No More Cap On Holder's Liability: A New FTC Perspective On The Holder Rule

• Published date: 08 March 2022
• Subject Matter: Finance and Banking, Consumer Protection, Financial Services, Consumer Law, Consumer Credit
• Law Firm: McGlinchey Stafford
• Author: James W. Sandy and Kelly Lipinski

On January 18, 2022, the Federal Trade Commission (FTC) issued an advisory opinion (the FTC Opinion) to clarify that the FTC's Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses (the Holder Rule), 16 C.F.R. ' 433.2, does not preclude the recovery of attorneys' fees and costs when state law authorizes such awards against a holder of a consumer credit contract. The FTC Opinion represents a potentially seismic shift in how the FTC, courts, and litigants have treated monetary recoveries against holders of consumer credit contracts for nearly fifty years.

The Holder Rule, promulgated by the FTC in 1975¹, provides that "[i]n connection with any sale or lease of goods or services to consumers, in or affecting commerce," it is an unfair practice in violation of section 5 of the Federal Trade Commission Act² to "[t]ake or receive a consumer credit contract" which does not include the following notice:

NOTICE

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.³

Historically, the FTC has encouraged courts and litigants to apply the Holder Rule's plain language.⁴ As recently as 2012, the FTC affirmed the 'plain language' approach when it opined that "no additional limitations on a consumer's right to an affirmative recovery should be read by and into the Rule, especially since a consumer would not have notice of those limitations because they are not included in the credit contract."⁵

This plain language interpretation makes sense and comports with the balance the Holder Rule seeks to achieve between permitting a consumer to assert claims and defenses against an otherwise innocent holder but capping its liability as a result. And, in fact, the majority of courts have applied the plain language interpretation and expressly precluded recovery of attorney's fees and costs against a holder, or capped the recovery of such fees to the amounts paid by the consumer under the contract.⁶

Creditor Considerations

The Advisory Opinion threatens to undermine the majority position on the recovery of attorney's fees under the Holder Rule. Here are three primary considerations for creditors and holders of consumer credit contracts.

The Advisory Opinion incentivizes additional litigation against holders of consumer credit contracts.

Usually, but not always, claims brought under the Holder Rule do not involve significant dollar amounts because, as the plain language makes clear, such recovery is capped as to the amounts actually paid under the contract.⁷

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