FTC Notice/Notice of Holder in Due Course

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Question:

On 9/3/01, a question regarding <a href="http://www.bankersonline.com/compliance/gurus_cmp0903c.html">"FTC Notice/Notice of Holder in Due Course"</a> was answered by Jim Bedsole. In our case, his answer states if we have a floor plan agreement with Dealer A and a borrower purchases an auto, but directly finances with us, the notice would still be required. He also stated this could be found at 16 CFR 433 and in the FTC Staff Commentary. My questions: 1) Where is the staff commentary, so I may provide to my attorney? and 2) what types of "claims and defenses" could a debtor assert against the seller?

Answer:

Answer by Jim Bedsole:
My copy of the FDIC "Laws, Regulations and Related Acts" (LRRA) had the referenced FTC Staff Guidelines on page 8555 8565. It indicates that the Guidelines were published by the FTC in the May 14, 1976 Federal Register.

When I went to find an online citation to refer you and your attorney to, I went to the FDIC website to the online version of LRRA and was surprised to find that this has apparently been amended to remove this section. I did some research and was unable to find if this removal was because the guidelines were no longer valid or why they were removed. The FTC may have repealed them as Staff Guidelines, but I couldn't find any Federal Register reference from 1995 on. I did find one reference that this rule (16 CFR 433) was due to be reviewed by FTC in 2001.

Answer:

Answer by Lucy Griffin:
There is a huge amount of confusion about the holder in due course rules. The "proper" name for this rule is "Preservation of Consumer Claims and Defenses." The rule is issued by the Federal Trade Commission. It applies to sellers of goods who provide or arrange financing for their customers. Jim's response explained how that worked. Basically, the seller of goods had to include a clause in the note that preserved the consumer's claims and defenses against the seller of the goods.

There was also a proposed rule that would have applied to creditors. This floated around in proposed form for more than a decade and then mysteriously faded away. As a result of its fading away, creditors need not include the clause in notes unless they have the relationship with the seller.

The clause is designed to prevent any future holder of the note from being a "holder in due course." A holder in due course can claim that s/he bought the note unaware of any underlying flaws, such as a claim the purchaser of goods might have against the seller. They were therefore immune from suit.

Shady sellers of goods began to create arrangements that appeared to create a holder in due course. The seller of goods financed the sale and then sold the note. However, the purchaser of the note was actually an affiliate or even the same party. When the consumer complianed that the goods were faulty, the holder of the note claimed status as a holder in due course.

The types of claims that consumers could file include failure to deliver the goods purchased, goods not as represented, or goods having flaws.

First published on BankersOnline.com 1/7/02