Compliance Blog

Jun 14, 2023
Categories: Consumer Lending

Adjustable-Rate Mortgages (ARMs) and Notice of the LIBOR Transition

The use of the LIBOR index is expected to end on June 30, 2023. Per the CFPB’s LIBOR Transition FAQs, “[t]his change will affect some adjustable (or variable) rate loans and lines of credit, such as adjustable-rate mortgages (ARMs), reverse mortgages, home equity lines of credit (HELOCs), credit cards, student loans, and any other consumer loans that use LIBOR as the index.” As such, I thought it may be helpful to provide some helpful FAQs from the CFPB in relation to adjustable-rate mortgages (ARMs) and notice of the transition.

As discussed in this previous post in the Compliance Blog, some contracts may have included “fallback provisions” that provided a new index to replace LIBOR, or a “determining person” who would be empowered to select a replacement index. For contracts that did not contain such provisions, however, the LIBOR Act and its implementing regulations chose the Secured Overnight Financing Rate (SOFR) as the rate that will replace LIBOR after June 30th. So, do credit unions need to provide notices to their members that the index will be changing from LIBOR to SOFR?

Per the CFPB, the sunsetting of the LIBOR index does not automatically trigger the ARM interest rate adjustment notice requirements. FAQ #9 provides the following:

 9. Will the LIBOR transition trigger the ARM interest rate adjustment notices for existing loans?

Generally, no. The Initial Interest Rate Adjustment Notice is required to be provided months prior to the initial interest rate adjustment (except loans with terms of one year or less). 12 CFR § 1026.20(d). Subsequent Interest Rate Adjustment Notices are triggered only if the adjustment results in a payment change. 12 CFR § 1026.20(c).

Generally, the method for addressing the sunset of LIBOR is to change the index, and thus, the source from which the interest rate for the adjustment is derived. In most cases, this index change will not disrupt the contract’s schedule of interest rate adjustments. As a result, for most accounts, the ARM interest rate adjustment notices will continue on the same schedule established prior to the LIBOR transition.” (Emphasis added).

That being said, the CFPB’s LIBOR Transition FAQs do state that a credit union can send a notice about the LIBOR transition if it’d like to (i.e., a voluntary notice). FAQ #13 states the following regarding sending voluntary notices:

“13. If sending voluntary notices identifying the future replacement index with the required ARM servicing disclosures that identify LIBOR as the currently applicable index, is there any language that can be added to the required disclosures to explain the difference?

In addition to the regulatory required notices described in LIBOR Adjustable-Rate Mortgage FAQ 8 above, creditors may choose to send voluntary notices to the consumer to help explain the LIBOR transition and account impacts, as discussed in LIBOR General FAQs 4 and 5. When doing so, it is possible that the required disclosure may reference LIBOR, while the voluntary notice describes how another index will replace the LIBOR index in the future.

If this occurs, creditors may wonder whether they can add information to the required notices. A creditor can add information only in certain circumstances, as discussed in LIBOR Adjustable-Rate Mortgage FAQs #11 and #12.

In all cases, however, information can be added to the voluntary notice to explain that LIBOR was identified on the required notice because LIBOR is currently the index that applies to the mortgage loan account or was used to calculate the new payment amount discussed on the notice, but that another index will replace the LIBOR index on a future date.” (Emphasis added).

Additionally, the FAQs do point out that the credit union should continue to send the notices required by Regulation Z for interest rate adjustments and periodic statements. Furthermore, as indicated by the CFPB, “[t]he LIBOR Transition Rule amended Appendix H-4(D)(2) and H-4(D)(4) of Regulation Z, which provides sample forms for the Initial and Subsequent Interest Rate Adjustment Notices.” As such, credit unions may want to review the sample forms contained in Appendix H. A discussion of these new forms – with helpful pictures – can be found in this recent article from the Federal Reserve’s Consumer Compliance Outlook.

Moreover, a credit union can include information about the LIBOR transition on the periodic statement. FAQ #12 states:

“12. May information be added to the Periodic Statement to notify the consumer of the LIBOR transition for existing loans?

Generally, yes. Regulation Z, 12 CFR § 1026.41(c) requires that the disclosures in the Periodic Statement be written clearly and conspicuously. Adding information to the Periodic Statement is not prohibited, as long as the additional information does not “overwhelm or obscure” the required disclosures. Comments 41(c)-1 and -2. Sample form H-30(B) provides an example of how to add additional information.

For more information on mortgage Periodic Statement requirements from the Mortgage Servicing Rule, see Section 5 of the Mortgage Servicing Small Entity Compliance Guide .” (Emphasis added).

As mentioned above, the additional information should not “overwhelm or obscure the required disclosures.”

Additionally, the CFPB has said that information can be included on a separate document in the same envelope. Per the CFPB:

“For the Initial Interest Rate Adjustment Notice, Regulation Z requires that the disclosures be provided in the same order as and be substantially similar to the forms in Appendix H of Regulation Z. 12 CFR § 1026.20(d)(3). The notice must also be on a separate document from other documents provided to the consumer. 12 CFR § 1026.17(a)(1); Comment 20(d)-3. Therefore, unrequired information about the LIBOR transition may not be included in the ARM notice and LIBOR transition information may not be included on the same piece of paper as the ARM notice.

But note, additional information may be provided in the same envelope as the Initial Interest Rate Adjustment Notice. Comment 20(d)-3. Thus, while additional information may not be included in the notice itself, the information may, but is not required to, be placed on a separate LIBOR transition notice document in the same envelope used to send the Initial Interest Rate Adjustment Notice to the consumer.” (Emphasis added).

Also, FAQ #11 states that “[i]nformation other than that required by the regulation (i.e., identifying the applicable index, payment, etc.) may not be added into the disclosure itself. However, the rule provides some flexibility for servicers to communicate additional information to the consumer when sending the notices, so long as that information is not provided within the ARM notice itself.” (Emphasis added).

Here is another NAFCU blog post that discusses the LIBOR transition that may also be helpful to review.


On your schedule! New On-Demand and Virtual Conference Options! 

BSA School On-Demand: Earn your NCBSO 

Risk Management Seminar On-Demand: Earn or Renew your NCRM 

Regulatory Compliance School On-Demand: Earn your NCCO 

Virtual Regulatory Compliance & BSA Seminar: Recertify your NCCO and/or NCBSO 

About the Author

Tara Simpson, NCCO, NCBSO, Regulatory Compliance Counsel, NAFCU

Tara Simpson---NAFCU-Regulatory-Compliance-Counsel

Tara Simpson joined NAFCU as a regulatory compliance counsel in July 2022. In this role, Tara assists credit unions with a variety of compliance issues.

Read full bio