Bureau is therefore proposing new provisions 
that detail specifically how HELOC creditors and card issuers may 
replace a LIBOR index with a replacement index for accounts on or after 
March 15, 2021. These proposed new provisions are in proposed Sec.  
1026.40(f)(3)(ii)(B) for HELOCs and in proposed Sec.  1026.55(b)(7)(ii) 
for credit card accounts.
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    \2\ Reverse mortgages structured as open-end credit are HELOCs 
subject to the provisions in Sec. Sec.  1026.40 and 1026.9(c)(1).
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    Under the proposal, HELOC creditors and card issuers must ensure 
that the APR calculated using the replacement index is substantially 
similar to the rate calculated using the LIBOR index, based on the 
values of these indices on December 31, 2020. The proposal also imposes 
other requirements on a replacement index. Under the proposal,

[[Page 36939]]

HELOC creditors and card issuers may select a replacement index that is 
newly established and has no history, or an index that is not newly 
established and has a history. HELOC creditors and card issuers may 
replace a LIBOR index with an index that has a history only if the 
index has historical fluctuations substantially similar to those of the 
LIBOR index. The Bureau is proposing to determine that the prime rate 
published in the Wall Street Journal (Prime) has historical 
fluctuations substantially similar to those of certain U.S. Dollar 
(USD) LIBOR indices. The Bureau also is proposing to determine that 
certain spread-adjusted \3\ indices based on the Secured Overnight 
Financing Rate (SOFR) recommended by the Alternative Reference Rates 
Committee (ARRC) have historical fluctuations that are substantially 
similar to those of certain USD LIBOR indices.
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    \3\ The spread between two indices is the difference between the 
levels of those indices, which may vary from day to day. For 
example, if today index X is 5% and index Y is 4%, then the X-Y 
spread today is one percentage point (or, equivalently, 100 basis 
points). A spread adjustment is a term that is added to one index to 
make it more similar to another index. For example, if the X-Y 
spread is typically around 100 basis points, then one reasonable 
spread adjustment may be to add 100 basis points to Y every day. 
Then the spread-adjusted value of Y will typically be much closer to 
the value of X than Y is, although there may still be differences 
between X and the spread-adjusted Y from day to day.
---------------------------------------------------------------------------

    Second, the Bureau is proposing to make clarifying changes to the 
existing provisions on the replacement of an index when the index 
becomes unavailable. These proposed changes are in proposed Sec.  
1026.40(f)(3)(ii)(A) for HELOCs and in proposed Sec.  1026.55(b)(7)(i) 
for credit card accounts.
    Third, the Bureau is proposing to revise change-in-terms notice 
requirements for HELOCs and credit card accounts to ensure that 
consumers know how the variable rates on their accounts will be 
determined going forward after the LIBOR index is replaced. The 
proposal would ensure that the change-in-terms notices for these 
accounts will disclose the index that is replacing the LIBOR index and 
any adjusted margin that will be used to calculate a consumer's rate, 
regardless of whether the margin is being reduced or increased. These 
proposed changes, if adopted, would become effective October 1, 2021. 
The proposed changes are in Sec.  1026.9(c)(1)(ii) for HELOCs and in 
Sec.  1026.9(c)(2)(v)(A) for credit card accounts.
    Fourth, the Bureau is proposing to add an exception from the rate 
reevaluation provisions applicable to credit card accounts. Currently, 
when a card issuer increases a rate on a credit card account, the card 
issuer generally must complete an analysis reevaluating the rate 
increase every six months until the rate is reduced to a certain 
degree. To facilitate compliance, the proposal would add an exception 
from these requirements for increases that occur as a result of 
replacing a LIBOR index using the specific proposed provisions 
described above for transitioning from a LIBOR index or as a result of 
the LIBOR index becoming unavailable. This proposed exception is in 
proposed Sec.  1026.59(h)(3). This proposed exception would not apply 
to rate increases that are already subject to the rate reevaluation 
requirements prior to the transition from the LIBOR index. The proposal 
also would address cases where the card issuer was already required to 
perform a rate reevaluation review prior to transitioning away from 
LIBOR and LIBOR was used as the benchmark for comparison for purposes 
of determining whether the card issuer can terminate the six-month 
reviews. To facilitate compliance, these proposed changes would address 
how a card issuer can terminate the obligation to review where the rate 
applicable immediately prior to the increase was a variable rate 
calculated using a LIBOR index. These proposed changes are set forth in 
proposed Sec.  1026.59(f)(3).
    Fifth, in relation to the open-end credit provisions, the Bureau is 
proposing several technical edits to comments 9(c)(2)(iv)-2 and 59(d)-2 
to replace LIBOR references with references to a SOFR index.

B. Closed-End Credit

    The Bureau is proposing amendments to the closed-end credit 
provisions in Regulation Z to address the sunset of LIBOR. First, the 
Bureau is proposing to identify specific indices as an example of a 
``comparable index'' for purposes of the closed-end refinancing 
provisions. Currently, under Regulation Z, if the creditor changes the 
index of a variable-rate closed-end loan to an index that is not a 
``comparable index,'' the index change may constitute a refinancing for 
purposes of Regulation Z, triggering certain requirements. The Bureau 
is proposing to add an illustrative example to identify the SOFR-based 
spread-adjusted replacement indices recommended by the ARRC as an 
example of a ``comparable index'' for the LIBOR indices that they are 
intended to replace. These proposed changes are in comment 20(a)(3)-ii.
    Second, in relation to the closed-end credit provisions, the Bureau 
is proposing technical edits to Sec.  1026.36(a)(4)(iii)(C) and 
(a)(5)(iii)(B), comment 37(j)(1)-1, and sample forms H-4(D)(2) and H-
4(D)(4) in appendix H. These proposed technical edits would replace 
LIBOR references with references to a SOFR index and make related 
changes and corrections.

II. Background

A. LIBOR

    Introduced in the 1980s, LIBOR (originally an acronym for London 
Interbank Offered Rate) was intended to measure the average rate at 
which a bank could obtain unsecured funding in the London interbank 
market for a given period, in a given currency. LIBOR is calculated 
based on submissions from a panel of contributing banks and published 
every London business day for five currencies (USD, British pound 
sterling (GBP), euro (EUR), Swiss franc (CHF), and Japanese yen (JPY)) 
and for seven tenors \4\ for each currency (overnight, 1-week, 1-month, 
2-month, 3-month, 6-month, and 1-year), resulting in 35 individual 
rates (collectively, LIBOR). As of March 2020, the panel for USD LIBOR 
is comprised of sixteen banks, and each bank contributes data for all 
seven tenors.\5\ In 2017, the chief executive of the U.K. Financial 
Conduct Authority (FCA), which regulates LIBOR, announced that it did 
not intend to persuade or compel banks to submit information for LIBOR 
past the end of 2021 and that the panel banks had agreed to voluntarily 
sustain LIBOR until then in order to provide sufficient time for the 
market to transition from using LIBOR indices to alternative 
indices.\6\ However, the Intercontinental Exchange (ICE) Benchmark 
Administration, which administers LIBOR, announced a goal to continue 
publishing certain LIBOR tenors past 2021 though it declined to 
guarantee their continued availability.\7\ The FCA has indicated that 
it would conduct ``representativeness tests'' if LIBOR continues to be 
published for some time after 2021 based on submissions from a smaller 
number of panel banks (and thus a smaller number of transactions), 
raising the possibility that LIBOR could

[[Page 36940]]

be declared to be unrepresentative by its regulator.\8\ As a result, 
industry faces uncertainty about the publication and representativeness 
of LIBOR, which is neither guaranteed to continue nor guaranteed to 
cease.
---------------------------------------------------------------------------

    \4\ The tenor refers to the length of time remaining until a 
loan matures.
    \5\ ICE LIBOR, (last visited Mar. 26, 2020), https://www.theice.com/iba/libor.
    \6\ Andrew Bailey, The Future of LIBOR, U.K. FCA, (July 27, 
2017), https://www.fca.org.uk/news/speeches/the-future-of-libor; FCA 
Statement on LIBOR Panels, U.K. FCA, (Nov. 24, 2017), https://www.fca.org.uk/news/statements/fca-statement-libor-panels.
    \7\ Intercontinental Exch. Benchmark Admin., ICE Benchmark 
Administration Survey on the Use of LIBOR, https://www.theice.com/iba/ice-benchmark-administration-survey-on-the-use-of-libor (last 
visited May 18, 2020).
    \8\ Andrew Bailey, LIBOR: Preparing for the End, U.K. FCA, (July 
15, 2019), https://www.fca.org.uk/news/speeches/libor-preparing-end.
---------------------------------------------------------------------------

B. Consumer Products Using LIBOR

    In the United States, financial institutions have used LIBOR as a 
common benchmark rate for a variety of adjustable-rate consumer 
financial products, including mortgages, credit cards, HELOCs, reverse 
mortgages, and student loans. Typically, the consumer pays an interest 
rate that is calculated as the sum of a benchmark index and a margin. 
For example, a consumer may pay an interest rate equal to the 1-year 
USD LIBOR plus two percentage points.
    Financial institutions have been developing plans and procedures to 
transition from the use of LIBOR indices to replacement indices for 
products that are being newly issued and existing accounts that were 
originally benchmarked to a LIBOR index. In some markets, such as for 
HELOCs and credit cards, the vast majority of newly originated lines of 
credit are already based on indices other than a LIBOR index.

C. Additional Written Guidance

    In addition to this proposed rule, the Bureau is issuing separate 
written guidance in the form of Frequently Asked Questions (FAQs) for 
creditors and card issuers to use as they transition away from using 
LIBOR indices. These FAQs address regulatory questions where the 
existing rule is clear on the requirements and already provides 
necessary alternatives needed for the LIBOR transition. The guidance 
can be found at: https://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/amendments-facilitate-libor-transition-regulation-z/. This guidance deals with issues related to: 
(1) Existing mortgage servicing notice requirements (including how 
servicers may notify consumers of the index change when sending the 
interest rate adjustment notices and periodic statements); (2) existing 
HELOC and adjustable-rate mortgage (ARM) loan program notice 
requirements disclosing historical index examples; (3) existing 
Alternative Mortgage Transaction Parity Act requirements for index 
changes that result in an increased interest rate or finance charge for 
alternative mortgage transactions; and (4) identification of 
implementation and consumer impacts for creditors or card issuers as 
they prepare for the LIBOR transition.

III. Outreach

    The Bureau has received feedback through both formal and informal 
channels, regarding ways in which the Bureau could use rulemaking to 
facilitate the market's orderly transition from using LIBOR indices to 
alternate indices. The following is a brief summary of some of the 
Bureau's engagement with industry, consumer advocates, regulators, and 
other stakeholders regarding the transition away from the use of LIBOR 
indices. The Bureau discusses feedback received through these various 
channels that is relevant to this proposal throughout the document.
    The Bureau is an ex officio member of the ARRC, a group of private-
market participants convened by the Board of Governors of the Federal 
Reserve System (Board) and the Federal Reserve Bank of New York (New 
York Fed) to ensure a successful transition from the use of LIBOR as an 
index by December 2021. The group is comprised of financial 
institutions and other market participants such as exchanges, 
regulators, and consumer advocates. As an ex officio member, the Bureau 
does not have voting rights and may only offer views and analysis to 
support the ARRC's objectives. Through its interaction with other ARRC 
members, the Bureau has received questions and requests for 
clarification regarding certain provisions in the Bureau's rules that 
could affect the industry's LIBOR transition plans. For example, the 
Bureau has received informal requests from members of the ARRC for 
clarification that the spread-adjusted SOFR-based index being developed 
by the ARRC is a ``comparable index'' to the LIBOR index. The Bureau 
has also, in coordination with the ARRC, actively sought comments 
regarding a potential rulemaking related to the LIBOR transition. For 
example, the Bureau convened multiple meetings for members of the ARRC 
to hear consumer groups' views on potential issues consumers may face 
during the sunset of LIBOR and solicited suggestions for potential 
actions the regulators could take to facilitate a smooth transition.
    The Bureau has engaged in ongoing market monitoring with individual 
institutions, trade associations, regulators, and other stakeholders to 
understand their plans for the LIBOR transition, their concerns, and 
potential impacts on consumers. Institutions and trade associations 
have met informally with the Bureau and sent letters outlining their 
concerns related to the sunset of LIBOR. The Bureau also has received 
feedback regarding the LIBOR transition through other formal channels 
that were related to general Bureau activities. For example, in January 
2019, the Bureau solicited information from the public about several 
aspects of the consumer credit card market. The Bureau received 
comments submitted from a banking trade group regarding changes to 
Regulation Z that could support the transition away from using LIBOR 
indices.\9\
---------------------------------------------------------------------------

    \9\ 84 FR 647 (Jan. 31, 2019).
---------------------------------------------------------------------------

    Through these various channels, industry trade associations, 
consumer groups, and other organizations have provided information 
about provisions in Bureau regulations that could be modified to reduce 
market confusion, enable institutions and consumers to transition away 
from using LIBOR indices in a timely manner, and lower market risk 
related to the LIBOR transition. A number of financial institutions 
raised concerns that LIBOR may continue for some time after December 
2021 but become less representative or reliable if, as expected, some 
panel banks stop submitting information before LIBOR finally is 
discontinued. Stakeholders noted that FCA could declare LIBOR to be 
``unrepresentative'' at some point after 2021 and wanted clarity from 
U.S. Federal regulators about how U.S. firms should interpret such a 
declaration. Some industry participants asked that the Bureau declare 
LIBOR to be ``unavailable'' for the purposes of Regulation Z. They also 
requested that the Bureau facilitate a transition timeline that would 
provide sufficient time for financial institutions to inform consumers 
of the change and make the necessary changes to their systems.
    Industry also recommended that the Bureau announce that it would 
not deem a replacement index to be unfair, deceptive, or abusive if it 
were recommended by the Board, the New York Fed, or a committee 
endorsed or convened by the Board or New York Fed.
    Credit card issuers and related trade associations stated that the 
prime rate should be permitted to replace a LIBOR index, noting that 
while a SOFR-based index is expected to replace a LIBOR index in many 
commercial contexts, the prime rate is the industry standard rate index 
for credit cards. They also requested that the Bureau permit card 
issuers to replace the LIBOR index used in setting the variable rates 
on existing accounts before LIBOR becomes unavailable to facilitate 
compliance.

[[Page 36941]]

They also requested guidance on how the rate reevaluation provisions 
applicable to credit card accounts apply to accounts that are 
transitioning away from using LIBOR indices.
    Consumer advocates emphasized the need for transparency as 
institutions sunset their use of LIBOR indices and indicated a 
preference for replacement indices that are publicly available. They 
recommended regulators protect consumers by preventing institutions 
from changing the index or margin in a manner that would raise the 
interest rate paid by the consumer. They also shared industry's 
concerns that LIBOR may continue for some time after December 2021 but 
become less representative or reliable until LIBOR finally is 
discontinued. Advocates noted that existing contract language may limit 
how and when institutions can transition away from LIBOR. They also 
discussed issues specific to particular consumer products, expressing 
concern, for example, that the contract language in the private student 
loan market is ambiguous and gives lenders wide leeway in determining a 
comparable replacement index for LIBOR indices.

IV. Legal Authority

A. Section 1022 of the Dodd-Frank Act

    Section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to 
prescribe rules ``as may be necessary or appropriate to enable the 
Bureau to administer and carry out the purposes and objectives of the 
Federal consumer financial laws, and to prevent evasions thereof.'' 
Among other statutes, title X of the Dodd-Frank Act and TILA are 
Federal consumer financial laws.\10\ Accordingly, in setting forth this 
proposal, the Bureau is exercising its authority under Dodd-Frank Act 
section 1022(b) to prescribe rules under TILA and title X that carry 
out the purposes and objectives and prevent evasion of those laws.
---------------------------------------------------------------------------

    \10\ Dodd-Frank Act section 1002(14) (defining ``Federal 
consumer financial law'' to include the ``enumerated consumer laws'' 
and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act 
section 1002(12) (defining ``enumerated consumer laws'' to include 
TILA).
---------------------------------------------------------------------------

B. The Truth in Lending Act

    TILA is a Federal consumer financial law. In adopting TILA, 
Congress explained that:

    [E]conomic stabilization would be enhanced and the competition 
among the various financial institutions and other firms engaged in 
the extension of consumer credit would be strengthened by the 
informed use of credit. The informed use of credit results from an 
awareness of the cost thereof by consumers. It is the purpose of 
this subchapter to assure a meaningful disclosure of credit terms so 
that the consumer will be able to compare more readily the various 
credit terms available to him and avoid the uninformed use of 
credit, and to protect the consumer against inaccurate and unfair 
credit billing and credit card practices.\11\
---------------------------------------------------------------------------

    \11\ TILA section 102(a), codified at 15 U.S.C. 1601(a).

    TILA and Regulation Z define credit broadly as the right granted by 
a creditor to a debtor to defer payment of debt or to incur debt and 
defer its payment.\12\ TILA and Regulation Z set forth disclosure and 
other requirements that apply to creditors. Different rules apply to 
creditors depending on whether they are extending ``open-end credit'' 
or ``closed-end credit.'' Under the statute and Regulation Z, open-end 
credit exists where there is a plan in which the creditor reasonably 
contemplates repeated transactions; the creditor may impose a finance 
charge from time to time on an outstanding unpaid balance; and the 
amount of credit that may be extended to the consumer during the term 
of the plan (up to any limit set by the creditor) is generally made 
available to the extent that any outstanding balance is repaid.\13\ 
Typically, closed-end credit is credit that does not meet the 
definition of open-end credit.\14\
---------------------------------------------------------------------------

    \12\ TILA section 103(f), codified at 15 U.S.C. 1602(f); 12 CFR 
1026.2(a)(14).
    \13\ 12 CFR 1026.2(a)(20).
    \14\ 12 CFR 1026.2(a)(10).
---------------------------------------------------------------------------

    The term ``creditor'' generally means a person who regularly 
extends consumer credit that is subject to a finance charge or is 
payable by written agreement in more than four installments (not 
including a down payment), and to whom the obligation is initially 
payable, either on the face of the note or contract, or by agreement 
when there is no note or contract.\15\ TILA defines ``finance charge'' 
generally as the sum of all charges, payable directly or indirectly by 
the person to whom the credit is extended, and imposed directly or 
indirectly by the creditor as an incident to the extension of 
credit.\16\
---------------------------------------------------------------------------

    \15\ See TILA section 103(g), codified at 15 U.S.C. 1602(g); 12 
CFR 1026.2(a)(17)(i).
    \16\ TILA section 106(a), codified at 15 U.S.C. 1605(a); see 12 
CFR 1026.4.
---------------------------------------------------------------------------

    The term ``creditor'' also includes a card issuer, which is a 
person or its agent that issues credit cards, when that person extends 
credit accessed by the credit card.\17\ Regulation Z defines the term 
``credit card'' to mean any card, plate, or other single credit device 
that may be used from time to time to obtain credit.\18\ A charge card 
is a credit card on an account for which no periodic rate is used to 
compute a finance charge.\19\ In addition to being creditors under TILA 
and Regulation Z, card issuers also generally must comply with the 
credit card rules set forth in the Fair Credit Billing Act \20\ and in 
the Credit Card Accountability Responsibility and Disclosure Act of 
2009 (Credit CARD Act) \21\ (if the card accesses an open-end credit 
plan), as implemented in Regulation Z subparts B and G.\22\
---------------------------------------------------------------------------

    \17\ See TILA section 103(g), codified at 15 U.S.C. 1602(g); 12 
CFR 1026.2(a)(17)(iii) and (iv).
    \18\ See 12 CFR 1026.2(a)(15).
    \19\ See 12 CFR 1026.2(a)(15)(iii).
    \20\ Title III of Public Law 93-495, 88 Stat. 1511 (1974).
    \21\ Public Law 111-24, 123 Stat. 1734 (2009).
    \22\ See generally 12 CFR 1026.5(b)(2)(ii), .7(b)(11), .12, 
.51-.60.
---------------------------------------------------------------------------

    TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 
105(a) \23\ directs the Bureau to prescribe regulations to carry out 
the purposes of TILA, and provides that such regulations may contain 
additional requirements, classifications, differentiations, or other 
provisions, and may provide for such adjustments and exceptions for all 
or any class of transactions, that the Bureau judges are necessary or 
proper to effectuate the purposes of TILA, to prevent circumvention or 
evasion thereof, or to facilitate compliance. Pursuant to TILA section 
102(a), a purpose of TILA is to assure a meaningful disclosure of 
credit terms to enable the consumer to avoid the uninformed use of 
credit and compare more readily the various credit terms available to 
the consumer. This stated purpose is tied to Congress's finding that 
economic stabilization would be enhanced and competition among the 
various financial institutions and other firms engaged in the extension 
of consumer credit would be strengthened by the informed use of 
credit.\24\ Thus, strengthened competition among financial institutions 
is a goal of TILA, achieved through the effectuation of TILA's 
purposes.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 1604(a).
    \24\ TILA section 102(a), codified at 15 U.S.C. 1601(a).
---------------------------------------------------------------------------

    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit through 
required disclosures and substantive regulation of certain practices. 
Dodd-Frank Act section 1100A clarified the Bureau's section 105(a) 
authority by amending that section to provide express authority to 
prescribe regulations that contain ``additional requirements'' that the 
Bureau finds are necessary or proper to effectuate the purposes of 
TILA, to prevent circumvention or evasion thereof, or to facilitate 
compliance. This

[[Page 36942]]

amendment clarified the authority to exercise TILA section 105(a) to 
prescribe requirements beyond those specifically listed in the statute 
that meet the standards outlined in section 105(a). As amended by the 
Dodd-Frank Act, TILA section 105(a) authority to make adjustments and 
exceptions to the requirements of TILA applies to all transactions 
subject to TILA, except with respect to the provisions of TILA section 
129 that apply to the high-cost mortgages referred to in TILA section 
103(bb).\25\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 1602(bb).
---------------------------------------------------------------------------

    For the reasons discussed in this document, the Bureau is proposing 
amendments to Regulation Z with respect to certain provisions that 
impact the transition from LIBOR indices to other indices to carry out 
TILA's purposes and is proposing such additional requirements, 
adjustments, and exceptions as, in the Bureau's judgment, are necessary 
and proper to carry out the purposes of TILA, prevent circumvention or 
evasion thereof, or to facilitate compliance. In developing these 
aspects of the proposal pursuant to its authority under TILA section 
105(a), the Bureau has considered the purposes of TILA, including 
ensuring meaningful disclosures, facilitating consumers' ability to 
compare credit terms, and helping consumers avoid the uninformed use of 
credit, and the findings of TILA, including strengthening competition 
among financial institutions and promoting economic stabilization.
    TILA section 105(d). As amended by the Dodd-Frank Act, TILA section 
105(d) \26\ states that any Bureau regulations requiring any disclosure 
which differs from the disclosures previously required in certain 
sections shall have an effective date of that October 1 which follows 
by at least six months the date of promulgation. The section also 
states that the Bureau may in its discretion lengthen or shorten the 
amount of time for compliance when it makes a specific finding that 
such action is necessary to comply with the findings of a court or to 
prevent unfair or deceptive disclosure practices. The section further 
states that any creditor or lessor may comply with any such newly 
promulgated disclosures requirements prior to the effective date of the 
requirements.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------

V. Section-by-Section Analysis

Section 1026.9 Subsequent Disclosure Requirements

9(c) Change in Terms
9(c)(1) Rules Affecting Home-Equity Plans
9(c)(1)(ii) Notice Not Required
    Section 1026.9(c)(1)(i) provides that for HELOCs subject to Sec.  
1026.40 whenever any term required to be disclosed in the account-
opening disclosures under Sec.  1026.6(a) is changed or the required 
minimum periodic payment is increased, the creditor must mail or 
deliver written notice of the change to each consumer who may be 
affected. The notice must be mailed or delivered at least 15 days prior 
to the effective date of the change. The 15-day timing requirement does 
not apply if the change has been agreed to by the consumer; the notice 
must be given, however, before the effective date of the change. 
Section 1026.9(c)(1)(ii) provides that for HELOCs subject to Sec.  
1026.40, a creditor is not required to provide a change-in-terms notice 
under Sec.  1026.9(c)(1) when the change involves a reduction of any 
component of a finance or other charge or when the change results from 
an agreement involving a court proceeding.
    A creditor for a HELOC subject to Sec.  1026.40 is required under 
current Sec.  1026.9(c)(1) to provide a change-in-terms notice 
disclosing the index that is replacing the LIBOR index. The index is a 
term that is required to be disclosed in the account-opening 
disclosures under Sec.  1026.6(a) and thus, a creditor must provide a 
change-in-terms notice disclosing the index that is replacing the LIBOR 
index.\27\ The exception in Sec.  1026.9(c)(1)(ii) that provides that a 
change-in-terms notice is not required when a change involves a 
reduction in the finance or other charge does not apply to the index 
change. The change in the index used in making rate adjustments is a 
change in a term required to be disclosed in a change-in-terms notice 
under Sec.  1026.9(c)(1) regardless of whether there is also a change 
in the index value or margin that involves a reduction in a finance or 
other charge.
---------------------------------------------------------------------------

    \27\ See 12 CFR 1026.6(a)(1)(ii) and (iv) and comment 
6(a)(1)(ii)-5.
---------------------------------------------------------------------------

    Under current Sec.  1026.9(c)(1), a creditor generally is required 
to provide a change-in-terms notice of a margin change if the margin is 
increasing. In disclosing the variable rate in the account-opening 
disclosures under Sec.  1026.6(a), the creditor must disclose the 
margin as part of an explanation of how the amount of any finance 
charge will be determined.\28\ Thus, a creditor must provide a change-
in-terms notice under current Sec.  1026.9(c)(1) disclosing the changed 
margin, unless Sec.  1026.9(c)(1)(ii) applies. Current Sec.  
1026.9(c)(1)(ii) applies to a decrease in the margin because that 
change would involve a reduction in a component of a finance or other 
charge. Thus, under current Sec.  1026.9(c)(1), a creditor would only 
be required to provide a change-in-terms notice of a change in the 
margin under Sec.  1026.9(c)(1) if the margin is increasing.
---------------------------------------------------------------------------

    \28\ See 12 CFR 1026.6(a)(1)(iv).
---------------------------------------------------------------------------

The Proposal
    The Bureau is proposing to revise Sec.  1026.9(c)(1)(ii) to provide 
that the exception in Sec.  1026.9(c)(1)(ii) under which a creditor is 
not required to provide a change-in-terms notice under Sec.  
1026.9(c)(1) when the change involves a reduction of any component of a 
finance or other charge does not apply on or after October 1, 2021, 
where the creditor is reducing the margin when a LIBOR index is 
replaced as permitted by proposed Sec.  1026.40(f)(3)(ii)(A) or Sec.  
1026.40(f)(3)(ii)(B).\29\ The proposed changes, if adopted, will ensure 
that the change-in-terms notices will disclose the replacement index 
and any adjusted margin that will be used to calculate a consumer's 
rate, regardless of whether the margin is being reduced or increased.
---------------------------------------------------------------------------

    \29\ As discussed in more detail in the section-by-section 
analysis of proposed Sec.  1026.40(f)(3)(ii)(A), the Bureau is 
proposing to move the provisions in current Sec.  1026.40(f)(3)(ii) 
that allow a creditor for HELOC plans subject to Sec.  1026.40 to 
replace an index and adjust the margin if the index is no longer 
available in certain circumstances to proposed Sec.  
1026.40(f)(3)(ii)(A) and to revise the proposed moved provisions for 
clarity and consistency. Also, as discussed in more detail in the 
section-by-section analysis of proposed Sec.  1026.40(f)(3)(ii)(B), 
to facilitate compliance, the Bureau is proposing to add new LIBOR-
specific provisions to proposed Sec.  1026.40(f)(3)(ii)(B) that 
would permit creditors for HELOC plans subject to Sec.  1026.40 that 
use a LIBOR index for calculating a variable rate to replace the 
LIBOR index and change the margin for calculating the variable rate 
on or after March 15, 2021, in certain circumstances.
---------------------------------------------------------------------------

    The Bureau also is proposing to add comment 9(c)(1)(ii)-3 to 
provide additional detail. Proposed comment 9(c)(1)(ii)-3 provides that 
for change-in-terms notices provided under Sec.  1026.9(c)(1) on or 
after October 1, 2021, covering changes permitted by proposed Sec.  
1026.40(f)(3)(ii)(A) or Sec.  1026.40(f)(3)(ii)(B), a creditor must 
provide a change-in-terms notice under Sec.  1026.9(c)(1) disclosing 
the replacement index for a LIBOR index and any adjusted margin that is 
permitted under proposed Sec.  1026.40(f)(3)(ii)(A) or

[[Page 36943]]

Sec.  1026.40(f)(3)(ii)(B), even if the margin is reduced. Proposed 
comment 9(c)(1)(ii)-3 also provides that prior to October 1, 2021, a 
creditor has the option of disclosing a reduced margin in the change-
in-terms notice that discloses the replacement index for a LIBOR index 
as permitted by proposed Sec.  1026.40(f)(3)(ii)(A) or Sec.  
1026.40(f)(3)(ii)(B).
    To effectuate the purposes of TILA, the Bureau is proposing to use 
its TILA section 105(a) authority to amend Sec.  1026.9(c)(1)(ii). TILA 
section 105(a) \30\ directs the Bureau to prescribe regulations to 
carry out the purposes of TILA, and provides that such regulations may 
contain additional requirements, classifications, differentiations, or 
other provisions, and may provide for such adjustments and exceptions 
for all or any class of transactions, that the Bureau judges are 
necessary or proper to effectuate the purposes of TILA, to prevent 
circumvention or evasion thereof, or to facilitate compliance. The 
Bureau believes that when a creditor for a HELOC plan that is subject 
to Sec.  1026.40 is replacing the LIBOR index and adjusting the margin 
as permitted by proposed Sec.  1026.40(f)(3)(ii)(A) or Sec.  
1026.40(f)(3)(ii)(B), it may be beneficial for consumers to receive 
notice not just of the replacement index, but also any adjustments to 
the margin, even if the margin is decreased. The Bureau believes that 
it may be important that consumers are informed of the replacement 
index and any adjusted margin (even a reduction in the margin) so that 
consumers will know how the variable rates on their accounts will be 
determined going forward after the LIBOR index is replaced. Otherwise, 
a consumer that is only notified that the LIBOR index is being replaced 
with a replacement index that has a higher index value but is not 
notified that the margin is decreasing could reasonably but mistakenly 
believe that the APR on the plan is increasing. The Bureau solicits 
comment generally on the proposed revisions to Sec.  1026.9(c)(1)(ii) 
and proposed comment 9(c)(1)(ii)-3.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------

    The proposed revisions to Sec.  1026.9(c)(1)(ii), if adopted as 
proposed, would apply to notices provided on or after October 1, 2021. 
TILA section 105(d) generally requires that changes in disclosures 
required by TILA or Regulation Z have an effective date of the October 
1 that is at least six months after the date the final rule is 
adopted.\31\ Proposed comment 9(c)(1)(ii)-3 clarifies that prior to 
October 1, 2021, a creditor has the option of disclosing a reduced 
margin in the change-in-terms notice that discloses the replacement 
index for a LIBOR index as permitted by proposed Sec.  
1026.40(f)(3)(ii)(A) or Sec.  1026.40(f)(3)(ii)(B). The Bureau believes 
that creditors for HELOC plans subject to Sec.  1026.40 may want to 
provide the information about the decreased margin in the change-in-
terms notice even if they replace the LIBOR index and adjust the margin 
pursuant to proposed Sec.  1026.40(f)(3)(ii)(A) or Sec.  
1026.40(f)(3)(ii)(B) earlier than October 1, 2021. The Bureau believes 
that these creditors may want to provide this information to avoid 
confusion by consumers and because this reduced margin is beneficial to 
consumers. Thus, proposed comment 9(c)(1)(ii)-3 would permit creditors 
for HELOC plans subject to Sec.  1026.40 to provide the information 
about the decreased margin in the change-in-terms notice even if they 
replace the LIBOR index and adjust the margin pursuant to proposed 
Sec.  1026.40(f)(3)(ii)(A) or Sec.  1026.40(f)(3)(ii)(B) earlier than 
October 1, 2021. The Bureau encourages creditors to include this 
information in change-in-terms notices provided earlier than October 1, 
2021, even though they are not required to do so, to ensure that 
consumers are informed of how the variable rates on their accounts will 
be determined going forward after the LIBOR index is replaced.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------

    The Bureau recognizes that a LIBOR index may be replaced on a HELOC 
plan subject to Sec.  1026.40 for reasons other than those set forth in 
proposed Sec.  1026.40(f)(3)(ii)(A) or Sec.  1026.40(f)(3)(ii)(B). For 
example, pursuant to current Sec.  1026.40(f)(3)(iii), a creditor for a 
HELOC plan may replace the LIBOR index used under a plan and adjust the 
margin if a consumer specifically agrees to the change in writing at 
the time of the change. The Bureau solicits comment on whether the 
Bureau should revise Sec.  1026.9(c)(1)(ii) to require that the 
creditor in those cases must disclose any decrease in the margin in 
change-in-terms notices provided on or after October 1, 2021, in the 
change-in-terms notice that discloses the replacement index for a LIBOR 
index used under the plan.
9(c)(2) Rules Affecting Open-End (Not Home-Secured) Plans
    TILA section 127(i)(1), which was added by the Credit CARD Act, 
provides that in the case of a credit card account under an open-end 
consumer credit plan, a creditor generally must provide a written 
notice of an increase in an APR not later than 45 days prior to the 
effective date of the increase.\32\ In addition, TILA section 127(i)(2) 
provides that in the case of a credit card account under an open-end 
consumer credit plan, a creditor must provide a written notice of any 
significant change, as determined by rule of the Bureau, in terms 
(other than APRs) of the cardholder agreement not later than 45 days 
prior to the effective date of the change.\33\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 1637(i)(1).
    \33\ 15 U.S.C. 1637(i)(2).
---------------------------------------------------------------------------

    Section 1026.9(c)(2)(i)(A) provides that for plans other than 
HELOCs subject to Sec.  1026.40, a creditor generally must provide a 
written notice of a ``significant change in account terms'' at least 45 
days prior to the effective date of the change to each consumer who may 
be affected. Section 1026.9(c)(2)(ii) defines ``significant change in 
account terms'' to mean a change in the terms required to be disclosed 
under Sec.  1026.6(b)(1) and (b)(2), an increase in the required 
minimum periodic payment, a change to a term required to be disclosed 
under Sec.  1026.6(b)(4), or the acquisition of a security interest. 
Among other things, Sec.  1026.9(c)(2)(v)(A) provides that a change-in-
terms notice is not required when a change involves a reduction of any 
component of a finance or other charge. The change-in-terms provisions 
in Sec.  1026.9(c)(2) generally apply to a credit card account under an 
open-end (not home-secured) consumer credit plan, and to other open-end 
plans that are not subject to Sec.  1026.40.
    The creditor is required to provide a change-in-terms notice under 
Sec.  1026.9(c)(2) disclosing the index that is replacing the LIBOR 
index pursuant to proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii). The index is a term that meets the definition of a 
``significant change in account terms'' under Sec.  1026.6(b)(2)(i)(A) 
and (4)(ii) and thus, the creditor must provide a change-in-terms 
notice disclosing the index that is replacing the LIBOR index.\34\ The 
exception in Sec.  1026.9(c)(2)(v)(A) that provides that a change-in-
terms notice is not required when a change involves a reduction in the 
finance or other charge does not apply to the index change. The change 
in the index used in making rate adjustments is a change in a term 
required to be disclosed in a change-in-terms notice under Sec.  
1026.9(c)(2) regardless of whether there is also a change in the index 
value or margin that involves a reduction in a finance or other charge.
---------------------------------------------------------------------------

    \34\ See 12 CFR 1026.6(a)(2) and (4) and 1026.9(c)(2)(iv)(D)(1) 
and comment 9(c)(2)(iv)-2.

---------------------------------------------------------------------------

[[Page 36944]]

    Under current Sec.  1026.9(c)(2), for plans other than HELOCs 
subject to Sec.  1026.40, a creditor generally is required to provide a 
change-in-terms notice of a margin change if the margin is increasing. 
In disclosing the variable rate in the account-opening disclosures, the 
creditor must disclose the margin as part of an explanation of how the 
rate is determined.\35\ Thus, a creditor must provide a change-in-terms 
notice under Sec.  1026.9(c)(2) disclosing the changed margin, unless 
Sec.  1026.9(c)(2)(v)(A) applies. Current Sec.  1026.9(c)(2)(v)(A) 
applies to a decrease in the margin because that change would involve a 
reduction in a component of a finance or other charge. Thus, under 
current Sec.  1026.9(c)(2), a creditor would only be required to 
provide a change-in-terms notice of a change in the margin under Sec.  
1026.9(c)(2) if the margin is increasing.
---------------------------------------------------------------------------

    \35\ 12 CFR 1026.6(b)(4)(ii)(B).
---------------------------------------------------------------------------

    The Bureau is proposing two changes to the provisions in Sec.  
1026.9(c)(2) and its accompanying commentary. First, the Bureau is 
proposing technical edits to comment 9(c)(2)(iv)-2 to replace LIBOR 
references with references to SOFR. Second, the Bureau is proposing 
changes to Sec.  1026.9(c)(2)(v)(A) to provide that for plans other 
than HELOCs subject to Sec.  1026.40, the exception in Sec.  
1026.9(c)(2)(v)(A) under which a creditor is not required to provide a 
change-in-terms notice under Sec.  1026.9(c)(2) when the change 
involves a reduction of any component of a finance or other charge does 
not apply on or after October 1, 2021, to margin reductions when a 
LIBOR index is replaced as permitted by proposed Sec.  1026.55(b)(7)(i) 
or Sec.  1026.55(b)(7)(ii). The proposed changes, if adopted, will 
ensure that the change-in-terms notices will disclose the replacement 
index and any adjusted margin that will be used to calculate a 
consumer's rate, regardless of whether the margin is being reduced or 
increased.
9(c)(2)(iv) Disclosure Requirements
    For plans other than HELOCs subject to Sec.  1026.40, comment 
9(c)(2)(iv)-2 explains that, if a creditor is changing the index used 
to calculate a variable rate, the creditor must disclose the following 
information in a tabular format in the change-in-terms notice: The 
amount of the new rate (as calculated using the new index) and indicate 
that the rate varies and how the rate is determined, as explained in 
Sec.  1026.6(b)(2)(i)(A). The comment provides an example, which 
indicates that, if a creditor is changing from using a prime rate to 
using LIBOR in calculating a variable rate, the creditor would disclose 
in the table required by Sec.  1026.9(c)(2)(iv)(D)(1) the new rate 
(using the new index) and indicate that the rate varies with the market 
based on LIBOR. In light of the anticipated discontinuation of LIBOR, 
the proposed rule would amend the example in comment 9(c)(2)(iv)-2 to 
substitute a SOFR index for LIBOR. The proposed rule would also make 
technical changes for clarity by changing ``prime rate'' to ``prime 
index.''
9(c)(2)(v) Notice Not Required
    The Bureau is proposing to revise Sec.  1026.9(c)(2)(v)(A) to 
provide that for plans other than HELOCs subject to Sec.  1026.40, the 
exception in Sec.  1026.9(c)(2)(v)(A) under which a creditor is not 
required to provide a change-in-terms notice under Sec.  1026.9(c)(2) 
when the change involves a reduction of any component of a finance or 
other charge does not apply on or after October 1, 2021, to margin 
reductions when a LIBOR index is replaced as permitted by proposed 
Sec.  1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii).\36\ The proposed 
changes, if adopted, will ensure that the change-in-terms notices will 
disclose the replacement index and any adjusted margin that will be 
used to calculate a consumer's rate, regardless of whether the margin 
is being reduced or increased.
---------------------------------------------------------------------------

    \36\ As discussed in more detail in the section-by-section 
analysis of proposed Sec.  1026.55(b)(7)(i), the Bureau is proposing 
to move the provisions in current comment 55(b)(2)-6 that allow a 
card issuer to replace an index and adjust the margin if the index 
becomes unavailable in certain circumstances to proposed Sec.  
1026.55(b)(7)(i) and to revise the proposed moved provisions for 
clarity and consistency. Also, as discussed in more detail in the 
section-by-section analysis of proposed Sec.  1026.55(b)(7)(ii), to 
facilitate compliance, the Bureau is proposing to add new LIBOR-
specific provisions to proposed Sec.  1026.55(b)(7)(ii) that would 
permit card issuers for a credit card account under an open-end (not 
home-secured) consumer credit plan that use a LIBOR index under the 
plan to replace the LIBOR index and change the margin on such plans 
on or after March 15, 2021, in certain circumstances.
---------------------------------------------------------------------------

    The Bureau also is proposing to add comment 9(c)(2)(v)-14 to 
provide additional detail. Proposed comment 9(c)(2)(v)-14 provides that 
for change-in-terms notices provided under Sec.  1026.9(c)(2) on or 
after October 1, 2021, covering changes permitted by proposed Sec.  
1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii), a creditor must provide a 
change-in-terms notice under Sec.  1026.9(c)(2) disclosing the 
replacement index for a LIBOR index and any adjusted margin that is 
permitted under proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii), even if the margin is reduced. Proposed comment 
9(c)(2)(v)-14 also provides that prior to October 1, 2021, a creditor 
has the option of disclosing a reduced margin in the change-in-terms 
notice that discloses the replacement index for a LIBOR index as 
permitted by proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii).
    The Bureau believes that when a creditor for plans other than 
HELOCs subject to Sec.  1026.40 is replacing the LIBOR index and 
adjusting the margin as permitted by proposed Sec.  1026.55(b)(7)(i) or 
Sec.  1026.55(b)(7)(ii), it may be beneficial for consumers to receive 
notice not just of the replacement index but also any adjustments to 
the margin, even if the margin is decreased. The Bureau believes that 
it may be important that consumers are informed of the replacement 
index and any adjusted margin (even a reduction in the margin) so that 
consumers will know how the variable rates on their accounts will be 
determined going forward after the LIBOR index is replaced. Otherwise, 
a consumer that is only notified that the LIBOR index is being replaced 
with a replacement index that has a higher index value but is not 
notified that the margin is decreasing could reasonably but mistakenly 
believe that the APR on the plan is increasing. The Bureau solicits 
comment generally on the proposed revisions to Sec.  1026.9(c)(2)(v)(A) 
and proposed comment 9(c)(2)(v)-14.
    The proposed revisions to Sec.  1026.9(c)(2)(v)(A), if adopted as 
proposed, would apply to notices provided on or after October 1, 2021. 
TILA section 105(d) generally requires that changes in disclosures 
required by TILA or Regulation Z have an effective date of the October 
1 that is at least six months after the date the final rule is 
adopted.\37\ Proposed comment 9(c)(2)(v)-14 clarifies that prior to 
October 1, 2021, a creditor has the option of disclosing a reduced 
margin in the change-in-terms notice that discloses the replacement 
index for a LIBOR index as permitted by proposed Sec.  1026.55(b)(7)(i) 
or Sec.  1026.55(b)(7)(ii). The Bureau believes that creditors for 
plans other than HELOCs subject to Sec.  1026.40 may want to provide 
the information about the decreased margin in the change-in-terms 
notice, even if they replace the LIBOR index and adjust the margin 
pursuant to proposed Sec.  1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii) 
earlier than October 1, 2021. The Bureau believes that these creditors 
may want to provide this information to avoid confusion by consumers 
and because this reduced margin is beneficial to consumers. Thus, 
proposed comment

[[Page 36945]]

9(c)(2)(v)-14 would permit creditors for plans other than HELOCs 
subject to Sec.  1026.40 to provide the information about the decreased 
margin in the change-in-terms notice even if they replace the LIBOR 
index and adjust the margin pursuant to proposed Sec.  1026.55(b)(7)(i) 
or Sec.  1026.55(b)(7)(ii) earlier than October 1, 2021. The Bureau 
encourages creditors to include this information in change-in-terms 
notices provided earlier than October 1, 2021, even though they are not 
required to do so, to ensure that consumers are informed of how the 
variable rates on their accounts will be determined going forward after 
the LIBOR index is replaced.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------

    The Bureau recognizes that there may be open-end credit plans that 
use a LIBOR index to calculate variable rates on the plan where the 
plan is not a HELOC that is subject to Sec.  1026.40 and is not a 
credit card account under an open-end (not home-secured) consumer 
credit plan. For example, there may be overdraft lines of credit and 
other types of open-end plans that are not HELOCs and are not credit 
card accounts that may use a LIBOR index. The proposed changes to Sec.  
1026.9(c)(2)(v)(A) requiring any reduced margin to be disclosed in a 
change-in-terms notice when the LIBOR index is being replaced would not 
apply to a decrease in the margin when a LIBOR index is replaced for 
these open-end plans because the proposed changes only apply when a 
LIBOR index is replaced under proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii). These open-end plans are not subject to the 
restrictions set forth in proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii) for replacing the LIBOR index and adjusting the 
margin. The Bureau solicits comment on whether the Bureau should revise 
Sec.  1026.9(c)(2)(v)(A) to require that creditors for those open-end 
plans must disclose any decrease in the margin in change-in-terms 
notices provided on or after October 1, 2021, where the creditor is 
replacing a LIBOR index used under the plan. The Bureau also solicits 
comment on the extent to which these types of open-end plans currently 
use a LIBOR index.

