With London Inter-Bank Offered Rate (LIBOR) sunsetting this year, the Consumer Financial Protection Bureau (CFPB) is still in the process of implementing new rules to assist with the transition. It is expected to transition all LIBOR index products to a new index. Some financial institutions are using this opportunity to switch both LIBOR and non-LIBOR products to a different index. This would standardize the index across the range of products being offered, however, not without challenges.
Non-home secured open-end lines (such as credit cards)
1026.9(c) of Regulation Z required 45 days advance notice for changes to significant account terms, which include how the rate is determined. Rates could be changed with a proper change-in-terms notice under this section of the regulation requirements; however, under the home equity line of credit’s (HELOC) section (1026.40(f)(3)), this prohibits changing any terms of a HELOC agreement (except in specific situations). A change in the index would not qualify as a specific situation.
1026.40(f)(3)(ii) of Regulation Z states “change the index and margin used under the 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 annual percentage rate substantially similar to the rate, in effect, at the time the original index became unavailable.” With that said, the regulation would allow a change in index when the original index is no longer available. If a financial institution is wanting to change the current index to a new index, to match other loan products being offered, this change would be prohibited until the original index is no longer available.
1026.40(f)(3)(iv) of Regulation Z states a financial institution may “make a change that will unequivocally benefit the consumer throughout the remainder of the plan.” If the new index change is clearly benefiting the customer, for the remainder of the HELOC term, the regulation would allow financial institutions to change the index. This brings the challenge of predicting future rates with a variety of different variables, including but not limited to different margins, maturity lengths and line amounts. In addition, it would be difficult to predict if the new index unequivocally benefited the customer for the remainder of the HELOC.
1026.40(f)(3)(iii) of Regulation Z would allow a financial institution to change the index if the consumer specifically agrees to do so in writing at the time of change. If a consumer does not agree in writing to the change, and the change in index is not unequivocally to the consumer’s benefit, the regulation would prohibit the financial institution from changing the index of a HELOC when the index is still available.