As lending transactions become more complex and creative, there is an increased risk that banks may violate the anti-tying provisions of §106 of the Bank Holding Company Act Amendments of 1970. §106 generally prohibits banks from conditioning the availability or price of a product on the requirement that the customer either (1) purchase another product from the bank, (2) provide a product to the bank, or (3) agree not to obtain a product from one of the bank’s competitors. Unlike the prohibitions on tying under the Sherman and Clayton Acts, under §106, there is no requirement that a plaintiff show anti-competitive effects.
While at first glance these provisions seem extremely restrictive, there are several broad statutory and regulatory exceptions that take some of the bite out of §106. For example, banks can tie “traditional bank products” to one another (e.g. requiring a borrower to maintain a savings account with the bank in order to receive a loan). Banks can restrict the availability of a product on the condition that the customer provide a “usually connected” product to the bank. Conditions to ensure the soundness of credit, such as conditioning a loan on the requirement that a borrower not borrow from other sources, are generally permitted. Transactions with foreign companies are exempt from §106’s anti-tying restrictions. There is also a “combined-balance discount” safe harbor that allows banks to change the pricing for a package of products based on a customer maintaining a minimum balance, provided certain conditions are met.
So with all of the exceptions, what are banks actually prohibited from doing? There are certain practices, such as requiring a borrower to purchase insurance from the bank in order to obtain a loan, that clearly violate §106. However, while case law and the 2003 Federal Reserve Board proposed (but never finalized) interpretation of §106 provide some guidance, many anti-tying questions remain unanswered. The treatment of derivative products such as interest rate swaps, foreign exchange swaps, and commodity swaps in connection with lending transactions is a prime example. While the Federal Reserve Board’s proposed interpretation indicates that a bank may limit a borrower’s permissible interest rate swap counterparties to those with a certain minimum credit rating, the Board did not offer any guidance on other derivative transactions, nor did it address a situation where a syndicate requires that an interest rate swap be purchased from a lender in the syndicate. Instead, the Board left these questions unsettled by specifically requesting comment on how derivative products sold in connection with lending transactions should be treated under §106.
Although prohibitions on tying may not be a top concern for banks when entering into lending transactions, practitioners should be mindful of the anti-tying restrictions. To help reduce potential liability, in situations where a bank requires a borrower to purchase additional products in connection with a loan, the bank should ensure that the arrangement falls within one of the exceptions to §106. While making this determination can be difficult given the many unsettled issues, this is especially important considering the statute allows for treble damages and recovery of costs and a reasonable attorney’s fee, making it attractive to borrowers facing financial difficulties.
