The FTC’s Holder Rule: still holding strong

A lot has changed since 1975: the invention of the internet, cellphones, and widespread availability of solar panels, just to name a few. But the important consumer protections of the Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses (aka the Holder Rule) are as relevant today as they were when the Rule became effective in its entirety in 1976. And there are good reasons for that.

Before the Holder Rule, sellers could (and did) shield themselves from liability for, among other things, selling faulty goods or services to a consumer on credit by assigning the contract to another company (“assignee”). The assignment effectively cut off a consumer’s ability to raise claims or defenses against the assignee or “holder” of the contract. Yet, the consumer was legally required to pay back the debt even if the seller engaged in misconduct or unlawful practices regarding the credit contract. Or, if the seller went out of business or never delivered the goods. The Holder Rule changed that.

As the name implies, the Holder Rule protects consumers who enter into certain 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 another company. So what happens if a seller doesn’t make good on its promises in the credit contract to install new windows or solar panels, provides defective or faulty goods, disappears before the job is done, or engages in other misconduct or unlawful practices regarding the credit contract? The consumer can still use the claims and defenses they had against the seller and can make those claims or defenses against the assignee.

To accomplish this protection, the Rule prohibits the seller from taking or receiving a consumer credit contract that does not contain a specific notice. The seller must include a notice provision in the underlying credit contract that makes any assignee or holder of the contract subject to the claims and defenses the consumer had against the original seller. The provision must state in at least 10-point bold face type:

NOTICE

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF.  RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

The Rule also prohibits the seller from accepting the proceeds of a purchase money loan unless the underlying credit contract contains a similar prescribed notice.

The Holder Rule’s important protections remain crucial today. If you’re in the business of selling consumer goods or services on credit, or purchasing credit contracts, keep in mind:

Don’t bury your head in the assignment sand. Companies that purchase covered credit contracts are subject to the Holder Rule — and that goes for financers too. In other words, the assignee of the credit contract stands in the shoes of the original seller when it comes to a consumer’s claims and defenses related to the seller’s misconduct and unlawful practices, among other things.

Don’t fail to notify with the Notice – the FTC will . . . notice. The Rule requires covered financing contracts to include the Holder Rule Notice verbatim, in full. And don’t include sneaky clauses in financing contracts that contradict or try to waive consumers’ rights. Violating the Holder Rule can be costly: the FTC can seek civil penalties currently at $51,744 per violation, refunds for consumers, and other remedies. Recent cases brought by the FTC and State Attorneys General — including Harris Jewelry and Saint James School of Medicine — demonstrate this point. And don’t forget: many state laws also apply and may protect consumers even if the seller excludes the Notice.

Read this blog this blog to learn more about the Holder Rule.

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