Section 1026.20 Disclosure Requirements Regarding Post-Consummation 
Events

20(a) Refinancings
    Section 1026.20 includes disclosure requirements regarding post-
consummation events for closed-end credit. Section 1026.20(a) and its 
commentary define when a refinancing occurs for closed-end credit and 
provide that a refinancing is a new transaction requiring new 
disclosures to the consumer. Comment 20(a)-3.ii.B explains that a new 
transaction subject to new disclosures results if the creditor adds a 
variable-rate feature to the obligation, even if it is not accomplished 
by the cancellation of the old obligation and substitution of a new 
one. The comment also states that a creditor does not add a variable-
rate feature by changing the index of a variable-rate transaction to a 
comparable index, whether the change replaces the existing index or 
substitutes an index for one that no longer exists. To clarify comment 
20(a)-3.ii.B, the Bureau is proposing to add to the comment an 
illustrative example, which would indicate that a creditor does not add 
a variable-rate feature by changing the index of a variable-rate 
transaction from the 1-month, 3-month, 6-month, or 1-year USD LIBOR 
index to the spread-adjusted index based on SOFR recommended by the 
ARRC to replace the 1-month, 3-month, 6-month, or 1-year USD LIBOR 
index respectively because the replacement index is a comparable index 
to the corresponding USD LIBOR index.\38\
---------------------------------------------------------------------------

    \38\ By ``corresponding USD LIBOR index,'' the Bureau means the 
specific USD LIBOR index for which the ARRC is recommending the 
replacement index as a replacement. Thus, if SOFR term rates are not 
available and the ARRC recommends a specific spread-adjusted 30-day 
SOFR index as a replacement for the 1-year LIBOR, the 1-year USD 
LIBOR index would be the ``corresponding USD LIBOR index'' for that 
specific spread-adjusted 30-day SOFR index.
---------------------------------------------------------------------------

    As discussed in part III, the Bureau has received requests from 
stakeholders for clarification that the spread-adjusted SOFR-based 
index being developed by the ARRC is a ``comparable index'' to LIBOR. 
The Bureau recognizes that this issue is of concern for a range of 
closed-end credit products because issuing new origination disclosures 
in connection with the LIBOR transition could be quite expensive. The 
Bureau also recognizes that the issue is of particular concern with 
respect to existing LIBOR closed-end mortgage loans because, if 
substitution of an index that is not a ``comparable index'' constitutes 
a refinancing under Sec.  1026.20(a) for an ARM, Sec.  1026.43 would 
require a new ability-to-repay determination if the requirements of 
Sec.  1026.43 are otherwise applicable.\39\
---------------------------------------------------------------------------

    \39\ Comment 43(a)-1 explains that Sec.  1026.43 does not apply 
to any change to an existing loan that is not treated as a 
refinancing under Sec.  1026.20(a). Comment 43(a)-1 further explains 
that Sec.  1026.43 generally applies to consumer credit transactions 
secured by a dwelling, but certain dwelling-secured consumer credit 
transactions are exempt or partially exempt from coverage under 
Sec.  1026.43(a)(1) through (3), and that Sec.  1026.43 does not 
apply to an extension of credit primarily for a business, 
commercial, or agricultural purpose, even if it is secured by a 
dwelling.
---------------------------------------------------------------------------

    The Bureau has reviewed the SOFR indices upon which the ARRC has 
indicated it will base its recommended replacement indices and the 
spread adjustment methodology that the ARRC is recommending using to 
develop the replacement indices. Based on this review, the Bureau 
anticipates that the spread-adjusted replacement indices that the ARRC 
is developing will provide a good example of a comparable index to the 
tenors of LIBOR that they are designated to replace.
    On June 22, 2017, the ARRC identified SOFR as its recommended 
alternative to LIBOR after considering various potential alternatives, 
including other term unsecured rates, overnight unsecured rates, other 
secured repurchase agreements (repo) rates, U.S. Treasury bill and bond 
rates, and overnight index swap rates linked to the effective Federal 
funds rate.\40\ The ARRC made its final recommendation of SOFR after 
evaluating and incorporating feedback from a 2016 consultation and from 
end users on its advisory group.\41\
---------------------------------------------------------------------------

    \40\ ARRC, ARRC Consultation on Spread Adjustment Methodologies 
for Fallbacks in Cash Products Referencing USD LIBOR at 3 (Jan. 21, 
2020), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation.pdf.
    \41\ Id.
---------------------------------------------------------------------------

    As the ARRC has explained, SOFR is a broad measure of the cost of 
borrowing cash overnight collateralized by U.S. Treasury 
securities.\42\ SOFR is determined based on transaction data composed 
of: (i) Tri-party repo, (ii) General Collateral Finance repo, and (iii) 
bilateral Treasury repo transactions cleared through Fixed Income 
Clearing Corporation. SOFR is representative of general funding 
conditions in the overnight Treasury repo market. As such, it reflects 
an economic cost of lending and borrowing relevant to the wide array of 
market participants active in the financial markets. In terms of the 
transactions underpinning SOFR, SOFR has the widest coverage of any 
Treasury repo rate available. Averaging over $1 trillion of daily 
trading, transaction volumes underlying SOFR are far larger than the 
transactions in any other U.S. money market.\43\
---------------------------------------------------------------------------

    \42\ Id. at 3.
    \43\ Fed. Reserve Bank of N.Y., Additional Information About 
SOFR and Other Treasury Repo Reference Rates, available at https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information 
(last visited May 11. 2020).
---------------------------------------------------------------------------

    The ARRC intends to endorse forward-looking term SOFR rates 
provided a consensus among its members can be reached that robust

[[Page 36946]]

term benchmarks that are compliant with International Organization of 
Securities Commissions (IOSCO) standards and meet appropriate criteria 
set by the ARRC can be produced. If the ARRC has not recommended 
relevant forward-looking term SOFR rates, it will base its recommended 
indices on a compounded average of SOFR over a selected compounding 
period.\44\ The ARRC has committed to making sure its recommended 
spread adjustments and the resulting spread-adjusted rates are 
published and to working with potential vendors to make sure that these 
spreads and spread-adjusted rates are made publicly available.\45\ The 
New York Fed has already begun daily publication of three compounded 
averages of SOFR, including a 30-day compounded average of SOFR (30-day 
SOFR), and a daily index that allows for the calculation of compounded 
average rates over custom time periods.\46\
---------------------------------------------------------------------------

    \44\ ARRC Consultation on Spread Adjustment Methodologies, supra 
note 40, at 5.
    \45\ ARRC, ARRC Announces Recommendation of a Spread Adjustment 
Methodology for Cash Products (Apr. 8, 2020), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Methodology.pdf.
    \46\ Fed. Reserve Bank of N.Y., SOFR Averages and Index Data, 
https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind (last 
visited May 11, 2020).
---------------------------------------------------------------------------

    The Bureau notes that the government-sponsored enterprises (GSEs) 
announced in February 2020 that they will begin accepting ARMs based on 
30-day average SOFR in 2020.\47\ For purposes of this proposed rule, 
the Bureau has conducted its analysis below assuming that the ARRC will 
base its recommended replacement indices on 30-day SOFR. Prior to the 
start of official publication of SOFR in 2018, the New York Fed 
released data from August 2014 to March 2018 representing modeled, pre-
production estimates of SOFR that are based on the same basic 
underlying transaction data and methodology that now underlie the 
official publication.\48\ The ARRC and the Bureau have compared the 
rate history that is available for SOFR (to calculate compounded 
averages) with the rate history for the applicable LIBOR indices.\49\ 
For the reasons discussed in the section-by-section analysis of 
proposed Sec.  1026.40(f)(3)(ii)(A), the Bureau is proposing to 
determine that the historical fluctuations in the spread-adjusted index 
based on 30-day SOFR are substantially similar to those of 1-month, 3-
month, 6-month, and 1-year USD LIBOR.
---------------------------------------------------------------------------

    \47\ See, e.g., Fed. Nat'l Mortgage Ass'n, Lender Letter LL-
2020-01 (Feb. 5, 2020), https://singlefamily.fanniemae.com/media/21831/display; Fed. Home Loan Mortgage Corp., Bulletin 2020-1 
Selling (Feb. 5, 2020), https://guide.freddiemac.com/app/guide/bulletin/2020-;1.
    \48\ See David Bowman, Historical Proxies for the Secured 
Overnight Financing Rate (July 15, 2019), available at https://www.federalreserve.gov/econres/notes/feds-notes/historical-proxies-for-the-secured-overnight-financing-rate-20190715.htm.
    \49\ See, e.g., ARRC Consultation on Spread Adjustment 
Methodologies, supra note 40, at 4 (comparing 3-month compounded 
SOFR relative to the 3-month USD LIBOR since 2014). The ARRC and the 
Bureau have also considered the history of other indices that could 
be viewed as historical proxies for SOFR. See, e.g., Bowman, supra 
note 48.
---------------------------------------------------------------------------

    While robust, IOSCO-compliant SOFR term rates endorsed by the ARRC 
do not yet exist, the Board has published data on ``indicative'' 1-
month, 3-month, and 6-month SOFR term rates.\50\ The Bureau has 
compared this data to data for the applicable LIBOR indices. For the 
reasons discussed in the section-by-section analysis of proposed Sec.  
1026.40(f)(3)(ii)(A), the Bureau is proposing to determine that (1) the 
historical fluctuations of 1-year and 6-month USD LIBOR are 
substantially similar to those of the 1-month, 3-month, and 6-month 
spread-adjusted SOFR term rates; (2) the historical fluctuations of 3-
month USD LIBOR are substantially similar to those of the 1-month and 
3-month spread-adjusted SOFR term rates; and (3) the historical 
fluctuations of 1-month USD LIBOR are substantially similar to those of 
the 1-month spread-adjusted SOFR term rate.
---------------------------------------------------------------------------

    \50\ Eric Heitfield & Yang Ho-Park, Indicative Forward-Looking 
SOFR Term Rates (Apr. 19, 2019), available at https://www.federalreserve.gov/econres/notes/feds-notes/indicative-forward-looking-sofr-term-rates-20190419.htm. (last updated May 1, 2020).
---------------------------------------------------------------------------

    The Bureau is proposing to make these determinations about the 
historical fluctuations in the spread-adjusted indices based on 30-day 
SOFR, 1-month term SOFR, 3-month term SOFR, and 6-month term SOFR, 
while analyzing data on 30-day SOFR, 1-month term SOFR, 3-month term 
SOFR, and 6-month term SOFR without spread adjustments. This analysis 
is valid because the ARRC has stated that the spread adjustments will 
be static, outside of a one-year transition period that has not yet 
started and so is not in the historical data. A static spread 
adjustment would have no effect on historical fluctuations.
    30-day SOFR, the applicable SOFR term rates, and the applicable 
LIBOR indices all reflect the cost of borrowing in the United States 
and have all generally moved together during SOFR's available history. 
However, the ARRC and the Bureau recognize that the SOFR indices will 
differ in some respects from the LIBOR indices. The nature and extent 
of these differences will depend on whether the SOFR indices are based 
on 30-day SOFR or SOFR term rates.
    30-day SOFR is a historical, backward-looking 30-day average of 
overnight rates, while the LIBOR indices are forward-looking term rates 
published with several different tenors (overnight, 1-week, 1-month, 2-
month, 3-month, 6-month, and 1-year). The LIBOR indices, therefore, 
reflect funding conditions for a different length of time than 30-day 
SOFR does, and they reflect those funding conditions in advance rather 
than with a lag as 30-day SOFR does. The LIBOR indices may also include 
term premia missing from 30-day SOFR.\51\ Moreover, SOFR is a secured 
rate while the LIBOR indices are unsecured and therefore include an 
element of bank credit risk. The LIBOR indices also may reflect supply 
and demand conditions in wholesale unsecured funding markets that also 
could lead to differences with SOFR.
---------------------------------------------------------------------------

    \51\ The ``term premium'' is the excess yield that investors 
require to buy a long-term bond instead of a series of shorter-term 
bonds.
---------------------------------------------------------------------------

    SOFR term rates, if they are available, will have fewer differences 
with LIBOR term rates than 30-day SOFR does. Since they are also term 
rates, they will also include term premia, and these should usually be 
similar to the term premia embedded in LIBOR. Since SOFR term rates 
will also be forward-looking, they should adjust quickly to changing 
expectations about future funding conditions as LIBOR term rates do, 
rather than following them with a lag as 30-day SOFR does. However, 
SOFR term rates will still have differences with the LIBOR indices. As 
mentioned above, SOFR is a secured rate while the LIBOR indices are 
unsecured. SOFR and LIBOR also reflect supply and demand conditions in 
different credit markets.
    Thus, whether the ARRC bases its recommended indices on forward-
looking SOFR term rates or backward-looking historical averages of 
SOFR, its recommended indices will without adjustments differ in levels 
from the LIBOR indices. The ARRC intends to account for these 
differences from the historical levels of LIBOR term rates through 
spread adjustments in the replacement indices that it recommends. On 
January 21, 2020, the ARRC released a consultation on spread adjustment 
methodologies that provided historical analyses of a number of 
potential spread adjustment methodologies and that showed that the 
proposed methodology performed well relative to other options, 
including potential dynamic spread adjustments.\52\ The ARRC's 
consultation

[[Page 36947]]

received over 70 responses from consumer advocacy groups, asset 
managers, corporations, banks, industry associations, GSEs, and 
others.\53\ On April 8, 2020, the ARRC announced that it had agreed on 
a recommended spread adjustment methodology for cash products 
referencing USD LIBOR.\54\ Following its consideration of feedback 
received on its public consultation, the ARRC is recommending a long-
term spread adjustment equal to the historical median of the five-year 
spread between USD LIBOR and SOFR. For consumer products, the ARRC is 
additionally recommending a 1-year transition period to this five-year 
median spread adjustment methodology.\55\ Thus, in the short term, the 
transition will be gradual. On the date specified by the ARRC, the 
spread adjustment will not be set immediately to its long-run value. 
Instead, on the date specified by the ARRC, the spread adjustment will 
be set to equalize the value of the SOFR-based spread-adjusted index 
and the LIBOR index. The spread adjustment will then transition 
steadily over the course of a year to its long-run value. The inclusion 
of a transition period for consumer products was endorsed by many 
respondents, including consumer advocacy groups.\56\ Although the ARRC 
has not yet finalized certain aspects of its recommendations for 
replacement indices, it is actively working on doing so.\57\
---------------------------------------------------------------------------

    \52\ ARRC Consultation on Spread Adjustment Methodologies, supra 
note 40.
    \53\ ARRC, Summary of Feedback Received in the ARRC Spread-
Adjustment Consultation and Follow-Up Consultation on Technical 
Details 2 (May 6, 2020), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation_Follow_Up.pdf. [hereinafter 
referred to as ARRC Supplemental Spread-Adjustment Consultation]
    \54\ ARRC Announces Recommendation of a Spread Adjustment 
Methodology, supra note 45.
    \55\ Id.
    \56\ ARRC Supplemental Spread-Adjustment Consultation, supra 
note 53, at 1.
    \57\ The ARRC issued a supplemental consultation on spread 
adjustment methodology on May 6, 2020, seeking further views on 
certain technical issues related to spread adjustment methodologies 
for cash products referencing USD LIBOR. Id.
---------------------------------------------------------------------------

    The ARRC has stated that each spread-adjusted replacement index 
that it recommends will incorporate a spread adjustment that will be 
fixed at a specified time at or before LIBOR's cessation and will 
remain static after the 1-year transition period.\58\ The ARRC intends 
for the adjustment to reflect and adjust for the historical differences 
between LIBOR and SOFR in order to make the spread-adjusted rate 
comparable to LIBOR in a fair and reasonable way, thereby minimizing 
the impact to borrowers and lenders.\59\ Although the methodology will 
be the same across different tenors of LIBOR, it may be applied to each 
LIBOR tenor separately, so that there would be a separate recommended 
spread adjustment calculated for 1-month, 2-month, 3-month, 6-month, 
and 1-year USD LIBOR.\60\
---------------------------------------------------------------------------

    \58\ ARRC Consultation on Spread Adjustment Methodologies, supra 
note 40, at 1, 2.
    \59\ Id. at 2, 3.
    \60\ Id. at 7. Thus, the calculated spread adjustment may differ 
for each tenor of LIBOR, even if the methodology used to calculate 
each is the same. Id. The supplemental consultation issued by the 
ARRC on May 6, 2020, invites participants to consider the option to 
use the same spread adjustment values that will be used by the 
International Swaps and Derivatives Association (ISDA) across all of 
the different fallback rates, rather than using the same adjustment 
methodology to calculate a different spread adjustment for each 
potential fallback rate. ARRC Supplemental Spread-Adjustment 
Consultation, supra note 53, at 3-4. The supplemental consultation 
also seeks views on a second issue: Recognizing that ISDA will now 
include a pre-cessation trigger, the supplemental consultation seeks 
views on whether the timing of the calculation of the ARRC's spread 
adjustment should match ISDA's timing if a pre-cessation event is 
operative. Id.
---------------------------------------------------------------------------

    The Bureau is proposing to determine that the spread-adjusted 
indices based on SOFR recommended by the ARRC as a replacement for the 
1-month, 3-month, 6-month, and 1-year USD LIBOR index are comparable 
indices to the 1-month, 3-month, 6-month, and 1-year USD LIBOR index 
respectively. The spread-adjusted indices based on SOFR that the ARRC 
recommends will be published and made publicly available. The ARRC's 
Consultation on its spread adjustment methodology presents several 
pieces of evidence that, in the ARRC's view, suggest that spread-
adjusted SOFR rates are likely to experience similar fluctuations to 
the corresponding tenors of LIBOR.\61\ Using them as a replacement for 
the corresponding tenors of LIBOR does not seem likely to significantly 
change the economic position of the parties to the contract, given that 
SOFR and the LIBOR indices have generally moved together and the 
replacement index will be spread adjusted based on a methodology that 
derived through a public consultation.
---------------------------------------------------------------------------

    \61\ ARRC Consultation on Spread Adjustment Methodologies, supra 
note 40.
---------------------------------------------------------------------------

    The proposed example would be illustrative only, and the Bureau 
does not intend to suggest that the spread-adjusted SOFR indices 
recommended by the ARRC are the only indices that would be comparable 
to the LIBOR indices. The Bureau recognizes that there may be other 
comparable indices that creditors may use as replacements for the 
various tenors of LIBOR but believes it would be helpful to add this 
example in the commentary. The Bureau requests comment on whether it is 
appropriate to add the proposed example to comment 20(a)-3.ii.B and 
whether the Bureau should make any other amendments to Sec.  1026.20(a) 
or its commentary in connection with the LIBOR transition. 
Specifically, the Bureau requests comment on whether there are any 
other replacement indices that it should identify as an example of a 
``comparable index'' in comment 20(a)-3.ii.B, and if so, which indices 
and on what bases.

Section 1026.36 Prohibited Acts or Practices and Certain Requirements 
for Credit Secured by a Dwelling

36(a) Definitions
36(a)(4) Seller Financiers; Three Properties
36(a)(4)(iii)
36(a)(4)(iii)(C)
    Section 1026.36(a)(1) defines the term ``loan originator'' for 
purposes of the prohibited acts or practices and requirements for 
credit secured by a dwelling in Sec.  1026.36. Section 1026.36(a)(4) 
addresses the three-property exclusion for seller financers and 
provides that a person (as defined in Sec.  1026.2(a)(22)) that meets 
all of the criteria specified in Sec.  1026.36(a)(4)(i) to (iii) is not 
a loan originator under Sec.  1026.36(a)(1). Pursuant to Sec.  
1026.36(a)(4)(iii)(C), one such criterion requires that, if the 
financing agreement has an adjustable rate, the index the adjustable 
rate is based on is a widely available index such as indices for U.S. 
Treasury securities or LIBOR. In light of the anticipated 
discontinuation of LIBOR, the proposed rule would amend the examples of 
indices provided in Sec.  1026.36(a)(4)(iii)(C) to substitute SOFR for 
LIBOR.
36(a)(5) Seller Financiers; One Property
36(a)(5)(iii)
36(a)(5)(iii)(B)
    Section 1026.36(a)(1) defines the term ``loan originator'' for 
purposes of the prohibited acts or practices and requirements for 
credit secured by a dwelling in Sec.  1026.36. Section 1026.36(a)(5) 
addresses the one-property exclusion for seller financers and provides 
that a natural person, estate, or trust that meets all of the criteria 
specified in Sec.  1026.36(a)(5)(i) to (iii) is not a loan originator 
under Sec.  1026.36(a)(1). Pursuant to Sec.  1026.36(a)(5)(iii)(B), one 
such criterion currently requires that, if the financing agreement has 
an adjustable rate, the index the adjustable rate is based on is a 
widely available index such as indices

[[Page 36948]]

for U.S. Treasury securities or LIBOR. In light of the anticipated 
discontinuation of LIBOR, the proposed rule would amend the examples of 
indices provided in Sec.  1026.36(a)(5)(iii)(B) to substitute SOFR for 
LIBOR.

Section 1026.37 Content of Disclosures for Certain Mortgage 
Transactions (Loan Estimate)

37(j) Adjustable Interest Rate Table
37(j)(1) Index and Margin
    Section 1026.37 governs the content of the Loan Estimate disclosure 
for certain mortgage transactions. If the interest rate may adjust and 
increase after consummation and the product type is not a step rate, 
Sec.  1026.37(j)(1) requires disclosure in the Loan Estimate of, inter 
alia, the index upon which the adjustments to the interest rate are 
based. Comment 37(j)(1)-1 explains that the index disclosed pursuant to 
Sec.  1026.37(j)(1) must be stated such that a consumer reasonably can 
identify it. The comment further explains that a common abbreviation or 
acronym of the name of the index may be disclosed in place of the 
proper name of the index, if it is a commonly used public method of 
identifying the index. The comment provides, as an example, that 
``LIBOR'' may be disclosed instead of London Interbank Offered Rate. In 
light of the anticipated discontinuation of LIBOR, the proposed rule 
would amend this example in comment 37(j)(1)-1 to provide that ``SOFR'' 
may be disclosed instead of Secured Overnight Financing Rate.

Section 1026.40 Requirements for Home Equity Plans

40(f) Limitations on Home Equity Plans
40(f)(3)
40(f)(3)(ii)
    TILA section 137(c)(1) provides that no open-end consumer credit 
plan under which extensions of credit are secured by a consumer's 
principal dwelling may contain a provision which permits a creditor to 
change unilaterally any term except in enumerated circumstances set 
forth in TILA section 137(c).\62\ TILA section 137(c)(2)(A) provides 
that a creditor may change the index and margin applicable to 
extensions of credit under such a plan if the index used by the 
creditor is no longer available and the substitute index and margin 
will result in a substantially similar interest rate.\63\ In 
implementing TILA section 137(c), Sec.  1026.40(f)(3) prohibits a 
creditor from changing the terms of a HELOC subject to Sec.  1026.40 
except in enumerated circumstances set forth in Sec.  1026.40(f)(3). 
Section 1026.40(f)(3)(ii) provides that a creditor may change the index 
and margin used under the HELOC plan if the original index is no longer 
available, the new index has a historical movement substantially 
similar to that of the original index, and the new index and margin 
would have resulted in an APR substantially similar to the rate in 
effect at the time the original index became unavailable.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 1647(c).
    \63\ 15 U.S.C. 1647(c)(2)(A).
---------------------------------------------------------------------------

    Current comment 40(f)(3)(ii)-1 provides that a creditor may change 
the index and margin used under the HELOC plan if the original index 
becomes unavailable, as long as historical fluctuations in the original 
and replacement indices were substantially similar, and as long as the 
replacement index and margin will produce a rate similar to the rate 
that was in effect at the time the original index became unavailable. 
Current comment 40(f)(3)(ii)-1 also provides that if the replacement 
index is newly established and therefore does not have any rate 
history, it may be used if it produces a rate substantially similar to 
the rate in effect when the original index became unavailable. As 
discussed in the section-by-section analysis of proposed Sec.  
1026.55(b)(7), card issuers for a credit card account under an open-end 
(not home-secured) consumer credit plan are subject to current comment 
55(b)(2)-6, which provides a similar provision on the unavailability of 
an index as current comment 40(f)(3)(ii)-1.
The Proposal
    As discussed in part III, the industry has requested that the 
Bureau permit card issuers to replace the LIBOR index used in setting 
the variable rates on existing accounts before LIBOR becomes 
unavailable to facilitate compliance. Among other things, the industry 
is concerned that if card issuers must wait until LIBOR become 
unavailable to replace the LIBOR indices used on existing accounts, 
these card issuers would not have sufficient time to inform consumers 
of the replacement index and update their systems to implement the 
change. To reduce uncertainty with respect to selecting a replacement 
index, the industry has also requested that the Bureau determine that 
the prime rate has ``historical fluctuations'' that are ``substantially 
similar'' to those of the LIBOR indices. The Bureau believes that 
similar issues may arise with respect to the transition of existing 
HELOC accounts away from using a LIBOR index.
    To address these concerns, as discussed in more detail in the 
section-by-section analysis of proposed Sec.  1026.40(f)(3)(ii)(B), the 
Bureau is proposing to add new LIBOR-specific provisions to proposed 
Sec.  1026.40(f)(3)(ii)(B) that would permit creditors for HELOC plans 
subject to Sec.  1026.40 that use a LIBOR index under the plan to 
replace the LIBOR index and change the margins for calculating the 
variable rates on or after March 15, 2021, in certain circumstances 
without needing to wait for LIBOR to become unavailable.
    Specifically, proposed Sec.  1026.40(f)(3)(ii)(B) provides that if 
a variable rate on a HELOC subject to Sec.  1026.40 is calculated using 
a LIBOR index, a creditor may replace the LIBOR index and change the 
margin for calculating the variable rate on or after March 15, 2021, as 
long as (1) the historical fluctuations in the LIBOR index and 
replacement index were substantially similar; and (2) the replacement 
index value in effect on December 31, 2020, and replacement margin will 
produce an APR substantially similar to the rate calculated using the 
LIBOR index value in effect on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. Proposed Sec.  
1026.40(f)(3)(ii)(B) also provides that if the replacement index is 
newly established and therefore does not have any rate history, it may 
be used if the replacement index value in effect on December 31, 2020, 
and replacement margin will produce an APR substantially similar to the 
rate calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan.
    Also, as discussed in more detail in the section-by-section 
analysis of proposed Sec.  1026.40(f)(3)(ii)(B), to reduce uncertainty 
with respect to selecting a replacement index that meets the standards 
in proposed Sec.  1026.40(f)(3)(ii)(B), the Bureau is proposing to 
determine that Prime is an example of an index that has historical 
fluctuations that are substantially similar to those of certain USD 
LIBOR indices. The Bureau also is proposing to determine that certain 
spread-adjusted indices based on SOFR recommended by the ARRC have 
historical fluctuations that are substantially similar to those of 
certain USD LIBOR indices. The Bureau also is proposing additional 
detail in comments 40(f)(3)(ii)(B)-1 through -3 with respect to 
proposed Sec.  1026.40(f)(3)(ii)(B).

[[Page 36949]]

    In addition, as discussed in more detail in the section-by-section 
analysis of proposed Sec.  1026.40(f)(3)(ii)(A), the Bureau is 
proposing to move the unavailability provisions in current Sec.  
1026.40(f)(3)(ii) and current comment 40(f)(3)(ii)-1 to proposed Sec.  
1026.40(f)(3)(ii)(A) and proposed comment 40(f)(3)(ii)(A)-1 
respectively and to revise the proposed moved provisions for clarity 
and consistency. The Bureau also is proposing additional detail in 
comments 40(f)(3)(ii)(A)-2 through -3 with respect to proposed Sec.  
1026.40(f)(3)(ii)(A). For example, to reduce uncertainty with respect 
to selecting a replacement index that meets the standards for selecting 
a replacement index under proposed Sec.  1026.40(f)(3)(ii)(A), the 
Bureau is proposing the same determinations described above related to 
Prime and the spread-adjusted indices based on SOFR recommended by the 
ARRC in relation to proposed Sec.  1026.40(f)(3)(ii)(A). The Bureau is 
proposing to make these revisions and provide additional detail because 
the Bureau understands that some HELOC creditors may use the 
unavailability provision in proposed Sec.  1026.40(f)(3)(ii)(A) to 
replace a LIBOR index used under a HELOC plan, depending on the 
contractual provisions applicable to their HELOC plans, as discussed in 
more detail below.
    Bureau is proposing new proposed LIBOR-specific provisions rather 
than interpreting when the LIBOR indices are unavailable. For several 
reasons, the Bureau is proposing new LIBOR-specific provisions under 
proposed Sec.  1026.40(f)(3)(ii)(B), rather than interpreting the LIBOR 
indices to be unavailable as of a certain date prior to LIBOR being 
discontinued under current Sec.  1026.40(f)(3)(ii) (as proposed to be 
moved to proposed Sec.  1026.40(f)(3)(ii)(A)). First, the Bureau is 
concerned about making a determination for Regulation Z purposes under 
current Sec.  1026.40(f)(3)(ii) (as proposed to be moved to proposed 
Sec.  1026.40(f)(3)(ii)(A)) that the LIBOR indices are unavailable or 
unreliable when the FCA, the regulator of LIBOR, has not made such a 
determination.
    Second, the Bureau is concerned that a determination by the Bureau 
that the LIBOR indices are unavailable for purposes of current Sec.  
1026.40(f)(3)(ii) (as proposed to be moved to proposed Sec.  
1026.40(f)(3)(ii)(A)) could have unintended consequences on other 
products or markets. For example, the Bureau is concerned that such a 
determination could unintentionally cause confusion for creditors for 
other products (e.g., ARMs) about whether the LIBOR indices are 
unavailable for those products too and could possibly put pressure on 
those creditors to replace the LIBOR index used for those products 
before those creditors are ready for the change.
    Third, even if the Bureau interpreted unavailability under current 
Sec.  1026.40(f)(3)(ii) (as proposed to be moved to proposed Sec.  
1026.40(f)(3)(ii)(A)) to indicate that the LIBOR indices are 
unavailable prior to LIBOR being discontinued, this interpretation 
would not completely solve the contractual issues for creditors whose 
contracts require them to wait until the LIBOR indices become 
unavailable before replacing the LIBOR index. Creditors still would 
need to decide for their contracts whether the LIBOR indices are 
unavailable. Thus, even if the Bureau decided that the LIBOR indices 
are unavailable under Regulation Z as described above, creditors whose 
contracts require them to wait until the LIBOR indices become 
unavailable before replacing the LIBOR index essentially would remain 
in the same position of interpreting their contracts as they would have 
been under the current rule.
    Thus, the Bureau is not proposing to interpret when the LIBOR 
indices are unavailable for purposes of current Sec.  1026.40(f)(3)(ii) 
(as proposed to be moved to proposed Sec.  1026.40(f)(3)(ii)(A)). The 
Bureau solicits comment, however, on whether the Bureau should 
interpret when the LIBOR indices are unavailable for purposes of 
current Sec.  1026.40(f)(3)(ii) (as proposed to be moved to proposed 
Sec.  1026.40(f)(3)(ii)(A)), and if so, why the Bureau should make that 
determination and when should the LIBOR indices be considered 
unavailable for purposes of that provision.
    The Bureau also solicits comment on an alternative to interpreting 
the term ``unavailable.'' Specifically, should the Bureau make 
revisions to the unavailability provisions in current Sec.  
1026.40(f)(3)(ii) (as proposed to be moved to proposed Sec.  
1026.40(f)(3)(ii)(A)) in a manner that would allow those creditors who 
need to transition from LIBOR and, for contractual reasons, may not be 
able to switch away from LIBOR prior to it being unavailable to be 
better able to use the unavailability provisions for an orderly 
transition on or after March 15, 2021? If so, what should these 
revisions be?
    Interaction among proposed Sec.  1026.40(f)(3)(ii)(A) and (B) and 
contractual provisions. Proposed comment 40(f)(3)(ii)-1 addresses the 
interaction among the unavailability provisions in proposed Sec.  
1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in proposed Sec.  
1026.40(f)(3)(ii)(B), and the contractual provisions that apply to the 
HELOC plan. The Bureau understands that HELOC contracts may be written 
in a variety of ways. For example, the Bureau recognizes that some 
existing contracts for HELOCs that use LIBOR as an index for a variable 
rate may provide that (1) a creditor can replace the LIBOR index and 
the margin for calculating the variable rate unilaterally only if the 
LIBOR index is no longer available or becomes unavailable; and (2) the 
replacement index and replacement margin will result in an APR 
substantially similar to a rate that is in effect when the LIBOR index 
becomes unavailable. Other HELOC contracts may provide that a creditor 
can replace the LIBOR index and the margin for calculating the variable 
rate unilaterally only if the LIBOR index is no longer available or 
becomes unavailable but does not require that the replacement index and 
replacement margin will result in an APR substantially similar to a 
rate that is in effect when the LIBOR index becomes unavailable. In 
addition, other HELOC contracts may allow a creditor to change the 
terms of the contract (including the LIBOR index used under the plan) 
as permitted by law. To facilitate compliance, the Bureau is proposing 
detail on the interaction among the unavailability provisions in 
proposed Sec.  1026.40(f)(3)(ii)(A), the LIBOR-specific provisions in 
proposed Sec.  1026.40(f)(3)(ii)(B), and the contractual provisions for 
the HELOC.
    Proposed comment 40(f)(3)(ii)-1 provides that a creditor may use 
either the provision in proposed Sec.  1026.40(f)(3)(ii)(A) or Sec.  
1026.40(f)(3)(ii)(B) to replace a LIBOR index used under a HELOC plan 
subject to Sec.  1026.40 so long as the applicable conditions are met 
for the provision used. This proposed comment makes clear, however, 
that neither proposed provision excuses the creditor from noncompliance 
with contractual provisions. As discussed in more detail below, 
proposed comment 40(f)(3)(ii)-1 provides examples to illustrate when a 
creditor may use the provisions in proposed Sec.  1026.40(f)(3)(ii)(A) 
or Sec.  1026.40(f)(3)(ii)(B) to replace the LIBOR index used under a 
HELOC plan and each of these examples assumes that the LIBOR index used 
under the plan becomes unavailable after March 15, 2021.
    Proposed comment 40(f)(3)(ii)-1.i provides an example where a HELOC 
contract provides that a creditor may

[[Page 36950]]

not replace an index unilaterally under a plan unless the original 
index becomes unavailable and provides that the replacement index and 
replacement margin will result in an APR substantially similar to a 
rate that is in effect when the original index becomes unavailable. In 
this case, proposed comment 40(f)(3)(ii)-1.i explains that the creditor 
may use the unavailability provisions in proposed Sec.  
1026.40(f)(3)(ii)(A) to replace the LIBOR index used under the plan so 
long as the conditions of that provision are met. Proposed comment 
40(f)(3)(ii)-1.i also explains that the proposed LIBOR-specific 
provisions in proposed Sec.  1026.40(f)(3)(ii)(B) provide that a 
creditor may replace the LIBOR index if the replacement index value in 
effect on December 31, 2020, and replacement margin will produce an APR 
substantially similar to the rate calculated using the LIBOR index 
value in effect on December 31, 2020, and the margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. Proposed comment 40(f)(3)(ii)-1.i notes, 
however, that the creditor in this example would be contractually 
prohibited from replacing the LIBOR index used under the plan unless 
the replacement index and replacement margin also will produce an APR 
substantially similar to a rate that is in effect when the LIBOR index 
becomes unavailable. The Bureau solicits comments on this proposed 
approach and example.
    Proposed comment 40(f)(3)(ii)-1.ii provides an example of a HELOC 
contract under which a creditor may not replace an index unilaterally 
under a plan unless the original index becomes unavailable but does not 
require that the replacement index and replacement margin will result 
in an APR substantially similar to a rate that is in effect when the 
original index becomes unavailable. In this case, the creditor would be 
contractually prohibited from unilaterally replacing a LIBOR index used 
under the plan until it becomes unavailable. At that time, the creditor 
has the option of using proposed Sec.  1026.40(f)(3)(ii)(A) or Sec.  
1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of 
the applicable provision are met.
    The Bureau is proposing to allow the creditor in this case to use 
either the proposed unavailability provisions in proposed Sec.  
1026.40(f)(3)(ii)(A) or the proposed LIBOR-specific provisions in 
proposed Sec.  1026.40(f)(3)(ii)(B). If the creditor uses the 
unavailability provisions in proposed Sec.  1026.40(f)(3)(ii)(A), the 
creditor must use a replacement index and replacement margin that will 
produce an APR substantially similar to the rate in effect when the 
LIBOR index became unavailable. If the creditor uses the proposed 
LIBOR-specific provisions in proposed Sec.  1026.40(f)(3)(ii)(B), the 
creditor must use the replacement index value in effect on December 31, 
2020, and the replacement margin that will produce an APR substantially 
similar to the rate calculated using the LIBOR index value in effect on 
December 31, 2020, and the margin that applied to the variable rate 
immediately prior to the replacement of the LIBOR index used under the 
plan.
    The Bureau is proposing to allow a creditor in this case to use the 
index values of the LIBOR index and replacement index on December 31, 
2020, under proposed Sec.  1026.40(f)(3)(ii)(B) to meet the 
``substantially similar'' standard with respect to the comparison of 
the rates even if the creditor is contractually prohibited from 
unilaterally replacing the LIBOR index used under the plan until it 
becomes unavailable. The Bureau recognizes that LIBOR may not be 
discontinued until the end of 2021, which is around a year later than 
the December 31, 2020, date. Nonetheless, the Bureau is proposing to 
allow creditors that are restricted by their contracts to replace the 
LIBOR index used under the HELOC plans until the LIBOR index becomes 
unavailable to use the LIBOR index values and the replacement index 
values in effect on December 31, 2020, under proposed Sec.  
1026.40(f)(3)(ii)(B), rather than the index values on the day that 
LIBOR becomes unavailable under proposed Sec.  1026.40(f)(3)(ii)(A). 
This proposal would allow those creditors to use consistent index 
values to those creditors that are not restricted by their contracts in 
replacing the LIBOR index prior to LIBOR becoming unavailable. This 
proposal would also promote consistency for consumers in that all HELOC 
creditors would be permitted to use the same LIBOR values in comparing 
the rates.
    In addition, as discussed in part III, the industry has raised 
concerns that LIBOR may continue for some time after December 2021 but 
become less representative or reliable until LIBOR finally is 
discontinued. Allowing creditors to use the December 31, 2020, values 
for comparison of the rates instead of the LIBOR values when the LIBOR 
indices become unavailable may address some of these concerns.
    Thus, the Bureau is proposing to provide creditors with the 
flexibility to choose to compare the rates using the index values for 
the LIBOR index and the replacement index on December 31, 2020, by 
using the proposed LIBOR-specific provisions under proposed Sec.  
1026.40(f)(3)(ii)(B), rather than using the unavailability provisions 
in proposed Sec.  1026.40(f)(3)(ii)(A). The Bureau solicits comment on 
this proposed approach and example.
    Proposed comment 40(f)(3)(ii)-1.iii provides an example of a HELOC 
contract under which a creditor may change the terms of the contract 
(including the index) as permitted by law. Proposed comment 
40(f)(3)(ii)-1.iii explains in this case, if the creditor replaces a 
LIBOR index under a plan on or after March 15, 2021, but does not wait 
until the LIBOR index becomes unavailable to do so, the creditor may 
only use proposed Sec.  1026.40(f)(3)(ii)(B) to replace the LIBOR index 
if the conditions of that provision are met. In this case, the creditor 
may not use proposed Sec.  1026.40(f)(3)(ii)(A). Proposed comment 
40(f)(3)(ii)-1.iii also explains that if the creditor waits until the 
LIBOR index used under the plan becomes unavailable to replace the 
LIBOR index, the creditor has the option of using proposed Sec.  
1026.40(f)(3)(ii)(A) or Sec.  1026.40(f)(3)(ii)(B) to replace the LIBOR 
index if the conditions of the applicable provision are met.
    The Bureau is proposing to allow the creditor in this case to use 
either the unavailability provisions in proposed Sec.  
1026.40(f)(3)(ii)(A) or the proposed LIBOR-specific provisions in 
proposed Sec.  1026.40(f)(3)(ii)(B) if the creditor waits until the 
LIBOR index used under the plan becomes unavailable to replace the 
LIBOR index. For the reasons explained above in the discussion of the 
example in proposed comment 40(f)(3)(ii)-1.ii, the Bureau is proposing 
in the situation described in proposed comment 40(f)(3)(ii)-1.iii to 
provide creditors with the flexibility to choose to use the index 
values of the LIBOR index and the replacement index on December 31, 
2020, by using the proposed LIBOR-specific provisions under proposed 
Sec.  1026.40(f)(3)(ii)(B), rather than using the unavailability 
provisions in proposed Sec.  1026.40(f)(3)(ii)(A). The Bureau solicits 
comment on this proposed approach and example.
40(f)(3)(ii)(A)
    Current Sec.  1026.40(f)(3)(ii) provides that a creditor may change 
the index and margin used under a HELOC plan subject to Sec.  1026.40 
if the original index is no longer available, the new index has a 
historical movement substantially similar to that of the original 
index, and the new index and margin would have resulted in an APR 
substantially similar

[[Page 36951]]

to the rate in effect at the time the original index became 
unavailable. Current comment 40(f)(3)(ii)-1 provides that a creditor 
may change the index and margin used under the plan if the original 
index becomes unavailable, as long as historical fluctuations in the 
original and replacement indices were substantially similar, and as 
long as the replacement index and margin will produce a rate similar to 
the rate that was in effect at the time the original index became 
unavailable. Current comment 40(f)(3)(ii)-1 also provides that if the 
replacement index is newly established and therefore does not have any 
rate history, it may be used if it produces a rate substantially 
similar to the rate in effect when the original index became 
unavailable.
The Proposal
    The Bureau is proposing to move the unavailability provisions in 
current Sec.  1026.40(f)(3)(ii) and current comment 40(f)(3)(ii)-1 to 
proposed Sec.  1026.40(f)(3)(ii)(A) and proposed comment 
40(f)(3)(ii)(A)-1 respectively and revise the moved provisions for 
clarity and consistency. In addition, the Bureau is proposing to add 
detail in proposed comments 40(f)(3)(ii)(A)-2 and -3 on the conditions 
set forth in proposed Sec.  1026.40(f)(3)(ii)(A). For example, to 
reduce uncertainty with respect to selecting a replacement index that 
meets the standards under proposed Sec.  1026.40(f)(3)(ii)(A), the 
Bureau is proposing to determine that Prime is an example of an index 
that has historical fluctuations that are substantially similar to 
those of certain USD LIBOR indices. The Bureau also is proposing to 
determine that certain spread-adjusted indices based on SOFR 
recommended by the ARRC have historical fluctuations that are 
substantially similar to those of certain USD LIBOR indices. The Bureau 
is proposing to make revisions and provide additional detail with 
respect to the unavailability provisions in proposed Sec.  
1026.40(f)(3)(ii)(A) because the Bureau understands that some HELOC 
creditors may use these unavailability provisions to replace a LIBOR 
index used under a HELOC plan, depending on the contractual provisions 
applicable to their HELOC plans, as discussed above in more detail in 
the section-by-section of Sec.  1026.40(f)(3)(ii).
    The Bureau solicits comments on proposed Sec.  1026.40(f)(3)(ii)(A) 
and proposed comments 40(f)(3)(ii)(A)-1 through -3. These proposed 
provisions are discussed in more detail below.
    Proposed Sec.  1026.40(f)(3)(ii)(A). Proposed Sec.  
1026.40(f)(3)(ii)(A) provides that a creditor for a HELOC plan subject 
to Sec.  1026.40 may change the index and margin used under the plan if 
the original index is no longer available, the replacement index has 
historical fluctuations substantially similar to that of the original 
index, and the replacement index and replacement margin would have 
resulted in an APR substantially similar to the rate in effect at the 
time the original index became unavailable. Proposed Sec.  
1020.40(f)(3)(ii)(A) also provides that if the replacement index is 
newly established and therefore does not have any rate history, it may 
be used if it and the replacement margin will produce an APR 
substantially similar to the rate in effect when the original index 
became unavailable.
    Proposed Sec.  1026.40(f)(3)(ii)(A) differs from current Sec.  
1026.40(f)(3)(ii) in three ways. First, proposed Sec.  
1026.40(f)(3)(ii)(A) differs from current Sec.  1040(f)(3)(ii) by using 
the term ``historical fluctuations'' rather than the term ``historical 
movement'' to refer to the original index and the replacement index. 
Under current Sec.  1026.40(f)(3)(ii), ``historical fluctuations'' 
appears to be equivalent to ``historical movement'' because the 
regulatory text provision in Sec.  1026.40(f)(3)(ii) uses the term 
``historical movement'' while current comment 40(f)(3)(ii)-1 (that 
interprets current Sec.  1026.40(f)(3)(ii)) uses the term ``historical 
fluctuations.'' For clarity and consistency, the Bureau is proposing to 
use ``historical fluctuations'' in both proposed Sec.  
1026.40(f)(3)(ii)(A) and proposed comment 40(f)(3)(ii)(A)-1, so that 
the proposed regulatory text and related commentary use the same term.
    Second, proposed Sec.  1026.40(f)(3)(ii)(A) differs from current 
Sec.  1026.40(f)(3)(ii) by including a provision regarding newly 
established indices that is not contained in current Sec.  
1026.40(f)(3)(ii). This proposed provision is similar to the sentence 
in current comment 40(f)(3)(ii)-1 on newly established indices except 
that the proposed provision in proposed Sec.  1026.40(f)(3)(ii)(A) 
makes clear that a creditor that is using a newly established index 
also may adjust the margin so that the newly established index and 
replacement margin will produce an APR substantially similar to the 
rate in effect when the original index became unavailable. The newly 
established index may not have the same index value as the original 
index, and the creditor may need to adjust the margin to meet the 
condition that the newly established index and replacement margin will 
produce an APR substantially similar to the rate in effect when the 
original index became unavailable.
    Third, proposed Sec.  1026.40(f)(3)(ii)(A) differs from current 
Sec.  1026.40(f)(3)(ii) by using the terms ``replacement index'' and 
``replacement index and replacement margin'' instead of using ``new 
index'' and ``new index and margin,'' respectively as contained in 
current Sec.  1026.40(f)(3)(ii). These proposed changes are designed to 
avoid any confusion as to when the provision in proposed Sec.  
1026.40(f)(3)(ii)(A) is referring to a replacement index and 
replacement margin as opposed to a newly established index.
    Proposed comment 40(f)(3)(ii)(A)-1. The Bureau is proposing to move 
current comment 40(f)(3)(ii)-1 to proposed comment 40(f)(3)(ii)(A)-1. 
The Bureau also is proposing to revise this proposed moved comment in 
three ways for clarity and consistency with proposed Sec.  
1026.40(f)(3)(ii)(A). First, proposed comment 40(f)(3)(ii)(A)-1 differs 
from current comment 40(f)(3)(ii)-1 by providing that if an index that 
is not newly established is used to replace the original index, the 
replacement index and replacement margin will produce a rate 
``substantially similar'' to the rate that was in effect at the time 
the original index became unavailable. Current comment 40(f)(3)(ii)-1 
uses the term ``similar'' instead of ``substantially similar'' for the 
comparison of these rates. Nonetheless, this use of the term 
``similar'' in current comment 40(f)(3)(ii)-1 is inconsistent with the 
use of ``substantially similar'' in current Sec.  1026.40(f)(3)(ii) for 
the comparison of these rates. To correct this inconsistency between 
the regulation text and the commentary provision that interprets it, 
the Bureau is proposing to use ``substantially similar'' consistently 
in proposed Sec.  1026.40(f)(3)(ii)(A) and proposed comment 
40(f)(3)(ii)(A)-1 for the comparison of these rates.
    Second, consistent with the proposed new sentence in proposed Sec.  
1026.40(f)(3)(ii)(A) related to newly established indices, proposed 
comment 40(f)(3)(ii)(A)-1 differs from current comment 40(f)(3)(ii)-1 
by clarifying that a creditor that is using a newly established index 
may also adjust the margin so that the newly established index and 
replacement margin will produce an APR substantially similar to the 
rate in effect when the original index became unavailable.
    Third, proposed comment 40(f)(3)(ii)(A)-1 differs from current 
comment 40(f)(3)(ii)-1 by using the term ``the replacement index and 
replacement margin'' instead of ``the replacement index and margin'' to 
make clear when the proposed comment is

