Federal Deception Law: 12.5 Restore Online Shoppers’ Confidence Act
The Restore Online Shoppers’ Confidence Act, enacted in 2010, provides several protections to consumers in online transactions.
The Restore Online Shoppers’ Confidence Act, enacted in 2010, provides several protections to consumers in online transactions.
The FTC’s Preservation of Consumers’ Claims and Defenses Rule1 is commonly called the “FTC Holder Rule,” although a more accurate (and possibly more appealing) name for it is the Preservation of Claims Rule. In keeping with common usage, this chapter uses the phrase “FTC Holder Rule” to describe the rule and “FTC Holder Notice” to describe the notice that the rule requires.
In a second way of extending credit, the sale of goods is financed by a loan that a third-party lender makes directly to the consumer, without the seller being the originating creditor. The seller may arrange the direct loan, and the loan proceeds may even go directly from the lender to the seller, but the seller is not listed on the loan obligation as the original creditor. When financing is set up in this manner, the consumer’s debt is owed to the lender from the outset.
Courts often find that the FTC Holder Rule does not apply to leases,29 and leases, as a practical matter, never include the FTC Holder Notice. Other theories may still be available to raise seller-related defenses against the holder of a lease.
The consumer’s ability to stop payment in response to seller misconduct is significantly different when the consumer uses a check, debit card, or other payment device instead of obtaining credit to make the purchase. The FTC Holder Rule does not apply because there is no credit. As a practical matter, it is almost impossible to stop payment on many of today’s payment devices.
The FTC Holder Rule is unique in that the scope of the rule is somewhat different from the scope of the rule’s operational effect. The rule operates by a notice placed in consumer credit agreements whereby, as a matter of the contract itself,38 the parties agree that the consumer can raise seller-related claims and defenses against the holder of the note or contract. As such, the effect of the rule is directly felt by any agreement that includes the FTC Holder Notice.
As described in § 4.2.1, supra, the rule’s operational scope is often different than its legal scope. If the FTC Holder Notice is found in the contract, then that notice is effective, as a matter of contract law, even if the transaction is outside the rule’s legal scope.
The FTC rule requires a notice to be inserted in credit agreements whenever the seller finances a sale or a creditor has a relationship with the seller and that creditor finances the sale. The rule applies broadly to “any sale or lease of goods or services to consumers in or affecting commerce.”48 The rule applies equally to the sale of services, such as home improvement contracting, vocational training, employment counseling, and health spa membership, as it does to the sale of tangibles.49
It is unclear whether the FTC Holder Rule applies to leases. While the rule explicitly indicates that it applies to a “sale or lease,” other aspects of the rule require the lease to involve a “consumer credit contract.”57 “Consumer credit contract” is a defined term that refers to the Truth in Lending Act definition of a finance charge and a credit sale.
The rule places certain obligations on “sellers,” defined as those in the ordinary course of business who sell or lease goods or services to consumers.61 Since the rule only applies to sellers who sell in the ordinary course of their business, isolated sales by individuals are not covered.
Public entities and actual nonprofit corporations are not within the scope of the FTC Act,64 and the FTC Holder Rule does not obligate these entities as sellers to arrange for the notice to be placed in consumer credit agreements. For example, the FTC Holder Rule does not apply to loans made by a community college.
Another approach to being able to raise claims or defenses against a holder when the holder notice is omitted is to bring a claim under a similar state statute. These state statutes are examined at § 4.5, infra, and it can be seen that there are extensive differences from state to state.
For both assigned installment sales contract and related direct loans, a creditor’s attempt to enforce a note without a required Holder Notice should be a state UDAP violation. Even though the FTC Holder Rule requires only the seller to arrange for the inclusion of the notice in the note or contract, the holder engages in an independent UDAP violation for its effort to deny the consumer rights provided by federal law.
In the relatively unusual situation in which a dealer signs over the actual title to a consumer and then decides to cancel the deal, the dealer needs not only to recover the vehicle, but also legal title to the vehicle. It often does so through a repossession title. But this process is complicated because, when transferring title to the consumer, dealers usually will have placed a lien on the car’s title not in their own name, but in the name of the expected assignee.
In a condition subsequent sale, the dealer’s rights when recovering the vehicle are specified by UCC Article 9. Article 9 applies whether the consumer returns the vehicle voluntarily or the dealer repossesses the vehicle. The consumer, by definition, is the owner and the dealer is, at best, a secured creditor.142 Even if the dealer states that it is repossessing pursuant to the contingency clause and not the security interest, this makes no difference for purposes of Article 9.
Unlike a condition precedent sale, in a condition subsequent sale the TILA disclosure is not an estimate, and thus is not disclosed with an “e.”149 The sale is the transaction as described in the disclosure form, and the finance charge begins accruing on the date of the sale, because the consumer obtains title on that date.150 Of course, if the agreement specifies that the dealer can unilaterally require an additional down payment or otherwise change the credit terms in its attempt to obtain fin
When the dealer cancels a sale it will often try to force the consumer to keep the purchased vehicle, but at a higher financing rate.
Dealers sometimes, after canceling a sale, have a consumer arrested for not returning a vehicle the consumer thought rightfully belonged to the consumer. In such cases a malicious prosecution action is one consumer option.
In the subsequent negotiation over new terms for the vehicle sale, after the original credit sale has been canceled, the dealer may engage in various misrepresentations. It is deceptive for a dealer to represent that a consumer’s failure to sign another installment agreement would result in the vehicle being considered stolen.194 It is also deceptive for a dealer to represent that the consumer has no choice but to sign another, less advantageous deal.
In many canceled yo-yo sales, the dealer rewrites the transaction at a higher interest rate or a higher down payment, or may even switch the vehicle itself. Any such subsequent transaction occurs on the date of that subsequent transaction, and is not retroactively effective from the date of the first transaction that has now been canceled.
Ways to defeat a binding arbitration requirement are detailed in other NCLC treatises.204 This subsection examines two specific challenges that come up especially in the yo-yo context. The first is that the very nature of the yo-yo sale makes the arbitration clause unenforceable.
The following are documents that should be requested from the dealer in a yo-yo case:
Consumer recoveries are, of course, dependent on the facts of the case. A number of attorneys are reporting settlements in individual yo-yo sales in excess of $100,000. Other attorneys are reporting routine yo-yo settlements in the $20,000 to $40,000 range. In one case, the jury awarded $4100 actual damages and $50,000 punitive damages, and this award was upheld by the Kentucky Supreme Court.211
The automobile sublease scam involves a firm taking over, without the lessor’s or creditor’s permission, an automobile lease or car installment payment from a consumer who wants to get out of the financing. The firm then subleases the car to another consumer.
A good example of an auto broker scam is found in Omari v. National Security Financial Services, Inc.,214 in which the California director of consumer affairs succeeded in proving that National Security, an automobile subleasing business, failed to obtain lessors’ approval prior to subleasing vehicles, failed to notify the department of motor vehicles of the transfers, failed to disclose to lessees that they were still liable on the lease, and misrepresented to sublessees that they had an interest in the lease.