The Federal Trade Commission has declared that a consumer’s right to an affirmative recovery under the Holder Rule is not limited to circumstances where the consumer can legally rescind the transaction or had purchased worthless goods.
The Holder Rule—officially titled the Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses—provides protection for consumers who obtain credit from a seller or seller-arranged credit to finance the purchase of goods or services. The rule allows the consumer to assert all claims and defenses against the holder of the credit contract that the consumer could assert against the seller.
The FTC’s advisory opinion, issued on May 3, 2012, was requested by the National Consumer Law Center and representatives of other consumer organizations, including the Center for Responsible Lending. In 1999, the FTC had issued a staff opinion letter rejecting limitations on the circumstances under which the Holder Rule permits an affirmative recovery. However, prompting the NCLC’s request were at least six cases decided since the issuance of the FTC’s 1999 letter that had refused to follow the staff opinion, including one such case that noted that the staff opinion was not binding on the FTC.
In its opinion, the FTC “affirms that the Rule is unambiguous,” and states that its plain language permits a consumer to assert a seller’s misconduct (1) to defend against a lawsuit for amounts owed under the credit contract, and/or (2) to bring a claim against the holder for an affirmative recovery of money already paid by the consumer under the contract.
According to the FTC, the only limitation in the Holder Rule is that a consumer may not recover more than the amounts he or she has paid under the contract.
Courts that have limited a consumer’s right to an affirmative recovery, the FTC opines, “have misinterpreted two isolated comments in the [Statement of Basis and Purpose (SBP)] that accompanies the Rule.” The SBP comments indicated that affirmative recovery would be available only “where a seller’s breach is so substantial that a court is persuaded that rescission and restitution are justified” or where the consumer “received little or nothing of value from the seller.”
The FTC’s opinion characterizes the SBP comments as “practical observations and predictions” that do not contradict the Holder Rule. The explanation offered by the FTC is that “affirmative recoveries will be rare in cases where rescission is not justified because such recoveries occur only if the consumer’s claim is larger than what the consumer still owes on the loan.” In most such cases, the opinion letter states, the consumer is likely to have discovered the injury and stopped payment when the consumer still owes more on the contract than the amount claimed.
The Holder Rule was included in the Consumer Financial Protection Bureau’s list of rules that it will enforce. (See our prior legal alert discussing the CFPB’s list.) While, as a technical matter, the FTC’s interpretation may not be binding on banks since they are not subject to FTC jurisdiction, it may nevertheless be prudent for banks to take note of the FTC’s interpretation.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).
The group also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.
For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com; or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.
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