Regulatory board cautions lenders on tying arrangements

WASHINGTON – An organization that sets standards and rules for marketing municipal securities is raising concerns that banks could be violating federal law by linking the purchase of services to promises to lend money.

Late last month, the Municipal Securities Rulemaking Board issued a notice reminding dealers of prohibitions against “tying arrangements,” as well as underpricing arrangements.

Experts say such arrangements have been on the upswing because of heightened interest in refinancing and a decline in the number of insurers offering credit enhancing municipal bond insurance.

The MSRB said it’s looking for information on arrangements in which the provision of liquidity facilities “may have been illegally tied to investment banking services.”

In its notice, the organization reminded bond dealers of the federal prohibitions and underscored that “any broker, dealer or municipal securities dealer that aids and abets a violation of federal bank tying or underpricing of credit prohibitions also would violate Rule G-17 on fair dealing.”

The heightened awareness of these lending practices might provide some relief for healthcare borrowers such as hospitals and senior living facilities, which, as borrowers with not-for-profit status, may be seeking to borrow money through the sale of municipal bonds.

One of the amendments to the Bank Holding Company Act of 1970 prohibits commercial banks from imposing certain types of tying arrangements on their customers. Tying includes making the availability or terms of loans or other credit products conditional, available only if the borrower purchases other products or services.

“While it’s legal for banks to tie credit and traditional banking products, such as cash management, it is not legal for banks to tie credit and debt underwriting from the bank or from the bank’s investment affiliate,” the notice said.

Underpricing – an extension of credit at below-market rates – may result if a bank provides a reduced rate on a liquidity facility because of an illegal tie-in with an underwriting. That could violate the Federal Reserve Act, which generally requires that certain transactions between a bank and its affiliates occur on market terms.