[[Page 36952]]

referring to a replacement margin and not the original margin.
    Historical fluctuations substantially similar for the LIBOR index 
and replacement index. Proposed comment 40(f)(3)(ii)(A)-2 provides 
detail on determining whether a replacement index that is not newly 
established has ``historical fluctuations'' that are ``substantially 
similar'' to those of the LIBOR index used under the plan for purposes 
of proposed Sec.  1026.40(f)(3)(ii)(A). Specifically, proposed comment 
40(f)(3)(ii)(A)-2 provides that for purposes of replacing a LIBOR index 
used under a plan pursuant to proposed Sec.  1026.40(f)(3)(ii)(A), a 
replacement index that is not newly established must have historical 
fluctuations that are substantially similar to those of the LIBOR index 
used under the plan, considering the historical fluctuations up through 
when the LIBOR index becomes unavailable or up through the date 
indicated in a Bureau determination that the replacement index and the 
LIBOR index have historical fluctuations that are substantially 
similar, whichever is earlier.
    Prime has ``historical fluctuations'' that are ``substantially 
similar'' to those of certain USD LIBOR indices. To facilitate 
compliance, proposed comment 40(f)(3)(ii)(A)-2.i includes a proposed 
determination that Prime has historical fluctuations that are 
substantially similar to those of the 1-month and 3-month USD LIBOR 
indices and includes a placeholder for the date when this proposed 
determination would be effective, if adopted in the final rule. The 
Bureau understands that some HELOC creditors may choose to replace a 
LIBOR index with Prime.
    The Bureau is proposing this determination after reviewing 
historical data from January 1986 through January 2020 on 1-month USD 
LIBOR, 3-month USD LIBOR, and Prime. The spread between 1-month USD 
LIBOR and Prime increased from roughly 142 basis points in 1986 to 281 
basis points in 1993. The spread between 3-month USD LIBOR increased 
from roughly 151 basis points in 1986 to 270 basis points in 1993. Both 
spreads were fairly steady after 1993. Given that for the last 27 years 
of history the spreads have remained relatively stable, the data, 
analysis, and conclusion discussed below are restricted to the period 
beginning in 1993.
    While Prime has not always moved in tandem with 1-month USD LIBOR 
and 3-month USD LIBOR after 1993, the Bureau believes that since 1993 
the historical fluctuations in 1-month USD LIBOR and Prime have been 
substantially similar and that the historical fluctuations in 3-month 
USD LIBOR and Prime have been substantially similar.\64\
---------------------------------------------------------------------------

    \64\ There was a temporary but large difference in the movements 
of LIBOR rates and Prime for roughly a month after Lehman Brothers 
filed for bankruptcy on September 15, 2008, reflecting the effects 
this event had on the perception of risk in the interbank lending 
market. For example, 1-month USD LIBOR increased over 200 basis 
points in the month after September 15, 2008, even as Prime and many 
other interest rates fell. The numbers presented in this analysis 
include this time period.
---------------------------------------------------------------------------

    The historical correlation between 1-month USD LIBOR and Prime is 
.9956. The historical correlation between 3-month USD LIBOR and Prime 
is .9918. While the correlation between these rates is quite high, 
correlation is not the only statistical measure of similarity that may 
be relevant for comparing the historical fluctuations of these 
rates.\65\ The Bureau has reviewed other statistical characteristics of 
these rates, such as the variance, skewness, and kurtosis,\66\ and 
these characteristics imply that on average both the 1-month USD LIBOR 
and 3-month USD LIBOR tend to move closely with Prime and that the 1-
month USD LIBOR and 3-month USD LIBOR tend to present consumers and 
creditors with payment changes that are similar to that presented by 
Prime.\67\
---------------------------------------------------------------------------

    \65\ For example, consider two wagers on a series of coin flips. 
The first wins one cent for every heads and loses one cent for every 
tails. The second wins a million dollars for every heads and loses a 
million dollars for every tails. These wagers are perfectly 
correlated (i.e., they have a correlation of 1) but have very 
different statistical properties.
    \66\ Roughly, variance is a statistical measure of how much a 
random number tends to deviate from its average value. Skewness is a 
statistical measure of whether particularly large deviations in a 
random number from its average value tend to be below or above that 
average value. Kurtosis is a statistical measure of whether 
deviations of a random number from its average value tend to be 
small and frequent or rare and large.
    \67\ The variance, skewness, and kurtosis of Prime are 4.5605, 
.3115, and 1.5337 respectively. The variance, skewness, and kurtosis 
of 1-month USD LIBOR are 4.8935, .2715, and 1.5168 respectively. The 
variance, skewness, and kurtosis of 3-month USD LIBOR are 4.7955, 
.2605, and 1.5252, respectively.
---------------------------------------------------------------------------

    Theoretically, these statistical measures could mask important 
long-term differences in movements. However, as mentioned above, the 
spread between 1-month USD LIBOR and Prime and the spread between 3-
month USD LIBOR and Prime have remained fairly steady after January 
1993 to January 2020. For example, the average spread between 1-month 
USD LIBOR and Prime was 281 basis points in 1993, and 306 basis points 
in 2019. The average spread between 3-month USD LIBOR and Prime was 270 
basis points in 1993, and 296 basis points in 2019.
    Finally, in performing its analysis, the Bureau also considered the 
impact different indices would have on consumer payments. To that end, 
the Bureau considered a specific example of a debt with a variable rate 
that resets monthly, and a balance that accumulates over time with 
interest but without further charges, payments, or fees. The Bureau 
used this example for HELOCs and credit card accounts because the 
Bureau understands that the rates for many of those accounts reset 
monthly. The example considers debt that accumulates interest over a 
period of ten years, beginning in January of every year from 1994 to 
2009. For this example, the Bureau found that since 1994 historical 
fluctuations in 1-month USD LIBOR and Prime, and 3-month USD LIBOR and 
Prime, produced substantially similar payment outcomes for consumers 
with debt similar to that considered.\68\ For example, if the initial 
balance in this example is $10,000, the average difference between the 
debt outstanding under Prime and the debt outstanding under adjusted 1-
month USD LIBOR after ten years is about $100. The Bureau also found 
similar results for Prime versus the adjusted 3-month USD LIBOR.
---------------------------------------------------------------------------

    \68\ In this example, for each starting year, three versions of 
debt are considered: (1) One with an interest rate equal to Prime; 
(2) one with an interest rate equal to the 1-month USD LIBOR plus 
the average spread between 1-month USD LIBOR and Prime for the 12 
months preceding the start date; and (3) one with an interest rate 
equal to 3-month USD LIBOR plus the average spread between 3-month 
USD LIBOR and Prime for the 12 months preceding the start date. For 
the 16 initial starting years considered, the average difference 
between the debt outstanding under Prime and the debt outstanding 
under the adjusted 1-month USD LIBOR after ten years is only around 
1% of the initial balance. The average absolute value of the 
difference in debt outstanding is around 2% of the initial balance. 
For the adjusted 3-month USD LIBOR, the average of the difference is 
around 1% of the initial balance, and the average of the absolute 
value of the difference is around 3% of the initial balance.
    The average difference can be small if the difference is often 
far from zero, as long as it is sometimes well above zero and it is 
sometimes well below zero. The absolute value of the difference will 
be small only if the difference is usually close to zero. For 
example, suppose the difference is $1 million one year and -$1 
million the next year. The average difference these two years is 
zero, indicating that the difference is close to zero on average. 
But the average of the absolute value of the difference is $1 
million, indicating that the difference is typically far from zero. 
Consumers and creditors should care more about the average 
difference, and less about the average of the absolute value of the 
difference, if they have more liquidity and risk tolerance.
---------------------------------------------------------------------------

    As discussed in the section-by-section analyses of proposed 
Sec. Sec.  1026.40(f)(3)(ii)(B), 1026.55(b)(7)(i) and (ii), the Bureau 
also is proposing

[[Page 36953]]

this same determination for purposes of proposed Sec. Sec.  
1026.40(f)(3)(ii)(B) and 1026.55(b)(7)(i) and (ii). The Bureau solicits 
comment on this proposed determination that Prime has historical 
fluctuations that are substantially similar to those of the 1-month and 
3-month USD LIBOR indices pursuant to proposed Sec. Sec.  
1026.40(f)(3)(ii)(A) and (B) and 1026.55(b)(7)(i) and (ii).
    Proposed comment 40(f)(3)(ii)(A)-2.i also clarifies that in order 
to use Prime as the replacement index for the 1-month or 3-month USD 
LIBOR index, the creditor also must comply with the condition in Sec.  
1026.40(f)(3)(ii)(A) that Prime and the replacement margin would have 
resulted in an APR substantially similar to the rate in effect at the 
time the LIBOR index became unavailable. This condition for comparing 
the rates under proposed Sec.  1026.40(f)(3)(ii)(A) is discussed in 
more detail below.
    Certain SOFR-based spread-adjusted indices have ``historical 
fluctuations'' that are ``substantially similar'' to those of certain 
USD LIBOR indices. To facilitate compliance, proposed comment 
40(f)(3)(ii)(A)-2.ii provides a proposed determination that the spread-
adjusted indices based on SOFR recommended by the ARRC to replace the 
1-month, 3-month, 6-month, and 1-year USD LIBOR indices have historical 
fluctuations that are substantially similar to those of the 1-month, 3-
month, 6-month, and 1-year USD LIBOR indices respectively. The proposed 
comment also provides a placeholder for the date when this proposed 
determination would be effective, if adopted in the final rule. The 
Bureau understands that some HELOC creditors may choose to replace a 
LIBOR index with a SOFR-based spread-adjusted index.
    As discussed above in the section-by-section analysis of Sec.  
1026.20(a), the ARRC intends to endorse forward-looking term SOFR rates 
provided a consensus among its members can be reached that robust term 
benchmarks that are compliant with IOSCO standards and meet appropriate 
criteria set by the ARRC can be produced. If the ARRC has not 
recommended relevant forward-looking term SOFR rates, it will base its 
recommended indices on a compounded average of SOFR over a selected 
compounding period. The Bureau notes that the GSEs announced in 
February 2020 that they will begin accepting ARMs based on 30-day 
average SOFR in 2020.\69\ For purposes of this proposed rule, the 
Bureau has conducted its analysis below assuming that the ARRC will 
base its recommended replacement indices on 30-day SOFR.
---------------------------------------------------------------------------

    \69\ See, e.g., Lender Letter LL-2020-01; Bulletin 2020-1 
Selling, supra note 47.
---------------------------------------------------------------------------

    In determining whether the SOFR-based spread-adjusted indices have 
historical fluctuations substantially similar to those of the 
applicable LIBOR indices, the Bureau has reviewed the historical data 
on SOFR and historical data on 1-month, 3-month, 6-month, and 1-year 
LIBOR from August 22, 2014, to March 16, 2020.\70\ With respect to the 
1-year LIBOR, while 30-day SOFR has not always moved in tandem with 1-
year LIBOR, the Bureau is proposing to determine that the historical 
fluctuations in 1-year LIBOR and the spread-adjusted index based on 30-
day SOFR have been substantially similar. As discussed in more detail 
below, the Bureau also is proposing to determine that the historical 
fluctuations in the spread-adjusted index based on 30-day SOFR are 
substantially similar to those of 1-month, 3-month, and 6-month LIBOR.
---------------------------------------------------------------------------

    \70\ Prior to the start of official publication of SOFR in 2018, 
the New York Fed released data from August 2014 to March 2018 
representing modeled, pre-production estimates of SOFR that are 
based on the same basic underlying transaction data and methodology 
that now underlie the official publication. The New York Fed has 
published indicative SOFR averages going back only to May 2, 2018. 
See Fed. Reserve Bank of N.Y., SOFR Averages and Index Data, https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind (last visited 
May 11, 2020). Therefore, the Bureau has used the estimated SOFR 
data going back to 2014 to estimate its own 30-day compound average 
of SOFR since 2014. The methodology to calculate compound averages 
of SOFR from daily data is described in Fed. Reserve Bank of N.Y., 
Statement Regarding Publication of SOFR Averages and a SOFR Index, 
https://www.newyorkfed.org/markets/opolicy/operating_policy_200212.
---------------------------------------------------------------------------

    The Bureau is proposing to make these determinations about the 
historical fluctuations in the spread-adjusted indices based on 30-day 
SOFR, while analyzing data on 30-day SOFR without spread adjustments. 
This analysis is valid because the ARRC has stated that the spread 
adjustments will be static, outside of a one-year transition period 
that has not yet started and so is not in the historical data. A static 
spread adjustment would have no effect on historical fluctuations.
    The historical correlation between 1-year LIBOR and 30-day SOFR is 
.8987. This correlation is high and suggests that on average 30-day 
SOFR tends to move closely with 1-year LIBOR. However, the raw 
correlation understates the similarity in the movements of these two 
rates, because 1-year LIBOR is a forward-looking term rate and 30-day 
SOFR is a backward-looking moving average. This means that 30-day SOFR 
often moves closely with 1-year LIBOR, but with a lag. For example, the 
historical correlation between 30-day SOFR and a 60-day lag of 1-year 
LIBOR is .9584. However, as discussed above with respect to the 
proposed determination related to Prime, correlation is not the only 
statistical measure of similarity that may be relevant for comparing 
the historical fluctuations of these rates. The Bureau has reviewed 
other statistical characteristics of these rates, such as the variance, 
skewness, and kurtosis, and these imply that 30-day SOFR tends to 
present consumers and creditors with payment changes that are similar 
to that presented by 1-year LIBOR.\71\
---------------------------------------------------------------------------

    \71\ The variance, skewness, and kurtosis of 30-day SOFR are 
.7179, .4098, and 1.6548 respectively. The variance, skewness, and 
kurtosis of 1-year LIBOR during the time period are .5829, .1179, 
and 1.9242, respectively.
---------------------------------------------------------------------------

    Theoretically, these statistical measures could mask important 
long-term differences in movements. The spread between 1-year LIBOR and 
30-day SOFR decreased from 68 basis points on average in 2015 to 13 
basis points on average in 2019. However, this decrease is mainly due 
to the timing mismatch issue discussed above together with the fact 
that interest rates in general began to decrease at the end of 2018. 
Because the backward-looking 30-day moving average of SOFR began to 
respond to this decrease in rates well after the forward-looking 1-year 
LIBOR term rate did, 30-day SOFR was temporarily high relative to 1-
year LIBOR for a short period in early 2019. The spread between a 60-
day lag of 1-year LIBOR and 30-day SOFR was 59 basis points on average 
in 2015 and 39 basis points on average in 2019.
    Finally, in performing this analysis, the Bureau also considered 
the impact different indices would have on consumer payments. To that 
end, the Bureau considered a specific example of a debt with a variable 
rate that resets monthly, and a balance that accumulates over time with 
interest but without further charges, payments, or fees. The Bureau 
used this example for HELOCs and credit card accounts because the 
Bureau understands that the rates for many of those accounts reset 
monthly. The example considers debt that accumulates interest over the 
period of four years, beginning in January of 2016 and ending in 
January 2020. For this example, the Bureau found historical 
fluctuations in 30-day SOFR and 1-year LIBOR produced substantially 
similar payment outcomes for consumers with debt similar to that

[[Page 36954]]

considered.\72\ For example, if the initial balance in this example is 
$10,000, the difference between the debt outstanding under 30-day SOFR 
and the debt outstanding under adjusted 1-year LIBOR after four years 
(called ``4-year balance difference'' in Table 1 below) is roughly $31.
---------------------------------------------------------------------------

    \72\ In this example, two versions of debt are considered: (1) 
One with an interest rate equal to 30-day SOFR; and (2) one with an 
interest rate equal to 1-year LIBOR plus the average spread between 
1-year LIBOR and 30-day SOFR for the 12 months preceding the start 
date. The average difference between the debt outstanding after four 
years under 30-day SOFR and the adjusted 1-year LIBOR is only around 
.3% of the initial debt.
---------------------------------------------------------------------------

    The Bureau also is proposing to determine that historical 
fluctuations in the spread-adjusted index based on 30-day SOFR are 
substantially similar to those of 1-month, 3-month, and 6-month LIBOR. 
For the reasons discussed above, the Bureau is proposing to make these 
determinations about the historical fluctuations in the spread-adjusted 
indices based on 30-day SOFR, while analyzing data on 30-day SOFR 
without spread adjustments.
    As discussed above, the largest differences between 30-day SOFR and 
1-year LIBOR arise because 30-day SOFR is backward-looking and 1-year 
LIBOR is forward-looking. Shorter tenors of LIBOR are less forward-
looking, and so in general have even smaller differences with 30-day 
SOFR. Echoing the analysis described above to compare historical 
fluctuations between 30-day SOFR and 1-year LIBOR, Table 1 provides 
statistics on the historical fluctuations in 1-month, 3-month, 6-month, 
and 1-year LIBOR during the time period in which data for 30-day SOFR 
is available. Based on this analysis, the Bureau is proposing to 
determine that historical fluctuations in the spread-adjusted index 
based on 30-day SOFR also are substantially similar to those of 1-
month, 3-month, and 6-month LIBOR.

           Table 1--Comparison of Historical Fluctuations in Different Tenors of LIBOR and 30-Day SOFR
----------------------------------------------------------------------------------------------------------------
                                    Correlation
              Rate                  with 30-day      Variance        Skewness        Kurtosis     4-Year balance
                                       SOFR                                                          difference
----------------------------------------------------------------------------------------------------------------
30-day SOFR.....................             N/A          0.7179          0.4098          1.6548             N/A
1-month LIBOR...................           .9893          0.6977          0.2376          1.5305             $26
3-month LIBOR...................           .9746          0.7241          0.1952          1.5835              60
6-month LIBOR...................           .9436           0.652          0.1038          1.7556              63
1-year LIBOR....................           .8987          0.5829          0.1179          1.9242              31
----------------------------------------------------------------------------------------------------------------

    As discussed above, the ARRC intends to endorse forward-looking 
term SOFR rates provided a consensus among its members can be reached 
that robust term benchmarks that are compliant with IOSCO standards and 
meet appropriate criteria set by the ARRC can be produced. These term 
rates do not yet exist. However, the Board has produced data on 
``indicative'' SOFR term rates that likely provide a good indication of 
how SOFR term rates would perform.\73\ The Bureau understands that if a 
SOFR term rate does not exist for a particular LIBOR tenor, the ARRC 
may use the next-longest SOFR term rate to develop the replacement 
index for the LIBOR tenor if any applicable SOFR term rate exists. For 
example, if there is not a 1-year SOFR term rate, the replacement for 
the 1-year LIBOR may be determined using the SOFR term rates in the 
following order if they exist: (1) 6-month SOFR; (2) 3-month SOFR; and 
(3) 1-month SOFR.
---------------------------------------------------------------------------

    \73\ See Heitfield & Ho-Park, supra note 50.
---------------------------------------------------------------------------

    As discussed above, the largest difference between different LIBOR 
tenors and 30-day SOFR arises because LIBOR is forward-looking and 30-
day SOFR is backward-looking. Because SOFR term rates are forward-
looking like LIBOR, the differences between SOFR term rates and LIBOR 
should in general be smaller than the differences between 30-day SOFR 
and LIBOR. The Bureau has reviewed the historical data on these 
indicative SOFR term rates and on 1-month, 3-month, 6-month, and 1-year 
LIBOR from June 11, 2018 to March 16, 2020.\74\ While the indicative 
SOFR term rates have not always moved in tandem with LIBOR, the Bureau 
is proposing to determine that (1) the historical fluctuations of 1-
year and 6-month USD LIBOR are substantially similar to those of the 1-
month, 3-month, and 6-month spread-adjusted SOFR term rates; (2) the 
historical fluctuations of 3-month USD LIBOR are substantially similar 
to those of the 1-month and 3-month spread-adjusted SOFR term rates; 
and (3) the historical fluctuations of 1-month USD LIBOR are 
substantially similar to those of the 1-month spread-adjusted SOFR term 
rate.
---------------------------------------------------------------------------

    \74\ June 11, 2018, is the first date for which indicative SOFR 
term rate data are available.
---------------------------------------------------------------------------

    The Bureau is proposing to make these determinations about the 
historical fluctuations in the spread-adjusted indices based on 1-month 
term SOFR, 3-month term SOFR, and 6-month term SOFR, while analyzing 
data on 1-month term SOFR, 3-month term SOFR, and 6-month term SOFR 
without spread adjustments. This analysis is valid because the ARRC has 
stated that the spread adjustments will be static, outside of a one-
year transition period that has not yet started and so is not in the 
historical data. A static spread adjustment would have no effect on 
historical fluctuations.
    Statistics that have led the Bureau to propose these determinations 
are in Tables 2 and 3.
---------------------------------------------------------------------------

    \75\ These correlations are for the period beginning June 11, 
2018, the first date for which indicative SOFR term rate data are 
available. These correlations are not directly comparable to those 
in Table 1, which uses data beginning August 22, 2014, the first 
date for which data for 30-day SOFR are available.

                     Table 2--Correlations Between LIBOR and Indicative SOFR Term Rates \75\
----------------------------------------------------------------------------------------------------------------
                           LIBOR tenor                             1-month SOFR    3-month SOFR    6-month SOFR
----------------------------------------------------------------------------------------------------------------
1-month.........................................................           .9890             N/A             N/A
3-month.........................................................           .8955           .9606             N/A
6-month.........................................................           .7606           .8923           .9691

[[Page 36955]]

 
1-year..........................................................           .6295           .8000           .9274
----------------------------------------------------------------------------------------------------------------

    The historical correlations presented in Table 2 are high, 
suggesting that the given SOFR term rates tend to move closely with the 
given LIBOR tenors. However, the raw correlations understate the 
similarity in the movements of the SOFR term rates and the LIBOR tenors 
when comparing a LIBOR tenor to a shorter SOFR term rate. This is 
because the SOFR term rate is less forward-looking than the LIBOR 
tenor, so the SOFR term rate moves closely with the LIBOR tenor but 
with a lag. This consideration is especially important during the time 
period for which indicative SOFR term rate data are available, when 
interest rates in general started to decrease. For example, the 
historical correlation between 1-month term SOFR and a 60-day lag of 1-
year LIBOR is .9039.
---------------------------------------------------------------------------

    \76\ Table 3 does not report a balance difference as Table 1 
does because data on the indicative SOFR term rates are not 
available for a sufficiently long period.

                        Table 3--Statistics on LIBOR and Indicative SOFR Term Rates \76\
----------------------------------------------------------------------------------------------------------------
                              Rate                                   Variance        Skewness        Kurtosis
----------------------------------------------------------------------------------------------------------------
1-month LIBOR...................................................          0.0735         -0.5459          2.1022
3-month LIBOR...................................................          0.0852         -0.2913          2.0771
6-month LIBOR...................................................          0.1219         -0.3037          1.6886
12-month LIBOR..................................................          0.1967         -0.2782          1.4281
1-month SOFR....................................................           0.093         -0.4791          1.8832
3-month SOFR....................................................          0.0952         -0.4804          1.8558
6-month SOFR....................................................          0.1168         -0.4671          1.6877
----------------------------------------------------------------------------------------------------------------

    The Bureau has reviewed other statistical characteristics of the 
LIBOR rates and the indicative SOFR term rates, such as the variance, 
skewness, and kurtosis, as shown in Table 3 and these imply that the 
indicative SOFR term rates tend to present consumers and creditors with 
payment changes that are similar to that presented by the LIBOR rates.
    As discussed in the section-by-section analyses of proposed 
Sec. Sec.  1026.40(f)(3)(ii)(B), 1026.55(b)(7)(i) and (ii), the Bureau 
also is proposing the same determination for purposes of proposed 
Sec. Sec.  1026.40(f)(3)(ii)(B) and 1026.55(b)(7)(i) and (ii). The 
Bureau solicits comment on this proposed determination that spread-
adjusted indices based on SOFR recommended by the ARRC to replace the 
1-month, 3-month, 6-month, and 1-year USD LIBOR indices have historical 
fluctuations that are substantially similar to those of the 1-month, 3-
month, 6-month, and 1-year USD LIBOR indices respectively, for purposes 
of proposed Sec. Sec.  1026.40(f)(3)(ii)(A) and (B) and 
1026.55(b)(7)(i) and (ii).
    The Bureau notes that the SOFR-based spread-adjusted indices are 
not yet being published and may not be published by the effective date 
of the final rule, if adopted. Nonetheless, the Bureau believes that it 
is appropriate to consider the underlying SOFR data that is available 
in proposing the determinations that the spread-adjusted indices based 
on SOFR recommended by the ARRC to replace the 1-month, 3-month, 6-
month, and 1-year USD LIBOR indices have historical fluctuations that 
are substantially similar to those of the 1-month, 3-month, 6-month, 
and 1-year USD LIBOR indices respectively. The Bureau solicits comment, 
however, on whether the Bureau should alternatively consider these 
SOFR-based spread-adjusted indices to be newly established indices for 
purposes of proposed Sec. Sec.  1026.40(f)(3)(ii)(A) and (B) and 
1026.55(b)(7)(i) and (ii), to the extent these indices are not being 
published by the effective date of the final rule, if adopted.
    Proposed comment 40(f)(3)(ii)(A)-2.ii also clarifies that in order 
to use a SOFR-based spread-adjusted index described above as the 
replacement index for the applicable LIBOR index, the creditor also 
must comply with the condition in Sec.  1026.40(f)(3)(ii)(A) that the 
SOFR-based spread-adjusted index and replacement margin would have 
resulted in an APR substantially similar to the rate in effect at the 
time the LIBOR index became unavailable. This condition under proposed 
Sec.  1026.40(f)(3)(ii)(A) is discussed in more detail below. Also, as 
discussed in more detail below, the Bureau solicits comment on whether 
the Bureau in the final rule, if adopted, should provide for purposes 
of proposed Sec.  1026.40(f)(3)(ii)(A) that the rate using the SOFR-
based spread-adjusted index is ``substantially similar'' to the rate in 
effect at the time the LIBOR index becomes unavailable, so long as the 
creditor uses as the replacement margin the same margin in effect on 
the day that the LIBOR index becomes unavailable.
    The Bureau also solicits comment on whether there are other indices 
that are not newly established for which the Bureau should make a 
determination that the index has historical fluctuations that are 
substantially similar to those of the LIBOR indices. If so, what are 
these other indices, and why should the Bureau make such a 
determination with respect to those indices?
    Newly established index as replacement for a LIBOR index. Proposed 
Sec.  1026.40(f)(3)(ii)(A) provides that if the replacement index is 
newly established and therefore does not have any rate history, it may 
be used if it and the replacement margin will produce an APR 
substantially similar to the rate in effect when the original index 
became unavailable. The Bureau solicits comment on whether the Bureau 
should provide any additional guidance on, or regulatory changes 
addressing, when an index is newly established with respect to 
replacing the LIBOR indices for purposes of proposed Sec.  
1026.40(f)(3)(ii)(A). The Bureau also solicits comment on whether the 
Bureau should provide any examples of indices that are newly 
established with respect to replacing the LIBOR indices for

[[Page 36956]]

purposes of Sec.  1026.40(f)(3)(ii)(A). If so, what are these indices 
and why should the Bureau determine these indices are newly established 
with respect to replacing the LIBOR indices?
    Substantially similar rate when LIBOR becomes unavailable. Under 
proposed Sec.  1026.40(f)(3)(ii)(A), the replacement index and 
replacement margin must produce an APR substantially similar to the 
rate that was in effect based on the LIBOR index used under the plan 
when the LIBOR index became unavailable. Proposed comment 
40(f)(3)(ii)(A)-3 explains that for the comparison of the rates, a 
creditor must use the value of the replacement index and the LIBOR 
index on the day that the LIBOR index becomes unavailable. The Bureau 
solicits comment on whether it should address the situation where the 
replacement index is not be published on the day that the LIBOR index 
becomes unavailable. For example, should the Bureau provide that if the 
replacement index is not published on the day that the LIBOR index 
becomes unavailable, the creditor must use the previous calendar day 
that both indices are published as the date on which the annual 
percentage rate based on the replacement index must be substantially 
similar to the rate based on the LIBOR index?
    Proposed comment 40(f)(3)(ii)(A)-3 also clarifies that the 
replacement index and replacement margin are not required to produce an 
APR that is substantially similar on the day that the replacement index 
and replacement margin become effective on the plan. Proposed comment 
40(f)(3)(ii)(A)-3.i provides an example to illustrate this comment.
    The Bureau believes that it may raise compliance issues if the rate 
calculated using the replacement index and replacement margin at the 
time the replacement index and replacement margin became effective had 
to be substantially similar to the rate in effect calculated using the 
LIBOR index on the date that the LIBOR index became unavailable. 
Specifically, under Sec.  1026.9(c)(1), the creditor must provide a 
change-in-terms notice of the replacement index and replacement margin 
(including disclosing any reduced margin in change-in-terms notices 
provided on or after October 1, 2021, as would be required by proposed 
Sec.  1026.9(c)(1)(ii)) at least 15 days prior to the effective date of 
the changes. The Bureau believes that this advance notice is important 
to consumers to inform them of how variable rates will be determined 
going forward after the LIBOR index is replaced. Because advance notice 
of the changes must be given prior to the changes becoming effective, a 
creditor would not be able to ensure that the rate based on the 
replacement index and margin at the time the change-in-terms notice 
becomes effective will be substantially similar to the rate in effect 
calculated using the LIBOR index at the time the LIBOR index becomes 
unavailable. The value of the replacement index may change after the 
LIBOR index becomes unavailable and before the change-in-terms notice 
becomes effective.
    The Bureau notes that proposed Sec.  1026.40(f)(3)(ii)(A) would 
require a creditor to use the index values of the replacement index and 
the original index on a single day (namely, the day that the original 
index becomes unavailable) to compare the rates to determine if they 
are ``substantially similar.'' In using a single day to compare the 
rates, this proposed provision is consistent with the condition in the 
unavailability provision in current Sec.  1026.40(f)(3)(ii), in the 
sense that it provides that the new index and margin must result in an 
APR that is substantially similar to the rate in effect on a single 
day. The Bureau notes that if the replacement index and the original 
index have ``historical fluctuations'' that are substantially similar, 
the spread between the replacement index and the original index on a 
particular day typically will be substantially similar to the 
historical spread between the two indices. Nonetheless, the Bureau 
recognizes that there is a possibility that the spread between the 
replacement index and the original index could differ significantly on 
a particular day from the historical spread in certain unusual 
circumstances, such as occurred to spreads between LIBOR and other 
indices soon after the collapse of Lehman Brothers in 2008.\77\ 
Therefore, it is possible that two rates may typically be substantially 
similar but may not be substantially similar on a given date. It is 
also possible that two rates may be substantially similar on a given 
date but may not typically be substantially similar. To the extent the 
historical spread better reflects the typical spread between the 
indices in the long run, it may be more appropriate to use the 
historical spread rather than the spread on a specific day in comparing 
the rates to help ensure the rates are ``substantially similar'' to 
each other in the long run. However, it is also possible that the 
spread on a specific, recent date may better reflect the typical spread 
between the indices in the future than a historical spread would, if 
the spread on that specific date deviates from the historical spread 
for reasons that are permanent rather than temporary.\78\ Moreover, 
considering the historical spread raises questions about how to define 
the ``historical spread,'' such as the date range to consider, and 
whether to take a median, mean, trimmed mean, or other statistic from 
the data for the date range.
---------------------------------------------------------------------------

    \77\ The Bureau analyzed the daily spread between Prime and 1-
month LIBOR from January 1, 1993, through April 23, 2020. For that 
timeframe, the median daily spread between those indices was 291 
basis points. Since 1993, the spread reached a low of roughly 
negative nine basis points on October 10, 2008, soon after the 
collapse of Lehman Brothers. Since 1993, the spread has never been 
below 200 basis points aside from September, October, and November 
2008. It has dipped below 250 basis points several times, including 
in May 2000 during the ``dotcom bust'' and in spring 2020 during the 
COVID-19 pandemic. As of April 23, 2020, the Prime-LIBOR spread had 
recovered to 276 basis points from a low of 223 basis points on 
April 1, 2020.
    \78\ For example, the spread between 1-month USD LIBOR and Prime 
increased from roughly 142 basis points in 1986 to 281 basis points 
in 1993 but has been fairly steady ever since. Therefore, the LIBOR-
Prime spread in early 1993 was much closer to the typical spread 
from then on than a ``historical spread'' would have been.
---------------------------------------------------------------------------

    Given these considerations, the Bureau solicits comment on whether 
the Bureau should adopt a different approach to determine whether a 
rate using the replacement index is ``substantially similar'' to the 
rate using the original index for purposes of proposed Sec.  
1026.40(f)(3)(ii)(A) and, if so, what criteria the Bureau should use in 
selecting such a different approach. For example, the Bureau solicits 
comment on whether it should require creditors to use a historical 
median or average of the spread between the replacement index and the 
original index over a certain time frame (e.g., the time period the 
historical data are available or 5 years, whichever is shorter) for 
purposes of determining whether a rate using the replacement index is 
``substantially similar'' to the rate using the original index. The 
Bureau also solicits comments on any compliance challenges that might 
arise as a result of adopting a potentially more complicated method of 
comparing the rates calculated using the replacement index and the 
rates calculated using the original index, and for any identified 
compliance challenges, how the Bureau could ease those compliance 
challenges.
    The Bureau is not proposing to address for purposes of proposed 
Sec.  1026.40(f)(3)(ii)(A) when a rate calculated using the replacement 
index and replacement margin is ``substantially similar'' to the rate 
in effect when the LIBOR index becomes unavailable. The Bureau is 
concerned about providing a ``range'' of rates that

[[Page 36957]]

would be considered to be ``substantially similar'' to the rate in 
effect at the time LIBOR becomes unavailable, and about providing other 
specific guidance on, or regulatory changes addressing, the 
``substantially similar'' standard, because the rates that will be 
considered ``substantially similar'' will be context-specific. The 
Bureau is concerned that if it provides a range of rates that will be 
considered substantially similar, this range might be too narrow or too 
broad in some cases depending on the specific circumstances. The Bureau 
also is concerned that some creditors may decide to charge an APR that 
is the highest APR in the range, even though the specific circumstances 
would indicate that the highest APR should not be considered 
substantially similar in those circumstances. The Bureau solicits 
comment, however, on whether the Bureau should provide guidance on, or 
regulatory changes addressing, the ``substantially similar'' standard 
in comparing the rates for purposes of proposed Sec.  
1026.40(f)(3)(ii)(A), and if so, what guidance, or regulatory changes, 
the Bureau should provide. For example, should the Bureau provide a 
range of rates that would be considered ``substantially similar'' as 
described above, and if so, how should the range be determined? Should 
the range of rates depend on context, and if so, what contexts should 
be considered? As an alternative to the range of rates approach, the 
Bureau solicits comment on whether it should provide factors that 
creditors must consider in deciding whether the rates are 
``substantially similar'' and if so, what those factors should be. Are 
there other approaches the Bureau should consider for addressing the 
``substantially similar'' standard for comparing rates?
    As discussed above, proposed comment 40(f)(3)(ii)(A)-2.ii clarifies 
that in order to use the SOFR-based spread-adjusted index as the 
replacement index for the applicable LIBOR index, the creditor must 
comply with the condition in Sec.  1026.40(f)(3)(ii)(A) that the SOFR-
based spread-adjusted index and replacement margin would have resulted 
in an APR substantially similar to the rate in effect at the time the 
LIBOR index became unavailable. The Bureau solicits comment on whether 
the Bureau in the final rule, if adopted, should provide for purposes 
of proposed Sec.  1026.40(f)(3)(ii)(A) that the rate using the SOFR-
based spread-adjusted index is ``substantially similar'' to the rate in 
effect at the time the LIBOR index becomes unavailable, so long as the 
creditor uses as the replacement margin the same margin in effect on 
the day that the LIBOR index becomes unavailable. As discussed in more 
detail in the section-by-section analysis of Sec.  1026.20(a), the 
spread adjustments for the SOFR-based spread-adjusted indices are 
designed to reflect and adjust for the historical differences between 
LIBOR and SOFR in order to make the spread-adjusted rate comparable to 
LIBOR. Thus, to facilitate compliance, the Bureau believes that it may 
be appropriate to provide for purposes of proposed Sec.  
1026.40(f)(3)(ii)(A) that a creditor complies with the ``substantially 
similar'' standard for comparing the rates when the creditor replaces 
the LIBOR index used under the plan with the applicable SOFR-based 
spread-adjusted index and uses as the replacement margin the same 
margin in effect at the time the LIBOR index becomes unavailable.
40(f)(3)(ii)(B)
The Proposal
    For the reasons discussed below and in the section-by-section 
analysis of Sec.  1026.40(f)(3)(ii), the Bureau is proposing to add new 
LIBOR-specific provisions to Sec.  1026.40(f)(3)(ii)(B) that would 
permit creditors for HELOC plans subject to Sec.  1026.40 that use a 
LIBOR index for calculating variable rates to replace the LIBOR index 
and change the margins for calculating the variable rates on or after 
March 15, 2021, in certain circumstances. Specifically, proposed Sec.  
1026.40(f)(3)(ii)(B) provides that if a variable rate on a HELOC 
subject to Sec.  1026.40 is calculated using a LIBOR index, a creditor 
may replace the LIBOR index and change the margin for calculating the 
variable rate on or after March 15, 2021, as long as (1) the historical 
fluctuations in the LIBOR index and replacement index were 
substantially similar; and (2) the replacement index value in effect on 
December 31, 2020, and replacement margin will produce an APR 
substantially similar to the rate calculated using the LIBOR index 
value in effect on December 31, 2020, and the margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. Proposed Sec.  1026.40(f)(3)(ii)(B) also 
provides that if the replacement index is newly established and 
therefore does not have any rate history, it may be used if the 
replacement index value in effect on December 31, 2020, and replacement 
margin will produce an APR substantially similar to the rate calculated 
using the LIBOR index value in effect on December 31, 2020, and the 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan.
    In addition, proposed Sec.  1026.40(f)(3)(ii)(B) provides that if 
either the LIBOR index or the replacement index is not published on 
December 31, 2020, the creditor must use the next calendar day that 
both indices are published as the date on which the APR based on the 
replacement index must be substantially similar to the rate based on 
the LIBOR index.
    The Bureau also is proposing to add detail in proposed comments 
40(f)(3)(ii)(B)-1 through -3 on the conditions set forth in proposed 
Sec.  1026.40(f)(3)(ii)(B). For example, to reduce uncertainty with 
respect to selecting a replacement index that meets the standards in 
proposed Sec.  1026.40(f)(3)(ii)(B), the Bureau is proposing to 
determine that Prime is an example of an index that has historical 
fluctuations that are substantially similar to those of certain USD 
LIBOR indices. The Bureau also is proposing to determine that certain 
spread-adjusted indices based on SOFR recommended by the ARRC have 
historical fluctuations that are substantially similar to those of 
certain USD LIBOR indices.
    To effectuate the purposes of TILA and to facilitate compliance, 
the Bureau is proposing to use its TILA section 105(a) authority to 
provide the new LIBOR-specific provisions under proposed Sec.  
1026.40(f)(3)(ii)(B). TILA section 105(a) \79\ directs the Bureau to 
prescribe regulations to carry out the purposes of TILA, and provides 
that such regulations may contain additional requirements, 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for all or any class of 
transactions, that the Bureau judges are necessary or proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance. The Bureau is proposing these 
LIBOR-specific provisions to facilitate compliance with TILA and 
effectuate its purposes. Specifically, the Bureau interprets 
``facilitate compliance'' to include enabling or fostering continued 
operation in conformity with the law.
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 1604(a),
---------------------------------------------------------------------------

    The Bureau is proposing to set March 15, 2021, as the date on or 
after which HELOC creditors are permitted to replace the LIBOR index 
used under the plan pursuant to proposed Sec.  1026.40(f)(3)(ii)(B) 
prior to LIBOR

[[Page 36958]]

becoming unavailable to facilitate compliance with the change-in-terms 
notice requirements applicable to creditors for HELOCs. As a practical 
matter, these proposed changes will allow creditors for HELOCs to 
provide the 15-day change-in-terms notices required under Sec.  
1026.9(c)(1) prior to the LIBOR indices becoming unavailable, and thus 
will allow those creditors to avoid being left without a LIBOR index to 
use in calculating the variable rate before the replacement index and 
margin become effective. Also, these proposed changes will allow HELOC 
creditors to provide the change-in-terms notices, and replace the LIBOR 
index used under the plans, on accounts on a rolling basis, rather than 
having to provide the change-in-terms notices, and replace the LIBOR 
index, for all its accounts at the same time as the LIBOR index used 
under the plan becomes unavailable.
    Without the proposed LIBOR-specific provisions in proposed Sec.  
1026.40(f)(3)(ii)(B), as a practical matter, HELOC creditors would have 
to wait until the LIBOR index becomes unavailable to provide the 15-day 
change-in-terms notice under Sec.  1026.9(c)(1), disclosing the 
replacement index and replacement margin (including disclosing any 
reduced margin in change-in-terms notices provided on or after October 
1, 2021, as would be required by proposed Sec.  1026.9(c)(1)(ii)). The 
Bureau believes that this advance notice is important to consumers to 
inform them of how variable rates will be determined going forward 
after the LIBOR index is replaced.
    For several reasons, HELOC creditors would not be able to send out 
change-in-terms notices disclosing the replacement index and 
replacement margin prior to LIBOR becoming unavailable. First, although 
LIBOR is expected to become unavailable around the end of 2021, there 
is no specific date known with certainty on which LIBOR will become 
unavailable. Thus, HELOC creditors could not send out the change-in-
terms notices prior to LIBOR becoming unavailable because they will not 
know when it will become unavailable and thus would not know when to 
make the replacement index and replacement margin effective on the 
account.
    Second, HELOC creditors would need to know the index values of the 
LIBOR index and the replacement index prior to sending out the change-
in-terms notice so that they could disclose the replacement margin in 
the change-in-terms notice. HELOC creditors will not know these index 
values until the day that LIBOR becomes unavailable. Thus, HELOC 
creditors would have to wait until LIBOR becomes unavailable before the 
creditors could send the 15-day change-in-terms notices under Sec.  
1026.9(c)(1) to replace the LIBOR index with a replacement index. Some 
creditors could be left without a LIBOR index value to use during the 
15-day period before the replacement index and replacement margin 
become effective, depending on their existing contractual terms. The 
Bureau is concerned this could cause compliance and systems issues.
    Also, as discussed in part III, the industry has raised concerns 
that LIBOR may continue for some time after December 2021 but become 
less representative or reliable until LIBOR finally is discontinued. 
Allowing creditors to replace the LIBOR indices on existing HELOC 
accounts prior to LIBOR becoming unavailable may address some of these 
concerns.
    The Bureau solicits comments on proposed Sec.  1026.40(f)(3)(ii)(B) 
and proposed comments 40(f)(3)(ii)(B)-1 through -3. The proposed 
comments are discussed in detail below.
    Consistent conditions with proposed Sec.  1026.40(f)(3)(ii)(A). The 
Bureau is proposing conditions in the LIBOR-specific provisions in 
proposed Sec.  1026.40(f)(3)(ii)(B) for how a creditor must select a 
replacement index and compare rates that are consistent with the 
conditions set forth in the unavailability provisions set forth in 
proposed Sec.  1026.40(f)(3)(ii)(A). For example, the availability 
provisions in proposed Sec.  1026.40(f)(3)(ii)(A) and the LIBOR-
specific provisions in proposed Sec.  1026.40(f)(3)(ii)(B) contain a 
consistent requirement that the APR calculated using the replacement 
index must be ``substantially similar'' to the rate calculated using 
the LIBOR index.\80\ In addition, both proposed Sec.  
1026.40(f)(3)(ii)(A) and (B) contain consistent conditions for how a 
creditor must select a replacement index.
---------------------------------------------------------------------------

    \80\ The conditions in proposed Sec.  1026.40(f)(3)(ii)(A) and 
(B) are consistent, but they are not the same. For example, although 
both proposed provisions use the ``substantially similar'' standard 
to compare the rates, they use different dates for selecting the 
index values in calculating the rates. The proposed provisions in 
proposed Sec.  1026.40(f)(3)(ii)(A) and (B) differ in the timing of 
when creditors are permitted to transition away from LIBOR, which 
creates some differences in how the conditions apply.
---------------------------------------------------------------------------

    For several reasons, the Bureau is proposing to keep the conditions 
for these two provisions consistent. First, as discussed above in the 
section-by-section analysis of Sec.  1026.40(f)(3)(ii), some HELOC 
creditors may need to wait until LIBOR become unavailable to transition 
to a replacement index because of contractual reasons. The Bureau 
believes that keeping the conditions consistent in the unavailability 
provisions in proposed Sec.  1026.40(f)(3)(ii)(A) and the LIBOR-
specific provisions in proposed Sec.  1026.40(f)(3)(ii)(B) will help 
ensure that creditors must meet consistent conditions in selecting a 
replacement index and setting the rates, regardless of whether they are 
using the unavailability provisions in proposed Sec.  
1026.40(f)(3)(ii)(A), or the LIBOR-specific provisions in proposed 
Sec.  1026.40(f)(3)(ii)(B).
    Second, some creditors may have the ability to choose between the 
unavailability provisions and LIBOR-specific provisions to switch away 
from using a LIBOR index, and if the conditions between those two 
provisions are inconsistent, these differences could undercut the 
purpose of the LIBOR-specific provisions to allow creditors to switch 
out earlier. For example, if the conditions for selecting a replacement 
index or setting the rates were stricter in the LIBOR-specific 
provisions than in the unavailability provisions, this may cause a 
creditor to wait until LIBOR becomes unavailable to switch to a 
replacement index, which would undercut the purpose of the LIBOR-
specific provisions to allow creditors to switch out earlier and 
prevent these creditors from having the time to transition from using a 
LIBOR index.
    Historical fluctuations substantially similar for the LIBOR index 
and replacement index. Proposed comment 40(f)(3)(ii)(B)-1 provides 
detail on determining whether a replacement index that is not newly 
established has ``historical fluctuations'' that are ``substantially 
similar'' to those of the LIBOR index used under the plan for purposes 
of proposed Sec.  1026.40(f)(3)(ii)(B). Specifically, proposed comment 
40(f)(3)(ii)(B)-1 provides that for purposes of replacing a LIBOR index 
used under a plan pursuant to proposed Sec.  1026.40(f)(3)(ii)(B), a 
replacement index that is not newly established must have historical 
fluctuations that are substantially similar to those of the LIBOR index 
used under the plan, considering the historical fluctuations up through 
December 31, 2020, or up through the date indicated in a Bureau 
determination that the replacement index and the LIBOR index have 
historical fluctuations that are substantially similar, whichever is 
earlier. The Bureau is proposing the December 31, 2020 date to be 
consistent with the date that creditors generally

