Ira L. Tannenbaum, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800

Dear Mr. Tannenbaum:

This is in response to your letter, dated March 17, 2000, regarding the applicability of the anti-tying prohibitions of section 106 of the Bank Holding Company Act Amendments of 1970, 12 U.S.C. § 1972 ("section 106"), to the credit card activities proposed to be conducted by FPC Financial, f.s.b. ("Thrift"), if those activities were conducted by a bank. Deere & Company ("Deere & Co."), John Deere Credit Company, and John Deere Capital Corporation ("JDCC") (collectively, "Applicants"), have applied to the Office of Thrift Supervision ("OTS") to form Thrift, which would be a direct subsidiary of JDCC. On approval of that application, two credit card subsidiaries of JDCC would transfer their credit card businesses to Thrift. You have asked for confirmation that those credit card activities, if they were conducted by a bank, would be excepted by the Board from the restrictions of section 106, and therefore would be eligible for a similar exception from section 5(q) of the Home Owners Loan Act, 12 U.S.C. § 1464(q) ("section 5(q)"). Section 5(q) places restrictions on savings associations that are almost identical to those placed on banks by section 106, although the OTS may only grant exceptions to section 5(q) that conform to exceptions to section 106 granted by the Board.¹

We understand that Thrift would offer three private-label credit cards: the Farm Plan card, the John Deere Credit Card, and the PowerPlan card. The Farm Plan card may be used at any participating merchant to purchase any product sold by that merchant, although purchases of large agricultural equipment are generally not financed using the card. You have indicated that participating merchants, who may or may not be Deere & Co. dealers, generally offer the Farm Plan card program as an alternative to carrying their own accounts receivable, and that the Farm Plan card program often is used by customers to purchase products that are not made or sold by Deere & Co. The John Deere Credit Card is used at dealers of Deere & Co. lawn and grounds care equipment. As with the Farm Plan card, the John Deere Credit Card may be used to purchase any item sold by those dealers, including products not made by Deere & Co. The PowerPlan card program is currently only offered at certain dealers of Deere & Co. construction equipment, but may be used to purchase products not manufactured by Deere & Co. Like the Farm Plan card, the PowerPlan card is intended to eliminate the need for participating dealers to carry their own accounts receivable.²

The present question is whether certain discounts offered in connection with the use of these cards to purchase Deere & Co. products would violate the anti-tying restrictions of section 106.³ Section 106 prohibits a bank from extending or varying the consideration for credit on the condition that the customer obtain any other nonbanking product from the bank holding company or any other subsidiary of the bank holding company. Among other things, this prevents a bank from offering a reduced interest rate on a loan that may be used only to purchase products made or sold by an affiliate of the bank. The question thus arises whether, if Thrift were a bank, it would be covered by this restriction or whether it would be appropriate to grant an exception to this restriction to allow Thrift to discount the credit it extends on its credit cards to a customer only when that customer purchases a Deere & Co. product.

You have stated that Thrift's credit card programs would be acquired from existing finance company subsidiaries of JDCC, and that Thrift would administer those programs very much like those finance subsidiaries currently do. Such subsidiaries generally function as if they were the manufacturer's credit department, and are created only to offer credit as an adjunct to the manufacturer's products. This would also be true in the case of Thrift, which is being established by Deere & Co. for the sole purpose of assuming some of the operations of JDCC's nonbanking finance companies. Like the finance companies, Thrift will receive all of its funding from its parent company.⁴ You have indicated that Deere & Co. does not intend to operate Thrift as a full-service institution,⁵ and that Thrift's business will consist almost entirely of providing financing for consumers purchasing Deere & Co. (as well as non-Deere & Co.) products.

Importantly, customers may use other credit cards, cash, and other forms of payment to purchase products sold by those dealers who accept the three credit cards. Also, the cards may be used to purchase non-Deere & Co. products carried by participating dealers on whatever terms the relevant dealer or manufacturer may set. Such transactions, where no Deere & Co. product is involved, suggest that the cards are a convenience for consumers, rather than a mechanism for Deere & Co. to increase unfairly sales of its non-bank products.

The Board notes that programs like the three credit card programs described above are common in the market, and often include discounts on credit similar to those currently offered by Applicants on the cards. Other credit providers are able to offer similar discounts on credit they extend in connection with the purchase of Deere & Co. products. In such circumstances, discounts on credit by Thrift would not appear to create any significant anticompetitive effects.

The purpose of section 106 is to prevent banks from using their market power in banking products, including credit, to gain an unfair competitive advantage in markets for nonbanking products and services. Under the circumstances noted above, the Board does not believe that the purpose of section 106 is implicated by Thrift's proposed credit card activities. In reaching this conclusion, the Board places special emphasis on the fact that Thrift's sole function is to act as the credit department for Deere & Co., that its funds for this purpose are provided entirely by Deere & Co, and that the facts show the financing is offered as a convenience to customers interested in purchasing certain products. Accordingly, and in view of the facts outlined in this letter, the Board concludes that if Thrift's proposed private-label credit card activities were conducted by a bank, the Board would grant an exception to clarify that the restrictions of section 106 would not apply.

This opinion is based on the facts and representations you have provided, and any material change in these facts or representations could result in a different conclusion and should be reported to Board staff. If you have any questions about this matter, please contact Andrew Baer (202/452-2246) of the Board's Legal Division.

Sincerely,

(Signed) J. Virgil Mattingly

J. Virgil Mattingly

cc: Office of Thrift Supervision

1. 12 U.S.C. § 1464(q)(6). Return to text

2. You have indicated that none of the dealers who accept the Farm Plan card or the John Deere Credit Card are affiliated with Deere & Co., and that only one of the construction equipment dealers who accepts the PowerPlan card is affiliated with Deere & Co.Return to text

3. Offered discounts include cash "dividends" that may be applied towards the price of future purchases on the card, and a variety of deferred or reduced interest or deferred payment programs. Several of these programs are available only for purchases of Deere & Co. products.Return to text

If such discounts were not offered by Thrift, its credit card programs would not be covered by the anti-tying prohibitions of section 106, in part because in all cases the cards may be used to purchase products not made by Deere & Co., and alternative forms of payment, such as cash, may be used. See also Letter from J. Virgil Mattingly, Jr., to William S. Eckland, Esq., dated December 7, 1999.Return to text

4. In addition, Applicants have committed that the aggregate amount of funds to be provided to Thrift by its affiliates will at all times exceed the aggregate amount of credit card receivables on the books of Thrift attributable to the sale of products manufactured by affiliates of Thrift.Return to text

5. Thrift will not open any branch offices and will not accept retail deposits.Return to text