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Federal Reserve extends critical regulatory exception to dealers

November 22, 2010

The Federal Reserve Board issued an interim rule July 5 that extends a critical regulatory exception under the FACT Act to automobile dealers and other non-bank creditors. If the FRB retains this approach in its final rule, dealers would be spared a hardship that would have resulted if the FRB and the other federal banking regulatory agencies excluded dealers from the regulatory exception.   

Section 411 of the FACT Act prohibits creditors from obtaining or using medical information for credit eligibility decisions. In addition to preventing creditors from considering a consumer’s medical condition during the underwriting process, the broad language of Section 411 prevents creditors from such routine uses as considering a consumer’s medical debt as a component of the consumer’s overall debt (as may be used in a debt-to-income analysis).


Despite the breadth of this prohibition, Section 411 authorizes the federal banking regulatory agencies to issue rules that would "permit transactions" that might otherwise be precluded. However, Section 411 does not extend the same authority to the Federal Trade Commission, the agency with enforcement authority over dealers and other non-bank creditors. 

In 2004, the banking agencies jointly proposed rules that permit creditors to obtain and use medical information when determining a consumer’s eligibility for credit, subject to certain conditions. However, the banking agencies limited the scope of the exception to the bank and credit union creditors they regulate.


The banking agencies’ proposed exception did not extend to dealers, captive finance companies and other non-bank creditors.  This would have significantly limited the ability of non-bank creditors to assess a buyer’s credit capacity and placed them at a competitive disadvantage with bank creditors not subject to this restriction. 

In response to this development, the NADA sent a joint NADA/Alliance of Automobile Manufacturers letter to each of the banking agencies, urging them to expand the scope of the above-mentioned exception to include non-bank creditors.


The letter argued that Congress never intended to treat bank and non-bank creditors differently and that excluding non-bank creditors from the exception would threaten the ability of dealers "to continue to offer their customers the choice and convenience of dealer financing." The FTC also sent a letter to the banking agencies urging them to avoid this unintended result. 

The banking agencies agreed with the arguments and recently decided that the FRB would create a separate interim rule that extends the regulatory exception to "creditors not otherwise covered by the rules of any of the agencies." The interim final rule takes effect March 7, 2006. 


The NADA will comment in support of the separate rule, which is available at​p; The NADA also will post a summary of the new section 411 restrictions at (requires member number) well in advance of the effective date.