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Financial Services Law Insights and Observations

FTC clarifies Holder Rule provision

Federal Issues FTC Holder Rule Attorney Fees Agency Rule-Making & Guidance FTC Act

Federal Issues

On January 20, the FTC issued an advisory opinion addressing the FTC’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses’ impact on consumers’ ability to recover costs and attorneys’ fees. Commonly known as the Holder Rule, the provisions protect “consumers who enter credit contracts by preserving their right to assert claims and defenses against any holder of certain loans and credit sales contracts, even if the loans or contracts are assigned to a third party.” Because a seller’s use of practices to foreclose these rights constitutes an unfair practice under Section 5 of the FTC Act, the Holder Rule requires sellers to include a notice in credit contracts of a consumer’s right to claims and defenses related to a seller’s misconduct. While courts have addressed the issue of whether consumers are able to recover costs and attorneys’ fees from the holder of a credit contract, the FTC noted that some courts and finance companies have misinterpreted previous FTC statements to suggest that the Holder Rule preempts state laws that authorize attorney fee awards against loan holders. According to the advisory opinion, the “Holder Rule does not eliminate any rights the consumer may have as a matter of separate state, local, or federal law. Consequently, whether costs and attorneys’ fees may be awarded against the holder of the credit contract is determined by the relevant law governing costs and fees.” Noting that “[n]othing in the Holder Rule states that application of such laws to holders is inconsistent with Section 5 of the FTC Act or that holders should be wholly or partially exempt from these laws,” the FTC added that “if the applicable law requires or allows costs or attorneys’ fee awards against a holder, the Holder Rule does not impose a cap on such an award.” While it is not clear how much deference courts would give to the advisory opinion, companies may choose to consider the Commission’s statement.

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