Quick Review of the FTC Holder Rule

In a recent post by the Federal Trade Commission titled, “The FTC’s Holder Rule: still holding strong,” the federal regulator draws special and renewed attention to the “Holder Rule.”  So, since the regulator thought it important enough to draw a recent spotlight on this regulation (which has been around since 1976), and the fact that violations of the rule can bring civil penalties from the FTC that are currently at $51,744 per violation, refunds for consumers, plus other remedies (just ask Harris Jewelry and Saint James School of Medicine), we figure a refresher on the Holder Rule would be a good idea.

Ever wonder why there is a dedicated disclosure in some contracts, including loan contracts for some manufactured homes that say:

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.

TMHA’s library of forms for our members has this separate notice in our FTC Preservation of Consumer Claims and Defenses.  It is also referenced on the bottom of page 4 of our Two-Party Direct Credit Sale Loan Contract.

The following details on the applicability of the Holder Rule in the context of manufactured housing lending is also included in our member Knowledge Base Article series under the - Guidance on Two-party Loan Contracts.

The applicability of the separate FTC notice - “Preservation of Consumer Claims and Defenses,” is required when the original loan contract was entered into with the seller of the thing being purchased (meaning the seller is also the creditor/lender, at least initially). 

So, in this context when there is a “credit sale” because the initial seller and the creditor are the same entity, and you are therefore using the “five-box” Two-Party Direct Credit Sale Loan Contract. This law essentially preserves their right to assert claims and defenses against any holder of the contract, even if the seller subsequently assigns the contract or works with a third-party creditor who finances the sale.  Similarly, the rule most likely will apply to all traditional retail installment contracts offered by the seller for the exact same reason – the seller is also the initial creditor.

A creditor or assignee of the contract is thus subject to any claims or defenses that the consumer could assert against the seller. The FTC adopted the Rule to provide recourse to consumers who otherwise would be legally obligated to make full payment to a creditor or assignee despite breach of warranty, misrepresentation, or even fraud on the part of the seller.

The notice to be used in conjunction with the TMHA form should be a separate form that is in at least 10-point font, bold face type.