[Federal Register Volume 84, Number 85 (Thursday, May 2, 2019)]
[Rules and Regulations]
[Pages 18711-18715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08886]
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FEDERAL TRADE COMMISSION
16 CFR Part 433
RIN 3084-AB16
Trade Regulation Rule Concerning Preservation of Consumers'
Claims and Defenses
AGENCY: Federal Trade Commission.
ACTION: Confirmation of rule.
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SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission'') has
completed its regulatory review of the Trade Regulation Rule Concerning
Preservation of Consumers' Claims and Defenses (``Holder Rule'' or
``Rule'') as part of the agency's regular review of all its regulations
and guides, and has determined to retain the Rule in its present form.
DATES: This action is effective May 2, 2019 and is applicable as of
April 23, 2019.
ADDRESSES: Relevant portions of the record of this proceeding,
including this document, are available at https://www.ftc.gov.
FOR FURTHER INFORMATION CONTACT: Stephanie Rosenthal, (202) 326-3332,
Bureau of Consumer Protection, Federal Trade Commission, 600
Pennsylvania Ave. NW, Washington, DC 20580.
SUPPLEMENTARY INFORMATION:
Introduction
The Federal Trade Commission previously requested comments on the
Holder Rule as part of its comprehensive regulatory review program.\1\
Specifically, the Commission sought comments on the Holder Rule's costs
and benefits, and on whether there is a continuing need for it.
Commenters uniformly supported the Rule, and a few suggested restating
a previously announced advisory opinion of the Rule, clarifying
portions of the Rule, or expanding the reach of the Rule. After
considering the comments and evidence, the Commission has determined to
retain the Rule without modification.
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\1\ The Commission publishes this schedule annually, with
adjustments in response to public input, changes in the marketplace,
and resource demands. For more information, see https://www.ftc.gov/enforcement/rules/retrospective-review-ftc-rules-guides.
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Background
On November 14, 1975, the Commission promulgated its Trade
Regulation Rule Concerning the Preservation of Consumers' Claims and
Defenses. The Holder Rule protects consumers who enter into credit
contracts with a seller of goods or services by preserving 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. It requires sellers that arrange
for or offer credit to finance consumers' purchases to include the
following Notice in at least ten-point, bold face type in their
contracts: ``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 . . . WITH THE PROCEEDS HEREOF.
RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE
DEBTOR HEREUNDER.'' \2\ A creditor or assignee of the contract is thus
subject to any claims or defenses that the consumer could assert
against the seller. The Commission 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.\3\
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\2\ 16 CFR 433.2. The Rule does not apply to financing by credit
card issuers. 16 CFR 433.1(c).
\3\ See 40 FR 53506, 53507 (Nov. 18, 1975) (``The rule is
directed at what the Commission believes to be an anomaly. . . . The
creditor may assert his right to be paid by the consumer despite
misrepresentation, breach of warranty or contract, or even fraud on
the part of the seller, and despite the fact that the consumer's
debt was generated by the sale.'')
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Regulatory Review Comments and Analysis
The Commission received nineteen comments in response to its
Federal Register notice.\4\ Three comments were from consumer groups
and legal advocacy organizations, three comments were from offices of
State Attorneys General, five comments were from industry and trade
association groups, four comments were from credit unions and a credit
union association, and four comments were from consumers. As discussed
below, all commenters who addressed the issue agreed that the
Commission should retain the Rule, although some suggested modifying or
clarifying the Rule.
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\4\ A table at the end of this notice lists the organizations
that commented. All nineteen comments are available on the
Commission's website at https://www.ftc.gov/policy/public-comments/initiative-631.
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The Commission discusses the comments in three sections. In Section
A, the Commission discusses the comments that support retaining the
Rule. Section B discusses the comments concerning affirmative
recoveries and the Commission's 2012 advisory opinion on that topic. In
Section C, the Commission analyzes the comments that propose
modifications to the Rule.\5\ The Commission has analyzed the proposed
benefits to consumers of proposed changes to the Rule's coverage,
including any evidence provided of those benefits, and balanced those
proposed benefits against the cost of implementing the changes, the
need for the change, and alternative means of providing these benefits
for consumers, such as consumer education materials.
