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.

 

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