The Federal Trade Commission has announced the completion of its review of the Holder in Due Course Rule (Holder Rule), a protection for consumers who purchase goods and services using credit obtained through a merchant or by a lender who works with a merchant.
The rule, formally called the “Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses,” was spared amid a review to streamline the Commission’s massive and aging regulatory frameworks. The regulation dates back to November 1975.
The Holder Rule requires that merchant loans include a provision that preserves consumers’ ability to raise the merchant’s misconduct as a reason for not repaying the loan, even if the loan is sold. It also prevents businesses from using financing mechanisms to collect debts from consumers in situations where the debt arises from a sale in which the merchant defrauded customers, failed to deliver the goods or services, or engaged in other misconduct.
Under the rule’s provisions, consumers can cite a seller’s misconduct in order to defend themselves against a creditor’s lawsuit for money owed under a contract or to seek a refund of money they have paid under the contract.
As part of its systematic review of all its rules and guides, the FTC, in November 2015, sought public comment on the rule, including its efficiency, costs and benefits, and effectiveness.
The FTC received 19 comments, all of which urged retaining the rule. After reviewing the comments, the Commission found “that there is a continuing need for the rule and the record did not warrant a rulemaking to modify” it. The Commission had specifically restated a 2012 advisory opinion that affirmed the remedies it provides are not limited to circumstances where the seller’s conduct warrants rescission of the contract or where the goods or services sold to the consumer are worthless.
The Commission, earlier this month, voted 5-0 to approve publication of the confirmation of the regulation in the Federal Register.
The FTC received 19 comments in response to its Federal Register notice. All commenters who addressed the issue agreed that the Commission should retain it, although some suggested modifying or clarifying its provisions.
All the commenters who addressed the issue supported maintaining the rule; none advocated rescinding it. For example, a comment on behalf of consumer groups stated, “The Holder rule is one of the most important actions the Commission has ever taken in preventing and remedying unfair and deceptive practices in the marketplace.” This comment also noted, “The rule has resulted in no cost to consumers and only minimal cost to businesses.”
Another comment stated that “consumer advocates have described the Holder rule as the FTC’s most effective tool against fraud.”
The Iowa Attorney General’s office described how the rule has benefitted consumers in Iowa and encouraged the Commission to retain the rule. Industry members and credit unions also supported maintaining the rule.
The American Financial Services Association and National Independent Automobile Dealers Association urged the Commission not to make any changes to the rule. The National Auto Dealer Association similarly supported retention of the rule as is, citing wide industry compliance with it in its current form.
In light of the comments received, and in the absence of any opposition, the Commission concluded that a continuing need exists for the Holder Rule. “The comments indicate that the rule benefits consumers and does not impose significant costs, and the Commission has no evidence to the contrary,” it wrote.
Accordingly, the FTC has decided to retain the rule in its current form.