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\5\ A few comments urged clarifications of the Rule or discussed
interpretative staff guidance. For example, several comments urged
the Commission to confirm or reject 1976 staff guidelines regarding
exempt transactions. Bingham (opposing $25,000 exemption ``made in
1976''); NCLC at 6 (commenting that Commission should clarify the
Rule's application to large transactions because 1976 staff
statement describing such an exemption was misconceived); AFSA at 3,
5 (urging the Commission to confirm 1976 staff guidelines and
arguing that transactions that exceed $50,000 are exempt). The
Commission has not formally reviewed or adopted the staff views
discussed in these comments. See 41 FR 20022 (1976). Staff will
review the 1976 informal guidelines and educational materials in
light of these comments. Because these comments do not advocate or
provide evidence for modification or rescission of the Rule, they
are beyond the scope of this review. See 80 FR 75019 (describing the
Commission's Regulatory Review Program).
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A. Support for the Rule
All of 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.'' \6\ This
comment also noted, ``The Holder Rule has resulted in no cost to
consumers and only minimal cost to businesses.'' \7\ Another comment
stated that ``[c]onsumer advocates have described the Holder Rule as
the `FTC's most effective tool against fraud.' '' \8\ NACA stated that
the Rule ``protects consumers in the marketplace from unscrupulous
vendors by providing a valuable avenue for redress when sellers
[[Page 18712]]
act badly.'' \9\ The Iowa Attorney General's office described how the
Rule has benefitted consumers in Iowa, and encouraged the Commission to
retain the Rule.\10\ Industry members and credit unions also supported
maintaining the Rule. The American Financial Services Association
(``AFSA'') and National Independent Automobile Dealers Association
(``NIADA'') urged the Commission not to make any changes to the
Rule.\11\ The National Auto Dealer Association (``NADA'') similarly
supported retention of the Rule as is, citing wide industry compliance
with the Rule in its current form.\12\ The Heartland Credit Union
Association (``Heartland'') supported the consumer protection goals of
the Rule and ``supports compliance with the Holder Rule.'' \13\
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\6\ National Consumer Law Center (``NCLC'').
\7\ Id.
\8\ National Association of Consumer Advocates (``NACA'').
\9\ Id.
\10\ Iowa Attorney General's office; see also Nadine Brown.
\11\ AFSA, NIADA.
\12\ NADA.
\13\ Heartland. See also Illinois Credit Union League (noting
that not a large number of their members' transactions are affected
by the Rule).
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In light of the comments received, and in the absence of any
opposition, the Commission concludes that a continuing need exists for
the Rule. The comments indicate that the Rule benefits consumers and
does not impose significant costs, and the Commission has no evidence
to the contrary. Accordingly, the Commission has decided to retain the
Rule.
B. Reiteration of the Commission's 2012 Advisory Opinion Regarding
Affirmative Recoveries
Two commenters asked the Commission to reiterate the Commission's
May 3, 2012 advisory opinion concerning affirmative recoveries.\14\ The
Commission restates that opinion as part of this rule review.\15\ In
particular, the Rule does not limit affirmative recovery to
circumstances where rescission is warranted or where the goods or
services sold to the consumer are worthless. Indeed, the Rule places no
limits on a consumer's right to an affirmative recovery other than
limiting recovery to a refund of monies paid under the contract. As the
Commission previously stated, to give full effect to the Commission's
original intent to shift seller misconduct costs away from consumers,
consumers must have the right to recover funds already paid under the
contract if such recovery is necessary to fully compensate the consumer
for the misconduct--even if rescission of the transaction is not
warranted.
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\14\ NACA and NCLC.
\15\ Letter to Jonathan Sheldon and Carolyn Carter, NCLC (May 3,
2012), available at https://www.ftc.gov/policy/advisory-opinions/16-cfr-part-433-federal-trade-commission-trade-regulation-rule-concerning.
