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
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 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 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.