Holding fast to the protections of the Holder Rule

The FTC’s long-standing Holder Rule requires businesses to include a special notice in credit contracts that gives consumers certain protections. Today, a Staff Note reiterates the Commission’s determination that the Rule applies regardless of the size of the transaction – and corrects some staff guidelines published in 1976.

The Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses – the Holder Rule – protects consumers who enter into credit contracts by preserving their right to assert claims and defenses against any holder of the contract, even if the seller later assigns the contract to a third-party creditor. As enacted by the Commission in 1975, the Rule doesn’t include a maximum dollar amount for covered transactions. However, because the Rule included some definitions that expressly referred to the Truth in Lending Act, FTC staff stated – in separate guidelines not issued by the Commission – that the $25,000 cap then included in TILA limited the reach of the Holder Rule.

Fast forward to the FTC’s most recent routine regulatory review of the Holder Rule. The Commission voted to maintain the Rule, but commenters cited what they urged was an error in the staff guidance limiting the Rule to transactions of $25,000 or less.

The commenters have a point. Because the Holder Rule wasn’t adopted pursuant to TILA, it’s not inherently subject to the exemptions in that law. Furthermore, the plain language of the Rule didn’t adopt TILA’s exemption for larger transactions. In fact, in finalizing the Rule in 1975, certain industry members asked the Commission to impose a cap – a suggestion the Commission expressly rejected.

Staff did say in the 1976 Federal Register Notice announcing the guidelines that they weren’t “formally reviewed or adopted by the Commission. Nor does anything here alter or amend either to the Rule or the official Statement of Basis and Purpose published with it.” If we had a DeLorean fitted with a flux capacitor, we’d go back in time to change the erroneous guidance. Since that’s not possible, we’re stating in the Staff Note that the Holder Rule is not subject to a cap. Businesses should make sure that the Holder Rule Notice is included in all contracts and loans described in the Rule, regardless of whether they’re within TILA’s cap.