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One commenter further urged the Commission to affirm that the
ability of consumers to bring an affirmative claim based on the Holder
Rule does not depend upon whether state law authorizes affirmative
actions against holders.\16\ The commenter was specifically concerned
with the Eighth Circuit's decision in LaBarre v. Credit Acceptance
Corp., in which the court concluded that a Minnesota consumer could not
rely on the Holder Rule Notice to bring an action against an assignee
because a state consumer protection statute that provided similar
protections specified that consumers may raise the statutory
protections only as a defense or set-off.\17\ Although the Minnesota
statute stated that this restriction on the manner in which consumers
could assert rights applied to ``the rights of the consumer under this
subdivision,'' the Eighth Circuit applied this restriction to a claim
based on the Holder Rule Notice in the consumer's contract. In our
judgment, the court erred by limiting recovery under the Holder Rule to
defense or set-off under the Minnesota statute. The Minnesota statutory
limitation might apply to claims and defenses asserted under the
specific subdivision of the Minnesota Code, but would not apply to
other claims and defenses that a consumer might assert against the
seller.\18\
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\16\ NCLC.
\17\ 174 F.3d 640, 644 (8th Cir. 1999) (citing Minn. Stat. sec.
325G.16, sub. 3). The Minnesota statute provides:
Claims and defenses. Any assignee of the contract or obligation
relating to the consumer credit sale shall be subject to all claims
and defenses of the consumer against the seller arising from the
sale, notwithstanding any agreement to the contrary. Provided,
however, that the assignee's liability under this subdivision shall
not exceed the amount owing to the assignee at the time the claim or
defense is asserted against the assignee. The rights of the consumer
under this subdivision can only be asserted as a matter of defense
to or set off against a claim by the assignee.
Minn. Stat. sec. 325G.16, sub. 3. A ``Consumer credit sale'' is
defined as a sale of goods or services in which:
(a) Credit is granted by a seller who regularly engages as a
seller in credit transactions of the same kind;
(b) the buyer is a natural person; and
(c) the goods or services are purchased primarily for a
personal, family or household purpose, and not for commercial,
agricultural, or business purpose.
Id. sec. 325G.15, sub. 2.
\18\ See Eachen v. Scott Housing Systems, Inc., 630 F. Supp.
162, 165-67 (M.D. Ala. 1986) (Holder Rule and state statute that
provides that consumer rights can only be asserted as defense or set
off are not in conflict because consumers premised their suit on
Holder Rule, and state limitation is applicable only to consumer
claims under that section of state law).
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C. Proposed Modifications of the Rule
Several commenters supported the Rule and additionally suggested
modifications to the Rule. As discussed in detail below, none of the
comments that proposed changing the Rule provided the Commission with
specific evidence of the potential costs and benefits of such
modifications.
1. Comments Regarding Contractual Language and Other Notices to and
Communications With Consumers
Several commenters suggested modifying the contractual language
notifying consumers of their rights under the Rule and requiring
additional notices to consumers. The Office of the New York Attorney
General, joined by the Attorneys General of Idaho, Iowa, Kentucky,
Louisiana, Maine, Maryland, Minnesota, Virginia, and Washington
(``Joint Attorneys General'') recommended amending the Rule to use
``less `legalistic' language,'' to ``explicitly state that the
consumer's right to an affirmative recovery is unqualified,'' and to
require that collection notices include a notice advising consumers of
their rights under the Rule.\19\ The Office of the District of Columbia
Attorney General (``DC AG'') also recommended modifying the
``legalistic'' wording of the Rule and requiring the Rule's notice in
collection notices.\20\ Other commenters recommended modifying the Rule
to require lenders to notify consumers of their rights under the Rule
and ``proactively and meaningfully respond to consumer complaints.''
\21\
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\19\ Joint Attorneys General.
\20\ DC AG.
\21\ See MFY Legal Services (``MFY'').