[[Page 36959]]

must use for selecting the index values to use in comparing the rates 
under proposed Sec.  1026.40(f)(3)(ii)(B). The Bureau solicits comment 
on the December 31, 2020 date for purposes of proposed comment 
40(f)(3)(ii)(B)-1 and whether another date or timeframe would be more 
appropriate for purposes of that proposed comment.
    To facilitate compliance, proposed comment 40(f)(3)(ii)(B)-1.i 
includes a proposed determination that Prime has historical 
fluctuations that are substantially similar to those of the 1-month and 
3-month USD LIBOR indices and includes a placeholder for the date when 
this proposed determination would be effective, if adopted in the final 
rule.\81\ The Bureau understands that some HELOC creditors may choose 
to replace a LIBOR index with Prime. Proposed comment 40(f)(3)(ii)(B)-
1.i also clarifies that in order to use Prime as the replacement index 
for the 1-month or 3-month USD LIBOR index, the creditor also must 
comply with the condition in proposed Sec.  1026.40(f)(3)(ii)(B) that 
the Prime index value in effect on December 31, 2020, and replacement 
margin will produce an APR substantially similar to the rate calculated 
using the LIBOR index value in effect on December 31, 2020, and the 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. If either the LIBOR 
index or the prime rate is not published on December 31, 2020, the 
creditor must use the next calendar day that both indices are published 
as the date on which the annual percentage rate based on the prime rate 
must be substantially similar to the rate based on the LIBOR index. 
This condition for comparing the rates under proposed Sec.  
1026.40(f)(3)(ii)(B) is discussed in more detail below.
---------------------------------------------------------------------------

    \81\ See the section-by-section analysis of proposed Sec.  
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the 
Bureau proposing this determination.
---------------------------------------------------------------------------

    To facilitate compliance, proposed comment 40(f)(3)(ii)(B)-1.ii 
provides a proposed determination that the spread-adjusted indices 
based on SOFR recommended by the ARRC to replace the 1-month, 3-month, 
6-month, and 1-year USD LIBOR indices have historical fluctuations that 
are substantially similar to those of the 1-month, 3-month, 6-month, 
and 1-year USD LIBOR indices respectively. The proposed comment also 
provides a placeholder for the date when this proposed determination 
would be effective, if adopted in the final rule.\82\ The Bureau 
understands that some HELOC creditors may choose to replace a LIBOR 
index with a SOFR-based spread-adjusted index.
---------------------------------------------------------------------------

    \82\ See the section-by-section analysis of proposed Sec.  
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the 
Bureau proposing this determination. Also, as discussed in the 
section-by-section analysis of proposed Sec.  1026.40(f)(3)(ii)(A), 
the Bureau solicits comment on whether the Bureau should 
alternatively consider these SOFR-based spread-adjusted indices to 
be newly established indices for purposes of proposed Sec.  
1026.40(f)(3)(ii)(B), to the extent these indices are not being 
published by the effective date of the final rule, if adopted.
---------------------------------------------------------------------------

    Comment 40(f)(3)(ii)(B)-1.ii also clarifies that in order to use 
this SOFR-based spread-adjusted index as the replacement index for the 
applicable LIBOR index, the creditor also must comply with the 
condition in Sec.  1026.40(f)(3)(ii)(B) that the SOFR-based spread-
adjusted index value in effect on December 31, 2020, and replacement 
margin will produce an APR substantially similar to the rate calculated 
using the LIBOR index value in effect on December 31, 2020, and the 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. If either the LIBOR 
index or the SOFR-based spread-adjusted index is not published on 
December 31, 2020, the creditor must use the next calendar day that 
both indices are published as the date on which the annual percentage 
rate based on the SOFR-based spread-adjusted index must be 
substantially similar to the rate based on the LIBOR index. This 
condition for comparing the rates under proposed Sec.  
1026.40(f)(3)(ii)(B) is discussed in more detail below. Also, for the 
reasons discussed below, the Bureau solicits comment on whether the 
Bureau in the final rule, if adopted, should provide for purposes of 
proposed Sec.  1026.40(f)(3)(ii)(B) that the rate using the SOFR-based 
spread-adjusted index is ``substantially similar'' to the rate 
calculated using the LIBOR index, so long as the creditor uses as the 
replacement margin the same margin that applied to the variable rate 
immediately prior to the replacement of the LIBOR index.
    The Bureau also solicits comment on whether there are other indices 
that are not newly established for which the Bureau should make a 
determination that the index has historical fluctuations that are 
substantially similar to those of the LIBOR indices for purposes of 
proposed Sec.  1026.40(f)(3)(ii)(B). If so, what are these other 
indices, and why should the Bureau make such a determination with 
respect to those indices?
    Newly established index as replacement for the LIBOR index. 
Proposed Sec.  1026.40(f)(3)(ii)(B) provides if the replacement index 
is newly established and therefore does not have any rate history, it 
may be used if the replacement index value in effect on December 31, 
2020, and the replacement margin will produce an APR substantially 
similar to the rate calculated using the LIBOR index value in effect on 
December 31, 2020, and the margin that applied to the variable rate 
immediately prior to the replacement of the LIBOR index used under the 
plan. The Bureau solicits comment on whether the Bureau should provide 
any additional guidance on, or regulatory changes addressing, when an 
index is newly established with respect to replacing the LIBOR indices 
for purposes of proposed Sec.  1026.40(f)(3)(ii)(B). The Bureau also 
solicits comment on whether the Bureau should provide any examples of 
indices that are newly established with respect to replacing the LIBOR 
indices for purposes of Sec.  1026.40(f)(3)(ii)(B). If so, what are 
these indices and why should the Bureau determine these indices are 
newly established with respect to replacing the LIBOR indices?
    Substantially similar rate using index values in effect on December 
31, 2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan. Under 
proposed Sec.  1026.40(f)(3)(ii)(B), if both the replacement index and 
LIBOR index used under the plan are published on December 31, 2020, the 
replacement index value in effect on December 31, 2020, and the 
replacement margin must produce an APR substantially similar to the 
rate calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan. 
Proposed comment 40(f)(3)(ii)(B)-2 also explains that the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan is the margin that applied to the 
variable rate immediately prior to when the creditor provides the 
change-in-terms notice disclosing the replacement index for the 
variable rate. Proposed comment 40(f)(3)(ii)(B)-2.i provides an example 
to illustrate this comment, when the margin used to calculate the 
variable rate is increased pursuant to a written agreement under Sec.  
1026.40(f)(3)(iii), and this change in the margin occurs after December 
31, 2020, but prior to the date that the creditor provides a change-in-
term notice under Sec.  1026.9(c)(1)

[[Page 36960]]

disclosing the replacement index for the variable rate.
    In calculating the comparison rates using the replacement index and 
the LIBOR index used under the HELOC plan, the Bureau generally is 
proposing to require creditors to use the index values for the 
replacement index and the LIBOR index in effect on December 31, 2020. 
The Bureau is proposing to require HELOC creditors to use these index 
values to promote consistency for creditors and consumers in which 
index values are used to compare the two rates. Under proposed Sec.  
1026.40(f)(3)(ii)(B), HELOC creditors are permitted to replace the 
LIBOR index used under the plan and adjust the margin used in 
calculating the variable rate used under the plan on or after March 15, 
2021, but creditors may vary in the timing of when they provide change-
in-terms notices to replace the LIBOR index used on their HELOC 
accounts and when these replacements become effective.
    For example, one HELOC creditor may replace the LIBOR index used 
under its HELOC plans in April 2021, while another HELOC creditor may 
replace the LIBOR index used under its HELOC plans in October 2021. In 
addition, a HELOC creditor may not replace the LIBOR index used under 
all of its HELOC plans at the same time. For example, a HELOC creditor 
may replace the LIBOR index used under some of its HELOC plans in April 
2021 but replace the LIBOR index used under other of its HELOC plans in 
May 2021.
    Nonetheless, regardless of when a particular creditor replaces the 
LIBOR index used under its HELOC plans, proposed Sec.  
1026.40(f)(3)(ii)(B) generally would require that all creditors for 
HELOCs use December 31, 2020, as the day for determining the index 
values for the replacement index and the LIBOR index, to promote 
consistency for creditors and consumers with respect to which index 
values are used to compare the two rates.
    In addition, using the December 31, 2020 date for the index values 
in comparing the rates may allow creditors for HELOCs to send out 
change-in-terms notices prior to March 15, 2021, and have the changes 
be effective on March 15, 2021, the proposed date on or after which 
creditors for HELOCs would be permitted to switch away from using LIBOR 
as an index on an existing HELOC account under proposed Sec.  
1026.40(f)(3)(ii)(B). If the Bureau instead required creditors to use 
the index values on March 15, 2021, creditors for HELOCs as a practical 
matter would not be able to provide change-in-terms notices of the 
replacement index and any adjusted margin until after March 15, 2021, 
because they would need the index values from that date in order to 
calculate the replacement margin. Thus, using the index values on March 
15, 2021, would delay when creditors for HELOCs could switch away from 
using LIBOR as an index on an existing HELOC account.
    Also, as discussed in part III, the industry has raised concerns 
that LIBOR may continue for some time after December 2021 but become 
less representative or reliable until LIBOR finally is discontinued. 
Using the index values for the replacement index and the LIBOR index 
used under the plan in effect on December 31, 2020, may address some of 
these concerns.
    The Bureau solicits comment specifically on the use of the December 
31, 2020 index values in calculating the comparison rates under 
proposed Sec.  1026.40(f)(3)(ii)(B).
    Proposed Sec.  1026.40(f)(3)(ii)(B) provides one exception to the 
proposed general requirement to use the index values for the 
replacement index and the LIBOR index used under the plan in effect on 
December 31, 2020. Proposed Sec.  1026.40(f)(3)(ii)(B) provides that if 
either the LIBOR index or the replacement index is not published on 
December 31, 2020, the creditor must use the next calendar day that 
both indices are published as the date on which the APR based on the 
replacement index must be substantially similar to the rate based on 
the LIBOR index.
    As discussed above, proposed Sec.  1026.40(f)(3)(ii)(B) would 
require a creditor to use the index values of the replacement index and 
the LIBOR index on a single day (generally December 31, 2020) \83\ to 
compare the rates to determine if they are ``substantially similar.'' 
In using a single day to compare the rates, this proposed provision is 
consistent with the condition in the unavailability provision in 
current Sec.  1026.40(f)(3)(ii), in the sense that it provides that the 
new index and margin must result in an APR that is substantially 
similar to the rate in effect on a single day. The Bureau notes that if 
the replacement index and the LIBOR index have ``historical 
fluctuations'' that are substantially similar, the spread between the 
replacement index and the LIBOR index on a particular day typically 
will be substantially similar to the historical spread between the two 
indices. Nonetheless, the Bureau recognizes that there is a possibility 
that the spread between the replacement index and the LIBOR index could 
differ significantly on a particular day from the historical spread in 
certain unusual circumstances, such as occurred to spreads between 
LIBOR and other indices soon after the collapse of Lehman Brothers in 
2008.\84\ Therefore, it is possible that two rates may typically be 
substantially similar but may not be substantially similar on a given 
date. It is also possible that two rates may be substantially similar 
on a given date but may not typically be substantially similar. To the 
extent the historical spread better reflects the typical spread between 
the indices in the long run, it may be more appropriate to use the 
historical spread rather than the spread on a specific day in comparing 
the rates to help ensure the rates are ``substantially similar'' to 
each other in the long run. However, it is also possible that the 
spread on a specific, recent date may better reflect the typical spread 
between the indices in the future than a historical spread would, if 
the spread on that specific date deviates from the historical spread 
for reasons that are permanent rather than temporary.\85\ Moreover, 
considering the historical spread raises questions about how to define 
the ``historical spread,'' such as the date range to consider, and 
whether to take a median, mean, trimmed mean, or other statistic from 
the data for the date range.
---------------------------------------------------------------------------

    \83\ If one or both of the indices are not available on December 
31, 2020, proposed Sec.  1026.40(f)(3)(ii)(B) would require that the 
creditor use the index values of the indices on the next calendar 
day that both indices are published.
    \84\ See supra note 72.
    \85\ See supra note 78.
---------------------------------------------------------------------------

    Given these considerations, the Bureau solicits comment on whether 
the Bureau should adopt a different approach to determine whether a 
rate using the replacement index is ``substantially similar'' to the 
rate using the LIBOR index for purposes of proposed Sec.  
1026.40(f)(3)(ii)(B) and, if so, what criteria the Bureau should use in 
selecting such a different approach. For example, the Bureau solicits 
comment on whether it should require creditors to use a historical 
median or average of the spread between the replacement index and the 
LIBOR index over a certain time frame (e.g., the time period the 
historical data are available or 5 years, whichever is shorter) for 
purposes of determining whether a rate using the replacement index is 
``substantially similar'' to the rate using the LIBOR index. The Bureau 
also solicits comments on any compliance challenges that might arise as 
a result of adopting a potentially more complicated method of comparing 
rates calculated

[[Page 36961]]

using the replacement index and the rates calculated using the LIBOR 
index, and for any identified compliance challenges, how the Bureau 
could ease those compliance challenges.
    Under proposed Sec.  1026.40(f)(3)(ii)(B), in calculating the 
comparison rates using the replacement index and the LIBOR index used 
under the HELOC plan, the creditor must use the margin that applied to 
the variable rate immediately prior to when the creditor provides the 
change-in-terms notice disclosing the replacement index for the 
variable rate. The Bureau is proposing that creditors must use this 
margin, rather than the margin in effect on December 31, 2020. The 
Bureau recognizes that creditors for HELOCs in certain instances may 
change the margin that is used to calculate the LIBOR variable rate 
after December 31, 2020, but prior to when the creditor provides a 
change-in-terms notice to replace the LIBOR index used under the plan. 
If the Bureau were to require that the creditor use the margin in 
effect on December 31, 2020, this would undo any margin changes that 
occurred after December 31, 2020, but prior to the creditor providing a 
change-in-terms notice of the replacement of the LIBOR index used under 
the plan, which would be inconsistent with the purpose of the 
comparisons of the rates under proposed Sec.  1026.40(f)(3)(ii)(B).
    Proposed comment 40(f)(3)(ii)(B)-3 clarifies that the replacement 
index and replacement margin are not required to produce an APR that is 
substantially similar on the day that the replacement index and 
replacement margin become effective on the plan. Proposed comment 
40(f)(3)(ii)(B)-3.i also provides an example to illustrate this 
comment. The Bureau believes that it would raise compliance issues if 
the rate calculated using the replacement index and replacement margin 
at the time the replacement index and replacement margin became 
effective had to be substantially similar to the rate calculated using 
the LIBOR index in effect on December 31, 2020. Under Sec.  
1026.9(c)(1), the creditor must provide a change-in-terms notice of the 
replacement index and replacement margin (including a reduced margin in 
a change-in-terms notice provided on or after October 1, 2021, as would 
be required by proposed Sec.  1026.9(c)(1)(ii)) at least 15 days prior 
to the effective date of the changes. The Bureau believes that this 
advance notice is important to consumers to inform them of how variable 
rates will be determined going forward after the LIBOR index is 
replaced. Because advance notice of the changes must be given prior to 
the changes becoming effective, a creditor would not be able to ensure 
that the rate based on the replacement index and replacement margin at 
the time the change-in-terms notice becomes effective will be 
substantially similar to the rate calculated using the LIBOR index in 
effect on December 31, 2020. The value of the replacement index may 
change after December 31, 2020, and before the change-in-terms notice 
becomes effective.
    The Bureau is not proposing to address for purposes of proposed 
Sec.  1026.40(f)(3)(ii)(B) when a rate calculated using the replacement 
index and replacement margin is ``substantially similar'' to the rate 
calculated using the LIBOR index value in effect on December 31, 2020, 
and the margin that applied to the variable rate immediately prior to 
the replacement of the LIBOR index used under the plan. The Bureau is 
concerned about providing a ``range'' of rates that would be considered 
to be ``substantially similar'' to the LIBOR rate described above, and 
about providing other specific guidance on, or regulatory changes 
addressing, the ``substantially similar'' standard, because the rates 
that will be considered ``substantially similar'' will be context-
specific. The Bureau is concerned that if it provides a range of rates 
that will be considered substantially similar, this range might be too 
narrow or too broad in some cases depending on the specific 
circumstances. The Bureau also is concerned that some creditors may 
decide to charge an APR that is the highest APR in the range, even 
though the specific circumstances would indicate that the highest APR 
should not be considered substantially similar in those circumstances. 
The Bureau solicits comment, however, on whether the Bureau should 
provide guidance on, or regulatory changes addressing, the 
``substantially similar'' standard in comparing the rates for purposes 
of proposed Sec.  1026.40(f)(3)(ii)(B), and if so, what guidance, or 
regulatory changes, the Bureau should provide. For example, should the 
Bureau provide a range of rates that would be considered 
``substantially similar'' as described above, and if so, how should the 
range be determined? Should the range of rates depend on context, and 
if so, what contexts should be considered? As an alternative to the 
range of rates approach, the Bureau solicits comment on whether it 
should provide factors that creditors must consider in deciding whether 
the rates are ``substantially similar'' and if so, what those factors 
should be. Are there other approaches the Bureau should consider for 
addressing the ``substantially similar'' standard for comparing rates?
    As discussed above, proposed comment 40(f)(3)(ii)(B)-1.ii clarifies 
that in order to use the SOFR-based spread-adjusted index as the 
replacement index for the applicable LIBOR index, the creditor must 
comply with the condition in Sec.  1026.40(f)(3)(ii)(B) that the SOFR-
based spread-adjusted index value in effect on December 31, 2020, and 
replacement margin will produce an APR substantially similar to the 
rate calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan. If 
either the LIBOR index or the SOFR-based spread-adjusted index is not 
published on December 31, 2020, the creditor must use the next calendar 
day that both indices are published as the date on which the annual 
percentage rate based on the SOFR-based spread-adjusted index must be 
substantially similar to the rate based on the LIBOR index. The Bureau 
solicits comment on whether the Bureau in the final rule, if adopted, 
should provide for purposes of proposed Sec.  1026.40(f)(3)(ii)(B) that 
the rate using the SOFR-based spread-adjusted index is ``substantially 
similar'' to the rate calculated using the LIBOR index, so long as the 
creditor uses as the replacement margin the same margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. As discussed in more detail in the section-
by-section analysis of Sec.  1026.20(a), the spread adjustments for the 
SOFR-based spread-adjusted indices are designed to reflect and adjust 
for the historical differences between LIBOR and SOFR in order to make 
the spread-adjusted rate comparable to LIBOR. Thus, the Bureau believes 
that it may be appropriate to provide for purposes of proposed Sec.  
1026.40(f)(3)(ii)(B) that a creditor complies with the ``substantially 
similar'' standard for comparing the rates when the creditor replaces 
the LIBOR index used under the plan with the applicable SOFR-based 
spread-adjusted index and uses as the replacement margin the same 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan.

[[Page 36962]]

Section 1026.55 Limitations on Increasing Annual Percentage Rates, 
Fees, and Charges

55(b) Exceptions
55(b)(7) Index Replacement and Margin Change Exception
    TILA section 171(a), which was added by the Credit CARD Act, 
provides that in the case of a credit card account under an open-end 
consumer credit plan, no creditor may increase any APR, fee, or finance 
charge applicable to any outstanding balance, except as permitted under 
TILA section 171(b).\86\ TILA section 171(b)(2) provides that the 
prohibition under TILA section 171(a) does not apply to an increase in 
a variable APR in accordance with a credit card agreement that provides 
for changes in the rate according to the operation of an index that is 
not under the control of the creditor and is available to the general 
public.\87\
---------------------------------------------------------------------------

    \86\ 15 U.S.C. 1666i-1(a).
    \87\ 15 U.S.C. 1666i-1(b)(2).
---------------------------------------------------------------------------

    In implementing these provisions of TILA section 171, Sec.  
1026.55(a) prohibits a card issuer from increasing an APR or certain 
enumerated fees or charges set forth in Sec.  1026.55(a) on a credit 
card account under an open-end (not home-secured) consumer credit plan, 
except as provided in Sec.  1026.55(b). Section 1026.55(b)(2) provides 
that a card issuer may increase an APR when: (1) The APR varies 
according to an index that is not under the card issuer's control and 
is available to the general public; and (2) the increase in the APR is 
due to an increase in the index.
    Comment 55(b)(2)-6 provides that a card issuer may change the index 
and margin used to determine the APR under Sec.  1026.55(b)(2) if the 
original index becomes unavailable, as long as historical fluctuations 
in the original and replacement indices were substantially similar, and 
as long as the replacement index and margin will produce a rate similar 
to the rate that was in effect at the time the original index became 
unavailable. If the replacement index is newly established and 
therefore does not have any rate history, it may be used if it produces 
a rate substantially similar to the rate in effect when the original 
index became unavailable.
The Proposal
    As discussed in part III, the industry has requested that the 
Bureau permit card issuers to replace the LIBOR index used in setting 
the variable rates on existing accounts prior to when the LIBOR indices 
become unavailable to facilitate compliance. Among other things, the 
industry is concerned that if card issuers must wait until LIBOR 
becomes unavailable to replace the LIBOR index used on existing 
accounts, card issuers would not have sufficient time to inform 
consumers of the replacement index and update their systems to 
implement the change. To reduce uncertainty with respect to selecting a 
replacement index, the industry also has requested that the Bureau 
determine that the prime rate has ``historical fluctuations'' that are 
``substantially similar'' to those of the LIBOR indices.
    To address these concerns, as discussed in more detail in the 
section-by-section analysis of proposed Sec.  1026.55(b)(7)(ii), the 
Bureau is proposing to add new LIBOR-specific provisions to proposed 
Sec.  1026.55(b)(7)(ii) that would permit card issuers for a credit 
card account under an open-end (not home-secured) consumer credit plan 
that uses a LIBOR index under the plan to replace LIBOR and change the 
margin on such plans on or after March 15, 2021, in certain 
circumstances.
    Specifically, proposed Sec.  1026.55(b)(7)(ii) provides that if a 
variable rate on a credit card account under an open-end (not home-
secured) consumer credit plan is calculated using a LIBOR index, a card 
issuer may replace the LIBOR index and change the margin for 
calculating the variable rate on or after March 15, 2021, as long as 
(1) the historical fluctuations in the LIBOR index and replacement 
index were substantially similar; and (2) the replacement index value 
in effect on December 31, 2020, and replacement margin will produce an 
APR substantially similar to the rate calculated using the LIBOR index 
value in effect on December 31, 2020, and the margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. If the replacement index is newly 
established and therefore does not have any rate history, it may be 
used if the replacement index value in effect on December 31, 2020, and 
the replacement margin will produce an APR substantially similar to the 
rate calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan.
    Also, as discussed in more detail in the section-by-section 
analysis of proposed Sec.  1026.55(b)(7)(ii), to reduce uncertainty 
with respect to selecting a replacement index that meets the standards 
in proposed Sec.  1026.55(b)(7)(ii), the Bureau is proposing to 
determine that Prime is an example of an index that has historical 
fluctuations that are substantially similar to those of certain USD 
LIBOR indices. The Bureau also is proposing to determine that certain 
spread-adjusted indices based on SOFR recommended by the ARRC have 
historical fluctuations that are substantially similar to those of 
certain USD LIBOR indices. The Bureau is also proposing additional 
detail in comments 55(b)(7)(ii)-1 through -3 with respect to proposed 
Sec.  1026.55(b)(7)(ii).
    In addition, as discussed in more detail in the section-by-section 
analysis of proposed Sec.  1026.55(b)(7)(i), the Bureau is proposing to 
move the unavailability provisions in current comment 55(b)(2)-6 to 
proposed Sec.  1026.55(b)(7)(i) and to revise the proposed moved 
provisions for clarity and consistency. The Bureau also is proposing 
additional detail in comments 55(b)(7)(i)-1 through -2 with respect to 
proposed Sec.  1026.55(b)(7)(i). For example, to reduce uncertainty 
with respect to selecting a replacement index that meets the standards 
under proposed Sec.  1026.55(b)(7)(i), the Bureau is proposing to make 
the same determinations discussed above related to Prime and the 
spread-adjusted indices based on SOFR recommended by the ARRC in 
relation to proposed Sec.  1026.55(b)(7)(i). The Bureau is proposing to 
make these revisions and provide additional detail in case card issuers 
use the unavailability provision in proposed Sec.  1026.55(b)(7)(i) to 
replace a LIBOR index used for their credit card accounts, as discussed 
in more detail below.
    Bureau is proposing new proposed LIBOR-specific provisions rather 
than interpreting when LIBOR is unavailable. For the same reasons that 
the Bureau is proposing LIBOR-specific provisions for HELOCs under 
proposed Sec.  1026.40(f)(3)(ii)(B), the Bureau is proposing these new 
LIBOR-specific provisions under proposed Sec.  1026.55(b)(7)(ii), 
rather than interpreting LIBOR indices to be unavailable as of a 
certain date prior to LIBOR being discontinued under current comment 
55(b)(2)-6 (as proposed to be moved to proposed Sec.  
1026.55(b)(7)(i)). First, the Bureau is concerned about making a 
determination for Regulation Z purposes under current comment 55(b)(2)-
6 (as proposed to be moved to proposed Sec.  1026.55(b)(7)(i)) that the 
LIBOR indices are unavailable or unreliable when the FCA, the regulator 
of LIBOR, has not made such a determination.
    Second, the Bureau is concerned that a determination by the Bureau 
that the

[[Page 36963]]

LIBOR indices are unavailable for purposes of comment 55(b)(2)-6 (as 
proposed to be moved to proposed Sec.  1026.55(b)(7)(i)) could have 
unintended consequences for other products or markets. For example, the 
Bureau is concerned that such a determination could unintentionally 
cause confusion for creditors for other products (e.g., ARMs) about 
whether the LIBOR indices are unavailable for those products too and 
could possibly put pressure on those creditors to replace the LIBOR 
index used for those products before those creditors are ready for the 
change.
    Third, even if the Bureau interpreted unavailability under comment 
55(b)(2)-6 (as proposed to be moved to proposed Sec.  1026.55(b)(7)(i)) 
to indicate that the LIBOR indices are unavailable prior to LIBOR being 
discontinued, this interpretation would not completely solve the 
contractual issues for card issuers whose contracts require them to 
wait until the LIBOR indices become unavailable before replacing the 
LIBOR index. Card issuers still would need to decide for their 
contracts whether the LIBOR indices are unavailable. Thus, even if the 
Bureau decided that the LIBOR indices are unavailable under Regulation 
Z as described above, card issuers whose contracts require them to wait 
until the LIBOR indices become unavailable before replacing the LIBOR 
index essentially would remain in the same position of interpreting 
their contracts as they would have been under the current rule.
    Thus, the Bureau is not proposing to interpret when the LIBOR 
indices are unavailable for purposes of current comment 55(b)(2)-6 (as 
proposed to be moved to proposed Sec.  1026.55(b)(7)(ii)). The Bureau 
solicits comment on whether the Bureau should interpret when the LIBOR 
indices are unavailable for purposes of current comment 55(b)(2)-6 (as 
proposed to be moved to proposed Sec.  1026.55(b)(7)(i)), and if so, 
why the Bureau should make that determination and when should the LIBOR 
indices be considered unavailable for purposes of that provision.
    The Bureau also solicits comment on an alternative to interpreting 
the term ``unavailable.'' Specifically, should the Bureau make 
revisions to the unavailability provisions in current comment 55(b)(2)-
6 (as proposed to be moved to proposed Sec.  1026.55(b)(7)(i)) in a 
manner that would allow those card issuers who need to transition from 
LIBOR and, for contractual reasons, may not be able to switch away from 
LIBOR prior to it being unavailable to be better able to use the 
unavailability provisions for an orderly transition on or after March 
15, 2021? If so, what should these revisions be?
    Interaction among proposed Sec.  1026.55(b)(7)(i) and (ii) and 
contractual provisions. Proposed comment 55(b)(7)-1 addresses the 
interaction among the unavailability provisions in proposed Sec.  
1026.55(b)(7)(i), the LIBOR-specific provisions in proposed Sec.  
1026.55(b)(7)(ii), and the contractual provisions applicable to the 
credit card account. The Bureau understands that credit card contracts 
generally allow a card issuer to change the terms of the contract 
(including the index) as permitted by law. Proposed comment 55(b)(7)-1 
provides detail where this contract language applies. In addition, 
consistent with the detail proposed in relation to HELOCs subject to 
Sec.  1026.40 in proposed comment 40(f)(3)(ii)-1, the Bureau also is 
providing detail on two other types of contract language, in case any 
credit card contracts include such language.
    For example, the Bureau is proposing detail in proposed comment 
55(b)(7)-1 for credit card contracts that contain language providing 
that (1) a card issuer can replace the LIBOR index and the margin for 
calculating the variable rate unilaterally only if the original index 
is no longer available or becomes unavailable; and (2) the replacement 
index and replacement margin will result in an APR substantially 
similar to a rate that is in effect when the original index becomes 
unavailable. The Bureau also is providing detail in proposed comment 
55(b)(7)-1 for credit card contracts that include language providing 
that the card issuer can replace the original index and the margin for 
calculating the variable rate unilaterally only if the original index 
is no longer available or becomes unavailable, but does not require 
that the replacement index and replacement margin will result in an APR 
substantially similar to a rate that is in effect when the original 
index becomes unavailable.
    Specifically, proposed comment 55(b)(7)-1 provides that a card 
issuer may use either the provision in proposed Sec.  1026.55(b)(7)(i) 
or Sec.  1026.55(b)(7)(ii) to replace a LIBOR index used under a credit 
card account under an open-end (not home-secured) consumer credit plan 
so long as the applicable conditions are met for the provision used. 
This proposed comment makes clear, however, that neither proposed 
provision excuses the card issuer from noncompliance with contractual 
provisions. As discussed below, proposed comment 55(b)(7)-1 provides 
examples to illustrate when a card issuer may use the provisions in 
proposed Sec.  1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii) to replace 
the LIBOR index used under a credit card account under an open-end (not 
home-secured) consumer credit and each of these examples assumes that 
the LIBOR index used under the plan becomes unavailable after March 15, 
2021.
    Proposed comment 55(b)(7)-1.i provides an example where a contract 
for a credit card account under an open-end (not home-secured) consumer 
credit plan provides that a card issuer may not unilaterally replace an 
index under a plan unless the original index becomes unavailable and 
provides that the replacement index and replacement margin will result 
in an APR substantially similar to a rate that is in effect when the 
original index becomes unavailable. In this case, proposed comment 
55(b)(7)-1.i explains that the card issuer may use the unavailability 
provisions in proposed Sec.  1026.55(b)(7)(i) to replace the LIBOR 
index used under the plan so long as the conditions of that provision 
are met. Proposed comment 55(b)(7)-1.i also explains that the proposed 
LIBOR-specific provisions in proposed Sec.  1026.55(b)(7)(ii) provides 
that a card issuer may replace the LIBOR index if the replacement index 
value in effect on December 31, 2020, and replacement margin will 
produce an APR substantially similar to the rate calculated using the 
LIBOR index value in effect on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. Proposed comment 55(b)(7)-1.i 
notes, however, that the card issuer in this example would be 
contractually prohibited from replacing the LIBOR index used under the 
plan unless the replacement index and replacement margin also will 
produce an APR substantially similar to a rate that is in effect when 
the LIBOR index becomes unavailable. The Bureau solicits comments on 
this proposed approach and example.
    Proposed comment 55(b)(7)-1.ii provides an example of a contract 
for a credit card account under an open-end (not home-secured) consumer 
credit plan under which a card issuer may not replace an index 
unilaterally under a plan unless the original index becomes unavailable 
but does not require that the replacement index and replacement margin 
will result in an APR substantially similar to a rate that is in effect 
when the original index becomes unavailable. In this case, the card 
issuer would be contractually prohibited from unilaterally replacing a 
LIBOR index

[[Page 36964]]

used under the plan until it becomes unavailable. At that time, the 
card issuer has the option of using proposed Sec.  1026.55(b)(7)(i) or 
Sec.  1026.55(b)(7)(ii) to replace the LIBOR index if the conditions of 
the applicable provision are met.
    The Bureau is proposing to allow the card issuer in this case to 
use either the proposed unavailability provisions in proposed Sec.  
1026.55(b)(7)(i) or the proposed LIBOR-specific provisions in proposed 
Sec.  1026.55(b)(7)(ii). If the card issuer uses the unavailability 
provisions in proposed Sec.  1026.55(b)(7)(i), the card issuer must use 
a replacement index and replacement margin that will produce an APR 
substantially similar to the rate in effect when the LIBOR index became 
unavailable. If the card issuer uses the proposed LIBOR-specific 
provisions in proposed Sec.  1026.55(b)(7)(ii), the card issuer 
generally must use a replacement index value in effect on December 31, 
2020, and replacement margin that will produce an APR substantially 
similar to the rate calculated using the LIBOR index value in effect on 
December 31, 2020, and the margin that applied to the variable rate 
immediately prior to the replacement of the LIBOR index used under the 
plan.
    The Bureau is proposing to allow a card issuer, in this case, to 
use the index values for the LIBOR index and the replacement index on 
December 31, 2020, to meet the ``substantially similar'' standard with 
respect to the comparison of the rates even if the card issuer is 
contractually prohibited from unilaterally replacing a LIBOR index used 
under the plan until it becomes unavailable. The Bureau recognizes that 
LIBOR may not be discontinued until the end of 2021, which is around a 
year later than the December 31, 2020 date. Nonetheless, the Bureau is 
proposing to allow card issuers that are restricted by their contracts 
to replace the LIBOR index used under the credit card plans until LIBOR 
becomes unavailable to use the LIBOR index values and the replacement 
index values in effect on December 31, 2020 under proposed Sec.  
1026.55(b)(7)(ii), rather than the index values on the day that the 
LIBOR indices become unavailable under proposed Sec.  1026.55(b)(7)(i). 
This proposal would allow those card issuers to use consistent index 
values to those card issuers that are not restricted by their contracts 
in replacing the LIBOR index prior to the LIBOR becoming unavailable. 
This proposal may also promote consistency for consumers in that all 
card issuers are permitted to use the same LIBOR values in comparing 
the rates.
    In addition, as discussed in part III, the industry has raised 
concerns that LIBOR may continue for some time after December 2021 but 
become less representative or reliable until LIBOR finally is 
discontinued. Allowing card issuers to use the December 31, 2020, 
values for comparison of the rates instead of the LIBOR values when the 
LIBOR indices become unavailable may address some of these concerns.
    Thus, the Bureau is proposing to provide card issuers with the 
flexibility to choose to use the index values for the LIBOR index and 
the replacement index on December 31, 2020, by using the proposed 
LIBOR-specific provisions under proposed Sec.  1026.55(b)(7)(ii), 
rather than using the unavailability provisions in proposed Sec.  
1026.55(b)(7)(i). The Bureau solicits comment on this proposed approach 
and example.
    Proposed comment 55(b)(7)-1.iii provides an example of a contract 
for a credit card account under an open-end (not home-secured) consumer 
credit plan under which a card issuer may change the terms of the 
contract (including the index) as permitted by law. Proposed comment 
55(b)(7)-1.iii explains in this case, if the card issuer replaces a 
LIBOR index under a plan on or after March 15, 2021, but does not wait 
until LIBOR becomes unavailable to do so, the card issuer may only use 
proposed Sec.  1026.55(b)(7)(ii) to replace the LIBOR index if the 
conditions of that provision are met. In this case, the card issuer may 
not use proposed Sec.  1026.55(b)(7)(i). Proposed comment 55(b)(7)-
1.iii also explains that if the card issuer waits until the LIBOR index 
used under the plan becomes unavailable to replace the LIBOR index, the 
card issuer has the option of using proposed Sec.  1026.55(b)(7)(i) or 
Sec.  1026.55(b)(7)(ii) to replace the LIBOR index if the conditions of 
the applicable provision are met.
    The Bureau is proposing to allow the card issuer, in this case, to 
use either the unavailability provisions in proposed Sec.  
1026.55(b)(7)(i) or the proposed LIBOR-specific provisions in proposed 
Sec.  1026.55(b)(7)(ii) if the card issuer waits until the LIBOR index 
used under the plan becomes unavailable to replace the LIBOR index. For 
the reasons explained above in the discussion of the example in 
proposed comment 55(b)(7)-1.ii, the Bureau is proposing in the 
situation described in proposed comment 55(b)(7)-1.iii to provide card 
issuers with the flexibility to choose to use the index values for the 
LIBOR index and the replacement index on December 31, 2020, by using 
the proposed LIBOR-specific provisions under proposed Sec.  
1026.55(b)(7)(ii), rather than using the unavailability provision in 
proposed Sec.  1026.55(b)(7)(i). The Bureau solicits comment on this 
proposed approach and example.
55(b)(7)(i)
    Section 1026.55(a) prohibits a card issuer from increasing an APR 
or certain enumerated fees or charges set forth in Sec.  1026.55(a) on 
a credit card account under an open-end (not home-secured) consumer 
credit plan, except as provided in Sec.  1026.55(b). Section 
1026.55(b)(2) provides that a card issuer may increase an APR when: (1) 
The APR varies according to an index that is not under the card 
issuer's control and is available to the general public; and (2) the 
increase in the APR is due to an increase in the index. Comment 
55(b)(2)-6 provides that a card issuer may change the index and margin 
used to determine the APR under Sec.  1026.55(b)(2) if the original 
index becomes unavailable, as long as historical fluctuations in the 
original and replacement indices were substantially similar, and as 
long as the replacement index and margin will produce a rate similar to 
the rate that was in effect at the time the original index became 
unavailable. If the replacement index is newly established and 
therefore does not have any rate history, it may be used if it produces 
a rate substantially similar to the rate in effect when the original 
index became unavailable.
The Proposal
    The Bureau is proposing to move the unavailability provisions in 
current comment 55(b)(2)-6 to proposed Sec.  1026.55(b)(7)(i) and to 
revise the proposed moved provisions for clarity and consistency. 
Proposed Sec.  1026.55(b)(7)(i) provides that a card issuer may 
increase an APR when the card issuer changes the index and margin used 
to determine the APR if the original index becomes unavailable, as long 
as (1) the historical fluctuations in the original and replacement 
indices were substantially similar; and (2) the replacement index and 
replacement margin will produce a rate substantially similar to the 
rate that was in effect at the time the original index became 
unavailable. If the replacement index is newly established and 
therefore does not have any rate history, it may be used if it and the 
replacement margin will produce a rate substantially similar to the 
rate in effect when the original index became unavailable.
    The Bureau also is proposing comments 55(b)(7)(i)-1 through -2 with 
respect to proposed Sec.  1026.55(b)(7)(i).

