Related Organizations

Tying — Federal Prohibitions

Control systems should ensure that the bank does not impermissibly condition the availability or price of one product on a requirement that the customer also obtain a product from an affiliate of the bank. The tying statute, 12 USC 1972, and its implementing regulation, 12 CFR 225.7, set forth prohibitions, but also provide some exceptions to the statutory tying restrictions. The exceptions permit certain tying arrangements for national banks and are applicable to national bank operating subsidiaries.

For purposes of the federal tying prohibitions, when a national bank and its financial subsidiary are part of a bank holding company, the subsidiary is considered a subsidiary of the holding company and not the bank, as provided in 12 USC 1971 (also see 12 CFR 5.39(h)(6)). Thus, the general tying restrictions applicable to national banks and their operating subsidiaries are not applicable to financial subsidiaries.

The term "affiliate" in the tying context refers to any company or natural person that controls a bank and any company that is controlled by such company or person (other than the bank itself). Any subsidiary of such a company is treated as a subsidiary of a bank holding company. The tying restrictions apply to banks; they generally do not apply to arrangements imposed by an affiliate of a bank. The Board of Governors of the Federal Reserve System has authority to interpret and grant exceptions to the tying statute. Banks and their affiliates also are subject to anti-tying standards under the general antitrust laws. These standards are premised on finding an actual anti-competitive effect of the tying arrangement, however.

The statutory and regulatory exceptions to tying allow a bank to restrict the availability or to vary the price of any bank product on the condition that the customer obtain a "traditional bank product" from the bank or an affiliate of the bank. For example, a bank may condition the availability or price of a particular loan on a requirement that the customer maintain a specified amount of deposits with the bank or its affiliates. This condition is allowed because the exception for traditional bank products includes deposits.

Further, the tying restrictions do not prevent a bank from requiring a customer to obtain acceptable credit-related insurance as a condition for loan approval. In such circumstances, the bank may inform the customer that insurance is available from the bank or its affiliates and may provide instructions on how the customer can obtain additional information. The bank is prohibited, however, from requiring the customer to purchase the insurance from the bank, its subsidiaries, or any of its affiliates as a condition of granting the loan, because the insurance is not a traditional bank product. Accordingly, the bank should clearly inform the customer that: (1) he or she need not purchase the insurance from the bank, its subsidiary, or an affiliate; (2) the insurance is available through brokers or agents other than the bank; and (3) the customer’s choice of insurance provider will not affect the bank’s credit decision or credit terms.

The bank’s controls system should include:

• Training bank employees about the tying prohibitions, including providing examples of prohibited practices.

• Reviewing training, marketing, audit, and compliance programs, and updating any policies and procedures to reflect changes in products, services, or applicable law.

• Reviewing customer files to determine whether the bank has impermissibly conditioned any extension of credit on the customer obtaining another product or service from the bank or its affiliates.

• Monitoring incentives, such as commissions and fee-splitting arrangements that may encourage tying.

• Responding to any customer allegations of prohibited tying arrangements.

Please refer to the FRB’s issuance, "Anti-Tying Restrictions of Section 106 of the Bank Holding Company Act Amendments of 1970"; the OCC’s paper, "Today’s Credit Markets, Relationship Banking, and Tying" (September 2003); and OCC Bulletin 95-20, "Tying Restrictions," for additional guidance on permissible and prohibited tying arrangements.

Previous: Accounting Next: Supervision of Related Organizations