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None of the comments proposing these modifications to the Rule
provided the Commission with evidence showing how and the extent to
which these changes would benefit consumers, and they did not address
whether the benefits to consumers would outweigh the potential
increased costs in adopting such changes. Industry commenters noted
that businesses would pass any increased costs of compliance with the
Holder Rule along to consumers.\22\
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\22\ See AFSA; Mortgage Bankers Association (``MBA'').
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The Commission believes that the record does not support
modification of the Rule language. To assist with consumers'
understanding of the Rule, however, the Commission will review and
consider revising its existing consumer education materials to help
[[Page 18713]]
inform consumers of the Rule's protections.
2. Comments Regarding Application to Leases
Three comments discussed the Rule's application to leases. Two
comments advocated for the Rule's application to leases, and one of
these commenters proposed a rulemaking to extend the Rule to consumer
motor vehicle leases.\23\ A third comment urged the Commission to
confirm that the Rule applies only to consumer credit contracts.\24\
NCLC noted that courts generally have found that the Rule does not
apply to leases. NCLC further asserted that leases today (in contrast
to 1976) are widespread, and the Rule's protections are just as
essential for leasing as consumer credit. This comment also indicated
that, under state law, lessees typically can bring seller-related
defenses but cannot assert claims against the assignee. AFSA, however,
stated that the ``plain language of the Rule does not apply to consumer
vehicle leases'' and urged the Commission not to amend or expand the
Rule's application to leases.\25\
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\23\ See NCLC, Bingham.
\24\ AFSA.
\25\ AFSA.
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The Commission appreciates the information provided by these
comments and notes that the Rule does apply to certain leases. Certain
contracts labelled as ``leases'' are credit transactions in which a
consumer repays debt by paying the lease installments. Such contracts,
when used in the sale or lease of goods or services, are subject to the
Rule.\26\ None of the comments that advocated expanding coverage to all
leases provided evidence as to how such a change would benefit
consumers.\27\ Furthermore, none of the comments addressed the
increased costs to businesses, if any, that would result from modifying
the Rule to cover all leases. Thus, the Commission does not propose
changing the Rule.\28\
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\26\ The Rule applies when a seller, ``[i]n connection with any
sale or lease of goods to consumers'' takes or receives ``a consumer
credit contract'' or accepts proceeds from ``a consumer credit
contract'' made in connection with a purchase money loan. 16 CFR
433.2; see also 16 CFR 433.1(j) (``Seller'' subject to the Holder
Rule means a person who ordinarily ``sells or leases'' goods or
services). Some leases satisfy the Rule's definition of ``consumer
credit contract,'' which encompasses ``[a]ny instrument which
evidences or embodies a debt arising from'' the transactions defined
in the Rule as a ``Purchase money loan'' and ``Financing a sale.''
16 CFR 433.1(i). ``Financing a sale'' is defined as extending credit
in connection with a ``Credit sale'' within the meaning of TILA and
Regulation Z. 16 CFR 433.1(e). Under the TILA and Regulation Z, a
``credit sale'' includes a contract in the form of a ``bailment or
lease'' if the contract is not terminable at will by the consumer,
and the consumer both contracts ``to pay as compensation for use a
sum substantially equivalent to, or in excess of, the total value of
the property and service involved,'' and will become (or has the
option to become), for no additional consideration or for nominal
consideration, the owner of the property upon compliance with the
agreement. 15 U.S.C. 1602(h); 12 CFR 226.2(a)(16); 12 CFR
1026.2(a)(16). Leases that satisfy these conditions are covered by
the Holder Rule; leases that do not are not ``consumer credit
contracts'' and are not subject to the Rule.
\27\ During an FTC-hosted roundtable on automobile leases in
November 2011, one panelist discussed the Holder Rule, stating that
it was not clear whether the Rule applied to leasing. None of the
panelists specifically advocated for modifying the Rule to include
all leases. See The Road Ahead: Selling, Financing & Leasing Motor
Vehicles, A Roundtable (November 17, 2011), https://www.ftc.gov/sites/default/files/documents/public_events/road-ahead-3rd-roundtable-november-17th/dc_sess1.pdf; https://www.ftc.gov/sites/default/files/documents/public_events/road-ahead-3rd-roundtable-november-17th/dc-agenda-final.pdf.
