WASHINGTON — Five federal financial regulatory agencies, including NCUA, plus state agencies have issued a joint statement they said is designed to highlight the risks posed by the discontinuation of LIBOR (London Interbank Offered Rate).
In addition to NCUA, other agencies issuing the statement include the Federal Reserve, CFPB, FDIC, Office of the Comptroller of the Currency and state bank and credit union regulators.
Banks, non-banks and credit unions are being advised to continue their efforts to transition to alternative reference rates to mitigate consumer protection, financial, legal, and operational risks.
The approaching discontinuation of most LIBOR tenors in June 2023 presents financial, legal, operational, and consumer protection risks, the statement notes, adding that consumers may not know when the transition from LIBOR will occur or how institutions will calculate their interest rates if they do not issue required disclosures to consumers.
CFPB Offers Resources
The CFPB noted it issued a Notice of Proposed Rulemaking and FAQs relating to the LIBOR transition and is continuing work on a final rule to address the anticipated expiration of LIBOR and expects to issue it in January 2022. The FAQs pertain to compliance with existing CFPB regulations for consumer financial products and services impacted by the anticipated LIBOR discontinuation and resulting need to transition to other indices.
The CFPB said it is also committed to helping creditors transition affected consumers from LIBOR in a transparent and orderly manner. In October 2019, the CFPB published a blog post discussing the transition away from LIBOR to help consumers understand this market-wide change. In June, 2020, the CFPB released an updated consumer handbook on adjustable rate mortgages to help consumers better understand these products and how their payments can change over time.
Addressing Risk Management
“Banks and nonbanks alike should have risk management processes in place to identify and mitigate risks to consumers that commensurate with the size and complexity of their exposure and third-party servicer arrangements,” according to the statement.
The interagency statement identifies specific actions financial institutions can consider in preparation for the elimination of LIBOR based loans. Among those actions include developing and implementing a transition plan for communicating with consumers and including fallback language that defines a fallback reference rate.
Finally, the interagency statement includes clarification on the meaning of certain key terms, factors industry should consider when selecting alternative rates, and expectations for fallback language.