Anti-Tying Regulations: What can a bank do and not do?

The state of Florida prohibits banks from using their own stock as collateral for extensions of credit. These prohibitions are known as anti-tying regulations. Tying is the practice of selling one product or service as a mandatory addition to the purchase of a different product or service. The purpose of anti-tying regulations are “to prohibit anticompetitive practices which require bank customers to accept or provide some other service or product or refrain from dealing with other parties in order to obtain the bank product or service they desire.” S. Rep. No. 91-1084, reprinted in 1970, U.S.C.C.A.N. 5519, 5535.

Lenders venture into prohibited territory when they begin demanding conditions from the borrower that do not seem to have anything to do with maintaining the soundness of the borrower’s loan. Risk minimization for lenders is important in order to avoid the pitfalls of anti-tying regulations and by understanding what a bank can and cannot do, these risks are minimized.

Impermissible Agreements:

Pursuant to 12 U.S.C. § 1972, banks are prohibited from extending credit, leasing or selling property, furnishing services, or varying prices on the condition that the customer:

1. obtain an additional product or service from or provide an additional product or service to the same bank, its holding company, or another subsidiary of its holding company;
2. provide some additional credit, property or service to the bank; or
3. not obtain an additional product or service from competitors of the bank, its holding company, or another subsidiary of its holding company.

Similarly, Florida Statute § 658.48(4)(c) provides that a loan may not be made by a bank: (1) on the security of the shares of its own capital stock or of its obligations subordinate to deposits; (2) on an unsecured basis for the purpose of purchasing shares of its own capital stock or its obligations subordinate to deposits; and (3) on a secured or unsecured basis for the purpose of purchasing shares of the stock of its one-bank holding company.

A bank under this section is defined as any person having a subsisting charter or other lawful authorization, under the laws of Florida or any other jurisdiction, authorizing such person to conduct a general commercial banking business.  Fla. Stat. § 658.12(2).  Tying is often illegal when the products are not naturally related.

Permissible Arrangements:

There are several general exceptions to anti-tying statutes, which permit a bank to extend credit, lease or sell property, furnish services, or vary prices on the condition that the customer:

1. obtain a loan, discount, deposit, or trust service from the bank (the “traditional bank product exception”);
2. provide an additional product or service related to and usually provided in connection with a loan, discount, deposit, or trust service to the same bank; or
3. not obtain additional products or services from competitors if the condition is reasonably imposed in a credit transaction to assure the soundness of the credit.

See Federal Reserve System, Anti-Tying Restrictions of Section 106 of the Bank Holding Company Act  Amendments of 1970, Docket No. OP-1158 (August 25, 2003).

There are no bright line rules that apply to any one transaction or customer and each transaction will be examined on a case-by-case basis. When determining whether an agreement is an acceptable tying arrangement, a set of principles should be applied to the facts: (1) whether the product or services being provided are generally “traditional bank products”, (2) whether the conditions are “related to and usually provided in connection with” a bank product; or (3) whether the conditions are reasonably imposed to ensure the soundness of the credit. For example, fairly traditional requirements that are generally understood by both the lender and the borrower, such as financial reporting and financial ratios, are generally permitted.

According to the Federal Reserve Board (FRB), there are sixteen types of permissible traditional bank products, including bank-issued credit derivatives, loan syndications, asset management services, and securities lending:

1. Extension of credit
2. Letters of credit
3. Lease transactions
4. Credit derivatives
5. Acquiring, brokering, arranging, syndicating and servicing loans or other extensions of credit
6. All forms of deposit accounts, including demand, negotiable order of withdrawal, savings and time deposit accounts
   1. Maintenance of balances is not a violation of the anti-tying regulations
7. Safe deposit box services
8. Escrow services
9. Payment and settlement services
10. Payroll services
11. Traveler’s check/money order services
12. Cash management services
13. Guardianship/executor services
14. Asset management services
15. Custody/securities lending services
16. Paying agent/transfer agent services

See Federal Reserve System, Anti-Tying Restrictions of Section 106 of the Bank Holding Company Act  Amendments of 1970, Docket No. OP-1158 (August 25, 2003).

Prevailing on a claim for violation of anti-tying restrictions:

In order to prevail on a claim for a violation of the anti-tying restrictions, the borrower needs to show three things: (1) the bank conditioned the extension of credit upon the borrower’s obtaining or offering additional credit, property, or services to or from the bank or its holding company; (2) the arrangement was not usual or traditional in the banking industry; and (3) the bank received a benefit.  Halifax Ctr., LLC v. PBI Bank, 2014 WL 626753 (W.D. Ky. Feb. 18, 2014).   The court in Halifax Center found that where a lender conditioned an extension of credit on the requirement that the customer somehow help the bank with one of its bad loans to an unrelated customer violated the anti-tying restrictions.  The court found further that this practice in no way could be construed as a normal or traditional banking practice.

How to Protect Against Anti-Tying Violations:

The FRB provides lenders with internal controls and procedures that banks can put in place to avoid violating anti-tying statutes. The FRB first suggests that “banks should review and update their anti-tying policies, procedures and systems periodically to ensure that these policies, procedures and systems reflect any changes in the nature, scope or complexity of the bank’s activities or applicable law, regulations or supervisory guidance.” See Federal Reserve System, Anti-Tying Restrictions of Section 106 of the Bank Holding Company Act  Amendments of 1970, Docket No. OP-1158 (August 25, 2003). Additional steps banks can take, as suggested by the FRB, are:

1. Incorporate anti-tying into the institution’s corporate policies and procedures
2. Ensure that bank personnel receive education and training concerning anti-tying prohibitions
3. Permit personnel with questions to discuss the issue with an appropriate representative
4. Prohibit the bank or any employee of the bank from taking adverse action against a customer because the customer submitted a complaint to the bank or the Federal banking agency
5. Internal audits to test the institutions anti-tying procedures

Conclusion:

In conclusion, banks should be pro-active and establish procedures and policies to prevent anti-tying violations. While the regulations, case law and FRB proposals provide guidance as to what may be prohibited practices, many transactions must be viewed independently on a case-by-case transaction, taking into consideration the borrower, the borrower’s industry, the meaningful choices and opportunities of the borrower to meet the conditions required by the issuing bank, and whether the products and services exchanged are reasonably related to ensuring the soundness of the credit, rather than for anti-competitive purposes.