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Facilitation of the Transition
Due to the all-encompassing nature of LIBOR and the iron-grip it has had on interest rates in the past , it may seem worrisome to be transitioning away . Luckily , there have already been some steps taken by financial entities and agencies to help choose new rates . As noted in the
LIBOR FAQ document , released by the CFPB , in the United States specifically , the Federal Reserve has created a group called the Alternative Reference Rates Committee ( ARRC ) to help . Comprised of a “ diverse set of private-sector entities ” in LIBOR-heavy markets , and a “ wide array of official-sector entities ” as non-voting members , the ARRC has already started researching , revising contracts and identifying replacement indexes . The ARRC
website contains additional information for entities who are in need and offers a wide variety of newsletters and informational posts .
Regulation Z , in its amended form , sets forth general guidelines on how to determine whether a replacement index is a comparable index to LIBOR for whichever purpose it needs . The
330-page rule states most replacement indexes will likely be recommended by the ARRC . If the replacement index is not sufficient and comparable , the change may constitute a refinancing .
Open-Ended Credit
The codified rule addresses HELOC creditors in one of the first sections , describing a “
detailed roadmap ” for HELOC creditors to choose a compliant replacement index . HELOC creditors are already permitted by Regulation Z to change an index and margin which they use to set the annual percentage rate ( APR ) on a variablerate account under certain conditions — when the original index becomes unavailable or is no longer available . This allows for an opportunity for those creditors to transition away from LIBOR before the expiration date .
To replace LIBOR , creditors and issuers must make sure the APR calculated by the replacement index is “ substantially similar ” to the rate calculated using LIBOR . The replacement index may also be selected if it is either newly established and has no history or is not newly established and has historical fluctuations substantially similar to LIBOR . The CFPB determined some substantially similar rates :
• Wall Street Journal prime rate has historical fluctuations substantially similar to those of the 1- and 3-month USD LIBOR
• Spread-adjusted indexes based on the Secured Overnight Financing Rate ( SOFR ) recommended by the ARRC for consumer products to replace 1- , 3- or 6-month USD LIBOR index has similar rates
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