[[Page 36965]]

For example, to reduce uncertainty with respect to selecting a 
replacement index that meets the standards under proposed Sec.  
1026.55(b)(7)(i), the Bureau is proposing to determine that Prime is an 
example of an index that has historical fluctuations that are 
substantially similar to those of certain USD LIBOR indices. The Bureau 
also is proposing to determine that certain spread-adjusted indices 
based on SOFR recommended by the ARRC have historical fluctuations that 
are substantially similar to those of certain USD LIBOR indices. The 
Bureau is proposing to make these revisions and provide additional 
detail, in case card issuers use the unavailability provisions in 
proposed Sec.  1026.55(b)(7)(i) to replace a LIBOR index used for 
credit card accounts, as discussed in more detail above in the section-
by-section analysis of proposed Sec.  1026.55(b)(7).
    Proposed Sec.  1026.55(b)(7)(i) differs from current comment 
55(b)(2)-6 in three ways. First, proposed Sec.  1026.55(b)(7)(i) 
provides that if an index that is not newly established is used to 
replace the original index, the replacement index and replacement 
margin will produce a rate ``substantially similar'' to the rate that 
was in effect at the time the original index became unavailable. 
Currently, comment 55(b)(2)-6 uses the term ``similar'' instead of 
``substantially similar'' for the comparison of these rates. 
Nonetheless, comment 55(b)(2)-6 provides that if the replacement index 
is newly established and therefore does not have any rate history, it 
may be used if it produces a rate ``substantially similar'' to the rate 
in effect when the original index became unavailable. To correct this 
inconsistency between the comparison of rates when an existing 
replacement index is used and when a newly established index is used, 
the Bureau is proposing to use ``substantially similar'' consistently 
in proposed Sec.  1026.55(b)(7)(i) for the comparison of rates. As 
discussed in the section-by-section analysis of proposed Sec.  
1026.40(f)(3)(ii)(A), the Bureau also is proposing to use 
``substantially similar'' as the standard for the comparison of rates 
for HELOC plans when the LIBOR index used under the plan becomes 
unavailable.
    Second, proposed Sec.  1026.55(b)(7)(i) differs from current 
comment 55(b)(2)-6 in that the proposed provision makes clear that a 
card issuer that is using a newly established index may also adjust the 
margin so that the newly established index and replacement margin will 
produce an APR substantially similar to the rate in effect when the 
original index became unavailable. The newly established index may not 
have the same index value as the original index, and the card issuer 
may need to adjust the margin to meet the condition that the newly 
established index and replacement margin will produce an APR 
substantially similar to the rate in effect when the original index 
became unavailable.
    Third, proposed Sec.  1026.55(b)(7)(i) differs from current comment 
55(b)(2)-6 in that the proposed provision uses the term ``the 
replacement index and replacement margin'' instead of ``the replacement 
index and margin'' to make clear when proposed Sec.  1026.55(b)(7)(i) 
is referring to a replacement margin and not the original margin.
    To effectuate the purposes of TILA and to facilitate compliance, 
the Bureau is proposing to use its TILA section 105(a) authority to 
propose Sec.  1026.55(b)(7)(i). TILA section 105(a) \88\ directs the 
Bureau to prescribe regulations to carry out the purposes of TILA, and 
provides that such regulations may contain additional requirements, 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for all or any class of 
transactions, that the Bureau judges are necessary or proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance. The Bureau is proposing this 
exception to facilitate compliance with TILA and effectuate its 
purposes. Specifically, the Bureau interprets ``facilitate compliance'' 
to include enabling or fostering continued operation in conformity with 
the law.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------

    The Bureau is proposing to move comment 55(b)(2)-6 to proposed 
Sec.  1026.55(b)(7)(i) as an exception to the general rule in current 
Sec.  1026.55(a) restricting rate increases. The Bureau believes that 
an index change could produce a rate increase at the time of the 
replacement or in the future. The Bureau is proposing to provide this 
exception to the general rule in Sec.  1026.55(a) in the circumstances 
in which an index becomes unavailable in the limited conditions set 
forth in proposed Sec.  1026.55(b)(7)(i) to enable or foster continued 
operation in conformity with the law. If the index that is used under a 
credit card account under an open-end (not home-secured) consumer 
credit plan becomes unavailable, the card issuer would need to replace 
the index with another index, so the rate remains a variable rate under 
the plan. The Bureau is proposing this exception to facilitate 
compliance with the rule by allowing the card issuer to maintain the 
rate as a variable rate, which is also likely to be consistent with the 
consumer's expectation that the rate on the account will be a variable 
rate. The Bureau is not aware of legislative history suggesting that 
Congress intended card issuers, in this case, to be required to convert 
variable-rate plans to a non-variable-rate plans when the index becomes 
unavailable.
    The Bureau solicits comments on proposed Sec.  1026.55(b)(7)(i) and 
proposed comments 55(b)(7)(i)-1 through -2. The proposed comments are 
discussed in more detail below.
    Historical fluctuations substantially similar for the LIBOR index 
and replacement index. Proposed comment 55(b)(7)(i)-1 provides detail 
on determining whether a replacement index that is not newly 
established has ``historical fluctuations'' that are ``substantially 
similar'' to those of the LIBOR index used under the plan for purposes 
of proposed Sec.  1026.55(b)(7)(i). Specifically, proposed comment 
55(b)(7)(i)-1 provides that for purposes of replacing a LIBOR index 
used under a plan pursuant to Sec.  1026.55(b)(7)(i), a replacement 
index that is not newly established must have historical fluctuations 
that are substantially similar to those of the LIBOR index used under 
the plan, considering the historical fluctuations up through when the 
LIBOR index becomes unavailable or up through the date indicated in a 
Bureau determination that the replacement index and the LIBOR index 
have historical fluctuations that are substantially similar, whichever 
is earlier. To facilitate compliance, proposed comment 55(b)(7)(i)-1.i 
includes a proposed determination that Prime has historical 
fluctuations that are substantially similar to those of the 1-month and 
3-month USD LIBOR indices and includes a placeholder for the date when 
this proposed determination would be effective, if adopted in the final 
rule.\89\ The Bureau understands that some card issuers may choose to 
replace a LIBOR index with Prime. Proposed comment 55(b)(7)(i)-1.i also 
clarifies that in order to use Prime as the replacement index for the 
1-month or 3-month USD LIBOR index, the card issuer also must comply 
with the condition in Sec.  1026.55(b)(7)(i) that Prime and the 
replacement margin will produce a rate substantially similar to the 
rate that was in effect at the time the LIBOR index became unavailable. 
This condition for comparing the rates under

[[Page 36966]]

proposed Sec.  1026.55(b)(7)(i) is discussed in more detail below.
---------------------------------------------------------------------------

    \89\ See the section-by-section analysis of proposed Sec.  
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the 
Bureau proposing this determination.
---------------------------------------------------------------------------

    To facilitate compliance, proposed comment 55(b)(7)(i)-1.ii 
provides a proposed determination that the spread-adjusted indices 
based on SOFR recommended by the ARRC to replace the 1-month, 3-month, 
6-month, and 1-year USD LIBOR indices have historical fluctuations that 
are substantially similar to those of the 1-month, 3-month, 6-month, 
and 1-year USD LIBOR indices respectively. The proposed comment 
provides a placeholder for the date when this proposed determination 
would be effective, if adopted in the final rule.\90\ The Bureau is 
proposing this determination in case some card issuers choose to 
replace a LIBOR index with the SOFR-based spread-adjusted index.
---------------------------------------------------------------------------

    \90\ See the section-by-section analysis of proposed Sec.  
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the 
Bureau proposing this determination. Also, as discussed in the 
section-by-section analysis of proposed Sec.  1026.40(f)(3)(ii)(A), 
the Bureau solicits comment on whether the Bureau should 
alternatively consider these SOFR-based spread-adjusted indices to 
be newly established indices for purposes of proposed Sec.  
1026.55(b)(7)(i), to the extent these indices are not being 
published by the effective date of the final rule, if adopted.
---------------------------------------------------------------------------

    Proposed comment 55(b)(7)(i)-1.ii also clarifies that in order to 
use this SOFR-based spread-adjusted index as the replacement index for 
the applicable LIBOR index, the card issuer also must comply with the 
condition in Sec.  1026.55(b)(7)(i) that the SOFR-based spread-adjusted 
index and replacement margin would have resulted in an APR 
substantially similar to the rate in effect at the time the LIBOR index 
became unavailable. This condition under proposed Sec.  
1026.55(b)(7)(i) is discussed in more detail below. Also, as discussed 
in more detail below, the Bureau solicits comment on whether the Bureau 
in the final rule, if adopted, should provide for purposes of proposed 
Sec.  1026.55(b)(7)(i) that the rate using the SOFR-based spread-
adjusted index is ``substantially similar'' to the rate in effect at 
the time the LIBOR index becomes unavailable, so long as the card 
issuer uses as the replacement margin the same margin in effect on the 
day that the LIBOR index becomes unavailable.
    The Bureau also solicits comment on whether there are other indices 
that are not newly established for which the Bureau should make a 
determination that the index has historical fluctuations that are 
substantially similar to those of the LIBOR indices for purposes of 
proposed Sec.  1026.55(b)(7)(i). If so, what are these other indices, 
and why should the Bureau make such a determination with respect to 
those indices?
    Newly established index as replacement for a LIBOR index. Proposed 
Sec.  1026.55(b)(7)(i) provides that if the replacement index is newly 
established and therefore does not have any rate history, it may be 
used if it and the replacement margin will produce an APR substantially 
similar to the rate in effect when the original index became 
unavailable. The Bureau solicits comment on whether the Bureau should 
provide any additional guidance on, or regulatory changes addressing, 
when an index is newly established with respect to replacing the LIBOR 
indices for purposes of proposed Sec.  1026.55(b)(7)(i). The Bureau 
also solicits comment on whether the Bureau should provide any examples 
of indices that are newly established with respect to replacing the 
LIBOR indices for purposes of Sec.  1026.55(b)(7)(i). If so, what are 
these indices and why should the Bureau determine these indices are 
newly established with respect to replacing the LIBOR indices?
    Substantially similar rate when LIBOR becomes unavailable. Under 
proposed Sec.  1026.55(b)(7)(i), the replacement index and replacement 
margin must produce an APR substantially similar to the rate that was 
in effect based on the LIBOR index used under the plan when the LIBOR 
index became unavailable. Proposed comment 55(b)(7)(i)-2 explains that 
for the comparison of the rates, a card issuer must use the value of 
the replacement index and the LIBOR index on the day that LIBOR becomes 
unavailable. The Bureau solicits comment on whether it should address 
the situation where the replacement index is not be published on the 
day that the LIBOR index becomes unavailable. For example, should the 
Bureau provide that if the replacement index is not published on the 
day that the LIBOR index becomes unavailable, the card issuer must use 
the previous calendar day that both indices are published as the date 
on which the annual percentage rate based on the replacement index must 
be substantially similar to the rate based on the LIBOR index?
    Proposed comment 55(b)(7)(i)-2 clarifies that the replacement index 
and replacement margin are not required to produce an APR that is 
substantially similar on the day that the replacement index and 
replacement margin become effective on the plan. Proposed comment 
55(b)(7)(i)-2.i provides an example to illustrate this comment.
    The Bureau believes that it may raise compliance issues if the rate 
calculated using the replacement index and replacement margin at the 
time the replacement index and replacement margin became effective had 
to be substantially similar to the rate calculated using the LIBOR 
index on the date that the LIBOR index became unavailable. 
Specifically, under Sec.  1026.9(c)(2), the card issuer must provide a 
change-in-terms notice of the replacement index and replacement margin 
(including disclosing any reduced margin in change-in-terms notices 
provided on or after October 1, 2021, which would be required under 
proposed Sec.  1026.9(c)(2)(v)(A)) at least 45 days prior to the 
effective date of the changes. The Bureau believes that this advance 
notice is important to consumers to inform them of how variable rates 
will be determined going forward after the LIBOR index is replaced. 
Because advance notice of the changes must be given prior to the 
changes becoming effective, a card issuer would not be able to ensure 
that the rate based on the replacement index and margin at the time the 
change-in-terms notice becomes effective will be substantially similar 
to the rate calculated using the LIBOR index in effect at the time the 
LIBOR index becomes unavailable. The value of the replacement index may 
change after the LIBOR index becomes unavailable and before the change-
in-terms notice becomes effective.
    The Bureau notes that proposed Sec.  1026.55(b)(7)(i) would require 
a card issuer to use the index values of the replacement index and the 
original index on a single day (namely, the day that the original index 
becomes unavailable) to compare the rates to determine if they are 
``substantially similar.'' In using a single day to compare the rates, 
this proposed provision is consistent with the condition in the 
unavailability provision in current comment 55(b)(2)-6, in the sense 
that it provides that the new index and margin must result in an APR 
that is substantially similar to the rate in effect on a single day. 
For the reasons discussed in the section-by-section analysis of 
proposed Sec.  1026.40(f)(3)(ii)(A), the Bureau solicits comment on 
whether the Bureau should adopt a different approach to determine 
whether a rate using the replacement index is ``substantially similar'' 
to the rate using the original index for purposes of Sec.  
1026.55(b)(7)(i) and, if so, what criteria the Bureau should use in 
selecting such a different approach. For example, the Bureau solicits 
comment on whether it should require card issuers to use a historical 
median or average of the spread between the replacement index and the 
original index over a certain time frame (e.g., the

[[Page 36967]]

time period the historical data are available or 5 years, whichever is 
shorter) for purposes of determining whether a rate using the 
replacement index is ``substantially similar'' to the rate using the 
original index. The Bureau also solicits comments on any compliance 
challenges that might arise as a result of adopting a potentially more 
complicated method of comparing the rates calculated using the 
replacement index and the rates calculated using the original index, 
and for any identified compliance challenges, how the Bureau could ease 
those compliance challenges.
    For the reasons discussed in more detail in the section-by-section 
analysis of proposed Sec.  1026.40(f)(3)(ii)(A), the Bureau is not 
proposing to address for purposes of proposed Sec.  1026.55(b)(7)(i) 
when a rate calculated using the replacement index and replacement 
margin is ``substantially similar'' to the rate in effect when the 
LIBOR index becomes unavailable. The Bureau solicits comment, however, 
on whether the Bureau should provide guidance on, or regulatory changes 
addressing, the ``substantially similar'' standard in comparing the 
rates for purposes of proposed Sec.  1026.55(b)(7)(i), and if so, what 
guidance, or regulatory changes, the Bureau should provide. For 
example, should the Bureau provide a range of rates that would be 
considered ``substantially similar'' as described above, and if so, how 
should the range be determined? Should the range of rates depend on 
context, and if so, what contexts should be considered? As an 
alternative to the range of rates approach, the Bureau solicits comment 
on whether it should provide factors that card issuers must consider in 
deciding whether the rates are ``substantially similar'' and if so, 
what those factors should be. Are there other approaches the Bureau 
should consider for addressing the ``substantially similar'' standard 
for comparing rates?
    As discussed above, proposed comment 55(b)(7)(i)-1.ii clarifies 
that in order to use the SOFR-based spread-adjusted index as the 
replacement index for the applicable LIBOR index, the card issuer must 
comply with the condition in Sec.  1026.55(b)(7)(i) that the SOFR-based 
spread-adjusted index and replacement margin would have resulted in an 
APR substantially similar to the rate in effect at the time the LIBOR 
index became unavailable. For the reasons discussed in more detail in 
the section-by-section analysis of proposed Sec.  1026.40(f)(3)(ii)(A), 
the Bureau solicits comment on whether the Bureau in the final rule, if 
adopted, should provide for purposes of proposed Sec.  1026.55(b)(7)(i) 
that the rate using the SOFR-based spread-adjusted index is 
``substantially similar'' to the rate in effect at the time the LIBOR 
index becomes unavailable, so long as the card issuer uses as the 
replacement margin the same margin in effect on the day that the LIBOR 
index becomes unavailable.
55(b)(7)(ii)
The Proposal
    For the reasons discussed below and in the section-by-section 
analysis of proposed Sec.  1026.55(b)(7), the Bureau is proposing to 
add new LIBOR-specific provisions to proposed Sec.  1026.55(b)(7)(ii) 
that would permit card issuers for a credit card account under an open-
end (not home-secured) consumer credit plan that uses a LIBOR index 
under the plan for calculating variable rates to replace the LIBOR 
index and change the margins for calculating the variable rates on or 
after March 15, 2021, in certain circumstances. Specifically, proposed 
Sec.  1026.55(b)(7)(ii) provides that if a variable rate on a credit 
card account under an open-end (not home-secured) consumer credit plan 
is calculated using a LIBOR index, a card issuer may replace the LIBOR 
index and change the margin for calculating the variable rate on or 
after March 15, 2021, as long as (1) the historical fluctuations in the 
LIBOR index and replacement index were substantially similar; and (2) 
the replacement index value in effect on December 31, 2020, and 
replacement margin will produce an APR substantially similar to the 
rate calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan. 
Proposed Sec.  1026.55(b)(7)(ii) also provides that if the replacement 
index is newly established and therefore does not have any rate 
history, it may be used if the replacement index value in effect on 
December 31, 2020, and replacement margin will produce an APR 
substantially similar to the rate calculated using the LIBOR index 
value in effect on December 31, 2020, and the margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. In addition, proposed Sec.  
1026.55(b)(7)(ii) provides that if either the LIBOR index or the 
replacement index is not published on December 31, 2020, the card 
issuer must use the next calendar day that both indices are published 
as the date on which the APR based on the replacement index must be 
substantially similar to the rate based on the LIBOR index.
    In addition, the Bureau is proposing to add detail in proposed 
comments 55(b)(7)(ii)-1 through -3 on the conditions set forth in 
proposed Sec.  1026.55(b)(7)(ii). For example, to reduce uncertainty 
with respect to selecting a replacement index that meets the standards 
in proposed Sec.  1026.55(b)(7)(ii), the Bureau is proposing to 
determine that Prime is an example of an index that has historical 
fluctuations that are substantially similar to those of certain USD 
LIBOR indices. The Bureau also is proposing to determine that certain 
spread-adjusted indices based on SOFR recommended by the ARRC have 
historical fluctuations that are substantially similar to those of 
certain USD LIBOR indices. Proposed Sec.  1026.55(b)(7)(ii) and 
proposed comments 55(b)(7)(ii)-1 through -3 applicable to credit card 
accounts under an open-end (not home-secured) consumer credit plan are 
similar to the LIBOR-specific provisions set forth in proposed Sec.  
1026.40(f)(3)(ii)(B) and proposed comments 40(f)(3)(ii)(B)-1 through -3 
applicable to HELOCs subject to Sec.  1026.40.
    To effectuate the purposes of TILA and to facilitate compliance, 
the Bureau is proposing to use its TILA section 105(a) authority to 
propose new LIBOR-specific provisions under proposed Sec.  
1026.55(b)(7)(ii). TILA section 105(a) \91\ directs the Bureau to 
prescribe regulations to carry out the purposes of TILA, and provides 
that such regulations may contain additional requirements, 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for all or any class of 
transactions, that the Bureau judges are necessary or proper to 
effectuate the purposes of TILA, to prevent circumvention or evasion 
thereof, or to facilitate compliance. The Bureau is proposing this 
exception to facilitate compliance with TILA and effectuate its 
purposes. Specifically, the Bureau interprets ``facilitate compliance'' 
to include enabling or fostering continued operation in conformity with 
the law.
---------------------------------------------------------------------------

    \91\ 15 U.S.C. 1604(a).
---------------------------------------------------------------------------

    The Bureau is proposing to set March 15, 2021, as the date on or 
after which card issuers are permitted to replace the LIBOR index used 
for a credit card account under an open-end (not home-secured) consumer 
credit plan under the plan pursuant to proposed Sec.  1026.55(b)(7)(ii) 
prior to LIBOR becoming unavailable to facilitate compliance with the 
change-in-terms

[[Page 36968]]

notice requirements applicable to card issuers by allowing them to 
provide the 45-day change-in-terms notices required under Sec.  
1026.9(c)(2) prior to the LIBOR indices becoming unavailable. This 
proposed change will allow those card issuers to avoid being left 
without a LIBOR index to use in calculating the variable rate before 
the replacement index and margin become effective. Also, it will allow 
card issuers to provide the change-in-terms notices, and replace the 
LIBOR index used under the plans, on accounts on a rolling basis, 
rather than having to provide the change-in-terms notices, and replace 
the LIBOR index, for all its accounts at the same time when the LIBOR 
index used under the plan becomes unavailable.
    Without the proposed LIBOR-specific provisions in proposed Sec.  
1026.55(b)(7)(ii), as a practical matter, card issuers would have to 
wait until LIBOR becomes unavailable to provide the 45-day change-in-
terms notice under Sec.  1026.9(c)(2) disclosing the replacement index 
and replacement margin (including disclosing any reduced margin in 
change-in-terms notices provided on or after October 1, 2021, which 
would be required under proposed Sec.  1026.9(c)(2)(v)(A)). The Bureau 
believes that this advance notice is important to consumers to inform 
them of how variable rates will be determined going forward after the 
LIBOR index is replaced.
    Card issuers would not be able to send out change-in-terms notices 
disclosing the replacement index and replacement margin prior to the 
LIBOR indices becoming unavailable for several reasons. First, although 
LIBOR is expected to become unavailable around the end of 2021, there 
is no specific date known with certainty on which LIBOR will become 
unavailable. Thus, card issuers could not send out the change-in-terms 
notices prior to the LIBOR index becoming unavailable because they will 
not know when it will become unavailable and thus would not know when 
to make the replacement index and replacement margin effective on the 
account.
    Second, card issuers would need to know the index values of the 
LIBOR index and the replacement index prior to sending out the change-
in-terms notice so that they could disclose the replacement margin in 
the change-in-terms notice. Card issuers will not know these index 
values until the day that LIBOR becomes unavailable. Thus, card issuers 
would have to wait until the LIBOR indices become unavailable before 
the card issuer could send the 45-day change-in-terms notice under 
Sec.  1026.9(c)(2) to replace the LIBOR index with a replacement index. 
Some card issuers could be left without a LIBOR index value to use 
during the 45-day period before the replacement index and replacement 
margin become effective, depending on their existing contractual terms. 
The Bureau is concerned this could cause compliance and systems issues.
    Also, as discussed in part III, the industry has raised concerns 
that LIBOR may continue for some time after December 2021 but become 
less representative or reliable until LIBOR finally is discontinued. 
Allowing card issuers to replace the LIBOR indices on existing credit 
card accounts prior to the LIBOR indices becoming unavailable may 
address some of these concerns.
    The Bureau solicits comments on proposed Sec.  1026.55(b)(7)(ii) 
and proposed comments 55(b)(7)(ii)-1 through -3. The proposed comments 
are discussed in more detail below.
    Consistent conditions with proposed Sec.  1026.55(b)(7)(i). The 
Bureau is proposing conditions in the LIBOR-specific provisions in 
proposed Sec.  1026.55(b)(7)(ii) for how a card issuer must select a 
replacement index and compare rates that are consistent with the 
conditions set forth in the unavailability provisions set forth in 
proposed Sec.  1026.55(b)(7)(i). For example, the availability 
provisions in proposed Sec.  1026.55(b)(7)(i) and the LIBOR-specific 
provisions in proposed Sec.  1026.55(b)(7)(ii) contain a consistent 
requirement that the APR calculated using the replacement index must be 
``substantially similar'' to the rate calculated using the LIBOR 
index.\92\ In addition, both proposed Sec.  1026.55(b)(7)(i) and (ii) 
would allow a card issuer to use an index that is not newly established 
as a replacement index only if the index has historical fluctuations 
that are substantially similar to those of the LIBOR index.
---------------------------------------------------------------------------

    \92\ The conditions in proposed Sec.  1026.55(b)(7)(i) and (ii) 
are consistent, but they are not the same. For example, although 
both proposed provisions use the ``substantially similar'' standard 
to compare the rates, they use different dates for selecting the 
index values in calculating the rates. The proposed provisions 
differ in the timing of when card issuers are permitted to 
transition away from LIBOR, which creates some differences in how 
the conditions apply.
---------------------------------------------------------------------------

    For several reasons, the Bureau is proposing to keep the conditions 
for these two provisions consistent. First, as discussed above in the 
section-by-section analysis of proposed Sec.  1026.55(b)(7), to the 
extent some card issuers may need to wait until the LIBOR indices 
become unavailable to transition to a replacement index because of 
contractual reasons, the Bureau believes that keeping the conditions 
consistent in the unavailability provisions in proposed Sec.  
1026.55(b)(7)(i) and the LIBOR-specific provisions in proposed Sec.  
1026.55(b)(7)(ii) will help ensure that card issuers must meet 
consistent conditions in selecting a replacement index and setting the 
rates, regardless of whether they are using the unavailability 
provisions in proposed Sec.  1026.55(b)(7)(i), or the LIBOR-specific 
provisions in proposed Sec.  1026.55(b)(7)(ii).
    Second, most card issuers may have the ability to choose between 
the unavailability provisions and LIBOR-specific provisions to switch 
away from using a LIBOR index, and if the conditions between those two 
provisions are inconsistent, these differences could undercut the 
purpose of the LIBOR-specific provisions to allow card issuers to 
switch out earlier. For example, if the conditions for selecting a 
replacement index or setting the rates were stricter in the LIBOR-
specific provisions than in the unavailability provisions, this may 
cause a card issuer to wait until the LIBOR indices become unavailable 
to switch to a replacement index, which would undercut the purpose of 
the LIBOR-specific provisions to allow card issuers to switch out 
earlier and prevent these card issuers from having the time required to 
transition from using a LIBOR index.
    Historical fluctuations substantially similar for the LIBOR index 
and replacement index. Proposed comment 55(b)(7)(ii)-1 provides detail 
on determining whether a replacement index that is not newly 
established has ``historical fluctuations'' that are ``substantially 
similar'' to those of the LIBOR index used under the plan for purposes 
of proposed Sec.  1026.55(b)(7)(ii). Specifically, proposed comment 
55(b)(7)(ii)-1 provides that for purposes of replacing a LIBOR index 
used under a plan pursuant to proposed Sec.  1026.55(b)(7)(ii), a 
replacement index that is not newly established must have historical 
fluctuations that are substantially similar to those of the LIBOR index 
used under the plan, considering the historical fluctuations up through 
December 31, 2020, or up through the date indicated in a Bureau 
determination that the replacement index and the LIBOR index have 
historical fluctuations that are substantially similar, whichever is 
earlier. The Bureau is proposing the December 31, 2020, date to be 
consistent with the date that card issuers generally must use for 
selecting the index values to use in comparing the rates under

[[Page 36969]]

proposed Sec.  1026.55(b)(7)(ii). The Bureau solicits comment on the 
December 31, 2020 date for purposes of proposed comment 55(b)(7)(ii)-1 
and whether another date or timeframe would be more appropriate for 
purposes of that proposed comment.
    To facilitate compliance, proposed comment 55(b)(7)(ii)-1.i 
includes a proposed determination that Prime has historical 
fluctuations that are substantially similar to those of the 1-month and 
3-month USD LIBOR indices and includes a placeholder for the date when 
this proposed determination would be effective, if adopted in the final 
rule.\93\ The Bureau understands some card issuers may choose to 
replace a LIBOR index with Prime. Proposed comment 55(b)(7)(ii)-1.i 
also clarifies that in order to use Prime as the replacement index for 
the 1-month or 3-month USD LIBOR index, the card issuer also must 
comply with the condition in Sec.  1026.55(b)(7)(ii) that the Prime 
index value in effect on December 31, 2020, and replacement margin will 
produce an APR substantially similar to the rate calculated using the 
LIBOR index value in effect on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. If either the LIBOR index or the 
prime rate is not published on December 31, 2020, the card issuer must 
use the next calendar day that both indices are published as the date 
on which the annual percentage rate based on the prime rate must be 
substantially similar to the rate based on the LIBOR index. This 
condition for comparing the rates under proposed Sec.  
1026.55(b)(7)(ii) is discussed in more detail below.
---------------------------------------------------------------------------

    \93\ See the section-by-section analysis of proposed Sec.  
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the 
Bureau proposing this determination.
---------------------------------------------------------------------------

    To facilitate compliance, proposed comment 55(b)(7)(ii)-1.ii 
provides a proposed determination that the spread-adjusted indices 
based on SOFR recommended by the ARRC to replace the 1-month, 3-month, 
6-month, and 1-year USD LIBOR indices have historical fluctuations that 
are substantially similar to those of the 1-month, 3-month, 6-month, 
and 1-year USD LIBOR indices respectively. The proposed comment 
provides a placeholder for the date when this proposed determination 
would be effective, if adopted in the final rule.\94\ The Bureau is 
making this proposed determination in case some card issuers choose to 
replace a LIBOR index with the SOFR-based spread-adjusted index. 
Proposed comment 55(b)(7)(ii)-1.ii also clarifies that in order to use 
this SOFR-based spread-adjusted index as the replacement index for the 
applicable LIBOR index, the card issuer also must comply with the 
condition in Sec.  1026.55(b)(7)(ii) that the SOFR-based spread-
adjusted index value in effect on December 31, 2020, and replacement 
margin will produce an APR substantially similar to the rate calculated 
using the LIBOR index value in effect on December 31, 2020, and the 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. If either the LIBOR 
index or the SOFR-based spread-adjusted index is not published on 
December 31, 2020, the card issuer must use the next calendar day that 
both indices are published as the date on which the annual percentage 
rate based on the SOFR-based spread-adjusted index must be 
substantially similar to the rate based on the LIBOR index. This 
condition for comparing the rates under proposed Sec.  
1026.55(b)(7)(ii) is discussed in more detail below. For the reasons 
discussed below, the Bureau solicits comment on whether the Bureau in 
the final rule, if adopted, should provide for purposes of proposed 
Sec.  1026.55(b)(7)(ii) that the rate using the SOFR-based spread-
adjusted index is ``substantially similar'' to the rate calculated 
using the LIBOR index, so long as the card issuer uses as the 
replacement margin the same margin that applied to the variable rate 
immediately prior to the replacement of the LIBOR index.
---------------------------------------------------------------------------

    \94\ See the section-by-section analysis of proposed Sec.  
1026.40(f)(3)(ii)(A) for a discussion of the rationale for the 
Bureau proposing this determination. Also, as discussed in the 
section-by-section analysis of proposed Sec.  1026.40(f)(3)(ii)(A), 
the Bureau solicits comment on whether the Bureau should 
alternatively consider these SOFR-based spread-adjusted indices to 
be newly established indices for purposes of proposed Sec.  
1026.55(b)(7)(ii), to the extent these indices are not being 
published by the effective date of the final rule, if adopted.
---------------------------------------------------------------------------

    The Bureau also solicits comment on whether there are other indices 
that are not newly established for which the Bureau should make a 
determination that the index has historical fluctuations that are 
substantially similar to those of the LIBOR indices for purposes of 
proposed Sec.  1026.55(b)(7)(ii). If so, what are these other indices, 
and why should the Bureau make such a determination with respect to 
those indices?
    Newly established index as replacement for a LIBOR index. Proposed 
Sec.  1026.55(b)(7)(ii) provides that if the replacement index is newly 
established and therefore does not have any rate history, it may be 
used if the replacement index value in effect on December 31, 2020, and 
the replacement margin will produce an APR substantially similar to the 
rate calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan. The 
Bureau solicits comment on whether the Bureau should provide any 
additional guidance on, or regulatory changes addressing, when an index 
is newly established with respect to replacing the LIBOR indices for 
purposes of proposed Sec.  1026.55(b)(7)(ii). The Bureau also solicits 
comment on whether the Bureau should provide any examples of indices 
that are newly established with respect to replacing the LIBOR indices 
for purposes of Sec.  1026.55(b)(7)(ii). If so, what are these indices 
and why should the Bureau determine these indices are newly established 
with respect to replacing the LIBOR indices?
    Substantially similar rate using index values on December 31, 2020, 
and the margin that applied to the variable rate immediately prior to 
the replacement of the LIBOR index used under the plan. Under proposed 
Sec.  1026.55(b)(7)(ii), if both the replacement index and LIBOR index 
used under the plan are published on December 31, 2020, the replacement 
index value in effect on December 31, 2020, and replacement margin must 
produce an APR substantially similar to the rate calculated using the 
LIBOR index value in effect on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. Proposed comment 55(b)(7)(ii)-2 
explains that the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan is the 
margin that applied to the variable rate immediately prior to when the 
card issuer provides the change-in-terms notice disclosing the 
replacement index for the variable rate. Proposed comment 55(b)(7)(ii)-
2.i and ii provides examples to illustrate this comment for the 
following two different scenarios: (1) When the margin used to 
calculate the variable rate is increased pursuant to Sec.  
1026.55(b)(3) for new transactions; and (2) when the margin used to 
calculate the variable rate is increased for the outstanding balances 
and new transactions pursuant to Sec.  1026.55(b)(4) because the 
consumer pays the minimum payment more than 60 days late. In both these 
proposed examples, the change in the margin occurs after December 31, 
2020, but prior to date that the card issuer provides a change-in-term 
notice under Sec.  1026.9(c)(2),

[[Page 36970]]

disclosing the replacement index for the variable rates.
    In calculating the comparison rates using the replacement index and 
the LIBOR index used under a credit card account under an open-end (not 
home-secured) consumer credit plan, the Bureau generally is proposing 
to require card issuers to use the index values for the replacement 
index and the LIBOR index in effect on December 31, 2020. The Bureau is 
proposing to require card issuers to use these index values to promote 
consistency for card issuers and consumers in which index values are 
used to compare the two rates. Under proposed Sec.  1026.55(b)(7)(ii), 
card issuers are permitted to replace the LIBOR index used under the 
plan and adjust the margin used in calculating the variable rate used 
under the plan on or after March 15, 2021, but card issuers may vary in 
the timing of when they provide change-in-terms notices to replace the 
LIBOR index used on their credit card accounts and when these 
replacements become effective. For example, one card issuer may replace 
the LIBOR index used under its credit card plans in April 2021, while 
another card issuer may replace the LIBOR index used under its credit 
card plans in October 2021. In addition, a card issuer may not replace 
the LIBOR index used under its credit card plans at the same time. For 
example, a card issuer may replace the LIBOR index used under some of 
its credit card plans in April 2021 but replace the LIBOR index used 
under other of its credit card plans in May 2021. Nonetheless, 
regardless of when a particular card issuer replaces the LIBOR index 
used under its credit card plans, proposed Sec.  1026.55(b)(7)(ii) 
generally would require that all card issuers to use the index values 
for the replacement index and the LIBOR index in effect on December 31, 
2020, to promote consistency for card issuers and consumers in which 
index values are used to compare the two rates.
    In addition, using the December 31, 2020 date for the index values 
in comparing the rates may allow card issuers to send out change-in-
terms notices prior to March 15, 2021, and have the changes be 
effective on March 15, 2021, the proposed date on or after which card 
issuers would be permitted to switch away from using LIBOR as an index 
on an existing credit card account under proposed Sec.  
1026.55(b)(7)(ii). If the Bureau instead required card issuers to use 
the index values on March 15, 2021, card issuers as a practical matter 
would not be able to provide change-in-terms notices of the replacement 
index and any adjusted margin until after March 15, 2021, because they 
would need the index values from that date in order to calculate the 
replacement margin. Thus, using the index values on March 15, 2021, 
would delay when card issuers could switch away from using LIBOR as an 
index on an existing credit card account.
    Also, as discussed in part III, the industry has raised concerns 
that LIBOR may continue for some time after December 2021 but become 
less representative or reliable until LIBOR finally is discontinued. 
Using the index values for the replacement index and the LIBOR index 
used under the plan in effect on December 31, 2020, may address some of 
these concerns.
    The Bureau solicits comment specifically on the use of the December 
31, 2020 index values in calculating the comparison rates under 
proposed Sec.  1026.55(b)(7)(ii).
    Proposed Sec.  1026.55(b)(7)(ii) provides one exception to the 
proposed general requirement to use the index values for the 
replacement index and the LIBOR index used under the plan in effect on 
December 31, 2020. Proposed Sec.  1026.55(b)(7)(ii) provides that if 
either the LIBOR index or the replacement index is not published on 
December 31, 2020, the card issuer must use the next calendar day that 
both indices are published as the date on which the APR based on the 
replacement index must be substantially similar to the rate based on 
the LIBOR index.
    As discussed above, proposed Sec.  1026.55(b)(7)(ii) would require 
a card issuer to use the index values of the replacement index and the 
LIBOR index on a single day (generally December 31, 2020) \95\ to 
compare the rates to determine if they are ``substantially similar.'' 
In using a single day to compare the rates, this proposed provision is 
consistent with the condition in the unavailability provision in 
current comment 55(b)(2)-6, in the sense that it provides that the new 
index and margin must result in an APR that is substantially similar to 
the rate in effect on a single day. For the reasons discussed in the 
section-by-section analysis of proposed Sec.  1026.40(f)(3)(ii)(B), the 
Bureau solicits comment on whether the Bureau should adopt a different 
approach to determine whether a rate using the replacement index is 
``substantially similar'' to the rate using the LIBOR index for 
purposes of proposed Sec.  1026.55(b)(7)(ii). For example, the Bureau 
solicits comment on whether it should require card issuers to use a 
historical median or average of the spread between the replacement 
index and the LIBOR index over a certain time frame (e.g., the time 
period the historical data are available or 5 years, whichever is 
shorter) for purposes of determining whether a rate using the 
replacement index is ``substantially similar'' to the rate using the 
LIBOR index The Bureau also solicits comments on any compliance 
challenges that might arise as a result of adopting a potentially more 
complicated method of comparing the rates calculated using the 
replacement index and the rates calculated using the LIBOR index, and 
for any identified compliance challenges, how the Bureau could ease 
those compliance challenges.
---------------------------------------------------------------------------

    \95\ If one or both of the indices are not available on December 
31, 2020, proposed Sec.  1026.55(b)(7)(ii) would require that the 
card issuer use the index values of the indices on the next calendar 
day that both indices are published.
---------------------------------------------------------------------------

    Under proposed Sec.  1026.55(b)(7)(ii), in calculating the 
comparison rates using the replacement index and the LIBOR index used 
under the plan, the card issuer must use the margin that applied to the 
variable rate immediately prior to when the card issuer provides the 
change-in-terms notice disclosing the replacement index for the 
variable rate. The Bureau is proposing that card issuers must use this 
margin, rather than the margin that applied to the variable rate on 
December 31, 2020. The Bureau recognizes that card issuers in certain 
instances may change the margin that is used to calculate the LIBOR 
variable rate after December 31, 2020, but prior to when the card 
issuer provides a change-in-terms notice to replace the LIBOR index 
used under the plan. If the Bureau were to require that the card issuer 
use the margin that applied to the variable rate on December 31, 2020, 
this would undo any margin changes that occurred after December 31, 
2020, but prior to the card issuer providing a change-in-terms notice 
of the replacement of the LIBOR index used under the plan, which is 
inconsistent with the purpose of the comparisons of the rates under 
proposed Sec.  1026.55(b)(7)(ii).
    Proposed comment 55(b)(7)(ii)-3 clarifies that the replacement 
index and replacement margin are not required to produce an APR that is 
substantially similar on the day that the replacement index and 
replacement margin become effective on the plan. Proposed comment 
55(b)(7)(ii)-3.i provides an example to illustrate this comment.
    The Bureau believes that it may raise compliance issues if the rate 
calculated using the replacement index and replacement margin at the 
time the replacement index and replacement margin became effective had 
to be substantially similar to the rate calculated using the LIBOR 
index in effect on December 31, 2020. Under

[[Page 36971]]

Sec.  1026.9(c)(2), the card issuer must provide a change-in-terms 
notice of the replacement index and replacement margin (including 
disclosing a reduced margin in a change-in-terms notice provided on or 
after October 1, 2021, which would be required under proposed Sec.  
1026.9(c)(2)(v)(A)) at least 45 days prior to the effective date of the 
changes. The Bureau believes that this advance notice is important to 
consumers to inform them of how variable rates will be determined going 
forward after the LIBOR index is replaced. Because advance notice of 
the changes must be given prior to the changes becoming effective, a 
card issuer would not be able to ensure that the rate based on the 
replacement index and margin at the time the change-in-terms notice 
becomes effective will be substantially similar to the rate calculated 
using the LIBOR index in effect on December 31, 2020. The value of the 
replacement index may change after December 31, 2020, and before the 
change-in-terms notice becomes effective.
    For the reasons discussed in more detail in the section-by-section 
analysis of proposed Sec.  1026.40(f)(3)(ii)(B), the Bureau is not 
proposing to address for purposes of proposed Sec.  1026.55(b)(7)(ii) 
when a rate calculated using the replacement index and replacement 
margin is ``substantially similar'' to the rate calculated using the 
LIBOR index value in effect on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. The Bureau solicits comment, 
however, on whether the Bureau should provide guidance on, or 
regulatory changes addressing, the ``substantially similar'' standard 
in comparing the rates for purposes of proposed Sec.  
1026.55(b)(7)(ii), and if so, what guidance, or regulatory changes, the 
Bureau should provide. For example, should the Bureau provide a range 
of rates that would be considered ``substantially similar'' as 
described above, and if so, how should the range be determined? Should 
the range of rates depend on context, and if so, what contexts should 
be considered? As an alternative to the range of rates approach, the 
Bureau solicits comment on whether it should provide factors that card 
issuers must consider in deciding whether the rates are ``substantially 
similar'' and if so, what those factors should be. Are there other 
approaches the Bureau should consider for addressing the 
``substantially similar'' standard for comparing rates?
    As discussed above, proposed comment 55(b)(7)(ii)-1.ii clarifies 
that in order to use the SOFR-based spread-adjusted index as the 
replacement index for the applicable LIBOR index, the card issuer must 
comply with the condition in Sec.  1026.55(b)(7)(ii) that the SOFR-
based spread-adjusted index value in effect on December 31, 2020, and 
replacement margin will produce an APR substantially similar to the 
rate calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan. If 
either the LIBOR index or the SOFR-based spread-adjusted index is not 
published on December 31, 2020, the card issuer must use the next 
calendar day that both indices are published as the date on which the 
annual percentage rate based on the SOFR-based spread-adjusted index 
must be substantially similar to the rate based on the LIBOR index. For 
the reasons discussed in the section-by-section analysis of proposed 
Sec.  1026.40(f)(3)(ii)(B), the Bureau solicits comment on whether the 
Bureau in the final rule, if adopted, should provide for purposes of 
proposed Sec.  1026.55(b)(7)(ii) that the rate using the SOFR-based 
spread-adjusted index is ``substantially similar'' to the rate 
calculated using the LIBOR index, so long as the card issuer uses as 
the replacement margin the same margin that applied to the variable 
rate immediately prior to the replacement of the LIBOR index used under 
the plan.

Section 1026.59 Reevaluation of Rate Increases

    TILA section 148, which was added by the Credit CARD Act, provides 
that if a creditor increases the APR applicable to a credit card 
account under an open-end consumer credit plan, based on factors 
including the credit risk of the obligor, market conditions, or other 
factors, the creditor shall consider changes in such factors in 
subsequently determining whether to reduce the APR for such 
obligor.\96\ Section 1026.59 implements this provision. The provisions 
in Sec.  1026.59 generally apply to card issuers that increase an APR 
applicable to a credit card account, based on the credit risk of the 
consumer, market conditions, or other factors. For any rate increase 
imposed on or after January 1, 2009, card issuers are required to 
review the account no less frequently than once each six months and, if 
appropriate based on that review, reduce the APR. The requirement to 
reevaluate rate increases applies both to increases in APRs based on 
consumer-specific factors, such as changes in the consumer's 
creditworthiness, and to increases in APRs imposed based on factors 
that are not specific to the consumer, such as changes in market 
conditions or the card issuer's cost of funds. If based on its review a 
card issuer is required to reduce the rate applicable to an account, 
the rule requires that the rate be reduced within 45 days after 
completion of the evaluation. Section 1026.59(f) requires that a card 
issuer continue to review a consumer's account each six months unless 
the rate is reduced to the rate in effect prior to the increase.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 1665c.
---------------------------------------------------------------------------

    As discussed in part III, the industry has raised concerns about 
how the requirements in Sec.  1026.59 would apply to accounts that are 
transitioning away from using LIBOR indices. The Bureau believes that 
the sunset of the LIBOR indices and transition to a new index for 
credit card accounts presents two interrelated issues with respect to 
compliance with Sec.  1026.59 generally. First, the transition from a 
LIBOR index to a different index on an account under proposed Sec.  
1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii) may constitute a rate 
increase for purposes of whether an account is subject to Sec.  
1026.59. Under current Sec.  1026.59 that potential rate increase could 
occur at the time of transition from the LIBOR index to a different 
index, or it could occur at a later time. Second, Sec.  1026.59(f) 
states that, once an account is subject to the general provisions of 
Sec.  1026.59, the obligation to review factors under Sec.  1026.59(a) 
ceases to apply if the card issuer reduces the APR to a rate equal to 
or less than the rate applicable immediately prior to the increase, or 
if the rate immediately prior to the increase was a variable rate, to a 
rate equal to or less than a variable rate determined by the same index 
and margin that applied prior to the increase. In the case where the 
LIBOR index is no longer available to serve as the ``same index'' that 
applied prior to the increase, the current regulation does not provide 
a mechanism by which a card issuer can determine the rate at which it 
can discontinue the obligation to review factors.
    The proposed revisions and additions to the regulation and 
commentary of Sec.  1026.59 are meant to address these two issues. With 
respect to the first issue, the addition of proposed Sec.  1026.59(h) 
excepts rate increases that occur as a result of the transition from 
the LIBOR index to another index under proposed Sec.  1026.55(b)(7)(i) 
or Sec.  1026.55(b)(7)(ii) from triggering the requirements of Sec.  
1026.59. The proposed provision does not except rate

[[Page 36972]]

increases already subject to the requirements of Sec.  1026.59 prior to 
the transition from the LIBOR index from the requirements of Sec.  
1026.59. With respect to the second issue, proposed Sec.  1026.59(f)(3) 
provides a mechanism by which card issuers can determine the rate at 
which they can discontinue the obligations under Sec.  1026.59 where 
the rate applicable immediately prior to the increase was a variable 
rate with a formula based on a LIBOR index.
    As discussed in more detail below, the Bureau also is proposing 
technical edits to comment 59(d)-2 to replace references to LIBOR with 
references to the SOFR index.
59(d) Factors
    Section 1026.59(d) identifies the factors that card issuers must 
review if they increase an APR that applies to a credit card account 
under an open-end (not home-secured) consumer credit plan. Under Sec.  
1026.59(a), if a card issuer evaluates an existing account using the 
same factors that it considers in determining the rates applicable to 
similar new accounts, the review of factors need not result in existing 
accounts being subject to exactly the same rates and rate structure as 
a creditor imposes on similar new accounts. Comment 59(d)-2 provides an 
illustrative example in which a creditor may offer variable rates on 
similar new accounts that are computed by adding a margin that depends 
on various factors to the value of the LIBOR index. In light of the 
anticipated discontinuation of LIBOR, the proposed rule would amend the 
example in comment 59(d)-2 to substitute a SOFR index for the LIBOR 
index. The proposed rule would also make technical changes for clarity 
by changing ``prime rate'' to ``prime index.'' In addition, the 
proposed rule would change ``creditor'' to ``card issuer'' in the 
comment to be consistent with the terminology used in Sec.  1026.59.
59(f) Termination of the Obligation To Review Factors
59(f)(3)
    Current Sec.  1026.59(f) provides that the obligation to review 
factors under Sec.  1026.59(a) ceases to apply if the card issuer 
reduces the APR to a rate equal to or less than the rate applicable 
immediately prior to the increase, or if the rate applicable 
immediately prior to the increase was a variable rate, to a rate 
determined by the same index and margin (previous formula) that applied 
prior to the increase. Once LIBOR is discontinued, it will not be 
possible for card issuers to use the ``same index.'' Thus, neither 
current Sec.  1026.59(f)(1) nor Sec.  1026.59(f)(2) would appear to 
allow termination of the obligation to review.
    Accordingly, proposed Sec.  1026.59(f)(3) provides, effective March 
15, 2021, a replacement formula that the card issuers can use to 
terminate the obligation to review factors under Sec.  1026.59(a) when 
the rate applicable immediately prior to the increase was a variable 
rate with a formula based on a LIBOR index. Proposed Sec.  
1026.59(f)(3) is intended to apply to situations in which a LIBOR index 
is used as the index in the formula used to determine the rate at which 
the obligation to review factors ceases,\97\ and is intended to cover 
situations where LIBOR will be discontinued.
---------------------------------------------------------------------------

    \97\ As noted below in the discussion regarding proposed Sec.  
1026.59(h)(3), proposed Sec.  1026.59(f)(3) is not intended to apply 
to rate increases that may result from the switch from a LIBOR index 
to another index under proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii) as those potential rate increases will be excepted 
from the provisions of Sec.  1026.59. Proposed Sec.  1026.59(f)(3) 
is, however, intended to cover rate increases that were already 
subject to the provisions of Sec.  1026.59 and use a formula under 
Sec.  1026.59(f) based on a LIBOR index to determine whether to 
terminate the review obligations under Sec.  1026.59.
---------------------------------------------------------------------------

    Proposed Sec.  1026.59(f)(3), if adopted, will be effective as of 
March 15, 2021, for accounts that are subject to Sec.  1026.59 and use 
a LIBOR index as the index in the formula to determine the rate at 
which a card issuer can cease the obligation to review factors under 
Sec.  1026.59(a). The Bureau believes that March 15, 2021, may be a 
reasonable date at which issuers can begin using the replacement 
formula outlined in proposed Sec.  1026.59(f)(3). It is the date when 
the proposed rulemaking generally is proposed to be effective and 
provides issuers with a sufficient amount of time to transition to the 
replacement formula before the estimated sunset of LIBOR. The Bureau 
solicits comment on whether proposed Sec.  1026.59(f)(3) should have an 
effective date different than March 15, 2021.
    Proposed Sec.  1026.59(f)(3) provides a replacement formula that 
issuers can use to determine the rate at which a card issuer can cease 
the obligation to review factors under Sec.  1026.59(a). Under proposed 
Sec.  1026.59(f)(3), the replacement formula, which includes the 
replacement index on December 31, 2020, plus replacement margin, must 
equal the LIBOR index value on December 31, 2020, plus the margin used 
to calculate the rate immediately prior to the increase. Proposed Sec.  
1026.59(f)(3) also provides that a card issuer must satisfy the 
conditions set forth in proposed Sec.  1026.55(b)(7)(ii) for selecting 
a replacement index. The Bureau believes that the conditions set forth 
in proposed Sec.  1026.55(b)(7)(ii) may provide a reasonable method of 
selecting a replacement index to the LIBOR index for the reasons set 
forth in the discussion regarding proposed Sec.  1026.55(b)(7)(ii), 
above. Proposed comment 59(f)-4 provides further clarification on how 
the replacement index must be selected and refers to the requirements 
described in proposed Sec.  1026.55(b)(7)(ii) and proposed comment 
55(b)(7)(ii)-1.
    Proposed Sec.  1026.59(f)(3) uses, in part, the values of the 
replacement index and the LIBOR index on December 31, 2020, to 
determine the replacement formula. The Bureau believes that using the 
December 31, 2020, value of both indices provides a static and 
consistent reference point by which to determine the formula and is 
consistent with the index values used in proposed Sec.  
1026.55(b)(7)(ii). If either the replacement index or the LIBOR index 
is not published on December 31, 2020, the card issuer must use the 
next available date that both indices are published as the index values 
to use to determine the replacement formula. Proposed Sec.  
1026.59(f)(3) also provides that in calculating the replacement 
formula, the card issuer must use the margin used to calculate the rate 
immediately prior to the rate increase.
    In essence, the replacement formula is calculated as: (Replacement 
index on December 31, 2020) plus (replacement margin) equals (LIBOR 
index on December 31, 2020) plus (margin immediately prior to the rate 
increase). If the replacement index on December 31, 2020, the LIBOR 
index on December 31, 2020, and the margin immediately prior to the 
rate increase are known, the replacement margin can be calculated. Once 
the replacement margin is calculated, the replacement formula is the 
replacement index value plus the replacement margin value. Proposed 
comment 59(f)-3 sets forth two examples of how to calculate the 
replacement formula. Proposed comment 59(f)-3ii.A provides an example 
of how to calculate the replacement formula in the scenario where the 
account was subject to Sec.  1026.59 as of March 15, 2021. Proposed 
comment 59(f)-3ii.B provides an example of how to calculate the 
replacement formula in the scenario where the account was not subject 
to Sec.  1026.59 as of March 15, 2021, but does become subject to Sec.  
1026.59 prior to the account being transitioned from a LIBOR index in 
accordance with proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii).
    Proposed Sec.  1026.59(f)(3) provides that the replacement formula 
must equal the

[[Page 36973]]

previous formula, within the context of the timing constraints (namely 
the value of the replacement and LIBOR indices as of December 31, 
2020). The Bureau believes that providing that the rates must match up 
when determining the replacement formula may provide the fairest way to 
produce a replacement mechanism where consumers will not be unduly 
harmed by the transition away from a LIBOR index used in the formula to 
determine the rate at which a card issuer may cease its review 
obligation under Sec.  1026.59.
    The Bureau recognizes that this may create some inconsistencies in 
the rates on some accounts. For example, assume that Account A is a 
variable-rate account with a LIBOR index where an APR increase occurred 
under Sec.  1026.55(b)(4) prior to the transition from a LIBOR index 
under proposed Sec.  1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii). In 
order to cease the obligation for review on Account A under Sec.  
1026.59, the card issuer must reduce the APR on Account A to an amount 
based on a formula that is ``equal'' to the LIBOR index value on 
December 31, 2020, plus the margin immediately prior to the rate 
increase. In contrast, Account B is a variable-rate account with a 
LIBOR index that is not subject to Sec.  1026.59. Account B is 
transitioned from the LIBOR index under proposed Sec.  1026.55(b)(7)(i) 
or Sec.  1026.55(b)(7)(ii) and the resulting APR on Account B must be 
``substantially similar'' to the account's pre-transition rate, which 
means the rate does not have to exactly equal to the pre-transition 
rate. Account B is subject to the exception in proposed Sec.  
1026.59(h)(3) with respect to the transition away from the LIBOR index, 
and will not be required to meet the requirements of proposed Sec.  
1026.59(f)(3). Thus, Account A and Account B may be treated differently 
with respect to what rate must be applied to the account. The Bureau 
solicits comment on whether the standard for proposed Sec.  
1026.59(f)(3) should be that the replacement formula should be 
substantially similar to the previous formula (rather than equal to as 
in the current proposal) to provide consistency with the language in 
proposed Sec.  1026.55(b)(7)(ii).
59(h) Exceptions
59(h)(3) Transition From LIBOR Exception
    Current Sec.  1026.59(h) provides two situations that are excepted 
from the requirements of Sec.  1026.59. Proposed Sec.  1026.59(h)(3) 
would add a third exception based upon the transition from a LIBOR 
index to a replacement index used in setting a variable rate. 
Specifically, proposed Sec.  1026.59(h)(3) excepts from the 
requirements of Sec.  1026.59 increases in an APR that occur as the 
result of the transition from the use of a LIBOR index as the index in 
setting a variable rate to the use of a replacement index in setting a 
variable rate if the change from the use of the LIBOR index to a 
replacement index occurs in accordance with proposed Sec.  
1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii). Proposed comment 59(h)-1 
clarifies that the proposed exception to the requirements of Sec.  
1026.59 does not apply to rate increases already subject to Sec.  
1026.59 prior to the transition from the use of a LIBOR index as the 
index in setting a variable rate to the use of a different index in 
setting a variable rate, where the change from the use of a LIBOR index 
to a different index occurred in accordance with proposed Sec.  
1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii).
    The Bureau is proposing this exception because the requirements of 
proposed Sec.  1026.55(b)(7)(i) and (ii) may provide sufficient 
protection for the consumers when a card issuer is replacing an index 
under these circumstances for the reasons listed above in the 
discussion of proposed Sec.  1026.55(b)(7)(i) and (ii). The Bureau 
believes that absent this proposed exception, some of the accounts 
transitioning away from a LIBOR index to a replacement index in setting 
a variable rate under proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii) would become subject to the requirements of Sec.  
1026.59, either at the time of transition or at a later date. The 
Bureau believes that the potential for compliance issues in 
transitioning away from a LIBOR index under proposed Sec.  
1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii) while also complying with 
the requirements of Sec.  1026.59 may be heightened. The Bureau is 
concerned that requiring card issuers to comply with the rate 
reevaluation requirements under Sec.  1026.59 with respect to the LIBOR 
transition under Sec.  1026.55(b)(7)(ii) may cause some card issuers to 
delay the transition away from the LIBOR index so as to avoid the 
requirements under Sec.  1026.59. Even if the requirements of Sec.  
1026.59 were to apply to the LIBOR transition under Sec.  
1026.55(b)(7)(ii), the card issuer would likely only be required to 
perform one review prior to LIBOR's expected discontinuance sometime 
after December 2021. Nonetheless, the card issuer could avoid this 
review if it delayed transitioning the account under Sec.  
1026.55(b)(7)(ii) so that the transition occurred within six months of 
when LIBOR is likely to be discontinued. The Bureau does not believe 
that this delay in the LIBOR transition would benefit card issuers or 
consumers. The Bureau seeks comment on issuers' understanding as to 
whether, and to what extent, the accounts in their portfolios will 
become subject to Sec.  1026.59 in the transition away from a LIBOR 
index under proposed Sec.  1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii), 
absent the proposed Sec.  1026.59(h)(3) exception. The Bureau also 
seeks comment on potential compliance issues in transitioning away from 
a LIBOR index while also becoming subject to the requirements of Sec.  
1026.59.
    As noted above, proposed comment 59(h)-1 provides clarification 
that the exception in proposed Sec.  1026.59(h)(3) does not apply to 
rate increases already subject to the requirements of Sec.  1026.59 
prior to the transition away from a LIBOR index to a replacement index 
under proposed Sec.  1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii). In 
these circumstances, the Bureau is proposing that the accounts should 
continue to be subject to the requirements of Sec.  1026.59 and 
consumers should not have to forego reviews on their accounts that 
could potentially result in rate reductions. The Bureau is proposing 
not to except these circumstances (where an account is already subject 
to the requirements of Sec.  1026.59 prior to the transition away from 
a LIBOR index under proposed Sec.  1026.55(b)(7)(i) or Sec.  
1026.55(b)(7)(ii)) because they differ from the situation where an 
account may become subject to the requirements of Sec.  1026.59 as a 
result of the transition away from a LIBOR index to a replacement index 
under proposed Sec.  1026.55(b)(7)(i) or Sec.  1026.55(b)(7)(ii). In 
particular, proposed Sec.  1026.55(b)(7)(i) and (ii) provide that the 
replacement index plus replacement margin must produce a rate that is 
substantially similar to the rate in effect at the time the original 
index became unavailable or the rate that was in effect based on the 
LIBOR index on December 31, 2020, depending on the provision. These 
provisions provide safeguards that the consumer will not be unduly 
harmed after the transition away from a LIBOR index with a rate that is 
substantially dissimilar to the rate prior to the transition. No 
similar safeguard exists for accounts on which a rate increase occurred 
prior to the transition that subjected the account to the requirements 
of Sec.  1026.59. Absent the requirements of Sec.  1026.59, issuers 
would not have to continue to review these accounts for possible rate 
reductions that could potentially bring

[[Page 36974]]

the rate on the account in line with the rate prior to the increase, as 
the requirements of Sec.  1026.59 (and proposed Sec.  1026.59(f)(3)) 
ensure that the account continues to be reviewed for a rate reduction 
that could potentially return the rate on the account to a rate that is 
the same as the rate before the increase.

