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Federal Deception Law: 4.3.4.3.3 Courts that get it right

A combination of the 2019 Federal Register notice, the 2012 full commission advisory opinion, 1999 FTC staff letter, and a growing understanding among courts of the issues involved has produced an impressive array of cases that reject limits on affirmative recovery (other than those explicit in the rule).143

Federal Deception Law: 4.3.4.4 Is Recovery of Amounts Paid Available Only When Otherwise Permitted by State Law?

In LaBarre v. Credit Acceptance Corp.,148 the Eighth Circuit seriously misinterpreted the operation of the FTC Holder Rule. It held that Minnesota law should decide when consumers under the FTC Holder Rule can raise seller-related claims against assignees. Relying on a Minnesota statute that limits a consumer to raising defenses—not claims—against an assignee, the court came to the conclusion that the FTC Holder Rule does not allow affirmative recovery for cases brought in Minnesota.

Federal Deception Law: 4.3.5.2 The California Supreme Court’s Reasoning As to Why Attorney Fees Are Not Capped

Pulliam v. HNL Automotive Inc.,164 is the most recent—and now leading—case on whether the FTC Holder Rule caps attorney fees. The California Supreme Court’s 2022 decision sets out a lengthy, well-reasoned analysis as to why fees awarded against a creditor are not capped. The only exception the court found was when the fees are awarded against the seller and the consumer seeks to recover those fees from the creditor.

Federal Deception Law: 4.3.6 Multiple or Punitive Damages

To the extent that treble or punitive damages are based on the seller’s willful misconduct, most courts find that the holder should be liable for those damages, but the holder’s maximum liability for those damages is capped under the FTC rule.177 The fact that the holder did not authorize the willful conduct is irrelevant, because what is at issue is the holder’s liability for all claims the consumer has against the seller, up to the cap.

Federal Deception Law: 4.3.7 Other Remedies

Consumers typically utilize the FTC Holder Rule language to seek damages from the holder, but a consumer’s remedies are not limited to damages. Consumers can seek all claims against the holder that a consumer could assert against the seller.

Federal Deception Law: 4.3.9.1 TILA Limits on Assignee Liability

The Truth in Lending Act (TILA) explicitly limits an assignee’s TILA liability for disclosure violations (but not for other, more substantive violations) to those that are apparent on the face of the documents. An assignee with no direct liability under the TILA disclosure provisions might arguably still be liable—pursuant to the FTC Holder Notice—for the assignor’s TILA liability for disclosure provisions.

Federal Deception Law: 4.3.9.2 ECOA Limits on Assignee Liability

While not found in the Equal Credit Opportunity Act (ECOA) itself, Regulation B implementing the Act limits the definition of “creditor” under the ECOA. The regulation specifies that “a person is not a creditor regarding any violation of the Act or this regulation committed by another creditor unless the person knew or had reasonable notice of the act, policy or practice that constituted the violation before becoming involved in the credit transaction.”194

Federal Deception Law: 4.3.9.3 Relation to the Magnuson-Moss Warranty Act

The federal Magnuson-Moss Warranty Act states that, for purposes of civil liability under that Act, “only the warrantor actually making a written affirmation of fact, promise, or undertaking shall be deemed to have created a written warranty, and any rights arising thereunder may be enforced under this section only against such warrantor and no other person.”196 The question arises whether a claim under the Magnuson-Moss Warranty Act can be brought against an assignee of the warrantor, based on the FTC Holder language, or whether the above-qu

Federal Deception Law: 4.3.10 Liability of Holders of Securitized Debt

One important area of concern is the consumer’s ability to raise claims and defenses under the FTC Holder Notice relating to securitized debt. A large number of consumer obligations are aggregated into pools, which are typically assigned to a trust. The trustee is then the legal owner of the obligation. Securities backed by this pool of obligations are then issued and sold by investment bankers to investors.206

Federal Deception Law: 4.3.11 Liability of FDIC or Subsequent Holders

When a federally insured bank or savings and loan is taken over by the Federal Deposit Insurance Corporation (FDIC), the consumer obligations held by the institution transfer to the federal agency as receiver. To promote the goals of confidence and stability in the banking system and efficiency in the trade of notes and other financial instruments, Congress and the courts have given the FDIC unique powers to enforce such instruments.