\28\ NACA also suggested that the FTC consider eliminating the
real estate mortgage exclusion from the Holder Rule so that it would
apply to such transactions. This suggestion was offered without a
discussion of the benefits to consumers or cost to business from the
proposed change and, therefore, the Commission does not have
sufficient information to consider such a modification. Wells Fargo
commented that it would be inappropriate to extend the Rule to home
mortgages and ``strongly urge[d] the FTC to carefully study the
potential impacts of any expansion, and to engage with participants
in all aspects of the residential mortgage market.''
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3. Comments Regarding Recovery of Attorney's Fees
Six comments addressed whether the Rule's limitation on recovery to
``amounts paid by the debtor'' allows or should allow consumers to
recover attorneys' fees above that cap: Four comments supported having
no cap on recovery of attorneys' fees, while one opposed it and one
proposed a set fee schedule in some circumstances.\29\ According to the
comments, some courts have permitted fees above the cap, while others
have not. NCLC argued that liability for attorneys' fees under fee-
shifting statutes is independent from an assignee's derivative
liability under the Holder Rule, and therefore is not capped by the
Rule's limitation to ``recovery hereunder.'' NCLC further argued that
the purpose of fee-shifting statutes is to encourage settlement and
make it feasible for consumers to pursue cases through small claims
actions--which NCLC asserted would be ineffective if attorneys' fee
recoveries were limited by the Rule to amounts paid by the debtor. This
comment noted that the Staff Guidelines indicate that the holder is
liable both for seller misconduct under the Holder Rule and for its own
conduct independent of any cap:
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\29\ See 16 CFR 433.2(a) and (b). For comments supporting no cap
on attorneys' fees recovery, see NCLC, NACA, Anderson, and MFY. For
comments opposing having no cap on attorneys' fees recovery or
otherwise limiting the scope of attorneys' fees in some situations,
see AFSA, CU Direct Corporation (``CU Direct''). Some commenters
recommended full elimination of the liability cap. See, e.g., MFY.
The words `recovery hereunder' . . . refer specifically to a
recovery under the Notice. If a larger affirmative recovery is
available against a creditor as a matter of state law, the consumer
would retain this right.'' \30\
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\30\ See NCLC (quoting Staff Guidelines, 41 FR at 20023); see
also NACA. The Staff Guidelines also state that the Rule does not
eliminate any other rights the consumer may have as a matter of
local, state, or federal law. 41 FR at 20023.
AFSA, however, argued that the plain language of the Rule limits all
recovery, including interests, costs, and attorneys' fees, to the
amount that the consumer has paid under the contract.\31\
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\31\ AFSA.
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We conclude that if a federal or state law separately provides for
recovery of attorneys' fees independent of claims or defenses arising
from the seller's misconduct, nothing in the Rule limits such recovery.
Conversely, if the holder's liability for fees is based on claims
against the seller that are preserved by the Holder Rule Notice, the
payment that the consumer may recover from the holder--including any
recovery based on attorneys' fees--cannot exceed the amount the
consumer paid under the contract. Claims against the seller for
attorneys' fees or other recovery may also provide a basis for set off
against the holder that reduces or eliminates the consumer's
obligation. The Commission does not believe that the record supports
modifying the Rule to authorize recovery of attorneys' fees from the
holder, based on the seller's conduct, if that recovery exceeds the
amount paid by the consumer.\32\ Additionally, one commenter suggested
that the Commission use the Rule to establish a schedule of attorneys'
fees and circumstances under which the fees could be awarded.\33\ Such
measures, however, are beyond the scope of the Rule, and not supported
by any showing
[[Page 18714]]
that such an expansion of the Rule is necessary to achieve its
objectives.
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\32\ Relatedly, AFSA argued that the language of the Holder Rule
stating that recovery shall not exceed amounts paid by the debtor
``prevents using the Rule to impose an injunction on Holders.'' In
support of this contention, AFSA cited precedents that discuss the
distinction between a legal cause of action and the remedies (such
as an injunction) that may be available for a cause of action.