Appendix H to Part 1026--Closed-End Model Forms and Clauses

    Appendix H to part 1026 provides a sample form for ARMs for 
complying with the requirements of Sec.  1026.20(c) in form H-4(D)(2) 
and a sample form for ARMs for complying with the requirements of Sec.  
1026.20(d) in form H-4(D)(4).\98\ Both of these sample forms refer to 
the 1-year LIBOR. In light of the anticipated discontinuation of LIBOR, 
the proposed rule would substitute the 30-day average SOFR index for 
the 1-year LIBOR index in the explanation of how the interest rate is 
determined in sample forms H-4(D)(2) and H-4(D)(4) in appendix H to 
provide more relevant samples. The proposed rule would also make 
related changes to other information listed on these sample forms, such 
as the effective date of the interest rate adjustment, the dates when 
future interest rate adjustments are scheduled to occur, the date the 
first new payment is due, the source of information about the index, 
the margin added in determining the new payment, and the limits on 
interest rate increases at each interest rate adjustment. To conform to 
the requirements in Sec.  1026.20(d)(2)(i) and (d)(3)(ii) and to make 
form H-4(D)(4) consistent with form H-4(D)(3), the Bureau is also 
proposing to add the date of the disclosure at the top of form H-
4(D)(4), which was inadvertently omitted from the original form H-
4(D)(4) as published in the Federal Register on February 14, 2013.\99\
---------------------------------------------------------------------------

    \98\ The Bureau notes that these are not required forms and that 
forms that meet the requirements of Sec.  1026.20(c) or (d) would be 
considered in compliance with those subsections, respectively.
    \99\ 78 FR 10902, 11012 (Feb. 14, 2013).
---------------------------------------------------------------------------

    The Bureau requests comment on whether these revisions to sample 
forms H-4(D)(2) and H-4(D)(4) are appropriate and whether the Bureau 
should make any other changes to the forms in appendix H in connection 
with the LIBOR transition. If the Bureau finalizes the proposed changes 
to forms H-4(D)(2) and H-4(D)(4), the Bureau also requests comment on 
whether some creditors, assignees, or servicers might still wish to use 
the original forms H-4(D)(2) and H-4(D)(4) as published on February 14, 
2013, after this final rule's effective date. This might include, for 
example, creditors, assignees, or servicers who might wish to rely on 
the original sample forms for notices sent out for LIBOR loans after 
the proposed March 15, 2021 effective date but before the LIBOR index 
is replaced or, alternatively, for non-LIBOR loans after the proposed 
effective date. The Bureau requests comment on whether it would be 
helpful for the Bureau to indicate in the final rule that the Bureau 
will deem creditors, assignees, or servicers properly using the 
original forms H-4(D)(2) and H-4(D)(4) to be in compliance with the 
regulation with regard to the disclosures required by Sec.  1026.20(c) 
and (d) respectively, even after the final rule's effective date.

VI. Effective Date

    Except as noted below, the Bureau is proposing that the final rule 
would take effect on March 15, 2021. This proposed effective date 
generally would mean that the changes to the regulation and commentary 
would be effective around nine months prior to the expected 
discontinuation of LIBOR, which is some time after December 2021. For 
example, creditors for HELOCs and card issuers would have around nine 
months to transition away from using the LIBOR indices for existing 
accounts prior to the expected discontinuation of LIBOR. The Bureau 
requests comment on this proposed effective date.
    The Bureau notes that the updated change-in-term disclosure 
requirements for HELOCs and credit card accounts in the final rule 
would apply as of October 1, 2021, if the final rule is adopted. This 
proposed October 1, 2021, date is consistent with TILA section 105(d), 
which generally requires that changes in disclosures required by TILA 
or Regulation Z have an effective date of the October 1 that is at 
least six months after the date the final rule is adopted.\100\
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 1604(d).
---------------------------------------------------------------------------

VII. Dodd-Frank Act Section 1022(b) Analysis

A. Overview

    In developing the proposed rule, the Bureau has considered the 
proposed rule's potential benefits, costs, and impacts.\101\ The Bureau 
requests comment on the preliminary analysis presented below as well as 
submissions of additional data that could inform the Bureau's analysis 
of the benefits, costs, and impacts. In developing the proposed rule, 
the Bureau has consulted, or offered to consult with, the appropriate 
prudential regulators and other Federal agencies, including regarding 
consistency with any prudential, market, or systemic objectives 
administered by such agencies.
---------------------------------------------------------------------------

    \101\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
(12 U.S.C. 5512(b)(2)(A)) requires the Bureau to consider the 
potential benefits and costs of the regulation to consumers and 
covered persons, including the potential reduction of access by 
consumers to consumer financial products and services; the impact of 
proposed rules on insured depository institutions and insured credit 
unions with $10 billion or less in total assets as described in 
section 1026 of the Dodd-Frank Act (12 U.S.C. 5516); and the impact 
on consumers in rural areas.
---------------------------------------------------------------------------

    The proposed rule is primarily designed to address potential 
compliance issues for creditors affected by the sunset of LIBOR. At 
this time, LIBOR is expected to be discontinued some time after 2021.
    The proposed rule would amend and add several provisions for open-
end credit. First, the proposed rule would add LIBOR-specific 
provisions that would permit creditors for HELOCs and card issuers for 
credit card accounts to replace the LIBOR index and adjust the margin 
used to set a variable rate on or after March 15, 2021, if certain 
conditions are met. Specifically, under the proposed rule, the APR 
calculated using the replacement index must be substantially similar to 
the rate calculated using the LIBOR index, based on the values of these 
indices on December 31, 2020. In addition, creditors for HELOCs and 
card issuers would be required to meet certain requirements in 
selecting a replacement index. Under the proposed rule, creditors for 
HELOCs and card issuers can select an index that is not newly 
established as a replacement index only if the index has historical 
fluctuations that are substantially similar to those of the LIBOR 
index. Creditors for HELOCs or card issuers can also use a replacement 
index that is newly established in certain circumstances. To reduce 
uncertainty with respect to selecting a replacement index that meets 
these standards, the Bureau is proposing to determine that Prime is an 
example of an index that has historical fluctuations that are 
substantially similar to those of certain USD LIBOR indices.\102\ The 
Bureau is also proposing to determine that certain spread-adjusted 
indices based on the SOFR recommended by the ARRC are indices that have 
historical fluctuations that are substantially similar to those of 
certain USD LIBOR indices.\103\
---------------------------------------------------------------------------

    \102\ Specifically, the Bureau is proposing to add to the 
commentary a proposed determination that Prime has historical 
fluctuations that are substantially similar to those of the 1-month 
and 3-month USD LIBOR.
    \103\ Specifically, the Bureau is proposing to add to the 
commentary a proposed determination that the spread-adjusted indices 
based on SOFR recommended by the ARRC to replace the 1-month, 3-
month, 6-month, and 1-year USD LIBOR indices have historical 
fluctuations that are substantially similar to those of the 1-month, 
3-month, 6-month, and 1-year USD LIBOR indices respectively.

---------------------------------------------------------------------------

[[Page 36975]]

    Second, the proposed rule also would revise existing language in 
Regulation Z that allows creditors for HELOCs and card issuers to 
replace an index and adjust the margin on an account if the index 
becomes unavailable if certain conditions are met.
    Third, the proposed rule would revise change-in-terms notice 
requirements, effective October 1, 2021, for HELOCs and credit card 
accounts to provide that if a creditor is replacing a LIBOR index on an 
account pursuant to the proposed LIBOR-specific provisions or because 
the LIBOR index becomes unavailable as discussed above, the creditor 
must provide a change-in-terms notice of any reduced margin that will 
be used to calculate the consumer's variable rate. This would help 
ensure that consumers are informed of how their variable rates will be 
determined after the LIBOR index is replaced.
    Fourth, the proposed rule would add a LIBOR-specific exception from 
the rate reevaluation requirements of Sec.  1026.59 applicable to 
credit card accounts for increases that occur as a result of replacing 
a LIBOR index to another index in accordance with the LIBOR-specific 
provisions or as a result of the LIBOR indices becoming unavailable as 
discussed above.
    Fifth, the proposed rule would add provisions to address how a card 
issuer, where an account was subject to the requirements of the 
reevaluation reviews in Sec.  1026.59 prior to the switch from a LIBOR 
index, can terminate the obligation to review where the rate applicable 
immediately prior to the increase was a variable rate calculated using 
a LIBOR index.
    Sixth, the proposed rule would make technical edits to several 
open-end provisions to replace LIBOR references with references to a 
SOFR index and to make related changes.
    The Bureau is also proposing several amendments to the closed-end 
provisions to address the sunset of LIBOR. First, the Bureau is 
proposing to amend comment 20(a)-3.ii to identify specific indices as 
an example of a ``comparable index'' for purposes of the closed-end 
refinancing provisions.\104\ Second, the Bureau is proposing technical 
edits to various closed-end provisions to replace LIBOR references with 
references to a SOFR index and to make related changes and corrections.
---------------------------------------------------------------------------

    \104\ Specifically, the Bureau is proposing to add to the 
comment an illustrative example indicating that a creditor does not 
add a variable-rate feature by changing the index of a variable-rate 
transaction from the 1-month, 3-month, 6-month, or 1-year USD LIBOR 
index to the spread-adjusted index based on the SOFR recommended by 
the ARRC as replacements for these indices, because the replacement 
index is a comparable index to the corresponding USD LIBOR index.
---------------------------------------------------------------------------

B. Provisions To Be Analyzed

    The analysis below considers the potential benefits, costs, and 
impacts to consumers and covered persons of significant provisions of 
the proposed rule (proposed provisions), which include the first, 
third, and fourth open-end provisions described above. The analysis 
also includes the first closed-end provision described above.\105\ 
Therefore, the Bureau has analyzed in more detail the following four 
proposed provisions:
---------------------------------------------------------------------------

    \105\ The Bureau does not believe that the other provisions 
described above would have any significant costs, benefits, or 
impacts for consumers or covered persons.
---------------------------------------------------------------------------

    1. LIBOR-specific provisions for index changes for HELOCs and 
credit card accounts,
    2. Revisions to change-in-terms notices requirements for HELOCs and 
credit card accounts to disclose margin decreases, if any,
    3. LIBOR-specific exception from the rate reevaluation provisions 
applicable to credit card accounts, and
    4. Commentary stating that specific indices are comparable to 
certain LIBOR tenors for purposes of the closed-end refinancing 
provisions.
    Because the proposed rule would address the transition of credit 
products from LIBOR to other indices, which should be complete within 
the next several years under both the baseline and the proposed rule, 
the analysis below is limited to considering the benefits, costs, and 
impacts of the proposed provisions over the next several years.

C. Data Limitations and Quantification of Benefits, Costs, and Impacts

    The discussion below relies on information that the Bureau has 
obtained from industry, other regulatory agencies, and publicly 
available sources. The Bureau has performed outreach on many of the 
issues addressed by the proposed rule, as described in part III. 
However, as discussed further below, the data are generally limited 
with which to quantify the potential costs, benefits, and impacts of 
the proposed provisions.
    In light of these data limitations, the analysis below generally 
provides a qualitative discussion of the benefits, costs, and impacts 
of the proposed provisions. General economic principles and the 
Bureau's expertise in consumer financial markets, together with the 
limited data that are available, provide insight into these benefits, 
costs, and impacts. The Bureau requests additional data or studies that 
could help quantify the benefits and costs to consumers and covered 
persons of the proposed provisions.

D. Baseline for Analysis

    In evaluating the potential benefits, costs, and impacts of the 
proposed rule, the Bureau takes as a baseline the current legal 
framework governing changes in indices used for variable-rate open-end 
and closed-end credit products, as applicable. The FCA has announced 
that it cannot guarantee the publication of LIBOR beyond 2021 and has 
urged relevant parties to prepare for the transition to alternative 
reference rates. Therefore, it is likely that even under current 
regulations, existing contracts for HELOCs, credit card accounts, and 
closed-end credit tied to a LIBOR index will have transitioned to other 
indices soon after the end of 2021. Furthermore, for HELOCs, credit 
card accounts, and closed-end credit, the proposed rule would not 
significantly alter the requirements that replacement indices for a 
LIBOR index must satisfy, nor would it alter how these requirements 
must be evaluated. Hence, the analysis below assumes the proposed rule 
would not substantially alter the number of HELOCs, credit card 
accounts, and closed-end credit accounts switched from a LIBOR index to 
other indices nor would it significantly alter the indices that HELOC 
creditors, card issuers, and closed-end creditors use to replace a 
LIBOR index. However, the proposed rule would enable HELOC creditors, 
card issuers, and closed-end creditors under Regulation Z to transfer 
existing contracts away from a LIBOR index with more certainty about 
what is required by and permitted under Regulation Z. The proposed rule 
would also enable HELOC creditors and card issuers to transfer existing 
contracts away from a LIBOR index earlier they could under the 
baseline, if they choose to do so.
    The proposed rule, however, would not excuse creditors or card 
issuers from noncompliance with contractual provisions. For example, a 
contract for a HELOC or a credit card account may provide that the 
creditor or card issuer respectively may not replace an index 
unilaterally under a plan unless the original index becomes 
unavailable. In this case, even under the proposed rule, the creditor 
or card issuer would be contractually prohibited from unilaterally 
replacing a LIBOR index used under the plan until LIBOR becomes 
unavailable.

[[Page 36976]]

E. Potential Benefits and Costs of the Proposed Rule for Consumers and 
Covered Persons

    Reliable data on the indices credit products are linked to is not 
generally available, so the Bureau cannot estimate the dollar value of 
debt tied to LIBOR in the distinct credit markets that may be impacted 
by the proposed rule. However, the ARRC has estimated that, at the end 
of 2016, there was $1.2 trillion of mortgage debt (including ARMs, 
HELOCs, and reverse mortgages) and $100 billion of non-mortgage debt 
tied to LIBOR.\106\
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    \106\ ARRC, Second Report (Mar. 2018), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
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1. LIBOR-Specific Provisions for Index Changes for HELOCs and Credit 
Card Accounts
    For consumers with HELOCs and credit card accounts with APRs tied 
to a LIBOR index, and for creditors of HELOCs and card issuers with 
APRs tied to a LIBOR index, the main effect of the LIBOR-specific 
provisions that allows HELOC creditors or card issuers under Regulation 
Z to replace a LIBOR index before it becomes unavailable would be that 
some creditors and card issuers for HELOCs and credit card accounts 
respectively would switch those contracts from a LIBOR index to other 
indices earlier than they would have without the proposed provision. 
Since the LIBOR indices are likely to become unavailable some time 
after December 2021, and the proposed provision would allow many 
creditors and card issuers under Regulation Z to switch on or after 
March 15, 2021, creditors and card issuers would likely switch 
contracts from a LIBOR index to other indices at most around nine 
months earlier than they would without the proposed provision (if 
permitted by the contractual provisions as discussed above). The Bureau 
cannot estimate when these accounts will be switched from a LIBOR index 
under the proposed provision. The Bureau also cannot estimate the 
number of accounts that contractually cannot be switched from a LIBOR 
index until that LIBOR index becomes unavailable, although the Bureau 
believes that a larger proportion of HELOC contracts than credit card 
contracts are affected by this issue.\107\
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    \107\ Furthermore, some HELOC creditors and card issuers may be 
able to switch indices from LIBOR to replacement indices even before 
LIBOR becomes unavailable (under the baseline) or March 15, 2021 
(under the proposed rule). For HELOCs, some creditors may be able to 
switch earlier if the consumer specifically agrees to the change in 
writing under Sec.  1026.40(f)(3)(iii). For credit card accounts 
that have been open for at least a year, card issuers may be able to 
switch indices earlier for new transactions under Sec.  
1026.55(b)(3). The Bureau cannot estimate the number of such 
accounts that could be switched early.
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    The proposed provision also would include revisions to commentary 
to Regulation Z to state that certain SOFR-based indices have 
historical fluctuations that are substantially similar to those of 
certain tenors of LIBOR and that Prime has historical fluctuations that 
are substantially similar to those of certain tenors of LIBOR. The 
Bureau believes that market participants, using analysis similar to 
that the Bureau has performed, would come to these conclusions even 
without the proposed commentary. Therefore, the Bureau estimates that 
the proposed commentary would not significantly change the indices that 
HELOC creditors or card issuers switch to, the dates on which indices 
are switched, or the manner in which those switches are made.
Potential Benefits and Costs to Consumers
    The Bureau believes that the proposed provision would benefit 
consumers primarily by making their experience transitioning from a 
LIBOR index more informed and less disruptive than it otherwise could 
be, although the Bureau does not have the data to quantify the value of 
this benefit. The Bureau expects this consumer benefit to arise because 
creditors for HELOCs and card issuers would have more time to 
transition contracts from LIBOR indices to replacement indices, giving 
them more time to plan for the transition, communicate with consumers 
about the transition, and avoid technical or system issues that could 
affect consumers' accounts during the transition.
    The Bureau does not anticipate that the proposed provision would 
impose any significant costs on consumers on average. Under the 
proposed provision, creditors for HELOCs and card issuers would have to 
adjust margins used to calculate the variable rates on the accounts so 
that consumers' APRs calculated using the value of the replacement 
index in effect on December 31, 2020, and the replacement margin will 
produce a rate that is substantially similar to their rates calculated 
using the value of the LIBOR index in effect on December 31, 2020, and 
the margins that applied to the variable rates immediately prior to the 
replacement of the LIBOR index. After the transition, consumers' APRs 
will be tied to the replacement indices and not to the LIBOR indices. 
Because the replacement indices creditors for HELOCs and card issuers 
would switch to are not identical to the LIBOR indices, they will not 
move identically to the LIBOR indices, and so for the roughly nine 
months affected by this proposed provision, affected consumers' 
payments will be different under the proposed provision than they would 
be under the baseline. On some dates in which indexed rates reset, some 
replacement indices may have increased relative to the LIBOR index. 
Consumers with these indices would then pay a cost due to the proposed 
provision until the next rate reset. On some dates in which indexed 
rates reset, some replacement indices may have decreased relative to 
the LIBOR index. Consumers with these indices would then benefit from 
the proposed provision until the next rate reset. Consumers vary in 
their constraints and preferences, the credit products they have, the 
dates those credit products reset, the replacement indices their 
creditors or card issuers would choose, and the transition dates their 
creditors or card issuers would choose. The benefits and costs that 
would accrue to consumers from the proposed provision and that arise 
because of differences in index movements will vary across consumers 
and over time. However, the Bureau expects ex-ante for these benefits 
and costs to be small on average, because the rates creditors or card 
issuers switch to must be substantially similar to existing LIBOR-based 
rates using index values in effect on December 31, 2020, and because 
replacement indices that are not newly established must have historical 
fluctuations that are substantially similar to those of the LIBOR 
index.
Potential Benefits and Costs to Covered Persons
    The Bureau believes the proposed provision will have three primary 
benefits for creditors for HELOCs and card issuers. First, under the 
proposed provision these creditors and card issuers would have more 
certainty about the transition date and more time to make the 
transition away from the LIBOR indices. This should increase the 
ability of HELOC creditors and card issuers to plan for the transition, 
improving their communication with consumers about the transition, and 
decreasing the likelihood of technical or system issues that affect 
consumers' accounts during the transition. Both of these effects should 
lower the cost of the transition to creditors. Second, the proposed 
provision will provide creditors for HELOCs and card issuers with 
additional detail for how to comply with their legal obligations

[[Page 36977]]

under Regulation Z with respect to the LIBOR transition. This should 
decrease the cost of legal and compliance staff time preparing for the 
transition beforehand and dealing with litigation after. Third, the 
proposed provision also would include revisions to commentary on 
Regulation Z stating that certain SOFR-based indices have historical 
fluctuations that are substantially similar to those of certain tenors 
of LIBOR and that Prime has historical fluctuations that are 
substantially similar to those of certain tenors of LIBOR. This should 
decrease the cost of compliance staff time coming to the same 
conclusions as the proposed commentary before the transition from 
LIBOR, and it should decrease the cost of litigation after.
    As discussed under ``Potential Benefits and Costs to Consumers'' 
above, because the replacement indices creditors for HELOCs and card 
issuers would switch to are not identical to the LIBOR indices, they 
will not move identically to the LIBOR indices, and so for the roughly 
nine months affected by this proposed provision, affected consumers' 
payments will be different under the proposed provision than they would 
be under the baseline. On some dates in which indexed rates reset, some 
replacement indices will have increased relative to the LIBOR index. 
HELOC creditors and card issuers with rates linked to these indices 
will then benefit from the proposed provision until the next rate 
reset. On some dates in which indexed rates reset, some replacement 
indices will have decreased relative to the LIBOR index. HELOC 
creditors and card issuers with rates linked to these indices will then 
pay a cost due to the proposed provision until the next rate reset. 
Creditors and card issuers vary in their constraints and preferences, 
the credit products they issue, the dates those credit products reset, 
the replacement indices they would choose under the proposed provision, 
and the transition dates they would choose under the proposed 
provision. The benefits and costs that would accrue to HELOC creditors 
and card issuers from the proposed provision and that arise because of 
differences in index movements will vary across creditors and card 
issuers and over time. However, the Bureau expects ex-ante for these 
benefits and costs to be small on average, because the rates creditors 
or card issuers switch to must be substantially similar to existing 
LIBOR-based rates using index values in effect on December 31, 2020, 
and replacement indices that are not newly established must have 
historical fluctuations that are substantially similar to those of the 
LIBOR index.
    The proposed provision would allow creditors for HELOCs and card 
issuers under Regulation Z to switch contracts from a LIBOR index 
earlier than they otherwise would have, but it does not require them to 
do so. Therefore, this aspect of the proposed provision does not impose 
any significant costs on HELOC creditors and card issuers. The proposed 
commentary would not determine that any specific indices have 
historical fluctuations that are not substantially similar to those of 
LIBOR, so the proposed revisions would not prevent creditors or card 
issuers from switching to other indices as long as those indices still 
satisfy regulatory requirements. Therefore, the proposed commentary 
also does not impose any significant costs on HELOC creditors and card 
issuers. However, as noted above, the replacement indices HELOC 
creditors and card issuers choose may move less favorably for them than 
the LIBOR indices would have.
2. Revisions to Change-in-Terms Notices Requirements for HELOCs and 
Credit Card Accounts To Disclose Margin Decreases, if Any
    The proposed provision would, effective October 1, 2021, require 
creditors for HELOCs and card issuers to disclose margin reductions to 
consumers when they switch contracts from using LIBOR indices to other 
indices. Under both the existing regulation and this proposed 
provision, creditors for HELOCs and card issuers are required to send 
consumers change-in-term notices when indices change, disclosing the 
replacement index and any increase in the margin. Therefore, this 
proposed provision would not affect the number of consumers who receive 
change-in-terms notices nor the number of change-in-terms notices 
creditors for HELOCs or card issuers must provide.
    The benefits, costs, and impacts of this proposed provision depend 
on whether HELOC creditors or card issuers would choose to disclose 
margin decreases even if not required to do so under the existing 
regulation. Creditors for HELOCs or card issuers that would not 
otherwise disclose margin decreases in their change-in-term notices 
would bear the cost of having to provide slightly longer notices. They 
may also have to develop distinct notices for different groups of 
consumers with different initial margins. Consumers with HELOC or 
credit card accounts from those creditors or card issuers would benefit 
by having an improved understanding of how and why their APRs would 
change. However, the Bureau believes it is likely that most creditors 
for HELOCs and card issuers would choose to disclose margin decreases 
in their change-in-terms notices even if the existing regulation does 
not require them to so, because margin decreases are beneficial for 
consumers, and because in these situations the creditors or card 
issuers likely benefit from improved consumer understanding. Further, 
this proposed provision would be effective only beginning October 1, 
2021. HELOC creditors and card issuers that would prefer not to 
disclose margin decreases could choose to change indices before this 
proposed provision becomes effective (if the change in indices are 
permitted by the contractual provisions at that time). Therefore, the 
Bureau expects that both the benefits and costs of this proposed 
provision for consumers and for HELOC creditors and card issuers would 
be small.
3. LIBOR-Specific Exception From the Rate Reevaluation Provisions 
Applicable to Credit Card Accounts
    Rate increases may occur due to the LIBOR transition either at the 
time of transition from the LIBOR index to a different index or at a 
later time. Under current Sec.  1026.59, in these scenarios card 
issuers would have to reevaluate the APRs until they equal or fall 
below what they would have been had they remained tied to LIBOR. The 
proposed provision would except card issuers from these rate 
reevaluation requirements for rate increases that occur as a result of 
the transition from the LIBOR index to another index under the LIBOR-
specific provisions discussed above or under the existing regulation 
that allows card issuers to replace an index when the index becomes 
unavailable. The proposed provision does not except rate increases 
already subject to the rate reevaluation requirements prior to the 
transition from the LIBOR index to another index as discussed above. 
Because relative rate movements are hard to anticipate ex-ante, it is 
unlikely that this proposed provision would affect the indices that 
card issuers use as replacements. Because card issuers can only switch 
from LIBOR-based rates to rates that are substantially similar using 
index values in effect on December 31, 2020, and use a replacement 
index (if the replacement index is not newly established) that has 
historical fluctuations that are substantially similar to those of the 
LIBOR index, it is unlikely such rate reevaluations would result in 
significant rate reductions for consumers before LIBOR is discontinued. 
Therefore,

[[Page 36978]]

before LIBOR is discontinued, the impact of this proposed provision on 
consumers is likely to be small. After LIBOR is discontinued, it will 
not be possible to compute what consumer rates would have been under 
the LIBOR indices, and so it is not clear how card issuers would 
conduct such rate reevaluations after that time. Therefore, after LIBOR 
is discontinued, the impact of this proposed provision on consumers is 
not clear. This proposed provision would benefit affected card issuers 
by saving them the cost of reevaluating rates until LIBOR is 
discontinued. This proposed provision would impose no costs on affected 
card issuers because they could still perform rate reevaluations if 
they choose to do so prior to LIBOR being discontinued.
4. Commentary Stating That Specific Indices are Comparable to Certain 
LIBOR Tenors for Purposes of the Closed-End Refinancing Provisions
    The Bureau is proposing to revise comment 20(a)-3.ii to Regulation 
Z to state that certain SOFR-based indices are comparable to certain 
tenors of LIBOR. The Bureau believes that market participants, using 
analysis similar to that the Bureau has performed, would come to this 
conclusion even without the proposed commentary. Therefore, the Bureau 
believes that the proposed commentary would not significantly change 
the indices that creditors switch to, the dates on which indices are 
switched, or the manner in which those switches are made. Hence, the 
Bureau estimates that the proposed revisions would have no significant 
benefits, costs, or impacts for consumers.
    For covered persons, the proposed provision would decrease costs by 
providing additional clarity and certainty about whether indices are 
comparable for purposes of Regulation Z. For creditors that would 
switch from certain LIBOR indices to certain SOFR indices, the proposed 
provision would decrease the compliance staff time required to come to 
the conclusion that the SOFR index is comparable to the LIBOR index. 
The proposed provision could also decrease litigation costs for 
creditors after the transition from certain LIBOR indices to certain 
SOFR indices.
    The proposed commentary would not determine that any specific 
indices are not comparable to LIBOR. Therefore, the proposed provision 
would not prevent creditors from switching to other indices as long as 
those indices still satisfy regulatory requirements. Therefore, the 
proposed provision would impose no significant costs on creditors.

F. Alternative Provisions Considered

    As discussed above in the section-by-section analyses of Sec.  
1026.40(f)(3)(ii) and proposed Sec.  1026.55(b)(7), the Bureau 
considered interpreting the LIBOR indices to be unavailable as of a 
certain date prior to LIBOR being discontinued. The Bureau briefly 
discusses the costs, benefits, and impacts of the considered 
interpretation below.
    If the Bureau were to interpret the LIBOR indices to be unavailable 
under the existing Regulation Z rules prior to LIBOR being 
discontinued, it could provide benefits similar to those of the 
proposed rule by allowing creditors and card issuers to switch away 
from LIBOR indices before LIBOR is discontinued. It might also 
potentially provide some benefit to consumers and covered persons whose 
contracts require them to wait until the LIBOR indices become 
unavailable before replacing the LIBOR index, by providing some 
additional clarity in interpreting that provision of their contracts.
    However, a determination by the Bureau that the LIBOR indices are 
unavailable could have unintended consequences on other products or 
markets. For example, the Bureau is concerned that such a determination 
could unintentionally cause confusion for creditors for other products 
(e.g., ARMs) about whether the LIBOR indices are also unavailable for 
those products and could possibly put pressure on those creditors to 
replace the LIBOR index used for those products before those creditors 
are ready for the change. This could impose significant costs on 
affected consumers and creditors in the markets for these other 
products.
    In addition, even if the Bureau interpreted unavailability to 
indicate that the LIBOR indices are unavailable prior to LIBOR being 
discontinued, this interpretation would not completely solve the 
contractual issues for creditors and card issuers whose contracts 
require them to wait until the LIBOR indices become unavailable before 
replacing the LIBOR index. Creditors and card issuers still would need 
to decide for their contracts whether the LIBOR indices are 
unavailable, and that decision could result in litigation or 
arbitration under the contracts. Thus, even if the Bureau decided that 
the LIBOR indices are unavailable under Regulation Z as described 
above, creditors and card issuers whose contracts require them to wait 
until the LIBOR indices become unavailable before replacing the LIBOR 
index essentially would be in the same position under the proposed rule 
as they would be under the current rule. Therefore, the benefits of the 
considered interpretation would be small even for the main intended 
beneficiaries of such an interpretation, specifically the consumers, 
creditors, and card issuers under contracts that require creditors and 
card issuers to wait until the LIBOR indices become unavailable before 
replacing the LIBOR index.

G. Potential Specific Impacts of the Proposed Rule

1. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, as Described in Section 1026
    The Bureau believes that the consideration of benefits and costs of 
covered persons presented above provides a largely accurate analysis of 
the impacts of the proposed provisions on depository institutions and 
credit unions with $10 billion or less in total assets that issue 
credit products that are tied to LIBOR and are covered by the proposed 
provisions.
2. Impact of the Proposed Rule on Consumer Access to Credit and on 
Consumers in Rural Areas
    Because the proposed rule would affect only existing accounts that 
are tied to LIBOR and would generally not affect new loans, the 
proposed rule would not directly impact consumer access to credit. 
While the proposed rule would provide some benefits and costs to 
creditors and card issuers in connection to the transition away from 
LIBOR, it is unlikely to affect the costs of providing new credit and 
therefore the Bureau believes that any impact on creditors and card 
issuers from the proposed rule is not likely to have a significant 
impact on consumer access to credit.
    Consumers in rural areas may experience benefits or costs from the 
proposed rule that are larger or smaller than the benefits and costs 
experienced by consumers in general if credit products in rural areas 
are more or less likely to be linked to LIBOR than credit products in 
other areas. The Bureau does not have any data or other information to 
understand whether this is the case. The Bureau will further consider 
the impact of the proposed rule on consumers in rural areas. The Bureau 
therefore asks interested parties to provide data, research results, 
and other information on the impact of the proposed rule on consumers 
in rural areas.

[[Page 36979]]

VIII. Regulatory Flexibility Act Analysis

A. Overview

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements, unless the agency certifies that 
the rule will not have a significant economic impact on a substantial 
number of small entities.\108\ The Bureau also is subject to certain 
additional procedures under the RFA involving the convening of a panel 
to consult with small business representatives before proposing a rule 
for which an IRFA is required.\109\
---------------------------------------------------------------------------

    \108\ 5 U.S.C. 601 et seq.
    \109\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    An IRFA is not required for this proposed rule because the proposed 
rule, if adopted, would not have a significant economic impact on a 
substantial number of small entities.

B. Impact of Proposed Provisions on Small Entities

    The analysis below evaluates the potential economic impact of the 
proposed provisions on small entities as defined by the RFA.\110\ A 
card issuer or depository institution is considered ``small'' if it has 
$600 million or less in assets.\111\ Except for card issuers, non-
depository creditors are considered ``small'' if their average annual 
receipts are less than $41.5 million.\112\
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    \110\ For purposes of assessing the impacts of the proposed rule 
on small entities, ``small entities'' is defined in the RFA to 
include small businesses, small not-for-profit organizations, and 
small government jurisdictions. 5 U.S.C. 601(6). A ``small 
business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (NAICS) classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \111\ U. S. Small Bus. Admin., Table of Small Business Size 
Standards Matched to North American Industry Classification System 
Codes, https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf (current SBA size standards).
    \112\ Id.
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    Based on its market intelligence, the Bureau believes that there 
are few, if any, small card issuers with LIBOR-based cards. Based on 
its market intelligence, the Bureau estimates that there are 
approximately 200 to 300 small institutional lenders with variable-rate 
student loans tied to LIBOR. There are also a few state-sponsored 
nonbank lenders that offer variable-rate student loans based on LIBOR.
    To estimate the number of small mortgage lenders that may be 
impacted by the proposed rule, the Bureau has analyzed the 2018 Home 
Mortgage Disclosure Act (HMDA) data.\113\ The HMDA data cover mortgage 
originations, while entities may be impacted by the proposed rule if 
they hold debt tied to LIBOR. The data will therefore not include 
entities that originated LIBOR-linked debt before 2018 but not during 
2018, even if those entities still hold that debt. The data will 
include entities that originated LIBOR-linked debt in 2018 but will 
have sold it before the proposed rule would come into effect, and so 
would not be impacted by the proposed rule. Other limitations of the 
data are discussed below. Despite these limitations, the HMDA data are 
the best data source currently available to the Bureau to quantify the 
number of small mortgage lenders that may be impacted by the proposed 
rule.
---------------------------------------------------------------------------

    \113\ See Bureau of Consumer Fin. Prot., Introducing New and 
Revised Data Points in HMDA (Aug. 2019), available at https://files.consumerfinance.gov/f/documents/cfpb_new-revised-data-points-in-hmda_report.pdf.
---------------------------------------------------------------------------

    The HMDA data include entities that originate ARMs, HELOCs, and 
reverse mortgages. The data include information on whether mortgages 
are open-end or closed-end, although some entities are exempt from 
reporting this information.\114\ The data do not include information on 
whether or not mortgages have rates that are tied to LIBOR. The data do 
indicate whether or not mortgages have rates that may change. This 
measure is used as a proxy for potential exposure to the proposed rule. 
Mortgages may have rates that are linked to indices besides LIBOR. They 
may also have ``step rates'' that switch from one pre-determined rate 
to another pre-determined rate that is not linked to any index. 
Therefore, the proxy for potential exposure to the proposed rule likely 
overstates the number of entities with rates tied to LIBOR.
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    \114\ In May 2017, Congress passed the Economic Growth, 
Regulatory Relief, and Consumer Protection Act (EGRRCPA) that 
granted certain HMDA reporters partial exemptions from HMDA 
reporting. The closed-end partial exemption applies to HMDA 
reporters that are insured depository institutions or insured credit 
unions and that originated fewer than 500 closed-end mortgages in 
each of the two preceding years. HMDA reporters that are insured 
depository institutions or insured credit unions that originated 
fewer than 500 open-end lines of credit in each of the two preceding 
years also qualify for a partial exemption with respect to reporting 
their open-end transactions. The insured depository institutions 
must also not have received certain less than satisfactory 
examination ratings under the Community Reinvestment Act of 1977 to 
qualify for the partial exemptions.
---------------------------------------------------------------------------

    Based on this data, the Bureau estimates that there are 117 small 
depositories that originated at least one closed-end adjustable-rate 
mortgage product in 2018 and so may be affected by the closed-end 
provisions of the proposed rule, and there are 669 small depositories 
that originated at least one open-end adjustable-rate mortgage product 
and so may be affected by the open-end provisions of the proposed rule. 
Of these, 82 small depositories originated at least one closed-end 
adjustable rate mortgage product and one open-end adjustable rate 
mortgage product, and so may be affected by both the open-end and 
closed-end provisions of the proposed rule.
    The definition of ``small'' for purposes of the RFA for non-
depository institutions that originate mortgages depends on average 
annual receipts. The HMDA data do not include this information, and so 
the Bureau cannot estimate the number of small non-depository mortgage 
lenders that may be affected by the proposed rule. The Bureau estimates 
that there are 50 non-depository mortgage lenders that originated at 
least one closed-end adjustable-rate mortgage product and 640 non-
depository mortgage lenders that originated at least one open-end 
adjustable-rate mortgage product. Of these, 43 originated at least one 
closed-end and one open-end adjustable-rate mortgage product.
    The numbers above do not include entities that reported originating 
mortgages but under the EGRRCPA were exempt from reporting whether or 
not those mortgages had adjustable rates. There are 1,530 such small 
depositories in the 2018 HMDA data. There are five such non-depository 
institutions in the 2018 HMDA data. These entities may have originated 
adjustable-rate mortgage products that were not explicitly reported as 
such.
    Finally, the numbers above also do not include entities that may 
have originated adjustable-rate mortgages in 2018 that were exempt 
entirely from reporting any 2018 HMDA data. The Bureau has estimated 
that approximately 11,800 institutions originated at least one closed-
end mortgage loan in 2018, and 5,666 institutions reported HMDA data in 
2018.\115\ This implies that approximately 6,134 institutions 
originated at least one closed-end

[[Page 36980]]

mortgage in 2018 but are not in the HMDA data. Because these 
institutions are not in the HMDA data, the Bureau cannot estimate the 
number that may have originated adjustable-rate mortgages. Furthermore, 
the Bureau cannot confirm that they are small for purposes of the RFA, 
although it is likely they are because HMDA reporting thresholds are 
based in part on origination volume. Finally, the Bureau cannot 
estimate the number of institutions that did not report HMDA data in 
2018 but did originate at least one open-end mortgage loan in 2018, or 
at least one closed-end and one open-end mortgage loan in 2018.
---------------------------------------------------------------------------

    \115\ See Bureau of Consumer Fin. Prot., Data Point: 2018 
Mortgage Market Activity and Trends (Aug. 2019), available at 
https://files.consumerfinance.gov/f/documents/cfpb_2018-mortgage-market-activity-trends_report.pdf.
---------------------------------------------------------------------------

    As discussed above in part VII, there are four main proposed 
provisions:
    1. LIBOR-specific provisions for index changes for HELOCs and 
credit card accounts,
    2. Revisions to change-in-terms notices requirements for HELOCs and 
credit card accounts to disclose margin decreases, if any,
    3. LIBOR-specific exception from the rate reevaluation provisions 
applicable to credit card accounts, and
    4. Commentary stating that specific indices are comparable to 
certain LIBOR tenors for purposes of the closed-end refinancing 
provisions.
    The proposed LIBOR-specific provisions for index change 
requirements for open-end credit would allow HELOC creditors and card 
issuers, including small entities, under Regulation Z to switch away 
from LIBOR earlier than they would under the baseline, but it does not 
require them to do so.\116\ This additional flexibility would benefit 
small entities with these outstanding credit products tied to LIBOR, by 
reducing uncertainty and allowing them to implement the switch in a 
more orderly way. This additional flexibility would not impose any 
significant costs on HELOC creditors and card issuers, including small 
entities.
---------------------------------------------------------------------------

    \116\ As discussed in the section-by-section analyses of Sec.  
1026.40(f)(3)(ii) and proposed Sec.  1026.55(b)(7) above, the 
proposal, however, would not excuse creditors or card issuers from 
noncompliance with contractual provisions. For example, a contract 
for a HELOC or a credit card account may provide that the creditor 
or card issuer respectively may not replace an index unilaterally 
under a plan unless the original index becomes unavailable. In this 
case, even under the proposal the creditor or card issuer would be 
contractually prohibited from unilaterally replacing a LIBOR index 
used under the plan until it becomes unavailable.
---------------------------------------------------------------------------

    The proposed LIBOR-specific provisions for index change 
requirements for open-end credit also would include revisions to 
commentary to Regulation Z to state that certain SOFR-based indices 
have historical fluctuations that are substantially similar to those of 
certain tenors of LIBOR and that Prime has historical fluctuations that 
are substantially similar to those of certain tenors of LIBOR. The 
proposed commentary would not determine that any specific indices have 
historical fluctuations that are not substantially similar to those of 
LIBOR, so the proposed revisions would not prevent creditors or card 
issuers from switching to other indices as long as those indices still 
satisfy regulatory requirements. Therefore, the proposed commentary 
does not impose any significant costs on HELOC creditors and card 
issuers, including small entities. Therefore, the proposed LIBOR-
specific provisions for index change requirements for open-end credit 
would impose no significant burden on small entities.
    The proposed revisions to change-in-terms notices requirements to 
disclose margin decreases, if any, expand regulatory requirements for 
creditors for HELOCs and card issuers, including small entities, and 
therefore may increase their compliance costs. The proposed provision 
would, effective October 1, 2021, require creditors for HELOCs and card 
issuers, including small entities, to disclose margin reductions to 
consumers when they switch contracts from using LIBOR indices to other 
indices. Under both the existing regulation and the proposed provision, 
creditors for HELOCs and card issuers, including small entities, are 
required to send consumers change-in-term notices when indices change, 
disclosing the replacement index and any increase in the margin. 
Therefore, this proposed provision would not affect the number of 
consumers who receive change-in-terms notices nor the number of change-
in-terms notices creditors for HELOCs or card issuers, including small 
entities, must provide.
    The benefits, costs, and impacts of this proposed provision depend 
on whether HELOC creditors or card issuers, including small entities, 
would choose to disclose margin decreases even if not required to do so 
under the existing regulation. Creditors for HELOCs or card issuers, 
including small entities, that would not otherwise disclose margin 
decreases in their change-in-term notices would bear the cost of having 
to provide slightly longer notices. They may also have to develop 
distinct notices for different groups of consumers with different 
initial margins. However, the Bureau believes it is likely that most 
creditors for HELOCs and card issuers, including small entities, would 
choose to disclose margin decreases in their change-in-terms notices 
even if the existing regulation does not require them to so, because 
margin decreases are beneficial for consumers, and because in these 
situations the creditors or card issuers likely benefit from improved 
consumer understanding. Further, this proposed provision would be 
effective only beginning effective October 1, 2021. HELOC creditors and 
card issuers, including small entities, that would prefer not to 
disclose margin decreases could choose to change indices before this 
proposed provision becomes effective (if the change in indices are 
permitted by the contractual provisions at that time). Therefore, the 
Bureau expects that both the benefits and costs of this proposed 
provision for HELOC creditors and card issuers, including small 
entities, would be small. Therefore, this proposed provision would not 
impose significant costs on a significant number of small entities.
    The LIBOR-specific exception from the rate reevaluation provisions 
applicable to credit card accounts would benefit affected card issuers, 
including small entities, by saving them the cost of reevaluating rate 
increases that occur as a result of the transition from the LIBOR index 
to another index under the LIBOR-specific provisions discussed above or 
under the existing regulation that allows card issuers to replace an 
index when the index becomes unavailable. This proposed provision would 
impose no costs on affected card issuers, including small entities, 
because they could still perform rate reevaluations if they choose to 
do so until LIBOR is discontinued. Therefore, this proposed provision 
would impose no significant burden on small entities.
    The Bureau is proposing to revise comment 20(a)-3.ii to Regulation 
Z to state that certain SOFR-based indices are comparable to certain 
tenors of LIBOR. The proposed commentary would not determine that any 
specific indices are not comparable to LIBOR. Therefore, the proposed 
provision would not prevent creditors from switching to other indices 
as long as those indices still satisfy regulatory requirements. 
Therefore, the proposed provision would impose no significant costs on 
creditors, including small entities.
    Accordingly, the Director hereby certifies that this proposed rule, 
if adopted, would not have a significant economic impact on a 
substantial number of small entities. Thus, neither an IRFA nor a small 
business review panel is required for this proposal. The Bureau 
requests comment on the

[[Page 36981]]

analysis above and requests any relevant data.