Federal Deception Law: 4.3.12.1 General

Virtually all states have statutes that subject creditors in at least some circumstances to claims or defenses that the consumer could assert against the seller.217 These statutes should be consulted whenever there is an issue of a creditor’s derivative liability for acts or omissions of the seller, particularly where questions are raised as to the applicability or utility of the FTC Holder Rule.

Federal Deception Law: 4.3.12.2 The LaBarre Court’s Misinterpretation

Notwithstanding the language of the FTC Holder Rule—and the FTC’s multiple unequivocal statements that the Holder Rule is not limited by state holder law restrictions—the Eighth Circuit in 1999 ruled to the contrary in LaBarre v. Credit Acceptance Corp.226 The court held that state law should be used to determine what claims can be brought under the FTC Holder Rule against assignees and related lenders.

Federal Deception Law: 4.3.13 Does the FTC Holder Rule Create Federal Jurisdiction?

A lender may attempt to remove a state law case to federal court (or the consumer may try to bring an action in federal court) based on the fact that the consumer’s case relies in part on the FTC Holder Notice, which is required by a federal rule. However, the consumer’s claim is not based upon federal law but upon a state law contract claim derived from the language of the credit agreement that contains the FTC Holder Notice.

Federal Deception Law: 4.3.14 Consumer’s Waiver of Claims Against the Holder

Consumers sometimes sign documents indicating the work purchased with the loan proceeds has been completed and performed satisfactorily. Holders argue that they can rely on this statement and are not liable under the Holder Notice for consumer claims against the seller that are inconsistent with this statement. Nevertheless, at a minimum, this statement should be no more binding on the consumer in an action against the holder than it would be in the consumer’s action against the seller.

Federal Deception Law: 4.4.1 Introduction

A major problem with the FTC Holder Rule is that if sellers violate the rule by failing to include or arrange for the prescribed notice in the credit contract, the consumer’s rights to raise seller-related claims and defenses against creditors are muddied.

Federal Deception Law: 4.4.2.1 UCC Article 9 Requires Notice to Be Implied into the Contract

UCC Article 9—adopted by all fifty states—makes an omitted Holder Notice implied as part of a credit-sale agreement as a matter of law, allowing the consumer to utilize the Holder Notice as if it were included.258 Article 9 states that an assignee of a contract without the required notice is subject to a consumer account debtor’s claims and defenses to the same extent as if the contract had contained the notice.259 Neither the assignor nor the assignee can seek a waiver from the consumer avoidin

Federal Deception Law: 4.4.2.2 Revised Article 3 Requires the Holder Notice to Be Implied in Negotiable Instruments

Filling the gap left by Article 9 for direct loans, Revised Article 3 states that the FTC Holder Notice shall be implied into any promissory note whenever that notice should have been inserted into the note.267 Revised Article 3 was adopted in 2002 by the National Conference of Commissioners on Uniform State Laws (now called the Uniform Laws Commission) and the American Law Institute, but the Article 3 FTC Holder provision has only been signed into law in nine jurisdictions.268

Federal Deception Law: 4.4.4.2 Holder’s Actions As a Deceptive Practice

When a creditor’s promissory note violates the FTC Holder Rule, the creditor is engaging in a deceptive practice. As one court put it, the creditor engages in “fraudulent conduct which creates a likelihood of confusion or misunderstanding” since the “FTC Regulation preserving defenses serves to eliminate confusion and misunderstanding created through an artificial bifurcation of a transaction by an installment seller in an effort to insulate the duty to pay from the duty to perform.”275

Federal Deception Law: 4.4.4.3 Holder’s Actions As a Violation of State UDAP Regulations

Massachusetts UDAP regulations indicate that creditors violate the state UDAP statute if they fail to comply with standards similar to the FTC Holder Notice. These standards are that lenders are subject to all defenses if they are related to the seller, they prepared the loan documents, they supplied the loan forms, the seller recommended the creditor and the creditor financed at least two consumer loans related to the seller in the calendar year, or the creditor issued a credit card used in the transaction.283

Federal Deception Law: 4.4.4.4 Holder’s Actions As an Unfair Practice

The creditor’s use of a contract violating the FTC Holder Rule fits neatly into the FTC’s definition of an unfair practice. There is substantial consumer injury and the consumer could not reasonably avoid the practice. Nor can there be any countervailing business justification for a lender to engage in loan practices that involve a violation of a federal regulation.287