Neither the precedents cited nor the text of the Holder Rule support
AFSA's contention that the Holder Rule does not allow the issuance
of an injunction. The final sentence of the Holder Rule Notice does
not restrict the types of remedies available when a claim or defense
is preserved; it simply states that the money that a consumer may
obtain from a holder based on the Notice may not exceed amounts
paid. The Commission affirms that the plain language of the Rule
does not limit the types of relief a court may award against a
holder.
\33\ See CU Direct.
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4. Comments Regarding Application of Rule in Absence of Written Notice
Some commenters asked the Commission to modify the Rule language so
that Holder Rule protections would apply even where the consumer credit
contract does not include the Holder Rule Notice.\34\ According to the
comments, if the contract does not contain the Holder Notice, consumers
may not be able to preserve claims and defenses in all the
circumstances contemplated by the Rule.
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\34\ See, e.g. DC AG, Joint Attorneys General.
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This issue would arise only in those instances where sellers make
contracts or accept the proceeds from purchase money loans that omit a
required Holder Rule Notice. The comments do not provide evidence that
such violations are widespread.\35\ Moreover, where such violations
occur, a consumer may be able assert claims and defenses against a
holder. Several state laws build upon the Holder Rule by providing
that, if an instrument is used to finance consumer transactions subject
to the Holder Rule, a holder's rights against a consumer are subject to
the limitations imposed by the Holder Rule Notice--just as if the
Notice was included in the instrument.\36\ The comments do not provide
evidence that there are a significant number of transactions in which
sellers violate the Holder Rule and, despite laws limiting holders'
remedies, the sellers' violations allow a holder to cut off consumer
claims and defenses. Therefore, the Commission declines to propose
modifying the Rule to address these concerns.
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\35\ To the contrary, commenter NADA cited an FTC press release
that stated an FTC investigation into 50 automobile dealers ``found
broad compliance with the Rule among auto dealers.'' NADA (citing
FTC, Press Release, FTC Finds Broad Compliance Among Auto Dealers
with Rule That Protects Consumers with Car Loans (May 16, 2011),
available at https://www.ftc.gov/news-events/press-releases/2011/05/ftc-finds-broad-compliance-among-auto-dealers-rule-protects).
\36\ See, e.g., Tex. Bus. & Com. Code section 3.305(e) (in a
consumer transaction, an instrument that omits statement required by
law preserving claims and defenses has the same effect as if the
statement was included, based on Uniform Commercial Code, rev. art.
3, section 3-305(e) (2002), adopted by seven states); Uniform
Commercial Code section 9-403(d) (1999) (same for record of debt in
a consumer transaction that is a secured transaction); Assocs. Home
Equity Servs., Inc. v. Troup, 343 N.J. Super. 254, 276, 778 A.2d
529, 542 (App. Div. 2001) (implying Holder Rule Notice in contract
from which it was omitted). A few states also have consumer
protection statutes that provide remedies against creditors that are
similar or the same as those contemplated by the Holder Rule, and
are not dependent on the presence of the Holder Rule Notice in the
loan document. See Iowa Code Sec. 537.3405 (preserving claims and
defenses in specified transactions as a matter of law); Md. Code,
Com. Law section 12-309 (same); Mass. Gen. Laws ch. 255D, section
25A (same); N.Y. Gen. Bus. Law section 253 (same); Kan. Stat.
sections 16a-3-404, 16a-3-405 (same, based on Uniform Consumer
Credit Code, 1974).
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5. Comments Regarding Waiver of Right To Assert Claims
Two comments urged that the FTC state that consumers' rights under
the Rule cannot be waived.\37\ These commenters, however, did not
describe specific ``waiver''-related practices that they believed were
not adequately addressed by the current Rule, or provide evidence of
unfair practices involving waivers.
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\37\ DC AG (``I also recommend that the Holder Rule Notice state
that a consumer's right to assert claims is unconditional and cannot
be waived, so that consumers will be less subject to deceptive
statements that state otherwise.''); Joint Attorneys General (``The
FTC should also clarify that the holder rule cannot be waived.'')