IX. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA),\117\ Federal 
agencies are generally required to seek the Office of Management and 
Budget's (OMB's) approval for information collection requirements prior 
to implementation. The collections of information related to Regulation 
Z have been previously reviewed and approved by OMB and assigned OMB 
Control number 3170-0015. Under the PRA, the Bureau may not conduct or 
sponsor and, notwithstanding any other provision of law, a person is 
not required to respond to an information collection unless the 
information collection displays a valid control number assigned by OMB.
---------------------------------------------------------------------------

    \117\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Bureau has determined that this proposed rule would not impose 
any new or revised information collection requirements (recordkeeping, 
reporting or disclosure requirements) on covered entities or members of 
the public that would constitute collections of information requiring 
OMB approval under the PRA.

X. Signing Authority

    The Director of the Bureau, having reviewed and approved this 
document, is delegating the authority to electronically sign this 
document to Laura Galban, a Bureau Federal Register Liaison, for 
purposes of publication in the Federal Register.

List of Subjects in 12 CFR Part 1026

    Advertising, Appraisal, Appraiser, Banking, Banks, Consumer 
protection, Credit, Credit unions, Mortgages, National banks, Reporting 
and recordkeeping requirements, Savings associations, Truth in lending.

Authority and Issuance

    For the reasons set forth above, the Bureau proposes to amend 
Regulation Z, 12 CFR part 1026, as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

    Authority: 12 U.S.C. 2601, 2603-2605, 2607, 2609, 2617, 3353, 
5511, 5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart B--Open-End Credit

0
2. Section 1026.9 is amended by revising paragraphs (c)(1)(ii) and 
(c)(2)(v)(A) to read as follows:


Sec.  1026.9  Subsequent disclosure requirements.

* * * * *
    (c) * * *
    (1) * * *
    (ii) Notice not required. For home-equity plans subject to the 
requirements of Sec.  1026.40, a creditor is not required to provide 
notice under this section when the change involves a reduction of any 
component of a finance or other charge (except that on or after October 
1, 2021, this provision on when the change involves a reduction of any 
component of a finance or other charge does not apply to any change in 
the margin when a LIBOR index is replaced, as permitted by Sec.  
1026.40(f)(3)(ii)(A) or (B)) or when the change results from an 
agreement involving a court proceeding.
* * * * *
    (2) * * *
    (v) * * *
    (A) When the change involves charges for documentary evidence; a 
reduction of any component of a finance or other charge (except that on 
or after October 1, 2021, this provision on when the change involves a 
reduction of any component of a finance or other charge does not apply 
to any change in the margin when a LIBOR index is replaced, as 
permitted by Sec.  1026.55(b)(7)(i) or (ii)); suspension of future 
credit privileges (except as provided in paragraph (c)(2)(vi) of this 
section) or termination of an account or plan; when the change results 
from an agreement involving a court proceeding; when the change is an 
extension of the grace period; or if the change is applicable only to 
checks that access a credit card account and the changed terms are 
disclosed on or with the checks in accordance with paragraph (b)(3) of 
this section;
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions


Sec.  1026.36  [Amended]

0
3. Section 1026.36 is amended by removing ``LIBOR'' and adding in its 
place ``SOFR'' in paragraphs (a)(4)(iii)(C) and (a)(5)(iii)(B).
0
4. Section 1026.40 is amended by revising paragraph (f)(3)(ii) to read 
as follows:


Sec.  1026.40  Requirements for home equity plans.

* * * * *
    (f) * * *
    (3) * * *
    (ii)(A) Change the index and margin used under the plan if the 
original index is no longer available, the replacement index has 
historical fluctuations substantially similar to that of the original 
index, and the replacement index and replacement margin would have 
resulted in an annual percentage rate substantially similar to the rate 
in effect at the time the original index became unavailable. If the 
replacement index is newly established and therefore does not have any 
rate history, it may be used if it and the replacement margin will 
produce an annual percentage rate substantially similar to the rate in 
effect when the original index became unavailable; or
    (B) If a variable rate on the plan is calculated using a LIBOR 
index, change the LIBOR index and the margin for calculating the 
variable rate on or after March 15, 2021, to a replacement index and a 
replacement margin, as long as historical fluctuations in the LIBOR 
index and replacement index were substantially similar, and as long as 
the replacement index value in effect on December 31, 2020, and 
replacement margin will produce an annual percentage rate substantially 
similar to the rate calculated using the LIBOR index value in effect on 
December 31, 2020, and the margin that applied to the variable rate 
immediately prior to the replacement of the LIBOR index used under the 
plan. If the replacement index is newly established and therefore does 
not have any rate history, it may be used if the replacement index 
value in effect on December 31, 2020, and the replacement margin will 
produce an annual percentage rate substantially similar to the rate 
calculated using the LIBOR index value in effect on December 31, 2020, 
and the margin that applied to the variable rate immediately prior to 
the replacement of the LIBOR index used under the plan. If either the 
LIBOR index or the replacement index is not published on December 31, 
2020, the creditor must use the next calendar day that both indices are 
published as the date on which the annual percentage rate based on the 
replacement index must be substantially similar to the rate based on 
the LIBOR index.
* * * * *

Subpart G--Special Rules Applicable to Credit Card Accounts and 
Open-End Credit Offered to College Students

0
5. Section 1026.55 is amended by adding paragraph (b)(7) to read as 
follows:


Sec.  1026.55  Limitations on increasing annual percentage rates, fees, 
and charges.

* * * * *
    (b) * * *
    (7) Index replacement and margin change exception. A card issuer 
may

[[Page 36982]]

increase an annual percentage rate when:
    (i) The card issuer changes the index and margin used to determine 
the annual percentage rate if the original index becomes unavailable, 
as long as historical fluctuations in the original and replacement 
indices were substantially similar, and as long as the replacement 
index and replacement margin will produce a rate substantially similar 
to the rate that was in effect at the time the original index became 
unavailable. If the replacement index is newly established and 
therefore does not have any rate history, it may be used if it and the 
replacement margin will produce a rate substantially similar to the 
rate in effect when the original index became unavailable; or
    (ii) If a variable rate on the plan is calculated using a LIBOR 
index, the card issuer changes the LIBOR index and the margin for 
calculating the variable rate on or after March 15, 2021, to a 
replacement index and a replacement margin, as long as historical 
fluctuations in the LIBOR index and replacement index were 
substantially similar, and as long as the replacement index value in 
effect on December 31, 2020, and replacement margin will produce an 
annual percentage rate substantially similar to the rate calculated 
using the LIBOR index value in effect on December 31, 2020, and the 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. If the replacement 
index is newly established and therefore does not have any rate 
history, it may be used if the replacement index value in effect on 
December 31, 2020, and the replacement margin will produce an annual 
percentage rate substantially similar to the rate calculated using the 
LIBOR index value in effect on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. If either the LIBOR index or the 
replacement index is not published on December 31, 2020, the card 
issuer must use the next calendar day that both indices are published 
as the date on which the annual percentage rate based on the 
replacement index must be substantially similar to the rate based on 
the LIBOR index.
* * * * *
0
6. Section 1026.59 is amended by adding paragraphs (f)(3) and (h)(3) to 
read as follows:


Sec.  1026.59  Reevaluation of rate increases.

* * * * *
    (f) * * *
    (3) Effective March 15, 2021, in the case where the rate applicable 
immediately prior to the increase was a variable rate with a formula 
based on a LIBOR index, the card issuer reduces the annual percentage 
rate to a rate determined by a replacement formula that is derived from 
a replacement index value on December 31, 2020, plus replacement margin 
that is equal to the LIBOR index value on December 31, 2020, plus the 
margin used to calculate the rate immediately prior to the increase 
(previous formula). A card issuer must satisfy the conditions set forth 
in Sec.  1026.55(b)(7)(ii) for selecting a replacement index. If either 
the LIBOR index or the replacement index is not published on December 
31, 2020, the card issuer must use the values of the indices on the 
next calendar day that both indices are published as the index values 
to use to determine the replacement formula.
* * * * *
    (h) * * *
    (3) Transition from LIBOR. The requirements of this section do not 
apply to increases in an annual percentage rate that occur as a result 
of the transition from the use of a LIBOR index as the index in setting 
a variable rate to the use of a replacement index in setting a variable 
rate if the change from the use of the LIBOR index to a replacement 
index occurs in accordance with Sec.  1026.55(b)(7)(i) or (ii).
0
7. Appendix H to part 1026 is amended by revising the entries for H-
4(D)(2) and H-4(D)(4) to read as follows:

Appendix H to Part 1026--Closed-End Model Forms and Clauses

* * * * *

H-4(D)(2) Sample Form for Sec.  1026.20(c)

BILLING CODE 4810-AM-P

[[Page 36983]]

[GRAPHIC] [TIFF OMITTED] TP18JN20.000

* * * * *

H-4(D)(4) Sample Form for Sec.  1026.20(d)

[[Page 36984]]

[GRAPHIC] [TIFF OMITTED] TP18JN20.001

BILLING CODE 4810-AM-C
* * * * *
0
8. In supplement I to part 1026:
0
a. Under Section 1026.9--Subsequent Disclosure Requirements, revise 
9(c)(1)(ii) Notice not Required, 9(c)(2)(iv) Disclosure Requirements, 
and 9(c)(2)(v) Notice not Required.
0
b. Under Section 1026.20--Disclosure Requirements Regarding Post-
Consummation Events, revise 20(a) Refinancings.
0
c. Under Section 1026.37--Content of Disclosures for Certain Mortgage 
Transactions (Loan Estimate), revise 37(j)(1) Index and margin.
0
d. Under Section 1026.40--Requirements for Home-Equity Plans, revise 
Paragraph 40(f)(3)(ii) and add Paragraph 40(f)(3)(ii)(A) and Paragraph 
40(f)(3)(ii)(B).
0
e. Under Section 1026.55--Limitations on Increasing Annual Percentage 
Rates, Fees, and Charges,

[[Page 36985]]

revise 55(b)(2) Variable rate exception and add 55(b)(7) Index 
replacement and margin change exception.
0
f. Under Section 1026.59--Reevaluation of Rate Increases, revise 59(d) 
Factors and 59(f) Termination of Obligation to Review Factors and add 
59(h) Exceptions.
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *
    Section 1026.9--Subsequent Disclosure Requirements
* * * * *

9(c)(1)(ii) Notice Not Required

    1. Changes not requiring notice. The following are examples of 
changes that do not require a change-in-terms notice:
    i. A change in the consumer's credit limit.
    ii. A change in the name of the credit card or credit card plan.
    iii. The substitution of one insurer for another.
    iv. A termination or suspension of credit privileges. (But see 
Sec.  1026.40(f).)
    v. Changes arising merely by operation of law; for example, if 
the creditor's security interest in a consumer's car automatically 
extends to the proceeds when the consumer sells the car.
    2. Skip features. If a credit program allows consumers to skip 
or reduce one or more payments during the year, or involves 
temporary reductions in finance charges, no notice of the change in 
terms is required either prior to the reduction or upon resumption 
of the higher rates or payments if these features are explained on 
the initial disclosure statement (including an explanation of the 
terms upon resumption). For example, a merchant may allow consumers 
to skip the December payment to encourage holiday shopping, or a 
teachers' credit union may not require payments during summer 
vacation. Otherwise, the creditor must give notice prior to resuming 
the original schedule or rate, even though no notice is required 
prior to the reduction. The change-in-terms notice may be combined 
with the notice offering the reduction. For example, the periodic 
statement reflecting the reduction or skip feature may also be used 
to notify the consumer of the resumption of the original schedule or 
rate, either by stating explicitly when the higher payment or 
charges resume, or by indicating the duration of the skip option. 
Language such as ``You may skip your October payment,'' or ``We will 
waive your finance charges for January,'' may serve as the change-
in-terms notice.
    3. Replacing LIBOR. The exception in Sec.  1026.9(c)(1)(ii) 
under which a creditor is not required to provide a change-in-terms 
notice under Sec.  1026.9(c)(1) when the change involves a reduction 
of any component of a finance or other charge does not apply on or 
after October 1, 2021, to margin reductions when a LIBOR index is 
replaced, as permitted by Sec.  1026.40(f)(3)(ii)(A) or 
(f)(3)(ii)(B). For change-in-terms notices provided under Sec.  
1026.9(c)(1) on or after October 1, 2021 covering changes permitted 
by Sec.  1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B), a creditor must 
provide a change-in-terms notice under Sec.  1026.9(c)(1) disclosing 
the replacement index for a LIBOR index and any adjusted margin that 
is permitted under Sec.  1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B), even 
if the margin is reduced. Prior to October 1, 2021, a creditor has 
the option of disclosing a reduced margin in the change-in-terms 
notice that discloses the replacement index for a LIBOR index as 
permitted by Sec.  1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B).
* * * * *

9(c)(2)(iv) Disclosure Requirements

    1. Changing margin for calculating a variable rate. If a 
creditor is changing a margin used to calculate a variable rate, the 
creditor must disclose the amount of the new rate (as calculated 
using the new margin) in the table described in Sec.  
1026.9(c)(2)(iv), and include a reminder that the rate is a variable 
rate. For example, if a creditor is changing the margin for a 
variable rate that uses the prime rate as an index, the creditor 
must disclose in the table the new rate (as calculated using the new 
margin) and indicate that the rate varies with the market based on 
the prime rate.
    2. Changing index for calculating a variable rate. If a creditor 
is changing the index used to calculate a variable rate, the 
creditor must disclose the amount of the new rate (as calculated 
using the new index) and indicate that the rate varies and how the 
rate is determined, as explained in Sec.  1026.6(b)(2)(i)(A). For 
example, if a creditor is changing from using a prime index to using 
a SOFR index in calculating a variable rate, the creditor would 
disclose in the table the new rate (using the new index) and 
indicate that the rate varies with the market based on a SOFR index.
    3. Changing from a variable rate to a non-variable rate. If a 
creditor is changing a rate applicable to a consumer's account from 
a variable rate to a non-variable rate, the creditor generally must 
provide a notice as otherwise required under Sec.  1026.9(c) even if 
the variable rate at the time of the change is higher than the non-
variable rate. However, a creditor is not required to provide a 
notice under Sec.  1026.9(c) if the creditor provides the 
disclosures required by Sec.  1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in 
connection with changing a variable rate to a lower non-variable 
rate. Similarly, a creditor is not required to provide a notice 
under Sec.  1026.9(c) when changing a variable rate to a lower non-
variable rate in order to comply with 50 U.S.C. app. 527 or a 
similar Federal or state statute or regulation. Finally, a creditor 
is not required to provide a notice under Sec.  1026.9(c) when 
changing a variable rate to a lower non-variable rate in order to 
comply with Sec.  1026.55(b)(4).
    4. Changing from a non-variable rate to a variable rate. If a 
creditor is changing a rate applicable to a consumer's account from 
a non-variable rate to a variable rate, the creditor generally must 
provide a notice as otherwise required under Sec.  1026.9(c) even if 
the non-variable rate is higher than the variable rate at the time 
of the change. However, a creditor is not required to provide a 
notice under Sec.  1026.9(c) if the creditor provides the 
disclosures required by Sec.  1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in 
connection with changing a non-variable rate to a lower variable 
rate. Similarly, a creditor is not required to provide a notice 
under Sec.  1026.9(c) when changing a non-variable rate to a lower 
variable rate in order to comply with 50 U.S.C. app. 527 or a 
similar Federal or state statute or regulation. Finally, a creditor 
is not required to provide a notice under Sec.  1026.9(c) when 
changing a non-variable rate to a lower variable rate in order to 
comply with Sec.  1026.55(b)(4). See comment 55(b)(2)-4 regarding 
the limitations in Sec.  1026.55(b)(2) on changing the rate that 
applies to a protected balance from a non-variable rate to a 
variable rate.
    5. Changes in the penalty rate, the triggers for the penalty 
rate, or how long the penalty rate applies. If a creditor is 
changing the amount of the penalty rate, the creditor must also 
redisclose the triggers for the penalty rate and the information 
about how long the penalty rate applies even if those terms are not 
changing. Likewise, if a creditor is changing the triggers for the 
penalty rate, the creditor must redisclose the amount of the penalty 
rate and information about how long the penalty rate applies. If a 
creditor is changing how long the penalty rate applies, the creditor 
must redisclose the amount of the penalty rate and the triggers for 
the penalty rate, even if they are not changing.
    6. Changes in fees. If a creditor is changing part of how a fee 
that is disclosed in a tabular format under Sec.  1026.6(b)(1) and 
(2) is determined, the creditor must redisclose all relevant 
information related to that fee regardless of whether this other 
information is changing. For example, if a creditor currently 
charges a cash advance fee of ``Either $5 or 3% of the transaction 
amount, whichever is greater (Max: $100),'' and the creditor is only 
changing the minimum dollar amount from $5 to $10, the issuer must 
redisclose the other information related to how the fee is 
determined. For example, the creditor in this example would disclose 
the following: ``Either $10 or 3% of the transaction amount, 
whichever is greater (Max: $100).''
    7. Combining a notice described in Sec.  1026.9(c)(2)(iv) with a 
notice described in Sec.  1026.9(g)(3). If a creditor is required to 
provide a notice described in Sec.  1026.9(c)(2)(iv) and a notice 
described in Sec.  1026.9(g)(3) to a consumer, the creditor may 
combine the two notices. This would occur if penalty pricing has 
been triggered, and other terms are changing on the consumer's 
account at the same time.
    8. Content. Sample G-20 contains an example of how to comply 
with the requirements in Sec.  1026.9(c)(2)(iv) when a variable rate 
is being changed to a non-variable rate on a credit card account. 
The sample explains when the new rate will apply to new transactions 
and to which balances the current rate will continue to apply. 
Sample G-21 contains an example of how to comply with the 
requirements in Sec.  1026.9(c)(2)(iv) when the late payment fee on 
a credit card account is being increased, and the returned payment 
fee is also being

[[Page 36986]]

increased. The sample discloses the consumer's right to reject the 
changes in accordance with Sec.  1026.9(h).
    9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to disclosures required 
under Sec.  1026.9(c)(2)(iv)(A)(1).
    10. Terminology. See Sec.  1026.5(a)(2) for terminology 
requirements applicable to disclosures required under Sec.  
1026.9(c)(2)(iv)(A)(1).
    11. Reasons for increase. i. In general. Section 
1026.9(c)(2)(iv)(A)(8) requires card issuers to disclose the 
principal reason(s) for increasing an annual percentage rate 
applicable to a credit card account under an open-end (not home-
secured) consumer credit plan. The regulation does not mandate a 
minimum number of reasons that must be disclosed. However, the 
specific reasons disclosed under Sec.  1026.9(c)(2)(iv)(A)(8) are 
required to relate to and accurately describe the principal factors 
actually considered by the card issuer in increasing the rate. A 
card issuer may describe the reasons for the increase in general 
terms. For example, the notice of a rate increase triggered by a 
decrease of 100 points in a consumer's credit score may state that 
the increase is due to ``a decline in your creditworthiness'' or ``a 
decline in your credit score.'' Similarly, a notice of a rate 
increase triggered by a 10% increase in the card issuer's cost of 
funds may be disclosed as ``a change in market conditions.'' In some 
circumstances, it may be appropriate for a card issuer to combine 
the disclosure of several reasons in one statement. However, Sec.  
1026.9(c)(2)(iv)(A)(8) requires that the notice specifically 
disclose any violation of the terms of the account on which the rate 
is being increased, such as a late payment or a returned payment, if 
such violation of the account terms is one of the four principal 
reasons for the rate increase.
    ii. Example. Assume that a consumer made a late payment on the 
credit card account on which the rate increase is being imposed, 
made a late payment on a credit card account with another card 
issuer, and the consumer's credit score decreased, in part due to 
such late payments. The card issuer may disclose the reasons for the 
rate increase as a decline in the consumer's credit score and the 
consumer's late payment on the account subject to the increase. 
Because the late payment on the credit card account with the other 
issuer also likely contributed to the decline in the consumer's 
credit score, it is not required to be separately disclosed. 
However, the late payment on the credit card account on which the 
rate increase is being imposed must be specifically disclosed even 
if that late payment also contributed to the decline in the 
consumer's credit score.

9(c)(2)(v) Notice Not Required

    1. Changes not requiring notice. The following are examples of 
changes that do not require a change-in-terms notice:
    i. A change in the consumer's credit limit except as otherwise 
required by Sec.  1026.9(c)(2)(vi).
    ii. A change in the name of the credit card or credit card plan.
    iii. The substitution of one insurer for another.
    iv. A termination or suspension of credit privileges.
    v. Changes arising merely by operation of law; for example, if 
the creditor's security interest in a consumer's car automatically 
extends to the proceeds when the consumer sells the car.
    2. Skip features. i. Skipped or reduced payments. If a credit 
program allows consumers to skip or reduce one or more payments 
during the year, no notice of the change in terms is required either 
prior to the reduction in payments or upon resumption of the higher 
payments if these features are explained on the account-opening 
disclosure statement (including an explanation of the terms upon 
resumption). For example, a merchant may allow consumers to skip the 
December payment to encourage holiday shopping, or a teacher's 
credit union may not require payments during summer vacation. 
Otherwise, the creditor must give notice prior to resuming the 
original payment schedule, even though no notice is required prior 
to the reduction. The change-in-terms notice may be combined with 
the notice offering the reduction. For example, the periodic 
statement reflecting the skip feature may also be used to notify the 
consumer of the resumption of the original payment schedule, either 
by stating explicitly when the higher resumes or by indicating the 
duration of the skip option. Language such as ``You may skip your 
October payment'' may serve as the change-in-terms notice.
    ii. Temporary reductions in interest rates or fees. If a credit 
program involves temporary reductions in an interest rate or fee, no 
notice of the change in terms is required either prior to the 
reduction or upon resumption of the original rate or fee if these 
features are disclosed in advance in accordance with the 
requirements of Sec.  1026.9(c)(2)(v)(B). Otherwise, the creditor 
must give notice prior to resuming the original rate or fee, even 
though no notice is required prior to the reduction. The notice 
provided prior to resuming the original rate or fee must comply with 
the timing requirements of Sec.  1026.9(c)(2)(i) and the content and 
format requirements of Sec.  1026.9(c)(2)(iv)(A), (B) (if 
applicable), (C) (if applicable), and (D). See comment 55(b)-3 for 
guidance regarding the application of Sec.  1026.55 in these 
circumstances.
    3. Changing from a variable rate to a non-variable rate. See 
comment 9(c)(2)(iv)-3.
    4. Changing from a non-variable rate to a variable rate. See 
comment 9(c)(2)(iv)-4.
    5. Temporary rate or fee reductions offered by telephone. The 
timing requirements of Sec.  1026.9(c)(2)(v)(B) are deemed to have 
been met, and written disclosures required by Sec.  
1026.9(c)(2)(v)(B) may be provided as soon as reasonably practicable 
after the first transaction subject to a rate that will be in effect 
for a specified period of time (a temporary rate) or the imposition 
of a fee that will be in effect for a specified period of time (a 
temporary fee) if:
    i. The consumer accepts the offer of the temporary rate or 
temporary fee by telephone;
    ii. The creditor permits the consumer to reject the temporary 
rate or temporary fee offer and have the rate or rates or fee that 
previously applied to the consumer's balances reinstated for 45 days 
after the creditor mails or delivers the written disclosures 
required by Sec.  1026.9(c)(2)(v)(B), except that the creditor need 
not permit the consumer to reject a temporary rate or temporary fee 
offer if the rate or rates or fee that will apply following 
expiration of the temporary rate do not exceed the rate or rates or 
fee that applied immediately prior to commencement of the temporary 
rate or temporary fee; and
    iii. The disclosures required by Sec.  1026.9(c)(2)(v)(B) and 
the consumer's right to reject the temporary rate or temporary fee 
offer and have the rate or rates or fee that previously applied to 
the consumer's account reinstated, if applicable, are disclosed to 
the consumer as part of the temporary rate or temporary fee offer.
    6. First listing. The disclosures required by Sec.  
1026.9(c)(2)(v)(B)(1) are only required to be provided in close 
proximity and in equal prominence to the first listing of the 
temporary rate or fee in the disclosure provided to the consumer. 
For purposes of Sec.  1026.9(c)(2)(v)(B), the first statement of the 
temporary rate or fee is the most prominent listing on the front 
side of the first page of the disclosure. If the temporary rate or 
fee does not appear on the front side of the first page of the 
disclosure, then the first listing of the temporary rate or fee is 
the most prominent listing of the temporary rate on the subsequent 
pages of the disclosure. For advertising requirements for 
promotional rates, see Sec.  1026.16(g).
    7. Close proximity--point of sale. Creditors providing the 
disclosures required by Sec.  1026.9(c)(2)(v)(B) of this section in 
person in connection with financing the purchase of goods or 
services may, at the creditor's option, disclose the annual 
percentage rate or fee that would apply after expiration of the 
period on a separate page or document from the temporary rate or fee 
and the length of the period, provided that the disclosure of the 
annual percentage rate or fee that would apply after the expiration 
of the period is equally prominent to, and is provided at the same 
time as, the disclosure of the temporary rate or fee and length of 
the period.
    8. Disclosure of annual percentage rates. If a rate disclosed 
pursuant to Sec.  1026.9(c)(2)(v)(B) or (c)(2)(v)(D) is a variable 
rate, the creditor must disclose the fact that the rate may vary and 
how the rate is determined. For example, a creditor could state 
``After October 1, 2009, your APR will be 14.99%. This APR will vary 
with the market based on the Prime Rate.''
    9. Deferred interest or similar programs. If the applicable 
conditions are met, the exception in Sec.  1026.9(c)(2)(v)(B) 
applies to deferred interest or similar promotional programs under 
which the consumer is not obligated to pay interest that accrues on 
a balance if that balance is paid in full prior to the expiration of 
a specified period of time. For purposes of this comment and Sec.  
1026.9(c)(2)(v)(B), ``deferred interest'' has the same meaning as in 
Sec.  1026.16(h)(2) and associated commentary. For such programs, a 
creditor must disclose pursuant to Sec.  1026.9(c)(2)(v)(B)(1) the 
length of the deferred interest period and the rate that will

[[Page 36987]]

apply to the balance subject to the deferred interest program if 
that balance is not paid in full prior to expiration of the deferred 
interest period. Examples of language that a creditor may use to 
make the required disclosures under Sec.  1026.9(c)(2)(v)(B)(1) 
include:
    i. ``No interest if paid in full in 6 months. If the balance is 
not paid in full in 6 months, interest will be imposed from the date 
of purchase at a rate of 15.99%.''
    ii. ``No interest if paid in full by December 31, 2010. If the 
balance is not paid in full by that date, interest will be imposed 
from the transaction date at a rate of 15%.''
    10. Relationship between Sec. Sec.  1026.9(c)(2)(v)(B) and 
1026.6(b). A disclosure of the information described in Sec.  
1026.9(c)(2)(v)(B)(1) provided in the account-opening table in 
accordance with Sec.  1026.6(b) complies with the requirements of 
Sec.  1026.9(c)(2)(v)(B)(2), if the listing of the introductory rate 
in such tabular disclosure also is the first listing as described in 
comment 9(c)(2)(v)-6.
    11. Disclosure of the terms of a workout or temporary hardship 
arrangement. In order for the exception in Sec.  1026.9(c)(2)(v)(D) 
to apply, the disclosure provided to the consumer pursuant to Sec.  
1026.9(c)(2)(v)(D)(2) must set forth:
    i. The annual percentage rate that will apply to balances 
subject to the workout or temporary hardship arrangement;
    ii. The annual percentage rate that will apply to such balances 
if the consumer completes or fails to comply with the terms of, the 
workout or temporary hardship arrangement;
    iii. Any reduced fee or charge of a type required to be 
disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), (b)(2)(viii), 
(b)(2)(ix), (b)(2)(xi), or (b)(2)(xii) that will apply to balances 
subject to the workout or temporary hardship arrangement, as well as 
the fee or charge that will apply if the consumer completes or fails 
to comply with the terms of the workout or temporary hardship 
arrangement;
    iv. Any reduced minimum periodic payment that will apply to 
balances subject to the workout or temporary hardship arrangement, 
as well as the minimum periodic payment that will apply if the 
consumer completes or fails to comply with the terms of the workout 
or temporary hardship arrangement; and
    v. If applicable, that the consumer must make timely minimum 
payments in order to remain eligible for the workout or temporary 
hardship arrangement.
    12. Index not under creditor's control. See comment 55(b)(2)-2 
for guidance on when an index is deemed to be under a creditor's 
control.
    13. Temporary rates--relationship to Sec.  1026.59. i. General. 
Section 1026.59 requires a card issuer to review rate increases 
imposed due to the revocation of a temporary rate. In some 
circumstances, Sec.  1026.59 may require an issuer to reinstate a 
reduced temporary rate based on that review. If, based on a review 
required by Sec.  1026.59, a creditor reinstates a temporary rate 
that had been revoked, the card issuer is not required to provide an 
additional notice to the consumer when the reinstated temporary rate 
expires, if the card issuer provided the disclosures required by 
Sec.  1026.9(c)(2)(v)(B) prior to the original commencement of the 
temporary rate. See Sec.  1026.55 and the associated commentary for 
guidance on the permissibility and applicability of rate increases.
    i. Example. A consumer opens a new credit card account under an 
open-end (not home-secured) consumer credit plan on January 1, 2011. 
The annual percentage rate applicable to purchases is 18%. The card 
issuer offers the consumer a 15% rate on purchases made between 
January 1, 2012 and January 1, 2014. Prior to January 1, 2012, the 
card issuer discloses, in accordance with Sec.  1026.9(c)(2)(v)(B), 
that the rate on purchases made during that period will increase to 
the standard 18% rate on January 1, 2014. In March 2012, the 
consumer makes a payment that is ten days late. The card issuer, 
upon providing 45 days' advance notice of the change under Sec.  
1026.9(g), increases the rate on new purchases to 18% effective as 
of June 1, 2012. On December 1, 2012, the issuer performs a review 
of the consumer's account in accordance with Sec.  1026.59. Based on 
that review, the card issuer is required to reduce the rate to the 
original 15% temporary rate as of January 15, 2013. On January 1, 
2014, the card issuer may increase the rate on purchases to 18%, as 
previously disclosed prior to January 1, 2012, without providing an 
additional notice to the consumer.
    14. Replacing LIBOR. The exception in Sec.  1026.9(c)(2)(v)(A) 
under which a creditor is not required to provide a change-in-terms 
notice under Sec.  1026.9(c)(2) when the change involves a reduction 
of any component of a finance or other charge does not apply on or 
after October 1, 2021, to margin reductions when a LIBOR index is 
replaced as permitted by Sec.  1026.55(b)(7)(i) or (b)(7)(ii). For 
change-in-terms notices provided under Sec.  1026.9(c)(2) on or 
after October 1, 2021, covering changes permitted by Sec.  
1026.55(b)(7)(i) or (b)(7)(ii), a creditor must provide a change-in-
terms notice under Sec.  1026.9(c)(2) disclosing the replacement 
index for a LIBOR index and any adjusted margin that is permitted 
under Sec.  1026.55(b)(7)(i) or (b)(7)(ii), even if the margin is 
reduced. Prior to October 1, 2021, a creditor has the option of 
disclosing a reduced margin in the change-in-terms notice that 
discloses the replacement index for a LIBOR index as permitted by 
Sec.  1026.55(b)(7)(i) or (b)(7)(ii).
* * * * *

Section 1026.20--Disclosure Requirements Regarding Post-
Consummation Events

20(a) Refinancings

    1. Definition. A refinancing is a new transaction requiring a 
complete new set of disclosures. Whether a refinancing has occurred 
is determined by reference to whether the original obligation has 
been satisfied or extinguished and replaced by a new obligation, 
based on the parties' contract and applicable law. The refinancing 
may involve the consolidation of several existing obligations, 
disbursement of new money to the consumer or on the consumer's 
behalf, or the rescheduling of payments under an existing 
obligation. In any form, the new obligation must completely replace 
the prior one.
    i. Changes in the terms of an existing obligation, such as the 
deferral of individual installments, will not constitute a 
refinancing unless accomplished by the cancellation of that 
obligation and the substitution of a new obligation.
    ii. A substitution of agreements that meets the refinancing 
definition will require new disclosures, even if the substitution 
does not substantially alter the prior credit terms.
    2. Exceptions. A transaction is subject to Sec.  1026.20(a) only 
if it meets the general definition of a refinancing. Section 
1026.20(a)(1) through (5) lists 5 events that are not treated as 
refinancings, even if they are accomplished by cancellation of the 
old obligation and substitution of a new one.
    3. Variable-rate. i. If a variable-rate feature was properly 
disclosed under the regulation, a rate change in accord with those 
disclosures is not a refinancing. For example, no new disclosures 
are required when the variable-rate feature is invoked on a 
renewable balloon-payment mortgage that was previously disclosed as 
a variable-rate transaction.
    ii. Even if it is not accomplished by the cancellation of the 
old obligation and substitution of a new one, a new transaction 
subject to new disclosures results if the creditor either:
    A. Increases the rate based on a variable-rate feature that was 
not previously disclosed; or
    B. Adds a variable-rate feature to the obligation. A creditor 
does not add a variable-rate feature by changing the index of a 
variable-rate transaction to a comparable index, whether the change 
replaces the existing index or substitutes an index for one that no 
longer exists. For example, a creditor does not add a variable-rate 
feature by changing the index of a variable-rate transaction from 
the 1-month, 3-month, 6-month, or 1-year U.S. Dollar LIBOR index to 
the spread-adjusted index based on SOFR recommended by the 
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, or 1-year U.S. Dollar LIBOR index respectively 
because the replacement index is a comparable index to the 
corresponding U.S. Dollar LIBOR index.
    iii. If either of the events in paragraph 20(a)-3.ii.A or ii.B 
occurs in a transaction secured by a principal dwelling with a term 
longer than one year, the disclosures required under Sec.  
1026.19(b) also must be given at that time.
    4. Unearned finance charge. In a transaction involving 
precomputed finance charges, the creditor must include in the 
finance charge on the refinanced obligation any unearned portion of 
the original finance charge that is not rebated to the consumer or 
credited against the underlying obligation. For example, in a 
transaction with an add-on finance charge, a creditor advances new 
money to a consumer in a fashion that extinguishes the original 
obligation and replaces it with a new one. The creditor neither 
refunds the unearned finance charge on the original obligation to 
the consumer

[[Page 36988]]

nor credits it to the remaining balance on the old obligation. Under 
these circumstances, the unearned finance charge must be included in 
the finance charge on the new obligation and reflected in the annual 
percentage rate disclosed on refinancing. Accrued but unpaid finance 
charges are included in the amount financed in the new obligation.
    5. Coverage. Section 1026.20(a) applies only to refinancings 
undertaken by the original creditor or a holder or servicer of the 
original obligation. A ``refinancing'' by any other person is a new 
transaction under the regulation, not a refinancing under this 
section.

Paragraph 20(a)(1)

    1. Renewal. This exception applies both to obligations with a 
single payment of principal and interest and to obligations with 
periodic payments of interest and a final payment of principal. In 
determining whether a new obligation replacing an old one is a 
renewal of the original terms or a refinancing, the creditor may 
consider it a renewal even if:
    i. Accrued unpaid interest is added to the principal balance.
    ii. Changes are made in the terms of renewal resulting from the 
factors listed in Sec.  1026.17(c)(3).
    iii. The principal at renewal is reduced by a curtailment of the 
obligation.

Paragraph 20(a)(2)

    1. Annual percentage rate reduction. A reduction in the annual 
percentage rate with a corresponding change in the payment schedule 
is not a refinancing. If the annual percentage rate is subsequently 
increased (even though it remains below its original level) and the 
increase is effected in such a way that the old obligation is 
satisfied and replaced, new disclosures must then be made.
    2. Corresponding change. A corresponding change in the payment 
schedule to implement a lower annual percentage rate would be a 
shortening of the maturity, or a reduction in the payment amount or 
the number of payments of an obligation. The exception in Sec.  
1026.20(a)(2) does not apply if the maturity is lengthened, or if 
the payment amount or number of payments is increased beyond that 
remaining on the existing transaction.

Paragraph 20(a)(3)

    1. Court agreements. This exception includes, for example, 
agreements such as reaffirmations of debts discharged in bankruptcy, 
settlement agreements, and post-judgment agreements. (See the 
commentary to Sec.  1026.2(a)(14) for a discussion of court-approved 
agreements that are not considered ``credit.'')

Paragraph 20(a)(4)

    1. Workout agreements. A workout agreement is not a refinancing 
unless the annual percentage rate is increased or additional credit 
is advanced beyond amounts already accrued plus insurance premiums.

Paragraph 20(a)(5)

    1. Insurance renewal. The renewal of optional insurance added to 
an existing credit transaction is not a refinancing, assuming that 
appropriate Truth in Lending disclosures were provided for the 
initial purchase of the insurance.
* * * * *

Section 1026.37--Content of Disclosures for Certain Mortgage 
Transactions (Loan Estimate)

* * * * *

37(j)(1) Index and Margin

    1. Index and margin. The index disclosed pursuant to Sec.  
1026.37(j)(1) must be stated such that a consumer reasonably can 
identify it. A common abbreviation or acronym of the name of the 
index may be disclosed in place of the proper name of the index, if 
it is a commonly used public method of identifying the index. For 
example, ``SOFR'' may be disclosed instead of Secured Overnight 
Financing Rate. The margin should be disclosed as a percentage. For 
example, if the contract determines the interest rate by adding 4.25 
percentage points to the index, the margin should be disclosed as 
``4.25%.''
* * * * *

Section 1026.40--Requirements for Home-Equity Plans

* * * * *

Paragraph 40(f)(3)(ii)

    1. Replacing LIBOR. A creditor may use either the provision in 
Sec.  1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B) to replace a LIBOR index 
used under a plan so long as the applicable conditions are met for 
the provision used. Neither provision, however, excuses the creditor 
from noncompliance with contractual provisions. The following 
examples illustrate when a creditor may use the provisions in Sec.  
1026.40(f)(3)(ii)(A) or (f)(3)(ii)(B) to replace the LIBOR index 
used under a plan.
    i. Assume that LIBOR becomes unavailable after March 15, 2021, 
and assume a contract provides that a creditor may not replace an 
index unilaterally under a plan unless the original index becomes 
unavailable and provides that the replacement index and replacement 
margin will result in an annual percentage rate substantially 
similar to a rate that is in effect when the original index becomes 
unavailable. In this case, the creditor may use Sec.  
1026.40(f)(3)(ii)(A) to replace the LIBOR index used under the plan 
so long as the conditions of that provision are met. Section 
1026.40(f)(3)(ii)(B) provides that a creditor may replace the LIBOR 
index if, among other conditions, the replacement index value in 
effect on December 31, 2020, and replacement margin will produce an 
annual percentage rate substantially similar to the rate calculated 
using the LIBOR index value in effect on December 31, 2020, and the 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. In this case, 
however, the creditor would be contractually prohibited from 
replacing the LIBOR index used under the plan unless the replacement 
index and replacement margin also will produce an annual percentage 
rate substantially similar to a rate that is in effect when the 
LIBOR index becomes unavailable.
    ii. Assume that LIBOR becomes unavailable after March 15, 2021, 
and assume a contract provides that a creditor may not replace an 
index unilaterally under a plan unless the original index becomes 
unavailable but does not require that the replacement index and 
replacement margin will result in an annual percentage rate 
substantially similar to a rate that is in effect when the original 
index becomes unavailable. In this case, the creditor would be 
contractually prohibited from unilaterally replacing a LIBOR index 
used under the plan until it becomes unavailable. At that time, the 
creditor has the option of using Sec.  1026.40(f)(3)(ii)(A) or 
(f)(3)(ii)(B) to replace the LIBOR index if the conditions of the 
applicable provision are met.
    iii. Assume that LIBOR becomes unavailable after March 15, 2021, 
and assume a contract provides that a creditor may change the terms 
of the contract (including the index) as permitted by law. In this 
case, if the creditor replaces a LIBOR index under a plan on or 
after March 15, 2021, but does not wait until the LIBOR index 
becomes unavailable to do so, the creditor may only use Sec.  
1026.40(f)(3)(ii)(B) to replace the LIBOR index if the conditions of 
that provision are met. In this case, the creditor may not use Sec.  
1026.40(f)(3)(ii)(A). If the creditor waits until the LIBOR index 
used under the plan becomes unavailable to replace the LIBOR index, 
the creditor has the option of using Sec.  1026.40(f)(3)(ii)(A) or 
(f)(3)(ii)(B) to replace the LIBOR index if the conditions of the 
applicable provision are met.

