WASHINGTON, D.C. -

In some good news for the auto industry, the Federal Trade Commission said this week that dealers have been doing a good job adhering to a rule that deals with consumer protection in credit contracts.

The FTC examined 50 dealerships throughout the U.S. to see how well they complied with the commission’s Rule Concerning Preservation of Consumers’ Claims and Defenses.

After doing so, the FTC said dealers are exhibiting “broad compliance” in obeying this rule, which is typically referred to as the “Holder in Due Course” Rule.

Officials said the rule essentially serves as a safeguard for a buyer when his credit contract is sold to another lender by the dealer.

“Specifically, the rule preserves consumers’ rights to raise claims and defenses against purchasers of consumer credit contracts; with automobile sales, it protects consumers who buy cars from dealers on credit,” the FTC explained. “When dealers sell credit contracts to lenders, consumers are obligated to pay the lenders instead of the dealers.

“Under the rule, if a dealer engaged in fraud or made misrepresentations in selling a car on credit, a consumer could raise the dealer’s conduct as a defense to the lender’s demand for payments,” officials continued. “Without the rule, consumers would not have this protection in states that preclude them from asserting against lenders the claims and defenses they have against dealers if the lenders bought the credit contracts in good faith and without knowledge of these claims and defenses.”

Per the rule, dealers must let contract-buying lenders know that they are subject to any claims and defense the consumer brings against the dealer.

“It effectively makes lenders liable for dealers’ conduct, and gives them an incentive to work with reputable dealers,” FTC stated.

Explaining the investigation, the commission said that it contacted the 50 dealerships — comprised of franchised and independent stores in 45 states — as well as two large online dealerships in November and requested they provide copies of consumer credit contracts that were executed after Oct. 1, 2009.

All of the dealers who participated included the mandatory Holder Notice, the FTC indicated. As such, those investigations have been closed.

FTC also stressed that there will be more obligations for dealers added to the rule soon.

As it stands, dealers do not have to provide the aforementioned notice when the amount financed in the contract is more than $25,000.

That said, per the Dodd-Frank Act of 2010, dealers will start having to including the notice for all contracts up to $50,000 beginning July 21.

“The commission encourages auto dealers to review their contracts to ensure that they are in compliance with the expanded scope of the Holder in Due Course Rule,” the FTC concluded.