Changing a Non-LIBOR Index: HELOCs
With the London Inter-Bank Offered Rate (LIBOR) sunsetting this year, many credit unions are looking to transition their suite of financial products away from the LIBOR index and to a new index. The Consumer Financial Protection Bureau (CFPB) is still in the process of implementing new rules to assist credit unions in the LIBOR transition. Because credit unions are expected to transition all LIBOR-based products to a new index, some credit unions are using this as an opportunity to transfer even non-LIBOR based products to a different index to standardize the index used across the range of the credit union’s products. This blog specifically addresses obstacles a credit union may have in transitioning non-LIBOR indexes.
For non-home secured open-end lines of credit, such as credit cards, section 1026.9(c) requires 45 days advance notice for changes to “significant” account terms, which includes how the rate is determined. The regulation would allow the credit union to change the index for non-home secured open-end lines of credit through a change-in-terms notice. However, for HELOCs, section 1026.40(f)(3) prohibits the credit union from changing any term of the HELOC agreement (including the index) except in specific situations.
Section 1026.40(f)(3)(ii) states that a credit union may not change any term of a HELOC except to change “the index and margin used under the plan if the original index is no longer available, the new index has an historical movement substantially similar to that of the original index, and the new index and margin would have resulted in an annual percentage rate substantially similar to the rate in effect at the time the original index became unavailable.” The regulation would only allow the credit union to change the index when the original index is no longer available. If the credit union is looking to change the current index to a new index to match the rest of the credit union’s products, the regulation would prohibit this change because the original index is still available.
Section 1026.40(f)(3)(iv) states that a credit union may make a “change that will unequivocally benefit the consumer throughout the remainder of the plan.” If the change to the new index will unequivocally benefit the member for the rest of the HELOC’s term, the regulation would allow the credit union to change the index. Difficulty in being able to project future index rates and having a HELOC portfolio that includes a variety of different margins, maturity lengths, and line amounts, may present challenges to the credit union in being able to determine if a change to a new index will unequivocally benefit the member for the remainder of the HELOC.
Section 1026.40(f)(3)(iii) would allow the credit union to change the index if the member specifically agrees to it in writing at the time of the change. If a member asked for a modification or rate reduction, the regulation would allow the credit union to change the terms of the HELOC which may include changing of the index. The credit union may want to work with local counsel to ensure that the change of an index is one that could be agreed to in writing.
If the member does not agree in writing to the change, and the change in index would not unequivocally benefit the member, the regulation would prohibit the credit union from changing the index of a HELOC when the index is still available.
NAFCU will continue to monitor and keep credit unions updated about the LIBOR transition and the CFPB’s above mentioned regulation.