New guidelines from the CFPB and ARRC offer milestones to help financial firms transition from LIBOR.

On June 4th, 2020, the Consumer Financial Protection Bureau (CFPB) announced steps to ease the transition away from LIBOR for regulated and consumer entities.1 They released an updated Consumer Handbook on Adjustable Rate Mortgages (CHARM) and a Notice of Proposed Rulemaking (NPRM).2  

The LIBOR transition presents unique concerns, including market uncertainty, integration challenges, impacts to liquidity and basis risk, as well as cost implications in transitioning to new alternative reference rates. Through its actions the CFPB is encouraging banks to actively begin efforts to adapt to the new regime. 

What this means

Interest rates on certain consumer financial products, including mortgages, credit cards, home equity lines of credit, reverse mortgages and student loans may rely on LIBOR as the benchmark rate to assess the interest rate that consumers would pay. To prepare for the discontinuation of LIBOR at the end of 2021, financial institutions have been developing plans for the transition to alternative rates. The CFPB is encouraging banks to begin notifying and transitioning consumers earlier so customers understand the impacts, and banks do not inadvertently mislead customers and so violate any existing Unfair, Deceptive or Abusive Acts or Practices (UDAAP).3 To be operationally ready for the transition, banks should also be considering changes to control programs, data and communication, and people readiness.  

In addition to the CFPB guidance, the Alternative Reference Rates Committee (ARRC) is also providing similar milestones for consumer products to transition away from LIBOR. New closed-end residential mortgages should include ARRC fallback language recommendations by June 30th, 2020, and student loans by September 30th, 2020.4 In addition, no new residential mortgages using USD LIBOR should be accepted after September 30th, 2020.5 Based on the CFPB and ARRC directives, financial institutions are encouraged to plan ahead to generate evidence demonstrating that their fiduciary duties are fulfilled.  

The CFPB is indicating financial institutions should provide information to consumers on why the rate change is occurring and provide a comparison of the new rate structure.6 This is to be communicated in writing in compliance with Regulation Z Truth in Lending Act (Reg Z).7  The CFPB guidance to amend certain provisions of Reg Z should encourage in our view proactive action from financial institutions, in communications with consumers, throughout the LIBOR transition journey.

Conclusion

While the ARRC and CFPB directives should help push banks to proactively begin efforts to adapt to the new reference rates, these proposals do not constitute binding rules, as each institution should decide what is relevant given their size and complexity.8 But they do offer a path forward to help market participants manage their efforts and effectively transition from LIBOR with greater confidence and less disruption.  

Many operational considerations need to be addressed, and some can begin soon. Careful planning and action can reduce or mitigate adverse risks arising from the transition, such as a reduction in customer complaints, unnecessary UDAAP violations, proactive prevention of repurchases and repossessions by investors, and mitigation of consumer risks.  

What can be done now and how Accenture can help:  

  • Undertake a health check: Conduct an analysis of current readiness for transition including understanding of consumer credit and product impacts, current capabilities and known gaps, and preparedness for change activities.
  • Ready production controls program: Develop and implement an actionable plan to transition existing portfolio of consumer credit loans, including adjusting, developing and testing/stressing control programs. 
  • Ready data and communications: Develop and provide adequate and resilient decision-making tools and dashboards with a specific focus on consumer protection. 
  • Prepare people: Make sure the transition plan is understood and checked, third parties are equipped to adopt the changing requirements, customers are notified, and employees are educated in new controls and processes. 
  • Create accountability: Establish a clear and accountable role for the transition across all lines of defense. 

To find out more on the topic, please contact the authors. 

References  

  1. “CFPB Takes Steps to Facilitate LIBOR Transition,” Consumer Financial Protection Bureau, June 4, 20120. Access at: https://www.consumerfinance.gov/about-us/newsroom/cfpb-facilitates-libor-transition/. 
  2. Ibid. 
  3. “Facilitating the LIBOR Transition (Regulation Z),” Bureau of Consumer Financial Protection. Access at: https://files.consumerfinance.gov/f/documents/cfpb_proposed-rule_amendments-to-facilitate-libor-transition_2020-06.pdf 
  4. “ARRC Recommended Best Practices for Completing the Transition from LIBOR,” Alternative Reference Rates Committee, May 27, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf.  
  5. Ibid. 
  6. “Facilitating the LIBOR Transition (Regulation Z),” Bureau of Consumer Financial Protection. Access at: https://files.consumerfinance.gov/f/documents/cfpb_proposed-rule_amendments-to-facilitate-libor-transition_2020-06.pdf 
  7. “Truth in Lending Act – Consumer Rights and Protection,” Debt.org. Access at: https://www.debt.org/credit/your-consumer-rights/truth-lending-act/. 
  8. “ARRC Recommended Best Practices for Completing the Transition from LIBOR,” Alternative Reference Rates Committee, May 27, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf. Facilitating the LIBOR Transition (Regulation Z),” Bureau of Consumer Financial Protection. Access at: https://files.consumerfinance.gov/f/documents/cfpb_proposed-rule_amendments-to-facilitate-libor-transition_2020-06.pdf.    

Newsletter Author: Bailey MayerMairi Bryan

Newsletter Contact Person: Venetia Woo 

Disclaimer  

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