Paragraph 40(f)(3)(ii)(A)

    1. Substitution of index. A creditor may change the index and 
margin used under the plan if the original index becomes 
unavailable, as long as historical fluctuations in the original and 
replacement indices were substantially similar, and as long as the 
replacement index and replacement margin will produce a rate 
substantially similar to the rate that was in effect at the time the 
original index became unavailable. If the replacement index is newly 
established and therefore does not have any rate history, it may be 
used if it and the replacement margin will produce a rate 
substantially similar to the rate in effect when the original index 
became unavailable.
    2. Replacing LIBOR. For purposes of replacing a LIBOR index used 
under a plan, a replacement index that is not newly established must 
have historical fluctuations that are substantially similar to those 
of the LIBOR index used under the plan, considering the historical 
fluctuations up through when the LIBOR index becomes unavailable or 
up through the date indicated in a Bureau determination that the 
replacement index and the LIBOR index have historical fluctuations 
that are substantially similar, whichever is earlier.
    i. The Bureau has determined that effective [applicable date] 
the prime rate published in the Wall Street Journal has historical 
fluctuations that are substantially similar to those of the 1-month 
and 3-month U.S. Dollar LIBOR indices. In order to use this prime 
rate as the replacement index for the 1-month or 3-month U.S. Dollar 
LIBOR index, the creditor also must comply with the condition

[[Page 36989]]

in Sec.  1026.40(f)(3)(ii)(A) that the prime rate and replacement 
margin would have resulted in an annual percentage rate 
substantially similar to the rate in effect at the time the LIBOR 
index became unavailable. See also comment 40(f)(3)(ii)(A)-3.
    ii. The Bureau has determined that effective [applicable date] 
the spread-adjusted indices based on SOFR recommended by the 
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical 
fluctuations that are substantially similar to those of the 1-month, 
3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. 
In order to use this SOFR-based spread-adjusted index as the 
replacement index for the applicable LIBOR index, the creditor also 
must comply with the condition in Sec.  1026.40(f)(3)(ii)(A) that 
the SOFR-based spread-adjusted index and replacement margin would 
have resulted in an annual percentage rate substantially similar to 
the rate in effect at the time the LIBOR index became unavailable. 
See also comment 40(f)(3)(ii)(A)-3.
    3. Substantially similar rate when LIBOR becomes unavailable. 
Under Sec.  1026.40(f)(3)(ii)(A), the replacement index and 
replacement margin must produce an annual percentage rate 
substantially similar to the rate that was in effect based on the 
LIBOR index used under the plan when the LIBOR index became 
unavailable. For this comparison of the rates, a creditor must use 
the value of the replacement index and the LIBOR index on the day 
that LIBOR becomes unavailable. The replacement index and 
replacement margin are not required to produce an annual percentage 
rate that is substantially similar on the day that the replacement 
index and replacement margin become effective on the plan. The 
following example illustrates this comment.
    i. Assume that the LIBOR index used under a plan becomes 
unavailable on December 31, 2021, and on that day the LIBOR index 
value is 2%, the margin is 10%, and the annual percentage rate is 
12%. Also, assume that a creditor has selected a prime index as the 
replacement index, and the value of the prime index is 5% on 
December 31, 2021. The creditor would satisfy the requirement to use 
a replacement index and replacement margin that will produce an 
annual percentage rate substantially similar to the rate that was in 
effect when the LIBOR index used under the plan became unavailable 
by selecting a 7% replacement margin. (The prime index value of 5% 
and the replacement margin of 7% would produce a rate of 12% on 
December 31, 2021.) Thus, if the creditor provides a change-in-terms 
notice under Sec.  1026.9(c)(1) on January 2, 2022, disclosing the 
prime index as the replacement index and a replacement margin of 7%, 
where these changes will become effective on January 18, 2022, the 
creditor satisfies the requirement to use a replacement index and 
replacement margin that will produce an annual percentage rate 
substantially similar to the rate that was in effect when the LIBOR 
index used under the plan became unavailable. This is true even if 
the prime index value changes after December 31, 2021, and the 
annual percentage rate calculated using the prime index value and 7% 
margin on January 18, 2022, is not substantially similar to the rate 
calculated using the LIBOR index value on December 31, 2021.

Paragraph 40(f)(3)(ii)(B)

    1. Replacing LIBOR. For purposes of replacing a LIBOR index used 
under a plan, a replacement index that is not newly established must 
have historical fluctuations that are substantially similar to those 
of the LIBOR index used under the plan, considering the historical 
fluctuations up through December 31, 2020, or up through the date 
indicated in a Bureau determination that the replacement index and 
the LIBOR index have historical fluctuations that are substantially 
similar, whichever is earlier.
    i. The Bureau has determined that effective [applicable date] 
the prime rate published in the Wall Street Journal has historical 
fluctuations that are substantially similar to those of the 1-month 
and 3-month U.S. Dollar LIBOR indices. In order to use this prime 
rate as the replacement index for the 1-month or 3-month U.S. Dollar 
LIBOR index, the creditor also must comply with the condition in 
Sec.  1026.40(f)(3)(ii)(B) that the prime rate index value in effect 
on December 31, 2020, and replacement margin will produce an annual 
percentage rate substantially similar to the rate calculated using 
the LIBOR index value in effect on December 31, 2020, and the margin 
that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. If either the 
LIBOR index or the prime rate is not published on December 31, 2020, 
the creditor must use the next calendar day that both indices are 
published as the date on which the annual percentage rate based on 
the prime rate must be substantially similar to the rate based on 
the LIBOR index. See also comments 40(f)(3)(ii)(B)-2 and -3.
    ii. The Bureau has determined that effective [applicable date] 
the spread-adjusted indices based on SOFR recommended by the 
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical 
fluctuations that are substantially similar to those of the 1-month, 
3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. 
In order to use this SOFR-based spread-adjusted index as the 
replacement index for the applicable LIBOR index, the creditor also 
must comply with the condition in Sec.  1026.40(f)(3)(ii)(B) that 
the SOFR-based spread-adjusted index value in effect on December 31, 
2020, and replacement margin will produce an annual percentage rate 
substantially similar to the rate calculated using the LIBOR index 
value in effect on December 31, 2020, and the margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. If either the LIBOR index or the SOFR-
based spread-adjusted index is not published on December 31, 2020, 
the creditor must use the next calendar day that both indices are 
published as the date on which the annual percentage rate based on 
the SOFR-based spread-adjusted index must be substantially similar 
to the rate based on the LIBOR index. See also comments 
40(f)(3)(ii)(B)-2 and -3.
    2. Using index values on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. Under Sec.  
1026.40(f)(3)(ii)(B), if both the replacement index and the LIBOR 
index used under the plan are published on December 31, 2020, the 
replacement index value in effect on December 31, 2020, and 
replacement margin must produce an annual percentage rate 
substantially similar to the rate calculated using the LIBOR index 
value in effect on December 31, 2020, and the margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. The margin that applied to the variable 
rate immediately prior to the replacement of the LIBOR index used 
under the plan is the margin that applied to the variable rate 
immediately prior to when the creditor provides the change-in-terms 
notice disclosing the replacement index for the variable rate. The 
following example illustrates this comment.
    i. Assume a variable rate used under the plan that is based on a 
LIBOR index and assume that LIBOR becomes unavailable after March 
15, 2021. On December 31, 2020, the LIBOR index value is 2%, the 
margin on that day is 10% and the annual percentage rate using that 
index value and margin is 12%. Assume on January 1, 2021, a creditor 
provides a change-in-terms notice under Sec.  1026.9(c)(1) 
disclosing a new margin of 12% for the variable rate pursuant to a 
written agreement under Sec.  1026.40(f)(3)(iii), and this change in 
the margin becomes effective on January 1, 2021, pursuant to Sec.  
1026.9(c)(1). Assume that there are no more changes in the margin 
that is used in calculating the variable rate prior to February 27, 
2021, the date on which the creditor provides a change-in-term 
notice under Sec.  1026.9(c)(1), disclosing the replacement index 
and replacement margin for the variable rate that will be effective 
on March 15, 2021. In this case, the margin that applied to the 
variable rate immediately prior to the replacement of the LIBOR 
index used under the plan is 12%. Assume that the creditor has 
selected a prime index as the replacement index, and the value of 
the prime index is 5% on December 31, 2020. A replacement margin of 
9% is permissible under Sec.  1026.40(f)(3)(ii)(B) because that 
replacement margin combined with the prime index value of 5% on 
December 31, 2020, will produce an annual percentage rate of 14%, 
which is substantially similar to the 14% annual percentage rate 
calculated using the LIBOR index value in effect on December 31, 
2020, (which is 2%) and the margin that applied to the variable rate 
immediately prior to the replacement of the LIBOR index used under 
the plan (which is 12%).
    3. Substantially similar rates using index values on December 
31, 2020. Under Sec.  1026.40(f)(3)(ii)(B), if both the replacement 
index and the LIBOR index used under the plan are published on 
December 31, 2020, the replacement index value in effect on December 
31, 2020, and replacement margin must produce an annual percentage 
rate substantially similar to the rate calculated using the LIBOR 
index value in effect on

[[Page 36990]]

December 31, 2020, and the margin that applied to the variable rate 
immediately prior to the replacement of the LIBOR index used under 
the plan. The replacement index and replacement margin are not 
required to produce an annual percentage rate that is substantially 
similar on the day that the replacement index and replacement margin 
become effective on the plan. The following example illustrates this 
comment.
    i. Assume that the LIBOR index used under the plan has a value 
of 2% on December 31, 2020, the margin that applied to the variable 
rate immediately prior to the replacement of the LIBOR index used 
under the plan is 10%, and the annual percentage rate based on that 
LIBOR index value and that margin is 12%. Also, assume that the 
creditor has selected a prime index as the replacement index, and 
the value of the prime index is 5% on December 31, 2020. A creditor 
would satisfy the requirement to use a replacement index value in 
effect on December 31, 2020, and replacement margin that will 
produce an annual percentage rate substantially similar to the rate 
calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan, by 
selecting a 7% replacement margin. (The prime index value of 5% and 
the replacement margin of 7% would produce a rate of 12%.) Thus, if 
the creditor provides a change-in-terms notice under Sec.  
1026.9(c)(1) on February 27, 2021, disclosing the prime index as the 
replacement index and a replacement margin of 7%, where these 
changes will become effective on March 15, 2021, the creditor 
satisfies the requirement to use a replacement index value in effect 
on December 31, 2020, and replacement margin that will produce an 
annual percentage rate substantially similar to the rate calculated 
using the LIBOR value in effect on December 31, 2020, and the margin 
that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. This is true 
even if the prime index value or the LIBOR index value changes after 
December 31, 2020, and the annual percentage rate calculated using 
the prime index value and 7% margin on March 15, 2021, is not 
substantially similar to the rate calculated using the LIBOR index 
value on December 31, 2020, or substantially similar to the rate 
calculated using the LIBOR index value on March 15, 2021.
* * * * *

Section 1026.55--Limitations on Increasing Annual Percentage Rates, 
Fees, and Charges

* * * * *

55(b)(2) Variable Rate Exception

    1. Increases due to increase in index. Section 1026.55(b)(2) 
provides that an annual percentage rate that varies according to an 
index that is not under the card issuer's control and is available 
to the general public may be increased due to an increase in the 
index. This section does not permit a card issuer to increase the 
rate by changing the method used to determine a rate that varies 
with an index (such as by increasing the margin), even if that 
change will not result in an immediate increase. However, from time 
to time, a card issuer may change the day on which index values are 
measured to determine changes to the rate.
    2. Index not under card issuer's control. A card issuer may 
increase a variable annual percentage rate pursuant to Sec.  
1026.55(b)(2) only if the increase is based on an index or indices 
outside the card issuer's control. For purposes of Sec.  
1026.55(b)(2), an index is under the card issuer's control if:
    i. The index is the card issuer's own prime rate or cost of 
funds. A card issuer is permitted, however, to use a published prime 
rate, such as that in the Wall Street Journal, even if the card 
issuer's own prime rate is one of several rates used to establish 
the published rate.
    ii. The variable rate is subject to a fixed minimum rate or 
similar requirement that does not permit the variable rate to 
decrease consistent with reductions in the index. A card issuer is 
permitted, however, to establish a fixed maximum rate that does not 
permit the variable rate to increase consistent with increases in an 
index. For example, assume that, under the terms of an account, a 
variable rate will be adjusted monthly by adding a margin of 5 
percentage points to a publicly-available index. When the account is 
opened, the index is 10% and therefore the variable rate is 15%. If 
the terms of the account provide that the variable rate will not 
decrease below 15% even if the index decreases below 10%, the card 
issuer cannot increase that rate pursuant to Sec.  1026.55(b)(2). 
However, Sec.  1026.55(b)(2) does not prohibit the card issuer from 
providing in the terms of the account that the variable rate will 
not increase above a certain amount (such as 20%).
    iii. The variable rate can be calculated based on any index 
value during a period of time (such as the 90 days preceding the 
last day of a billing cycle). A card issuer is permitted, however, 
to provide in the terms of the account that the variable rate will 
be calculated based on the average index value during a specified 
period. In the alternative, the card issuer is permitted to provide 
in the terms of the account that the variable rate will be 
calculated based on the index value on a specific day (such as the 
last day of a billing cycle). For example, assume that the terms of 
an account provide that a variable rate will be adjusted at the 
beginning of each quarter by adding a margin of 7 percentage points 
to a publicly-available index. At account opening at the beginning 
of the first quarter, the variable rate is 17% (based on an index 
value of 10%). During the first quarter, the index varies between 
9.8% and 10.5% with an average value of 10.1%. On the last day of 
the first quarter, the index value is 10.2%. At the beginning of the 
second quarter, Sec.  1026.55(b)(2) does not permit the card issuer 
to increase the variable rate to 17.5% based on the first quarter's 
maximum index value of 10.5%. However, if the terms of the account 
provide that the variable rate will be calculated based on the 
average index value during the prior quarter, Sec.  1026.55(b)(2) 
permits the card issuer to increase the variable rate to 17.1% 
(based on the average index value of 10.1% during the first 
quarter). In the alternative, if the terms of the account provide 
that the variable rate will be calculated based on the index value 
on the last day of the prior quarter, Sec.  1026.55(b)(2) permits 
the card issuer to increase the variable rate to 17.2% (based on the 
index value of 10.2% on the last day of the first quarter).
    3. Publicly available. The index or indices must be available to 
the public. A publicly-available index need not be published in a 
newspaper, but it must be one the consumer can independently obtain 
(by telephone, for example) and use to verify the annual percentage 
rate applied to the account.
    4. Changing a non-variable rate to a variable rate. Section 
1026.55 generally prohibits a card issuer from changing a non-
variable annual percentage rate to a variable annual percentage rate 
because such a change can result in an increase. However, a card 
issuer may change a non-variable rate to a variable rate to the 
extent permitted by one of the exceptions in Sec.  1026.55(b). For 
example, Sec.  1026.55(b)(1) permits a card issuer to change a non-
variable rate to a variable rate upon expiration of a specified 
period of time. Similarly, following the first year after the 
account is opened, Sec.  1026.55(b)(3) permits a card issuer to 
change a non-variable rate to a variable rate with respect to new 
transactions (after complying with the notice requirements in Sec.  
1026.9(b), (c) or (g)).
    5. Changing a variable rate to a non-variable rate. Nothing in 
Sec.  1026.55 prohibits a card issuer from changing a variable 
annual percentage rate to an equal or lower non-variable rate. 
Whether the non-variable rate is equal to or lower than the variable 
rate is determined at the time the card issuer provides the notice 
required by Sec.  1026.9(c). For example, assume that on March 1 a 
variable annual percentage rate that is currently 15% applies to a 
balance of $2,000 and the card issuer sends a notice pursuant to 
Sec.  1026.9(c) informing the consumer that the variable rate will 
be converted to a non-variable rate of 14% effective April 15. On 
April 15, the card issuer may apply the 14% non-variable rate to the 
$2,000 balance and to new transactions even if the variable rate on 
March 2 or a later date was less than 14%.
* * * * *

55(b)(7) Index Replacement and Margin Change Exception

    1. Replacing LIBOR. A card issuer may use either the provision 
in Sec.  1026.55(b)(7)(i) or (b)(7)(ii) to replace a LIBOR index 
used under the plan so long as the applicable conditions are met for 
the provision used. Neither provision, however, excuses the card 
issuer from noncompliance with contractual provisions. The following 
examples illustrate when a card issuer may use the provisions in 
Sec.  1026.55(b)(7)(i) or (b)(7)(ii) to replace a LIBOR index on the 
plan.
    i. Assume that LIBOR becomes unavailable after March 15, 2021, 
and assume a contract provides that a card issuer may not replace an 
index unilaterally under a plan unless the original index becomes 
unavailable and provides that the replacement index and replacement 
margin will result in an annual percentage rate substantially 
similar to a rate that is in effect when the original index

[[Page 36991]]

becomes unavailable. The card issuer may use Sec.  1026.55(b)(7)(i) 
to replace the LIBOR index used under the plan so long as the 
conditions of that provision are met. Section 1026.55(b)(7)(ii) 
provides that a card issuer may replace the LIBOR index if, among 
other conditions, the replacement index value in effect on December 
31, 2020, and replacement margin will produce an annual percentage 
rate substantially similar to the rate calculated using the LIBOR 
index value in effect on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. In this case, however, the card 
issuer would be contractually prohibited from replacing the LIBOR 
index used under the plan unless the replacement index and 
replacement margin also will produce an annual percentage rate 
substantially similar to a rate that is in effect when the LIBOR 
index becomes unavailable.
    ii. Assume that LIBOR becomes unavailable after March 15, 2021, 
and assume a contract provides that a card issuer may not replace an 
index unilaterally under a plan unless the original index becomes 
unavailable but does not require that the replacement index and 
replacement margin will result in an annual percentage rate 
substantially similar to a rate that is in effect when the original 
index becomes unavailable. In this case, the card issuer would be 
contractually prohibited from unilaterally replacing the LIBOR index 
used under the plan until it becomes unavailable. At that time, the 
card issuer has the option of using Sec.  1026.55(b)(7)(i) or 
(b)(7)(ii) to replace the LIBOR index used under the plan if the 
conditions of the applicable provision are met.
    iii. Assume that LIBOR becomes unavailable after March 15, 2021, 
and assume a contract provides that a card issuer may change the 
terms of the contract (including the index) as permitted by law. In 
this case, if the card issuer replaces the LIBOR index used under 
the plan on or after March 15, 2021, but does not wait until the 
LIBOR index becomes unavailable to do so, the card issuer may only 
use Sec.  1026.55(b)(7)(ii) to replace the LIBOR index if the 
conditions of that provision are met. In that case, the card issuer 
may not use Sec.  1026.55(b)(7)(i). If the card issuer waits until 
the LIBOR index used under the plan becomes unavailable to replace 
LIBOR, the card issuer has the option of using Sec.  
1026.55(b)(7)(i) or (b)(7)(ii) to replace the LIBOR index if the 
conditions of the applicable provisions are met.

Paragraph 55(b)(7)(i)

    1. Replacing LIBOR. For purposes of replacing a LIBOR index used 
under a plan, a replacement index that is not newly established must 
have historical fluctuations that are substantially similar to those 
of the LIBOR index used under the plan, considering the historical 
fluctuations up through when the LIBOR index becomes unavailable or 
up through the date indicated in a Bureau determination that the 
replacement index and the LIBOR index have historical fluctuations 
that are substantially similar, whichever is earlier.
    i. The Bureau has determined that effective [applicable date] 
the prime rate published in the Wall Street Journal has historical 
fluctuations that are substantially similar to those of the 1-month 
and 3-month U.S. Dollar LIBOR indices. In order to use this prime 
rate as the replacement index for the 1-month or 3-month U.S. Dollar 
LIBOR index, the card issuer also must comply with the condition in 
Sec.  1026.55(b)(7)(i) that the prime rate and replacement margin 
will produce a rate substantially similar to the rate that was in 
effect at the time the LIBOR index became unavailable. See also 
comment 55(b)(7)(i)-2.
    ii. The Bureau has determined that effective [applicable date] 
the spread-adjusted indices based on SOFR recommended by the 
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical 
fluctuations that are substantially similar to those of the 1-month, 
3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. 
In order to use this SOFR-based spread-adjusted index as the 
replacement index for the applicable LIBOR index, the card issuer 
also must comply with the condition in Sec.  1026.55(b)(7)(i) that 
the SOFR-based spread-adjusted index replacement margin will produce 
a rate substantially similar to the rate that was in effect at the 
time the LIBOR index became unavailable. See also comment 
55(b)(7)(i)-2.
    2. Substantially similar rate when LIBOR becomes unavailable. 
Under Sec.  1026.55(b)(7)(i), the replacement index and replacement 
margin must produce an annual percentage rate substantially similar 
to the rate that was in effect at the time the LIBOR index used 
under the plan became unavailable. For this comparison of the rates, 
a card issuer must use the value of the replacement index and the 
LIBOR index on the day that LIBOR becomes unavailable. The 
replacement index and replacement margin are not required to produce 
an annual percentage rate that is substantially similar on the day 
that the replacement index and replacement margin become effective 
on the plan. The following example illustrates this comment.
    i. Assume that the LIBOR index used under the plan becomes 
unavailable on December 31, 2021, and on that day the LIBOR value is 
2%, the margin is 10%, and the annual percentage rate is 12%. Also, 
assume that a card issuer has selected a prime index as the 
replacement index, and the value of the prime index is 5% on 
December 31, 2021. The card issuer would satisfy the requirement to 
use a replacement index and replacement margin that will produce an 
annual percentage rate substantially similar to the rate that was in 
effect when the LIBOR index used under the plan became unavailable 
by selecting a 7% replacement margin. (The prime index value of 5% 
and the replacement margin of 7% would produce a rate of 12% on 
December 31, 2021.) Thus, if the card issuer provides a change-in-
terms notice under Sec.  1026.9(c)(2) on January 2, 2022, disclosing 
the prime index as the replacement index and a replacement margin of 
7%, where these changes will become effective on February 17, 2022, 
the card issuer satisfies the requirement to use a replacement index 
and replacement margin that will produce an annual percentage rate 
substantially similar to the rate that was in effect when the LIBOR 
index used under the plan became unavailable. This is true even if 
the prime index value changes after December 31, 2021, and the 
annual percentage rate calculated using the prime index value and 7% 
margin on February 17, 2022, is not substantially similar to the 
rate calculated using the LIBOR index value on December 31, 2021.

Paragraph 55(b)(7)(ii)

    1. Replacing LIBOR. For purposes of replacing a LIBOR index used 
under a plan, a replacement index that is not newly established must 
have historical fluctuations that are substantially similar to those 
of the LIBOR index used under the plan, considering the historical 
fluctuations up through December 31, 2020, or up through the date 
indicated in a Bureau determination that the replacement index and 
the LIBOR index have historical fluctuations that are substantially 
similar, whichever is earlier.
    i. The Bureau has determined that effective [applicable date] 
the prime rate published in the Wall Street Journal has historical 
fluctuations that are substantially similar to those of the 1-month 
and 3-month U.S. Dollar LIBOR indices. In order to use this prime 
rate as the replacement index for the 1-month or 3-month U.S. Dollar 
LIBOR index, the card issuer also must comply with the condition in 
Sec.  1026.55(b)(7)(ii) that the prime rate index value in effect on 
December 31, 2020, and replacement margin will produce an annual 
percentage rate substantially similar to the rate calculated using 
the LIBOR index value in effect on December 31, 2020, and the margin 
that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. If either the 
LIBOR index or the prime rate is not published on December 31, 2020, 
the card issuer must use the next calendar day that both indices are 
published as the date on which the annual percentage rate based on 
the prime rate must be substantially similar to the rate based on 
the LIBOR index. See also comments 55(b)(7)(ii)-2 and -3.
    ii. The Bureau has determined that effective [applicable date] 
the spread-adjusted indices based on SOFR recommended by the 
Alternative Reference Rates Committee to replace the 1-month, 3-
month, 6-month, and 1-year U.S. Dollar LIBOR indices have historical 
fluctuations that are substantially similar to those of the 1-month, 
3-month, 6-month, and 1-year U.S. Dollar LIBOR indices respectively. 
In order to use this SOFR-based spread-adjusted index as the 
replacement index for the applicable LIBOR index, the card issuer 
also must comply with the condition in Sec.  1026.55(b)(7)(ii) that 
the SOFR-based spread-adjusted index value in effect on December 31, 
2020, and replacement margin will produce an annual percentage rate 
substantially similar to the rate calculated using the LIBOR index 
value in effect on December 31, 2020, and the margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. If either the LIBOR index or the SOFR-
based spread-adjusted index is not published on December 31, 2020, 
the card

[[Page 36992]]

issuer must use the next calendar day that both indices are 
published as the date on which the annual percentage rate based on 
the SOFR-based spread-adjusted index must be substantially similar 
to the rate based on the LIBOR index. See also comments 
55(b)(7)(ii)-2 and -3.
    2. Using index values on December 31, 2020, and the margin that 
applied to the variable rate immediately prior to the replacement of 
the LIBOR index used under the plan. Under Sec.  1026.55(b)(7)(ii), 
if both the replacement index and the LIBOR index used under the 
plan are published on December 31, 2020, the replacement index value 
in effect on December 31, 2020, and replacement margin must produce 
an annual percentage rate substantially similar to the rate 
calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan. The 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan is the margin 
that applied to the variable rate immediately prior to when the card 
issuer provides the change-in-terms notice disclosing the 
replacement index for the variable rate. The following examples 
illustrate how to determine the margin that applied to the variable 
rate immediately prior to the replacement of the LIBOR index used 
under the plan.
    i. Assume a variable rate used under the plan that is based on a 
LIBOR index, and assume that LIBOR becomes unavailable after March 
15, 2021. On December 31, 2020, the LIBOR index value is 2%, the 
margin on that day is 10% and the annual percentage rate using that 
index value and margin is 12%. Assume that on November 16, 2020, 
pursuant to Sec.  1026.55(b)(3), a card issuer provides a change-in-
terms notice under Sec.  1026.9(c)(2) disclosing a new margin of 12% 
for the variable rate that will apply to new transactions after 
November 30, 2020, and this change in the margin becomes effective 
on January 1, 2021. The margin for the variable rate applicable to 
the transactions that occurred on or prior to November 30, 2020, 
remains at 10%. Assume that there are no more changes in the margin 
used on the variable rate that applied to transactions that occurred 
after November 30, 2020, or to the margin used on the variable rate 
that applied to transactions that occurred on or prior to November 
30, 2020, prior to when the card issuer provides a change-in-terms 
notice on January 28, 2021, disclosing the replacement index and 
replacement margins for both variable rates that will be effective 
on March 15, 2021. In this case, the margin that applied to the 
variable rate immediately prior to the replacement of the LIBOR 
index used under the plan for transactions that occurred on or prior 
to November 30, 2020, is 10%. The margin that applied to the 
variable rate immediately prior to the replacement of the LIBOR 
index used under the plan for transactions that occurred after 
November 30, 2020, is 12%. Assume that the card issuer has selected 
a prime index as the replacement index, and the value of the prime 
index is 5% on December 31, 2020. A replacement margin of 7% is 
permissible under Sec.  1026.55(b)(7)(ii) for transactions that 
occurred on or prior to November 30, 2020, because that replacement 
margin combined with the prime index value of 5% on December 31, 
2020, will produce an annual percentage rate of 12%, which is 
substantially similar to the 12% annual percentage rate calculated 
using the LIBOR index value in effect on December 31, 2020, (which 
is 2%) and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan for 
that balance (which is 10%). A replacement margin of 9% is 
permissible under Sec.  1026.55(b)(7)(ii) for transactions that 
occurred after November 30, 2020, because that replacement margin 
combined with the prime index value of 5% on December 31, 2020, will 
produce an annual percentage rate of 14%, which is substantially 
similar to the 14% annual percentage rate calculated using the LIBOR 
index value in effect on December 31, 2020, (which is 2%) and the 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan for transactions 
that occurred after November 30, 2020, (which is 12%).
    ii. Assume a variable rate used under the plan that is based on 
a LIBOR index, and assume that LIBOR becomes unavailable after March 
15, 2021. On December 31, 2020, the LIBOR index value is 2%, the 
margin on that day is 10% and the annual percentage rate using that 
index value and margin is 12%. Assume that on November 16, 2020, 
pursuant to Sec.  1026.55(b)(4), a card issuer provides a penalty 
rate notice under Sec.  1026.9(g) increasing the margin for the 
variable rate to 20% that will apply to both outstanding balances 
and new transactions effective January 1, 2021, because the consumer 
was more than 60 days late in making a minimum payment. Assume that 
there are no more changes in the margin used on the variable rate 
for either the outstanding balance or new transactions prior to 
January 28, 2021, the date on which the card issuer provides a 
change-in-terms notice under Sec.  1026.9(c)(2) disclosing the 
replacement index and replacement margin for the variable rate that 
will be effective on March 15, 2021. The margin that applied to the 
variable rate immediately prior to the replacement of the LIBOR 
index used under the plan for the outstanding balance and new 
transactions is 12%. Assume that the card issuer has selected a 
prime index as the replacement index, and the value of the prime 
index is 5% on December 31, 2020. A replacement margin of 17% is 
permissible under Sec.  1026.55(b)(7)(ii) for the outstanding 
balance and new transactions because that replacement margin 
combined with the prime index value of 5% on December 31, 2020, will 
produce an annual percentage rate of 22%, which is substantially 
similar to the 22% annual percentage rate calculated using the LIBOR 
index value in effect on December 31, 2020, (which is 2%) and the 
margin that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan for the 
outstanding balance and new transactions (which is 20%).
    3. Substantially similar rate using index values on December 31, 
2020. Under Sec.  1026.55(b)(7)(ii), if both the replacement index 
and the LIBOR index used under the plan are published on December 
31, 2020, the replacement index value in effect on December 31, 
2020, and replacement margin must produce an annual percentage rate 
substantially similar to the rate calculated using the LIBOR index 
value in effect on December 31, 2020, and the margin that applied to 
the variable rate immediately prior to the replacement of the LIBOR 
index used under the plan. A card issuer is not required to produce 
an annual percentage rate that is substantially similar on the day 
that the replacement index and replacement margin become effective 
on the plan. The following example illustrates this comment.
    i. Assume that the LIBOR index used under the plan has a value 
of 2% on December 31, 2020, the margin that applied to the variable 
rate immediately prior to the replacement of the LIBOR index used 
under the plan is 10%, and the annual percentage rate based on that 
LIBOR index value and that margin is 12%. Also, assume that the card 
issuer has selected a prime index as the replacement index, and the 
value of the prime index is 5% on December 31, 2020. A card issuer 
would satisfy the requirement to use a replacement index value in 
effect on December 31, 2020, and replacement margin that will 
produce an annual percentage rate substantially similar to the rate 
calculated using the LIBOR index value in effect on December 31, 
2020, and the margin that applied to the variable rate immediately 
prior to the replacement of the LIBOR index used under the plan, by 
selecting a 7% replacement margin. (The prime index value of 5% and 
the replacement margin of 7% would produce a rate of 12%.) Thus, if 
the card issuer provides a change-in-terms notice under Sec.  
1026.9(c)(2) on January 28, 2021, disclosing the prime index as the 
replacement index and a replacement margin of 7%, where these 
changes will become effective on March 15, 2021, the card issuer 
satisfies the requirement to use a replacement index value in effect 
on December 31, 2020, and replacement margin that will produce an 
annual percentage rate substantially similar to the rate calculated 
using the LIBOR value in effect on December 31, 2020, and the margin 
that applied to the variable rate immediately prior to the 
replacement of the LIBOR index used under the plan. This is true 
even if the prime index value or the LIBOR value change after 
December 31, 2020, and the annual percentage rate calculated using 
the prime index value and 7% margin on March 15, 2021, is not 
substantially similar to the rate calculated using the LIBOR index 
value on December 31, 2020, or substantially similar to the rate 
calculated using the LIBOR index value on March 15, 2021.
* * * * *

Section 1026.59--Reevaluation of Rate Increases

* * * * *

59(d) Factors

    1. Change in factors. A creditor that complies with Sec.  
1026.59(a) by reviewing the factors it currently considers in 
determining

[[Page 36993]]

the annual percentage rates applicable to similar new credit card 
accounts may change those factors from time to time. When a creditor 
changes the factors it considers in determining the annual 
percentage rates applicable to similar new credit card accounts from 
time to time, it may comply with Sec.  1026.59(a) by reviewing the 
set of factors it considered immediately prior to the change in 
factors for a brief transition period, or may consider the new 
factors. For example, a creditor changes the factors it uses to 
determine the rates applicable to similar new credit card accounts 
on January 1, 2012. The creditor reviews the rates applicable to its 
existing accounts that have been subject to a rate increase pursuant 
to Sec.  1026.59(a) on January 25, 2012. The creditor complies with 
Sec.  1026.59(a) by reviewing, at its option, either the factors 
that it considered on December 31, 2011 when determining the rates 
applicable to similar new credit card accounts or the factors that 
it considers as of January 25, 2012. For purposes of compliance with 
Sec.  1026.59(d), a transition period of 60 days from the change of 
factors constitutes a brief transition period.
    2. Comparison of existing account to factors used for similar 
new accounts. Under Sec.  1026.59(a), if a card issuer evaluates an 
existing account using the same factors that it considers in 
determining the rates applicable to similar new accounts, the review 
of factors need not result in existing accounts being subject to 
exactly the same rates and rate structure as a card issuer imposes 
on similar new accounts. For example, a card issuer may offer 
variable rates on similar new accounts that are computed by adding a 
margin that depends on various factors to the value of a SOFR index. 
The account that the card issuer is required to review pursuant to 
Sec.  1026.59(a) may have variable rates that were determined by 
adding a different margin, depending on different factors, to a 
published prime index. In performing the review required by Sec.  
1026.59(a), the card issuer may review the factors it uses to 
determine the rates applicable to similar new accounts. If a rate 
reduction is required, however, the card issuer need not base the 
variable rate for the existing account on the SOFR index but may 
continue to use the published prime index. Section 1026.59(a) 
requires, however, that the rate on the existing account after the 
reduction, as determined by adding the published prime index and 
margin, be comparable to the rate, as determined by adding the 
margin and the SOFR index, charged on a new account for which the 
factors are comparable.
    3. Similar new credit card accounts. A card issuer complying 
with Sec.  1026.59(d)(1)(ii) is required to consider the factors 
that the card issuer currently considers when determining the annual 
percentage rates applicable to similar new credit card accounts 
under an open-end (not home-secured) consumer credit plan. For 
example, a card issuer may review different factors in determining 
the annual percentage rate that applies to credit card plans for 
which the consumer pays an annual fee and receives rewards points 
than it reviews in determining the rates for credit card plans with 
no annual fee and no rewards points. Similarly, a card issuer may 
review different factors in determining the annual percentage rate 
that applies to private label credit cards than it reviews in 
determining the rates applicable to credit cards that can be used at 
a wider variety of merchants. In addition, a card issuer may review 
different factors in determining the annual percentage rate that 
applies to private label credit cards usable only at Merchant A than 
it may review for private label credit cards usable only at Merchant 
B. However, Sec.  1026.59(d)(1)(ii) requires a card issuer to review 
the factors it considers when determining the rates for new credit 
card accounts with similar features that are offered for similar 
purposes.
    4. No similar new credit card accounts. In some circumstances, a 
card issuer that complies with Sec.  1026.59(a) by reviewing the 
factors that it currently considers in determining the annual 
percentage rates applicable to similar new accounts may not be able 
to identify a class of new accounts that are similar to the existing 
accounts on which a rate increase has been imposed. For example, 
consumers may have existing credit card accounts under an open-end 
(not home-secured) consumer credit plan but the card issuer may no 
longer offer a product to new consumers with similar 
characteristics, such as the availability of rewards, size of credit 
line, or other features. Similarly, some consumers' accounts may 
have been closed and therefore cannot be used for new transactions, 
while all new accounts can be used for new transactions. In those 
circumstances, Sec.  1026.59 requires that the card issuer 
nonetheless perform a review of the rate increase on the existing 
customers' accounts. A card issuer does not comply with Sec.  
1026.59 by maintaining an increased rate without performing such an 
evaluation. In such circumstances, Sec.  1026.59(d)(1)(ii) requires 
that the card issuer compare the existing accounts to the most 
closely comparable new accounts that it offers.
    5. Consideration of consumer's conduct on existing account. A 
card issuer that complies with Sec.  1026.59(a) by reviewing the 
factors that it currently considers in determining the annual 
percentage rates applicable to similar new accounts may consider the 
consumer's payment or other account behavior on the existing account 
only to the same extent and in the same manner that the issuer 
considers such information when one of its current cardholders 
applies for a new account with the card issuer. For example, a card 
issuer might obtain consumer reports for all of its applicants. The 
consumer reports contain certain information regarding the 
applicant's past performance on existing credit card accounts. 
However, the card issuer may have additional information about an 
existing cardholder's payment history or account usage that does not 
appear in the consumer report and that, accordingly, it would not 
generally have for all new applicants. For example, a consumer may 
have made a payment that is five days late on his or her account 
with the card issuer, but this information does not appear on the 
consumer report. The card issuer may consider this additional 
information in performing its review under Sec.  1026.59(a), but 
only to the extent and in the manner that it considers such 
information if a current cardholder applies for a new account with 
the issuer.
    6. Multiple rate increases between January 1, 2009 and February 
21, 2010. i. General. Section 1026.59(d)(2) applies if an issuer 
increased the rate applicable to a credit card account under an 
open-end (not home- secured) consumer credit plan between January 1, 
2009 and February 21, 2010, and the increase was not based solely 
upon factors specific to the consumer. In some cases, a credit card 
account may have been subject to multiple rate increases during the 
period from January 1, 2009 to February 21, 2010. Some such rate 
increases may have been based solely upon factors specific to the 
consumer, while others may have been based on factors not specific 
to the consumer, such as the issuer's cost of funds or market 
conditions. In such circumstances, when conducting the first two 
reviews required under Sec.  1026.59, the card issuer may separately 
review: (i) Rate increases imposed based on factors not specific to 
the consumer, using the factors described in Sec.  1026.59(d)(1)(ii) 
(as required by Sec.  1026.59(d)(2)); and (ii) rate increases 
imposed based on consumer-specific factors, using the factors 
described in Sec.  1026.59(d)(1)(i). If the review of factors 
described in Sec.  1026.59(d)(1)(i) indicates that it is appropriate 
to continue to apply a penalty or other increased rate to the 
account as a result of the consumer's payment history or other 
factors specific to the consumer, Sec.  1026.59 permits the card 
issuer to continue to impose the penalty or other increased rate, 
even if the review of the factors described in Sec.  
1026.59(d)(1)(ii) would otherwise require a rate decrease.
    i. Example. Assume a credit card account was subject to a rate 
of 15% on all transactions as of January 1, 2009. On May 1, 2009, 
the issuer increased the rate on existing balances and new 
transactions to 18%, based upon market conditions or other factors 
not specific to the consumer or the consumer's account. 
Subsequently, on September 1, 2009, based on a payment that was 
received five days after the due date, the issuer increased the 
applicable rate on existing balances and new transactions from 18% 
to a penalty rate of 25%. When conducting the first review required 
under Sec.  1026.59, the card issuer reviews the rate increase from 
15% to 18% using the factors described in Sec.  1026.59(d)(1)(ii) 
(as required by Sec.  1026.59(d)(2)), and separately but 
concurrently reviews the rate increase from 18% to 25% using the 
factors described in paragraph Sec.  1026.59(d)(1)(i). The review of 
the rate increase from 15% to 18% based upon the factors described 
in Sec.  1026.59(d)(1)(ii) indicates that a similarly situated new 
consumer would receive a rate of 17%. The review of the rate 
increase from 18% to 25% based upon the factors described in Sec.  
1026.59(d)(1)(i) indicates that it is appropriate to continue to 
apply the 25% penalty rate based upon the consumer's late payment. 
Section 1026.59 permits the rate on the account to remain at 25%.
* * * * *

[[Page 36994]]

59(f) Termination of Obligation To Review Factors

    1. Revocation of temporary rates. i. In general. If an annual 
percentage rate is increased due to revocation of a temporary rate, 
Sec.  1026.59(a) requires that the card issuer periodically review 
the increased rate. In contrast, if the rate increase results from 
the expiration of a temporary rate previously disclosed in 
accordance with Sec.  1026.9(c)(2)(v)(B), the review requirements in 
Sec.  1026.59(a) do not apply. If a temporary rate is revoked such 
that the requirements of Sec.  1026.59(a) apply, Sec.  1026.59(f) 
permits an issuer to terminate the review of the rate increase if 
and when the applicable rate is the same as the rate that would have 
applied if the increase had not occurred.
    ii. Examples. Assume that on January 1, 2011, a consumer opens a 
new credit card account under an open-end (not home-secured) 
consumer credit plan. The annual percentage rate applicable to 
purchases is 15%. The card issuer offers the consumer a 10% rate on 
purchases made between February 1, 2012 and August 1, 2013 and 
discloses pursuant to Sec.  1026.9(c)(2)(v)(B) that on August 1, 
2013 the rate on purchases will revert to the original 15% rate. The 
consumer makes a payment that is five days late in July 2012.
    A. Upon providing 45 days' advance notice and to the extent 
permitted under Sec.  1026.55, the card issuer increases the rate 
applicable to new purchases to 15%, effective on September 1, 2012. 
The card issuer must review that rate increase under Sec.  
1026.59(a) at least once each six months during the period from 
September 1, 2012 to August 1, 2013, unless and until the card 
issuer reduces the rate to 10%. The card issuer performs reviews of 
the rate increase on January 1, 2013 and July 1, 2013. Based on 
those reviews, the rate applicable to purchases remains at 15%. 
Beginning on August 1, 2013, the card issuer is not required to 
continue periodically reviewing the rate increase, because if the 
temporary rate had expired in accordance with its previously 
disclosed terms, the 15% rate would have applied to purchase 
balances as of August 1, 2013 even if the rate increase had not 
occurred on September 1, 2012.
    B. Same facts as above except that the review conducted on July 
1, 2013 indicates that a reduction to the original temporary rate of 
10% is appropriate. Section 1026.59(a)(2)(i) requires that the rate 
be reduced no later than 45 days after completion of the review, or 
no later than August 15, 2013. Because the temporary rate would have 
expired prior to the date on which the rate decrease is required to 
take effect, the card issuer may, at its option, reduce the rate to 
10% for any portion of the period from July 1, 2013, to August 1, 
2013, or may continue to impose the 15% rate for that entire period. 
The card issuer is not required to conduct further reviews of the 
15% rate on purchases.
    C. Same facts as above except that on September 1, 2012 the card 
issuer increases the rate applicable to new purchases to the penalty 
rate on the consumer's account, which is 25%. The card issuer 
conducts reviews of the increased rate in accordance with Sec.  
1026.59 on January 1, 2013 and July 1, 2013. Based on those reviews, 
the rate applicable to purchases remains at 25%. The card issuer's 
obligation to review the rate increase continues to apply after 
August 1, 2013, because the 25% penalty rate exceeds the 15% rate 
that would have applied if the temporary rate expired in accordance 
with its previously disclosed terms. The card issuer's obligation to 
review the rate terminates if and when the annual percentage rate 
applicable to purchases is reduced to the 15% rate.
    2. Example--relationship to Sec.  1026.59(a). Assume that on 
January 1, 2011, a consumer opens a new credit card account under an 
open-end (not home-secured) consumer credit plan. The annual 
percentage rate applicable to purchases is 15%. Upon providing 45 
days' advance notice and to the extent permitted under Sec.  
1026.55, the card issuer increases the rate applicable to new 
purchases to 18%, effective on September 1, 2012. The card issuer 
conducts reviews of the increased rate in accordance with Sec.  
1026.59 on January 1, 2013 and July 1, 2013, based on the factors 
described in Sec.  1026.59(d)(1)(ii). Based on the January 1, 2013 
review, the rate applicable to purchases remains at 18%. In the 
review conducted on July 1, 2013, the card issuer determines that, 
based on the relevant factors, the rate it would offer on a 
comparable new account would be 14%. Consistent with Sec.  
1026.59(f), Sec.  1026.59(a) requires that the card issuer reduce 
the rate on the existing account to the 15% rate that was in effect 
prior to the September 1, 2012 rate increase.
    3. Transition from LIBOR. i. General. Effective March 15, 2021, 
in the case where the rate applicable immediately prior to the 
increase was a variable rate with a formula based on a LIBOR index, 
a card issuer may terminate the obligation to review if the card 
issuer reduces the annual percentage rate to a rate determined by a 
replacement formula that is derived from a replacement index value 
on December 31, 2020, plus replacement margin that is equal to the 
annual percentage rate of the LIBOR index value on December 31, 
2020, plus the margin used to calculate the rate immediately prior 
to the increase (previous formula).
    ii. Examples. A. Assume that on March 15, 2021, the previous 
formula is a LIBOR index plus a margin of 10% equal to a 12% annual 
percentage rate. In this case, the LIBOR index value is 2%. The card 
issuer selects a prime index as the replacement index. The 
replacement formula used to derive the rate at which the card issuer 
may terminate its obligation to review factors must be set at a 
replacement index plus replacement margin that equals 12%. If the 
prime index is 4% on December 31, 2020, the replacement margin must 
be 8% in the replacement formula. The replacement formula for 
purposes of determining when the card issuer can terminate the 
obligation to review factors is the prime index plus 8%.
    B. Assume that on March 15, 2021, the account was not subject to 
Sec.  1026.59 and the annual percentage rate was a LIBOR index plus 
a margin of 10% equal to 12%. On April 1, 2021, the card issuer 
raises the annual percentage rate to a LIBOR index plus a margin of 
12% equal to 14%. On May 1, 2021, the card issuer transitions the 
account from a LIBOR index in accordance with Sec.  1026.55(b)(7)(i) 
or (b)(7)(ii). The card issuer selects a prime index as the 
replacement index with a value on December 31, 2020, of 4%. The 
replacement formula used to derive the rate at which the card issuer 
may terminate its obligation to review factors must be set at the 
value of a replacement index on December 31, 2020, plus replacement 
margin that equals 12%. In this example, the replacement formula is 
the prime index plus 8%.
    4. Selecting a replacement index. In selecting a replacement 
index for purposes of Sec.  1026.59(f)(3), the card issuer must meet 
the conditions for selecting a replacement index that are described 
in Sec.  1026.55(b)(7)(ii) and comment 55(b)(7)(ii)-1. For example, 
a card issuer may select a replacement index that is not newly 
established for purposes of Sec.  1026.59(f)(3), so long as the 
replacement index has historical fluctuations that are substantially 
similar to those of the LIBOR index used in the previous formula, 
considering the historical fluctuations up through December 31, 
2020, or up through the date indicated in a Bureau determination 
that the replacement index and the LIBOR index have historical 
fluctuations that are substantially similar, whichever is earlier. 
The Bureau has determined that effective [applicable date] the prime 
rate published in the Wall Street Journal has historical 
fluctuations that are substantially similar to those of the 1-month 
and 3-month U.S. Dollar LIBOR indices. The Bureau also has 
determined that effective [applicable date] the spread-adjusted 
indices based on SOFR recommended by the Alternative Reference Rates 
Committee to replace the 1-month, 3-month, 6-month, and 1-year U.S. 
Dollar LIBOR indices have historical fluctuations that are 
substantially similar to those of the 1-month, 3-month, 6-month, and 
1-year U.S. Dollar LIBOR indices respectively. See comment 
55(b)(7)(ii)-1. Also, for purposes of Sec.  1026.59(f)(3), a card 
issuer may select a replacement index that is newly established as 
described in Sec.  1026.55(b)(7)(ii).
* * * * *

59(h) Exceptions

    1. Transition from LIBOR. The exception to the requirements of 
this section does not apply to rate increases already subject to 
Sec.  1026.59 prior to the transition from the use of a LIBOR index 
as the index in setting a variable rate to the use of a different 
index in setting a variable rate where the change from the use of a 
LIBOR index to a different index occurred in accordance with Sec.  
1026.55(b)(7)(i) or (b)(7)(ii).

    Dated: June 2, 2020.
Laura Galban,
Federal Register Liaison, Bureau of Consumer Financial Protection.
[FR Doc. 2020-12239 Filed 6-17-20; 8:45 am]
BILLING CODE 4810-AM-P