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The Holder Rule was adopted, in part, to prevent the use of
contractual waivers to cut off consumer claims and defenses.\38\ Courts
have recognized that the contractual provision required by the Rule
makes unenforceable other provisions that purport to waive or otherwise
undermine the consumers' ability to assert the claims or defenses.\39\
Some states have also recognized a private right of action under state
law against sellers, lenders or holders that attempt to undermine the
Rule through contractual provisions or notices that might be described
as a waiver.\40\ Moreover, the Commission, in an unlitigated settlement
of an enforcement action, indicated that it is an unfair or deceptive
practice under federal law for a creditor to represent that consumers
waive their rights under the Holder Rule if they do not give the
creditor written notice of their complaints about sellers.\41\
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\38\ 40 FR at 53508, 53510, 53512 (describing practice in which
consumers rights are cut off by inserting a waiver of defenses
clause in the consumer's sales agreement with the seller); see also
id. at 53523 (``[T]he use of promissory notes, waivers of defenses,
and vendor-related loan financing to foreclose consumer claims and
defenses in credit sale transactions constitutes an unfair practice
under 15 U.S.C. 45, as amended.'')
\39\ Hinojosa v. Castellow Chevrolet Oldsmobile, 678 SW2d 707,
709-10 (Tex. Ct. App. Corpus Christi 1984); Hernandez v. Forbes
Chevrolet Co., 680 SW2d 75, 76-77 (Tex. Ct. App. 13th Dist.1984);
but see Blackmon v. Hindrew, 824 SW2d 85, 88 (Mo. Ct. App. 1992)
(reaching contrary result by giving effect to contract recitals
inconsistent with the Holder Notice).
\40\ Heastie v. Community Bank, 727 F. Supp. 1133 (N.D.
Ill.1989); Jaramillo v. Gonzales, 50 P.3d 554, 561-62 (N.M. Ct. App.
2002) (bank's alleged refusal to acknowledge its liability under the
FTC Holder Rule stated a claim for violation of the state's Unfair
Practices Act).
\41\ Beneficial Corporation, 96 F.T.C. 120 (1980) (alleging that
Beneficial's notices to consumers stating that the consumers'
ability to assert claims or notices would be waived unless the
consumer provided written notification within a certain period ``has
the tendency and capacity to deter consumers from asserting valid
claims and defenses'' and violates Section 5 of the FTC Act).
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Thus, practices that purport to waive a consumer's rights under the
Holder Rule are contrary to its purpose, and companies that engage in
such practices risk liability under federal and state laws. Because the
current record does not provide examples of misconduct associated with
waivers that is occurring despite the existing law, the Commission is
not convinced that these comments warrant considering changes to the
Rule. However, the Commission staff will continue to monitor this
issue.\42\
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\42\ Two commenters urged the Commission to list specific
practices related to the operation of the Holder Rule that are
unfair or deceptive under Section 5 of the FTC Act. NCLC; NACA. The
Commission declines to enumerate such a list, which is beyond the
scope of this regulatory review, but will continue to use its
enforcement authority to combat unfair and deceptive practices.
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6. Comments Regarding Modifying the Rule To Apply More Broadly to
Lenders
Two comments recommended that the Commission expand the Rule to
cover lenders, in addition to retail ``sellers.'' \43\ Specifically,
these comments urged the Commission to require lenders to include
Holder Rule language in their contracts because they assert that most
credit contracts are drafted by the assignee, rather than the seller,
and both the seller and the lender should have joint responsibility to
include the Holder Rule Notice.\44\ However, industry commenters
explained that expanding the requirements to lenders under the Rule
would have meaningful costs to lenders that would ultimately be passed
on to consumers.\45\ Upon review of the comments, the Commission
concludes that the record does not include sufficient evidence to
support proposing an expansion of the Rule to apply to lenders.\46\
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\43\ See, e.g., MFY, NCLC.
\44\ See NCLC.
\45\ See AFSA, MBA.
