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4000 - Advisory Opinions
Bank Program Giving Certain Customers Automatically Reduced
Interest Rates on Loans Does Not Violate Prohibition Against Tying
Arrangements, but Could Violate ECOA or FHA
FDIC--95--32
November 27, 1995
Mark A. Mellon, Counsel
This is in response to your letter of October 5 pertaining to a
program offered by your depository institution.
Based on your letter, it is my understanding that the program is
open to any individual with: 1) an annual personal income of $100,000
or more; and 2) combined deposit balances with the depository
institution of $5,000 or more (an individual may, however, participate
in the program by paying a fee rather than keep the necessary deposit
balances). Program participants receive the following benefits: 1) low
or no-cost checking; 2) reduced or no fee
{{4-30-96 p.4959}}safe deposit box; 3) premium interest
rates on certain deposit products; and 4) automatic reduced interest on
non-business related loans.
You wish to know whether such a program would pose any problems with
respect to the prohibition against tying arrangements set forth in
12 C.F.R. § 225.7, Tying
Restrictions, of 12 C.F.R. Part 225, Bank Holding Companies and Change
in Bank Control (Regulation Y) ("Regulation Y"). You also wish to
ascertain whether the program would present any problems with respect
to the Equal Credit Opportunity Act and in light of the federal banking
agencies' recent efforts to promote fair lending.
Section 106(b) of the Bank Holding Company Act Amendments of 1970
(12 U.S.C. § 1972)
generally prohibits a bank from tying a product or service to another
product or service offered by the bank or any of its affiliates. A bank
engages in a tie for purposes of section 106 by conditioning the
availability of, or offering a discount on, one product or service (the
"tying product") on the condition that the customer obtain some
additional product or service (the "tied product") from the bank
or from any of its affiliates. Section 106 is implemented by section
225.7 of Regulation Y.
The Board of Governors of the Federal Reserve System, the federal
agency responsible for Regulation Y, recently adopted a regulatory
"safe harbor" from the anti-tying restrictions of section 106
which provides that a bank may vary the consideration for any product
or package of products based on a customer's maintaining a combined
minimum balance in certain products specified by the bank if: 1) the
bank offers deposits and all such deposits are eligible products; and
2) deposit balances count as least as much as non-deposit products
toward the minimum balance. See 12 C.F.R. § 225.7(b)(4), 60
Federal Register 20186 (April 25, 1995).
Based on my telephone conversation with you, it is my understanding
that non-deposit products would not be included in the program and that
the deposit products are offered solely by your depository institution.
In light of these facts and our review of section 225.7(b)(4), it is
our conclusion that your proposed program poses no problems with
respect to prohibited tying arrangements. The program meets the
criteria of section 225.7(b)(4) since only deposits are eligible
products under the program. We have discussed this matter with a
Federal Reserve System staff attorney who agrees with our conclusion on
this point.
The Equal Credit Opportunity Act and its implementing regulation,
12 C.F.R. Part 202, Equal
Credit Opportunity (Regulation B) ("Regulation B") prohibit
discrimination in lending by depository institutions based on race,
color, religion, national origin, sex, marital status, age, or the fact
that all or part of a loan applicant's income derives from any public
assistance program. The Fair Housing Act (the "FHA") prohibits
discrimination in residential real-estate related transactions (any
loan where a dwelling is taken as collateral or where the proceeds of a
loan will go to purchase, improve, or maintain residential property)
based on race, color, religion, national origin, sex, familial status,
or handicap.
In addition to these specific prohibitions, the federal banking
agencies have over the last two years engaged in an effort to promote
fair lending among the depository institutions which they supervise.
Toward that end, the federal banking agencies adopted a
Statement of Policy on
Discrimination in Lending. See 59 Federal Register
18266 (April 15, 1994). The policy statement notes that one method
of proof of lending discrimination under the ECOA and the FHA which has
been recognized by courts is "evidence of disparate
impact'" when a lender applies a practice uniformly to all
applicants but the practice has a discriminatory effect on a prohibited
basis and is not justified by business necessity.
You propose to only offer your program to individuals who have an
annual personal income of $100,000 and maintain deposit balances of
$5,000 (or pay a monthly fee). Depending upon your location and your
customer base, these policies could have a discriminatory effect upon
members of the classes who are protected by the prohibitions of the
ECOA and FHA. Although the precise contours of the law on disparate
impact as it applies to lending discrimination have not yet been
defined (see 59 Fed. Reg. at 18269), you should be aware of
the potential which your program may have to expose your depository
institution to a suit from a customer who may allege that he or she has
been
{{4-30-96 p.4960}}discriminated against in violation of
the ECOA or FHA. There is also a possibility that the program may be
singled out as a possible violation of the ECOA or FHA as the result of
a compliance examination.
The depository institution must be ready, if such situations should
occur, to demonstrate that the qualifications for participation in the
program are justified by business necessity. The justification must be
manifest and may not be hypothetical or speculative. Factors that may
be relevant to the justification could include cost and profitability.
Even if a policy or practice that has a disparate impact on a
prohibited basis can be justified by business necessity, it still may
be found to be discriminatory if an alternative policy or practice
could serve the same purpose with less discriminatory effect. See 59
Fed. Reg. at 18269.
We are sorry that we are not able to provide you with more
definitive guidance on this point. Please do not hesitate to contact me
if you should have any questions about this or any other
matter.
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