Consumers who finance their purchases through a third-party lender may have new protections against repaying their loan in full when the retailer engages in consumer fraud or deceptive trade practices. The Federal Trade Commission (FTC) is currently reviewing the Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses (a.k.a. the Holder Rule). The Holder Rule is critical in preventing and remedying unfair and deceptive trade practices, allowing consumers to bring claims against the entity holding debt when a seller helps to arrange credit. Under the Holder Rule, there must be a notice in all credit documents that third-party credit assignees and lenders are subject to any claims that the consumer has against the seller of goods or services.
According to The National Consumer Law Center, the Holder Rule is the most effective legal tool a consumer has against consumer fraud. The Holder Rule gives consumers a remedy for seller misconduct, even when their debt obligation is to a creditor and not this seller.
What does this mean for consumers? Claims can be brought against lenders and creditors in legal disputes related to:
- Car purchases and loans
- Private student loans
- Home improvement contracts
- Defective goods and goods that were never delivered
- Faulty products or services
- Any consumer transaction
Consumer Fraud Claims Before The Holder Rule Was Adopted by FTC
Prior to the Holder Rule adoption by the FTC, the market was ripe for consumer fraud. Vendors would sell faulty goods on credit and then arrange a creditor contract that would waive consumer rights to claims against any seller-related defenses against the creditor. Consumers were then legally obligated to pay the full price of goods and finance charges even when goods were defective or never delivered. Creditors made a profit and had no incentive to police seller misconduct and consumers had no legal defenses against the seller.
Proposed Modifications for Consumer Protection
The Holder Rule gives consumers the right to affirmative recover when goods or services are worthless. Now consumers can raise seller-related defenses against creditors and lenders. Consumers can now stop payment in the event of seller misconduct, giving creditors an incentive to police transactions. The FTC is currently reviewing the Holder Rule and the following changes to bolster consumer protections:
- Give consumers the right to recover payments made in a fraudulent transaction regardless of consumer has right to rescind
- Revise guidelines to apply Holder Rule to transactions over $25,000, extending protections to many car sales and loans
- Issue a statement that Rule covers leases not only “consumer credit contracts”
- Make lenders responsible for complying with the rule. Currently consumers have no remedy against lender where Holder Notice is improperly omitted from loan documents
- Revise rule to provide that it is deceptive to include contract terms that contradict the Holder Notice.
- Bring enforcement actions against sellers who fail to insert or arrange for the insertion of the Holder Notice in credit arrangements.
- Issue opinion that the rule operates independently of state law regulations related to holder liability.
- Issue an opinion stating that Truth in Lending Act limit on creditor liability only applies to TIL Act violations, not liability under Holder Rule for state law claims.
- Issue an opinion that interprets to rule to allow consumers recovery for attorney fees in addition to contract amount. Currently, the maximum recovery is amount paid under contract.
- Expand the rule to allow consumers to raise claims and defenses against loan originator, not just against seller.
Know Your Rights and Support Holder Rule Modifications
Consumers benefit significantly from the Holder Rule, but would have additional legal protections with these modifications in place. If you are a consumer who has suffered because of seller fraud or you have been obligated to pay a creditor even in the event of seller misconduct you may have a claim. Our firm is in support of FTC modifications and is currently reviewing cases of seller fraud and consumer credit contracts. For more information about your rights as a consumer under The Holder Rule, please contact the Minnesota consumer lawyers at Wanta Thome PLC at 612-252-3570.