On January 20, the FTC issued an advisory opinion clarifying that the Holder Rule does not prevent state law from providing costs or attorneys’ fees against loan holders, contrary to the conclusions drawn by some courts. The FTC approved the adoption of the advisory opinion unanimously.

The FTC adopted the Holder Rule to protect consumers when they make purchases using credit. The Rule protects the consumer’s right to assert claims and defense against holders of loans and credit sales contracts even if the loans or contracts are later sold to a third party. The Holder Rule requires sellers that finance sales to include a notice in credit contracts alerting consumers to the claims and defenses available to them in the event of seller misconduct.

When loan holders unsuccessfully dispute claims or defenses covered by the Holder Rule, consumers may seek to have their court costs and attorneys’ fees covered by the loan holder. Some courts have incorrectly asserted that the Holder’s Rule preempts state laws authorizing attorneys’ fee award against loan holders.

In its advisory opinion, the FTC has clarified that the Holder Rule does not eliminate any rights that a consumer may have under separate state, local, or federal law. Consequently, whether costs and attorneys’ fees may be awarded against the holder of a loan or credit contract is determined by relevant state law and is not preempted by the Holder Rule. Further, The Holder Rule does not impose a cap on costs or attorneys’ fees.

Putting It Into Practice: The clarity provided by FTC’s advisory opinion serves to further underscore the power of the Holder Rule in providing protection for consumers against loan holders. The FTC has made clear that the Holder Rule not only provides consumers with rights of action against purchasers of their loans and credit contracts, but also does not impose limits on their ability to recover court costs and attorneys’ fees in the event they succeed. Financial services companies, including indirect lenders in the business of financing sales, should ensure that their business practices are in compliance with the Holder Rule, taking into account potential exposure for attorneys’ fees and court costs in the event that they are subject to liability under the Holder Rule.