It’s been nearly 50 years since the Federal Trade Commission rolled out the Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, better known in compliance circles as the Holder Rule.

While much has developed in almost five decades since, FTC attorney Carole Reynolds explained that components and consumer protections associated with the Holder Rule are as relevant today as they were when the rule became effective in its entirety in 1976.

“Before the Holder Rule, sellers could (and did) shield themselves from liability for, among other things, selling faulty goods or services to a consumer on credit by assigning the contract to another company (assignee),” Reynolds wrote in a blog post distributed by the FTC this week.

“The assignment effectively cut off a consumer’s ability to raise claims or defenses against the assignee or ‘holder’ of the contract. Yet, the consumer was legally required to pay back the debt even if the seller engaged in misconduct or unlawful practices regarding the credit contract. Or, if the seller went out of business or never delivered the goods. The Holder Rule changed that,” Reynolds continued.

Reynolds reiterated the Holder Rule protects consumers who enter into certain credit contracts by preserving their right to assert claims and defenses against any holder of the contract, even if the seller later assigns the contract to another company.

Sounds like the process when any vehicle is delivered and includes financing, doesn’t it?

Reynolds pointed out that paperwork like what’s included in deal jackets must have this statement:

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 PURSUANT HERETO OR WITH THE PROCEEDS HEREOF.  RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

“To accomplish this protection, the rule prohibits the seller from taking or receiving a consumer credit contract that does not contain a specific notice. The seller must include a notice provision in the underlying credit contract that makes any assignee or holder of the contract subject to the claims and defenses the consumer had against the original seller,” Reynolds wrote.

“The rule also prohibits the seller from accepting the proceeds of a purchase money loan unless the underlying credit contract contains a similar prescribed notice,” she added.

Reynolds closed her blog with two suggestions for dealerships and finance companies since they’re in the business of selling consumer goods or services on credit and purchasing credit contracts,

“Don’t bury your head in the assignment sand,” Reynolds wrote. “Companies that purchase covered credit contracts are subject to the Holder Rule — and that goes for financers too. In other words, the assignee of the credit contract stands in the shoes of the original seller when it comes to a consumer’s claims and defenses related to the seller’s misconduct and unlawful practices, among other things.

“Don’t fail to notify with the notice – the FTC will . . . notice,” Reynolds continued. “The rule requires covered financing contracts to include the Holder Rule Notice verbatim, in full. And don’t include sneaky clauses in financing contracts that contradict or try to waive consumers’ rights.”

Reynolds pointed out that violating the Holder Rule can be costly. The FTC can seek civil penalties currently at $51,744 per violation, refunds for consumers and other remedies.

And don’t forget: many state laws also apply and may protect consumers even if the seller excludes the notice,” Reynolds added.