California Federal Court Holds FTC Holder Rule Does Not Require Lenders, Creditors to Provide Holder Notice; NBA Preempts Certain California UCL Claims

On April 12, the U.S. District Court for the Northern District of California held that (i) the Federal Trade Commission’s (FTC) Holder Rule does not require lenders or creditors to include the FTC Holder Notice in consumer credit contracts when the seller has failed to do so, and (ii) the National Bank Act (NBA) preempts certain California Unfair Competition Law (UCL) claims in connection with the failure for a national bank to include the FTC Holder Notice. Kilgore v. Keybank, N.A., Case No. C-08-2958, 2010 WL 1461577 (N.D. Cal. Apr. 12, 2010). In this putative class action, the defendant bank was the partner and preferred lender for an educational institution that became bankrupt. The borrowers alleged that they took out loans from the bank to pay for tuition but were unable to complete their studies because the institution declared bankruptcy. The borrowers brought six claims under the UCL and sought to enjoin the bank from collecting on the loans. The borrowers alleged that its service contracts with the educational institution and the promissory notes with the bank were both consumer credit contracts and omitted the Holder Notice, which the borrowers argued was required. The court first held that the bank was not required to provide the Holder Notice because it was the lender, not a seller, in the transaction. The court reasoned that the Holder Rule imposes obligations only on sellers: “[a]lthough a seller violates the Holder Rule by taking a consumer credit contract – or by accepting proceeds of a purchase money loan made pursuant to a contract – that omits the notice, the same cannot be said of a lender or creditor.” The court also dismissed the borrowers’ fraud claim because it did not properly plead that the bank breached a duty to disclose, as required by the UCL. Next, the court held that the NBA and Office of the Comptroller of the Currency (OCC) regulations preempted several remaining UCL claims against the bank. The court concluded that enjoining the lender from enforcing the notes, based on alleged violations of the UCL, because the borrowers would have had a defense to payment if the Holder Notice had been included, would contravene OCC regulations by allowing the plaintiffs to use state law to alter the terms of credit in the bank’s promissory notes. As stated by the court, “[p]laintiffs’ theory would deploy the UCL to require [the national bank] to comply with a federal regulation that does not itself require [the national bank’s] compliance. Abiding by the Holder Rule would directly affect the terms of credit extended by [the national bank], infringing on a power that national banks are meant to exercise free from state authority.”