\46\ The Commission previously considered amending the Rule to
extend it to third-party creditors, but ultimately declined to do so
because the evidence was ``inadequate to support'' such an
amendment. Regulatory Flexibility Act Review of the Trade Regulation
Rule Concerning Preservation of Consumers' Claims and Defenses, 53
FR 44456, 44457 (Nov. 3, 1988). In particular, the Commission found
that ``the record contains little evidence of consumer injury
occurring after the Holder Rule became effective and little evidence
to suggest that creditor participation in cutting off consumers'
claims is prevalent.'' Id.
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Conclusion
The comments uniformly favored retention of the Rule and stated
that there is a continuing need for the Rule; that the Rule benefits
consumers; that
[[Page 18715]]
the Rule does not impose substantial economic burdens; and that the
benefits outweigh the minimal costs the Rule imposes. Although
commenters recommended that the Commission modify certain aspects of
the Rule, none of the comments provided sufficient evidence
demonstrating that such modifications were necessary and would, in
fact, help consumers. Moreover, none of the comments proposing such
modifications analyzed the associated costs.
The FTC plans to review and consider revising our consumer
education materials to address the concerns raised in the comments
submitted pursuant to this rule review to ensure that consumers more
easily understand the Rule's protections. Furthermore, as noted in both
NCLC's and NACA's comments, the Commission has a variety of enforcement
tools available to help ensure compliance.\47\ If, at a later date, the
Commission concludes that the Rule, case law interpreting the Rule, and
the FTC's other enforcement tools do not provide adequate guidance and
protection for consumers in the marketplace, it can then consider,
based on a further record, whether and how to amend the Rule.
Accordingly, the Commission has determined to retain the current Rule
and is terminating this review.
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\47\ The Commission encourages all stakeholders and consumers to
refer suspected violations of the Holder Rule to the Commission via
ftc.gov/complaints.
By direction of the Commission.
Julie A. Mack,
Acting Secretary.
List of Commenting Organizations and Short-Names/Acronyms
------------------------------------------------------------------------
Short-name/acronyms Commenter
------------------------------------------------------------------------
AFSA...................................... American Financial Services
Association.
CU Direct................................. CU Direct Corporation.
CUNA...................................... Credit Union National
Association.
DC AG..................................... Attorney General for the
District of Columbia.
Heartland................................. Heartland Credit Union
Association.
ICUL...................................... Illinois Credit Union
League.
Iowa AG................................... Iowa Attorney General's
Office.
Joint Attorney Generals................... Attorneys General of New
York, Idaho, Iowa,
Kentucky, Louisiana, Maine,
Maryland, Minnesota,
Virginia and Washington.
MBA....................................... Mortgage Bankers
Association.
MFY....................................... MFY Legal Services, Inc.,
Lincoln Square Legal
Services, Inc., and Fordham
Law School's Feerick Center
for Social Justice.
NACA...................................... National Association of
Consumer Advocates.
NADA...................................... National Automobile Dealers
Association.
NCLC...................................... National Consumer Law
Center, Americans for
Financial Reform, The
Center for Responsible
Lending, Consumer Action,
Consumer Federation of
America, Consumers for Auto
Reliability and Safety,
Consumers Union, NAACP,
NACA, The Institute for
College Access & Success,
U.S. Public Interest
Research Group, Alabama
Appleseed, Arizona
Community Action
Association, Arkansans
Against Abusive Payday
Lending, Arkansas Community
Organizations, Community
Legal Services, Connecticut
Association for Human
Services, Connecticut
Citizens Action Group,
Housing and Economic Rights
Advocates, Kentucky Equal
Justice Center, LAF, The
Legal Assistance Resource
Center of Connecticut,
North Carolina Justice
Center, Public Justice
Center, Public Law Center,
Veterans Education Success,
Virginia Citizens Consumer
Council, and Woodstock
Institute.
NIADA..................................... National Independent
Automobile Dealers
Association.
Wells Fargo............................... Wells Fargo Bank.
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[FR Doc. 2019-08886 Filed 5-1-19; 8:45 am]
BILLING CODE 6750-01-P