CFPB / RegulatoryPolitics & Money

CFPB sets hard 2023 date for end of LIBOR

The Consumer Financial Protection Bureau (CFPB) issued a final ruling Tuesday that will progress financial institutions away from the LIBOR index rate for consumer financial products.

The CFPB ruled that no new financial contracts may reference LIBOR as the relevant index after the end of 2021, and beginning June 2023, LIBOR can no longer be used for existing financial contracts. According to the CFPB, $1.4 trillion of consumer loans are currently tied to LIBOR.

To help consumers understand how creditors will determine rate changes in the variable rates for their loans, these disclosure requirements will be effective April 1, 2022, and have a mandatory compliance date of October 1, 2022.

Within the transition period, the CFPB made clear it will be monitoring whether new indices meet Regulation Z standards – a federal law that standardizes how lenders convey the cost of borrowing to consumers.

Financial institutions began searching more exclusively for alternatives since regulators in the UK stated that LIBOR cannot be guaranteed beyond next 2021. LIBOR, or London Interbank Offered Rate, is commonly used in setting the interest rate for many adjustable-rate consumer financial products like reverse mortgages, credit cards, home equity loans, student loans and adjustable-rate mortgages (ARMs).

The CFPB said the transition away from LIBOR is a direct result of the “criminal rate-setting” conspiracy by large international banks that manipulated the index – a scandal that eventually came to light in 2012 after an international investigation was launched.

Since 2015, authorities in both the UK and the United States have brought criminal charges against individual traders and brokers for their role in manipulating rates, though the success of these prosecutions has been mixed. 

Many leading financial institutions were implicated in the scandal, including Deutsche Bank, Barclays, Citigroup, JPMorgan Chase and the Royal Bank of Scotland.

“In the wake of the crisis, we learned that large international banks had conspired to set the LIBOR rate in order to conceal weaknesses in the financial system and to boost their bottom line,” Rohit Chopra, Director of the CFPB, said in a statement following the ruling.

“This banking cartel, at times, illegally increased LIBOR to maximize the value of their derivatives bets and other financial positions. For years, the interest rate that underpins hundreds of trillions of dollars of financial contracts, including the exploding adjustable rate mortgages, was a lie,” Chopra added.

The most viable replacement to LIBOR is the Secured Overnight Financing Rate (SOFR) index, which has been recommended by the Alternative Reference Rates Committee (ARRC) and endorsed by the New York Federal Reserve.

The CFPB said in most circumstances, SOFR will be used to transition away from the previous indices as it is less vulnerable to financial abuse and represents actual transaction data. SOFR represents the cost of overnight borrowing collateralized by U.S. Treasury securities in the repurchase market and is produced and published by the New York Fed each day.

Additionally, SOFR is not calculated based on sample size or future forecast by a small, elite group of banks. Instead, the calculation considers underlying daily transactions, which reduces the chances of potential manipulation, as no panel banks or judges are required.

“Creditors and servicers must continue preparing for the end of LIBOR,” said Chopra. “By developing orderly and clear steps to reduce risks to people who may be impacted by the transition, creditors and their servicers can mitigate compliance, legal, financial, and operational risks and support a healthy recovery.”

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