Two Ohio banks want to offer cut-rate loans to auto dealers that steer a lot of retail business their way.
National City Corp. of Cleveland and Huntington Bancshares of Columbus have asked the Federal Reserve Board for an exemption from anti-tying rules to reward auto dealers that refer large volumes of consumer loan business.
Auto dealers would act as de facto loan agents for the banks, delivering more customers in exchange for sweeter terms on "floor plan loans" used to finance inventory.
This discount plan may have been considered illegal several years ago, but the Fed has gradually been loosening its interpretation of strict "anti-tying" legislation from 1970. Over the last two years, the Fed has passed rules that let banks and nonbank affiliates package their services and offer discounts to customers who maintain multiple accounts.
In 1994, for example, the Fed let Fleet Financial Group of Providence, R.I., waive monthly fees for customers holding at least $10,000 in one of several accounts. And later that year, it agreed to let holding companies give price breaks to bank customers who buy services from nonbank affiliates.
The Fed will probably approve the Ohio banks' requests, said Melanie Fein, a partner at the Washington law firm Arnold & Porter. The floor plan discounts already may be exempt under the current rules, she noted.
"I think it would be a relatively simple matter for the Fed to deal with," Ms. Fein said. "It's the same reasoning that caused them to extend the original exemptions. (The floor plan loan discount) is not the kind of arrangement Congress intended to be prohibited - that's more where the bank is using its power in the banking market to require the customer to obtain a nonbank product."
Lawyers for National City and Huntington each said that the banks were mainly asking the Fed for clarification of the rules before they went ahead with their floor plan discount plans.
"Our concern is that it really wasn't clear if a bank could do this type of tying without a technical problem," said Daniel Morton, vice-president and company counsel for Huntington National Bank, the banking subsidiary of Huntington Bancshares. "Our purpose for filing the request was to try and get the issue resolved."
Mr. Morton said it makes no sense to prevent banks from tying floor plan discounts to consumer loan volume when many nonbank institutions, such as automobile credit agencies, already do just that.
"We think that (tying discounts) should enable us to be more competitive," Mr. Morton said.
Mr. Duchemin writes for Medill News Service