Anti-Tying Requirements Defined
by Mary Beth Guard, BOL Guru
Question: I don't understand what people mean when they refer to the anti-tying requirements. Could you provide a brief explanation?
Answer: The term "tying" is used to refer to a situation where one benefit is tied to the person or entity doing something else. Under the 1970 amendments to the Bank Holding Company Act, Congress attempted to limit unfair competitive practices by providing that a bank shall not extend credit to a borrower on the condition that the borrower obtain some other service from the bank or an affiliate of the bank. When credit transactions are tied, there is an anti-competitive effect on the marketplace. On the other hand, financial institutions should not be entirely precluded from trying to leverage their customer relationships, so the law and regulations attempt to achieve a balance.
Under federal law, the basic rule is that banks generally may not:
- extend credit,
- lease or sell property,
- furnish any service, or
- fix or vary the cost of any of the preceding items, on the condition or requirement that the customer:
(A) obtain some additional credit, property, or service from the bank other than a loan, discount, deposit, or trust service;
(B) obtain some additional credit, property, or service from a bank holding company of the bank, a subsidiary of the bank holding company, or a financial subsidiary of the bank;
(C) provide some additional credit, property, or service to the bank, other than those related to and usually provided in connection with a loan, discount, deposit, or trust service;
(D) provide some additional credit, property, or service to a bank holding company of the bank, a subsidiary of the bank holding company, or a financial subsidiary of the bank; or
(E) not obtain some other credit, property, or service from a competitor of the bank, a bank holding company of the bank, a subsidiary of the bank holding company, or a financial subsidiary of the bank, other than a condition or requirement that the bank reasonably imposes in a credit transaction to assure the soundness of the credit.
There are important exceptions to the prohibitions, however, designed to give banks greater flexibility in packaging their products. One of the most important, and most well known, is the so-called "traditional bank product" exception. (Traditional bank products include loans, discounts, deposits, trust services.) Under it, a bank or its subsidiary may offer a discount or otherwise vary the consideration for any traditional bank product on the condition or requirement that a customer also obtain a traditional bank product from an affiliate, so long as all the products are available for separate purchase by the customer.
It is also permissible for a bank to offer a discount or otherwise vary the consideration for a product or package of products on the condition that the customer maintain a combined minimum balance in deposits and other products specified by the bank, so long as deposit balances count at least as much as nondeposit products toward the minimum balance requirement.
In 1997, the Federal Reserve Board modified Regulation Y (which includes the anti-tying provisions) to eliminate the provision that formerly subjected bank holding companies and nonbanking subsidiaries to the same anti-tying restrictions as apply directly to the banks. As a result, bank holding companies and their nonbanking subsidiaries may enter into tie-in arrangements involving mutual funds and other products or services, although such arrangements remain subject generally to antitrust restrictions. The restrictions still apply as to bank subsidiaries.
The original version appeared in the January/February 2003 edition of the Oklahoma Bankers Association Compliance Informer.
First published on BankersOnline.com 6/9/03
First published on 06/09/2003